FNB CORP/PA/ 10-Q

ITEM 1. FINANCIAL STATEMENTS F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in millions, except share and per share data) June 30, 2022 December 31, 2021 (Unaudited) Assets Cash and due from banks $ 438 $ 337 Interest-bearing deposits with banks 1,591 3,156 Cash and Cash Equivalents 2,029 3,493 Debt securities available for sale (amortized cost of $ 3,785 and $ 3,416 ; allowance for credit losses of $ 0 and $ 0 ) 3,566 3,426 Debt securities held to maturity (fair value of $ 3,470 and $ 3,506 ; allowance for credit losses of $ 0 and $ 0 ) 3,740 3,463 Loans held for sale (includes $ 130 and $ 269 measured at fair value) (1) 164 295 Loans and leases, net of unearned income of $ 20 and $ 36 28,044 24,968 Allowance for credit losses on loans and leases ( 378 ) ( 344 ) Net Loans and Leases 27,666 24,624 Premises and equipment, net 405 345 Goodwill 2,434 2,262 Core deposit and other intangible assets, net 55 42 Bank owned life insurance 627 546 Other assets 995 1,017 Total Assets $ 41,681 $ 39,513 Liabilities Deposits: Non-interest-bearing demand $ 11,716 $ 10,789 Interest-bearing demand 14,739 14,409 Savings 3,982 3,669 Certificates and other time deposits 3,043 2,859 Total Deposits 33,480 31,726 Short-term borrowings 1,391 1,536 Long-term borrowings 712 682 Other liabilities 662 419 Total Liabilities 36,245 34,363 Stockholders’ Equity Preferred stock - $ 0.01 par value; liquidation preference of $ 1,000 per share Authorized – 20,000,000 shares Issued – 110,877 shares 107 107 Common stock - $ 0.01 par value Authorized – 500,000,000 shares Issued – 365,197,355 and 329,464,669 shares 4 3 Additional paid-in capital 4,562 4,109 Retained earnings 1,182 1,110 Accumulated other comprehensive loss ( 252 ) ( 62 ) Treasury stock – 14,471,977 and 10,531,177 shares at cost ( 167 ) ( 117 ) Total Stockholders’ Equity 5,436 5,150 Total Liabilities and Stockholders’ Equity $ 41,681 $ 39,513 (1) Amount represents loans for which we have elected the fair value option. See Note 19. See accompanying Notes to Consolidated Financial Statements (unaudited) 5 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except per share data) Unaudited Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Interest Income Loans and leases, including fees $ 242 $ 224 $ 463 $ 445 Securities: Taxable 27 21 51 43 Tax-exempt 6 7 13 15 Other 5 1 7 1 Total Interest Income 280 253 534 504 Interest Expense Deposits 15 12 23 27 Short-term borrowings 5 7 11 14 Long-term borrowings 6 6 12 12 Total Interest Expense 26 25 46 53 Net Interest Income 254 228 488 451 Provision for credit losses 6 ( 1 ) 24 5 Net Interest Income After Provision for Credit Losses 248 229 464 446 Non-Interest Income Service charges 35 30 66 58 Trust services 10 9 20 18 Insurance commissions and fees 6 6 14 13 Securities commissions and fees 6 6 12 12 Capital markets income 8 7 15 15 Mortgage banking operations 6 7 13 23 Dividends on non-marketable equity securities 3 3 5 5 Bank owned life insurance 4 5 7 8 Other 4 7 8 11 Total Non-Interest Income 82 80 160 163 Non-Interest Expense Salaries and employee benefits 104 102 216 209 Net occupancy 16 16 34 32 Equipment 18 17 36 34 Amortization of intangibles 4 3 7 6 Outside services 17 19 34 36 Marketing 5 4 8 7 FDIC insurance 5 4 10 9 Bank shares and franchise taxes 4 4 8 8 Merger-related 2 — 31 — Other 18 13 36 26 Total Non-Interest Expense 193 182 420 367 Income Before Income Taxes 137 127 204 242 Income taxes 28 25 42 47 Net Income 109 102 162 195 Preferred stock dividends 2 2 4 4 Net Income Available to Common Stockholders $ 107 $ 100 $ 158 $ 191 Earnings per Common Share Basic $ 0.30 $ 0.31 $ 0.45 $ 0.60 Diluted 0.30 0.31 0.45 0.59 See accompanying Notes to Consolidated Financial Statements (unaudited) 6 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in millions) Unaudited Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income $ 109 $ 102 $ 162 $ 195 Other comprehensive income (loss): Securities available for sale: Unrealized gains (losses) arising during the period, net of tax expense (benefit) of $( 15 ) , $ 1 , $( 51 ) and $( 5 ) ( 50 ) 2 ( 178 ) ( 19 ) Derivative instruments: Unrealized gains (losses) arising during the period, net of tax expense (benefit) of $( 1 ) , $ 0 , $( 5 ) and $ 1 ( 2 ) — ( 17 ) 4 Reclassification adjustment for gains included in net income, net of tax expense of $ 1 , $ 1 , $ 1 and $ 2 2 3 4 7 Pension and postretirement benefit obligations: Unrealized gains arising during the period, net of tax expense of $ 0 , $ 0 , $ 0 and $ 0 — — 1 1 Other Comprehensive Income (Loss) ( 50 ) 5 ( 190 ) ( 7 ) Comprehensive Income (Loss) $ 59 $ 107 $ ( 28 ) $ 188 See accompanying Notes to Consolidated Financial Statements (unaudited) 7 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Dollars in millions, except per share data) Unaudited Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Three Months Ended June 30, 2021 Balance at beginning of period $ 107 $ 3 $ 4,099 $ 921 $ ( 51 ) $ ( 105 ) $ 4,974 Comprehensive income 102 5 107 Dividends declared: Preferred stock: $ 18.13 /share ( 2 ) ( 2 ) Common stock: $ 0.12 /share ( 39 ) ( 39 ) Issuance of common stock — 2 ( 1 ) ( 4 ) ( 3 ) Balance at end of period $ 107 $ 3 $ 4,101 $ 981 $ ( 46 ) $ ( 109 ) $ 5,037 Three Months Ended June 30, 2022 Balance at beginning of period $ 107 $ 4 $ 4,560 $ 1,118 $ ( 202 ) $ ( 148 ) $ 5,439 Comprehensive income (loss) 109 ( 50 ) 59 Dividends declared: Preferred stock: $ 18.13 /share ( 2 ) ( 2 ) Common stock: $ 0.12 /share ( 43 ) ( 43 ) Issuance of common stock — — ( 6 ) ( 6 ) Repurchase of common stock ( 13 ) ( 13 ) Restricted stock compensation 2 2 Balance at end of period $ 107 $ 4 $ 4,562 $ 1,182 $ ( 252 ) $ ( 167 ) $ 5,436 8 Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Six Months Ended June 30, 2021 Balance at beginning of period $ 107 $ 3 $ 4,087 $ 869 $ ( 39 ) $ ( 68 ) $ 4,959 Comprehensive income (loss) 195 ( 7 ) 188 Dividends declared: Preferred stock: $ 36.26 /share ( 4 ) ( 4 ) Common stock: $ 0.24 /share ( 78 ) ( 78 ) Issuance of common stock — 3 ( 1 ) ( 5 ) ( 3 ) Repurchase of common stock ( 36 ) ( 36 ) Restricted stock compensation 11 11 Balance at end of period $ 107 $ 3 $ 4,101 $ 981 $ ( 46 ) $ ( 109 ) $ 5,037 Six Months Ended June 30, 2022 Balance at beginning of period $ 107 $ 3 $ 4,109 $ 1,110 $ ( 62 ) $ ( 117 ) $ 5,150 Comprehensive income (loss) 162 ( 190 ) ( 28 ) Dividends declared: Preferred stock: $ 36.26 /share ( 4 ) ( 4 ) Common stock: $ 0.24 /share ( 86 ) ( 86 ) Issuance of common stock — 1 ( 7 ) ( 6 ) Issuance of common stock - acquisitions 1 442 443 Repurchase of common stock ( 43 ) ( 43 ) Restricted stock compensation 10 10 Balance at end of period $ 107 $ 4 $ 4,562 $ 1,182 $ ( 252 ) $ ( 167 ) $ 5,436 See accompanying Notes to Consolidated Financial Statements (unaudited) 9 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) Unaudited Six Months Ended June 30, 2022 2021 Operating Activities Net income $ 162 $ 195 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation, amortization and accretion 35 2 Provision for credit losses 24 5 Deferred tax expense (benefit) 8 3 Loans originated for sale ( 613 ) ( 1,099 ) Loans sold 774 1,107 Net gain on sale of loans ( 30 ) ( 32 ) Net change in: Interest receivable ( 4 ) 6 Interest payable 1 ( 2 ) Bank owned life insurance, excluding purchases ( 1 ) 1 Other, net 336 114 Net cash flows provided by (used in) operating activities 692 300 Investing Activities Net change in loans and leases, excluding sales and transfers ( 1,275 ) 381 Debt securities available for sale: Purchases ( 773 ) ( 854 ) Sales 287 — Maturities/payments 430 1,161 Debt securities held to maturity: Purchases ( 636 ) ( 725 ) Maturities/payments 354 453 Increase in premises and equipment ( 50 ) ( 32 ) Net cash received in business acquisition 75 — Net cash flows provided by (used in) investing activities ( 1,588 ) 384 Financing Activities Net change in: Demand (non-interest bearing and interest bearing) and savings accounts ( 40 ) 1,807 Time deposits ( 36 ) ( 461 ) Short-term borrowings ( 160 ) ( 153 ) Proceeds from issuance of long-term borrowings 11 12 Repayment of long-term borrowings ( 214 ) ( 218 ) Repurchases of common stock ( 43 ) ( 36 ) Cash dividends paid: Preferred stock ( 4 ) ( 4 ) Common stock ( 86 ) ( 78 ) Other, net 4 8 Net cash flows provided by (used in) financing activities ( 568 ) 877 Net Increase in Cash and Cash Equivalents ( 1,464 ) 1,561 Cash and cash equivalents at beginning of period 3,493 1,383 Cash and Cash Equivalents at End of Period $ 2,029 $ 2,944 See accompanying Notes to Consolidated Financial Statements (unaudited) 10 F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2022 The terms “FNB,” “the Corporation,” “we,” “us” and “our” throughout this Report mean F.N.B. Corporation and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, F.N.B. Corporation. When we refer to "FNBPA" in this Report, we mean our bank subsidiary, First National Bank of Pennsylvania, and its subsidiaries. NATURE OF OPERATIONS F.N.B. Corporation, headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in seven states and the District of Columbia. Our market coverage spans several major metropolitan areas including: Pittsburgh, Pennsylvania; Baltimore, Maryland; Cleveland, Ohio; Washington, D.C.; Charlotte, Raleigh, Durham and the Piedmont Triad (Winston-Salem, Greensboro and High Point) in North Carolina; and Charleston, South Carolina. As of June 30, 2022, we had 338 banking offices throughout Pennsylvania, Ohio, Maryland, West Virginia, North Carolina, South Carolina, Washington D.C. and Virginia. We provide a full range of commercial banking, consumer banking and wealth management solutions through our subsidiary network which is led by our largest affiliate, FNBPA, founded in 1864. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, government banking, business credit, capital markets and lease financing. Consumer banking provides a full line of consumer banking products and services, including deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. Wealth management services include asset management, private banking and insurance. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Our accompanying Consolidated Financial Statements and these Notes to Consolidated Financial Statements (unaudited) include subsidiaries in which we have a controlling financial interest. We own and operate FNBPA, First National Trust Company, First National Investment Services Company, LLC, F.N.B. Investment Advisors, Inc., First National Insurance Agency, LLC, Bank Capital Services, LLC, F.N.B. Capital Corporation, LLC and Waubank Securities, LLC, and include results for each of these entities in the accompanying Consolidated Financial Statements. Companies in which we hold a controlling financial interest, or are a VIE in which we have the power to direct the activities of an entity that most significantly impact the entity’s economic performance and have an obligation to absorb losses or the right to receive benefits which could potentially be significant to the VIE, are consolidated. For a voting interest entity, a controlling financial interest is generally where we hold more than 50% of the outstanding voting shares. VIEs in which we do not hold the power to direct the activities of the entity that most significantly impact the entity’s economic performance or an obligation to absorb losses or the right to receive benefits which could potentially be significant to the VIE are not consolidated. Investments in companies that are not consolidated are accounted for using the equity method when we have the ability to exert significant influence or the cost method when we do not have the ability to exert significant influence. Investments in private investment partnerships that are accounted for under the equity method or the cost method are included in other assets and our proportional interest in the equity investments’ earnings are included in other non-interest income. Investment interests accounted for under the cost and equity methods are periodically evaluated for impairment. The accompanying interim unaudited Consolidated Financial Statements include all adjustments that are necessary, in the opinion of management, to fairly reflect our financial position and results of operations in accordance with GAAP. All significant intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to the current period presentation. Such reclassifications had no impact on our net income and stockholders' equity. Events occurring subsequent to June 30, 2022 have been evaluated for potential recognition or disclosure in the Consolidated Financial Statements through the date of the filing of the Consolidated Financial Statements with the SEC. Certain information and Note disclosures normally included in Consolidated Financial Statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The interim operating results are not necessarily indicative of operating results FNB expects for the full year. These interim unaudited Consolidated Financial 