NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2023
The terms “FNB,” “the Corporation,” “we,” “us” and “our” throughout this Report mean F.N.B. Corporation and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, F.N.B. Corporation. When we refer to "FNBPA" in this Report, we mean our bank subsidiary, First National Bank of Pennsylvania, and its subsidiaries.
NATURE OF OPERATIONS
F.N.B. Corporation, headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in seven states and the District of Columbia. Our market coverage spans several major metropolitan areas including: Pittsburgh, Pennsylvania; Baltimore, Maryland; Cleveland, Ohio; Washington, D.C.; Charlotte, Raleigh, Durham and the Piedmont Triad (Winston-Salem, Greensboro and High Point) in North Carolina; and Charleston, South Carolina. As of March 31, 2023, we had 349 branches throughout Pennsylvania, Ohio, Maryland, West Virginia, North Carolina, South Carolina, Washington D.C. and Virginia.
We provide a full range of commercial banking, consumer banking and wealth management solutions through our subsidiary network which is led by our largest affiliate, FNBPA, founded in 1864. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, government banking, business credit, capital markets and lease financing. Consumer banking provides a full line of consumer banking products and services, including deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. Wealth management services include asset management, private banking and insurance.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our accompanying Consolidated Financial Statements and these Notes to Consolidated Financial Statements (unaudited) include subsidiaries in which we have a controlling financial interest. We own and operate FNBPA, First National Trust Company, First National Investment Services Company, LLC, F.N.B. Investment Advisors, Inc., First National Insurance Agency, LLC, Bank Capital Services, LLC, F.N.B. Capital Corporation, LLC and Waubank Securities, LLC, and include results for each of these entities in the accompanying Consolidated Financial Statements.
Companies in which we hold a controlling financial interest, or are a VIE in which we have the power to direct the activities of an entity that most significantly impact the entity’s economic performance and have an obligation to absorb losses or the right to receive benefits which could potentially be significant to the VIE, are consolidated. For a voting interest entity, a controlling financial interest is generally where we hold more than 50% of the outstanding voting shares. VIEs in which we do not hold the power to direct the activities of the entity that most significantly impact the entity’s economic performance or an obligation to absorb losses or the right to receive benefits which could potentially be significant to the VIE are not consolidated. Investments in companies that are not consolidated are accounted for using the equity method when we have the ability to exert significant influence or the cost method when we do not have the ability to exert significant influence. Investments in private investment partnerships that are accounted for under the equity method or the cost method are included in other assets and our proportional interest in the equity investments’ earnings are included in other non-interest income. Investment interests accounted for under the cost and equity methods are periodically evaluated for impairment.
The accompanying interim unaudited Consolidated Financial Statements include all adjustments that are necessary, in the opinion of management, to fairly reflect our financial position and results of operations in accordance with GAAP. All significant intercompany balances and transactions have been eliminated. Events occurring subsequent to March 31, 2023 have been evaluated for potential recognition or disclosure in the Consolidated Financial Statements through the date of the filing of the Consolidated Financial Statements with the SEC.
Certain information and Note disclosures normally included in Consolidated Financial Statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The interim operating results are not necessarily indicative of operating results we expect for the full year. These interim unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our 2022 Annual Report on Form 10-K filed with the SEC on February 24, 2023.
Use of Estimates
Our accounting and reporting policies conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements (unaudited). Actual results could materially differ from those estimates. Material estimates that are particularly susceptible to significant changes include the ACL, fair value of financial instruments, goodwill and other intangible assets, income taxes and deferred tax assets and litigation reserves, which are listed in the critical accounting estimates. For a detailed description of our significant accounting policies and critical accounting estimates, see Note 1, "Summary of Significant Accounting Policies" and the "Application of Critical Accounting Policies" section in the MD&A, both in our 2022 Annual Report on Form 10-K. NOTE 2. NEW ACCOUNTING STANDARDS
The following table summarizes accounting pronouncements issued by the FASB that we recently adopted or will be adopting in the future.
TABLE 2.1 | | | | | | | | | | | | | | |
Standard | | Description | | Financial Statements Impact |
Tax Equity Investments | | | | |
ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method | | This Update expands the use of the proportional amortization method of accounting, previously only allowable for LITHC investments, to equity investments in other tax credit structures that meet certain criteria.
The Update also removed the specialized guidance for LIHTC investments that are not accounted for using the proportional amortization method or equity method and require that those investments are accounted for using Topic 321 regarding equity investments. | | This Update is to be applied using either a modified retrospective or a retrospective method and will be effective as of January 1, 2024. Early adoption of this Update is permitted.
We are in the process of reviewing our existing tax equity investment portfolios and assessing the potential impact to our consolidated financial statements. |
Troubled Debt Restructuring and Charge-offs |
ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures | | This Update eliminates the recognition and measurement guidance on TDRs for creditors that have adopted ASC 326 and requires entities to apply loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. The Update requires enhanced disclosures for certain loan modifications by creditors when a borrower is experiencing financial difficulty if the modification includes principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, a term extension, or a combination of those modification types.
This Update also requires public business entities to present current-period gross write-offs by year of origination in their vintage disclosures. | | This Update is to be applied using a prospective method. For the transition method related to TDRs, an entity has the option to apply a modified retrospective transition method.
We adopted this Update on January 1, 2023. Adoption of this Update did not have a material impact on our consolidated financial statements.
|
NOTE 3. MERGERS AND ACQUISITIONS
Howard Bancorp, Inc.
On January 22, 2022, we completed our acquisition of Howard, a bank holding company headquartered in Baltimore City, Maryland. The acquisition enhanced our presence in the Mid-Atlantic Region. Additionally, cost savings, efficiencies and other benefits were realized from the combined operations. On the acquisition date, Howard had assets with a net book value of approximately $2.4 billion, including $1.8 billion in both loans and deposits. The acquisition was valued at approximately $443 million and resulted in the issuance of 34,074,495 shares of our common stock in exchange for 18,930,329 shares of Howard common stock. We also acquired restricted stock units and the fully vested outstanding stock options of Howard.
This merger was accounted for in accordance with the acquisition method of accounting. Fair values for all assets and liabilities are presented in Table 3.1. Determining the fair value of assets and liabilities is a complex process involving significant judgment regarding estimates and assumptions used to calculate fair values. We have completed the review of valuations for the acquired assets and liabilities.
Goodwill related to the Howard acquisition was recorded in the Community Banking business segment and is not deductible for income tax purposes as the acquisition was accounted for as a tax-free exchange for tax purposes. We incurred merger expenses relating to the Howard acquisition of $28.6 million for the first three months of 2022. We did not record any merger expenses relating to the Howard acquisition in 2023.
Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. We consider various factors in connection with the identification of more-than-insignificant deterioration in credit, including but not limited to nonperforming status, delinquency, risk ratings, TDR classification, FICO scores and other qualitative factors that indicate deterioration in credit quality since origination. For PCD loans and leases, the initial estimate of expected credit losses is recognized in the ACL on the date of acquisition using the same methodology as other loans and leases held-for-investment. As part of the Howard acquisition, we acquired PCD loans and leases of $186.9 million. We established an ACL at acquisition of $10.0 million with a corresponding gross-up to the amortized cost of the PCD loans and leases. The non-credit discount on the PCD loans and leases was $5.4 million and the Day 1 fair value was $171.5 million. The initial provision expense for non-PCD loans associated with the Howard acquisition was $19.1 million.
We integrated the systems and the operating activities of Howard into FNB in February 2022. Due to that integration, it is impracticable to disclose the revenue from the Howard assets acquired and income before income taxes subsequent to the acquisition.
UB Bancorp
On December 9, 2022, we completed our acquisition of Union, a bank holding company based in Greenville, North Carolina. This acquisition further increases our presence in North Carolina and adds low-cost granular deposits which continue to be value accretive in the current economic environment. On the acquisition date, Union had assets with a net book value of approximately $1.1 billion, including $0.7 billion in loans and $1.0 billion in deposits. The acquisition was valued at approximately $126 million and resulted in the issuance of 9,672,691 shares of our common stock in exchange for 6,008,123 shares of Union common stock.
This merger was accounted for in accordance with the acquisition method of accounting. Preliminary fair values for all assets and liabilities are presented in Table 3.1. Determining the fair value of assets and liabilities is a complex process involving significant judgment regarding estimates and assumptions used to calculate fair values. Accordingly, the initial accounting for the merger is not complete.
We continue to analyze the valuations assigned to the acquired assets and assumed liabilities. Due to the complexity in valuing the loans and the significant amount of data inputs required, the valuation of the loans is not yet final. We are also assessing the valuation on deferred taxes. The valuation on acquired premises, core deposit intangibles and debt have been completed.
Goodwill related to the Union acquisition was recorded in the Community Banking business segment and is not deductible for income tax purposes as the acquisition was accounted for as a tax-free exchange for tax purposes. We incurred merger expenses relating to the Union acquisition of $2.1 million for the first three months of 2023. We recorded core deposit intangibles of $41 million which reflect the much higher cost of alternative funding given the higher interest rate environment at the time of acquisition.
Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. We consider various factors in connection with the identification of more-than-insignificant deterioration in credit, including but not limited to nonperforming status, delinquency, risk ratings, FICO scores and other qualitative factors that indicate deterioration in credit quality since origination. For PCD loans and leases, the initial estimate of expected credit losses is recognized in the ACL on the date of acquisition using the same methodology as other loans and leases held-for-investment. As part of the Union acquisition, we acquired PCD loans and leases of $36.9 million. We established an ACL at acquisition of $1.8 million with a corresponding gross-up to the amortized cost of the PCD loans and leases. The non-credit discount on the PCD loans and leases was $0.5 million and the Day 1 fair value was $34.7 million. The initial provision expense for non-PCD loans associated with the Union acquisition was $9.4 million.
We integrated the systems and the operating activities of Union in December 2022. Due to that integration, it is impracticable to disclose the revenue from the Union assets acquired and income before income taxes subsequent to the acquisition.
The following table summarizes the amounts recorded on the consolidated balance sheets as of the acquisition dates in conjunction with the Howard and Union acquisitions discussed above.
TABLE 3.1
| | | | | | | | | | | |
(in millions) | Howard | | Union |
Fair value of consideration paid | $ | 443 | | | $ | 126 | |
Fair value of identifiable assets acquired: | | | |
Cash and cash equivalents | 75 | | | 113 | |
Securities | 321 | | | 212 | |
Loans | 1,780 | | | 652 | |
Core deposit and other intangible assets | 19 | | | 41 | |
Fixed and other assets | 156 | | | 59 | |
Total identifiable assets acquired | 2,351 | | | 1,077 | |
Fair value of liabilities assumed: | | | |
Deposits | 1,831 | | | 956 | |
Borrowings | 247 | | | 30 | |
Other liabilities | 7 | | | 3 | |
Total liabilities assumed | 2,085 | | | 989 | |
Fair value of net identifiable assets acquired | 266 | | | 88 | |
Goodwill recognized | $ | 177 | | | $ | 38 | |
NOTE 4. SECURITIES
The amortized cost and fair value of AFS debt securities are presented in the table below. There was no ACL in the AFS portfolio at March 31, 2023 and December 31, 2022. Accrued interest receivable on AFS debt securities totaled $8.9 million at both March 31, 2023 and December 31, 2022, and is excluded from the estimate of credit losses and assessed separately in other assets in the Consolidated Balance Sheets. Accordingly, we have excluded accrued interest receivable from both the fair value and the amortized cost basis of AFS debt securities.
TABLE 4.1
| | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | | | Fair Value |
Debt Securities AFS: | | | | | | | | | |
March 31, 2023 | | | | | | | | | |
U.S. Treasury | $ | 278 | | | $ | — | | | $ | (17) | | | | | $ | 261 | |
U.S. government agencies | 100 | | | 1 | | | — | | | | | 101 | |
U.S. government-sponsored entities | 279 | | | — | | | (18) | | | | | 261 | |
Residential mortgage-backed securities: | | | | | | | | | |
Agency mortgage-backed securities | 1,299 | | | — | | | (112) | | | | | 1,187 | |
Agency collateralized mortgage obligations | 1,070 | | | — | | | (120) | | | | | 950 | |
| | | | | | | | | |
Commercial mortgage-backed securities | 424 | | | — | | | (32) | | | | | 392 | |
States of the U.S. and political subdivisions (municipals) | 32 | | | — | | | (3) | | | | | 29 | |
Other debt securities | 21 | | | — | | | (1) | | | | | 20 | |
Total debt securities AFS | $ | 3,503 | | | $ | 1 | | | $ | (303) | | | | | $ | 3,201 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Debt Securities AFS: | | | | | | | |
December 31, 2022 | | | | | | | |
U.S. Treasury | $ | 278 | | | $ | — | | | $ | (21) | | | $ | 257 | |
U.S. government agencies | 107 | | | 1 | | | — | | | 108 | |
U.S. government-sponsored entities | 283 | | | — | | | (21) | | | 262 | |
Residential mortgage-backed securities: | | | | | | | |
Agency mortgage-backed securities | 1,360 | | | — | | | (128) | | | 1,232 | |
Agency collateralized mortgage obligations | 1,110 | | | — | | | (138) | | | 972 | |
| | | | | | | |
Commercial mortgage-backed securities | 430 | | | — | | | (35) | | | 395 | |
States of the U.S. and political subdivisions (municipals) | 33 | | | — | | | (4) | | | 29 | |
Other debt securities | 21 | | | — | | | (1) | | | 20 | |
Total debt securities AFS | $ | 3,622 | | | $ | 1 | | | $ | (348) | | | $ | 3,275 | |
The amortized cost and fair value of HTM debt securities are presented in the table below. The ACL for the HTM portfolio was $0.32 million and $0.23 million at March 31, 2023 and December 31, 2022, respectively. Accrued interest receivable on HTM debt securities totaled $13.6 million and $14.0 million at March 31, 2023 and December 31, 2022, respectively, and is excluded from the estimate of credit losses and assessed separately in other assets in the Consolidated Balance Sheets. Accordingly, we have excluded accrued interest receivable from both the fair value and the amortized cost basis of HTM debt securities.
