FIRST CITIZENS BANCSHARES INC /DE/ 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF PREDECESSOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and the Board of Directors First Citizens BancShares, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying statements of income, comprehensive income, changes in stockholders’ equity and cash flows of First Citizens BancShares, Inc. and Subsidiaries (the "Company") for the year ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ FORVIS, LLP (Formerly Dixon Hughes Goodman LLP) We served as the Company’s auditor from 2004 to 2021. Raleigh, North Carolina February 24, 2021 87 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders First Citizens BancShares, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of First Citizens BancShares, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 88 Quantitative component of the allowance for credit losses for legacy First Citizens BancShares, Inc. loans and leases evaluated on a collective basis As discussed in Notes 1 and 5 to the consolidated financial statements, as of December 31, 2022, the Company had an allowance for credit losses (ACL) of $922 million, which includes the quantitative component for loans evaluated on a collective basis for legacy First Citizens BancShares, Inc. loans and leases (the FCB quantitative collective ACL). Loans and leases are segregated into pools with similar risk characteristics, and each have a model that is utilized to estimate the quantitative collective ACL. The FCB quantitative collective ACL models estimate the probability of default (PD) and loss given default (LGD) for individual loans and leases within the risk pool based on historical loss experience, borrower characteristics, collateral type, forecasts of relevant economic conditions, expected future recoveries and other factors. Loan and lease level undiscounted ACL is calculated by applying the modeled PD and LGD to forecasted loan and lease balances which are adjusted for contractual payments, pre-payments, and prior defaults. The Company uses a life of loan reasonable and supportable forecast period which incorporates macroeconomic forecasts at the time of the evaluation. The Company’s ACL forecasts utilize scenario weighting of a range of economic scenarios, including baseline, upside and downside scenarios. Model outputs may be adjusted through a qualitative assessment to reflect economic conditions and trends not captured within the models including credit quality, concentrations, and significant policy and underwriting changes. We identified the assessment of the FCB quantitative collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the FCB quantitative collective ACL due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the methodology, including the models used to estimate the PD and LGD, the selection of the economic scenarios, and the weighting of each economic scenario. The assessment also included an evaluation of the conceptual soundness and performance of the PD and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the FCB quantitative collective ACL including controls related to the: • development and approval of the ACL methodology • continued use and appropriateness of changes to the PD and LGD models, including the significant assumptions used in the PD and LGD models • selection of the economic scenarios and the weighting of each economic scenario • performance monitoring of the PD and LGD models • analysis of the ACL results, trends, and ratios. We evaluated the Company’s process to develop the FCB quantitative collective ACL by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in: • evaluating the FCB quantitative collective ACL methodology for compliance with U.S. generally accepted accounting principles • evaluating judgments made by the Company relative to the assessment and performance testing of the PD and LGD models by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices • assessing the conceptual soundness of the PD and LGD models by inspecting the model documentation to determine whether the models are suitable for their intended use • evaluating the selection of the economic scenarios and the weighting applied to each economic scenario by comparing them to the Company’s business environment and relevant industry practices We also assessed the sufficiency of the audit evidence obtained related to the FCB quantitative collective ACL by evaluating the: • cumulative results of the audit procedures • qualitative aspects of the Company’s accounting practices • potential bias in the accounting estimate. 89 Quantitative component of the allowance for credit losses for loans and leases evaluated on a collective basis acquired in the merger with CIT as of the date of the merger and as of year-end As discussed in Notes 1 and 5 to the consolidated financial statements, on January 3, 2022, First Citizens BancShares, Inc. (the Company) closed on a merger transaction with CIT Group Inc. The Company’s allowance for credit losses (ACL) on legal day one (LD1) for the CIT acquired loans and leases was $726 million, which includes the quantitative component for loans and leases evaluated on a collective basis at January 3, 2022 (the LD1 CIT quantitative collective ACL). As discussed in Notes 1 and 5 to the consolidated financial statements, as of December 31, 2022, the Company’s ACL was $922 million, which includes the quantitative component for loans and leases evaluated on a collective basis for legacy CIT Group (together with the LD1 CIT quantitative collective ACL, the CIT quantitative collective ACL). Loans and leases are segregated into pools with similar risk characteristics, and each have a model that is utilized to estimate the quantitative collective ACL. The CIT quantitative collective ACL models estimate the probability of default (PD) and loss given default (LGD) for individual loans within the risk pool based on historical loss experience, borrower characteristics, collateral type, forecasts of relevant economic conditions, expected future recoveries, loan grades and other factors. Loan level undiscounted ACL is calculated by applying the modeled PD and LGD to forecasted loan balances which are adjusted for contractual payments, pre-payments, and prior defaults. The Company uses a life of loan reasonable and supportable forecast period which incorporates macroeconomic forecasts at the time of the evaluation. The CIT quantitative collective ACL forecasts utilize scenario weighting of a range of economic scenarios, including baseline, upside and downside scenarios. Model outputs may be adjusted through a qualitative assessment to reflect economic conditions and trends not captured within the models including credit quality, concentrations, and significant policy and underwriting changes. We identified the assessment of the CIT quantitative collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the methodology, including the methods and models used to estimate the PD and LGD, the selection of the economic scenarios, and the weighting of each economic scenario. The assessment also included an evaluation of the conceptual soundness and performance of the PD and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of the audit evidence obtained. The following are primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the CIT quantitative collective ACL including controls related to the: • development and approval of the CIT quantitative collective ACL methodology • continued use and appropriateness of changes to the PD and LGD models, including the significant assumptions used in the PD and LGD models • selection of the economic scenarios and the weighting of each economic scenario • performance monitoring of the PD and LGD models • analysis of the ACL results, trends and ratios We evaluated the Company’s process to develop the CIT quantitative collective ACL by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in: • evaluating the CIT quantitative collective ACL methodology for compliance with U.S. generally accepted accounting principles. • evaluating judgments made by the Company relative to the assessment and performance testing of the PD and LGD models by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices. • assessing the conceptual soundness of the PD and LGD models by inspecting the model documentation to determine whether the models are suitable for their intended use • evaluating the selection of the economic scenarios and the weighting applied to each economic scenario by comparing them to the Company’s business environment and relevant industry practices 90 We also assessed the sufficiency of the audit evidence obtained related to the CIT quantitative collective ACL by evaluating the: • cumulative results of the audit procedures • qualitative aspects of the Company’s accounting practices • potential bias in the accounting estimate Valuation of loans and leases, rail operating lease equipment and the core deposit intangible acquired in the merger with CIT As discussed in Note 2 to the consolidated financial statements, on January 3, 2022, First Citizens BancShares, Inc. (the Company) closed on a merger transaction with CIT Group Inc. (the Merger). The assets acquired and liabilities assumed are required to be measured at fair value at the date of acquisition under the purchase method of accounting. The Company acquired loans and leases with a fair value of $33 billion, rail operating lease equipment of $8 billion and established a core deposit intangible (CDI) asset with a fair value of $143 million. • The fair value of the acquired loans and leases is based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, fixed or variable interest rate, remaining term, and certain assumptions including market implied credit losses (probability of default, loss given default), discount rates, and prepayment rates. • The fair value of the rail operating lease equipment is based primarily on a cost approach that considers factors including the railcar type, age, leasing status and certain assumptions including replacement cost, functional and economic obsolescence and salvage values. For certain rail operating lease equipment, a market approach was used that considers factors including railcar type, age and certain assumptions including estimated sales values and salvage values. • The fair value of the CDI asset is based on an income approach, after-tax savings method. This method estimates the fair value by discounting to present value the favorable funding spread attributable to the core deposit balances. The favorable funding spread is calculated as the difference in the alternative cost of funds and the net deposit cost whereby projected net cash flow benefits are derived from estimating costs to carry deposits compared to alternative funding costs, and certain assumptions including the discount rates, interest costs, deposit attrition rates, alternative costs of funds, and net maintenance costs. We identified the valuation of the acquired loans and leases, rail operating lease equipment and CDI asset in the Merger as a critical audit matter. Specifically, the evaluation of the methodologies and the determination of certain assumptions used to estimate the fair values involved a high degree of auditor judgment and specialized skills and knowledge. Such assumptions included the market implied credit losses, discount rates, and prepayment rates for the loans and leases; the replacement costs and the functional and economic obsolescence for the rail operating lease equipment; and the discount rate for the CDI asset. These assumptions required subjective auditor judgment as changes in the assumptions could have a significant impact on the estimated fair value. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the process to measure the estimate of fair values of the acquired loans and leases, the rail operating lease equipment and the CDI asset, including controls over: • evaluating the fair value methodologies • determining the market implied credit losses, discount rates, and prepayment rates for the loans and leases • determining the replacement costs and the functional and economic obsolescence for the rail operating lease equipment • determining the discount rate for the CDI asset We evaluated the Company’s process to develop the fair values of the acquired loans and leases, the rail operating lease equipment and the CDI asset by testing certain sources of data and assumptions that the Company used and considered the relevance and reliability of such data and assumptions. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the Company’s estimate of these fair values by: • evaluating the valuation methodologies used by the Company to estimate the fair values for reasonableness and compliance with U.S. generally accepted accounting principles 91 Specific to the acquired loans and leases: • developing independent ranges of fair value for certain acquired loans and leases, including the development of independent assumptions utilizing market data for implied credit loss, discount rate and prepayment rate assumptions • assessing the Company’s estimate of fair value for certain acquired loans and leases by comparing them to the independently developed rangesSpecific to the rail operating lease equipment: • developing independent assumptions for replacement costs on rail operating lease equipment by assessing market information from third-party sources • evaluating the Company’s process for developing the functional and economic obsolescence, including the criteria used to determine extent of obsolescence, for reasonableness • developing independent ranges of fair value for certain acquired rail operating lease equipment using multiple approaches and comparing the Company’s estimate to the independently developed estimates Specific to the CDI asset: • evaluating the Company’s process for developing the discount rate, by assessing the approach used to derive the assumption, reviewing the peer group used to determine the market beta for comparability, assessing market information from third-party sources and developing the size premium and company specific risk premiums and comparing to those selected by management /s/ KPMG LLP We have served as the Company’s auditor since 2021. Raleigh, North Carolina February 24, 2023 92 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders First Citizens BancShares, Inc.: Opinion on Internal Control Over Financial Reporting We have audited First Citizens BancShares, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 24, 2023 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 93 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Raleigh, North Carolina February 24, 2023 94 First Citizens BancShares, Inc. and Subsidiaries Consolidated Balance Sheets dollars in millions, except share data December 31, 2022 December 31, 2021 Assets Cash and due from banks $ 518 $ 338 Interest-earning deposits at banks 5,025 9,115 Investment in marketable equity securities (cost of $ 75 at December 31, 2022 and $ 73 at December 31, 2021) 95 98 Investment securities available for sale (cost of $ 9,967 at December 31, 2022 and $ 9,215 at December 31, 2021) 8,995 9,203 Investment securities held to maturity (fair value of $ 8,795 at December 31, 2022 and $ 3,759 at December 31, 2021) 10,279 3,809 Assets held for sale 60 99 Loans and leases 70,781 32,372 Allowance for credit losses ( 922 ) ( 178 ) Loans and leases, net of allowance for credit losses 69,859 32,194 Operating lease equipment, net 8,156 — Premises and equipment, net 1,456 1,233 Goodwill 346 346 Other intangible assets 140 19 Other assets 4,369 1,855 Total assets $ 109,298 $ 58,309 Liabilities Deposits: Noninterest-bearing $ 24,922 $ 21,405 Interest-bearing 64,486 30,001 Total deposits 89,408 51,406 Credit balances of factoring clients 995 — Borrowings: Short-term borrowings 2,186 589 Long-term borrowings 4,459 1,195 Total borrowings 6,645 1,784 Other liabilities 2,588 381 Total liabilities 99,636 53,571 Stockholders’ equity Preferred stock - $ 0.01 par value ( 10,000,000 shares authorized at December 31, 2022 and December 31, 2021) 881 340 Common stock: Class A - $ 1 par value ( 16,000,000 shares authorized; 13,501,017 and 8,811,220 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively) 14 9 Class B - $ 1 par value ( 2,000,000 shares authorized; 1,005,185 shares issued and outstanding at December 31, 2022 and December 31, 2021) 1 1 Additional paid in capital 4,109 — Retained earnings 5,392 4,378 Accumulated other comprehensive (loss) income ( 735 ) 10 Total stockholders’ equity 9,662 4,738 Total liabilities and stockholders’ equity $ 109,298 $ 58,309 See accompanying Notes to the Consolidated Financial Statements. 95 First Citizens BancShares, Inc. and Subsidiaries Consolidated Statements of Income Year ended December 31 dollars in millions, except share and per share data 2022 2021 2020 Interest income Interest and fees on loans $ 2,953 $ 1,295 $ 1,333 Interest on investment securities 354 145 144 Interest on deposits at banks 106 11 7 Total interest income 3,413 1,451 1,484 Interest expense Deposits 335 33 67 Borrowings 132 28 29 Total interest expense 467 61 96 Net interest income 2,946 1,390 1,388 Provision (benefit) for credit losses 645 ( 37 ) 58 Net interest income after provision for credit losses 2,301 1,427 1,330 Noninterest income Rental income on operating lease equipment 864 — — Fee income and other service charges 163 42 37 Wealth management services 142 129 103 Service charges on deposit accounts 100 95 88 Factoring commissions 104 — — Cardholder services, net 102 87 74 Merchant services, net 35 33 24 Insurance commissions 47 16 15 Realized gain on sale of investment securities available for sale, net — 33 60 Fair value adjustment on marketable equity securities, net ( 3 ) 34 29 Bank-owned life insurance 32 3 3 Gain on sale of leasing equipment, net 15 — — Gain on acquisition 431 — — Gain on extinguishment of debt 7 — — Other noninterest income 97 36 44 Total noninterest income 2,136 508 477 Noninterest expense Depreciation on operating lease equipment 345 — — Maintenance and other operating lease expenses 189 — — Salaries and benefits 1,396 759 722 Net occupancy expense 194 117 117 Equipment expense 216 119 116 Professional fees 57 20 17 Third-party processing fees 103 60 45 FDIC insurance expense 31 14 13 Marketing expense 53 10 10 Merger-related expenses 231 29 17 Intangible asset amortization 23 12 15 Other noninterest expense 237 94 117 Total noninterest expense 3,075 1,234 1,189 Income before income taxes 1,362 701 618 Income tax expense 264 154 126 Net income $ 1,098 $ 547 $ 492 Preferred stock dividends 50 18 14 Net income available to common stockholders $ 1,048 $ 529 $ 478 Earnings per common share Basic $ 67.47 $ 53.88 $ 47.50 Diluted $ 67.40 $ 53.88 $ 47.50 Weighted average common shares outstanding Basic 15,531,924 9,816,405 10,056,654 Diluted 15,549,944 9,816,405 10,056,654 See accompanying Notes to the Consolidated Financial Statements. 96 First Citizens BancShares, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income Year ended December 31 dollars in millions 2022 2021 2020 Net income $ 1,098 $ 547 $ 492 Other comprehensive (loss) income, net of tax Net unrealized (loss) gain on securities available for sale ( 730 ) ( 88 ) 73 Net change in unrealized loss on securities available for sale transferred to securities held to maturity 1 ( 11 ) 4 Net change in defined benefit pension items ( 16 ) 97 62 Other comprehensive (loss) income, net of tax $ ( 745 ) $ ( 2 ) $ 139 Total comprehensive income $ 353 $ 545 $ 631 See accompanying Notes to the Consolidated Financial Statements. 97 First Citizens BancShares, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity dollars in millions, except share data Preferred Stock Class A Common Stock Class B Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Stockholders' Equity Balance at December 31, 2019 $ — $ 10 $ 1 $ 44 $ 3,658 $ ( 127 ) $ 3,586 Cumulative effect of adoption of ASC 326 — — — — 37 — 37 Net income — — — — 492 — 492 Other comprehensive loss, net of tax — — — — — 139 139 Issuance of preferred stock 340 — — — — — 340 Repurchased 813,090 shares of Class A common stock — ( 1 ) — ( 44 ) ( 289 ) — ( 334 ) Cash dividends declared ($ 1.67 per common share): Class A common stock — — — — ( 15 ) — ( 15 ) Class B common stock — — — — ( 2 ) — ( 2 ) Preferred stock dividends declared — — — — ( 14 ) — ( 14 ) Balance at December 31, 2020 340 9 1 — 3,867 12 4,229 Net income — — — — 547 — 547 Other comprehensive loss, net of tax — — — — — ( 2 ) ( 2 ) Cash dividends declared ($ 1.88 per common share): Class A common stock — — — — ( 16 ) — ( 16 ) Class B common stock — — — — ( 2 ) — ( 2 ) Preferred stock dividends declared — — — — ( 18 ) — ( 18 ) Balance at December 31, 2021 340 9 1 — 4,378 10 4,738 Net income — — — — 1,098 — 1,098 Other comprehensive loss, net of tax — — — — — ( 745 ) ( 745 ) Issued in CIT Merger: Common stock — 6 — 5,273 — — 5,279 Series B preferred stock 334 — — — — — 334 Series C preferred stock 207 — — — — — 207 Stock-based compensation — — — 75 — — 75 Repurchased 1,500,000 shares of Class A common stock — ( 1 ) — ( 1,239 ) — — ( 1,240 ) Cash dividends declared ($ 2.16 per common share): Class A common stock — — — — ( 32 ) — ( 32 ) Class B common stock — — — — ( 2 ) — ( 2 ) Preferred stock dividends declared: Series A — — — — ( 19 ) — ( 19 ) Series B — — — — ( 20 ) — ( 20 ) Series C — — — — ( 11 ) — ( 11 ) Balance at December 31, 2022 $ 881 $ 14 $ 1 $ 4,109 $ 5,392 $ ( 735 ) $ 9,662 See accompanying Notes to Consolidated Financial Statements. 98 First Citizens BancShares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Year Ended December 31, dollars in millions 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,098 $ 547 $ 492 Adjustments to reconcile net income to cash provided by (used in) operating activities: Provision (benefit) for credit losses 645 ( 37 ) 58 Deferred tax expense (benefit) 206 ( 8 ) ( 26 ) Depreciation, amortization, and accretion, net 533 143 133 Stock based compensation expense 19 — — Realized gain on sale of investment securities available for sale, net — ( 33 ) ( 60 ) Fair value adjustment on marketable equity securities, net 3 ( 34 ) ( 29 ) Gain on sale of loans, net ( 22 ) ( 33 ) ( 38 ) Gain on sale of operating lease equipment, net ( 15 ) — — Loss on sale of premises and equipment, net 5 — — (Gain) loss on other real estate owned, net ( 14 ) ( 1 ) 4 Gain on acquisition ( 431 ) — — Gain on extinguishment of debt ( 7 ) — — Origination of loans held for sale ( 499 ) ( 1,123 ) ( 1,042 ) Proceeds from sale of loans held for sale 562 1,036 1,046 Net change in other assets 484 ( 733 ) ( 135 ) Net change in other liabilities 260 5 ( 15 ) Other operating activities ( 36 ) ( 13 ) ( 12 ) Net cash provided by (used in) operating activities 2,791 ( 284 ) 376 CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in interest-earning deposits at banks 6,965 ( 4,767 ) ( 3,204 ) Purchase of marketable equity securities — ( 2 ) ( 333 ) Proceeds from sales of investments in marketable equity securities — 30 353 Purchase of investment securities available for sale ( 1,985 ) ( 6,375 ) ( 8,667 ) Proceeds from maturities of investment securities available for sale 1,237 2,455 2,791 Proceeds from sale of investment securities available for sale 2 1,367 4,585 Purchase of investment securities held to maturity ( 755 ) ( 1,401 ) ( 1,633 ) Proceeds from maturities of investment securities held to maturity 835 809 301 Net change in loans ( 5,344 ) 423 ( 3,850 ) Proceeds from sale of loans 245 — 13 Net decrease in credit balances of factoring clients ( 538 ) — — Purchase of operating lease equipment ( 771 ) — — Proceeds from sale of operating lease equipment 95 — — Purchase of premises and equipment ( 155 ) ( 107 ) ( 133 ) Proceeds from sales of premises and equipment 13 1 1 Proceeds from sales of other real estate owned 48 41 28 Acquisition, net of cash acquired 134 — ( 60 ) Other investing activities 49 ( 42 ) ( 100 ) Net cash provided by (used in) investing activities 75 ( 7,568 ) ( 9,908 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in time deposits 568 ( 406 ) ( 1,010 ) Net (decrease) increase in demand and other interest-bearing deposits ( 2,259 ) 8,382 9,989 Net decrease in securities sold under customer repurchase agreements ( 153 ) ( 52 ) ( 97 ) Repayment of short-term borrowings ( 1,355 ) — — Proceeds from issuance of short-term borrowings 3,105 — — Repayment of long-term borrowings ( 5,099 ) ( 54 ) ( 87 ) Proceeds from issuance of long-term borrowings 3,854 — 746 Net proceeds from issuance of preferred stock — — 340 Repurchase of Class A common stock ( 1,240 ) — ( 334 ) Cash dividends paid ( 83 ) ( 42 ) ( 30 ) Other financing activities ( 24 ) — — Net cash (used in) provided by financing activities ( 2,686 ) 7,828 9,517 Change in cash and due from banks 180 ( 24 ) ( 15 ) Cash and due from banks at beginning of year 338 362 377 Cash and due from banks at end of year $ 518 $ 338 $ 362 99 Year Ended December 31, dollars in millions 2022 2021 2020 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid (refunded) during the period for: Interest $ 525 $ 62 $ 105 Income taxes ( 551 ) 870 117 Significant non-cash investing and financing activities: Transfers of loans to other real estate 14 14 12 Transfers of premises and equipment to other real estate 19 14 15 Transfer of investment securities available for sale to held to maturity — 452 1,461 Dividends declared but not paid 1 — 5 Transfer of assets from held for investment to held for sale 188 88 49 Transfer of assets from held for sale to held for investment 21 4 6 Loans held for sale exchanged for investment securities 38 231 11 Commitments extended during the period on affordable housing investment credits 110 15 15 Issuance of common stock as consideration for acquisition 5,279 — — Stock-based compensation as consideration for acquisition 81 — — Issuance of preferred stock as consideration for acquisition 541 — — See accompanying Notes to the Consolidated Financial Statements. 100 First Citizens BancShares, Inc. and Subsidiaries Notes to Consolidated Financial Statements NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION Nature of Operations First Citizens BancShares, Inc. (the “Parent Company” and, when including all of its subsidiaries on a consolidated basis, “we,” “us,” “our,” “BancShares”) is a financial holding company organized under the laws of Delaware that conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (“FCB,” or the “Bank”), which is headquartered in Raleigh, North Carolina. BancShares and its subsidiaries operate a network of over 500 branches in 22 states, predominantly located in the Southeast, Mid-Atlantic, Midwest and Western United States. BancShares provides various types of commercial and consumer banking services, including lending, leasing and wealth management services. Deposit services include checking, savings, money market and time deposit accounts. BASIS OF PRESENTATION Principles of Consolidation and Basis of Presentation The accounting and reporting policies of BancShares are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. The consolidated financial statements of BancShares include the accounts of BancShares and its subsidiaries, certain partnership interests and variable interest entities (“VIEs”) where BancShares is the primary beneficiary, if applicable. All significant intercompany accounts and transactions are eliminated upon consolidation. Assets held in agency or fiduciary capacity are not included in the consolidated financial statements. VIEs are legal entities that either do not have sufficient equity to finance their activities without the support from other parties or whose equity investors lack a controlling financial interest. BancShares has investments in certain partnerships and limited liability entities that have been evaluated and determined to be VIEs. Consolidation of a VIE is appropriate if a reporting entity holds a controlling financial interest in the VIE and is the primary beneficiary. BancShares is not the primary beneficiary and does not hold a controlling interest in the VIEs as it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. As such, assets and liabilities of these entities are not consolidated into the financial statements of BancShares. The recorded investment in these entities is reported within other assets. See Note 10 — Other Assets and Note 12 — Variable Interest Entities for additional information. Reclassifications In certain instances, amounts reported in the 2021 and 2020 consolidated financial statements have been reclassified to conform to the 2022 financial statement presentation, primarily reflecting impacts from the CIT Merger (as defined below). Such reclassifications had no effect on previously reported stockholders’ equity or net income. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions impacting the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The significant estimates include the allowance for credit losses (“ACL”) and fair value estimates of acquired loans and operating lease equipment and core deposit intangibles. Business Combinations BancShares accounts for business combinations using the acquisition method of accounting. Under this method, acquired assets and assumed liabilities are included with the acquirer’s accounts at their estimated fair value as of the date of acquisition, with any excess of purchase price over the fair value of the net tangible and intangible assets acquired recognized as goodwill. To the extent the fair value of identifiable net assets acquired exceeds the purchase price, a gain on acquisition is recognized. Merger-related costs are recognized as period expenses as incurred. On January 3, 2022, BancShares completed its previously announced merger (the “CIT Merger”) with CIT Group Inc. (“CIT”), pursuant to an Agreement and Plan of Merger, dated as of October 15, 2020, as amended by Amendment No. 1, dated as of September 30, 2021 (as amended, the “Merger Agreement”) . See Note 2 — Business Combinations for additional information. 