FIRST CITIZENS BANCSHARES, INC. 
Management's discussion and analysis ("MD&A") of earnings and related financial
data is presented to assist in understanding the financial condition and results
of operations of First Citizens BancShares, Inc. (the "Parent Company" and, when
including all of its subsidiaries on a consolidated basis, "we," "us," "our,"
"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 ended December 31, 2021 (the "2021 Form 10-K").
Intercompany accounts and transactions have been eliminated. Although certain
amounts for prior years have been reclassified to conform to statement
presentations for 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 does not include any CIT related data, and therefore are not directly comparable to the three and six months endedJune 30, 2022 . EXECUTIVE OVERVIEWThe 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 theFederal Deposit Insurance Corporation ("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 Form 10-K for further discussion of our strategy.
64
--------------------------------------------------------------------------------Significant Events in 2022 CIT Merger 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 and reported in the new Rail segment. •The fair value of deposits acquired was$39.4 billion that included deposits derived from online banking andHome Owner's Association ("HOA") deposits related to Community Association Banking ("CAB"), and commercial deposits. The transaction also included approximately 80 bank branches, about 60 of which were 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. Share Repurchase Program OnJuly 26, 2022 , our Board of Directors (the "Board") authorized a share repurchase program for up to 1,500,000 shares of BancShares' Class A common stock for the period commencingAugust 1, 2022 throughJuly 28, 2023 . Under the authorized share repurchase program, shares of BancShares' Class A common stock may be repurchased from time to time on the open market or in privately negotiated transactions, including through a Rule 10b5-1 plan. However, the Board's action does not obligate BancShares to repurchase any particular number of shares, and repurchases may be suspended or discontinued at any time. 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 and year-to-date activity and ending and average balances are not comparable to the 2021 periods. Beginning with the second quarter of 2022, we present a linked quarter comparison in the discussions of our consolidated results of operations and consolidated financial position, as permitted by applicable rules of theSecurities and Exchange Commission . We believe this will provide relevant information to our investors relating to our performance due to the inclusion of the CIT Merger in both quarters. Further discussions are included in the remaining sections of this MD&A. 65 -------------------------------------------------------------------------------- Table 1 Selected Quarterly Data Three Months Ended Six Months Ended dollars in millions, except share data June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021 SUMMARY OF OPERATIONS Interest income $ 757 $ 710 $ 362$ 1,467 $ 717 Interest expense 57 61 16 118 31 Net interest income 700 649 346 1,349 686 Provision (benefit) for credit losses 42 464 (20) 506 (31) Net interest income after provision for credit losses 658 185 366 843 717 Noninterest income 424 850 133 1,274 270 Noninterest expense 745 810 300 1,555 597 Income before income taxes 337 225 199 562 390 Income taxes 82 (46) 46 36 90 Net income 255 271 153 526 300 Preferred stock dividends 17 7 5 24 9 Net income available to common stockholders $ 238 $
264 $ 148 $ 502 $ 291
PER COMMON SHARE DATA Average diluted common shares 16,035,090 15,779,153 9,816,405 15,937,826
9,816,405
Net income available to common stockholders (diluted)$ 14.86 $
16.70
Book value per common share$ 609.95 $
605.48
KEY PERFORMANCE METRICS Return on average assets (ROA) 0.95 % 1.00 % 1.13 % 0.97 % 1.14 % Return on average common stockholders' equity (ROE) 9.87 % 11.18 % 14.64 % 10.51 % 14.67 % Net interest margin (NIM)(1) 3.04 % 2.73 % 2.67 % 2.89 % 2.73 % SELECTED QUARTERLY AVERAGE BALANCES Total investments$ 19,185 $
19,492
66,488 65,303 33,166 65,899 33,127
Total operating lease equipment (net) 7,973 7,924 - 7,949 -
Total assets 107,575 110,394 54,399 108,977 52,913
Total deposits 90,621 91,574 47,751 91,118 46,313
Total common stockholders' equity 9,686 9,560 4,398 9,624 4,358
SELECTED QUARTER-END BALANCES
Total investments $ 19,136 $ 19,469 $ 10,895 $ 19,136 $ 10,895
Total loans and leases 67,735 65,524 32,690 67,735 32,690
Total operating lease equipment (net) 7,971 7,972 - 7,971 -
Total assets 107,673 108,597 55,175 107,673 55,175
Total deposits 89,329 91,597 48,410 89,329 48,410
Total common stockholders' equity 9,761 9,689 4,137 9,761 4,137
Loan to deposit ratio 75.83 % 71.53 % 67.53 % 75.83 % 67.53 %
Noninterest-bearing deposits to total
deposits 29.83 % 28.27 % 43.33 % 29.83 % 43.33 %
CAPITAL RATIOS
Common equity tier 1 ratio 11.35 % 11.34 % 11.14 % 11.35 % 11.14 %
Tier 1 risk-based capital ratio 12.37 % 12.39 % 12.13 % 12.37 % 12.13 %
Total risk-based capital ratio 14.46 % 14.47 % 14.15 % 14.46 % 14.15 %
Tier 1 leverage capital ratio 9.85 % 9.55 % 7.67 % 9.85 % 7.67 %
ASSET QUALITY
Ratio of nonaccrual loans to total loans 0.76 % 0.82 % 0.57 % 0.76 % 0.57 %
Allowance for credit losses to loans
ratio 1.26 % 1.29 % 0.58 % 1.26 % 0.58 %
Net charge off ratio 0.13 % 0.09 % 0.02 % 0.11 % 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
--------------------------------------------------------------------------------
Second Quarter Income Statement Highlights
For the three months ended June 30, 2022 compared to the three months ended
March 31, 2022 ("linked quarter" comparisons):
•Net income for the three months ended June 30, 2022 was $255 million , a
decrease of $16 million , or 6% compared to the linked quarter. The decrease was
primarily due to lower non-interest income, partially offset by lower provision
for credit losses, higher net interest income and lower operating expense. Net
income available to common stockholders for the three months ended June 30, 2022
totaled $238 million , a decrease of $26 million , or 10% compared to the linked
quarter. In addition to the factors above, the decline also includes higher
dividends on preferred stock, primarily related to the Series B Preferred Stock.
Net income per diluted common share for the three months ended June 30, 2022
decreased $1.84 , or 11%, to $14.86 , from $16.70 per share in the linked quarter.
•Select items in the current and linked quarters include:
•For the three months ended June 30, 2022 :
•Gain on sale of corporate aircraft acquired in the CIT Merger of $6 million in
other noninterest income.
•Merger-related expenses of $34 million in noninterest expense.
•For the three months ended March 31, 2022 :
•Current expected credit losses ("CECL") day 2 provision for loans and leases
and unfunded commitments of $513 million .
•Preliminary gain on acquisition of $431 million in noninterest income,
representing the excess of the fair value of net assets acquired over the
purchase price.
•Gain on debt redemptions in noninterest income of $6 million from $2.9 billion
of borrowings assumed in the CIT Merger.
•Merger-related expenses of $135 million in noninterest expenses.
•A reduction in other noninterest expense of $27 million related to the
termination of certain legacy CIT retiree benefits, reflecting amounts
previously accrued.
•Return on average assets for the three months ended June 30, 2022 was 0.95%,
compared to 1.00% for the three months ended March 31, 2022 .
•Net interest income ("NII") for the three months ended June 30, 2022 was
$700 million , an increase of $51 million , or 8% compared to the three months
ended March 31, 2022 . This was primarily due to higher earning asset yields and
growth in our loan portfolio, along with lower interest expense on borrowings.
The net interest margin ("NIM") for the three months ended June 30, 2022 was
3.04%, an increase of 31 bps from 2.73% for the three months ended March 31,
2022 , reflecting the rising interest rate environment that increased yields on
our earning assets, the impact of a $2.9 billion debt redemption last quarter,
partially offset by a higher rate paid on interest-bearing deposits and lower
SBA-PPP income.
•Provision for credit losses for the three months ended June 30, 2022 was
$42 million compared to a provision of $464 million for the three months ended
March 31, 2022 . The provision for credit losses in the current quarter reflects
deterioration in CECL macroeconomic forecasts and loan portfolio growth. The
provision in the prior quarter included the day 2 CECL provision of
$513 million . The net charge-off ratio for the three months ended June 30, 2022
was 0.13%, up from 0.09% for the three months ended March 31, 2022 .
•Noninterest income for the three months ended June 30, 2022 was $424 million ,
compared to $850 million for the three months ended March 31, 2022 , which
included the preliminary gain on acquisition of $431 million . The remaining
change included higher capital markets and wealth management revenue and a gain
on sale of the corporate aircraft, mostly offset by fair value adjustments on
equity investments.
•Noninterest expense for the three months ended June 30, 2022 was $745 million ,
compared to $810 million in the three months ended March 31, 2022 . The decrease
of $65 million primarily reflects $101 million lower merger-related costs
partially offset by the $27 million benefit related to the termination of
certain legacy CIT retiree benefit plans that reduced prior quarter expenses.
The remaining change primarily reflects higher depreciation and maintenance
costs of operating lease equipment, which offset lower salaries and benefits.
For the three months ended June 30, 2022 compared to the three months ended
June 30, 2021 :
•Net income for the three months ended June 30, 2022 was $255 million , an
increase of $102 million , or 67% compared to the three months ended June 30,
2021 . Net income available to common stockholders for the three months ended
June 30, 2022 totaled $238 million , an increase of $90 million , or 61% compared
to the three months ended June 30, 2021 . Net income per diluted common share for
the three months ended June 30, 2022 decreased $0.23 , or 2%, to $14.86 , from
$15.09 per share during the three months ended June 30, 2021 .
•Select items for the three months ended June 30, 2022 are mentioned above.
•Return on average assets for the three months ended June 30, 2022 was 0.95%,
compared to 1.13% in the same quarter in 2021.
67
--------------------------------------------------------------------------------
•NII was $700 million for the three months ended June 30, 2022 , an increase of
$354 million , or 102% compared to the three months ended June 30, 2021 . This was
primarily due to the CIT Merger, partially offset by lower interest and fee
income on SBA-PPP loans. NIM was 3.04% for the three months ended June 30, 2022 ,
an increase of 37 bps from 2.67% for the three months ended June 30, 2021 ,
reflecting higher loan yields on earning assets.
•Provision for credit losses for the three months ended June 30, 2022 was
$42 million , compared to a benefit of $20 million for the three months ended
June 30, 2021 , primarily due to deterioration in CECL macroeconomic forecasts
and loan growth during the second quarter of 2022, versus a reserve release in
the second quarter of 2021. The net charge-off ratio for the three months ended
June 30, 2022 was 0.13%, up from 0.02% for the three months ended June 30, 2021 .
•Noninterest income for the three months ended June 30, 2022 was $424 million ,
compared to $133 million for the three months ended June 30, 2021 , benefiting
from the CIT Merger. The largest component of the increase was rental income on
operating leases totaling $213 million . The remaining increase was driven
primarily by the added activity due to the CIT Merger.
•Noninterest expense for the three months ended June 30, 2022 was $745 million ,
compared to $300 million for the three months ended June 30, 2021 . The increase
is associated with higher expenses for the combined company, led by higher
salaries and benefit costs of $153 million due to the increase in employees and
certain new costs, such as $136 million of depreciation and maintenance costs
associated with the operating lease portfolio.
Year to Date Income Statement Highlights
•Net income for the six months ended June 30, 2022 was $526 million , an increase
of $226 million , or 75% compared to the same period in 2021. Net income
available to common stockholders for the six months ended June 30, 2022 totaled
$502 million , an increase of $211 million , or 73% compared to the same period in
2021. Net income per diluted common share for the six months ended June 30, 2022
increased $1.85 , or 6%, to $31.48 , from $29.63 per share during the same period
in 2021. The increases are primarily attributed to the CIT Merger.
•Select items for the six months ended June 30, 2022 are mentioned above.
•Return on average assets for the six months ended June 30, 2022 was 0.97%,
compared to 1.14% in the same period in 2021.
•NII for the six months ended June 30, 2022 was $1,349 million , an increase of
$663 million , or 97% compared to the same period in 2021. This was primarily due
to the CIT Merger and higher yields on earning assets, partially offset by lower
interest and fee income on SBA-PPP loans. NIM for the six months ended June 30,
2022 was 2.89%, an increase of 16 bps from 2.73% for the same period in 2021.
•Provision for credit losses for the six months ended June 30, 2022 was
$506 million , compared to a benefit of $31 million for the same period in 2021.
The net charge-off ratio for the six months ended June 30, 2022 was 0.11%, up
from 0.03% for the same period in 2021.
•Noninterest income for the six months ended June 30, 2022 was $1,274 million ,
compared to $270 million for the same period in 2021, benefiting from the CIT
Merger. The six months ended June 30, 2022 includes a preliminary gain on
acquisition of $431 million and rental income on operating leases of
$421 million . The remaining increase was driven by the added activity due to the
CIT Merger.
