Management's discussion and analysis ("MD&A") of earnings and related financial data is presented to assist in understanding the financial condition and results of operations ofFirst Citizens BancShares, Inc. (the "Parent Company" and, when including all of its subsidiaries on a consolidated basis, "we," "us," "our," "BancShares") and its banking subsidiary,First-Citizens Bank & Trust Company ("FCB"). Unless otherwise noted, the terms "we," "us," "our," and "BancShares" in this section refer to the consolidated financial position and consolidated results of operations for BancShares. This MD&A is expected to provide our investors with a view of BancShares' financial condition and results of operations from our management's perspective. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this Quarterly Report on Form 10-Q along with our financial statements and related MD&A of financial condition and results of operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Annual Report"). Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2022, the reclassifications had no effect on stockholders' equity or net income as previously reported. Throughout this MD&A we reference specific "Notes" to our financial statements. These are Notes to the consolidated financial statements in Part One, Item 1. Financial Statements.
Management uses certain non-GAAP financial measures in its analysis of the financial condition and results of operations of BancShares. See "Non-GAAP Financial Measurements" for a reconciliation of these financial measures to the most directly comparable financial measures in accordance with GAAP.
OnJanuary 3, 2022 , BancShares completed its largest acquisition to date with the merger with CIT Group Inc. ("CIT") and its subsidiaryCIT Bank, N.A ., a national banking association ("CIT Bank "), pursuant to the terms and subject to the conditions set forth in the Agreement and Plan of Merger (as amended, the "Merger Agreement") (such acquisition, the CIT Merger). CIT had consolidated total assets of approximately$53.2 billion as ofDecember 31, 2021 . The CIT Merger is described further below and in Note 2 - Business Combinations. Financial data for periods prior to the CIT Merger do not include any CIT related data, and therefore are not directly comparable to the three months endedMarch 31, 2022 .
EXECUTIVE OVERVIEW
The Parent Company is a bank holding company ("BHC") andFinancial Holding Company ("FHC"). BancShares is regulated by theBoard of Governors of theFederal Reserve System under theU.S. Bank Holding Company Act of 1956, as amended. BancShares is also registered under the BHC laws ofNorth Carolina and is subject to supervision, regulation and examination by theNorth Carolina Commissioner of Banks ("NCCOB"). BancShares conducts its banking operations through its wholly-owned subsidiary FCB, a state-chartered bank organized under the laws of the state ofNorth Carolina . FCB is regulated by the NCCOB. In addition, FCB, as an insured depository institution, is supervised by the "FDIC". BancShares' earnings and cash flows are primarily derived from its commercial and retail banking activities. We expanded our products and services with the CIT Merger, and now have leased assets, primarily rail-related, and offer factoring services. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and interest-earning deposits at banks. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by banks. The fees and service charges generated from these products and services are primary sources of noninterest income, which is an essential component of our total revenue.
We are focused on expanding our position in legacy and target markets through organic growth and strategic acquisitions. We believe our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people.
Refer to our 2021 Annual Report for further discussion of our strategy.
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-------------------------------------------------------------------------------- Significant Events in 2022 As discussed in detail in Note 2 - Business Combinations, the CIT Merger closed onJanuary 3, 2022 . Significant items related to the CIT Merger are as follows: •The fair value of total assets acquired was$53.8 billion , which mainly consisted of approximately$32.7 billion of loans,$7.8 billion of operating lease equipment and approximately$6.6 billion of investment securities. Loans consisted of commercial and industrial loans, commercial real estate loans and finance leases, which are included in our Commercial Banking segment, and consumer loans (primarily residential mortgages), which are in our General Banking segment, as further discussed below. Acquired rail assets were mostly operating lease equipment that are in the new Rail segment. •The fair value of deposits acquired was$39.4 billion that included deposits derived from online banking and HOA deposits related to CAB, and commercial deposits. The transaction also included approximately 80 bank branches, about 60 of which were inSouthern California and the remaining primarily in the Southwest, Midwest and Southeast. •FCB recorded a preliminary gain on acquisition of$431 million , representing the excess of the net assets acquired over the purchase price, and recorded a$143 million core deposit intangible and a$52 million intangible liability for net below market lessor lease contract rental rates related to the rail portfolio. Segment Updates As ofDecember 31, 2021 , BancShares managed its business and reported its financial results as a single segment. BancShares began reporting multiple segments during the first quarter of 2022. BancShares now has three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. BancShares conformed the comparative prior periods presented to reflect the new segments. The substantial majority of BancShares' operations for historical periods prior to completion of the CIT Merger are included in the General Banking segment. The Commercial Banking and Rail segments primarily relate to operations acquired in the CIT Merger.
Information about our segments is included Note 22 - Business Segment Information and in Results by Business Segments, later in this MD&A.
Financial Performance Summary The following table summarizes the BancShares' results in accordance withU.S. GAAP, unless otherwise noted. Refer to the Non-GAAP Financial Measurements section at the end of the MD&A for a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Additionally, due to the CIT Merger, current quarter ending and average balances are not comparable to the prior periods. Further discussions are included in the remaining sections of this MD&A. 65 --------------------------------------------------------------------------------
Table 1 Selected Quarterly Data Three Months Ended March 31, dollars in millions, except share data 2022 2021 SUMMARY OF OPERATIONS Interest income $ 710$ 355 Interest expense 61 15 Net interest income 649 340 Provision (benefit) for credit losses 464 (11) Net interest income after provision for credit losses 185 351 Noninterest income 850 137 Noninterest expense 810 297 Income before income taxes 225 191 Income taxes (46) 44 Net income 271 147 Preferred stock dividends 7 4 Net income available to common stockholders $ 264$ 143 PER COMMON SHARE DATA Average diluted common shares 15,779,153 9,816,405 Net income available to common stockholders (diluted)$ 16.70 $ 14.53 Book value per common share 605.48 405.59 KEY PERFORMANCE METRICS Return on average assets (ROA) 1.00 % 1.16 % Return on average common stockholders' equity (ROE) 11.18 % 14.70 % Net interest margin (NIM)(1) 2.73 % 2.79 % SELECTED QUARTERLY AVERAGE BALANCES Total investments$ 19,492 $ 9,757 Total loans and leases(2) 64,144 33,087 Total operating lease equipment (net) 7,924 - Total assets 109,234 51,409 Total deposits 91,574 44,858 Total common stockholders' equity 9,560 3,935 SELECTED QUARTER-END BALANCES Total investments$ 19,469 $ 10,222 Total loans and leases 65,524 33,181 Total operating lease equipment (net) 7,972 - Total assets 108,597 53,909 Total deposits 91,597 47,331 Total common stockholders' equity 9,689 4,321 Loan to deposit ratio 71.53 % 70.10 % Noninterest-bearing deposits to total deposits 28.27 % 43.34 % CAPITAL RATIOS Common equity tier 1 ratio 11.34 % 12.02 % Tier 1 risk-based capital ratio 12.39 % 14.14 % Total risk-based capital ratio 14.47 % 11.00 % Tier 1 leverage capital ratio 9.55 % 7.84 % ASSET QUALITY Ratio of nonaccrual loans to total loans 0.82 % 0.59 % Allowance for credit losses to loans ratio 1.29 % 0.63 % Net charge off ratio 0.09 % 0.03 % (1)See "Non-GAAP Financial Measures" section for reconciliation of NIM presented to unadjusted NIM (GAAP). (2)Average loan balances include held for sale and non-accrual loans. 66 -------------------------------------------------------------------------------- First Quarter Highlights •Net income for the first quarter of 2022 was$271 million , an increase of$124 million , or 84% compared to the same quarter in 2021. Net income available to common stockholders totaled$264 million for the first quarter of 2022, an increase of$121 million , or 85% compared to the same quarter in 2021. Net income per common share increased$2.17 , or 15%, to$16.70 in the first quarter of 2022, from$14.53 per share during the same quarter in 2021. The increases are primarily attributed to the CIT Merger. •Certain notable items and approximate after-tax amounts and impacts on earnings per share included: •Current expected credit losses ("CECL") day 2 provision for loans and leases and unfunded commitments of$513 million ($387 million after tax,$24.50 per common share). •Preliminary gain on acquisition of$431 million (non-taxable,$27.34 per common share) in other noninterest income, representing the excess of the fair value of net assets acquired over the purchase price. •Gain on debt redemptions in other noninterest income of$6 million ($5 million after tax,$0.29 per common share) from approximately$2.9 billion of borrowings assumed in the CIT Merger. •Merger related expenses of$135 million ($102 million after tax,$6.45 per common share) in other noninterest expenses. •A reduction in other noninterest expenses of approximately$27 million ($20 million after tax,$1.28 per common share) related to the termination of certain healthcare and life insurance plans of legacy CIT, reflecting amounts previously accrued. •Return on average assets for the first quarter of 2022 was 1.00%, compared to 1.16% in the first quarter of 2021. •Net interest income ("NII") was$649 million for the first quarter of 2022, an increase of$309 million , or 91% compared to the same quarter in 2021. This was primarily due to the CIT Merger, partially offset by lower interest and fee income on SBA-PPP loans. The net interest margin ("NIM") was 2.73% for the first quarter of 2022, a decrease of 6 bps from 2.79% for the first quarter in 2021. •Provision for credit losses was$464 million for the first quarter of 2022 compared to a benefit of$11 million for the same quarter in 2021. While still low, net charge-off ratio was 0.09% for the first quarter of 2022, up from 0.03% for the first quarter of 2021. •Noninterest income was$850 million for the first quarter of 2022, compared to$137 million for the same quarter of 2021, benefiting from the CIT Merger. The current quarter includes a preliminary gain on acquisition of$431 million and rental income on operating leases of$208 million . The remaining increase was driven by the added activity due to the CIT Merger. •Noninterest expense was$810 million for the first quarter of 2022, compared to$297 million in the same quarter of 2021. The increase is primarily associated with the CIT Merger, reflecting higher salaries and benefit costs of$168 million due to the increase in employees,$124 million of depreciation and maintenance costs associated with the operating lease portfolio and higher merger costs of$128 million . •Total loans and leases of$65.5 billion increased$32.5 billion fromDecember 31, 2021 , reflecting the addition of$32.7 billion from the CIT Merger. •Total deposits of$91.6 billion increased$40.2 billion fromDecember 31, 2021 , reflecting the addition of$39.4 billion from the CIT Merger. •AtMarch 31, 2022 , BancShares remained well capitalized with a total risk-based capital ratio of 14.47%, a Tier 1 risk-based capital of 12.39%, a common equity Tier 1 ratio of 11.34% and a leverage ratio of 9.55%. 67 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
NII reflects our interest income less interest expense and is included as a line
item on the Consolidated Statements of Income. NII was
The following table presents the average balance sheet and related rates, along with disaggregated quarter-over-quarter changes in NII between volume (level of lending or borrowing) and rate (rates charged to customers or incurred on borrowings). Volume change is calculated as change in volume times the previous rate, while rate change is calculated as change in rate times the previous volume. The rate/volume change, change in rate times change in volume, is allocated between volume change and rate change. Tax equivalent net interest income was not materially different from NII, therefore we present NII in our analysis. Table 2 Average Balances and Rates Three Months Ended March 31, 2022 March 31, 2021 Change in NII Due to: Average Income / Yield / Average Income / Yield / Volume(1) Yield /Rate(1) Total
