ASSOCIATED BANC-CORP The following discussion is management's analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of the Corporation. It should be read in conjunction with the consolidated financial statements and footnotes and the selected financial data presented elsewhere in this report. Within the tables presented, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes. The detailed financial discussion that follows focuses on 2021 results compared to 2020. For a discussion of 2020 results compared to 2019, see the Corporation's Annual Report on Form 10-K for the year ended December 31, 2020 . Overview The Corporation is a bank holding company headquartered inWisconsin , providing a broad array of banking and nonbanking products and services to businesses and consumers primarily within our three-state footprint. The Corporation's primary sources of revenue, through the Bank, are net interest income (predominantly from loans and investment securities) and noninterest income (principally fees and other revenue from financial services provided to customers or ancillary services tied to loans and deposits). Performance Summary and 2022 Outlook •Diluted earnings per common share of$2.18 in 2021 increased$0.32 , or 17%, from 2020. •Average loans of$24.1 billion for 2021 decreased$480 million , or 2%, from a year ago, driven by decreases in residential mortgages and PPP loans. For 2022, the Corporation expects auto finance loan growth of more than$1.2 billion and commercial loan growth, including asset-based lending and equipment finance, of$750 million to$1.0 billion . •Average deposits of$27.7 billion for 2021 increased$1.7 billion , or 6%, from a year ago, driven by increases in low cost deposits partially offset by decreases in higher cost deposits. •Net interest income of$726 million in 2021 decreased$37 million , or 5%, from 2020. Net interest margin of 2.39% in 2021 decreased 14 bp from 2.53% in 2020. The decrease was primarily driven by the continued low interest rate environment and increased liquidity during 2021. For 2022, the Corporation expects net interest income of more than$800 million . •Provision for credit losses had a release of$88 million in 2021, compared to provision of$174 million in 2020. For 2022, the Corporation expects to adjust the provision to reflect changes to risk grades, economic conditions, loan volumes, and other indications of credit quality. •Noninterest income of$332 million in 2021 decreased$182 million , or 35%, from 2020, primarily due to a$163 million gain on the sale of ABRC during the second quarter of 2020, and a reduction of$45 million in insurance revenue in 2021, resulting from the sale of the business. For 2022, the Corporation expects noninterest income of more than$300 million . •Noninterest expense of$710 million in 2021 decreased$66 million , or 9%, from 2020, primarily driven by a$45 million loss on prepayment of FHLB advances during the third quarter of 2020, and a$5 million reduction in personnel expense. For 2022, the Corporation expects noninterest expense will be approximately$725 million to$740 million . 45 -------------------------------------------------------------------------------- Income Statement Analysis Net Interest Income Table 2 Net Interest Income Analysis Years Ended December 31, 2021 2020 2019 Average Interest Average Average Interest Average Average Interest Average Balance Income / Yield / Balance Income / Yield / Balance Income / Yield / ($ in Thousands) Expense Rate Expense Rate Expense Rate Assets Earning assets Loans(a)(b)(c) Commercial PPP lending$ 472,216 $ 33,637 7.12 %$ 701,111 $ 21,867 3.12 % $ - $ - - % Asset-based lending 120,903 3,704 3.06 % 177,710 6,039 3.40 % 273,949 13,966 5.10 %
Commercial and business lending (excl PPP 8,511,364 212,744
2.50 % 8,531,333 252,699 2.96 % 8,152,825 371,107 4.55 %
& ABL)
Commercial real estate lending 6,156,214 178,354 2.90 % 5,811,498 192,545 3.31 % 5,150,464 255,582 4.96 %
Total commercial 15,260,697 428,439 2.81 % 15,221,651 473,150 3.11 % 13,577,238 640,655 4.72 %
Residential mortgage 7,847,564 221,099 2.82 % 8,190,190 254,814 3.11 % 8,311,914 282,134 3.39 %
Retail 949,719 45,723 4.81 % 1,125,806 58,655 5.21 % 1,233,646 76,939 6.24 %
Total loans 24,057,980 695,260 2.89 % 24,537,648 786,619 3.21 % 23,122,797 999,727 4.32 %
Investment securities
Taxable 3,383,528 37,916 1.12 % 3,295,718 59,806 1.81 % 4,284,991 100,304 2.34 %
Tax-exempt(a) 2,036,030 73,975 3.63 % 1,930,853 72,901 3.78 % 1,909,474 71,956 3.77 %
Other short-term investments 1,644,995 7,833 0.48 % 1,067,788 9,473 0.89 % 503,566 16,643 3.30 %
Investments and other 7,064,552 119,724 1.69 % 6,294,359 142,179 2.26 % 6,698,032 188,903 2.82 %
Total earning assets $ 31,122,532 $ 814,984 2.62 % $ 30,832,007 $ 928,799 3.01 % $ 29,820,829 $ 1,188,630 3.99 %
Other assets, net 3,341,725 3,433,200 3,225,775
Total assets $ 34,464,257 $ 34,265,207 $ 33,046,604
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
Savings $ 4,138,732 $ 1,435 0.03 % $ 3,306,385 $ 2,966 0.09 % $ 2,439,872 $ 7,086 0.29 %
Interest-bearing demand 6,113,660 4,610 0.08 % 5,583,144 12,496 0.22 % 5,080,857 56,742 1.12 %
Money market 6,940,513 4,028 0.06 % 6,509,924 15,273 0.23 % 7,005,265 74,467 1.06 %
Network transaction deposits 929,544 1,120 0.12 % 1,442,951 6,219 0.43 % 1,860,951 42,523 2.29 %
Time deposits 1,495,060 7,429 0.50 % 2,281,040 30,685 1.35 % 3,129,142 56,468 1.80 %
Total interest-bearing deposits 19,617,508 18,622 0.09 % 19,123,444 67,639 0.35 % 19,516,088 237,286 1.22 %
Federal funds purchased and securities 207,132 143
0.07 % 175,713 485 0.28 % 137,679 1,579 1.15 %
sold under agreements to repurchase
Commercial paper 49,546 22 0.04 % 38,583 41 0.11 % 32,123 138 0.43 %
PPPLF - - - % 565,371 1,984 0.35 % - - - %
Other short-term funding - - - % 4,226 11 0.25 % - - - %
FHLB advances 1,623,508 36,493 2.25 % 2,535,731 57,359 2.26 % 3,106,279 69,816 2.25 %
Long-term funding 407,912 17,053 4.18 % 549,143 22,365 4.07 % 742,946 28,116 3.78 %
Total short and long-term funding 2,288,098 53,712 2.35 % 3,868,767 82,245 2.13 % 4,019,027 99,651 2.48 %
Total interest-bearing liabilities
0.33 %$ 22,992,211 $ 149,883 0.65 %$ 23,535,115 $ 336,936 1.43 % Noninterest-bearing demand deposits 8,075,906 6,884,241 5,219,520 Other liabilities 403,296 444,183 420,100 Stockholders' equity 4,079,449 3,944,572 3,871,869 Total liabilities and stockholders'$ 34,464,257 $ 34,265,207 $ 33,046,604 equity Interest rate spread 2.29 % 2.36 % 2.56 % Net free funds 0.10 % 0.17 % 0.30 % Fully tax-equivalent net interest income$ 742,650 2.39 %$ 778,915 2.53 %$ 851,693 2.86 % and net interest margin Fully tax-equivalent adjustment$ 16,796 $ 15,959 $ 16,020 Net interest income$ 725,855 $ 762,957 $ 835,674 (a) The yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 21% and is net of the effects of certain disallowed interest deductions. (b) Nonaccrual loans and loans held for sale have been included in the average balances. (c) Interest income includes amortization of net deferred loan origination costs and net accreted purchase loan discount. Net interest income is the primary source of the Corporation's revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, re-pricing frequencies, loan prepayment behavior, and the use of interest rate derivative financial instruments. 46 -------------------------------------------------------------------------------- Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because net free funds, principally noninterest-bearing demand deposits and stockholders' equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt loans and investment securities is computed on a fully tax-equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a fully tax-equivalent basis. Table 2 provides average balances of earning assets and interest-bearing liabilities, the associated interest income and expense, and the corresponding interest rates earned and paid, as well as net interest income, interest rate spread, and net interest margin on a fully tax-equivalent basis for the years endedDecember 31, 2021 , 2020, and 2019. Table 3 presents additional information to facilitate the review and discussion of fully tax-equivalent net interest income, interest rate spread, and net interest margin. Notable Contributions to the Change in 2021 Net Interest Income •Net interest income on the consolidated statements of income (which excludes the fully tax-equivalent adjustment) was$726 million in 2021 compared to$763 million in 2020. Fully tax-equivalent net interest income of$743 million for 2021 was$36 million , or 5%, lower than 2020. The decrease was attributable to the continued low interest rate environment. See sections Interest Rate Risk and Quantitative and Qualitative Disclosures about Market Risk for a discussion of interest rate risk and market risk. •Average earning assets of$31.1 billion in 2021 were$291 million , or 1%, higher than 2020. The increase in average earning assets was driven by an increase of$770 million , or 12%, in investments and other short-term investments primarily driven by excess liquidity at theFederal Reserve Bank which is part of short term investments, offset by a$480 million , or 2%, decrease in average loans, primarily driven by decreases of$343 million , or 4%, in residential mortgages and$229 million , or 33%, in PPP loans, partially offset by CRE loans increasing$345 million , or 6%. •Average interest-bearing liabilities of$21.9 billion in 2021 were down$1.1 billion , or 5%, versus 2020. On average, short and long-term funding decreased$1.6 billion , or 41%, with FHLB advances down$912 million , or 36%, due to the prepayment of$950 million of long-term FHLB advances in the third quarter of 2020 and PPPLF funding was down$565 million as a result of paying off the PPPLF line in the fourth quarter of 2020. Interest-bearing deposits increased$494 million , or 3%, primarily driven by increases in low cost deposits, partially offset by decreases in higher cost deposits. Average noninterest-bearing demand deposits of$8.1 billion were up$1.2 billion , or 17%, over 2020. This increase is primarily attributed to customers holding proceeds from government stimulus programs in their deposit accounts. •The average cost of interest-bearing liabilities was 0.33% in 2021, 32 bp lower than 2020. The decrease was due to a 26 bp decrease in the average cost of interest-bearing deposits to 0.09%, while short and long-term funding increased 22 bp to 2.35%. •The Federal Funds rate onDecember 31, 2021 was in the range of 0.00% to 0.25 %, which was unchanged from the previous year endedDecember 31, 2020 . 47 --------------------------------------------------------------------------------
Table 3 Rate/Volume Analysis(a)
2021 Compared to 2020 2020 Compared to 2019
Increase (Decrease) Due to Increase (Decrease) Due to
($ in Thousands) Volume Rate Net Volume Rate Net
Interest income
Loans(b)
Commercial PPP lending $ (8,997) $ 20,767 $ 11,770 $ 21,867 $ - $ 21,867
Asset-based lending (1,785) (551) (2,336) (4,067) (3,859) (7,926) Commercial and business lending (excl PPP & ABL) (590) (39,365)
(39,955) 16,523 (134,931) (118,408) Commercial real estate lending
10,961 (25,152) (14,191) 29,765 (92,803) (63,037)
Total commercial (411) (44,300) (44,711) 64,089 (231,593) (167,504)
Residential mortgage (10,351) (23,364) (33,715) (4,080) (23,240) (27,320)
Retail (8,705) (4,227) (12,933) (6,342) (11,942) (18,283)
Total loans (19,467) (71,892) (91,359) 53,667 (266,775) (213,108)
Investment securities
Taxable 1,554 (23,444) (21,890) (20,520) (19,978) (40,498)
Tax-exempt(b) 3,883 (2,808) 1,074 807 138 945
Other short-term investments 3,843 (5,483) (1,640) 10,394 (17,564) (7,170)
Investments and other 9,279 (31,735) (22,455) (9,319) (37,404) (46,723)
Total earning assets $ (10,188) $ (103,626) $ (113,814) $ 44,348 $ (304,179) $ (259,831)
Interest expense
Savings $ 613 $ (2,144) $ (1,531) $ 1,926 $ (6,046) $ (4,120)
Interest-bearing demand 1,089 (8,975) (7,886) 5,116 (49,361) (44,246)
Money market 949 (12,194) (11,245) (4,924) (54,270) (59,194) Network transaction deposits
(1,686) (3,413) (5,099) (7,871) (28,433) (36,304) Time deposits
(8,186) (15,070) (23,256) (13,656) (12,128) (25,783) Total interest-bearing deposits
(7,220) (41,796) (49,016) (19,409) (150,238) (169,647) Federal funds purchased and securities sold
74 (417) (342) 348 (1,442) (1,094)
under agreements to repurchase
Commercial paper 9 (28) (18) 23 (121) (98)
PPPLF (1,984) - (1,984) 1,984 - 1,984
Other short-term funding (11) - (11) 11 - 11
FHLB advances (20,507) (359) (20,866) (12,903) 446 (12,457)
Long-term funding (5,890) 578 (5,312) (7,767) 2,015 (5,751) Total short and long-term funding
(28,309) (224) (28,533) (18,304) 898 (17,406) Total interest-bearing liabilities
(35,529) (42,020)
(77,549) (37,713) (149,340) (187,053)
Fully tax-equivalent net interest income
(a) The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each. (b) The yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 21% and is net of the effects of certain disallowed interest deductions. Provision for Credit Losses The provision for credit losses is predominantly a function of the Corporation's reserving methodology and judgments as to other qualitative and quantitative factors used to determine the appropriate level of the ACLL, which focuses on changes in the size and character of the loan portfolio, changes in levels of individually evaluated and other nonaccrual loans, historical losses and delinquencies in each portfolio category, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions and economic forecasts, the fair value of underlying collateral, and other factors which could affect potential credit losses. The forecast the Corporation used forDecember 31, 2021 was the Moody's baseline scenario fromDecember 2021 over a 2 year reasonable and supportable period with straight-line reversion to historical losses over the second year of the period. See additional discussion under the sections titled Loans, Credit Risk, Nonperforming Assets, and Allowance for Credit Losses on Loans. 48 --------------------------------------------------------------------------------
Noninterest Income
Table 4 Noninterest Income
Years Ended December 31, Change From Prior Year
% Change $ Change % Change
($ in Thousands) 2021 2020 2019 $ Change 2021 2021 2020 2020
Wealth management fees(a) $ 89,854 $ 84,957 $ 83,467 $ 4,897 6 % $ 1,490 2 %Service charges and deposit account fees 64,406 56,307
63,135 8,099 14 % (6,828) (11) % Card-based fees 43,014 38,534 39,755 4,480 12 % (1,221) (3) % Other fee-based revenue 17,086 19,238 18,942 (2,152) (11) % 296 2 % Total fee-based revenue 214,360 199,036 205,299 15,324 8 % (6,263) (3) % Capital markets, net 30,602 27,966 19,862 2,636 9 % 8,104 41 % Mortgage servicing fees, net(b) (434) (648) 10,141 214 (33) % (10,789)
N/M
Gains and fair value adjustment on loans held for sale 34,999 60,000 17,344 (25,001) (42) % 42,656
N/M
Fair value adjustment on portfolio loans transferred to held for sale - 3,932 4,456 (3,932) (100) % (524) (12) % Mortgage servicing rights (impairment) recovery 16,186 (17,704) (63) 33,890 N/M (17,641) N/M Mortgage banking, net 50,751 45,580 31,878 5,171 11 % 13,702 43 %
Bank and corporate owned life insurance 13,254 13,771
14,845 (517) (4) % (1,074) (7) % Insurance commissions and fees 336 45,245 89,104 (44,909) (99) % (43,859) (49) % Other 11,031 10,200 11,165 831 8 % (965) (9) % Subtotal 320,333 341,798 372,154 (21,465) (6) % (30,356) (8) % Asset gains, net (c) 11,009 155,589 2,713 (144,580) (93) % 152,876 N/M
Investment securities gains (losses), net (16) 9,222
5,957 (9,238) N/M 3,265 55 %
Gains on sale of branches, net(d) 1,038 7,449 - (6,411) (86) % 7,449 N/M
Total noninterest income $ 332,364 $ 514,056 $ 380,824 $ (181,692) (35) % $ 133,232 35 %
Mortgage loans originated for sale during
period $ 1,749,556 $ 1,642,135 $ 1,090,792 $ 107,421 7 % $ 551,343 51 %
Mortgage loan settlements during period 1,774,791 1,959,571 1,317,077 (184,780)
(9) % 642,494 49 %
Mortgage portfolio loans transferred to
held for sale during period - 269,203 242,382 (269,203) (100) % 26,821 11 %
Assets under management, at market
value(e) 13,679 13,314 12,104 365 3 % 1,210 10 %
N/M = Not Meaningful
(a) Includes trust, asset management, brokerage, and annuity fees.