11 Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our 2021 Annual Report on Form 10-K filed with the SEC on February 24, 2022. Use of Estimates Our accounting and reporting policies conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements (unaudited). Actual results could materially differ from those estimates. Material estimates that are particularly susceptible to significant changes include the ACL, fair value of financial instruments, goodwill and other intangible assets, income taxes and deferred tax assets and litigation reserves, which are listed in the critical accounting estimates. For a detailed description of our significant accounting policies and critical accounting estimates, see Note 1, "Summary of Significant Accounting Policies" and the "Application of Critical Accounting Policies" section in the MD&A, both in our 2021 Annual Report on Form 10-K . NOTE 2. NEW ACCOUNTING STANDARDS The following table summarizes accounting pronouncements issued by the FASB that we recently adopted or will be adopting in the future. TABLE 2.1 Standard Description Financial Statements Impact Troubled Debt Restructuring and Charge-offs ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures This Update eliminates the recognition and measurement guidance on TDRs for creditors that have adopted ASC 326 and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. This Update also requires public business entities to present current-period gross write-offs by year of origination in their vintage disclosures. This Update is to be applied using a prospective method. For the transition method related to TDRs, an entity has the option to apply a modified retrospective transition method. Early adoption of this Update is permitted. An entity is allowed to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. We are currently assessing the potential impact to our consolidated financial statements. NOTE 3. MERGERS AND ACQUISITIONS Howard Bancorp, Inc. On January 22, 2022, we completed our acquisition of Howard, a bank holding company headquartered in Baltimore City, Maryland. The acquisition enhances our presence in the Mid-Atlantic Region. Additionally, cost savings, efficiencies and other benefits are expected from the combined operations. On the acquisition date, Howard had assets with a net book value of approximately $ 2.4 billion, including $ 1.8 billion in both loans and deposits. The acquisition was valued at approximately $ 443 million and resulted in the issuance of 34,074,495 shares of our common stock in exchange for 18,930,329 shares of Howard common stock. We also acquired restricted stock units and the fully vested outstanding stock options of Howard. 12 The merger was accounted for in accordance with the acquisition method of accounting. Preliminary fair values for all assets and liabilities are presented below. Determining the fair value of assets and liabilities is a complex process involving significant judgment regarding estimates and assumptions used to calculate fair values. Accordingly, the initial accounting for the merger is not complete. TABLE 3.1 (in millions) Howard Fair value of consideration paid $ 443 Fair value of identifiable assets acquired: Cash and cash equivalents 75 Securities 321 Loans 1,780 Core deposit and other intangible assets 19 Fixed and other assets 161 Total identifiable assets acquired 2,356 Fair value of liabilities assumed: Deposits 1,831 Borrowings 247 Other liabilities 7 Total liabilities assumed 2,085 Fair value of net identifiable assets acquired 271 Goodwill recognized $ 172 Goodwill related to the transaction was recorded in the Community Banking business segment and is not deductible for income tax purposes as the acquisition was accounted for as a tax-free exchange for tax purposes. We incurred merger expenses relating to the Howard acquisition of $ 30.2 million for the first six months of 2022. We continue to analyze the valuations assigned to the acquired assets and assumed liabilities. Due to the complexity in valuing the loans and the significant amount of data inputs required, the valuation of the loans is not yet final. In addition, we are reviewing third-party valuations on acquired premises. We are also assessing the valuation on deferred taxes. During the second quarter, we completed the review of the third-party valuations for core deposit intangibles, deposits and debt. There were no changes to provisional amounts for core deposit intangibles, deposits and debt. Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. We consider various factors in connection with the identification of more-than-insignificant deterioration in credit, including but not limited to nonperforming status, delinquency, risk ratings, TDR classification, Fair Isaac Corporation (FICO) scores and other qualitative factors that indicate deterioration in credit quality since origination. For PCD loans and leases, the initial estimate of expected credit losses is recognized in the ACL on the date of acquisition using the same methodology as other loans and leases held-for-investment. As part of the Howard acquisition, we acquired PCD loans and leases of $ 186.9 million. We established an ACL at acquisition of $ 10.0 million with a corresponding gross-up to the amortized cost of the PCD loans and leases. The non-credit discount on the PCD loans and leases was $ 5.4 million and the Day 1 fair value was $ 171.5 million. The initial provision expense for non-PCD loans associated with the Howard acquisition was $ 19.1 million. We integrated the systems and the operating activities of Howard into FNB in February. Due to that integration, it is impracticable to disclose the revenue from the Howard assets acquired and income before income taxes subsequent to the acquisition. Pending Acquisition – UB Bancorp On May 31, 2022, FNB entered into a definitive merger agreement to acquire UB Bancorp, a bank holding company based in Greenville, North Carolina with approximately $ 1.2 billion in total assets. The transaction is valued at approximately $ 119 million. Under the terms of the merger agreement, UB Bancorp voting common shareholders will be entitled to receive 1.61 shares of FNB’s common stock for each share of UB Bancorp common stock. FNB expects to issue approximately 9.8 million shares of its common stock in exchange for approximately 6.0 million shares of UB Bancorp common stock. UB Bancorp’s banking affiliate, Union Bank, will be merged into FNBPA. The transaction is expected to be completed in late 13 2022, pending satisfaction of customary closing conditions, including regulatory approvals and the approval of UB Bancorp's stockholders. NOTE 4. SECURITIES The amortized cost and fair value of AFS debt securities are presented in the table below. There was no ACL in the AFS portfolio at June 30, 2022 and December 31, 2021. Accrued interest receivable on AFS debt securities totaled $ 8.6 million and $ 7.3 million at June 30, 2022 and December 31, 2021, respectively, and is excluded from the estimate of credit losses and assessed separately in other assets in the Consolidated Balance Sheets. Accordingly, we have excluded accrued interest receivable from both the fair value and the amortized cost basis of AFS debt securities. TABLE 4.1 (in millions) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Debt Securities AFS: June 30, 2022 U.S. Treasury $ 279 $ — $ ( 14 ) $ 265 U.S. government agencies 128 2 — 130 U.S. government-sponsored entities 287 — ( 13 ) 274 Residential mortgage-backed securities: Agency mortgage-backed securities 1,459 — ( 82 ) 1,377 Agency collateralized mortgage obligations 1,194 — ( 91 ) 1,103 Commercial mortgage-backed securities 389 — ( 18 ) 371 States of the U.S. and political subdivisions (municipals) 32 — ( 3 ) 29 Other debt securities 17 — — 17 Total debt securities AFS $ 3,785 $ 2 $ ( 221 ) $ 3,566 (in millions) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Debt Securities AFS: December 31, 2021 U.S. Treasury $ 205 $ — $ ( 1 ) $ 204 U.S. government agencies 154 1 — 155 U.S. government-sponsored entities 194 — ( 2 ) 192 Residential mortgage-backed securities: Agency mortgage-backed securities 1,342 19 ( 4 ) 1,357 Agency collateralized mortgage obligations 1,192 11 ( 17 ) 1,186 Commercial mortgage-backed securities 294 5 ( 2 ) 297 States of the U.S. and political subdivisions (municipals) 33 — — 33 Other debt securities 2 — — 2 Total debt securities AFS $ 3,416 $ 36 $ ( 26 ) $ 3,426 The amortized cost and fair value of HTM debt securities are presented in the table below. The ACL for the HTM portfolio was $ 0.13 million and $ 0.05 million at June 30, 2022 and December 31, 2021, respectively. Accrued interest receivable on HTM debt securities totaled $ 12.7 million and $ 12.3 million at June 30, 2022 and December 31, 2021, respectively, and is excluded from the estimate of credit losses and assessed separately in other assets in the Consolidated Balance Sheets. Accordingly, we have excluded accrued interest receivable from both the fair value and the amortized cost basis of HTM debt securities. 14 TABLE 4.2 (in millions) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Debt Securities HTM: June 30, 2022 U.S. Treasury $ 1 $ — $ — $ 1 U.S. government agencies 1 — — 1 Residential mortgage-backed securities: Agency mortgage-backed securities 1,200 — ( 85 ) 1,115 Agency collateralized mortgage obligations 1,043 — ( 75 ) 968 Commercial mortgage-backed securities 517 1 ( 22 ) 496 States of the U.S. and political subdivisions (municipals) 973 1 ( 90 ) 884 Other debt securities 5 — — 5 Total debt securities HTM $ 3,740 $ 2 $ ( 272 ) $ 3,470 (in millions) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Debt Securities HTM: December 31, 2021 U.S. Treasury $ 1 $ — $ — $ 1 U.S. government agencies 1 — — 1 Residential mortgage-backed securities: Agency mortgage-backed securities 1,191 15 ( 5 ) 1,201 Agency collateralized mortgage obligations 930 5 ( 12 ) 923 Commercial mortgage-backed securities 323 3 ( 2 ) 324 States of the U.S. and political subdivisions (municipals) 1,017 39 — 1,056 Total debt securities HTM $ 3,463 $ 62 $ ( 19 ) $ 3,506 There were no significant gross gains or gross losses realized on securities during the six months ended June 30, 2022 or 2021. As of June 30, 2022, the amortized cost and fair value of debt securities, by contractual maturities, were as follows: TABLE 4.3 Available for Sale Held to Maturity (in millions) Amortized Cost Fair Value Amortized Cost Fair Value Due in one year or less $ 13 $ 13 $ 1 $ 1 Due after one year but within five years 577 550 23 23 Due after five years but within ten years 102 101 162 154 Due after ten years 51 51 794 713 743 715 980 891 Residential mortgage-backed securities: Agency mortgage-backed securities 1,459 1,377 1,200 1,115 Agency collateralized mortgage obligations 1,194 1,103 1,043 968 Commercial mortgage-backed securities 389 371 517 496 Total debt securities $ 3,785 $ 3,566 $ 3,740 $ 3,470 15 Actual maturities may differ from contractual terms because security issuers may have the right to call or prepay obligations with or without penalties. Periodic principal payments are received on residential mortgage-backed securities based on the payment patterns of the underlying collateral. Following is information relating to securities pledged: TABLE 4.4 (dollars in millions) June 30, 2022 December 31, 2021 Securities pledged (carrying value): To secure public deposits, trust deposits and for other purposes as required by law $ 5,963 $ 5,660 As collateral for short-term borrowings 340 392 Securities pledged as a percent of total securities 86.3 % 87.9 % 16 Following are summaries of the fair values of AFS debt securities in an unrealized loss position for which an ACL has not been recorded, segregated by security type and length of continuous loss position: TABLE 4.5 Less than 12 Months 12 Months or More Total (dollars in millions) # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Debt Securities AFS June 30, 2022 U.S. Treasury 5 $ 240 $ ( 14 ) — $ — $ — 5 $ 240 $ ( 14 ) U.S. government agencies 2 20 — 8 5 — 10 25 — U.S. government-sponsored entities 13 228 ( 11 ) 1 23 ( 2 ) 14 251 ( 13 ) Residential mortgage-backed securities: Agency mortgage-backed securities 113 1,372 ( 82 ) — — — 113 1,372 ( 82 ) Agency collateralized mortgage obligations 65 866 ( 61 ) 9 237 ( 30 ) 74 1,103 ( 91 ) Commercial mortgage-backed securities 16 343 ( 15 ) 2 28 ( 3 ) 18 371 ( 18 ) States of the U.S. and political subdivisions (municipals) 12 26 ( 2 ) 1 2 ( 1 ) 13 28 ( 3 ) Other debt securities 6 12 — 1 2 — 7 14 — Total 232 $ 3,107 $ ( 185 ) 22 $ 297 $ ( 36 ) 254 $ 3,404 $ ( 221 ) Less than 12 Months 12 Months or More Total (dollars in millions) # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Debt Securities AFS December 31, 2021 U.S. Treasury 3 $ 151 $ ( 1 ) — $ — $ — 3 $ 151 $ ( 1 ) U.S. government agencies 3 22 — 9 8 — 12 30 — U.S. government-sponsored entities 3 99 ( 1 ) 1 24 ( 1 ) 4 123 ( 2 ) Residential mortgage-backed securities: Agency mortgage-backed