TABLE 4.2
| | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | |
Debt Securities HTM: | | | | | | | | | |
March 31, 2023 | | | | | | | | | |
| | | | | | | | | |
U.S. government agencies | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | | | |
U.S. government-sponsored entities | 92 | | | 1 | | | — | | | 93 | | | |
Residential mortgage-backed securities: | | | | | | | | | |
Agency mortgage-backed securities | 1,139 | | | — | | | (110) | | | 1,029 | | | |
Agency collateralized mortgage obligations | 920 | | | — | | | (107) | | | 813 | | | |
| | | | | | | | | |
Commercial mortgage-backed securities | 873 | | | 3 | | | (44) | | | 832 | | | |
States of the U.S. and political subdivisions (municipals) | 1,032 | | | 3 | | | (76) | | | 959 | | | |
Other debt securities | 16 | | | — | | | (1) | | | 15 | | | |
Total debt securities HTM | $ | 4,073 | | | $ | 7 | | | $ | (338) | | | $ | 3,742 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | |
Debt Securities HTM: | | | | | | | | | |
December 31, 2022 | | | | | | | | | |
| | | | | | | | | |
U.S. government agencies | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | | | |
U.S. government-sponsored entities | 52 | | | — | | | — | | | 52 | | | |
Residential mortgage-backed securities: | | | | | | | | | |
Agency mortgage-backed securities | 1,178 | | | — | | | (125) | | | 1,053 | | | |
Agency collateralized mortgage obligations | 953 | | | — | | | (120) | | | 833 | | | |
| | | | | | | | | |
Commercial mortgage-backed securities | 866 | | | 2 | | | (50) | | | 818 | | | |
States of the U.S. and political subdivisions (municipals) | 1,025 | | | 1 | | | (107) | | | 919 | | | |
Other debt securities | 12 | | | — | | | (1) | | | 11 | | | |
Total debt securities HTM | $ | 4,087 | | | $ | 3 | | | $ | (403) | | | $ | 3,687 | | | |
There were no significant gross gains or gross losses realized on securities during the three months ended March 31, 2023 or 2022. Unrealized losses on the AFS and HTM portfolios are due to the increase in market interest rates with 84.9% of these securities backed or sponsored by the U.S. government as of March 31, 2023.
As of March 31, 2023, the amortized cost and fair value of debt securities, by contractual maturities, were as follows:
TABLE 4.3
| | | | | | | | | | | | | | | | | | | | | | | |
| Available for Sale | | Held to Maturity |
(in millions) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | $ | 8 | | | $ | 8 | | | $ | 3 | | | $ | 3 | |
Due after one year but within five years | 578 | | | 542 | | | 131 | | | 131 | |
Due after five years but within ten years | 85 | | | 83 | | | 225 | | | 216 | |
Due after ten years | 39 | | | 39 | | | 782 | | | 718 | |
| 710 | | | 672 | | | 1,141 | | | 1,068 | |
Residential mortgage-backed securities: | | | | | | | |
Agency mortgage-backed securities | 1,299 | | | 1,187 | | | 1,139 | | | 1,029 | |
Agency collateralized mortgage obligations | 1,070 | | | 950 | | | 920 | | | 813 | |
| | | | | | | |
Commercial mortgage-backed securities | 424 | | | 392 | | | 873 | | | 832 | |
Total debt securities | $ | 3,503 | | | $ | 3,201 | | | $ | 4,073 | | | $ | 3,742 | |
Actual maturities may differ from contractual terms because security issuers may have the right to call or prepay obligations with or without penalties. Periodic principal payments are received on residential mortgage-backed securities based on the payment patterns of the underlying collateral.
Following is information relating to securities pledged:
TABLE 4.4
| | | | | | | | | | | |
(dollars in millions) | March 31, 2023 | | December 31, 2022 |
Securities pledged (carrying value): | | | |
To secure public deposits, trust deposits and for other purposes as required by law | $ | 5,904 | | | $ | 6,403 | |
As collateral for short-term borrowings | 282 | | | 348 | |
Securities pledged as a percent of total securities | 85.0 | % | | 91.7 | % |
Following are summaries of the fair values of AFS debt securities in an unrealized loss position for which an ACL has not been recorded, segregated by security type and length of time in a continuous loss position:
TABLE 4.5
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or More | | Total |
(dollars in millions) | # | | Fair Value | | Unrealized Losses | | # | | Fair Value | | Unrealized Losses | | # | | Fair Value | | Unrealized Losses |
Debt Securities AFS | | | | | | | | | | | | | | | | |
March 31, 2023 | | | | | | | | | | | | | | | | | |
U.S. Treasury | 2 | | | $ | 73 | | | $ | (2) | | | 4 | | | $ | 188 | | | $ | (15) | | | 6 | | | $ | 261 | | | $ | (17) | |
U.S. government agencies | 6 | | | 37 | | | — | | | 9 | | | 10 | | | — | | | 15 | | | 47 | | | — | |
U.S. government-sponsored entities | 3 | | | 72 | | | (2) | | | 9 | | | 189 | | | (16) | | | 12 | | | 261 | | | (18) | |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | |
Agency mortgage-backed securities | 15 | | | 152 | | | (5) | | | 100 | | | 1,032 | | | (107) | | | 115 | | | 1,184 | | | (112) | |
Agency collateralized mortgage obligations | 5 | | | 60 | | | (3) | | | 66 | | | 890 | | | (117) | | | 71 | | | 950 | | | (120) | |
| | | | | | | | | | | | | | | | | |
Commercial mortgage-backed securities | 8 | | | 164 | | | (7) | | | 13 | | | 228 | | | (25) | | | 21 | | | 392 | | | (32) | |
States of the U.S. and political subdivisions (municipals) | 1 | | | 1 | | | — | | | 13 | | | 28 | | | (3) | | | 14 | | | 29 | | | (3) | |
Other debt securities | 2 | | | 9 | | | — | | | 6 | | | 8 | | | (1) | | | 8 | | | 17 | | | (1) | |
Total | 42 | | | $ | 568 | | | $ | (19) | | | 220 | | | $ | 2,573 | | | $ | (284) | | | 262 | | | $ | 3,141 | | | $ | (303) | |
| Less than 12 Months | | 12 Months or More | | Total |
(dollars in millions) | # | | Fair Value | | Unrealized Losses | | # | | Fair Value | | Unrealized Losses | | # | | Fair Value | | Unrealized Losses |
Debt Securities AFS | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | | | | | |
U.S. Treasury | 3 | | | $ | 120 | | | $ | (7) | | | 3 | | | $ | 137 | | | $ | (14) | | | 6 | | | $ | 257 | | | $ | (21) | |
U.S. government agencies | 6 | | | 46 | | | — | | | 8 | | | 4 | | | — | | | 14 | | | 50 | | | — | |
U.S. government-sponsored entities | 9 | | | 150 | | | (8) | | | 4 | | | 112 | | | (13) | | | 13 | | | 262 | | | (21) | |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | |
Agency mortgage-backed securities | 104 | | | 773 | | | (58) | | | 13 | | | 455 | | | (70) | | | 117 | | | 1,228 | | | (128) | |
Agency collateralized mortgage obligations | 49 | | | 455 | | | (42) | | | 23 | | | 517 | | | (96) | | | 72 | | | 972 | | | (138) | |
| | | | | | | | | | | | | | | | | |
Commercial mortgage-backed securities | 16 | | | 302 | | | (21) | | | 5 | | | 94 | | | (14) | | | 21 | | | 396 | | | (35) | |
States of the U.S. and political subdivisions (municipals) | 4 | | | 7 | | | (1) | | | 10 | | | 22 | | | (3) | | | 14 | | | 29 | | | (4) | |
Other debt securities | 7 | | | 15 | | | (1) | | | 1 | | | 2 | | | — | | | 8 | | | 17 | | | (1) | |
Total | 198 | | | $ | 1,868 | | | $ | (138) | | | 67 | | | $ | 1,343 | | | $ | (210) | | | 265 | | | $ | 3,211 | | | $ | (348) | |
We evaluated the AFS debt securities that were in an unrealized loss position at March 31, 2023. Based on the credit ratings and implied government guarantee for these securities, we concluded the loss position is temporary and caused by the significant movement of interest rates since 2022 and does not reflect any expected credit losses. We do not intend to sell these
AFS debt securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost basis.
Credit Quality Indicators
We use credit ratings and the most recent financial information to help evaluate the credit quality of our credit-related AFS and HTM securities portfolios. Management reviews the credit profile of each issuer on an annual basis, and more frequently as needed. Based on the nature of the issuers and current conditions, we have determined that securities backed by the UST, Fannie Mae, Freddie Mac, FHLB, Ginnie Mae, and the SBA have zero expected credit loss.
Our municipal bond portfolio, with a carrying amount of $1.1 billion as of March 31, 2023 is highly rated with an average rating of AA and 100% of the portfolio having an A or better rating. All of the securities in the municipal portfolio are general obligation bonds. Geographically, municipal bonds support our primary footprint as 60% of the securities are from municipalities located in the primary states within which we conduct business. The average holding size of the securities in the municipal bond portfolio is $2.5 million. In addition to the strong stand-alone ratings, 60% of the municipal bonds have some formal credit enhancement (e.g., insurance) that strengthens the creditworthiness of the bond.
The ACL on the HTM municipal bond portfolio is calculated on each bond using:
•The bond’s underlying credit rating, time to maturity and exposure amount;
•Credit enhancements that improve the bond’s credit rating (e.g., insurance); and
•Moody’s U.S. Bond Defaults and Recoveries, 1970-2021 study.
By using these components, we derive the expected credit loss on the HTM general obligation municipal bond portfolio. We further refine the expected credit loss by factoring in economic forecast data using our Commercial and Industrial Non-Manufacturing loan portfolio forecast adjustment as derived through our assessment of the loan portfolio as a proxy for our municipal bond portfolio.
Our corporate bond portfolio, with a carrying amount of $36.1 million as of March 31, 2023 primarily consists of subordinated debentures of banks within our footprint. The average holding size of the securities in the corporate bond portfolio is $2.4 million.
The ACL on the HTM corporate bond portfolio is calculated using:
•The bond’s credit rating, time to maturity and exposure amount;
•Moody’s Annual Default Study, 03/13/2023; and
•Most recent financial statements.
By using these components, we derive the expected credit loss on the HTM corporate bond portfolio. We further refine the expected credit loss by factoring in economic forecast data using our bank-wide loan portfolio forecast adjustment as derived through our assessment of the Bank's loan portfolio as a proxy for our corporate bond portfolio.
For the year-to-date periods ending March 31, 2023 and 2022, we had no significant provision expense and no charge-offs or recoveries. The ACL on the HTM portfolio was $0.32 million, consisting of $0.07 million relating to the municipal bond portfolio and $0.25 million relating to other debt securities, as of March 31, 2023, and $0.07 million relating to the municipal bond portfolio and $0.16 million relating to other debt securities as of December 31, 2022. The AFS securities portfolios did not have an ACL at March 31, 2023 or December 31, 2022 and there were no securities that were past due or on non-accrual at either date.
NOTE 5. LOANS AND LEASES
Accrued interest receivable on loans and leases, which totaled $100.4 million at March 31, 2023 and $99.3 million at December 31, 2022, is excluded from the estimate of credit losses and assessed separately in other assets in the Consolidated Balance Sheets for both periods and not included in the following tables.
Loans and Leases by Portfolio Segment
Following is a summary of total loans and leases, net of unearned income:
TABLE 5.1
| | | | | | | | | | | |
| | | |
(in millions) | March 31, 2023 | | December 31, 2022 |
Commercial real estate | $ | 11,528 | | | $ | 11,526 | |
Commercial and industrial | 7,246 | | | 7,131 | |
Commercial leases | 562 | | | 519 | |
Other | 176 | | | 114 | |
Total commercial loans and leases | 19,512 | | | 19,290 | |
Direct installment | 2,752 | | | 2,784 | |
Residential mortgages | 5,589 | | | 5,297 | |
Indirect installment | 1,525 | | | 1,553 | |
Consumer lines of credit | 1,295 | | | 1,331 | |
Total consumer loans | 11,161 | | | 10,965 | |
Total loans and leases, net of unearned income | $ | 30,673 | | | $ | 30,255 | |
The remaining accretable discount included in the amortized cost of acquired loans was $54.5 million and $58.6 million at March 31, 2023 and December 31, 2022, respectively, which includes $10.1 million and $30.9 million established for Howard and Union, respectively, at the time of acquisition.
The loans and leases portfolio categories are comprised of the following types of loans, where in each case the LGD is dependent on the nature and value of the respective collateral:
•Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties where operational cash flows on owner-occupied properties or rents received by our borrowers from their tenant(s) on both a property and global basis are the primary default risk drivers, including rents paid by stand-alone business customers for owner-occupied properties;
•Commercial and industrial includes loans to businesses that are not secured by real estate where the borrower's leverage and cash flows from operations are the primary default risk drivers;
•Commercial leases consist of leases for new or used equipment where the borrower's cash flow from operations is the primary default risk driver;
•Other is comprised primarily of credit cards and mezzanine loans where the borrower's cash flow from operations is the primary default risk driver;
•Direct installment is comprised of fixed-rate, closed-end consumer loans for personal, family or household use, such as home equity loans and automobile loans where the primary default risk driver is the borrower's employment status and income;
•Residential mortgages consist of conventional and jumbo mortgage loans for 1-4 family properties where the primary default risk driver is the borrower's employment status and income;
•Indirect installment is comprised of loans originated by approved third parties and underwritten by us, primarily automobile loans where the primary default risk driver is the borrower's employment status and income; and
•Consumer lines of credit include home equity lines of credit and consumer lines of credit that are either unsecured or secured by collateral other than home equity where the primary default risk driver is the borrower's employment status and income.
The loans and leases portfolio consists principally of loans to individuals and small- and medium-sized businesses within our primary market in seven states and the District of Columbia. Our primary market coverage spans several major metropolitan areas including: Pittsburgh, Pennsylvania; Baltimore, Maryland; Cleveland, Ohio; Washington, D.C.; Charlotte, Raleigh, Durham and the Piedmont Triad (Winston-Salem, Greensboro and High Point) in North Carolina; and Charleston, South Carolina.
The following table shows occupancy information relating to commercial real estate loans:
TABLE 5.2
| | | | | | | | | | | |
(dollars in millions) | March 31, 2023 | | December 31, 2022 |
Commercial real estate: | | | |
Percent owner-occupied | 29.9 | % | | 30.2 | % |
Percent non-owner-occupied | 70.1 | | | 69.8 | |
Credit Quality
We monitor the credit quality of our loan portfolio using several performance measures based on payment activity and borrower performance. We use an internal risk rating assigned to a commercial loan or lease at origination, summarized below.
