Associated Banc-Corp.
Associated Banc-Corp. details
Associated Banc-Corp is one of the top 50 publicly traded U.S. bank holding companies. Headquartered in Green Bay, Wisconsin, Associated is a leading Midwest banking franchise, offering a full range of financial products and services from more than 220 banking locations serving more than 120 communities throughout Wisconsin, Illinois and Minnesota, and commercial financial services in Indiana, Michigan, Missouri, Ohio and Texas. Associated Bank, N.A. is an Equal Housing Lender, Equal Opportunity Lender and Member FDIC.
Ticker:ASB
Employees: 4000
Filing
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-31343
Associated Banc-Corp
(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
433 Main Street
Green Bay, Wisconsin 54301
(Address of principal executive offices) (Zip Code)
( 920 ) 491-7500
(Registrant’s telephone number, including area code )
(not applicable)
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common stock, par value $0.01 per share ASB New York Stock Exchange
Depositary Shrs, each representing 1/40th intrst in a shr of 5.875% Non-Cum. Perp Pref Stock, Srs E ASB PrE New York Stock Exchange
Depositary Shrs, each representing 1/40th intrst in a shr of 5.625% Non-Cum. Perp Pref Stock, Srs F ASB PrF New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at October 24, 2022 was 150,359,198 .
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ASSOCIATED BANC-CORP
Table of Contents
Page
PART I. Financial Information
Item 1. Financial Statements (Unaudited): 5
Consolidated Balance Sheets 5
Consolidated Statements of Income 6
Consolidated Statements of Comprehensive Income 7
Consolidated Statements of Changes in Stockholders’ Equity 8
Consolidated Statements of Cash Flows 10
Notes to Consolidated Financial Statements 12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 51
Item 3. Quantitative and Qualitative Disclosures About Market Risk 75
Item 4. Controls and Procedures 76
PART II. Other Information
Item 1. Legal Proceedings 77
Item 1A. Risk Factors 77
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 77
Item 6. Exhibits 78
Signatures 79
2
ASSOCIATED BANC-CORP
Commonly Used Acronyms and Abbreviations
The following listing provides a reference of common acronyms and abbreviations used throughout the document:
ACLL Allowance for Credit Losses on Loans
AFS Available for Sale
ALCO Asset / Liability Committee
ARRC Alternative Reference Rate Committee
ASC Accounting Standards Codification
Associated / the Company / Corporation / our / we Associated Banc-Corp collectively with all of its subsidiaries and affiliates
ASU Accounting Standards Update
the Bank Associated Bank, National Association
Basel III International framework established by the Basel Committee on Banking Supervision for the regulation of capital and liquidity
bp basis point(s)
CDs Certificates of Deposit
CDIs Core Deposit Intangibles
CECL Current Expected Credit Losses
CET1 Common Equity Tier 1
CRA Community Reinvestment Act
CRE Commercial Real Estate
EAR Earnings at Risk
Exchange Act Securities Exchange Act of 1934, as amended
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Federal Reserve Board of Governors of the Federal Reserve System
FFELP Federal Family Education Loan Program
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FICO Fair Isaac Corporation, provider of a broad-based risk score to aid in credit decisions
FNMA Federal National Mortgage Association
FOMC Federal Open Market Committee
FTEs Full-time equivalent employees
FTP Funds Transfer Pricing
GAAP Generally Accepted Accounting Principles
GNMA Government National Mortgage Association
GSEs Government-Sponsored Enterprises
HTM Held to Maturity
LIBOR London Interbank Offered Rate
LOCOM Lower of Cost or Market
LTV Loan-to-Value
MSRs Mortgage Servicing Rights
MVE Market Value of Equity
Net Free Funds Noninterest-bearing sources of funds
NII Net Interest Income
NPAs Nonperforming Assets
OREO Other Real Estate Owned
Parent Company Associated Banc-Corp individually
PPP Paycheck Protection Program
3
RAP Retirement Account Plan - the Corporation's noncontributory defined benefit retirement plan
Repurchase Agreements Securities sold under agreements to repurchase
Restricted Stock Awards Restricted common stock and restricted common stock units to certain key employees
Retirement Eligible Colleagues Colleagues whose retirement meets the early retirement or normal retirement definitions under the applicable equity compensation plan
ROCET1 Return on Common Equity Tier 1
Rockefeller Rockefeller Capital Management
S&P Standard & Poor's
SBA Small Business Administration
SEC U.S. Securities and Exchange Commission
Series C Preferred Stock The Corporation's 6.125% Non-Cumulative Perpetual Preferred Stock, Series C, liquidation preference $1,000 per share
Series D Preferred Stock The Corporation's 5.375% Non-Cumulative Perpetual Preferred Stock, Series D, liquidation preference $1,000 per share
Series E Preferred Stock The Corporation's 5.875% Non-Cumulative Perpetual Preferred Stock, Series E, liquidation preference $1,000 per share
Series F Preferred Stock The Corporation's 5.625% Non-Cumulative Perpetual Preferred Stock, Series F, liquidation preference $1,000 per share
SOFR Secured Overnight Finance Rate
TDRs Troubled Debt Restructurings
Whitnell Whitnell & Co.
YTD Year-to-Date
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Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
Sep 30, 2022 Dec 31, 2021
(In Thousands, except share and per share data) (Unaudited) (Audited)
Assets
Cash and due from banks $ 386,231 $ 343,831
Interest-bearing deposits in other financial institutions 112,173 681,684
Federal funds sold and securities purchased under agreements to resell 4,015 —
AFS investment securities, at fair value 2,487,312 4,332,015
HTM investment securities, net, at amortized cost 3,951,491 2,238,947
Equity securities 24,879 18,352
Federal Home Loan Bank and Federal Reserve Bank stocks, at cost 279,334 168,281
Residential loans held for sale 51,134 136,638
Loans 27,817,280 24,224,949
Allowance for loan losses ( 292,904 ) ( 280,015 )
Loans, net 27,524,376 23,944,934
Tax credit and other investments 275,247 293,733
Premises and equipment, net 379,462 385,173
Bank and corporate owned life insurance 677,129 680,021
Goodwill 1,104,992 1,104,992
Other intangible assets, net 51,485 58,093
Mortgage servicing rights, net (a) 78,352 54,862
Interest receivable 115,782 80,528
Other assets 546,214 582,168
Total assets $ 38,049,607 $ 35,104,253
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $ 8,224,579 $ 8,504,077
Interest-bearing deposits 20,974,003 19,962,353
Total deposits 29,198,581 28,466,430
Federal funds purchased and securities sold under agreements to repurchase 276,674 319,532
Commercial paper 7,687 34,730
FHLB advances 3,777,478 1,621,047
Other long-term funding 249,484 249,324
Allowance for unfunded commitments 39,776 39,776
Accrued expenses and other liabilities 545,976 348,560
Total liabilities $ 34,095,656 $ 31,079,399
Stockholders’ Equity
Preferred equity $ 194,112 $ 193,195
Common equity
Common stock $ 1,752 $ 1,752
Surplus 1,710,075 1,713,851
Retained earnings 2,830,877 2,672,601
Accumulated other comprehensive (loss) ( 255,391 ) ( 10,317 )
Treasury stock, at cost ( 527,473 ) ( 546,229 )
Total common equity 3,759,840 3,831,658
Total stockholders’ equity 3,953,952 4,024,853
Total liabilities and stockholders’ equity $ 38,049,607 $ 35,104,253
Preferred shares authorized (par value $ 1.00 per share) 750,000 750,000
Preferred shares issued and outstanding 200,000 200,000
Common shares authorized (par value $ 0.01 per share) 250,000,000 250,000,000
Common shares issued 175,216,409 175,216,409
Common shares outstanding 150,328,196 149,342,641
Numbers may not sum due to rounding.
(a) MSRs at December 31, 2021 were carried at LOCOM. On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value.
See accompanying notes to consolidated financial statements.
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Table of Contents
Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income (Unaudited)
Three Months Ended Sep 30, Nine Months Ended Sep 30,
(In Thousands, except per share data) 2022 2021 2022 2021
Interest income
Interest and fees on loans $ 275,666 $ 174,643 $ 643,239 $ 522,920
Interest and dividends on investment securities
Taxable 19,221 8,745 54,009 24,600
Tax-exempt 16,538 14,613 49,025 43,141
Other interest 3,284 2,281 7,696 5,802
Total interest income 314,708 200,282 753,969 596,462
Interest expense
Interest on deposits 26,000 4,427 37,590 14,945
Interest on federal funds purchased and securities sold under agreements to repurchase 756 48 1,200 103
Interest on other short-term funding 1 8 2 21
Interest on FHLB advances 20,792 8,962 38,663 27,979
Interest on long-term funding 2,722 3,163 8,182 14,323
Total interest expense 50,270 16,607 85,637 57,371
Net interest income 264,439 183,675 668,332 539,092
Provision for credit losses 16,998 ( 24,010 ) 13,006 ( 82,018 )
Net interest income after provision for credit losses 247,440 207,685 655,326 621,110
Noninterest income
Wealth management fees 19,984 22,110 63,719 67,229
Service charges and deposit account fees 15,029 16,962 48,392 47,366
Card-based fees 11,479 11,113 32,847 31,838
Other fee-based revenue 4,487 3,929 12,613 12,769
Capital markets, net 7,675 7,114 24,331 20,928
Mortgage banking, net 2,098 10,657 16,635 42,710
Bank and corporate owned life insurance 1,827 2,760 8,004 8,551
Asset gains, net 18 5,228 1,883 10,024
Investment securities gains (losses), net 5,664 — 5,676 ( 16 )
Gains on sale of branches, net (a) — — — 1,038
Other 2,527 2,205 6,613 8,425
Total noninterest income 70,788 82,076 220,713 250,862
Noninterest expense
Personnel 118,243 107,880 335,720 318,900
Technology 22,694 19,927 65,401 60,902
Occupancy 13,717 15,814 43,948 46,649
Business development and advertising 6,778 6,156 17,388 15,522
Equipment 4,921 5,200 14,841 16,199
Legal and professional 4,159 4,304 14,118 17,495
Loan and foreclosure costs 1,631 1,616 5,121 6,508
FDIC assessment 5,800 5,000 16,300 13,350
Other intangible amortization 2,203 2,203 6,608 6,642
Other 15,645 9,793 31,057 25,547
Total noninterest expense 195,791 177,892 550,503 527,713
Income before income taxes 122,438 111,870 325,536 344,259
Income tax expense 26,163 23,060 68,176 70,142
Net income 96,275 88,809 257,360 274,117
Preferred stock dividends 2,875 4,155 8,625 14,236
Net income available to common equity $ 93,400 $ 84,655 $ 248,735 $ 259,880
Earnings per common share
Basic $ 0.62 $ 0.56 $ 1.66 $ 1.70
Diluted $ 0.62 $ 0.56 $ 1.65 $ 1.69
Average common shares outstanding
Basic 149,321 150,046 149,063 151,473
Diluted 150,262 151,143 150,205 152,701
Numbers may not sum due to rounding.
(a) Includes the deposit premium on the sale of branches net of miscellaneous costs to sell. See Note 2 Acquisitions and Dispositions for additional details on the branch sales.
See accompanying notes to consolidated financial statements.
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Table of Contents
Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Net income $ 96,275 $ 88,809 $ 257,360 $ 274,117
Other comprehensive income (loss), net of tax
AFS investment securities
Net unrealized (losses) ( 100,092 ) ( 19,827 ) ( 268,413 ) ( 35,829 )
Unrealized (losses) on AFS securities transferred to HTM securities — — ( 67,604 ) —
Amortization of net unrealized losses on AFS securities transferred to HTM securities 2,888 172 7,269 1,335
Reclassification adjustment for net losses (gains) realized in net income — — ( 12 ) 16
Income tax benefit 24,810 4,975 83,906 8,548
Other comprehensive (loss) on AFS securities ( 72,394 ) ( 14,681 ) ( 244,854 ) ( 25,930 )
Defined benefit pension and postretirement obligations
Amortization of prior service cost ( 82 ) ( 37 ) ( 244 ) ( 111 )
Amortization of actuarial loss 347 1,346 494 3,446
Income tax (expense) ( 474 ) ( 330 ) ( 470 ) ( 836 )
Other comprehensive income (loss) on pension and postretirement obligations ( 209 ) 979 ( 221 ) 2,498
Total other comprehensive (loss) ( 72,603 ) ( 13,702 ) ( 245,074 ) ( 23,431 )
Comprehensive income $ 23,672 $ 75,107 $ 12,286 $ 250,685
Numbers may not sum due to rounding.
See accompanying notes to consolidated financial statements.
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Table of Contents
Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
Accumulated
Other
Retained Comprehensive
(In Thousands, except per share data) Preferred Equity Common Stock Surplus Earnings (Loss) Treasury Stock Total
Balance, December 31, 2021 $ 193,195 $ 1,752 $ 1,713,851 $ 2,672,601 $ ( 10,317 ) $ ( 546,229 ) $ 4,024,853
Change in accounting principle (a) — — — 1,713 — — 1,713
Total shareholder's equity at beginning of period, as adjusted 193,195 1,752 1,713,851 2,674,314 ( 10,317 ) ( 546,229 ) 4,026,566
Comprehensive (loss):
Net income — — — 74,262 — — 74,262
Other comprehensive income (loss) — — — — ( 126,708 ) — ( 126,708 )
Comprehensive (loss) ( 52,445 )
Common stock issued
Stock-based compensation plans, net — — ( 11,911 ) — — 18,565 6,654
Purchase of treasury stock, stock-based compensation plans — — — — — ( 5,193 ) ( 5,193 )
Cash dividends
Common stock, $0.20 per share — — — ( 30,583 ) — — ( 30,583 )
Preferred stock (b) — — — ( 2,875 ) — — ( 2,875 )
Stock-based compensation expense, net — — 6,164 — — — 6,164
Balance, March 31, 2022 $ 193,195 $ 1,752 $ 1,708,104 $ 2,715,118 $ ( 137,024 ) $ ( 532,858 ) $ 3,948,287
Comprehensive income:
Net income — — — 86,824 — — 86,824
Other comprehensive income (loss) — — — — ( 45,764 ) — ( 45,764 )
Comprehensive income 41,060
Common stock issued:
Stock-based compensation plans, net — — ( 1,771 ) — — 1,910 139
Purchase of treasury stock, stock-based compensation plans — — — — — ( 884 ) ( 884 )
Cash dividends:
Common stock, $0.20 per share — — — ( 30,331 ) — — ( 30,331 )
Preferred stock (b) — — — ( 2,875 ) — — ( 2,875 )
Stock-based compensation expense, net — — 3,986 — — — 3,986
Balance, June 30, 2022 $ 193,195 $ 1,752 $ 1,710,319 $ 2,768,736 $ ( 182,788 ) $ ( 531,832 ) $ 3,959,382
Comprehensive income:
Net income — — — 96,275 — — 96,275
Other comprehensive income (loss) — — — — ( 72,603 ) — ( 72,603 )
Comprehensive income 23,672
Common stock issued:
Stock-based compensation plans, net — — ( 3,274 ) — — 4,540 1,266
Purchase of treasury stock, stock-based compensation plans — — — — — ( 181 ) ( 181 )
Cash dividends:
Common stock, $0.20 per share — — — ( 30,342 ) — — ( 30,342 )
Preferred stock (b) — — — ( 2,875 ) — — ( 2,875 )
Stock-based compensation expense, net — — 3,030 — — — 3,030
Other 916 — — ( 916 ) — — —
Balance, September 30, 2022 $ 194,112 $ 1,752 $ 1,710,075 $ 2,830,877 $ ( 255,391 ) $ ( 527,473 ) $ 3,953,952
Numbers may not sum due to rounding.
(a) MSRs at December 31, 2021 were carried at LOCOM. On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value.
(b) Series E, $ 0.3671875 per share; and Series F, $ 0.3515625 per share.
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Table of Contents
Accumulated
Other
Retained Comprehensive
(In Thousands, except per share data) Preferred Equity Common Stock Surplus Earnings Income (Loss) Treasury Stock Total
Balance, December 31, 2020 $ 353,512 $ 1,752 $ 1,720,329 $ 2,458,920 $ 12,618 $ ( 456,198 ) $ 4,090,933
Comprehensive income:
Net income — — — 94,301 — — 94,301
Other comprehensive income (loss) — — — — ( 16,811 ) — ( 16,811 )
Comprehensive income 77,490
Common stock issued
Stock-based compensation plans, net — — ( 16,986 ) — — 27,542 10,556
Purchase of treasury stock, open market purchases — — — — — ( 17,973 ) ( 17,973 )
Purchase of treasury stock, stock-based compensation plans — — — — — ( 3,593 ) ( 3,593 )
Cash dividends
Common stock, $0.18 per share — — — ( 27,870 ) — — ( 27,870 )
Preferred stock (a) — — — ( 5,207 ) — — ( 5,207 )
Stock-based compensation expense, net — — 3,444 — — — 3,444
Balance, March 31, 2021 $ 353,512 $ 1,752 $ 1,706,786 $ 2,520,144 $ ( 4,193 ) $ ( 450,222 ) $ 4,127,780
Comprehensive income:
Net income — — — 91,007 — — 91,007
Other comprehensive income (loss) — — — — 7,082 — 7,082
Comprehensive income 98,088
Common stock issued:
Stock-based compensation plans, net — — ( 3,632 ) — — 11,250 7,618
Purchase of treasury stock, open market purchases — — — — — ( 29,972 ) ( 29,972 )
Purchase of treasury stock, stock-based compensation plans — — — — — ( 856 ) ( 856 )
Cash dividends:
Common stock, $0.18 per share — — — ( 27,822 ) — — ( 27,822 )
Preferred stock (b) — — — ( 4,875 ) — — ( 4,875 )
Redemption of preferred stock ( 63,313 ) — — ( 1,687 ) — — ( 65,000 )
Stock-based compensation expense, net — — 5,092 — — — 5,092
Balance, June 30, 2021 $ 290,200 $ 1,752 $ 1,708,246 $ 2,576,766 $ 2,889 $ ( 469,801 ) $ 4,110,052
Comprehensive income:
Net income — — — 88,809 — — 88,809
Other comprehensive income (loss) — — — — ( 13,702 ) — ( 13,702 )
Comprehensive income 75,107
Common stock issued:
Stock-based compensation plans, net — — 6 — — 449 455
Purchase of treasury stock, open market purchases — — — — — ( 59,998 ) ( 59,998 )
Purchase of treasury stock, stock-based compensation plans — — — — — ( 112 ) ( 112 )
Cash dividends:
Common stock, $0.20 per share — — — ( 30,546 ) — — ( 30,546 )
Preferred stock (c) — — — ( 4,155 ) — — ( 4,155 )
Redemption of preferred stock ( 97,004 ) — — ( 2,454 ) — — ( 99,458 )
Stock-based compensation expense, net — — 3,616 — — — 3,616
Balance, September 30, 2021 $ 193,195 $ 1,752 $ 1,711,867 $ 2,628,421 $ ( 10,813 ) $ ( 529,461 ) $ 3,994,961
Numbers may not sum due to rounding.
(a) Series C, $ 0.3828125 per share; Series D, $ 0.3359375 per share; Series E, $ 0.3671875 per share; and Series F, $ 0.3515625 per share.
(b) Series C, $ 0.3197115 per share; Series D, $ 0.3359375 per share; Series E, $ 0.3671875 per share; and Series F, $ 0.3515625 per share.
(c) Series D, $ 0.2842548 per share; Series E, $ 0.3671875 per share; and Series F, $ 0.3515625 per share.
See accompanying notes to consolidated financial statements.
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Table of Contents
Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Sep 30,
($ in Thousands) 2022 2021
Cash Flow From Operating Activities
Net income $ 257,360 $ 274,117
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 13,006 ( 82,018 )
Depreciation and amortization 33,743 36,109
Change in MSRs valuation (a) ( 22,348 ) ( 12,231 )
Amortization of other intangible assets 6,608 6,642
Amortization and accretion on earning assets, funding, and other, net 13,280 12,184
Net amortization of tax credit investments 25,916 25,196
Losses (gains) on sales of investment securities, net ( 260 ) 16
Asset (gains), net ( 1,883 ) ( 10,024 )
(Gains) on sale of branches, net — ( 1,038 )
(Gain) loss on mortgage banking activities, net 5,712 ( 32,304 )
Mortgage loans originated and acquired for sale ( 535,694 ) ( 1,345,158 )
Proceeds from sales of mortgage loans held for sale 619,940 1,348,006
Changes in certain assets and liabilities
(Increase) decrease in interest receivable ( 35,254 ) 11,252
(Decrease) increase in interest payable 1,795 ( 13,287 )
(Decrease) increase in expense payable ( 17,994 ) 24,509
Decrease in net derivative position 320,972 82,122
Net change in other assets and other liabilities 37,430 40,049
Net cash provided by operating activities 722,330 364,141
Cash Flow From Investing Activities
Net decrease (increase) in loans ( 3,595,331 ) 804,497
Purchases of
AFS securities ( 511,401 ) ( 1,985,700 )
HTM securities ( 245,826 ) ( 250,259 )
Federal Home Loan Bank and Federal Reserve Bank stocks and equity securities ( 111,057 ) ( 9 )
Premises, equipment, and software, net of disposals ( 45,441 ) ( 34,337 )
Proceeds from
Sales of AFS and equity securities 1,320 158,743
Prepayments, calls, and maturities of AFS securities 392,275 927,053
Prepayments, calls, and maturities of HTM securities 153,163 243,063
Sales, prepayments, calls, and maturities of other assets 31,732 18,149
Net cash received in business segment sale — 2,415
Net change in tax credit and alternative investments ( 50,386 ) ( 45,655 )
Net cash (used in) investing activities ( 3,980,951 ) ( 162,040 )
Cash Flow From Financing Activities
Net increase in deposits 732,347 1,400,162
Net decrease in deposits due to branch sales — ( 31,083 )
Net increase (decrease) in short-term funding ( 69,902 ) 70,179
Net increase in short-term FHLB advances 2,583,000 —
Repayment of long-term FHLB advances ( 414,004 ) ( 18,276 )
Proceeds from long-term FHLB advances 1,838 6,576
(Repayment) proceeds of finance lease principal 327 ( 1,056 )
Repayment of senior notes — ( 300,000 )
Proceeds from issuance of common stock for stock-based compensation plans 8,059 18,629
Redemption of preferred shares — ( 164,458 )
Purchase of treasury stock, open market purchases — ( 107,943 )
Purchase of treasury stock, stock-based compensation plans ( 6,259 ) ( 4,562 )
Cash dividends on common stock ( 91,256 ) ( 86,238 )
Cash dividends on preferred stock ( 8,625 ) ( 14,236 )
Net cash provided by financing activities 2,735,525 767,695
Net increase (decrease) in cash and cash equivalents ( 523,096 ) 969,796
Cash and cash equivalents at beginning of period 1,025,515 716,048
Cash and cash equivalents at end of period (b) $ 502,419 $ 1,685,843
Numbers may not sum due to rounding.