(b) Includes mortgage origination and servicing fees, net of mortgage servicing
rights amortization.
(c) 2020 includes a gain of $163 million from the sale of ABRC.
(d) Includes the deposit premium on the sale of branches net of miscellaneous
costs to sell. See Note 2 Acquisitions and Dispositions for addition details on
the branch sales.
(e) $ in millions. Excludes assets held in brokerage accounts.
Notable Contributions to the Change in 2021 Noninterest Income
•Service charges and deposit account fees increased from 2020 as a result of
service charges that were waived during 2020 in response to the COVID-19
pandemic.
•Mortgage banking, net increased compared to 2020 due to a $16 million recovery
of MSRs impairment during 2021 as a result of market rates recovering, compared
to impairment of $18 million during 2020 partially offset by decreased gains on
sold loans due to lower mortgage settlements as well as contracting margins on
the loans sold.
•Insurance commissions and fees decreased from 2020, driven by the sale of ABRC
during the second quarter of 2020 which largely eliminated the source of
noninterest income.
•Asset gains, net was down from 2020, primarily driven by a gain of $163 million
from the sale of ABRC during the second quarter of 2020, offset by a gain of $2
million from the sale of Whitnell and higher gains from private equity
investments during 2021.
•Investment securities gains (losses), net decreased due to more securities
sales in 2020 to reposition the portfolio based on prepayment expectations.
•Gains on sale of branches, net decreased from 2020 primarily due to branch
sales resulting in higher deposit premiums in 2020.
49
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Noninterest Expense
Table 5 Noninterest Expense
Years Ended December 31, Change From Prior Year
% Change $ Change % Change
($ in Thousands) 2021 2020 2019 $ Change 2021 2021 2020 2020
Personnel $ 426,687 $ 432,151 $ 487,063 $ (5,464) (1) % $ (54,912) (11) %
Technology 81,689 81,214 82,429 475 1 % (1,215) (1) %
Occupancy 63,513 64,064 62,399 (551) (1) % 1,665 3 %
Business development and advertising 21,149 18,428 29,600 2,721 15 % (11,172) (38) %
Equipment 21,104 21,705 23,550 (601) (3) % (1,845) (8) %
Legal and professional 21,923 21,546 19,901 377 2 % 1,645 8 %
Loan and foreclosure costs 8,143 12,600 8,861 (4,457) (35) % 3,739 42 %
FDIC assessment 18,150 20,350 16,250 (2,200) (11) % 4,100 25 %
Other intangible amortization 8,844 10,192 9,948 (1,348) (13) % 244 2 %
Loss on prepayments of FHLB advances - 44,650 - (44,650) (100) % 44,650 N/M
Other 38,721 49,135 53,986 (10,414) (21) % (4,851) (9) %
Total noninterest expense $ 709,924 $ 776,034 $ 793,988 $ (66,110) (9) % $ (17,954) (2) %
Average FTEs(a) 4,003 4,459 4,702 (456) (10) % (243) (5) %
N/M = Not Meaningful
(a) Average FTEs without overtime
Notable Contributions to the Change in 2021 Noninterest Expense
•Personnel costs decreased from 2020, primarily due to having fewer employees as
a result of the sales of ABRC and Whitnell, corporate restructurings, and branch
sales, partially offset by an increase in funding for the management incentive
plan.
•Loan and foreclosure costs decreased from 2020 driven by lower costs associated
with collections on loans.
•During the third quarter of 2020, the Corporation prepaid $950 million of
long-term FHLB advances and incurred a loss of $45 million on the prepayment.
Income Taxes
The Corporation recognized income tax expense of $85 million for 2021, compared
to income tax expense of $20 million for 2020. The Corporation's effective tax
rate was 19.55% for 2021, compared to an effective tax rate of 6.18% for 2020.
The increase in income tax expense during 2021 was primarily driven by an
increase in income in 2021 and by tax planning strategies which occurred during
the third quarter of 2020. The increase in the effective tax rate during 2021
was primarily driven by the tax planning strategies which occurred in 2020.
See Note 1 Summary of Significant Accounting Policies of the notes to
consolidated financial statements for the Corporation's income tax accounting
policy. Income tax expense recorded on the consolidated statements of income
involves the interpretation and application of certain accounting pronouncements
and federal and state tax laws and regulations. The Corporation is subject to
examination by various taxing authorities. Examination by taxing authorities may
impact the amount of tax expense and/or the reserve for uncertainty in income
taxes if their interpretations differ from those of management, based on their
judgments about information available to them at the time of their examinations.
See Note 13 Income Taxes of the notes to consolidated financial statements for
more information.
50
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Balance Sheet Analysis
•At December 31, 2021 , total assets were $35.1 billion , up $1.7 billion , or 5%,
from December 31, 2020 .
•Interest-bearing deposits in other financial institutions were $682 million at
December 31, 2021 , up $383 million from December 31, 2020 , due to excess
liquidity being held at the Federal Reserve Bank .
•At December 31, 2021 , total investment securities were $6.6 billion , up $1.6
billion , or 32%, from December 31, 2020 , resulting from the deployment of cash
into higher yielding assets. See section Investment Securities Portfolio and
Note 3 Investment Securities of the notes to consolidated financial statements
for additional information on investment securities.
•At December 31, 2021 , total deposits of $28.5 billion were up $2.0 billion , or
7%, from December 31, 2020 , driven by increases in demand deposits and savings
deposits of $1.8 billion and $760 million , respectively. See section Deposits
and Customer Funding and Note 8 Deposits of the notes to consolidated financial
statements for additional information on deposits.
•Other long-term funding was $249 million at December 31, 2021 , down $300
million , or 55%, from December 31, 2020 , primarily driven by the redemption of
the Bank's senior notes on July 13, 2021 . See section Other Funding Sources and
Note 9 Short and Long-Term Funding of the notes to consolidated financial
statements for additional details on funding.
•At December 31, 2021 , preferred equity was $193 million , down $160 million , or
45%, from December 31, 2020 , as a result of the redemption of the Corporation's
Series C Preferred Stock during the second quarter of 2021 and the redemption of
the Corporation's Series D Preferred Stock during the third quarter of 2021. See
Note 10 Stockholders' Equity of the notes to consolidated financial statements
for additional information on the Corporation's preferred stock.