101 Reportable Segments As of December 31, 2021, BancShares managed its business and reported its financial results as a single segment. BancShares began reporting multiple segments during the first quarter of 2022 and now reports General Banking, Commercial Banking, Rail, and Corporate segments. BancShares conformed the comparative prior periods presented to reflect the new segments. The substantial majority of BancShares’ operations for historical periods prior to completion of the CIT Merger are included in the General Banking segment. The Commercial Banking and Rail segments primarily relate to operations acquired in the CIT Merger. See Note 23 — Business Segment Information for additional information. SIGNIFICANT ACCOUNTING POLICIES Interest-Earning Deposits at Banks Interest-earning deposits at banks are primarily comprised of interest-bearing deposits with banks and federal funds sold. Interest-earning deposits at banks have initial maturities of three months or less. The carrying value of interest-earning deposits at banks approximates its fair value due to its short-term nature. Investments Debt Securities BancShares classifies debt securities as held to maturity (“HTM”) or available for sale (“AFS”). Debt securities are classified as HTM when BancShares has the intent and ability to hold the securities to maturity. HTM securities are reported at amortized cost. Other debt securities are classified as AFS and reported at estimated fair value, with unrealized gains and losses, net of income taxes, reported in Accumulated Other Comprehensive Income (“AOCI”). Amortization of premiums and accretion of discounts for debt securities are recorded in interest income. Realized gains and losses from the sale of debt securities are included in noninterest income. BancShares performs pre-purchase due diligence and evaluates the credit risk of AFS and HTM debt securities purchased directly into BancShares' portfolio or via acquisition. If securities have evidence of more than insignificant credit deterioration since issuance, they are designated as purchased credit deteriorated (“PCD”). For AFS debt securities, management performs a quarterly analysis of the investment portfolio to evaluate securities currently in an unrealized loss position for potential credit-related impairment. If BancShares intends to sell a security, or does not have the intent and ability to hold a security before recovering the amortized cost, the entirety of the unrealized loss is immediately recorded in earnings to the extent that it exceeds the associated ACL previously established. For the remaining securities, an analysis is performed to determine if any portion of the unrealized loss recorded relates to credit impairment. If credit-related impairment exists, the amount is recorded through the ACL and related provision. This review includes indicators such as changes in credit rating, delinquency, bankruptcy or other significant news event impacting the issuer. BancShares determined that there were no expected credit losses on the HTM or AFS portfolios. Debt securities are also classified as past due when the payment of principal and interest based upon contractual terms is 30 days delinquent or greater. Missed interest payments on debt securities are rare. Management reviews all debt securities with delinquent interest and immediately charges off any accrued interest determined to be uncollectible. See Note 3 — Investment Securities for additional information. Equity Securities Investments in equity securities having readily determinable fair values are stated at fair value. Realized and unrealized gains and losses on these securities are included in noninterest income. Non-marketable equity securities are securities with no readily determinable fair values and are measured at cost. BancShares evaluates its equity securities for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience. Impairment is assessed at each reporting period and if identified, is recognized in other noninterest expense. See Note 10 — Other Assets for amounts of non-marketable equity securities at December 31, 2022 and 2021. Other Securities Membership in the Federal Home Loan Bank (“FHLB”) network requires ownership of FHLB restricted stock. This stock is restricted as it may only be sold to the FHLB and all sales must be at par. Accordingly, the FHLB restricted stock is carried at cost, less any applicable impairment charges and is recorded within other assets. Additionally, BancShares holds shares of Visa Inc. (“Visa”) Class B common stock. See Note 3 — Investment Securities and Note 10 — Other Assets for additional information. 102 Investment in Qualified Affordable Housing Projects BancShares has investments in qualified affordable housing projects primarily for the purposes of fulfilling Community Reinvestment Act requirements and obtaining tax credits. These investments are accounted for using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received, and the net investment performance is recognized in the income statement as a component of income tax expense. All investments held in qualified affordable housing projects qualify for the proportional amortization method. See Note 10 — Other Assets and Note 12 — Variable Interest Entities for additional information. Assets Held for Sale Assets held for sale (“AHFS”) at December 31, 2022 consist of residential mortgage loans held for sale of $ 4 million carried at fair value and commercial loans held for sale of $ 48 million carried at the lower of the cost or fair value (“LOCOM”). The remainder related to operating lease equipment held for sale, which is carried at LOCOM. AHFS at December 31, 2021 consist of residential mortgage loans held for sale of $ 99 million carried at fair value. Loans and Leases BancShares extends credit to commercial customers through a variety of financing arrangements including term loans, revolving credit facilities, finance leases and operating leases. BancShares also extends credit through consumer loans, including residential mortgages and auto loans. We re-evaluated our loan classes to reflect the characteristics of BancShares’ portfolio. The changes to the loan classes primarily include: (i) reclassifying Small Business Administration Paycheck Protection Program (“SBA-PPP”) loans into the commercial and industrial class, (ii) identifying a separate loan class for leases, and (iii) no longer having PCD loans as a separate loan class. Our loan classes as of December 31, 2022 are described below. Prior period disclosures have been conformed to the current presentation. Commercial Loans and Leases Commercial Construction - Commercial construction consists of loans to finance land for commercial development of real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult. Owner Occupied Commercial Mortgage - Owner occupied commercial mortgage consists of loans to purchase or refinance owner occupied nonresidential properties. This includes office buildings, other commercial facilities and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. Non-owner Occupied Commercial Mortgage - Non-owner occupied commercial mortgage consists of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. Commercial and Industrial - Commercial and industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, and business credit cards. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk that the borrower will be unable to service the debt consistent with the contractual terms of the loan. Factoring - We provide factoring, receivable management, and secured financing to businesses (our clients, who are generally manufacturers or importers of goods) that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics. Factoring entails the assumption of credit risk with respect to trade accounts receivable arising from the sale of goods by our clients to their customers (generally retailers) that have been factored (i.e., sold or assigned to the factor). The most prevalent risk in factoring transactions is customer credit risk, which relates to the financial inability of a customer to pay undisputed factored trade accounts receivable. Factoring receivables are primarily included in the commercial and industrial loan class. Leases – Leases consists of finance lease arrangements for technology and office equipment and large and small industrial, medical, and transportation equipment. 103 Consumer Loans Residential Mortgage - Consumer mortgage consists of loans to purchase, construct, or refinance the borrower’s primary dwelling, secondary residence or vacation home and are often secured by 1-4 family residential properties or undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. Delays in construction and development projects can cause cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral. Revolving Mortgage - Revolving mortgage consists of home equity lines of credit and other lines of credit or loans secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior liens as a substantial decline in value could render the junior lien position effectively unsecured. Consumer Auto - Consumer auto loans consist of installment loans to finance purchases of vehicles. These loans include direct auto loans originated in bank branches, as well as indirect auto loans originated through agreements with auto dealerships. The value of the underlying collateral within this class is at risk of potential rapid depreciation, which could result in unpaid balances in excess of the collateral, if any. Consumer Other - Other consumer loans consist of loans to finance unsecured home improvements, student loans, and revolving lines of credit that can be secured or unsecured, including personal credit cards. The value of the underlying collateral within this class is at risk of potential rapid depreciation, which could result in unpaid balances in excess of the collateral. Originated loans for which management has the intent and ability to hold for the foreseeable future are classified as held for investment (“HFI”) and carried at the principal amount outstanding net of any unearned income, charge-offs and unamortized fees and costs. Nonrefundable fees collected and certain direct costs incurred related to loan originations are deferred and recorded as an adjustment to loans outstanding. The net amount of the nonrefundable fees and costs is amortized to interest income over the contractual lives using methods that approximate a constant yield. Acquired Loans and Leases BancShares’ accounting methods for acquired loans and leases depends on whether or not the loans reflect more than insignificant credit deterioration since origination at the date of acquisition. Non-Purchased Credit Deteriorated Loans and Leases Non-Purchased Credit Deteriorated (“Non-PCD”) loans and leases do not reflect more than insignificant credit deterioration since origination at the date of acquisition. These loans are recorded at fair value and an increase to the ACL is recorded with a corresponding increase to the provision for credit losses at the date of acquisition. The difference between the fair value and the unpaid principal balance (“UPB”) at the acquisition date is amortized or accreted to interest income over the contractual life of the loan using the effective interest method. Purchased Credit Deteriorated Loans and Leases Purchased loans and leases that reflect a more than insignificant credit deterioration since origination at the date of acquisition are classified as PCD loans and leases. PCD loans and leases are recorded at acquisition-date amortized cost, which is the purchase price or fair value in a business combination, plus BancShares' initial ACL, which results in a gross up of the loan balance (the “PCD Gross-Up”). The initial ACL for PCD loans and leases is established through the PCD Gross-Up and there is no corresponding increase to the provision for credit losses. The difference between the UPB and the acquisition date amortized cost resulting from the PCD Gross-Up is amortized or accreted to interest income over the contractual life of the loan using the effective interest method. Past Due and Non-Accrual Loans and Leases Loans and leases are classified as past due when the payment of principal and interest based upon contractual terms is 30 days or greater delinquent. Loans and leases are generally placed on nonaccrual when principal or interest becomes 90 days past due or when it is probable the principal or interest is not fully collectible. When loans are placed on nonaccrual, previously uncollected accrued interest is reversed from interest income and the ongoing accrual of interest is discontinued. All payments received thereafter are applied as a reduction of the outstanding balance until the account is collected, charged-off or returned to accrual status. Loans and leases are generally removed from nonaccrual status when they become current for a sustained period of time and there is no longer concern as to the collectability of principal and interest. 104 Troubled Debt Restructurings A loan is considered a troubled debt restructuring (“TDR”) when both a modification to a borrower’s debt agreement is made and a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be granted. TDR concessions could include short-term deferrals of interest, modifications of payment terms or, in certain limited instances, forgiveness of principal or interest. Loans restructured as a TDR are treated and reported as such for the remaining life of the loan. TDR loans can be nonaccrual or accrual, depending on the individual facts and circumstances of the borrower. In circumstances where a portion of the loan balance is charged-off, the remaining balance is typically classified as nonaccrual. Refer to further discussion in the “Recently Issued Accounting Standards” section of Note 1 — Significant Accounting Policies and Basis of Presentation. Loan Charge-Offs and Recoveries Loan charge-offs are recorded after considering such factors as the borrower’s financial condition, the value of underlying collateral, guarantees, and the status of collection activities. Loan balances considered uncollectible are charged-off against the ACL and deducted from the carrying value of the related loans. Consumer loans are subject to mandatory charge-off at specified delinquency dates in accordance with regulatory guidelines. The value of the underlying collateral for consumer loans is considered when determining the charge-off amount if repossession is reasonably assured and in process. See Note 4 — Loans and Leases for additional information. Realized recoveries of amounts previously charged-off are credited to the ACL. Allowance for Credit Losses Loans and Leases The ACL represents management’s best estimate of credit losses expected over the life of the loan or lease, adjusted for expected contractual payments and the impact of prepayment expectations. Estimates for loan and lease losses are determined by analyzing quantitative and qualitative components present as of the evaluation date. Adjustments to the ACL are recorded with a corresponding entry to the provision or benefit for credit losses in accordance with FASB Accounting Standard Codification (“ASC”) 326 Financial Instruments- Credit Losses (“ASC 326”). ASC 326 introduced the current expected credit losses methodology (“CECL”) for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. BancShares adopted ASC 326 on January 1, 2020 and CECL is applied for all periods presented in these consolidated financial statements. The ACL is calculated based on a variety of considerations, including, but not limited to actual net loss history of the various loan and lease pools, delinquency trends, changes in forecasted economic conditions, loan growth, estimated loan life, and changes in portfolio credit quality. Loans and leases are segregated into pools with similar risk characteristics and each have a model that is utilized to estimate the ACL. These ACL models estimate the probability of default (“PD”) and loss given default (“LGD”) for individual loans and leases within each risk pool based on historical loss experience, borrower characteristics, collateral type, forecasts of future economic conditions, expected future recoveries and other factors. The loan and lease level, undiscounted ACL is calculated by applying the modeled PD and LGD to monthly forecasted loan and lease balances which are adjusted for contractual payments, prior defaults, and prepayments. Prepayment assumptions were developed through a review of BancShares’ historical prepayment activity and considered forecasts of future economic conditions. Forecasted LGDs are adjusted for expected recoveries. Model outputs may be adjusted through a qualitative assessment to reflect trends not captured within the models, which could include economic conditions, credit quality, concentrations, and significant policy and underwriting changes. Risk pools for estimating the ACL are aggregated into commercial and consumer loan classes for reporting purposes in Note 5 — Allowance for Credit Losses. The ACL models utilize economic variables, including unemployment, gross domestic product (“GDP”), home price index, commercial real estate index, corporate profits, and credit spreads. These economic variables are based on macroeconomic scenario forecasts with a forecast horizon that covers the lives of the loan portfolios. Due to the inherent uncertainty in the macroeconomic forecasts, BancShares utilizes baseline, upside, and downside macroeconomic scenarios and weights the scenarios based on review of variable forecasts for each scenario and comparison to expectations. When loans do not share risk characteristics similar to others in the pool, the ACL is evaluated on an individual basis. Given that BancShares' CECL models are loan level models, the population of loans evaluated individually is not significant and consists primarily of loans greater than $500 thousand. A specific ACL is established, or partial charge-off is recorded, for the difference between the excess amortized cost of loan and the loan’s estimated fair value. 105 Certain aspects of BancShares’ ACL methodology were changed during the first quarter of 2022 in order to integrate the methodologies of BancShares and CIT. The changes include the following: (i) applying a forecast horizon that covers the lives of the loan portfolios instead of using a two year reasonable and supportable period with a one year reversion period followed by a historical long run average economic forecast for the remainder of the portfolio life; and (ii) implementing scenario weighting of baseline, upside, and downside macroeconomic scenarios instead of utilizing just the consensus baseline scenario as the basis of the quantitative ACL estimate. Accrued Interest Receivable BancShares' accounting policies and credit monitoring provide that uncollectible accrued interest is reversed or written off against interest income in a timely manner. Therefore, BancShares elected to not measure an ACL for accrued interest receivable and it is excluded from the amortized cost basis of loans and HTM debt securities. Unfunded Commitments A reserve for unfunded commitments is established for off-balance sheet exposures such as unfunded balances for existing lines of credit, deferred purchase agreements, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). These unfunded commitments are assessed to determine both the probability of funding as well as the expectation of future losses. BancShares estimates the expected funding amounts and applies its PD and LGD models to those expected funding amounts to estimate the reserve for unfunded commitments. See Note 5 — Allowance for Credit Losses for additional information. Leases Lessor Arrangements BancShares did not have significant amounts of equipment related to operating leases prior to completion of the CIT Merger. At December 31, 2022, BancShares has operating lease equipment of $ 8.16 billion, primarily related to the Rail segment. Operating lease equipment is carried at cost less accumulated depreciation. Operating lease equipment is depreciated to its estimated residual value using the straight-line method over the lease term or estimated useful life of the asset. Rail equipment has estimated useful lives of 40 - 50 years and the useful lives of other equipment are generally 3 - 10 years. Where management’s intention is to sell the operating lease equipment, it is marked to LOCOM and classified as AHFS. Depreciation is no longer recognized, and the assets are evaluated for impairment, with any further marks to LOCOM recorded in other noninterest income. Equipment received at the end of the lease to be sold, is marked to LOCOM with the adjustment recorded in other noninterest income. Initial direct costs are amortized over the lease term. Sales-type and direct financing leases are carried at the aggregate of lease payments receivable and estimated residual value of the leased property, if applicable, less unearned income. Interest income is recognized over the term of the leases to achieve a constant periodic rate of return on the outstanding investment. Our finance lease activity primarily relates to leasing of new equipment with the equipment purchase price equal to fair value and therefore there is no selling profit or loss at lease commencement. Lease components are separated from non-lease components that transfer a good or service to the customer; and the non-lease components in our lease contracts are accounted for in accordance with ASC 310 Receivables . BancShares utilizes the operating lease practical expedient for its Rail portfolio leases to not separate non-lease components of railcar maintenance services from associated lease components, and as a result rental income includes the maintenance non-lease component. This practical expedient is available when both of the following are met: (i) the timing and pattern of transfer of the non-lease components and associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease. We manage and evaluate residual risk by performing periodic reviews of estimated residual values and monitoring levels of residual realizations. A change in estimated operating lease residual values would result in a change in future depreciation expense. A change in estimated finance lease residual values during the lease term impacts the ACL as the lessor considers both the lease receivable and the unguaranteed residual asset when determining the finance lease net investment allowance. 106 Impairment of Operating Lease Equipment A review for impairment of our operating lease equipment is performed at least annually or when events or changes in circumstances indicate that the carrying amount of these long-lived assets may not be recoverable. Impairment of long-lived assets is determined by comparing the carrying amount to future undiscounted net cash flows expected to be generated. If a long-lived asset is impaired, the impairment is the amount by which the carrying amount exceeds the fair value of the long-lived asset. Fair value is based upon discounted cash flow analysis and available market data. Current lease rentals, as well as relevant and available market information (including third party sales for similar equipment and published appraisal data), are considered both in determining undiscounted future cash flows when testing for the existence of impairment and in determining estimated fair value in measuring impairment. Depreciation expense is adjusted when the projected fair value is below the projected book value at the end of the depreciable life. Lessee Arrangements BancShares leases certain branch locations, administrative offices and equipment. Operating lease right of use assets (“ROU assets”) are included in other assets and the associated lease obligations are included in other liabilities. Finance leases are included in premises and equipment and other borrowings. See Note 13 — Borrowings for additional information. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets; BancShares instead recognizes lease expense for these leases on a straight-line basis over the lease term. ROU assets represent BancShares' right to use an underlying asset for the lease term and lease liabilities represent BancShares' corresponding obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets also include initial direct costs and pre-paid lease payments made, excluding lease incentives. As most of BancShares' leases do not provide an implicit rate, BancShares uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is determined using secured rates for new FHLB advances under similar terms as the lease at inception. Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at BancShares' sole discretion. When it is reasonably certain BancShares will exercise its option to renew or extend the lease term, the option is included in calculating the value of the ROU asset and lease liability. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. BancShares determines if an arrangement is a lease at inception. BancShares’ lease agreements do not contain any material residual value guarantees or material restrictive covenants. BancShares does not lease any properties or facilities from any related party. As of December 31, 2022, there were no leases that have not yet commenced that would have a material impact on BancShares’ consolidated financial statements. See Note 6 — Leases for additional information. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price of an acquired entity over the fair value of the identifiable assets acquired. Goodwill is not amortized, but is evaluated at least annually for impairment during the third quarter, or when events or changes in circumstances indicate a potential impairment exists. Other acquired intangible assets with finite lives, such as core deposit intangibles, are initially recorded at fair value and are amortized over their average estimated useful lives. Intangible assets are evaluated for impairment when events or changes in circumstances indicate a potential impairment exists. See Note 8 — Goodwill and Other Intangibles for additional information . Other Real Estate Owned Other Real Estate Owned (“OREO”) includes foreclosed real estate property and closed branch properties. Foreclosed real estate property in OREO is initially recorded at the asset’s estimated fair value less costs to sell. Any excess in the recorded investment in the loan over the estimated fair value less costs to sell is charged-off against the ACL at the time of foreclosure. If the estimated value of the OREO exceeds the recorded investment of the loan, the difference is recorded as a gain within other income. OREO is subsequently carried at the lower of cost or market value less estimated selling costs and is evaluated at least annually. The periodic evaluations are generally based on the appraised value of the property and may include additional adjustments based upon management’s review of the valuation estimate and specific knowledge of the property. Routine maintenance costs, income and expenses related to the operation of the foreclosed asset, subsequent declines in market value and net gains or losses on disposal are included in collection and foreclosure-related expense. 107 Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Land is carried at cost. Depreciation expense is generally computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements and capitalized leases are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the assets. BancShares reviews premises and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and when an impairment loss is recognized the adjusted carrying amount will be its new cost basis to depreciate over the remaining useful life of the asset. Derivative Financial Instruments BancShares did not have any significant derivative financial instruments prior to completion of the CIT Merger. However, BancShares acquired various derivative financial instruments in connection with the CIT Merger as further described in Note 14 — Derivative Financial Instruments. BancShares manages economic risk and exposure to interest rate and foreign currency risk through derivative transactions in over-the-counter markets with other financial institutions. BancShares also offers derivative products to its customers in order for them to manage their interest rate and currency risks. BancShares does not enter into derivative financial instruments for speculative purposes. Derivatives utilized by BancShares may include swaps, forward settlement contracts, options contracts and risk participations. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined future date, and rate or price. An option contract is an agreement that gives the buyer the right, but not the obligation, to buy or sell an underlying asset from or to another party at a predetermined price or rate over a specific period of time. A risk participation is a financial guarantee, in exchange for a fee, that gives the buyer the right to be made whole in the event of a predefined default event. BancShares documents, at inception, all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking various hedges. Upon executing a derivative contract, BancShares designates the derivative as either a qualifying hedge or non-qualifying hedge. The designation may change based upon management’s reassessment of circumstances. BancShares does not have any qualifying fair value, cash flow or net investment hedges as of December 31, 2022. BancShares provides interest rate derivative contracts to support the business requirements of its customers. The derivative contracts include interest rate swap agreements and interest rate cap and floor agreements wherein BancShares acts as a seller of these derivative contracts to its customers. To mitigate the market risk associated with these customer derivatives, BancShares enters into similar offsetting positions with broker-dealers. BancShares has both bought and sold credit protection in the form of participations in interest rate swaps (risk participations). These risk participations were entered into in the ordinary course of business to facilitate customer credit needs. Swap participations where BancShares has sold credit protection have maturities ranging between 2023 and 2036 and may require BancShares to make payment to the counterparty if the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. BancShares uses foreign currency forward contracts, interest rate swaps, and options to hedge interest rate and foreign currency risks arising from its asset and liability mix. These are treated as economic hedges. All derivative instruments are recorded at their respective fair value. BancShares reports all derivatives on a gross basis in the Consolidated Balance Sheets and does not offset derivative assets and liabilities and cash collateral under master netting agreements except for swap contracts cleared by the Chicago Mercantile Exchange and LCH Clearnet. These swap contracts are accounted as “settled-to-market” and cash variation margin paid or received is characterized as settlement of the derivative exposure. Variation margin balances are offset against the corresponding derivative asset and liability balances on the balance sheet. Nonqualifying hedges are presented in the Consolidated Balance Sheets in other assets or other liabilities, with their resulting gains or losses recognized in other noninterest income. For non-qualifying derivatives with periodic interest settlements, BancShares reports such settlements with other changes in fair value in other noninterest income. Fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. Valuations of derivative assets and liabilities reflect the value of the instrument including BancShares’ and the counterparty’s credit risk. 108 BancShares is exposed to credit risk to the extent that the counterparty fails to perform under the terms of a derivative agreement. Losses related to credit risk are reflected in other noninterest income. BancShares manages this credit risk by requiring that all derivative transactions entered into as hedges be conducted with counterparties rated investment grade at the initial transaction by nationally recognized rating agencies, and by setting limits on the exposure with any individual counterparty. In addition, pursuant to the terms of the Credit Support Annexes between BancShares and its counterparties, BancShares may be required to post collateral or may be entitled to receive collateral in the form of cash or highly liquid securities depending on the valuation of the derivative instruments as measured on a daily basis. See Note 14 — Derivative Financial Instruments for additional information. Mortgage Servicing Rights Mortgage servicing rights (“MSRs”) represent the right to provide servicing under various loan servicing contracts when servicing is retained in connection with a loan sale or acquired in a business combination. MSRs are initially recorded at fair value and amortized in proportion to, and over the period of, the future net servicing income of the underlying loan. At each reporting period, MSRs are evaluated for impairment based upon the fair value of the rights as compared to the carrying value. See Note 9 — Mortgage Servicing Rights for additional information. Fair Values Fair Value Hierarchy BancShares measures the fair value of its financial assets and liabilities in accordance with ASC 820 Fair Value Measurement , which defines fair value, establishes a consistent framework for measuring fair value and requires disclosures about fair value measurements. BancShares categorizes its financial instruments based on the significance of inputs to the valuation techniques according to the following three-tier fair value hierarchy: • Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. Level 1 assets and liabilities include equity securities that are traded in an active exchange market. • Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include certain commercial loans, debt and equity securities with quoted prices that are traded less frequently than exchange-traded instruments, borrowings, time deposits, securities sold under customer repurchase agreements and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. • Level 3 - Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments such as collateral dependent commercial and consumer loans, as well as loans held for sale, certain available for sale corporate securities and derivative contracts whose values are determined using valuation models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. See Note 16 — Fair Value for additional information. Per Share Data Earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of Class A Common Stock and Class B Common Stock outstanding during each period. Diluted earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding increased by the weighted-average potential impact of dilutive shares. BancShares’ potential dilutive instruments include unvested RSUs assumed in the CIT Merger. The dilutive effect is computed using the treasury stock method, which assumes the conversion of these instruments. However, in periods when there is a net loss, these shares would not be included in the diluted earnings per common share computation as the result would have an anti-dilutive effect. BancShares had no potential dilutive common shares outstanding prior to the CIT Merger and did not report diluted earnings per common share for prior periods. See Note 20 — Earnings Per Common Share for additional information. Income Taxes Income taxes are accounted for using the asset and liability approach as prescribed in ASC 740, Income Taxes . Under this method, a deferred tax asset or liability is determined based on the currently enacted tax rates applicable to the period in which the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in BancShares’ income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period which includes the enactment date. 109 BancShares has unrecognized tax benefits related to the uncertain portion of tax positions BancShares has taken or expects to take. The potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities is continually monitored and evaluated. Income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where income tax returns are filed, as well as potential or pending audits or assessments by such tax auditors are evaluated on a periodic basis. BancShares files a consolidated federal income tax return and various combined and separate company state tax returns. As a result of the Inflation Reduction Act of 2022, effective for tax years beginning after December 31, 2022, BancShares may be subject to a Corporate Alternative Minimum Tax (“CAMT”). BancShares will treat any CAMT that may be applicable to tax years beginning after December 31, 2022 as a period cost. Refer to Note 21 — Income Taxes, for additional disclosures. Bank-Owned Life Insurance (“BOLI”) Banks can purchase life insurance policies on the lives of certain officers and employees and are the owner and beneficiary of the policies. These policies, known as BOLI, offset the cost of providing employee benefits. BancShares records BOLI at each policy’s respective cash surrender value (“CSV”), with changes in the CSV recorded as noninterest income in the Consolidated Statements of Income. Stock-Based Compensation BancShares did not have stock-based compensation awards prior to completion of the CIT Merger. Certain CIT employees received grants of restricted stock unit awards (“CIT RSUs”) or performance stock unit awards (“CIT PSUs”). Upon completion of the CIT Merger and pursuant to the terms of the Merger Agreement, (i) the CIT RSUs and CIT PSUs converted into “BancShares RSUs” based on the 0.062 exchange ratio (the “Exchange Ratio”) and (ii) the BancShares RSUs became subject to the same terms and conditions (including vesting terms, payment timing and rights to receive dividend equivalents) applicable to the CIT RSUs and CIT PSUs, except that vesting for the converted CIT PSUs was no longer subject to any performance goals or metrics. Upon completion of the CIT Merger, the fair value of the BancShares RSUs was determined based on the closing share price of the Parent Company’s Class A Common Stock (the “Class A Common Stock”) on January 3, 2022. The fair value of the BancShares RSUs is (i) included in the purchase price consideration for the portion related to employee services provided prior to completion of the CIT Merger and (ii) recognized in expenses for the portion related to employee services to be provided after completion of the CIT Merger. For “graded vesting” awards, each vesting tranche of the award is amortized separately as if each were a separate award. For “cliff vesting” awards, compensation expense is recognized over the requisite service period. BancShares recognizes the effect of forfeitures in compensation expense when they occur. In the event of involuntary termination of employees after the Merger Date (as defined below), vesting occurs on the employee termination date for BancShares RSUs subject to change in control provisions. Expenses related to stock-based compensation are included in merger-related expenses in the Consolidated Statements of Income. Stock-based compensation is discussed further in Note 22 — Employee Benefit Plans. Members of the CIT Board of Directors had RSU awards, stock settled annual awards, and deferred stock-settled annual awards (collectively, the “CIT Director Equity Awards”), which vested immediately upon the completion of the CIT Merger. The fair value of the CIT Director Equity Awards was determined based on the Exchange Ratio and the closing share price of the Class A Common Stock on January 3, 2022, and was included in the purchase price consideration disclosed in Note 2 — Business Combinations. Defined Benefit Pension Plans and Other Postretirement Benefits BancShares has both funded and unfunded noncontributory defined benefit pension and postretirement plans covering certain employees. The calculation of the obligations and related expenses under the plans require the use of actuarial valuation methods and assumptions. Actuarial assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used. All assumptions are reviewed annually for appropriateness. The discount rate assumption used to measure the plan obligations is based on a yield curve developed from high-quality corporate bonds across a full maturity spectrum. The projected cash flows of the pension plans are discounted based on this yield curve, and a single discount rate is calculated to achieve the same present value. The assumed rate of future compensation increases is based on actual experience and future salary expectations. BancShares also estimates a long-term rate of return on pension plan assets used to estimate the future value of plan assets. In developing the long-term rate of return, BancShares considers such factors as the actual return earned on plan assets, historical returns on the various asset classes in the plans and projections of future returns on various asset classes. In conjunction with the CIT Merger, BancShares assumed the funded and unfunded noncontributory defined benefit pension and postretirement plans of CIT. The postretirement plans acquired were terminated during the year. See Note 22 — Employee Benefit Plans for disclosures related to the plans. 110 Revenue Recognition Interest income on HFI loans is recognized using the effective interest method or on a basis approximating a level rate of return over the life of the asset. Interest income includes components of accretion of the fair value discount on loans and lease receivables recorded in connection with purchase accounting adjustments (“PAA”), which are accreted using the effective interest method as a yield adjustment over the remaining contractual term of the loan and recorded in interest income. If the loan is subsequently classified as held for sale, accretion (amortization) of the discount (premium) will cease. Interest income on loans HFI and held for sale is included in interest and fees on loans in the Consolidated Statements of Income. Interest on investment securities and interest on interest-earning deposits at banks is recognized in interest income on an accrual basis. Amortization of premiums and accretion of discounts for investment securities are included in interest on investment securities. Dividends received from marketable equity securities are recognized within interest on investment securities. BancShares generally acts in a principal capacity, on its own behalf, in its contracts with customers. In these transactions, BancShares recognizes revenues and the related costs to generate those revenues on a gross basis. In certain, circumstances, BancShares acts in an agent capacity, on behalf of the customers with other entities, and recognizes revenues and the related costs to provide BancShares' services on a net basis. BancShares acts as an agent when providing certain cardholder and merchant, insurance, and brokerage services. Descriptions of BancShares' noninterest revenue-generating activities are broadly segregated as follows: Rental income on operating leases – Rental income is recognized on a straight-line basis over the lease term for lease contract fixed payments and is included in noninterest income. Rental income also includes variable lease income which is recognized as earned. The accrual of rental income on operating leases is suspended when the collection of substantially all rental payments is no longer probable and rental income for such leases is recognized when cash payments are received. In the period we conclude that collection of rental payments is no longer probable, accrued but uncollected rental revenue is reversed against rental income. Cardholder and Merchant Services – These represent interchange fees from customer debit and credit card transactions earned when a cardholder engages in a transaction with a merchant as well as fees charged to merchants for providing them the ability to accept and process the debit and credit card transaction. Revenue is recognized when the performance obligation has been satisfied, which is upon completion of the card transaction. Additionally, as BancShares is acting as an agent for the customer and transaction processor, costs associated with cardholder and merchant services transactions are netted against the fee income. Service charges on deposit accounts – These deposit account-related fees represent monthly account maintenance and transaction-based service fees, such as overdraft fees, stop payment fees and charges for issuing cashier’s checks and money orders. For account maintenance services, revenue is recognized at the end of the statement period when BancShares' performance obligation has been satisfied. All other revenues from transaction-based services are recognized at a point in time when the performance obligation has been completed. Wealth management services – These primarily represent sales commissions on various product offerings, transaction fees and trust and asset management fees. The performance obligation for wealth management services is the provision of services to place annuity products issued by the counterparty to investors and the provision of services to manage the client’s assets, including brokerage custodial and other management services. Revenue from wealth management services is recognized over the period in which services are performed, and is based on a percentage of the value of the assets under management/administration. Fees and other service charges – These include, but are not limited to, check cashing fees, international banking fees, internet banking fees, wire transfer fees, safe deposit fees, as well as capital market-related fees and fees on lines and letters of credit. The performance obligation is fulfilled and revenue is recognized at the point in time the requested service is provided to the customer. Insurance commissions – These represent commissions earned on the issuance of insurance products and services. The performance obligation is generally satisfied upon the issuance of the insurance policy and revenue is recognized when the commission payment is remitted by the insurance carrier or policy holder depending on whether the billing is performed by BancShares or the carrier. ATM income - These represent fees imposed on customers and non-customers for engaging in an ATM transaction. Revenue is recognized at the time of the transaction as the performance obligation of rendering the ATM service has been met. Factoring commissions – These are earned in the Commercial Banking segment and are driven by factoring volumes, principally in the retail sectors. Factoring commissions are charged as a percentage of the invoice amount of the receivables assigned to BancShares. The volume of factoring activity and the commission rates charged impact factoring commission income earned. Factoring commissions are deferred and recognized as income over time based on the underlying terms of the assigned receivables. See Commercial Loans and Leases section for additional commentary on factoring. 111 Gains on leasing equipment – These are recognized upon completion of sale (sale closing) and transfer of title. The gain is determined based on sales price less book carrying value (net of accumulated depreciation). BOLI income – This reflects income earned on changes in the CSV of the BOLI policies. Other – This consists of several forms of recurring revenue, such as FHLB dividends. For the remaining transactions, revenue is recognized when, or as, the performance obligation is satisfied. Newly Adopted Accounting Standards The following pronouncements or ASUs were issued by the FASB and adopted by BancShares as of January 1, 2022. ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity - Issued August 2020 The amendments in this ASU reduce the number of models used to account for convertible instruments, amend diluted earnings per share calculations for convertible instruments, amend the requirements for a contract (or embedded derivative) that is potentially settled in an entity’s own shares to be classified in equity, and expand disclosure requirements for convertible instruments. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares does not have any convertible instruments within the scope of this ASU. ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options - Issued May 2021 The amendments in this ASU clarify an issuer's accounting for certain modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The ASU requires that such modifications or exchanges be treated as an exchange of the original instrument for a new instrument. An issuer should measure the effect of such modifications or exchanges based on analysis of the difference between the fair value of the modified instrument and the fair value of that instrument immediately before modification or exchange. Recognition of a modification or an exchange of a freestanding equity-classified written call option is then based upon the substance of the transaction. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares currently does not have any freestanding equity-classified written call options within the scope of this ASU. ASU 2021-05, Leases, (Topic 842), Lessors - Certain Leases with Variable Lease Payments - Issued July 2021 The amendments in this ASU improve lessor accounting for certain leases with variable lease payments so that lessors are no longer required to recognize a day-one selling loss upon lease commencement when specified criteria are met. Specifically, this ASU requires a lessor to classify a lease with variable payments that do not depend on a reference index or a rate as an operating lease if classifying the lease as a sales-type lease or a direct financing lease would result in the recognition of a day-one selling loss at lease commencement. A day-one selling loss is not recognized under operating lease accounting. The adoption of this ASU did not have a material impact on BancShares’ consolidated financial statements and disclosures as BancShares has not originated finance leases which required a day-one selling loss at lease commencement. Recently Issued Accounting Standards ASU 2022-02 Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures- Issued March 2022 For creditors that have adopted CECL, the amendments in this ASU: (i) eliminate the previous recognition and measurement guidance for TDRs, (ii) require new disclosures for loan modifications when a borrower is experiencing financial difficulty (the “Modification Disclosures”) and (iii) require disclosures of current period gross charge-offs by year of origination in the vintage disclosures (the “Gross Charge-off Vintage Disclosures”). The Modification Disclosures apply to the following modification types: principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, or a combination thereof. Creditors will be required to disclose the following by loan class: (i) amounts and relative percentages of each modification type, (ii) the financial effect of each modification type, including the amount of principal forgiveness and reduction in weighted average interest rate, (iii) the performance of the loan in the 12 months following the modification and (iv) qualitative information discussing how the modifications factored into the determination of the ACL. BancShares adopted ASU 2022-02 as of January 1, 2023 and elected to apply the modified retrospective transition method for ACL recognition and measurement. As a result of adopting this ASU, BancShares does not expect a material change to its ACL related to loans previously modified as a TDR and, therefore, does not expect a material cumulative effect adjustment to retained earnings as of January 1, 2023. The Modification Disclosures and Gross Charge-off Vintage Disclosures are required to be applied prospectively, beginning in BancShares’ Quarterly Report on Form 10-Q as of and for the three months ending March 31, 2023. 112 NOTE 2 — BUSINESS COMBINATIONS CIT Group Inc. BancShares completed the CIT Merger on January 3, 2022 (the “Merger Date”). Pursuant to the Merger Agreement, each share of CIT common stock, par value $ 0.01 per share (“CIT Common Stock”), issued and outstanding, except for certain shares of CIT Common Stock owned by CIT or BancShares, was converted into the right to receive 0.062 shares of Class A Common Stock, par value $ 1.00 per share, plus cash in lieu of fractional shares of Class A Common Stock. The Parent Company issued approximately 6.1 million shares of Class A Common Stock in connection with the consummation of the CIT Merger. The closing share price of Class A Common Stock on the Nasdaq Global Select Market was $ 859.76 on January 3, 2022. The purchase price consideration related to the issuance of Class A Common Stock was $ 5.3 billion. There were approximately 8,800 fractional shares for which the Parent Company paid cash of $ 7 million. Pursuant to the terms of the Merger Agreement, each issued and outstanding share of fixed-to-floating rate non-cumulative perpetual preferred stock, series A, par value $ 0.01 per share, of CIT (“CIT Series A Preferred Stock”) and each issued and outstanding share of 5.625 % non-cumulative perpetual preferred stock, series B, par value $ 0.01 per share, of CIT (“CIT Series B Preferred Stock” and together with CIT Series A Preferred Stock, “CIT Preferred Stock”), converted into the right to receive one share of a newly created series of preferred stock, series B, of the Parent Company (“BancShares Series B Preferred Stock”) and one share of a newly created series of preferred stock, series C, of the Parent Company (“BancShares Series C Preferred Stock” and together with the BancShares Series B Preferred Stock, the “New BancShares Preferred Stock”), respectively, having such rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, that are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, of the CIT Series A Preferred Stock and the CIT Series B Preferred Stock, respectively. The non-callable period for the New BancShares Preferred Stock is January 4, 2027, which is five years from the original issuance date of the New BancShares Preferred Stock. There are 325,000 shares of BancShares Series B Preferred Stock with a liquidation preference of $ 1,000 per share, resulting in a total liquidation preference of $ 325 million. There are 8 million shares of BancShares Series C Preferred Stock with a liquidation preference of $ 25 per share, resulting in a total liquidation preference of $ 200 million. The New BancShares Preferred Stock qualifies as Tier 1 capital. The purchase price consideration related to the fair value of the New BancShares Preferred Stock was $ 541 million. CIT RSUs and PSUs converted to BancShares RSUs, and CIT Director Equity Awards immediately vested upon completion of the CIT Merger, as further described in the “Stock-Based Compensation” discussion in Note 1 — Significant Accounting Policies and Basis of Presentation. The aggregate purchase price consideration related to these compensation awards was $ 81 million. The CIT Merger has been accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values based on the acquisition date. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the merger and other future events that are highly subjective in nature. Purchase accounting could change until management finalized its analysis of the acquired assets and assumed liabilities, up to one year from the Merger Date. As of December 31, 2022, fair value measurements were finalized. 113 The following table provides a purchase price allocation to the identifiable assets acquired and liabilities assumed at their estimated fair values as of the Merger Date: Purchase Price Consideration and Net Assets Acquired dollars in millions, except shares issued and price per share Purchase Price Allocation Common share consideration Shares of Class A Common Stock issued 6,140,010 Price per share on January 3, 2022 $ 859.76 Common stock consideration $ 5,279 Preferred stock consideration 541 Stock-based compensation consideration 81 Cash in lieu of fractional shares and other consideration paid 51 Purchase price consideration $ 5,952 Assets Cash and interest-earning deposits at banks $ 3,060 Investment securities 6,561 Assets held for sale 59 Loans and leases 32,714 Operating lease equipment 7,838 Bank-owned life insurance 1,202 Intangible assets 143 Other assets 2,198 Total assets acquired $ 53,775 Liabilities Deposits $ 39,428 Borrowings 4,536 Credit balances of factoring clients 1,534 Other liabilities 1,894 Total liabilities assumed $ 47,392 Fair value of net assets acquired 6,383 Gain on acquisition $ 431 BancShares recorded a gain on acquisition of $ 431 million in noninterest income, representing the excess of the fair value of net assets acquired over the purchase price. The gain on acquisition is not taxable. The following is a description of the methods used to determine the estimated fair values of significant assets acquired and liabilities assumed as presented above. Cash and interest-earning deposits at banks For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value. Investment securities Fair values for investment securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models and/or discounted cash flows methodologies. Assets held for sale and loans and leases Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, fixed or variable interest rate, remaining term, credit quality ratings or scores, amortization status and current discount rate. Selected larger, impaired loans were specifically reviewed to evaluate credit risk. Loans with similar risk characteristics were pooled together when applying various valuation techniques. The discount rates used for loans were based on an evaluation of current market rates for new originations of comparable loans and required rates of return for market participants to purchase similar assets, including adjustments for liquidity and credit quality when necessary. 114 BancShares’ accounting methods for acquired loans and leases are discussed in Note 1 — Significant Accounting Policies and Basis of Presentation. The following table presents the UPB and fair value of the loans and leases acquired by BancShares in the CIT Merger. The UPB for PCD loans and leases includes the PCD Gross-Up of $ 272 million as discussed further in Note 4 — Loans and Leases. Loans Acquired dollars in millions Loans and Leases UPB Fair Value Non-PCD loans and leases $ 29,542 $ 29,481 PCD loans and leases 3,550 3,233 Total loans and leases $ 33,092 $ 32,714 Operating Lease Equipment Operating lease equipment were comprised of two sub-groups: rail and non-rail equipment. Fair values for both were based on the cost approach where market values were not available. The sales approach was used to value rail assets where market information was available, or when replacement cost less depreciation was lower than the current market value. An intangible liability was recorded for net below market lease contracts rental rates, for which fair value was estimated using the income approach and market lease rates and other key inputs. A discount was recorded for operating lease equipment, which includes railcars, locomotives and other equipment, to reduce it to fair value. This adjustment will reduce depreciation expense over the remaining useful lives of the equipment on a straight-line basis. The intangible liability (see Note 8 — Goodwill and Other Intangibles) will be amortized, thereby increasing rental income (a component of noninterest income) over the remaining term of the lease agreements on a straight-line basis. Bank Owned Life Insurance The fair values of BOLI policies were determined by the policy administrator and calculated based on the net present value of investment cash flows. Expected premium payments, death benefits and expected mortality were considered in the net present value calculation. Based upon the administrator’s analysis and management’s review of the analysis, fair value was determined to equate to book value as of the merger date. Intangible assets The following table presents the intangible asset recorded in conjunction with the CIT Merger related to the valuation of core deposits: Intangible Assets dollars in millions Fair Value Estimated Useful Life Amortization Method Core deposit intangibles $ 143 10 years Straight-line Certain core deposits were acquired as part of the CIT Merger, which provide an additional source of funds for BancShares. The core deposit intangibles represent the costs saved by BancShares by acquiring the core deposits rather than sourcing the funds elsewhere. This intangible was valued using the income approach, after-tax cost savings method. This method estimates the fair value by discounting to present value the favorable funding spread attributable to the core deposit balances over their estimated average remaining life. The favorable funding spread is calculated as the difference in the alternative cost of funds and the net deposit cost. Refer to Note 8 — Goodwill and Other Intangibles for further discussion. 