•Noninterest expense for the six months ended June 30, 2022 was $1,555 million ,
compared to $597 million for the same period in 2021. The increase is primarily
associated with the CIT Merger, including higher salaries and benefit costs of
$321 million due to the increase in employees, $260 million of depreciation and
maintenance costs associated with the operating lease portfolio and higher
merger-related costs of $156 million .
Balance Sheet Highlights
•Total loans and leases at June 30, 2022 were $67.7 billion , an increase of
$2.2 billion or 13.5% annualized, from March 31, 2022 . We continued to see
strong growth in our branch network and residential mortgage portfolio as well
as growth in our commercial bank from a number of our industry verticals, middle
market banking and business capital, driven by growth in commercial and
industrial and residential mortgage loans. Total loans and leases increased
$35.4 billion from December 31, 2021 , reflecting the addition of $32.7 billion
from the CIT Merger.
•Total deposits at June 30, 2022 were $89.3 billion , a decrease of $2.3 billion
or 9.9% annualized, from March 31, 2022 , driven by declines in money market and
time deposits as we saw the most rate sensitive customers begin to move funds in
response to recent rate increases. The reductions were primarily concentrated in
acquired higher cost channels including the direct bank and legacy OneWest
branches, offset by growth in our branch network. These declines were offset by
growth in noninterest bearing deposits of $747 million , or 11.5% annualized.
Total deposits increased $37.9 billion from December 31, 2021 , reflecting the
addition of $39.4 billion from the CIT Merger.
•At June 30, 2022 , BancShares remained well capitalized with a total risk-based
capital ratio of 14.46%, a Tier 1 risk-based capital of 12.37%, a common equity
Tier 1 ratio of 11.35% and a leverage ratio of 9.85%.
68
--------------------------------------------------------------------------------Recent Economic and Industry Developments
During the second quarter of 2022, theFederal Reserve's Federal Open Market Committee ("FOMC") significantly raised its target for the federal funds rate in an effort to combat rising inflation. At its March, May, June and July meetings, theFOMC raised rates by 25, 50, 75, and 75 basis points, respectively. TheFOMC projects that there could be a total of seven rate hikes in 2022. TheFOMC's efforts to control inflation has increased concerns over the possibility of a recession within the next twelve months. In addition, geopolitical events, including the ongoing conflict withRussia andUkraine and related events, are likely to create additional upward pressure on inflation and weigh on economic activity. The timing and impact of inflation, rising interest rates and possible recession will depend on future developments, which are highly uncertain and difficult to predict. RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
NII is the difference between interest income earned on assets such as loans, leases, securities and cash, and interest expense incurred on liabilities such as deposits and borrowings and is included as a line item on the Consolidated Statements of Income. NII for the three months endedJune 30, 2022 was$700 million , up from$649 million in the three months endedMarch 31, 2022 , and up from$346 million for the three months endedJune 30, 2021 . NII for the six months endedJune 30, 2022 was$1,349 million , an increase of$663 million , or 97% compared to the same period in 2021. NII is affected by changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The following table presents the average balance sheet and related rates, along with disaggregated quarter-over-quarter changes in NII between volume (level of lending or borrowing) and rate (rates charged to customers or incurred on borrowings). Volume change is calculated as change in volume times the previous rate, while rate change is calculated as change in rate times the previous volume. The rate/volume change, change in rate times change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of their total. Tax equivalent net interest income was not materially different from NII, therefore we present NII in our analysis. 69 -------------------------------------------------------------------------------- Table 2 Average Balances and Rates Three Months Ended June 30, 2022 March 31, 2022 Change in NII Due to: Average Income / Yield / Average Income / Yield / Volume(1) Yield /Rate(1) Total Change dollars in millions Balance Expense Rate Balance Expense Rate Loans and leases (1)(2)$ 65,298 $ 655 4.01 %$ 64,144 $ 621 3.88 %$ 11 $ 23 $ 34 Total investment securities 19,185 89 1.85 19,492 83 1.71 (1) 7 6 Interest-earning deposits at banks 7,629 13 0.72 11,476 6 0.19 (4) 11 7 Total interest-earning assets (2)$ 92,112 $ 757 3.28 %$ 95,112 $ 710 2.99 %$ 6 $ 41 $ 47 Operating lease equipment, net (including held for sale)$ 7,973 $ 7,924 Cash and due from banks 524 536 Allowance for credit losses (849) (907) All other noninterest-earning assets 7,815 7,729 Total assets$ 107,575 $ 110,394 Interest-bearing deposits: Checking with interest$ 16,503 $ 4 0.12 %$ 16,605 $ 5 0.10 %$ (1) $ - $ (1) Money market 25,468 18 0.28 26,199 15 0.24 - 3 3 Savings 13,303 11 0.34 13,659 9 0.26 (1) 3 2 Time deposits 8,796 9 0.38 9,794 10 0.43 - (1) (1) Total interest-bearing deposits 64,070 42 0.26 66,257 39 0.24 (2) 5 3 Securities sold under customer repurchase agreements 627 - 0.16 600 - 0.16 - - -
Borrowings:
Federal Home Loan Bank borrowings 386 2 1.64 641 2 1.27 (1) 1 - Senior unsecured borrowings 894 4 2.05 2,719 12 1.71 (10) 2 (8) Subordinated debt 1,057 8 3.06 1,060 8 2.96 - - - Other borrowings 83 1 2.46 85 - 1.95 1 - 1 Total borrowings 2,420 15 2.43 4,505 22 1.95 (10) 3 (7) Total interest-bearing liabilities$ 67,117 $ 57 0.34 %$ 71,362 $ 61 0.35 %$ (12) $ 8 $ (4) Noninterest-bearing deposits$ 26,551 $ 25,317 Credit balances of factoring clients 1,189 1,160 Other noninterest-bearing liabilities 2,151 2,132 Stockholders' equity 10,567 10,423 Total liabilities and stockholders' equity$ 107,575 $ 110,394 Interest rate spread (2) 2.94 % 2.64 % Net interest income and net yield on interest-earning assets (2)$ 700 3.04 %$ 649 2.73 % (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 reconciliations, description of adjusted interest earning assets and why these balances are shown net of credit balances of factoring clients. 70 -------------------------------------------------------------------------------- Three Months Ended June 30, 2022 June 30, 2021 Change in NII Due to: Average Income / Yield / Average Income / Yield / Yield / Total Balance Expense Rate Balance Expense Rate Volume(1) Rate(1) Change Loans and leases (1)(2)$ 65,298 $ 655 4.01 %$ 33,166 $ 324 3.88 % $
322
Total investment securities 19,185 89 1.85 % 10,535 36 1.35 % 36 17 53 Interest-earning deposits at banks 7,629 13 0.72 % 7,819 2 0.11 % (1) 12 11 Total interest-earning assets (2)$ 92,112 $ 757 3.28 %$ 51,520 $ 362 2.79 % $
357
Operating lease equipment, net (including held for sale)$ 7,973 $ - Cash and due from banks 524 364 Allowance for credit losses (849) (212) All other noninterest-earning assets 7,815 2,727 Total assets$ 107,575 $ 54,399 Interest-bearing deposits: Checking with interest$ 16,503 $ 4 0.12 %$ 10,953 $ 1 0.06 %$ 1 $ 2 $ 3 Money market 25,468 18 0.28 % 9,582 3 0.11 % 8 7 15 Savings 13,303 11 0.34 % 3,797 - 0.03 % 2 9 11 Time deposits 8,796 9 0.38 % 2,673 4 0.61 % 7 (2) 5 Total interest-bearing deposits 64,070 42 0.26 % 27,005 8 0.13 % 18 16 34 Securities sold under customer repurchase agreements 627 - 0.16 % 677 - 0.21 % - - -
Borrowings:
Federal Home Loan Bank borrowings 386 2 1.64 % 648 2 1.29 % (1) 1 - Senior unsecured borrowings 894 4 2.05 % - - - % 4 - 4 Subordinated debt 1,057 8 3.06 % 497 5 3.62 % 3 - 3 Other borrowings 83 1 2.46 % 82 1 3.40 % - - - Total borrowings 2,420 15 2.43 % 1,227 8 2.12 % 6 1 7 Total interest-bearing liabilities$ 67,117 $ 57 0.34 %$ 28,909 $ 16 0.21 %$ 24 $ 17 $ 41 Noninterest-bearing deposits$ 26,551 $ 20,747 Credit balances of factoring clients 1,189 - Other noninterest-bearing liabilities 2,151 345 Stockholders' equity 10,567 4,398 Total liabilities and stockholders' equity$ 107,575 $ 54,399 Interest rate spread 2.94 % 2.58 % Net interest income and net yield on interest-earning assets$ 700 3.04 %$ 346 2.67 %
(1), (2) See footnotes to previous table.
71
--------------------------------------------------------------------------------
Six Months Ended
June 30, 2022 June 30, 2021 Change in NII Due to:
Average Income / Yield / Average Income / Yield / Yield /
Balance Expense Rate Balance Expense Rate Volume(1) Rate(1) Total Change
Loans and leases(1)(2) $ 64,724 $ - $ 1,276 $ - 3.96 % $ 33,127 $ 647 3.90 % $ 623 $ 6 $ 629
Total investment securities 19,338 172 1.78 % 10,148 66 1.31 % 76 30 106
Interest-earning deposits at banks 9,542 19 0.40 % 6,850 4 0.10 % 1 14 15
Total interest-earning assets(2) $ 93,604 $ 1,467 3.14 % $ 50,125 $ 717 2.85 % Operating lease equipment, net (including held for sale)$ 7,949 $ - Cash and due from banks 530 349 Allowance for credit losses (882) (218) All other noninterest-earning assets 7,776 2,657 Total assets$ 108,977 $ 52,913 Interest-bearing deposits: Checking with interest$ 16,554 $ 9 0.11 %$ 10,850 $ 3 0.05 %$ 2 $ 4 $ 6 Money market 25,832 33 0.26 % 9,297 5 0.11 % 16 12 28 Savings 13,480 20 0.30 % 3,630 1 0.03 % 4 15 19 Time deposits 9,293 19 0.40 % 2,739 8 0.64 % 15 (4) 11 Total interest-bearing deposits 65,159 81 0.25 % 26,516 17 0.13 % 37 27 64 Securities sold under customer repurchase agreements 614 - 0.16 % 659 - 0.21 % - - -
Borrowings:
Federal Home Loan Bank borrowings 513 4 1.41 % 650 4 1.29 % - - - Senior unsecured borrowings 1,801 16 1.80 % - - - % 16 - 16 Subordinated debt 1,059 16 3.01 % 497 9 3.65 % 8 (1) 7 Other borrowings 84 1 2.20 % 85 1 2.12 % - - - Total borrowings 3,457 37 2.12 % 1,232 14 2.12 % 24 (1) 23 Total interest-bearing liabilities$ 69,230 $ 118 0.34 %$ 28,407 $ 31 0.22 %$ 61 $ 26 $ 87 Noninterest-bearing deposits$ 25,960 $ 19,797 Credit balances of factoring clients 1,175 - Other noninterest-bearing liabilities 2,117 372 Stockholders' equity 10,495 4,337 Total liabilities and stockholders' equity$ 108,977 $ 52,913 Interest rate spread 2.80 % 2.63 % Net interest income and net yield on interest-earning assets$ 1,349 2.89 %$ 686 2.73 %
(1), (2) See footnotes to previous table.
