Leases

6 Months Ended

Jun. 30, 2024

Leases [Abstract]

Leases

Leases

Lessor Arrangements

The Company is a lessor in the equipment finance business where it has executed direct financing leases (“lease finance receivables”). The Company produces lease finance receivables through a specialty finance subsidiary that participates in syndicated loans that are brought to them, and equipment loans and leases that are assigned to them, by a select group of nationally recognized sources, and are generally made to large corporate obligors, many of which are publicly traded, carry investment grade or near-investment grade ratings, and participate in stable industries nationwide. Lease finance receivables are carried at the aggregate of lease payments receivable plus the estimated residual value of the leased assets and any initial direct costs incurred to originate these leases, less unearned income, which is accreted to interest income over the lease term using the interest method.

The standard leases are typically repayable on a level monthly basis with terms ranging from 24 to 120 months. At the end of the lease term, the lessee usually has the option to return the equipment, to renew the lease or purchase the equipment at the then fair market value (“FMV”) price. For leases with a FMV renewal/purchase option, the relevant residual value assumptions are based on the estimated value of the leased asset at the end of the lease term, including evaluation of key factors, such as, the estimated remaining useful life of the leased asset, its historical secondary market value including history of the lessee executing the FMV option, overall credit evaluation and return provisions. The Company acquires the leased asset at fair market value and provides funding to the respective lessee at acquisition cost, less any volume or trade discounts, as applicable. Therefore, there is generally no selling profit or loss to recognize or defer at inception of a lease.

The residual value component of a lease financing receivable represents the estimated fair value of the leased equipment at the end of the lease term. In establishing residual value estimates, the Company may rely on industry data, historical experience, and independent appraisals and, where appropriate, information regarding product life cycle, product upgrades and competing products. Upon expiration of a lease, residual assets are remarketed, resulting in either an extension of the lease by the lessee, a lease to a new customer or purchase of the residual asset by the lessee or another party. Impairment of residual values arises if the expected fair value is less than the carrying amount. The Company assesses its net investment in lease financing receivables (including residual values) for impairment on an annual basis with any impairment losses recognized in accordance with the impairment guidance for financial instruments. As such, net investment in lease financing receivables may be reduced by an allowance for credit losses with changes recognized as provision expense. On certain lease financings, the Company obtains residual value insurance from third parties to manage and reduce the risk associated with the residual value of the leased assets. At June 30, 2024 and December 31, 2023, the carrying value of residual assets with third-party residual value insurance for at least a portion of the asset value was $26 million and $280 million, respectively.

The Company uses the interest rate implicit in the lease to determine the present value of its lease financing receivables.

The components of lease income were as follows:

	Three Months Ended,				Six Months Ended,
(in millions)	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Interest income on lease financing (1)	$	35	$	32	$	73	$	52

(1)Included in Interest Income – Loans and leases in the Consolidated Statements of Income and Comprehensive Income.

At June 30, 2024 and December 31, 2023, the carrying value of net investment in leases, excluding purchase accounting adjustments was $3.0 billion and $3.5 billion, respectively. The components of net investment in direct financing leases, including the carrying amount of the lease receivables, as well as the unguaranteed residual asset were as follows:

(in millions)	June 30, 2024		December 31, 2023
Net investment in the lease - lease payments receivable	$	2,625	$	3,187
Net investment in the lease - unguaranteed residual assets	360		321
Total lease payments	$	2,985	$	3,508

The following table presents the remaining maturity analysis of the undiscounted lease receivables, as well as the reconciliation to the total amount of receivables recognized in the Consolidated Statements of Condition:

(in millions)	June 30, 2024
2024	$	268
2025	432
2026	703
2027	446
2028	267
Thereafter	869
Total lease payments	$	2,985
Plus: deferred origination costs	28
Less: unearned income	(218)
Less: purchase accounting adjustment	(64)
Total lease finance receivables, net	$	2,731

Lessee Arrangements

The Company has operating leases for corporate offices, branch locations, and certain equipment. These leases generally have terms of 20 years or less, determined based on the contractual maturity of the lease, and include periods covered by options to extend or terminate the lease when the Company is reasonably certain that it will exercise those options. For the vast majority of the Company’s leases, we are not reasonably certain we will exercise our options to renew to the end of all renewal option periods. The Company determines if an arrangement is a lease at inception. Operating leases are included in other assets and other liabilities in the Consolidated Statements of Condition.