(a) On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value. For all prior periods, MSRs were carried at LOCOM.
(b) No restricted cash due to the Federal Reserve reducing the required reserve ratio to zero.
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Table of Contents
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Sep 30,
($ in Thousands) 2022 2021
Supplemental disclosures of cash flow information
Cash paid for interest $ 83,337 $ 69,470
Cash paid for income and franchise taxes 6,087 56,262
Loans and bank premises transferred to OREO 5,052 33,794
Capitalized mortgage servicing rights 6,316 11,761
Loans transferred from held for sale into portfolio, net 1,789 10,071
Transfer of AFS securities to HTM securities 1,621,990 —
Unsettled trades to purchase securities 4,130 9,855
Write-up of equity securities without readily determinable fair values 5,690 —
Fair value adjustments on hedged long-term FHLB advances and subordinated debt 14,703 —
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Item 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements
These interim consolidated financial statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information and footnote disclosures normally presented in accordance with GAAP have been omitted or abbreviated. The information contained on the consolidated financial statements and footnotes in Associated Banc-Corp's 2021 Annual Report on Form 10-K should be referred to in connection with the reading of these unaudited interim consolidated financial statements.
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and comprehensive income, changes in stockholders’ equity, and cash flows of the Corporation and Parent Company for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the ACLL and MSRs valuation. Management has evaluated subsequent events for potential recognition or disclosure.
Within the tables presented, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes.
Note 2 Acquisitions and Dispositions
Acquisitions:
The Corporation did not have any acquisitions during the first nine months of 2022 or during 2021.
Dispositions:
2021
On March 1, 2021, the Corporation closed on the sale of its wealth management subsidiary, Whitnell, to Rockefeller for a purchase price of $ 8 million. Associated reported a first quarter 2021 pre-tax gain of $ 2 million, included in asset gains, net on the consolidated statements of income, in conjunction with the sale.
On February 26, 2021, the Bank completed the sale of one branch located in Monroe, Wisconsin to Summit Credit Union. Under the terms of the transaction, the Bank sold $31 million in total deposits and no loans. The Bank received an approximately 4% purchase premium on deposits transferred.
Note 3 Summary of Significant Accounting Policies
The accounting and reporting policies of the Corporation conform to U.S. GAAP and to general practice within the financial services industry. A discussion of these policies can be found in Note 1 Summary of Significant Accounting Policies included in the Corporation’s 2021 Annual Report on Form 10-K. As a result of the irrevocable election to account for MSRs under the fair value measurement methodology, as permitted under ASC 860-50-35-3, there has been a change to the Corporation's significant accounting policies since December 31, 2021, which is described below.
Mortgage Servicing Rights
The Corporation sells residential mortgage loans in the secondary market and typically retains the rights to service the loans sold. Upon sale, a MSRs asset is capitalized, which represents the then current fair value of future net cash flows expected to be realized for performing servicing activities. On January 1, 2022, the Corporation made the irrevocable election to account for its MSRs asset under the fair value measurement method. As a result of the change, a cumulative effect adjustment of $ 2 million, increasing retained earnings on the consolidated balance sheets, was recognized. Under this methodology, changes in the fair value are recognized in earnings as they occur through mortgage banking, net on the consolidated statements of income.
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MSRs are not traded in active markets. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds, assumed servicing costs, ancillary income, costs to service delinquent loans, costs of foreclosure, and discount rates with option-adjusted spreads, used by this model are based on current market sources. Assumptions used to value MSRs are considered significant unobservable inputs. A separate third-party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. Fair value estimates from outside sources are received periodically to corroborate the results of the valuation model.
New Accounting Pronouncements Adopted
There were no applicable material accounting pronouncements adopted by the Corporation since December 31, 2021.
Future Accounting Pronouncements
The expected impact of applicable material accounting pronouncements recently issued or proposed but not yet required to be adopted are discussed in the table below. To the extent that the adoption of new accounting standards materially affects the Corporation's financial condition, results of operations, liquidity or disclosures, the impacts are discussed in the applicable sections of this financial review.
Standard Description Date of anticipated adoption Effect on financial statements
ASU 2022-02 Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures The FASB issued these amendments to eliminate accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty, and to require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. The amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively, except as provided in the next sentence. For the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted if an entity has adopted the amendments in Update 2016-03, including adoption in an interim period. 1st Quarter 2023 Adoption of this amendment is not expected to have a material impact on the Corporation's results of operation, financial position or liquidity, but will result in additional disclosure requirements related to gross charge offs by vintage year and the removal of TDR disclosures, replaced by additional disclosures on the types of modifications of loans to borrowers experiencing financial difficulties. The Corporation intends to adopt this update prospectively.
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Note 4 Earnings Per Common Share
Earnings per common share are calculated utilizing the two-class method. Basic earnings per common share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per common share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock awards). Presented below are the calculations for basic and diluted earnings per common share:
Three Months Ended Sep 30, Nine Months Ended Sep 30,
(In Thousands, except per share data) 2022 2021 2022 2021
Net income $ 96,275 $ 88,809 $ 257,360 $ 274,117
Preferred stock dividends ( 2,875 ) ( 4,155 ) ( 8,625 ) ( 14,236 )
Net income available to common equity $ 93,400 $ 84,655 $ 248,735 $ 259,880
Common shareholder dividends ( 30,149 ) ( 30,323 ) ( 90,647 ) ( 85,604 )
Unvested share-based payment awards ( 194 ) ( 222 ) ( 609 ) ( 634 )
Undistributed earnings $ 63,057 $ 54,109 $ 157,479 $ 173,642
Undistributed earnings allocated to common shareholders $ 62,648 $ 53,716 $ 156,454 $ 172,436
Undistributed earnings allocated to unvested share-based payment awards 409 393 1,025 1,206
Undistributed earnings $ 63,057 $ 54,109 $ 157,479 $ 173,642
Basic
Distributed earnings to common shareholders $ 30,149 $ 30,323 $ 90,647 $ 85,604
Undistributed earnings allocated to common shareholders 62,648 53,716 156,454 172,436
Total common shareholders earnings, basic $ 92,796 $ 84,039 $ 247,102 $ 258,040
Diluted
Distributed earnings to common shareholders $ 30,149 $ 30,323 $ 90,647 $ 85,604
Undistributed earnings allocated to common shareholders 62,648 53,716 156,454 172,436
Total common shareholders earnings, diluted $ 92,796 $ 84,039 $ 247,102 $ 258,040
Weighted average common shares outstanding 149,321 150,046 149,063 151,473
Effect of dilutive common stock awards 942 1,096 1,141 1,228
Diluted weighted average common shares outstanding 150,262 151,143 150,205 152,701
Basic earnings per common share $ 0.62 $ 0.56 $ 1.66 $ 1.70
Diluted earnings per common share $ 0.62 $ 0.56 $ 1.65 $ 1.69
Approximately 3 million anti-dilutive common stock options were excluded from the earnings per common share calculation for the three and nine months ended September 30, 2022 and 2021 .
Note 5 Stock-Based Compensation
The fair values of stock options and restricted stock awards are amortized as compensation expense on a straight-line basis over the vesting period of the grants. For colleagues who meet the definition of retirement eligible under the 2017 Incentive Compensation Plan and the 2020 Incentive Compensation Plan, expenses related to stock options and restricted stock awards are fully recognized on the date the colleague meets the definition of normal or early retirement. Compensation expense recognized is included in personnel expense on the consolidated statements of income.
A summary of the Corporation’s stock option activity for the nine months ended September 30, 2022 is presented below:
Weighted Average
Stock Options Shares (a) Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (a)
Outstanding at December 31, 2021 4,814 $ 20.72 5.96 years $ 12,532
Exercised 436 17.61
Forfeited or expired 62 19.83
Outstanding at September 30, 2022 4,316 $ 21.05 5.14 years $ 4,506
Options Exercisable at September 30, 2022 3,735 $ 21.35 4.82 years $ 3,547
(a) In thousands
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock option. For the nine months ended September 30, 2022, the intrinsic value of stock options exercised was $ 3 million compared to $ 6 million for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the total fair value of stock options vested was $ 2 million compared to $ 3 million for the nine months ended September 30, 2021.
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The Corporation recognized compensation expense for the vesting of stock options of approximately $ 587,000 for the nine months ended September 30, 2022, compared to $ 1 million for the nine months ended September 30, 2021. Compensation expense for the nine months ended September 30, 2022 related to accelerated vesting of stock options for retirement eligible colleagues was immaterial . At September 30, 2022, the Corporation had approximately $ 563,000 of unrecognized compensation expense related to stock options that is expected to be recognized over the remaining requisite service periods that extend predominately through the first quarter of 2024.
The Corporation also has issued time-based and performance-based restricted stock awards under the 2017 Incentive Compensation Plan and subsequent 2020 Incentive Compensation Plan. Performance awards are based on performance goals determined by the Corporation's Compensation and Benefits Committee, with vesting ranging from a minimum of 0 % to a maximum of 150 % of the target award. Performance awards are valued utilizing a Monte Carlo simulation model to estimate fair value of the awards at the grant date.
The following table summarizes information about the Corporation’s restricted stock awards activity for the nine months ended September 30, 2022:
Weighted Average
Restricted Stock Awards Shares (a) Grant Date Fair Value
Outstanding at December 31, 2021 2,635 $ 19.87
Granted 785 22.91
Vested 948 21.83
Forfeited 109 20.30
Outstanding at September 30, 2022 2,363 $ 20.91
(a) In thousands
The Corporation amortizes the expense related to restricted stock awards as compensation expense over the vesting period specified in the grant's award agreement. Performance-based restricted stock awards granted during 2021 and 2022 will cliff-vest after the three year performance period has ended. Service-based restricted stock awards granted during 2021 and 2022 will vest ratably over a period of four years . Expense for restricted stock awards of $ 13 million was recorded for the nine months ended September 30, 2022 and $ 11 million was recorded for the nine months ended September 30, 2021. Included in compensation expense for the first nine months of 2022 was $ 3 million of expense for the accelerated vesting of restricted stock awards granted to retirement eligible colleagues. The Corporation had $ 24 million of unrecognized compensation costs related to restricted stock awards at September 30, 2022 that are expected to be recognized over the remaining requisite service periods that extend predominately through the first quarter of 2026 .
The Corporation has the ability to issue shares from treasury or new shares upon the exercise of stock options or the granting of restricted stock awards. The Board of Directors has authorized management to repurchase shares of the Corporation’s common stock in the market, to be made available for issuance in connection with the Corporation’s employee incentive plans and for other corporate purposes. The repurchase of shares, if any, will be based on market and investment opportunities, capital levels, growth prospects, and regulatory constraints. Such repurchases may occur from time to time in open market purchases, block transactions, private transactions, accelerated share repurchase programs, or similar facilities.
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Note 6 Investment Securities
Investment securities are designated as AFS, HTM, or equity on the consolidated balance sheets at the time of purchase. The amortized cost and fair values of AFS and HTM securities at September 30, 2022 were as follows:
Gross Gross
Amortized Unrealized Unrealized
($ in Thousands) Cost Gains (Losses) Fair Value
AFS investment securities
U. S. Treasury securities $ 124,403 $ — $ ( 16,119 ) $ 108,284
Agency securities 15,000 — ( 1,601 ) 13,399
Obligations of state and political subdivisions (municipal securities) 356,539 28 ( 15,669 ) 340,898
Residential mortgage-related securities
FNMA / FHLMC 1,882,668 413 ( 227,020 ) 1,656,061
GNMA 82,263 — ( 4,234 ) 78,029
Commercial mortgage-related securities
FNMA / FHLMC 19,123 — ( 1,837 ) 17,286
GNMA 111,286 — ( 4,192 ) 107,094
Asset backed securities
FFELP 163,314 — ( 4,757 ) 158,556
SBA 4,797 20 ( 45 ) 4,772
Other debt securities 3,000 — ( 67 ) 2,933
Total AFS investment securities $ 2,762,393 $ 461 $ ( 275,542 ) $ 2,487,312
HTM investment securities
U. S. Treasury securities $ 998 $ — $ ( 66 ) $ 932
Obligations of state and political subdivisions (municipal securities) 1,737,135 273 ( 272,360 ) 1,465,048
Residential mortgage-related securities
FNMA / FHLMC 961,946 32,561 ( 182,409 ) 812,099
GNMA 43,168 27 ( 3,872 ) 39,323
Private-label 369,711 12,167 ( 74,906 ) 306,972
Commercial mortgage-related securities
FNMA/FHLMC 762,377 16,045 ( 176,822 ) 601,600
GNMA 76,217 716 ( 7,147 ) 69,787
Total HTM investment securities $ 3,951,553 $ 61,791 $ ( 717,582 ) $ 3,295,760
During the first quarter of 2022, the Corporation redesignated approximately $1.6 billion of mortgage-related securities from AFS to HTM. The reclassification of these investment securities was accounted for at fair value. Management elected to transfer these investment securities as the Corporation has the positive intent and ability to hold these investment securities to maturity. See Note 16 for additional information on the unrealized losses on investment securities transferred from AFS to HTM.
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The amortized cost and fair values of AFS and HTM securities at December 31, 2021 were as follows:
Gross Gross
Amortized Unrealized Unrealized
($ in Thousands) Cost Gains (Losses) Fair Value
AFS investment securities
U. S. Treasury securities $ 124,291 $ — $ ( 1,334 ) $ 122,957
Agency securities 15,000 — ( 103 ) 14,897
Obligations of state and political subdivisions (municipal securities) 381,517 18,940 — 400,457
Residential mortgage-related securities
FNMA / FHLMC 2,709,399 3,729 ( 21,249 ) 2,691,879
GNMA 66,189 1,591 — 67,780
Private-label 332,028 31 ( 2,335 ) 329,724
Commercial mortgage-related securities
FNMA / FHLMC 357,240 2,686 ( 9,302 ) 350,623
GNMA 165,439 1,360 — 166,799
Asset backed securities
FFELP 177,974 475 ( 1,123 ) 177,325
SBA 6,594 39 ( 54 ) 6,580
Other debt securities 3,000 — ( 6 ) 2,994
Total AFS investment securities $ 4,338,671 $ 28,850 $ ( 35,506 ) $ 4,332,015
HTM investment securities
U. S. Treasury securities $ 1,000 $ 1 $ — $ 1,001
Obligations of state and political subdivisions (municipal securities) 1,628,759 113,179 ( 1,951 ) 1,739,988
Residential mortgage-related securities
FNMA / FHLMC 34,347 1,792 — 36,139
GNMA 48,053 1,578 — 49,631
Commercial mortgage-related securities
FNMA / FHLMC 425,937 122 ( 6,659 ) 419,400
GNMA 100,907 1,799 ( 200 ) 102,506
Total HTM investment securities $ 2,239,003 $ 118,471 $ ( 8,809 ) $ 2,348,664
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The expected maturities of AFS and HTM securities at September 30, 2022, are shown below:
AFS HTM
Amortized Fair Amortized Fair
($ in Thousands) Cost Value Cost Value
Due in one year or less $ 9,023 $ 9,000 $ 16,969 $ 16,931
Due after one year through five years 105,078 97,875 32,282 31,668
Due after five years through ten years 347,517 323,983 164,216 157,427
Due after ten years 37,325 34,656 1,524,666 1,259,955
Total debt securities 498,943 465,514 1,738,134 1,465,980
Residential mortgage-related securities
FNMA / FHLMC 1,882,668 1,656,061 961,946 812,099
GNMA 82,263 78,029 43,168 39,323
Private-label — — 369,711 306,972
Commercial mortgage-related securities
FNMA / FHLMC 19,123 17,286 762,377 601,600
GNMA 111,286 107,094 76,217 69,787
Asset backed securities
FFELP 163,314 158,556 — —
SBA 4,797 4,772 — —
Total investment securities $ 2,762,393 $ 2,487,312 $ 3,951,553 $ 3,295,760
Ratio of fair value to amortized cost 90.0 % 83.4 %
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On a quarterly basis, the Corporation refreshes the credit quality of each HTM security. The following table summarizes the credit quality indicators of HTM securities at amortized cost at September 30, 2022:
($ in Thousands) AAA AA A Not Rated Total
U. S. Treasury securities $ 998 $ — $ — $ — $ 998
Obligations of state and political subdivisions (municipal securities) 807,240 920,765 7,972 1,158 1,737,135
Residential mortgage-related securities
FNMA / FHLMC 961,946 — — — 961,946
GNMA 43,168 — — — 43,168
Private-label 369,711 — — — 369,711
Commercial mortgage-related securities
FNMA / FHLMC 762,377 — — — 762,377
GNMA 76,217 — — — 76,217
Total HTM securities $ 3,021,657 $ 920,765 $ 7,972 $ 1,158 $ 3,951,553
The following table summarizes the credit quality indicators of HTM securities at amortized cost at December 31, 2021:
($ in Thousands) AAA AA A Not Rated Total
U. S. Treasury securities $ 1,000 $ — $ — $ — $ 1,000
Obligations of state and political subdivisions (municipal securities) 702,399 914,591 10,873 896 1,628,759
Residential mortgage-related securities
FNMA / FHLMC 34,347 — — — 34,347
GNMA 48,053 — — — 48,053
Commercial mortgage-related securities
FNMA / FHLMC 425,937 — — — 425,937
GNMA 100,907 — — — 100,907
Total HTM securities $ 1,312,642 $ 914,591 $ 10,873 $ 896 $ 2,239,003
The following table summarizes gross realized gains and losses on AFS securities, the gain on sale and net write-up of equity securities, and proceeds from the sale of investment securities for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Gross gains on AFS securities $ — $ — $ 21 $ 421
Gross (losses) on AFS securities — — ( 8 ) ( 437 )
Gain on sale and net write-up of equity securities 5,664 — 5,664 —
Investment securities gains (losses), net $ 5,664 $ — $ 5,676 $ ( 16 )
Proceeds from sales of investment securities $ 248 $ — $ 1,309 $ 158,708
During the third quarter of 2022, the Corporation sold its Visa Class B restricted shares obtained in the acquisition of First Staunton, which were carried at a zero-cost basis. The remaining shares, which are carried at fair value, were subsequently written up to reflect the new observable price resulting from that sale.
During the second quarter of 2021, the Corporation sold $ 107 million of lower yielding FFELP student loan asset backed securities at an immaterial gain and reinvested the proceeds into higher yielding mortgage backed securities. During the first quarter of 2021, the Corporation sold $ 51 million of lower yielding U.S. Treasury and Agency securities at an immaterial loss to take advantage of the steeper yield curve by reinvesting the proceeds into similar but higher yielding, longer duration securities.
Investment securities with a carrying value of $ 2.4 billion and $ 2.3 billion at September 30, 2022 and December 31, 2021, respectively, were pledged to secure certain deposits or for other purposes.
Accrued interest receivable on HTM securities totaled $ 16 million and $ 15 million at September 30, 2022 and December 31, 2021, respectively. Accrued interest receivable on AFS securities totaled $ 8 million and $ 9 million at September 30, 2022 and December 31, 2021, respectively. Accrued interest receivable on both HTM and AFS securities is included in interest receivable on the consolidated balance sheets. There was no interest income reversed for investments going into nonaccrual at both September 30, 2022 and 2021.
A security is considered past due once it is 30 days past due under the terms of the agreement. At both September 30, 2022 and December 31, 2021, the Corporation had no past due HTM securities.
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The allowance for credit losses on HTM securities was approximately $ 61 ,000 at September 30, 2022 and approximately $ 55 ,000 at December 31, 2021, attributable entirely to the Corporation's municipal securities, included in HTM investment securities, net, at amortized cost on the consolidated balance sheets. The Corporation also holds U.S. Treasury, municipal, and mortgage-related securities issued by the U.S. government or a GSE which are backed by the full faith and credit of the U.S. government and private-label residential mortgage-related securities that have credit enhancement which covers the first 15% of losses and, as a result, no allowance for credit losses has been recorded related to these securities.