Second Quarter 2022 compared to First Quarter 2022 •NII for the three months endedJune 30, 2022 was$700 million , an increase of$51 million compared to the first quarter of 2022. The increase was primarily due to the impact of higher yields on loans, investment securities and overnight investments, the debt redemption in the first quarter and strong loan growth, partially offset by a decline in SBA-PPP income and slightly higher interest-bearing deposit costs. •Interest income earned on loans and leases for the three months endedJune 30, 2022 was$655 million , an increase of$34 million compared to the first quarter of 2022. The increase was primarily due to higher yields and growth in the average loans and leases balance from$64.1 billion in the previous quarter to$65.3 billion in the current quarter. The increase was partially offset by a decline in SBA-PPP interest income. •Interest income earned on investment securities for the three months endedJune 30, 2022 was$89 million , an increase of$6 million compared to the first quarter of 2022. The increase was primarily due to higher reinvestment rates and lower prepayments and premium amortization on our mortgage-backed investment security portfolio. •Interest income earned on interest earning deposits at banks for the three months endedJune 30, 2022 was$13 million , an increase of$7 million , reflecting higher Fed Funds rates, which offset the decline in the average balance. 72 -------------------------------------------------------------------------------- •Interest expense on interest-bearing deposits for the three months endedJune 30, 2022 was$42 million , an increase of$3 million compared to the first quarter of 2022, as slightly higher deposit rates were partially offset by lower balances, with runoff concentrated in higher cost money market accounts and maturing time deposits. Interest expense on borrowings for the three months endedJune 30, 2022 was$15 million , a decrease of$7 million compared to the first quarter of 2022. The decrease was primarily due to the redemption of approximately$2.9 billion of senior unsecured notes in February of 2022. •NIM for the three months endedJune 30, 2022 was 3.04%, an increase of 31 bps from the first quarter of 2022, due to the impact of the items noted above, including higher earning asset yields and strong long growth, the impact of the debt redemption in the first quarter, partially offset by a decline in SBA-PPP income and slightly higher interest-bearing deposit costs. Purchase accounting and SBA-PPP income impact on the NIM was minimal. •Average interest-earning assets for the three months endedJune 30, 2022 were$92.1 billion . This is a decline from$95.1 billion for the three months endedMarch 31, 2022 , reflecting lower deposits and borrowings. •Average interest-bearing liabilities for the three months endedJune 30, 2022 were$67.1 billion . This is a decline from$71.4 billion for the three months endedMarch 31, 2022 , driven by declines in money market and time deposits and the approximately$2.9 billion redemption of senior unsecured notes in February of 2022. The average rate on interest-bearing liabilities for the three months endedJune 30, 2022 was 0.34%. This is a decrease of 1 bp compared to the three months endedMarch 31, 2022 . Second Quarter 2022 compared to Second Quarter 2021 •NII for the three months endedJune 30, 2022 was$700 million , an increase of$354 million compared to the second quarter of 2021, primarily due to the CIT Merger, as well as subsequent loan growth and rising interest rates, partially offset by a decline in interest income on SBA-PPP loans. •Interest income earned on loans and leases for the three months endedJune 30, 2022 was$655 million , an increase of$331 million compared to the second quarter of 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, partially offset by lower SBA-PPP interest income. SBA-PPP loans contributed$5 million of interest income during the second quarter of 2022 compared to$27 million in the second quarter of 2021. •Interest income earned on investment securities for the three months endedJune 30, 2022 was$89 million , an increase of$53 million compared to the second quarter of 2021. The increase was due to the addition of$6.6 billion of investment securities acquired in the CIT Merger and higher portfolio yield. •Interest income earned on interest-earning deposits at banks for the three months endedJune 30, 2022 was$13 million , an increase of$11 million compared to the second quarter of 2021, reflecting higher interest rates. •Interest expense on interest-bearing deposits for the three months endedJune 30, 2022 was$42 million , an increase of$34 million compared to second quarter of 2021. The increase was primarily due to the additional interest-bearing deposits acquired in the CIT Merger, which carried a higher average rate than legacy FCB interest-bearing deposits. Interest expense on borrowings for the three months endedJune 30, 2022 was$15 million , an increase of$7 million compared to the second quarter of 2021. The increase was primarily due to the assumed borrowings in the CIT Merger. •NIM was 3.04% for the three months endedJune 30, 2022 , an increase of 37 bps from the second quarter of 2021, primarily reflective of the higher interest rate environment and the assets acquired and liabilities assumed in the CIT Merger. •Average interest-earning assets for the three months endedJune 30, 2022 were$92.1 billion , an increase of$40.6 billion compared to the second quarter of 2021. This increase was primary due to the added interest-earning assets from the CIT Merger. •Average interest-bearing liabilities for the three months endedJune 30, 2022 were$67.1 billion , an increase of$38.2 billion compared to the second quarter of 2021. The increase was primarily due to the addition of deposits and borrowings from the CIT Merger. Rates on interest-bearing liabilities for the three months endedJune 30, 2022 were 0.34%. This increase of 13 bps from the second quarter of 2021 is primarily due to the higher rates on the deposits and borrowings acquired in the CIT Merger. Year to Date 2022 compared to 2021 •NII for the six months endedJune 30, 2022 was$1,349 million , an increase of$663 million compared to the same period in 2021, primarily due to the CIT Merger, as well as loan growth and a higher interest rate environment, partially offset by a decline in interest income on SBA-PPP loans. 73 -------------------------------------------------------------------------------- •Interest income earned on loans and leases for the six months endedJune 30, 2022 was$1,276 million , an increase of$629 million compared to the same period in 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, partially offset by lower SBA-PPP interest income. SBA-PPP loans contributed$14 million of interest income during the six months endedJune 30, 2022 compared to$58 million in the same period in 2021. •Interest income earned on investment securities for the six months endedJune 30, 2022 was$172 million , an increase of$106 million compared to the same period in 2021. The increase was primarily due to the addition of$6.6 billion of investment securities acquired in the CIT Merger and higher portfolio yield. •Interest income earned on interest-earning deposits at banks for the six months endedJune 30, 2022 was$19 million , an increase of$15 million compared to the same period in 2021, reflecting higher interest rates. •Interest expense on interest-bearing deposits for the six months endedJune 30, 2022 was$81 million , an increase of$64 million compared to the same period in 2021. The increase was primarily due to the additional interest-bearing deposits acquired in the CIT Merger, which carried a higher average rate than legacy FCB deposits. Interest expense on borrowings for the six months endedJune 30, 2022 was$37 million , an increase of$23 million compared to the same period in 2021. The increase was primarily due to the assumed borrowings in the CIT Merger. Utilizing excess cash, we redeemed approximately$2.9 billion of the$4.5 billion assumed debt during the first quarter. •NIM for the six months endedJune 30, 2022 was 2.89%, an increase of 16 bps from the same period in 2021, primarily reflective of the higher interest rate environment. •Average interest-earning assets for the six months endedJune 30, 2022 were$93.6 billion , compared to$50.1 billion in 2021. The change was primarily due to the interest-earning assets acquired in the CIT Merger. •Average interest-bearing liabilities for six months endedJune 30, 2022 were$69.2 billion . This is an increase from$28.4 billion in the same period in 2021, primarily due to the addition of deposits and borrowings from the CIT Merger. Rates on interest-bearing liabilities for the six months endedJune 30, 2022 were 0.34%. This increase of 12 bps from the same period in 2021 was primarily due to the higher rates on the deposits and borrowings acquired in the CIT Merger.
The following table details the average interest earning assets by category.
Table 3
Average Interest-earning Asset Mix
% of Total Interest-earning Assets
Three Months Ended Six Months Ended
June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Loans and leases 71 % 67 % 64 % 69 % 66 %
Investment securities 21 % 21 % 21 % 21 % 20 %
Interest-earning deposits at banks 8 % 12 % 15 % 10 % 14 %
Total interest earning assets 100 % 100 % 100 % 100 % 100 %
The following table shows our average funding mix.
Table 4
Average Funding Mix
% of Total Interest-bearing Liabilities
Three Months Ended Six Months Ended
June 30, 2022 March 31 ,
2022
95 % 93 % 94 % 94 % 94 %
Securities sold under customer
repurchase agreements 1 % 1 % 2 % 1 % 2 %
Long-term borrowings 4 % 6 % 4 % 5 % 4 %
100 % 100 % 100 % 100 % 100 %
PROVISION FOR CREDIT LOSSES
BancShares provides an amount for expected credit losses within the loan and
lease portfolio and for unfunded commitments that is based on factors discussed
in the Critical Accounting Estimates section of our 2021 Form 10-K. The
provision is recorded to bring the ACL and reserve for unfunded commitments to a
level deemed appropriate to cover losses expected in the portfolios.
74
--------------------------------------------------------------------------------
The provision for credit losses for the three months ended June 30, 2022 was
$42 million , compared to a provision of $464 million for the three months ended
March 31, 2022 , which included the day 2 provision related to the CIT Merger as
explained below, and a benefit of $20 million for the same quarter in 2021. The
provision for credit losses for the six months ended June 30, 2022 was
$506 million compared to a benefit of $31 million in the same period of 2021.
The provision for credit losses for the three months ended June 30, 2022 of
$42 million reflects loan portfolio growth and deterioration in the CECL
macroeconomic forecast used to determine the ACL, partially offset by benefits
from improved credit quality and lower specific reserves. The decrease in the
provision for credit losses compared to the three months ended March 31, 2022
was due to the impact of the CIT Merger in the first quarter. 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 first
quarter provision for credit losses also included $63 million related to
unfunded commitments, of which $59 million was 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 in the first quarter of $513
million that related to the CIT Merger were partially offset by a benefit of
$53 million , primarily reflecting improvements in the most significant economic
factors used to determine the ACL as of March 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.
The increases in the provision for credit losses compared to the three and six
months ended
NONINTEREST INCOME
Noninterest Income
Noninterest income is an essential component of our total revenue. The primary
sources of noninterest income consist of rental income on operating leases, fee
income and other service charges, wealth management services, fees and service
charges generated from deposit accounts, cardholder and merchant services,
factoring commissions and mortgage lending and servicing.
Table 5
Noninterest Income
Three Months Ended Six Months Ended
dollars in millions June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Rental income on operating leases $ 213 $ 208 $ - $ 421 $ -
Other noninterest income:
Fee income and other service charges 39 35 10 74 21
Wealth management services 37 35 32 72 64
Service charges on deposit accounts 28 28 21 56 43
Factoring commissions 27 27 - 54 -
Cardholder services, net 26 25 22 51 42
Merchant services, net 9 10 8 19 17
Insurance commissions 11 12 4 23 8
Realized gain on sales of investment
securities available for sale, net - - 16 - 25
Fair value adjustment on marketable
equity securities, net (6) 3 12 (3) 28
Bank-owned life insurance 9 8 - 17 1
Gain on sales of leasing equipment,
net 5 6 - 11 -
Gain on acquisition - 431 - 431 -
Gain on extinguishment of debt - 6 - 6 -
Other noninterest income 26 16 8 42 21
Total other noninterest income 211 642 133 853 270
Total noninterest income $ 424 $ 850 $ 133 $ 1,274 $ 270
Rental Income on Operating Leases
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, utilization of the railcars, re-pricing
of equipment upon lease maturities and pricing on new equipment leases.
Re-pricing refers to the rental rate in the renewed equipment contract compared
to the prior contract. Refer to the Rail discussion in the Results by Business
Segment section for further details.
75
--------------------------------------------------------------------------------
Other Noninterest Income
Other noninterest income for the three months ended June 30, 2022 was
$211 million , compared to $642 million in the three months ended March 31, 2022
and $133 million for the same period in 2021. Other noninterest income for the
six months ended June 30, 2022 was $853 million compared to $270 million in the
same period of 2021. The increases for the comparable 2021 periods were
primarily due to the additional activity related to the CIT Merger, both
complimentary to existing BancShares services and products, as well as new items
such as factoring services and gains recognized on equipment sales, along with
the preliminary estimated gain on acquisition related to the CIT Merger. See
Note 2 - Business Combinations for details.
The linked quarter comparison to the three months ended June 30, 2022 reflects a
$431 million decline, primarily due to the preliminary estimated gain on
acquisition related to the CIT Merger recognized in the first quarter. The
remaining changes netted to a minimal amount, consisting of increases and
decreases among other noninterest income accounts. The more significant
variances follow:
•Fee income and other service charges, consisting of items such as capital
market-related fees, fees on lines and letters of credit, and servicing fees,
increased by $4 million , primarily reflecting higher capital market fees.
•Wealth management services increased by $2 million , and was led by our
brokerage channel, which offset some of the pressure in trust from broad-based
equity and bond market declines. In brokerage, the income was driven by
increases in annuities and structured products.
•Service charges on deposit accounts were unchanged. In January, we announced
our intent to eliminate our nonsufficient funds ("NSF") fees and lower our
overdraft fees from $36 to $10 on consumer accounts beginning mid-year 2022.
•During the first quarter of 2022, we redeemed approximately $2.9 billion of
borrowings assumed in the CIT Merger, resulting in a $6 million gain on debt
extinguishment.
•Other noninterest income primarily consisted of bank owned life insurance
("BOLI") income, gain on sales of loans and OREO. Other noninterest income also
includes derivative-related gains and losses and other various income items.
Other noninterest income increased by $10 million , primarily reflecting a $6
million gain on sale of a corporate aircraft acquired in the CIT Merger.
NONINTEREST EXPENSE
Table 6
Noninterest Expense
Three Months Ended Six Months Ended
dollars in millions June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Depreciation on operating lease
equipment $ 89 $ 81 $ - $ 170 $ -
Maintenance and other operating
lease expenses 47 43 - 90 -
Operating expenses
Salaries and benefits 341 352 188 693 372
Net occupancy expense 48 49 28 97 58
Equipment expense 54 52 29 106 59
Professional fees 15 16 4 31 8
Third-party processing fees 26 24 14 50 28
FDIC insurance expense 9 12 4 21 7
Marketing 9 8 2 17 4
Merger-related expenses 34 135 6 169 13
Intangible asset amortization 6 6 3 12 6
Other noninterest expense 67 32 22 99 42
Total operating expenses 609 686 300 1,295 597
Total noninterest expense $ 745 $ 810 $ 300 $ 1,555 $ 597
Depreciation on Operating Lease Equipment
Depreciation expense is driven by rail equipment and small and large ticket
equipment we own and lease to others. The increase in expense from the prior
quarter primarily reflects adjustments to residual values. Operating lease
activity is in the Rail and Commercial Banking segments. The useful lives of
rail equipment is generally longer in duration, 40-50 years, whereas small and
large ticket equipment is generally 3-10 years. Refer to the Rail discussion in
the Results by Business Segments section for further details.
76
--------------------------------------------------------------------------------
Maintenance and Other Operating Lease Expenses
Rail provides railcars primarily pursuant to full-service lease contracts under
which Rail as lessor is responsible for railcar maintenance and repair.
