ASSOCIATED BANC-CORP Special Note Regarding Forward-Looking Statements This report contains statements that may constitute forward-looking statements within the meaning of the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, such as statements other than historical facts contained or incorporated by reference into this report. These forward-looking statements include statements with respect to the Corporation's financial condition, results of operations, plans, objectives, future performance and business, including statements preceded by, followed by or that include the words "believes," "expects," or "anticipates," references to estimates or similar expressions. Future filings by the Corporation with theSEC , and future statements other than historical facts contained in written material, press releases and oral statements issued by, or on behalf of the Corporation may also constitute forward-looking statements. All forward-looking statements contained in this report or which may be contained in future statements made for or on behalf of the Corporation are based upon information available at the time the statement is made and the Corporation assumes no obligation to update any forward-looking statements, except as required by federal securities law. Forward-looking statements are subject to significant risks and uncertainties, and the Corporation's actual results may differ materially from the expected results discussed in such forward-looking statements. Factors that might cause actual results to differ from the results discussed in forward-looking statements include, but are not limited to, the risk factors in Item 1A, Risk Factors, in the Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2019 , in the Corporation's Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2020 , in Item 1A of Part 2 herein, and as may be described from time to time in the Corporation's subsequentSEC filings. Overview The following discussion and analysis is presented to assist in the understanding and evaluation of the Corporation's financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction therewith. Management continually evaluates strategic acquisition opportunities and various other strategic alternatives that could involve the sale or acquisition of branches or other assets, or the consolidation or creation of subsidiaries. Within the tables presented, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes. 57 -------------------------------------------------------------------------------- Table of Contents Performance Summary •Average loans of$24.5 billion increased$1.3 billion , or 5%, compared to the first nine months of 2019, driven by an increase in PPP and CRE loans. •Average deposits of$25.8 billion increased$814 million , or 3%, from the first nine months of 2019, driven primarily by government stimulus related inflows. •Net interest income of$575 million decreased$61 million , or 10%, from the first nine months of 2019 and net interest margin was 2.54% compared to 2.86% for the first nine months of 2019 primarily due to a lower interest rate environment. The Corporation expects the fourth quarter 2020 margin to be approximately 2.50%. •Provision for credit losses was$157 million , compared to provision of$16 million for the first nine months of 2019. •Noninterest income of$428 million was up$140 million , or 49%, from the first nine months of 2019, primarily due to a$163 million gain on the sale of ABRC during the second quarter of 2020 partially offset by decreased insurance revenue resulting from the sale of the business. The Corporation expects to see a continued positive trend in fee revenue through the end of 2020. •Noninterest expense of$603 million increased$13 million , or 2%, from the first nine months of 2019 driven by the$45 million loss on prepayment of FHLB advances partially offset by a$32 million reduction in personnel expense. The Corporation expects noninterest expense of$175 million , including$3 million of restructuring costs, for the fourth quarter of 2020 and expects full year 2021 expenses to be$685 million . Table 1 Summary Results of Operations: Trends YTD ($ in Thousands, except per September 30, September 30, share data) 2020 2019 3Q20 2Q20 1Q20 4Q19 3Q19 Net income$ 239,769 $ 254,686 $ 45,214 $ 148,718 $ 45,838 $ 72,103 $ 83,339 Net income available to common equity 226,618 243,285 40,007 144,573 42,037 68,303 79,539 Earnings per common share - basic 1.47 1.49 0.26 0.94 0.27 0.43 0.50 Earnings per common share - diluted 1.46 1.48 0.26 0.94 0.27 0.43 0.49 Effective tax rate 1.37 % 19.67 % N/M 25.62 % 18.23 % 19.41 % 20.09 % N/M = Not Meaningful 58
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Back to table of contents Income Statement Analysis Net Interest Income
Table 2 Net Interest Income Analysis
Nine Months Ended
2020 2019
Interest Average Interest Average
Average Income / Yield / Average Income / Yield /
($ in Thousands) Balance Expense Rate Balance Expense Rate
Assets
Earning assets
Loans(a)(b)(c)
Commercial PPP lending $ 624,305 $ 11,012 2.36 % $ - $ - - %
Commercial and business lending (excl PPP
loans) 8,774,616 201,265 3.06 % 8,500,475 299,621 4.71 %
Commercial real estate lending 5,695,281 147,909 3.47 % 5,135,447 196,005 5.10 %
Total commercial 15,094,201 360,187 3.19 % 13,635,922 495,626 4.86 %
Residential mortgage 8,244,116 194,521 3.15 % 8,360,481 215,329 3.43 %
Retail 1,150,916 45,621 5.29 % 1,240,793 58,517 6.29 %
Total loans 24,489,234 600,329 3.27 % 23,237,195 769,472 4.42 %
Investment securities
Taxable 3,343,083 50,064 2.00 % 4,507,586 79,248 2.34 %
Tax-exempt(a) 1,939,968 55,026 3.78 % 1,902,768 53,687 3.76 %
Other short-term investments 1,095,555 7,774 0.95 % 523,010 13,086 3.34 %
Investments and other 6,378,606 112,864 2.36 % 6,933,364 146,022 2.81 %
Total earning assets 30,867,840 $ 713,193 3.08 % 30,170,560 $ 915,493 4.05 %
Other assets, net 3,460,967 3,167,352
Total assets $ 34,328,806 $ 33,337,911
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Savings $ 3,198,244 $ 2,610 0.11 % $ 2,347,428 $ 5,000 0.28 %
Interest-bearing demand 5,530,482 11,281 0.27 % 5,061,561 45,284 1.20 %
Money market 6,499,965 14,152 0.29 % 7,144,999 60,509 1.13 %
Network transaction deposits 1,502,449 5,750 0.51 % 2,003,179 36,228 2.42 %
Time deposits 2,412,985 26,083 1.44 % 3,257,930 44,388 1.82 %
Total interest-bearing deposits 19,144,126 59,877 0.42 % 19,815,097 191,408 1.29 %
Federal funds purchased and securities sold
under agreements to repurchase 179,615 454 0.34 % 124,428 1,058 1.14 %
Commercial paper 38,064 35 0.12 % 33,610 113 0.45 %
PPPLF 599,368 1,574 0.35 % - - - %
Other short-term funding 5,645 11 0.25 % - - - %
FHLB advances 2,829,680 47,471 2.24 % 3,172,606 53,194 2.24 %
Long-term funding 549,088 16,780 4.07 % 796,165 22,196 3.72 %
Total short and long-term funding 4,201,461 66,325 2.11 % 4,126,810 76,560 2.48 %
Total interest-bearing liabilities 23,345,586 $ 126,201 0.72 % 23,941,907 $ 267,969 1.50 %
Noninterest-bearing demand deposits 6,618,058 5,133,573
Other liabilities 457,195 404,941
Stockholders' equity 3,907,966 3,857,490
Total liabilities and stockholders' equity $ 34,328,806 $ 33,337,911
Interest rate spread 2.36 % 2.55 %
Net free funds 0.18 % 0.31 %
Fully tax-equivalent net interest income and
net interest margin ("NIM") $ 586,992 2.54 % $ 647,525 2.86 %
Fully tax-equivalent adjustment 12,028 11,993
Net interest income $ 574,964 $ 635,532
(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.
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Table 2 Net Interest Income Analysis
Three Months Ended
September 30, 2020 June 30, 2020 September 30, 2019
Interest Average Interest Average Interest Average
Average Income / Yield / Average Income / Yield / Average Income / Yield /
($ in Thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Earning assets
Loans(a)(b)(c)
Commercial PPP lending $ 1,019,808 $ 6,172 2.41 % $ 848,761 $ 4,841 2.29 % $ - $ - - %Commercial and business lending (excl PPP loans) 8,751,083 56,951
2.59 % 9,192,910 64,097 2.80 % 8,502,268 96,327 4.49 %
Commercial real estate lending 6,032,308 44,354 2.93 % 5,720,262 46,057 3.24 % 5,157,031 64,058 4.92 %
Total commercial 15,803,199 107,476 2.71 % 15,761,933 114,995 2.93 % 13,659,299 160,386 4.66 %
Residential mortgage 8,058,283 61,701 3.06 % 8,271,757 62,860 3.04 % 8,337,230 68,656 3.29 %
Retail 1,101,589 13,780 4.99 % 1,157,116 14,368 4.98 % 1,255,540 20,066 6.38 %
Total loans 24,963,071 182,957 2.92 % 25,190,806 192,223 3.06 % 23,252,068 249,108 4.26 %
Investment securities
Taxable 3,438,858 13,689 1.59 % 3,129,113 16,103 2.06 % 4,032,027 23,485 2.33 %
Tax-exempt(a) 1,923,445 18,154 3.78 % 1,922,392 18,270 3.80 % 1,918,661 18,114 3.78 %
Other short-term investments 1,788,471 2,238 0.50 % 1,016,976 2,231 0.88 % 619,334 4,865 3.12 %
Investments and other 7,150,775 34,081 1.90 % 6,068,481 36,604 2.41 % 6,570,022 46,464 2.83 %
Total earning assets 32,113,847 $ 217,038 2.70 % 31,259,287 $ 228,826 2.94 % 29,822,090 $ 295,572 3.94 %
Other assets, net 3,436,512 3,586,656 3,331,910
Total assets $ 35,550,359 $ 34,845,943 $ 33,154,000
Liabilities and Stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
Savings $ 3,462,942 $ 382 0.04 % $ 3,260,040 $ 429 0.05 % $ 2,618,188 $ 2,164 0.33 %
Interest-bearing demand 5,835,597 1,085 0.07 % 5,445,267 1,442 0.11 % 5,452,674 16,055 1.17 %
Money market 6,464,784 1,444 0.09 % 6,496,841 1,902 0.12 % 6,933,230 18,839 1.08 %
Network transaction deposits 1,528,199 609 0.16 % 1,544,737 539 0.14 % 1,764,961 10,147 2.28 %
Time deposits 2,135,870 6,513 1.21 % 2,469,899 8,866 1.44 % 3,107,670 14,381 1.84 %
Total interest-bearing deposits 19,427,392 10,033 0.21 % 19,216,785 13,178 0.28 % 19,876,723 61,585 1.23 %
Federal funds purchased and securities sold
under agreements to repurchase 140,321 34 0.10 % 204,548 51 0.10 % 81,285 145 0.71 %
Commercial paper 42,338 5 0.05 % 37,526 5 0.05 % 28,721 30 0.41 %
PPPLF 1,018,994 899 0.35 % 774,500 676 0.35 % - - - %
FHLB advances 2,450,344 14,375 2.33 % 2,810,867 15,470 2.21 % 2,716,946 15,896 2.32 %
Long-term funding 549,042 5,580 4.06 % 548,757 5,593 4.08 % 796,561 7,398 3.71 %
Total short and long-term funding 4,201,039 20,892 1.98 % 4,376,199 21,795 2.00 % 3,623,513 23,469 2.58 %
Total interest-bearing liabilities 23,628,431 $ 30,925 0.52 % 23,592,983 $ 34,973 0.60 % 23,500,235 $ 85,054 1.44 %
Noninterest-bearing demand deposits 7,412,186 6,926,401 5,324,481
Other liabilities 475,310 480,041 425,810
Stockholders' Equity 4,034,432 3,846,517 3,903,474
Total liabilities and stockholders' equity $ 35,550,359 $ 34,845,943 $ 33,154,000
Interest rate spread 2.18 % 2.34 % 2.50 %
Net free funds 0.13 % 0.15 % 0.31 %
Fully tax-equivalent net interest income and net
interest margin ("NIM") $ 186,112 2.31 % $ 193,853 2.49 % $ 210,517 2.81 %
Fully tax-equivalent adjustment 3,963 3,981 4,152
Net interest income $ 182,150 $ 189,872 $ 206,365
(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.