115 Other assets The following table details other assets acquired: Other Assets dollars in millions Fair Value Low-income housing tax credits and other investments $ 777 Right of use assets 327 Premises and equipment 230 Fair value of derivative financial instruments 209 Counterparty receivables 133 Other 522 Total other assets $ 2,198 The fair values of the tax credit investments considered the ongoing equity installments that are regularly allocated to each of the underlying tax credit funds comprising the low-income housing tax credits investments, along with changes to projected tax benefits and the impact this has on future capital contributions, and an appropriately determined discount rate. The fair value of the investments in unconsolidated entities was valued using the income approach. The right of use asset associated with real estate operating leases were measured at the same amount as the lease liability as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms. The lease liability was measured at the present value of the remaining lease payments, as if the acquired lease were a new lease of the acquirer at the acquisition date and using BancShares incremental borrowing rate. The lease term was determined for individual leases based on management’s assessment of the probability of exercising the existing renewal, termination and/or purchase option. Fair values for property, including leasehold improvements, furniture and fixtures, computer software and other digital equipment were determined using the cost approach. Certain tangible assets that are expected to be sold in the short term were reported at net book. Real estate property, such as land and buildings, was valued using the sales comparison approach, where sales of comparable properties are adjusted for differences to estimate the value of each subject property. The fair values of the derivative financial instruments, as well as counterparty receivables, were valued using prices of financial instruments with similar characteristics and observable inputs. Deposits The fair values for time deposits were estimated using a discounted cash flow analysis whereby the contractual remaining cash flows were discounted using market rates currently being offered for time deposits of similar maturities. For transactional deposits, carrying amounts approximate fair value. Borrowings In connection with the CIT Merger, BancShares assumed the outstanding borrowings of CIT. The fair values of borrowings were estimated based on readily observable prices using reliable market sources. Credit balances of Factoring Clients Credit balance amounts represent short-term payables that are tied to the factoring receivables. Due to the short-term nature of these payables and given that amounts are settled at book value, it was determined that the carrying value is equivalent to fair value. Other Liabilities Other liabilities include items such as accounts payable and accrued liabilities, lease liabilities, current and deferred taxes, commitments to fund tax credit investments and other miscellaneous liabilities. The fair value of lease liabilities was measured using the present value of remaining lease payments, using BancShares’ discount rate at the merger date. The fair value of the remaining liabilities was determined to approximate book value. For all accrued liabilities and accounts payable, it was determined that the carrying value equals book value. 116 Unaudited Pro Forma Information The amount of interest income, noninterest income and net income of $ 1.75 billion, $ 1.24 billion and $ 587 million, respectively, attributable to the acquisition of CIT were included in BancShares’ Consolidated Statement of Income for the year ended December 31, 2022. CIT’s interest income, noninterest income and net income noted above reflect management’s best estimates, based on information available at the reporting date. The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the year ended December 31, 2022 and 2021 as if CIT had been acquired on January 1, 2021. The unaudited estimated pro forma information combines the historical results of CIT and BancShares and includes certain pro forma adjustments. The key pro forma adjustments relate to the following items that were recognized in BancShares Consolidated Statement of Income for the year ended December 31, 2022, but were reflected in 2021 for the pro forma financial information: (i) provision for credit losses of $ 513 million related to the Non-PCD loans and leases and unfunded commitments; (ii) merger-related expenses of $ 231 million; (iii) estimated PAA accretion and amortization related to fair value adjustments and intangibles associated with the CIT Merger; and (iv) $ 431 million gain on acquisition. BancShares expects to achieve operating cost savings and other business synergies as a result of the acquisition that are not reflected in the pro forma amounts that follow. The pro forma information should not be relied upon as being indicative of the historical results of operations that would have occurred had the acquisition taken place on January 1, 2021. Actual results may differ from the unaudited pro forma information presented below and the differences could be significant. Selected Unaudited Pro Forma Financial Information for Consolidated BancShares dollars in millions Year Ended December 31, 2022 2021 Interest income $ 3,413 $ 2,867 Noninterest income 1,705 2,537 Net income 1,225 1,497 117 NOTE 3 — INVESTMENT SECURITIES The following tables as of December 31, 2022 include the investment security balances acquired in the CIT Merger, which were recorded at fair value on the acquisition date. The amortized cost and fair value of investment securities at December 31, 2022 and 2021, were as follows: Amortized Cost and Fair Value - Debt Securities dollars in millions December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Investment securities available for sale U.S. Treasury $ 2,035 $ — $ ( 137 ) $ 1,898 Government agency 164 — ( 2 ) 162 Residential mortgage-backed securities 5,424 1 ( 630 ) 4,795 Commercial mortgage-backed securities 1,774 — ( 170 ) 1,604 Corporate bonds 570 — ( 34 ) 536 Total investment securities available for sale $ 9,967 $ 1 $ ( 973 ) $ 8,995 Investment in marketable equity securities $ 75 $ 21 $ ( 1 ) $ 95 Investment securities held to maturity U.S. Treasury $ 474 $ — $ ( 50 ) $ 424 Government agency 1,548 — ( 186 ) 1,362 Residential mortgage-backed securities 4,605 — ( 723 ) 3,882 Commercial mortgage-backed securities 3,355 — ( 484 ) 2,871 Supranational securities 295 — ( 41 ) 254 Other 2 — — 2 Total investment securities held to maturity $ 10,279 $ — $ ( 1,484 ) $ 8,795 Total investment securities $ 20,321 $ 22 $ ( 2,458 ) $ 17,885 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Investment securities available for sale U.S. Treasury $ 2,007 $ — $ ( 2 ) $ 2,005 Government agency 221 1 ( 1 ) 221 Residential mortgage-backed securities 4,757 8 ( 36 ) 4,729 Commercial mortgage-backed securities 1,648 9 ( 17 ) 1,640 Corporate bonds 582 27 ( 1 ) 608 Total investment securities available for sale $ 9,215 $ 45 $ ( 57 ) $ 9,203 Investment in marketable equity securities $ 73 $ 25 $ — $ 98 Investment securities held to maturity Residential mortgage-backed securities $ 2,322 $ 6 $ ( 22 ) $ 2,306 Commercial mortgage-backed securities 1,485 — ( 34 ) 1,451 Other 2 — — 2 Total investment securities held to maturity $ 3,809 $ 6 $ ( 56 ) $ 3,759 Total investment securities $ 13,097 $ 76 $ ( 113 ) $ 13,060 Investments in mortgage-backed securities represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. U.S. Treasury investments represents T-bills and Notes issued by the U.S. Treasury. Investments in government agency securities represent securities issued by the Small Business Association, FHLB and other agencies. Investments in supranational securities represent securities issued by the Supranational Entities and Multilateral Development Banks. Investments in corporate bonds represent positions in debt securities of other financial institutions. Investments in marketable equity securities represent positions in common stock of publicly traded financial institutions. Other held to maturity investments include certificates of deposit with other financial institutions. 118 BancShares also holds approximately 354,000 shares of Class B common stock of Visa. Until the resolution of certain litigation, at which time the Visa Class B common stock will convert to publicly traded Visa Class A common stock, these shares are only transferable to other stockholders of Visa Class B common stock. As a result, there is limited transfer activity in private transactions between buyers and sellers. Given this limited trading activity and the continuing uncertainty regarding the likelihood, ultimate timing and eventual exchange rate for shares of Visa Class B common stock into shares of Visa Class A common stock, these shares are not considered to have a readily determinable fair value and have no carrying value. BancShares continues to monitor the trading activity in Visa Class B common stock and the status of the resolution of certain litigation matters at Visa that would trigger the conversion of the Visa Class B common stock into Visa Class A common stock. Accrued interest receivables for available for sale and held to maturity debt securities were excluded from the estimate for credit losses. At December 31, 2022, accrued interest receivables for available for sale and held to maturity debt securities were $ 33 million and $ 19 million, respectively. At December 31, 2021, accrued interest receivables for available for sale and held to maturity debt securities were $ 22 million and $ 7 million, respectively. During the year ended December 31, 2022 and 2021, there was no accrued interest that was deemed uncollectible and written off against interest income. The following table provides the amortized cost and fair value by contractual maturity. Expected maturities will differ from contractual maturities on certain securities because borrowers and issuers may have the right to call or prepay obligations with or without prepayment penalties. Residential and commercial mortgage-backed and government agency securities are stated separately as they are not due at a single maturity date. Maturities - Debt Securities dollars in millions December 31, 2022 December 31, 2021 Cost Fair Value Cost Fair Value Investment securities available for sale Non-amortizing securities maturing in: One year or less $ 37 $ 37 $ — $ — After one through five years 2,068 1,928 2,049 2,048 After five through 10 years 483 455 523 548 After 10 years 17 14 17 17 Government agency 164 162 221 221 Residential mortgage-backed securities 5,424 4,795 4,757 4,729 Commercial mortgage-backed securities 1,774 1,604 1,648 1,640 Total investment securities available for sale $ 9,967 $ 8,995 $ 9,215 $ 9,203 Investment securities held to maturity Non-amortizing securities maturing in: One year or less $ 51 $ 51 $ 2 $ 2 After one through five years 1,479 1,328 — — After five through 10 years 789 663 — — Residential mortgage-backed securities 4,605 3,882 2,322 2,306 Commercial mortgage-backed securities 3,355 2,871 1,485 1,451 Total investment securities held to maturity $ 10,279 $ 8,795 $ 3,809 $ 3,759 119 T he following table presents interest and dividend income on investment securities. Interest and Dividends on Investment Securities dollars in millions Year ended December 31 2022 2021 2020 Interest income - taxable investment securities $ 352 $ 143 $ 140 Dividend income - marketable equity securities 2 2 4 Interest on investment securities $ 354 $ 145 $ 144 The following table provides the gross realized gains and losses on the sales of investment securities available for sale: Realized Gains on Debt Securities Available For Sale dollars in millions Year ended December 31 2022 2021 2020 Gross realized gains on sales of investment securities available for sale $ — $ 33 $ 61 Gross realized losses on sales of investment securities available for sale — — ( 1 ) Net realized gains on sales of investment securities available for sale $ — $ 33 $ 60 The following table provides the fair value adjustment on marketable equity securities: Fair Value Adjustment on Marketable Equity Securities dollars in millions Year ended December 31 2022 2021 2020 Fair value adjustment on marketable equity securities, net $ ( 3 ) $ 34 $ 29 The following table provides information regarding investment securities available for sale with unrealized losses for which an ACL has not been recorded: Gross Unrealized Losses on Debt Securities Available For Sale dollars in millions December 31, 2022 Less than 12 months 12 months or more Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Investment securities available for sale U.S. Treasury $ 403 $ ( 27 ) $ 1,495 $ ( 110 ) $ 1,898 $ ( 137 ) Government agency 65 ( 1 ) 62 ( 1 ) 127 ( 2 ) Residential mortgage-backed securities 1,698 ( 165 ) 3,001 ( 465 ) 4,699 ( 630 ) Commercial mortgage-backed securities 836 ( 53 ) 752 ( 117 ) 1,588 ( 170 ) Corporate bonds 499 ( 30 ) 37 ( 4 ) 536 ( 34 ) Total $ 3,501 $ ( 276 ) $ 5,347 $ ( 697 ) $ 8,848 $ ( 973 ) December 31, 2021 Less than 12 months 12 months or more Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Investment securities available for sale U.S. Treasury $ 1,811 $ ( 2 ) $ — $ — $ 1,811 $ ( 2 ) Government agency 17 — 79 ( 1 ) 96 ( 1 ) Residential mortgage-backed securities 3,992 ( 36 ) 1 — 3,993 ( 36 ) Commercial mortgage-backed securities 852 ( 15 ) 111 ( 2 ) 963 ( 17 ) Corporate bonds 52 ( 1 ) — — 52 ( 1 ) Total $ 6,724 $ ( 54 ) $ 191 $ ( 3 ) $ 6,915 $ ( 57 ) 120 As of December 31, 2022, there were 151 investment securities available for sale with continuous unrealized losses for more than 12 months, of which 144 were government sponsored enterprise-issued mortgage-backed securities or government agency securities and the remaining seven related to corporate bonds. None of the unrealized losses identified as of December 31, 2022 or December 31, 2021, relate to the issuer’s ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the investment securities were purchased, and do not indicate credit-related impairment. BancShares considered other factors including changes in credit ratings, delinquencies, and other macroeconomic factors in this determination. As a result, none of the available for sale securities were deemed to require an ACL. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the Supranational Entities and Multilateral Development Banks and Federal Deposit Insurance Corporation (“FDIC”) guaranteed CDs with other financial institutions. Given the consistently strong credit rating of the U.S. Treasury, the Supranational Entities and Multilateral Development Banks and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, as of December 31, 2022 and 2021, no ACL was required for held to maturity debt securities. Investment securities having an aggregate carrying value of $ 4.2 billion at December 31, 2022, and $ 5.7 billion at December 31, 2021, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law. A security is considered past due once it is 30 days contractually past due under the terms of the agreement. There were no securities past due as of December 31, 2022 and 2021. There were no debt securities held to maturity on non-accrual status as of December 31, 2022 and 2021. Certain investments held by BancShares were recorded in other assets. BancShares held FHLB stock of $ 197 million and $ 40 million at December 31, 2022 and 2021, respectively; these securities are recorded at cost. BancShares held $ 58 million and $ 1 million of nonmarketable securities without readily determinable fair values, which are measured at cost at December 31, 2022 and December 31, 2021, respectively. Investments in qualified affordable housing projects, all of which qualify for the proportional amortization method, were $ 598 million and $ 157 million at December 31, 2022 and 2021, respectively. 121 NOTE 4 — LOANS AND LEASES The following tables as of December 31, 2022 include loan and lease balances acquired in the CIT Merger, which were recorded at fair value on the Merger Date. Refer to Note 2 — Business Combinations for further information and to Note 1 — Significant Accounting Policies and Basis of Presentation for our accounting policies related to loans. Unless otherwise noted, loans held for sale are not included in the following tables. Leases in the following tables include finance leases, but exclude operating lease equipment. Loans by Class dollars in millions December 31, 2022 December 31, 2021 Commercial Commercial construction $ 2,804 $ 1,238 Owner occupied commercial mortgage 14,473 12,099 Non-owner occupied commercial mortgage 9,902 3,041 Commercial and industrial 24,105 5,937 Leases 2,171 271 Total commercial 53,455 22,586 Consumer Residential mortgage 13,309 6,088 Revolving mortgage 1,951 1,818 Consumer auto 1,414 1,332 Consumer other 652 548 Total consumer 17,326 9,786 Total loans and leases $ 70,781 $ 32,372 At December 31, 2022 and 2021, accrued interest receivable on loans included in other assets was $ 203 million and $ 87 million, respectively, and was excluded from the estimate of credit losses. The following table presents selected components of the amortized cost of loans. Components of Amortized Cost dollars in millions December 31, 2022 December 31, 2021 Deferred fees, including unearned fees and unamortized costs on Non-PCD loans $ 85 $ 32 Net unamortized discount on purchased loans Non-PCD $ 73 $ 11 PCD 45 29 Total net unamortized discount $ 118 $ 40 122 The aging of the outstanding loans and leases, by class, at December 31, 2022 and 2021 is provided in the tables below. Loans and leases less than 30 days past due are considered current, as various grace periods allow borrowers to make payments within a stated period after the due date and remain in compliance with the respective agreement. Loans and Leases - Delinquency Status dollars in millions December 31, 2022 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Total Past Due Current Total Commercial Commercial construction $ 50 $ — $ 1 $ 51 $ 2,753 $ 2,804 Owner occupied commercial mortgage 29 5 25 59 14,414 14,473 Non-owner occupied commercial mortgage 76 144 11 231 9,671 9,902 Commercial and industrial 173 26 53 252 23,853 24,105 Leases 59 17 16 92 2,079 2,171 Total commercial 387 192 106 685 52,770 53,455 Consumer Residential mortgage 73 16 52 141 13,168 13,309 Revolving mortgage 9 3 8 20 1,931 1,951 Consumer auto 7 1 1 9 1,405 1,414 Consumer other 4 2 3 9 643 652 Total consumer 93 22 64 179 17,147 17,326 Total loans and leases $ 480 $ 214 $ 170 $ 864 $ 69,917 $ 70,781 December 31, 2021 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Total Past Due Current Total Commercial Commercial construction $ 1 $ — $ 2 $ 3 $ 1,235 $ 1,238 Owner occupied commercial mortgage 21 1 9 31 12,068 12,099 Non-owner occupied commercial mortgage 3 — 2 5 3,036 3,041 Commercial and industrial 8 3 5 16 5,921 5,937 Leases — 1 1 2 269 271 Total commercial 33 5 19 57 22,529 22,586 Consumer Residential mortgage 24 6 23 53 6,035 6,088 Revolving mortgage 6 2 6 14 1,804 1,818 Consumer auto 6 1 1 8 1,324 1,332 Consumer other 2 2 1 5 543 548 Total consumer 38 11 31 80 9,706 9,786 Total loans and leases $ 71 $ 16 $ 50 $ 137 $ 32,235 $ 32,372 123 The amortized cost, by class, of loans and leases on non-accrual status, and loans and leases greater than 90 days past due and still accruing at December 31, 2022 and 2021 are presented below. Loans on Non-Accrual Status (1) (2) dollars in millions December 31, 2022 December 31, 2021 Non-Accrual Loans Loans > 90 Days and Accruing Non-Accrual Loans Loans > 90 Days and Accruing Commercial Commercial construction $ 48 $ — $ 4 $ — Owner occupied commercial mortgage 41 2 18 5 Non-owner occupied commercial mortgage 228 — 5 — Commercial and industrial 184 41 15 1 Leases 28 7 3 — Total commercial 529 50 45 6 Consumer Residential mortgage 75 10 54 — Revolving mortgage 18 — 18 — Consumer auto 4 — 3 — Consumer other 1 3 1 1 Total consumer 98 13 76 1 Total loans and leases $ 627 $ 63 $ 121 $ 7 (1) Accrued interest that was reversed when the loan went to non-accrual status was $ 4 million for the year ended December 31, 2022. (2) Non-accrual loans for which there was no related ACL totaled $ 63 million at December 31, 2022 and $ 15 million at December 31, 2021. OREO and repossessed assets were $ 47 million as of December 31, 2022 and $ 40 million as of December 31, 2021. Credit quality indicators Loans and leases are monitored for credit quality on a recurring basis. Commercial loans and leases and consumer loans have different credit quality indicators as a result of the unique characteristics of the loan classes being evaluated. The credit quality indicators for commercial loans and leases are developed through a review of individual borrowers on an ongoing basis. Commercial loans are evaluated periodically with more frequent evaluations done on criticized loans. The indicators as of the date presented are based on the most recent assessment performed and are defined below: Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification. Special mention – A special mention asset has potential weaknesses which deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification. Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected. Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values. Loss – Assets classified as loss are considered uncollectible and of such little value it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future. Ungraded – Ungraded loans represent loans not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at December 31, 2022 and 2021, relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. 124 The credit quality indicator for consumer loans is based on delinquency status of the borrower as of the date presented. As the borrower becomes more delinquent, the likelihood of loss increases. An exemption is applied to government guaranteed loans as the principal repayments are insured by the Federal Housing Administration and U.S. Department of Veterans Affairs and thus remain on accrual status regardless of delinquency status. The following table summarizes the commercial loans disaggregated by year of origination and by risk rating. The consumer loan delinquency status by year of origination is also presented below. The tables reflect the amortized cost of the loans and include PCD loans. Commercial Loans - Risk Classifications by Class December 31, 2022 Risk Classification: Term Loans by Origination Year Revolving Converted to Term Loans dollars in millions 2022 2021 2020 2019 2018 2017 & Prior Revolving Total Commercial construction Pass $ 1,140 $ 759 $ 511 $ 157 $ 27 $ 75 $ 42 $ — $ 2,711 Special Mention 4 — 18 18 — — — — 40 Substandard 2 — — 43 — 5 — — 50 Doubtful — — — 3 — — — — 3 Ungraded — — — — — — — — — Total commercial construction 1,146 759 529 221 27 80 42 — 2,804 Owner occupied commercial mortgage Pass 2,773 3,328 2,966 1,825 1,048 1,867 177 — 13,984 Special Mention 33 14 32 33 18 49 2 — 181 Substandard 24 47 41 28 47 114 6 — 307 Doubtful — — — — — 1 — — 1 Ungraded — — — — — — — — — Total owner occupied commercial mortgage 2,830 3,389 3,039 1,886 1,113 2,031 185 — 14,473 Non-owner occupied commercial mortgage Pass 2,501 1,658 1,794 1,397 680 933 48 — 9,011 Special Mention — 1 69 38 35 10 1 — 154 Substandard 3 11 68 324 58 236 — — 700 Doubtful — — — 17 — 20 — — 37 Ungraded — — — — — — — — — Total non-owner occupied commercial mortgage 2,504 1,670 1,931 1,776 773 1,199 49 — 9,902 Commercial and industrial Pass 7,695 4,145 2,035 1,533 872 845 5,252 29 22,406 Special Mention 87 153 79 63 52 23 40 — 497 Substandard 106 117 194 132 166 145 200 1 1,061 Doubtful 1 4 3 11 6 16 7 — 48 Ungraded — — — — — — 93 — 93 Total commercial and industrial 7,889 4,419 2,311 1,739 1,096 1,029 5,592 30 24,105 Leases Pass 718 466 389 216 80 108 — — 1,977 Special Mention 21 22 17 9 4 — — — 73 Substandard 32 32 27 12 7 1 — — 111 Doubtful 2 3 2 1 1 — — — 9 Ungraded — — — — — 1 — — 1 Total leases 773 523 435 238 92 110 — — 2,171 Total commercial $ 15,142 $ 10,760 $ 8,245 $ 5,860 $ 3,101 $ 4,449 $ 5,868 $ 30 $ 53,455 125 Consumer Loans - Delinquency Status by Class December 31, 2022 Days Past Due: Term Loans by Origination Year Revolving Converted to Term Loans dollars in millions 2022 2021 2020 2019 2018 2017 & Prior Revolving Total Residential mortgage Current $ 3,485 $ 3,721 $ 2,097 $ 805 $ 413 $ 2,625 $ 22 $ — $ 13,168 30-59 days 3 7 6 5 3 49 — — 73 60-89 days 1 1 2 — 1 11 — — 16 90 days or greater — 1 1 2 2 46 — — 52 Total residential mortgage 3,489 3,730 2,106 812 419 2,731 22 — 13,309 Revolving mortgage Current — — — — — — 1,839 92 1,931 30-59 days — — — — — — 5 4 9 60-89 days — — — — — — 2 1 3 90 days or greater — — — — — — 5 3 8 Total revolving mortgage — — — — — — 1,851 100 1,951 Consumer auto Current 599 398 216 111 59 22 — — 1,405 30-59 days 1 2 2 1 1 — — — 7 60-89 days — 1 — — — — — — 1 90 days or greater — 1 — — — — — — 1 Total consumer auto 600 402 218 112 60 22 — — 1,414 Consumer other Current 160 82 13 6 2 19 361 — 643 30-59 days — — — — — 1 3 — 4 60-89 days — — — — — 1 1 — 2 90 days or greater — — — — — 1 2 — 3 Total consumer other 160 82 13 6 2 22 367 — 652 Total consumer $ 4,249 $ 4,214 $ 2,337 $ 930 $ 481 $ 2,775 $ 2,240 $ 100 $ 17,326 126 The following tables represent current credit quality indicators by origination year as of December 31, 2021. Commercial Loans - Risk Classifications by Class December 31, 2021 Risk Classification: Term Loans by Origination Year Revolving Converted to Term Loans dollars in millions 2021 2020 2019 2018 2017 2016 & Prior Revolving Total Commercial construction Pass $ 540 $ 400 $ 189 $ 29 $ 48 $ 11 $ 10 $ — $ 1,227 Special Mention — — — — — 1 — — 1 Substandard 2 — 1 2 4 1 — — 10 Doubtful — — — — — — — — — Ungraded — — — — — — — — — Total commercial construction 542 400 190 31 52 13 10 — 1,238 Owner occupied commercial mortgage Pass 3,045 3,022 1,873 1,194 963 1,572 125 — 11,794 Special Mention 3 35 37 22 13 33 5 — 148 Substandard 31 16 18 12 18 56 6 — 157 Doubtful — — — — — — — — — Ungraded — — — — — — — — — Total owner occupied commercial mortgage 3,079 3,073 1,928 1,228 994 1,661 136 — 12,099 Non-owner occupied commercial mortgage Pass 644 737 578 263 266 412 37 — 2,937 Special Mention 1 — — 3 3 10 — — 17 Substandard 9 11 24 12 7 22 1 — 86 Doubtful — — — — 1 — — — 1 Ungraded — — — — — — — — — Total non-owner occupied commercial mortgage 654 748 602 278 277 444 38 — 3,041 Commercial and industrial Pass 2,107 1,018 599 257 149 281 1,342 5 5,758 Special Mention 9 7 20 2 4 5 5 — 52 Substandard 20 7 3 4 2 2 16 1 55 Doubtful — — — — — — — — — Ungraded — — — — — — 72 — 72 Total commercial and industrial 2,136 1,032 622 263 155 288 1,435 6 5,937 Leases Pass 93 68 38 42 17 8 — — 266 Special Mention — 1 — — — — — — 1 Substandard 2 1 — 1 — — — — 4 Doubtful — — — — — — — — — Ungraded — — — — — — — — — Total leases 95 70 38 43 17 8 — — 271 Total commercial $ 6,506 $ 5,323 $ 3,380 $ 1,843 $ 1,495 $ 2,414 $ 1,619 $ 6 $ 22,586 127 Consumer Loans - Delinquency Status by Class December 31, 2021 Days Past Due: Term Loans by Origination Year Revolving Converted to Term Loans dollars in millions 2021 2020 2019 2018 2017 2016 & Prior Revolving Total Residential mortgage Current $ 2,139 $ 1,663 $ 627 $ 368 $ 349 $ 867 $ 22 $ — $ 6,035 30-59 days 2 3 2 2 1 14 — — 24 60-89 days — — — 1 1 4 — — 6 90 days or greater 1 1 1 2 1 17 — — 23 Total residential mortgage 2,142 1,667 630 373 352 902 22 — 6,088 Revolving mortgage Current — — — — — — 1,678 126 1,804 30-59 days — — — — — — 4 2 6 60-89 days — — — — — — — 2 2 90 days or greater — — — — — — 2 4 6 Total revolving mortgage — — — — — — 1,684 134 1,818 Consumer auto Current 597 343 198 119 48 19 — — 1,324 30-59 days 1 2 1 1 — 1 — — 6 60-89 days — — — — — 1 — — 1 90 days or greater — — — — — 1 — — 1 Total consumer auto 598 345 199 120 48 22 — — 1,332 Consumer other Current 131 24 11 4 2 29 342 — 543 30-59 days — — — — — — 2 — 2 60-89 days 1 — — — — — 1 — 2 90 days or greater — — — — — — 1 — 1 Total consumer other 132 24 11 4 2 29 346 — 548 Total consumer $ 2,872 $ 2,036 $ 840 $ 497 $ 402 $ 953 $ 2,052 $ 134 $ 9,786 Purchased loans and leases The following table summarizes PCD loans and leases that BancShares acquired in the CIT Merger. PCD Loans and Leases - CIT Merger dollars in millions Total PCD from CIT Merger UPB $ 3,550 Initial PCD ACL ( 272 ) Fair value discount, net of the PCD Gross-Up ( 45 ) Purchase price $ 3,233 The recorded fair values of Non-PCD loans acquired in the CIT Merger as of the acquisition date was $ 29.5 billion, resulting in a PAA discount of $ 61 million. BancShares’ accounting methods for acquired loans and leases are discussed in Note 1 — Significant Accounting Policies and Basis of Presentation. See Note 2 — Business Combinations for further discussion of the CIT Merger. 