Maintenance and other operating lease expenses for the three months ended June
30, 2022 and March 31, 2022 were $47 million and $43 million , respectively.
Maintenance and other operating lease expenses relate to equipment ownership and
leasing costs associated with the Rail portfolio and tend to be variable. The
increase from the prior quarter reflects higher renewal activity for railcars
put back on lease and inflationary pressures. Refer to the Rail discussion in
the Results by Business Segment section for further detail on our rail
portfolio.
Operating Expenses
The primary components of operating expenses are salaries and related employee
benefits, occupancy and equipment expense.
Operating expenses for the three months ended June 30, 2022 were $609 million ,
compared to $686 million in the three months ended March 31, 2022 and
$300 million for the same period in 2021. Operating expenses for the six months
ended June 30, 2022 were $1,295 million compared to $597 million in the same
period of 2021. The increases compared to the same periods in 2021 were
primarily driven by the CIT Merger; significant drivers included higher employee
headcount, more branches and office space, additional technology systems and
merger-related expenses.
Operating expenses for the three months ended June 30, 2022 declined by
$77 million compared to the linked quarter, which was primarily comprised of the
following:
•Salaries and benefits decreased by $11 million , primarily reflecting lower
benefit expenses, lower incentive compensation and higher deferred loan
origination costs, partially offset by higher salary expense due to annual merit
increases and net staff additions. The staff additions are the result of
building out teams to support our move to large bank compliance, as well as to
backfill vacancies.
•The $3 million decrease in FDIC insurance expense primarily reflects the
decline in deposits from last quarter.
•Merger-related expenses decreased by $101 million , primarily driven by lower
severance and retention costs.
•Other expenses 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. Other expense increased by
$35 million , as the first quarter of 2022 included a $27 million reversal of an
accrual related to legacy CIT postretirement plans that were terminated after
the Merger Date. See Note 21 - Employee Benefit Plans. The remaining change
included a legal settlement accrual and small net increases in other
miscellaneous items, such as travel.
INCOME TAXES
Table 7
Income Tax Data
Three Months Ended Six Months Ended
dollars in millions June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Income before income taxes $ 337 $ 225 $ 199 $ 562 $ 390
Income taxes 82 (46) 46 36 90
Effective tax rate 24.2 % (20.4) % 23.1 % 6.3 % 23.0 %
The effective tax rate ("ETR") was 24.2% in the three months ended June 30,
2022 , compared to (20.4)% for the three months ended March 31, 2022 and 23.1% in
the year-ago quarter. The increase in effective rate from 23.1% in the year ago
quarter to 24.2% for the three months ended June 30, 2022 was primarily driven
by the increase in state and local taxes resulting from the CIT Merger. The
effective rates for the three months ended March 31, 2022 , and the six months
ended June 30, 2022 , were 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 ETR in future
periods 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.
77
--------------------------------------------------------------------------------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 select items, are reflected in Corporate.
General Banking General Banking delivers services to individuals and businesses through an extensive branch network, digital banking, telephone banking and various ATM networks, including a full suite of deposit products, loans (primarily residential mortgages and commercial loans), and various fee-based services. General Banking also provides: a variety of wealth management products and services to individuals and institutional clients, including brokerage, investment advisory, and trust services; and deposit, cash management and lending to 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. Table 8 General Banking: Financial Data and Metrics dollars in millions Three Months Ended Six Months Ended Earnings Summary June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Net interest income $ 467 $ 437
$ 363 $ 904 $ 707 Provision (benefit) for credit
7 (15) (21) (8) (32)
losses
Net interest income after provision (benefit) for credit 460 452 384 912 739 losses Noninterest income 125 123 104 248 214 Noninterest expense 390 409 289 799 579 Income before income taxes 195 166 199 361 374 Income tax expense 40 40 46 80 86 Net income $ 155 $ 126 $ 153 $ 281 $ 288 Select Period End Balances Loans and leases$ 40,444 $ 38,778 $ 32,033 $ 40,444 $ 32,033 Deposits 83,535 85,469 48,344 83,535 48,344
Results for the 2022 periods reflect the additional activity from the CIT Merger, which were not included in 2021 income statements.
Net income for the three months endedJune 30, 2022 increased compared to the three months endedMarch 31, 2022 , reflecting higher NII, mostly due to growth in the loan portfolio, partially offset by a higher provision for credit losses. The provision for credit losses in the current quarter reflects deterioration in CECL macroeconomic scenarios and portfolio growth. Noninterest income for the three months endedJune 30, 2022 increased compared to the three months endedMarch 31, 2022 , reflecting increases in wealth management income and cardholder services income, and slightly higher service charges on deposits compared, to the three months endedMarch 31, 2022 . Noninterest expenses for the three months endedJune 30, 2022 decreased compared to the three months endedMarch 31, 2022 , reflecting items discussed previously in the Noninterest Expenses section. Loans and leases atJune 30, 2022 increased fromMarch 31, 2022 reflecting strong demand through our branch network. Growth was primarily concentrated in business and commercial loans. Mortgage loans also grew, reflecting lower prepayments and originating loans that were held on-balance sheet. Compared toJune 30, 2021 , loans and leases increased reflecting the additional residential mortgages and consumer loans acquired in the CIT Merger, partially offset by run-off of SBA-PPP loans. 78 -------------------------------------------------------------------------------- Deposits include deposits from the branch, online and community association banking channels. The additional branches acquired in the CIT Merger were mostly inCalifornia . Deposits atJune 30, 2022 were down fromMarch 31, 2022 , reflecting declines in higher-priced deposits from legacy CIT, partially offset by higher noninterest earning deposits, while the increase compared toJune 30, 2021 reflects deposits acquired in the CIT Merger. See discussions in Net Interest Income and Net Interest Margin section above and Balance Sheet Analysis-Deposits section below. Commercial Banking Commercial Banking provides lending, leasing and other financial and advisory services, primarily to small and middle-market companies across various industries. Commercial Banking also provides asset-based lending, factoring, receivables management products and supply chain financing. Revenue is primarily generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities and banking services, along with capital markets transactions and commissions earned on factoring and related activities. We provide factoring, receivable management, and secured financing to businesses (our clients, who are generally manufacturers or importers of goods) that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored (i.e., sold or assigned to the factor). Table 9 Commercial Banking: Financial Data and Metrics dollars in millions Three Months Ended Six Months Ended Earnings Summary June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Net interest income $ 204 $ 207 $ 4 $ 411 $ 8 Provision (benefit) for credit 35 (34) 1 1 1
losses
Net interest income after provision (benefit) for credit 169 241 3 410 7 losses Noninterest income 130 112 - 242 - Noninterest expense 180 191 1 371 2 Income before income taxes 119 162 2 281 5 Income tax expense 24 41 - 65 1 Net income $ 95 $ 121 $ 2 $ 216 $ 4 Select Period End Balances Loans and leases$ 27,220 26,672 $ 657$ 27,220 $ 657 Deposits 4,449 4,687 66 4,449 66
Results for the 2022 periods primarily reflect activity from the former CIT businesses, which were not included in 2021 income statements.
Net income for the three months endedJune 30, 2022 decreased compared to the three months endedMarch 31, 2022 , mostly due to a higher provision for credit losses, which offset higher noninterest income and lower noninterest expenses. The provision for credit losses in the current quarter reflects deterioration in CECL macroeconomic forecasts and loan growth. For the three months endedJune 30 , andMarch 31, 2022 , noninterest income included rental income on operating lease equipment of$53 million and$49 million , respectively. The increase reflected higher operating lease equipment in the current quarter. The remaining increase in non-interest income was due to higher capital market fees, market adjustments on derivatives and higher gains on equipment sales. Noninterest expense include operating expenses and depreciation on operating lease equipment. Noninterest expenses for the three months endedJune 30, 2022 decreased compared to the three months endedMarch 31, 2022 , reflecting items discussed previously in the Noninterest Expenses section. The decline in the operating expenses was partially offset by an increase in depreciation on operating lease equipment, which totaled$42 million for the three months endedJune 30, 2022 and$40 million for the three months endedMarch 31, 2022 . The increase reflected the higher asset balance. Loans and leases atJune 30, 2022 increased fromMarch 31, 2022 , reflecting growth in the commercial and industrial loans, partially offset by a decline in real estate finance loans, as prepayments remained elevated. The increase in loans and leases and deposits for the 2022 periods compared to 2021 reflect those acquired in the CIT Merger. 79 --------------------------------------------------------------------------------
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 center beams 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 Six Months Ended Earnings Summary June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Rental income on operating $ 159$ 319 $ - leases $ 160 $ - Depreciation on operating lease equipment 47 41 - 88 - Maintenance and other operating lease expenses 47 43 - 90 - Net revenue on operating leases(1) 66 75 - 141 - Interest expense, net 18 19 - 37 - Noninterest income - 3 - 3 - Operating expenses 17 16 - 33 - Income before income taxes 31 43 - 74 - Income tax expense 7 11 - 18 - Net income $ 24 $ 32 $ - $ 56 $ - Select Period End Balances Operating lease equipment, net$ 7,247 $ 7,251 $ -$ 7,247 $ -
(1)Net revenue on operating leases is a non-GAAP measure. See the "Non-GAAP Financial Measures" section for a reconciliation from the GAAP measure (segment net income) to the non-GAAP measure (net revenue on operating leases).
Net income and net revenue on operating leases are utilized to measure the profitability of our Rail segment. Net revenue on operating leases reflects rental income on operating lease equipment less depreciation, maintenance and other operating lease expenses. Maintenance and other operating lease expenses relate to equipment ownership and leasing costs associated with the Rail portfolio and tend to be variable. Due to the nature of our portfolio, which is essentially all operating lease equipment, certain financial measures commonly used by banks, such as NII, are not as meaningful for this business. NII is not used because it includes the impact of debt costs of our operating lease assets but excludes the associated rental income. Net income and net revenue on operating leases for the three months endedJune 30, 2022 , were$24 million and$66 million , respectively, both down from the three months endedMarch 31, 2022 , driven by higher depreciation and higher maintenance costs. Depreciation is recognized on railcars, and the current quarter included higher costs driven by adjustments to residual values. Maintenance and other operating lease expenses increased from the prior quarter, reflecting higher renewal activity for railcars put back on lease and inflationary pressures. Other noninterest income reflects gains on equipment sales, which were insignificant in the three months endedJune 30, 2022 . Our fleet is diverse and the average re-pricing of equipment upon lease maturities was 114% of the average prior or expiring lease rate, strengthened by various railcar types during the quarter, such as plastics, mill gondolas, covered hoppers and boxcars. Our railcar utilization, including commitments to lease, atJune 30, 2022 was 96.2%, up from 95.5% atMarch 31, 2022 , with broad based improvements across most car types.