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Notable Contributions to the Change in Net Interest Income
• Average loans of $24.5 billion increased $1.3 billion , or 5%, compared to the
first nine months of 2019 primarily driven by PPP loan originations beginning in
April, which increased average loans by $624 million . In addition, CRE loans
increased $560 million , or 11%, from the first nine months of 2019 driven by the
continued funding of loans previously in the pipeline and slowed loan payoffs.
•Taxable investment securities decreased $1.2 billion , or 26%, as the
Corporation repositioned its balance sheet in a lower rate environment.
•Net interest income on the consolidated statements of income (which excludes
the fully tax-equivalent adjustment) was $575 million for the first nine months
of 2020 compared to $636 million for the first nine months of 2019. Fully
tax-equivalent net interest income of $587 million for the first nine months of
2020 was $61 million , or 9%, lower than the first nine months of 2019. The net
interest margin for the first nine months of 2020 was 2.54% compared to 2.86%
for the first nine months of 2019. The decreases were attributable to a lower
interest rate environment and increased liquidity primarily due to deposit
growth related to government stimulus money. To lessen the impact of the lower
rate environment, the Corporation began requiring LIBOR floors in all applicable
loan restructurings, renewals of existing loan transactions, and any new loan
transactions. See sections Interest Rate Risk and Quantitative and Qualitative
Disclosures about Market Risk for a discussion of interest rate risk and market
risk.
• Average interest-bearing liabilities of $23.3 billion for the first nine
months of 2020 were down $596 million , or 2%, versus the first nine months of
2019. On average, interest-bearing deposits decreased $671 million , or 3%,
primarily driven by decreases in higher cost deposits such as network, time and
money market accounts. Average noninterest-bearing demand deposits of $6.6
billion for the first nine months of 2020 were up $1.5 billion , or 29% versus
the first nine months of 2019. This increase is primarily attributed to
customers holding proceeds from government stimulus programs in their deposit
accounts. On the funding side, PPPLF funding increased $599 million , partially
offset by a decrease in long-term funding of $247 million , or 31%, primarily due
to the redemption of $250 million of senior notes in October 2019 .
• The cost of interest-bearing liabilities was 0.72% for the first nine months
of 2020, which was 78 bp lower than the first nine months of 2019. The decrease
was primarily due to a 87 bp decrease in the cost of average interest-bearing
deposits to 0.42%, primarily attributed to the federal funds rate decreases over
the last year.
•The Federal Reserve lowered the federal funds target interest rate by 175 bp
since the end of the third quarter of 2019, to a range of 0.00% to 0.25%, at the
end of the third quarter of 2020, compared to a range of 1.75% to 2.00% at the
end of the third quarter of 2019.
Provision for Credit Losses
The provision for credit losses is predominantly a function of the Corporation's
reserving methodology and judgments as to other qualitative and quantitative
factors used to determine the appropriate level of the allowance for loan losses
and the allowance for unfunded commitments, which focuses on changes in the size
and character of the loan portfolio, changes in levels of individually evaluated
and other nonaccrual loans, historical losses and delinquencies in each
portfolio category, the level of loans sold or transferred to held for sale, the
risk inherent in specific loans, concentrations of loans to specific borrowers
or industries, existing economic conditions and economic forecasts, the fair
value of underlying collateral, and other factors which could affect potential
credit losses. The forecast the Corporation used for September 30, 2020 was the
Moody's baseline scenario from September 2020 over a 1 year reasonable and
supportable period with immediate reversion to historical losses. See additional
discussion under the sections titled, Loans, Credit Risk, Nonperforming Assets,
and Allowance for Credit Losses.
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Noninterest Income
Table 3 Noninterest Income
YTD 3Q20 Change vs
September 30, September 30,
($ in Thousands, except as noted) 2020 2019 YTD % Change 3Q20 2Q20 1Q20 4Q19 3Q19 2Q20 3Q19
Wealth management fees(a) $ 62,884 $ 61,885 2 % $ 21,152 $ 20,916 $ 20,816 $ 21,582 $ 21,015 1 % 1 %
Service charges and deposit account
fees 40,989 47,102 (13) % 14,283 11,484 15,222 16,032 16,561 24 % (14) %
Card-based fees 28,685 29,848 (4) % 10,195 8,893 9,597 9,906 10,456 15 % (2) %
Other fee-based revenue 14,240 14,246 - % 4,968 4,774 4,497 4,696 5,085 4 % (2) %
Total fee-based revenue 146,798 153,082 (4) % 50,598 46,068 50,132 52,217 53,117 10 % (5) %
Capital markets, net 22,067 12,215 81 % 7,222 6,910 7,935 7,647 4,300 5 % 68 %
Mortgage servicing fees, net(b) 324 8,037 (96) % (957) (781) 2,062 2,104 2,473
23 % N/M
Gains (losses) and fair value
adjustments on loans held for sale 45,267 12,803 N/M 14,536 20,976 9,756 4,542 4,043 (31) % N/M
Fair value adjustment on portfolio
loans transferred to held for sale 3,932 4,456 (12) % 509 - 3,423 - 4,456 N/M (89) %
Mortgage servicing rights
(impairment) recovery (18,481) (177) N/M (1,451) (7,932) (9,098) 114 (31) (82) % N/M Mortgage banking, net
31,043 25,118 24 % 12,636 12,263 6,143 6,760 10,940
3 % 16 %
Bank and corporate owned life
insurance 9,793 11,482 (15) % 3,074 3,625 3,094 3,364 4,337
(15) % (29) % Insurance commissions and fees 45,153 69,403
(35) % 114 22,430 22,608 19,701 20,954
(99) % (99) % Other 7,321 8,344
(12) % 2,232 2,737 2,352 2,822 2,537
(18) % (12) % Subtotal 262,175 279,644
(6) % 75,877 94,034 92,264 92,510 96,185
(19) % (21) % Asset gains (losses), net(c) 156,945 2,316 N/M (339) 157,361 (77) 398 877 (100) % (139) % Investment securities gains(losses), net 9,222 5,931 55 % 7 3,096 6,118 26 3,788 (100) % (100) % Total noninterest income$ 428,342 $ 287,890
49 %
(70) % (25) % Mortgage loans originated for sale during period$ 1,319,034 $ 824,289
60 %
(17) % 26 % Mortgage loan settlements during period 1,620,777 1,048,729
55 % 598,509 725,003 297,265 268,348 616,630
(17) % (3) % Mortgage portfolio loans transferred to held for sale during period 269,119 242,382 11 % 69,532 - 199,587 - 242,382 N/M (71) % Assets under management, at market value(d) 12,195 11,604 5 % 12,195 11,755 10,454 12,104 11,604 4 % 5 % 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) YTDSeptember 30, 2020 and 2Q20 include a gain of$163 million from the sale of ABRC. YTDSeptember 30, 2019 include less than$1 million ofHuntington related asset losses. (d) $ in millions. Excludes assets held in brokerage accounts.