The following represents gross unrealized losses and the related fair value of AFS and HTM securities, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position, at September 30, 2022:
Less than 12 months 12 months or more Total
Number Number
of Unrealized Fair of Unrealized Fair Unrealized Fair
($ in Thousands) Securities (Losses) Value Securities (Losses) Value (Losses) Value
AFS investment securities
U.S. Treasury securities 1 $ ( 651 ) $ 4,293 6 $ ( 15,468 ) $ 103,991 $ ( 16,119 ) $ 108,284
Agency securities — — — 1 ( 1,601 ) 13,399 ( 1,601 ) 13,399
Obligations of state and political subdivisions (municipal securities) 605 ( 15,669 ) 328,806 — — — ( 15,669 ) 328,806
Residential mortgage-related securities
FNMA / FHLMC 68 ( 109,670 ) 827,116 40 ( 117,350 ) 802,215 ( 227,020 ) 1,629,330
GNMA 17 ( 4,234 ) 78,029 — — — ( 4,234 ) 78,029
Commercial mortgage-related securities
FNMA / FHLMC 1 ( 1,837 ) 17,286 — — — ( 1,837 ) 17,286
GNMA 36 ( 4,192 ) 107,094 — — — ( 4,192 ) 107,094
Asset backed securities
FFELP 5 ( 1,735 ) 66,349 10 ( 3,022 ) 92,207 ( 4,757 ) 158,556
SBA 1 — 350 7 ( 45 ) 2,218 ( 45 ) 2,569
Other debt securities 2 ( 21 ) 1,979 1 ( 46 ) 954 ( 67 ) 2,933
Total 736 $ ( 138,010 ) $ 1,431,302 65 $ ( 137,533 ) $ 1,014,983 $ ( 275,542 ) $ 2,446,286
HTM investment securities
U.S. Treasury securities 1 $ ( 66 ) $ 932 — $ — $ — $ ( 66 ) $ 932
Obligations of state and political subdivisions (municipal securities) 1,123 ( 244,555 ) 1,350,294 29 ( 27,805 ) 53,371 ( 272,360 ) 1,403,665
Residential mortgage-related securities
FNMA / FHLMC 87 ( 105,032 ) 496,903 11 ( 77,377 ) 314,998 ( 182,409 ) 811,900
GNMA 78 ( 3,872 ) 39,323 — — — ( 3,872 ) 39,323
Private-label 16 ( 59,733 ) 252,382 2 ( 15,173 ) 54,590 ( 74,906 ) 306,972
Commercial mortgage-related securities
FNMA / FHLMC 13 ( 76,439 ) 221,584 30 ( 100,382 ) 380,012 ( 176,822 ) 601,596
GNMA 13 ( 5,252 ) 58,883 1 ( 1,895 ) 10,904 ( 7,147 ) 69,787
Total 1,331 $ ( 494,950 ) $ 2,420,301 73 $ ( 222,632 ) $ 813,874 $ ( 717,582 ) $ 3,234,175
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For comparative purposes, the following represents gross unrealized losses and the related fair value of AFS and HTM securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2021:
Less than 12 months 12 months or more Total
Number Number
of Unrealized Fair of Unrealized Fair Unrealized Fair
($ in Thousands) Securities (Losses) Value Securities (Losses) Value (Losses) Value
AFS investment securities
U.S. Treasury securities 7 $ ( 1,334 ) $ 122,957 — $ — $ — $ ( 1,334 ) $ 122,957
Agency securities 1 ( 103 ) 14,897 — — — ( 103 ) 14,897
Residential mortgage-related securities
FNMA / FHLMC 74 ( 21,249 ) 2,172,837 — — — ( 21,249 ) 2,172,837
Private-label 12 ( 2,335 ) 248,617 — — — ( 2,335 ) 248,617
FNMA / FHLMC commercial mortgage-related securities 19 ( 9,302 ) 328,568 — — — ( 9,302 ) 328,568
Asset backed securities
FFELP 4 ( 256 ) 64,282 8 ( 867 ) 62,576 ( 1,123 ) 126,858
SBA — — — 9 ( 54 ) 3,902 ( 54 ) 3,902
Other debt securities 3 ( 6 ) 2,994 — — — ( 6 ) 2,994
Total 120 $ ( 34,586 ) $ 2,955,152 17 $ ( 920 ) $ 66,478 $ ( 35,506 ) $ 3,021,630
HTM investment securities
Obligations of state and political subdivisions (municipal securities) 49 $ ( 1,951 ) $ 112,038 — $ — $ — $ ( 1,951 ) $ 112,038
Commercial mortgage-related securities
FNMA/FHLMC 18 ( 6,272 ) 388,072 1 ( 387 ) 10,775 ( 6,659 ) 398,847
GNMA 5 ( 200 ) 33,468 — — — ( 200 ) 33,468
Total 72 $ ( 8,422 ) $ 533,577 1 $ ( 387 ) $ 10,775 $ ( 8,809 ) $ 544,352
The Corporation reviews the AFS investment securities portfolio on a quarterly basis to monitor its credit exposure. A determination as to whether a security’s decline in fair value is the result of credit risk takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Corporation may consider in this impairment analysis include the extent to which the security has been in an unrealized loss position, the change in security rating, financial condition and near-term prospects of the issuer, as well as the security and industry specific economic conditions.
Based on the Corporation’s evaluation, management does not believe any unrealized losses at September 30, 2022 represent credit deterioration as these unrealized losses are primarily attributable to changes in interest rates and the current market conditions. The Corporation does not intend to sell nor does it believe that it will be required to sell the securities in an unrealized loss position before recovery of their amortized cost basis.
FHLB and Federal Reserve Bank stocks: The Corporation is required to maintain Federal Reserve Bank stock and FHLB stock as a member bank of both the Federal Reserve System and the FHLB, and in amounts as required by these institutions. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other marketable equity securities and their fair value is equal to amortized cost. The Corporation had FHLB stock of $ 193 million and $ 82 million at September 30, 2022 and December 31, 2021, respectively. The Corporation had Federal Reserve Bank stock of $ 87 million at both September 30, 2022 and December 31, 2021. Accrued interest receivable on FHLB stock totaled $ 2 million and approximately $ 975 ,000 at September 30, 2022 and December 31, 2021, respectively. There was approximately $ 819 ,000 of accrued interest receivable on Federal Reserve Bank Stock at September 30, 2022 and none at December 31, 2021. Accrued interest receivable on both FHLB stock and Federal Reserve Bank stock is included in interest receivable on the consolidated balance sheets.
Equity Securities
Equity securities with readily determinable fair values: The Corporation's portfolio of equity securities with readily determinable fair values is primarily comprised of CRA Qualified Investment mutual funds and other mutual funds. At September 30, 2022 and December 31, 2021, the Corporation had equity securities with readily determinable fair values of $ 6 million and $ 5 million, respectively.
Equity securities without readily determinable fair values: The Corporation's portfolio of equity securities without readily determinable fair values, which primarily consists of Visa Class B restricted shares, was carried at $19 million and $14 million at September 30, 2022 and December 31, 2021, respectively .
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Note 7 Loans
The period end loan composition was as follows:
($ in Thousands) Sep 30, 2022 Dec 31, 2021
PPP $ 1,050 $ 66,070
Asset-based lending & equipment finance (a) 380,830 178,027
Commercial and industrial 9,190,045 8,208,289
Commercial real estate — owner occupied 999,786 971,326
Commercial and business lending 10,571,711 9,423,711
Commercial real estate — investor 5,064,289 4,384,569
Real estate construction 1,835,159 1,808,976
Commercial real estate lending 6,899,449 6,193,545
Total commercial 17,471,159 15,617,256
Residential mortgage 8,314,902 7,567,310
Auto finance 1,117,136 143,045
Home equity 612,608 595,615
Other consumer 301,475 301,723
Total consumer 10,346,121 8,607,693
Total loans $ 27,817,280 $ 24,224,949
(a) Dec 31, 2021 does not include equipment finance .
Accrued interest receivable on loans totaled $ 88 million at September 30, 2022, and $ 55 million at December 31, 2021, and is included in interest receivable on the consolidated balance sheets. Interest accrued but not received for loans placed on nonaccrual is reversed against interest income. The amount of accrued interest reversed totaled approximately $ 189 ,000 and $ 328 ,000 for the three and nine months ended September 30, 2022, respectively, and approximately $ 91 ,000 and $ 329 ,000 for the three and nine months ended September 30, 2021, respectively.
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T he following table presents commercial and consumer loans by credit quality indicator by origination year at September 30, 2022:
Term Loans Amortized Cost Basis by Origination Year (a)
($ in Thousands) Rev Loans Converted to Term (a) Rev Loans Amortized Cost Basis YTD 2022 2021 2020 2019 2018 Prior Total
PPP: (b)
Risk rating:
Pass $ — $ — $ 21 $ 960 $ 28 $ — $ — $ — $ 1,009
Potential Problem — — 40 — — — — — 40
PPP $ — $ — $ 62 $ 960 $ 28 $ — $ — $ — $ 1,050
Asset-based lending & equipment finance:
Risk rating:
Pass $ — $ 29,680 $ 202,201 $ 112,162 $ 16,349 $ 765 $ 133 $ — $ 361,291
Special Mention — — — — 274 — — — 274
Potential Problem — 1,266 1,500 — 16,500 — — — 19,266
Asset-based lending & equipment finance $ — $ 30,946 $ 203,701 $ 112,162 $ 33,123 $ 765 $ 133 $ — $ 380,830
Commercial and industrial:
Risk rating:
Pass $ 488 $ 2,281,083 $ 2,283,710 $ 2,422,332 $ 593,095 $ 639,386 $ 353,799 $ 452,229 $ 9,025,634
Special Mention — 9,329 98 14,885 4,675 — 21 30,577 59,585
Potential Problem 154 14,557 17,644 4,615 6,105 39,087 2 7,240 89,250
Nonaccrual 3,979 — 5,379 — 10,182 — — 15 15,576
Commercial and industrial $ 4,621 $ 2,304,968 $ 2,306,830 $ 2,441,833 $ 614,058 $ 678,473 $ 353,821 $ 490,062 $ 9,190,045
Commercial real estate - owner occupied:
Risk rating:
Pass $ — $ 13,623 $ 179,172 $ 243,087 $ 165,701 $ 163,570 $ 88,718 $ 109,126 $ 962,997
Special Mention — — — — 6,995 1,506 — — 8,502
Potential Problem — 850 475 8,104 3,375 10,473 374 4,635 28,287
Commercial real estate - owner occupied $ — $ 14,473 $ 179,648 $ 251,191 $ 176,071 $ 175,549 $ 89,092 $ 113,761 $ 999,786
Commercial and business lending:
Risk rating:
Pass $ 488 $ 2,324,387 $ 2,665,105 $ 2,778,541 $ 775,174 $ 803,720 $ 442,650 $ 561,355 $ 10,350,931
Special Mention — 9,329 98 14,885 11,944 1,506 21 30,577 68,360
Potential Problem 154 16,673 19,660 12,719 25,980 49,560 376 11,875 136,843
Nonaccrual 3,979 — 5,379 — 10,182 — — 15 15,576
Commercial and business lending $ 4,621 $ 2,350,388 $ 2,690,241 $ 2,806,146 $ 823,280 $ 854,787 $ 443,047 $ 603,822 $ 10,571,711
Commercial real estate - investor:
Risk rating:
Pass $ 38,623 $ 64,392 $ 1,285,655 $ 1,568,948 $ 815,494 $ 526,134 $ 289,786 $ 261,243 $ 4,811,653
Special Mention — — 43,113 24,786 8,296 20,855 — 126 97,176
Potential Problem — — 442 44,388 19,432 25,285 19,025 9,409 117,982
Nonaccrual — — 805 36,230 — 444 — — 37,479
Commercial real estate - investor $ 38,623 $ 64,392 $ 1,330,015 $ 1,674,352 $ 843,223 $ 572,718 $ 308,811 $ 270,778 $ 5,064,289
Real estate construction:
Risk rating:
Pass $ — $ 26,489 $ 568,302 $ 931,799 $ 225,552 $ 21,908 $ 2,572 $ 10,321 $ 1,786,943
Special Mention — — — — 12,014 36,061 — — 48,076
Nonaccrual — — — — — — — 141 141
Real estate construction $ — $ 26,489 $ 568,302 $ 931,799 $ 237,566 $ 57,969 $ 2,572 $ 10,462 $ 1,835,159
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Term Loans Amortized Cost Basis by Origination Year (a)
($ in Thousands) Rev Loans Converted to Term (a) Rev Loans Amortized Cost Basis YTD 2022 2021 2020 2019 2018 Prior Total
Commercial real estate lending:
Risk rating:
Pass $ 38,623 $ 90,882 $ 1,853,957 $ 2,500,747 $ 1,041,046 $ 548,041 $ 292,358 $ 271,564 $ 6,598,595
Special Mention — — 43,113 24,786 20,310 56,916 — 126 145,251
Potential Problem — — 442 44,388 19,432 25,285 19,025 9,409 117,982
Nonaccrual — — 805 36,230 — 444 — 141 37,620
Commercial real estate lending $ 38,623 $ 90,882 $ 1,898,317 $ 2,606,151 $ 1,080,789 $ 630,687 $ 311,383 $ 281,241 $ 6,899,449
Total commercial:
Risk rating:
Pass $ 39,111 $ 2,415,268 $ 4,519,062 $ 5,279,288 $ 1,816,220 $ 1,351,761 $ 735,008 $ 832,919 $ 16,949,527
Special Mention — 9,329 43,211 39,671 32,254 58,423 21 30,703 213,611
Potential Problem 154 16,673 20,101 57,108 45,412 74,846 19,401 21,285 254,825
Nonaccrual 3,979 — 6,183 36,230 10,182 444 — 156 53,196
Total commercial $ 43,243 $ 2,441,270 $ 4,588,558 $ 5,412,296 $ 1,904,069 $ 1,485,474 $ 754,429 $ 885,063 $ 17,471,159
Residential mortgage:
Risk rating:
Pass $ — $ — $ 1,175,995 $ 2,094,652 $ 1,750,699 $ 832,300 $ 379,935 $ 2,022,844 $ 8,256,426
Special Mention — — — — — — — 146 146
Potential Problem — — 324 201 — 746 626 948 2,845
Nonaccrual — — 4,815 2,479 4,886 3,984 6,411 32,910 55,485
Residential mortgage $ — $ — $ 1,181,134 $ 2,097,333 $ 1,755,585 $ 837,030 $ 386,972 $ 2,056,849 $ 8,314,902
Auto finance:
Risk rating:
Pass $ — $ — $ 998,531 $ 114,979 $ 416 $ 1,564 $ 598 $ 103 $ 1,116,192
Special Mention — — 509 132 — 1 — — 642
Nonaccrual — — 149 128 — 18 7 — 302
Auto finance $ — $ — $ 999,189 $ 115,240 $ 416 $ 1,583 $ 605 $ 103 $ 1,117,136
Home equity:
Risk rating:
Pass $ 5,637 $ 502,745 $ 22,620 $ 4,873 $ 1,787 $ 6,113 $ 7,174 $ 58,873 $ 604,186
Special Mention 456 221 — 18 97 — — 575 912
Potential Problem — — — — — 35 5 146 185
Nonaccrual 1,077 50 36 15 67 229 340 6,587 7,325
Home equity $ 7,170 $ 503,016 $ 22,657 $ 4,906 $ 1,951 $ 6,377 $ 7,519 $ 66,181 $ 612,608
Other consumer:
Risk rating:
Pass $ 97 $ 199,564 $ 6,028 $ 5,093 $ 2,469 $ 1,323 $ 227 $ 86,169 $ 300,873
Special Mention 1 466 5 21 3 8 — 1 504
Nonaccrual 8 53 — 10 8 18 — 9 98
Other consumer $ 106 $ 200,084 $ 6,033 $ 5,124 $ 2,480 $ 1,349 $ 227 $ 86,179 $ 301,475
Total consumer:
Risk rating:
Pass $ 5,734 $ 702,309 $ 2,203,175 $ 2,219,597 $ 1,755,371 $ 841,300 $ 387,934 $ 2,167,990 $ 10,277,677
Special Mention 458 687 513 172 100 9 — 723 2,204
Potential Problem — — 324 201 — 781 631 1,094 3,030
Nonaccrual 1,085 103 5,001 2,632 4,961 4,249 6,758 39,506 63,210
Total consumer $ 7,277 $ 703,100 $ 2,209,013 $ 2,222,602 $ 1,760,432 $ 846,338 $ 395,323 $ 2,209,313 $ 10,346,121
Total loans:
Risk rating:
Pass $ 44,845 $ 3,117,577 $ 6,722,237 $ 7,498,885 $ 3,571,591 $ 2,193,062 $ 1,122,942 $ 3,000,909 $ 27,227,203
Special Mention 458 10,016 43,724 39,843 32,354 58,431 21 31,426 215,816
Potential Problem 154 16,673 20,425 57,309 45,412 75,626 20,032 22,378 257,855
Nonaccrual 5,063 103 11,184 38,861 15,143 4,693 6,758 39,662 116,406
Total loans $ 50,520 $ 3,144,369 $ 6,797,570 $ 7,634,899 $ 3,664,501 $ 2,331,812 $ 1,149,753 $ 3,094,376 $ 27,817,280
(a) Revolving loans converted to term loans are those converted during the reporting period and are also reported in their year of origination.
(b) 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.
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The following table presents commercial and consumer loans by credit quality indicator by origination year at December 31, 2021:
Term Loans Amortized Cost Basis by Origination Year (a)
($ in Thousands) Rev Loans Converted to Term (a) Rev Loans Amortized Cost Basis 2021 2020 2019 2018 2017 Prior Total
PPP: (b)
Risk rating:
Pass $ — $ — $ 44,921 $ 18,610 $ — $ — $ — $ — $ 63,531
Special Mention — — 212 281 — — — — 493
Potential Problem — — 2,000 — — — — — 2,000
Nonaccrual — — — 46 — — — — 46
PPP $ — $ — $ 47,134 $ 18,936 $ — $ — $ — $ — $ 66,070
Commercial and industrial: (c)
Risk rating:
Pass $ 2,084 $ 2,371,605 $ 2,631,753 $ 852,758 $ 986,300 $ 710,491 $ 177,568 $ 493,876 $ 8,224,351
Special Mention — 7,068 5,900 1,695 — — — 2,811 17,474
Potential Problem 2,706 26,387 23,415 19,960 46,296 20,924 104 1,172 138,258
Nonaccrual 76 — 5,996 161 52 24 — — 6,233
Commercial and industrial $ 4,867 $ 2,405,059 $ 2,667,064 $ 874,575 $ 1,032,647 $ 731,439 $ 177,671 $ 497,860 $ 8,386,316
Commercial real estate - owner occupied:
Risk rating:
Pass $ 10,092 $ 30,869 $ 261,418 $ 178,424 $ 187,073 $ 110,169 $ 54,538 $ 117,011 $ 939,503
Special Mention — 226 — 4,628 — — — 245 5,100
Potential Problem — 526 5,953 4,721 10,047 727 2,204 2,546 26,723
Commercial real estate - owner occupied $ 10,092 $ 31,621 $ 267,371 $ 187,773 $ 197,120 $ 110,896 $ 56,742 $ 119,802 $ 971,326
Commercial and business lending:
Risk rating:
Pass $ 12,176 $ 2,402,474 $ 2,938,092 $ 1,049,792 $ 1,173,373 $ 820,660 $ 232,106 $ 610,887 $ 9,227,385
Special Mention — 7,294 6,112 6,604 — — — 3,056 23,066
Potential Problem 2,706 26,913 31,368 24,681 56,343 21,651 2,307 3,718 166,981
Nonaccrual 76 — 5,996 207 52 24 — — 6,279
Commercial and business lending $ 14,958 $ 2,436,680 $ 2,981,569 $ 1,081,284 $ 1,229,767 $ 842,335 $ 234,414 $ 617,662 $ 9,423,711
Commercial real estate - investor:
Risk rating:
Pass $ 37,430 $ 105,521 $ 1,650,936 $ 685,423 $ 867,606 $ 414,079 $ 139,320 $ 230,452 $ 4,093,337
Special Mention — — 57,163 27,384 33,016 72 — 6,781 124,416
Potential Problem — — 21,309 9,860 22,243 34,591 3,564 14,573 106,138
Nonaccrual — — 45,502 8,158 6,820 — — 197 60,677
Commercial real estate - investor $ 37,430 $ 105,521 $ 1,774,910 $ 730,825 $ 929,685 $ 448,741 $ 142,883 $ 252,003 $ 4,384,569
Real estate construction:
Risk rating:
Pass $ — $ 31,773 $ 843,664 $ 614,469 $ 204,337 $ 48,647 $ 2,229 $ 12,212 $ 1,757,331
Special Mention — — 2,203 11,929 — 15,885 41 2 30,060
Potential Problem — — 37 120 21,251 — — — 21,408
Nonaccrual — — — — — — — 177 177
Real estate construction $ — $ 31,773 $ 845,903 $ 626,518 $ 225,588 $ 64,532 $ 2,270 $ 12,392 $ 1,808,976
Commercial real estate lending:
Risk rating:
Pass $ 37,430 $ 137,294 $ 2,494,600 $ 1,299,893 $ 1,071,943 $ 462,726 $ 141,549 $ 242,664 $ 5,850,668
Special Mention — — 59,366 39,313 33,016 15,957 41 6,784 154,476
Potential Problem — — 21,345 9,980 43,494 34,591 3,564 14,573 127,546
Nonaccrual — — 45,502 8,158 6,820 — — 374 60,855
Commercial real estate lending $ 37,430 $ 137,294 $ 2,620,814 $ 1,357,343 $ 1,155,273 $ 513,273 $ 145,153 $ 264,395 $ 6,193,545
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Term Loans Amortized Cost Basis by Origination Year (a)
($ in Thousands) Rev Loans Converted to Term (a) Rev Loans Amortized Cost Basis 2021 2020 2019 2018 2017 Prior Total
Total commercial:
Risk rating:
Pass $ 49,606 $ 2,539,768 $ 5,432,693 $ 2,349,685 $ 2,245,316 $ 1,283,386 $ 373,655 $ 853,551 $ 15,078,053
Special Mention — 7,294 65,478 45,917 33,016 15,957 41 9,840 177,543
Potential Problem 2,706 26,913 52,713 34,660 99,837 56,241 5,871 18,291 294,527
Nonaccrual 76 — 51,498 8,365 6,872 24 — 374 67,134
Total commercial $ 52,388 $ 2,573,974 $ 5,602,382 $ 2,438,627 $ 2,385,040 $ 1,355,608 $ 379,567 $ 882,057 $ 15,617,256
Residential mortgage:
Risk rating:
Pass $ — $ — $ 1,771,447 $ 1,945,029 $ 974,188 $ 428,459 $ 673,447 $ 1,716,419 $ 7,508,989
Special Mention — — — — — 285 — 461 746
Potential Problem — — 475 332 404 265 81 658 2,214
Nonaccrual — — 1,993 2,911 4,479 6,224 6,019 33,734 55,362
Residential mortgage $ — $ — $ 1,773,915 $ 1,948,272 $ 979,071 $ 435,233 $ 679,547 $ 1,751,272 $ 7,567,310
Auto finance:
Risk rating:
Pass $ — $ — $ 137,952 $ 707 $ 2,675 $ 1,200 $ 352 $ 107 $ 142,993
Nonaccrual — — — — 36 15 — — 52
Auto finance $ — $ — $ 137,952 $ 707 $ 2,711 $ 1,216 $ 352 $ 107 $ 143,045
Home equity:
Risk rating:
Pass $ 6,728 $ 498,970 $ 1,216 $ 1,401 $ 7,640 $ 8,742 $ 7,660 $ 61,251 $ 586,880
Special Mention 133 100 — 102 4 — — 638 844
Potential Problem 6 — 6 — — 13 — 146 165
Nonaccrual 925 35 9 92 211 305 302 6,772 7,726
Home equity $ 7,792 $ 499,104 $ 1,232 $ 1,595 $ 7,856 $ 9,059 $ 7,962 $ 68,807 $ 595,615
Other consumer:
Risk rating:
Pass $ 443 $ 180,312 $ 9,297 $ 4,987 $ 2,884 $ 371 $ 265 $ 103,075 $ 301,191
Special Mention 7 351 — 4 — — — 7 363
Nonaccrual 6 120 — 14 7 — 19 11 170
Other consumer $ 456 $ 180,783 $ 9,297 $ 5,005 $ 2,890 $ 371 $ 284 $ 103,093 $ 301,723
Total consumer:
Risk rating:
Pass $ 7,171 $ 679,353 $ 1,919,912 $ 1,952,124 $ 987,387 $ 438,771 $ 681,725 $ 1,880,781 $ 8,540,053
Special Mention 140 451 — 106 4 285 — 1,106 1,952
Potential Problem 6 — 481 332 404 277 81 804 2,379
Nonaccrual 931 154 2,003 3,017 4,733 6,545 6,340 40,517 63,309
Total consumer $ 8,248 $ 679,959 $ 1,922,396 $ 1,955,579 $ 992,528 $ 445,878 $ 688,145 $ 1,923,208 $ 8,607,693
Total loans:
Risk rating:
Pass $ 56,777 $ 3,219,121 $ 7,352,605 $ 4,301,809 $ 3,232,703 $ 1,722,157 $ 1,055,380 $ 2,734,332 $ 23,618,106
Special Mention 140 7,745 65,478 46,023 33,021 16,241 41 10,946 179,495
Potential Problem 2,713 26,913 53,194 34,992 100,240 56,519 5,952 19,095 296,905
Nonaccrual 1,006 154 53,501 11,382 11,605 6,569 6,340 40,891 130,443
Total loans $ 60,636 $ 3,253,933 $ 7,524,778 $ 4,394,206 $ 3,377,569 $ 1,801,486 $ 1,067,713 $ 2,805,265 $ 24,224,949
(a) Revolving loans converted to term loans are those converted during the reporting period and are also reported in their year of origination.