Portfolio
Rail customers include all of theU.S. and Canadian Class I railroads (i.e., railroads with annual revenues of approximately$500 million and greater), other railroads, as well as manufacturers and commodity shippers. Our total operating lease fleet atJune 30, 2022 consisted of approximately 119,500 railcars, down slightly fromMarch 31, 2022 . The following table reflects the proportion of railcars by type based on units and net investment, respectively: 80 -------------------------------------------------------------------------------- Table 11 Operating lease Railcar Portfolio by Type (units and net investment) June 30, 2022 March 31, 2022 Total Owned Total Owned Total Owned Total Owned Fleet - % Total Fleet - % Total Fleet - % Total Fleet - % Total Railcar Type Units Net Investment Units Net Investment Covered Hoppers 42 % 40 % 42 % 40 % Tank Cars 30 % 41 % 30 % 41 % Mill/Coil Gondolas 8 % 6 % 8 % 6 % Coal 8 % 1 % 8 % 1 % Boxcars 6 % 7 % 6 % 7 % Other 6 % 5 % 6 % 5 % Total 100 % 100 % 100 % 100 % Table 12 Rail Operating Lease Equipment by Obligor Industry dollars in millions June 30, 2022 March 31, 2022 Manufacturing$ 3,057 42 %$ 2,879 40 % Rail 1,937 27 % 2,306 32 % Wholesale 980 14 % 945 13 % Oil and gas extraction / services 556 8 % 447 6 % Energy and utilities 237 3 % 224 3 % Other 480 6 % 450 6 % Total$ 7,247 100 %$ 7,251 100 % Corporate Certain items that are not allocated to operating segments are included in the Corporate segment. Some of the more significant and recurring items include interest income on investment securities, a portion of interest expense primarily related to corporate funding costs (including brokered deposits), income on BOLI (other noninterest income), merger-related expenses, as well as certain unallocated costs and intangible asset amortization expense (operating expenses). Corporate also includes certain significant items that are infrequent, such as: the Initial Non-PCD Provision for loans and leases and unfunded commitments; and the preliminary gain on acquisition, each of which are related to the CIT Merger. Table 13 Corporate: Financial Data and Metrics dollars in millions Three Months Ended Six Months Ended Earnings Summary June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Net interest income (expense)$ 47 $ 24 $ (21)$ 71 $ (29) Provision for credit losses - 513 - 513 - Net interest income (expense) after provision for credit 47 (489) (21) (442) (29) losses Noninterest income 9 453 29 462 56 Noninterest expense 64 110 10 174 16 Income before income taxes (8) (146) (2) (154) 11 Income tax expense (benefit) 11 (138) - (127) 3 Net loss$ (19) $ (8) $ (2)$ (27) $ 8 Results for 2022 were driven by impacts from the CIT Merger. Results in the three months endedJune 30, 2022 included$34 million of merger-related expenses and a$6 million gain on sale of a corporate aircraft. The three months endedMarch 31, 2022 included$513 million related to the Initial Non-PCD Provision, a preliminary gain on acquisition of$431 million in noninterest income and$135 million of merger-related expenses, partially offset by a reduction of approximately$27 million related to the termination of certain legacy CIT retiree benefit plans in noninterest expenses. 81 --------------------------------------------------------------------------------
BALANCE SHEET ANALYSIS INTEREST-EARNING ASSETS Interest-earning assets include interest-bearing cash, investment securities, assets held for sale and loans and leases, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. 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 atJune 30, 2022 totaled$6.5 billion . This was down from$9.3 billion atMarch 31, 2022 and$9.1 billion atDecember 31, 2021 . These declines related to lower deposits, loan growth, and the timing of investment maturities. While the CIT Merger added approximately$2.9 billion of interest-bearing cash as of the Merger Date, that amount was offset by the use of cash for the redemption of approximately$2.9 billion of assumed debt in February.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 atJune 30, 2022 totaled$19.1 billion . This was down from$19.5 billion atMarch 31, 2022 , reflecting investment security purchases of$0.5 billion , maturities and paydowns of$0.6 billion , and the remaining primarily due to change in fair value. The increase from$13.1 billion atDecember 31, 2021 , primarily reflected the CIT Merger, which added$6.6 billion . The remaining year to date activity in the portfolio included investment securities purchases of$1.3 billion , partially offset by maturities and paydowns of$1.2 billion , and fair value changes. Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of AOCI, net of deferred taxes. As ofJune 30, 2022 , investment securities available for sale had a net pre-tax unrealized loss of$647 million , compared to a net pre-tax unrealized losses of$431 million as ofMarch 31, 2022 and$12 million as ofDecember 31, 2021 . Management evaluated the available for sale securities in an unrealized loss position and concluded that the unrealized losses related to changes in interest rates relative to when the securities were purchased, and therefore BancShares management determined that no ACL was needed atJune 30, 2022 . BancShares' portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities,U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by theWorld Bank andFDIC guaranteed CDs with other financial institutions. Given the consistently strong credit rating of theU.S. Treasury , theWorld Bank and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, BancShares management determined that no ACL was needed atJune 30, 2022 andDecember 31, 2021 . 82 --------------------------------------------------------------------------------
Table 14 presents the investment securities portfolio at
Table 14Investment Securities June 30, 2022 March 31, 2022 December 31, 2021 Amortized Fair Amortized Fair Amortized Fair dollars in millions Composition(1) cost value Composition(1) cost value Composition(1) cost value Investment securities available for saleU.S. Treasury 10.5 %$ 2,005 $ 1,903 10.2 %$ 2,014 $ 1,931 15.4 %$ 2,007 $ 2,005 Government agency 1.1 % 191 190 1.1 % 206 206 1.7 % 221 221 Residential mortgage-backed securities 27.7 % 5,448 5,020 26.8 % 5,340 5,052 36.2 % 4,757 4,729 Commercial mortgage-backed securities 8.4 % 1,632 1,527 8.1 % 1,584 1,520 12.6 % 1,648 1,640 Corporate bonds 3.1 % 581 570 3.1 % 582 586 4.7 % 582 608 Total investment securities available for sale 50.8 %$ 9,857 $ 9,210 49.3 %$ 9,726 $ 9,295 70.6 %$ 9,215 $ 9,203 Investment in marketable equity securities 0.5 %$ 73 $ 94 0.5 %$ 73 $ 100 0.7 %$ 73 $ 98 Investment securities held to maturityU.S. Treasury 2.4 %$ 472 $ 437 2.4 %$ 471 $ 447 - % $ - $ - Government agency 7.9 % 1,544 1,424 7.8 % 1,541 1,463 - % - - Residential mortgage-backed securities 22.8 % 4,633 4,119 23.6 % 4,776 4,461 17.7 % 2,322 2,306 Commercial mortgage-backed securities 14.1 % 2,886 2,563 14.9 % 2,988 2,805 11.0 % 1,485 1,451 Supranational securities 1.5 % 294 266 1.5 % 294 277 - % - - Other investments - % 3 3 - % 4 4 - % 2 2 Total investment securities held to maturity 48.7 %$ 9,832 $ 8,812 50.2 %$ 10,074 $ 9,457 28.7 %$ 3,809 $ 3,759 Total investment securities 100 %$ 19,762 $ 18,116 100 %$ 19,873 $ 18,852 100 %$ 13,097 $ 13,060
(1) Calculated as a percent of the total fair value of investment securities.
83-------------------------------------------------------------------------------- Table 15 presents the weighted average yields for investment securities available for sale and held to maturity atJune 30, 2022 , segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio is calculated using security-level annualized yields. Table 15 Weighted Average Yield onInvestment Securities June 30, 2022 Within One to Five Five to 10 One Year Years Years After 10 Years Total Investment securities available for sale U.S. Treasury - % 0.96 % - % - % 0.96 % Government agency - % 3.98 % 3.40 % 3.49 % 3.41 % Residential mortgage-backed securities 1.40 % 2.24 % 2.16 % 1.67 % 1.68
%
Commercial mortgage-backed securities - % 3.50 % 4.65 % 2.53 % 2.57 % Corporate bonds - % 6.08 % 5.32 % 4.67 % 5.37 % Total investment securities available for sale 1.40 % 1.17 % 4.67 % 1.87 % 1.93
%
Investment securities held to maturity U.S. Treasury - % 1.30 % 1.44 % - % 1.38 % Government agency 0.44 % 1.32 % 1.70 % - % 1.49 % Residential mortgage-backed securities(1) - % 3.70 % 3.60 % 1.76 % 1.76
%
Commercial mortgage-backed securities(1) - % - % 2.28 % 1.83 % 1.84 % Supranational Securities - % 1.23 % 1.64 % - % 1.56 % Other investments 0.48 % - % - % - % 0.48 % Total investment securities held to maturity 0.44 % 1.31 % 1.65 % 1.79 % 1.72 % (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. Assets Held for Sale Assets held for sale atJune 30, 2022 were$38 million , of which$35 million related to loans and the remainder to non-interest earning operating lease equipment. Assets held for sale totaled$83 million atMarch 31, 2022 and$99 million atDecember 31, 2021 . The declines were primarily due to loan sales. Certain residential real estate loans and commercial loans are originated to be sold to investors or lenders, respectively, and are recorded in assets 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 atJune 30, 2022 were$67.7 billion , an increase from$65.5 billion , atMarch 31, 2022 . We continued to see strong growth in our branch network and residential mortgage portfolio as well as growth in our commercial bank from a number of our industry verticals, middle market banking and business capital, driven by growth in commercial and industrial and residential mortgage loans. These increases were partially offset by a decline in real estate finance loans, reflecting continued prepayment activity. Total loans and leases increased from$32.4 billion atDecember 31, 2021 , reflecting the addition of$32.7 billion from the CIT Merger and the above noted activity, partially offset by a reduction in SBA-PPP loans. Upon completion of the CIT Merger, we re-evaluated our loan classes to reflect the risk characteristics of the combined portfolio. BancShares reports its commercial loan portfolio in the following classes: commercial construction, owner occupied commercial mortgage, non-owner occupied commercial mortgage, commercial and industrial, and leases. The consumer portfolio includes residential mortgage, revolving mortgage, consumer auto and consumer other. Commercial loans atJune 30, 2022 were$51.5 billion compared to$50.1 billion atMarch 31, 2022 and$22.6 billion atDecember 31, 2021 , representing 76%, 76% and 70% of total loans and leases, respectively. Consumer loans atJune 30, 2022 were$16.3 billion , compared to$15.4 billion atMarch 31, 2022 and$9.8 billion atDecember 31, 2021 , representing 24%, 24% and 30% of total loans and leases, respectively. 84 --------------------------------------------------------------------------------
Table 16 Loans and Leases dollars in millions June 30, 2022 March 31, 2022 December 31, 2021 Commercial: Commercial construction$ 2,783 $ 2,633 $ 1,238 Owner occupied commercial mortgage 13,795 13,553 12,099 Non-owner occupied commercial mortgage 9,167 9,293 3,041 Commercial and industrial 23,554 22,402 5,937 Leases 2,178 2,220 271 Total commercial$ 51,477 $ 50,101 $ 22,586 Consumer: Residential mortgage 12,441 11,711 6,088 Revolving mortgage 1,893 1,840 1,818 Consumer auto 1,338 1,320 1,332 Consumer other 586 552 548 Total consumer$ 16,258 $ 15,423 $ 9,786 Total loans and leases 67,735 65,524 32,372 Less allowance for credit losses 850 848 178 Net loans and leases$ 66,885 $ 64,676 $ 32,194
The discount related to acquired loans was
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 June 30, 2022 March 31, 2022 Railcars and locomotives$ 7,247 $ 7,251 Other equipment 724 721 Total(1)$ 7,971 $ 7,972
(1)Includes off-lease Rail equipment of
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 atJune 30, 2022 totaled$67.1 billion , compared to$69.0 billion atMarch 31, 2022 and$31.8 billion atDecember 31, 2021 . As discussed further below, the decrease fromMarch 31, 2022 reflects lower deposits, partially offset by higher borrowings. The increase fromDecember 31, 2021 was mostly due to deposits and borrowings from the CIT Merger, partially offset by the redemption of assumed debt during the first quarter. See Note 2 - Business Combinations for details on deposits and borrowings associated with the CIT Merger.
Deposits
Total deposits atJune 30, 2022 were$89.3 billion , a decrease of$2.3 billion as compared toMarch 31, 2022 and an increase of$37.9 billion as compared toDecember 31, 2021 . Interest-bearing deposits totaled$62.7 billion ,$65.7 billion and$30.0 billion atJune 30, 2022 ,March 31, 2022 andDecember 31, 2021 , respectively. Noninterest-bearing deposits totaled$26.6 billion ,$25.9 billion and$21.4 billion atJune 30, 2022 ,March 31, 2022 andDecember 31, 2021 , respectively. The decline in total deposits as compared toMarch 31, 2022 was driven by lower money market and time deposits, as we saw the most rate sensitive customers begin to move funds in response to recent increases by theFOMC in the target federal funds rate. The reductions were primarily concentrated in acquired higher cost channels including the direct bank and legacy OneWest branches. These declines were partially offset by growth in noninterest-bearing deposits, primarily from our branch network. The increase in total deposits as compared toDecember 31, 2021 was primarily driven by the$39.4 billion of deposits from the CIT Merger. As part of the CIT Merger, we acquired CIT's online banking platform and an HOA deposit channel. 85 --------------------------------------------------------------------------------
Table 18 Deposits dollars in millions June 30, 2022 March 31, 2022 December 31, 2021 Noninterest-bearing demand$ 26,645 $ 25,898 $ 21,405 Checking with interest 16,285 16,702 12,694 Money market 24,699 26,249 10,590 Savings 13,319 13,506 4,236 Time 8,381 9,242 2,481 Total deposits$ 89,329 $ 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$31.0 billion and$23.0 billion atJune 30, 2022 andDecember 31, 2021 , respectively. Table 19 provides the expected maturity of time deposits in excess of$250,000 , theFDIC insurance limit, as ofJune 30, 2022 . Table 19 Maturities of Time Deposits In Excess of$250,000 dollars in millions June 30, 2022 Time deposits maturing in: Three months or less $ 395 Over three months through six months 252 Over six months through 12 months 405 More than 12 months 315 Total$ 1,367 Borrowings Total borrowings atJune 30, 2022 were$4.5 billion , compared to$3.3 billion atMarch 31, 2022 and$1.8 billion atDecember 31, 2021 . The increase fromMarch 31, 2022 primarily reflecting new FHLB borrowings of$1.65 billion , partially offset by repayments of$0.5 billion . The additional$2.7 billion increase fromDecember 31, 2021 reflected$4.5 billion debt assumed in the CIT Merger and the new FHLB borrowings net of repayments, partially offset by debt redemption of approximately$2.9 billion in February. 86 --------------------------------------------------------------------------------
Table 20 presents borrowings, including the respective unamortized purchase accounting adjustments and issuance costs.