Notable Contributions to the Change in Noninterest Income
•Insurance commission and fees was down$24 million , or 35% from the first nine months of 2019, driven by the sale of ABRC during the second quarter of 2020. •Asset gains (losses), net was up$155 million from the first nine months of 2019, driven by a gain of$163 million from the sale of ABRC. •Capital markets, net was up$10 million , or 81%, from the first nine months of 2019, driven by higher interest rate swap fees. •Mortgage banking, net was up$6 million , or 24%, from the first nine months of 2019. During the first nine months of 2020, there was a$32 million increase in gains and fair value adjustments on loans held for sale driven by higher refinance activity due to the lower rate environment, partially offset by an increase of$18 million in MSRs impairment driven by lower rates. •Service charges and deposit account fees was down$6 million , or 13%, from the first nine months of 2019 due to fee waivers during the COVID-19 pandemic. The Corporation resumed charging these fees during the third quarter of 2020. 62
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Noninterest Expense
Table 4 Noninterest Expense
YTD 3Q20 Change vs
Sept 30, Sept 30,
($ in Thousands) 2020 2019 YTD % Change 3Q20 2Q20 1Q20 4Q19 3Q19 2Q20 3Q19
Personnel $ 334,117 $ 366,449 (9) % $ 108,567 $ 111,350 $ 114,200 $ 120,614 $ 123,170 (2) % (12) %
Technology 61,639 59,698 3 % 19,666 21,174 20,799 22,731 20,572 (7) % (4) %
Occupancy 48,386 45,466 6 % 17,854 14,464 16,069 16,933 15,164 23 % 18 %
Business development and
advertising 13,007 21,284 (39) % 3,626 3,556 5,826 8,316 7,991 2 % (55) %
Equipment 16,150 17,580 (8) % 5,399 5,312 5,439 5,970 6,335 2 % (15) %
Legal and professional 15,809 14,342 10 % 5,591 5,058 5,160 5,559 5,724 11 % (2) %
Loan and foreclosure costs 8,842 5,599 58 % 2,118 3,605 3,120 3,262 1,638 (41) % 29 %
FDIC assessment 14,650 12,250 20 % 3,900 5,250 5,500 4,000 4,000 (26) % (3) %
Other intangible amortization 7,939 7,237 10 % 2,253 2,872 2,814 2,712 2,686 (22) %
(16) % Acquisition related costs(a) 2,457 5,995 (59) %
218 518 1,721 1,325 1,629 (58) %
(87) % Loss on prepayments of FHLB advances 44,650 - N/M 44,650 - - - - N/M N/M Other 35,537 34,479 3 % 13,745 10,249 11,543 12,187 12,021 34 % 14 % Total noninterest expense$ 603,184 $ 590,380 2 % $
227,587
13 %
Average full-time equivalent
employees(b) 4,568 4,703 (3) % 4,374 4,701 4,631 4,696 4,782 (7) % (9) %
(a) Includes Huntington branch and First Staunton acquisition related costs only (b) Average full-time equivalent employees without overtime
Notable Contributions to the Change in Noninterest Expense •Personnel expense decreased$32 million , or 9%, from the first nine months of 2019, primarily driven by a decrease in funding for the management incentive plan. •Business development and advertising expense decreased$8 million , or 39%, from the first nine months of 2019, primarily driven by reductions in travel and entertainment costs and special event sponsorships, largely due to the COVID-19 pandemic. •Loan and foreclosure costs increased$3 million , or 58%, from the first nine months of 2019, driven by an increase in legal fees pertaining to loan collections due to fewer recoveries of previous expenses during 2020. •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$3 million for the nine months endedSeptember 30, 2020 , compared to income tax expense of$62 million for the nine months endedSeptember 30, 2019 . The Corporation's effective tax rate was 1.37% for the first nine months of 2020, compared to an effective tax rate of 19.67% for the first nine months of 2019. The lower effective tax rate and income tax expense during the first nine months of 2020 was primarily driven by tax planning strategies 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. These tax planning strategies were successfully completed in the third quarter of 2020. With the successful completion of these tax planning strategies, we expect the full year 2020 effective tax rate to be in the low to mid-single digits. 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, and is, therefore, considered a critical accounting policy. The Corporation is subject to examination by various taxing authorities. Examination by taxing authorities may impact the amount of tax expense and / or 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 section Critical Accounting Policies, in the Corporation's 2019 Annual Report on Form 10-K for additional information on income taxes. 63 -------------------------------------------------------------------------------- Table of Contents Balance Sheet Analysis •AtSeptember 30, 2020 , total assets were$34.7 billion , up$2.3 billion , or 7%, fromDecember 31, 2019 and up$2.1 billion , or 6%, fromSeptember 30, 2019 . •Loans of$25.0 billion atSeptember 30, 2020 were up$2.2 billion , or 10%, from bothDecember 31, 2019 andSeptember 30, 2019 partially driven by a$1.0 billion increase in PPP loans originated largely during the second quarter of 2020. In addition, the Corporation saw an increase in CRE loans. The Corporation added$370 million in loans from the First Staunton acquisition during the first quarter of 2020. See Note 7 Loans for additional details. •AtSeptember 30, 2020 , total deposits of$26.7 billion were up$2.9 billion , or 12%, fromDecember 31, 2019 and were up$2.3 billion , or 9%, fromSeptember 30, 2019 . During the first quarter of 2020, the Corporation assumed$439 million of deposits from the First Staunton acquisition. In addition, the balance increases were primarily due to customers holding proceeds from government stimulus programs in their deposit accounts. See section Deposits and Customer Funding for additional information on deposits. •AtSeptember 30, 2020 , FHLB advances of$1.7 billion decreased$1.5 billion , or 46%, fromDecember 31, 2019 and$1.2 billion , or 41%, fromSeptember 30, 2019 , primarily driven by the Corporation's prepayment of$950 million in long-term FHLB advances during the third quarter of 2020. In addition, the Corporation saw a decrease in short-term FHLB advances. See Note 9 Short and Long-Term Funding for additional details. •AtSeptember 30, 2020 , PPPLF was$1.0 billion largely due to the funding of PPP loans during the second quarter of 2020. See Note 9 Short and Long-Term Funding for additional details. •OnJanuary 1, 2020 , the Corporation adopted ASU 2016-13 using the modified retrospective approach which resulted in an increase to the allowance for loan losses of$112 million and an increase to the allowance for unfunded commitments of$19 million for a total increase to the ACLL of$131 million . A corresponding after tax decrease to common equity of$98 million was recorded along with a deferred tax asset of$33 million . •AtSeptember 30, 2020 , preferred equity was$354 million , up$97 million , or 38%, from bothDecember 31, 2019 andSeptember 30, 2019 . OnJune 9, 2020 , the Corporation issued$100 million , or$97 million net of issuance costs, of 5.625% Non-Cumulative Perpetual Preferred Stock, Series F. Loans Table 5 Period End Loan CompositionSeptember 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 % of % of % of % of % of ($ in Thousands) Amount Total Amount Total Amount Total Amount Total Amount Total PPP$ 1,022,217 4 %$ 1,012,033 4 % $ - - % $ - - % $ - - % Commercial and industrial 7,933,404 32 % 7,968,709 32 % 8,517,974 35 % 7,354,594 32 % 7,495,623 33 % Commercial real estate - owner occupied 904,997 4 % 914,385 4 % 940,687 4 % 911,265 4 % 915,524 4 % Commercial and business lending 9,860,618 39 % 9,895,127 40 % 9,458,661 39 % 8,265,858 36 % 8,411,147 37 % Commercial real estate - investor 4,320,926 17 % 4,174,125 17 % 4,038,036 17 % 3,794,517 17 % 3,803,277 17 % Real estate construction 1,859,609 7 % 1,708,189 7 % 1,544,858 6 % 1,420,900 6 % 1,356,508 6 % Commercial real estate lending 6,180,536 25 % 5,882,314 24 % 5,582,894 23 % 5,215,417 23 % 5,159,784 23 % Total commercial 16,041,154 64 % 15,777,441 64 % 15,041,555 62 % 13,481,275 59 % 13,570,932 60 % Residential mortgage 7,885,523 32 % 7,933,518 32 % 8,132,417 33 % 8,136,980 36 % 7,954,801 35 % Home Equity 761,593 3 % 795,671 3 % 844,901 3 % 852,025 4 % 879,642 4 % Other consumer 315,483 1 % 326,040 1 % 346,761 1 % 351,159 2 % 349,335 2 % Total consumer 8,962,599 36 % 9,055,230 36 % 9,324,079 38 % 9,340,164 41 % 9,183,778 40 % Total loans$ 25,003,753 100 %$ 24,832,671 100 %$ 24,365,633 100 %$ 22,821,440 100 %$ 22,754,710 100 % The Corporation has long-term guidelines relative to the proportion of Commercial and Business,Commercial Real Estate , 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 2019 and the first nine months of 2020. Furthermore, certain sub-asset classes within the respective portfolios are further defined and dollar limitations are placed on these sub-portfolios. These 64 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 30, 2020 are summarized in the following table: Table 6 Loan Distribution and Interest Rate Sensitivity ($ in Thousands) Within 1 Year(a) 1-5 Years After 5 Years Total % of Total PPP $ -$ 1,022,217 $ -$ 1,022,217 4 % Commercial and industrial 7,377,493 441,045 114,867 7,933,404 32 % Commercial real estate - owner occupied 479,130 242,001 183,866 904,997 4 % Commercial real estate - investor 3,894,842 330,267 95,816 4,320,926 17 % Real estate construction 1,786,215 58,198 15,196 1,859,609 7 % Residential Mortgage - Adjustable(b) 591,957 1,880,665 2,015,084 4,487,706 18 % Residential Mortgage - Fixed 44,429 83,413 3,269,974 3,397,817 14 % Home Equity 34,463 106,261 620,870 761,593 3 % Other Consumer 39,701 60,774 215,008 315,483 1 % Total Loans$ 14,248,230 $ 4,224,842 $ 6,530,682 $ 25,003,753 100 % Fixed rate$ 5,841,503 $ 2,082,450 $ 3,860,305 $ 11,784,258 47 % Floating or adjustable rate 8,406,726 2,142,392 2,670,377 13,219,495 53 % Total$ 14,248,230 $ 4,224,842 $ 6,530,682 $ 25,003,753 100 % (a) Demand loans, past due loans, overdrafts, and credit cards are reported in the "Within 1 Year" category. (b) Based on contractual loan terms for adjustable rate mortgages; does not factor in early prepayments or amortization. AtSeptember 30, 2020 ,$19.1 billion , or 76%, of the 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 7 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. AtSeptember 30, 2020 , no significant concentrations existed in the Corporation's portfolio in excess of 10% of total loans. 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 7 Largest Commercial and Business Lending Industry Group Exposures % of Total Commercial and September 30, 2020 % of Total Loans Business Lending Power and Utilities 7 % 18 % Manufacturing and Wholesale Trade 7 % 17 % Finance and Insurance 7 % 17 % Real Estate 5 % 12 % The remaining commercial and business lending portfolio is spread over a diverse range of industries, none of which exceed 2% of total loans. 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. Currently, a higher risk segment of the commercial and business lending portfolio is loans to borrowers supporting oil and gas exploration and production, which are further discussed under oil and gas lending below. 65 -------------------------------------------------------------------------------- Table of Contents Oil and gas lending: The Corporation provided reserve based loans to oil and gas exploration and production firms. The oil and gas portfolio is in run-off and no new oil and gas loans have been originated sinceFebruary 2019 . AtSeptember 30, 2020 , the oil and gas portfolio was comprised of 30 credits, totaling$333 million of outstanding balances, which represents less than 2% of the Corporation's total loans. The decrease in balances from bothDecember 31, 2019 andSeptember 30, 2019 continues to be driven by a purposeful reduction in exposure to the Corporation's higher-leveraged borrowers. The Corporation's oil and gas lending team is based inHouston and focuses on serving the funding needs of small and mid-sized companies in the upstream oil and gas business. The oil and gas loans are first lien, reserve-based, and borrowing base dependent lines of credit. The portfolio is diversified across all majorU.S. geographic basins and is diversified by product line with approximately 58% in oil and 42% in gas atSeptember 30, 2020 . Borrowing base re-determinations for the portfolio are generally completed twice a year and are based on detailed engineering reports and discounted cash flow analysis. The following table summarizes information about the Corporation's oil and gas loan portfolio. Table 8 Oil and Gas Loan Portfolio September 30, June 30, March 31, December 31, September 30, ($ in Millions) 2020 2020 2020 2019 2019 Pass$ 242 $ 294 $ 361 $ 408 $ 493 Special mention 23 24 10 9 20 Potential problem 60 63 67 43 32 Nonaccrual 8 50 29 23 36
Total oil and gas related loans
$ 466 $ 484 $ 582
Quarter net charge offs/(recoveries) $ 20
$ 9 $ 10 $ 21 Oil and gas related allowance for loan losses 49 82 75 12 21 Oil and gas related ACLL on loans 51 84 78 13 22 Oil and gas allowance for loan losses to total oil and gas loans N/A N/A N/A 2.6 % 3.7 % Oil and gas ACLL to total oil and gas loans 15.3 % 19.4 % 16.6 % 2.7 % 3.8 % •The increase in the ACLL attributable to oil and gas related credits (included within the commercial and industrial ACLL) from bothDecember 31, 2019 andSeptember 30, 2019 is driven by the expected impact of the COVID-19 pandemic within the economic models used in the new expected credit loss methodology. The decrease fromJune 30, 2020 was primarily due to runoff in the portfolio as the Corporation continues to reduce exposure to its higher-leveraged borrowers. The adoption impact of ASU 2016-13 for oil and gas loans was included within the commercial and industrial line item of the adoption table in Note 3 Summary of Significant Accounting Policies. The following table provides a summary of the changes in the ACLL in the Corporation's oil and gas loan portfolio as a result of adopting ASU 2016-13. Table 9 Oil and Gas Impact of Adopting ASU 2016-13 December 31, 2019 January 1, 2020 Allowance for Allowance for CECL Day 1 ($ in Millions) Loan Loss Unfunded Commitment Adjustment ACLL Oil and Gas $ 12 $ 1 $ 55$ 69 66
-------------------------------------------------------------------------------- Table of Contents The following tables provide a summary of the changes in ACLL in the Corporation's oil and gas loan portfolio atSeptember 30, 2020 and a summary of the changes in allowance for loan losses in the Corporation's oil and gas loan portfolio atDecember 31, 2019 : Table 10 Allowance for Credit Losses on Oil and Gas Loans Cumulative effect of ASU 2016-13 Dec. 31, adoption Net Charge Provision for Sep. 30, ($ in Millions) 2019 (CECL) Jan. 1, 2020
Charge offs Recoveries offs loan losses 2020 ACLL / Loans
Allowance for loan losses
(55) $ 2 $ (53) $ 36 $ 49
Allowance for unfunded 1 2 3 - - - (1) 2
commitments
Allowance for credit losses
(55) $ 2 $ (53) $ 35 $ 51 15.3 %
on loans
Table 11 Allowance for Loan Losses on Oil and Gas Loans
Provision for loan
($ in Millions) Dec. 31, 2018 Charge offs Recoveries Net Charge offs losses Dec. 31, 2019
Allowance for loan losses $ 12 $ (50) $ 5 $ (44) $ 45 $ 12
Commercial real estate - investor: Commercial real estate-investor is comprised
of loans secured by various non-owner occupied or investor income producing
property types.