Loans
Table 6 Period End Loan Composition
As of December 31,
2021 2020 2019 2018 2017
Amount % of Amount % of Amount % of Amount % of
Amount % of
($ in Thousands) Total Total Total Total Total
PPP $ 66,070 - % $ 767,757 3 % $ - - % $ - - % $ - - %
Asset-based lending 178,027 1 % 137,476 1 % 239,182 1 % 306,433 1 %
252,125 1 %
Commercial and industrial 8,208,289 34 % 7,563,945 31 % 7,115,411 31 % 7,091,612 31 % 6,147,568 30 % Commercial real estate - owner occupied 971,326 4 % 900,912 4 % 911,265 4 % 920,443 4 %
802,209 4 %
Commercial and business lending 9,423,711 39 % 9,370,091 38 % 8,265,858 36 % 8,318,487 36 % 7,201,902 35 % Commercial real estate - investor
4,384,569 18 % 4,342,584 18 % 3,794,517 17 % 3,751,554 16 % 3,315,254 16 %
Real estate construction 1,808,976 7 % 1,840,417 8 % 1,420,900 6 % 1,335,031 6 % 1,451,684 7 % Commercial real estate lending
6,193,545 26 % 6,183,001 25 % 5,215,417 23 % 5,086,585 22 % 4,766,938 23 %
Total commercial 15,617,256 64 % 15,553,091 64 % 13,481,275 59 % 13,405,072 58 % 11,968,840 58 %
Residential mortgage 7,567,310 31 % 7,878,324 32 % 8,136,980 36 % 8,277,712 36 % 7,546,534 36 %
Home equity 595,615 2 %
707,255 3 % 852,025 4 % 894,473 4 %
883,804 4 %
Other consumer 301,723 1 % 301,876 1 % 348,177 2 % 361,049 2 % 384,576 2 %
Auto 143,045 1 % 11,177 - % 2,982 - % 2,123 - % 1,237 - %
Total consumer 8,607,693 36 % 8,898,632 36 % 9,340,164 41 % 9,535,357 42 % 8,816,151 42 % Total loans
$ 24,224,949 100 % $
24,451,724 100 %
%$ 20,784,991 100 % Commercial real estate and real estate construction loan detail Non-owner occupied$ 2,972,584 68 % $
2,969,906 68 %
1,405,264 32 % 1,360,305 31 % 1,201,835 32 % 1,204,552 32 % 952,473 29 % Farmland
6,720 - % 12,373 - % 2,844 - % 1,250 - %
1,399 - %
Commercial real estate - investor $ 4,384,569 100 % $ 4,342,584 100 % $ 3,794,517 100 % $ 3,751,554 100 % $ 3,315,254 100 %
1-4 family construction $ 380,160 21 % $ 270,467 15 % $ 261,908 18 % $ 289,558 22 % $ 353,902 24 %
All other construction 1,428,816 79 % 1,569,950 85 % 1,158,992 82 % 1,045,474 78 % 1,097,782 76 % Real estate construction
$ 1,808,976 100 %$ 1,840,417 100 %$ 1,420,900 100 %$ 1,335,031 100 %$ 1,451,684 100 % 51
-------------------------------------------------------------------------------- The Corporation has long-term guidelines relative to the proportion of Commercial and Business, CRE, and Consumer loans within the overall loan portfolio, with each targeted to represent 30-40% of the overall loan portfolio. The targeted long-term guidelines were unchanged during 2021 and 2020. Furthermore, certain sub-asset classes within the respective portfolios are further defined and dollar limitations are placed on these sub-portfolios. These guidelines and limits are reviewed quarterly and approved annually by the Enterprise Risk Committee of the Corporation's Board of Directors. These guidelines and limits are designed to create balance and diversification within the loan portfolios. The Corporation's loan distribution and interest rate sensitivity as ofDecember 31, 2021 are summarized in the following table: Table 7 Loan Distribution and Interest Rate Sensitivity ($ in Thousands) Within 1 Year(a) 1-5 Years 5-15 Years Over 15 Years Total % of Total PPP $ 18,619$ 47,450 $ - $ -$ 66,070 - % Commercial and industrial(b) 7,789,298 485,387 99,803 11,827 8,386,316 35 % Commercial real estate - owner occupied 543,313 306,415 121,014 584 971,326 4 % Commercial real estate - investor 4,006,186 287,569 90,532 282 4,384,569 18 % Real estate construction 1,752,512 45,062 1,581 9,821 1,808,976 7 % Commercial - adjustable 8,469,106 152,890 17,122 2,068 8,641,186 36 % Commercial - fixed 5,640,822 1,018,993 295,809 20,446 6,976,070 29 % Residential mortgage - adjustable 416,447 651,500 1,377,357 83,818 2,529,122 10 % Residential mortgage - fixed 34,991 77,907 730,567 4,194,723 5,038,188 21 % Home equity 25,856 70,968 108,399 390,391 595,615 2 % Other consumer 52,802 52,646 160,866 35,410 301,723 1 % Auto 368 22,368 120,310 - 143,045 1 % Total loans$ 14,640,391 $ 2,047,272 $ 2,810,430 $ 4,726,856 $ 24,224,949 100 % Fixed-rate$ 5,672,236 $ 1,178,997 $ 938,990 $ 4,619,411 $ 12,409,634 51 % Floating or adjustable rate 8,968,155 868,275 1,871,440 107,446 11,815,315 49 % Total$ 14,640,391 $ 2,047,272 $ 2,810,430 $ 4,726,856 $ 24,224,949 100 % (a) Demand loans, past due loans, overdrafts, and credit cards are reported in the "Within 1 Year" category. (b) Includes asset-based lending. AtDecember 31, 2021 ,$17.5 billion , or 72%, of the total loans outstanding and$14.3 billion , or 91%, of the commercial loans outstanding were floating rate, adjustable rate, re-pricing within one year, or maturing within one year. Credit Risk An active credit risk management process is used for commercial loans to ensure that sound and consistent credit decisions are made. Credit risk is controlled by detailed underwriting procedures, comprehensive loan administration, and periodic review of borrowers' outstanding loans and commitments. Borrower relationships are formally reviewed and graded on an ongoing basis for early identification of potential problems. Further analysis by customer, industry, and geographic location are performed to monitor trends, financial performance, and concentrations. See Note 4 Loans of the notes to consolidated financial statements for additional information on managing overall credit quality. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within the Corporation's branch footprint. Significant loan concentrations are considered to exist when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. AtDecember 31, 2021 , no significant concentrations existed in the Corporation's loan portfolio in excess of 10% of total loans. 52 -------------------------------------------------------------------------------- Commercial and business lending: The commercial and business lending classification primarily includes commercial loans to large corporations, middle market companies, small businesses, and lease financing. Table 8 Largest Commercial and Industrial Industry Group Exposures, by NAICS Subsector % of Total Loan December 31, 2021 NAICS Subsector Outstanding Balance Total Exposure Exposure Credit Intermediation and Related Activities(a) 522 $ 1,333,524$ 2,798,507 8 % Real Estate(b) 531 1,462,003 2,688,293 8 % Utilities(c) 221 1,807,926 1,958,668 6 % (a) Includes mortgage warehouse lines (b) Includes REIT lines (c) 60% of the total exposure supports wind and solar projects The remaining commercial and industrial portfolio is spread over a diverse range of industries, none of which exceed 2% of total loan exposure. The CRE-owner occupied portfolio is spread over a diverse range of industries, none of which exceed 2% of total loan exposure. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower's operations or on the value of underlying collateral, if any. Commercial real estate - investor: CRE-investor is comprised of loans secured by various non-owner occupied or investor income producing property types. Table 9 Largest Commercial Real Estate Investor Property Type Exposures
% of Total Commercial Real
Estate - Investor Loan
December 31, 2021 % of Total Loan Exposure Exposure
Multi-Family 4 % 30 %
Office 3 % 25 %
Industrial 3 % 21 %
The remaining CRE-investor portfolio is spread over various other property
types, none of which exceed 2% of total loan exposure.
Credit risk is managed in a similar manner to commercial and business lending by
employing sound underwriting guidelines, lending primarily to borrowers in local
markets and businesses, periodically evaluating the underlying collateral, and
formally reviewing the borrower's financial soundness and relationship on an
ongoing basis.
Real estate construction: Real estate construction loans are primarily
short-term or interim loans that provide financing for the acquisition or
development of commercial income properties, multi-family projects or
residential development, both single family and condominium. Real estate
construction loans are made to developers and project managers who are generally
well known to the Corporation and have prior successful project experience. The
credit risk associated with real estate construction loans is generally confined
to specific geographic areas but is also influenced by general economic
conditions. The Corporation controls the credit risk on these types of loans by
making loans in familiar markets to developers, reviewing the merits of
individual projects, controlling loan structure, and monitoring project progress
and construction advances.
Table 10 Largest Real Estate Construction Property Type Exposures
% of Total Real Estate
December 31, 2021 % of Total Loan Exposure Construction Loan Exposure
Multi-Family 4 % 37 %
Single-Family 3 % 23 %
Industrial 3 % 23 %
The remaining real estate construction portfolio is spread over various other
property types, none of which exceed 2% of total loan exposure.
The Corporation's current lending standards for CRE and real estate construction
lending are determined by property type and specifically address many criteria,
including: maximum loan amounts, maximum LTV, requirements for pre-leasing and /
or presales, minimum borrower equity, and maximum loan-to-cost. Currently, the
maximum standard for LTV is 80%, with lower limits established for certain
higher risk types, such as raw land that has a 50% LTV maximum. The
Corporation's LTV guidelines are in compliance with regulatory supervisory
limits. In most cases, for real estate construction loans, the loan
53
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amounts include interest reserves, which are built into the loans and sized to
fund loan payments through construction and lease up and/or sell out.
Residential mortgages: Residential mortgage loans are primarily first lien home
mortgages with a maximum loan-to-collateral value without credit enhancement
(e.g., private mortgage insurance) of 80%. The residential mortgage portfolio is
focused primarily in the Corporation's three-state branch footprint, with
approximately 87% of the outstanding loan balances in the Corporation's branch
footprint at December 31, 2021 . The majority of the on balance sheet residential
mortgage portfolio consists of constant maturity treasury based, hybrid,
adjustable rate mortgage loans with initial fixed-rate terms of 3, 5, 7, or 10
years. The rates on these mortgages adjust based upon the movement in the
underlying index which is then added to a margin and rounded to the nearest
0.125%. That result is then subjected to any periodic caps to produce the
borrower's interest rate for the coming term.
The Corporation generally retains certain fixed-rate residential real estate
mortgages in its loan portfolio, including retail and private banking jumbo
mortgages and CRA-related mortgages. As part of management's historical practice
of originating and servicing residential mortgage loans, generally the
Corporation's 30 year, agency conforming, fixed-rate residential real estate
mortgage loans have been sold in the secondary market with servicing rights
retained. Subject to management's analysis of the current interest rate
environment, among other market factors, the Corporation may choose to retain 30
year mortgage loan production on its balance sheet. See section Loans for
additional information on loans.
The Corporation's underwriting and risk-based pricing guidelines for residential
mortgage loans include minimum borrower FICO score and maximum LTV of the
property securing the loan. Residential mortgage products generally are
underwritten using FHLMC and FNMA secondary marketing guidelines.
Home equity: Home equity consists of both home equity lines of credit and
closed-end home equity loans. The Corporation's credit risk monitoring
guidelines for home equity is based on an ongoing review of loan delinquency
status, as well as a quarterly review of FICO score deterioration and property
devaluation. The Corporation does not routinely obtain appraisals on performing
loans to update LTV ratios after origination; however, the Corporation monitors
the local housing markets by reviewing the various home price indices and
incorporates the impact of the changing market conditions in its ongoing credit
monitoring process. For junior lien home equity loans, the Corporation is unable
to track the performance of the first lien loan if it does not own or service
the first lien loan. However, the Corporation obtains a refreshed FICO score on
a quarterly basis and monitors this as part of its assessment of the home equity
portfolio.
The Corporation's underwriting and risk-based pricing guidelines for home equity
lines and loans consist of a combination of both borrower FICO score and the
original cumulative LTV against the property securing the loan. Currently, the
Corporation's policy sets the maximum acceptable LTV at 90% and the minimum
acceptable FICO score at 670. The Corporation's current home equity line of
credit offering is priced based on floating rate indices and generally allows 10
years of interest-only payments followed by a 20-year amortization of the
outstanding balance. The loans in the Corporation's portfolio generally have an
original term of 20 years with principal and interest payments required. See
section Loans for additional information on loans.
Indirect Auto: The Corporation currently purchases retail auto sales contracts
via a network of 665 approved auto dealerships across 13 states throughout the
Northeast, Mid-Atlantic and Mid-Western United States. The auto dealerships
finance the sale of automobiles as the initial lender and then assign the
contracts to the Corporation pursuant to dealer agreements. The Corporation's
underwriting and pricing guidelines are based on a dual risk grade derived from
a combination of FICO auto score and proprietary internal custom score. Minimum
grade and FICO score standards ensure the credit risk is appropriately managed
to the Corporation's risk appetite. Further, the grade influences loan-specific
parameters such as vehicle age, term, LTV, loan amount, mileage, payment and
debt service thresholds and pricing. Maximum loan terms offered are 84 months on
select grades with vehicle age, mileage and other limitations in place to
qualify. The program is designed to capture primarily prime and super prime
contracts. Over time, the Corporation expects roughly 60% of originations to be
secured by used vehicles.
Other consumer: Other consumer consists of student loans, short-term personal
installment loans, and credit cards. The Corporation had $101 million and $118
million of student loans at December 31, 2021 and December 31, 2020 ,
respectively, the majority of which are government guaranteed. As a result of
the COVID-19 pandemic, the passage of the CARES Act, and subsequent executive
orders, the federal student loan relief was extended through May 1, 2022 . Credit
risk for non-government guaranteed student loans, short-term personal
installment loans, and credit cards is influenced by general economic
conditions, the characteristics of individual borrowers, and the nature of the
loan collateral. Risks of loss are generally on smaller average balances per
loan spread over many borrowers. Once charged off, there is usually less
opportunity for recovery of these smaller consumer loans. Credit risk is
primarily controlled by reviewing the creditworthiness of the borrowers,
monitoring payment
54
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histories, and taking appropriate collateral and guarantee positions. The
student loan portfolio is in run-off and no new student loans are being
originated.
SBA Loans under the PPP:
The Corporation began submitting PPP forgiveness applications to the SBA on
behalf of our customers on September 14, 2020 . On December 27, 2020 , the
Economic Aid Act was signed into law, which included another round of PPP
funding. The Corporation began originating the new round of PPP loans in January
2021 until the statutory end of the program in May 2021 .