dollars in millions Balance Expense Rate Balance Expense Rate Change Loans and leases (1)(2)$ 64,144 $ 621 3.88 %$ 33,087 $ 323 3.92 %$ 301 $ (3)$ 298 Total investment securities 19,492 83 1.71 9,757 31 1.27 26 26 52 Interest-earning deposits at banks 11,476 6 0.19 5,871 1 0.10 4 1 5 Total adjusted interest earning assets(2)$ 95,112 $ 710 2.99 %$ 48,715 $ 355 2.92 %$ 331 $ 24$ 355 Operating lease equipment, net (including held for sale) 7,924 - Cash and due from banks 536 333 Allowance for credit losses (907) (224) All other noninterest bearing assets 6,569 2,585 Total assets$ 109,234 $ 51,409 Interest-bearing deposits: Checking with interest$ 16,605 $ 5 0.10 %$ 10,746 $ 1 0.05 %$ 3 $ 1$ 4 Money market 26,199 15 0.24 9,008 3 0.11 9 3 12 Savings 13,659 9 0.26 3,462 - 0.04 7 2 9 Time deposits 9,794 10 0.43 2,805 5 0.66 7 (2) 5 Total interest-bearing deposits 66,257 39 0.24 26,021 9 0.14 26 4 30 Securities sold under customer repurchase agreements 600 - 0.16 641 - 0.21 - - - Borrowings:Federal Home Loan Bank borrowings 641 2 1.27 651 2 1.28 - - - Senior unsecured borrowings 2,719 12 1.71 - - - 12 - 12 Subordinated debt 1,060 8 2.96 497 4 3.37 4 - 4 Other borrowings 85 - 1.95 88 - 1.22 - - - Total borrowings 4,505 22 1.95 1,236 6 2.12 16 - 16 Total interest-bearing liabilities$ 71,362 $ 61 0.35 %$ 27,898 $ 15 0.23 %$ 42 $ 4$ 46 Noninterest-bearing deposits 25,317 18,837 Other noninterest-bearing liabilities 2,132 399 Stockholders' equity 10,423 4,275 Total liabilities and stockholders' equity$ 109,234 $ 51,409 Interest rate spread (2) 2.64 % 2.69 % Net interest income and net yield on interest-earning assets (2)$ 649 2.73 %$ 340 2.79 % (1)Loans and leases include non-PCD and PCD loans, nonaccrual loans and held for sale. Interest income on loans and leases includes accretion income and loan fees. (2)The balance and rate presented is calculated net of average credit balances of factoring clients. See "Non-GAAP Financial Measures" section for description of adjusted interest earning assets and why these balances are shown net of credit balances of factoring clients. 68 -------------------------------------------------------------------------------- First Quarter 2022 compared to First Quarter 2021 •NII was$649 million for the three months endedMarch 31, 2022 , an increase of$309 million compared to the first quarter of 2021, primarily due to the CIT Merger, as well as loan growth absent the decline in SBA-PPP loans, partially offset by a decline in interest and fee income on SBA-PPP loans and lower yields on other interest-earning assets. •Interest income earned on loans and leases was$621 million for the three months endedMarch 31, 2022 , an increase of$298 million compared to 2021. The increase was primarily due to the addition of$32.7 billion of loans acquired in the CIT Merger along with growth in loans, excluding SBA-PPP loans. Partially offsetting was lower SBA-PPP interest and fee income. SBA-PPP loans contributed$9 million in interest and fee income during the first quarter of 2022 compared to$31 million in the first quarter of 2021. •Interest income earned on investment securities was$83 million for the three months endedMarch 31, 2022 , an increase of$53 million compared to 2021. The increase was primarily due to the addition of$6.6 billion of securities acquired in the CIT Merger and higher portfolio yield, reflecting the mix of acquired investments and a higher rate environment. •Interest expense on interest-bearing deposits was$39 million for the three months endedMarch 31, 2022 , an increase of$30 million compared to 2021. The increase was primarily due to the additional interest-bearing deposits acquired in the CIT Merger, which also carried a higher average rate. Interest expense on borrowings was$22 million for the three months endedMarch 31, 2022 , an increase of$16 million compared to 2021. The increase was primarily due to the assumed borrowings in the CIT Merger. Utilizing excess cash, we redeemed approximately$2.9 billion of the$4.5 billion assumed debt during the quarter. •NIM was 2.73% in the first quarter of 2022, a decrease of 6 bps from the comparable quarter in the prior year. The margin decline reflected higher yield on our investment portfolio, offset by lower SBA-PPP income and purchase accounting accretion, which reduced the loan portfolio yield, and higher rates on deposits. •Average interest-earning assets increased to$95.1 billion for the first quarter of 2022, compared to$48.7 billion in the first quarter of 2021. The primary driver for this change was the added assets from the CIT Merger. The following table details the average interest earning asset by category. Table 3 Average Interest-earning Asset Mix % of Total Interest-earning Assets Three months ended March 31, 2022 March 31, 2021 Loans and leases 67 % 68 % Investment securities 21 % 20 % Interest-bearing cash 12 % 12 % Total interest earning assets 100 %
100 %
•Average interest-bearing liabilities increased to$71.4 billion compared to$27.9 billion the first quarter of 2021, reflecting the addition of deposits and borrowings from the CIT Merger. The following table shows our average funding mix. Table 4 Average Funding Mix %
of Total Interest-bearing Liabilities
Three months ended
March 31, 2022 March 31, 2021 Total interest-bearing deposits 93 % 93 % Securities sold under customer repurchase agreements 1 % 2 % Long-term borrowings 6 % 5 % 100 % 100 %
•Rates on interest-bearing liabilities increased by 12 bps to 0.35%, primarily due to the higher rates on the deposits and borrowings acquired in the CIT Merger.
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PROVISION FOR CREDIT LOSSES
The provision for credit losses was$464 million for the first quarter of 2022, compared to a benefit of$11 million for the same quarter in 2021. The increase of$475 million was primarily due to the impact of the CIT Merger. The initial ACL for Non-Purchased Credit Deteriorated ("Non-PCD") loans and leases acquired in the CIT Merger was established through a corresponding increase of$454 million to the provision for credit losses (the "Initial Non-PCD Provision"). The provision for credit losses for unfunded commitments increased to$63 million for the first quarter of 2022 compared to a benefit of$1 million for the first quarter of 2021. The increase of$64 million was primarily due to the$59 million provision for unfunded commitments recognized on the Merger Date related to off balance sheet exposures acquired in the CIT Merger. The noted increases to the provision for credit losses of$513 million related to the CIT Merger were partially offset by a benefit of$53 million , primarily related to improvements in the most significant economic factors used to determine the ACL as ofMarch 31, 2022 compared to the economic factors used to determine the ACL as of the Merger Date. The ACL is further discussed in Risk Management - Credit Risk Management below. NONINTEREST INCOME Table 5 Noninterest Income Three Months Ended March 31, dollars in millions 2022 March 31, 2021 Rental income on operating leases$ 208 $ - Other noninterest income Fee income and other revenue 33 9 Wealth management services 35 32 Gains on leasing equipment, net 6 - Service charges on deposit accounts 28 22 Factoring commissions 27 - Cardholder services, net 25 20 Merchant services, net 10 9 Realized gains on investment securities available for sale, net - 9 Marketable equity securities gains, net 3 16 Gain on acquisition 431 - Gain (loss) on extinguishment of debt 6 - Other noninterest income 38 20 Total other noninterest income$ 642 $ 137 Noninterest Income Noninterest income is an essential component of our total revenue. The primary sources of noninterest income consist of rental income on operating leases, wealth management services, fees and service charges generated from deposit accounts, cardholder and merchant services, factoring commissions and mortgage lending and servicing. A primary driver of the increases from the first quarter of 2021 to the first quarter of 2022 was the addition of income related to the CIT Merger. Rental income from equipment we lease 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, re-pricing of equipment upon lease maturities and pricing on new equipment leases. Re-pricing refers to the rental rate in the renewed equipment contract compared to the prior contract. Refer to the Rail discussion in the Results by Business Segment section for further details. Other noninterest income for the first quarter of 2022 was$642 million , compared to$137 million for the same period in 2021. The increase for the comparable period was primarily due to the preliminary estimated gain on acquisition related to the CIT Merger. See Note 2 - Business Combinations for details. The remaining increase was primarily due to the following: •Fee income and other revenue, consisting of items such as capital market-related fees, fees on lines and letters of credit, agent and advisory fees, servicing and insurance fees, increased by$24 million , reflecting the added CIT activity. •Factoring commissions totaled$27 million during the quarter on factoring volume of$6.4 billion . See Results By Business Segment - Commercial Banking below for a brief discussion on the factoring business. •Cardholder services and merchant services increased by$6 million primarily due to an increase in the volume of transactions processed. •Service charges on deposit accounts increased by$6 million , primarily due to additional customer deposit balances acquired in the CIT Merger. In January, we announced our intent to eliminate our NSF fees and significantly lower our overdraft fees from$36 to$10 on consumer accounts beginning mid-year 2022. 70 -------------------------------------------------------------------------------- •Wealth management services increased by$3 million , primarily due to increases in advisory and transactions fees, assets under management and annuity fees. •Gains on equipment sales were$6 million during the quarter and are recognized on operating lease equipment sold, primarily related to rail equipment. •During the quarter, we redeemed approximately$2.9 billion of borrowings assumed in the CIT Merger, resulting in a$6 million gain in debt extinguishment. •Realized gains on sales of investment securities declined by$9 million . •The fair market value adjustment on marketable equity securities declined by$13 million . •Other noninterest income increased by$18 million and primarily consisted of insurance commissions, bank owned life insurance ("BOLI") income, gain on sales of loans and OREO. Other noninterest income also includes derivative-related gains and losses, ATM fees, and other various income items. NONINTEREST EXPENSE Table 6 Noninterest Expense Three Months Ended dollars in millions March 31, 2022 March 31, 2021 Depreciation on operating lease equipment$ 81 $ - Maintenance and other operating lease expenses 43 - Operating expenses Salaries and benefits 352 184 Net occupancy expense 49 30 Equipment expense 52 30 Third-party processing fees 24 14 FDIC insurance expense 12 3 Merger-related expenses 135 7 Intangible asset amortization 6 3 Other 56 26 Total operating expenses$ 686 $ 297 Depreciation on Operating Lease Equipment Depreciation expense is driven by rail equipment and small and large ticket equipment we own and lease to others. 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 Results by Business Segments section for further details. Maintenance and Other Operating Lease Expenses Maintenance and other operating lease expenses of$43 million for the three months endedMarch 31, 2022 related to equipment ownership and leasing costs associated with the Rail portfolio and tend to be variable. Rail provides railcars primarily pursuant to full-service lease contracts under which Rail as lessor is responsible for railcar maintenance and repair. Refer to the Rail discussion in the Results by Business Segment section for further details. Operating Expenses The primary components of operating expenses are salaries and related employee benefits, occupancy and equipment expense. Operating expenses were$686 million during the first quarter of 2022. The increase compared to the same quarter in 2021 was primarily driven by the CIT Merger. The most significant components of the change were as follows: •Salaries and benefits, which includes salaries, wages and employee benefits, were up$168 million , primarily reflecting the added headcount. •Net occupancy expense includes rent expense on leased office space and depreciation on buildings we own. The$19 million increase reflects the added branches and office space from the CIT Merger. •Equipment expense increased$22 million , reflecting the additional costs for the IT systems from the CIT Merger. •Third-party processing fees increased$10 million as a result of the CIT Merger and our continued investments in digital and technology to support revenue-generating businesses and improve internal processes. •Merger-related expenses increased by$128 million , driven by expenses related to the CIT Merger, including severance, retention, consulting and legal costs. •The$9 million increase inFDIC insurance expense reflects the additional deposits acquired in the CIT Merger. 71 -------------------------------------------------------------------------------- •Intangible amortization was up$3 million , reflecting the additional amortization on the core deposit intangible asset recorded in the CIT Merger. See Note 2 - Business Combinations for additional information. •Other expense increased by$30 million and consisted of other insurance and taxes (other than income tax), foreclosure, collection and other OREO-related expenses, advertising, consulting, telecommunications and other miscellaneous expenses including travel, postage, supplies, and appraisal expense. The first quarter of 2022 included a$27 million reversal of an accrual related to legacy CIT postretirement plans that were terminated after the acquisition date. See Note 21 - Employee Benefit Plans. INCOME TAXES Table 7 Income Tax Data Three Months Ended dollars in millions March 31, 2022 March 31, 2021 Income before income taxes$ 225 $ 191 Income taxes (46) 44 Effective tax rate (20.4) % 23.0 % The effective tax rate ("ETR") was (20.4)% in the current quarter, compared to 23.0% in the year-ago quarter. The effective rate for the three months endedMarch 31, 2022 was primarily driven by the non-taxable nature of the preliminary bargain purchase gain arising from the CIT Merger. The ETR each quarter is impacted by a number of factors, including the relative mix of domestic and international earnings, effects of changes in enacted tax laws, adjustments to valuation allowances, and discrete items. The future period's ETR may vary from the actual 2022 ETR due to changes in these factors. We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expense and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors.