securities 13 599 ( 4 ) — — — 13 599 ( 4 ) Agency collateralized mortgage obligations 23 659 ( 15 ) 3 68 ( 2 ) 26 727 ( 17 ) Commercial mortgage-backed securities 5 125 ( 2 ) — — — 5 125 ( 2 ) States of the U.S. and political subdivisions (municipals) 10 24 — — — — 10 24 — Other debt securities — — — 1 2 — 1 2 — Total 60 $ 1,679 $ ( 23 ) 14 $ 102 $ ( 3 ) 74 $ 1,781 $ ( 26 ) We evaluated the AFS debt securities that were in an unrealized loss position at June 30, 2022. Based on the credit ratings and implied government guarantee for these securities, we concluded the loss position is temporary and caused by the movement of 17 interest rates and does not reflect any expected credit losses. We do not intend to sell the AFS debt securities and it is not more likely than not that we will be required to sell the securities before the recovery of their amortized cost basis. Credit Quality Indicators We use credit ratings and the most recent financial information to help evaluate the credit quality of our credit-related AFS and HTM securities portfolios. Management reviews the credit profile of each issuer on an annual basis, and more frequently as needed. Based on the nature of the issuers and current conditions, we have determined that securities backed by the UST, Fannie Mae, Freddie Mac, FHLB, Ginnie Mae, and the SBA have zero expected credit loss. Our municipal bond portfolio, with a carrying amount of $ 1.0 billion as of June 30, 2022 is highly rated with an average rating of AA and 99 % of the portfolio having an A or better rating. All the securities in the municipal portfolio are general obligation bonds. Geographically, municipal bonds support our primary footprint as 61 % of the securities are from municipalities located in the primary states within which we conduct business. The average holding size of the securities in the municipal bond portfolio is $ 3.5 million. In addition to the strong stand-alone ratings, 61 % of the municipal bonds have some formal credit enhancement (e.g., insurance) that strengthens the creditworthiness of the bond. The ACL on the HTM municipal bond portfolio is calculated on each bond using: • The bond’s underlying credit rating, time to maturity and exposure amount; • Credit enhancements that improve the bond’s credit rating (e.g., insurance); and • Moody’s U.S. Bond Defaults and Recoveries, 1970-2021 study. By using these components, we derive the expected credit loss on the HTM general obligation municipal bond portfolio. We further refine the expected credit loss by factoring in economic forecast data using our Commercial and Industrial Non-Manufacturing loan portfolio forecast adjustment as derived through our assessment of the loan portfolio as a proxy for our municipal bond portfolio. Our corporate bond portfolio, with a carrying amount of $ 21.7 million as of June 30, 2022 primarily consists of subordinated debentures of banks within our footprint. The average holding size of the securities in the corporate bond portfolio is $ 2.0 million. The ACL on the HTM corporate bond portfolio is calculated using: • The bond’s credit rating, time to maturity and exposure amount; • Moody’s Annual Default Study, 02/08/2022; and • Most recent financial statements. By using these components, we derive the expected credit loss on the HTM corporate bond portfolio. We further refine the expected credit loss by factoring in economic forecast data using our bank-wide loan portfolio forecast adjustment as derived through our assessment of the Bank's loan portfolio as a proxy for our corporate bond portfolio. For the year-to-date periods ending June 30, 2022 and 2021, we had no significant provision expense and no charge-offs or recoveries. The ACL on the HTM portfolio was $ 0.13 million, consisting of $ 0.06 million relating to the municipal bond portfolio and $ 0.07 million relating to other debt securities, as of June 30, 2022 and $ 0.05 million relating to the municipal bond portfolio as of December 31, 2021. No other securities portfolios had an ACL. At June 30, 2022 and December 31, 2021, there were no securities that were past due or on non-accrual. 18 NOTE 5. LOANS AND LEASES Accrued interest receivable on loans and leases, which totaled $ 60.8 million at June 30, 2022 and $ 48.9 million at December 31, 2021, is excluded from the estimate of credit losses and assessed separately in other assets in the Consolidated Balance Sheets for both periods and not included in the following tables. Loans and Leases by Portfolio Segment Following is a summary of total loans and leases, net of unearned income: TABLE 5.1 (in millions) June 30, 2022 December 31, 2021 Commercial real estate $ 10,787 $ 9,899 Commercial and industrial 6,564 5,977 Commercial leases 504 495 Other 136 94 Total commercial loans and leases 17,991 16,465 Direct installment 2,769 2,376 Residential mortgages 4,595 3,654 Indirect installment 1,384 1,227 Consumer lines of credit 1,305 1,246 Total consumer loans 10,053 8,503 Total loans and leases, net of unearned income $ 28,044 $ 24,968 The remaining accretable discount included in the amortized cost of acquired loans was $ 34.4 million and $ 30.0 million at June 30, 2022 and December 31, 2021, respectively, which includes the $ 10 million established for Howard at the time of acquisition. The loans and leases portfolio categories are comprised of the following types of loans, where in each case the LGD is dependent on the nature and value of the respective collateral: • Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties where operational cash flows on owner-occupied properties or rents received by our borrowers from their tenant(s) on both a property and global basis are the primary default risk drivers, including rents paid by stand-alone business customers for owner-occupied properties; • Commercial and industrial includes loans to businesses that are not secured by real estate where the borrower's leverage and cash flows from operations are the primary default risk drivers, except for PPP loans that are 100 % guaranteed by the SBA, which provides a reduced risk of loss to us on these loans. PPP loans are included in the commercial and industrial category and comprise $ 85.8 million and $ 336.6 million of this category's outstanding balance at June 30, 2022 and December 31, 2021, respectively; • Commercial leases consist of leases for new or used equipment where the borrower's cash flow from operations is the primary default risk driver; • Other is comprised primarily of credit cards and mezzanine loans where the borrower's cash flow from operations is the primary default risk driver; • Direct installment is comprised of fixed-rate, closed-end consumer loans for personal, family or household use, such as home equity loans and automobile loans where the primary default risk driver is the borrower's employment status and income; • Residential mortgages consist of conventional and jumbo mortgage loans for 1-4 family properties where the primary default risk driver is the borrower's employment status and income; 19 • Indirect installment is comprised of loans originated by approved third parties and underwritten by us, primarily automobile loans where the primary default risk driver is the borrower's employment status and income; and • Consumer lines of credit include home equity lines of credit and consumer lines of credit that are either unsecured or secured by collateral other than home equity where the primary default risk driver is the borrower's employment status and income. The loans and leases portfolio consists principally of loans to individuals and small- and medium-sized businesses within our primary market in seven states and the District of Columbia. Our primary market coverage spans several major metropolitan areas including: Pittsburgh, Pennsylvania; Baltimore, Maryland; Cleveland, Ohio; Washington, D.C.; Charlotte, Raleigh, Durham and the Piedmont Triad (Winston-Salem, Greensboro and High Point) in North Carolina; and Charleston, South Carolina. The following table shows occupancy information relating to commercial real estate loans: TABLE 5.2 (dollars in millions) June 30, 2022 December 31, 2021 Commercial real estate: Percent owner-occupied 29.6 % 28.8 % Percent non-owner-occupied 70.4 71.2 Credit Quality We monitor the credit quality of our loan portfolio using several performance measures based on payment activity and borrower performance. We use an internal risk rating assigned to a commercial loan or lease at origination, summarized below. TABLE 5.3 Rating Category Definition Pass in general, the condition of the borrower and the performance of the loan is satisfactory or better Special Mention in general, the condition of the borrower has deteriorated, requiring an increased level of monitoring Substandard in general, the condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate if deficiencies are not corrected Doubtful in general, the condition of the borrower has significantly deteriorated and the collection in full of both principal and interest is highly questionable or improbable The use of these internally assigned credit quality categories within the commercial loan and lease portfolio permits our use of transition matrices to establish a basis which is then impacted by quantitative inputs from our econometric model forecasts over the R&S period. Our internal credit risk grading system is based on past experiences with similarly graded loans and leases and conforms to regulatory categories. In general, loan and lease risk ratings within each category are reviewed on an ongoing basis according to our policy for each class of loans and leases. Each quarter, we analyze the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the commercial loan and lease portfolio. Loans and leases within the Pass credit category or that migrate toward the Pass credit category generally have a lower risk of loss compared to loans and leases that migrate toward the Substandard or Doubtful credit categories. Accordingly, we apply higher risk factors to Substandard and Doubtful credit categories. 20 The following tables summarize the designated loan rating category by loan class including term loans on an amortized cost basis by origination year: TABLE 5.4 June 30, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total (in millions) COMMERCIAL Commercial Real Estate: Risk Rating: Pass $ 897 $ 2,126 $ 1,743 $ 1,422 $ 785 $ 2,738 $ 252 $ 9,963 Special Mention 1 33 21 85 99 259 3 501 Substandard 2 11 13 35 45 189 28 323 Total commercial real estate 900 2,170 1,777 1,542 929 3,186 283 10,787 Commercial and Industrial: Risk Rating: Pass 858 1,294 760 682 356 434 1,798 6,182 Special Mention 1 4 21 10 4 102 38 180 Substandard 2 17 10 15 50 57 51 202 Total commercial and industrial 861 1,315 791 707 410 593 1,887 6,564 Commercial Leases: Risk Rating: Pass 87 157 88 83 46 36 — 497 Special Mention — — 1 — — — — 1 Substandard — 1 2 2 1 — — 6 Total commercial leases 87 158 91 85 47 36 — 504 Other Commercial: Risk Rating: Pass 60 — — — — 13 63 136 Total other commercial 60 — — — — 13 63 136 Total commercial loans and leases 1,908 3,643 2,659 2,334 1,386 3,828 2,233 17,991 CONSUMER Direct Installment: Current 604 945 493 182 103 429 — 2,756 Past due — 1 1 — 1 10 — 13 Total direct installment 604 946 494 182 104 439 — 2,769 Residential Mortgages: Current 701 1,518 907 401 141 885 — 4,553 Past due — 2 3 1 3 33 — 42 Total residential mortgages 701 1,520 910 402 144 918 — 4,595 Indirect Installment: Current 425 432 209 118 122 62 — 1,368 Past due 1 8 3 2 1 1 — 16 Total indirect installment 426 440 212 120 123 63 — 1,384 Consumer Lines of Credit: Current 47 20 3 3 4 133 1,080 1,290 Past due — — — — — 13 2 15 Total consumer lines of credit 47 20 3 3 4 146 1,082 1,305 Total consumer loans 1,778 2,926 1,619 707 375 1,566 1,082 10,053 Total loans and leases $ 3,686 $ 6,569 $ 4,278 $ 3,041 $ 1,761 $ 5,394 $ 3,315 $ 28,044 21 December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total (in millions) COMMERCIAL Commercial Real Estate: Risk Rating: Pass $ 1,878 $ 1,782 $ 1,503 $ 830 $ 743 $ 2,171 $ 183 $ 9,090 Special Mention 15 21 89 105 107 175 9 521 Substandard — 15 28 45 45 152 3 288 Total commercial real estate 1,893 1,818 1,620 980 895 2,498 195 9,899 Commercial and Industrial: Risk Rating: Pass 1,663 833 731 386 184 296 1,509 5,602 Special Mention 8 12 18 7 37 42 52 176 Substandard 1 4 14 57 42 17 64 199 Total commercial and industrial 1,672 849 763 450 263 355 1,625 5,977 Commercial Leases: Risk Rating: Pass 182 109 98 53 39 1 — 482 Special Mention — 1 — 2 3 1 — 7 Substandard — 2 3 1 — — — 6 Total commercial leases 182 112 101 56 42 2 — 495 Other Commercial: Risk Rating: Pass 39 — — — — 3 52 94 Total other commercial 39 — — — — 3 52 94 Total commercial loans and leases 3,786 2,779 2,484 1,486 1,200 2,858 1,872 16,465 CONSUMER Direct Installment: Current 978 538 215 125 96 412 — 2,364 Past due — — 1 1 — 10 — 12 Total direct installment 978 538 216 126 96 422 — 2,376 Residential Mortgages: Current 1,280 932 392 152 212 652 — 3,620 Past due 1 1 1 3 3 25 — 34 Total residential mortgages 1,281 933 393 155 215 677 — 3,654 Indirect Installment: Current 516 262 157 178 64 35 — 1,212 Past due 6 3 2 2 1 1 — 15 Total indirect installment 522 265 159 180 65 36 — 1,227 Consumer Lines of Credit: Current 20 3 4 5 3 127 1,072 1,234 Past due — — — — — 10 2 12 Total consumer lines of credit 20 3 4 5 3 137 1,074 1,246 Total consumer loans 2,801 1,739 772 466 379 1,272 1,074 8,503 Total loans and leases $ 6,587 $ 4,518 $ 3,256 $ 1,952 $ 1,579 $ 4,130 $ 2,946 $ 24,968 We use delinquency transition matrices within the consumer and other loan classes to establish the basis for the R&S forecast portion of the credit risk. Each month, management analyzes payment and volume activity, FICO scores and Debt-to-Income (DTI) scores and other external factors such as unemployment, to determine how consumer loans are performing. 