The following table summarizes the balance segmentation of the PPP loans and
associated deferred fees as of December 31, 2021 :
Table 11 Paycheck Protection Program Loan Segmentation
Round 1 & 2 Round 3 Total
Originated Outstanding Originated Outstanding Outstanding
($ in Thousands) Originated Loans Balance Balance Originated Loans Balance Balance Balance
>=$2,000,000 99 $ 335,534 $ 15,043 11 $ 22,000 $ 8,000 $ 23,043 <
$2,000,000 And >$350,000 485 386,245 2,017 158 118,491 19,864 21,882
<=$350,000 7,495 344,032 1,876 5,332 188,514 19,269 21,145
Total 8,079 $ 1,065,811 $ 18,936 5,501 $ 329,004 $ 47,134 $ 66,070
Deferred Fees $ 80 $ 1,722 $ 1,803
55
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Nonperforming Assets
Management is committed to a proactive nonaccrual and problem loan
identification philosophy. This philosophy is implemented through the ongoing
monitoring and review of all pools of risk in the loan portfolio to ensure that
problem loans are identified quickly and the risk of loss is minimized. Table 12
provides detailed information regarding NPAs, which include nonaccrual loans,
OREO, and other NPAs:
Table 12 Nonperforming Assets
As of December 31,
($ in Thousands) 2021 2020 2019 2018 2017
Nonperforming assets
PPP $ 46 $ - $ - $ - $ -
Commercial and industrial 6,233 61,859 46,312 41,021 112,786
Commercial real estate - owner occupied - 1,058 67 3,957 22,740
Commercial and business lending 6,279 62,917 46,380 44,978 135,526
Commercial real estate - investor 60,677 78,220 4,409 1,952 4,729
Real estate construction 177 353 493 979 974
Commercial real estate lending 60,855 78,573 4,902 2,931 5,703
Total commercial 67,134 141,490 51,282 47,909 141,229
Residential mortgage 55,362 59,337 57,844 67,574 53,632
Home equity 7,726 9,888 9,104 12,339 13,514
Other consumer 170 91 152 79 163
Auto 52 49 - - 8
Total consumer 63,309 69,364 67,099 79,992 67,317
Total nonaccrual loans 130,443 210,854 118,380 127,901 208,546
Commercial real estate owned 984 2,185 3,530 4,047 6,735
Residential real estate owned 3,666 1,194 5,696 2,963 5,873
Bank properties real estate owned(a) 24,969 10,889 11,874 4,974 -
OREO 29,619 14,269 21,101 11,984 12,608
Other nonperforming assets - - 6,004 - 7,418
Total nonperforming assets $ 160,062 $ 225,123 $ 145,485 $ 139,885 $ 228,572
Accruing loans past due 90 days or more
Commercial $ 151 $ 175 $ 342 $ 311 $ 418
Consumer 1,111 1,423 1,917 1,853 1,449
Total accruing loans past due 90 days or more $ 1,263 $ 1,598 $ 2,259 $ 2,165 $ 1,867
Restructured loans (accruing)(b)
Commercial $ 22,763 $ 41,119 $ 18,944 $ 28,668 $ 48,735
Consumer 19,768 10,973 7,097 24,595 25,883
Total restructured loans (accruing) $ 42,530 $ 52,092 $ 26,041 $ 53,263 $ 74,618
Nonaccrual restructured loans (included in
nonaccrual loans) $ 17,426 $ 20,190 $ 22,494 $ 26,292 $ 23,486
Ratios
Nonaccrual loans to total loans 0.54 % 0.86 % 0.52 % 0.56 % 1.00 %
NPAs to total loans plus OREO 0.66 % 0.92 % 0.64 % 0.61 % 1.10 %
NPAs to total assets 0.46 % 0.67 % 0.45 % 0.42 % 0.75 %
Allowance for credit losses on loans to nonaccrual
loans 245.16 % 204.63 % 188.61 % 205.13 % 139.19 %
56--------------------------------------------------------------------------------
Table 12 Nonperforming Assets (continued)
As of December 31,
($ in Thousands) 2021 2020 2019 2018 2017
Accruing loans 30-89 days past due
PPP $ 83 $ - $ - $ - $ -
Commercial and industrial 632 6,119 821 525 271
Commercial real estate - owner occupied 163 373 1,369 2,699 48
Commercial and business lending 878 6,492 2,190 3,224 319
Commercial real estate - investor 616 12,793 1,812 3,767 374
Real estate construction 1,620 991 97 330 251
Commercial real estate lending 2,236 13,784 1,909 4,097 625
Total commercial 3,114 20,276 4,099 7,321 944
Residential mortgage 6,169 10,385 9,274 9,706 9,552
Home equity 3,711 4,802 5,647 6,049 6,825
Other consumer 2,307 1,543 2,083 2,269 2,005
Auto 11 57 - - 2
Total consumer 12,198 16,786 17,005 18,024 18,384
Total accruing loans 30-89 days past due $ 15,312 $ 37,062 $ 21,104 $ 25,345 $ 19,328
Potential problem loans
PPP(c) $ 2,000 $ 18,002 $ - $ - $ -
Commercial and industrial 138,258 121,487 110,308 116,578 113,778
Commercial real estate - owner occupied 26,723 26,179 19,889 55,964 41,997
Commercial and business lending 166,981 165,668 130,197 172,542 155,775
Commercial real estate - investor 106,138 91,396 29,449 67,481 19,291
Real estate construction 21,408 19,046 - 3,834 -
Commercial real estate lending 127,546 110,442 29,449 71,315 19,291
Total commercial 294,527 276,111 159,646 243,856 175,066
Residential mortgage 2,214 3,749 1,451 5,975 1,616
Home equity 165 2,068 - 103 195
Total consumer 2,379 5,817 1,451 6,078 1,811
Total potential problem loans $ 296,905 $ 281,928
(a) Primarily closed branches and other bank operated real estate facilities,
pending disposition.
(b) Does not include any restructured loans related to the COVID-19 pandemic in
accordance with Section 4013 of the CARES Act.
(c) The Corporation's policy is to assign risk ratings at the borrower level.
PPP loans are 100% guaranteed by the SBA and therefore the Corporation considers
these loans to have a risk profile similar to pass rated loans.
Nonaccrual loans: Nonaccrual loans are considered to be one indicator of
potential future loan losses. See management's accounting policy for nonaccrual
loans in Note 1 Summary of Significant Accounting Policies and Note 4 Loans of
the notes to consolidated financial statements for additional nonaccrual loan
disclosures. See also sections Credit Risk and Allowance for Credit Losses on
Loans.
Accruing loans past due 90 days or more: Loans past due 90 days or more but
still accruing interest are classified as such where the underlying loans are
both well secured (the collateral value is sufficient to cover principal and
accrued interest) and are in the process of collection.
Restructured loans: Loans are considered restructured loans if concessions have
been granted to borrowers that are experiencing financial difficulty. See also
Note 4 Loans of the notes to consolidated financial statements for additional
restructured loans disclosures.
Potential problem loans: The level of potential problem loans is another
predominant factor in determining the relative level of risk in the loan
portfolio and in determining the appropriate level of the ACLL. Potential
problem loans are generally defined by management to include loans rated as
substandard by management that are collectively evaluated (not nonaccrual loans
or accruing TDRs); however, there are circumstances present to create doubt as
to the ability of the borrower to comply with present repayment terms. The
decision of management to include performing loans in potential problem loans
does not necessarily mean that the Corporation expects losses to occur, but that
management recognizes a higher degree of risk associated with these loans.
OREO: Management actively seeks to ensure OREO properties held are monitored to
minimize the Corporation's risk of loss.
57
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Foregone Loan Interest: The following table shows, for those loans accounted for
on a nonaccrual basis and restructured loans for the years ended as indicated,
the approximate gross interest that would have been recorded if the loans had
been current in accordance with their original terms and the amount of interest
income that was included in interest income for the period:
Table 13 Foregone Loan Interest
Years Ended December 31,
($ in Thousands) 2021 2020 2019 2018 2017
Interest income in accordance with original terms $ 6,537 $ 11,262 $ 12,032 $ 10,606 $ 16,205
Interest income recognized (4,495) (6,891) (5,015) (5,500) (9,339)
Reduction in interest income $ 2,042 $ 4,371 $
7,016
Allowance for Credit Losses on Loans Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and the minimization of loan losses. Credit risk management for each loan type is discussed in the section entitled Credit Risk. See Note 4 Loans of the notes to consolidated financial statements for additional disclosures on the ACLL. To assess the appropriateness of the ACLL, the Corporation focuses on the evaluation of many factors, including but not limited to: evaluation of facts and issues related to specific loans, management's ongoing review and grading of the loan portfolio, credit report refreshes, consideration of historical loan loss and delinquency experience on each portfolio category, trends in past due and nonaccrual loans, the level of potential problem loans, the risk characteristics of the various classifications of loan segments, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and economic forecasts, the fair value of underlying collateral, funding assumptions on lines, and other qualitative and quantitative factors which could affect potential credit losses. The Corporation utilized the Moody's baseline forecast forDecember 2021 in the allowance model. The forecast is applied over a 2 year reasonable and supportable period with straight-line reversion to historical losses over the second year of the period. Assessing these factors involves significant judgment. Because each of the criteria used is subject to change, the ACLL is not necessarily indicative of the trend of future credit losses on loans in any particular segment. Therefore, management considers the ACLL a critical accounting estimate, see section Critical Accounting Estimates for additional information on the ACLL. See section Nonperforming Assets for a detailed discussion on asset quality. See also Note 4 Loans of the notes to consolidated financial statements for additional ACLL disclosures. Table 6 provides information on loan growth and period end loan composition, Table 12 provides additional information regarding NPAs, and Table 14 and Table 15 provide additional information regarding activity in the ACLL. The loan segmentation used in calculating the ACLL atDecember 31, 2021 andDecember 31, 2020 was generally comparable. The methodology to calculate the ACLL consists of the following components: a valuation allowance estimate is established for commercial and consumer loans determined by the Corporation to be individually evaluated, using discounted cash flows, estimated fair value of underlying collateral, and/or other data available. Loans are segmented for criticized loan pools by loan type as well as for non-criticized loan pools by loan type, primarily based on historical loss rates after considering loan type, historical loss and delinquency experience, credit quality, and industry classifications. Loans that have been criticized are considered to have a higher risk of default than non-criticized loans, as circumstances were present to support the lower loan grade, warranting higher loss factors. The loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels or other risks. Additionally, management allocates ACLL to absorb losses that may not be provided for by the other components due to qualitative factors evaluated by management, such as limitations within the credit risk grading process, known current economic or business conditions that may not yet show in trends, industry or other concentrations with current issues that impose higher inherent risks than are reflected in the loss factors, and other relevant considerations. The total allowance is available to absorb losses from any segment of the loan portfolio. 58 --------------------------------------------------------------------------------
Table 14 Allowance for Credit Losses on Loans
Years Ended December 31,
($ in Thousands) 2021 2020 2019 2018 2017
Allowance for loan losses
Balance at beginning of period $ 383,702 $ 201,371 $ 238,023 $ 265,880 $ 278,335
Cumulative effect of ASU 2016-13 adoption
(CECL) N/A 112,457 N/A N/A N/A
Balance at beginning of period, adjusted 383,702 313,828 238,023 265,880 278,335
Provision for loan losses (80,000) 164,457 18,500 2,500 27,000
Provision for loan losses recorded at
acquisition - 2,543 - - -
Gross up of allowance for PCD loans at
acquisition - 3,504 - - -
Loans charged off
Asset-based lending - (6,650) (8,777) - -
Commercial and industrial (21,564) (73,670) (54,538) (30,837) (44,533)
Commercial real estate - owner occupied - (419) (222) (1,363) (344)
Commercial and business lending (21,564) (80,739) (63,537) (32,200) (44,877)
Commercial real estate - investor (14,346) (22,920) - (7,914) (991)
Real estate construction (5) (19) (60) (298) (604)
Commercial real estate lending (14,351) (22,938) (60) (8,212) (1,595)
Total commercial (35,915) (103,677) (63,597) (40,412) (46,472)
Residential mortgage (880) (1,867) (3,322) (1,627) (2,611)
Home equity (668) (1,719) (1,846) (3,236) (2,724)
Other consumer (3,168) (4,783) (5,548) (5,257) (4,439)
Auto (22) (7) - (4) -
Total consumer (4,738) (8,376) (10,716) (10,124) (9,774)
Total loans charged off (40,652) (112,053) (74,313) (50,536) (56,246)
Recoveries of loans previously charged off
Asset-based lending 412 561 519 - -
Commercial and industrial 8,152 6,444 11,356 13,714 11,465
Commercial real estate - owner occupied 120 147 2,795 639 173
Commercial and business lending 8,684 7,151 14,670 14,353 11,638
Commercial real estate - investor 3,162 643 31 668 242
Real estate construction 126 49 302 446 74
Commercial real estate lending 3,288 692 333 1,114 316
Total commercial 11,972 7,844 15,003 15,467 11,954
Residential mortgage 841 500 692 1,271 927
Home equity 2,854 1,978 2,599 2,628 3,194 Other consumer 1,267 1,076 858 803 701 Auto 31 25 10 10 15 Total consumer 4,993 3,579 4,158 4,712 4,837 Total recoveries 16,965 11,422 19,161 20,179 16,791 Net (charge offs) (23,687) (100,631) (55,152) (30,358) (39,455) Balance at end of period$ 280,015 $ 383,702 $ 201,371 $ 238,023 $ 265,880 Allowance for unfunded commitments Balance at beginning of period$ 47,776 $ 21,907 $ 24,336 $ 24,400 $ 25,400 Cumulative effect of ASU 2016-13 adoption (CECL) N/A 18,690 N/A N/A N/A Balance at beginning of period, adjusted 47,776 40,597 24,336 24,400 25,400 Provision for unfunded commitments (8,000) 7,000 (2,500) (2,500) (1,000) Amount recorded at acquisition - 179 70 2,436 - Balance at end of period$ 39,776 $ 47,776 $ 21,907 $ 24,336 $ 24,400 Allowance for credit losses on loans$ 319,791 $ 431,478 $ 223,278 $ 262,359 $ 290,280 Provision for credit losses on loans (88,000) 174,000 16,000 - 26,000 59
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Table 14 Allowance for Credit Losses on Loans (continued)
Years Ended December 31,
($ in Thousands) 2021 2020 2019 2018 2017
Net loan (charge offs) recoveries
Asset-based lending $ 412 $ (6,090) $ (8,259) $ - $ -
Commercial and industrial (13,412) (67,226) (43,182) (17,124) (33,067)
Commercial real estate - owner occupied 120 (272) 2,573 (724) (171)
Commercial and business lending (12,880) (73,588) (48,868) (17,848) (33,239)
Commercial real estate - investor (11,184) (22,277) 31 (7,246) (749)
Real estate construction 121 31 243 149 (530)
Commercial real estate lending (11,063) (22,246) 274 (7,098) (1,279)
Total commercial (23,943) (95,834) (48,594) (24,946) (34,518)
Residential mortgage (38) (1,367) (2,630) (355) (1,684)
Home equity 2,186 259 753 (608) 470
Other consumer (1,901) (3,707) (4,690) (4,455) (3,738)
Auto 9 19 10 6 15
Total consumer 256 (4,797) (6,558) (5,412) (4,937)
Total net (charge offs) $ (23,687) $ (100,631) $ (55,152) $ (30,358) $ (39,455)
Ratios
Allowance for credit losses on loans to total
loans 1.32 % 1.76 % 0.98 % 1.14 % 1.40 %
Allowance for credit losses on loans to net charge offs 13.5x 4.3x 4.0x 8.6x 7.4x Loan Evaluation Method for ACLL Individually evaluated for impairment$ 15,194 $ 79,831 $ 14,026 $ 11,053 $ 21,308 Collectively evaluated for impairment 304,597 351,646 209,252 251,306 268,972 Total ACLL$ 319,791 $ 431,478 $ 223,278 $ 262,359 $ 290,280 Loan Balance Individually evaluated for impairment$ 115,643 $ 259,497 $ 111,595 $ 138,543 $ 247,575 Collectively evaluated for impairment 24,109,306 24,192,227 22,709,845 22,801,887 20,537,416 Total loan balance$ 24,224,949 $ 24,451,724
Table 15 Net (Charge Offs) Recoveries(a)
Years Ended
(In Basis Points) 2021 2020 2019 2018 2017
Net loan (charge offs) recoveries
Asset-based lending 34 (343) (301) - -
Commercial and industrial (18) (88) (60) (26) (54)
Commercial real estate - owner occupied 1 (3) 28
(9) (2)
Commercial and business lending (14) (78) (58) (23) (46)
Commercial real estate - investor (26) (54) -
(18) (2)
Real estate construction 1 - 2 1 (3)
Commercial real estate lending (18) (38) 1
(13) (3)
Total commercial (16) (63) (36) (19) (28)
Residential mortgage - (2) (3) - (2)
Home equity 34 3 9 (6) 5
Other consumer (65) (117) (133) (120) (99)
Auto 4 14 37 36 131
Total consumer - (5) (7) (6) (6)
Total net (charge offs) (10) (41) (24) (13) (19)
(a) Ratio of net charge offs to average loans by loan type
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Notable Contributions to the Change in the Allowance for Credit Losses on Loans
•Loans decreased $227 million , or 1%, from December 31, 2020 , primarily driven
by decreases in PPP, residential mortgage, and home equity, which were partially
offset by increases in the commercial and industrial and auto portfolios. See
section Loans for additional information on the changes in the loan portfolio
and see section Credit Risk for discussion about credit risk management for each
loan type.