See Note 20 - Income Taxes for additional information.
RESULTS BY BUSINESS SEGMENT
Prior to the CIT Merger, BancShares operated with centralized management and combined reporting, thus, BancShares operated as one consolidated reportable segment. Due to the CIT Merger, we made changes to reflect the inclusion of CIT operations and to reflect how we manage the combined business. As summarized in the sections below, BancShares now reports financial results in three operating segments: General Banking, Commercial Banking, and Rail, and a non-operating segment, Corporate. We conformed prior period comparisons to this new segment presentation. Based on the approach for segment disclosures, the substantial majority of BancShares' operations for historical periods prior to the CIT Merger are reflected in the General Banking segment. See Note 22 - Business Segments for related disclosures on the segments.
Results in our business segments reflect our funds transfer policy and allocation of expenses. Unallocated balances and, when applicable, certain notable items, are reflected in Corporate.
General Banking General Banking delivers services to individuals and businesses through an extensive branch network, digital banking, telephone banking and various ATM networks, including a full suite of deposit products, loans (primarily residential mortgages and commercial loans), and various fee-based services. General Banking also provides: a variety of wealth management products and services to individuals and institutional clients, including brokerage, investment advisory, and trust services; and deposit, cash management and lending to homeowner associations and property management companies. As part of the CIT Merger, CAB products were added that will drive the associated HOA deposit channel. Revenue is primarily generated from interest earned on residential mortgages, small business loans and fees for banking services. 72 -------------------------------------------------------------------------------- Table 8 General Banking: Financial Data and Metrics dollars in millions Three Months Ended March 31, Earnings Summary 2022 2021 Net interest income$ 437 $ 344 Benefit for credit losses (15) (11) Net interest income after benefit for credit losses 452 355 Noninterest income 123 110 Noninterest expense 409 290 Segment income before income taxes 166 175 Provision for income taxes 40 40 Segment net income$ 126 $ 135 Select Period End Balances Loans and leases$ 38,778 $ 32,580 Deposits 85,469 47,277 Results for the quarter reflect the additional activity from the CIT Merger, driving the increase in NII. Noninterest income is driven by fees from services we provide to our customers, such as wealth management and cardholder, plus service charges on deposits. Noninterest expense was higher, primarily due to the additional costs associated with the larger business and additional employees. The results for the three months endedMarch 31, 2021 reflect the vast majority of the historic operating activity for BancShares only. Loans and leases increased, reflecting the additional residential mortgages and consumer loans acquired in the CIT Merger, partially offset by run-off of SBA-PPP loans. Deposits include deposits from the branch, online and community association banking channels, most of which were acquired in the CIT Merger. See discussions in Net Interest Income and Deposits sections. The additional branches acquired in the CIT Merger were mostly inCalifornia . Commercial Banking Commercial Banking provides lending, leasing and other financial and advisory services, primarily to small and middle-market companies across industries. Commercial Banking also provides asset-based lending, factoring, receivables management products and supply chain financing. Revenue is primarily generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities and banking services, along with capital markets transactions and commissions earned on factoring and related activities. We provide factoring, receivable management, and secured financing to businesses (our clients, who are generally manufacturers or importers of goods) that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored (i.e., sold or assigned to the factor). Table 9 Commercial Banking: Financial Data and Metrics dollars in millions Three Months Ended March 31, Earnings Summary 2022 2021 Net interest income$ 207 $ 4 Benefit for credit losses (34) - Net interest income after benefit for credit losses 241 4 Noninterest income 112 - Noninterest expense 191 1 Segment income before income taxes 162 3 Provision for income taxes 41 1 Segment net income$ 121 $ 2 Select Period End Balances Loans and leases$ 26,672 $ 601 Deposits 4,687 54 Factoring volume 6,433 - 73
-------------------------------------------------------------------------------- Results for the current quarter primarily reflect activity from the former CIT businesses which are not included in the year-ago activity. Noninterest income primarily includes rental income on operating lease equipment of$49 million and factoring commissions of$27 million , plus other fee and income items. Noninterest expense reflects normal operating costs and includes depreciation on operating lease equipment of$40 million .
The increase in loans and leases and deposits for the three months ended
Rail
Rail offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughoutNorth America . Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement; tank cars for energy products and chemicals; gondolas for coal, steel coil and mill service products; open hopper cars for coal and aggregates; boxcars for paper and auto parts, and centerbeams and flat cars for lumber. Revenues are primarily generated from operating lease income. Table 10 Rail: Financial Data and Metrics dollars in millions Three Months Ended March 31, Earnings Summary 2022 2021 Rental income on operating leases$ 159 $ - Depreciation on operating lease equipment 41 - Maintenance and other operating lease expenses 43 - Net revenue on operating leases(1) 75 - Interest expense, net 19 - Noninterest income 3 - Noninterest expense 16 - Segment income before income taxes 43 - Provision for income taxes 11 - Segment net income$ 32 $ - Select Period End Balances Operating lease equipment, net $
7,251 $ -
(1)Net revenue on operating leases is a non-GAAP measure. See the "Non-GAAP Financial Measures" section for a reconciliation from the GAAP measure (segment net income) to the non-GAAP measure (net revenue on operating leases).
Net income and net revenue on operating leases are utilized to measure the profitability of our Rail segment. Net revenue on operating leases reflects rental income on operating lease equipment less depreciation on operating lease equipment and maintenance and other operating lease expenses. Due to the nature of our portfolio, which is essentially all operating lease equipment, certain financial measures commonly used by banks, such as NII, are not as meaningful for this business. NII is not used because it includes the impact of debt costs of our operating lease assets but excludes the associated rental income.
Net income and net revenue on operating leases for the three months ended
Depreciation is recognized on railcars. Maintenance and other operating lease expenses tend to be variable. Maintenance costs relate to freight and storage costs, reflecting railcars returned, and costs to put cars back on lease.
Portfolio
Rail customers include all of theU.S. and Canadian Class I railroads (i.e., railroads with annual revenues of approximately$500 million and greater), other railroads, as well as manufacturers and commodity shippers. AtMarch 31, 2022 our total operating lease fleet consisted of approximately 119,600 railcars. The following table reflects the proportion of railcars by type based on units and net investment, respectively: 74 -------------------------------------------------------------------------------- Table 11 Operating lease Railcar Portfolio by Type as ofMarch 31, 2022 (units and net investment) Total Owned Total Owned Fleet - % Total Railcar Type Fleet - % Total Units Net Investment Covered Hoppers 42 % 40 % Tank Cars 30 % 41 % Mill/Coil Gondolas 8 % 6 % Coal 8 % 1 % Boxcars 6 % 7 % Other 6 % 5 % Total 100 % 100 %
Table 12 Rail Operating Lease Equipment by Obligor Industry dollars in millions
March 31, 2022 Manufacturing$ 2,879 40 % Rail 2,306 32 % Wholesale 945 13 % Oil and gas extraction / services 447 6 % Energy and utilities 224 3 % Other 450 6 % Total$ 7,251 100 % Corporate Certain items are not allocated to operating segments and are included in the Corporate segment. Some of the more significant and recurring items include interest income on investment securities, a portion of interest expense primarily related to corporate funding costs (including brokered deposits), income on BOLI (other noninterest income), merger-related costs, as well as certain unallocated costs and intangible asset amortization expense (operating expenses). Corporate also includes certain significant items that are infrequent, such as: the Initial Non-PCD Provision for loans and leases and unfunded commitments; and the preliminary gain on acquisition, each of which are related to the CIT Merger. Table 13 Corporate: Financial Data and Metrics dollars in millions Three Months Ended March 31, Earnings Summary 2022 2021 Net interest income (expense) $ 24$ (8) Provision for credit losses 513 - Net interest expense after provision for credit losses (489) (8) Noninterest income 453 27 Noninterest expense 110 6 Segment (loss) income before income taxes (146) 13 (Benefit) provision for income taxes (138) 3 Segment net (loss) income $ (8)$ 10 Results for the three months endedMarch 31, 2022 were driven by impacts from the CIT Merger. Results in the current quarter included notable items of$513 million related to the Initial Non-PCD Provision, a preliminary gain on acquisition of$431 million (noninterest income) and$135 million of merger related expenses. 75 --------------------------------------------------------------------------------
BALANCE SHEET ANALYSIS Interest-earning Assets Interest-earning assets include interest-bearing cash, investment securities, loans and leases, and loans and leases held for sale, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Higher risk investments typically carry a higher interest rate but expose us to higher levels of market and/or credit risk. We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum. Interest-earning Deposits at Banks Interest-bearing cash totaled$9.3 billion atMarch 31, 2022 , up from$9.1 billion atDecember 31, 2021 , reflecting lending and deposit levels, and the timing of investment maturities. While the CIT Merger added nearly$2.9 billion at the time of the merger, that was offset by the use of cash for the redemption of approximately$2.9 billion of assumed debt.Investment Securities The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity risk and low to moderate interest rate risk and credit risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares' objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note 1 - Accounting Policies and Basis of Presentation, and Note 3 - Investments, for additional disclosures regarding investment securities. The carrying value of investment securities totaled$19.5 billion atMarch 31, 2022 , an increase of$6.4 billion compared toDecember 31, 2021 , primarily reflecting the CIT Merger, which added$6.6 billion at the time of the merger. The remaining activity in the portfolio included investment securities purchases of$0.8 billion , partially offset by maturities and paydowns of$0.6 billion . Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of AOCI, net of deferred taxes. As ofMarch 31, 2022 , investment securities available for sale had a net pre-tax unrealized loss of$431 million , compared to a net pre-tax unrealized loss of$12 million as ofDecember 31, 2021 . Management evaluated the available for sale securities in an unrealized loss position and concluded that the unrealized losses related to changes in interest rates relative to when the securities were purchased, and therefore, no ACL was needed atMarch 31, 2022 . BancShares' portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities,US Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by theWorld Bank andFDIC guaranteed CDs with other financial institutions. Given the consistently strong credit rating of theU.S. Treasury , theWorld Bank and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, no ACL was needed atMarch 31, 2022 andDecember 31, 2021 . 76 --------------------------------------------------------------------------------