Table 12 Largest Commercial Real Estate Investor Property Type Exposures
September 30, 2020 % of Total Loans % of Total Commercial Real Estate - Investor
Multi-Family 5 % 31 %
Office 4 % 24 %
Retail 4 % 21 %
Industrial 3 % 17 %
The remaining commercial real estate-investor portfolio is spread over various
other property types, none of which exceed 2% of total loans.
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 13 Largest Real Estate Construction Property Type Exposures
September 30, 2020 % of Total Loans % of Total Real Estate Construction
Multi-Family 3 % 34 %
The remaining real estate construction portfolio is spread over various other
property types, none of which exceed 2% of total loans.
The Corporation's current lending standards for commercial real estate 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
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loans, the loan 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 88% of the outstanding loan balances in the Corporation's branch
footprint at September 30, 2020 . The majority of the on balance sheet
residential mortgage portfolio consists of LIBOR 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.
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 Alternative Reference
Rates Committee, through authority from the Board of Governors of the Federal
Reserve System , have selected the Secured Overnight Financing Rate as the
alternative rate and developed a paced transition plan which addresses the risk
that LIBOR may not exist beyond the end of 2021. There are still many components
of this plan which have not been fully decided or implemented in the industry.
As a result, the Corporation is reaching out to borrowers offering an
opportunity to refinance or modify their loan to avoid any uncertainty around
the LIBOR transition. Performing borrowers can modify or refinance 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 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. During the nine months ended
September 30, 2020 , the Corporation sold approximately $260 million of
residential portfolio loans, in order to reduce the Corporation's exposure to
prepayment risk in the current low rate environment. 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 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 of credit and loans consist of a combination of both borrower FICO and the
original cumulative LTV against the property securing the loan. During the
second quarter of 2020, in the volatile economic environment, the Corporation
reduced its exposure by reducing its maximum LTV on home equity lines of credit
from 90% to 80%, among other changes, while maintaining the minimum acceptable
FICO 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. During the third quarter of 2020, based upon an analysis of market
conditions and uncertainty around the timing and scope of the anticipated
economic recovery, the Corporation temporarily suspended new applications for
home equity lines of credit. The Corporation has significantly curtailed its
offerings of fixed-rate, closed-end home equity loans. 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.
Other consumer: Other consumer consists of student loans, short-term and other
personal installment loans and credit cards. The Corporation had $121 million
and $136 million of student loans at September 30, 2020 and December 31, 2019 ,
respectively, the majority of which are government guaranteed. As a result of
the COVID-19 pandemic and the passage of the CARES Act, government guaranteed
student loans had been placed on an administrative forbearance through September
30, 2020 . Subsequently, on August 8, 2020 , President Donald Trump directed the
Secretary of Education to continue to suspend
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loan payments, stop collections, and waive interest on U.S. Department of
Education held federal student loans through December 31, 2020 . 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 histories,
and taking appropriate collateral and guarantee positions. The student loan
portfolio is in run-off and no new student loans are being originated.
COVID-19 Update:
Beginning on April 3, 2020 , the Corporation began originating SBA loans under
the PPP, which are included in commercial and business lending loans, to help
businesses keep their workforce employed and cover other working capital needs
during the COVID-19 pandemic. All complete eligible applications for the PPP
have been processed in the order in which they have been received. The
Corporation has fully funded the PPP loans by drawing from the PPPLF,
established under the CARES Act. The Corporation began submitting PPP
forgiveness applications to the SBA on behalf of our customers on September 14,
2020 . Forgiveness payments from the SBA began to be received early in the fourth
quarter. The Corporation believes we will receive a modest amount of forgiveness
payments yet in 2020, with the majority to be received in 2021.
The following table summarizes the balance segmentation of the PPP loans as of
September 30, 2020 :
Table 14 Paycheck Protection Program Loan Segmentation
Originated Outstanding
($ in Thousands) Originated Loans Balance Balance Impacted Jobs
>=$2,000,000 99 $ 335,534 $ 302,399 26,688
< $2,000,000 And >$350,000 485 386,062 378,435 37,274
<=$350,000 7,495 343,895 341,382 50,468
Total 8,079 $ 1,065,491 $ 1,022,217 114,430
For consumers, the Corporation suspended certain transaction and late fees;
initiated consumer and mortgage loan payment deferral and credit card payment
relief programs; and suspended foreclosures and repossessions. The Corporation
began collecting these fees again during the third quarter of 2020.
The following table summarizes loan forbearances outstanding in response to
COVID-19 as of
Table 15 COVID-19 Loan Forbearances ($ in Thousands) Number of Loans Outstanding
Balance
Commercial and business lending 136 $ 57,525
Commercial real estate 69 228,729
Total consumer 1,439 375,794
Total 1,644 $ 662,048
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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 16
provides detailed information regarding NPAs, which include nonaccrual loans,
OREO, and other NPAs:
Table 16 Nonperforming Assets
September 30, June 30, March 31, December 31, September 30,
($ in Thousands) 2020 2020 2020 2019 2019
Nonperforming assets
Commercial and industrial $ 105,899 $ 80,239
2,043 1,932 1,838 67 68
Commercial and business lending 107,941 82,171 60,692 46,380 56,604
Commercial real estate - investor 50,458 11,172 1,091 4,409 4,800
Real estate construction 392 503 486 493 542
Commercial real estate lending 50,850 11,675 1,577 4,902 5,342
Total commercial 158,792 93,846 62,269 51,282 61,946
Residential mortgage 62,331 66,656 64,855 57,844 57,056
Home equity 10,277 10,829 9,378 9,104 9,828
Other consumer 190 276 215 152 109
Total consumer 72,798 77,761 74,448 67,099 66,993
Total nonaccrual loans 231,590 171,607 136,717 118,380 128,939
Commercial real estate owned 2,113 2,968 3,105 3,530 3,603
Residential real estate owned 1,535 3,573 5,994 5,696 4,791
Bank properties real estate owned 15,335 13,723 13,431 11,874 11,230
OREO 18,983 20,264 22,530 21,101 19,625
Other nonperforming assets 909 909 6,004 6,004 6,004
Total nonperforming assets $ 251,481 $ 192,780 Accruing loans past due 90 days or more Commercial $ 763$ 385 $ 436 $ 342 $ 266 Consumer 1,091 1,081 1,819 1,917 1,720 Total accruing loans past due 90 days or more$ 1,854 $ 1,466
$ 18,407 $ 18,189
8,485 7,114 7,618 7,097 6,487
Total restructured loans (accruing)
0.93 % 0.69 % 0.56 % 0.52 % 0.57 %
NPAs to total loans plus OREO 1.01 % 0.78 % 0.68 % 0.64 % 0.68 %
NPAs to total assets 0.72 % 0.54 % 0.49 % 0.45 % 0.47 %
Allowance for loan losses to
nonaccrual loans N/A N/A N/A 170.10 % 166.30 %
Allowance for credit losses on loans
to nonaccrual loans 190.85 % 249.74 % 288.24 % 188.61 % 184.07 %
(a) Does not include any restructured loans related to COVID-19 in accordance with Section 4013 of the CARES Act.