•Potential problem loans increased $15 million , or 5%, from December 31, 2020 ,
largely driven by increases in potential problem loans across the Corporation's
commercial and industrial and CRE-investor portfolios, which were partially
offset by a decrease in PPP loans. See also Note 4 Loans of the notes to
consolidated financial statements and section Nonperforming Assets for
additional disclosures on the changes in asset quality.
•For the year ended December 31, 2021 , net charge offs decreased $77 million , or
76%, from December 31, 2020 , primarily driven by decreased charge off amounts in
the commercial and industrial portfolio, due to better performance within the
remaining oil and gas portfolio, as well as lower charge offs in the
CRE-investor portfolio. See Tables 14 and 15 for additional information
regarding the activity in the ACLL.
•Total nonaccrual loans decreased $80 million , or 38%, from December 31, 2020 ,
primarily driven by decreases in nonaccrual commercial and industrial, over half
of the decrease was due to better performance within the remaining oil and gas
portfolio, and CRE-investor loans, stemming in part from the economic recovery
seen throughout 2021. See also Note 4 Loans of the notes to consolidated
financial statements and section Nonperforming Assets for additional disclosures
on the changes in asset quality.
Management believes the level of ACLL to be appropriate at December 31, 2021 .
Consolidated net income and stockholders' equity could be affected if
management's estimate of the ACLL is subsequently materially different,
requiring additional or less provision for credit losses to be recorded.
Management carefully considers numerous detailed and general factors, its
assumptions, and the likelihood of materially different conditions that could
alter its assumptions. While management uses currently available information to
recognize losses on loans, future adjustments to the ACLL may be necessary based
on newly received appraisals, updated commercial customer financial statements,
rapidly deteriorating customer cash flow, and changes in economic conditions
that affect our customers. Additionally, larger credit relationships do not
inherently create more risk, but can create wider fluctuations in net charge
offs and asset quality measures. As an integral part of their examination
processes, various federal and state regulatory agencies also review the ACLL.
These agencies may require additions to the ACLL or may require that certain
loan balances be charged off or downgraded into criticized loan categories when
their credit evaluations differ from those of management, based on their
judgments about information available to them at the time of their examinations.
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Investment Securities Portfolio
Management of the investment securities portfolio involves the maximization of
income while actively monitoring the portfolio's liquidity, market risk, quality
of the investment securities, and its role in balance sheet and capital
management. The Corporation classifies its investment securities as AFS, HTM, or
equity securities on the consolidated balance sheets at the time of purchase or
adoption of a new accounting standard. Securities classified as AFS may be sold
from time to time in order to help manage interest rate risk, liquidity, credit
quality, capital levels, or to take advantage of relative value opportunities in
the marketplace. Investment securities classified as AFS and equity are carried
at fair value on the consolidated balance sheets, while investment securities
classified as HTM are carried at amortized cost on the consolidated balance
sheets.
Table 16 Investment Securities Portfolio
At December 31,
($ in Thousands) 2021 % of Total 2020 % of Total 2019 % of Total
Investment securities AFS
Amortized cost
U.S. Treasury securities $ 124,291 3 % $ 26,436 1 % $ - - %
Agency securities 15,000 - % 24,985 1 % - - %
Obligations of state and political subdivisions
(municipal securities) 381,517 9 % 425,057 14 % 529,908 16%
Residential mortgage-related securities FNMA / FHLMC 2,709,399 62 % 1,448,806 48 % 131,158 4 % GNMA 66,189 2 % 231,364 8 % 982,941 30 % Private-label 332,028 8 % - - % - - % Commercial mortgage-related securities FNMA / FHLMC 357,240 8 % 19,654 1 % 19,929 1 % GNMA 165,439 4 % 511,429 17 % 1,314,836 40 % Asset backed securities FFELP 177,974 4 % 329,030 11 % 270,178 8 % SBA 6,594 - % 8,637 - % - - % Other debt securities 3,000 - % 3,000 - % 3,000 - % Total amortized cost$ 4,338,671 100 %$ 3,028,399 100 %$ 3,251,950 100 % Fair value U.S. Treasury securities$ 122,957 3 %$ 26,531 1 % $ - - % Agency securities 14,897 - % 25,038 1 % - - % Obligations of state and political subdivisions (municipal securities) 400,457 9 % 450,662 15 % 546,160 17
%
Residential mortgage-related securities FNMA / FHLMC 2,691,879 62 % 1,461,241 47 % 132,660 4 % GNMA 67,780 2 % 235,537 8 % 985,139 30 % Private-label 329,724 8 % - - % - - % Commercial mortgage-related securities FNMA / FHLMC 350,623 8 % 22,904 1 % 21,728 1 % GNMA 166,799 4 % 524,756 17 % 1,310,207 40 % Asset backed securities FFELP 177,325 4 % 327,189 11 % 263,693 8 % SBA 6,580 - % 8,584 - % - - % Other debt securities 2,994 - % 3,000 - % 3,000 - % Total fair value and carrying value$ 4,332,015 100 %$ 3,085,441 100 %$ 3,262,586 100
%
Net unrealized holding gains (losses)$ (6,656) $ 57,043 $ 10,636 62
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Table 16 Investment Securities Portfolio (continued)
At December 31,
($ in Thousands) 2021 % of Total 2020 % of Total 2019 % of Total
Investment securities HTM
Amortized cost
U.S. Treasury securities $ 1,000 - % $ 999 - % $ 999 - %
Obligations of state and political
subdivisions (municipal securities) 1,628,759 73 % 1,441,900 77 % 1,418,569 64 %
Residential mortgage-related securities
FNMA / FHLMC 34,347 2 % 54,599 3 % 81,676 4 %
GNMA 48,053 2 % 114,553 6 % 269,523 12 %
Commercial mortgage-related securities
FNMA/FHLMC 425,937 19 % 11,211 1 % - - %
GNMA 100,907 5 % 255,742 14 % 434,317 20 %
Total amortized cost and carrying value $ 2,239,003 100 % $ 1,879,005 100 % $ 2,205,083 100 %
Fair value
U.S. Treasury securities $ 1,001 - % $ 1,024 - % $ 1,018 - %
Obligations of state and political
subdivisions (municipal securities) 1,739,988 74 % 1,575,445 78 % 1,487,227 65 %
Residential mortgage-related securities
FNMA / FHLMC 36,139 2 % 57,490 3 % 83,420 4 %
GNMA 49,631 2 % 118,813 6 % 270,296 12 %
Commercial mortgage-related securities
FNMA/FHLMC 419,400 18 % 11,211 1 % - - %
GNMA 102,506 4 % 264,960 13 % 434,503 19 %
Total fair value $ 2,348,664 100 % $ 2,028,943 100 % $ 2,276,465 100 %
Net unrealized holding gains (losses) $ 109,662 $ 149,938 $ 71,381
Equity securities
Equity securities carrying value and fair
value $ 18,352 100 % $ 15,106 100 % $ 15,090 100 %
At December 31, 2021 , the Corporation's investment securities portfolio did not
contain securities of any single non-government or non-GSE issuer that were
payable from and secured by the same source of revenue or taxing authority where
the aggregate carrying value of such securities exceeded 5% of stockholders'
equity.
The Corporation did not recognize any credit-related write-downs to the
allowance for credit losses on investments during 2021 or 2020, or any other
than temporary impairment write-downs in 2019. See Note 1 Summary of Significant
Accounting Policies for management's accounting policy for investment securities
and Note 3 Investment Securities of the notes to consolidated financial
statements for additional investment securities disclosures.
AFS Securities
U.S. Treasury Securities : U.S. Treasury Securities , including Treasury bills,
notes, and bonds, are debt obligations issued by the U.S. Department of the
Treasury and are backed by the full faith and credit of the U.S. government.
Municipal Securities : The municipal securities relate to various state and
political subdivisions and school districts. The municipal securities portfolio
is regularly assessed for credit quality and deterioration.
Agency Securities : Agency securities are debt obligations that are issued by a
U.S. GSE or other federally related entity, and have an implied guarantee from
the U.S. government.
Agency Residential and Agency Commercial Mortgage-Related Securities :
Residential and commercial mortgage-related securities include predominantly
GNMA, FNMA , and FHLMC MBS and CMOs. The fair value of these mortgage-related
securities is subject to inherent risks, such as prepayment risk and interest
rate changes. The Corporation regularly assesses valuation of these securities.
Private Label Residential Mortgage-Related Securities : Private label residential
mortgage-related securities are the most senior AAA-rated tranche CMO securities
issued by a non-agency sponsor and collateralized by Prime Jumbo residential
mortgage loans.
FFELP Asset Backed Securities : FFELP asset backed securities are collateralized
with government guaranteed student loans.
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SBA Asset Backed Securities : SBA asset backed securities are securities whose
underlying assets are loans from the SBA. These loans are backed by the U.S.
government.
Other Debt Securities : Other debt securities are primarily comprised of debt
securities that mature within 3 years and have a rating of A.
HTM Securities
Municipal Securities : The municipal securities relate to various state and
political subdivisions and school districts. The municipal securities portfolio
is regularly assessed for credit quality and deterioration.
Agency Residential and Agency Commercial Mortgage-Related Securities :
Residential and commercial mortgage-related securities in HTM are comprised of
select MBS and CMOs, such as when a component qualifies for CRA purposes.
Equity Securities
Equity Securities with Readily Determinable Fair Values: The Corporation's
portfolio of equity securities with readily determinable fair values is
primarily comprised of CRA Qualified Investment mutual funds and other mutual
funds.
Equity Securities without Readily Determinable Fair Values: The Corporation's
portfolio of equity securities without readily determinable fair values
primarily consists of Visa Class B restricted shares that the Corporation
received in 2008 as part of Visa's initial public offering as well as additional
Visa Class B restricted shares that were acquired during the acquisition of
First Staunton during the first quarter of 2020.
Regulatory Stock (FHLB and Federal Reserve System )
In addition to the AFS, HTM, and equity investment securities noted above, the
Corporation is also required to hold certain regulatory stock. The Corporation
is required to maintain Federal Reserve Bank stock and FHLB stock as member
banks of both the Federal Reserve System and the FHLB, and in amounts as
required by these institutions. See Note 3 Investment Securities of the notes to
consolidated financial statements for additional information on the regulatory
stock.