Table 14 presents the investment securities portfolio at
Table 14Investment Securities March 31, 2022 December 31, 2021 Amortized Fair Amortized Fair dollars in millions Composition(1) cost value Composition(1) cost value Investment securities available for sale U.S. Treasury 10.2 %$ 2,014 $ 1,931 15.4 %$ 2,007 $ 2,005 Government agency 1.1 % 206 206 1.7 % 221 222 Residential mortgage-backed securities 26.8 % 5,340 5,052 36.2 % 4,757 4,728 Commercial mortgage-backed securities 8.1 % 1,584 1,520 12.6 % 1,648 1,640 Corporate bonds 3.1 % 582 586 4.7 % 582 608 Total investment securities available for sale 49.3 %$ 9,726 $ 9,295 70.6 %$ 9,215 $ 9,203 Investment in marketable equity securities 0.5 %$ 73 $ 100 0.7 %$ 73 $ 98 Investment securities held to maturity U.S. Treasury 2.4 %$ 471 $ 447 - % $ - $ - Government agency 7.8 % 1,541 1,463 - % - - Residential mortgage-backed securities 23.6 % 4,776 4,461 17.7 % 2,323 2,307 Commercial mortgage-backed securities 14.9 % 2,988 2,805 11.0 % 1,485 1,451 Supranational securities 1.5 % 294 277 - % - - Other investments - % 4 4 - % 2 2 Total investment securities held to maturity 50.2 %$ 10,074 $ 9,457 28.7 %$ 3,810 $ 3,760 Total investment securities 100 %$ 19,873 $ 18,852 100 %$ 13,098
Table 15 presents the weighted average yields for investment securities available for sale and held to maturity atMarch 31, 2022 , segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio is calculated using security-level annualized yields. Table 15 Weighted Average Yield onInvestment Securities March 31, 2022 Within One to Five Five to 10 One Year Years Years After 10 Years Total Investment securities available for sale U.S. Treasury 0.11 % 0.96 % - % - % 0.96 % Government agency - % 3.44 % 2.78 % 2.81 % 2.79 % Residential mortgage-backed securities 1.70 % 1.84 % 2.18 % 1.50 % 1.51 % Commercial mortgage-backed securities - % 3.16 % 4.02 % 2.17 % 2.20 % Corporate bonds 3.54 % 5.88 % 5.43 % 5.28 % 5.46 % Total investment securities available for sale 0.19 % 1.12 % 4.52 % 1.66 %
1.77 %
Investment securities held to maturity U.S. Treasury - % 1.19 % 1.44 % - % 1.38 % Government agency - % 1.26 % 1.70 % - % 1.49 % Residential mortgage-backed securities(1) - % 3.36 % 7.67 % 1.74 % 1.74 % Commercial mortgage-backed securities(1) - % - % 2.37 % 1.84 % 1.84 % Supranational Securities - % 1.23 % 1.64 % - % 1.56 % Other investments 0.59 % - % - % - % 0.59 % Total investment securities held to maturity 0.59 % 1.25 % 1.63 % 1.78 % 1.71 % (1)Residential mortgage-backed and commercial mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life will differ from contractual maturities because borrowers have the right to prepay the underlying loans. 77 -------------------------------------------------------------------------------- Assets Held for Sale Assets held for sale were$83 million atMarch 31, 2022 , of which$81 million related to loans and remainder to non-interest earning operating lease equipment. The decrease sinceDecember 31, 2021 is primarily due to loan sales, partially offset by assets acquired in the CIT Merger and originations. Certain residential real estate loans and commercial loans are originated to be sold to investors or lenders, respectively, and are recorded in assets held for sale at fair value. In addition, BancShares may change its strategy for certain portfolio loans and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value. Loans and Leases Loans and leases held for investment were$65.5 billion atMarch 31, 2022 , an increase of$32.5 billion sinceDecember 31, 2021 , primarily related to the$32.7 billion of loans acquired as part of the CIT Merger and partially offset by a reduction in SBA-PPP loans. Upon completion of the CIT Merger, we re-evaluated our loan classes to reflect the risk characteristics of the combined portfolio. BancShares reports its commercial loan portfolio in the following classes: commercial construction, owner occupied commercial mortgage, non-owner occupied commercial mortgage, commercial and industrial, and leases. The consumer portfolio reflects residential mortgage, revolving mortgage, consumer auto and consumer other. Commercial loans atMarch 31, 2022 were$50.1 billion compared to$22.6 billion atDecember 31, 2021 , representing 76% and 70% of total loans and leases, respectively. Consumer loans atMarch 31, 2022 were$15.4 billion , compared to$9.8 billion atDecember 31, 2021 , representing 24% and 30% of total loans and leases, respectively. Table 16 Loans and Leases dollars in millions March 31, 2022 December 31, 2021 Commercial: Commercial construction $ 2,633 $ 1,238 Owner occupied commercial mortgage 13,553
12,099
Non-owner occupied commercial mortgage 9,293 3,041 Commercial and industrial 22,402 5,937 Leases 2,220 271 Total commercial$ 50,101 $ 22,586 Consumer: Residential mortgage 11,711 6,088 Revolving mortgage 1,840 1,818 Consumer auto 1,320 1,332 Consumer other 552 548 Total consumer$ 15,423 $ 9,786 Total loans and leases 65,524 32,372 Less allowance for credit losses 848 178 Net loans and leases$ 64,676 $ 32,194 Non-PCD and PCD loans were$62.1 billion and$3.4 billion atMarch 31, 2022 , respectively, compared to$32.0 billion and$0.3 billion atDecember 31, 2021 , respectively. The discount related to acquired non-PCD loans was$74.7 million and$11.4 million atMarch 31, 2022 andDecember 31, 2021 , respectively. The discount related to PCD loans was$66.9 million and$29.0 million atMarch 31, 2022 andDecember 31, 2021 , respectively.
OPERATING LEASE EQUIPMENT, NET
As detailed in the following table, our operating lease portfolio is mostly comprised of rail assets. See the Rail segment section for further details on the rail portfolio.
Table 17 Operating Lease Equipment dollars in millions March 31, 2022 Railcars and locomotives$ 7,251 Other equipment 721 Total(1)$ 7,972
(1)Includes off-lease Rail equipment of
78 --------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debt, and other borrowings. Interest-bearing liabilities totaled$69.0 billion atMarch 31, 2022 , compared to$31.8 billion atDecember 31, 2021 . The increase was mostly due to deposits and borrowings from the CIT Merger, partially offset by the redemption of assumed debt during the quarter. See Note 2 - Business Combinations for details on deposits and borrowings associated with the CIT Merger.
Deposits
AtMarch 31, 2022 , total deposits were$91.6 billion , an increase of$40.2 billion sinceDecember 31, 2021 , driven by the$39.4 billion of deposits from the CIT Merger. As part of the CIT Merger, we acquired CIT's online banking platform and a leading HOA deposit channel. Table 18 Deposits dollars in millions March 31, 2022 December 31, 2021 Demand$ 25,898 $ 21,405 Checking with interest 16,702 12,694 Money market 26,249 10,590 Savings 13,506 4,236 Time 9,242 2,481 Total deposits$ 91,597 $ 51,406 We strive to maintain a strong liquidity position, and therefore a focus on core deposit retention remains a key business objective. We believe traditional bank deposit products remain an attractive option for many customers, as evidenced by the significant deposit growth the industry has experienced over the past 18 months. As economic conditions improve, we recognize that our liquidity position could be adversely affected as bank deposits are withdrawn. Our ability to fund future loan growth is significantly dependent on our success in retaining existing deposits and generating new deposits at a reasonable cost. We estimate total uninsured deposits were$31.3 billion and$23.0 billion atMarch 31, 2022 andDecember 31, 2021 , respectively. Table 20 provides the expected maturity of time deposits in excess of$250,000 , theFDIC insurance limit, as ofMarch 31, 2022 . Table 19 Maturities of Time Deposits In Excess of$250,000 dollars in millions March 31, 2022 Time deposits maturing in: Three months or less $ 470 Over three months through six months 346 Over six months through 12 months 456 More than 12 months 319 Total$ 1,591 Borrowings AtMarch 31, 2022 , total borrowings were$3.3 billion compared to$1.8 billion atDecember 31, 2021 . The$1.5 billion increase was due to the$4.5 billion debt assumed in the CIT Merger. As part of liability management and to reduce higher debt costs, onFebruary 24, 2022 , BancShares redeemed approximately$2.9 billion of senior unsecured notes that were assumed in the CIT Merger. This included all of the outstanding approximately$1.1 billion aggregate principal amount of the 5.000% Senior Unsecured Notes due 2022,$750 million aggregate principal amount of the 5.000% Senior Unsecured Notes due 2023,$500 million aggregate principal amount of the 4.750% Senior Unsecured Notes due 2024, and$500 million aggregate principal amount of the 5.250% Senior Unsecured Notes due 2025. 79 --------------------------------------------------------------------------------
Table 20 presents borrowings, including the respective unamortized purchase accounting adjustments and issuance costs.
Table 20 Borrowings dollars in millions March 31, 2022 December 31, 2021 Securities sold under customer repurchase agreements $ 616 $ 589 Federal Home Loan Bank borrowings 639 645 Senior Unsecured Borrowings 3.929% fixed-to-floating rate notes due June 2024(1) 513 - 2.969% fixed-to-floating rate notes due September 2025(1) 322 - 6.000% fixed rate notes due April 2036(1) 60 - Subordinated debt SCB Capital Trust I - floating rate debenture due April 2034 10 11 FCB/SC Capital Trust II - floating rate debenture due June 2034 18 18 FCB/NC Capital Trust III - floating rate debenture due June 2036 88 88 Macon Capital Trust I - floating rate debenture due March 2034 14 14 3.375 % fixed-to-floating rate notes due March 2030 347 347 6.125% fixed rate notes due March 2028(1) 478 - 4.125% fixed-to-fixed rate notes due November 2029(1) 103 - Total subordinated debt 1,058 478 Other borrowings 84 72 Total borrowings$ 3,292 $ 1,784
(1)Debt assumed in the CIT Merger.
BancShares owns four special purpose entities - SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III, and Macon Capital Trust I (the "Trusts"), which mature in 2034, 2034, 2036, and 2034, respectively. Subordinated debt included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III, and Macon Capital Trust I.
RISK MANAGEMENT
BancShares provided detail risk management information in our 2021 Form 10-K. The following is a summary of those disclosures or updates to those disclosures, primarily due to the CIT Merger. Risk is inherent in any business. BancShares has defined a moderate risk appetite, a 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, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares may be exposed, with effective challenge and oversight by management committees. In addition, our Board of Directors (the "Board") strives to ensure the business culture is integrated with the Risk Management program and policies, procedures and metrics for identifying, assessing, monitoring and managing risk are part of the decision-making process. The Board's role in risk oversight is an integral part of our overall Risk Management Framework and Risk Appetite Framework. The Board administers its risk oversight function primarily through the Board Risk Committee. The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Board Risk Committee is directed to monitor and advise the full Board regarding risk exposures, including Credit, Market, Capital, Liquidity, Operational, Compliance, Asset, Strategic and Reputational risks; review, approve, and monitor adherence to the Risk Appetite Statement and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework. The Board Risk Committee also reviews: reports of examination by and communications from regulatory agencies; the results of internal and third party testing and qualitative and quantitative assessments related to risk management; and any other matters within the scope of the Board Risk Committee's oversight responsibilities. The Board Risk Committee monitors management's response to certain risk-related regulatory and audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and theCompensation, Nominations and Governance Committee for the review of financial statements and related risks, compensation risk management and other areas of joint responsibility. 80 --------------------------------------------------------------------------------
In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.