22 Non-Performing and Past Due The following tables provide an analysis of the aging of loans by class. TABLE 5.5 (in millions) 30-89 Days Past Due > 90 Days Past Due and Still Accruing Non- Accrual Total Past Due Current Total Loans and Leases Non-accrual with No ACL June 30, 2022 Commercial real estate $ 8 $ — $ 49 $ 57 $ 10,730 $ 10,787 $ 31 Commercial and industrial 7 — 10 17 6,547 6,564 2 Commercial leases 2 — 1 3 501 504 — Other — — — — 136 136 — Total commercial loans and leases 17 — 60 77 17,914 17,991 33 Direct installment 5 1 7 13 2,756 2,769 — Residential mortgages 21 4 17 42 4,553 4,595 — Indirect installment 13 1 2 16 1,368 1,384 — Consumer lines of credit 7 2 6 15 1,290 1,305 — Total consumer loans 46 8 32 86 9,967 10,053 — Total loans and leases $ 63 $ 8 $ 92 $ 163 $ 27,881 $ 28,044 $ 33 (in millions) 30-89 Days Past Due > 90 Days Past Due and Still Accruing Non- Accrual Total Past Due Current Total Loans and Leases Non-accrual with No ACL December 31, 2021 Commercial real estate $ 11 $ — $ 48 $ 59 $ 9,840 $ 9,899 $ 20 Commercial and industrial 4 — 15 19 5,958 5,977 4 Commercial leases 1 — 1 2 493 495 — Other — — — — 94 94 — Total commercial loans and leases 16 — 64 80 16,385 16,465 24 Direct installment 5 — 7 12 2,364 2,376 — Residential mortgages 20 4 10 34 3,620 3,654 — Indirect installment 12 1 2 15 1,212 1,227 — Consumer lines of credit 6 1 5 12 1,234 1,246 — Total consumer loans 43 6 24 73 8,430 8,503 — Total loans and leases $ 59 $ 6 $ 88 $ 153 $ 24,815 $ 24,968 $ 24 23 Following is a summary of non-performing assets: TABLE 5.6 (dollars in millions) June 30, 2022 December 31, 2021 Non-accrual loans $ 92 $ 88 Total non-performing loans 92 88 Other real estate owned 10 8 Total non-performing assets $ 102 $ 96 Asset quality ratios: Non-performing loans / total loans and leases 0.33 % 0.35 % Non-performing assets + 90 days past due / total loans and leases + OREO 0.39 0.41 The carrying value of residential-secured consumer OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure amounted to $ 1.3 million at June 30, 2022 and $ 1.6 million at December 31, 2021. The recorded investment of residential-secured consumer OREO for which formal foreclosure proceedings are in process at June 30, 2022 and December 31, 2021 totaled $ 10.7 million and $ 4.3 million, respectively. During 2020 and 2021, we extended the residential mortgage foreclosure moratorium beyond the requirements for government-backed loans under the CARES Act to all residential mortgage loan customers. Approximately $ 53.5 million of commercial loans are collateral dependent at June 30, 2022. Repayment is expected to be substantially through the operation or sale of the collateral on the loan. These loans are primarily secured by business assets or commercial real estate. Troubled Debt Restructurings TDRs are loans whose contractual terms have been modified in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs typically result from loss mitigation activities and could include the extension of a maturity date, interest rate reduction, principal forgiveness, deferral or decrease in payments for a period of time and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. Following is a summary of the composition of total TDRs: TABLE 5.7 (in millions) June 30, 2022 December 31, 2021 Accruing $ 62 $ 60 Non-accrual 33 32 Total TDRs $ 95 $ 92 TDRs that are accruing and performing include loans that met the criteria for non-accrual of interest prior to restructuring for which we can reasonably estimate the timing and amount of the expected cash flows on such loans and for which we expect to fully collect the new carrying value of the loans. During the six months ended June 30, 2022, we returned to accruing status $ 5.7 million in restructured residential mortgage loans that have consistently met their modified obligations for more than six months. TDRs that are on non-accrual are not placed on accruing status until all delinquent principal and interest have been paid and the ultimate collectability of the remaining principal and interest is reasonably assured. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses which are factored into the ACL. Commercial loans over $ 1.0 million whose terms have been modified in a TDR are generally placed on non-accrual, individually analyzed and measured based on the fair value of the underlying collateral. Our ACL includes specific reserves for commercial TDRs of $ 1.9 million at June 30, 2022, compared to $ 1.5 million at December 31, 2021, and pooled reserves for individual loans of $ 1.1 million and $ 1.5 million for those same periods, respectively, based on loan segment LGD. Upon 24 default, the amount of the recorded investment in the TDR in excess of the fair value of the collateral, less estimated selling costs, is generally considered a confirmed loss and is charged-off against the ACL. All other classes of loans whose terms have been modified in a TDR are pooled and measured based on the loan segment LGD. Our ACL included pooled reserves for these classes of loans of $ 3.7 million for June 30, 2022 and $ 3.9 million for December 31, 2021. Upon default of an individual loan, our charge-off policy is followed for that class of loan. Following is a summary of TDR loans, by class, for loans that were modified during the periods indicated: TABLE 5.8 Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 (dollars in millions) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Commercial real estate 7 $ 3 $ 3 9 $ 3 $ 4 Commercial and industrial 6 1 — 6 1 1 Total commercial loans 13 4 3 15 4 5 Direct installment 13 1 1 26 1 1 Residential mortgages 15 3 3 20 3 3 Consumer lines of credit 5 — 1 8 1 1 Total consumer loans 33 4 5 54 5 5 Total 46 $ 8 $ 8 69 $ 9 $ 10 Three Months Ended June 30, 2021 Six Months Ended June 30, 2021 (dollars in millions) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Commercial real estate 9 $ 2 $ 2 19 $ 19 $ 19 Commercial and industrial 4 — — 5 — — Total commercial loans 13 2 2 24 19 19 Direct installment 9 — — 19 1 1 Residential mortgages 2 — — 3 — — Consumer lines of credit 15 1 1 25 2 2 Total consumer loans 26 1 1 47 3 3 Total 39 $ 3 $ 3 71 $ 22 $ 22 The year-to-date items in the above tables have been adjusted for loans that have been paid off and/or sold. 25 Following is a summary of TDRs, by class, for which there was a payment default, excluding loans that have been paid off and/or sold. Default occurs when a loan is 90 days or more past due and is within 12 months of restructuring. TABLE 5.9 Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 (dollars in millions) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Commercial real estate — $ — 2 $ — Total commercial loans — — 2 — Direct installment 1 — 2 — Residential mortgages 3 — 3 — Total consumer loans 4 — 5 — Total 4 $ — 7 $ — Three Months Ended June 30, 2021 Six Months Ended June 30, 2021 (dollars in millions) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Commercial and industrial — $ — 1 $ — Total commercial loans — — 1 — Direct installment 1 — 1 — Residential mortgages — — 1 — Total consumer loans 1 — 2 — Total 1 $ — 3 $ — NOTE 6. ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES The ACL is maintained for credit losses expected in the existing loan and lease portfolio and is presented as a reserve against loans and leases on the Consolidated Balance Sheets. Loan and lease losses are charged off against the ACL, with recoveries of amounts previously charged off credited to the ACL. Provisions for credit losses are charged to operations based on management’s periodic evaluation of the appropriate level of the ACL. 26 Following is a summary of changes in the ACL, by loan and lease class: TABLE 6.1 (in millions) Balance at Beginning of Period Charge- Offs Recoveries Net (Charge- Offs) Recoveries Provision for Credit Losses Balance at End of Period Three Months Ended June 30, 2022 Commercial real estate $ 165.7 $ ( 0.6 ) $ 0.7 $ 0.1 $ ( 7.9 ) $ 157.9 Commercial and industrial 91.7 ( 1.1 ) 2.7 1.6 1.0 94.3 Commercial leases 13.8 — — — ( 0.1 ) 13.7 Other 3.8 ( 0.7 ) 0.3 ( 0.4 ) 0.8 4.2 Total commercial loans and leases 275.0 ( 2.4 ) 3.7 1.3 ( 6.2 ) 270.1 Direct installment 31.2 ( 0.2 ) 0.2 — 3.0 34.2 Residential mortgages 39.7 ( 0.2 ) 0.1 ( 0.1 ) 7.6 47.2 Indirect installment 14.2 ( 1.2 ) 0.4 ( 0.8 ) 2.6 16.0 Consumer lines of credit 10.5 ( 0.2 ) 0.2 — — 10.5 Total consumer loans 95.6 ( 1.8 ) 0.9 ( 0.9 ) 13.2 107.9 Total allowance for credit losses on loans and leases 370.6 ( 4.2 ) 4.6 0.4 7.0 378.0 Allowance for unfunded loan commitments 18.8 — — — ( 0.6 ) 18.2 Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments $ 389.4 $ ( 4.2 ) $ 4.6 $ 0.4 $ 6.4 $ 396.2 (in millions) Balance at Beginning of Period Charge- Offs Recoveries Net (Charge- Offs) Recoveries Provision for Credit Losses Allowance for PCD Loans and Leases at Acquisition Balance at End of Period Six Months Ended June 30, 2022 Commercial real estate $ 156.5 $ ( 1.6 ) $ 2.1 $ 0.5 $ ( 3.5 ) $ 4.4 $ 157.9 Commercial and industrial 87.4 ( 4.3 ) 4.0 ( 0.3 ) 3.8 3.4 94.3 Commercial leases 14.7 ( 0.1 ) — ( 0.1 ) ( 0.9 ) — 13.7 Other 2.6 ( 1.4 ) 0.5 ( 0.9 ) 2.5 — 4.2 Total commercial loans and leases 261.2 ( 7.4 ) 6.6 ( 0.8 ) 1.9 7.8 270.1 Direct installment 26.4 ( 0.2 ) 0.4 0.2 7.1 0.5 34.2 Residential mortgages 33.1 ( 0.3 ) 0.3 — 12.8 1.3 47.2 Indirect installment 13.5 ( 2.2 ) 1.1 ( 1.1 ) 3.6 — 16.0 Consumer lines of credit 10.1 ( 0.4 ) 0.6 0.2 ( 0.2 ) 0.4 10.5 Total consumer loans 83.1 ( 3.1 ) 2.4 ( 0.7 ) 23.3 2.2 107.9 Total allowance for credit losses on loans and leases 344.3 ( 10.5 ) 9.0 ( 1.5 ) 25.2 10.0 378.0 Allowance for unfunded loan commitments 19.1 — — — ( 0.9 ) — 18.2 Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments $ 363.4 $ ( 10.5 ) $ 9.0 $ ( 1.5 ) $ 24.3 $ 10.0 $ 396.2 27 (in millions) Balance at Beginning of Period Charge- Offs Recoveries Net Charge- Offs Provision for Credit Losses Balance at End of Period Three Months Ended June 30, 2021 Commercial real estate $ 184 $ ( 5 ) $ 2 $ ( 3 ) $ ( 5 ) $ 176 Commercial and industrial 79 ( 1 ) 1 — 2 81 Commercial leases 17 — — — ( 1 ) 16 Other 1 ( 1 ) — ( 1 ) 1 1 Total commercial loans and leases 281 ( 7 ) 3 ( 4 ) ( 3 ) 274 Direct installment 26 — — — 1 27 Residential mortgages 32 — — — 1 33 Indirect installment 11 ( 1 ) 1 — 1 12 Consumer lines of credit 12 — — — ( 1 ) 11 Total consumer loans 81 ( 1 ) 1 — 2 83 Total allowance for credit losses on loans and leases 362 ( 8 ) 4 ( 4 ) ( 1 ) 357 Allowance for unfunded loan commitments 14 — — — — 14 Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments $ 376 $ ( 8 ) $ 4 $ ( 4 ) $ ( 1 ) $ 371 Six Months Ended June 30, 2021 Commercial real estate $ 181 $ ( 6 ) $ 3 $ ( 3 ) $ ( 2 ) $ 176 Commercial and industrial 81 ( 9 ) 2 ( 7 ) 7 81 Commercial leases 17 — 1 1 ( 2 ) 16 Other 1 ( 2 ) 1 ( 1 ) 1 1 Total commercial loans and leases 280 ( 17 ) 7 ( 10 ) 4 274 Direct installment 26 — — — 1 27 Residential mortgages 34 — — — ( 1 ) 33 Indirect installment 11 ( 3 ) 2 ( 1 ) 2 12 Consumer lines of credit 12 — — — ( 1 ) 11 Total consumer loans 83 ( 3 ) 2 ( 1 ) 1 83 Total allowance for credit losses on loans and leases 363 ( 20 ) 9 ( 11 ) 5 357 Allowance for unfunded loan commitments 14 — — — — 14 Total allowance for credit losses on loans and leases and allowance for unfunded loan commitments $ 377 $ ( 20 ) $ 9 $ ( 11 ) $ 5 $ 371 28 Following is a summary of changes in the AULC by portfolio segment: TABLE 6.2 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in millions) Balance at beginning of period $ 19 $ 14 $ 19 $ 14 Provision for unfunded loan commitments and letters of credit: Commercial portfolio ( 1 ) — ( 1 ) — Consumer portfolio — — — — Balance at end of period $ 18 $ 14 $ 18 $ 14 The model used to calculate the ACL is dependent on the portfolio composition and credit quality, as well as historical experience, current conditions and forecasts of economic conditions and interest rates. Specifically, the following considerations are incorporated into the ACL calculation: • a third-party macroeconomic forecast scenario; • a 24-month R&S forecast period for macroeconomic factors with a reversion