(b) 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.
(c) Includes asset-based lending & equipment finance.
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Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, and appropriate policies for ACLL, nonaccrual loans, and charge offs.
For commercial loans, management has determined the pass credit quality indicator to include credits exhibiting acceptable financial statements, cash flow, and leverage. If any risk exists, it is mitigated by the loan structure, collateral, monitoring, or control. For consumer loans, performing loans include credits performing in accordance with the original contractual terms.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Special mention credits have potential weaknesses that warrant specific attention from management. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Accruing TDRs could be pass or special mention, depending on the risk rating on the loan. Potential problem loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness, or weaknesses, which may jeopardize liquidation of the debt, and are characterized by the distinct possibility the Corporation will sustain some loss if the deficiencies are not corrected. Management has determined commercial loan relationships in nonaccrual status, and commercial and consumer loan relationships with their terms restructured in a TDR, meet the criteria to be individually evaluated. Commercial loans classified as special mention, potential problem, and nonaccrual are reviewed at a minimum on a quarterly basis, while pass credits, which are performing rated credits, are generally reviewed on an annual basis or more frequently if the loan renewal is less than one year or if otherwise warranted.
The following table presents loans by past due status at September 30, 2022:
Accruing
30-59 Days 60-89 Days 90+ Days
($ in Thousands) Current Past Due Past Due Past Due Nonaccrual (a)(b) Total
PPP $ 798 $ 231 $ 21 $ — $ — $ 1,050
Asset-based lending & equipment finance 380,830 — — — — 380,830
Commercial and industrial 9,172,739 1,505 104 121 15,576 9,190,045
Commercial real estate - owner occupied 999,786 — — — — 999,786
Commercial and business lending 10,554,153 1,736 124 121 15,576 10,571,711
Commercial real estate - investor 5,026,810 — — — 37,479 5,064,289
Real estate construction 1,834,975 43 — — 141 1,835,159
Commercial real estate lending 6,861,786 43 — — 37,620 6,899,449
Total commercial 17,415,939 1,779 124 121 53,196 17,471,159
Residential mortgage 8,252,714 6,371 146 186 55,485 8,314,902
Auto finance 1,110,628 5,564 642 — 302 1,117,136
Home equity 601,049 3,322 912 — 7,325 612,608
Other consumer 298,675 995 596 1,111 98 301,475
Total consumer 10,263,065 16,252 2,296 1,297 63,210 10,346,121
Total loans $ 27,679,004 $ 18,032 $ 2,421 $ 1,417 $ 116,406 $ 27,817,280
(a) Of the total nonaccrual loans, $ 72 million, or 62 %, were current with respect to payment at September 30, 2022.
(b) No interest income was recognized on nonaccrual loans for the three and nine months ended September 30, 2022. In addition, there were $ 21 million of nonaccrual loans for which there was no related ACLL at September 30, 2022.
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The following table presents loans by past due status at December 31, 2021:
Accruing
30-59 Days 60-89 Days 90+ Days
($ in Thousands) Current Past Due Past Due Past Due Nonaccrual (a)(b) Total
PPP $ 65,941 $ 40 $ 43 $ — $ 46 $ 66,070
Asset-based lending 178,027 — — — — 178,027
Commercial and industrial (c) 8,201,272 579 54 151 6,233 8,208,289
Commercial real estate - owner occupied 971,163 163 — — — 971,326
Commercial and business lending 9,416,403 781 97 151 6,279 9,423,711
Commercial real estate - investor 4,323,276 142 474 — 60,677 4,384,569
Real estate construction 1,807,178 1,618 2 — 177 1,808,976
Commercial real estate lending 6,130,454 1,759 477 — 60,855 6,193,545
Total commercial 15,546,857 2,541 573 151 67,134 15,617,256
Residential mortgage 7,505,654 5,500 669 126 55,362 7,567,310
Auto finance 142,982 11 — — 52 143,045
Home equity 584,177 2,867 844 — 7,726 595,615
Other consumer 298,261 1,835 472 986 170 301,723
Total consumer 8,531,074 10,213 1,985 1,111 63,309 8,607,693
Total loans $ 24,077,931 $ 12,754 $ 2,558 $ 1,263 $ 130,443 $ 24,224,949
(a) Of the total nonaccrual loans, $ 84 million, or 65 %, were current with respect to payment at December 31, 2021.
(b) No interest income was recognized on nonaccrual loans for the year ended December 31, 2021. In addition, there were $ 9 million of nonaccrual loans for which there was no related ACLL at December 31, 2021.
(c) Includes equipment finance.
Troubled Debt Restructurings
Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty.
The following table presents nonaccrual and performing restructured loans by loan portfolio:
Sep 30, 2022 Dec 31, 2021
Performing Nonaccrual Performing Nonaccrual
Restructured Restructured Restructured Restructured
($ in Thousands) Loans Loans (a) Loans Loans (a)
Commercial and industrial $ 14,829 $ — $ 8,687 $ —
Commercial real estate — owner occupied 369 — 967 —
Commercial real estate — investor 733 3,268 12,866 3,093
Real estate construction 165 42 242 45
Residential mortgage 16,169 17,372 16,316 13,483
Home equity 2,103 967 2,648 806
Other consumer 764 — 803 —
Total restructured loans $ 35,132 $ 21,650 $ 42,530 $ 17,426
(a) Nonaccrual restructured loans have been included within nonaccrual loans.
The Corporation had a recorded investment of $ 11 million in loans modified as TDRs during the nine months ended September 30, 2022, of which $ 1 million were in accrual status, included in pass or special mention based on their risk rating within the credit quality tables, and $ 10 million were in nonaccrual within the credit quality tables, pending a sustained period of repayment. The following table provides the number of loans modified in a TDR by loan portfolio, the recorded investment, and unpaid principal balance for the nine months ended September 30, 2022 and 2021:
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Number Unpaid Number Unpaid
of Recorded Principal of Recorded Principal
($ in Thousands) Loans Investment (a) Balance (b) Loans Investment (a) Balance (b)
Commercial and industrial 2 $ 265 $ 265 4 $ 638 $ 638
Commercial real estate — investor 1 547 573 4 1,682 1,682
Residential mortgage 44 9,641 9,833 55 10,434 10,460
Home equity 12 390 412 7 916 963
Total loans modified 59 $ 10,844 $ 11,083 70 $ 13,670 $ 13,744
(a) Represents post-modification outstanding recorded investment.
(b) Represents pre-modification outstanding recorded investment.
Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, modification of note structure (A/B Note), non-reaffirmed Chapter 7 bankruptcies, principal reduction, or some
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combination of these concessions. During the nine months ended September 30, 2022, restructured loan modifications of commercial loans primarily included maturity date extensions and payment schedule modifications. Restructured loan modifications of consumer loans primarily included maturity date extensions, interest rate concessions, non-reaffirmed Chapter 7 bankruptcies, or a combination of these concessions for the nine months ended September 30, 2022.
The following table provides the number of loans modified in a TDR during the previous twelve months which subsequently defaulted during the nine months ended September 30, 2022 and 2021, and the recorded investment in these restructured loans as of September 30, 2022 and 2021:
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Number of Recorded Number of Recorded
($ in Thousands) Loans Investment Loans Investment
Residential mortgage 4 $ 1,178 2 $ 200
All loans modified in a TDR are individually evaluated for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a subsequent payment default, are considered in the determination of an appropriate level of the ACLL.
The Corporation analyzes loans for classification as a probable TDR. This analysis includes identifying customers that are showing possible liquidity issues in the near term without reasonable access to alternative sources of capital. At September 30, 2022, the Corporation had no loans meeting this classification compared to $ 7 million at December 31, 2021.
Allowance for Credit Losses on Loans
The ACLL is comprised of the allowance for loan losses and the allowance for unfunded commitments. The level of the ACLL represents management’s estimate of an amount appropriate to provide for expected lifetime credit losses in the loan portfolio at the balance sheet date. The expected lifetime credit losses are the product of multiplying the Corporation's estimates of probability of default, loss given default, and the individual loan level exposure at default on an undiscounted basis. A main factor in the determination of the ACLL is the economic forecast. The Corporation utilized Moody's baseline forecast, updated during August 2022 and reviewed against the September 2022 forecast for material updates, in the allowance model. The forecast is applied over a 2 year reasonable and supportable period with straight-line reversion to the historical losses over the second year of the period. The allowance for unfunded commitments is maintained at a level believed by management to be sufficient to absorb expected lifetime losses related to unfunded credit facilities (including unfunded loan commitments and letters of credit). See Note 12 for additional information on the change in the allowance for unfunded commitments.
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The following table presents a summary of the changes in the ACLL by portfolio segment for the nine months ended September 30, 2022:
($ in Thousands) Dec 31, 2021 Charge offs Recoveries Net Charge offs Provision for credit losses Sep 30, 2022 ACLL / Loans
Allowance for loan losses
PPP $ 51 $ — $ — $ — $ ( 50 ) $ 1
Asset-based lending & equipment finance 4,182 — — — 1,406 5,588
Commercial and industrial 85,624 ( 3,644 ) 4,157 512 16,107 102,243
Commercial real estate — owner occupied 11,473 — 10 10 ( 2,852 ) 8,631
Commercial and business lending 101,330 ( 3,644 ) 4,167 523 14,611 116,464
Commercial real estate — investor 72,803 — — — ( 12,032 ) 60,771
Real estate construction 37,643 ( 48 ) 90 43 ( 1,266 ) 36,419
Commercial real estate lending 110,446 ( 48 ) 90 43 ( 13,299 ) 97,190
Total commercial 211,776 ( 3,692 ) 4,258 565 1,313 213,654
Residential mortgage 40,787 ( 287 ) 752 465 ( 2,345 ) 38,907
Auto finance 1,999 ( 228 ) 53 ( 175 ) 13,917 15,741
Home equity 14,011 ( 524 ) 1,199 675 ( 601 ) 14,086
Other consumer 11,441 ( 2,434 ) 792 ( 1,642 ) 716 10,516
Total consumer 68,239 ( 3,472 ) 2,796 ( 676 ) 11,687 79,250
Total loans $ 280,015 $ ( 7,165 ) $ 7,054 $ ( 111 ) $ 13,000 $ 292,904
Allowance for unfunded commitments
Asset-based lending & equipment finance $ 857 $ — $ — $ — $ 184 $ 1,042
Commercial and industrial 17,601 — — — 4 17,606
Commercial real estate — owner occupied 208 — — — ( 119 ) 89
Commercial and business lending 18,667 — — — 70 18,737
Commercial real estate — investor 936 — — — ( 303 ) 633
Real estate construction 15,586 — — — 552 16,138
Commercial real estate lending 16,522 — — — 249 16,771
Total commercial 35,189 — — — 319 35,508
Home equity 2,592 — — — — 2,592
Other consumer 1,995 — — — ( 319 ) 1,675
Total consumer 4,587 — — — ( 319 ) 4,268
Total loans $ 39,776 $ — $ — $ — $ — $ 39,776
Allowance for credit losses on loans
PPP $ 51 $ — $ — $ — $ ( 50 ) $ 1 0.10 %
Asset-based lending & equipment finance 5,040 — — — 1,590 6,630 1.74 %
Commercial and industrial 103,225 ( 3,644 ) 4,157 512 16,112 119,849 1.30 %
Commercial real estate — owner occupied 11,681 — 10 10 ( 2,971 ) 8,721 0.87 %
Commercial and business lending 119,997 ( 3,644 ) 4,167 523 14,681 135,200 1.28 %
Commercial real estate — investor 73,739 — — — ( 12,335 ) 61,404 1.21 %
Real estate construction 53,229 ( 48 ) 90 43 ( 714 ) 52,557 2.86 %
Commercial real estate lending 126,968 ( 48 ) 90 43 ( 13,049 ) 113,961 1.65 %
Total commercial 246,965 ( 3,692 ) 4,258 565 1,632 249,162 1.43 %
Residential mortgage 40,787 ( 287 ) 752 465 ( 2,345 ) 38,907 0.47 %
Auto finance 1,999 ( 228 ) 53 ( 175 ) 13,917 15,741 1.41 %
Home equity 16,603 ( 524 ) 1,199 675 ( 600 ) 16,678 2.72 %
Other consumer 13,436 ( 2,434 ) 792 ( 1,642 ) 397 12,191 4.04 %
Total consumer 72,825 ( 3,472 ) 2,796 ( 676 ) 11,368 83,517 0.81 %
Total loans $ 319,791 $ ( 7,165 ) $ 7,054 $ ( 111 ) $ 13,000 $ 332,680 1.20 %
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The following table presents a summary of the changes in the ACLL by portfolio segment for the year ended December 31, 2021:
($ in Thousands) Dec 31, 2020 Charge offs Recoveries Net Charge offs Provision for credit losses Dec 31, 2021 ACLL / Loans
Allowance for loan losses
PPP $ 531 $ — $ — $ — $ ( 480 ) $ 51
Asset-based lending 2,077 — 412 412 1,693 4,182
Commercial and industrial (a) 140,716 ( 21,564 ) 8,152 ( 13,412 ) ( 41,680 ) 85,624
Commercial real estate — owner occupied 11,274 — 120 120 80 11,473
Commercial and business lending 154,598 ( 21,564 ) 8,684 ( 12,880 ) ( 40,388 ) 101,330
Commercial real estate — investor 93,435 ( 14,346 ) 3,162 ( 11,184 ) ( 9,448 ) 72,803
Real estate construction 59,193 ( 5 ) 126 121 ( 21,672 ) 37,643
Commercial real estate lending 152,629 ( 14,351 ) 3,288 ( 11,063 ) ( 31,120 ) 110,446
Total commercial 307,226 ( 35,915 ) 11,972 ( 23,943 ) ( 71,508 ) 211,776
Residential mortgage 42,996 ( 880 ) 841 ( 38 ) ( 2,170 ) 40,787
Auto finance 174 ( 22 ) 31 9 1,816 1,999
Home equity 18,849 ( 668 ) 2,854 2,186 ( 7,024 ) 14,011
Other consumer 14,456 ( 3,168 ) 1,267 ( 1,901 ) ( 1,113 ) 11,441
Total consumer 76,475 ( 4,738 ) 4,993 256 ( 8,492 ) 68,239
Total loans $ 383,702 $ ( 40,652 ) $ 16,965 $ ( 23,687 ) $ ( 80,000 ) $ 280,015
Allowance for unfunded commitments
Asset-based lending $ 901 $ — $ — $ — $ ( 43 ) $ 857
Commercial and industrial (a) 21,411 — — — ( 3,809 ) 17,601
Commercial real estate — owner occupied 266 — — — ( 58 ) 208
Commercial and business lending 22,577 — — — ( 3,911 ) 18,667
Commercial real estate — investor 636 — — — 300 936
Real estate construction 18,887 — — — ( 3,301 ) 15,586
Commercial real estate lending 19,523 — — — ( 3,001 ) 16,522
Total commercial 42,101 — — — ( 6,912 ) 35,189
Home equity 3,118 — — — ( 526 ) 2,592
Other consumer 2,557 — — — ( 563 ) 1,995
Total consumer 5,675 — — — ( 1,088 ) 4,587
Total loans $ 47,776 $ — $ — $ — $ ( 8,000 ) $ 39,776
Allowance for credit losses on loans
PPP $ 531 $ — $ — $ — $ ( 480 ) $ 51 0.08 %
Asset-based lending 2,978 — 412 412 1,649 5,040 2.83 %
Commercial and industrial (a) 162,126 ( 21,564 ) 8,152 ( 13,412 ) ( 45,490 ) 103,225 1.26 %
Commercial real estate — owner occupied 11,539 — 120 120 22 11,681 1.20 %
Commercial and business lending 177,175 ( 21,564 ) 8,684 ( 12,880 ) ( 44,299 ) 119,997 1.27 %
Commercial real estate — investor 94,071 ( 14,346 ) 3,162 ( 11,184 ) ( 9,148 ) 73,739 1.68 %
Real estate construction 78,080 ( 5 ) 126 121 ( 24,972 ) 53,229 2.94 %
Commercial real estate lending 172,152 ( 14,351 ) 3,288 ( 11,063 ) ( 34,121 ) 126,968 2.05 %
Total commercial 349,327 ( 35,915 ) 11,972 ( 23,943 ) ( 78,419 ) 246,965 1.58 %
Residential mortgage 42,996 ( 880 ) 841 ( 38 ) ( 2,170 ) 40,787 0.54 %
Auto finance 174 ( 22 ) 31 9 1,816 1,999 1.40 %
Home equity 21,967 ( 668 ) 2,854 2,186 ( 7,550 ) 16,603 2.79 %
Other consumer 17,013 ( 3,168 ) 1,267 ( 1,901 ) ( 1,676 ) 13,436 4.45 %
Total consumer 82,150 ( 4,738 ) 4,993 256 ( 9,581 ) 72,825 0.85 %
Total loans $ 431,478 $ ( 40,652 ) $ 16,965 $ ( 23,687 ) $ ( 88,000 ) $ 319,791 1.32 %
(a) Includes equipment finance.
Note 8 Goodwill and Other Intangible Assets
Goodwill
Goodwill is not amortized but is instead subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
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The Corporation conducted its most recent annual impairment testing in May 2022, utilizing a qualitative assessment. Factors that management considered in this assessment included macroeconomic conditions, industry and market considerations, overall financial performance of the Corporation and each reporting unit (both current and projected), changes in management strategy, and changes in the composition or carrying amount of net assets. In addition, management considered the changes in both the Corporation's common stock price and in the overall bank common stock index (based on the S&P 400 Regional Bank Sub-Industry Index), as well as the Corporation's earnings per common share trend over the past year. Based on these assessments, management concluded that it is more likely than not that the estimated fair value exceeded the carrying value (including goodwill) for each reporting unit. Therefore, a step one quantitative analysis was not required. There have been no events since the May 2022 impairment test that have changed the Corporation's impairment assessment conclusion. There were no impairment charges recorded in 2021 or the first nine months of 2022.
The Corporation had goodwill of $ 1.1 billion at both September 30, 2022 and December 31, 2021.