BancShares is subject to a variety of risks that may arise through its business activities. As identified in our 2021 Form 10-K, our primary risks are credit, market, capital, liquidity, operational, compliance, strategic and reputational risks. Given several factors including but not limited to positive internal and external trends, positive risk metrics, effective incident, oversight and monitoring, the Company returned to business as usual operations and lifted internal COVID-19 related restrictions in early April. BancShares will continue to comply with any state and local orders that are in place. Monitoring of associated credit and operational risks has now been integrating into normal risk monitoring activities. Since the filing of our 2021 Annual Report on Form 10-K, BancShares has been assessing the emerging impacts of the rising international tensions that could impact the economy and exacerbate headwinds of rising inflation, global supply chain disruptions, and recessionary pressures as well as operational risks such as those associated with potential cyber-attacks for FCB and third parties upon whom it relies. Assessments have not identified material impacts to date but those assessments will remain ongoing as the condition continues to exist. Due to the CIT Merger, we included additional information on added risks, Asset Risk (due to the operating lease portfolio) and Counterparty Risk (due to the increased use of derivatives).
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 we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCD or non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an appropriate ACL that accounts for losses inherent in the loan and lease portfolio. Commercial Lending and Leasing Commercial loans and leases acquired in the CIT Merger, which are primarily within the Commercial Banking segment, are graded according to a rating system that was used by CIT prior to the merger with respect to probability of obligor default ("PD") and loss given default (severity) based on various risk factors. The PD and severity are derived through historical observations of default and subsequent losses within each risk grading. When these loans and leases were graded at underwriting, or when updated periodically, a model is run to generate a preliminary risk rating. The model incorporates both internal and external historical default and loss data to develop loss rates for each risk rating. The preliminary risk rating assigned by the model can be adjusted as a result of borrower specific facts that in management's judgment warrant a modification of the modeled risk rating to arrive at the final approved risk ratings. For small-ticket lending and leasing portfolio acquired in the CIT Merger, automated credit scoring models for origination (scorecards) and re-grading (auto re-grade algorithms) are also employed. These are supplemented by business rules and expert judgment. Adjustments to credit scorecards, auto re-grading algorithms, business rules and lending programs may be made periodically based on these evaluations. A credit approval hierarchy is enforced to ensure that an underwriter with the appropriate level of authority reviews applications. Consumer Lending Consumer lending begins with an evaluation of a consumer borrower's credit profile against published standards. Credit decisions are made after analyzing quantitative and qualitative factors, including borrower's ability to repay the loan, collateral values, and considering the transaction from a judgmental perspective. Consumer products use traditional and measurable standards to document and assess the creditworthiness of a loan applicant. Credit standards follow industry standard documentation requirements. Performance is largely evaluated based on an acceptable pay history along with a quarterly assessment which incorporates current market conditions. Non-traditional loans may also be monitored by way of a quarterly review of the borrower's refreshed credit score. Loans are placed on non-accrual status at 90 days past due or more, except for government guaranteed loans. When warranted an additional review of the underlying collateral's loan-to-value may be conducted. 81 -------------------------------------------------------------------------------- Allowance for Credit Losses The ACL was$848 million atMarch 31, 2022 , compared to$178 million atDecember 31, 2021 . The ACL as a percentage of total loans and leases was 1.29% atMarch 31, 2022 , compared to 0.55% atDecember 31, 2021 . The increase in the ACL was primarily due to the impact of the CIT Merger. The initial ACL for PCD loans and leases acquired in the CIT Merger (the "Initial PCD ACL") was$284 million . The Initial PCD ACL was established through the PCD Gross-Up and there was no corresponding increase to the provision for credit losses. The PCD Gross-Up is discussed further in Note 2 - Business Combinations. The initial ACL for Non-PCD loans and leases acquired in the CIT Merger was established through a corresponding increase of$454 million to the provision for credit losses for the "Initial Non-PCD Provision". The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. For the period endedMarch 31, 2022 , the ACL increase sinceDecember 31, 2021 was primarily driven by the Initial PCD ACL and Initial Non-PCD ACL discussed above, partially offset by improvements in macroeconomic factors. Forecasted economic conditions are developed using third party macroeconomic scenarios and may be adjusted based on management's expectations over the life of the portfolio. Significant macroeconomic factors used in estimating the expected losses include unemployment, GDP, home price index, commercial real estate index, corporate profits, and credit spreads. TheMarch 31, 2022 ACL forecast was calculated using scenario weighting of a range of economic scenarios, including a baseline, an upside, and a downside scenario. The scenarios showed improvements in the most significant economic factors compared to what was used to generate theDecember 31, 2021 ACL and estimate the Initial PCD ACL and Initial Non-PCD Provision at the Merger Date. These loss estimates were also influenced by BancShares' strong credit quality and low net charge-offs. BancShares determined that an ACL of$848 million was appropriate as ofMarch 31, 2022 . In the three months endedMarch 31, 2022 , the ACL on commercial portfolios increased$663 million and the ACL on consumer portfolios increased$7 million , reflecting the CIT Merger. While management utilizes its best judgment and information available, the ACL is dependent upon factors that are inherently difficult to predict, the most significant being the factors in the economic scenarios. ACL estimates in these scenarios ranged from approximately$625 million to approximately$1.1 billion . BancShares determined that an ACL of$848 million was appropriate as ofMarch 31, 2022 . 82 --------------------------------------------------------------------------------
Table 21 Allowance for Credit Losses Three months ended March 31, 2022 dollars in millions Commercial Consumer Total Balance at December 31, 2021$ 80 $ 98 $ 178 Initial PCD ACL(1) 270 14 284 Initial Non-PCD Provision 432 22 454 Benefit for credit losses - loans and leases (23) (30) (53) Total provision (benefit) for credit losses- loans and leases$ 409 $ (8) $ 401 Charge-offs(1) (28) (5) (33) Recoveries 12 6 18 Balance at March 31, 2022$ 743 $ 105 $ 848 Annualized net charge-off ratio 0.09 % Net charge-offs (recoveries)$ 16 $ (1) $ 15 Average loans$ 65,182 Percent of loans in each category to total loans 76 % 24 % 100 % Three months ended March 31, 2021 dollars in millions Commercial Consumer Total Balance at December 31, 2020$ 92 $ 133 $ 225 Benefit for credit losses - loans and leases (3) (8) (11) Charge-offs (4) (5) (9) Recoveries 2 4 6 Balance at March 31, 2021$ 87 $ 124 $ 211 Annualized net charge-off ratio 0.03 % Net charge-offs $ 2 $ 1$ 3 Average loans$ 32,970 Percent of loans in each category to total loans 70 % 30 % 100 % (1)The Initial PCD ACL related to the CIT Merger was$284 million , net of an additional$243 million for loans that CIT charged-off prior to the Merger Date (whether full or partial) which met BancShares' charge-off policy at the Merger Date. Net charge-offs were$15 million during the first quarter of 2022, compared to$3 million during the first quarter of 2021. On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.09% and 0.03% for the first quarter of 2022 and 2021, respectively.
The following table provides trends in the ACL ratios.
Table 22 Allowance for Credit Losses Ratios dollars in millions March 31, 2022 December 31, 2021 Allowance for credit losses to total loans and leases: 1.29 % 0.55 % Allowance for credit losses $ 848 $ 178 Total loans and leases$ 65,524 $ 32,372 Commercial Loans: Commercial allowance for credit losses to commercial loans and leases: 1.48 % 0.35 % Allowance for credit losses - commercial $ 743 $ 80 Commercial loans and leases$ 50,101 $ 22,586 Consumer Loans: Consumer allowance for credit losses to consumer loans and leases: 0.69 % 1.01 % Allowance for credit losses - consumer $ 105 $ 98 Consumer loans and leases$ 15,423 $ 9,786 The reserve for unfunded loan commitments was$75 million and$12 million atMarch 31, 2022 andDecember 31, 2021 , respectively. The increase was driven by the additional commitments from the CIT Merger. The additional off-balance sheet commitments primarily reflect loan commitments or lines of credit and DPAs. See Note 23 - Commitments and Contingencies for information relating to off-balance sheet commitments and Note 1 - Accounting Policies and Basis of Presentation for discussion on the ACL for unfunded commitments. 83 -------------------------------------------------------------------------------- Credit Metrics Non-performing Assets Nonperforming assets include non-accrual loans and leases and OREO. AtMarch 31, 2022 , BancShares' nonperforming assets totaled$581 million , an increase of$420 million sinceDecember 31, 2021 , reflecting the added balances of the CIT Merger portfolio.
The following table presents total nonperforming assets.