to the historical mean on a straight-line basis over a 12-month period; and • the historical through-the-cycle mean was calculated using an expanded period to include a prior recessionary period. At June 30, 2022 and December 31, 2021, we utilized a third-party consensus macroeconomic forecast reflecting the current and projected macroeconomic environment. For our ACL calculation at June 30, 2022, the macroeconomic variables that we utilized included, but were not limited to: (i) the purchase only Housing Price Index, which reflects growth of 6.0 % over our R&S forecast period, (ii) a Commercial Real Estate Price Index, which reflects growth of 11.4 % over our R&S forecast period, (iii) S&P Volatility, which increases 2.3 % in 2022 and decreases 8.6 % in 2023 and (iv) bankruptcies, which increase steadily over the R&S forecast period but average below historical levels. Macroeconomic variables that we utilized for our ACL calculation as of December 31, 2021 included, but were not limited to: (i) the purchase only Housing Price Index, which reflected growth of 6.3 % over our R&S forecast period, (ii) a Commercial Real Estate Price Index, which reflected growth of 13.0 % over our R&S forecast period, (iii) S&P Volatility, which increases 15.2 % in 2022 and 1.9 % in 2023 and (iv) bankruptcies, which increase steadily over the R&S forecast period but average below historical levels. The ACL on loans and leases of $ 378.0 million at June 30, 2022 increased $ 33.7 million, or 9.8 %, from December 31, 2021 primarily due to the Howard acquisition and the associated ACL attributable to the acquired loans and leases, significant loan growth and CECL-related model impacts from lower prepayment speed assumptions in the second quarter of 2022, partially offset by positive credit quality trends. Our ending ACL coverage ratio at June 30, 2022 was 1.35 %, compared to 1.38 % at December 31, 2021. Total provision for credit losses for the three months ended June 30, 2022 was $ 6.4 million. Net recoveries were $ 0.4 million during the three months ended June 30, 2022, compared to net charge-offs of $ 3.8 million during the three months ended June 30, 2021, reflecting continued strong underlying portfolio credit trends. Total provision for credit losses for the six months ended June 30, 2022 was $ 24.3 million and included $ 19.1 million of initial provision for non-PCD loans associated with the Howard acquisition. Net charge-offs were $ 1.5 million during the six months ended June 30, 2022, compared to $ 11.0 million during the six months ended June 30, 2021. 29 NOTE 7. LOAN SERVICING Mortgage Loan Servicing We retain the servicing rights on certain mortgage loans sold. The unpaid principal balance of mortgage loans serviced for others is listed below: TABLE 7.1 (in millions) June 30, 2022 December 31, 2021 Mortgage loans sold with servicing retained $ 5,094 $ 4,855 The following table summarizes activity relating to mortgage loans sold with servicing retained: TABLE 7.2 Three Months Ended June 30, Six Months Ended June 30, (in millions) 2022 2021 2022 2021 Mortgage loans sold with servicing retained $ 315 $ 518 $ 666 $ 1,024 Pretax net gains resulting from above loan sales (1) ( 7 ) 11 ( 7 ) 26 Mortgage servicing fees (1) 3 3 6 6 (1) Recorded in mortgage banking operations on the Consolidated Statements of Income. Following is a summary of activity relating to MSRs: TABLE 7.3 Three Months Ended June 30, Six Months Ended June 30, (in millions) 2022 2021 2022 2021 Balance at beginning of period $ 48.5 $ 38.6 $ 44.4 $ 35.6 Additions 4.0 5.7 8.1 10.9 Payoffs and curtailments ( 1.4 ) ( 3.5 ) ( 3.0 ) ( 7.6 ) (Impairment charge) / recovery 0.2 0.3 2.5 2.8 Amortization ( 0.6 ) ( 0.6 ) ( 1.3 ) ( 1.2 ) Balance at end of period $ 50.7 $ 40.5 $ 50.7 $ 40.5 Fair value, beginning of period $ 58.2 $ 40.2 $ 46.0 $ 35.6 Fair value, end of period 64.1 40.8 64.1 40.8 We had no valuation allowance for MSRs as of June 30, 2022, compared to $ 2.5 million at December 31, 2021. The fair value of MSRs is highly sensitive to changes in assumptions and is determined by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and with the use of independent third-party valuations. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSRs and as interest rates increase, mortgage loan prepayments decline, which results in an increase in the fair value of MSRs. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time. 30 Following is a summary of the sensitivity of the fair value of MSRs to changes in key assumptions: TABLE 7.4 (dollars in millions) June 30, 2022 December 31, 2021 Weighted average life (months) 94.8 76.6 Constant prepayment rate (annualized) 7.5 % 11.2 % Discount rate 9.5 % 9.5 % Effect on fair value due to change in interest rates: +2.00% $ 9 $ 15 +1.00% 5 9 +0.50% 3 5 +0.25% 1 3 -0.25% ( 2 ) ( 3 ) -0.50% ( 3 ) ( 7 ) The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. Also, in this table, the effects of an adverse variation in a particular assumption on the fair value of MSRs is calculated without changing any other assumptions, while, in reality, changes in one factor may result in changing another, which may magnify or contract the effect of the change. NOTE 8. LEASES We have operating leases primarily for certain branches, office space, land and office equipment. We have finance leases for certain branches. Our operating leases expire at various dates through the year 2046 and generally include one or more options to renew. Our finance leases expire at various dates through the year 2051 and generally include one or more options to renew. The exercise of lease renewal options is at our sole discretion. As of June 30, 2022, we had operating lease right-of-use assets and operating lease liabilities of $ 136.2 million and $ 145.9 million, respectively. We have finance lease right-of-use assets and finance lease liabilities of $ 20.8 million and $ 21.1 million, respectively. Our operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of June 30, 2022, we have certain operating lease agreements, primarily for administrative office space, that have not yet commenced. At commencement, it is expected that these leases will add approximately $ 69.2 million in right-of-use assets and $ 90.6 million in other liabilities. These operating leases are currently expected to commence in 2023 with lease terms up to 16 years. These operating leases include the lease, with a related party, of the future new FNB headquarters building in Pittsburgh, Pennsylvania. The related party operating lease is accounted for in a manner consistent with all other leases on the basis of the legally enforceable terms and conditions of the lease and the related party represents a VIE for which we are not the primary beneficiary. The components of lease expense were as follows: TABLE 8.1 Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2022 2021 2022 2021 Operating lease cost $ 8 $ 7 $ 16 $ 14 Variable lease cost 1 1 2 2 Total lease cost $ 9 $ 8 $ 18 $ 16 31 Other information related to leases is as follows: TABLE 8.2 Six Months Ended June 30, (dollars in millions) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 7 $ 7 Operating cash flows from finance leases $ — $ — Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 1 $ 2 Finance leases $ 6 $ 10 Weighted average remaining lease term (years): Operating leases 9.60 9.36 Finance leases 22.06 24.34 Weighted average discount rate: Operating leases 2.4 % 2.6 % Finance leases 2.5 % 1.9 % Maturities of lease liabilities were as follows: TABLE 8.3 (in millions) Operating Leases Finance Leases Total Leases June 30, 2022 2022 $ 14 $ 1 $ 15 2023 24 1 25 2024 22 1 23 2025 16 1 17 2026 13 1 14 Later years 77 23 100 Total lease payments 166 28 194 Less: imputed interest ( 20 ) ( 7 ) ( 27 ) Present value of lease liabilities $ 146 $ 21 $ 167 As a lessor we offer commercial leasing services to customers in need of new or used equipment primarily within our market areas of Pennsylvania, Ohio, Maryland, North Carolina, South Carolina and West Virginia. Additional information relating to commercial leasing is provided in Note 5, “Loans and Leases” in the Notes to Consolidated Financial Statements. NOTE 9. VARIABLE INTEREST ENTITIES We evaluate our interest in certain entities to determine if these entities meet the definition of a VIE and whether we are the primary beneficiary and required to consolidate the entity based on the variable interest we held both at inception and when there is a change in circumstances that requires a reconsideration. 32 Unconsolidated VIEs The following table provides a summary of the assets and liabilities included in our Consolidated Financial Statements, as well as the maximum exposure to losses, associated with our interests related to VIEs for which we hold an interest, but are not the primary beneficiary, at June 30, 2022 and December 31, 2021. TABLE 9.1 (in millions) Total Assets Total Liabilities Maximum Exposure to Loss June 30, 2022 Trust preferred securities (1) $ 1 $ 72 $ — Affordable housing tax credit partnerships 123 37 123 Other investments 30 5 30 Total $ 154 $ 114 $ 153 December 31, 2021 Trust preferred securities (1) $ 1 $ 67 $ — Affordable housing tax credit partnerships 121 34 121 Other investments 28 6 28 Total $ 150 $ 107 $ 149 (1) Represents our investment in unconsolidated subsidiaries. Trust-Preferred Securities We have certain wholly-owned trusts whose assets, liabilities, equity, income and expenses are not included within our Consolidated Financial Statements. These trusts have been formed for the sole purpose of issuing TPS, from which the proceeds are then invested in our junior subordinated debentures, which are reflected in our Consolidated Balance Sheets as subordinated notes. The TPS are the obligations of the trusts, and as such, are not consolidated within our Consolidated Financial Statements. For additional information relating to our TPS, see Note 10, “Borrowings” in the Notes to Consolidated Financial Statements. Each issue of the junior subordinated debentures has an interest rate equal to the corresponding TPS distribution rate. We have the right to defer payment of interest on the debentures at any time, or from time-to-time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the related debentures. During any such extension period, distributions to the TPS will also be deferred and our ability to pay dividends on our common stock will be restricted. Periodic cash payments and payments upon liquidation or redemption with respect to TPS are guaranteed by us to the extent of funds held by the trusts. The guarantee ranks subordinate and junior in right of payment to all of our indebtedness to the same extent as the junior subordinated debt. The guarantee does not place a limitation on the amount of additional indebtedness that may be incurred by us. Affordable Housing Tax Credit Partnerships We make equity investments as a limited partner in various partnerships that sponsor affordable housing projects utilizing the LIHTC pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to support initiatives associated with the Community Reinvestment Act while earning a satisfactory return. The activities of these LIHTC partnerships include the development and operation of multi-family housing that is leased to qualifying residential tenants. These partnerships are generally located in communities where we have a banking presence and meet the definition of a VIE; however, we are not the primary beneficiary of the entities, as the general partner or managing member has both the power to direct the activities that most significantly impact the economic performance of the entities and the obligation to absorb losses beyond our own equity investment. We record our investment in LIHTC partnerships as a component of other assets and use the proportional amortization method to account for our investments in LIHTC partnerships. Amortization related to our LIHTC investments is recorded on a net basis as a component of the provision for income taxes on the Consolidated Statements of Income. 