TABLE 5.3
| | | | | |
Rating Category | Definition |
Pass | in general, the condition of the borrower and the performance of the loan is satisfactory or better |
| |
Special Mention | in general, the condition of the borrower has deteriorated, requiring an increased level of monitoring |
| |
Substandard | in general, the condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate if deficiencies are not corrected |
| |
Doubtful | in general, the condition of the borrower has significantly deteriorated and the collection in full of both principal and interest is highly questionable or improbable |
The use of these internally assigned credit quality categories within the commercial loan and lease portfolio permits our use of transition matrices to establish a basis which is then impacted by quantitative inputs from our econometric model forecasts over the R&S period. Our internal credit risk grading system is based on past experiences with similarly graded loans and leases and conforms to regulatory categories. In general, loan and lease risk ratings within each category are reviewed on an ongoing basis according to our policy for each class of loans and leases. Each quarter, we analyze the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the commercial loan and lease portfolio. Loans and leases within the Pass credit category or that migrate toward the Pass credit category generally have a lower risk of loss compared to loans and leases that migrate toward the Substandard or Doubtful credit categories. Accordingly, we apply higher risk factors to Substandard and Doubtful credit categories.
The following table summarize the designated loan rating category by loan class including term loans on an amortized cost basis by origination year and year-to-date gross charge-offs by originating year:
TABLE 5.4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans Amortized Cost Basis | | Total |
(in millions) | | | | | | | | | | | | | | | |
COMMERCIAL | | | | | | | | | | | | | | | |
Commercial Real Estate: | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | |
Pass | $ | 225 | | | $ | 1,967 | | | $ | 2,368 | | | $ | 1,647 | | | $ | 1,270 | | | $ | 2,984 | | | $ | 245 | | | $ | 10,706 | |
Special Mention | 2 | | | 44 | | | 33 | | | 84 | | | 48 | | | 268 | | | 8 | | | 487 | |
Substandard | — | | | 6 | | | 7 | | | 20 | | | 60 | | | 221 | | | 21 | | | 335 | |
| | | | | | | | | | | | | | | |
Total commercial real estate | 227 | | | 2,017 | | | 2,408 | | | 1,751 | | | 1,378 | | | 3,473 | | | 274 | | | 11,528 | |
Commercial real estate current period gross charge-offs | — | | | — | | | 0.1 | | | — | | | — | | | 6.4 | | | — | | | 6.5 | |
Commercial and Industrial: | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | |
Pass | 359 | | | 1,576 | | | 1,159 | | | 747 | | | 489 | | | 654 | | | 1,742 | | | 6,726 | |
Special Mention | 4 | | | 26 | | | 47 | | | 10 | | | 25 | | | 109 | | | 34 | | | 255 | |
Substandard | 7 | | | 12 | | | 41 | | | 8 | | | 20 | | | 79 | | | 98 | | | 265 | |
| | | | | | | | | | | | | | | |
Total commercial and industrial | 370 | | | 1,614 | | | 1,247 | | | 765 | | | 534 | | | 842 | | | 1,874 | | | 7,246 | |
Commercial and industrial current period gross charge-offs | — | | | 0.2 | | | 0.1 | | | 0.3 | | | 0.6 | | | 4.6 | | | — | | | 5.8 | |
Commercial Leases: | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | |
Pass | 105 | | | 142 | | | 114 | | | 66 | | | 51 | | | 57 | | | — | | | 535 | |
Special Mention | 7 | | | 2 | | | 1 | | | — | | | — | | | — | | | — | | | 10 | |
Substandard | — | | | 2 | | | 4 | | | 8 | | | 2 | | | 1 | | | — | | | 17 | |
| | | | | | | | | | | | | | | |
Total commercial leases | 112 | | | 146 | | | 119 | | | 74 | | | 53 | | | 58 | | | — | | | 562 | |
Commercial leases current period gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other Commercial: | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | |
Pass | 57 | | | — | | | — | | | — | | | — | | | 11 | | | 108 | | | 176 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total other commercial | 57 | | | — | | | — | | | — | | | — | | | 11 | | | 108 | | | 176 | |
Other commercial current period gross charge-offs | — | | | — | | | — | | | — | | | — | | | 0.8 | | | — | | | 0.8 | |
Total commercial loans and leases | 766 | | | 3,777 | | | 3,774 | | | 2,590 | | | 1,965 | | | 4,384 | | | 2,256 | | | 19,512 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans Amortized Cost Basis | | Total |
(in millions) | | | | | | | | | | | | | | | |
CONSUMER | | | | | | | | | | | | | | | |
Direct Installment: | | | | | | | | | | | | | | | |
Current | 63 | | | 781 | | | 863 | | | 437 | | | 157 | | | 439 | | | — | | | 2,740 | |
Past due | — | | | 1 | | | 1 | | | — | | | — | | | 10 | | | — | | | 12 | |
Total direct installment | 63 | | | 782 | | | 864 | | | 437 | | | 157 | | | 449 | | | — | | | 2,752 | |
Direct installment current period gross charge-offs | — | | | — | | | 0.1 | | | — | | | — | | | 0.2 | | | — | | | 0.3 | |
Residential Mortgages: | | | | | | | | | | | | | | | |
Current | 269 | | | 1,555 | | | 1,582 | | | 853 | | | 371 | | | 919 | | | 1 | | | 5,550 | |
Past due | — | | | 2 | | | 2 | | | 3 | | | 1 | | | 31 | | | — | | | 39 | |
Total residential mortgages | 269 | | | 1,557 | | | 1,584 | | | 856 | | | 372 | | | 950 | | | 1 | | | 5,589 | |
Residential mortgages current period gross charge-offs | — | | | — | | | — | | | — | | | — | | | 0.4 | | | — | | | 0.4 | |
Indirect Installment: | | | | | | | | | | | | | | | |
Current | 117 | | | 746 | | | 329 | | | 149 | | | 75 | | | 95 | | | — | | | 1,511 | |
Past due | — | | | 4 | | | 6 | | | 2 | | | 1 | | | 1 | | | — | | | 14 | |
Total indirect installment | 117 | | | 750 | | | 335 | | | 151 | | | 76 | | | 96 | | | — | | | 1,525 | |
Indirect installment current period gross charge-offs | — | | | 1.0 | | | 1.2 | | | 0.2 | | | — | | | 0.2 | | | — | | | 2.6 | |
Consumer Lines of Credit: | | | | | | | | | | | | | | | |
Current | 12 | | | 72 | | | 17 | | | 2 | | | 3 | | | 128 | | | 1,046 | | | 1,280 | |
Past due | — | | | — | | | — | | | — | | | — | | | 13 | | | 2 | | | 15 | |
Total consumer lines of credit | 12 | | | 72 | | | 17 | | | 2 | | | 3 | | | 141 | | | 1,048 | | | 1,295 | |
Consumer lines of credit current period gross charge-offs | — | | | — | | | — | | | — | | | — | | | 0.3 | | | — | | | 0.3 | |
Total consumer loans | 461 | | | 3,161 | | | 2,800 | | | 1,446 | | | 608 | | | 1,636 | | | 1,049 | | | 11,161 | |
Total loans and leases | $ | 1,227 | | | $ | 6,938 | | | $ | 6,574 | | | $ | 4,036 | | | $ | 2,573 | | | $ | 6,020 | | | $ | 3,305 | | | $ | 30,673 | |
Total charge-offs | $ | — | | | $ | 1.2 | | | $ | 1.5 | | | $ | 0.5 | | | $ | 0.6 | | | $ | 12.9 | | | $ | — | | | $ | 16.7 | |
The following table summarize the designated loan rating category by loan class including term loans on an amortized cost basis by origination year:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans Amortized Cost Basis | | Total |
(in millions) | | | | | | | | | | | | | | | |
COMMERCIAL | | | | | | | | | | | | | | | |
Commercial Real Estate: | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | |
Pass | $ | 1,967 | | | $ | 2,348 | | | $ | 1,678 | | | $ | 1,283 | | | $ | 700 | | | $ | 2,447 | | | $ | 258 | | | $ | 10,681 | |
Special Mention | 43 | | | 35 | | | 67 | | | 74 | | | 104 | | | 208 | | | 5 | | | 536 | |
Substandard | 3 | | | 7 | | | 20 | | | 47 | | | 45 | | | 167 | | | 20 | | | 309 | |
| | | | | | | | | | | | | | | |
Total commercial real estate | 2,013 | | | 2,390 | | | 1,765 | | | 1,404 | | | 849 | | | 2,822 | | | 283 | | | 11,526 | |
| | | | | | | | | | | | | | | |
Commercial and Industrial: | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | |
Pass | 1,635 | | | 1,194 | | | 760 | | | 533 | | | 289 | | | 453 | | | 1,856 | | | 6,720 | |
Special Mention | 15 | | | 43 | | | 16 | | | 27 | | | 48 | | | 48 | | | 54 | | | 251 | |
Substandard | 5 | | | 12 | | | 11 | | | 8 | | | 38 | | | 34 | | | 52 | | | 160 | |
| | | | | | | | | | | | | | | |
Total commercial and industrial | 1,655 | | | 1,249 | | | 787 | | | 568 | | | 375 | | | 535 | | | 1,962 | | | 7,131 | |
| | | | | | | | | | | | | | | |
Commercial Leases: | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | |
Pass | 187 | | | 121 | | | 69 | | | 59 | | | 36 | | | 27 | | | — | | | 499 | |
Special Mention | — | | | 1 | | | — | | | 1 | | | — | | | — | | | — | | | 2 | |
Substandard | 2 | | | 5 | | | 8 | | | 1 | | | 1 | | | 1 | | | — | | | 18 | |
| | | | | | | | | | | | | | | |
Total commercial leases | 189 | | | 127 | | | 77 | | | 61 | | | 37 | | | 28 | | | — | | | 519 | |
| | | | | | | | | | | | | | | |
Other Commercial: | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | |
Pass | 58 | | | — | | | — | | | — | | | — | | | 12 | | | 44 | | | 114 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total other commercial | 58 | | | — | | | — | | | — | | | — | | | 12 | | | 44 | | | 114 | |
| | | | | | | | | | | | | | | |
Total commercial loans and leases | 3,915 | | | 3,766 | | | 2,629 | | | 2,033 | | | 1,261 | | | 3,397 | | | 2,289 | | | 19,290 | |
| | | | | | | | | | | | | | | |
CONSUMER | | | | | | | | | | | | | | | |
Direct Installment: | | | | | | | | | | | | | | | |
Current | 801 | | | 887 | | | 453 | | | 163 | | | 91 | | | 374 | | | — | | | 2,769 | |
Past due | — | | | 1 | | | 1 | | | 1 | | | 1 | | | 11 | | | — | | | 15 | |
Total direct installment | 801 | | | 888 | | | 454 | | | 164 | | | 92 | | | 385 | | | — | | | 2,784 | |
| | | | | | | | | | | | | | | |
Residential Mortgages: | | | | | | | | | | | | | | | |
Current | 1,464 | | | 1,587 | | | 871 | | | 378 | | | 128 | | | 819 | | | 2 | | | 5,249 | |
Past due | 2 | | | 3 | | | 3 | | | 2 | | | 5 | | | 33 | | | — | | | 48 | |
Total residential mortgages | 1,466 | | | 1,590 | | | 874 | | | 380 | | | 133 | | | 852 | | | 2 | | | 5,297 | |
| | | | | | | | | | | | | | | |
Indirect Installment: | | | | | | | | | | | | | | | |
Current | 800 | | | 357 | | | 166 | | | 88 | | | 80 | | | 40 | | | — | | | 1,531 | |
Past due | 5 | | | 11 | | | 3 | | | 1 | | | 1 | | | 1 | | | — | | | 22 | |
Total indirect installment | 805 | | | 368 | | | 169 | | | 89 | | | 81 | | | 41 | | | — | | | 1,553 | |
| | | | | | | | | | | | | | | |
Consumer Lines of Credit: | | | | | | | | | | | | | | | |
Current | 74 | | | 17 | | | 1 | | | 3 | | | 4 | | | 126 | | | 1,086 | | | 1,311 | |
Past due | — | | | 1 | | | 1 | | | — | | | — | | | 15 | | | 3 | | | 20 | |
Total consumer lines of credit | 74 | | | 18 | | | 2 | | | 3 | | | 4 | | | 141 | | | 1,089 | | | 1,331 | |
| | | | | | | | | | | | | | | |
Total consumer loans | 3,146 | | | 2,864 | | | 1,499 | | | 636 | | | 310 | | | 1,419 | | | 1,091 | | | 10,965 | |
Total loans and leases | $ | 7,061 | | | $ | 6,630 | | | $ | 4,128 | | | $ | 2,669 | | | $ | 1,571 | | | $ | 4,816 | | | $ | 3,380 | | | $ | 30,255 | |
| | | | | | | | | | | | | | | |
We use delinquency transition matrices within the consumer and other loan classes to establish the basis for the R&S forecast portion of the credit risk. Each month, management analyzes payment and volume activity, FICO scores and Debt-to-Income (DTI) scores and other external factors such as unemployment, to determine how consumer loans are performing.
Non-Performing and Past Due
The following tables provide an analysis of the aging of loans by class.