Table 23 Non-Performing Assets dollars in millions March 31, 2022 December 31, 2021 Non-accrual loans: Commercial loans $ 426 $ 45 Consumer loans 112 76 Total non-accrual loans $ 538 $ 121 Other real estate owned 43 40 Total non-performing assets $ 581 $ 161 Allowance for credit losses to total loans and leases: 1.29 % 0.55 %
Ratio of total nonperforming assets to total loans, leases and other real estate owned
0.89 % 0.49 %
Ratio of non-accrual loans and leases to total loans and leases 0.82 %
0.37 % Ratio of allowance for credit losses to non-accrual loans and leases 157.55 % 148.37 % Non-accrual loans and leases atMarch 31, 2022 were$538 million , reflecting an increase of$417 million sinceDecember 31, 2021 . Non-accrual loans and leases as a percentage of total loans and leases was 0.82% and 0.37% atMarch 31, 2022 andDecember 31, 2021 , respectively. The increases were driven by the CIT Merger. The increase in consumer non-accrual loans primarily reflects the addition of a legacy CIT single family residential loan portfolio. AtMarch 31, 2022 , OREO totaled$43 million , representing an increase of$3 million sinceDecember 31, 2021 . Nonperforming assets as a percentage of total loans, leases and OREO was 0.89% as ofMarch 31, 2022 compared to 0.49% as ofDecember 31, 2021 . Past Due Accounts The percentage of loans 30 days or more past due was 0.81% of loans atMarch 31, 2022 and 0.43% atDecember 31, 2021 . Delinquency status of loans is presented in Note 4 - Loans and Leases Troubled Debt Restructurings We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. TDRs not accruing interest at the time of restructure are included as nonperforming loans. TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing loans. The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators inApril 2020 to clarify accounting and reporting expectations for loan modifications in determining TDR designation for borrowers experiencing COVID-19-related financial difficulty. BancShares applied this regulatory guidance during its TDR identification process for short-term loan forbearance agreements as a result of COVID-19, and in most cases, is not recording these as TDRs. Table 24 Troubled Debt Restructurings March 31, 2022 December 31, 2021 dollars in millions Commercial Consumer Total Commercial Consumer Total Accruing TDRs$ 103 $ 48 $ 151 $ 97 $ 49 $ 146 Nonaccruing TDRs 28 24 52 21 25 46 Total TDRs$ 131 $ 72 $ 203 $ 118 $ 74 $ 192 Concentration Risk We maintain a well-diversified loan portfolio and seek to minimize the risks associated with large concentrations within specific geographic areas, collateral types or industries. 84 -------------------------------------------------------------------------------- Commercial Concentrations Geographic Concentrations The following table summarizes state concentrations greater than 5.0% of our loans. Data is based on obligor location unless secured by real estate, then data based on property location. Table 25 Commercial Loans - Geography dollars in millions March 31, 2022 December 31, 2021 State California$ 8,701 17.4 % $ 3,163 14.0 % North Carolina 7,973 15.9 % 7,181 31.8 % Texas 3,235 6.5 % 879 3.9 % Florida 3,020 6.0 % 1,496 6.6 % South Carolina 2,969 5.9 % 2,855 12.6 % All other states 22,784 45.5 % 7,012 31.1 % Total U.S.$ 48,682 97.2 % $ 22,586 100.0 %Total International 1,419 2.8 % - - % Total$ 50,101 100.0 % $ 22,586 100.0 % Industry Concentrations The following table represents loans by industry of obligor: Table 26 Commercial Loans - Industry dollars in millions March 31, 2022 December 31, 2021 Real Estate$ 11,233 22.4 %$ 4,279 18.9 % Healthcare 8,311 16.6 % 6,997 31.0 % Transportation, communication, gas, utilities 4,156 8.3 % 774 3.4 % Manufacturing 4,092 8.2 % 1,347 6.0 % Business Services 4,053 8.1 % 2,307 10.2 % Retail 3,832 7.6 % 1,301 5.8 % Finance and insurance 3,228 6.4 % 1,361 6.0 % Service industries 3,199 6.4 % 722 3.2 % Wholesale 2,198 4.4 % 882 3.9 % Other 5,799 11.6 % 2,615 11.6 % Total$ 50,101 100.0 %$ 22,585 100.0 % Consumer Concentrations Loan concentrations may exist when multiple borrowers could be similarly impacted by economic or other conditions. The following table summarizes state concentrations greater than 5.0% based upon property address. Table 27 Consumer Loans Geographic Concentrations March 31, 2022 December 31, 2021 Net % of Net % of dollars in millions Investment Total Investment Total State North Carolina$ 5,013 32.5 % $ 4,931 50.4 % California 3,616 23.4 % 161 1.6 % South Carolina 2,682 17.4 % 2,626 26.9 % Other states 4,112 26.7 % 2,068 21.1 % Total loans$ 15,423 100.0 % $ 9,786 100.0 % Counterparty Risk We enter into interest rate derivatives and foreign exchange forward contracts as part of our overall risk management practices and also on behalf of our clients. We establish risk metrics and evaluate and manage the counterparty risk associated with these derivative instruments in accordance with the comprehensive Risk Management Framework and Risk Appetite Framework. 85 -------------------------------------------------------------------------------- Counterparty credit exposure or counterparty risk is a primary risk of derivative instruments, relating to the ability of a counterparty to perform its financial obligations under the derivative contract. We seek to control credit risk of derivative agreements through counterparty credit approvals, pre-established exposure limits and monitoring procedures, which are integrated with our cash and issuer related credit processes. The Chief Credit Officer, or delegate, approves each counterparty and establishes exposure limits based on credit analysis of each counterparty. Derivative agreements for BancShares' risk management purposes and for the hedging of client transactions are executed with major financial institutions and are settled through the major clearing exchanges, which are rated investment grade by nationally recognized statistical rating agencies. Credit exposure is mitigated via the exchange of collateral between the counterparties covering mark-to-market valuations. Client related derivative transactions, which are primarily related to lending activities, are incorporated into our loan underwriting and reporting processes.
ASSET RISK
Asset risk is a form of price risk and is a primary risk of our leasing businesses related to the risk to earning of capital arising from changes in the value of owned leasing equipment. Reflecting the addition of operating lease equipment and additional asset-based lending from the CIT Merger, we are subject to increased asset risk. Asset risk in our leasing business is evaluated and managed in the divisions and overseen by risk management processes. In our asset based lending business, we also use residual value guarantees to mitigate or partially mitigate exposure to end of lease residual value exposure on certain of our finance leases. Our business process consists of: (1) setting residual values at transaction inception, (2) systematic periodic residual value reviews, and (3) monitoring levels of residual realizations. Residual realizations, by business and product, are reviewed as part of the quarterly financial and asset quality review. Reviews for impairment are performed at least annually. In combination with other risk management and monitoring practices, asset risk is monitored through reviews of the equipment markets including utilization rates and traffic flows, the evaluation of supply and demand dynamics, the impact of new technologies and changes in regulatory requirements on different types of equipment. At a high level, demand for equipment is correlated with GDP growth trends for the markets the equipment serves, as well as the more immediate conditions of those markets. Cyclicality in the economy and shifts in trade flows due to specific events represent risks to the earnings that can be realized by these businesses. For instance, in the Rail business, BancShares seeks to mitigate these risks by maintaining a relatively young fleet of assets, which can bolster attractive lease and utilization rates.
MARKET RISK
Interest rate risk management
BancShares is exposed to the risk that changes in market conditions or government policy may affect interest rates and negatively impact earnings. The risk arises from the nature of BancShares' business activities, the composition of BancShares' balance sheet, and changes in the level or shape of the yield curve. BancShares manages this inherent risk strategically based on prescribed guidelines and approved limits. Interest rate risk can arise from many of the BancShares' business activities, such as lending, leasing, investing, deposit taking, derivatives, and funding activities. We evaluate and monitor interest rate risk primarily through two metrics. •Net Interest Income Sensitivity ("NII Sensitivity") measures the net impact of hypothetical changes in interest rates on forecasted NII; and •Economic Value of Equity ("EVE Sensitivity") measures the net impact of these hypothetical changes on the value of equity by assessing the economic value of assets, liabilities and off-balance sheet instruments. BancShares uses a holistic process to measure and monitor both short term and long term risks which includes, but is not limited to, gradual and immediate parallel rate shocks, changes in the shape of the yield curve, and changes in the relationship of various yield curves. NII Sensitivity generally focuses on shorter term earnings risk, while EVE Sensitivity assesses the longer-term risk of the existing balance sheet. Our exposure to NII Sensitivity is guided by BancShares risk appetite framework and a range of risk metrics and BancShares may utilize tools across the balance sheet to adjust its interest rate risk exposures, including through business line actions and actions within the investment, funding and derivative activities. 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. 86 --------------------------------------------------------------------------------
Our funding sources consist primarily of non-maturity deposits and time deposits. We also support our funding needs through wholesale funding sources (including unsecured and secured borrowings).
The deposit rates we offer are influenced by market conditions and competitive factors. Market rates are the key drivers of deposit costs and we continue to optimize deposit costs by improving our deposit mix. Changes in interest rates, expected funding needs, as well as actions by competitors, can affect our deposit taking activities and deposit pricing. We believe our targeted non-maturity deposit customer retention is strong and we remain focused on optimizing our mix of deposits. We regularly assess the effect of deposit rate changes on our balances and seek to achieve optimal alignment between assets and liabilities. Table 28 below summarizes the results of 12-month NII Sensitivity simulations produced our asset/liability management system. These simulations assume static balance sheet replacement with like products and implied forward market rates, but also incorporates additional assumptions, such as, but not limited to prepayment estimates, pricing estimates and deposit behaviors. The below simulations assume an immediate 25, 100 and 200 bps parallel increase and 25 and 100 bps decrease from the market-based forward curve forMarch 31, 2022 andDecember 2021 . Table 28 Net Interest Income Sensitivity Simulation Analysis Estimated (decrease) increase in net interest income Change in interest rate (basis points) March 31, 2022 December 31, 2021 -100 (6.10) % (5.77) % -25 (1.50) % (1.15) % +25 1.60 % 1.05 % +100 6.10 % 3.21 % +200 12.20 % 6.30 % NII Sensitivity metrics atMarch 31, 2022 , compared toDecember 31, 2021 , were primarily affected by the addition of CIT assets and liabilities, and subsequent debt redemptions. BancShares continues to have an asset sensitive interest rate risk profile. The potential upside to forecasted earnings is largely driven by the composition of the balance sheet (primarily due to floating rate commercial loans and cash), as well as modest estimates of future deposit betas. Approximately 45% of our loans have floating contractual reference rates, indexed primarily to 1-month LIBOR, 3-month LIBOR, Prime and Secured Overnight Financing Rate ("SOFR"). Deposit betas for the combined company are modeled and have a portfolio average of 20%-25%, which blends the lower beta deposits of legacy FCB with the higher betas from legacy CIT. Impacts to NII Sensitivity may change due to actual results differing from modeled expectations. As noted above, EVE Sensitivity supplements NII simulations as it estimates risk exposures beyond a twelve-month horizon. EVE Sensitivity measures the change in value of the economic value of equity driven by changes in assets, liabilities, and off-balance sheet instruments in response to a change in interest rates. EVE Sensitivity is calculated by estimating the change in the net present value of assets, liabilities, and off balance sheet items under various rate movements.
Table 29 presents the EVE profile as of
Table 29 Economic Value Of Equity Modeling Analysis Estimated (decrease) increase in EVE Change in interest rate (basis points) March 31, 2022 December 31, 2021 -100 (7.90) % (13.68) % -25 (1.80) % - % +100 6.40 % 6.10 % +200 8.40 % 5.93 % The economic value of equity metrics atMarch 31, 2022 compared toDecember 31, 2021 , were primarily affected by the CIT Merger, coupled with 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. 87 -------------------------------------------------------------------------------- We use results of our various interest rate risk analyses to formulate and implement asset and liability management strategies, in coordination with the Asset Liability Committee, to achieve the desired risk profile, while managing our objectives for market risk and other strategic objectives. Specifically, we may manage our interest rate risk position through certain pricing strategies and product design for loans and deposits, our investment portfolio, funding portfolio, or by using off balance sheet derivatives to mitigate earnings volatility. The above sensitivities provide an estimate of our interest rate sensitivity; however, they do not account for potential changes in credit quality, size, mix, or changes in the competition for business in the industries we serve. They also do not account for other business developments and other actions. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, the range of such simulations is not intended to represent our current view of the expected range of future interest rate movements.
Table 30 provides loan maturity distribution information.
Table 30 Loan Maturity Distribution At March 31, 2022, maturing Within One to Five Five to 15 After15 dollars in millions One Year Years Years years Total Commercial Commercial construction$ 563 $ 1,368
549 3,886 8,623 496 13,554 Non-owner occupied commercial mortgage 2,133 4,966 1,934 259 9,292 Commercial and industrial 6,550 12,362 3,373 117 22,402 Leases 742 1,427 51 - 2,220 Total commercial$ 10,537 $ 24,009 $ 14,586 $ 969 $ 50,101 Consumer Residential mortgage 275 1,085 3,456 6,895 11,711 Revolving mortgage 114 222 95 1,410 1,841 Consumer auto 10 627 683 - 1,320 Consumer other 296 129 88 38 551 Total consumer$ 695 $ 2,063 $ 4,322 $ 8,343 $ 15,423 Total loans and leases$ 11,232 $ 26,072 $ 18,908 $ 9,312 $ 65,524
Table 31 provides information regarding the sensitivity of loans and leases to changes in interest rates.