33 The following table presents the balances of our affordable housing tax credit investments and related unfunded commitments: TABLE 9.2 (in millions) June 30, 2022 December 31, 2021 LIHTC investments included in other assets $ 86 $ 87 Unfunded LIHTC commitments 37 34 The following table summarizes the impact of these LIHTC investments on the provision for income taxes in our Consolidated Statements of Income: TABLE 9.3 Three Months Ended June 30, Six Months Ended June 30, (in millions) 2022 2021 2022 2021 Provision for income taxes: Amortization of LIHTC investments under proportional method $ 3 $ 4 $ 7 $ 7 Low-income housing tax credits ( 4 ) ( 4 ) ( 8 ) ( 7 ) Other tax benefits related to tax credit investments — ( 1 ) ( 1 ) ( 2 ) Total impact on provision for income taxes $ ( 1 ) $ ( 1 ) $ ( 2 ) $ ( 2 ) Other Investments Other investments we also consider to be unconsolidated VIE’s include investments in Small Business Investment Companies, Historic Tax Credit investments, and other equity method investments. NOTE 10. BORROWINGS Following is a summary of short-term borrowings: TABLE 10.1 (in millions) June 30, 2022 December 31, 2021 Securities sold under repurchase agreements $ 328 $ 376 Federal Home Loan Bank advances 930 1,030 Subordinated notes 133 130 Total short-term borrowings $ 1,391 $ 1,536 Borrowings with original maturities of one year or less are classified as short-term. Securities sold under repurchase agreements are comprised of customer repurchase agreements, which are sweep accounts with next-day maturities utilized by larger commercial customers to earn interest on their funds. Securities are pledged to these customers in an amount at least equal to the outstanding balance. We did no t have any short-term FHLB advances with overnight maturities as of June 30, 2022 or December 31, 2021. At June 30, 2022, $ 930.0 million, or 100.0 %, of the short-term FHLB advances were swapped to fixed rates with various maturities through 2024. This compares to $ 1.0 billion, or 100.0 %, as of December 31, 2021. 34 Following is a summary of long-term borrowings: TABLE 10.2 (in millions) June 30, 2022 December 31, 2021 Senior notes $ 299 $ 299 Subordinated notes 67 68 Junior subordinated debt 72 67 Other subordinated debt 274 248 Total long-term borrowings $ 712 $ 682 We assumed $ 25 million of other subordinated debt and $ 5 million of junior subordinated debt from the Howard acquisition. Those additions are reflected in the balances above and in the tables below. Our banking affiliate has available credit with the FHLB of $ 9.3 billion, of which $ 0.9 billion was utilized and included in short-term borrowings as of June 30, 2022. The short-term FHLB borrowings are secured by loans collateralized by residential mortgages, home equity lines of credit, commercial real estate and FHLB stock and are scheduled to mature in various amounts periodically during 2022. There were no long-term FHLB borrowings as of June 30, 2022 or December 31, 2021. Effective interest rates paid on the long-term FHLB borrowings held during 2021 ranged from 0.26 % to 0.29 % for the year ended December 31, 2021. The following table provides information relating to our senior notes and other subordinated debt as of June 30, 2022. The subordinated notes are eligible for treatment as tier 2 capital for regulatory capital purposes. TABLE 10.3 (dollars in millions) Aggregate Principal Amount Issued Net Proceeds (4) Carrying Value Stated Maturity Date Interest Rate 2.20 % Senior Notes due February 24, 2023 $ 300 $ 298 $ 299 2/24/2023 2.20 % 4.95 % Fixed-To-Floating Rate Subordinated Notes due 2029 (1) 120 118 119 2/14/2029 4.95 % 4.875 % Subordinated Notes due 2025 100 98 99 10/2/2025 4.875 % 7.625 % Subordinated Notes due August 12, 2023 (3) 38 46 30 8/12/2023 7.625 % 6.00 % Fixed-To-Floating Rate Subordinated Notes due December 6, 2028 (2) (3) 25 26 26 12/6/2028 6.00 % Total $ 583 $ 586 $ 573 (1) Fixed-to-floating rate until February 14, 2024, at which time the floating rate will be three-month LIBOR plus 240 basis points (bps), or an alternative rate that may replace LIBOR, as specified in the prospectus for this offering. (2) Fixed-to-floating rate until December 6, 2023, at which time the floating rate will be three-month LIBOR plus 302 bps, or an alternative rate that may replace LIBOR, as specified in the prospectus for this offering. (3) Assumed from an acquisition and adjusted to fair value at the time of acquisition. (4) After deducting underwriting discounts and commissions and offering costs. For the debt assumed from acquisitions, this is the fair value of the debt at the time of the acquisition. The junior subordinated debt is comprised of the debt securities issued by FNB, or companies we acquired, in relation to our unconsolidated subsidiary trusts (collectively, the Trusts), which are unconsolidated VIEs, and are included on the Consolidated Balance Sheets in long-term borrowings. Since third-party investors are the primary beneficiaries, the Trusts are not consolidated in our Financial Statements. We record the distributions on the junior subordinated debt issued to the Trusts as interest expense. 35 The following table provides information relating to the Trusts as of June 30, 2022: TABLE 10.4 (dollars in millions) Trust Preferred Securities Common Securities Junior Subordinated Debt Stated Maturity Date Interest Rate Rate Reset Factor F.N.B. Statutory Trust II $ 22 $ 1 $ 22 6/15/2036 3.48 % LIBOR + 165 bps Yadkin Valley Statutory Trust I 25 1 22 12/15/2037 3.15 % LIBOR + 132 bps FNB Financial Services Capital Trust I 25 1 23 9/30/2035 3.71 % LIBOR + 146 bps Patapsco Statutory Trust I 5 — 5 12/15/2035 3.31 % LIBOR + 148 bps Total $ 77 $ 3 $ 72 NOTE 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate risk, primarily by managing the amount, source, and duration of our assets and liabilities, and through the use of derivative instruments. Derivative instruments are used to reduce the effects that changes in interest rates may have on net income and cash flows. We also use derivative instruments to facilitate transactions on behalf of our customers. All derivatives are carried on the Consolidated Balance Sheets at fair value and do not take into account the effects of master netting arrangements we have with other financial institutions. Credit risk is included in the determination of the estimated fair value of derivatives. Derivative assets are reported in the Consolidated Balance Sheets in other assets and derivative liabilities are reported in other liabilities. Changes in fair value are recognized in earnings except for certain changes related to derivative instruments designated as part of a cash flow hedging relationship, which are recognized in other comprehensive income. The following table presents notional amounts and gross fair values of our derivative assets and derivative liabilities which are not offset in the Consolidated Balance Sheets: TABLE 11.1 June 30, 2022 December 31, 2021 Notional Fair Value Notional Fair Value (in millions) Amount Asset Liability Amount Asset Liability Gross Derivatives Subject to master netting arrangements: Interest rate contracts – designated $ 1,980 $ — $ — $ 2,080 $ 1 $ — Interest rate swaps – not designated 5,310 40 9 5,547 2 20 Total subject to master netting arrangements 7,290 40 9 7,627 3 20 Not subject to master netting arrangements: Interest rate swaps – not designated 5,310 14 242 5,547 172 24 Interest rate lock commitments – not designated 265 1 15 482 9 — Forward delivery commitments – not designated 280 2 — 502 1 1 Credit risk contracts – not designated 385 — — 368 — — Total not subject to master netting arrangements 6,240 17 257 6,899 182 25 Total $ 13,530 $ 57 $ 266 $ 14,526 $ 185 $ 45 The change in the fair value of assets and liabilities from December 31, 2021 is due to a significant increase in rates during 2022. 36 Certain derivative exchanges have enacted a rule change which in effect results in the legal characterization of variation margin payments for certain derivative contracts as settlement of the derivatives mark-to-market exposure and not collateral. Accordingly, we have changed our reporting of certain derivatives to record variation margin on trades cleared through these exchanges as settled. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument. We adopted RRR on October 1, 2020, and the guidance will be followed until the Update terminates on December 31, 2022. As of October 16, 2020, we changed our valuation methodology to reflect changes made by central clearinghouses that changed the discounting methodology and interest calculation of cash migration from overnight index swap (OIS) to SOFR for U.S. dollar cleared interest rate swaps to better reflect prices obtainable in the markets in which we transact. Certain of these valuation methodology changes were applied to eligible hedging relationships. Accordingly, we have updated our hedge documentation to reflect the election of certain expedients and exceptions related to our cash flow hedging programs. The change in valuation methodology was applied prospectively as a change in accounting estimate and did not have a material impact on our consolidated financial position or results of operations. Derivatives Designated as Hedging Instruments under GAAP Interest Rate Contracts. We entered into interest rate derivative agreements to modify the interest rate characteristics of certain commercial loans and certain of our FHLB advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges, hedging the exposure to variability in expected future cash flows. The derivative’s gain or loss, including any ineffectiveness, is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same line item associated with the forecasted transaction when the forecasted transaction affects earnings. The following table shows amounts reclassified from AOCI: TABLE 11.2 Amount of Gain (Loss) Recognized in OCI on Derivatives Location of Gain (Loss) Reclassified from AOCI into Income Amount of Gain (Loss) Reclassified from AOCI into Income Six Months Ended June 30, Six Months Ended June 30, (in millions) 2022 2021 2022 2021 Derivatives in cash flow hedging relationships: Interest rate contracts $ ( 22 ) $ 5 Interest income (expense) $ ( 4 ) $ ( 9 ) Other income — — The following table represents gains (losses) recognized in the Consolidated Statements of Income on cash flow hedging relationships: TABLE 11.3 Six months ended June 30, 2022 2021 (in millions) Interest Income - Loans and Leases Interest Expense - Short-Term Borrowings Interest Income - Loans and Leases Interest Expense - Short-Term Borrowings Total amounts of income and expense line items presented in the Consolidated Statements of Income (the effects of cash flow hedges are included in these line items) $ 463 $ 11 $ 445 $ 14 The effects of cash flow hedging: Gain (loss) on cash flow hedging relationships: Interest rate contracts: Amount of gain (loss) reclassified from AOCI into net income 3 ( 7 ) 1 ( 10 ) 37 As of June 30, 2022, the maximum length of time over which forecasted interest cash flows are hedged is 3.3 years. In the twelve months that follow June 30, 2022, we expect to reclassify from the amount currently reported in AOCI net derivative losses of $ 13.9 million ($ 10.8 million net of tax), in association with interest on the hedged loans and FHLB advances. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2022. There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to these cash flow hedges. Also, during the six months ended June 30, 2022 and 2021, there were no gains or losses from cash flow hedge derivatives reclassified to earnings because it became probable that the original forecasted transactions would not occur. Derivatives Not Designated as Hedging Instruments under GAAP A description of interest rate swaps, interest rate lock commitments, forward delivery commitments and credit risk contracts can be found in Note 15, "Derivative Instruments and Hedging Activities" in the Consolidated Financial Statements included in our 2021 Annual Report on Form 10-K filed with the SEC on February 24, 2022. Interest rate swap agreements with loan customers and with the offsetting counterparties are reported at fair value in other assets and other liabilities on the Consolidated Balance Sheets with any resulting gain or loss recorded in current period earnings as other income or other expense. Risk participation agreements sold with notional amounts totaling $ 286.3 million as of June 30, 2022 have remaining terms ranging from one month to nineteen years . Under these agreements, our maximum exposure assuming a customer defaults on their obligation to perform under certain derivative swap contracts with third parties would be $ 0.1 million at June 30, 2022 and $ 0.2 million at December 31, 2021. The fair values of risk participation agreements purchased and sold were $ 0.2 million and $ 0.1 million, respectively, at June 30, 2022 and $ 0.1 million and $ 0.2 million, respectively at December 31, 2021. The following table presents the effect of certain derivative financial instruments on the Consolidated Statements of Income: TABLE 11.4 Six Months Ended June 30, (in millions) Consolidated Statements of Income Location 2022 2021 Interest rate swaps Non-interest income - other $ — $ — Interest rate lock commitments Mortgage banking operations — — Forward delivery contracts Mortgage banking operations 2 ( 1 ) Credit risk contracts Non-interest income - other — — Counterparty Credit Risk We are party to master netting arrangements with most of our swap derivative dealer counterparties. Collateral, usually marketable securities and/or cash, is exchanged between FNB and our counterparties, and is generally subject to thresholds and transfer minimums. For swap transactions that require central clearing, we post cash to our clearing agency. Collateral positions are settled or valued daily, and adjustments to amounts received and pledged by us are made as appropriate to maintain proper collateralization for these transactions. Certain master netting agreements contain provisions that, if violated, could cause the counterparties to request immediate settlement or demand full collateralization under the derivative instrument. If we had breached our agreements with our derivative counterparties we would be required to settle our obligations under the agreements at the termination value and would be required to pay an additional $ 0.0 million and $ 0.2 million as of June 30, 2022 and December 31, 2021, respectively, in excess of amounts previously posted as collateral with the respective counterparty. 