128 Troubled Debt Restructuring As part of BancShares’ ongoing risk-management practices, BancShares attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications are made in accordance with internal policies and guidelines to conform to regulatory guidance. BancShares accounts for certain loan modifications or restructurings as TDRs. In general, a modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. BancShares may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if is probable that a borrower may default in the foreseeable future. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty. Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty, and whether a concession has been granted, are subjective in nature and management’s judgment is required when determining whether a modification is classified as a TDR. In accordance with regulatory guidance discussed below, certain loan modifications that might ordinarily have qualified as TDRs were not accounted for as TDRs. The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (the “Interagency Statement”) was published by banking regulators in April 2020 to clarify expectations around loan modifications and the determination of TDRs for borrowers experiencing COVID-19-related financial difficulty. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and Interagency Statement offer some practical expedients for evaluating whether loan modifications that occur in response to the COVID-19 pandemic were TDRs. Any loan modification that meets these practical expedients would not automatically be considered a TDR because the borrower is presumed not to be experiencing financial difficulty at the time of the loan modification. BancShares applied this regulatory guidance during its TDR identification process through January 1, 2022 for short-term loan forbearance agreements as a result of COVID-19 and in most cases did not record these as TDRs. Modified loans that meet the definition of a TDR are subject to BancShares’ individually reviewed loans policy. The following table presents amortized cost of TDRs. TDRs dollars in millions December 31, 2022 Accruing Non-Accruing Total Commercial Commercial construction $ 2 $ 1 $ 3 Owner occupied commercial mortgage 46 9 55 Non-owner occupied commercial mortgage 24 30 54 Commercial and industrial 26 8 34 Leases — 1 1 Total commercial 98 49 147 Consumer Residential mortgage 33 17 50 Revolving mortgage 17 5 22 Consumer auto 2 — 2 Consumer other — — — Total consumer 52 22 74 Total TDRs $ 150 $ 71 $ 221 129 December 31, 2021 Accruing Non-Accruing Total Commercial Commercial construction $ 2 $ — $ 2 Owner occupied commercial mortgage 57 8 65 Non-owner occupied commercial mortgage 26 3 29 Commercial and industrial 12 9 21 Leases — 1 1 Total commercial 97 21 118 Consumer Residential mortgage 29 18 47 Revolving mortgage 17 7 24 Consumer auto 2 — 2 Consumer other 1 — 1 Total consumer 49 25 74 Total TDRs $ 146 $ 46 $ 192 The following table summarizes the loan restructurings during the years ended December 31, 2022, 2021, and 2020 that were designated as TDRs. BancShares defines payment default as movement of the TDR to non-accrual status, which is generally 90 days past due, foreclosure or charge-off, whichever occurs first. Restructurings dollars in millions (except for number of loans) Year ended December 31 2022 2021 2020 Number of Loans Amortized Cost at Period End Number of Loans Amortized Cost at Period End Number of Loans Amortized Cost at Period End Loans and leases Interest only 17 $ 39 20 $ 18 37 $ 32 Loan term extension 128 26 129 16 92 11 Below market rates 86 9 177 20 254 40 Discharge from bankruptcy 106 5 128 10 216 9 Total 337 $ 79 454 $ 64 599 $ 92 There were $ 1.5 million, $ 0.4 million, and $ 0.2 million of commitments to lend additional funds to borrowers whose loan terms have been modified in TDRs as of December 31, 2022, 2021, and 2020 respectively. 130 After a loan is determined to be a TDR, BancShares continues to track its performance under its most recent restructured terms. TDRs that subsequently defaulted during the year ended December 31, 2022, 2021, and 2020 and were classified as TDRs during the applicable 12-month period preceding December 31, 2022, 2021, and 2020 were as follows: TDR Defaults dollars in millions December 31, 2022 December 31, 2021 December 31, 2020 TDR Defaults $ 6 $ 8 $ 9 Loans Pledged The following table provides information regarding loans pledged as collateral for borrowing capacity through the FHLB of Atlanta and the Federal Reserve Bank (“FRB”) as of December 31, 2022 and 2021: Loans Pledged dollars in millions December 31, 2022 December 31, 2021 FHLB of Atlanta Lendable collateral value of pledged Non-PCD loans $ 14,918 $ 9,564 Less: Advances 4,250 645 Less: Letters of Credit 1,450 — Available borrowing capacity $ 9,218 $ 8,919 Pledged Non-PCD loans (contractual balance) $ 23,491 $ 14,507 FRB Lendable collateral value of pledged non-PCD loans $ 4,203 $ 3,951 Less: Advances — — Available borrowing capacity $ 4,203 $ 3,951 Pledged Non-PCD loans (contractual balance) $ 5,697 $ 4,806 131 NOTE 5 — ALLOWANCE FOR CREDIT LOSSES The ACL for loans and leases is reported in the allowance for credit losses on the Consolidated Balance Sheets, while the ACL for unfunded commitments is reported in other liabilities. The provision or benefit for credit losses related to both (i) loans and leases and (ii) unfunded commitments is reported in the Consolidated Statements of Income as provision or benefit for credit losses. The ACL methodology is discussed in Note 1 — Significant Accounting Policies and Basis of Presentation. The initial ACL for PCD loans and leases acquired in the CIT Merger (the “Initial PCD ACL”) of $ 272 million was established through the PCD Gross-Up and there was no corresponding increase to the provision for credit losses. The PCD Gross-Up is discussed further in Note 1 — Significant Accounting Policies and Basis of Presentation. The initial ACL for Non-PCD loans and leases acquired in the CIT Merger was established through a corresponding increase of $ 454 million to the provision for credit losses (the “Day 2 provision for loans and leases”). The ACL activity for loans and leases and the ACL for unfunded commitments is summarized in the following tables. The increase in the ACL is primarily related to the CIT Merger, loan growth, and deterioration in the economic outlook. ACL for Loans and Leases dollars in millions Year Ended December 31, 2022 Commercial Consumer Total Balance at December 31, 2021 $ 80 $ 98 $ 178 Initial PCD ACL (1) 258 14 272 Day 2 provision for loans and leases 432 22 454 Provision (benefit) for credit losses - loans and leases 101 ( 4 ) 97 Total provision for credit losses- loans and leases 533 18 551 Charge-offs (1) ( 126 ) ( 20 ) ( 146 ) Recoveries 44 23 67 Balance at December 31, 2022 $ 789 $ 133 $ 922 Year Ended December 31, 2021 Commercial Consumer Total Balance at December 31, 2020 $ 92 $ 133 $ 225 (Benefit) for credit losses - loans and leases ( 7 ) ( 30 ) ( 37 ) Charge-offs ( 18 ) ( 18 ) ( 36 ) Recoveries 13 13 26 Balance at December 31, 2021 $ 80 $ 98 $ 178 Year Ended December 31, 2020 Commercial Consumer Total Balance at December 31, 2019 $ 150 $ 75 $ 225 Adoption of ASC 326 ( 84 ) 46 ( 38 ) Balance after adoption of ASC 326 66 121 187 Provision for credit losses - loans and leases 34 24 58 Initial balance on PCD loans 1 1 2 Charge-offs ( 20 ) ( 25 ) ( 45 ) Recoveries 11 12 23 Balance at December 31, 2020 $ 92 $ 133 $ 225 (1) The Initial PCD ACL related to the CIT Merger was $ 272 million, net of an additional $ 243 million for loans that CIT charged-off prior to the Merger Date (whether full or partial) which met BancShares’ charge-off policy at the Merger Date. ACL for Unfunded Commitments dollars in millions Year Ended December 31, 2022 2021 2020 Beginning balance $ 12 $ 13 $ 1 Adoption of ASC 326 — — 9 Balance after adoption of ASC 326 12 13 10 Provision (benefit) for credit losses - unfunded commitments (1) 94 ( 1 ) 3 Ending balance $ 106 $ 12 $ 13 (1) Includes the Day 2 provision for unfunded commitments of $ 59 million related to the CIT Merger. 132 NOTE 6 — LEASES Lessee BancShares leases primarily include administrative offices and bank locations. Substantially all of our lease liabilities relate to United States real estate leases under operating lease arrangements. Our real estate leases have remaining lease terms of up to 17 years. Our lease terms may include options to extend or terminate the lease. The options are included in the lease term when it is determined that it is reasonably certain the option will be exercised. The following table presents supplemental balance sheet information and remaining weighted average lease terms and discount rates. Supplemental Lease Information dollars in millions Classification December 31, 2022 December 31, 2021 ROU assets: Operating leases Other assets $ 345 $ 64 Finance leases Premises and equipment 7 4 Total ROU assets $ 352 $ 68 Lease liabilities: Operating leases Other liabilities $ 352 $ 64 Finance leases Other borrowings 7 4 Total lease liabilities $ 359 $ 68 Weighted-average remaining lease terms: Operating leases 9.6 years 8.9 years Finance leases 4.1 years 3.5 years Weighted-average discount rate: Operating leases 2.19 % 3.00 % Finance leases 2.34 % 3.12 % The following table presents components of lease cost: Components of Net Lease Cost dollars in millions Year ended December 31 Classification 2022 2021 2020 Lease cost Operating lease cost (1)(2) Occupancy expense $ 58 $ 14 $ 15 Finance lease cost Amortization of leased assets Equipment expense 2 2 2 Interest on lease liabilities Interest expense - other borrowings — — — Variable lease cost Occupancy expense 12 3 3 Sublease income Occupancy expense ( 2 ) — — Net lease cost $ 70 $ 19 $ 20 (1) Includes short-term lease cost, which is not significant. (2) In addition, approximately $ 6 million of costs related to leased branches to be closed or subleased was included in merger-related expenses in the consolidated statements of income for the year ended December 31, 2022. Variable lease cost includes common area maintenance, property taxes, utilities, and other operating expenses related to leased premises recognized in the period in which the expense was incurred. Certain of our lease agreements also include rental payments adjusted periodically for inflation. While lease liabilities are not remeasured because of these changes, these adjustments are treated as variable lease costs and recognized in the period in which the expense is incurred. Sublease income results from leasing excess building space that BancShares is no longer utilizing under operating leases, which have remaining lease terms of up to 14 years. 133 The following table presents supplemental cash flow information related to leases: Supplemental Cash Flow Information dollars in millions Year ended December 31 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 54 $ 13 Operating cash flows from finance leases — — Financing cash flows from finance leases 2 2 ROU assets obtained in exchange for new operating lease liabilities 19 7 ROU assets obtained in exchange for new finance lease liabilities 5 — The following table presents lease liability maturities at December 31, 2022: Maturity of Lease Liabilities dollars in millions Operating Leases Finance Leases Total 2023 $ 48 $ 2 $ 50 2024 50 2 52 2025 44 2 46 2026 42 1 43 2027 39 — 39 Thereafter 168 — 168 Total undiscounted lease payments $ 391 $ 7 $ 398 Difference between undiscounted cash flows and discounted cash flows 39 — 39 Lease liabilities, at present value $ 352 $ 7 $ 359 Lessor BancShares leases equipment to commercial end-users under operating lease and finance lease arrangements. The majority of operating lease equipment is long-lived rail equipment, which is typically leased several times over its life. We also lease technology and office equipment, and large and small industrial, medical, and transportation equipment under both operating leases and finance leases. Our Rail operating leases typically do not include purchase options. Many of our finance leases, and other equipment operating leases, offer the lessee the option to purchase the equipment at fair market value or for a nominal fixed purchase option and many of the leases that do not have a nominal purchase option include renewal provisions resulting in some leases continuing beyond the initial contractual term. Our leases typically do not include early termination options; and continued rent payments are due if leased equipment is not returned at the end of the lease. The following table provides the net book value of operating lease equipment (net of accumulated depreciation of $ 296 million at December 31, 2022) by equipment type. Operating Lease Equipment dollars in millions December 31, 2022 Railcars and locomotives (1) $ 7,433 Other equipment 723 Total (1) $ 8,156 (1) Includes off-lease rail equipment of $ 457 million at December 31, 2022. 134 The following table presents the components of the finance lease net investment on a discounted basis: Components of Net Investment in Finance Leases dollars in millions December 31, 2022 December 31, 2021 Lease receivables $ 1,786 $ 246 Unguaranteed residual assets 317 25 Total net investment in finance leases 2,103 271 Leveraged lease net investment (1) 68 — Total $ 2,171 $ 271 (1) Leveraged leases are reported net of non-recourse debt of $ 11 million at December 31, 2022. Our leveraged lease arrangements commenced before the ASC 842 effective date and continue to be reported under the leveraged lease accounting model. ASC 842 eliminated leveraged lease accounting for new leases and for existing leases modified on or after the standard’s effective date. The table that follows presents lease income related to BancShares’ operating and finance leases: Lease Income dollars in millions Year ended December 31 2022 2021 2020 Lease income – Operating leases $ 796 $ — $ — Variable lease income – Operating leases (1) 68 — — Rental income on operating leases 864 — — Interest income - Sales type and direct financing leases 169 18 23 Variable lease income included in Other noninterest income (2) 51 — — Interest income - Leveraged leases 20 — — Total lease income $ 1,104 $ 18 $ 23 (1) Primarily includes per diem railcar operating lease rental income earned on a time or mileage usage basis. (2) Includes leased equipment property tax reimbursements due from customers of $ 17 million for the year ended December 31, 2022 and revenue related to insurance coverage on leased equipment of $ 33 million for the year ended December 31, 2022. There was no revenue related to property tax reimbursements due from customers or insurance coverage on leased equipment during 2021 or 2020. The following tables present lease payments due on non-cancellable operating leases and lease receivables due on finance leases at December 31, 2022. Excluded from these tables are variable lease payments, including rentals calculated based on asset usage levels, rentals from future renewal and re-leasing activity, and expected sales proceeds from remarketing equipment at lease expiration, all of which are components of lease profitability. Maturity Analysis of Operating Lease Payments dollars in millions 2023 $ 655 2024 507 2025 339 2026 217 2027 131 Thereafter 322 Total $ 2,171 Maturity Analysis of Lease Receivable Payments - Sales Type and Direct Financing Leases dollars in millions 2023 $ 811 2024 550 2025 342 2026 179 2027 83 Thereafter 24 Total undiscounted lease receivables $ 1,989 Difference between undiscounted cash flows and discounted cash flows 203 Lease receivables, at present value $ 1,786 135 NOTE 7 — PREMISES AND EQUIPMENT Major classifications of premises and equipment at December 31, 2022 and 2021 are summarized as follows: dollars in millions Useful Life (years) 2022 2021 Land indefinite $ 352 $ 334 Premises and leasehold improvements 3 - 40 1,458 1,308 Furniture, equipment and software 3 - 10 840 671 Total 2,650 2,313 Less accumulated depreciation and amortization 1,194 1,080 Total premises and equipment $ 1,456 $ 1,233 Depreciation and amortization expense was $ 142 million, $ 107 million and $ 109 million for the years ended December 31, 2022, 2021 and 2020, respectively NOTE 8 — GOODWILL AND OTHER INTANGIBLES Goodwill BancShares applied the acquisition method of accounting for the CIT Merger. The fair value of the net assets acquired exceeded the purchase price. Consequently, there was a gain on acquisition (and no goodwill) related to the CIT Merger as discussed further in Note 2 — Business Combinations. BancShares’ annual impairment test, conducted as of July 31 each year, or more frequently if events occur or circumstances change that may trigger a decline in the value of the reporting unit or otherwise indicate that a potential impairment exists, resulted in no indication of goodwill impairment. Subsequent to the annual impairment test, there were no events or changes in circumstances that would indicate goodwill should be tested for impairment during the interim period between annual tests. BancShares had goodwill of $ 346 million at December 31, 2022 and 2021. The entire amount of goodwill relates to business combinations that BancShares completed prior to the CIT Merger and is reported in the General Banking segment. There was no goodwill impairment during 2022, 2021 or 2020. The following table presents the changes in the carrying amount of goodwill for the years ending December 31, 2022 and 2021: Year ended December 31 dollars in millions 2022 2021 Balance at January 1 $ 346 $ 350 Other adjustment — ( 4 ) Balance at December 31 $ 346 $ 346 Core Deposit Intangibles Core deposit intangibles represent the estimated fair value of core deposits and other customer relationships acquired. Core deposit intangibles are being amortized over their estimated useful life. The following tables summarize the activity for core deposit intangibles for the year ended December 31, 2022. Core Deposit Intangibles Year ended December 31 dollars in millions 2022 2021 Balance, net of accumulated amortization at January 1 $ 19 $ 30 Core deposit intangibles related to the CIT Merger 143 — Amortization for the period ( 22 ) ( 11 ) Balance at December 31, net of accumulated amortization $ 140 $ 19 Core Deposit Intangible Accumulated Amortization dollars in millions December 31, 2022 December 31, 2021 Gross balance $ 271 $ 128 Accumulated amortization ( 131 ) ( 109 ) Balance, net of accumulated amortization $ 140 $ 19 136 The following table summarizes the expected amortization expense as of December 31, 2022 in subsequent periods for core deposit intangibles. Core Deposit Intangible Expected Amortization dollars in millions 2023 $ 19 2024 17 2025 16 2026 15 2027 15 Thereafter 58 Total $ 140 Intangible Liability An intangible liability of $ 52 million was recorded in other liabilities for net below market lessor lease contract rental rates related to the rail portfolio as a result of the CIT Merger. This lease intangible is being amortized on a straight-line basis over the lease term, thereby increasing rental income (a component of noninterest income) over the remaining term of the lease agreements. The following tables summarize the activity for the intangible liability for the year ended December 31, 2022. Intangible Liability dollars in millions 2022 Balance at January 1 $ — Acquired in CIT Merger 52 Amortization for the period ( 16 ) Balance at December 31, net of accumulated amortization $ 36 The following table summarizes the expected amortization as of December 31, 2022 in subsequent periods for the intangible liability. Intangible Liability dollars in millions 2023 $ 12 2024 6 2025 4 2026 3 2027 2 Thereafter 9 Total $ 36 137 NOTE 9 — MORTGAGE SERVICING RIGHTS BancShares originates certain residential mortgages loans to sell in the secondary market. BancShares’ portfolio of residential mortgage loans serviced for third parties was approximately $ 3.7 billion and $ 3.4 billion for the year ended December 31, 2022 and 2021, respectively. For certain loans, the originated loans are sold to third parties on a non-recourse basis with servicing rights retained. The retained servicing rights are recorded as a servicing asset and are reported in other assets. The associated amortization expense and any changes in the valuation allowance recognized were included as a reduction of mortgage income. MSRs are initially recorded at fair value and then carried at the lower of amortized cost or fair value. Contractually specified mortgage servicing fees, late fees and ancillary fees earned are reported in mortgage income and were $ 10 million, $ 9 million, and $ 9 million for the year ended December 31, 2022, 2021, and 2020 respectively. The following table presents changes in the servicing asset during the year ended December 31, 2022 and 2021: Servicing Asset dollars in millions Year Ended December 31, 2022 2021 2020 Beginning balance $ 23 $ 18 $ 23 Servicing rights originated 4 11 8 Servicing rights obtained in CIT Merger 3 — — Amortization ( 6 ) ( 9 ) ( 9 ) Valuation allowance benefit (provision) 1 3 ( 4 ) Ending balance $ 25 $ 23 $ 18 The following table presents the activity in the servicing asset valuation allowance: Servicing Asset Valuation Allowance dollars in millions Year Ended December 31, 2022 2021 2020 Beginning balance $ 1 $ 4 $ — Valuation allowance (benefit) provision ( 1 ) ( 3 ) 4 Ending balance $ — $ 1 $ 4 MSRs valuations are performed using a pooling methodology where loans with similar risk characteristics are grouped together and evaluated using discounted cash flows to estimate the present value of future earnings. Key economic assumptions used to value MSRs were as follows: MSRs Valuation Assumptions December 31, 2022 December 31, 2021 Discount rate 9.62 % 8.55 % Weighted average constant prepayment rate 6.76 % 15.69 % Weighted average cost to service a loan $ 81 $ 88 The fair value of MSRs are sensitive to changes in assumptions and is determined by estimating the present value of the asset’s future cash flows by utilizing discount rates, prepayment rates, and other inputs. The discount rates applied to the cash flows in the valuation of MSRs are market-based and provided on a pretax basis. The prepayment rate is derived from dynamic modeling, which is compared to actual prepayment rates annually for reasonableness. The average cost to service a loan is based on the number of loans serviced and the total costs to service the loans. 138 NOTE 10 — OTHER ASSETS The following table includes the components of other assets. The increases from December 31, 2021 primarily reflect the other assets acquired in the CIT Merger. Other Assets dollars in millions December 31, 2022 December 31, 2021 Affordable housing tax credit and other unconsolidated investments (1) $ 762 $ 169 Income tax receivable 275 799 Bank-owned life insurance (2) 586 116 Right of use assets for operating leases, net 345 64 Pension assets 343 289 Accrued interest receivable 329 134 Counterparty receivables 98 — Federal Home Loan Bank stock 197 40 Fair value of derivative financial instruments 159 3 Nonmarketable equity securities 58 1 Other real estate owned 47 40 Mortgage servicing assets 25 23 Other (2) 1,145 177 Total other assets $ 4,369 $ 1,855 (1) Refer to Note 12 – Variable Interest Entities for additional information. (2) In December of 2022, BancShares made the strategic decision to surrender $ 1.25 billion of BOLI policies. The balance sheet treatment at December 31, 2022 for the surrendered BOLI policies is as follows: $ 483 million is in BOLI as these policies had not terminated or cash-settled; $ 607 million is in “Other” as these policies had terminated, but not cash-settled; and $ 157 million of these policies had terminated and cash-settled. NOTE 11 — DEPOSITS The following table provides detail on deposit types. The deposit balances as of December 31, 2022 reflect those acquired in the CIT Merger, as described in Note 2 — Business Combinations. Deposit Types dollars in millions December 31, 2022 December 31, 2021 Noninterest-bearing demand $ 24,922 $ 21,405 Checking with interest 16,202 12,694 Money market 21,040 10,590 Savings 16,634 4,236 Time 10,610 2,481 Total deposits $ 89,408 $ 51,406 At December 31, 2022, the scheduled maturities of time deposits were: Deposit Maturities dollars in millions Year Ended December 31, 2023 $ 6,896 2024 2,935 2025 546 2026 73 2027 34 Thereafter 126 Total time deposits $ 10,610 Time deposits with a denomination of $250,000 or more were $ 2.22 billion and $ 593 million at December 31, 2022 and 2021, respectively. As of December 31, 2021, FCB’s primary deposit markets were North Carolina and South Carolina, which represent approximately 50.8 % and 22.7 %, respectively, of total FCB deposits. Deposits (based on branch location) as of December 31, 2022, in North Carolina and South Carolina represented approximately 39.7 % and 13.3 %, respectively, of total deposits. Additionally, the CIT Merger added deposits that were primarily related to the Digital Bank of $ 16.47 billion or 18.4 % of total FCB deposits as of December 31, 2022. 139 NOTE 12 — VARIABLE INTEREST ENTITIES Variable Interest Entities Described below are the results of BancShares’ assessment of its variable interests in order to determine its current status with regard to being the VIE primary beneficiary. Refer to Note 1 — Significant Accounting Policies and Basis of Presentation for additional information on accounting for VIEs and investments in qualified affordable housing projects. Consolidated VIEs At December 31, 2022 and 2021, there were no consolidated VIEs. Unconsolidated VIEs Unconsolidated VIEs include limited partnership interests and joint ventures where BancShares’ involvement is limited to an investor interest and BancShares does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance or obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The table below presents potential losses that would be incurred under hypothetical circumstances, such that the value of BancShares’ interests and any associated collateral declines to zero and assuming no recovery or offset from any economic hedges. BancShares believes the possibility is remote under this hypothetical scenario; accordingly, this disclosure is not an indication of expected loss. Unconsolidated VIEs Carrying Value dollars in millions December 31, 2022 December 31, 2021 Investment in qualified affordable housing projects (1) $ 598 $ 157 Other tax credit equity investments 5 — Total tax credit equity investments $ 603 $ 157 Other unconsolidated investments 159 12 Total assets (maximum loss exposure) (2) $ 762 $ 169 Liabilities for commitments to tax credit investments (3) $ 295 $ 43 (1) These investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. During 2022, 2021 and 2020, BancShares recorded $ 60 million, $ 22 million and $ 19 million, respectively, in tax provisions under the proportional amortization method. During 2022, 2021 and 2020, BancShares recognized total tax benefits of $ 77 million, $ 26 million and $ 23 million, which included tax credits of $ 60 million, $ 22 million and $ 19 million, respectively, recorded in income taxes. See Note 1 – Significant Accounting Policies and Basis of Presentation for additional information. (2) Included in other assets in Note 10 – Other Assets. (3) Represents commitments to invest in qualified affordable housing investments, and other investments qualifying for community reinvestment tax credits. These commitments are payable on demand and are included in other liabilities in Note 15 – Other Liabilities. 140 NOTE 13 — BORROWINGS Short-term Borrowings Short-term borrowings at December 31, 2022 and 2021 include: dollars in millions December 31, 2022 December 31, 2021 Securities sold under customer repurchase agreements $ 436 $ 589 Notes payable to FHLB of Atlanta at overnight SOFR plus spreads ranging from 0.19 % to 0.20 %. 1,750 — Total short-term borrowings $ 2,186 $ 589 Securities Sold under Agreements to Repurchase At December 31, 2022, BancShares held $ 436 million of securities sold under agreements to repurchase, with overnight contractual maturities, that are collateralized by government agency securities. At December 31, 2021, BancShares held $ 589 million of securities sold under agreements to repurchase, with overnight and continuous remaining contractual maturities, of which $ 508 million were collateralized by government agency securities and $ 81 million were collateralized by commercial mortgage-backed securities. BancShares utilizes securities sold under agreements to repurchase to facilitate the needs for collateralization of commercial customers and secure wholesale funding needs. Repurchase agreements are transactions whereby BancShares offers to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates BancShares to repurchase the security at an agreed upon date, repurchase price and interest rate. These agreements are recorded at the amount of cash received in connection with the transactions and are reflected as securities sold under customer repurchase agreements. BancShares monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and segregates the security from general assets in accordance with regulations governing custodial holdings of securities. The primary risk with repurchase agreements is market risk associated with the investments securing the transactions, as additional collateral may be required based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents. The carrying value of investment securities pledged as collateral under repurchase agreements was $ 496 million and $ 619 million at December 31, 2022 and 2021, respectively. 