Table 31 Loan Interest Rate Sensitivity Loans
maturing one year or after with
Fixed interest Variable interest dollars in millions rates rates Commercial Commercial construction $ 853$ 1,217 Owner occupied commercial mortgage 11,353 1,592 Non-owner occupied commercial mortgage 2,608 4,552 Commercial and industrial 6,933 8,979 Leases 1,477 - Total commercial$ 23,224 $ 16,340 Consumer Residential mortgage 6,912 4,524 Revolving mortgage 38 1,688 Consumer auto 1,311 - Consumer other 215 40 Total consumer$ 8,476 $ 6,252 Total loans and leases$ 31,700 $ 22,592 88
-------------------------------------------------------------------------------- Reference Rate Reform The administrator of LIBOR has announced that publication of the most commonly usedU.S. Dollar LIBOR will cease to be provided or cease to be representative afterJune 30, 2023 . The publication of all other LIBOR settings ceased to be provided or ceased to be representative onDecember 31, 2021 . TheU.S. federal banking agencies had also issued guidance strongly encouraging banking organizations to cease using theU.S. Dollar LIBOR as a reference rate in "new" contracts byDecember 31, 2021 at the latest. As a result, prior to the CIT Merger, FCB and CIT had ceased originating new products using LIBOR by the end of 2021. InApril 2018 , the FRB ofNew York commenced publication of SOFR, which has been recommended as an alternative toU.S. Dollar LIBOR by the Alternative Reference Rates Committee, a group of market and official sector participants. However, uncertainty remains as to the transition process and acceptance of SOFR as the primary alternative to LIBOR. 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, 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. However, we are positioned to accommodate other alternative reference rates (e.g. credit sensitive rates) in response to how the market evolves.
LIQUIDITY RISK MANAGEMENT
Our liquidity risk management and monitoring process is designed to ensure the availability of adequate cash and collateral resources and funding capacity to meet our obligations. Our overall liquidity management strategy is intended to ensure appropriate liquidity to meet expected and contingent funding needs under both normal and stressed environments. Consistent with this strategy, we maintain significant amounts ofAvailable Cash and High-Quality Liquid Securities . Additional sources of liquidity include FHLB borrowing capacity, committed credit facilities, repurchase agreements, Brokered CD issuances, unsecured debt issuances, and cash collections generated by portfolio asset sales to third parties. We utilize a series of measurement tools to assess and monitor the level and adequacy of our liquidity position, liquidity conditions and trends. We measure and forecast liquidity and liquidity risks under different hypothetical scenarios and across different horizons. We use a liquidity stress testing framework to better understand the range of potential risks and their impacts to which BancShares is exposed. Stress test results inform our business strategy, risk appetite, levels of liquid asset, 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
89 --------------------------------------------------------------------------------
Table 32 Liquidity dollars in millions March 31, 2022 Available Cash $ 9,075 High Quality Liquid Securities 12,457 Liquid Assets$ 21,532 FHLB capacity(1)$ 13,143 FRB capacity 4,242 Line of credit with bank 75 Total contingent sources$ 17,460
Total Liquid Assets and contingent sources
(1)See Table 33 for additional details.
We fund our operations through deposits and borrowings. Our primary source of liquidity is our branch-generated deposit portfolio due to the generally stable balances and low cost. Deposits totaled$91.6 billion and$51.4 billion atMarch 31, 2022 andDecember 31, 2021 , respectively. Borrowings totaled$3.3 billion and$1.8 billion atMarch 31, 2022 andDecember 31, 2021 , respectively. Borrowings consist of long-term debt, FHLB advances and securities sold under customer repurchase agreements. A source of available funds is advances from the FHLB ofAtlanta . We may pledge assets for secured borrowing transactions, which include borrowings from the FHLB and/or FRB, or for other purposes as required or permitted by law. The debt issued in conjunction with these transactions is collateralized by certain discrete receivables, securities, loans, leases and/or underlying equipment. Certain related cash balances are restricted. FHLB Advances Table 33 FHLB Balances March 31, 2022 December 31, 2021 dollars in millions Total Total Total borrowing capacity$ 13,782 $ 9,564 Less: Advances 639 645 Available capacity$ 13,143 $ 8,919
Pledged non-PCD loans (contractual balance)
14,507 Weighted Average Rate 1.27 % 1.28 %
Under borrowing arrangements with the FRB of
Commitments and Contractual Obligations Table 34 identifies significant obligations and commitments as ofMarch 31, 2022 , representing required and potential cash outflows. See Note 23 - Commitments and Contingencies, for additional information regarding commitments. Financing commitments, letters of credit and deferred purchase commitments are presented at contractual amounts and do not necessarily reflect future cash outflows as many are expected to expire unused or partially used. 90 -------------------------------------------------------------------------------- Table 34 Commitments and Contractual Obligations Type of obligation Payments due by period dollars in millions Less than 1 year 1-3 years 4-5 years Thereafter Total Contractual obligations: Time deposits $ 6,765$ 1,918 $ 436 $ 123 $ 9,242 Short-term borrowings 616 - - - 616 Long-term obligations 94 683 347 1,552 2,676 Total contractual obligations $ 7,475$ 2,601 $ 783 $ 1,675 $ 12,534 Commitments: Financing commitments $ 11,051$ 4,724 $ 1,983 $ 4,049 $ 21,807 Letters of credit 169 98 76 23 366 Deferred purchase agreements 2,097 - - - 2,097 Lessor commitments 513 - - - 513 Affordable housing partnerships(1) 84 137 14 7 242 Total commitments $ 13,914$ 4,959 $ 2,073 $ 4,079 $ 25,025
(1)On-balance sheet commitments, included in other liabilities.
CAPITAL
Capital requirements applicable to BancShares' are discussed in Item 1. Business - Regulation, subsections "Regulatory Considerations" of our 2021 Annual Report.
BancShares maintains a comprehensive capital adequacy process. BancShares establishes internal capital risk limits and warning thresholds, which utilizeRisk-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. 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, CIT Series A and B Preferred Stock was converted into the rights to receive BancShares Series B and C Preferred Stock, respectively. In connection with the consummation of the CIT Merger, the Parent Company issued (a) 325,000 shares of BancShares Series B Preferred Stock with a liquidation preference of$1,000 per share, resulting in a total liquidation preference of$325 million , and (b) 8 million shares of BancShares Series C Preferred Stock with a liquidation preference of$25 per share, resulting in a total liquidation preference of$200 million .
The table below shows activities that caused the change in outstanding Class A Common Stock for the quarter.
Table 35 Changes in Shares of Class A Common Stock Outstanding
Three months ended
2022 Class A shares outstanding at beginning of period 8,811,220 Share issuance in conjunction with the CIT Merger 6,140,010 Restricted stock units vested, net of shares held to cover taxes 45,095 Class A shares outstanding at end of period 14,996,325
We also had 1,005,185 Class B Common Stock outstanding at
We are committed to effectively managing our capital to protect our depositors, creditors and stockholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements. In accordance with GAAP, the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within stockholders' equity. These amounts are excluded from regulatory in the calculation of our regulatory capital ratios under current regulatory guidelines. 91 -------------------------------------------------------------------------------- Table 36 Analysis of Capital Adequacy Requirements to be March 31, 2022 December 31, 2021 dollars in millions Well-Capitalized Amount Ratio Amount Ratio BancShares Risk-based capital ratios Total risk-based capital 10.00 %$ 12,117 14.47 %$ 5,042 14.35 % Tier 1 risk-based capital 8.00 % 10,377 12.39 % 4,380 12.47 % Common equity Tier 1 6.50 % 9,496 11.34 % 4,041 11.50 % Tier 1 leverage ratio 5.00 % 10,377 9.55 % 4,380 7.59 % FCB Risk-based capital ratios Total risk-based capital 10.00 %$ 11,925 14.25 %$ 4,858 13.85 % Tier 1 risk-based capital 8.00 % 10,641 12.71 % 4,651 13.26 % Common equity Tier 1 6.50 % 10,641 12.71 % 4,651 13.26 % Tier 1 leverage ratio 5.00 % 10,641 9.81 % 4,651 8.07 % As ofMarch 31, 2022 , BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. AtMarch 31, 2022 , BancShares and FCB had total risk-based capital ratio conservation buffers of 6.47% and 6.25%, respectively, which are in excess of the fully phased in Basel III conservation buffer of 2.50%. AtDecember 31, 2021 , BancShares and FCB had total risk-based capital ratio conservation buffers were 6.35% and 5.85%. The capital ratio conservation buffers represent the excess of the regulatory capital ratio as ofMarch 31, 2022 andDecember 31, 2021 over the Basel III minimum. Additional Tier 1 capital for BancShares includes perpetual preferred stock. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt. 92 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Accounting policies related to the ACL are considered critical accounting
estimates as described in our 2021 Annual Report. The ACL as of
Fair values of loans acquired in and the core deposit intangibles associated with the CIT Merger are considered critical accounting estimates. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the merger and other future events that are highly subjective in nature and may require adjustments. The fair values for these items are further discussed in Note 2 - Business Combinations.
RECENT ACCOUNTING PRONOUNCEMENTS
The following accounting pronouncements were issued by the FASB but are not yet effective for BancShares. Standard Summary of Guidance
Effect on BancShares' Financial
Statements
ASU 2020-04, Reference The amendments in these updates apply only The amendments are effective for all Rate Reform (Topic 848) to contracts, hedging relationships, and entities at issuance date of March 12, Facilitation of the other transactions that reference LIBOR or 2020, and once adopted will apply to Effects of Reference Rate another reference rate expected to be contract modifications made and hedging Reform on Financial discontinued because of reference rate relationships entered into on or before Reporting reform.
certain optional expedients for contract expedients as applicable for eligible ASU 2021-01 - Reference modifications and removes the requirements contract modifications and any hedge Rate Reform (Topic 848): to remeasure contract modifications or relationships. However, we do not expect Scope de-designate hedging relationships. In to
have a material impact on the
addition, potential sources of financial statements. Issued January 2021 ineffectiveness as a result of reference rate reform may be disregarded when performing certain effectiveness assessments. ASU 2021-01 refines the scope of ASC 848 and clarifies which optional expedients may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified in connection with the market-wide transition to new reference rates. Guidance in these ASUs are effective as of March 12, 2020 through December 31, 2022. ASU 2022-01, Fair Value The amendments in this Update allows Effective for BancShares as of January 1, Hedging - Portfolio Layer entities to designate multiple hedged 2023. Early adoption is permitted. Method layers of a single closed portfolio, and The
guidance on hedging multiple layers
Issued
method to include non-prepayable financial
prospectively. The guidance on the
assets.
accounting for fair value basis
Provides additional guidance on the
adjustments is applied on a modified
accounting for and disclosure of hedge
retrospective basis.
basis adjustments under the portfolio layer
BancShares is currently evaluating timing
method. of
adoption of this guidance and the
In addition, as of the adoption date the
impact of the guidance on its
Update permits reclassification of debt
consolidated financial statements and
securities from the held-to-maturity disclosures. category to the available-for-sale category if the entity intends to include those securities in a portfolio designated in a portfolio layer method hedge. Also provides 30 days post adoption to reclassify securities and include them in a hedged closed portfolio. 93
-------------------------------------------------------------------------------- ASU No. 2022-02, Troubled The amendments in this ASU eliminates the Effective for BancShares as of January 1, Debt Restructurings and recognition and measurement guidance for 2023. Early adoption is permitted. Vintage Disclosures TDRs for creditors that have adopted the Provides the option to early adopt the Issued March 2022 CECL model and enhances disclosure amendments related to TDRs separately from Issued March 2022 requirements for loan refinancings and the
amendments related to vintage
restructurings made with borrowers
disclosures.
experiencing financial difficulty.