Other Intangible Assets
The Corporation has CDIs and historically had other intangible assets, both of which are amortized. For CDIs and other intangibles, changes in the gross carrying amount, accumulated amortization, and net book value were as follows:
($ in Thousands) Nine Months Ended September 30, 2022 Year Ended Dec 31, 2021
Core deposit intangibles
Gross carrying amount at the beginning of period $ 88,109 $ 88,109
Accumulated amortization ( 36,624 ) ( 30,016 )
Net book value $ 51,485 $ 58,093
Amortization during the period $ 6,608 $ 8,811
Other intangibles
Gross carrying amount at the beginning of period $ — $ 2,000
Reductions due to sale — ( 1,317 )
Accumulated amortization — ( 683 )
Net book value $ — $ —
Amortization during the period $ — $ 33
Mortgage Servicing Rights
The Corporation sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold. On January 1, 2022, the Corporation made the irrevocable election to account for its MSRs under the fair value measurement method, with any change in fair value being recognized through earnings in mortgage banking, net on the consolidated statements of income. MSRs are not traded in active markets. As a result, a cash flow model is used to determine fair value. Key assumptions and estimates, projected prepayment speeds, assumed servicing costs, ancillary income, costs to service delinquent loans, costs of foreclosure, and discount rates with option-adjusted spreads, are used in measuring the fair value of the MSRs asset. These assumptions are considered significant unobservable inputs. See Note 12 for a discussion of the recourse provisions on sold residential mortgage loans. See Note 13 which further discusses fair value measurement relative to the MSRs asset.
A summary of changes in the balance of the MSRs asset under the fair value measurement method for the nine months ended September 30, 2022 is as follows:
($ in Thousands) Nine Months Ended September 30, 2022
Mortgage servicing rights
Mortgage servicing rights at beginning of period $ 54,862
Cumulative effect of accounting methodology change 2,296
Balance at beginning of period, adjusted $ 57,158
Additions 6,316
Paydowns ( 7,470 )
Valuation:
Change in fair value model assumptions 5,715
Changes in fair value of asset 16,633
Mortgage servicing rights at end of period $ 78,352
Portfolio of residential mortgage loans serviced for others (“servicing portfolio”) $ 6,800,404
Mortgage servicing rights to servicing portfolio 1.15 %
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Prior to January 1, 2022, the Corporation accounted for its MSRs under the amortization methodology. Under this methodology the Corporation evaluated its MSRs asset for impairment at minimum on a quarterly basis. Impairment was assessed based on fair value at each reporting date using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). As mortgage interest rates fell, prepayment speeds were usually faster and the value of the MSRs asset generally decreased, requiring additional valuation reserve. Conversely, as mortgage interest rates rose, prepayment speeds were usually slower and the value of the MSRs asset generally increased, requiring less valuation reserve. A valuation allowance was established, through a charge to earnings, to the extent the amortized cost of the MSRs exceeded the estimated fair value by stratification. An other-than-temporary impairment (i.e., recoverability was considered remote when considering interest rates and loan pay off activity) was recognized as a write-down of the MSRs asset and the related valuation allowance (to the extent a valuation allowance was available) and then against earnings. A direct write-down permanently reduced the carrying value of the MSRs asset and valuation allowance, precluding subsequent recoveries.
A summary of changes in the balance of the MSRs asset and the MSRs valuation allowance under the amortization method for the year ended December 31, 2021 is as follows:
($ in Thousands) Year Ended Dec 31, 2021
Mortgage servicing rights
Mortgage servicing rights at beginning of period $ 59,967
Additions 16,151
Amortization ( 19,436 )
Mortgage servicing rights at end of period $ 56,682
Valuation allowance at beginning of period $ ( 18,006 )
Recoveries, net 16,186
Valuation allowance at end of period $ ( 1,820 )
Mortgage servicing rights, net $ 54,862
Fair value of mortgage servicing rights $ 57,259
Portfolio of residential mortgage loans serviced for others (“servicing portfolio”) $ 6,994,834
Mortgage servicing rights, net to servicing portfolio 0.78 %
Mortgage servicing rights expense (a) $ 3,250
(a) Includes the amortization of mortgage servicing rights and additions / recoveries to the valuation allowance of mortgage servicing rights, and is a component of mortgage banking, net on the consolidated statements of income .
The projections of amortization expense for CDIs and decay for MSRs are based on existing asset balances, the current interest rate environment, and prepayment speeds as of September 30, 2022. The actual expense the Corporation recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements, and events or circumstances that indicate the carrying amount of an asset may not be recoverable. The following table shows the estimated future amortization expense for CDIs and the decay for MSRs:
($ in Thousands) Core Deposit Intangibles Mortgage Servicing Rights
Three months ending December 31, 2022 $ 2,203 $ 3,585
2023 8,811 13,582
2024 8,811 11,827
2025 8,811 10,246
2026 8,811 8,800
2027 8,811 7,451
Beyond 2027 5,227 22,861
Total estimated amortization expense $ 51,485 $ 78,352
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Note 9 Short and Long-Term Funding
The following table presents the components of short-term funding (funding with original contractual maturities of one year or less) and long-term funding (funding with original contractual maturities greater than one year):
($ in Thousands) Sep 30, 2022 Dec 31, 2021
Short-Term Funding
Federal funds purchased $ 505 $ 120
Securities sold under agreements to repurchase 276,169 319,412
Federal funds purchased and securities sold under agreements to repurchase 276,674 319,532
Commercial paper 7,687 34,730
Total short-term funding $ 284,361 $ 354,262
Long-Term Funding
Corporation subordinated notes, at par, due 2025 $ 250,000 $ 250,000
Capitalized costs ( 617 ) ( 839 )
Subordinated debt fair value hedge liability (a) ( 389 ) —
Finance leases 490 163
Total long-term funding $ 249,484 $ 249,324
Total short and long-term funding, excluding FHLB advances $ 533,844 $ 603,587
FHLB Advances
Short-term FHLB advances $ 2,583,000 $ —
Long-term FHLB advances 1,208,791 1,621,047
FHLB advance fair value hedge liability (a) ( 14,314 ) —
Total FHLB advances $ 3,777,478 $ 1,621,047
Total short and long-term funding $ 4,311,322 $ 2,224,633
(a) For additional information on the fair value hedge liability, see Note 10.
Securities Sold Under Agreements to Repurchase
The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. The obligation to repurchase the securities is reflected as a liability on the Corporation’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts (i.e., there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities).
The Corporation utilizes securities sold under agreements to repurchase to facilitate the needs of its customers. The fair value of securities pledged to secure repurchase agreements may decline. At September 30, 2022, the Corporation had pledged securities valued at 164 % of the gross outstanding balance of repurchase agreements to manage this risk.
The remaining contractual maturity of the securities sold under agreements to repurchase on the consolidated balance sheets as of September 30, 2022 and December 31, 2021 are presented in the following table:
Overnight and Continuous
($ in Thousands) Sep 30, 2022 Dec 31, 2021
Repurchase agreements
Agency mortgage-related securities $ 276,169 $ 319,412
Long-Term Funding
Subordinated Notes
In November 2014 , the Corporation issued $ 250 million of 10 -year subordinated notes, due January 2025 , and callable October 2024 . The subordinated notes have a fixed coupon interest rate of 4.25 % and were issued at a discount.
Finance Leases
Finance leases are used in conjunction with branch operations. See Note 18 for additional disclosure regarding the Corporation’s leases.
FHLB Advances
The Corporation prepaid $400 million in long-term FHLB advances during the first quarter of 2022 with no prepayment fee.
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Note 10 Derivative and Hedging Activities
The Corporation is exposed to certain risk arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the values of which are determined by interest rates. The Corporation's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation's known or expected cash receipts and its known or expected cash payments principally related to the Corporation's assets.
The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. The Corporation is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. To mitigate the counterparty risk, contracts generally contain language outlining collateral pledging requirements for each counterparty. For non-centrally cleared derivatives, collateral must be posted when the market value exceeds certain mutually agreed upon threshold limits. Securities and cash are often pledged as collateral. The Corporation pledged $ 81 million and $ 71 million of investment securities as collateral at September 30, 2022 and December 31, 2021, respectively. The Corporation's required cash collateral was immaterial at September 30, 2022, compared to $ 11 million at December 31, 2021.
Federal regulations require the Corporation to clear all LIBOR and compound SOFR interest rate swaps through a clearing house, if possible. For derivatives cleared through central clearing houses, the variation margin payments are legally characterized as daily settlements of the derivative rather than collateral. The Corporation's clearing agent for interest rate derivative contracts that are centrally cleared through the Chicago Mercantile Exchange and the London Clearing House settles the variation margin daily. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. Depending on the net position, the fair value is reported in other assets or accrued expenses and other liabilities on the consolidated balance sheets. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument.
Fair Value Hedges of Interest Rate Risk
The Corporation is exposed to changes in the fair value of its fixed-rate debt due to changes in benchmark interest rates. The Corporation uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rates. Interest rate swaps designated as fair value hedges involve receiving payment of fixed-rate amounts from a counterparty in exchange for the Corporation paying variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, as allowed under U.S. GAAP, we applied the "shortcut" method of accounting, which permits the assumption of perfect effectiveness. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest expense. These items, along with the net interest from the derivative, are reported in the same income statement line as the fixed-rate debt expense.
Derivatives to Accommodate Customer Needs
The Corporation facilitates customer borrowing activity by entering into various derivative contracts which are designated as free standing derivative contracts. Free standing derivative products are entered into primarily for the benefit of commercial customers seeking to manage their exposures to interest rate risk, foreign currency, and until early 2022, commodity prices. As of the end of the first quarter of 2022, the Corporation no longer had any outstanding commodity contracts. These derivative contracts are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and, therefore, do not qualify for hedge accounting treatment. Such derivative contracts are carried at fair value in other assets and accrued expenses and other liabilities on the consolidated balance sheets with changes in the fair value recorded as a component of capital markets, net, and typically include interest rate-related instruments (swaps and caps), foreign currency exchange forwards, and until the end of the first quarter of 2022, commodity contracts. See Note 11 for additional information and disclosures on balance sheet offsetting.
Interest rate-related and other instruments: The Corporation provides interest rate risk management services to commercial customers, primarily forward interest rate swaps and caps. The Corporation’s market risk from unfavorable movements in interest rates related to these derivative contracts is generally economically hedged by concurrently entering into offsetting derivative contracts. The offsetting derivative contracts have identical notional values, terms, and indices. The Corporation also enters into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in
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which we are either a participant or a lead bank. The risk participation agreements entered into by the Corporation as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution.
Foreign currency exchange forwards: The Corporation provides foreign currency exchange services to customers, primarily forward contracts. The Corporation's customers enter into a foreign currency exchange forward with the Corporation as a means for them to mitigate exchange rate risk. The Corporation mitigates its risk by then entering into an offsetting foreign currency exchange derivative contract.
Commodity contracts: As of the end of the first quarter of 2022, the Corporation no longer had any outstanding commodity contracts. Historically, commodity contracts were entered into primarily for the benefit of commercial customers seeking to manage their exposure to fluctuating commodity prices. The Corporation mitigated its risk by then entering into an offsetting commodity derivative contract.
Mortgage Derivatives
Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments on residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded in other assets and accrued expenses and other liabilities on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net on the consolidated statements of income.
Interest rate-related instruments for MSRs hedge: The fair value of the Corporation's MSRs asset changes in response to changes in primary mortgage loan rates and other assumptions. To mitigate the earnings volatility caused by changes in the fair value of MSRs, the Corporation designates certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs and are recorded in other assets and accrued expenses and other liabilities on the consolidated balance sheets with the changes in fair value recorded as a component of mortgage banking, net on the consolidated statements of income.
The following table presents the total notional amounts and gross fair values of the Corporation’s derivatives, as well as the balance sheet netting adjustments as of September 30, 2022 and December 31, 2021. The derivative assets and liabilities are presented on a gross basis prior to the application of bilateral collateral and master netting agreements, but after the variation margin payments with central clearing organizations have been applied as settlement, as applicable. Total derivative assets and liabilities are adjusted to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of September 30, 2022 and December 31, 2021. The resulting net derivative asset and liability fair values are included in other assets and accrued expenses and other liabilities, respectively, on the consolidated balance sheets.
Sep 30, 2022 Dec 31, 2021
Asset Liability Asset Liability
($ in Thousands) Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value
Designated as hedging instruments
Interest rate-related instruments $ — $ — $ 850,000 $ 906 $ — $ — $ — $ —
Not designated as hedging instruments
Interest rate-related and other instruments 4,250,397 59,618 4,535,166 264,212 3,874,781 83,626 3,874,781 26,231
Foreign currency exchange forwards 482,983 10,109 458,140 9,524 490,057 5,490 478,745 5,441
Commodity contracts — — — — 3,894 1,264 3,910 1,248
Mortgage banking (a)(b) 41,327 3,492 88,000 403 133,990 2,647 245,016 —
Total not designated as hedging instruments 73,218 274,139 93,026 32,921
Gross derivatives before netting 73,218 275,045 93,026 32,921
Less: Legally enforceable master netting agreements 869 869 2,143 2,143
Less: Cash collateral pledged/received 63,699 — 1,313 11,357
Total derivative instruments, after netting $ 8,650 $ 274,176 $ 89,570 $ 19,421
(a) The notional amount of the mortgage derivative asset includes interest rate lock commitments, while the notional amount of the mortgage derivative liability includes forward commitments.
(b) At September 30, 2022, the mortgage derivative asset includes approximately $ 3 million of forward commitments fair value, while the mortgage derivative liability includes approximately $ 403,000 of interest rate lock commitments fair value. At December 31, 2021, the mortgage derivative asset included approximately $ 30 ,000 of forward commitments fair value.
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The following table presents amounts that were recorded on the consolidated balance sheets related to cumulative basis adjustments for fair value hedges:
Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included
Carrying Amount of the Hedged Assets/(Liabilities) Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
($ in Thousands) September 30, 2022
Other long-term funding $ ( 249,611 ) $ 389
FHLB Advances ( 585,686 ) 14,314
Total $ ( 835,297 ) $ 14,703
The Corporation terminated its $ 500 million fair value hedge on loans and investment securities receivables during the fourth quarter of 2019. At September 30, 2022, the amortized cost basis of the closed portfolios which had previously been used in the terminated hedging relationship was $ 340 million and is included in loans on the consolidated balance sheets. This amount includes $ 2 million of hedging adjustments on the discontinued hedging relationships, which are not presented in the table above.
The table below identifies the effect of fair value hedge accounting on the Corporation's consolidated statements of income for the three and nine months ended September 30, 2022 and 2021:
Location and Amount Recognized on the Consolidated Statements of Income in
Fair Value and Cash Flow Hedging Relationships
Three months ended Sep 30, Nine Months Ended Sep 30,
2022 2021 2022 2021
($ in Thousands) Interest Income Interest Expense Interest Income Interest Income Interest Expense Interest Income
Total amounts of income presented on the consolidated statements of income in which the effects of the fair value hedge are recorded $ ( 120 ) $ ( 380 ) $ ( 292 ) $ ( 428 ) $ ( 380 ) $ ( 1,128 )
The effects of fair value hedging: Impact on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items ( 120 ) ( 14,703 ) ( 292 ) ( 428 ) ( 14,703 ) ( 1,128 )
Derivatives designated as hedging instruments (a) — 14,323 — — 14,323 —
(a) Includes net settlements on the derivatives.
The table below identifies the effect of derivatives not designated as hedging instruments on the Corporation's consolidated statements of income for the three and nine months ended September 30, 2022 and 2021:
Consolidated Statements of Income Category of Gain / (Loss)
Recognized in Income Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Derivative Instruments
Interest rate-related and other instruments — customer and mirror, net Capital markets, net $ ( 33 ) $ 557 $ 548 $ 2,546
Interest rate-related instruments — MSRs hedge Mortgage banking, net ( 3,547 ) — ( 12,559 ) —
Foreign currency exchange forwards Capital markets, net 159 ( 8 ) 536 109
Commodity contracts Capital markets, net — ( 124 ) ( 16 ) ( 1,256 )
Interest rate lock commitments (mortgage) Mortgage banking, net ( 1,389 ) ( 1,356 ) ( 3,020 ) ( 4,438 )
Forward commitments (mortgage) Mortgage banking, net 3,543 1,402 3,415 3,017
Note 11 Balance Sheet Offsetting
Interest Rate-Related Instruments, Commodity Contracts, and Foreign Exchange Forwards (“Interest, Commodity, and Foreign Exchange Agreements”)
The Corporation enters into interest rate-related instruments to facilitate the interest rate risk management strategies of commercial customers and foreign exchange forwards to manage customers' exposure to fluctuating foreign exchange rates. The Corporation mitigates these risks by entering into equal and offsetting agreements with highly rated third-party financial institutions. Historically, the Corporation entered into commodity contracts to manage commercial customers' exposure to fluctuating commodity prices. As of the end of the first quarter of 2022, the Corporation no longer had any outstanding commodity contracts. The Corporation is party to master netting arrangements with some of its financial institution counterparties that create single net settlements of all legal claims or obligations to pay or receive the net amount of settlement of the individual interest and foreign exchange agreements. Collateral, usually in the form of investment securities and cash, is
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posted by the counterparty with net liability positions in accordance with contract thresholds. Derivatives subject to a legally enforceable master netting agreement are reported with assets and liabilities offset resulting in a net position which is further offset by any cash and investment securities collateral, and is reported in other assets and accrued expenses and other liabilities on the face of the consolidated balance sheets. See Note 10 for additional information on the Corporation’s derivative and hedging activities.
The following table presents the interest rate and foreign exchange assets and liabilities subject to an enforceable master netting arrangement as of September 30, 2022 and interest rate, commodity, and foreign exchange assets and liabilities subject to an enforceable master netting arrangement as of December 31, 2021. The interest and foreign exchange agreements the Corporation has with its commercial customers and the commodity agreements the Corporation had with its commercial customers are not subject to an enforceable master netting arrangement and are therefore excluded from this table:
Gross Amounts Recognized Gross Amounts Subject to Master Netting Arrangements Offset on the Consolidated Balance Sheets Net Amounts Presented on the Consolidated Balance Sheets
Derivative
($ in Thousands) Liabilities Offset Cash Collateral Received
Derivative assets
September 30, 2022 $ 67,819 $ ( 869 ) $ ( 63,699 ) $ 3,252
December 31, 2021 3,567 ( 2,143 ) ( 1,313 ) 111
Gross Amounts Recognized Gross Amounts Subject to Master Netting Arrangements Offset on the Consolidated Balance Sheets Net Amounts Presented on the Consolidated Balance Sheets
Derivative
($ in Thousands) Assets Offset Cash Collateral Pledged
Derivative liabilities
September 30, 2022 $ 870 $ ( 869 ) $ — $ 1
December 31, 2021 15,620 ( 2,143 ) ( 11,357 ) 2,120
Note 12 Commitments, Off-Balance Sheet Arrangements, Legal Proceedings, Regulatory Matters and Operational Matters
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 and other commitments (see below) as well as derivative instruments (see Note 10). The following is a summary of lending-related commitments:
($ in Thousands) Sep 30, 2022 Dec 31, 2021
Commitments to extend credit, excluding commitments to originate residential mortgage loans held for sale (a)(b) $ 12,270,556 $ 10,848,136
Commercial letters of credit (a) 5,170 5,992
Standby letters of credit (c) 240,487 230,661
(a) These off-balance sheet financial instruments are exercisable at the market rate prevailing at the date the underlying transaction will be completed and, thus, are deemed to have no current fair value, or the fair value is based on fees currently charged to enter into similar agreements and was not material at September 30, 2022 or December 31, 2021.
(b) Interest rate lock commitments to originate residential mortgage loans held for sale are considered derivative instruments and are disclosed in Note 10.
(c) Standby letters of credit are presented excluding participations. The Corporation has established a liability of $ 2 million at both September 30, 2022 and December 31, 2021, as an estimate of the fair value of these financial instruments.
Lending-related Commitments
As a financial services provider, the Corporation routinely enters into commitments to extend credit. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Corporation, with each customer’s creditworthiness evaluated on a case-by-case basis. The commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of those instruments. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the customer. Since a significant portion of commitments to extend credit are subject to specific restrictive loan covenants or may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. An allowance for unfunded commitments is maintained at a level believed by management to be sufficient
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to absorb expected lifetime losses related to unfunded commitments (including unfunded loan commitments and letters of credit).
The following table presents a summary of the changes in the allowance for unfunded commitments:
($ in Thousands) Nine Months Ended September 30, 2022 Year Ended December 31, 2021
Allowance for Unfunded Commitments
Balance at beginning of period $ 39,776 $ 47,776
Provision for unfunded commitments — ( 8,000 )
Balance at end of period $ 39,776 $ 39,776
Lending-related commitments include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, and standby letters of credit. Commitments to extend credit are legally binding agreements to lend to customers at predetermined interest rates, as long as there is no violation of any condition established in the contracts. Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments on residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded in other assets and accrued expenses and other liabilities on the consolidated balance sheets. The Corporation’s derivative and hedging activity is further described in Note 10. Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.
Other Commitments
The Corporation invests in qualified affordable housing projects, historic projects, new market projects, and opportunity zone funds for the purpose of community reinvestment and obtaining tax credits and other tax benefits. Return on the Corporation's investment in these projects and funds comes in the form of the tax credits and tax losses that pass through to the Corporation, and deferral or elimination of capital gain recognition for tax purposes. The aggregate carrying value of these investments at September 30, 2022 was $ 250 million, compared to $ 268 million at December 31, 2021, included in tax credit and other investments on the consolidated balance sheets. The Corporation utilizes the proportional amortization method to account for investments in qualified affordable housing projects.
Under the proportional amortization method, the Corporation amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits. The Corporation recognized additional income tax expense attributable to the amortization of investments in qualified affordable housing projects of $ 25 million and $ 24 million for the nine months ended September 30, 2022 and September 30, 2021, respectively, and $ 9 million and $ 8 million for the three months ended September 30, 2022 and September 30, 2021, respectively. The Corporation's remaining investment in qualified affordable housing projects accounted for under the proportional amortization method totaled $ 246 million at September 30, 2022 and $ 262 million at December 31, 2021.