141 Long-term Borrowings Long-term borrowings at December 31, 2022 and 2021 include: dollars in millions Maturity December 31, 2022 December 31, 2021 Parent Company: Senior: Unsecured term loan at 1-month LIBOR plus 1.10 % September 2022 $ — $ 68 Subordinated: Fixed-to-Floating subordinated notes at 3.375 % March 2030 350 350 Junior subordinated debenture at 3-month LIBOR plus 2.25 % (FCB/SC Capital Trust II) June 2034 20 20 Junior subordinated debenture at 3-month LIBOR plus 1.75 % (FCB/NC Capital Trust III) June 2036 88 88 Subsidiaries: Senior: Senior unsecured fixed to floating rate notes at 3.929 % (1) June 2024 500 — Senior unsecured fixed to floating rate notes at 2.969 % (1) September 2025 315 — Fixed senior unsecured notes at 6.00 % (1) April 2036 51 — Subordinated: Fixed subordinated notes at 6.125 % (1) March 2028 400 — Fixed-to-Fixed subordinated notes at 4.125 % (1) November 2029 100 — Junior subordinated debentures at 3-month LIBOR plus 2.80 % (Macon Capital Trust I) March 2034 14 14 Junior subordinated debentures at 3-month LIBOR plus 2.85 % (SCB Capital Trust I) April 2034 10 10 Secured: Notes payable to FHLB of Atlanta at overnight SOFR plus spreads ranging from 0.24 % to 0.34 %. Maturities through September 2025 2,500 — Fixed notes payable to FHLB of Atlanta Maturities through March 2032 — 645 Other secured financings (1) Maturities through January 2024 18 — Capital lease obligations Maturities through June 2027 7 4 Unamortized issuance costs ( 1 ) ( 2 ) Unamortized purchase accounting adjustments (2) 87 ( 2 ) Total long-term borrowings $ 4,459 $ 1,195 (1) Reflects the remaining outstanding debt securities assumed by the BancShares in connection with the CIT Merger. On February 24, 2022, BancShares redeemed all of the outstanding (i) 5.00 % senior unsecured notes due 2022, (ii) 5.00 %, senior unsecured notes due 2023; (iii) 4.750 % senior unsecured notes due 2024; and (iv) 5.250 % senior unsecured notes due 2025 that it had assumed in the CIT Merger. (2) At December 31, 2022 a nd December 31, 2021, unamortized purchase accounting adjustments were $ 69 million and $ 2 million, respectively, for subordinated debentures. Long-term borrowings maturing in each of the five years subsequent to December 31, 2022 and thereafter include: Long-term Borrowings Maturities dollars in millions Year Ended December 31, 2023 $ 518 2024 1,535 2025 1,330 2026 16 2027 19 Thereafter 1,041 Total long-term borrowings $ 4,459 142 Senior Unsecured Notes Senior unsecured notes included the following as of December 31, 2022: • Fixed-rate senior unsecured notes outstanding totaled $ 866 million with a weighted average coupon rate of 3.70 %. These notes were assumed by FCB as part of the CIT Merger. On February 24, 2022, FCB completed a redemption of approximately $ 2.9 billion of senior unsecured notes that were assumed in the CIT Merger, resulting in a gain of approximately $ 6 million. Subordinated Unsecured Notes Subordinated unsecured notes included the following as of December 31, 2022: • $ 350 million aggregate principal amount of its 3.375 % fixed-to-floating rate subordinated notes due March 2030 and redeemable at the option of BancShares starting with the interest payment due March 15, 2025. • $ 400 million aggregate principal amount of 6.125 % fixed rate subordinated notes with a maturity date of March 2028 and $ 100 million aggregate principal amount of 4.125 % fixed-to-fixed rate subordinated notes with a maturity date of November 2029, which were assumed by BancShares as part of the CIT Merger. • $ 132 million in junior subordinated debentures representing obligations to Macon Capital Trust I, SCB Capital Trust I, FCB/SC Capital Trust II, and FCB/NC Capital Trust III special purpose entities and grantor trusts (the “Trusts”) for trust preferred securities. The Trusts had outstanding trust preferred securities of $ 128 million at December 31, 2022 and 2021, which mature in 2034, 2034, 2034 and 2036, respectively, and may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts. Secured Borrowings At December 31, 2022, BancShares had pledged $ 29.2 billion of loans to several financing facilities. Notes Payable to FHLB As a member of the FHLB, FCB can access financing based on an evaluation of its creditworthiness, statement of financial position, size and eligibility of collateral. Pledged assets related to these financings totaled $ 23.5 billion at December 31, 2022. FCB may at any time grant a security interest in, sell, convey or otherwise dispose of any of the assets used for collateral, provided that FCB is in compliance with the collateral maintenance requirement immediately following such disposition. Other Secured Financings Other secured (other than FHLB) financings were not significant and totaled $ 18 million at December 31, 2022. Pledged assets related to these financings totaled $ 18 million. These transactions do not meet accounting requirements for sales treatment and are recorded as secured borrowings. At December 31, 2022, BancShares had other unused credit lines allowing contingent access to borrowings of up to $ 100 million on an unsecured basis. Under borrowing arrangements with the FRB of Richmond, BancShares has access to an additional $ 4.2 billion on a secured basis. There were no outstanding borrowings with the FRB Discount Window at December 31, 2022 and December 31, 2021. Assets pledged to the FRB of Richmond totaled $ 5.7 billion at December 31, 2022. 143 NOTE 14 — DERIVATIVE FINANCIAL INSTRUMENTS BancShares acquired various derivative financial instruments in the CIT Merger. The following table presents notional amount and fair value of derivative financial instruments on a gross basis. At December 31, 2022, BancShares’ derivatives are not designated as hedging instruments. Notional Amount and Fair Value of Derivative Financial Instruments dollars in millions December 31, 2022 Notional Amount Asset Fair Value Liability Fair Value Derivatives not designated as hedging instruments (Non-qualifying hedges) Interest rate contracts (1)(3) $ 18,173 $ 158 $ ( 482 ) Foreign exchange contracts 125 1 ( 4 ) Other contracts (2) 507 — — Total derivatives not designated as hedging instruments $ 18,805 159 ( 486 ) Gross derivatives fair values presented in the Consolidated Balance Sheets 159 ( 486 ) Less: Gross amounts offset in the Consolidated Balance Sheets — — Net amount presented in the Consolidated Balance Sheets 159 ( 486 ) Less: Amounts subject to master netting agreements (4) ( 13 ) 13 Less: Cash collateral pledged(received) subject to master netting agreements (5) ( 124 ) — Total net derivative fair value $ 22 $ ( 473 ) ( 1) Fair value balances include accrued interest. (2) Other derivative contracts not designated as hedging instruments include risk participation agreements. (3) BancShares accounts for swap contracts cleared by the Chicago Mercantile Exchange and LCH Clearnet as “settled-to-market”. As a result, variation margin payments are characterized as settlement of the derivative exposure and variation margin balances are netted against the corresponding derivative mark-to-market balances. Gross amounts of recognized assets and liabilities were lowered by $ 376 million and $ 19 million, respectively, at December 31, 2022. (4) BancShares’ derivative transactions are governed by International Swaps and Derivatives Association (“ISDA”) agreements that allow for net settlements of certain payments as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. BancShares believes its ISDA agreements meet the definition of a master netting arrangement or similar agreement for purposes of the above disclosure. (5) In conjunction with the ISDA agreements described above, BancShares has entered into collateral arrangements with its counterparties, which provide for the exchange of cash depending on change in the market valuation of the derivative contracts outstanding. Such collateral is available to be applied in settlement of the net balances upon an event of default of one of the counterparties. Collateral pledged or received is included in other assets or other liabilities, respectively. Non-Qualifying Hedges The following table presents gains related to non-qualifying hedges recognized on the Consolidated Statements of Income: Gains on Non-Qualifying Hedges dollars in millions Year ended December 31 Amounts Recognized 2022 2021 2020 Interest rate contracts Other noninterest income $ 12 $ — $ — Foreign currency forward contracts Other noninterest income 20 — — Other contracts Other noninterest income 1 — — Total non-qualifying hedges - income statement impact $ 33 $ — $ — NOTE 15 — OTHER LIABILITIES The following table presents the components of other liabilities. The increases from December 31, 2021 primarily reflect the other liabilities assumed in the CIT Merger. Other Liabilities dollars in millions December 31, 2022 December 31, 2021 Accrued expenses and accounts payable $ 313 $ 5 Lease liabilities 352 64 Fair value of derivative financial instruments 486 — Commitments to fund tax credit investments 295 43 Deferred taxes 286 33 Reserve for off-balance sheet credit exposure 106 12 Incentive plan liabilities 267 84 Accrued interest payable 57 8 Other 426 132 Total other liabilities $ 2,588 $ 381 144 NOTE 16 — FAIR VALUE Fair Value Hierarchy BancShares measures certain financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. Assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. See Note 1 — Significant Accounting Policies and Basis of Presentation for detailed descriptions. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table summarizes BancShares’ assets and liabilities measured at estimated fair value on a recurring basis. Assets and Liabilities Measured at Fair Value - Recurring Basis dollars in millions December 31, 2022 Total Level 1 Level 2 Level 3 Assets Investment securities available for sale U.S. Treasury $ 1,898 $ — $ 1,898 $ — Government agency 162 — 162 — Residential mortgage-backed securities 4,795 — 4,795 — Commercial mortgage-backed securities 1,604 — 1,604 — Corporate bonds 536 — 362 174 Total investment securities available for sale $ 8,995 $ — $ 8,821 $ 174 Marketable equity securities 95 32 63 — Loans held for sale 4 — 4 — Derivative assets (1) Interest rate contracts — non-qualifying hedges $ 158 $ — $ 158 $ — Other derivative — non-qualifying hedges 1 — 1 — Total derivative assets $ 159 $ — $ 159 $ — Liabilities Derivative liabilities (1) Interest rate contracts — non-qualifying hedges $ 482 $ — $ 482 $ — Other derivative— non-qualifying hedges 4 — 4 — Total derivative liabilities $ 486 $ — $ 486 $ — December 31, 2021 Total Level 1 Level 2 Level 3 Assets Investment securities available for sale U.S. Treasury $ 2,005 $ — $ 2,005 $ — Government agency 221 — 221 — Residential mortgage-backed securities 4,729 — 4,729 — Commercial mortgage-backed securities 1,640 — 1,640 — Corporate bonds 608 — 401 207 Total investment securities available for sale $ 9,203 $ — $ 8,996 $ 207 Marketable equity securities 98 34 64 — Loans held for sale 99 — 99 — (1) Derivative fair values include accrued interest. 145 The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a recurring basis are as follows: Investment securities available for sale . The fair value of U.S. Treasury, government agency, mortgage-backed securities, and a portion of the corporate bonds are generally estimated using a third-party pricing service. To obtain an understanding of the processes and methodologies used, management reviews correspondence from the third-party pricing service. Management also performs a price variance analysis process to corroborate the reasonableness of prices. The third-party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models which use a variety of inputs, such as benchmark yields, reported trades, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2. The remaining corporate bonds held are generally measured at fair value based on indicative bids from broker-dealers using inputs that are not directly observable. These securities are classified as Level 3. Marketable equity securities. Equity securities are measured at fair value using observable closing prices. The valuation also considers the amount of market activity by examining the trade volume of each security. Equity securities are classified as Level 1 if they are traded in an active market and as Level 2 if the observable closing price is from a less than active market. Loans held for sale. Certain residential real estate loans originated for sale to investors are carried at fair value based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are considered Level 2 inputs. Derivative Assets and Liabilities. Derivatives were valued using models that incorporate inputs depending on the type of derivative. Other than the fair value of credit derivatives, which were estimated using Level 3 inputs, most derivative instruments were valued using Level 2 inputs based on observed pricing for similar assets and liabilities and model-based valuation techniques for which all significant assumptions are observable in the market. See Note 14 — Derivative Financial Instruments for notional amounts and fair values. The following tables summarize information about significant unobservable inputs related to BancShares’ categories of Level 3 financial assets and liabilities measured on a recurring basis. Quantitative Information About Level 3 Fair Value Measurements - Recurring Basis dollars in millions Financial Instrument Estimated Fair Value Valuation Technique(s) Significant Unobservable Inputs December 31, 2022 Assets Corporate bonds $ 174 Indicative bid provided by broker Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer. December 31, 2021 Assets Corporate bonds $ 207 Indicative bid provided by broker Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer. The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3). Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities - Recurring Basis dollars in millions Year Ended December 31, 2022 Year Ended December 31, 2021 Corporate Bonds Other Derivative Liabilities — Non-Qualifying Corporate Bonds Beginning balance $ 207 $ — $ 317 Purchases — 1 31 Included in earnings — ( 1 ) 2 Included in comprehensive income ( 19 ) — 6 Transfers out ( 14 ) — ( 102 ) Maturity and settlements — — ( 47 ) Ending balance $ 174 $ — $ 207 146 Fair Value Option The following table summarizes the difference between the aggregate fair value and the UPB for residential real estate loans originated for sale measured at fair value as of December 31, 2022 and 2021. dollars in millions December 31, 2022 Fair Value Unpaid Principal Balance Difference Originated loans held for sale $ 4 $ 4 $ — December 31, 2021 Fair Value Unpaid Principal Balance Difference Originated loans held for sale $ 99 $ 96 $ 3 BancShares has elected the fair value option for residential real estate loans originated for sale. This election reduces certain timing differences in the Consolidated Statements of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value were recorded as a component of mortgage income and included a loss of $ 3 million in each of the year ended December 31, 2022 and 2021. Interest earned on loans held for sale is recorded within interest income on loans and leases in the Consolidated Statements of Income. No originated loans held for sale were 90 or more days past due or on non-accrual status as of December 31, 2022 or 2021. Assets Measured at Estimated Fair Value on a Non-recurring Basis Certain assets or liabilities are required to be measured at estimated fair value on a non-recurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. The following table presents carrying value of assets measured at estimated fair value on a non-recurring basis for which gains and losses have been recorded in the periods. The gains and losses reflect amounts recorded for the respective periods, regardless of whether the asset is still held at period end. Assets Measured at Fair Value - Non-recurring Basis dollars in millions Fair Value Measurements Total Level 1 Level 2 Level 3 Total Gains (Losses) December 31, 2022 Assets held for sale - loans $ 23 $ — $ — $ 23 $ ( 1 ) Loans - collateral dependent loans 149 — — 149 ( 24 ) Other real estate owned 43 — — 43 14 Mortgage servicing rights — — — — 1 Total $ 215 $ — $ — $ 215 $ ( 10 ) December 31, 2021 Loans - collateral dependent loans $ 3 $ — $ — $ 3 $ ( 2 ) Other real estate owned 34 — — 34 ( 4 ) Mortgage servicing rights 22 — — 22 3 Total $ 59 $ — $ — $ 59 $ ( 3 ) Certain other assets are adjusted to their fair value on a non-recurring basis, including certain loans, OREO, and goodwill, which are periodically tested for impairment, and MSRs, which are carried at the lower of amortized cost or market. Most loans held for investment, deposits, and borrowings are not reported at fair value. 147 The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a non-recurring basis are as follows: Assets held for sale - loans. Loans held for investment subsequently transferred to held for sale are carried at the lower of cost or market. When available, the fair values for the transferred loans are based on quoted prices from the purchase commitments for the individual loans being transferred and are considered Level 1 inputs. The fair value of Level 2 assets was primarily estimated based on prices of recent trades of similar assets. For other loans held for sale, the fair value of Level 3 assets was primarily measured under the income approach using the discounted cash flow model based on Level 3 inputs including discount rate or the price of committed trades. Loans - collateral dependent loans. The population of Level 3 loans measured at fair value on a non-recurring basis includes collateral-dependent loans evaluated individually. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, and adjustments for other external factors that may impact the marketability of the collateral. Other real estate owned. OREO is carried at LOCOM. OREO asset valuations are determined by using appraisals or other third-party value estimates of the subject property with discounts, generally between 6 % and 15 %, applied for estimated selling costs and other external factors that may impact the marketability of the property. At December 31, 2022 and 2021, the weighted average discount applied was 9.31 % and 8.79 %, respectively. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals are ordered to ensure the reported values reflect the most current information. Mortgage servicing rights. MSRs are carried at the lower of amortized cost or market and are, therefore, carried at fair value only when fair value is less than amortized cost. The fair value of MSRs is determined using a pooling methodology. Similar loans are pooled together and a discounted cash flow model, which takes into consideration discount rates, prepayment rates, and the weighted average cost to service the loans, is used to determine the fair value. 148 Financial Instruments Fair Value The table below presents the carrying values and estimated fair values for financial instruments, excluding leases and certain other assets and liabilities for which these disclosures are not required. Carrying Values and Fair Values of Financial Assets and Liabilities dollars in millions December 31, 2022 Estimated Fair Value Carrying Value Level 1 Level 2 Level 3 Total Financial Assets Cash and due from banks $ 518 $ 518 $ — $ — $ 518 Interest earning deposits at banks 5,025 5,025 — — 5,025 Investment in marketable equity securities 95 32 63 — 95 Investment securities available for sale 8,995 — 8,821 174 8,995 Investment securities held to maturity 10,279 — 8,795 — 8,795 Loans held for sale 52 — 4 45 49 Net loans 67,720 — 1,679 62,633 64,312 Accrued interest receivable 329 — 329 — 329 Federal Home Loan Bank stock 197 — 197 — 197 Mortgage and other servicing rights 25 — — 47 47 Derivative assets 159 — 159 — 159 Financial Liabilities Deposits with no stated maturity 78,798 — 78,798 — 78,798 Time deposits 10,610 — 10,504 — 10,504 Credit balances of factoring clients 995 — — 995 995 Securities sold under customer repurchase agreements 436 — 436 — 436 Other short-term borrowings 1,750 — 1,750 — 1,750 Long-term borrowings 4,452 — 4,312 18 4,330 Accrued interest payable 57 — 57 — 57 Derivative liabilities 486 — 486 — 486 December 31, 2021 Estimated Fair Value Carrying Value Level 1 Level 2 Level 3 Total Financial Assets Cash and due from banks $ 338 $ 338 $ — $ — $ 338 Interest earning deposits at banks 9,115 9,115 — — 9,115 Investment in marketable equity securities 98 34 64 — 98 Investment securities available for sale 9,203 — 8,996 207 9,203 Investment securities held to maturity 3,809 — 3,759 — 3,759 Loans held for sale 99 — 99 — 99 Net loans 32,193 — — 31,890 31,890 Accrued interest receivable 134 — 134 — 134 Federal Home Loan Bank stock 40 — 40 — 40 Mortgage and other servicing rights 23 — — 23 23 Financial Liabilities Deposits with no stated maturity 48,925 — 48,925 — 48,925 Time deposits 2,481 — 2,471 — 2,471 Securities sold under customer repurchase agreements 589 — 589 — 589 Long-term borrowings 1,195 — 1,222 — 1,222 Accrued interest payable 8 — 8 — 8 149 The methods and assumptions used to estimate the fair value of each class of financial instruments not discussed elsewhere are as follows: Net loans. The carrying value of net loans is net of the ACL. Loans are generally valued by discounting expected cash flows using market inputs with adjustments based on cohort level assumptions for certain loan types as well as internally developed estimates at a business segment level. Due to the significance of the unobservable market inputs and assumptions, as well as the absence of a liquid secondary market for most loans, these loans are classified as Level 3. Certain loans are measured based on observable market prices sourced from external data providers and classified as Level 2. Nonaccrual loans are written down and reported at their estimated recovery value which approximates their fair value and classified as Level 3. Investment securities held to maturity. BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the Supranational Entities and Multilateral Development Banks and FDIC guaranteed CDs with other financial institutions. We primarily use prices obtained from pricing services to determine the fair value of securities, which are Level 2 inputs. FHLB stock. The carrying amount of FHLB stock is a reasonable estimate of fair value, as these securities are not readily marketable and are evaluated for impairment based on the ultimate recoverability of the par value. BancShares considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. BancShares investment in FHLB stock is ultimately recoverable at par. The inputs used in the fair value measurement for the FHLB stock are considered Level 2 inputs. Mortgage and other servicing rights. Mortgage and other servicing rights are initially recorded at fair value and subsequently carried at the lower of amortized cost or market. Therefore, servicing rights are carried at fair value only when fair value is less than the amortized cost. The fair value of mortgage and other servicing rights is determined using a pooling methodology. Similar loans are pooled together and a model which relies on discount rates, estimates of prepayment rates and the weighted average cost to service the loans is used to determine the fair value. The inputs used in the fair value measurement for mortgage and other servicing rights are considered Level 3 inputs. Deposits. The estimated fair value of deposits with no stated maturity, such as demand deposit accounts, money market accounts, and savings accounts was the amount payable on demand at the reporting date. The fair value of time deposits was estimated based on a discounted cash flow technique using Level 2 inputs appropriate to the contractual maturity. Credit balances of factoring clients. The impact of the time value of money from the unobservable discount rate for credit balances of factoring clients is inconsequential due to the short term nature of these balances, therefore, the fair value approximated carrying value, and the credit balances were classified as Level 3 Short-term borrowed funds. Includes federal funds purchased, repurchase agreements and certain other short-term borrowings and payables. The fair value approximates carrying value and are classified as Level 2. Long-term Borrowings. For certain long-term senior and subordinated unsecured borrowings, the fair values are sourced from a third-party pricing service. The fair value of other long-term borrowings are determined by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for FHLB borrowings, senior and subordinated debentures, and other borrowings are classified as Level 2. The fair value of other secured borrowings are estimated based on unobservable inputs and therefore classified as Level 3. For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of December 31, 2022 and 2021. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short-term in nature and there is no interest rate or credit risk that would cause the fair value to differ from the carrying value. Cash and due from banks, and interest earning deposits at banks, are classified on the fair value hierarchy as Level 1. Accrued interest receivable and accrued interest payable are classified as Level 2. 150 NOTE 17 — STOCKHOLDERS' EQUITY The common stock activity for the year ended December 31, 2022 is presented in the following table. There was no common stock activity for the year ended December 31, 2021. Number of Shares of Common Stock Outstanding Class A Class B Common stock at December 31, 2021 8,811,220 1,005,185 Common stock issued in CIT Merger 6,140,010 — Restricted stock units vested, net of shares held to cover taxes 49,787 — Shares purchased under authorized repurchase plan ( 1,500,000 ) — Common stock at December 31, 2022 13,501,017 1,005,185 Common Stock The Parent Company has Class A Common Stock and Class B Common Stock. Shares of Class A Common Stock have one vote per share, while shares of Class B Common Stock have 16 votes per share. In connection with the consummation of the CIT Merger, the Parent Company issued approximately 6.1 million shares of Class A Common Stock as further discussed in Note 2 — Business Combinations. Restricted Stock Units Refer to Note 22 — Employee Benefit Plans for discussion of the BancShares RSUs. Non-Cumulative Perpetual Preferred Stock On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares (the “Depositary Shares”), each representing a 1/40th interest in a share of 5.375 % non-cumulative perpetual preferred stock, series A (“BancShares Series A Preferred Stock”) (equivalent to $ 1,000 per share of the BancShares Series A Preferred Stock) for a total of $ 345 million. As part of the CIT Merger, each issued and outstanding share of CIT Series A Preferred Stock and CIT Series B Preferred Stock automatically converted into the right to receive one share of BancShares Series B Preferred Stock and BancShares Series C Preferred Stock, respectively, having such rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, that were not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions, taken as a whole, of the CIT Series A Preferred Stock and the CIT Series B Preferred Stock, respectively . The following table summarizes BancShares’ non-cumulative perpetual preferred stock. dollars in millions, except per share and par value data Preferred Stock Issuance Date Earliest Redemption Date Par Value Shares Authorized, Issued and Outstanding Liquidation Preference Per Share Total Liquidation Preference Dividend Dividend Payment Dates Series A March 12, 2020 March 15, 2025 $ 0.01 345,000 $ 1,000 $ 345 5.375 % Quarterly in arrears Series B January 3, 2022 January 4, 2027 0.01 325,000 1,000 325 5.8 %, converted to LIBOR + 3.972 % beginning June 15, 2022 Semi-annually during the fixed rate period, then quarterly in arrears, as of June 15, 2022 Series C January 3, 2022 January 4, 2027 0.01 8,000,000 25 200 5.625 % Quarterly in arrears, as of March 15, 2022 Dividends on BancShares Series A, B, and C Preferred Stock (together, “BancShares Preferred Stock”) will be paid when, as, and if declared by the Board of Directors of the Parent Company, or a duly authorized committee thereof, to the extent that the Parent Company has lawfully available funds to pay dividends. If declared, dividends with respect to the BancShares Series A Preferred Stock and BancShares Series C Preferred Stock will accrue and be payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year. Dividends on the BancShares Series B Preferred Stock initially accrued and were payable on a semi-annual basis during the fixed rate period. Upon expiration of the fixed rate period on June 15, 2022, dividends with respect to the BancShares Series B Preferred Stock, if declared, now accrue and are payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year. Dividends on the BancShares Preferred Stock will not be cumulative. 