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Table 16 Nonperforming Assets (continued)
September 30, June 30, March 31, December 31, September 30,
($ in Thousands) 2020 2020 2020 2019 2019
Accruing loans 30-89 days past due
Commercial and industrial $ 298$ 716
870 199 51 1,369 2,646
Commercial and business lending 1,167 916 1,027 2,190 3,073
Commercial real estate - investor 409 13,874 14,462 1,812 636
Real estate construction 111 385 179 97 595
Commercial real estate lending 520 14,260 14,641 1,909 1,232
Total commercial 1,687 15,175 15,668 4,099 4,304
Residential mortgage 6,185 3,023 10,102 9,274 8,063
Home equity 5,609 3,108 7,001 5,647 4,798
Other consumer 1,351 1,482 1,777 2,083 2,203
Total consumer 13,144 7,613 18,879 17,005 15,063
Total accruing loans 30-89 days
past due $ 14,831 $ 22,788 $ 34,547 $ 21,104 $ 19,367
Potential problem loans
PPP(a) $ 19,161 $ 19,161 $ - $ - $ -
Commercial and industrial 144,159 176,270 149,747 110,308 59,427
Commercial real estate - owner
occupied 22,808 15,919 15,802 19,889 22,624
Commercial and business lending 186,129 211,350 165,550 130,197 82,051
Commercial real estate - investor 100,459 88,237 61,030 29,449 49,353
Real estate construction 2,178 2,170 1,753 - 544
Commercial real estate lending 102,637 90,407 62,783 29,449 49,897
Total commercial 288,766 301,758 228,333 159,646 131,948
Residential mortgage 2,396 3,157 3,322 1,451 1,242
Home equity 1,632 1,921 2,238 - -
Total consumer 4,028 5,078 5,559 1,451 1,242
Total potential problem loans
(a) 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 Note 7 Loans of the notes to consolidated financial statements for additional nonaccrual loan disclosures. See also Allowance for Credit Losses. 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 7 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 allowance for loan losses. Potential problem loans are generally defined by management to include loans rated as substandard by management but that are not individually evaluated (i.e., nonaccrual loans and 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. Other nonperforming assets: The asset balance as ofSeptember 30, 2020 represents the Bank's units of ownership interest in oil and gas limited liability companies as a result of a partial settlement of a debt. During the second quarter of 2020, the Corporation wrote the value for one of the ownership interests down to the fair market value, resulting in a$5 million asset loss. These investments are included in tax credit and other investments on the consolidated balance sheets. 71 -------------------------------------------------------------------------------- Table of Contents 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 7 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 forSeptember 2020 in the allowance model. The forecast is applied over a 1 year reasonable and supportable period with immediate reversion to historical losses due to the length and depth of the pandemic. 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 policy, see section Critical Accounting Policies for additional information on the ACLL. See section Nonperforming Assets for a detailed discussion on asset quality. See also Note 7 Loans of the notes to consolidated financial statements for additional ACLL disclosures. Table 5 provides information on loan growth and period end loan composition, Table 16 provides additional information regarding NPAs, and Table 17 and Table 18 provide additional information regarding activity in the ACLL. The loan segmentation used in calculating the ACLL atSeptember 30, 2020 andDecember 31, 2019 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. 72
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Table 17 Allowance for Credit Losses on Loans
YTD Quarter Ended
September 30, September 30, September 30, June 30, March 31, December 31, September 30,
($ in Thousands) 2020 2019 2020 2020 2020 2019 2019
Allowance for Loan Losses
Balance at beginning of period $ 201,371 $ 238,023 $
363,803
112,457 N/A N/A N/A 112,457 N/A N/A
Balance at beginning of period,
adjusted 313,828 238,023 363,803 337,793 313,828 214,425 233,659
Provision for loan losses 137,957 17,500 50,500 52,500 34,957 1,000 1,000
Provision for loan losses
recorded at acquisition 2,543 N/A N/A N/A 2,543 N/A N/A
Gross up of allowance for PCD
loans at acquisition 3,504 N/A N/A N/A 3,504 N/A N/A
Charge offs (81,738) (57,560) (34,079) (28,351) (19,308) (16,752) (26,313)
Recoveries 8,617 16,462 4,488 1,861 2,268 2,699 6,079
Net (charge offs) recoveries (73,121) (41,098) (29,592) (26,490) (17,040) (14,054) (20,234)
Balance at end of period $ 384,711 $ 214,425 $ 384,711 $ 363,803 $ 337,793 $ 201,371 $ 214,425
Allowance for Unfunded
Commitments
Balance at beginning of period $ 21,907 $ 24,336 $
64,776
18,690 N/A N/A N/A 18,690 N/A N/A
Balance at beginning of period,
adjusted 40,597 24,336 64,776 56,276 40,597 22,907 21,907
Provision for unfunded
commitments 16,500 (1,500) (7,500) 8,500 15,500 (1,000) 1,000
Amount recorded at acquisition 179 70 - - 179 - -
Balance at end of period
57,276
$ 441,988 $ 237,331 $ 441,988 $ 428,579 $ 394,069 $ 223,278 $ 237,331 Provision for credit losses on loans(b)(c) 157,000 16,000 43,000 61,000 53,000 - 2,000 Net loan (charge offs) recoveries Commercial and industrial$ (64,802) $ (39,523) $
(24,834)
(415) 2,573 (416) 1 - - 1,483
Commercial and business lending (65,216) (36,950) (25,249) (24,919) (15,048) (11,917) (18,435)
Commercial real estate
- investor (3,581) 31 (3,609) 28 - - (3)
Real estate construction (12) 170 (21) (3) 11 72 20
Commercial real estate lending (3,593) 202 (3,630) 25 11 72 17
Total commercial (68,810) (36,749) (28,879) (24,893) (15,037) (11,845) (18,418) Residential mortgage
(1,206) (1,215) (79) (215) (912) (1,415) (393)
Home equity (76) 273 156 (303) 71 480 (275)
Other consumer (3,030) (3,407) (790) (1,078) (1,162) (1,274) (1,148)
Total consumer (4,311) (4,349) (712) (1,596) (2,003) (2,208) (1,816) Total net (charge offs) recoveries
$ (73,121) $ (41,098) $
(29,592)
Ratios
Allowance for loan losses to total loans N/A 0.94 %
N/A N/A N/A 0.88 % 0.94 % Allowance for credit losses on loans to total loans
1.77 % 1.04 % 1.77 % 1.73 % 1.62 % 0.98 % 1.04 % Allowance for loan losses to net charge offs (annualized)
N/A 3.9x N/A N/A N/A 3.6x 2.7x
Allowance for credit losses on
loans to net charge offs
(annualized) 4.5x 4.3x 3.8x 4.0x 5.7x 4.0x 3.0x
(a) Excludes approximately $70,000 of allowance for held to maturity investment
securities.
(b) Includes the provision for loan losses and the provision for unfunded
commitments.
(c) The three and nine months ended September 30, 2020 exclude approximately
$9,000 of provision for held to maturity investment securities and the three
months ended March 31, 2020 excludes less than $1,000 of provision for held to
maturity investment securities.
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Table 18 Annualized net (charge offs) recoveries(a)
YTD Quarter Ended
September 30, September 30, September 30, June 30, March 31, December 31, September 30,
(In basis points) 2020 2019 2020 2020 2020 2019 2019
Net loan (charge offs)
recoveries
Commercial and
industrial (108) (70) (126) (121) (81) (65) (104)
Commercial real estate
- owner occupied (6) 37 (18) - - - 63
Commercial and business
lending (93) (58) (103) (100) (72) (58) (86)
Commercial real estate
- investor (12) - (34) - - - -
Real estate construction - 2 - - - 2 1
Commercial real estate
lending (8) 1 (24) - - 1 -
Total commercial (61) (36) (73) (64) (44) (35) (53)
Residential mortgage (2) (2) - (1) (4) (7) (2)
Home equity (1) 4 8 (15) 3 22 (12)
Other consumer (120) (128) (98) (128) (134) (145) (129)
Total consumer (6) (6) (3) (7) (8) (9) (8)
Total net (charge offs)
recoveries (40) (24) (47) (42) (29) (24) (35)
(a) Annualized ratio of net charge offs to average loans by loan type.
The following table illustrates the effect of the Day 1 adoption of ASU 2016-13 as well as the quarterly increase for the first three quarters of 2020 in the ACLL as ofSeptember 30, 2020 : Table 19 Allowance for Credit Losses on Loans by Loan Portfolio December 31, CECL Day 1 ACLL
Beginning Net ACLL
($ in Thousands) 2019 Adjustment Balance
Build 2020 Build 2020 Build 2020 ACLL / Loans PPP
$ - $ - $ -
$ - $ -
968 0.09 % Commercial and industrial 103,409 48,921 152,330 36,458 188,788 6,367 195,155 (6,171) 188,983 2.38 % Commercial real estate - owner occupied 10,411 (1,851) 8,560 1,993 10,553 (15) 10,538 1,215 11,755 1.30 % Commercial and business lending 113,820 47,070 160,890 38,451 199,342 7,159 206,501 (4,795) 201,706 2.05 % Commercial real estate - investor 41,044 2,287 43,331 (785) 42,546 16,524 59,070 31,850 90,921 2.10 % Real estate construction 32,447 25,814 58,261 7,428 65,688 10,585 76,273 (10,528) 65,745 3.54 % Commercial real estate lending 73,490 28,101 101,591
6,643 108,235 27,109 135,343 21,323 156,667 2.53 % Total Commercial
187,311 75,171 262,482 45,094 307,577 34,269 341,844 16,527 358,372 2.23 % Residential mortgage
16,960 33,215 50,175 (6,227) 43,947 (121) 43,826 (183) 43,643 0.55 %
Home equity 11,964 14,240 26,204 39 26,244 (936) 25,308 (2,359) 22,949 3.01 % Other consumer
7,044 8,520 15,564 737 16,302 1,299 17,601 (578) 17,023 5.40 % Total consumer
35,968 55,975 91,943 (5,450) 86,493 242 86,735 (3,120) 83,616 0.93 %
Total allowance for credit
losses on loans $ 223,278 $ 131,147 $ 354,425 Notable Contributions to the Change in the Allowance for Credit Losses on Loans •Total loans increased$2.2 billion , or 10%, from bothDecember 31, 2019 andSeptember 30, 2019 , primarily driven by increases in PPP loans and commercial real estate lending. In addition, the Corporation added$370 million in loans from the First Staunton acquisition during the first quarter of 2020. 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$132 million , or 82%, fromDecember 31, 2019 and increased$160 million , or 120%, fromSeptember 30, 2019 , primarily due to increases in commercial and industrial and commercial real estate - investor 74
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Table of Contents loans, stemming in part from the effects of COVID-19. See Table 16 for additional information on the changes in potential problem loans.
•Total nonaccrual loans increased$113 million , or 96%, fromDecember 31, 2019 and increased$103 million , or 80%, fromSeptember 30, 2019 . The increases were primarily due to an increase in nonaccrual commercial & industrial loans and nonaccrual commercial real estate - investor loans, stemming in part from the effects of COVID-19. See Note 7 Loans of the notes to consolidated financial statements and Table 16 for additional disclosures on the changes in asset quality.