Allows adoption using either a prospective
or
modified retrospective transition
The guidance also requires disclosure of
methods. Under prospective method,
current-period gross write-offs by year
entities are permitted to apply this
of origination in the vintage disclosure.
guidance to modifications occurring after
the
first day of the fiscal year of
adoption. If the modified retrospective
transition method is elected, a cumulative
effect adjustment to retained earnings is
recorded in the period of adoption to
recognize any change in the allowance for
credit losses that had been recognized for
receivables previously modified in a TDR.
BancShares is currently evaluating the
transition methods and timing of adoption,
along
with the impact on its consolidated
financial statements and disclosures.
GLOSSARY OF KEY TERMS
To assist the users of this document, we have added the following Glossary of key terms:
Adjusted Interest-Earnings Assets is a non-GAAP measure that is the sum of loans and leases (as defined below, less the credit balances of factoring clients), loans and leases held for sale, interest-bearing cash, investment securities, and securities purchased under agreements to resell. 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 non-GAAP measure that is computed using daily balances of Interest-Earning Assets. We use this average for certain key profitability ratios, including NIM (as defined below) for the respective period.
Average Loans and Leases is computed using daily balances and is used to measure the rate of return on loans and leases (finance leases) and the rate of net charge-offs, for the respective period.
Capital Conservation Buffer ("CCB") is the excess 2.5% of each of the capital tiers that banks are required to hold in accordance with Basel III rules, above the minimum CET 1 Capital, Tier 1 capital and Total capital requirements, designed to absorb losses during periods of economic stress. 94 -------------------------------------------------------------------------------- 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 theFederal 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 or a foreign currency exchange rate. As the value of that asset or index changes, so does the value of the derivative contract. Economic Value of Equity ("EVE") 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.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 ofTreasury and Agency securities held outright or via reverse repurchase agreements. Impaired Loan is a loan for which, based on current information and events, it is probable that BancShares will be unable to collect all amounts due according to the contractual terms of the loan. Interest income includes interest earned on loans, interest-bearing cash balances, debt investments and dividends on investments. Lease - finance 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.
Lease - operating is a lease in which BancShares retains ownership of the asset (operating lease equipment, net), collects rental payments, recognizes depreciation on the asset, and retains the risks of ownership, including obsolescence.
Liquid Assets includes Available Cash and HQLS.
Loans and Leases include loans, finance lease receivables, and factoring receivables, and do not include amounts contained within assets held for sale (unless otherwise noted) or operating leases.
Loan-to-Value Ratio ("LTV") is a calculation of a loan's collateral coverage that is used in underwriting and assessing risk in our lending portfolio. LTV is calculated as the total loan obligations (unpaid principal balance) secured by collateral divided by the fair value of the collateral. Net Interest Income ("NII") reflects interest and fees on loans, interest on interest-bearing cash, and interest/dividends on investments less interest expense on deposits and borrowings. When divided by average adjusted interest earning assets, the quotient is defined as Net Interest Margin ("NIM").
Net Interest Income Sensitivity ("NII Sensitivity") measures the net impact of hypothetical changes in interest rates on forecasted NII.
Net Operating Loss Carryforward / Carryback ("NOLs") is a tax concept, whereby tax losses in one year can be used to offset taxable income in other years. The rules pertaining to the number of years allowed for the carryback or carryforward of an NOL varies by jurisdiction. 95 -------------------------------------------------------------------------------- Non-accrual Loans include loans greater than or equal to$500,000 that are individually evaluated and determined to be impaired, as well as loans less than$500,000 that are delinquent (generally for 90 days or more), unless it is both well secured and in the process of collection. Non-accrual loans also include loans with revenue recognition on a cash basis because of deterioration in the financial position of the borrower.
Non-performing Assets include Non-accrual Loans, OREO, and repossessed assets.
Other Noninterest Income includes (1) fee income and other revenue, (2) wealth management services, (3) gains and losses on leasing equipment, net, (4) Service charges on deposit accounts, (5) factoring commissions, (6) cardholder services, net, (7) merchant services, (8) realized gains and losses on investment securities available for sale, net, (9) marketable equity securities gains and losses, net, (10) gain on acquisition, (11) gain and losses on extinguishments of debt, and (12) other income.
Other Real Estate Owned ("OREO") is a term applied to real estate properties owned by a financial institution and are considered non-performing assets.
Pledged Assets are those required under the collateral maintenance requirement in connection with borrowing availability at the FHLB, which are comprised primarily of consumer and commercial real estate loans and also include certain HQL securities that are available for secured funding at the FHLB.
Purchase Accounting Adjustments ("PAA") reflect the fair value adjustments to acquired assets and liabilities assumed in a business combination.
Purchased Credit Deteriorated ("PCD") financial assets are acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer's assessment. Regulatory Credit Classifications used by BancShares are as follows: •Pass - A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification; •Special Mention - A special mention asset has potential weaknesses which deserve management's close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification; •Substandard - A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected; •Doubtful - An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values; and •Loss - Assets classified as loss are considered uncollectible and of such little value it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.
Classified assets are rated as substandard, doubtful or loss based on the criteria outlined above. Classified assets can be accruing or on non-accrual depending on the evaluation of the relevant factors. Classified loans plus special mention loans are considered criticized loans.
Residual Values for finance leases represent the estimated value of equipment at the end of its lease term. For operating lease equipment, it is the value to which the asset is depreciated at the end of lease term or at the end of estimated useful life.
Right of Use Asset ("ROU Asset") represents our right, as lessee, to use underlying assets for the lease term, and lease liabilities represent our obligation to make lease payments arising from the leases.
Risk Weighted Assets ("RWA") is the denominator to which CET1, Tier 1 Capital and Total Capital is compared to derive the respective risk based regulatory ratios. RWA is comprised of both on-balance sheet assets and certain off-balance sheet items (for example loan commitments, purchase commitments or derivative contracts). RWA items are adjusted by certain risk-weightings as defined by the regulators, which are based upon, among other things, the relative credit risk of the counterparty. 96 -------------------------------------------------------------------------------- Troubled Debt Restructuring ("TDR") occurs when a lender, for economic or legal reasons, grants a concession to the borrower related to the borrower's financial difficulties that it would not otherwise consider. Variable Interest Entity ("VIE") is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets. These entities: lack sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; have equity owners who either do not have voting rights or lack the ability to make significant decisions affecting the entity's operations; and/or have equity owners that do not have an obligation to absorb the entity's losses or the right to receive the entity's returns. Yield-related Fees are collected in connection with our assumption of underwriting risk in certain transactions in addition to interest income. We recognize yield-related origination fees in interest income over the life of the lending transaction and recognize yield-related prepayment fees when the loan is prepaid.
NON-GAAP FINANCIAL MEASUREMENTS
BancShares provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. A non-GAAP financial measure is a numerical measure of a company's historical or future financial performance or financial position that may either exclude or include amounts or is adjusted in some way to the effect of including or excluding amounts, as compared to the most directly comparable measure calculated and presented in accordance with GAAP financial statements. BancShares believes that non-GAAP financial measures, when reviewed in conjunction with GAAP financial information, can provide transparency about, or an alternate means of assessing, its operating results and financial position to its investors, analysts and management. These non-GAAP measures should be considered in addition to, and not superior to or a substitute for, GAAP measures presented in BancShares' consolidated financial statements and other publicly filed reports. In addition, our non-GAAP measures may be different from or inconsistent with non-GAAP financial measures used by other institutions. Whenever we refer to a non-GAAP financial measure we will generally define and present the most directly comparable financial measure calculated and presented in accordance withU.S. GAAP, along with a reconciliation between theU.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 tables provide: (1) a reconciliation of net income (GAAP) to net revenue on operating leases (non-GAAP) for the Rail Segment, and (2) a computation of adjusted interest-earning assets (non-GAAP).
Net Revenue on Operating Leases for Rail Segment Net revenue on operating leases within the Rail segment is calculated as gross revenue earned on rail car leases less depreciation and maintenance. This metric allows us to monitor the performance and profitability of the rail leases after deducting direct expenses. The table below presents a reconciliation of net income to net revenue on operating leases. Three Months Ended March 31, dollars in millions 2022 2021 Net income (GAAP measure) $ 32 $ - Plus: Provision for income taxes 11 - Plus: Noninterest expense 16 - Less: Noninterest income 3 - Plus: Interest expense, net 19 - Net revenue on operating leases (non-GAAP measure) $
75 $ -
97 -------------------------------------------------------------------------------- Adjusted Interest-earning Assets Interest-earning assets (period end balances) (GAAP) displayed in the table below are directly derived from the following line items in the Consolidated Balance Sheets or footnotes thereto: (i) interest-earning deposits at banks; (ii) investment securities; (iii) assets held for sale; and (iv) loans and leases. These represent interest income generating assets and the average of which provides a basis for management performance calculations, such as NII and NIM. We net the liabilities related to the factoring clients as the correlating receivable, which is included in loans and leases, generate commission income, which is noninterest income. Three
Months Ended
Average Period End dollars in millions Balance Balance Interest earning assets (GAAP measure)$ 96,272 $ 94,361 Less: credit balances for factoring clients (1,160) (1,150)
Adjusted interest earning assets, net of credit balances of
$ 93,211 factoring clients (non-GAAP measure) Three
Months Ended
Yield on Interest Interest Rate Net Interest Margin dollars in millions Earning Assets
Spread
Unadjusted (GAAP measure) 2.95 % 2.60 % 2.69 % Impact of credit balances for factoring clients 0.04 % 0.04 % 0.04 % Adjusted (non-GAAP measure) 2.99 % 2.64 % 2.73 % Forward-Looking Statements Statements in this Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans and future performance of BancShares. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "plans," "projects," "targets," "designed," "could," "may," "should," "will" or other similar words and expressions are intended to identify these forward-looking statements. These forward-looking statements are based on BancShares' current expectations and assumptions regarding BancShares' business, the economy, and other future conditions. Because forward-looking statements relate to future results and occurrences, they are subject to inherent risks, uncertainties, changes in circumstances and other factors that are difficult to predict. Many possible events or factors could affect BancShares' future financial results and performance and could cause the actual results, performance or achievements of BancShares to differ materially from any anticipated results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, general competitive, economic, political, geopolitical events (including the military conflict betweenRussia andUkraine ) and market conditions, the impacts of the global 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, rising inflation, actions of government regulators, the availability of capital and personnel, the failure to realize the anticipated benefits of BancShares' previously announced acquisition transaction(s), including the recently-completed transaction with CIT, which acquisition risks include (1) disruption from the transaction, or recently completed mergers, with customer, supplier or employee relationships, (2) the possibility that the amount of the costs, fees, expenses and charges related to the transaction may be greater than anticipated, including as a result of unexpected or unknown factors, events or liabilities, (3) reputational risk and the reaction of the parties' customers to the transaction, (4) the risk that the cost savings and any revenue synergies from the transaction may not be realized or take longer than anticipated to be realized, and (5) difficulties experienced in the integration of the businesses. Except to the extent required by applicable law or regulation, BancShares disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Additional factors which could affect the forward-looking statements can be found in BancShares' Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and its other filings with theSecurities and Exchange Commission .
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