151 The Parent Company may redeem the BancShares Preferred Stock at its option, and subject to any required regulatory approval, at a redemption price equal to the “Liquidation Preference Per Share” in the table above, plus any declared and unpaid dividends to, but excluding, the redemption date, (i) in whole or in part, from time to time, on any dividend payment date on or after the “Earliest Redemption Date” in the table above, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event. NOTE 18 — ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME The following table details the components of accumulated other comprehensive (loss) income: Components of Accumulated Other Comprehensive (Loss) Income dollars in millions December 31, 2022 December 31, 2021 Pretax Income Taxes Net of Income Taxes Pretax Income Taxes Net of Income Taxes Unrealized loss on securities available for sale $ ( 972 ) $ 233 $ ( 739 ) $ ( 12 ) $ 3 $ ( 9 ) Unrealized loss on securities available for sale transferred to securities held to maturity ( 8 ) 2 ( 6 ) ( 9 ) 2 ( 7 ) Defined benefit pension items 13 ( 3 ) 10 34 ( 8 ) 26 Total accumulated other comprehensive (loss) income $ ( 967 ) $ 232 $ ( 735 ) $ 13 $ ( 3 ) $ 10 The following table details the changes in the components of accumulated other comprehensive (loss) income, net of income tax: Changes in Components of Accumulated Other Comprehensive (Loss) Income, net of income tax dollars in millions Unrealized (loss) gain on securities available for sale Unrealized (loss) gain on securities available for sale transferred to securities held to maturity Net change in defined benefit pension items Total accumulated other comprehensive (loss) income Balance as of December 31, 2021 $ ( 9 ) $ ( 7 ) $ 26 $ 10 AOCI activity before reclassifications ( 730 ) — ( 25 ) ( 755 ) Amounts reclassified from AOCI — 1 9 10 Other comprehensive (loss) income for the period ( 730 ) 1 ( 16 ) ( 745 ) Balance as of December 31, 2022 $ ( 739 ) $ ( 6 ) $ 10 $ ( 735 ) Balance as of December 31, 2020 $ 79 $ 4 $ ( 71 ) $ 12 AOCI activity before reclassifications ( 62 ) ( 10 ) 76 4 Amounts reclassified from AOCI ( 26 ) ( 1 ) 21 ( 6 ) Other comprehensive (loss) income for the period ( 88 ) ( 11 ) 97 ( 2 ) Balance as of December 31, 2021 $ ( 9 ) $ ( 7 ) $ 26 $ 10 152 Other Comprehensive (Loss) Income The amounts included in the Consolidated Statements of Comprehensive Income are net of income taxes. The following table presents the pretax and after-tax components of other comprehensive income. Components of Other Comprehensive (Loss) Income dollars in millions Year ended December 31 2022 2021 Pretax Income Taxes Net of Income Taxes Pretax Income Taxes Net of Income Taxes Income Statement Line Item Defined benefit pension items Actuarial (loss) gain $ ( 33 ) $ 8 $ ( 25 ) $ 98 $ ( 22 ) $ 76 Amounts reclassified from AOCI 12 ( 3 ) 9 27 ( 6 ) 21 Other noninterest expense Other comprehensive (loss) income for defined benefit pension items $ ( 21 ) $ 5 $ ( 16 ) $ 125 $ ( 28 ) $ 97 Unrealized loss on securities available for sale transferred to securities held to maturity Amounts reclassified from AOCI $ — $ — $ — $ ( 13 ) $ 3 $ ( 10 ) Reclassifications out of AOCI 1 — 1 ( 1 ) — ( 1 ) Interest on investment securities Other comprehensive income (loss) on securities available for sale transferred to securities held to maturity $ 1 $ — $ 1 $ ( 14 ) $ 3 $ ( 11 ) Unrealized loss on securities available for sale AOCI activity before reclassification $ ( 960 ) $ 230 $ ( 730 ) $ ( 81 ) $ 19 $ ( 62 ) Amounts reclassified from AOCI — — — ( 33 ) 7 ( 26 ) Realized gain on sale of investment securities available for sale, net Other comprehensive loss on securities available for sale $ ( 960 ) $ 230 $ ( 730 ) $ ( 114 ) $ 26 $ ( 88 ) Total other comprehensive loss $ ( 980 ) $ 235 $ ( 745 ) $ ( 3 ) $ 1 $ ( 2 ) NOTE 19 — REGULATORY CAPITAL BancShares and FCB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the BancShares’ Consolidated Financial Statements. Certain activities, such as the ability to undertake new business initiatives, including acquisitions, the access to and cost of funding for new business initiatives, the ability to pay dividends, the ability to repurchase shares or other capital instruments, the level of deposit insurance costs, and the level and nature of regulatory oversight, largely depend on a financial institution’s capital strength. Federal banking agencies approved regulatory capital guidelines (“Basel III”) aimed at strengthening previous capital requirements for banking organizations and the associated capital conservation buffers are 2.50%. The following table includes the Basel III requirements for regulatory capital ratios. Basel III Minimums Basel III Conservation Buffers Basel III Requirements Regulatory capital ratios Total risk-based capital 8.00 % 2.50 % 10.50 % Tier 1 risk-based capital 6.00 2.50 8.50 Common equity Tier 1 4.50 2.50 7.00 Tier 1 leverage 4.00 — 4.00 153 The FDIC also has Prompt Corrective Action (“PCA”) thresholds for regulatory capital ratios. The regulatory capital ratios for BancShares and FCB are calculated in accordance with the guidelines of the federal banking authorities. The regulatory capital ratios for BancShares and FCB exceed the Basel III requirements and the PCA well-capitalized thresholds as of December 31, 2022 and 2021 as summarized in the following table. dollars in millions December 31, 2022 December 31, 2021 Basel III Requirements PCA well-capitalized thresholds Amount Ratio Amount Ratio BancShares Total risk-based capital 10.50 % 10.00 % $ 11,799 13.18 % $ 5,042 14.35 % Tier 1 risk-based capital 8.50 8.00 9,902 11.06 4,380 12.47 Common equity Tier 1 7.00 6.50 9,021 10.08 4,041 11.50 Tier 1 leverage 4.00 5.00 9,902 8.99 4,380 7.59 FCB Total risk-based capital 10.50 % 10.00 % $ 11,627 12.99 % $ 4,858 13.85 % Tier 1 risk-based capital 8.50 8.00 10,186 11.38 4,651 13.26 Common equity Tier 1 7.00 6.50 10,186 11.38 4,651 13.26 Tier 1 leverage 4.00 5.00 10,186 9.25 4,651 8.07 At December 31, 2022, BancShares and FCB had risk-based capital ratio conservation buffers of 5.06 % and 4.99 %, respectively, which are in excess of the Basel III conservation buffer of 2.50%. At December 31, 2021, BancShares and FCB had risk-based capital ratio conservation buffers of 6.35 % and 5.85 %, respectively. The capital ratio conservation buffers represent the excess of the regulatory capital ratio as of December 31, 2022 and 2021 over the Basel III minimum for the ratio that is the binding constraint. Additional Tier 1 capital for BancShares includes preferred stock discussed further in Note 17 — Stockholders’ Equity. Additional Tier 2 capital for BancShares and FCB primarily consists of qualifying ACL and qualifying subordinated debt. Dividend Restrictions Dividends paid from FCB to the Parent Company are the primary source of funds available to the Parent Company for payment of dividends to its stockholders. The Board of Directors of FCB may approve distributions, including dividends, as it deems appropriate, subject to the requirements of the FDIC and the General Statutes of North Carolina, provided that the distributions do not reduce the regulatory capital ratios below the applicable requirements. FCB could have paid additional dividends to the Parent Company in the amount of $ 2.7 billion while continuing to meet the requirements for well-capitalized banks at December 31, 2022. Dividends declared by FCB and paid to the Parent Company amounted to $ 1.4 billion for the year ended December 31, 2022. Payment of dividends is made at the discretion of FCB’s Board of Directors and is contingent upon satisfactory earnings as well as projected capital needs. NOTE 20 — EARNINGS PER COMMON SHARE The following table sets forth the computation of the basic and diluted earnings per common share: Earnings per Common Share dollars in millions, except per share data Year ended December 31 2022 2021 2020 Net income $ 1,098 $ 547 $ 492 Preferred stock dividends 50 18 14 Net income available to common stockholders $ 1,048 $ 529 $ 478 Weighted average common shares outstanding Basic shares outstanding 15,531,924 9,816,405 10,056,654 Stock-based awards 18,020 — — Diluted shares outstanding 15,549,944 9,816,405 10,056,654 Earnings per common share Basic $ 67.47 $ 53.88 $ 47.50 Diluted $ 67.40 $ 53.88 $ 47.50 BancShares RSUs are discussed in Note 22 — Employee Benefit Plans. 154 NOTE 21 — INCOME TAXES The provision (benefit) for income taxes for the year ended December 31, 2022, 2021 and 2020 is comprised of the following: Provision (Benefit) for Income Taxes dollars in millions Year ended December 31 2022 2021 2020 Current U.S. federal income tax provision $ 58 $ 140 $ 137 Deferred U.S. federal income tax provision / (benefit) 170 ( 6 ) ( 29 ) Total federal income tax provision 228 134 108 Current state and local income tax provision 4 21 15 Deferred state and local income tax provision / (benefit) 23 ( 1 ) 3 Total state and local income tax provision 27 20 18 Total non-U.S. income tax provision 9 — — Total provision for income taxes $ 264 $ 154 $ 126 A reconciliation from the U.S. Federal statutory rate to BancShares’ actual effective income tax rate for the year ended December 31, 2022, 2021 and 2020 is the following: Percentage of Pretax Income dollars in millions Effective Tax Rate 2022 2021 2020 Pretax Income Income Tax Expense (Benefit) Percentage of Pretax Income Pretax Income Income Tax Expense (Benefit) Percentage of Pretax Income Pretax Income Income Tax Expense (Benefit) Percentage of Pretax Income Federal income taxes and rate $ 1,362 $ 286 21.0 % $ 701 $ 147 21.0 % $ 618 $ 130 21.0 % Increase (decrease) due to: State and local income taxes, net of federal income tax benefit 53 3.9 % 16 2.2 % 14 2.2 % Non-taxable bargain purchase gain (1) ( 105 ) ( 7.7 ) % — — % — — % Domestic tax credits ( 20 ) ( 1.5 ) % ( 5 ) ( 0.7 ) % ( 5 ) ( 0.9 ) % Effect of BOLI surrender (1) 48 3.5 % — — % — — % Deferred tax liability adjustment ( 8 ) ( 0.6 ) % — — % — — % Difference in tax rates applicable to non-U.S. earnings 1 0.1 % — — % — — % Repayment of claim of right income — — % ( 2 ) ( 0.3 ) % ( 14 ) ( 2.2 ) % Valuation allowances ( 5 ) ( 0.4 ) % — — % — — % Other 14 1.1 % ( 2 ) ( 0.2 ) % 1 0.3 % Provision for income taxes and effective tax rate $ 264 19.4 % $ 154 22.0 % $ 126 20.4 % (1) Income tax expense (benefit) includes, if applicable, federal, state, foreign and penalty taxes. Income tax expense for 2021 and 2020 was favorably impacted by $ 2 million and $ 14 million respectively, due to BancShares’ decision in the second quarter of 2020 to utilize an allowable alternative for computing its 2021 and 2020 federal income tax liability. The allowable alternative provides BancShares the ability to use the federal income tax rate for certain current year deductible amounts related to prior year FDIC-assisted acquisitions that was applicable when these amounts were originally subjected to tax. As a result of the CIT Merger, BancShares permanently reinvested eligible earnings of certain foreign subsidiaries and accordingly, does not accrue any U.S. or foreign taxes that would be due if those earnings were repatriated. As of December 31, 2022, this assertion resulted in an unrecognized net deferred tax liability of $ 18 million on reinvested earnings of $ 665 million. 155 The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at December 31, 2022 and 2021 are presented below: Components of Deferred Income Tax Assets and Liabilities dollars in millions 2022 2021 Deferred Tax Assets: Net operating loss (NOL) carry forwards $ 358 $ 8 Basis difference in loans 57 — Allowance for credit losses 252 40 Accrued liabilities and reserves 37 6 Deferred compensation 51 19 Right of use - lease liability 92 14 Domestic tax credits 176 — Mark to market adjustments 28 — Capitalized costs 15 — Unrealized net loss on securities AFS 275 5 Other 48 17 Total gross deferred tax assets 1,389 109 Deferred Tax Liabilities: Operating leases ( 1,311 ) — Right of use - lease asset ( 86 ) ( 14 ) Loans and direct financing leases ( 43 ) ( 8 ) Deferred BOLI Gain ( 15 ) — Pension ( 54 ) ( 64 ) Prepaid expenses ( 14 ) — Market discount accretion ( 35 ) — Other ( 47 ) ( 56 ) Total deferred tax liabilities ( 1,605 ) ( 142 ) Total net deferred tax liability before valuation allowances ( 216 ) ( 33 ) Less: valuation allowances ( 70 ) — Net deferred tax liability after valuation allowances $ ( 286 ) $ ( 33 ) Net Operating Loss Carryforwards and Valuation Adjustments As a result of the CIT Merger, BancShares’ net deferred tax liabilities increased by approximately $ 300 million. That amount included an increase to deferred tax assets (“DTAs”) primarily from net operating losses, capitalized costs and tax credits net of deferred tax liabilities, primarily from operating leases. As of December 31, 2022, BancShares has DTAs totaling $ 358 million on its global NOLs. This includes: (1) a DTA of $ 192 million relating to its cumulative U.S. federal NOLs of $ 913 million; (2) DTAs of $ 150 million relating to cumulative state NOLs of $ 2.8 billion, including amounts of reporting entities that file in multiple jurisdictions, and (3) DTAs of $ 16 million relating to cumulative non-U.S. NOLs of $ 68 million. The U.S. federal NOLs will begin to expire in 2030 and state NOLs will begin to expire in 2024. As of December 31, 2022, BancShares has deferred tax assets of $ 176 million from its domestic tax credits. This includes: (1) DTAs of $ 167 million from federal tax credits and (2) DTAs of $ 9 million from state tax credits. The federal tax credits begin to expire in 2032 and the state tax credits have an indefinite carryforward. During 2022, Management updated BancShares’ long-term forecast of future U.S. federal taxable income. The updated forecast continues to support the realization of the U.S. federal DTAs on NOLs and therefore no valuation allowance is necessary. However, a valuation allowance of $ 67 million was retained on U.S. state DTAs relating to certain state NOLs as of December 31, 2022. BancShares maintained a valuation allowance of $ 3 million against certain non-U.S. reporting entities' net DTAs at December 31, 2022. There was no valuation allowance at December 31, 2021. The increase is mainly related to the CIT Merger. BancShares’ ability to recognize DTAs is evaluated on a quarterly basis to determine if there are any significant events that would affect our ability to utilize existing DTAs. If events are identified that affect our ability to utilize our DTAs, the respective valuation allowance may be adjusted accordingly. 156 Liabilities for Unrecognized Tax Benefits A reconciliation of the beginning and ending amount of unrecognized tax benefits ("UTBs") is as follows: Unrecognized Tax Benefits (1) dollars in millions Liabilities for Unrecognized Tax Benefits Interest / Penalties Total Balance at December 31, 2021 $ 30 $ 1 $ 31 Effect of CIT Merger 4 2 6 Additions for tax positions related to prior years 1 — 1 Reductions for tax positions of prior years ( 2 ) — ( 2 ) Expiration of statutes of limitations ( 1 ) — ( 1 ) Settlements ( 5 ) — ( 5 ) Balance at December 31, 2022 $ 27 $ 3 $ 30 (1) Tabular rollforward does not present the comparable data for the prior years, as activity in the prior years was not material. BancShares recognizes tax benefits when it is more likely than not that the position will prevail, based solely on the technical merits under the tax law of the relevant jurisdiction. BancShares will recognize the tax benefit if the position meets this recognition threshold determined based on the largest amount of the benefit that is more than likely to be recognized. As a result of the CIT Merger, BancShares’ liabilities for unrecognized tax benefits, including interest and penalties, increased by $ 6 million. During the year ended December 31, 2022, BancShares recorded a net decrease in UTBs, including interest and penalties. The net decrease primarily related to settlements, partially offset by the increase resulting from the CIT Merger. As of December 31, 2022, the accrued liability for interest and penalties is $ 3 million. BancShares recognizes accrued interest and penalties on UTBs in income tax expense. BancShares has UTBs relating to uncertain state tax positions in North Carolina and other state jurisdictions resulting from tax filings submitted to the states. No tax benefit has been recorded for these uncertain tax positions in the consolidated financial statements. It is reasonably possible that these uncertain tax positions may be settled or resolved in the next twelve months. No reasonable estimate of the settlement or resolution can be made. The entire $ 30 million of UTBs including interest and penalties at December 31, 2022, would lower BancShares’ effective tax rate, if realized. Management believes that it is reasonably possible the total potential liability before interest and penalties may be increased or decreased by $ 10 million within the next twelve months of the reporting date because of anticipated settlement with taxing authorities, resolution of open tax matters, and the expiration of various statutes of limitations. Income Tax Audits BancShares is subject to examinations by the U.S. Internal Revenue Service (“IRS”) and other taxing authorities in jurisdictions where BancShares has significant business operations. The tax years under examination vary by jurisdiction. BancShares does not expect completion of those audits to have a material impact on the firm’s financial condition, but it may be material to operating results for a particular period, depending, in part, on the operating results for that period. The table below presents the earliest tax years that remain subject to examination by major jurisdiction. Jurisdiction December 31, 2022 U.S. Federal 2019 New York State and City 2015 North Carolina 2019 California 2017 Canada 2015 BancShares and its subsidiaries are subject to examinations by the IRS and other taxing authorities in jurisdictions where BancShares has business operations for years ranging from 2012 through 2022. Management does not anticipate that the completion of these examinations will have a material impact on the firm’s financial condition, but it may be material to operating results for a particular period, depending, in part, on the operating results for that period. 157 NOTE 22 — EMPLOYEE BENEFIT PLANS BancShares sponsors benefit plans for its qualifying employees and former employees of Bancorporation, Inc. (“Bancorporation”). The benefit plans include noncontributory defined benefit pension plans and 401(k) savings plans, which are qualified under the Internal Revenue Code. BancShares also maintains agreements with certain executives providing supplemental benefits paid upon death or separation from service at an agreed-upon age. Certain benefit plans of CIT were assumed by BancShares upon closing of the CIT Merger. CIT sponsored both funded and unfunded noncontributory defined benefit pension and postretirement plans, executive retirement plans, and a 401(k) savings plan covering certain employees as further discussed below. Retirement and Post-Retirement Plans Pension Plans BancShares sponsors three qualified noncontributory defined benefit pension plans (the “Pension Plans”), including the FCB-North Pension Plan (the “BancShares Pension Plan”), FCB-South (“Bancorporation”) Pension Plan (the “Bancorporation Pension Plan”), and a plan assumed upon completion of the CIT Merger (the “CIT Pension Plan”). BancShares employees who were hired prior to April 1, 2007 and qualified under length of service and other requirements are covered by the BancShares Pension Plan, which was closed to new participants as of April 1, 2007. There was no discretionary contribution made to the BancShares Pension Plan during 2022, while discretionary contributions of $ 32 thousand were made during 2021. Certain legacy Bancorporation employees that qualified under length of service and other requirements are covered by the Bancorporation Pension Plan, which was closed to new participants as of September 1, 2007. There were no discretionary contributions made to the Bancorporation Pension Plan during 2022 or 2021. Participants in the BancShares Pension Plan and Bancorporation Pension Plan were fully vested after five years of service. Retirement benefits are based on years of service and highest annual compensation for five consecutive years during the last ten years of employment. BancShares assumed the CIT Pension Plan upon completion of the CIT Merger. There was no discretionary contribution made to the CIT Pension Plan during 2022. BancShares makes contributions to the Pension Plans in amounts between the minimum required for funding and the maximum amount deductible for federal income tax purposes. Management evaluates the need for its contributions to these plans on a periodic basis based upon numerous factors including, but not limited to, funded status, returns on plan assets, discount rates and the current economic environment. Supplemental and Executive Retirement Plans Upon completion of the CIT Merger, BancShares assumed a frozen U.S. non-contributory supplemental retirement plan (the “Supplemental Retirement Plan”) and an additional retirement plan for certain executives (the “Executive Retirement Plan”), which had been closed to new participants since 2006 and whose participants were all inactive. There were no discretionary contributions made to the Executive Retirement Plan or the Supplemental Retirement Plan in 2022. Accumulated balances under the Executive Retirement Plan and the Supplemental Retirement Plan continue to receive periodic interest, subject to certain government limits. The interest credit was 1.9 % for the year ended December 31, 2022. Postretirement Benefit Plans Upon completion of the CIT Merger, BancShares assumed four postretirement benefit plans (the “Postretirement Plans”) that provided healthcare and life insurance benefits to eligible retired employees. For most eligible retirees, healthcare was contributory and life insurance was non-contributory. The Postretirement Plans were funded on a “pay-as-you-go” basis. Certain Postretirement Plans were terminated during the first quarter of 2022. BancShares recognized a reduction in other noninterest expense of approximately $ 27 million in the first quarter of 2022 related to obligations previously accrued. 158 Funding for Retirement and Postretirement Plans The funding policy for the Pension Plans is to contribute an amount each year to meet all Employee Retirement Income Security Act (“ERISA”) minimum requirements, including amounts to meet quarterly funding requirements, avoid “at-risk” status and avoid any benefit restrictions. BancShares may also contribute additional voluntary amounts each year (up to the maximum tax-deductible amount) in order to achieve certain target funding levels in the plans, with consideration also given to current and future cash flow and tax positions. No contributions are currently expected for the year ending December 31, 2023. The tables and disclosures below address the following: (i) the Pension Plans, the Supplemental Retirement Plan, and the Executive Retirement Plan (the “Retirement Plans”) and (ii) the Postretirement Plans (collectively with the Retirement Plans, the “Plans”). The Supplemental and Executive Retirement Plans are unfunded. Therefore, the tables and disclosures below regarding plan assets apply to the Pension Plans, which are funded. Obligations and Funded Status The following table provides the changes in benefit obligations, assets and the funded status of the Plans at December 31, 2022 and 2021. Obligations and Funded Status Retirement Plans Postretirement Plans dollars in millions 2022 2021 2022 Change in benefit obligation Projected benefit obligation at January 1 $ 1,056 $ 1,078 $ — Projected benefit obligation of acquired plans 389 — 28 Service cost 14 15 — Interest cost 43 30 — Actuarial (gain) loss ( 324 ) ( 31 ) — Benefits paid ( 63 ) ( 36 ) ( 1 ) Plan termination — — ( 27 ) Projected benefit obligation at December 31 1,115 1,056 — Change in plan assets Fair value of plan assets at January 1 1,345 1,236 — Fair value of plan assets of acquired plans 386 — — Actual (loss) return on plan assets ( 270 ) 145 — Benefits paid ( 57 ) ( 36 ) — Fair value of plan assets at December 31 1,404 1,345 — Funded status at December 31 $ 289 $ 289 $ — Information for pension plans with a benefit obligation in excess of plan assets Projected and accumulated benefit obligations $ 54 $ — $ — The Consolidated Balance Sheets include $ 343 million and $ 289 million in other assets related to the Pension Plans at December 31, 2022 and 2021, respectively. The Consolidated Balance Sheet includes $ 54 million in other liabilities at December 31, 2022 for the unfunded Supplemental Retirement and Executive Retirement Plans. 159 The following table details the amounts recognized in accumulated other comprehensive income, before income taxes, at December 31, 2022 and 2021. See Note 18 — Accumulated Other Comprehensive (Loss) Income for additional information. Retirement Plans Postretirement Plans dollars in millions 2022 2021 2022 Net actuarial gain $ 13 $ 34 $ — The accumulated benefit obligation for the Plans at December 31, 2022 and 2021 was $ 1.1 billion and $ 973 million, respectively. The Plans use a measurement date of December 31. The following table shows the components of periodic benefit cost related to the Plans and changes in assets and benefit obligations of the Plans recognized in other comprehensive income, before income taxes, for the years ended December 31, 2022, 2021 and 2020. See Note 18 — Accumulated Other Comprehensive (Loss) Income for additional information. Net Periodic Benefit Costs and Other Amounts Retirement Plans Postretirement Plans Year ended December 31 Year ended December 31 dollars in millions 2022 2021 2020 2022 Service cost $ 14 $ 15 $ 14 $ — Interest cost 43 30 34 — Expected return on assets ( 87 ) ( 78 ) ( 65 ) — Net prior service credit amortization — — — ( 27 ) Amortization of net actuarial loss 12 27 25 — Total net periodic (benefit) cost ( 18 ) ( 6 ) 8 ( 27 ) Current year actuarial loss (gain) 33 ( 98 ) ( 55 ) — Amortization of actuarial loss ( 12 ) ( 27 ) ( 25 ) — Current year amortization of prior service cost — — — 27 Amortization of prior service cost — — — ( 27 ) Net loss (gain) recognized in other comprehensive income 21 ( 125 ) ( 80 ) — Total recognized in net periodic benefit cost and other comprehensive income $ 3 $ ( 131 ) $ ( 72 ) $ ( 27 ) The actuarial loss in 2022 was primarily due to lower than expected return on assets and higher interest crediting rate, partially offset by increased discount rates. Actuarial gains in 2021 and 2020 were primarily due to return on assets greater than expected, partially offset by the impact of a decreased discount rate. Service costs and the amortization of prior service costs are recorded in personnel expense, while interest cost, expected return on assets and the amortization of actuarial gains or losses are recorded in other noninterest expense. 160 The assumptions used to determine the benefit obligations at December 31, 2022 and 2021 are as follows: Weighted Average Assumptions Retirement Plans Postretirement Plans 2022 2021 2022 Discount rate 5.57 % 3.04 % N/A Rate of compensation increase 5.60 5.60 N/A Interest crediting rate (1) 4.25 N/A N/A (1) Specific to cash investments in the CIT Pension Plan. The assumptions used to determine the net periodic benefit cost for the years ended December 31, 2022, 2021 and 2020, are as follows: Weighted Average Assumptions Retirement Plans Postretirement Plans 2022 2021 2020 2022 Discount rate 3.03 % 2.76 % 3.46 % 3.02 % Rate of compensation increase 5.60 5.60 5.60 N/A Expected long-term return on plan assets 5.87 7.50 7.50 N/A Interest crediting rate (1) 1.50 N/A N/A N/A (1) Specific to cash investments in the CIT Pension Plan. The estimated discount rate, which represents the interest rate that could be obtained for a suitable investment used to fund the benefit obligations, is based on a yield curve developed from high-quality corporate bonds across a full maturity spectrum. The projected cash flows of the Pension Plans are discounted based on this yield curve and a single discount rate is calculated to achieve the same present value. The increase in discount rate from the prior year is reflective of the current market conditions. The weighted average expected long-term rate of return on Pension Plans’ assets represents the average rate of return expected to be earned on the Pension Plans’ assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return on the Pension Plans’ assets, historical and current returns, as well as investment allocation strategies, are considered. Assets of the Pension Plans For the Pension Plans, our primary total return objective is to achieve returns over the long term that will fund retirement liabilities and provide desired benefits of the Pension Plans in a manner that satisfies the fiduciary requirements of the ERISA. The Pension Plans’ assets have a long-term time horizon that runs concurrent with the average life expectancy of the participants. As such, the Pension Plans can assume a time horizon that extends well beyond a full market cycle and can assume a reasonable level of risk. It is expected, however, that both professional investment management and sufficient portfolio diversification will smooth volatility and help generate a consistent level of return. The investments are broadly diversified across global, economic and market risk factors in an attempt to reduce volatility and target multiple return sources. Within approved guidelines and restrictions, the investment manager has discretion over the timing and selection of individual investments. The assets of the BancShares Pension Plan and Bancorporation Pension Plan are held by the BancShares’ trust department. Assets of the CIT Pension Plan were held by a third party servicer during 2022. Equity securities are measured at fair value using observable closing prices. These securities are classified as Level 1 as they are traded in an active market. Fixed income securities are generally estimated using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models which use a variety of inputs, such as benchmark yields, reported trades, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2. In the following table, assets of the CIT Pension Plan are primarily included in the Common Collective Trust. These investments have been measured using the net asset value per share practical expedient and are not required to be classified in the fair value hierarchy. 