•YTD net charge offs increased
Management believes the level of ACLL to be appropriate atSeptember 30, 2020 . Deposits and Customer Funding The following table summarizes the composition of our deposits and customer funding: Table 20 Period End Deposit and Customer Funding CompositionSeptember 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 % of % of % of % of % of ($ in Thousands) Amount Total Amount Total Amount Total Amount Total Amount Total Noninterest-bearing demand$ 7,489,048 28 %$ 7,573,942 29 %$ 6,107,386 24 %$ 5,450,709 23 %$ 5,503,223 23 % Savings 3,529,423 13 % 3,394,930 13 % 3,033,039 12 % 2,735,036 12 % 2,643,950 11 % Interest-bearing demand 5,979,449 22 % 5,847,349 22 % 6,170,071 24 % 5,329,717 22 % 5,434,955 22 % Money market 7,687,775 29 % 7,486,319 28 % 7,717,739 30 % 7,640,798 32 % 7,930,676 32 % Brokered CDs - - % 4,225 - % 65,000 - % 5,964 - % 16,266 - % Other time 2,026,852 8 % 2,244,680 8 % 2,568,345 10 % 2,616,839 11 % 2,893,493 12 % Total deposits$ 26,712,547 100 %$ 26,551,444 100 %$ 25,661,580 100 %$ 23,779,064 100 %$ 24,422,562 100 % Customer funding(a) 198,741 178,398 142,174 103,113 108,369 Total deposits and customer funding$ 26,911,289 $ 26,729,842 $ 25,803,754 $ 23,882,177 $ 24,530,932 Network transaction deposits(b)$ 1,390,778 $ 1,496,958 $ 1,731,996 $ 1,336,286 $ 1,527,910 Net deposits and customer funding (total deposits and customer funding, excluding Brokered CDs and network transaction deposits)$ 25,520,511 $ 25,228,660 $ 24,006,758 $ 22,539,927 $ 22,986,756 Time deposits of more than$250,000 $ 463,739$ 559,434 $ 756,195 $ 861,183$ 1,074,990
(a) Securities sold under agreement to repurchase and commercial paper. (b) Included above in interest-bearing demand and money market.
•Deposits are the Corporation's largest source of funds. •Total deposits increased$2.9 billion , or 12%, fromDecember 31, 2019 and increased$2.3 billion , or 9%, fromSeptember 30, 2019 driven by customers holding proceeds from government stimulus programs in their deposit accounts. In addition, onFebruary 14, 2020 , the Corporation assumed$439 million in deposits from the acquisition of First Staunton. •Noninterest-bearing deposits increased$2.0 billion , or 37%, fromDecember 31, 2019 , and increased$2.0 billion , or 36%, fromSeptember 30, 2019 and savings accounts increased$794 million , or 29%, fromDecember 31, 2019 and increased$885 million , or 33%, fromSeptember 30, 2019 . These increases were primarily due to government stimulus program inflows. •Time deposits decreased$596 million , or 23%, fromDecember 31, 2019 and decreased$883 million , or 30%, fromSeptember 30, 2019 due to higher priced time deposits rolling off as they mature. •Non-maturity deposit accounts comprised of savings, money market, and demand (both interest and noninterest-bearing) accounts comprised 92% of the Corporation's total deposits atSeptember 30, 2020 . 75 -------------------------------------------------------------------------------- Table of Contents •Included in the above amounts were$1.4 billion of network deposits, primarily sourced from other financial institutions and intermediaries. These represented 5% of the Corporation's total deposits atSeptember 30, 2020 . Network deposits increased$54 million , or 4%, fromDecember 31, 2019 , but decreased$137 million , or 9%, fromSeptember 30, 2019 . 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 percentage 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. AtSeptember 30, 2020 , the Corporation was in compliance with its internal liquidity objectives and has sufficient asset-based liquidity to meet its obligations 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 6Investment 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 theFederal 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 against the collateral. The collateral is also used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Bank. As ofSeptember 30, 2020 , the Bank had$5.1 billion available for future advances. TheFederal Reserve Bank also establishes a collateral value of assets to support borrowings from the discount window. As ofSeptember 30, 2020 , the Bank had$943 million available for discount window borrowings. •A$200 million Parent Company commercial paper program, of which$51 million was outstanding as ofSeptember 30, 2020 . •Dividends and service fees from subsidiaries, as well as the proceeds from issuance of capital, which are also funding sources for the Parent Company. •Equity issuances by the Parent Company; the Corporation has filed a shelf registration statement with theSEC 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 also has filed a universal shelf registration statement with theSEC , 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 the 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. InAugust 2018 , the Bank issued$300 million of senior notes, dueAugust 2021 , and callableJuly 2021 . 76 -------------------------------------------------------------------------------- Table of Contents 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 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 atSeptember 30, 2020 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 nine months ended September 30, 2020 , net cash provided by operating
activities and financing activities was $423 million and $1.7 billion ,
respectively, while net cash used in investing activities was $1.6 billion for a
net increase in cash, cash equivalents, and restricted cash of $525 million
since year-end 2019. At September 30, 2020 , assets of $34.7 billion increased
$2.3 billion , or 7%, from year-end 2019, primarily driven by a $2.2 billion , or
10%, increase in loans. On February 14, 2020 , the Corporation added $370 million
in loans from the First Staunton acquisition and at September 30, 2020 the
Corporation had $1.0 billion in PPP loans that were originated throughout the
year, largely in the second quarter of 2020. On the funding side, deposits of
$26.7 billion increased $2.9 billion , or 12%, from year-end. On February 14,
2020 , the Corporation assumed $439 million of deposits from the First Staunton
acquisition. In addition, the increase in balances was due to customers holding
proceeds from government stimulus programs in their deposit accounts.
For the nine months ended September 30, 2019 , net cash provided by operating
activities, and investing activities was $470 million , and $1.6 billion ,
respectively, while financing activities used net cash of $2.2 billion for a net
decrease in cash, cash equivalents, and restricted cash of $117 million since
year-end 2018. At September 30, 2019 , assets of $32.6 billion decreased $1.0
billion , or 3%, from year-end 2018, primarily driven by a $511 million , or 13%
decrease in available for sale investment securities, and a $540 million , or
20%, decrease in held to maturity securities. On June 14, 2019 , the Corporation
added $116 million in loans from the Huntington branch acquisition. On the
funding side, deposits of $24.4 billion decreased $475 million , or 2%, from
year-end. On June 14, 2019 , the Corporation assumed $725 million of deposits
from the Huntington branch acquisition. As a result of the acquisition, the
Corporation was able to reduce higher cost brokered CDs and network deposits.
FHLB advances of $2.9 billion decreased $697 million , or 19%, from year-end
2018.
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 is 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 the first nine months of 2020.
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
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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
September 30, 2020 .
For further discussion of the Corporation's interest rate risk and corresponding
key assumptions, see the Interest Rate Risk section of Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
Corporation's 2019 Annual Report on Form 10-K.
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 Earnings at Risk Over 12 Months
Dynamic Forecast Static Forecast Dynamic Forecast Static Forecast
September 30, 2020 September 30, 2020 December 31, 2019 December 31, 2019
Gradual Rate Change
100 bp increase in interest 5.8 % 5.8 % 4.0 % 3.7 %
rates
200 bp increase in interest 11.8 % 11.5 % 7.4 % 6.7 %
rates
At
Table 23 Market Value of Equity Sensitivity
September 30, 2020 December 31 ,
2019
Instantaneous Rate Change 100 bp increase in interest rates 1.7 % (0.5) % 200 bp increase in interest rates 2.9 %
(2.1) %
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.
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.
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Contractual Obligations, Commitments, Off-Balance Sheet Arrangements, and
Contingent Liabilities
The following table summarizes significant contractual obligations and other
commitments at September 30, 2020 , at those amounts contractually due to the
recipient, including any unamortized premiums or discounts, hedge basis
adjustments, or other similar carrying value adjustments.
Table 24 Contractual Obligations and Other Commitments
One Year One to Three to Over
($ in Thousands) or Less Three Years Five Years Five Years Total
Time deposits $ 1,604,065 $ 335,633 $ 87,143 $ 11 $ 2,026,852
Short-term funding 206,316 - - - 206,316
FHLB advances 91,768 9,961 1,000,633 604,401 1,706,763
PPPLF - 1,000,145 22,073 - 1,022,217
Other long-term funding 299,243 155 249,803 - 549,201
Operating leases 9,250 12,589 8,135 10,859 40,833
Commitments to extend credit 4,556,350 3,753,792 1,357,817 178,277 9,846,235
Total $ 6,766,992 $ 5,112,274 $ 2,725,604 $ 793,548 $ 15,398,417
The Corporation utilizes a variety of financial instruments in the normal course
of business to meet the financial needs of its customers and to manage its own
exposure to fluctuations in interest rates. These financial instruments include
lending-related commitments and derivative instruments. A discussion of the
Corporation's derivative instruments at September 30, 2020 is included in Note
10 Derivative and Hedging Activities of the notes to consolidated financial
statements. A discussion of the Corporation's lending-related commitments is
included in Note 12 Commitments, Off-Balance Sheet Arrangements, Legal
Proceedings and Regulatory Matters of the notes to consolidated financial
statements. See Note 9 Short and Long-Term Funding of the notes to consolidated
financial statements for additional information on the Corporation's short-term
funding, FHLB advances, PPPLF, and long-term funding. See also Note 18 Leases of
the notes to consolidated financial statements for additional information on the
Corporation's operating leases.
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. At
September 30, 2020 , 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.
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Table 25 Capital Ratios
YTD Quarter Ended
September 30, September 30, September 30, June 30, March 31, December 31, September 30,
($ in Thousands) 2020 2019 2020 2020 2020 2019 2019
Risk-based Capital(a)
CET1 $ 2,671,739 $ 2,651,286 $ 2,421,135 $ 2,480,698 $ 2,482,394
Tier 1 capital 3,024,710 3,004,424 2,676,951 2,736,776 2,738,708
Total capital 3,601,705 3,577,757 3,249,807 3,208,625 3,224,538
Total risk-weighted assets 26,141,710 25,864,463 25,866,140 24,296,382 24,312,727
CET1 capital ratio 10.22 % 10.25 % 9.36 % 10.21 % 10.21 %
Tier 1 capital ratio 11.57 % 11.62 % 10.35 % 11.26 % 11.26 %
Total capital ratio 13.78 % 13.83 % 12.56 % 13.21 % 13.26 %
Tier 1 leverage ratio 9.02 % 9.08 % 8.50 % 8.83 % 8.57 %
Selected Equity and Performance
Ratios
Total stockholders' equity /
assets 11.66 % 11.34 % 11.18 % 12.11 % 12.03 %
Dividend payout ratio(b) 36.73 % 34.23 % 69.23 % 19.15 % 66.67 % 41.86 % 34.00 %
Return on average assets(c) 0.93 % 1.02 % 0.51 % 1.72 % 0.57 % 0.89 % 1.00 %
Noninterest expense / average
assets(c) 2.35 % 2.37 % 2.55 % 2.12 % 2.37 % 2.51 % 2.40 %
(a) The Federal Reserve establishes regulatory capital requirements, including
well-capitalized standards for the Corporation. The Corporation follows Basel
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.
(c) Annualized.