Right of use asset assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the vast majority of the leases do not provide an implicit rate, the incremental borrowing rate (FHLB borrowing rate) is used based on the information available at commencement date in determining the present value of lease payments. The implicit rate is used when readily determinable. The operating lease right of use asset is measured at cost, which includes the initial measurement of the lease liability, prepaid rent and initial direct costs incurred by the Company, less incentives received.

Variable costs such as the proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred.

The components of lease expense were as follows:

	Three Months Ended,				Six Months Ended,
(in millions)	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Operating lease cost	$	20	$	25	$	38	$	35
Total lease cost	$	20	$	25	$	38	$	35

Supplemental cash flow information related to the leases for the following periods:

	Three Months Ended,				Six Months Ended,
(in millions)	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	18	$	20	$	36	$	30

Supplemental balance sheet information related to the leases for the following periods:

(in millions, except lease term and discount rate)	June 30, 2024			December 31, 2023
Operating Leases:
Operating lease right-of-use assets (1)	$	414		$	426
Operating lease liabilities (2)	$	436		$	446
Weighted average remaining lease term	10.7 years			11.2 years
Weighted average discount rate %	4.71		%	4.71		%

(1)Included in Other assets in the Consolidated Statements of Condition.

(2)Included in Other liabilities in the Consolidated Statements of Condition.

(in millions)	June 30, 2024
Maturities of lease liabilities:
2024	$	37
2025	70
2026	62
2027	55
2028	48
Thereafter	293
Total lease payments	$	565
Less: imputed interest	$	(129)
Total present value of lease liabilities	$	436

Leases

Leases

Lessor Arrangements

The Company is a lessor in the equipment finance business where it has executed direct financing leases (“lease finance receivables”). The Company produces lease finance receivables through a specialty finance subsidiary that participates in syndicated loans that are brought to them, and equipment loans and leases that are assigned to them, by a select group of nationally recognized sources, and are generally made to large corporate obligors, many of which are publicly traded, carry investment grade or near-investment grade ratings, and participate in stable industries nationwide. Lease finance receivables are carried at the aggregate of lease payments receivable plus the estimated residual value of the leased assets and any initial direct costs incurred to originate these leases, less unearned income, which is accreted to interest income over the lease term using the interest method.

The standard leases are typically repayable on a level monthly basis with terms ranging from 24 to 120 months. At the end of the lease term, the lessee usually has the option to return the equipment, to renew the lease or purchase the equipment at the then fair market value (“FMV”) price. For leases with a FMV renewal/purchase option, the relevant residual value assumptions are based on the estimated value of the leased asset at the end of the lease term, including evaluation of key factors, such as, the estimated remaining useful life of the leased asset, its historical secondary market value including history of the lessee executing the FMV option, overall credit evaluation and return provisions. The Company acquires the leased asset at fair market value and provides funding to the respective lessee at acquisition cost, less any volume or trade discounts, as applicable. Therefore, there is generally no selling profit or loss to recognize or defer at inception of a lease.

The residual value component of a lease financing receivable represents the estimated fair value of the leased equipment at the end of the lease term. In establishing residual value estimates, the Company may rely on industry data, historical experience, and independent appraisals and, where appropriate, information regarding product life cycle, product upgrades and competing products. Upon expiration of a lease, residual assets are remarketed, resulting in either an extension of the lease by the lessee, a lease to a new customer or purchase of the residual asset by the lessee or another party. Impairment of residual values arises if the expected fair value is less than the carrying amount. The Company assesses its net investment in lease financing receivables (including residual values) for impairment on an annual basis with any impairment losses recognized in accordance with the impairment guidance for financial instruments. As such, net investment in lease financing receivables may be reduced by an allowance for credit losses with changes recognized as provision expense. On certain lease financings, the Company obtains residual value insurance from third parties to manage and reduce the risk associated with the residual value of the leased assets. At June 30, 2024 and December 31, 2023, the carrying value of residual assets with third-party residual value insurance for at least a portion of the asset value was $26 million and $280 million, respectively.