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--------------------------------------------------------------------------------Table 17 Investment Securities Portfolio Maturity Distribution(a)
Weighted Average
($ in Thousands) Amortized Cost Fair Value Yield(b)
AFS securities
U. S. Treasury securities
After one but within five years $ 34,516 $ 34,022 0.84 %
After five years but within ten years 89,775 88,935 1.22 %
Total U. S. Treasury securities $ 124,291 $ 122,957 1.11 %
Agency securities
After one but within five years$ 15,000 $ 14,897 0.91 % Total agency securities$ 15,000 $ 14,897 0.91 % Obligations of state and political subdivisions (municipal securities) Within one year $ 5,799$ 5,810 3.38 % After one but within five years 22,733 23,228 3.39 % After five years but within ten years 315,570 330,007 3.24 % After ten years 37,416 41,412 4.27 %
Total obligations of state and political subdivisions (municipal securities)
$ 381,517 $ 400,457 3.35 % Agency residential mortgage-related securities Within one year $ 2,371$ 2,385 2.41 % After one but within five years 1,344,549 1,340,493 1.32 % After five years but within ten years 602,003 598,577 1.38 % After ten years 826,666 818,204 1.92 %
Total agency residential mortgage-related securities
1.51 %
Private-label residential mortgage-related securities
After one but within five years$ 262,180 $ 259,980 2.26 % After five years but within ten years 69,848 69,744 2.43 % Total private-label residential mortgage-related securities$ 332,028 $ 329,724 2.30 % Agency commercial mortgage-related securities Within one year$ 30,683 $ 30,902 2.42 % After one but within five years 148,374 149,090 2.19 % After five years but within ten years 343,622 337,431 1.47 %
Total agency commercial mortgage-related securities
1.73 %
Asset backed securities
Within one year $ 114 $ 114 3.13 %
After one but within five years 34,225 33,865 1.04 %
After five years but within ten years 150,229 149,926 0.83 %
Total asset backed securities $ 184,568 $ 183,905 0.87 %
Other debt securities
Within one year $ 1,000 $ 999 2.82 %
After one but within five years 2,000 1,995 1.33 %
Total other debt securities $ 3,000 $ 2,994 1.83 %
Total AFS securities $ 4,338,671 $ 4,332,015 1.72 %
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Table 17 Investment Securities Portfolio Maturity Distribution (continued) (a)
Weighted Average
($ in Thousands) Amortized Cost Fair Value Yield(b)
HTM securities
U. S. Treasury securities
Within one year $ 1,000 $ 1,001 2.56 %
Total U. S. Treasury securities $ 1,000 $ 1,001 2.56 %
Obligations of state and political subdivisions
(municipal securities)
Within one year $ 33,646 $ 33,842 3.66 %
After one but within five years 34,697 35,820 3.37 %
After five years but within ten years 161,627 167,967 3.69 %
After ten years 1,398,789 1,502,359 3.72 %
Total obligations of state and political subdivisions (municipal securities)
$ 1,628,759 $ 1,739,988 3.71 % Agency residential mortgage-related securities Within one year $ 2,521$ 2,602 2.10 % After one but within five years 67,770 70,515 2.78 % After five years but within ten years 5,218 5,437 3.19 % After ten years 6,891 7,216 3.53 %
Total agency residential mortgage-related securities
2.85 %
Agency commercial mortgage-related securities
Within one year $ 37 $ 37 2.12 %
After one but within five years 100,870 102,469 2.28 %
After five years but within ten years 276,533 273,173 2.04 %
After ten years 149,404 146,226 2.11 %
Total agency commercial mortgage-related securities $ 526,844 $ 521,905 2.10 %
Total HTM securities $ 2,239,003 $ 2,348,664 3.30 %
Equity securities
Equity securities with readily determinable fair values $ 4,810
- %
Equity securities without readily determinable fair
values 13,542 13,542 - %
Total equity securities $ 18,352 $ 18,352 - %
(a) Expected maturities will differ from contractual maturities, as borrowers
may have the right to call or repay obligations with or without call or
prepayment penalties.
(b) Yields on tax-exempt securities are computed on a fully tax-equivalent basis
using a tax rate of 21% and are net of the effects of certain disallowed
interest deductions.
Analysis of Deposits and Funding
Deposits and Customer Funding
The following table summarizes the composition of our deposits and customer
funding:
Table 18 Period End Deposit and Customer Funding Composition
As of December 31,
($ in Thousands) 2021 2020 2019
Noninterest-bearing demand $ 8,504,077 $ 7,661,728 $ 5,450,709
Savings 4,410,198 3,650,085 2,735,036
Interest-bearing demand 7,019,782 6,090,869 5,329,717
Money market 7,185,111 7,322,769 7,640,798
Brokered CDs - - 5,964
Other time deposits 1,347,262 1,757,030 2,616,839
Total deposits 28,466,430 26,482,481 23,779,064
Customer funding(a) 354,142 245,247 103,113
Total deposits and customer funding $ 28,820,572 $ 26,727,727 $ 23,882,177
Network transaction deposits(b) $ 766,965 $ 1,197,093 $ 1,336,286
Brokered CDs - - 5,964
Total network and brokered funding 766,965 1,197,093 1,342,250 Net deposits and customer funding (total deposits and customer funding, excluding Brokered CDs and network transaction deposits)
$ 28,053,607
(a) Securities sold under agreement to repurchase and commercial paper. (b) Included above in interest-bearing demand and money market.
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•Total deposits, which are the Corporation's largest source of funds, increased
$2.0 billion , or 7%, from December 31, 2020 driven by a change in customer
savings habits and government stimulus in response to the pandemic.
•Time deposits decreased $410 million , or 23%, from December 31, 2020 due to
maturing higher priced time deposits rolling off.
•Included in the above amounts were $767 million of network deposits, primarily
sourced from other financial institutions and intermediaries. These account for
3% of the Corporation's total deposits at December 31, 2021 . Network deposits
decreased $430 million , or 36%, from December 31, 2020 .
Table 19 Maturity Distribution - Uninsured Time Deposits
($ in Thousands) December 31, 2021
Three months or less $ 50,090
Over three months through six months 46,106
Over six months through twelve months 22,327
Over twelve months 9,826
Total $ 128,350
Selected period end deposit information is detailed in Note 8 Deposits of the
notes to consolidated financial statements, including a maturity distribution of
all time deposits at December 31, 2021 . See Table 2 for additional information
on average deposit balances and deposit rates.
Other Funding Sources
Short-Term Funding: Short-term funding is comprised of federal funds purchased,
securities sold under agreements to repurchase, and commercial paper. Many
short-term funding sources are expected to be reissued and, therefore, do not
represent an immediate need for cash. Short-term funding sources at December 31,
2021 were $354 million , an increase of $102 million from December 31, 2020 .
Long-Term Funding: Long-term funding is comprised of long-term FHLB advances
(with original contractual maturities greater than one year), senior notes,
subordinated notes, and finance leases. Long-term funding at December 31, 2021
was $1.9 billion , a decrease of $312 million from December 31, 2020 . The
decrease in long-term funding is due to the redemption of the Bank senior notes
on July 13, 2021 , the initial redemption date under the terms of the notes.
See Note 9 Short and Long-Term Funding of the notes to consolidated financial
statements for additional information on short-term and long-term funding. See
Table 2 for additional information on average funding and rates.
Contractual Obligations, Commitments, Off-Balance Sheet Arrangements, and
Contingent Liabilities
The following table summarizes significant contractual obligations and other
commitments at December 31, 2021 , at those amounts contractually due to the
recipient, including any unamortized premiums or discounts, hedge basis
adjustments, or other similar carrying value adjustments.
Table 20 Contractual Obligations and Other Commitments(a)
Note One Year One to Three to Over
($ in Thousands) Reference or Less Three Years Five Years Five Years Total
Time deposits 8 $ 1,055,614 $ 243,820 $ 47,823 $ 5 $ 1,347,262
Short-term funding 9 354,262 - - - 354,262
FHLB advances 9 11,759 2,885 1,005,028 601,375 1,621,047
Other long-term funding 9 140 22 249,161 - 249,324
Operating leases 7 6,494 10,402 6,997 7,452 31,345 Commitments to extend credit
14 & 16 5,350,135 3,613,885 1,889,106 240,026 11,093,152
Total $ 6,778,405 $ 3,871,014 $ 3,198,116 $ 848,858 $ 14,696,393
(a) Based on original contractual maturity
Through the normal course of operations, the Corporation has entered into
certain contractual obligations and other commitments, including but not limited
to those most usually related to funding of operations through deposits or
funding, commitments to extend credit, derivative contracts to assist management
of interest rate exposure, and to a lesser degree leases for premises and
equipment. Further discussion of the nature of each obligation is included in
the referenced note to the consolidated financial statements.
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The Corporation also has obligations under its retirement plans as described in
Note 12 Retirement Plans of the notes to consolidated financial statements.
The Corporation may have a variety of financial transactions that, under GAAP,
are either not recorded on the consolidated balance sheets or are recorded on
the consolidated balance sheets in amounts that differ from the full contract or
notional amounts.
Liquidity
The objective of liquidity risk management is to ensure that the Corporation has
the ability to generate sufficient cash or cash equivalents in a timely and cost
effective manner to satisfy the cash flow requirements of depositors and
borrowers and to meet its other commitments as they become due. The
Corporation's liquidity risk management process is designed to identify,
measure, and manage the Corporation's funding and liquidity risk to meet its
daily funding needs in the ordinary course of business, as well as to address
expected and unexpected changes in its funding requirements. The Corporation
engages in various activities to manage its liquidity risk, including
diversifying its funding sources, stress testing, and holding readily-marketable
assets which can be used as a source of liquidity, if needed.
The Corporation performs dynamic scenario analysis in accordance with industry
best practices. Measures have been established to ensure the Corporation has
sufficient high quality short-term liquidity to meet cash flow requirements
under stressed scenarios. In addition, the Corporation also reviews static
measures such as deposit funding as a percent of total assets and liquid asset
levels. Strong capital ratios, credit quality, and core earnings are also
essential to maintaining cost effective access to wholesale funding markets. At
December 31, 2021 , the Corporation was in compliance with its internal liquidity
objectives and had sufficient asset-based liquidity to meet its obligations even
under a stressed scenario.
The Corporation maintains diverse and readily available liquidity sources,
including:
•Investment securities, which are an important tool to the Corporation's
liquidity objective and can be pledged or sold to enhance liquidity, if
necessary. See Note 3 Investment Securities of the notes to consolidated
financial statements for additional information on the Corporation's investment
securities portfolio, including pledged investment securities.
•Pledgeable loan collateral, which is eligible collateral with both the Federal
Reserve Bank and the FHLB under established lines of credit. Based on the amount
of collateral pledged, the FHLB established a collateral value from which the
Bank may draw advances, and issue letters of credit in favor of public fund
depositors, against the collateral. As of December 31, 2021 , the Bank had
$3.8 billion available for future funding needs. The Federal Reserve Bank also
establishes a collateral value of assets to support borrowings from the discount
window. As of December 31, 2021 , the Bank had $761 million available for
discount window borrowings.
•A $200 million Parent Company commercial paper program, of which $35 million
was outstanding at December 31, 2021 .
•Dividends and service fees from subsidiaries, as well as the proceeds from
issuance of capital, which are also funding sources for the Parent Company.
•Acquisition related equity issuances by the Parent Company; the Corporation has
filed a shelf registration statement with the SEC under which the Parent Company
may, from time to time, offer shares of the Corporation's common stock in
connection with acquisitions of businesses, assets, or securities of other
companies.
•Other issuances by the Parent Company; the Corporation maintains on file with
the SEC a universal shelf registration statement, under which the Parent Company
may offer the following securities, either separately or in units: debt
securities, preferred stock, depositary shares, common stock, and warrants.
•Bank issuances; the Bank may also issue institutional CDs, network transaction
deposits, and brokered CDs.
•Global Bank Note Program issuances; the Bank has implemented a program pursuant
to which it may from time to time offer up to $2.0 billion aggregate principal
amount of its unsecured senior and subordinated notes.
Based on contractual obligations and ongoing operations, the Corporation's
sources of liquidity are sufficient to meet present and future liquidity needs.
See Table 20 for information about the Corporation's contractual obligations and
other commitments.
Credit ratings relate to the Corporation's ability to issue debt securities and
the cost to borrow money, and should not be viewed as an indication of future
stock performance or a recommendation to buy, sell, or hold securities. Adverse
changes in these
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factors could result in a negative change in credit ratings and impact not only
the ability to raise funds in the capital markets but also the cost of these
funds. The credit ratings of the Parent Company and the Bank at December 31,
2021 are displayed below:
Table 21 Credit Ratings
Moody's S&P
Bank short-term deposits P-1 -
Bank long-term deposits/issuer A1 BBB+
Corporation commercial paper P-2 -
Corporation long-term senior debt/issuer Baa1 BBB Outlook
Negative Stable
For the year ended December 31, 2021 , net cash provided by operating and
financing activities was $530 million and $1.4 billion , respectively, while
investing activities used net cash of $1.6 billion , for a net increase in cash
and cash equivalents of $309 million since year-end 2020. During 2021, total
assets increased to $35.1 billion , up $1.7 billion compared to year-end 2020,
primarily due to an increase of $1.6 billion in total investment securities,
which was driven by the deployment of cash into higher yielding assets. On the
funding side, deposits increased $2.0 billion , mainly driven by increases in
demand deposits and savings deposits of $1.8 billion and $760 million ,
respectively. Additionally, total short and long-term funding was down $210
million . The decrease in funding was primarily driven by the redemption of the
Bank's senior notes on July 13, 2021 .
For the year ended December 31, 2020 , net cash provided by operating and
financing activities was $550 million and $371 million , respectively, while
investing activities used net cash of $794 million , for a net increase in cash
and cash equivalents of $127 million since year-end 2019. During 2020, total
assets increased to $33.4 billion , up $1.0 billion compared to year-end 2019,
primarily due to an increase of $1.6 billion in loans. The increase was
primarily driven by PPP loan originations, growth in CRE loans, and loans
acquired as a result of the First Staunton acquisition. On the funding side,
deposits increased $2.7 billion , mainly driven by customers holding proceeds
from government stimulus programs in their deposit accounts, while funding,
including short-term, long-term, and FHLB advances, was down $1.8 billion . The
decrease in funding was primarily driven by the prepayment of $950 million of
long-term FHLB advances and the paydown of $520 million of short-term FHLB
advances.