TABLE 5.5
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | 30-89 Days Past Due | | > 90 Days Past Due and Still Accruing | | Non- Accrual | | Total Past Due | | Current | | Total Loans and Leases | | Non-accrual with No ACL |
March 31, 2023 | | | | | | | | | | | | | |
Commercial real estate | $ | 9 | | | $ | — | | | $ | 44 | | | $ | 53 | | | $ | 11,475 | | | $ | 11,528 | | | $ | 11 | |
Commercial and industrial | 7 | | | — | | | 41 | | | 48 | | | 7,198 | | | 7,246 | | | 12 | |
Commercial leases | 1 | | | — | | | 1 | | | 2 | | | 560 | | | 562 | | | — | |
Other | — | | | — | | | — | | | — | | | 176 | | | 176 | | | — | |
Total commercial loans and leases | 17 | | | — | | | 86 | | | 103 | | | 19,409 | | | 19,512 | | | 23 | |
Direct installment | 6 | | | — | | | 6 | | | 12 | | | 2,740 | | | 2,752 | | | — | |
Residential mortgages | 22 | | | 4 | | | 13 | | | 39 | | | 5,550 | | | 5,589 | | | — | |
Indirect installment | 11 | | | 1 | | | 2 | | | 14 | | | 1,511 | | | 1,525 | | | — | |
Consumer lines of credit | 7 | | | 2 | | | 6 | | | 15 | | | 1,280 | | | 1,295 | | | — | |
Total consumer loans | 46 | | | 7 | | | 27 | | | 80 | | | 11,081 | | | 11,161 | | | — | |
Total loans and leases | $ | 63 | | | $ | 7 | | | $ | 113 | | | $ | 183 | | | $ | 30,490 | | | $ | 30,673 | | | $ | 23 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | 30-89 Days Past Due | | > 90 Days Past Due and Still Accruing | | Non- Accrual | | Total Past Due | | Current | | Total Loans and Leases | | Non-accrual with No ACL |
December 31, 2022 | | | | | | | | | | | | | |
Commercial real estate | $ | 13 | | | $ | — | | | $ | 39 | | | $ | 52 | | | $ | 11,474 | | | $ | 11,526 | | | $ | 15 | |
Commercial and industrial | 9 | | | 1 | | | 44 | | | 54 | | | 7,077 | | | 7,131 | | | 11 | |
Commercial leases | 3 | | | — | | | 1 | | | 4 | | | 515 | | | 519 | | | — | |
Other | 1 | | | — | | | — | | | 1 | | | 113 | | | 114 | | | — | |
Total commercial loans and leases | 26 | | | 1 | | | 84 | | | 111 | | | 19,179 | | | 19,290 | | | 26 | |
Direct installment | 7 | | | 1 | | | 7 | | | 15 | | | 2,769 | | | 2,784 | | | — | |
Residential mortgages | 28 | | | 6 | | | 14 | | | 48 | | | 5,249 | | | 5,297 | | | — | |
Indirect installment | 20 | | | 1 | | | 1 | | | 22 | | | 1,531 | | | 1,553 | | | — | |
Consumer lines of credit | 10 | | | 3 | | | 7 | | | 20 | | | 1,311 | | | 1,331 | | | — | |
Total consumer loans | 65 | | | 11 | | | 29 | | | 105 | | | 10,860 | | | 10,965 | | | — | |
Total loans and leases | $ | 91 | | | $ | 12 | | | $ | 113 | | | $ | 216 | | | $ | 30,039 | | | $ | 30,255 | | | $ | 26 | |
Following is a summary of non-performing assets:
TABLE 5.6
| | | | | | | | | | | |
(dollars in millions) | March 31, 2023 | | December 31, 2022 |
Non-accrual loans | $ | 113 | | | $ | 113 | |
Total non-performing loans and leases | 113 | | | 113 | |
Other real estate owned | 6 | | | 6 | |
Total non-performing assets | $ | 119 | | | $ | 119 | |
Asset quality ratios: | | | |
Non-performing loans and leases / total loans and leases | 0.37 | % | | 0.37 | % |
Non-performing assets + 90 days past due / total loans and leases + OREO | 0.41 | | | 0.44 | |
The carrying value of residential-secured consumer OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure amounted to $1.0 million at March 31, 2023 and $1.1 million at December 31, 2022. The recorded investment of residential-secured consumer OREO for which formal foreclosure proceedings are in process at March 31, 2023 and December 31, 2022 totaled $14.4 million and $11.8 million, respectively.
Approximately $49.0 million of commercial loans are collateral dependent at March 31, 2023. Repayment is expected to be substantially through the operation or sale of the collateral on the loan. These loans are primarily secured by business assets or commercial real estate. Loan Modifications
During the period, there are loans whose contractual terms have been modified in a manner that grants a concession to a borrower experiencing financial difficulties. These modifications typically result from loss mitigation activities and could include a term extension, interest rate reduction, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. Accrued interest receivable on loan modifications totaled $0.02 million at March 31, 2023, and is excluded from the amortized cost of loan modifications in the tables below.
The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable, type of concession granted and the financial effect of the modifications made to borrowers experiencing financial difficulty:
TABLE 5.7
| | | | | | | | | | | | | | | | | |
(dollars in millions) | Amortized Cost Basis | | % of Total Class of Financing Receivable | | Financial Effect |
March 31, 2023 | | | | | |
Term Extension | | | | | |
| | | | | |
Commercial and industrial | $ | 2.4 | | | 0.03 | % | | The modified loans had an average increase in term of 9 months, extending the maturity date. |
| | | | | |
| | | | | |
Direct installment | 0.1 | | | — | | | The repayment on the loans modified were extended, lowering the monthly repayment. |
Residential mortgages | 0.1 | | | — | | | The repayment on the loans modified was extended, lowering the monthly repayment. |
| | | | | |
Consumer lines of credit | 0.2 | | | 0.02 | | | The repayment on the loans modified was extended, lowering the monthly repayment. |
Total | $ | 2.8 | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Term Extension and Rate Reduction | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Direct installment | $ | 0.1 | | | — | % | | The term was extended, with a weighted average yield reduction of 134 bps. |
Residential mortgages | 0.3 | | | 0.01 | | | The term was extended, with a weighted average yield reduction of 113 bps. |
| | | | | |
| | | | | |
Total | $ | 0.4 | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Other | | | | | |
Commercial real estate | $ | 0.6 | | | 0.01 | % | | Multiple modifications were made with no material financial effect. |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Residential mortgages | 0.1 | | | — | | | Multiple modifications were made with no material financial effect. |
| | | | | |
| | | | | |
Total | $ | 0.7 | | | | | |
Total Outstanding Modified | $ | 3.9 | | | | | |
Some loan modifications may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses which are factored into the ACL. There were no additional funds committed to borrowers whose loans were modified during the first three months of 2023.
Commercial loans over $1.0 million whose terms have been modified are generally placed on non-accrual, individually analyzed and measured based on the fair value of the underlying collateral. Our ACL includes specific reserves for commercial loans modified. There was $1.6 million and no specific reserve for commercial loans modified at March 31, 2023 and December 31, 2022, respectively, and pooled reserves for individual loans of $1.1 million and $1.1 million for those same periods, respectively, based on loan segment LGD. Upon default, the amount of the recorded investment of the modified loan balance in excess of the fair value of the collateral, less estimated selling costs, is generally considered a confirmed loss and is charged-off against the ACL.
All other classes of loans whose terms have been modified are pooled and measured based on the loan segment LGD. Our ACL included pooled reserves for these classes of loans of $3.7 million for March 31, 2023 and $3.8 million for December 31, 2022. Upon default of an individual loan, our charge-off policy is followed for that class of loan.
Following is a summary of loans modified in a manner that grants a concession to a borrower experiencing financial difficulties, by class, for which there was a payment default, excluding loans that have been paid off and/or sold. Default occurs when a loan is 90 days or more past due or in non-accrual and is within 12 months of restructuring.
TABLE 5.8
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortized cost basis of modified financing receivables that subsequently defaulted: | | | | | | | | | | | | |
(in millions) | Term Extension | | | | | | Term Extension and Rate Reduction | | | | | | | | | | Other | | Total Outstanding Modified |
March 31, 2023 | | | | | | | | | | | | | | | | | | | |
Commercial real estate | $ | — | | | | | | | $ | — | | | | | | | | | | | $ | 0.6 | | | $ | 0.6 | |
Commercial and industrial | 1.6 | | | | | | | — | | | | | | | | | | | — | | | 1.6 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total commercial loans and leases | 1.6 | | | | | | | — | | | | | | | | | | | 0.6 | | | 2.2 | |
| | | | | | | | | | | | | | | | | | | |
Residential mortgages | — | | | | | | | 0.3 | | | | | | | | | | | — | | | 0.3 | |
| | | | | | | | | | | | | | | | | | | |
Consumer lines of credit | 0.1 | | | | | | | — | | | | | | | | | | | — | | | 0.1 | |
Total consumer loans | 0.1 | | | | | | | 0.3 | | | | | | | | | | | — | | | 0.4 | |
Total | $ | 1.7 | | | | | | | $ | 0.3 | | | | | | | | | | | $ | 0.6 | | | $ | 2.6 | |
We closely monitor the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months:
TABLE 5.9 | | | | | | | | | | | | | | | | | |
Payment status - amortization cost basis: |
(in millions) | Current | | 30-89 Days Past Due | | 90+ Days Past Due |
March 31, 2023 | | | | | |
Commercial real estate | $ | 0.6 | | | $ | — | | | $ | — | |
Commercial and industrial | 2.4 | | | — | | | — | |
| | | | | |
| | | | | |
Total commercial loans and leases | 3.0 | | | — | | | — | |
Direct installment | 0.2 | | | — | | | |
Residential mortgages | 0.2 | | | — | | | 0.3 | |
| | | | | |
Consumer lines of credit | 0.2 | | | — | | | — | |
Total consumer loans | 0.6 | | | — | | | 0.3 | |
Total | $ | 3.6 | | | $ | — | | | $ | 0.3 | |
Prior to the adoption of ASU 2022-02, below are the tables relating to the TDR disclosures as of March 31, 2022.
Following is a summary of TDR loans, by class, for loans that were modified during the periods indicated.
TABLE 5.10 | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
(dollars in millions) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post- Modification Outstanding Recorded Investment |
Commercial real estate | 2 | | | $ | — | | | $ | — | |
| | | | | |
| | | | | |
Total commercial loans | 2 | | | — | | | — | |
Direct installment | 13 | | | — | | | — | |
Residential mortgages | 5 | | | 1 | | | 1 | |
| | | | | |
Consumer lines of credit | 3 | | | — | | | — | |
Total consumer loans | 21 | | | 1 | | | 1 | |
Total | 23 | | | $ | 1 | | | $ | 1 | |
| | | | | |
Following is a summary of TDRs, by class, for which there was a payment default, excluding loans that have been paid off and/or sold. Default occurs when a loan is 90 days or more past due and is within 12 months of restructuring.
TABLE 5.11
| | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
(dollars in millions) | Number of Contracts | | Recorded Investment |
Commercial real estate | 3 | | | $ | — | |
| | | |
Total commercial loans | 3 | | | — | |
Direct installment | 1 | | | — | |
Residential mortgages | 1 | | | — | |
| | | |
| | | |
Total consumer loans | 2 | | | — | |
Total | 5 | | | $ | — | |
NOTE 6. ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES
The ACL is maintained for credit losses expected in the existing loan and lease portfolio and is presented as a reserve against loans and leases on the Consolidated Balance Sheets. Loan and lease losses are charged off against the ACL, with recoveries of amounts previously charged off credited to the ACL. Provisions for credit losses are charged to operations based on management’s periodic evaluation of the appropriate level of the ACL.
Following is a summary of changes in the ACL, by loan and lease class:
TABLE 6.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Balance at Beginning of Period | | Charge- Offs | | Recoveries | | Net (Charge- Offs) Recoveries | | Provision for Credit Losses | | | | | | Balance at End of Period |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Three Months Ended March 31, 2023 | | | | | | | | | | | | | | |
Commercial real estate | $ | 162.1 | | | $ | (6.5) | | | $ | 1.0 | | | $ | (5.5) | | | $ | 2.6 | | | | | | | $ | 159.2 | |
Commercial and industrial | 102.1 | | | (5.8) | | | 0.9 | | | (4.9) | | | 4.5 | | | | | | | 101.7 | |
Commercial leases | 13.5 | | | — | | | — | | | — | | | 1.3 | | | | | | | 14.8 | |
Other | 4.0 | | | (0.8) | | | 0.3 | | | (0.5) | | | 0.5 | | | | | | | 4.0 | |
Total commercial loans and leases | 281.7 | | | (13.1) | | | 2.2 | | | (10.9) | | | 8.9 | | | | | | | 279.7 | |
Direct installment | 35.9 | | | (0.3) | | | 0.2 | | | (0.1) | | | 0.4 | | | | | | | 36.2 | |
Residential mortgages | 55.5 | | | (0.4) | | | 0.2 | | | (0.2) | | | 5.1 | | | | | | | 60.4 | |
Indirect installment | 17.3 | | | (2.6) | | | 0.6 | | | (2.0) | | | 1.3 | | | | | | | 16.6 | |
Consumer lines of credit | 11.3 | | | (0.3) | | | 0.3 | | | — | | | (0.8) | | | | | | | 10.5 | |
Total consumer loans | 120.0 | | | (3.6) | | | 1.3 | | | (2.3) | | | 6.0 | | | | | | | 123.7 | |
Total allowance for credit losses on loans and leases | 401.7 | | | (16.7) | | | 3.5 | | | (13.2) | | | 14.9 | | | | | | | 403.4 | |
Allowance for unfunded loan commitments | 21.4 | | | — | | | — | | | — | | | (0.9) | | | | | | | 20.5 | |
Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments | $ | 423.1 | | | $ | (16.7) | | | $ | 3.5 | | | $ | (13.2) | | | $ | 14.0 | | | | | | | $ | 423.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Balance at Beginning of Period | | Charge- Offs | | Recoveries | | Net (Charge- Offs) Recoveries | | Provision for Credit Losses | | | | Allowance for PCD Loans and Leases at Acquisition | | Balance at End of Period |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Three Months Ended March 31, 2022 | | | | | | | | | | | | | |
Commercial real estate | $ | 156.5 | | | $ | (1.0) | | | $ | 1.4 | | | $ | 0.4 | | | $ | 4.4 | | | | | $ | 4.4 | | | $ | 165.7 | |
Commercial and industrial | 87.4 | | | (3.2) | | | 1.3 | | | (1.9) | | | 2.8 | | | | | 3.4 | | | 91.7 | |
Commercial leases | 14.7 | | | (0.1) | | | — | | | (0.1) | | | (0.8) | | | | | — | | | 13.8 | |
Other | 2.6 | | | (0.7) | | | 0.2 | | | (0.5) | | | 1.7 | | | | | — | | | 3.8 | |
Total commercial loans and leases | 261.2 | | | (5.0) | | | 2.9 | | | (2.1) | | | 8.1 | | | | | 7.8 | | | 275.0 | |
Direct installment | 26.4 | | | — | | | 0.2 | | | 0.2 | | | 4.1 | | | | | 0.5 | | | 31.2 | |
Residential mortgages | 33.1 | | | (0.1) | | | 0.2 | | | 0.1 | | | 5.2 | | | | | 1.3 | | | 39.7 | |
Indirect installment | 13.5 | | | (1.0) | | | 0.7 | | | (0.3) | | | 1.0 | | | | | — | | | 14.2 | |
Consumer lines of credit | 10.1 | | | (0.2) | | | 0.4 | | | 0.2 | | | (0.2) | | | | | 0.4 | | | 10.5 | |
Total consumer loans | 83.1 | | | (1.3) | | | 1.5 | | | 0.2 | | | 10.1 | | | | | 2.2 | | | 95.6 | |
Total allowance for credit losses on loans and leases | 344.3 | | | (6.3) | | | 4.4 | | | (1.9) | | | 18.2 | | | | | 10.0 | | | 370.6 | |
Allowance for unfunded loan commitments | 19.1 | | | — | | | — | | | — | | | (0.3) | | | | | — | | | 18.8 | |
Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments | $ | 363.4 | | | $ | (6.3) | | | $ | 4.4 | | | $ | (1.9) | | | $ | 17.9 | | | | | $ | 10.0 | | | $ | 389.4 | |
Following is a summary of changes in the AULC by portfolio segment:
TABLE 6.2
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
(in millions) | | | | | | | |
Balance at beginning of period | | | | | $ | 21.4 | | | $ | 19.1 | |
Provision for unfunded loan commitments and letters of credit: | | | | | | | |
Commercial portfolio | | | | | (0.9) | | | (0.3) | |
Consumer portfolio | | | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance at end of period | | | | | $ | 20.5 | | | $ | 18.8 | |
The model used to calculate the ACL is dependent on the portfolio composition and credit quality, as well as historical experience, current conditions and forecasts of economic conditions and interest rates. Specifically, the following considerations are incorporated into the ACL calculation:
•a third-party macroeconomic forecast scenario;
•a 24-month R&S forecast period for macroeconomic factors with a reversion to the historical mean on a straight-line basis over a 12-month period; and
•the historical through-the-cycle mean was calculated using an expanded period to include a prior recessionary period.