161 The following tables summarize the fair values and fair value hierarchy for the assets of the Pension Plans at December 31, 2022 and 2021. Fair Value Measurements December 31, 2022 dollars in millions Market Value Level 1 Level 2 Level 3 Not Classified (1) Weighted Average Target Allocation Pension Plans Actual % of Plans' Assets Cash and equivalents $ 25 $ 25 $ — $ — $ — 0 - 5 % 2 % Equity securities 25 - 60 % 46 % Common and preferred stock 88 88 — — — Mutual funds 181 181 — — — Exchange traded funds 376 376 — — — Fixed income 25 - 60 % 31 % U.S. government and government agency securities 198 — 198 — — Corporate bonds 233 — 233 — — Alternative investments 0 - 30 % 21 % Common collective trust, measured at NAV 302 — — — 302 Limited partnerships 1 — — — 1 Total pension assets $ 1,404 $ 670 $ 431 $ — $ 303 100 % (1) These investments have been measured using the net asset value per share practical expedient and are not required to be classified in the table above. December 31, 2021 Market Value Level 1 Level 2 Level 3 Target Allocation Actual % of Plan Assets Cash and equivalents $ 17 $ 17 $ — $ — 0 - 5 % 1 % Equity securities 30 - 70 % 61 % Common and preferred stock 76 76 — — Mutual funds 482 482 — — Exchange traded funds 263 263 — — Fixed income 15 - 45 % 38 % U.S. government and government agency securities 228 — 228 — Corporate bonds 279 3 276 — Total pension assets $ 1,345 $ 841 $ 504 $ — 100 % There were no direct investments in equity securities of BancShares included in the Pension Plans’ assets in any of the years presented. Cash Flows The following table presents estimated future benefits projected to be paid for the next ten years from the Pension Plans’ assets or from the Company's general assets calculated using current actuarial assumptions. Actual benefit payments may differ from projected benefit payments. Projected Benefits dollars in millions Retirement Plans 2023 $ 72 2024 74 2025 77 2026 79 2027 82 2028-2032 420 162 401(k) Savings Plans Certain employees enrolled in the BancShares or Bancorporation Pension Plans are also eligible to participate in a 401(k) savings plan (the “401(k) Plan”) through deferral of portions of their salary. For employees who participate in the 401(k) Plan who also continue to accrue additional years of service under the BancShares or Bancorporation Pension Plans, BancShares makes a matching contribution equal to 100 % of the first 3 % and 50 % of the next 3 % of the participant’s deferral up to and including a maximum contribution of 4.5 % of the participant’s eligible compensation. The matching contribution immediately vests. At the end of 2007, employees were given the option to continue to accrue additional years of service under the BancShares or Bancorporation Pension Plans or to elect to join an enhanced 401(k) savings plan (the “Enhanced 401(k) Plan”). Under the Enhanced 401(k) Plan, BancShares matches participants’ contributions in an amount equal to 100 % of the first 6 % of the participant’s eligible compensation. The matching contribution immediately vests. In addition to the employer match of the employee contributions, the Enhanced 401(k) Plan provides a required employer non-elective contribution equal to 3 % of the compensation of a participant who remains employed at the end of the calendar year. Effective January 1, 2023 this non-elective contribution will be discretionary. This employer contribution vests after three years of service. Employees who elected to enroll in the Enhanced 401(k) Plan discontinued the accrual of additional years of service under the BancShares or Bancorporation Pension Plans and became enrolled in the Enhanced 401(k) Plan effective January 1, 2008. Eligible employees hired after January 1, 2008, are eligible to participate in the Enhanced 401(k) Plan. CIT sponsored a 401(k) plan (the “CIT 401(k) Plan”), which was assumed by BancShares upon completion of the CIT Merger. Under the CIT 401(k) Plan, BancShares matched 100 % of the participants’ contributions up to 4 % of the participant’s eligible compensation. In January 2023, the CIT 401(k) Plan was merged into the Enhanced 401(k) Plan. BancShares recognized expense related to contributions to all 401(k) plans of $ 55 million, $ 36 million, and $ 36 million during 2022, 2021 and 2020, respectively. Additional Benefits for Executives, Directors, and Officers BancShares has entered into contractual agreements with certain executives providing payments for a period of no more than ten years following separation from service occurring no earlier than an agreed-upon age. These agreements also provide a death benefit in the event a participant dies prior to separation from service or during the payment period following separation from service. BancShares has also assumed liability for contractual obligations to directors and officers of previously acquired entities. The following table provides the accrued liability as of December 31, 2022 and 2021, and the changes in the accrued liability during the years then ended: dollars in millions 2022 2021 Accrued liability as of January 1 $ 39 $ 43 Accrued liability of acquired banks 2 — Discount rate adjustment ( 2 ) ( 1 ) Benefit expense and interest cost 2 2 Benefits paid ( 5 ) ( 5 ) Benefits forfeited — — Accrued liability as of December 31 $ 36 $ 39 Discount rate at December 31 4.67 % 3.04 % 163 Other Compensation Plans BancShares offers various short-term and long-term incentive plans for certain employees. Compensation awarded under these plans may be based on defined formulas, performance criteria, or at the discretion of management. The incentive compensation programs were designed to motivate employees through a balanced approach of risk and reward for their contributions toward BancShares’ success. As of December 31, 2022 and 2021, the accrued liability for incentive compensation was $ 267 million and $ 84 million, respectively. CIT had compensation awards that either converted to BancShares RSUs or immediately vested at completion of the CIT Merger as further described in the “Stock-Based Compensation” discussion in Note 1 — Significant Accounting Policies and Basis of Presentation. In February 2016, CIT adopted the CIT Group Inc. 2016 Omnibus Incentive Plan (the "2016 Plan"), which provided for grants of stock-based awards to employees, executive officers, and directors. The BancShares RSUs are the only outstanding awards subject to the terms of the 2016 Plan and no further awards will be made under the 2016 Plan. Compensation expense is recognized over the vesting period or the requisite service period, which is generally three years for BancShares RSUs, under the graded vesting method, whereby each vesting tranche of the award is amortized separately as if each were a separate award. The following table presents the unvested BancShares RSUs at December 31, 2022, which have vesting periods through 2024. There were no grants of stock-based compensation awards during 2022. The fair value of RSUs that vested and settled in stock during 2022 was $ 64 million. Stock-Settled Awards Outstanding share amounts in whole dollars Stock-Settled Awards Number of Shares Weighted Average Grant Date Value (1) Unvested BancShares at December 31, 2021 — $ — Unvested CIT RSUs converted to BancShares RSUs at Merger Date 116,958 859.76 Unvested CIT PSUs converted to BancShares RSUs at Merger Date 10,678 859.76 Forfeitures ( 5,194 ) 859.76 Vested / settled awards ( 79,453 ) 859.76 Unvested BancShares RSUs at December 31, 2022 42,989 $ 859.76 (1) Represents the share price of BancShares as of the CIT Merger Date. 164 NOTE 23 — BUSINESS SEGMENT INFORMATION BancShares began reporting multiple segments during the first quarter of 2022 and now reports General Banking, Commercial Banking, Rail, and Corporate segments, as further discussed in Note 1 — Significant Accounting Policies and Basis of Presentation. Each of the segments are described below. General Banking General Banking delivers products and services to consumers and businesses through an extensive network of branches and various digital channels, including a full suite of deposit products, loans (primarily residential mortgages and business/commercial loans), and various fee-based services. General Banking also provides a variety of wealth management products and services to individuals and institutional clients, including brokerage, investment advisory, and trust services. In addition, General Banking has a dedicated business line that supports deposit, cash management and lending to homeowner associations and property management companies nationwide. Revenue is primarily generated from interest earned on loans and fees for banking and advisory services. General Banking segment is the primary deposit gathering business of FCB. Commercial Banking Commercial Banking provides a range of lending, leasing, capital markets, asset management and other financial and advisory services primarily to small and middle market companies in a wide range of industries. Loans offered are primarily senior secured loans collateralized by accounts receivable, inventory, machinery and equipment, transportation equipment and/or intangibles, and are often used for working capital, plant expansion, acquisitions or recapitalizations. These loans include revolving lines of credit and term loans and, depending on the nature of the collateral, may be referred to as collateral-backed loans, asset-based loans or cash flow loans. Commercial Banking provides senior secured loans to developers and other commercial real estate professionals, and also provides small business loans and leases, including both capital and operating leases, through a highly automated credit approval, documentation and funding process. Commercial Banking provides factoring, receivable management, and secured financing to businesses that operate in various industries. Revenue is primarily generated from interest earned on loans, rents on equipment leased, fees and other revenue from lending and leasing activities and banking services, along with capital markets transactions and commissions earned on factoring and related activities. Rail Rail offers customized leasing and financing solutions on a fleet of railcars and locomotives to railroads and shippers throughout North America. Railcar types include covered hopper cars used to ship grain and agricultural products, plastic pellets, sand, and cement; tank cars for energy products and chemicals; gondolas for coal, steel coil and mill service products; open hopper cars for coal and aggregates; boxcars for paper and auto parts, and center beams and flat cars for lumber. Revenue is primarily from operating lease income. Corporate Certain items that are not allocated to operating segments are included in the Corporate segment. Some of the more significant and recurring items include interest income on investment securities, a portion of interest expense primarily related to corporate funding costs (including brokered deposits), income on BOLI (other noninterest income), merger-related costs, as well as certain unallocated costs and intangible asset amortization expense (operating expenses). Corporate also includes certain significant items that are infrequent, such as: the Initial Non-PCD Provision for loans and leases and unfunded commitments; and the gain on acquisition, each of which are related to the CIT Merger. 165 Segment Net Income (Loss) and Select Period End Balances The following table presents the condensed income statements and select period end balances for each segment. dollars in millions Year Ended December 31, 2022 General Banking Commercial Banking Rail Corporate Total BancShares Net interest income (expense) $ 1,942 $ 889 $ ( 80 ) $ 195 $ 2,946 Provision for credit losses 11 121 — 513 645 Net interest income (expense) after provision for credit losses 1,931 768 ( 80 ) ( 318 ) 2,301 Noninterest income 472 521 657 486 2,136 Noninterest expense 1,570 746 428 331 3,075 Income (loss) before income taxes 833 543 149 ( 163 ) 1,362 Income tax expense (benefit) 204 128 37 ( 105 ) 264 Net income (loss) $ 629 $ 415 $ 112 $ ( 58 ) $ 1,098 Select Period End Balances Loans and leases $ 42,930 $ 27,773 $ 78 $ — $ 70,781 Deposits 84,361 3,225 15 1,807 89,408 Operating lease equipment, net — 723 7,433 — 8,156 Year Ended December 31, 2021 General Banking Commercial Banking Rail Corporate Total BancShares Net interest income (expense) $ 1,447 $ 17 $ — $ ( 74 ) $ 1,390 Benefit for credit losses ( 37 ) — — — ( 37 ) Net interest income (expense) after benefit for credit losses 1,484 17 — ( 74 ) 1,427 Noninterest income 433 — — 75 508 Noninterest expense 1,179 3 — 52 1,234 Income (loss) before income taxes 738 14 — ( 51 ) 701 Income tax expense (benefit) 162 3 — ( 11 ) 154 Net income (loss) $ 576 $ 11 $ — $ ( 40 ) $ 547 Select Period End Balances Loans and leases $ 31,820 $ 552 $ — $ — $ 32,372 Deposits 51,344 62 — — 51,406 Year Ended December 31, 2020 General Banking Commercial Banking Rail Corporate Total BancShares Net interest income (expense) $ 1,391 $ 15 $ — $ ( 18 ) $ 1,388 Provision for credit losses 58 — — — 58 Net interest income (expense) after provision for credit losses 1,333 15 — ( 18 ) 1,330 Noninterest income 379 — — 98 477 Noninterest expense 1,146 3 — 40 1,189 Income before income taxes 566 12 — 40 618 Income tax expense 116 2 — 8 126 Net income $ 450 $ 10 $ — $ 32 $ 492 Select Period End Balances Loans and leases $ 32,235 $ 554 $ — $ 3 $ 32,792 Deposits 43,391 40 — 1 43,432 166 NOTE 24 — COMMITMENTS AND CONTINGENCIES Commitments To meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments involve elements of credit, interest rate or liquidity risk and include commitments to extend credit and standby letters of credit. The accompanying table summarizes credit-related commitments and other purchase and funding commitments: dollars in millions December 31, 2022 December 31, 2021 Financing Commitments Financing assets (excluding leases) $ 23,452 $ 13,011 Letters of Credit Standby letters of credit 436 92 Other letters of credit 44 24 Deferred Purchase Agreements 2,039 — Purchase and Funding Commitments (1) Lessor commitments (1) 941 — (1) BancShares’ purchase and funding commitments relate to the equipment leasing businesses’ commitments to fund finance leases and operating leases, and Rail’s railcar manufacturer purchase and upgrade commitments. Financing Commitments Commitments to extend credit are legally binding agreements to lend to customers. These commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires collateral be pledged to secure the commitment, including cash deposits, securities and other assets. Financing commitments, referred to as loan commitments or lines of credit, primarily reflect BancShares’ agreements to lend to its customers, subject to the customers’ compliance with contractual obligations. At December 31, 2022, substantially all undrawn financing commitments were senior facilities. Most of the undrawn and available financing commitments are in the Commercial Banking segment. Financing commitments also include approximately $ 66 million related to off-balance sheet commitments to fund equity investments. Commitments to fund equity investments are contingent on events that have yet to occur and may be subject to change. As financing commitments may not be fully drawn, may expire unused, may be reduced or canceled at the customer’s request, and may require the customer to be in compliance with certain conditions, total commitment amounts do not necessarily reflect actual future cash flow requirements. The table above excludes uncommitted revolving credit facilities extended by Commercial Services to its clients for working capital purposes. In connection with these facilities, Commercial Services has the sole discretion throughout the duration of these facilities to determine the amount of credit that may be made available to its clients at any time and whether to honor any specific advance requests made by its clients under these credit facilities. Letters of Credit Standby letters of credit are commitments to pay the beneficiary thereof if drawn upon by the beneficiary upon satisfaction of the terms of the letter of credit. Those commitments are primarily issued to support public and private borrowing arrangements. To mitigate its risk, BancShares’ credit policies govern the issuance of standby letters of credit. The credit risk related to the issuance of these letters of credit is essentially the same as in extending loans to clients and, therefore, these letters of credit are collateralized when necessary. These financial instruments generate fees and involve, to varying degrees, elements of credit risk in excess of amounts recognized in the Consolidated Balance Sheets. 167 Deferred Purchase Agreements (“DPA”) A DPA is provided in conjunction with factoring, whereby a client is provided with credit protection for trade receivables without purchasing the receivables. The trade receivables terms generally require payment in 90 days or less. If the client’s customer is unable to pay an undisputed receivable solely as the result of credit risk, BancShares is then required to purchase the receivable from the client, less any borrowings for such client based on such defaulted receivable. The outstanding amount in the table above, less $ 186 million at December 31, 2022 of borrowings for such clients, is the maximum amount that BancShares would be required to pay under all DPAs. This maximum amount would only occur if all receivables subject to DPAs default in the manner described above, thereby requiring BancShares to purchase all such receivables from the DPA clients. The table above includes $ 1.9 billion of DPA exposures at December 31, 2022, related to receivables on which BancShares has assumed the credit risk. The table also includes $ 138 million available under DPA credit line agreements provided at December 31, 2022. The DPA credit line agreements specify a contractually committed amount of DPA credit protection and are cancellable by us only after a notice period, which is typically 90 days or less. Litigation and other Contingencies The Parent Company and certain of its subsidiaries have been named as a defendant in legal actions arising from its normal business activities in which damages in various amounts are claimed. BancShares is also exposed to litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed. As part of the CIT Merger, BancShares assumed litigation in which CIT and CIT Bank, N.A. d/b/a OneWest Bank (“OneWest”) were named as defendants in a then existing lawsuit brought as a qui tam (i.e., whistleblower) action by a former OneWest employee on behalf of the U.S. Government. The lawsuit asserted claims related to OneWest’s participation in the Home Affordable Modification Program (“HAMP”) administered by the United States Treasury Department, as well as Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) programs. On October 15, 2019, the plaintiff filed a second amended complaint in the United States District Court for the Eastern District of Texas alleging that, beginning in 2009, CIT (and its predecessor, OneWest) falsely certified its compliance with HAMP, submitted false claims for incentive payments for loan modifications, submitted false claims for FHA and VA insurance payments, and failed to self-report these violations. Plaintiff sought the return of all U.S. Government payments to CIT under the HAMP, FHA, and VA programs. CIT has received approximately $ 93 million in servicer incentives under HAMP, and the U.S. Government has paid more than $ 440 million in the aggregate in borrower, servicer, and investor incentives in connection with loans modified by OneWest or CIT under HAMP. OneWest and CIT denied all allegations of liability. The Department of Justice declined to intervene in the case. On July 26, 2022, the parties settled all claims for $ 18.5 million and pursuant to the terms of the settlement, the parties filed a joint stipulation of dismissal with prejudice. The settlement payment of $ 18.5 million was paid on August 4, 2022 and on August 29, 2022, the Court entered an Order dismissing the case. BancShares is also involved, and from time to time in the future may be involved, in a number of pending and threatened judicial, regulatory, and arbitration proceedings as well as proceedings, investigations, examinations and other actions brought or considered by governmental and self-regulatory agencies. These matters arise in connection with the ordinary conduct of BancShares’ business. At any given time, BancShares may also be in the process of responding to subpoenas, requests for documents, data and testimony relating to such matters and engaging in discussions to resolve the matters (all of the foregoing collectively being referred to as “Litigation”). While most Litigation relates to individual claims, BancShares may be subject to putative class action claims and similar broader claims and indemnification obligations. In light of the inherent difficulty of predicting the outcome of Litigation matters and indemnification obligations, particularly when such matters are in their early stages or where the claimants seek indeterminate damages, BancShares cannot state with confidence what the eventual outcome of the pending Litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines, or penalties related to each pending matter will be, if any. In accordance with applicable accounting guidance, BancShares’ establishes reserves for Litigation when those matters present loss contingencies as to which it is both probable that a loss will occur and the amount of such loss can reasonably be estimated. Based on currently available information, BancShares believes that the outcome of Litigation that is currently pending will not have a material adverse effect on BancShares’ financial condition, but may be material to BancShares’ operating results or cash flows for any particular period, depending in part on its operating results for that period. The actual results of resolving such matters may be substantially higher than the amounts reserved. 168 For certain Litigation matters in which BancShares is involved, BancShares is able to estimate a range of reasonably possible losses in excess of established reserves and insurance. For other matters for which a loss is probable or reasonably possible, such an estimate cannot be determined. For Litigation and other matters where losses are reasonably possible, management currently estimates an aggregate range of reasonably possible losses of up to $ 10 million in excess of any established reserves and any insurance we reasonably believe we will collect related to those matters. This estimate represents reasonably possible losses (in excess of established reserves and insurance) over the life of such Litigation, which may span a currently indeterminable number of years, and is based on information currently available as of December 31, 2022. The Litigation matters underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate. Those Litigation matters for which an estimate is not reasonably possible or as to which a loss does not appear to be reasonably possible, based on current information, are not included within this estimated range and, therefore, this estimated range does not represent BancShares’ maximum loss exposure. The foregoing statements about BancShares’ Litigation are based on BancShares’ judgments, assumptions, and estimates and are necessarily subjective and uncertain. In the event of unexpected future developments, it is possible that the ultimate resolution of these cases, matters, and proceedings, if unfavorable, may be material to BancShares’ consolidated financial position in a particular period. NOTE 25 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CIT Northbridge Credit LLC (“Northbridge”) is an asset-based-lending joint venture between FCB (as successor to CIT Bank) and Allstate Insurance Company and its subsidiary (“Allstate”) that extends credit in asset-based lending middle-market loans. FCB holds a 20 % equity investment in Northbridge, and CIT Asset Management LLC, a non-bank subsidiary of FCB, acts as an investment advisor and servicer of the loan portfolio. Allstate is an 80 % equity investor. FCB’s investment was $ 43 million at December 31, 2022, with the expectation of additional investment as the joint venture grows. Management fees were earned on loans under management. BancShares accounts for Northbridge under the equity method and recognized $ 4 million in the Consolidated Statement of Income for the year ended December 31, 2022 for its proportion of Northbridge’s net income. BancShares has investments in qualified affordable housing projects primarily for the purposes of fulfilling Community Reinvestment Act requirements and obtaining tax credits. These investments are accounted for using the proportional amortization method. BancShares also has investments in various trusts, partnerships, and limited liability corporations established in conjunction with structured financing transactions of equipment, power and infrastructure projects and workout transactions. BancShares’ interests in these entities were entered into in the ordinary course of business that are accounted for under the equity or cost methods. Refer to Note 10 – Other Assets and Note 12 – Variable Interest Entities for additional information. The combination of investments in and loans to unconsolidated entities represents BancShares’ maximum exposure to loss, as BancShares does not provide guarantees or other forms of indemnification to unconsolidated entities. BancShares has, and expects to have in the future, banking transactions in the ordinary course of business with directors, officers and their associates (“Related Persons”) and entities controlled by Related Persons. For those identified as Related Persons as of December 31, 2022, the following table provides an analysis of changes in the loans outstanding during 2022 and 2021: Year ended December 31 dollars in thousands 2022 2021 Balance at January 1 $ 122 $ 117 New loans 61 21 Repayments ( 12 ) ( 16 ) Balance at December 31 $ 171 $ 122 The amounts presented exclude loans to Related Persons for credit card lines of $ 15,000 or less, overdraft lines of $ 5,000 or less, and intercompany transactions between the Parent Company and FCB. Unfunded loan commitments available to Related Persons were $ 2.6 million and $ 2.7 million as of December 31, 2022 and 2021, respectively. 169 NOTE 26 — PARENT COMPANY FINANCIAL STATEMENTS Parent Company Condensed Balance Sheets (dollars in millions) December 31, 2022 December 31, 2021 Assets Cash and due from banks $ 119 $ 174 Interest-earning deposits at banks 3 6 Investment in marketable equity securities 93 98 Investment in banking subsidiary 9,935 4,987 Investment in other subsidiaries 34 — Other assets 48 44 Total assets $ 10,232 $ 5,309 Liabilities and Stockholders' Equity Subordinated debt $ 454 $ 453 Borrowings due to banking subsidiary 60 40 Other borrowings — 68 Other liabilities 56 11 Total liabilities 570 572 Stockholders’ equity 9,662 4,737 Total liabilities and stockholders’ equity $ 10,232 $ 5,309 Parent Company Condensed Statements of Income Year ended December 31 (dollars in millions) 2022 2021 2020 Income Dividends from banking subsidiary $ 1,410 $ 173 $ 230 Other (loss) income ( 2 ) 36 33 Total income 1,408 209 263 Expenses Interest expense 19 17 17 Other expenses 26 11 12 Total expenses 45 28 29 Income before income taxes and equity in undistributed net income of subsidiaries 1,363 181 234 Income tax expense 44 2 1 Income before equity in undistributed net income of subsidiaries 1,319 179 233 Equity in (distributed) undistributed net income of subsidiaries ( 221 ) 368 259 Net income 1,098 547 492 Preferred stock dividends 50 18 14 Net income available to common stockholders $ 1,048 $ 529 $ 478 170 Parent Company Condensed Statements of Cash Flows Year ended December 31 (dollars in millions) 2022 2021 2020 OPERATING ACTIVITIES Net income $ 1,098 $ 547 $ 492 Adjustments to reconcile net income to cash provided by operating activities: Distributed (undistributed) net income of subsidiaries 221 ( 368 ) ( 259 ) Deferred tax expense 48 — — Net amortization of premiums and discounts 1 1 1 Fair value adjustment on marketable equity securities, net 6 ( 34 ) ( 29 ) Stock based compensation expense 19 — — Net change in due to/from subsidiaries — 4 ( 3 ) Net change in other assets ( 3 ) 7 ( 3 ) Net change in other liabilities ( 2 ) 3 ( 1 ) Net cash provided by operating activities 1,388 160 198 INVESTING ACTIVITIES Net decrease (increase) in interest-earning deposits at banks 3 ( 4 ) 1 Purchase of marketable equity securities — ( 2 ) ( 333 ) Proceeds from sales of marketable equity securities — 30 353 Proceeds from sales, calls, and maturities of investment securities — 2 1 Investment in subsidiaries — — ( 423 ) Net cash paid in acquisition ( 51 ) — — Net cash (used in) provided by investing activities ( 48 ) 26 ( 401 ) FINANCING ACTIVITIES Repayment of short-term borrowings — — ( 40 ) Repayment of other borrowings ( 68 ) ( 20 ) ( 33 ) Net proceeds from issuance of subordinated debt — — 346 Proceeds from borrowings due to banking subsidiary 20 — — Net proceeds from issuance of preferred stock — — 340 Repurchase of Class A common stock ( 1,240 ) — ( 334 ) Cash dividends paid ( 83 ) ( 42 ) ( 31 ) Other financing activities ( 24 ) — — Net cash (used in) provided by financing activities ( 1,395 ) ( 62 ) 248 Net change in cash and due from banks ( 55 ) 124 45 Cash and due from banks at beginning of year 174 50 5 Cash and due from banks at end of year $ 119 $ 174 $ 50 CASH PAYMENTS (REFUNDS) FOR: Interest $ 18 $ 17 $ 13 (Refunds) payments for income taxes ( 536 ) 810 107 171