The Corporation’s unfunded equity contributions relating to investments in qualified affordable housing and historic projects are recorded in accrued expenses and other liabilities on the consolidated balance sheets. The Corporation’s remaining unfunded equity contributions totaled $ 38 million at September 30, 2022 and $ 80 million at December 31, 2021.
For the nine months ended September 30, 2022 and the year ended December 31, 2021, the Corporation did not record any impairment related to qualified affordable housing investments.
The Corporation has principal investment commitments to provide capital-based financing to private companies through either direct investment in specific companies or through investment funds and partnerships. The timing of future cash requirements to fund such principal investment commitments is generally dependent on the investment cycle, whereby privately held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, which can vary based on overall market conditions, as well as the nature and type of industry in which the companies operate. The Corporation also invests in loan pools that support CRA loans. The timing of future cash requirements to fund these pools is dependent upon loan demand, which can vary over time. The aggregate carrying value of these investments was $ 25 million at both September 30, 2022 and December 31, 2021, included in tax credit and other investments on the consolidated balance sheets.
Legal Proceedings
The Corporation is party to various pending and threatened claims and legal proceedings arising in the normal course of business activities, some of which involve claims for substantial amounts. Although there can be no assurance as to the ultimate
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outcomes, the Corporation believes it has meritorious defenses to the claims asserted against it in its currently outstanding matters and intends to continue to defend itself vigorously with respect to such legal proceedings. The Corporation will consider settlement of cases when, in management’s judgment, it is in the best interests of the Corporation and its shareholders.
On at least a quarterly basis, the Corporation assesses its liabilities and contingencies in connection with all pending or threatened claims and litigation, utilizing the most recent information available. On a matter by matter basis, an accrual for loss is established for those matters which the Corporation believes it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, each accrual is adjusted as appropriate to reflect any subsequent developments. Accordingly, management’s estimate will change from time to time, and actual losses may be more or less than the current estimate. For matters where a loss is not probable, or the amount of the loss cannot be estimated, no accrual is established.
Resolution of legal claims is inherently unpredictable, and in many legal proceedings various factors exacerbate this inherent unpredictability, including where the damages sought are unsubstantiated or indeterminate, it is unclear whether a case brought as a class action will be allowed to proceed on that basis, discovery is not complete, the proceeding is not yet in its final stages, the matters present legal uncertainties, there are significant facts in dispute, there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants), or there is a wide range of potential results.
A lawsuit, Evans et al v. Associated Banc-Corp et al , was filed in the United States District Court for the Eastern District of Wisconsin - Green Bay Division on January 13, 2021 by one current and one former participant in the Associated Banc-Corp 401(k) and Employee Stock Ownership Plan (the “Plan”) as representatives of a putative class. The plaintiffs alleged that Associated Banc-Corp, the Associated Banc-Corp Plan Administrative Committee, and current and past members of such committee during the relevant time period (the “Defendants”) breached their fiduciary duties with respect to the Plan in violation of Employee Retirement Income Security Act of 1974, as amended, by applying an imprudent and inappropriate preference for products associated with Associated Banc-Corp within the Plan, and that the Defendants failed to monitor or control the recordkeeping expenses paid to Associated Trust Company, N.A. On March 18, 2021, the Defendants filed a motion to dismiss. On April 8, 2021, the plaintiffs filed an amended complaint which dropped the record keeping claim, added Associated Trust Company N.A. and Kellogg Asset Management, LLC as defendants, and alleged various breaches of fiduciary duty related to the selection and monitoring of, and the fees charged by, proprietary collective investment trusts. The plaintiffs, in part, sought an accounting and disgorgement of certain profits, as well as certain equitable restitution and equitable monetary relief. On September 30, 2022, the Defendants' motion to dismiss was granted. On October 11, 2022, the plaintiffs agreed not to appeal the dismissal in exchange for the Defendants' agreement not to seek attorneys' fees.
Regulatory Matters
A variety of consumer products, including mortgage and deposit products, and certain fees and charges related to such products, have come under increased regulatory scrutiny. It is possible that regulatory authorities could bring enforcement actions, including civil money penalties, or take other actions against the Corporation and the Bank in regard to these consumer products. The Bank could also determine of its own accord, or be required by regulators, to refund or otherwise make remediation payments to customers in connection with these products. It is not possible at this time for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss related to such matters.
Operational Matters
In November 2021, we became aware that during several routine purges of old documents, certain documents that were more than seven years old relating to active accounts were inadvertently purged from our electronic database. The active account documents that were inadvertently purged related to (1) certain customer documents obtained as part of bank acquisitions, and (2) certain customer documents that were transferred to a new cold storage system without correct retention coding. Both the acquisitions and the transfer occurred years ago. The majority of the documents inadvertently purged were signature cards. We have undertaken measures to replace (if possible) or otherwise lessen the impact on customers of any inadvertently purged documents. While the impact on the Company of this incident has been immaterial to date, and we are not aware of any material adverse customer impact, it is not possible at this time for management to reasonably estimate the amount of any potential loss related to this incident.
Mortgage Repurchase Reserve
The Corporation sells residential mortgage loans to investors in the normal course of business. Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages originated under the Corporation's usual underwriting procedures, and are most often sold on a nonrecourse basis, primarily to the GSEs. The Corporation’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold, related to credit information, loan documentation, collateral, and insurability. Subsequent to being sold,
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if a material underwriting deficiency or documentation defect is discovered, the Corporation may be obligated to repurchase the loan or reimburse the GSEs for losses incurred (collectively, “make whole requests”). The make whole requests and any related risk of loss under the representations and warranties are largely driven by borrower performance. Additionally, beginning in the third quarter of 2021, qualifying residential mortgage loans guaranteed by U.S. government agencies have been sold into GNMA pools.
As a result of make whole requests, the Corporation has repurchased loans with aggregate principal balances of $ 4 million and $ 8 million for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively. There were no loss reimbursement and settlement claims paid in the nine months ended September 30, 2022, and approximately $ 114 ,000 of such claims were paid for the year ended December 31, 2021. Make whole requests since January 1, 2021 generally arose from loans originated during the period of January 1, 2018 to June 30, 2022. Since January 1, 2018, loans sold totaled $ 6.7 billion at the time of sale, and consisted primarily of loans sold to GSEs. As of September 30, 2022, $ 4.3 billion of loans originated since January 1, 2018 remain outstanding.
The balance in the mortgage repurchase reserve at the balance sheet date reflects the estimated amount of potential loss the Corporation could incur from repurchasing a loan, as well as loss reimbursements, indemnifications, and other settlement resolutions. The mortgage repurchase reserve, included in accrued expenses and other liabilities on the consolidated balance sheets, was $ 1 million at both September 30, 2022 and December 31, 2021.
The Corporation may also sell residential mortgage loans with limited recourse (limited in that the recourse period ends prior to the loan’s maturity, usually after certain time and / or loan paydown criteria have been met), whereby repurchase could be required if the loan had defined delinquency issues during the limited recourse periods. At September 30, 2022 and December 31, 2021, there were $ 7 million and $ 10 million, respectively, of residential mortgage loans sold with such recourse risk. There have been limited instances and immaterial historical losses on repurchases for recourse under the limited recourse criteria.
The Corporation has a subordinate position to the FHLB in the credit risk on residential mortgage loans it sold to the FHLB in exchange for a monthly credit enhancement fee. The Corporation has not sold loans to the FHLB with such credit risk retention since February 2005. At September 30, 2022 and December 31, 2021, there were $ 20 million and $ 24 million, respectively, of such residential mortgage loans with credit risk recourse, upon which there have been immaterial historical losses to the Corporation.
Note 13 Fair Value Measurements
Fair value represents the estimated price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept).
The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Corporation’s 2021 Annual Report on Form 10-K. There has been one significant change to the methodologies for assets and liabilities measured at fair value on a recurring basis:
Mortgage Servicing Rights: The Corporation sells residential mortgage loans in the secondary market and typically retains the rights to service the loans sold. Upon sale, a MSRs asset is capitalized, which represents the then current fair value of future net cash flows expected to be realized for performing servicing activities. On January 1, 2022, the Corporation made the irrevocable election to account for its MSRs asset under the fair value measurement method. Under this methodology, changes in the fair value are recognized in earnings as they occur through mortgage banking, net on the consolidated statements of income.
MSRs are not traded in active markets. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds, assumed servicing costs, ancillary income, costs to service delinquent loans, costs of foreclosure, and discount rates with option-adjusted spreads, used by this model are based on current market sources. Assumptions used to value MSRs are considered significant unobservable inputs. A separate third-party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. Fair value estimates from outside sources are received periodically to corroborate the results of the valuation model. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the fair value hierarchy. See Note 8 for additional disclosures about the Corporation's MSRs.
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The table below presents the Corporation’s financial instruments measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, aggregated by the level in the fair value hierarchy within which those measurements fall:
($ in Thousands) Fair Value Hierarchy Sep 30, 2022 Dec 31, 2021
Assets
AFS investment securities
U.S. Treasury securities Level 1 $ 108,284 $ 122,957
Agency securities Level 2 13,399 14,897
Obligations of state and political subdivisions (municipal securities) Level 2 340,898 400,457
Residential mortgage-related securities
FNMA / FHLMC Level 2 1,656,061 2,691,879
GNMA Level 2 78,029 67,780
Private-label Level 2 — 329,724
Commercial mortgage-related securities
FNMA / FHLMC Level 2 17,286 350,623
GNMA Level 2 107,094 166,799
Asset backed securities
FFELP Level 2 158,556 177,325
SBA Level 2 4,772 6,580
Other debt securities Level 2 2,933 2,994
Total AFS investment securities Level 1 $ 108,284 $ 122,957
Total AFS investment securities Level 2 2,379,028 4,209,058
Equity securities with readily determinable fair values Level 1 5,655 4,810
Residential loans held for sale Level 2 51,134 136,638
Mortgage servicing rights, net (a) Level 3 78,352 N/A
Interest rate-related and other instruments not designated as hedging instruments (b) Level 2 59,618 83,626
Foreign currency exchange forwards (b) Level 2 10,109 5,490
Commodity contracts (b) Level 2 — 1,264
Interest rate lock commitments to originate residential mortgage loans held for sale Level 3 — 2,617
Forward commitments on residential mortgage loans Level 3 3,492 30
Liabilities
Interest rate-related instruments designated as hedging instruments Level 2 $ 906 $ —
Interest rate-related and other instruments not designated as hedging instruments (b) Level 2 264,212 26,231
Foreign currency exchange forwards (b) Level 2 9,524 5,441
Commodity contracts (b) Level 2 — 1,248
Interest rate lock commitments to originate residential mortgage loans held for sale Level 3 403 —
(a) MSRs at December 31, 2021 were carried at LOCOM. On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value on a recurring basis.
(b) Figures are presented gross before netting. See Note 10 and Note 11 for information relating to the impact of offsetting derivative assets and liabilities and cash collateral with the
same counterparty where there is a legally enforceable master netting agreement in place.
The table below presents a rollforward of the consolidated balance sheets amounts for the nine months ended September 30, 2022 and the year ended December 31, 2021, for the Corporation's mortgage derivatives measured on a recurring basis and classified within Level 3 of the fair value hierarchy:
($ in Thousands) Interest rate lock commitments to originate residential mortgage loans held for sale Forward commitments on residential mortgage loans Total
Balance December 31, 2020 $ 9,624 $ 2,046 $ 7,579
New production 53,686 ( 3,281 ) 56,966
Closed loans / settlements ( 53,477 ) 3,740 ( 57,217 )
Other ( 7,216 ) ( 2,535 ) ( 4,680 )
Change in mortgage derivative ( 7,007 ) ( 2,076 ) ( 4,932 )
Balance December 31, 2021 $ 2,617 $ ( 30 ) $ 2,647
New production $ 9,526 $ ( 1,734 ) $ 11,260
Closed loans / settlements ( 641 ) 21,244 ( 21,885 )
Other ( 11,905 ) ( 22,972 ) 11,067
Change in mortgage derivative ( 3,020 ) ( 3,462 ) 442
Balance September 30, 2022 $ ( 403 ) $ ( 3,492 ) $ 3,089
The following table presents the carrying value of equity securities without readily determinable fair values as of September 30, 2022 that are measured under the measurement alternative and the related adjustments recorded during the periods presented for those securities with observable price changes. These securities are included in the nonrecurring fair value tables when
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applicable price changes are observable. Also shown are the cumulative upward and downward adjustments for the Corporation's equity securities without readily determinable fair values as of September 30, 2022:
($ in Thousands)
Equity securities without readily determinable fair values
Carrying value as of December 31, 2021 $ 13,542
Carrying value changes 5,690
Additions 4
Sales ( 12 )
Carrying value as of September 30, 2022 $ 19,224
Cumulative upward carrying value changes between January 1, 2018 and September 30, 2022 $ 19,134
Cumulative downward carrying value changes/impairment between January 1, 2018 and September 30, 2022 $ —
The table below presents the Corporation’s assets measured at fair value on a nonrecurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall:
($ in Thousands) Fair Value Hierarchy Fair Value Consolidated Statements of Income Category of Adjustment Recognized in Income Adjustment Recognized on the Consolidated Statements of Income (a)
September 30, 2022
Assets
Individually evaluated loans (b) Level 3 $ 29,558 Provision for credit losses $ 5,010
OREO (c) Level 2 3,534 Other noninterest expense / provision for credit losses (d) 1,639
Equity securities without readily determinable fair values Level 3 19,134 Investment securities gains (losses), net 5,690
December 31, 2021
Assets
Individually evaluated loans (b) Level 3 $ 69,917 Provision for credit losses $ ( 3,045 )
OREO (c) Level 2 21,299 Other noninterest expense / provision for credit losses (d) 7,345
Mortgage servicing rights (e) Level 3 57,259 Mortgage banking, net 16,186
(a) Includes the full year impact on the consolidated statements of income.
(b) Includes probable TDRs which are individually analyzed, net of the related ACLL, of which there were none at September 30, 2022.
(c) If the fair value of the collateral exceeds the carrying amount of the asset, no charge off or adjustment is necessary, the asset is not considered to be carried at fair value, and is therefore not included in the table.
(d) When a property's value is written down at the time it is transferred to OREO, the charge off is booked to the provision for credit losses. When a property is already in OREO and subsequently written down, the charge off is booked to other noninterest expense.
(e) MSRs at December 31, 2021 were carried at LOCOM. On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value on a recurring basis.
Certain nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis include the fair value analysis in the goodwill impairment test as well as intangible assets and other nonfinancial long-lived assets measured at fair value for the purpose of impairment assessment.
The table below presents the unobservable inputs that are readily quantifiable pertaining to Level 3 measurements:
September 30, 2022 Valuation Technique Significant Unobservable Input Range of Inputs Weighted Average Input Applied
Mortgage servicing rights Discounted cash flow Option adjusted spread 6 % - 9 % 7 %
Mortgage servicing rights Discounted cash flow Constant prepayment rate 0 % - 100 % 9 %
Individually evaluated loans Appraisals / Discounted cash flow Collateral / Discount factor 29 % - 52 % 36 %
Interest rate lock commitments to originate residential mortgage loans held for sale Discounted cash flow Closing Ratio 17 % - 100 % 83 %
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Fair Value of Financial Instruments
The Corporation is required to disclose estimated fair values for its financial instruments.
Fair value estimates are set forth below for the Corporation’s financial instruments:
Sep 30, 2022 Dec 31, 2021
($ in Thousands) Fair Value Hierarchy Level Carrying Amount Fair Value Carrying Amount Fair Value
Financial assets
Cash and due from banks Level 1 $ 386,231 $ 386,231 $ 343,831 $ 343,831
Interest-bearing deposits in other financial institutions Level 1 112,173 112,173 681,684 681,684
Federal funds sold and securities purchased under agreements to resell Level 1 4,015 4,015 — —
AFS investment securities Level 1 108,284 108,284 122,957 122,957
AFS investment securities Level 2 2,379,028 2,379,028 4,209,058 4,209,058
HTM investment securities, net Level 1 998 932 1,000 1,001
HTM investment securities, net Level 2 3,950,493 3,294,767 2,237,947 2,347,608
Equity securities with readily determinable fair values Level 1 5,655 5,655 4,810 4,810
Equity securities without readily determinable fair values Level 3 19,224 19,224 13,542 13,542
FHLB and Federal Reserve Bank stocks Level 2 279,334 279,334 168,281 168,281
Residential loans held for sale Level 2 51,134 51,134 136,638 136,638
Loans, net Level 3 27,524,376 26,285,810 23,944,934 23,980,330
Bank and corporate owned life insurance Level 2 677,129 677,129 680,021 680,021
Mortgage servicing rights, net (a) Level 3 78,352 78,352 54,862 57,259
Derivatives (other assets) (b) Level 2 69,726 69,726 90,379 90,379
Interest rate lock commitments to originate residential mortgage loans held for sale (other assets) Level 3 — — 2,617 2,617
Forward commitments on residential mortgage loans (other assets) Level 3 3,492 3,492 30 30
Financial liabilities
Noninterest-bearing demand, savings, interest-bearing demand, and money market accounts Level 3 $ 27,964,749 $ 27,964,749 $ 27,119,167 $ 27,119,167
Time deposits (c) Level 2 1,233,833 1,233,833 1,347,262 1,347,262
Short-term funding Level 2 284,361 283,755 354,262 354,248
FHLB advances Level 2 3,777,478 3,780,744 1,621,047 1,680,814
Other long-term funding Level 2 249,484 243,586 249,324 265,545
Standby letters of credit (d) Level 2 2,457 2,457 2,367 2,367
Derivatives (accrued expenses and other liabilities) (b) Level 2 274,642 274,642 32,921 32,921
Interest rate lock commitments to originate residential mortgage loans held for sale (accrued expenses and other liabilities) Level 3 403 403 — —
(a) MSRs at December 31, 2021 were carried at LOCOM. On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value.
(b) Figures are presented gross before netting. See Note 10 and Note 11 for information relating to the impact of offsetting derivative assets and liabilities and cash collateral with the
same counterparty where there is a legally enforceable master netting agreement in place.
(c) When the estimated fair value is less than the carrying value, the carrying value is reported as the fair value.
(d) The commitment on standby letters of credit was $ 240 million at September 30, 2022 and $ 231 million at December 31, 2021. See Note 12 for additional information on the standby letters of credit and for information on the fair value of lending-related commitments.
Note 14 Retirement Plans
The Corporation has a noncontributory defined benefit RAP, covering substantially all employees who meet participation requirements. The benefits are based primarily on years of service and the employee’s compensation paid. Employees of acquired entities generally participate in the RAP after consummation of the business combinations. Any retirement plans of acquired entities are typically merged into the RAP after completion of the mergers, and credit is usually given to employees for years of service at the acquired institution for vesting and eligibility purposes.
The Corporation also provides legacy healthcare access to a limited group of retired employees from a previous acquisition in the Postretirement Plan. There are no other active retiree healthcare plans.
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The components of net periodic pension cost and net periodic benefit cost for the RAP and Postretirement Plan for the three and nine months ended September 30, 2022 and 2021 were as follows:
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Components of Net Periodic Benefit Cost
RAP
Service cost $ 906 $ 1,684 $ 2,752 $ 5,835
Interest cost 1,820 1,682 5,364 4,927
Expected return on plan assets ( 6,706 ) ( 6,395 ) ( 20,177 ) ( 19,256 )
Amortization of prior service cost ( 63 ) ( 19 ) ( 188 ) ( 55 )
Amortization of actuarial loss 347 1,346 494 3,446
Total net periodic pension cost $ ( 3,696 ) $ ( 1,701 ) $ ( 11,754 ) $ ( 5,103 )
Postretirement Plan
Interest cost $ 13 $ 13 $ 40 $ 39
Amortization of prior service cost ( 19 ) ( 19 ) ( 56 ) ( 56 )
Total net periodic benefit cost $ ( 6 ) $ ( 6 ) $ ( 17 ) $ ( 17 )
The components of net periodic pension cost and net periodic benefit cost, other than the service cost component, are included in the line item other of noninterest expense on the consolidated statements of income. The service cost components are included in personnel on the consolidated statements of income.
The Corporation’s funding policy is to pay at least the minimum amount required by federal law and regulations, with consideration given to the maximum funding amounts allowed. The Corporation regularly reviews the funding of its RAP. There were no contributions during the nine months ended September 30, 2022 and 2021.
Note 15 Segment Reporting
The Corporation utilizes a risk-based internal profitability measurement system to provide strategic business unit reporting. The profitability measurement system is based on internal management methodologies designed to produce consistent results and reflect the underlying economics of the units. 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 three reportable segments are Corporate and Commercial Specialty; Community, Consumer, and Business; and Risk Management and Shared Services. The financial information of the Corporation’s segments has been compiled utilizing the accounting policies described in the Corporation’s 2021 Annual Report on Form 10-K with certain exceptions. The more significant of these exceptions are described herein.
The reportable segment results are presented based on the Corporation's internal management accounting process. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to U.S. GAAP. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in previously reported segment financial data. Additionally, the information presented is not indicative of how the segments would perform if they operated as independent entities.
To determine financial performance of each segment, the Corporation allocates FTP assignments, the provision for credit losses, certain noninterest expenses, income taxes, and equity to each segment. Allocation methodologies are subject to periodic adjustment as the internal management accounting system is revised, the interest rate environment evolves, and business or product lines within the segments change. Also, because the development and application of these methodologies is a dynamic process, the financial results presented may be periodically reviewed.
The Corporation allocates net interest income using an internal FTP methodology that charges users of funds (assets, primarily loans) and credits providers of funds (liabilities, primarily deposits) based on the maturity, prepayment and / or re-pricing characteristics of the assets and liabilities. The net effect of this allocation is offset in the Risk Management and Shared Services segment to ensure consolidated totals reflect the Corporation's net interest income. The net FTP allocation is reflected as net intersegment interest income (expense) in the accompanying tables.