At March 31, 2023 and December 31, 2022, we utilized a third-party consensus macroeconomic forecast reflecting the current and projected macroeconomic environment. For our ACL calculation at March 31, 2023, the macroeconomic variables that we utilized included, but were not limited to: (i) the purchase only Housing Price Index, which declines 2.5% over our R&S forecast period, (ii) a Commercial Real Estate Price Index, which declines 4.6% over our R&S forecast period, (iii) S&P Volatility, which decreases 39.7% in 2023 and 10.5% in 2024 and (iv) bankruptcies, which increase steadily over the R&S forecast period but average below historical levels. Macroeconomic variables that we utilized for our ACL calculation as of December 31, 2022 included, but were not limited to: (i) the purchase only Housing Price Index, which declines 3.7% over our R&S forecast period, (ii) a Commercial Real Estate Price Index, which declines 0.9% over our R&S forecast period, (iii) S&P Volatility, which decreases 41.0% in 2023 and 8.1% in 2024 and (iv) bankruptcies, which increase steadily over the R&S forecast period but average below historical levels.
The ACL on loans and leases of $403.4 million at March 31, 2023 increased $1.7 million, or 0.4%, from December 31, 2022. Our ending ACL coverage ratio at March 31, 2023 was 1.32%, compared to 1.33% at December 31, 2022. Total provision for credit losses for the three months ended March 31, 2023 was $14.1 million compared to $18.0 million for the same period of 2022. Provision was primarily due to loan growth, CECL-related model impacts from forecasted macroeconomic conditions and charge-off activity. The first quarter of 2023 reflected net charge-offs of $13.2 million, or 0.18% annualized of average total loans, compared to $1.9 million, or 0.03% annualized, in the first quarter of 2022.
NOTE 7. LOAN SERVICING
Mortgage Loan Servicing
We retain the servicing rights on certain mortgage loans sold. The unpaid principal balance of mortgage loans serviced for others is listed below:
TABLE 7.1
| | | | | | | | | | | |
(in millions) | March 31, 2023 | | December 31, 2022 |
Mortgage loans sold with servicing retained | $ | 5,343 | | | $ | 5,242 | |
The following table summarizes activity relating to mortgage loans sold with servicing retained:
TABLE 7.2
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in millions) | | | | | 2023 | | 2022 |
Mortgage loans sold with servicing retained | | | | | $ | 198 | | | $ | 351 | |
Pre-tax net gains (losses) resulting from above loan sales (1) | | | | | — | | | 1 | |
Mortgage servicing fees (1) | | | | | 3 | | | 3 | |
(1) Recorded in mortgage banking operations on the Consolidated Statements of Income.
Following is a summary of activity relating to MSRs:
TABLE 7.3
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in millions) | | | | | 2023 | | 2022 |
Balance at beginning of period | | | | | $ | 52.8 | | | $ | 44.4 | |
| | | | | | | |
Additions | | | | | 2.5 | | | 4.1 | |
Payoffs and curtailments | | | | | (0.3) | | | (1.6) | |
Impairment (charge) / recovery | | | | | — | | | 2.3 | |
Amortization | | | | | (0.7) | | | (0.7) | |
Balance at end of period | | | | | $ | 54.3 | | | $ | 48.5 | |
Fair value, beginning of period | | | | | $ | 68.6 | | | $ | 46.0 | |
Fair value, end of period | | | | | 67.8 | | | 58.2 | |
We had no valuation allowance for MSRs as of March 31, 2023 or December 31, 2022.
The fair value of MSRs is highly sensitive to changes in assumptions and is determined by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and the use of independent third-party valuations. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSRs and as interest rates increase, mortgage loan prepayments decline, which results in an increase in the fair value of MSRs. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.
Following is a summary of the sensitivity of the fair value of MSRs to changes in key assumptions:
TABLE 7.4
| | | | | | | | | | | |
(dollars in millions) | March 31, 2023 | | December 31, 2022 |
Weighted average life (months) | 95 | | 96 |
Constant prepayment rate (annualized) | 7.5 | % | | 7.3 | % |
Discount rate | 10.0 | % | | 10.0 | % |
Effect on fair value due to change in interest rates: | | | |
+2.00% | $ | 10 | | | $ | 9 | |
+1.00% | 5 | | | 4 | |
+0.50% | 3 | | | 2 | |
+0.25% | 1 | | | 1 | |
-0.25% | (2) | | | (1) | |
-0.50% | (3) | | | (3) | |
-1.00% | (7) | | | (6) | |
-2.00% | (18) | | | (15) | |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. Also, in this table, the effects of an adverse variation in a particular assumption on the fair value of MSRs is calculated without changing any other assumptions, while, in reality, changes in one factor may result in changing another, which may magnify or contract the effect of the change. NOTE 8. LEASES
We have operating leases primarily for certain branches, office space, land and office equipment. We have finance leases for certain branches. Our operating leases expire at various dates through the year 2046 and generally include one or more options to renew. Our finance leases expire at various dates through the year 2051 and generally include one or more options to renew. The exercise of lease renewal options is at our sole discretion. As of March 31, 2023, we had operating lease right-of-use assets and operating lease liabilities of $135.1 million and $145.2 million, respectively. We have finance lease right-of-use assets and finance lease liabilities of $25.5 million and $26.2 million, respectively.
Our operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of March 31, 2023, we have certain operating lease agreements, primarily for administrative office space, that have not yet commenced. At commencement, it is expected that these leases will add approximately $76.4 million in right-of-use assets and $97.8 million in other liabilities. These operating leases are currently expected to commence throughout the remainder of 2023 with lease terms of up to 21 years. These operating leases include the lease, with a related party, of the future new FNB headquarters building in Pittsburgh, Pennsylvania. The related party operating lease is accounted for in a manner consistent with all other leases on the basis of the legally enforceable terms and conditions of the lease and the related party represents a VIE for which we are not the primary beneficiary.
The components of lease expense were as follows:
TABLE 8.1
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(dollars in millions) | | | | | 2023 | | 2022 |
Operating lease cost | | | | | $ | 8 | | | $ | 8 | |
| | | | | | | |
Variable lease cost | | | | | 1 | | | 1 | |
| | | | | | | |
Finance lease cost | | | | | 1 | | | — | |
Total lease cost | | | | | $ | 10 | | | $ | 9 | |
Other information related to leases is as follows:
TABLE 8.2
| | | | | | | | | | | |
| Three Months Ended March 31, |
(dollars in millions) | 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 7 | | | $ | 7 | |
Operating cash flows from finance leases | $ | — | | | $ | — | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | — | | | $ | 2 | |
Finance leases | $ | — | | | $ | 4 | |
Weighted average remaining lease term (years): | | | |
Operating leases | 9.13 | | 9.69 |
Finance leases | 20.61 | | 23.08 |
Weighted average discount rate: | | | |
Operating leases | 2.6 | % | | 2.4 | % |
Finance leases | 2.8 | % | | 2.0 | % |
Maturities of lease liabilities were as follows:
TABLE 8.3
| | | | | | | | | | | | | | | | | |
(in millions) | Operating Leases | | Finance Leases | | Total Leases |
March 31, 2023 | | | | | |
2023 | $ | 21 | | | $ | 1 | | | $ | 22 | |
2024 | 26 | | | 1 | | | 27 | |
2025 | 19 | | | 2 | | | 21 | |
2026 | 16 | | | 2 | | | 18 | |
2027 | 13 | | | 2 | | | 15 | |
Later years | 70 | | | 28 | | | 98 | |
Total lease payments | 165 | | | 36 | | | 201 | |
Less: imputed interest | (20) | | | (10) | | | (30) | |
Present value of lease liabilities | $ | 145 | | | $ | 26 | | | $ | 171 | |
As a lessor we offer commercial leasing services to customers in need of new or used equipment primarily within our market areas of Pennsylvania, Ohio, Maryland, North Carolina, South Carolina and West Virginia. Additional information relating to commercial leasing is provided in Note 5, “Loans and Leases” in the Notes to Consolidated Financial Statements.
NOTE 9. VARIABLE INTEREST ENTITIES
We evaluate our interest in certain entities to determine if these entities meet the definition of a VIE and whether we are the primary beneficiary and required to consolidate the entity based on the variable interest we held both at inception and when there is a change in circumstances that requires a reconsideration.
Unconsolidated VIEs
The following table provides a summary of the assets and liabilities included in our Consolidated Financial Statements, as well as the maximum exposure to losses, associated with our interests related to VIEs for which we hold an interest, but are not the primary beneficiary, at March 31, 2023 and December 31, 2022.
TABLE 9.1
| | | | | | | | | | | | | | | | | |
(in millions) | Total Assets | | Total Liabilities | | Maximum Exposure to Loss |
March 31, 2023 | | | | | |
Trust preferred securities (1) | $ | 1 | | | $ | 72 | | | $ | — | |
Affordable housing tax credit partnerships | 119 | | | 34 | | | 119 | |
Other investments | 36 | | | 8 | | | 36 | |
Total | $ | 156 | | | $ | 114 | | | $ | 155 | |
December 31, 2022 | | | | | |
Trust preferred securities (1) | $ | 1 | | | $ | 72 | | | $ | — | |
Affordable housing tax credit partnerships | 123 | | | 37 | | | 123 | |
Other investments | 33 | | | 9 | | | 33 | |
Total | $ | 157 | | | $ | 118 | | | $ | 156 | |
(1) Represents our investment in unconsolidated subsidiaries. | | | | | |
Trust-Preferred Securities
We have certain wholly-owned trusts whose assets, liabilities, equity, income and expenses are not included within our Consolidated Financial Statements. These trusts have been formed for the sole purpose of issuing TPS, from which the proceeds are then invested in our junior subordinated debentures, which are reflected in our Consolidated Balance Sheets as subordinated notes. The TPS are the obligations of the trusts, and as such, are not consolidated within our Consolidated Financial Statements. For additional information relating to our TPS, see Note 10, “Borrowings” in the Notes to Consolidated Financial Statements.
Each issue of the junior subordinated debentures has an interest rate equal to the corresponding TPS distribution rate. We have the right to defer payment of interest on the debentures at any time, or from time-to-time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the related debentures. During any such extension period, distributions to the TPS will also be deferred and our ability to pay dividends on our common stock will be restricted. Periodic cash payments and payments upon liquidation or redemption with respect to TPS are guaranteed by us to the extent of funds held by the trusts. The guarantee ranks subordinate and junior in right of payment to all of our indebtedness to the same extent as the junior subordinated debt. The guarantee does not place a limitation on the amount of additional indebtedness that may be incurred by us.
Affordable Housing Tax Credit Partnerships
We make equity investments as a limited partner in various partnerships that sponsor affordable housing projects utilizing the LIHTC pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to support initiatives
associated with the Community Reinvestment Act while earning a satisfactory return. The activities of these LIHTC partnerships include the development and operation of multi-family housing that is leased to qualifying residential tenants. These partnerships are generally located in communities where we have a banking presence and meet the definition of a VIE; however, we are not the primary beneficiary of the entities, as the general partner or managing member has both the power to direct the activities that most significantly impact the economic performance of the entities and the obligation to absorb losses beyond our own equity investment. We record our investment in LIHTC partnerships as a component of other assets and use the proportional amortization method to account for our investments in LIHTC partnerships. Amortization related to our LIHTC investments is recorded on a net basis as a component of the provision for income taxes on the Consolidated Statements of Income.
The following table presents the balances of our affordable housing tax credit investments and related unfunded commitments:
TABLE 9.2
| | | | | | | | | | | |
(in millions) | March 31, 2023 | | December 31, 2022 |
LIHTC investments included in other assets | $ | 85 | | | $ | 86 | |
Unfunded LIHTC commitments | 34 | | | 37 | |
The following table summarizes the impact of these LIHTC investments on the provision for income taxes in our Consolidated Statements of Income:
TABLE 9.3
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in millions) | | | | | 2023 | | 2022 |
Provision for income taxes: | | | | | | | |
Amortization of LIHTC investments under proportional method | | | | | $ | 4 | | | $ | 4 | |
Low-income housing tax credits | | | | | (4) | | | (4) | |
Other tax benefits related to tax credit investments | | | | | (1) | | | (1) | |
Total impact on provision for income taxes | | | | | $ | (1) | | | $ | (1) | |
Other Investments
Other investments we also consider to be unconsolidated VIE’s include investments in Small Business Investment Companies, Historic Tax Credit investments, New Market Tax Credit investments and other equity method investments.