Table 20
Borrowings
December 31,
dollars in millions June 30, 2022 March 31, 2022 2021Securities sold under customer repurchase agreements $ 646
$ 616 $ 589
Federal Home Loan Bank borrowings
Floating rate notes due through July 2024 1,650 - -
Fixed rate notes due through March 2032 135 639 645
Senior Unsecured Borrowings
3.929% fixed-to-floating rate notes due June 2024(1) 510 513 -
2.969% fixed-to-floating rate notes due
322 322 -
6.000% fixed rate notes due April 2036(1) 60 60 -
Subordinated debt
6.125% fixed rate notes due March 2028(1) 475 478 -
4.125% fixed-to-fixed rate notes due November 2029(1) 102 103 -
3.375% fixed-to-floating rate notes due March 2030 348 347 347
Macon Capital Trust I - floating rate debenture due
14 14 14
SCB Capital Trust I - floating rate debenture due
10 10 11
FCB/SC Capital Trust II - floating rate debenture due
18 18 18
FCB/NC Capital Trust III - floating rate debenture due
June 2036 88 88 88
Total subordinated debt 1,055 1,058 478
Other borrowings 81 84 72
Total borrowings $ 4,459 $ 3,292 $ 1,784 (1) Debt assumed in the CIT Merger.
See Note 12 - Borrowings for further information on the various components.
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, 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.
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.
87
--------------------------------------------------------------------------------
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. Due to the CIT Merger, further below we added Asset Risk (due to the
operating lease portfolio) as a primary risk and enhanced our credit risk to
highlight counterparty risk (due to the increased use of derivatives).
Given several factors including but not limited to positive internal and
external trends, positive risk metrics, effective incident, oversight and
monitoring, the Company returned to business as usual operations and lifted
internal COVID-19 related restrictions in early April. BancShares will continue
to comply with any state and local orders that are in place. Monitoring of
associated credit and operational risks has now been integrating into normal
risk monitoring activities.
Since the filing of our 2021 Form 10-K, BancShares has been assessing the
emerging impacts of the rising international tensions that could impact the
economy and exacerbate headwinds of rising inflation, elevated market
volatility, global supply chain disruptions, and recessionary pressures as well
as operational risks such as those associated with potential cyber-attacks for
FCB and third parties upon whom it relies. Assessments have not identified
material impacts to date but those assessments will remain ongoing as the
condition continues to exist.
CREDIT RISK
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 expected losses over the life of
the loan and lease portfolios.
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.
88
--------------------------------------------------------------------------------
Allowance for Credit Losses
The ACL is calculated using a variety of factors, including, but not limited to,
charge-off and recovery activity, loan growth, changes in macroeconomic factors,
collateral type, estimated loan life and changes in credit quality. Forecasted
economic conditions are developed using third party macroeconomic scenarios and
may be adjusted based on management's expectations over the lives of the
portfolios. Significant macroeconomic factors used in estimating the expected
losses include unemployment, GDP, home price index, commercial real estate
index, corporate profits, and credit spreads.
The ACL at June 30, 2022 was $850 million , compared to $848 million at March 31,
2022 and $178 million at December 31, 2021 . The ACL as a percentage of total
loans and leases at June 30, 2022 was 1.26%, compared to 1.29% at March 31, 2022
and 0.55% at December 31, 2021 .
The ACL at June 30, 2022 increased slightly compared to March 31, 2022 due to
the impacts of loan growth and deterioration in the CECL macroeconomic forecast
(primarily related to GDP, home prices, and commercial real estate prices) were
partially offset by improvements in credit quality and a $12 million decrease in
the initial ACL for PCD loans and leases acquired in the CIT Merger (the
"Initial PCD ACL"). In the three months ended June 30, 2022 , the ACL on
commercial loans decreased $3 million and the ACL on consumer portfolios
increased $5 million .
Compared to December 31, 2021 , the increase in the ACL at June 30, 2022 on
commercial portfolios was $660 million and $12 million on the consumer
portfolios. The increase was primarily due to the impact of the CIT Merger. The
Initial PCD ACL of $272 million was established through the PCD Gross-Up and
there was no corresponding increase to the provision for credit losses. The PCD
Gross-Up is discussed further in Note 2 - Business Combinations. The initial ACL
for Non-PCD loans and leases acquired in the CIT Merger was established through
a corresponding increase of $454 million to the provision for credit losses for
the "Initial Non-PCD Provision". In addition to the impact on the ACL from the
CIT Merger, changes in CECL macroeconomic forecasts during the first half of
2022 impacted the ACL. As previously discussed above, the economic forecasts
utilized to determine the ACL at June 30, 2022 deteriorated compared to the
forecasts utilized to determine the ACL at March 31, 2022 . The scenarios
utilized to generate the ACL at March 31, 2022 showed improvements in the most
significant economic factors compared to what was used to generate the
December 31, 2021 ACL. The loss estimates were also influenced by BancShares'
strong credit quality and low net charge-offs.
While management utilizes its best judgment and information available, the ACL
is dependent upon factors that are inherently difficult to predict, the most
significant being the factors in the economic scenarios. ACL estimates in these
scenarios ranged from approximately $660 million to approximately $1.3 billion .
BancShares management determined that an ACL of $850 million was appropriate as
of June 30, 2022 .
89
--------------------------------------------------------------------------------
Table 21
Allowance for Credit Losses
Three Months Ended June 30, 2022
dollars in millions Commercial Consumer Total
Balance at March 31, 2022 $ 743 $ 105 $ 848
Initial PCD ACL(1) (12) - (12)
Initial Non-PCD Provision - - -
Provision for credit losses - loans and leases 33 3 36
Total provision for credit losses - loans and leases 33 3 36
Charge-offs(1) (36) (5) (41)
Recoveries 12 7 19
Balance at June 30, 2022 $ 740 $ 110 $ 850
Annualized net charge-off ratio 0.13 %
Net charge-offs (recoveries) $ 24 $ (2) $ 22
Average loans $ 66,431
Percent of loans in each category to total loans 76 % 24 % 100 %
Three
Months Ended
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
Commercial Consumer Total
Balance at March 31, 2021 $ 86 $ 124 $ 210
Provision (benefit) for credit losses - loans and
leases 1 (20) (19)
Charge-offs (3) (4) (7)
Recoveries 2 3 5
Balance at June 30, 2021 $ 86 $ 103 $ 189
Annualized net charge-off ratio 0.02 %
Net charge-offs $ 1 $ 1 $ 2
Average loans $ 33,042
Percent of loans in each category to total loans 70 % 30 % 100 %
(1) The Initial PCD ACL related to the CIT Merger was $272 million , net of an
additional $243 million for loans that CIT charged-off prior to the Merger Date
(whether full or partial) which met BancShares' charge-off policy at the Merger
Date. The $12 million reflects second quarter adjustment to the original amount
recorded on the Merger Date, with an equal adjustment to the UPB of PCD loans.
There was no income statement impact or adjustment to the purchase price.
90
--------------------------------------------------------------------------------
Six Months Ended June 30, 2022
dollars in millions Commercial Consumer Total
Balance at December 31, 2021 $ 80 $ 98 $ 178 Initial PCD ACL(1) 258 14 272 Initial Non-PCD Provision 432 22 454 Provision (benefit) for credit losses - loans and leases 10 (27) (17) Total provision (benefit) for credit losses - loans and leases 442 (5) 437 Charge-offs(1) (64) (10) (74) Recoveries 24 13 37 Balance at June 30, 2022$ 740 $ 110 $ 850 Annualized net charge-off ratio 0.11 % Net charge-offs (recoveries)$ 40 $ (3) $ 37 Average loans$ 65,810 Percent of loans in each category to total loans 76 % 24 % 100 % Six
Months Ended
Commercial Consumer Total
Balance at December 31, 2020 $ 92 $ 133 $ 225
Benefit for credit losses - loans and leases (3) (28) (31)
Charge-offs (7) (9) (16)
Recoveries 4 7 11
Balance at June 30, 2021 $ 86 $ 103 $ 189
Annualized net charge-off ratio 0.03 %
Net charge-offs $ 3 $ 2 $ 5
Average loans $ 33,007
Percent of loans in each category to total loans 70 % 30 % 100 %
(1) See footnote to table above.
Net charge-offs during the three months endedJune 30, 2022 were$22 million , compared to$15 million during the first quarter of 2022 and$2 million during the second quarter of 2021. The increase in net charge-offs from the first quarter of 2022 was primarily driven by a single commercial account. On an annualized basis, the net charge-off ratio was 0.13%, 0.09% and 0.02% for the three months endedJune 30, 2022 ,March 31, 2022 andJune 30, 2021 , respectively. Net charge-offs for the six months endedJune 30, 2022 and 2021 were$37 million (net charge-off ratio of 0.11%) and$5 million (net charge-off ratio of 0.03%), respectively.
The following table provides trends in the ACL ratios.
Table 22 Allowance for Credit Losses Ratios dollars in millions June 30, 2022 March 31, 2022 December 31, 2021 Allowance for credit losses to total loans and leases: 1.26 % 1.29 % 0.55 % Allowance for credit losses $ 850 $ 848 $ 178 Total loans and leases$ 67,735 $ 65,524 $ 32,372 Commercial loans and leases: Commercial allowance for credit losses to commercial loans and leases: 1.43 % 1.48 % 0.35 %
Allowance for credit losses - commercial $ 740 $
743 $ 80
Commercial loans and leases $ 51,477 $ 50,101 $ 22,586
Consumer loans:
Consumer allowance for credit losses to consumer
loans: 0.69 % 0.69 % 1.01 %
Allowance for credit losses - consumer $ 110 $ 105 $ 98
Consumer loans $ 16,258 $ 15,423 $ 9,786
The reserve for unfunded loan commitments was $81 million , $75 million and
$12 million at June 30, 2022 , March 31, 2022 and December 31, 2021 ,
respectively. The 2022 increases from December 31, 2021 were driven by the
additional commitments from the CIT Merger. The additional off-balance sheet
commitments primarily reflect loan commitments or lines of credit and DPAs. See
Note 23 - Commitments and Contingencies for information relating to off-balance
sheet commitments and Note 5 - Allowance for Credit Losses for a roll forward of
the ACL for unfunded commitments.
91
--------------------------------------------------------------------------------
Credit Metrics
Non-performing Assets
Non-performing assets include non-accrual loans and leases and OREO.
Non-performing assets at June 30, 2022 totaled $558 million , compared to
$581 million at March 31, 2022 and an increase of $397 million since
December 31, 2021 , primarily reflecting the added balances of the CIT portfolio.
The following table presents total nonperforming assets.
Table 23 Non-Performing Assets dollars in millions June 30, 2022 March 31, 2022 December 31, 2021 Non-accrual loans: Commercial loans$ 413 $ 426 $ 45 Consumer loans 100 112 76 Total non-accrual loans$ 513 $ 538 $ 121 Other real estate owned 45 43 40 Total non-performing assets$ 558 $ 581 $ 161 Allowance for credit losses to total loans and leases: 1.26 % 1.29 % 0.55 % Ratio of total non-performing assets to total loans, leases and other real estate owned 0.83 % 0.89 % 0.49 % Ratio of non-accrual loans and leases to total loans and leases 0.76 % 0.82 % 0.37 % Ratio of allowance for credit losses to non-accrual loans and leases 165.41 % 157.55 % 148.37 % Non-accrual loans and leases atJune 30, 2022 were$513 million , a decrease of$25 million fromMarch 31, 2022 and an increase of$392 million sinceDecember 31, 2021 . Non-accrual loans and leases as a percentage of total loans and leases was 0.76%, 0.82% and 0.37% atJune 30, 2022 ,March 31, 2022 andDecember 31, 2021 , respectively. The increase fromDecember 31, 2021 was primarily driven by the CIT Merger. The increase in consumer non-accrual loans was primarily due to the addition of a legacy CIT single family residential loan portfolio. OREO atJune 30, 2022 totaled$45 million , representing an increase of$2 million fromMarch 31, 2022 and$5 million sinceDecember 31, 2021 . Non-performing assets as a percentage of total loans, leases and OREO atJune 30, 2022 was 0.83% compared to 0.89% atMarch 31, 2022 and 0.49% atDecember 31, 2021 . Past Due Accounts The percentage of loans 30 days or more past due atJune 30, 2022 was 0.78% of loans, compared to 0.81% 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, did not record these as TDRs. 92
--------------------------------------------------------------------------------
Table 24
Troubled Debt Restructurings
June 30, 2022 March 31, 2022
dollars in millions Commercial Consumer Total Commercial Consumer Total
Accruing TDRs $ 105 $ 49 $ 154 $ 103 $ 48 $ 151
Non-accruing TDRs 25 24 49 28 24 52
Total TDRs $ 130 $ 73 $ 203 $ 131 $ 72 $ 203
December 31, 2021
Accruing TDRs $ 97 $ 49 $ 146
Non-accruing TDRs 21 25 46
Total TDRs $ 118 $ 74 $ 192
Concentration Risk
We aim to maintain a well-diversified loan portfolio and seek to minimize the
risks associated with large concentrations within specific geographic areas,
collateral types or industries.
Commercial Concentrations
Geographic Concentrations
The following table summarizes state concentrations greater than 5.0% of our
loans. Data is based on obligor location unless secured by real estate, then
data based on property location.