The provision for credit losses is allocated to segments based on the expected long-term annual net charge off rates attributable to the credit risk of loans managed by the segment during the period. In contrast, the level of the consolidated provision for credit losses is determined based on an ACLL model using the methodologies described in the Corporation’s 2021 Annual Report on Form 10-K. The net effect of the credit provision is recorded in Risk Management and Shared Services. Indirect
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expenses incurred by certain centralized support areas are allocated to segments based on actual usage (for example, volume measurements) and other criteria. Certain types of administrative expense and bank-wide expense accruals (including amortization of CDIs and other intangible assets associated with acquisitions, acquisition-related costs, and asset gains on disposed business units) are generally not allocated to segments. Income taxes are allocated to segments based on the Corporation’s estimated effective tax rate, with certain segments adjusted for any tax-exempt income or non-deductible expenses. Equity is allocated to the segments based on regulatory capital requirements and in proportion to an assessment of the inherent risks associated with the business of the segment (including interest, credit and operating risk).
A brief description of each business segment is presented below. A more in-depth discussion of these segments can be found in the Segment Reporting note in the Corporation’s 2021 Annual Report on Form 10-K.
The Corporate and Commercial Specialty segment serves a wide range of customers including larger businesses, developers, not-for-profits, municipalities, and financial institutions by providing lending and deposit solutions as well as the support to deliver, fund, and manage such banking solutions. In addition, this segment provides a variety of investment, fiduciary, and retirement planning products and services to individuals and small to mid-sized businesses. During the first quarter of 2021, the Corporation sold its wealth management subsidiary Whitnell. The Community, Consumer, and Business segment serves individuals, as well as small and mid-sized businesses, by providing lending and deposit solutions. The Risk Management and Shared Services segment includes key shared operational functions and also includes residual revenue and expenses, representing the difference between actual amounts incurred and the amounts allocated to operating segments, including interest rate risk residuals (FTP mismatches) and credit risk and provision residuals (long-term credit charge mismatches).
Effective during the third quarter of 2022, the product and marketing functions were moved to the Risk Management and Shared Services segment from the Community, Consumer, and Business and Corporate and Commercial Specialty segments in order to centralize these functions under common leadership.
Effective during the first quarter of 2022, certain support functions and a select group of banking regions were realigned into the Community, Consumer, and Business segment from the Corporate and Commercial Specialty segment.
Information about the Corporation’s segments is presented below:
Corporate and Commercial Specialty
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Net interest income $ 161,143 $ 91,012 $ 363,135 $ 270,712
Net intersegment interest income (expense) ( 37,998 ) 3,696 ( 34,774 ) 12,690
Segment net interest income 123,145 94,709 328,361 283,403
Noninterest income (a) 35,663 41,892 112,620 120,991
Total revenue 158,808 136,601 440,981 404,394
Provision for credit losses 11,904 14,349 36,803 46,745
Noninterest expense 58,934 56,209 172,141 165,568
Income before income taxes 87,970 66,043 232,037 192,082
Income tax expense 16,420 11,920 42,692 35,021
Net income $ 71,551 $ 54,123 $ 189,346 $ 157,060
Allocated goodwill $ 525,836 $ 525,836
Community, Consumer, and Business
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Net interest income $ 87,156 $ 73,616 $ 233,699 $ 218,868
Net intersegment interest income 49,575 15,283 99,046 46,165
Segment net interest income 136,731 88,899 332,745 265,033
Noninterest income 26,745 37,053 92,072 117,351
Total revenue 163,476 125,952 424,817 382,384
Provision for credit losses 5,378 4,748 14,958 15,955
Noninterest expense 107,782 98,172 311,210 300,913
Income before income taxes 50,316 23,032 98,649 65,517
Income tax expense 10,567 4,837 20,716 13,758
Net income $ 39,749 $ 18,196 $ 77,933 $ 51,758
Allocated goodwill $ 579,156 $ 579,156
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Risk Management and Shared Services
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Net interest income $ 16,140 $ 19,047 $ 71,498 $ 49,511
Net intersegment (expense) ( 11,577 ) ( 18,980 ) ( 64,272 ) ( 58,855 )
Segment net interest income (loss) 4,563 68 7,227 ( 9,344 )
Noninterest income 8,381 3,131 16,021 12,520
Total revenue 12,943 3,199 23,247 3,176
Provision for credit losses ( 283 ) ( 43,107 ) ( 38,756 ) ( 144,717 )
Noninterest expense 29,076 23,512 67,153 61,233
Income (loss) before income taxes ( 15,849 ) 22,794 ( 5,150 ) 86,660
Income tax expense (benefit) ( 824 ) 6,304 4,769 21,363
Net income (loss) $ ( 15,025 ) $ 16,490 $ ( 9,918 ) $ 65,298
Allocated goodwill $ — $ —
Consolidated Total
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Net interest income $ 264,439 $ 183,675 $ 668,332 $ 539,092
Net intersegment interest income — — — —
Segment net interest income 264,439 183,675 668,332 539,092
Noninterest income (a) 70,788 82,076 220,713 250,862
Total revenue 335,227 265,752 889,045 789,954
Provision for credit losses 16,998 ( 24,010 ) 13,006 ( 82,018 )
Noninterest expense 195,791 177,892 550,503 527,713
Income before income taxes 122,438 111,870 325,536 344,259
Income tax expense 26,163 23,060 68,176 70,142
Net income $ 96,275 $ 88,809 $ 257,360 $ 274,117
Allocated goodwill $ 1,104,992 $ 1,104,992
(a) For the nine months ended September 30, 2021, the Corporation recognized a $2 million pre-tax gain on sale of Whitnell.
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Note 16 Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of accumulated other comprehensive income (loss) at September 30, 2022 and 2021, including changes during the preceding three and nine month periods as well as any reclassifications out of accumulated other comprehensive income (loss):
Defined Benefit Accumulated
Pension and Other
AFS Investment Postretirement Comprehensive
($ in Thousands) Securities Obligations Income (Loss)
Balance December 31, 2021 $ ( 5,266 ) $ ( 5,051 ) $ ( 10,317 )
Other comprehensive (loss) before reclassifications ( 268,413 ) — ( 268,413 )
Unrealized (losses) on AFS securities transferred to HTM securities ( 67,604 ) — ( 67,604 )
Amounts reclassified from accumulated other comprehensive income (loss)
Investment securities (gains), net ( 12 ) — ( 12 )
HTM investment securities, net, at amortized cost 7,269 — 7,269
Personnel (expense) — ( 244 ) ( 244 )
Other expense — 494 494
Income tax (expense) benefit 83,906 ( 470 ) 83,436
Net other comprehensive (loss) during period ( 244,854 ) ( 221 ) ( 245,074 )
Balance September 30, 2022 $ ( 250,120 ) $ ( 5,272 ) $ ( 255,391 )
Balance December 31, 2020 $ 41,325 $ ( 28,707 ) $ 12,618
Other comprehensive (loss) before reclassifications ( 35,829 ) — ( 35,829 )
Amounts reclassified from accumulated other comprehensive income (loss)
Investment securities losses, net 16 — 16
HTM investment securities, net, at amortized cost 1,335 — 1,335
Personnel (expense) — ( 111 ) ( 111 )
Other expense — 3,446 3,446
Income tax (expense) benefit 8,548 ( 836 ) 7,712
Net other comprehensive income (loss) during period ( 25,930 ) 2,498 ( 23,431 )
Balance September 30, 2021 $ 15,395 $ ( 26,209 ) $ ( 10,813 )
Defined Benefit Accumulated
Pension and Other
AFS Investment Post Retirement Comprehensive
($ in Thousands) Securities Obligations Income (Loss)
Balance June 30, 2022 $ ( 177,726 ) $ ( 5,062 ) $ ( 182,788 )
Other comprehensive (loss) before reclassifications ( 100,092 ) — ( 100,092 )
Amounts reclassified from accumulated other comprehensive income (loss)
HTM investment securities, net, at amortized cost 2,888 — 2,888
Personnel (expense) — ( 82 ) ( 82 )
Other expense — 347 347
Income tax (expense) benefit 24,810 ( 474 ) 24,336
Net other comprehensive (loss) during period ( 72,394 ) ( 209 ) ( 72,603 )
Balance September 30, 2022 $ ( 250,120 ) $ ( 5,272 ) $ ( 255,391 )
Balance June 30, 2021 $ 30,076 $ ( 27,187 ) $ 2,889
Other comprehensive (loss) before reclassifications ( 19,827 ) — ( 19,827 )
Amounts reclassified from accumulated other comprehensive income (loss)
HTM investment securities, net, at amortized cost 172 — 172
Personnel (expense) — ( 37 ) ( 37 )
Other expense — 1,346 1,346
Income tax (expense) benefit 4,975 ( 330 ) 4,644
Net other comprehensive (loss) during period ( 14,681 ) 979 ( 13,702 )
Balance September 30, 2021 $ 15,395 $ ( 26,209 ) $ ( 10,813 )
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Note 17 Revenue from Contracts with Customers
Revenue from contracts with customers is recognized when obligations under the terms of a contract with the Corporation's customer are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We do not have any material significant payment terms as payment is received at or shortly after the satisfaction of the performance obligation.
The Corporation's disaggregated revenue by major source is presented below:
Corporate and Commercial Specialty
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Wealth management fees $ 19,984 $ 22,110 $ 63,719 $ 67,229
Service charges and deposit account fees 3,128 3,948 10,636 11,748
Card-based fees (a) 424 381 1,203 1,011
Other revenue 395 738 2,288 2,552
Noninterest income (in-scope of Topic 606) $ 23,931 $ 27,176 $ 77,846 $ 82,540
Noninterest income (out-of-scope of Topic 606) (b) 11,732 14,717 34,774 38,451
Total noninterest income $ 35,663 $ 41,892 $ 112,620 $ 120,991
Community, Consumer, and Business
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Service charges and deposit account fees $ 11,896 $ 13,009 $ 37,743 $ 35,591
Card-based fees (a) 10,970 10,707 31,629 30,830
Other revenue 1,637 2,088 5,270 8,563
Noninterest income (in-scope of Topic 606) $ 24,503 $ 25,803 $ 74,642 $ 74,984
Noninterest income (out-of-scope of Topic 606) 2,241 11,250 17,431 42,366
Total noninterest income $ 26,745 $ 37,053 $ 92,072 $ 117,351
Risk Management and Shared Services
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Service charges and deposit account fees $ 5 $ 5 $ 13 $ 27
Card-based fees (a) 118 60 101 79
Other revenue 454 55 373 752
Noninterest income (in-scope of Topic 606) $ 577 $ 120 $ 486 $ 858
Noninterest income (out-of-scope of Topic 606) 7,804 3,011 15,535 11,662
Total noninterest income $ 8,381 $ 3,131 $ 16,021 $ 12,520
Consolidated Total
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Wealth management fees $ 19,984 $ 22,110 $ 63,719 $ 67,229
Service charges and deposit account fees 15,029 16,962 48,392 47,366
Card-based fees (a) 11,512 11,147 32,933 31,920
Other revenue 2,486 2,880 7,930 11,868
Noninterest income (in-scope of Topic 606) $ 49,011 $ 53,099 $ 152,974 $ 158,383
Noninterest income (out-of-scope of Topic 606) (b) 21,777 28,977 67,740 92,479
Total noninterest income $ 70,788 $ 82,076 $ 220,713 $ 250,862
(a) Certain card-based fees are out-of-scope of Topic 606.
(b) For the nine months ended September 30, 2021, the Corporation recognized a $2 million pre-tax gain on the sale of Whitnell.
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Below is a listing of performance obligations for the Corporation's main revenue streams:
Revenue Stream Noninterest income in-scope of Topic 606
Service charges and deposit account fees Service charges and deposit account fees consist of monthly service fees (i.e. business analyzed fees and consumer service charges) and other deposit account related fees. The Corporation's performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Corporation's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges and deposit account fees is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Card-based fees (a) Card-based fees are primarily comprised of debit and credit card income, ATM fees, and merchant services income. Debit and credit card income is primarily comprised of interchange fees earned whenever the Corporation's debit and credit cards are processed through card payment networks. ATM and merchant fees are largely transactional based, and therefore, the Corporation's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment is typically received immediately or in the following month.
Trust and asset management fees (b) Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Corporation's performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to the customers’ accounts. The Corporation's performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Brokerage and advisory fees (b) Brokerage and advisory fees primarily consist of investment advisory, brokerage, retirement services, and annuities. The Corporation's performance obligation for investment advisory services and retirement services is generally satisfied, and the related revenue recognized, over the period in which the services are provided. The performance obligation for annuities is satisfied upon sale of the annuity, and therefore, the related revenue is primarily recognized at the time of sale. Payment for these services are typically received immediately or in advance of the service.
(a) Certain card-based fees are out-of-scope of Topic 606.
(b) Trust and asset management fees and brokerage and advisory fees are included in wealth management fees.
Note 18 Leases
The Corporation has operating leases for retail and corporate offices, land, and equipment. The Corporation also has a finance lease for retail and corporate offices.
These leases have original terms of 1 year or longer with remaining maturities up to 40 years, some of which include options to extend the lease term. An analysis of the lease options has been completed and any purchase options or optional periods that the Corporation is reasonably likely to extend have been included in the capitalization.
The discount rate used to capitalize the operating leases is the Corporation's FHLB borrowing rate on the date of lease commencement. When determining the rate to discount specific lease obligations, the repayment period and term are considered.
Operating and finance lease costs and cash flows resulting from these leases are presented below:
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 2022 2021
Operating lease costs $ 1,637 $ 2,367 $ 5,361 $ 6,850
Finance lease costs 23 17 96 76
Operating lease cash flows 1,880 2,858 6,614 8,598
Finance lease cash flows 22 21 103 101
The lease classifications on the consolidated balance sheets were as follows:
($ in Thousands) Consolidated Balance Sheets Category Sep 30, 2022 Dec 31, 2021
Operating lease right-of-use asset Premises and equipment $ 26,970 $ 28,299
Finance lease right-of-use asset Other assets 477 143
Operating lease liability Accrued expenses and other liabilities 29,897 31,345
Finance lease liability Other long-term funding 490 163
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The lease payment obligations, weighted-average remaining lease term, and weighted-average original discount rate were as follows:
Sep 30, 2022 Dec 31, 2021
($ in Thousands) Lease payments Weighted-average lease term (in years) Weighted-average discount rate Lease payments Weighted-average lease term (in years) Weighted-average discount rate
Operating leases
Retail and corporate offices $ 27,640 6.07 2.56 % $ 29,008 5.56 3.26 %
Land 4,963 7.53 3.13 % 5,551 8.29 3.12 %
Equipment — 0.00 — % 192 1.50 0.45 %
Total operating leases $ 32,604 6.28 2.65 % $ 34,751 5.94 3.22 %
Finance leases
Retail and corporate offices $ 508 5.50 1.32 % $ 112 1.25 1.32 %
Land — 0.00 — % 51 0.67 1.07 %
Total finance leases $ 508 5.50 1.32 % $ 164 1.07 1.24 %
Contractual lease payment obligations for each of the next five years and thereafter, in addition to a reconciliation to the Corporation’s lease liability, were as follows:
($ in Thousands) Operating Leases Finance Leases Total Leases
Three months ending December 31, 2022 $ 1,641 $ 22 $ 1,664
2023 6,224 92 6,316
2024 5,669 93 5,761
2025 4,548 93 4,641
2026 4,249 93 4,342
Beyond 2026 10,272 116 10,388
Total lease payments $ 32,604 $ 508 $ 33,111
Less: interest 2,707 18 2,724
Present value of lease payments $ 29,897 $ 490 $ 30,387
As of September 30, 2022 and December 31, 2021, additional operating leases, primarily retail and corporate offices, that had not yet commenced totaled $14 million and $13 million, respectively. The leases that had not yet commenced as of September 30, 2022 will commence between October 2022 and October 2023 with lease terms of 1 year to 6 years.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 the SEC, 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 ended December 31, 2021, in the Corporation's Quarterly Report on Form 10-Q for the quarters ended June 30, 2022 and March 31, 2022, in Item 1A of Part II and as may be described from time to time in the Corporation’s subsequent SEC 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.
Performance Summary
• Average loans of $25.5 billion increased $1.4 billion, or 6%, compared to the first nine months of 2021, with growth across nearly all loan categories.
• Average deposits of $28.6 billion increased $1.1 billion, or 4%, from the first nine months of 2021, driven primarily by increases in lower cost deposits partially offset by decreases in higher cost deposits.
• Net interest income of $668 million increased $129 million, or 24%, from the first nine months of 2021, and net interest margin was 2.76% compared to 2.38% for the first nine months of 2021. The increase in net interest income was driven by higher interest income as a result of growth in nearly all loan categories, along with higher investment balances resulting in more interest income. Both of these further benefited from the Federal Reserve increasing the federal funds target interest rate 300 bp during the first nine months of 2022. For 2022, the Corporation expects net interest income of more than $935 million, assuming a 75 bp rate increase in November and a 50 bp rate increase in December at the FOMC meeting.
• Provision for credit losses had a provision of $13 million, compared to a release of $82 million for the first nine months of 2021, due to loan growth within the portfolio.
• Noninterest income of $221 million decreased $30 million, or 12%, from the first nine months of 2021, primarily driven by the $26 million, or 61%, decrease in mortgage banking, net, resulting from decreased gains on sold loans due to lower mortgage settlements.
• Noninterest expense of $551 million increased $23 million, or 4%, from the first nine months of 2021, primarily driven by higher personnel expense due to additional staffing for implementation of recently announced initiatives and continued investment in our employees. For 2022, the Corporation expects noninterest expense will be approximately $740 million to $750 million.
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Table 1 Summary Results of Operations: Trends
Nine months ended Three months ended
($ in Thousands, except per share data) Sep 30, 2022 Sep 30, 2021 Sep 30, 2022 Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021
Net income $ 257,360 $ 274,117 $ 96,275 $ 86,824 $ 74,262 $ 76,877 $ 88,809
Net income available to common equity 248,735 259,880 93,400 83,949 71,387 74,002 84,655
Earnings per common share - basic 1.66 1.70 0.62 0.56 0.48 0.49 0.56
Earnings per common share - diluted 1.65 1.69 0.62 0.56 0.47 0.49 0.56
Effective tax rate 20.94 % 20.37 % 21.37 % 21.20 % 20.07 % 16.48 % 20.61 %
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Income Statement Analysis
Net Interest Income
Table 2 Net Interest Income Analysis
Nine Months Ended Sep 30,
2022 2021
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 $ 20,633 $ 1,885 12.21 % $ 592,571 $ 28,582 6.45 %
Asset-based lending (ABL) & equipment finance (d) 255,442 7,658 4.01 % 119,352 2,732 3.06 %
Commercial and business lending (excl PPP, ABL and equipment finance) 9,347,852 227,429 3.25 % 8,442,471 159,343 2.52 %
Commercial real estate lending 6,438,335 176,006 3.65 % 6,163,684 133,314 2.89 %
Total commercial 16,062,262 412,977 3.44 % 15,318,077 323,971 2.83 %
Residential mortgage 7,920,382 177,906 2.99 % 7,879,992 166,146 2.81 %
Auto finance 657,150 17,837 3.63 % 8,591 284 4.41 %
Other retail 888,241 35,900 5.40 % 939,858 33,664 4.78 %
Total loans 25,528,036 644,621 3.37 % 24,146,518 524,065 2.90 %
Investment securities
Taxable 4,385,580 54,009 1.64 % 3,152,994 24,600 1.04 %
Tax-exempt (a) 2,416,064 61,771 3.41 % 1,961,528 54,357 3.69 %
Other short-term investments 625,748 7,696 1.64 % 1,662,571 5,802 0.47 %
Investments and other 7,427,392 123,477 2.22 % 6,777,093 84,759 1.67 %
Total earning assets 32,955,428 $ 768,098 3.11 % 30,923,610 $ 608,824 2.63 %
Other assets, net 3,120,342 3,354,657
Total assets $ 36,075,770 $ 34,278,268
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Savings $ 4,650,105 $ 1,427 0.04 % $ 4,061,728 $ 1,066 0.04 %
Interest-bearing demand 6,573,680 14,307 0.29 % 5,981,295 3,596 0.08 %
Money market 7,090,960 12,642 0.24 % 6,956,591 3,101 0.06 %
Network transaction deposits 795,059 6,460 1.09 % 960,308 880 0.12 %
Time deposits 1,266,116 2,754 0.29 % 1,533,466 6,302 0.55 %
Total interest-bearing deposits 20,375,920 37,590 0.25 % 19,493,387 14,945 0.10 %
Federal funds purchased and securities sold under agreements to repurchase 376,687 1,200 0.43 % 177,875 103 0.08 %
Commercial paper 23,106 2 0.01 % 51,330 21 0.05 %
FHLB advances 2,445,486 38,663 2.11 % 1,624,320 27,979 2.30 %
Long-term funding 249,759 8,182 4.37 % 461,390 14,323 4.14 %
Total short and long-term funding 3,095,039 48,047 2.07 % 2,314,915 42,425 2.45 %
Total interest-bearing liabilities 23,470,959 $ 85,637 0.49 % 21,808,303 $ 57,371 0.35 %
Noninterest-bearing demand deposits 8,189,067 7,961,119
Other liabilities 446,249 403,925
Stockholders’ equity 3,969,495 4,104,921
Total liabilities and stockholders’ equity $ 36,075,770 $ 34,278,268
Interest rate spread 2.62 % 2.28 %
Net free funds 0.14 % 0.10 %
Fully tax-equivalent net interest income and net interest margin ("NIM") $ 682,461 2.76 % $ 551,453 2.38 %
Fully tax-equivalent adjustment 14,129 12,362
Net interest income $ 668,332 $ 539,092
(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.