NOTE 10. BORROWINGS
Following is a summary of short-term borrowings:
TABLE 10.1
| | | | | | | | | | | |
(in millions) | March 31, 2023 | | December 31, 2022 |
Securities sold under repurchase agreements | $ | 255 | | | $ | 317 | |
Federal Home Loan Bank advances | 1,600 | | | 930 | |
Federal funds purchased | 175 | | | — | |
Subordinated notes | 119 | | | 125 | |
Total short-term borrowings | $ | 2,149 | | | $ | 1,372 | |
Borrowings with original maturities of one year or less are classified as short-term. Securities sold under repurchase agreements are comprised of customer repurchase agreements, which are sweep accounts with next-day maturities utilized by larger commercial customers to earn interest on their funds. Securities are pledged to these customers in an amount at least equal to
the outstanding balance. Of the total short-term FHLB advances, 9.4% had overnight maturities as of March 31, 2023. We did not have any short-term FHLB advances with overnight maturities as of December 31, 2022. At March 31, 2023, $800.0 million, or 50.0%, of the short-term FHLB advances were swapped to fixed rates with various maturities through 2024. This compares to $930.0 million, or 100.0%, as of December 31, 2022.
Following is a summary of long-term borrowings:
TABLE 10.2
| | | | | | | | | | | |
(in millions) | March 31, 2023 | | December 31, 2022 |
Federal Home Loan Bank advances | $ | 500 | | | $ | — | |
Senior notes | 348 | | | 648 | |
Subordinated notes | 75 | | | 70 | |
Junior subordinated debt | 72 | | | 72 | |
Other subordinated debt | 303 | | | 303 | |
Total long-term borrowings | $ | 1,298 | | | $ | 1,093 | |
During the third quarter of 2022, we completed a debt offering in which we issued $350 million aggregate principal amount of 5.150% fixed-rate senior notes due in 2025. The net proceeds of the debt offering after deducting underwriting discounts and commissions and offering costs were $347.4 million. These proceeds were used for general corporate purposes, which included the repayment of $300 million in 2.200% Senior Notes that matured in February 2023, and may also include investments at the holding company level, capital to support the growth of FNBPA and refinancing of outstanding indebtedness.
During 2022, we assumed $25 million of other subordinated debt and $5 million of junior subordinated debt from the Howard acquisition and $31 million of other subordinated debt from the Union acquisition. Those additions are reflected in the balances above and in the tables below.
Our banking affiliate has available credit with the FHLB of $10.5 billion, of which $2.1 billion was utilized and included in short-term and long-term borrowings and $590.0 million was utilized for a letter of credit for pledging of public funds as of March 31, 2023. These advances are secured by loans collateralized by residential mortgages, home equity lines of credit, commercial real estate and FHLB stock and the short-term borrowings are scheduled to mature in various amounts periodically during 2023 while the long-term borrowings are scheduled to mature in 2025. Effective interest rates paid on the long-term FHLB advances held during 2023 ranged from 4.55% to 4.69% for the three months ended March 31, 2023. There were no long-term FHLB borrowings during the first three months of 2022, or as of December 31, 2022.
The following table provides information relating to our senior notes and other subordinated debt as of March 31, 2023. The subordinated notes are eligible for treatment as tier 2 capital for regulatory capital purposes.
TABLE 10.3
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Aggregate Principal Amount Issued | | Net Proceeds (6) | | Carrying Value | | Stated Maturity Date | | Interest Rate |
Senior Notes: | | | | | | | | | |
| | | | | | | | | |
5.150% Senior Notes due August 25, 2025 | $ | 350 | | | $ | 347 | | | $ | 348 | | | 8/25/2025 | | 5.150 | % |
Total senior notes | 350 | | | 347 | | | 348 | | | | | |
Other Subordinated Debt: | | | | | | | | | |
4.950% Fixed-To-Floating Rate Subordinated Notes due 2029 (1) | 120 | | | 118 | | | 119 | | | 2/14/2029 | | 4.950 | % |
4.875% Subordinated Notes due 2025 | 100 | | | 98 | | | 100 | | | 10/2/2025 | | 4.875 | % |
7.625% Subordinated Notes due August 12, 2023 (5) | 38 | | | 46 | | | 29 | | | 8/12/2023 | | 7.625 | % |
6.000% Fixed-To-Floating Rate Subordinated Notes due December 6, 2028 (2) (5) | 25 | | | 26 | | | 25 | | | 12/6/2028 | | 6.000 | % |
5.000% Fixed-To-Floating Rate Subordinated Note due May 29, 2030 (3) (5) | 25 | | | 24 | | | 24 | | | 5/29/2030 | | 5.000 | % |
6.000% Fixed-To-Floating Rate Subordinated Note due May 15, 2028 (4) (5) | 6 | | | 6 | | | 6 | | | 5/15/2028 | | 6.000 | % |
Total other subordinated debt | 314 | | | 318 | | | 303 | | | | | |
Total | $ | 664 | | | $ | 665 | | | $ | 651 | | | | | |
(1) Fixed-to-floating rate until February 14, 2024, at which time the floating rate will be three-month LIBOR plus 240 basis points, or an alternative rate that may replace LIBOR, as specified in the prospectus for this offering.
(2) Fixed-to-floating rate until December 6, 2023, at which time the floating rate will be three-month LIBOR plus 302 basis points, or an alternative rate that may replace LIBOR, as specified in the prospectus for this offering.
(3) Fixed-to-floating rate until May 29, 2025, at which time the floating rate will be three-month SOFR plus 464 basis points.
(4) Fixed-to-floating rate until May 15, 2023, at which time the floating rate will be three-month LIBOR plus 350 basis points, or an alternative rate that may replace LIBOR, as specified in the prospectus for this offering.
(5) Assumed from an acquisition and adjusted to fair value at the time of acquisition.
(6) After deducting underwriting discounts and commissions and offering costs. For the debt assumed from acquisitions, this is the fair value of the debt at the time of the acquisition.
The junior subordinated debt is comprised of the debt securities issued by FNB, or companies we acquired, in relation to our four unconsolidated subsidiary trusts (collectively, the Trusts), which are unconsolidated VIEs, and are included on the Consolidated Balance Sheets in long-term borrowings. Since third-party investors are the primary beneficiaries, the Trusts are not consolidated in our Financial Statements. We record the distributions on the junior subordinated debt issued to the Trusts as interest expense.
The following table provides information relating to the Trusts as of March 31, 2023:
TABLE 10.4
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Trust Preferred Securities | | Common Securities | | Junior Subordinated Debt | | Stated Maturity Date | | Interest Rate | | Rate Reset Factor |
F.N.B. Statutory Trust II | $ | 22 | | | $ | 1 | | | $ | 22 | | | 6/15/2036 | | 6.52 | % | | LIBOR + 165 bps |
| | | | | | | | | | | |
Yadkin Valley Statutory Trust I | 25 | | | 1 | | | 22 | | | 12/15/2037 | | 6.19 | % | | LIBOR + 132 bps |
FNB Financial Services Capital Trust I | 25 | | | 1 | | | 23 | | | 9/30/2035 | | 6.62 | % | | LIBOR + 146 bps |
Patapsco Statutory Trust I | 5 | | | — | | | 5 | | | 12/15/2035 | | 6.35 | % | | LIBOR + 148 bps |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | $ | 77 | | | $ | 3 | | | $ | 72 | | | | | | | |
NOTE 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate risk, primarily by managing the amount, source, and duration of our assets and liabilities, and through the use of derivative instruments. Derivative instruments are used to reduce the effects that changes in interest rates may have on net income and cash flows. We also use derivative instruments to facilitate transactions on behalf of our customers.
All derivatives are carried on the Consolidated Balance Sheets at fair value and do not take into account the effects of master netting arrangements we have with other financial institutions. Credit risk is included in the determination of the estimated fair value of derivatives. Derivative assets are reported in the Consolidated Balance Sheets in other assets and derivative liabilities are reported in other liabilities. Changes in fair value are recognized in earnings except for certain changes related to derivative instruments designated as part of a cash flow hedging relationship, which are recognized in other comprehensive income.
The following table presents notional amounts and gross fair values of our derivative assets and derivative liabilities which are not offset in the Consolidated Balance Sheets:
TABLE 11.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Notional | | Fair Value | | Notional | | Fair Value |
(in millions) | Amount | | Asset | | Liability | | Amount | | Asset | | Liability |
Gross Derivatives | | | | | | | | | | | |
Subject to master netting arrangements: | | | | | | | | | | | |
Interest rate contracts – designated | $ | 2,050 | | | $ | 2 | | | $ | — | | | $ | 2,180 | | | $ | — | | | $ | 1 | |
Interest rate swaps – not designated | 5,401 | | | 65 | | | 15 | | | 5,333 | | | 89 | | | 6 | |
| | | | | | | | | | | |
Total subject to master netting arrangements | 7,451 | | | 67 | | | 15 | | | 7,513 | | | 89 | | | 7 | |
Not subject to master netting arrangements: | | | | | | | | | | | |
Interest rate swaps – not designated | 5,401 | | | 15 | | | 303 | | | 5,333 | | | 6 | | | 390 | |
Interest rate lock commitments – not designated | 141 | | | 1 | | | 4 | | | 163 | | | — | | | 12 | |
Forward delivery commitments – not designated | 157 | | | — | | | 2 | | | 203 | | | 1 | | | 2 | |
Credit risk contracts – not designated | 609 | | | — | | | — | | | 506 | | | — | | | — | |
| | | | | | | | | | | |
Total not subject to master netting arrangements | 6,308 | | | 16 | | | 309 | | | 6,205 | | | 7 | | | 404 | |
Total | $ | 13,759 | | | $ | 83 | | | $ | 324 | | | $ | 13,718 | | | $ | 96 | | | $ | 411 | |
Certain derivative exchanges have enacted a rule change which in effect results in the legal characterization of variation margin payments for certain derivative contracts as settlement of the derivatives mark-to-market exposure and not collateral. Accordingly, we have changed our reporting of certain derivatives to record variation margin on trades cleared through these exchanges as settled. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument.
We adopted Reference Rate Reform (RRR) on October 1, 2020, and the guidance will be followed until the Update terminates on December 31, 2024. As of October 16, 2020, we changed our valuation methodology to reflect changes made by central clearinghouses that changed the discounting methodology and interest calculation of cash migration from overnight index swap (OIS) to SOFR for U.S. dollar cleared interest rate swaps to better reflect prices obtainable in the markets in which we transact. Certain of these valuation methodology changes were applied to eligible hedging relationships. Accordingly, we have updated our hedge documentation to reflect the election of certain expedients and exceptions related to our cash flow hedging programs. The change in valuation methodology was applied prospectively as a change in accounting estimate and did not have a material impact on our consolidated financial position or results of operations.
Derivatives Designated as Hedging Instruments under GAAP
Interest Rate Contracts. We entered into interest rate derivative agreements to modify the interest rate characteristics of certain commercial loans and certain of our FHLB advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges, hedging the exposure to variability in expected future cash flows. The derivative’s gain or loss, including any ineffectiveness, is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same line item associated with the forecasted transaction when the forecasted transaction affects earnings.
The following table shows amounts reclassified from AOCI:
TABLE 11.2
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in OCI on Derivatives | | Location of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income |
| Three Months Ended March 31, | | | | Three Months Ended March 31, |
(in millions) | 2023 | | 2022 | | | | 2023 | | 2022 |
Derivatives in cash flow hedging relationships: | | | | | | | | | |
Interest rate contracts | $ | 5 | | | $ | (19) | | | Interest income (expense) | | $ | (4) | | | $ | (2) | |
| | | | | Other income | | — | | | — | |
The following table represents gains (losses) recognized in the Consolidated Statements of Income on cash flow hedging relationships:
TABLE 11.3
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2022 |
(in millions) | Interest Income - Loans and Leases | | Interest Expense - Short-Term Borrowings | | Interest Income - Loans and Leases | | Interest Expense - Short-Term Borrowings |
Total amounts of income and expense line items presented in the Consolidated Statements of Income (the effects of cash flow hedges are included in these line items) | $ | 394 | | | $ | 10 | | | $ | 221 | | | $ | 6 | |
The effects of cash flow hedging: | | | | | | | |
Gain (loss) on cash flow hedging relationships: | | | | | | | |
Interest rate contracts: | | | | | | | |
Amount of gain (loss) reclassified from AOCI into net income | (10) | | | 6 | | | 2 | | | (4) | |
| | | | | | | |
|
|
As of March 31, 2023, the maximum length of time over which forecasted interest cash flows are hedged is 3.1 years. In the twelve months that follow March 31, 2023, we expect to reclassify from the amount currently reported in AOCI net derivative losses of $23.9 million ($18.5 million net of tax), in association with interest on the hedged loans and FHLB advances. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to March 31, 2023.
There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to these cash flow hedges. Also, during the three months ended March 31, 2023 and 2022, there were no gains or losses from cash flow hedge derivatives reclassified to earnings because it became probable that the original forecasted transactions would not occur.
Derivatives Not Designated as Hedging Instruments under GAAP
A description of interest rate swaps, interest rate lock commitments, forward delivery commitments and credit risk contracts can be found in Note 16, "Derivative Instruments and Hedging Activities" in the Consolidated Financial Statements included in our 2022 Annual Report on Form 10-K filed with the SEC on February 24, 2023. Interest rate swap agreements with loan customers and with the offsetting counterparties are reported at fair value in other assets and other liabilities on the Consolidated Balance Sheets with any resulting gain or loss recorded in current period earnings as other income or other expense.
Risk participation agreements sold with notional amounts totaling $483.7 million as of March 31, 2023 have remaining terms ranging from one month to eighteen years. Under these agreements, our maximum exposure assuming a customer defaults on their obligation to perform under certain derivative swap contracts with third parties would be $0.2 million at March 31, 2023 and $0.1 million at December 31, 2022. The fair values of risk participation agreements purchased and sold were $0.1 million and $0.2 million, respectively, at March 31, 2023 and $0.1 million and $0.1 million, respectively at December 31, 2022.