Table 25
Commercial Loans - Geography
dollars in millions June 30, 2022 March 31, 2022 December 31, 2021
State
North Carolina $ 8,639 16.8 % $ 7,973 15.9 % $ 7,181 31.8 %
California 8,636 16.8 % 8,701 17.4 % 3,163 14.0 %
Texas 3,330 6.5 % 3,235 6.5 % 879 3.9 %
Florida 3,156 6.1 % 3,020 6.0 % 1,496 6.6 %
South Carolina 2,989 5.8 % 2,969 5.9 % 2,855 12.6 %
All other states 23,217 45.1 % 22,784 45.5 % 7,012 31.1 %
Total U.S. $ 49,967 97.1 % $ 48,682 97.2 % $ 22,586 100.0 %
Total International 1,510 2.9 % 1,419 2.8 % - - %
Total $ 51,477 100.0 % $ 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 June 30, 2022 March 31, 2022 December 31, 2021
Real Estate $ 10,850 21.1 % $ 11,233 22.4 % $ 4,279 18.9 %
Healthcare 7,267 14.1 % 8,311 16.6 % 6,997 31.0 %
Transportation, communication,
gas, utilities 5,022 9.8 % 4,156 8.3 % 774 3.4 %
Manufacturing 4,586 8.9 % 4,092 8.2 % 1,347 6.0 %
Business Services 4,199 8.2 % 4,053 8.1 % 2,307 10.2 %
Retail 3,647 7.1 % 3,832 7.6 % 1,301 5.8 %
Service industries 3,303 6.4 % 3,199 6.4 % 722 3.2 %
Finance and insurance 3,279 6.4 % 3,228 6.4 % 1,361 6.0 %
Wholesale 2,333 4.5 % 2,198 4.4 % 882 3.9 %
Other 6,991 13.5 % 5,799 11.6 % 2,616 11.6 %
Total $ 51,477 100.0 % $ 50,101 100.0 % $ 22,586 100.0 %
Consumer Concentrations
Loan concentrations may exist when multiple borrowers could be similarly
impacted by economic or other conditions. The following table summarizes state
concentrations greater than 5.0% based on property address.
93
--------------------------------------------------------------------------------
Table 27
Consumer Loans - Geographic
June 30, 2022 March 31, 2022 December 31, 2021
Net % of Net % of Net % of
dollars in millions Investment Total Investment Total Investment Total
State
North Carolina $ 5,266 32.4 % $ 5,013 32.5 % $ 4,931 50.4 %
California 3,796 23.4 % 3,616 23.4 % 161 1.6 %
South Carolina 2,786 17.1 % 2,682 17.4 % 2,626 26.9 %
Other states 4,410 27.1 % 4,112 26.7 % 2,068 21.1 %
Total loans $ 16,258 100.0 % $ 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.
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.
94
--------------------------------------------------------------------------------
•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 the 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.
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 forJune 30, 2022 ,March 31, 2022 , andDecember 2021 . Table 28 Net Interest Income Sensitivity Simulation Analysis Estimated (Decrease) Increase in NII Change in interest rate (bps) June 30, 2022 March 31, 2022 December 31, 2021 -100 (5.34) % (6.10) % (5.77) % -25 (1.25) % (1.50) % (1.15) % +25 1.34 % 1.60 % 1.05 % +100 5.17 % 6.10 % 3.21 % +200 10.20 % 12.20 % 6.30 % NII Sensitivity metrics atJune 30, 2022 , compared toMarch 31, 2022 , were primarily affected by continued deployment of cash as well as liability management actions which included borrowing FHLB advances indexed to Secured Overnight Financing Rate ("SOFR"). BancShares continues to have an asset sensitive interest rate risk profile. The potential exposure to forecasted earnings is largely driven by the composition of the balance sheet (primarily due to floating rate commercial loans and cash), as well as 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 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. 95 --------------------------------------------------------------------------------
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 (bps) June 30, 2022 March 31, 2022 December 31, 2021
-100 (7.17) % (7.90) % (13.68) %
-25 (1.67) % (1.80) % - %
+100 5.92 % 6.40 % 6.10 %
+200 7.21 % 8.40 % 5.93 %
The economic value of equity metrics at
In addition to the above reported sensitivities, a wide variety of potential interest rate scenarios are simulated within our asset/liability management system. Scenarios that impact management volumes, specific risk events, or the sensitivity to key assumptions are also evaluated. We use results of our various interest rate risk analyses to formulate and implement asset and liability management strategies, in coordination with the Asset Liability Committee, to achieve the desired risk profile, while managing our objectives for market risk and other strategic objectives. Specifically, we may manage our interest rate risk position through certain pricing strategies and product design for loans and deposits, our investment portfolio, funding portfolio, or by using off balance sheet derivatives to mitigate earnings volatility. The above sensitivities provide an estimate of our interest rate sensitivity; however, they do not account for potential changes in credit quality, size, mix, or changes in the competition for business in the industries we serve. They also do not account for other business developments and other actions. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, the range of such simulations is not intended to represent our current view of the expected range of future interest rate movements.
Table 30 provides loan maturity distribution information.
Table 30
Loan Maturity Distribution
At June 30, 2022, Maturing
Within One to Five Five to 15 After 15
dollars in millions One Year Years Years Years Total
Commercial
Commercial construction $ 661 $ 1,343
530 3,863 8,926 476 13,795
Non-owner occupied commercial mortgage 1,891 5,070 1,962 244 9,167
Commercial and industrial 6,910 13,013 3,471 160 23,554
Leases 740 1,387 51 - 2,178
Total commercial $ 10,732 $ 24,676 $ 15,093 $ 976 $ 51,477
Consumer
Residential mortgage 308 1,071 3,585 7,477 12,441
Revolving mortgage 94 190 91 1,518 1,893
Consumer auto 10 637 691 - 1,338
Consumer other 301 143 105 37 586
Total consumer $ 713 $ 2,041 $ 4,472 $ 9,032 $ 16,258
Total loans and leases $ 11,445 $ 26,717 $ 19,565 $ 10,008 $ 67,735
96--------------------------------------------------------------------------------
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
dollars in millions Rates Interest Rates
Commercial
Commercial construction $ 888 $ 1,234
Owner occupied commercial mortgage 11,687 1,578
Non-owner occupied commercial mortgage 2,784 4,492
Commercial and industrial 7,166 9,478
Leases 1,438 -
Total commercial $ 23,963 $ 16,782
Consumer
Residential mortgage 7,234 4,899
Revolving mortgage 38 1,761 Consumer auto 1,328 - Consumer other 247 38 Total consumer$ 8,847 $ 6,698 Total loans and leases $
32,810
Reference Rate Reform The administrator of LIBOR has announced that publication of the most commonly used tenors ofU.S. Dollar LIBOR will cease to be provided or cease to be representative afterJune 30, 2023 . 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. Accordingly, 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. OnMarch 15, 2022 , theU.S. Congress adopted, as part of the Consolidated Appropriation Act of 2022, the Adjustable Interest (LIBOR) Act, which provides certain statutory requirements and guidance for the selection and use of alternative reference rates in legacy financial contracts governed byU.S. law that do not provide for the use of a clearly defined or practicable alternative reference rate. OnJuly 19, 2022 , theBoard of Governors of theFederal Reserve System issued a notice of proposed rulemaking on a proposed regulation to implement the LIBOR Act, as required by its terms. The LIBOR Act requires implementing regulations be in place within 180 days of its enactment. BancShares anticipates using the safe harbors that are expected in the final regulations. BancShares holds instruments such as loans, investments, derivative products, and other financial instruments that use LIBOR as a benchmark rate. However, BancShares' LIBOR exposure is primarily to tenures other than one week and two-month USD LIBOR. LIBOR is a benchmark interest rate for most of our floating rate loans, 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.
97
--------------------------------------------------------------------------------
For a further discussion of risks BancShares faces in connection with the
replacement of LIBOR on its operations, see "Risk Factors-Market Risks-We may be
adversely impacted by the transition from LIBOR as a reference rate." in Item
1A. Risk Factors of our 2021 Form 10-K.
LIQUIDITY RISK
Our liquidity risk management and monitoring process is designed to ensure the availability of adequate cash and collateral resources and funding capacity to meet our obligations. Our overall liquidity management strategy is intended to ensure appropriate liquidity to meet expected and contingent funding needs under both normal and stressed environments. Consistent with this strategy, we maintain 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 assets, and contingency funding plans. Also included among our liquidity measurement tools are key risk indicators that assist in identifying potential liquidity risk and stress events. BancShares maintains a framework to establish liquidity risk tolerances, monitoring, and breach escalation protocol to alert management of potential funding and liquidity risks and to initiate mitigating actions as appropriate. Further, BancShares maintains a contingent funding plan which details protocols and potential actions to be taken under liquidity stress conditions.
Liquidity includes
Table 32 Liquidity dollars in millions June 30, 2022 Available Cash$ 6,340 High Quality Liquid Securities 12,544 Liquid Assets$ 18,884 FHLB capacity(1)$ 11,562 FRB capacity 4,190 Line of credit with bank 75 Total contingent sources$ 15,827
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$89.3 billion ,$91.6 billion and$51.4 billion atJune 30, 2022 ,March 31, 2022 andDecember 31, 2021 , respectively. Borrowings totaled$4.5 billion ,$3.3 billion and$1.8 billion atJune 30, 2022 ,March 31, 2022 andDecember 31, 2021 , respectively. Borrowings consist of long-term debt, FHLB advances and securities sold under customer repurchase agreements. A source of available funds is advances from the FHLB ofAtlanta . We may pledge assets for secured borrowing transactions, which include borrowings from the FHLB and/or FRB, or for other purposes as required or permitted by law. The debt issued in conjunction with these transactions is collateralized by certain discrete receivables, securities, loans, leases and/or underlying equipment. Certain related cash balances are restricted. 98
--------------------------------------------------------------------------------
FHLB Advances
Table 33
FHLB Balances
June 30, 2022 March 31, 2022 December 31, 2021
dollars in millions Total Total TotalTotal borrowing capacity$ 14,097 $ 13,782 $ 9,564 Less: Advances 1,785 639 645 Letter of credit(1) 750 - - Available capacity$ 11,562 $ 13,143 $ 8,919 Pledged non-PCD loans (contractual balance)$ 20,680 $ 19,889 $ 14,507 Weighted Average Rate 1.88 % 1.27 % 1.28 %
(1) A letter of credit was established with the FHLB to collateralize public funds.
During the second quarter of 2022, we repaid approximately$0.5 billion of the amounts outstanding as ofMarch 31, 2022 , and inJune 2022 , we borrowed$1.65 billion . Under borrowing arrangements with the FRB ofRichmond , FCB has access to an additional$4.2 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window atJune 30, 2022 ,March 31, 2022 , andDecember 31, 2021 . Commitments and Contractual Obligations Table 34 identifies significant obligations and commitments as ofJune 30, 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. 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 $ 5,963$ 2,036 $ 260 $ 122 $ 8,381 Short-term borrowings 646 - - - 646 Long-term obligations 86 2,332 347 1,048 3,813 Total contractual obligations $ 6,695$ 4,368 $ 607 $ 1,170 $ 12,840 Commitments: Financing commitments $ 11,495$ 4,442 $ 2,278 $ 4,248 $ 22,463 Letters of credit 166 121 76 22 385 Deferred purchase agreements 1,897 - - - 1,897 Lessor commitments 664 37 - - 701 Affordable housing partnerships(1) 109 107 17 10 243 Total commitments $ 14,331$ 4,707 $ 2,371 $ 4,280 $ 25,689
(1) On-balance sheet commitments, included in other liabilities.
CAPITAL
Capital requirements applicable to BancShares' are discussed in Item 1. Business - Regulation, subsections "Regulatory Considerations" of our 2021 Form 10-K.
BancShares maintains a comprehensive capital adequacy process. BancShares establishes internal capital risk limits and warning thresholds, which 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. 99 -------------------------------------------------------------------------------- Share Repurchase Program OnJuly 26, 2022 , the Board authorized a share repurchase program for up to 1,500,000 shares of BancShares' Class A common stock for the period commencingAugust 1, 2022 throughJuly 28, 2023 . Under the authorized share repurchase program, shares of BancShares' Class A common stock may be repurchased from time to time on the open market or in privately negotiated transactions, including through a Rule 10b5-1 plan. However, the Board's action does not obligate BancShares to repurchase any particular number of shares, and repurchases may be suspended or discontinued at any time. 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$200 million .
The table below shows activities that caused the change in outstanding Class A Common Stock for the quarter.
Table 35
Changes in Shares of Class A Common Stock Outstanding
Three Months Ended June Six Months Ended June
30, 2022 30, 2022
Class A shares outstanding at beginning of period 14,996,325 8,811,220
Share issuance in conjunction with the CIT Merger - 6,140,010
Restricted stock units vested, net of shares held to cover taxes
877 45,972
Class A shares outstanding at end of period 14,997,202 14,997,202
We also had 1,005,185 Class B Common Stock outstanding at
We are committed to effectively managing our capital to protect our depositors,
creditors and stockholders. We continually monitor the capital levels and ratios
for BancShares and FCB to ensure they exceed the minimum requirements imposed by
regulatory authorities and to ensure they are appropriate given growth
projections, risk profile and potential changes in the regulatory or external
environment. Failure to meet certain capital requirements may result in actions
by regulatory agencies that could have a material impact on our consolidated
financial statements.