Quantitative and Qualitative Disclosures about Market Risk
Market risk and interest rate risk are managed centrally. Market risk is the
potential for loss arising from adverse changes in the fair value of
fixed-income securities, equity securities, other earning assets, and derivative
financial instruments as a result of changes in interest rates or other factors.
Interest rate risk is the potential for reduced net interest income resulting
from adverse changes in the level of interest rates. As a financial institution
that engages in transactions involving an array of financial products, the
Corporation is exposed to both market risk and interest rate risk. In addition
to market risk, interest rate risk is measured and managed through a number of
methods. The Corporation uses financial modeling simulation techniques that
measure the sensitivity of future earnings due to changing rate environments to
measure interest rate risk.
Policies established by the Corporation's ALCO and approved by the Board of
Directors are intended to limit these risks. The Board has delegated day-to-day
responsibility for managing market and interest rate risk to ALCO. The primary
objectives of market risk management are to minimize any adverse effect that
changes in market risk factors may have on net interest income and to offset the
risk of price changes for certain assets recorded at fair value.
Interest Rate Risk
The primary goal of interest rate risk management is to control exposure to
interest rate risk within policy limits approved by the Board of Directors.
These limits and guidelines reflect the Corporation's risk appetite for interest
rate risk over both short-term and long-term horizons. No interest rate limit
breaches occurred during 2021.
The major sources of the Corporation's non-trading interest rate risk are timing
differences in the maturity and re-pricing characteristics of assets and
liabilities, changes in the shape of the yield curve, and the potential exercise
of explicit or embedded options. We measure these risks and their impact by
identifying and quantifying exposures through the use of sophisticated
simulation and valuation models which are employed by management to understand
NII at risk, interest rate sensitive EAR, and MVE at risk. The Corporation's
interest rate risk profile is such that a higher or steeper yield curve adds to
income while a flatter yield curve is relatively neutral, and a lower or
inverted yield curve generally has a negative impact on earnings. The
Corporation's EAR profile is asset sensitive at December 31, 2021 .
MVE and EAR are complementary interest rate risk metrics and should be viewed
together. NII and EAR sensitivity capture asset and liability re-pricing
mismatches for the first year inclusive of forecast balance sheet changes and
are considered shorter
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term measures, while MVE sensitivity captures mismatches within the period end
balance sheets through the financial instruments' respective maturities and is
considered a longer term measure.
A positive NII and EAR sensitivity in a rising rate environment indicates that
over the forecast horizon of one year, asset-based income will increase more
quickly than liability based expense due to the balance sheet composition. A
negative MVE sensitivity in a rising rate environment indicates that the value
of financial assets will decrease more than the value of financial liabilities.
One of the primary methods that we use to quantify and manage interest rate risk
is simulation analysis, which we use to model NII and rate sensitive noninterest
items from the Corporation's balance sheet and derivative positions under
various interest rate scenarios. As the future path of interest rates is not
known with certainty, we use simulation analysis to project rate sensitive
income under many scenarios including implied forward and deliberately extreme
and perhaps unlikely scenarios. The analyses may include rapid and gradual
ramping of interest rates, rate shocks, basis risk analysis, and yield curve
twists. Specific balance sheet management strategies are also analyzed to
determine their impact on NII and EAR.
Key assumptions in the simulation analysis (and in the valuation analysis
discussed below) relate to the behavior of interest rates and pricing spreads,
the changes in product balances, and the behavior of loan and deposit clients in
different rate environments. This analysis incorporates several assumptions, the
most material of which relate to the re-pricing characteristics and balance
fluctuations of deposits with indeterminate or non-contractual maturities, and
prepayment of loans and securities.
The sensitivity analysis included below is measured as a percentage change in
NII and EAR due to gradual moves in benchmark interest rates from a baseline
scenario over 12 months. We evaluate the sensitivity using: 1) a dynamic
forecast incorporating expected growth in the balance sheet, and 2) a static
forecast where the current balance sheet is held constant.
While a gradual shift in interest rates was used in this analysis to provide an
estimate of exposure under a probable scenario, an instantaneous shift in
interest rates would have a much more significant impact.
Table 22 Estimated % Change in Rate Sensitive EAR Over 12 Months
Dynamic Forecast Static Forecast Dynamic Forecast Static Forecast
December 31, 2021
5.0% 5.4% 6.2% 6.3%
200 bp increase in interest rates 10.6% 11.7% 12.8% 12.7%
We also perform valuation analysis, which we use for discerning levels of risk
present in the balance sheet and derivative positions that might not be taken
into account in the NII simulation analysis. Whereas, NII and EAR simulation
highlights exposures over a relatively short time horizon, valuation analysis
incorporates all cash flows over the estimated remaining life of all balance
sheet and derivative positions. The valuation of the balance sheet, at a point
in time, is defined as the discounted present value of all asset cash flows and
derivative cash flows, minus the discounted present value of all liability cash
flows, the net of which is referred to as MVE. The sensitivity of MVE to changes
in the level of interest rates is a measure of the longer-term re-pricing risk
and options risk embedded in the balance sheet. Unlike the NII simulation, MVE
uses instantaneous changes in rates. Additionally, MVE values only the current
balance sheet and does not incorporate the growth assumptions that are used in
the NII and EAR simulations. As with NII and EAR simulations, assumptions about
the timing and variability of balance sheet cash flows are critical in the MVE
analysis. Particularly important are the assumptions driving prepayments and the
expected changes in balances and pricing of the indeterminate deposit
portfolios. At December 31, 2021 , the MVE profile indicates a decrease in net
balance sheet value due to instantaneous upward changes in rates.
Table 23 Market Value of Equity Sensitivity
December 31, 2021 December 31, 2020
Instantaneous Rate Change
100 bp increase in interest rates (1.8) % 1.9 %
200 bp increase in interest rates (3.7) % 2.8 %
In the current rate environment, an increase in rates would result in a decrease
in MVE versus an increase in 2020. The growth of our investment securities
portfolio was the main driver of the change. Since MVE measures the discounted
present value of cash flows over the estimated lives of instruments, the change
in MVE does not directly correlate to the degree that earnings would be impacted
over a shorter time horizon (i.e., the current year). Further, MVE does not take
into account factors such as future balance sheet growth, changes in product
mix, changes in yield curve relationships, and changes in product spreads that
could mitigate the adverse impact of changes in interest rates.
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The above NII, EAR, and MVE measures do not include all actions that management
may undertake to manage this risk in response to anticipated changes in interest
rates.
In 2014, the Financial Stability Oversight Council and Financial Stability Board
raised concerns about the reliability and robustness of LIBOR and called for the
development of alternative interest rate benchmarks. The ARRC, through authority
from the Federal Reserve , has selected the SOFR as the alternative rate and
developed a paced transition plan which addresses the risk that LIBOR may not
exist beyond June 2023 .
As part of the Corporation's efforts to limit exposure to LIBOR based loans,
performing borrowers can modify or refinance their residential mortgage loans to
a fixed interest rate or an adjustable rate mortgage tied to the one-year
treasury adjusted to a constant maturity of one-year with an appropriate margin.
This provides the Bank and borrower with greater certainty around the loan
structure. The Bank has not booked a LIBOR adjustable rate mortgage since the
first quarter of 2020.
Additionally, the Corporation has been monitoring its volume of commercial
credits tied to LIBOR. In 2021, the Corporation began prioritizing SOFR, Prime
and Ameribor as the preferred alternative reference rates with plans to cease
booking LIBOR based commitments after the end of 2021. Loans with a maturity
after June 2023 are being reviewed and monitored to ensure there is appropriate
fallback language in place when LIBOR is no longer published. Loans with a
maturity date before that time should naturally mature and be re-underwritten
with an appropriate alternative index rate.
As of December 31, 2021 , the notional amount of our LIBOR-referenced interest
rate derivative contracts was $7.0 billion .
The following table summarizes the outstanding LIBOR loan exposures at December
31, 2021 and the exposures based upon loan maturity at June 30, 2023 .
Table 24 LIBOR Loan Exposure
December 31, 2021 June 30, 2023
Contractual
Outstanding LIBOR Loan Commitments Balance Commitment Commitment(a)
Commercial and industrial(b) $ 2,621,076 $ 5,966,356 $ 1,680,370
Commercial real estate - owner occupied 436,256 477,352 383,351
Commercial and business lending 3,057,332 6,443,708 2,063,720
Commercial real estate - investor 3,138,568 3,420,456 2,249,849
Real estate construction 1,181,921 2,895,912 1,900,557
Commercial real estate lending 4,320,489 6,316,368 4,150,406
Total commercial 7,377,821 12,760,076 6,214,126
Residential mortgage 481,998 481,998 481,867
Other consumer 13,446 30,338 5,577
Total consumer 495,444 512,336 487,444
Total $ 7,873,265 $ 13,272,412 $ 6,701,570
(a) Based on current December 31, 2021 balances not factoring in amortization
between December 31, 2021 and June 30, 2023 .
(b) Includes asset-based lending
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--------------------------------------------------------------------------------Capital
Management actively reviews capital strategies for the Corporation and each of its subsidiaries in light of perceived business risks, future growth opportunities, industry standards, and compliance with regulatory requirements. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic condition in markets served, and strength of management. AtDecember 31, 2021 , the capital ratios of the Corporation and its banking subsidiaries were in excess of regulatory minimum requirements. The Corporation's capital ratios are summarized in the following table. Table 25 Capital Ratios As of December 31, ($ in Thousands) 2021 2020 2019 Risk-based Capital(a) CET1$ 2,808,289 $ 2,706,010 $ 2,480,698 Tier 1 capital 3,001,074 3,058,809 2,736,776 Total capital 3,570,026 3,632,807 3,208,625 Total risk-weighted assets 27,242,735 25,903,415 24,296,382 Modified CECL transitional amount 89,702 117,624 - CET1 capital ratio 10.31 % 10.45 % 10.21 % Tier 1 capital ratio 11.02 % 11.81 % 11.26 % Total capital ratio 13.10 % 14.02 % 13.21 % Tier 1 leverage ratio 8.83 % 9.37 % 8.83 % Selected Equity and Performance Ratios Total stockholders' equity / total assets 11.47 % 12.24 % 12.11 % Dividend payout ratio(b) 34.55 % 38.50 % 35.75 % Return on average assets 1.02 % 0.90 % 0.99 % Noninterest expense / average assets 2.06 % 2.26 %
2.40 %
(a)TheFederal Reserve establishes regulatory capital requirements, including well-capitalized standards for the Corporation. The Corporation followsBasel III, subject to certain transition provisions. These regulatory capital measurements are used by management, regulators, investors, and analysts to assess, monitor and compare the quality and composition of the Corporation's capital with the capital of other financial services companies. (b) Ratio is based upon basic earnings per common share. See Part II, Item 5, Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities , for information on the shares repurchased during the fourth quarter of 2021. During the second quarter of 2021, the Corporation redeemed all outstanding Series C Preferred Stock, for$65 million . During the third quarter of 2021, the Corporation redeemed all outstanding Series D Preferred Stock, for$99 million . 72 --------------------------------------------------------------------------------
Table 26 Non-GAAP Measures
At or for the Year Ended December 31,
($ in Thousands) 2021 2020 2019 2018 2017
Selected equity and performance ratios(a)(b)
Tangible common equity / tangible assets 7.86 % 7.94 % 7.71 % 7.04 % 7.08 % Return on average equity
8.60 % 7.78 % 8.44 % 9.03 % 7.23 % Return on average tangible common equity
12.74 % 11.99 % 13.21 % 14.06 % 10.86 % Return on average CET1
12.08 % 11.23 % 12.59 % 13.15 % 10.43 % Return on average tangible assets
1.05 % 0.93 % 1.03 % 1.05 % 0.81 % Average stockholders' equity / average assets
11.84 % 11.51 % 11.72 % 11.19 % 10.77 % Tangible common equity reconciliation(a) Common equity
$ 3,831,658 $
3,737,421
(1,163,085) (1,177,554) (1,264,531) (1,244,859) (991,819) Tangible common equity
$ 2,668,573 $
2,559,867
Tangible assets reconciliation(a) Total assets$ 35,104,253 $
33,419,783
(1,163,085) (1,177,554) (1,264,531) (1,244,859) (991,819) Tangible assets
$ 33,941,167 $ 32,242,230 $ 31,121,947 $ 32,370,263 $ 29,451,807 Average tangible common equity and average CET1 reconciliation(a)(b) Common equity$ 3,789,331 $
3,633,259
(1,168,560) (1,227,561) (1,256,668) (1,209,311) (988,073) Tangible common equity
2,620,771 2,405,698 2,358,485 2,295,764 2,024,631 Modified CECL transitional amount
102,307 115,052 N/A N/A N/A
Accumulated other comprehensive loss (income) 1,234 2,643 68,946 117,408 53,879 Deferred tax assets (liabilities), net
40,011 43,789 46,980 41,747 30,949 Average CET1
$ 2,764,323 $
2,567,182
$ 34,464,257 $
34,265,207
(1,168,560) (1,227,561) (1,256,668) (1,209,311) (988,073) Tangible assets
$ 33,295,697 $
33,037,646
66.33 % 61.76 % 65.38 % 66.23 % 65.97 % Fully tax-equivalent adjustment
(1.04) % (0.77) % (0.85) % (0.71) % (1.28) % Other intangible amortization
(0.84) % (0.80) % (0.82) % (0.66) % (0.18) % Fully tax-equivalent efficiency ratio
64.47 % 60.20 % 63.72 % 64.87 % 64.51 %
Provision for unfunded commitments adjustment 0.74 %
(0.55) % 0.20 % 0.20 % 0.09 % Asset gains (losses), net adjustment
0.67 % 8.20 % 0.14 % - % (0.07) %
Acquisitions, branch sales, and initiatives (0.53) % (5.08) % (0.60) % (2.42) % - %
Adjusted efficiency ratio 65.36 % 62.76 % 63.47 % 62.65 % 64.53 %
(a) The ratio tangible common equity to tangible assets excludes goodwill and
other intangible assets, net. This financial measure has been included as it is
considered to be a critical metric with which to analyze and evaluate financial
condition and capital strength.