The following table presents the effect of certain derivative financial instruments on the Consolidated Statements of Income:
TABLE 11.4
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in millions) | Consolidated Statements of Income Location | | 2023 | | 2022 |
Interest rate swaps | Non-interest income - other | | $ | — | | | $ | — | |
Interest rate lock commitments | Mortgage banking operations | | — | | | — | |
Forward delivery contracts | Mortgage banking operations | | (1) | | | 9 | |
Credit risk contracts | Non-interest income - other | | — | | | — | |
Counterparty Credit Risk
We are party to master netting arrangements with most of our swap derivative dealer counterparties. Collateral, usually marketable securities and/or cash, is exchanged between FNB and our counterparties, and is generally subject to thresholds and transfer minimums. For swap transactions that require central clearing, we post cash and securities to our clearing agency. Collateral positions are settled or valued daily, and adjustments to amounts received and pledged by us are made as appropriate to maintain proper collateralization for these transactions.
Certain master netting agreements contain provisions that, if violated, could cause the counterparties to request immediate settlement or demand full collateralization under the derivative instrument. If we had breached our agreements with our derivative counterparties we would be required to settle our obligations under the agreements at the termination value and would be required to pay nothing as of March 31, 2023 and an additional $0.1 million as of December 31, 2022, in excess of amounts previously posted as collateral with the respective counterparty.
The following table presents a reconciliation of the net amounts of derivative assets and derivative liabilities presented in the Consolidated Balance Sheets to the net amounts that would result in the event of offset:
TABLE 11.5
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount Not Offset in the Consolidated Balance Sheets | | |
(in millions) | Net Amount Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral | | Net Amount |
March 31, 2023 | | | | | | | |
Derivative Assets | | | | | | | |
Interest rate contracts: | | | | | | | |
Designated | $ | 2 | | | $ | — | | | $ | 2 | | | $ | — | |
Not designated | 65 | | | — | | | 65 | | | — | |
| | | | | | | |
Total | $ | 67 | | | $ | — | | | $ | 67 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
Derivative Liabilities | | | | | | | |
Interest rate contracts: | | | | | | | |
| | | | | | | |
Not designated | $ | 15 | | | $ | — | | | $ | 15 | | | $ | — | |
Total | $ | 15 | | | $ | — | | | $ | 15 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | |
Derivative Assets | | | | | | | |
Interest rate contracts: | | | | | | | |
| | | | | | | |
Not designated | $ | 89 | | | $ | — | | | $ | 88 | | | $ | 1 | |
| | | | | | | |
Total | $ | 89 | | | $ | — | | | $ | 88 | | | $ | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Derivative Liabilities | | | | | | | |
Interest rate contracts: | | | | | | | |
Designated | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | |
Not designated | 6 | | | — | | | 6 | | | — | |
Total | $ | 7 | | | $ | — | | | $ | 7 | | | $ | — | |
NOTE 12. COMMITMENTS, CREDIT RISK AND CONTINGENCIES
We have commitments to extend credit and standby letters of credit that involve certain elements of credit risk in excess of the amount stated in the Consolidated Balance Sheets. Our exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. The credit risk associated with commitments to extend credit and standby letters of credit is essentially the same as that involved in extending loans and leases to customers and is subject to normal credit policies. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
Following is a summary of off-balance sheet credit risk information:
TABLE 12.1
| | | | | | | | | | | |
(in millions) | March 31, 2023 | | December 31, 2022 |
Commitments to extend credit | $ | 13,009 | | | $ | 13,250 | |
Standby letters of credit | 229 | | | 207 | |
At March 31, 2023, funding of 73.7% of the commitments to extend credit was dependent on the financial condition of the customer. We have the ability to withdraw such commitments at our discretion. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Based on management’s credit evaluation of the customer, collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by us that may require payment at a future date. The credit risk involved in issuing letters of credit is actively monitored through review of the historical performance of our portfolios.
Our AULC for commitments that are not unconditionally cancellable, which is included in other liabilities on the Consolidated Balance Sheets, was $20.5 million at March 31, 2023 and $21.4 million at December 31, 2022. Additional information relating to the AULC is provided in Note 6, "Allowance for Credit Losses on Loans and Leases" in the Notes to Consolidated Financial Statements.
In addition to the above commitments, subordinated notes issued by FNB Financial Services, LP, a wholly-owned finance subsidiary, are fully and unconditionally guaranteed by FNB. These subordinated notes are included in the summaries of short-term borrowings and long-term borrowings in Note 10, “Borrowings” in the Notes to Consolidated Financial Statements.
Other Legal Proceedings
In the ordinary course of business, we may assert claims in legal proceedings against another party or parties, and we are routinely named as defendants in, or made parties to, pending and potential legal actions. Also, as regulated entities, we are subject to governmental and regulatory examinations, information-gathering requests, and may be subject to investigations and proceedings (both formal and informal). Such threatened claims, litigation, investigations, regulatory and administrative proceedings typically entail matters that are considered incidental to the normal conduct of business. Claims for significant monetary damages may be asserted in many of these types of legal actions, while claims for disgorgement, reimbursement, restitution, penalties and/or other remedial actions or sanctions may be sought in regulatory matters. In these instances, if we determine that we have meritorious defenses, we will engage in an aggressive defense. However, if management determines, in consultation with counsel, that settlement of a matter is in the best interest of FNB and our shareholders, we may do so. It is inherently difficult to predict the eventual outcomes of such matters given their complexity and the particular facts and circumstances at issue in each of these matters. However, on the basis of current knowledge and understanding, and advice of counsel, we do not believe that judgments, sanctions, settlement resolutions, regulatory actions, investigations, settlements or orders, if any, that have arisen or may arise from these matters (either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage) will have a material adverse effect on our financial position or liquidity, although they could potentially have a material effect on net income in a given period.
In view of the inherent unpredictability of outcomes in litigation and governmental and regulatory matters, particularly where (i) the damages sought are indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel legal theories or a large number of parties, as a matter of course, there is considerable uncertainty surrounding the timing or ultimate resolution of litigation and governmental and regulatory matters, including a possible eventual loss, fine, restitution, penalty, business or adverse reputational impact, if any, associated with each such matter. In accordance with applicable accounting guidance, we establish accruals for litigation and governmental and regulatory matters when those matters proceed to a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. We will continue to monitor such matters, including ongoing reviews, examinations, and investigations by banking regulatory agencies and other government authorities, for developments that could affect the amount of the accrual, and will adjust the accrual amount as appropriate. If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. We believe that our accruals for legal proceedings are appropriate and, in the aggregate, are not material to our consolidated financial position, although future accruals could have a material effect on net income in a given period.
NOTE 13. STOCK INCENTIVE PLANS
Restricted Stock
We issue restricted stock awards to key employees under our Incentive Compensation Plan (Plan). We issue time-based awards and performance-based awards under this Plan, both of which are based on a three-year vesting period. The grant date fair value of the time-based awards is equal to the price of our common stock on the grant date. The fair value of the performance-based awards is based on a Monte-Carlo simulation valuation of our common stock as of the grant date. The assumptions used for this valuation include stock price volatility, risk-free interest rate and dividend yield. We granted 470,173 and 495,844 restricted stock units during the three months ended March 31, 2023 and 2022, respectively, including 282,106 and 297,508
performance-based restricted stock units during those same periods, respectively. As of March 31, 2023, we had available up to 8,680,887 shares of common stock to issue under this Plan, including 7,397,956 shares registered during the second quarter of 2022.
The unvested restricted stock unit awards are eligible to receive cash dividends or dividend equivalents which are ultimately used to purchase additional shares of stock and are subject to forfeiture if the requisite service period is not completed or the specified performance criteria are not met. These awards are subject to certain accelerated vesting provisions upon retirement, death, disability or in the event of a change of control as defined in the award agreements.
The following table summarizes the activity relating to restricted stock units during the periods indicated:
TABLE 13.1
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Units | | Weighted Average Grant Price per Share | | Units | | Weighted Average Grant Price per Share |
Unvested units outstanding at beginning of period | 4,821,182 | | | $ | 10.30 | | | 4,680,786 | | | $ | 9.71 | |
Granted | 470,173 | | | 15.06 | | | 495,844 | | | 14.22 | |
Acquired | — | | | — | | | 60,300 | | | 9.41 | |
Net adjustment due to performance | 288,800 | | | 8.04 | | | — | | | — | |
Vested | (1,198,383) | | | 8.31 | | | (216,373) | | | 8.77 | |
Forfeited/expired/canceled | (539,233) | | | 7.80 | | | (18,239) | | | 9.34 | |
Dividend reinvestment | 37,587 | | | 12.48 | | | 46,696 | | | 12.85 | |
Unvested units outstanding at end of period | 3,880,126 | | | 11.69 | | | 5,049,014 | | | 10.22 | |
The following table provides certain information related to restricted stock units:
TABLE 13.2
| | | | | | | | | | | |
(in millions) | Three Months Ended March 31, |
| 2023 | | 2022 |
Stock-based compensation expense | $ | 11 | | | $ | 9 | |
Tax benefit related to stock-based compensation expense | 2 | | | 2 | |
Fair value of units vested | 17 | | | 3 | |
As of March 31, 2023, there was $7.9 million of unrecognized compensation cost related to unvested restricted stock units, including $0.3 million that is subject to accelerated vesting under the Plan’s immediate vesting upon retirement.
The components of the restricted stock units as of March 31, 2023 are as follows:
TABLE 13.3
| | | | | | | | | | | | | | | | | |
(dollars in millions) | Service- Based Units | | Performance- Based Units | | Total |
Unvested restricted stock units | 2,735,134 | | | 1,144,992 | | | 3,880,126 | |
Unrecognized compensation expense | $ | 7 | | | $ | 1 | | | $ | 8 | |
Intrinsic value | $ | 32 | | | $ | 13 | | | $ | 45 | |
Weighted average remaining life (in years) | 1.68 | | 1.89 | | 1.74 |
Stock Options
All outstanding stock options were assumed from acquisitions and are fully vested. Upon consummation of our acquisitions, all outstanding stock options issued by the acquired companies were converted into equivalent FNB stock options. We issue shares of treasury stock or authorized but unissued shares to satisfy stock options exercised.
As of March 31, 2023, we had 110,222 stock options outstanding and exercisable at a weighted average exercise price per share of $9.86, compared to 176,602 stock options outstanding and exercisable at a weighted average exercise price per share of $8.96 as of March 31, 2022.
The intrinsic value of outstanding and exercisable stock options at March 31, 2023 was $0.2 million. The aggregate intrinsic value represents the amount by which the fair value of underlying stock exceeds the option exercise price.
NOTE 14. INCOME TAXES
Income Tax Expense
Federal and state income tax expense and the statutory tax rate and the actual effective tax rate consist of the following:
TABLE 14.1
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(dollars in millions) | | | | | 2023 | | 2022 |
Current income taxes: | | | | | | | |
Federal taxes | | | | | $ | 31 | | | $ | 7 | |
State taxes | | | | | 2 | | | 2 | |
Total current income taxes | | | | | 33 | | | 9 | |
Deferred income taxes: | | | | | | | |
Federal taxes | | | | | 2 | | | 5 | |
| | | | | | | |
Total deferred income taxes | | | | | 2 | | | 5 | |
Total income taxes | | | | | $ | 35 | | | $ | 14 | |
Statutory federal tax rate | | | | | 21.0 | % | | 21.0 | % |
Effective tax rate | | | | | 19.5 | | | 20.9 | |
Income tax expense was higher in 2023 due to higher pre-tax earnings as we had merger-related expenses from the Howard and Union acquisitions in 2022. The decrease in the effective tax rate for the three months ended March 31, 2023 compared to 2022 was primarily driven by higher deduction levels from employee stock compensation vesting.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Net deferred tax assets were $133.7 million and $147.7 million at March 31, 2023 and December 31, 2022, respectively.
NOTE 15. OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents changes in AOCI, net of tax, by component:
TABLE 15.1
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Unrealized Net Gains (Losses) on Debt Securities Available for Sale | | Unrealized Net Gains (Losses) on Derivative Instruments | | Unrecognized Pension and Postretirement Obligations | | Total |
Three Months Ended March 31, 2023 | | | | | | | |
Balance at beginning of period | $ | (269) | | | $ | (44) | | | $ | (44) | | | $ | (357) | |
Other comprehensive (loss) income before reclassifications | 35 | | | 4 | | | — | | | 39 | |
Amounts reclassified from AOCI | — | | | 3 | | | — | | | 3 | |
Net current period other comprehensive (loss) income | 35 | | | 7 | | | — | | | 42 | |
Balance at end of period | $ | (234) | | | $ | (37) | | | $ | (44) | | | $ | (315) | |
|
The amounts reclassified from AOCI related to debt securities AFS are included in net securities gains on the Consolidated Statements of Income, while the amounts reclassified from AOCI related to derivative instruments in cash flow hedge programs are generally included in interest income on loans and leases on the Consolidated Statements of Income. The tax (benefit) expense amounts reclassified from AOCI in connection with the debt securities AFS and derivative instruments reclassifications are included in income taxes on the Consolidated Statements of Income.
NOTE 16. EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding net of unvested shares of restricted stock.
Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding, adjusted for the dilutive effect of potential common shares issuable for stock options and restricted shares, as calculated using the treasury stock method. Adjustments to the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share.
The following table sets forth the computation of basic and diluted earnings per common share:
TABLE 16.1
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(dollars in millions, except per share data) | | | | | 2023 | | 2022 |
Net income | | | | | $ | 147 | | | $ | 53 | |
Less: Preferred stock dividends | | | | | 2 | | | 2 | |
Net income available to common stockholders | | | | | $ | 145 | | | $ | 51 | |
Basic weighted average common shares outstanding | | | | | 360,858,904 | | | 344,352,853 | |
Net effect of dilutive stock options and restricted stock | | | | | 4,071,384 | | | 4,573,193 | |
Diluted weighted average common shares outstanding | | | | | 364,930,288 | | | 348,926,046 | |
Earnings per common share: | | | | | | | |
Basic | | | | | $ | 0.40 | | | $ | 0.15 | |
Diluted | | | | | $ | 0.40 | | | $ | 0.15 | |
There were no anti-dilutive shares for either the three months ended or three months ended March 31, 2023 and 2022.