The Company uses the interest rate implicit in the lease to determine the present value of its lease financing receivables.

The components of lease income were as follows:

	Three Months Ended,				Six Months Ended,
(in millions)	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Interest income on lease financing (1)	$	35	$	32	$	73	$	52

(1)Included in Interest Income – Loans and leases in the Consolidated Statements of Income and Comprehensive Income.

At June 30, 2024 and December 31, 2023, the carrying value of net investment in leases, excluding purchase accounting adjustments was $3.0 billion and $3.5 billion, respectively. The components of net investment in direct financing leases, including the carrying amount of the lease receivables, as well as the unguaranteed residual asset were as follows:

(in millions)	June 30, 2024		December 31, 2023
Net investment in the lease - lease payments receivable	$	2,625	$	3,187
Net investment in the lease - unguaranteed residual assets	360		321
Total lease payments	$	2,985	$	3,508

The following table presents the remaining maturity analysis of the undiscounted lease receivables, as well as the reconciliation to the total amount of receivables recognized in the Consolidated Statements of Condition:

(in millions)	June 30, 2024
2024	$	268
2025	432
2026	703
2027	446
2028	267
Thereafter	869
Total lease payments	$	2,985
Plus: deferred origination costs	28
Less: unearned income	(218)
Less: purchase accounting adjustment	(64)
Total lease finance receivables, net	$	2,731

Lessee Arrangements

The Company has operating leases for corporate offices, branch locations, and certain equipment. These leases generally have terms of 20 years or less, determined based on the contractual maturity of the lease, and include periods covered by options to extend or terminate the lease when the Company is reasonably certain that it will exercise those options. For the vast majority of the Company’s leases, we are not reasonably certain we will exercise our options to renew to the end of all renewal option periods. The Company determines if an arrangement is a lease at inception. Operating leases are included in other assets and other liabilities in the Consolidated Statements of Condition.

Right of use asset assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the vast majority of the leases do not provide an implicit rate, the incremental borrowing rate (FHLB borrowing rate) is used based on the information available at commencement date in determining the present value of lease payments. The implicit rate is used when readily determinable. The operating lease right of use asset is measured at cost, which includes the initial measurement of the lease liability, prepaid rent and initial direct costs incurred by the Company, less incentives received.

Variable costs such as the proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred.

The components of lease expense were as follows:

	Three Months Ended,				Six Months Ended,
(in millions)	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Operating lease cost	$	20	$	25	$	38	$	35
Total lease cost	$	20	$	25	$	38	$	35

Supplemental cash flow information related to the leases for the following periods:

	Three Months Ended,				Six Months Ended,
(in millions)	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	18	$	20	$	36	$	30

Supplemental balance sheet information related to the leases for the following periods:

(in millions, except lease term and discount rate)	June 30, 2024			December 31, 2023
Operating Leases:
Operating lease right-of-use assets (1)	$	414		$	426
Operating lease liabilities (2)	$	436		$	446
Weighted average remaining lease term	10.7 years			11.2 years
Weighted average discount rate %	4.71		%	4.71		%

(1)Included in Other assets in the Consolidated Statements of Condition.

(2)Included in Other liabilities in the Consolidated Statements of Condition.

(in millions)	June 30, 2024
Maturities of lease liabilities:
2024	$	37
2025	70
2026	62
2027	55
2028	48
Thereafter	293
Total lease payments	$	565
Less: imputed interest	$	(129)
Total present value of lease liabilities	$	436