(b) These capital measurements are used by management, regulators, investors,
and analysts to assess, monitor, and compare the quality and composition of our
capital with the capital of other financial services companies.
(c) The efficiency ratio as defined by the Federal Reserve guidance is
noninterest expense (which includes the provision for unfunded commitments)
divided by the sum of net interest income plus noninterest income, excluding
investment securities gains / losses, net. The fully tax-equivalent efficiency
ratio is noninterest expense (which includes the provision for unfunded
commitments), excluding other intangible amortization, divided by the sum of
fully tax-equivalent net interest income plus noninterest income, excluding
investment securities gains / losses, net. The adjusted efficiency ratio is
noninterest expense, which excludes the provision for unfunded commitments,
other intangible amortization, acquisition related costs, and announced
initiatives, divided by the sum of fully tax-equivalent net interest income plus
noninterest income, excluding investment securities gains (losses), net,
acquisition related costs, asset gains (losses), net, and gain on sale of
branches, net. Management believes the adjusted efficiency ratio is a meaningful
measure as it enhances the comparability of net interest income arising from
taxable and tax-exempt sources and provides a better measure as to how the
Corporation is managing its expenses by adjusting for acquisition related costs,
provision for unfunded commitments, asset gains (losses), net, branch sales, and
announced initiatives.
See Note 10 Stockholders' Equity and Note 19 Regulatory Matters of the notes to
consolidated financial statements for additional capital disclosures.
Segment Review
As discussed in Note 21 Segment Reporting of the notes to consolidated financial
statements, the Corporation's reportable segments have been determined based
upon its internal profitability reporting system, which is organized by
strategic business unit. Certain strategic business units have been combined for
segment information reporting purposes where the nature of the products and
services, the type of customer, and the distribution of those products and
services are similar. The reportable segments are Corporate and Commercial
Specialty; Community, Consumer and Business; and Risk Management and Shared
Services. The financial information of the Corporation's segments was compiled
utilizing the accounting policies described in
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Note 1 Summary of Significant Accounting Policies and Note 21 Segment Reporting
of the notes to consolidated financial statements.
FTP is an important tool for managing the Corporation's balance sheet structure
and measuring risk-adjusted profitability. By appropriately allocating the cost
of funding and contingent liquidity to business units, the FTP process improves
product pricing which influences the volume and terms of new business and helps
to optimize the risk / reward profile of the balance sheet. This process helps
align the Corporation's funding and contingent liquidity risk with its risk
appetite and complements broader liquidity and interest rate risk management
programs. FTP methodologies are designed to promote more resilient, sustainable
business models and centralize the management of funding and contingent
liquidity risks. Through FTP, the Corporation transfers these risks to a central
management function that can take advantage of natural off-sets, centralized
hedging activities, and a broader view of these risks across business units. The
net FTP allocation is reflected as net intersegment interest income (expense)
shown in Note 21 Segment Reporting of the notes to consolidated financial
statements.
Table 27 Selected Segment Financial Data
Year Ended December 31, Change From Prior Year
($ in Thousands) 2021 2020 2019 % Change 2020 % Change 2019
Corporate and Commercial Specialty
Total revenue $ 570,903 $ 554,991 $ 531,876 3 % 4 %
Provision for credit losses 62,795 59,780 49,341 5 % 21 %
Noninterest expense 229,444 209,507 233,655 10 % (10) %
Income tax expense 49,772 53,193 47,480 (6) % 12 %
Net income 228,891 232,512 201,399 (2) % 15 %
Average earning assets 14,591,044 14,247,664 12,836,136 2 % 11 %
Average loans 14,590,313 14,244,938 12,829,331 2 % 11 %
Average deposits 9,853,905 9,423,485 9,710,281 5 % (3) %Average allocated capital (Average CET1)(a) 1,477,890 1,428,291
1,283,231 3 % 11 %
Return on average allocated capital
(ROCET1)(a) 15.49 % 16.28 % 15.69 % -79 bp 59 bp
Community, Consumer, and Business
Total revenue $ 476,978 $ 535,237 $ 618,606 (11) % (13) %
Provision for credit losses 18,138 21,862 18,594 (17) % 18 %
Noninterest expense 387,033 429,565 467,086 (10) % (8) %
Income tax expense 15,080 17,600 27,914 (14) % (37) %
Net income 56,728 66,210 105,011 (14) % (37) %
Average earning assets 8,766,754 9,395,680 9,162,911 (7) % 3 %
Average loans 8,766,754 9,395,680 9,162,911 (7) % 3 %
Average deposits 16,817,803 15,026,889 12,957,467 12 % 16 %Average allocated capital (Average CET1)(a) 473,937 533,954
541,992 (11) % (1) %
Return on average allocated capital
(ROCET1)(a) 11.97 % 12.40 % 19.38 % -43 bp N/M
Risk Management and Shared Services
Total revenue(b) $ 10,338 $ 186,784 $ 66,017 (94) % 183 %
Provision for credit losses (168,944) 92,365 (51,935) N/M N/M
Noninterest expense (c) 93,446 136,962 93,247 (32) % 47 %
Income tax expense (benefit)(d) 20,461 (50,593) 4,325 N/M N/M
Net income 65,374 8,050 20,379 N/M (60) %
Average earning assets 7,764,734 7,188,664 7,821,782 8 % (8) %
Average loans 700,913 897,030 1,130,555 (22) % (21) %
Average deposits 1,021,706 1,557,311 2,067,860 (34) % (25) %Average allocated capital (Average CET1)(a) 812,495 604,937
649,188 34 % (7) %
Return on average allocated capital
(ROCET1)(a) 8.05 % (1.70) % 0.80 % N/M N/M
Consolidated Total
Total revenue $ 1,058,219 $ 1,277,012 $ 1,216,498 (17) % 5 %
Return on average allocated capital
(ROCET1)(a) 12.08 % 11.23 % 12.59 % 85 bp -136 bp
N/M = Not Meaningful
(a) The Federal Reserve establishes capital adequacy requirements for the
Corporation, including CET1. For segment reporting purposes, the return on CET1
("ROCET1") reflects return on average allocated CET1. The ROCET1 for the Risk
Management and Shared Services segment and the Consolidated Total is inclusive
of the annualized effect of the preferred stock dividends. Please refer to Table
26 for a reconciliation of non-GAAP financial measures to GAAP financial
measures.
(b) For the year ended December 31, 2020 , the Corporation recognized a $163
million asset gain related to the sale of ABRC.
(c) The Risk Management and Shared Services segment incurred a loss of
$45 million on the prepayment of FHLB advances during the third quarter of 2020.
(d) The Corporation recognized $63 million in tax benefits in 2020, primarily
driven by corporate restructuring which allowed for the recognition of built in
capital losses and tax basis step-up yielding this tax benefit.
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Segment Review 2021 Compared to 2020
The Corporate and Commercial Specialty segment consists of lending and deposit
solutions to larger businesses, developers, not-for-profits, municipalities, and
financial institutions, and the support to deliver, fund, and manage such
banking solutions. In addition, this segment provides a variety of investment,
fiduciary, and retirement planning products and services to individuals and
small to mid-sized businesses. During the first quarter of 2021, the Corporation
sold its wealth management subsidiary, Whitnell.
•Revenue increased $16 million from the year ended December 31, 2020 , primarily
driven by higher asset gains on private equity investments and increases in
trust and asset management fees, partially offset by lower net interest income.
•Noninterest expense increased $20 million from the year ended December 31,
2020 , primarily driven by an increase in the funding of the management incentive
plan, partially offset by lower salary expense as a result of having fewer
employees.
•Average loan balances increased $345 million from the year ended December 31,
2020 , largely due to growth in CRE lending.
The Community, Consumer, and Business segment consists of lending, deposit
solutions, and historically offered ancillary financial services, primarily
insurance and risk consulting, to individuals and small to mid-sized businesses.
•Revenue decreased $58 million from the year ended December 31, 2020 , largely
driven by reduced insurance commissions and fees due to the sale of ABRC in
2020, and the lower interest rate environment.
•Noninterest expense decreased $43 million from the year ended December 31,
2020 , primarily driven by a decrease in personnel expense as a result of having
fewer employees.
•Average deposit balances increased $1.8 billion from the year ended
December 31, 2020 , largely driven by customers holding higher demand and saving
deposit balances.
The Risk Management and Shared Services segment includes key shared Corporate
functions, Parent Company activity, intersegment eliminations, and residual
revenues and expenses.
•Revenue decreased $176 million from the year ended December 31, 2020 , primarily
driven by a $163 million gain from the sale of ABRC in 2020.
•Provision for credit losses decreased $261 million from the year ended
December 31, 2020 , as a result of improving credit quality within the loan
portfolio and the impact of a more positive economic forecast model as the
COVID-19 pandemic became less uncertain.
•Noninterest expense decreased $44 million from the year ended December 31,
2020 , primarily due to a $45 million loss on the prepayment of FHLB advances in
2020.
•Income tax expense increased $71 million from the year ended December 31, 2020 ,
primarily driven by corporate restructuring which allowed for the recognition of
built in capital losses and tax basis step-up yielding a tax benefit of $63
million , partially offset by the gain on sale of ABRC in 2020.
•Average earning assets increased $576 million from the year ended December 31,
2020 , driven by elevated liquidity.
•Average deposits decreased $536 million from the year ended December 31, 2020 ,
primarily driven by a decrease in higher cost network deposit accounts.
Critical Accounting Estimates
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the ACLL and MSRs valuation.
The consolidated financial statements of the Corporation are prepared in
conformity with U.S. GAAP and follow general practices within the industries in
which it operates. This preparation requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions,
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and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain estimates inherently have a greater reliance on the use of assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following estimates are both important to the portrayal of the Corporation's financial condition and results of operations and require subjective or complex judgments and, therefore, management considers the following to be critical accounting estimates. The critical accounting estimates are discussed directly with the Audit Committee of the Corporation's Board of Directors. Allowance for Credit Losses on Loans: Management's evaluation process used to determine the appropriateness of the ACLL is subject to the use of estimates, assumptions, and judgments. The evaluation process combines many factors: management's ongoing review and grading of the loan portfolio using a dual risk rating system leveraging probability of default and loss given default, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, existing economic conditions and forecasts, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect future credit losses. The Corporation uses Moody's baseline economic forecast within its model. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACLL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. As an integral part of their examination process, various regulatory agencies also review the ACLL. Such agencies may require additions to the ACLL or may require that certain loan balances be charged off or downgraded into criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. The Corporation believes the level of the ACLL is appropriate. See Note 1 Summary of Significant Accounting Policies and Note 4 Loans of the notes to consolidated financial statements as well as the Allowance for Credit Losses on Loans section. Mortgage Servicing Rights Valuation: The fair value of the Corporation's MSRs asset is important to the presentation of the consolidated financial statements since the MSRs are carried on the consolidated balance sheets at the lower of amortized cost or estimated fair value. MSRs do not trade in an active open market with readily observable prices. As such, like other participants in the mortgage banking business, the Corporation relies on an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its MSRs. The use of a discounted cash flow model involves judgment, particularly of estimated prepayment speeds of underlying mortgages serviced and the overall level of interest rates. Loan type and note interest rate are the predominant risk characteristics of the underlying loans used to stratify capitalized MSRs for purposes of measuring impairment. The Corporation periodically reviews the assumptions underlying the valuation of MSRs. While the Corporation believes that the values produced by the discounted cash flow model are indicative of the fair value of its MSRs portfolio, these values can change significantly depending upon key factors, such as the then current interest rate environment, estimated prepayment speeds of the underlying mortgages serviced, and other economic conditions. The proceeds that might be received should the Corporation actually consider a sale of some or all of the MSRs portfolio could differ from the amounts reported at any point in time. To better understand the sensitivity of the impact of prepayment speeds and refinance rates on the value of the MSRs asset atDecember 31, 2021 , (holding all other factors unchanged), if refinance rates were to decrease 50 bp, the estimated value of the MSRs asset would have been$9 million , or 16%, lower. Conversely, if refinance rates were to increase 50 bp, the estimated value of the MSRs asset would have been$10 million , or 18%, higher. However, the Corporation's potential recovery recognition due to valuation improvement is limited to the balance of the MSRs valuation reserve, which was$2 million atDecember 31, 2021 . The potential recovery recognition is constrained as the Corporation has elected to use the amortization method of accounting (rather than fair value measurement accounting). Under the amortization method, MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. Therefore, the MSRs asset may only be marked up to the extent of the previously recognized valuation reserve. The Corporation believes the MSRs asset is properly recorded on the consolidated balance sheets. See Note 1 Summary of Significant Accounting Policies and Note 5Goodwill and Other Intangible Assets of the notes to consolidated financial statements.
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