See Part II, Item 2, Unregistered Sales of Equity Securities and Use of
Proceeds, for information on the shares repurchased during the third quarter of
2020, which consisted entirely of repurchases related to tax withholding on
equity compensation with no open market purchases due to the suspension of the
share repurchase program on March 13, 2020 .
During the second quarter of 2020, the Corporation completed the issuance of 4.0
million depositary shares each representing a 1/40th interest in a share of
5.625% Non-Cumulative Perpetual Preferred Stock, Series F, for net proceeds of
approximately $97 million .
In February 2019 , the federal bank regulatory agencies issued a final rule (the
"2019 CECL Rule") that revised certain capital regulations to account for
changes to credit loss accounting under GAAP. The rule included a transition
option that allows banking organizations to phase in, over a three-year period,
the day-one impact of CECL adoption on regulatory capital ratios. In March 2020 ,
the federal bank regulatory agencies issued an interim final rule that maintains
the three-year transition option of the 2019 CECL Rule and also provides an
option to delay for two years an estimate of the effect of CECL on regulatory
capital, relative to the incurred loss methodology's effect on regulatory
capital, followed by a three-year transition period. The Corporation has elected
to utilize the CECL Transition Provision granted by the banking regulators.
Under these provisions, the Day 1 capital impact relating to the adoption of ASU
2016-13 and 25% of the difference between the period end ACL and the Day 1 ACL
will be 100% deferred for 2 years, and then phased in over the next 3 years. At
September 30, 2020 , the Corporation had a modified CECL transitional amount of
$120 million .
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Non-GAAP Measures
Table 26 Non-GAAP Measures
YTD Quarter Ended
September 30, September 30, September 30, June 30, March 31, December 31, September 30,
($ in Thousands) 2020 2019 2020 2020 2020 2019 2019
Selected Equity and Performance Ratios(a)(b)
Tangible common equity / tangible assets 7.50 % 7.25 % 6.90 % 7.71 % 7.65 %
Return on average equity 8.20 % 8.83 % 4.46 % 15.55 % 4.80 % 7.31 % 8.47 %
Return on average tangible common equity 12.79 % 13.86 % 6.36 % 25.45 % 7.31 % 11.33 % 13.27 %
Return on average common equity Tier 1 11.97 % 13.15 % 5.98 % 23.71 % 6.84 % 10.94 % 12.78 %
Return on average tangible assets 0.97 % 1.06 % 0.52 % 1.78 % 0.59 % 0.93 % 1.04 % Average stockholders' equity / average assets 11.38 % 11.57 % 11.35 % 11.04 % 11.79 % 12.16 % 11.77 % Tangible Common Equity Reconciliation(a) Common equity$ 3,691,796 $ 3,670,612 $ 3,533,755 $ 3,665,407 $ 3,664,139 Goodwill and other intangible assets, net (1,178,409) (1,180,661) (1,284,111) (1,264,531) (1,267,319) Tangible common equity$ 2,513,387 $ 2,489,951 $ 2,249,644 $ 2,400,876 $ 2,396,820 Tangible Assets Reconciliation(a) Total assets$ 34,698,746 $ 35,501,464 $ 33,908,056 $ 32,386,478 $ 32,596,460 Goodwill and other intangible assets, net (1,178,409) (1,180,661) (1,284,111) (1,264,531) (1,267,319) Tangible assets$ 33,520,337 $ 34,320,803 $ 32,623,944 $ 31,121,947 $ 31,329,141 Average Tangible Common Equity and Average Common Equity Tier 1 Reconciliation(a)(b) Common equity$ 3,610,864 $
3,600,774
(1,179,796) (1,281,176) (1,272,175) (1,266,117) (1,268,960)
Tangible common equity 2,366,717 2,347,290 2,500,891 2,285,117 2,312,908 2,391,706 2,377,798
Modified CECL transitional amount 112,441 N/A 120,228 115,272 101,340 N/A N/A
Accumulated other comprehensive loss (income) 4,762 79,775 (3,682) 7,663 10,398 36,810 42,224
Deferred tax assets (liabilities), net 44,516 46,713 42,183 44,777 46,635 47,774 48,772
Average common equity Tier 1 $ 2,528,436 $ 2,473,778 $ 2,659,620 $ 2,452,829 $ 2,471,281 $ 2,476,290 $ 2,468,794
Average Tangible Assets Reconciliation(a)
Total assets $ 34,328,806 $
33,337,911
(1,179,796) (1,281,176) (1,272,175) (1,266,117) (1,268,960)
Tangible assets $ 33,084,660 $
32,084,428
Efficiency Ratio Reconciliation(c) Federal Reserve efficiency ratio 62.34 % 64.18 % 85.41 % 43.49 % 70.37 % 69.14 % 66.55 % Fully tax-equivalent adjustment (0.75) % (0.83) % (1.29) % (0.39) % (0.96) % (0.91) % (0.90) % Other intangible amortization (0.80) % (0.79) % (0.87) % (0.65) % (0.95) % (0.93) % (0.89) % Fully tax-equivalent efficiency ratio 60.80 % 62.58 % 83.25 % 42.46 % 68.47 % 67.32 % 64.78 % Acquisition related costs adjustment(d) (0.24) % (0.65) % (0.08) % (0.12) % (0.58) % (0.45) % (0.53) % Provision for unfunded commitments adjustment (1.64) % 0.16 % 2.87 % (1.91) % (5.18) % 0.34 % (0.33) % Asset gains (losses), net adjustment 10.89 % 0.16 % (0.11) % 22.10 % (0.02) % 0.09 % 0.18 % 3Q 2020 Initiatives(e) (7.07) % - % (22.90) % - % - % - % - % Adjusted efficiency ratio 62.74 % 62.24 % 63.00 % 62.53 % 62.70 % 67.30
% 64.11 %
(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) 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. (c) The efficiency ratio as defined by theFederal 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 3Q 2020 initiatives, divided by the sum of fully tax-equivalent net interest income plus noninterest income, excluding investment securities gains (losses), net, acquisition related costs, and asset gains (losses), 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, 3Q 2020 initiatives, and asset gains (losses), net. (d) 2020 periods include First Staunton acquisition related costs, while 2019 periods includeHuntington branch and First Staunton acquisition related costs. (e) 3Q 2020 initiatives consist of cost saving efforts that were executed during the quarter. These initiatives included a$45 million loss on prepayment of FHLB advances,$10 million in severance, and$5 million in write-downs related to branch sales and lease breakage related to announced branch consolidations. 81 -------------------------------------------------------------------------------- Table of Contents Sequential Quarter Results The Corporation reported net income of$45 million for the third quarter of 2020, compared to net income of$149 million for the second quarter of 2020. Net income available to common equity was$40 million for the third quarter of 2020, or$0.26 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the second quarter of 2020 was$145 million , or$0.94 for both basic and diluted earnings per common share (see Table 1). Fully tax-equivalent net interest income for the third quarter of 2020 was$186 million ,$8 million , or 4%, lower than the second quarter of 2020. The net interest margin in the third quarter of 2020 was down 18 bp to 2.31%. Average earning assets increased$855 million , or 3%, to$32.1 billion in the third quarter of 2020 primarily driven by excess funds invested at theFederal Reserve Bank which negatively impacted margin. On the funding side, average interest-bearing deposits were up$211 million , or 1%, and noninterest bearing deposits were up$486 million , or 7%, primarily due to customers holding proceeds from government stimulus programs in their deposit accounts. In addition, PPPLF borrowings increased$244 million while FHLB advances decreased$361 million , or 13%, primarily driven by the prepayment of$950 million of FHLB advances during the third quarter of 2020 (see Table 2). The provision for credit losses was$43 million for the third quarter of 2020, compared to$61 million in the second quarter of 2020 (see Table 17). See discussion under sections: Provision for Credit Losses, Nonperforming Assets, and Allowance for Credit Losses on Loans. Noninterest income for the third quarter of 2020 decreased$179 million from the second quarter of 2020, primarily due to a$163 million gain on sale of ABRC during the second quarter of 2020 and lower insurance revenue related to the sale of ABRC (see Table 3). Noninterest expense increased$44 million , or 24%, to$228 million , due to incurring a$45 million loss on the prepayment of FHLB advances during the third quarter. In addition, personnel expense decreased quarter over quarter from the sale of ABRC partially offset by elevated severance from the announced restructurings during the third quarter of 2020 (see Table 4). For the third quarter of 2020, the Corporation recognized an income tax benefit of$58 million , compared to income tax expense of$51 million for the second quarter of 2020. The lower income tax expense during the third quarter of 2020 compared to the second quarter of 2020 was primarily driven by less income before taxes as a result of the second quarter gain on sale of ABRC, and the execution of tax planning strategies which allowed for the recognition of built in capital losses and a tax basis step-up yielding a change in the tax benefit of$35 million quarter over quarter. See Income Taxes section for a detailed discussion on income taxes. Comparable Quarter Results The Corporation reported net income of$45 million for the third quarter of 2020, compared to$83 million for the third quarter of 2019. Net income available to common equity was$40 million for the third quarter of 2020, or$0.26 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the third quarter of 2019 was$80 million , or$0.50 for basic earnings per share and$0.49 for diluted earnings per common share (see Table 1). Fully tax-equivalent net interest income for the third quarter of 2020 was$186 million ,$24 million , or 12%, lower than the third quarter of 2019. The net interest margin between the comparable quarters was down 50 bp, to 2.31% in the third quarter of 2020. The decrease in net interest income and net interest margin was due to a lower interest rate environment. Average earning assets increased$2.3 billion , or 8%, to$32.1 billion in the third quarter of 2020 as the Corporation added PPP loans during the second and third quarters of 2020. Additionally, excess funds invested at theFederal Reserve increased which negatively impacted net interest margin. On the funding side, average interest-bearing deposits decreased$449 million , or 2%, from the third quarter of 2019, due to decreases in higher cost deposits. Average noninterest-bearing deposits increased$2.1 billion , or 39% to$7.4 billion . Average short and long-term funding increased$578 million , or 16%, partially due to an increase in PPPLF borrowings offset partially by decreases in both FHLB advances and long-term funding (see Table 2). The provision for credit losses was$43 million for the third quarter of 2020, compared to$2 million for the third quarter of 2019 (see Table 17). See discussion under sections: Provision for Credit Losses, Nonperforming Assets, and Allowance for Credit Losses on Loans. Noninterest income for the third quarter of 2020 was$76 million , down$25 million . or 25%, compared to the third quarter of 2019, primarily due to minimal insurance revenue due to the sale of ABRC in the second quarter of 2020 (see Table 3). Noninterest expense increased$27 million , or 13%, to$228 million for the third quarter of 2020, due to a$45 million loss on the prepayment of FHLB advances, partially offset by a$15 million , or 12%, decrease in personnel expense primarily related 82 -------------------------------------------------------------------------------- Back to table of contents to the sale of ABRC partially offset by elevated severance from the announced restructurings during the third quarter of 2020 (see Table 4). The Corporation recognized an income tax benefit of$58 million for the third quarter of 2020, compared to income tax expense of$21 million for the third quarter of 2019. Income tax expense is lower than the comparable quarter primarily driven by less income before taxes, and the execution of tax planning strategies which allowed for the recognition of built in capital losses and a tax basis step-up yielding a decrease in tax expense of$49 million during the third quarter of 2020. See section Income Taxes for a detailed discussion on income taxes. Segment Review As discussed in Note 15 Segment Reporting of the notes to consolidated financial statements, the Corporation's reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer, and the distribution of those products and services are similar. The reportable segments are Corporate and Commercial Specialty; Community, Consumer and Business; and Risk Management and Shared Services. 