NOTE 17. CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information:
TABLE 17.1
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2023 | | 2022 |
Interest paid on deposits and other borrowings | $ | 101 | | | $ | 21 | |
| | | |
Transfers of loans to other real estate owned | — | | | 1 | |
| | | |
| | | |
Loans transferred to portfolio from held for sale | 15 | | — | |
We did not have any restricted cash as of March 31, 2023 and 2022.
Supplemental non-cash information relating to the Howard and Union acquisitions is included in Note 3, Mergers and Acquisitions.
NOTE 18. BUSINESS SEGMENTS
We operate in three reportable segments: Community Banking, Wealth Management and Insurance.
•The Community Banking segment provides commercial and consumer banking services. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, business credit, capital markets and lease financing. Consumer banking products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services.
•The Wealth Management segment provides a broad range of personal and corporate fiduciary services including the administration of decedent and trust estates. In addition, it offers various alternative products, including securities brokerage (under a third-party arrangement) and investment advisory services, mutual funds and annuities.
•The Insurance segment includes a full-service insurance brokerage service offering all lines of commercial and personal insurance through major carriers. The Insurance segment also includes a reinsurer.
The following tables provide financial information for these segments of FNB. The information provided under the caption “Parent and Other” represents operations not considered to be reportable segments and/or general operating expenses of FNB, and includes the parent company, other non-bank subsidiaries and eliminations and adjustments to reconcile to the Consolidated Financial Statements.
TABLE 18.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Community Banking | | Wealth Management | | Insurance | | Parent and Other | | Consolidated |
At or for the Three Months Ended March 31, 2023 | | | | | | | | |
Interest income | $ | 442 | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 444 | |
Interest expense | 98 | | | — | | | — | | | 9 | | | 107 | |
Net interest income | 344 | | | — | | | — | | | (7) | | | 337 | |
Provision for credit losses | 14 | | | — | | | — | | | — | | | 14 | |
Non-interest income | 55 | | | 18 | | | 7 | | | (1) | | | 79 | |
Non-interest expense (1) | 195 | | | 13 | | | 4 | | | 3 | | | 215 | |
Amortization of intangibles | 5 | | | — | | | — | | | — | | | 5 | |
Income tax expense (benefit) | 38 | | | 1 | | | — | | | (4) | | | 35 | |
Net income (loss) | 147 | | | 4 | | | 3 | | | (7) | | | 147 | |
Total assets | 43,998 | | | 38 | | | 31 | | | 79 | | | 44,146 | |
Total intangibles | 2,526 | | | 9 | | | 26 | | | — | | | 2,561 | |
At or for the Three Months Ended March 31, 2022 | | | | | | | | |
Interest income | $ | 253 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 254 | |
Interest expense | 17 | | | — | | | — | | | 3 | | | 20 | |
Net interest income | 236 | | | — | | | — | | | (2) | | | 234 | |
Provision for credit losses | 17 | | | — | | | — | | | 1 | | | 18 | |
Non-interest income | 56 | | | 16 | | | 7 | | | (1) | | | 78 | |
Non-interest expense (1) | 207 | | | 11 | | | 5 | | | 1 | | | 224 | |
Amortization of intangibles | 3 | | | — | | | — | | | — | | | 3 | |
Income tax expense (benefit) | 14 | | | 1 | | | — | | | (1) | | | 14 | |
Net income (loss) | 51 | | | 4 | | | 2 | | | (4) | | | 53 | |
Total assets | 41,896 | | | 38 | | | 33 | | | 55 | | | 42,022 | |
Total intangibles | 2,457 | | | 9 | | | 27 | | | — | | | 2,493 | |
(1) Excludes amortization of intangibles, which is presented separately.
NOTE 19. FAIR VALUE MEASUREMENTS
Refer to Note 26 "Fair Value Measurements" to the Consolidated Financial Statements included in our 2022 Annual Report on Form 10-K filed with the SEC on February 24, 2023 for a description of additional valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. The following table presents the balances of assets and liabilities measured at fair value on a recurring basis:
TABLE 19.1
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Total |
March 31, 2023 | | | | | | | |
Assets Measured at Fair Value | | | | | | | |
Debt securities available for sale | | | | | | | |
U.S. Treasury | $ | 261 | | | $ | — | | | $ | — | | | $ | 261 | |
U.S. government agencies | — | | | 101 | | | — | | | 101 | |
U.S. government-sponsored entities | — | | | 261 | | | — | | | 261 | |
Residential mortgage-backed securities: | | | | | | | |
Agency mortgage-backed securities | — | | | 1,187 | | | — | | | 1,187 | |
Agency collateralized mortgage obligations | — | | | 950 | | | — | | | 950 | |
| | | | | | | |
Commercial mortgage-backed securities | — | | | 392 | | | — | | | 392 | |
States of the U.S. and political subdivisions (municipals) | — | | | 29 | | | — | | | 29 | |
Other debt securities | — | | | 20 | | | — | | | 20 | |
Total debt securities available for sale | 261 | | | 2,940 | | | — | | | 3,201 | |
Loans held for sale | — | | | 76 | | | — | | | 76 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Derivative financial instruments | | | | | | | |
Trading | — | | | 80 | | | — | | | 80 | |
Not for trading | — | | | 2 | | | 1 | | | 3 | |
Total derivative financial instruments | — | | | 82 | | | 1 | | | 83 | |
Total assets measured at fair value on a recurring basis | $ | 261 | | | $ | 3,098 | | | $ | 1 | | | $ | 3,360 | |
Liabilities Measured at Fair Value | | | | | | | |
Derivative financial instruments | | | | | | | |
Trading | $ | — | | | $ | 317 | | | $ | — | | | $ | 317 | |
Not for trading | — | | | 3 | | | 4 | | | 7 | |
Total derivative financial instruments | — | | | 320 | | | 4 | | | 324 | |
Total liabilities measured at fair value on a recurring basis | $ | — | | | $ | 320 | | | $ | 4 | | | $ | 324 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Total |
December 31, 2022 | | | | | | | |
Assets Measured at Fair Value | | | | | | | |
Debt securities available for sale | | | | | | | |
U.S. Treasury | $ | 257 | | | $ | — | | | $ | — | | | $ | 257 | |
U.S. government agencies | — | | | 108 | | | — | | | 108 | |
U.S. government-sponsored entities | — | | | 262 | | | — | | | 262 | |
Residential mortgage-backed securities: | | | | | | | |
Agency mortgage-backed securities | — | | | 1,232 | | | — | | | 1,232 | |
Agency collateralized mortgage obligations | — | | | 972 | | | — | | | 972 | |
| | | | | | | |
Commercial mortgage-backed securities | — | | | 395 | | | — | | | 395 | |
States of the U.S. and political subdivisions (municipals) | — | | | 29 | | | — | | | 29 | |
Other debt securities | — | | | 20 | | | — | | | 20 | |
Total debt securities available for sale | 257 | | | 3,018 | | | — | | | 3,275 | |
Loans held for sale | — | | | 91 | | | — | | | 91 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Derivative financial instruments | | | | | | | |
Trading | — | | | 95 | | | — | | | 95 | |
Not for trading | — | | | 1 | | | — | | | 1 | |
Total derivative financial instruments | — | | | 96 | | | — | | | 96 | |
Total assets measured at fair value on a recurring basis | $ | 257 | | | $ | 3,205 | | | $ | — | | | $ | 3,462 | |
Liabilities Measured at Fair Value | | | | | | | |
Derivative financial instruments | | | | | | | |
Trading | $ | — | | | $ | 396 | | | $ | — | | | $ | 396 | |
Not for trading | — | | | 3 | | | 12 | | | 15 | |
Total derivative financial instruments | — | | | 399 | | | 12 | | | 411 | |
Total liabilities measured at fair value on a recurring basis | $ | — | | | $ | 399 | | | $ | 12 | | | $ | 411 | |
The following table presents additional information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:
TABLE 19.2
| | | | | | | | | | | | | | | | | | | | | |
(in millions) | Other Debt Securities | | | | | | Interest Rate Lock Commitments | | Total |
Three Months Ended March 31, 2023 | | | | | | | | | |
Balance at beginning of period | $ | — | | | | | | | $ | — | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Purchases, issuances, sales and settlements: | | | | | | | | | |
| | | | | | | | | |
Issuances | — | | | | | | | 1 | | | 1 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Balance at end of period | $ | — | | | | | | | $ | 1 | | | $ | 1 | |
Year Ended December 31, 2022 | | | | | | | | | |
Balance at beginning of period | $ | — | | | | | | | $ | 9 | | | $ | 9 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Purchases, issuances, sales and settlements: | | | | | | | | | |
Purchases | 2 | | | | | | | — | | | 2 | |
| | | | | | | | | |
| | | | | | | | | |
Settlements | (1) | | | | | | | (9) | | | (10) | |
Transfers from Level 3 | (1) | | | | | | | — | | | (1) | |
| | | | | | | | | |
Balance at end of period | $ | — | | | | | | | $ | — | | | $ | — | |
We review fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of Level 3 at fair value at the beginning of the period in which the changes occur. There were no transfers of assets or liabilities between the hierarchy levels during the first three months of 2023 or 2022.
From time to time, we measure certain assets at fair value on a non-recurring basis. These adjustments to fair value usually result from the application of the lower of cost or fair value accounting or write-downs of individual assets. Valuation methodologies used to measure these fair value adjustments were described in Note 26, "Fair Value Measurements" to the Consolidated Financial Statements included in 2022 Annual Report on Form 10-K. For assets measured at fair value on a non-recurring basis still held at the Balance Sheet date, the following table provides the hierarchy level and the fair value of the related assets or portfolios: TABLE 19.3
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Total |
March 31, 2023 | | | | | | | |
Collateral dependent loans | $ | — | | | $ | — | | | $ | 30 | | | $ | 30 | |
| | | | | | | |
Other assets - SBA servicing asset | — | | | — | | | 2 | | | 2 | |
Other real estate owned | — | | | — | | | 1 | | | 1 | |
December 31, 2022 | | | | | | | |
Collateral dependent loans | $ | — | | | $ | — | | | $ | 34 | | | $ | 34 | |
| | | | | | | |
Other assets - SBA servicing asset | — | | | — | | | 2 | | | 2 | |
Other real estate owned | — | | | — | | | 3 | | | 3 | |
The fair value amounts for collateral dependent loans and OREO in the table above were estimated at a date during the three months or twelve months ended March 31, 2023 and December 31, 2022, respectively. Consequently, the fair value information presented is not necessarily as of the period’s end. Collateral dependent loans measured or re-measured at fair value on a non-recurring basis during the three months ended March 31, 2023 had a carrying amount of $29.9 million, which includes an allocated ACL of $8.8 million. The ACL includes a credit to the provision applicable to the current period fair value measurements of $6.9 million, which was included in provision for credit losses for the three months ended March 31, 2023.
SBA servicing assets measured at fair value on a non-recurring basis had a carrying value of $1.9 million. During 2023, the valuation allowance decreased $0.3 million to $1.3 million as of March 31, 2023, down from $1.6 million at December 31, 2022, which is reflected in the year-to-date provision expense.
OREO measured at fair value on a non-recurring basis during 2023 had a carrying amount of $0.6 million, which included a valuation allowance of $0.3 million, as of March 31, 2023. The valuation allowance includes a loss of $0.4 million, which was included in earnings for the three months ended March 31, 2023.
Fair Value of Financial Instruments
Refer to Note 26, "Fair Value Measurements" to the Consolidated Financial Statements included in our 2022 Annual Report on Form 10-K filed with the SEC on February 24, 2023 for a description of methods and assumptions that were used to estimate the fair value of each financial instrument.
The fair values of our financial instruments are as follows:
TABLE 19.4
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements |
(in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
March 31, 2023 | | | | | | | | | |
Financial Assets | | | | | | | | | |
Cash and cash equivalents | $ | 1,723 | | | $ | 1,723 | | | $ | 1,723 | | | $ | — | | | $ | — | |
Debt securities available for sale | 3,201 | | | 3,201 | | | 261 | | | 2,940 | | | — | |
Debt securities held to maturity | 4,073 | | | 3,742 | | | — | | | 3,742 | | | — | |
Net loans and leases, including loans held for sale | 30,370 | | | 29,620 | | | — | | | 76 | | | 29,544 | |
Loan servicing rights | 56 | | | 70 | | | — | | | — | | | 70 | |
| | | | | | | | | |
Derivative assets | 83 | | | 83 | | | — | | | 82 | | | 1 | |
Accrued interest receivable | 130 | | | 130 | | | 130 | | | — | | | — | |
Financial Liabilities | | | | | | | | | |
Deposits | 34,190 | | | 34,105 | | | 29,441 | | | 4,664 | | | — | |
Short-term borrowings | 2,149 | | | 2,148 | | | 2,148 | | | — | | | — | |
Long-term borrowings | 1,298 | | | 1,260 | | | — | | | — | | | 1,260 | |
Derivative liabilities | 324 | | | 324 | | | — | | | 320 | | | 4 | |
Accrued interest payable | 37 | | | 37 | | | 37 | | | — | | | — | |
December 31, 2022 | | | | | | | | | |
Financial Assets | | | | | | | | | |
Cash and cash equivalents | $ | 1,674 | | | $ | 1,674 | | | $ | 1,674 | | | $ | — | | | $ | — | |
Debt securities available for sale | 3,275 | | | 3,275 | | | 257 | | | 3,018 | | | — | |
Debt securities held to maturity | 4,087 | | | 3,687 | | | — | | | 3,687 | | | — | |
Net loans and leases, including loans held for sale | 29,977 | | | 29,008 | | | — | | | 91 | | | 28,917 | |
Loan servicing rights | 55 | | | 71 | | | — | | | — | | | 71 | |
| | | | | | | | | |
Derivative assets | 96 | | | 96 | | | — | | | 96 | | | — | |
Accrued interest receivable | 126 | | | 126 | | | 126 | | | — | | | — | |
Financial Liabilities | | | | | | | | | |
Deposits | 34,770 | | | 34,673 | | | 31,158 | | | 3,515 | | | — | |
Short-term borrowings | 1,372 | | | 1,369 | | | 1,369 | | | — | | | — | |
Long-term borrowings | 1,093 | | | 1,061 | | | — | | | — | | | 1,061 | |
Derivative liabilities | 411 | | | 411 | | | — | | | 399 | | | 12 | |
Accrued interest payable | 31 | | | 31 | | | 31 | | | — | | | — | |