In accordance with GAAP, the unrealized gains and losses on certain assets and
liabilities, net of deferred taxes, are included in accumulated other
comprehensive loss within stockholders' equity. These amounts are excluded from
regulatory in the calculation of our regulatory capital ratios under current
regulatory guidelines.
Table 36
Analysis of Capital Adequacy
Requirements to be June 30, 2022 March 31, 2022 December 31, 2021
dollars in millions Well-Capitalized Amount Ratio Amount Ratio Amount Ratio
BancShares
Risk-based capital ratios Total risk-based capital 10.00 %$ 12,396 14.46 %$ 12,117 14.47 %$ 5,042 14.35 % Tier 1 risk-based capital 8.00 % 10,605 12.37 % 10,377 12.39 % 4,380 12.47 % Common equity Tier 1 6.50 % 9,724 11.35 % 9,496 11.34 % 4,041 11.50 % Tier 1 leverage ratio 5.00 % 10,605 9.85 % 10,377 9.55 % 4,380 7.59 % FCB Risk-based capital ratios Total risk-based capital 10.00 %$ 12,233 14.28 %$ 11,925 14.25 %$ 4,858 13.85 % Tier 1 risk-based capital 8.00 % 10,899 12.73 % 10,641 12.71 % 4,651 13.26 % Common equity Tier 1 6.50 % 10,899 12.73 % 10,641 12.71 % 4,651 13.26 % Tier 1 leverage ratio 5.00 % 10,899 10.14 % 10,641 9.81 % 4,651 8.07 % 100
-------------------------------------------------------------------------------- As ofJune 30, 2022 , BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. AtJune 30, 2022 , BancShares and FCB had total risk-based capital ratio conservation buffers of 6.46% and 6.28%, 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%, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratio over the Basel III minimum. Additional Tier 1 capital for BancShares includes perpetual preferred stock. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt.
CRITICAL ACCOUNTING ESTIMATES
Accounting policies related to the ACL are considered critical accounting estimates as described in our 2021 Form 10-K. The ACL as ofJune 30, 2022 is discussed in Note 5 - Allowance for credit Losses and the Credit Risk Management section of Item II in this Quarterly Report on Form 10-Q. 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 The amendments are effective for all Rate Reform (Topic 848) only to contracts, hedging relationships, entities at issuance date of March 12, Facilitation of the and other transactions that reference 2020, and once adopted will apply to Effects of Reference Rate LIBOR or another reference rate expected contract modifications made and hedging Reform on Financial to be discontinued because of reference relationships entered into on or before Reporting rate reform.
certain optional expedients for contract expedients as applicable for eligible
ASU 2021-01 - Reference modifications and removes the contract modifications and any hedge
Rate Reform (Topic 848): requirements to remeasure contract relationships. However, we do not expect
Scope modifications or de-designate hedging the guidance to have a material impact on
Issued January 2021 relationships. In addition, potential the financial statements.
sources of ineffectiveness as a result of
reference rate reform may be disregarded
when performing certain effectiveness
assessments.
ASU 2021-01 refines the scope of ASC 848
and clarifies which optional expedients
may be applied to derivative instruments
that do not reference LIBOR or a
reference rate that is expected to be
discontinued, but that are being modified
in connection with the market-wide
transition to new reference rates.
Guidance in these ASUs are effective as
of March 12, 2020 through December 31,
2022.
101-------------------------------------------------------------------------------- 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 in Issued March 2022 expands the scope of the portfolio layer a
closed portfolio is applied
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 consolidated
Update permits reclassification of debt financial statements and disclosures.
securities from the held-to-maturity
category to the available-for-sale category
if the entity intends to include those
securities in a portfolio designated in a
portfolio layer method hedge.
Also provides 30 days post adoption to
reclassify securities and include them in a
hedged closed portfolio.
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
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 of entities are permitted to apply this
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.
102
--------------------------------------------------------------------------------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.
Common Equity Tier 1 ("CET1"), Additional Tier 1 Capital, Tier 1 Capital, Tier 2
Capital, and Total Capital are regulatory capital measures as defined in the
capital adequacy guidelines issued by the Federal Reserve . CET1 is common
stockholders' equity reduced by capital deductions such as goodwill, intangible
assets and DTAs that arise from net operating loss and tax credit carryforwards
and adjusted by elements of other comprehensive income and other items. Tier 1
Capital is Common Equity Tier 1 Capital plus other Additional Tier 1 Capital
instruments, including non-cumulative preferred stock. Total Capital consists of
Tier 1 Capital and Tier 2 Capital, which includes subordinated debt, and
qualifying allowance for credit losses and other reserves.
Current Expected Credit Losses ("CECL") is a forward-looking "expected loss"
model used to estimate credit losses over the full remaining expected life of
the portfolio. Estimates under the CECL model are based on relevant information
about past events, current conditions, and reasonable and supportable forecasts
regarding the collectability of reported amounts. Generally, the model requires
that an ACL be estimated and recognized for financial assets measured at
amortized cost within its scope.
Delinquent Loan categorization occurs when payment is not received when contractually due. Delinquent loan trends are used as a gauge of potential portfolio degradation or improvement.
Derivative Contract is a contract whose value is derived from a specified asset or an index, such as an interest rate. As the value of that asset or index changes, so does the value of the derivative contract.
Economic Value of Equity ("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.
Finance leases - lessor is an agreement in which the party who owns the property
(lessor), which is BancShares as part of our finance business, permits another
party (lessee), which is our customer, to use the property with substantially
all of the economic benefits and risks of asset ownership passed to the lessee.
Finance leases are commonly known as sales-type leases and direct finance leases
and are included in the consolidated balance sheet in the line "Loans and
leases."
High Quality Liquid Securities ("HQLS") consist of readily-marketable, unpledged
securities, as well as securities pledged but not drawn against at the FHLB and
available for sale, and generally is comprised of Treasury and Agency securities
held outright or via reverse repurchase agreements.
Impaired Loan is a loan for which, based on current information and events, it
is probable that BancShares will be unable to collect all amounts due according
to the contractual terms of the loan.
Interest income includes interest earned on loans, interest-bearing cash balances, debt investments and dividends on investments.
Liquid Assets includes Available Cash and HQLS.
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.
103
--------------------------------------------------------------------------------
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.
Non-accrual Loans include loans greater than or equal to $500,000 that are
individually evaluated and determined to be impaired, as well as loans less than
$500,000 that are delinquent (generally for 90 days or more), unless it is both
well secured and in the process of collection. Non-accrual loans also include
loans with revenue recognition on a cash basis because of deterioration in the
financial position of the borrower.
Non-performing Assets include Non-accrual Loans, OREO, and repossessed assets.
Operating leases - lessor is a lease in which BancShares retains ownership of the asset (operating lease equipment, net), collects rental payments, recognizes depreciation on the asset, and retains the risks of ownership, including obsolescence. Other Noninterest Income includes (1) fee income and other revenue, (2) wealth management services, (3) gains and losses on leasing equipment, net, (4) Service charges on deposit accounts, (5) factoring commissions, (6) cardholder services, net, (7) merchant services, (8) realized gains and losses on investment securities available for sale, net, (9) marketable equity securities gains and losses, net, (10) gain on acquisition, (11) gain and losses on extinguishments of debt, and (12) other income.
Other Real Estate Owned ("OREO") is a term applied to real estate properties owned by a financial institution and are considered non-performing assets.
Pledged Assets are those required under the collateral maintenance requirement in connection with borrowing availability at the FHLB, which are comprised primarily of consumer and commercial real estate loans and also include certain 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.
104
--------------------------------------------------------------------------------Classified assets are rated as substandard, doubtful or loss based on the criteria outlined above. Classified assets can be accruing or on non-accrual depending on the evaluation of the relevant factors. Classified loans plus special mention loans are considered criticized loans.
Residual Values for finance leases represent the estimated value of equipment at the end of its lease term. For operating lease equipment, it is the value to which the asset is depreciated at the end of lease term or at the end of estimated useful life.
Right of Use Asset ("ROU Asset") represents our right, as lessee, to use underlying assets for the lease term, and lease liabilities represent our obligation to make lease payments arising from the leases.
Risk Weighted Assets ("RWA") is the denominator to which CET1, Tier 1 Capital
and Total Capital is compared to derive the respective risk based regulatory
ratios. RWA is comprised of both on-balance sheet assets and certain off-balance
sheet items (for example loan commitments, purchase commitments or derivative
contracts). RWA items are adjusted by certain risk-weightings as defined by the
regulators, which are based upon, among other things, the relative credit risk
of the counterparty.
Troubled Debt Restructuring ("TDR") occurs when a lender, for economic or legal
reasons, grants a concession to the borrower related to the borrower's financial
difficulties that it would not otherwise consider.
Variable Interest Entity ("VIE") is a corporation, partnership, limited
liability company, or any other legal structure used to conduct activities or
hold assets. These entities: lack sufficient equity investment at risk to permit
the entity to finance its activities without additional subordinated financial
support from other parties; have equity owners who either do not have voting
rights or lack the ability to make significant decisions affecting the entity's
operations; and/or have equity owners that do not have an obligation to absorb
the entity's losses or the right to receive the entity's returns.
Yield-related Fees are collected in connection with our assumption of
underwriting risk in certain transactions in addition to interest income. We
recognize yield-related origination fees in interest income over the life of the
lending transaction and recognize yield-related prepayment fees when the loan is
prepaid.
NON-GAAP FINANCIAL MEASUREMENTS
BancShares provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. A non-GAAP financial measure is a numerical measure of a company's historical or future financial performance or financial position that may either exclude or include amounts or is adjusted in some way to the effect of including or excluding amounts, as compared to the most directly comparable measure calculated and presented in accordance with GAAP financial statements. BancShares believes that non-GAAP financial measures, when reviewed in conjunction with GAAP financial information, can provide transparency about, or an alternate means of assessing, its operating results and financial position to its investors, analysts and management. These non-GAAP measures should be considered in addition to, and not superior to or a substitute for, GAAP measures presented in BancShares' consolidated financial statements and other publicly filed reports. In addition, our non-GAAP measures may be different from or inconsistent with non-GAAP financial measures used by other institutions. Whenever we refer to a non-GAAP financial measure we will generally define and present the most directly comparable financial measure calculated and presented in accordance 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).
105--------------------------------------------------------------------------------
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 Six Months Ended
dollars in millions June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Net income (GAAP) $ 24 $ 32 $ - $ 56 $ -
Plus: Provision for income taxes 7 11 - 18 -
Plus: Other noninterest expense 17 16 - 33 -
Less: Other noninterest income - 3 - 3 -
Plus: Interest expense, net 18 19 - 37 -
Net revenue on operating leases
(non-GAAP) $ 66 $ 75 $ - $ 141 $ -
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 (reconciliation provided below). 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 Three Months Ended Six Months Ended
June 30, 2022 March 31, 2022 June 30, 2022
Average Period End Average Period End Average Period End
dollars in millions Balance Balance Balance Balance Balance Balance
Interest earning assets (GAAP)
1,070 1,160 1,150 1,175 1,070
clients
Adjusted interest earning assets
$ 95,112 $ 93,211 $ 93,604 $ 92,315 (non-GAAP) Three Months Ended Three Months Ended June 30, 2022 March 31, 2022 Yield on Interest Rate Net Interest Yield on Interest Rate Net Interest Interest Earning Spread Margin Interest Earning Spread Margin dollars in millions Assets Assets
NIM - unadjusted (GAAP) 3.24 % 2.90 % 3.00 % 2.95 % 2.60 % 2.69 %
Impact of credit balances
for factoring clients 0.04 % 0.04 % 0.04 % 0.04 % 0.04 % 0.04 %
NIM - adjusted (non-GAAP) 3.28 % 2.94 % 3.04 % 2.99 % 2.64 % 2.73 %
Six Months Ended
June 30, 2022
Yield on Interest Rate Net Interest
Interest Earning Spread Margin
Assets
NIM - unadjusted (GAAP) 3.10 % 2.75 % 2.85 %
Impact of credit balances
for factoring clients 0.04 % 0.04 % 0.04 %
NIM - adjusted (non-GAAP) 3.14 % 2.80 % 2.89 %
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q contains "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," "potential," "continue," "aims" or
other similar words and expressions are intended to identify these
forward-looking statements. These forward-looking statements are based on
BancShares' current expectations and assumptions regarding BancShares' business,
the economy, and other future conditions.
106--------------------------------------------------------------------------------
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, including the recent and projected interest rate hikes by theBoard of Governors of theFederal Reserve Board (the "Federal Reserve"), the potential impact of decisions by theFederal Reserve on BancShares' capital plans, adverse developments with respect toU.S. or global economic conditions, the impact of the current inflationary environment, the impact of implementation and compliance with current or proposed laws, regulations and regulatory interpretations, regulators, the availability of capital and personnel, the failure to realize the anticipated benefits of BancShares' previously announced acquisition transaction(s), including the recently-completed transaction with CIT, which acquisition risks 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 the 2021 Form 10-K and its other filings with theSecurities and Exchange Commission .
© Edgar Online, source
