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Leases | 6 Months Ended
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Jun. 30, 2022
Leases [Abstract] |
Leases | Note 11. 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 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 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, 2022 and December 31, 2021, the carrying value of residual assets with third-party residual value insurance for at least a portion of the asset value was $40 million and $61 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:
(in millions) |  | For the Three Months Ended June 30, 2022 |  |  | For the Six Months Ended June 30, 2022 |  |  | For the Three Months Ended June 30, 2021 |  |  | For the Six Months Ended June 30, 2021 |
Interest income on lease financing (1) |  | $ | 12 |  |  | $ | 24 |  |  | $ | 14 |  |  | $ | 28 |
(1) Included in Interest Income – Loans and leases in the Consolidated Statements of Income and Comprehensive Income. At June 30, 2022 and December 31, 2021, the carrying value of net investment in leases was $1.8 billion and $1.9 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, 2022 |  |  | December 31, 2021 |
Net investment in the lease - lease payments receivable |  | $ | 1,777 |  |  | $ | 1,790 |
Net investment in the lease - unguaranteed residual assets |  |  | 64 |  |  |  | 75 |
Total lease payments |  | $ | 1,841 |  |  | $ | 1,865 |
The following table presents the remaining maturity analysis of the undiscounted lease receivables as of June 30, 2022, as well as the reconciliation to the total amount of receivables recognized in the Consolidated Statements of Condition:
(in millions) |  | June 30, 2022 |
2022 |  | $ |  | 6 |
2023 |  |  |  | 141 |
2024 |  |  |  | 220 |
2025 |  |  |  | 418 |
2026 |  |  |  | 388 |
Thereafter |  |  |  | 668 |
Total lease payments |  |  |  | 1,841 |
Plus: deferred origination costs |  |  |  | 21 |
Less: unearned income |  |  |  | (85 | )
Total lease finance receivables, net |  | $ |  | 1,777 |
Lessee Arrangements The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets and operating lease liabilities in the Consolidated Statements of Condition. ROU 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 ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most leases do not provide an implicit rate, the incremental borrowing rate (FHLB borrowing rate) is used in determining the present value of lease payments. The implicit rate is used when readily determinable. The operating lease ROU 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. The lease terms include options to extend the lease when it is reasonably certain that we will exercise that option. For the vast majority of the Company’s leases, we are reasonably certain we will exercise our options to renew to the end of all renewal option periods. As such, substantially all of our future options to extend the leases have been included in the lease liability and ROU assets. 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. Amortization of the ROU assets was $16 million and $10 million for the six months ended June 30, 2022 and June 30, 2021, respectively. Included in these amounts was $11 million and $5 million for the three months ended June 30, 2022 and June 30, 2021, respectively. The Company has operating leases for corporate offices, branch locations, and certain equipment. The Company’s leases have remaining lease terms of one year to approximately 25 years, the vast majority of which include one or more options to extend the leases for up to five years resulting in lease terms up to 40 years. The components of lease expense were as follows:
(in millions) |  | For the Three Months Ended June 30, 2022 |  |  | For the Six Months Ended June 30, 2022 |  |  | For the Three Months Ended June 30, 2021 |  |  | For the Six Months Ended June 30, 2021 |
Operating lease cost |  | $ | 7 |  |  | $ | 14 |  |  | $ | 7 |  |  | $ | 13 |
Sublease income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total lease cost |  | $ | 7 |  |  | $ | 14 |  |  | $ | 7 |  |  | $ | 13 |
Supplemental cash flow information related to the leases for the following periods:
(in millions) |  | For the Three Months Ended June 30, 2022 |  |  | For the Six Months Ended June 30, 2022 |  |  | For the Three Months Ended June 30, 2021 |  |  | For the Six Months Ended June 30, 2021 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | 7 |  |  | $ | 14 |  |  | $ | 7 |  |  | $ | 13 |
Supplemental balance sheet information related to the leases for the following periods:
(in millions, except lease term and discount rate) |  | June 30, 2022 |  |  | December 31, 2021 |
Operating Leases: |  |  |  |  |  |
Operating lease right-of-use assets |  | $ | 232 |  |  | $ | 249 |
Operating lease liabilities |  | $ | 232 |  |  | $ | 249 |
Weighted average remaining lease term |  | 13 years |  |  | 16 years |
Weighted average discount rate% |  |  | 3.00 | % |  |  | 3.05 | %
(in millions) Maturities of lease liabilities: |  | June 30, 2022 |
2022 |  | $ |  | 14 |
2023 |  |  |  | 27 |
2024 |  |  |  | 26 |
2025 |  |  |  | 25 |
2026 |  |  |  | 24 |
Thereafter |  |  |  | 171 |
Total lease payments |  |  |  | 287 |
Less: imputed interest |  |  |  | (55 | )
Total present value of lease liabilities |  | $ |  | 232 |

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- Definition The entire disclosure for operating leases of lessee. Includes, but is not limited to, description of operating lease and maturity analysis of operating lease liability. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 842 -SubTopic 20 -URI https://asc.fasb.org/subtopic&trid=77888251 + Details
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