83 -------------------------------------------------------------------------------- Table of Contents Table 27 Selected Segment Financial Data Three Months Ended September 30, Nine Months Ended September 30, ($ in Thousands) 2020 2019 % Change 2020 2019 % Change Corporate and Commercial Specialty Total revenue$ 136,376 $ 132,691 3 %$ 412,987 $ 399,495 3 % Credit provision 15,572 12,248 27 % 41,456 37,417 11 % Noninterest expense 52,144 57,946 (10) % 159,471 174,570 (9) % Income tax expense (benefit) 12,600 11,249 12 % 39,461 35,472 11 % Average earning assets 14,614,788 12,887,424 13 % 14,064,225 12,796,836 10 % Average loans 14,681,690 12,952,246 13 % 14,124,838 12,853,566 10 % Average deposits 9,631,000 9,985,041 (4) % 9,387,212 9,930,193 (5) % Average allocated capital (Average CET1)(a) 1,468,341 1,294,617 13 % 1,414,696 1,281,093 10
%
Return on average allocated capital (ROCET1)(a) 15.19 % 15.71 % (52) bp 16.30 % 15.87 % 43 bp Community, Consumer, and Business Total revenue$ 115,833 $ 159,148 (27) %$ 404,345 $ 470,688 (14) % Credit provision 5,758 4,631 24 % 16,296 13,942 17 % Noninterest expense 102,100 118,241 (14) % 335,591 345,611 (3) % Income tax expense (benefit) 1,675 7,618 (78) % 11,016 23,338 (53) % Average earning assets 9,482,677 9,285,506 2 % 9,522,498 9,270,774 3 % Average loans 9,414,194 9,217,874 2 % 9,457,405 9,205,289 3 % Average deposits 15,577,322 13,369,386 17 % 14,753,893 12,762,492 16 % Average allocated capital (Average CET1)(a) 507,233 543,473 (7) % 543,377 545,760 -
%
Return on average allocated capital (ROCET1)(a) 4.94 % 20.92 % N/M 10.19 % 21.51 %
N/M
Risk Management and Shared Services Total revenue(c)$ 5,487 $ 15,376 (64) %$ 185,973 $ 53,239 N/M Credit provision 21,679 (14,879) N/M 99,257 (35,359) N/M Noninterest expense(b) 73,343 24,743 196 % 108,122 70,198 54 % Income tax expense (benefit)(d) (72,389) 2,080 N/M (47,135) 3,546 N/M Average earning assets 8,016,381 7,649,160 5 % 7,281,117 8,102,949 (10) % Average loans 867,187 1,081,948 (20) % 906,992 1,178,341 (23) % Average deposits 1,631,256 1,846,776 (12) % 1,621,079 2,255,985 (28) % Average allocated capital (Average CET1)(a) 684,046 630,704 8 % 570,363 646,925 (12)
%
Return on average allocated capital (ROCET1)(a) (13.00) % (0.23) % N/M 6.03 % 0.71 % N/M Consolidated Total Total revenue(c)$ 257,695 $ 307,216 (16) %$ 1,003,305 $ 923,422 9 % Return on average allocated capital (ROCET1)(a) 5.98 % 12.78 % N/M 11.97 % 13.15 % (118) bp N/M = Not meaningful (a) TheFederal Reserve establishes capital adequacy requirements for the Corporation, including common equity Tier 1. For segment reporting purposes, the return on common equity Tier 1 ("ROCET1") reflects return on average allocated common equity Tier 1. 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 three months endedSeptember 30, 2020 and 2019, the Risk Management and Shared Services segment included approximately$218 thousand and$2 million respectively, of acquisition related noninterest expense. For the nine months endedSeptember 30, 2020 and 2019, the Risk Management and Shared Services segment included approximately$2 million and$6 million respectively, of acquisition related noninterest expense. For the three and nine months endedSeptember 30, 2020 , the Risk Management and Shared Services segment also incurred a$45 million loss on the prepayment of FHLB advances. (c) For the nine months endedSeptember 30, 2020 , the Corporation recognized a$163 million asset gain related to the sale of ABRC. (d) The Corporation has recognized$63 million in tax benefits for the nine months endedSeptember 30, 2020 , and$49 million for the three months endedSeptember 30, 2020 , primarily driven by tax planning strategies which allowed for the recognition of built in capital losses and tax basis step-up yielding this tax benefit. Notable Changes in Segment Financial Data 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. •Revenue increased$4 million , or 3%, from the three months endedSeptember 30, 2019 , and increased$13 million , or 3%, from the first nine months of 2019. The increase from the nine months ended 2019 was primarily driven by a$9 million increase in capital market fees, which were driven by higher interest rate swap fees. 84 -------------------------------------------------------------------------------- Table of Contents •Noninterest expense decreased$6 million , or 10%, from the three months endedSeptember 30, 2019 , and decreased$15 million , or 9%, from the first nine months of 2019. The decrease from the first nine months of 2019 was mainly driven by an$11 million decrease in personnel expense primarily related to a decrease in the funding for the management incentive plan. •Average loans increased$1.7 billion , or 13%, from the three months endedSeptember 30, 2019 , and increased$1.3 billion , or 10%, from the first nine months of 2019, primarily driven by PPP loans and growth in CRE loans. 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$43 million , or 27%, from the three months endedSeptember 30, 2019 , and decreased$66 million , or 14%, from the first nine months of 2019. The decrease from the nine months ended 2019 was primarily due to a decrease in segment net interest income of$36 million which was largely driven by the current interest rate environment, along with a$24 million decrease in insurance commissions and fees which can be attributed to the sale of ABRC. •Noninterest expense decreased$16 million , or 14%, from the three months endedSeptember 30, 2019 , and decreased$10 million , or 3%, from the first nine months of 2019, primarily driven by a$10 million decrease in personnel expense, largely driven by a reduction in FTEs as a result of the sale of ABRC. •Average deposits increased$2.2 billion , or 17%, from the three months endedSeptember 30, 2019 , and increased$2.0 billion , or 16%, from the first nine months of 2019, primarily driven by customers holding proceeds from government stimulus programs in their deposit accounts. The Risk Management and Shared Services segment includes key shared Corporate functions, Parent Company activity, intersegment eliminations, and residual revenues and expenses. •Revenues decreased$10 million , or 64%, from the three months endedSeptember 30, 2019 , but increased$133 million from the first nine months of 2019, primarily driven by a$163 million asset gain on sale of ABRC. •Credit provision increased$37 million from the three months endedSeptember 30, 2019 , and increased$135 million from the first nine months of 2019, as a result of the expected impact of the COVID-19 pandemic within the economic models used in the new expected credit loss methodology. •Noninterest expense increased$49 million from the three months endedSeptember 30, 2019 , and increased$38 million , or 54%, from the first nine months of 2019. The increase from the first nine months of 2019 was mainly driven by a$45 million FHLB prepayment fee, which was partially offset by a$12 million decrease in personnel expense related to a decrease in the funding for the management incentive plan. •Income tax expense decreased$74 million from the three months endedSeptember 30, 2019 , and decreased$51 million from the first nine months of 2019. The lower tax expense from the first nine months of 2019 was due to tax planning strategies, which led to a$63 million tax benefit. •Average loans decreased$215 million , or 20%, from the three months endedSeptember 30, 2019 , and decreased$271 million , or 23%, from the first nine months of 2019. The decrease from the first nine months of 2019 was mainly driven by a decrease in oil and gas lending. •Average deposits decreased$216 million , or 12%, from the three months endedSeptember 30, 2019 , and decreased$635 million , or 28%, from the first nine months of 2019, primarily driven by a decrease in higher cost network and time deposit accounts. Critical Accounting Policies 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, goodwill impairment assessment, MSRs valuation, and income taxes. A discussion of these policies can be found in the Critical Accounting Policies section in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Corporation's 2019 Annual Report on Form 10-K. There has been one change in the Corporation's application of critical accounting policies sinceDecember 31, 2019 driven by the adoption of ASU 2016-13. 85
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Table of Contents 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. 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. The Corporation uses Moody's baseline economic forecast within its model. 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 3 Summary of Significant Accounting Policies and Note 7 Loans of the notes to consolidated financial statements as well as the Allowance for Credit Losses section. Recent Developments OnOctober 8, 2020 , the SBA released a streamlined loan forgiveness application for PPP loans totaling$50,000 or less. This release is expected to simplify the forgiveness application and allow for quicker receipt of paydowns of small balance PPP loans. As ofOctober 8, 2020 , the Corporation holds approximately 5,500 loans totaling$95 million that fall under the threshold defined by the SBA in the streamlined application. OnOctober 27, 2020 , the Corporation's Board of Directors declared a regular quarterly cash dividend of$0.18 per common share, payable onDecember 15, 2020 to shareholders of record at the close of business onDecember 1, 2020 . The Board of Directors also declared a regular quarterly cash dividend of$0.3828125 per depositary share on Associated's 6.125% Series C Perpetual Preferred Stock, payable onDecember 15, 2020 to shareholders of record at the close of business onDecember 1, 2020 . The Board of Directors also declared a regular quarterly cash dividend of$0.3359375 per depositary share on Associated's 5.375% Series D Perpetual Preferred Stock, payable onDecember 15, 2020 to shareholders of record at the close of business onDecember 1, 2020 . The Board of Directors also declared a regular quarterly cash dividend of$0.3671875 per depositary share on Associated's 5.875% Series E Perpetual Preferred Stock, payable onDecember 15, 2020 to shareholders of record at the close of business onDecember 1, 2020 . The Board of Directors also declared a regular quarterly cash dividend of$0.3515625 per depositary share on Associated's 5.625% Series F Perpetual Preferred Stock, payable onDecember 15, 2020 to shareholders of record at the close of business onDecember 1, 2020 .
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