38 The following table presents a reconciliation of the net amounts of derivative assets and derivative liabilities presented in the Consolidated Balance Sheets to the net amounts that would result in the event of offset: TABLE 11.5 Amount Not Offset in the Consolidated Balance Sheets (in millions) Net Amount Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Net Amount June 30, 2022 Derivative Assets Interest rate contracts: Not designated $ 40 $ — $ 40 $ — Total $ 40 $ — $ 40 $ — Derivative Liabilities Interest rate contracts: Not designated $ 9 $ — $ 9 $ — Total $ 9 $ — $ 9 $ — December 31, 2021 Derivative Assets Interest rate contracts: Designated $ 1 $ — $ 1 $ — Not designated 2 — 2 — Total $ 3 $ — $ 3 $ — Derivative Liabilities Interest rate contracts: Not designated $ 20 $ — $ 20 $ — Total $ 20 $ — $ 20 $ — NOTE 12. COMMITMENTS, CREDIT RISK AND CONTINGENCIES We have commitments to extend credit and standby letters of credit that involve certain elements of credit risk in excess of the amount stated in the Consolidated Balance Sheets. Our exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. The credit risk associated with commitments to extend credit and standby letters of credit is essentially the same as that involved in extending loans and leases to customers and is subject to normal credit policies. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. Following is a summary of off-balance sheet credit risk information: TABLE 12.1 (in millions) June 30, 2022 December 31, 2021 Commitments to extend credit $ 12,277 $ 11,228 Standby letters of credit 203 194 At June 30, 2022, funding of 71.9 % of the commitments to extend credit was dependent on the financial condition of the customer. We have the ability to withdraw such commitments at our discretion. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Based on management’s credit evaluation of the customer, 39 collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by us that may require payment at a future date. The credit risk involved in issuing letters of credit is actively monitored through review of the historical performance of our portfolios. Our AULC for commitments that are not unconditionally cancellable, which is included in other liabilities on the Consolidated Balance Sheets, was $ 18.2 million at June 30, 2022 and $ 19.2 million at December 31, 2021. Additional information relating to the AULC is provided in Note 6, "Allowance for Credit Losses on Loans and Leases" in the Notes to Consolidated Financial Statements. In addition to the above commitments, subordinated notes issued by FNB Financial Services, LP, a wholly-owned finance subsidiary, are fully and unconditionally guaranteed by FNB. These subordinated notes are included in the summaries of short-term borrowings and long-term borrowings in Note 10, “Borrowings” in the Notes to Consolidated Financial Statements. Other Legal Proceedings In the ordinary course of business, we may assert claims in legal proceedings against another party or parties, and we are routinely named as defendants in, or made parties to, pending and potential legal actions. Also, as regulated entities, we are subject to governmental and regulatory examinations, information-gathering requests, and may be subject to investigations and proceedings (both formal and informal). Such threatened claims, litigation, investigations, regulatory and administrative proceedings typically entail matters that are considered incidental to the normal conduct of business. Claims for significant monetary damages may be asserted in many of these types of legal actions, while claims for disgorgement, reimbursement, restitution, penalties and/or other remedial actions or sanctions may be sought in regulatory matters. In these instances, if we determine that we have meritorious defenses, we will engage in an aggressive defense. However, if management determines, in consultation with counsel, that settlement of a matter is in the best interest of FNB and our shareholders, we may do so. It is inherently difficult to predict the eventual outcomes of such matters given their complexity and the particular facts and circumstances at issue in each of these matters. However, on the basis of current knowledge and understanding, and advice of counsel, we do not believe that judgments, sanctions, settlement resolutions, regulatory actions, investigations, settlements or orders, if any, that have arisen or may arise from these matters (either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage) will have a material adverse effect on our financial position or liquidity, although they could potentially have a material effect on net income in a given period. In view of the inherent unpredictability of outcomes in litigation and governmental and regulatory matters, particularly where (i) the damages sought are indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel legal theories or a large number of parties, as a matter of course, there is considerable uncertainty surrounding the timing or ultimate resolution of litigation and governmental and regulatory matters, including a possible eventual loss, fine, restitution, penalty, business or adverse reputational impact, if any, associated with each such matter. In accordance with applicable accounting guidance, we establish accruals for litigation and governmental and regulatory matters when those matters proceed to a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. We will continue to monitor such matters for developments that could affect the amount of the accrual, and will adjust the accrual amount as appropriate. If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. We believe that our accruals for legal proceedings are appropriate and, in the aggregate, are not material to our consolidated financial position, although future accruals could have a material effect on net income in a given period. NOTE 13. STOCK INCENTIVE PLANS Restricted Stock We issue restricted stock awards to key employees under our Incentive Compensation Plan (Plan). We issue time-based awards and performance-based awards under this Plan, both of which are based on a three-year vesting period. The grant date fair value of the time-based awards is equal to the price of our common stock on the grant date. The fair value of the performance-based awards is based on a Monte-Carlo simulation valuation of our common stock as of the grant date. The assumptions used for this valuation include stock price volatility, risk-free interest rate and dividend yield. We granted 1,219,416 and 1,102,607 restricted stock units during the six months ended June 30, 2022 and 2021, respectively, including 297,508 and 325,284 performance-based restricted stock units during those same periods, respectively. As of June 30, 2022, we had available up to 40 9,881,378 shares of common stock to issue under this Plan, including 7,397,956 shares registered during the second quarter of 2022. The unvested restricted stock unit awards are eligible to receive cash dividends or dividend equivalents which are ultimately used to purchase additional shares of stock and are subject to forfeiture if the requisite service period is not completed or the specified performance criteria are not met. These awards are subject to certain accelerated vesting provisions upon retirement, death, disability or in the event of a change of control as defined in the award agreements. The following table summarizes the activity relating to restricted stock units during the periods indicated: TABLE 13.1 Six Months Ended June 30, 2022 2021 Units Weighted Average Grant Price per Share Units Weighted Average Grant Price per Share Unvested units outstanding at beginning of period 4,680,786 $ 9.71 4,322,115 $ 9.46 Granted 1,219,416 13.11 1,102,607 12.66 Acquired 60,300 9.41 — — Net adjustment due to performance 105,026 9.89 327,256 11.84 Vested ( 1,648,252 ) 10.60 ( 1,229,683 ) 12.16 Forfeited/expired/canceled ( 211,295 ) 10.90 ( 75,132 ) 11.55 Dividend reinvestment 93,375 11.90 84,619 13.10 Unvested units outstanding at end of period 4,299,356 10.32 4,531,782 9.71 The following table provides certain information related to restricted stock units: TABLE 13.2 (in millions) Six Months Ended June 30, 2022 2021 Stock-based compensation expense $ 12 $ 14 Tax benefit related to stock-based compensation expense 3 3 Fair value of units vested 21 15 As of June 30, 2022, there was $ 14.0 million of unrecognized compensation cost related to unvested restricted stock units, including $ 1.9 million that is subject to accelerated vesting under the Plan’s immediate vesting upon retirement. The components of the restricted stock units as of June 30, 2022 are as follows: TABLE 13.3 (dollars in millions) Service- Based Units Performance- Based Units Total Unvested restricted stock units 2,825,768 1,473,588 4,299,356 Unrecognized compensation expense $ 13 $ 1 $ 14 Intrinsic value $ 31 $ 16 $ 47 Weighted average remaining life (in years) 2.04 1.38 1.82 41 Stock Options All outstanding stock options were assumed from acquisitions and are fully vested. Upon consummation of our acquisitions, all outstanding stock options issued by the acquired companies were converted into equivalent FNB stock options. We issue shares of treasury stock or authorized but unissued shares to satisfy stock options exercised. As of June 30, 2022, we had 176,366 stock options outstanding and exercisable at a weighted average exercise price per share of $ 8.96 , compared to 170,647 stock options outstanding and exercisable at a weighted average exercise price per share of $ 8.75 as of June 30, 2021. The intrinsic value of outstanding and exercisable stock options at June 30, 2022 was $ 0.3 million. The aggregate intrinsic value represents the amount by which the fair value of underlying stock exceeds the option exercise price. NOTE 14. INCOME TAXES Income Tax Expense Federal and state income tax expense and the statutory tax rate and the actual effective tax rate consist of the following: TABLE 14.1 Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2022 2021 2022 2021 Current income taxes: Federal taxes $ 22 $ 19 $ 29 $ 40 State taxes 3 1 5 3 Total current income taxes 25 20 34 43 Deferred income taxes: Federal taxes 3 4 8 3 State taxes — 1 — 1 Total deferred income taxes 3 5 8 4 Total income taxes $ 28 $ 25 $ 42 $ 47 Statutory tax rate 21.0 % 21.0 % 21.0 % 21.0 % Effective tax rate 20.1 19.7 20.4 19.3 The increase in the effective tax rate for the six months ended June 30, 2022 compared to 2021 was primarily due to higher state income taxes and nondeductible merger-related expenses resulting from the Howard acquisition. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Net deferred tax assets were $ 115.3 million and $ 43.4 million at June 30, 2022 and December 31, 2021, respectively. The increase is due to the acquisition of net deferred taxes from Howard, as well as increases in the deferred tax asset related to unrealized losses on debt securities. 42 NOTE 15. OTHER COMPREHENSIVE INCOME (LOSS) The following table presents changes in AOCI, net of tax, by component: TABLE 15.1 (in millions) Unrealized Net Gains (Losses) on Debt Securities Available for Sale Unrealized Net Gains (Losses) on Derivative Instruments Unrecognized Pension and Postretirement Obligations Total Six Months Ended June 30, 2022 Balance at beginning of period $ 8 $ ( 22 ) $ ( 48 ) $ ( 62 ) Other comprehensive (loss) income before reclassifications ( 178 ) ( 17 ) 1 ( 194 ) Amounts reclassified from AOCI — 4 — 4 Net current period other comprehensive (loss) income ( 178 ) ( 13 ) 1 ( 190 ) Balance at end of period $ ( 170 ) $ ( 35 ) $ ( 47 ) $ ( 252 ) The amounts reclassified from AOCI related to debt securities AFS are included in net securities gains on the Consolidated Statements of Income, while the amounts reclassified from AOCI related to derivative instruments in cash flow hedge programs are generally included in interest income on loans and leases on the Consolidated Statements of Income. The tax (benefit) expense amounts reclassified from AOCI in connection with the debt securities AFS and derivative instruments reclassifications are included in income taxes on the Consolidated Statements of Income. NOTE 16. EARNINGS PER COMMON SHARE Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding net of unvested shares of restricted stock. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding, adjusted for the dilutive effect of potential common shares issuable for stock options and restricted shares, as calculated using the treasury stock method. Adjustments to the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share. The following table sets forth the computation of basic and diluted earnings per common share: TABLE 16.1 Three Months Ended June 30, Six Months Ended June 30, ( dollars in millions, except per share data) 2022 2021 2022 2021 Net income $ 109 $ 102 $ 162 $ 195 Less: Preferred stock dividends 2 2 4 4 Net income available to common stockholders $ 107 $ 100 $ 158 $ 191 Basic weighted average common shares outstanding 351,269,791 319,599,352 347,830,430 320,283,480 Net effect of dilutive stock options, warrants and restricted stock 3,417,278 3,728,813 4,004,504 3,744,783 Diluted weighted average common shares outstanding 354,687,069 323,328,165 351,834,934 324,028,263 Earnings per common share: Basic $ 0.30 $ 0.31 $ 0.45 $ 0.60 Diluted $ 0.30 $ 0.31 $ 0.45 $ 0.59 There were no anti-dilutive shares for either the three months ended or six months ended June 30, 2022 and 2021. In January 2022, we issued 34.1 million common shares as part of the Howard acquisition. 43 NOTE 17. CASH FLOW INFORMATION Following is a summary of supplemental cash flow information: TABLE 17.1 Six Months Ended June 30, (in millions) 2022 2021 Interest paid on deposits and other borrowings $ 45 $ 55 Income taxes paid 35 38 Transfers of loans to other real estate owned 1 2 We did no t have any restricted cash as of June 30, 2022 and 2021. Supplemental non-cash information relating to the Howard acquisition is included in Note 3, Mergers and Acquisitions. NOTE 18. BUSINESS SEGMENTS We operate in three reportable segments: Community Banking, Wealth Management and Insurance. • The Community Banking segment provides commercial and consumer banking services. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, business credit, capital markets and lease financing. Consumer banking products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. • The Wealth Management segment provides a broad range of personal and corporate fiduciary services including the administration of decedent and trust estates. In addition, it offers various alternative products, including securities brokerage (under a third-party arrangement) and investment advisory services, mutual funds and annuities. • The Insurance segment includes a full-service insurance brokerage service offering all lines of commercial and personal insurance through major carriers. The Insurance segment also includes a reinsurer. 44 The following tables provide financial information for these segments of FNB. The information provided under the caption “Parent and Other” represents operations not considered to be reportable segments and/or general operating expenses of FNB, and includes the parent company, other non-bank subsidiaries and eliminations and adjustments to reconcile to the Consolidated Financial Statements. TABLE 18.1 (in millions) Community Banking Wealth Management Insurance Parent and Other Consolidated At or for the Three Months Ended June 30, 2022 Interest income $ 279 $ — $ — $ 1 $ 280 Interest expense 24 — — 2 26 Net interest income 255 — — ( 1 ) 254 Provision for credit losses 6 — — — 6 Non-interest income 61 16 6 ( 1 ) 82 Non-interest expense (1) 173 10 4 2 189 Amortization of intangibles 3 — 1 — 4 Income tax expense (benefit) 28 1 1 ( 2 ) 28 Net income (loss) 106 5 — ( 2 ) 109 Total assets 41,545 37 35 64 41,681 Total intangibles 2,453 9 27 — 2,489 At or for the Three Months Ended June 30, 2021 Interest income $ 253 $ — $ — $ — $ 253 Interest expense 22 — — 3 25 Net interest income 231 — — ( 3 ) 228 Provision for credit losses ( 2 ) — — 1 ( 1 ) Non-interest income 60 15 7 ( 2 ) 80 Non-interest expense (1) 162 10 5 2 179 Amortization of intangibles 2 — 1 — 3 Income tax expense (benefit) 26 1 1 ( 3 ) 25 Net income (loss) 103 4 — ( 5 ) 102 Total assets 38,288 42 35 41 38,406 Total intangibles 2,273 9 28 — 2,310 (1) Excludes amortization of intangibles, which is presented separately. 45 (in millions) Community Banking Wealth Management Insurance Parent and Other Consolidated At or for the Six Months Ended June 30, 2022 Interest income $ 532 $ — $ — $ 2 $ 534 Interest expense 41 — — 5 46 Net interest income 491 — — ( 3 ) 488 Provision for credit losses 23 — — 1 24 Non-interest income 117 32 13 ( 2 ) 160 Non-interest expense (1) 380 21 9 3 413 Amortization of intangibles 6 — 1 — 7 Income tax expense (benefit) 42 2 1 ( 3 ) 42 Net income (loss) 157 9 2 ( 6 ) 162 Total assets 41,545 37 35 64 41,681 Total intangibles 2,453 9 27 — 2,489 At or for the Six Months Ended June 30, 2021 Interest income $ 504 $ — $ — $ — $ 504 Interest expense 47 — — 6 53 Net interest income 457 — — ( 6 ) 451 Provision for credit losses 4 — — 1 5 Non-interest income 123 30 13 ( 3 ) 163 Non-interest expense (1) 327 20 10 4 361 Amortization of intangibles 5 — 1 — 6 Income tax expense (benefit) 48 2 1 ( 4 ) 47 Net income (loss) 196 8 1 ( 10 ) 195 Total assets 38,288 42 35 41 38,406 Total intangibles 2,273 9 28 — 2,310 (1) Excludes amortization of intangibles, which is presented separately. 46 NOTE 19. FAIR VALUE MEASUREMENTS Refer to Note 25 "Fair Value Measurements" to the Consolidated Financial Statements included in our 2021 Annual Report on Form 10-K filed with the SEC on February 24, 2022 for a description of additional valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. The following table presents the balances of assets and liabilities measured at fair value on a recurring basis: TABLE 19.1 (in millions) Level 1 Level 2 Level 3 Total June 30, 2022 Assets Measured at Fair Value Debt securities available for sale U.S. Treasury $ 265 $ — $ — $ 265 U.S. government agencies — 130 — 130 U.S. government-sponsored entities — 274 — 274 Residential mortgage-backed securities: Agency mortgage-backed securities — 1,377 — 1,377 Agency collateralized mortgage obligations — 1,103 — 1,103 Commercial mortgage-backed securities — 371 — 371 States of the U.S. and political subdivisions (municipals) — 29 — 29 Other debt securities — 15 2 17 Total debt securities available for sale 265 3,299 2 3,566 Loans held for sale — 130 — 130 Derivative financial instruments Trading — 54 — 54 Not for trading — 2 1 3 Total derivative financial instruments — 56 1 57 Total assets measured at fair value on a recurring basis $ 265 $ 3,485 $ 3 $ 3,753 Liabilities Measured at Fair Value Derivative financial instruments Trading $ — $ 250 $ — $ 250 Not for trading — 1 15 16 Total derivative financial instruments — 251 15 266 Total liabilities measured at fair value on a recurring basis $ — $ 251 $ 15 $ 266 47 (in millions) Level 1 Level 2 Level 3 Total December 31, 2021 Assets Measured at Fair Value Debt securities available for sale U.S. Treasury $ 204 $ — $ — $ 204 U.S. government agencies — 155 — 155 U.S. government-sponsored entities — 192 — 192 Residential mortgage-backed securities: Agency mortgage-backed securities — 1,357 — 1,357 Agency collateralized mortgage obligations — 1,186 — 1,186 Commercial mortgage-backed securities — 297 — 297 States of the U.S. and political subdivisions (municipals) — 33 — 33 Other debt securities — 2 — 2 Total debt securities available for sale 204 3,222 — 3,426 Loans held for sale — 269 — 269 Derivative financial instruments Trading — 174 — 174 Not for trading — 2 9 11 Total derivative financial instruments — 176 9 185 Total assets measured at fair value on a recurring basis $ 204 $ 3,667 $ 9 $ 3,880 Liabilities Measured at Fair Value Derivative financial instruments Trading $ — $ 44 $ — $ 44 Not for trading — 1 — 1 Total derivative financial instruments — 45 — 45 Total liabilities measured at fair value on a recurring basis $ — $ 45 $ — $ 45 48 The following table presents additional information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value: TABLE 19.2 (in millions) Other Debt Securities Interest Rate Lock Commitments Total Six Months Ended June 30, 2022 Balance at beginning of period $ — $ 9 $ 9 Purchases, issuances, sales and settlements: Purchases 2 — 2 Issuances — 1 1 Settlements — ( 9 ) ( 9 ) Balance at end of period $ 2 $ 1 $ 3 Year Ended December 31, 2021 Balance at beginning of period $ — $ 24 $ 24 Purchases, issuances, sales and settlements: Issuances — 9 9 Settlements — ( 24 ) ( 24 ) Balance at end of period $ — $ 9 $ 9 We review fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of Level 3 at fair value at the beginning of the period in which the changes occur. There were no transfers of assets or liabilities between the hierarchy levels during the first six months of 2022 or 2021. From time to time, we measure certain assets at fair value on a non-recurring basis. These adjustments to fair value usually result from the application of the lower of cost or fair value accounting or write-downs of individual assets. Valuation methodologies used to measure these fair value adjustments were described in Note 25, "Fair Value Measurements" to the Consolidated Financial Statements included in 2021 Annual Report on Form 10-K . For assets measured at fair value on a non-recurring basis still held at the Balance Sheet date, the following table provides the hierarchy level and the fair value of the related assets or portfolios: TABLE 19.3 (in millions) Level 1 Level 2 Level 3 Total June 30, 2022 Collateral dependent loans $ — $ — $ 15 $ 15 Other assets - MSRs — — — — Other assets - SBA servicing asset — — 3 3 Other real estate owned — — 2 2 December 31, 2021 Collateral dependent loans $ — $ — $ 20 $ 20 Other assets - MSRs — — 10 10 Other assets - SBA servicing asset — — 3 3 Other real estate owned — — 2 2 The fair value amounts for collateral dependent loans and OREO in the table above were estimated at a date during the six months or twelve months ended June 30, 2022 and December 31, 2021, respectively. Consequently, the fair value information presented is not necessarily as of the period’s end. Collateral dependent loans measured or re-measured at fair value on a non-recurring basis during the six months ended June 30, 2022 had a carrying amount of $ 14.9 million, which includes an allocated 49 ACL of $ 9.0 million. The ACL includes a provision applicable to the current period fair value measurements of $ 0.3 million, which was included in provision for credit losses for the six months ended June 30, 2022. MSRs measured at fair value on a non-recurring basis had a carrying value of $ 0.03 million, which included a valuation allowance of $ 1 thousand, as of June 30, 2022. The valuation allowance reflects a recovery of $ 2.5 million included in earnings for the six months ended June 30, 2022. SBA servicing assets measured at fair value on a non-recurring basis had a carrying value of $ 2.3 million, which included a valuation allowance of $ 1.5 million, as of June 30, 2022. There was no recovery of the valuation allowance included in earnings for the six months ended June 30, 2022. OREO measured at fair value on a non-recurring basis during 2022 had a carrying amount of $ 2.4 million, which included a valuation allowance of $ 0.3 million, as of June 30, 2022. The valuation allowance includes a loss of $ 0.3 million, which was included in earnings for the six months ended June 30, 2022. Fair Value of Financial Instruments Refer to Note 25, "Fair Value Measurements" to the Consolidated Financial Statements included in our 2021 Annual Report on Form 10-K filed with the SEC on February 24, 2022 for a description of methods and assumptions that were used to estimate the fair value of each financial instrument. 50 The fair values of our financial instruments are as follows: TABLE 19.4 Fair Value Measurements (in millions) Carrying Amount Fair Value Level 1 Level 2 Level 3 June 30, 2022 Financial Assets Cash and cash equivalents $ 2,029 $ 2,029 $ 2,029 $ — $ — Debt securities available for sale 3,566 3,566 265 3,299 2 Debt securities held to maturity 3,740 3,470 — 3,470 — Net loans and leases, including loans held for sale 27,830 26,973 — 130 26,843 Loan servicing rights 53 67 — — 67 Derivative assets 57 57 — 56 1 Accrued interest receivable 86 86 86 — — Financial Liabilities Deposits 33,480 33,415 30,437 2,978 — Short-term borrowings 1,391 1,383 1,383 — — Long-term borrowings 712 719 — — 719 Derivative liabilities 266 266 — 251 15 Accrued interest payable 11 11 11 — — December 31, 2021 Financial Assets Cash and cash equivalents $ 3,493 $ 3,493 $ 3,493 $ — $ — Debt securities available for sale 3,426 3,426 204 3,222 — Debt securities held to maturity 3,463 3,506 — 3,506 — Net loans and leases, including loans held for sale 24,919 24,518 — 269 24,249 Loan servicing rights 47 49 — — 49 Derivative assets 185 185 — 176 9 Accrued interest receivable 76 76 76 — — Financial Liabilities Deposits 31,726 31,725 28,867 2,858 — Short-term borrowings 1,536 1,536 1,536 — — Long-term borrowings 682 704 — — 704 Derivative liabilities 45 45 — 45 — Accrued interest payable 10 10 10 — — 51