(d) Periods prior to March 31, 2022 do not include equipment finance.
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Table 2 Net Interest Income Analysis
Three Months Ended
Sep 30, 2022 Jun 30, 2022 Sep 30, 2021
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 $ 4,531 $ 261 22.83 % $ 14,026 $ 346 9.91 % $ 275,414 $ 9,633 13.88 %
Asset-based lending (ABL) & equipment finance (d) 317,857 4,027 5.03 % 244,369 2,181 3.58 % 99,463 766 3.06 %
Commercial and business lending (excl PPP, ABL and equipment finance) 9,870,075 105,927 4.26 % 9,346,218 68,748 2.95 % 8,609,196 53,333 2.46 %
Commercial real estate lending 6,768,054 78,887 4.62 % 6,363,395 53,233 3.36 % 6,160,241 44,859 2.89 %
Total commercial 16,960,517 189,101 4.42 % 15,968,007 124,509 3.13 % 15,144,314 108,591 2.85 %
Residential mortgage 8,223,531 64,069 3.12 % 7,860,220 58,434 2.97 % 7,817,737 55,305 2.83 %
Auto finance 969,918 9,170 3.75 % 689,027 6,017 3.50 % 7,157 79 4.39 %
Other retail 901,738 13,868 6.13 % 880,910 11,370 5.17 % 914,749 11,041 4.81 %
Total loans 27,055,703 276,209 4.06 % 25,398,163 200,331 3.16 % 23,883,957 175,016 2.92 %
Investment securities
Taxable 4,344,409 19,221 1.77 % 4,448,811 18,317 1.65 % 3,258,587 8,745 1.07 %
Tax-exempt (a) 2,435,957 20,838 3.42 % 2,427,068 20,637 3.40 % 2,029,126 18,412 3.63 %
Other short-term investments 378,528 3,284 3.45 % 352,310 2,420 2.75 % 2,215,805 2,281 0.41 %
Investments and other 7,158,894 43,342 2.42 % 7,228,189 41,374 2.29 % 7,503,518 29,439 1.57 %
Total earning assets 34,214,597 $ 319,551 3.72 % 32,626,351 $ 241,705 2.97 % 31,387,475 $ 204,455 2.59 %
Other assets, net 3,057,182 3,106,232 3,372,013
Total assets $ 37,271,779 $ 35,732,583 $ 34,759,489
Liabilities and Stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
Savings $ 4,735,285 $ 516 0.04 % $ 4,682,783 $ 530 0.05 % $ 4,248,493 $ 377 0.04 %
Interest-bearing demand 6,587,404 10,306 0.62 % 6,413,077 2,977 0.19 % 6,344,504 1,361 0.09 %
Money market 7,328,165 9,474 0.51 % 6,910,505 2,203 0.13 % 7,011,075 1,019 0.06 %
Network transaction deposits 873,168 4,716 2.14 % 775,593 1,480 0.77 % 893,991 290 0.13 %
Time deposits 1,230,859 989 0.32 % 1,255,292 829 0.26 % 1,434,588 1,379 0.38 %
Total interest-bearing deposits 20,754,882 26,000 0.50 % 20,037,250 8,019 0.16 % 19,932,650 4,427 0.09 %
Federal funds purchased and securities sold under agreements to repurchase 380,674 756 0.79 % 454,519 406 0.36 % 238,735 48 0.08 %
Commercial paper 18,308 1 0.01 % 23,154 1 0.01 % 55,864 8 0.05 %
FHLB advances 3,283,328 20,792 2.51 % 2,423,771 9,689 1.60 % 1,620,790 8,962 2.19 %
Long-term funding 249,838 2,722 4.36 % 249,805 2,730 4.37 % 288,236 3,163 4.39 %
Total short and long-term funding 3,932,149 24,270 2.45 % 3,151,249 12,826 1.63 % 2,203,625 12,180 2.20 %
Total interest-bearing liabilities 24,687,031 $ 50,270 0.81 % 23,188,499 $ 20,845 0.36 % 22,136,276 $ 16,607 0.30 %
Noninterest-bearing demand deposits 8,119,475 8,133,492 8,141,723
Other liabilities 480,672 473,478 401,077
Stockholders’ Equity 3,984,602 3,937,114 4,080,413
Total liabilities and stockholders’ equity $ 37,271,779 $ 35,732,583 $ 34,759,489
Interest rate spread 2.91 % 2.61 % 2.29 %
Net free funds 0.22 % 0.10 % 0.09 %
Fully tax-equivalent net interest income and net interest margin ("NIM") $ 269,281 3.13 % $ 220,860 2.71 % $ 187,848 2.38 %
Fully tax-equivalent adjustment 4,843 4,713 4,172
Net interest income $ 264,439 $ 216,146 $ 183,675
(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.
(d) Periods prior to March 31, 2022 do not include equipment finance.
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Notable Contributions to the Change in Net Interest Income
• Fully tax-equivalent net interest income and net interest income were $131 million, or 24%, and $129 million, or 24%, higher than the first nine months of 2021, respectively. Average loans increased $1.4 billion, or 6%, while average investments and other short-term investments increased $650 million, or 10%, from the first nine months of 2021. The increase in net interest income was driven by higher interest income as a result of growth in nearly all loan categories, along with higher investment balances resulting in more interest income. Both of these further benefited from the Federal Reserve increasing the federal funds target interest rate 300 bp during the first nine months of 2022, which resulted in the yield on earning assets increasing by 48 bp. 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 were up $1.7 billion, or 8%, compared to the first nine months of 2021. Interest-bearing deposits increased $883 million, or 5%, driven primarily by increases in low cost deposits partially offset by decreases in higher cost deposits. Average noninterest-bearing demand deposits were up $228 million, or 3%, versus the first nine months of 2021. FHLB advances increased $821 million, or 51%, to fund loan growth. The cost of interest-bearing liabilities increased 14 bp from the first nine months of 2021.
Provision for Credit Losses
The provision for credit losses is predominantly a function of the Corporation’s reserving methodology and judgments as to other qualitative and quantitative factors used to determine the appropriate level of the ACLL, which focuses on changes in the size and character of the loan portfolio, changes in levels of individually evaluated and other nonaccrual loans, historical losses and delinquencies in each portfolio category, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions and economic forecasts, the fair value of underlying collateral, and other factors which could affect potential credit losses. The forecast the Corporation used for September 30, 2022 was the Moody's baseline forecast from August 2022, which was reviewed against the September 2022 forecast for material updates, over a 2 year reasonable and supportable period with straight-line reversion to historical losses over the second year of the period. See additional discussion under the sections titled Loans, Credit Risk, Nonperforming Assets, and Allowance for Credit Losses on Loans.
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Noninterest Income
Table 3 Noninterest Income
Nine months ended Three months ended Changes vs
($ in Thousands, except as noted) Sep 30, 2022 Sep 30, 2021 YTD % Change Sep 30, 2022 Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021 Jun 30, 2022 Sep 30, 2021
Wealth management fees $ 63,719 $ 67,229 (5) % $ 19,984 $ 21,332 $ 22,404 $ 22,625 $ 22,110 (6) % (10) %
Service charges and deposit account fees 48,392 47,366 2 % 15,029 16,506 16,856 17,039 16,962 (9) % (11) %
Card-based fees 32,847 31,838 3 % 11,479 11,442 9,926 11,176 11,113 — % 3 %
Other fee-based revenue 12,613 12,769 (1) % 4,487 4,360 3,766 4,316 3,929 3 % 14 %
Total fee-based revenue 157,571 159,203 (1) % 50,979 53,641 52,952 55,157 54,113 (5) % (6) %
Capital markets, net 24,331 20,928 16 % 7,675 8,010 8,646 9,674 7,114 (4) % 8 %
Mortgage servicing fees, net (a) 5,847 (1,230) N/M 2,135 1,882 1,830 795 323 13 % N/M
Gains and fair value adjustments on loans held for sale 1,046 31,709 (97) % 625 (363) 785 3,290 8,341 N/M (93) %
Changes in mortgage servicing rights valuation, net of economic hedge (b) 9,742 12,231 (20) % (661) 4,627 5,776 3,955 1,993 N/M N/M
Mortgage banking, net 16,635 42,710 (61) % 2,098 6,145 8,391 8,041 10,657 (66) % (80) %
Bank and corporate owned life insurance 8,004 8,551 (6) % 1,827 4,106 2,071 4,704 2,760 (56) % (34) %
Other 6,613 8,425 (22) % 2,527 1,888 2,198 2,941 2,205 34 % 15 %
Subtotal 213,154 239,817 (11) % 65,106 73,790 74,258 80,517 76,848 (12) % (15) %
Asset gains, net 1,883 10,024 (81) % 18 1,677 188 985 5,228 (99) % (100) %
Investment securities gains (losses), net 5,676 (16) N/M 5,664 (8) 21 — — N/M N/M
Gain on the sale of branches, net (c) — 1,038 (100) % — — — — — N/M N/M
Total noninterest income $ 220,713 $ 250,862 (12) % $ 70,788 $ 75,458 $ 74,467 $ 81,502 $ 82,076 (6) % (14) %
Mortgage loans originated for sale during period $ 535,694 $ 1,345,158 (60) % $ 131,743 $ 151,838 $ 252,113 $ 404,398 $ 455,842 (13) % (71) %
Mortgage loan settlements during period 619,940 1,348,006 (54) % 119,530 204,321 296,089 426,785 463,425 (41) % (74) %
Assets under management, at market value (d) 11,142 11,561 12,937 13,679 13,148 (4) % (15) %
N/M = Not Meaningful
(a) Includes mortgage origination and servicing fees, net of MSRs amortization/decay.
(b) On January 1, 2022, the Corporation made the irrevocable election to account for MSRs at fair value. For all prior periods, MSRs were carried at LOCOM.
(c) Includes the deposit premium on the sale of branches net of miscellaneous costs to sell. See Note 2 Acquisitions and Dispositions of the notes to the consolidated financial statements for additional details on the branch sales.
(d) $ in millions. Excludes assets held in brokerage accounts.
Notable Contributions to the Change in Noninterest Income
• Mortgage banking, net decreased $26 million from the first nine months of 2021, driven by decreased gains on sold loans due to lower mortgage settlements offset partially by a decrease in MSRs expense.
• Asset gains, net decreased $8 million from the first nine months of 2021, due to higher gains from private equity investments during the first nine months of 2021 and a gain of $2 million from the sale of Whitnell on March 1, 2021.
• Investment securities gains (losses), net increased $6 million from the first nine months of 2021, primarily due to the sale of Visa Class B restricted shares acquired from First Staunton and the subsequent write up of the remaining shares still held.
• Capital markets, net increased $3 million from the first nine months of 2021 as a result of higher interest rate swap revenue and higher syndication fees.
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Noninterest Expense
Table 4 Noninterest Expense
Nine months ended Three months ended Change vs
($ in Thousands) Sep 30, 2022 Sep 30, 2021 YTD % Change Sep 30, 2022 Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021 Jun 30, 2022 Sep 30, 2021
Personnel $ 335,720 $ 318,900 5 % $ 118,243 $ 112,666 $ 104,811 $ 107,787 $ 107,880 5 % 10 %
Technology 65,401 60,902 7 % 22,694 21,223 21,485 20,787 19,927 7 % 14 %
Occupancy 43,948 46,649 (6) % 13,717 14,151 16,080 16,863 15,814 (3) % (13) %
Business development and advertising 17,388 15,522 12 % 6,778 5,655 4,954 5,627 6,156 20 % 10 %
Equipment 14,841 16,199 (8) % 4,921 4,960 4,960 4,905 5,200 (1) % (5) %
Legal and professional 14,118 17,495 (19) % 4,159 4,873 5,087 4,428 4,304 (15) % (3) %
Loan and foreclosure costs 5,121 6,508 (21) % 1,631 1,476 2,014 1,636 1,616 11 % 1 %
FDIC assessment 16,300 13,350 22 % 5,800 5,400 5,100 4,800 5,000 7 % 16 %
Other intangible amortization 6,608 6,642 (1) % 2,203 2,203 2,203 2,203 2,203 — % — %
Other 31,057 25,547 22 % 15,645 8,815 6,597 13,173 9,793 77 % 60 %
Total noninterest expense $ 550,503 $ 527,713 4 % $ 195,791 $ 181,420 $ 173,292 $ 182,210 $ 177,892 8 % 10 %
Average FTEs (a) 4,101 4,006 2 % 4,182 4,101 4,018 3,992 4,010 2 % 4 %
(a) Average FTEs without overtime
Notable Contributions to the Change in Noninterest Expense
• Personnel expense increased $17 million from the first nine months of 2021, largely as a result of increased FTEs due to hiring related to previously announced initiatives and continued investment in our employees.
• Other expense increased $6 million from the first nine months of 2021, driven by a $6 million contribution to the Corporation's charitable remainder trust to fund donations out of the foundation.
• Legal and professional expenses decreased $3 million from the first nine months of 2021 as a result of lower consulting costs associated with mortgage activity.
• FDIC expense increased $3 million from the first nine months of 2021 due to a decrease in liquid assets.
Income Taxes
The Corporation recognized income tax expense of $68 million for the nine months ended September 30, 2022, compared to income tax expense of $70 million for the nine months ended September 30, 2021. The Corporation's effective tax rate was 20.94% for the first nine months of 2022, compared to an effective tax rate of 20.37% for the first nine months of 2021. The decrease in income tax expense during the first nine months of 2022 was primarily driven by a decrease in income before tax. The increase in the effective tax rate was primarily driven by an increase in state tax expense. The Corporation expects a full year effective tax rate of approximately 21%, assuming no change in the statutory corporate tax rate.
Income tax expense recorded on the consolidated statements of income involves the interpretation and application of certain accounting pronouncements and federal and state tax laws and regulations. The Corporation is subject to examination by various taxing authorities. Examination by taxing authorities may impact the amount of tax expense and/or the reserve for uncertainty in income taxes if their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations.
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Balance Sheet Analysis
• At September 30, 2022, total assets were $38.0 billion, up $2.9 billion, or 8%, from December 31, 2021 and up $3.6 billion, or 10%, from September 30, 2021.
• Interest bearing deposits in other financial institutions were $112 million at September 30, 2022, down $570 million, or 84%, from December 31, 2021 and down $1.2 billion, or 91%, from September 30, 2021, due to the deployment of excess liquidity into investment securities purchases and loan growth.
• AFS investment securities, at fair value were $2.5 billion at September 30, 2022, down $1.8 billion, or 43%, from December 31, 2021, and down $1.4 billion, or 36%, from September 30, 2021. HTM investment securities, net, at amortized cost were $4.0 billion at September 30, 2022, up $1.7 billion, or 76%, from December 31, 2021 and up $2.0 billion, or 105%, from September 30, 2021, driven by a $1.6 billion transfer of AFS investment securities, at fair value, to HTM investment securities, net, at amortized cost during the first quarter of 2022. See Note 6 Investment Securities of the notes to consolidated financial statements for additional details.
• Lo ans of $27.8 billion at September 30, 2022 were up $3.6 billion , or 15%, from December 31, 2021 and up $4.2 billion, or 18%, from September 30, 2021 . See Note 7 Loans of the notes to consolidated financial statements for additional details.
• At September 30, 2022, total deposits of $29.2 billion were up $732 million, or 3%, from December 31, 2021 and were up $1.3 billion , or 5%, from September 30, 2021. See section Deposits and Customer Funding for additional information on deposits.
• FHLB advances were $3.8 billion at September 30, 2022, up $2.2 billion, or 133%, from both December 31, 2021 and September 30, 2021, mainly due to loan growth. See Note 9 Short and Long-Term Funding of the notes to consolidated financial statements for additional details.
Loans
Table 5 Period End Loan Composition
Sep 30, 2022 Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021
% of % of % of % of % of
($ in Thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
PPP $ 1,050 — % $ 9,514 — % $ 17,995 — % $ 66,070 — % $ 182,121 1 %
Asset-based lending & equipment finance (a) 380,830 1 % 263,044 1 % 231,040 1 % 178,027 1 % 111,027 — %
Commercial and industrial 9,190,045 33 % 8,984,127 34 % 8,102,380 33 % 8,208,289 34 % 7,816,432 33 %
Commercial real estate — owner occupied 999,786 4 % 928,152 4 % 973,572 4 % 971,326 4 % 879,554 4 %
Commercial and business lending 10,571,711 38 % 10,184,836 38 % 9,324,986 38 % 9,423,711 39 % 8,989,133 38 %
Commercial real estate — investor 5,064,289 18 % 4,790,241 18 % 4,469,241 18 % 4,384,569 18 % 4,296,489 18 %
Real estate construction 1,835,159 7 % 1,775,648 7 % 1,760,076 7 % 1,808,976 7 % 1,834,871 8 %
Commercial real estate lending 6,899,449 25 % 6,565,889 25 % 6,229,317 25 % 6,193,545 26 % 6,131,360 26 %
Total commercial 17,471,159 63 % 16,750,726 63 % 15,554,303 63 % 15,617,256 64 % 15,120,493 64 %
Residential mortgage 8,314,902 30 % 8,002,943 30 % 7,609,343 31 % 7,567,310 31 % 7,590,895 32 %
Auto finance 1,117,136 4 % 847,969 3 % 497,523 2 % 143,045 1 % 6,739 — %
Home equity 612,608 2 % 592,843 2 % 580,867 2 % 595,615 2 % 608,566 3 %
Other consumer 301,475 1 % 300,217 1 % 289,889 1 % 301,723 1 % 294,979 1 %
Total consumer 10,346,121 37 % 9,743,972 37 % 8,977,622 37 % 8,607,693 36 % 8,501,180 36 %
Total loans $ 27,817,280 100 % $ 26,494,698 100 % $ 24,531,926 100 % $ 24,224,949 100 % $ 23,621,673 100 %
(a) Periods prior to March 31, 2022 do not include equipment finance.
The Corporation has long-term guidelines relative to the proportion of Commercial and Business, CRE, and Consumer loan commitments within the overall loan portfolio, with each targeted to represent 30 to 40% of the overall loan portfolio. The targeted long-term guidelines were unchanged during 2021 and the first nine months of 2022. Furthermore, certain sub-asset classes within the respective portfolios are further defined and dollar limitations are placed on these sub-portfolios. These guidelines and limits are reviewed quarterly and approved annually by the Enterprise Risk Committee of the Corporation’s Board of Directors. These guidelines and limits are designed to create balance and diversification within the loan portfolios.
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The Corporation’s loan distribution and interest rate sensitivity as of September 30, 2022 are summarized in the following table:
Table 6 Loan Distribution and Interest Rate Sensitivity
($ in Thousands) Within 1 Year (a) 1-5 Years 5-15 Years Over 15 Years Total % of Total
PPP $ 62 $ 988 $ — $ — $ 1,050 — %
Asset-based lending & equipment finance 175,462 134,233 71,135 — 380,830 1 %
Commercial and industrial 8,673,678 387,540 119,480 9,347 9,190,045 33 %
Commercial real estate — owner occupied 610,221 269,484 119,513 568 999,786 4 %
Commercial real estate — investor 4,656,409 257,711 150,170 — 5,064,289 18 %
Real estate construction 1,794,918 35,360 4,881 — 1,835,159 7 %
Commercial - adjustable 8,593,863 17,829 17,326 — 8,629,018 31 %
Commercial - fixed 7,316,888 1,067,486 447,852 9,915 8,842,141 32 %
Residential mortgage - adjustable 316,296 675,107 1,853,298 88,305 2,933,006 11 %
Residential mortgage - fixed 25,430 81,871 627,869 4,646,726 5,381,896 19 %
Auto finance 253 246,150 870,733 — 1,117,136 4 %
Home equity 554,178 16,388 34,671 7,370 612,608 2 %
Other consumer 210,529 38,303 34,265 18,379 301,475 1 %
Total loans $ 17,017,437 $ 2,143,135 $ 3,886,014 $ 4,770,694 $ 27,817,280 100 %
Fixed-rate $ 7,921,998 $ 1,204,747 $ 1,144,682 $ 4,682,389 $ 14,953,816 54 %
Floating or adjustable rate 9,095,439 938,388 2,741,332 88,305 12,863,464 46 %
Total $ 17,017,437 $ 2,143,135 $ 3,886,014 $ 4,770,694 $ 27,817,280 100 %
(a) Demand loans, past due loans, overdrafts, and credit cards are reported in the “Within 1 Year” category.
At September 30, 2022, $20.8 billion, or 75%, of the loans outstanding and $15.9 billion, or 91%, of the commercial loans outstanding were floating rate, adjustable rate, re-pricing within one year, or maturing within one year.
Credit Risk
An active credit risk management process is used for commercial loans to ensure that sound and consistent credit decisions are made. Credit risk is controlled by detailed underwriting procedures, comprehensive loan administration, and periodic review of borrowers’ outstanding loans and commitments. Borrower relationships are formally reviewed and graded on an ongoing basis for early identification of potential problems. Further analysis by customer, industry, and geographic location are performed to monitor trends, financial performance, and concentrations. See Note 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. At September 30, 2022, no significant concentrations existed in the Corporation’s portfolio in excess of 10% of total loan exposure.
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 Industrial Industry Group Exposures, by NAICS Subsector
September 30, 2022 NAICS Subsector Outstanding Balance Total Exposure % of Total Loan Exposure
Real Estate (a) 531 $ 1,799,566 $ 3,319,689 8 %
Credit Intermediation and Related Activities (b) 522 1,000,071 2,477,339 6 %
Utilities (c) 221 2,107,765 2,471,723 6 %
Merchant Wholesalers, Durable Goods 423 423,488 805,326 2 %
(a) Includes REIT lines
(b) Includes mortgage warehouse lines
(c) 51% of the total exposure supports wind and solar projects
The remaining commercial and industrial portfolio is spread over a diverse range of industries, none of which exceed 2% of total loan exposure.
The CRE-owner occupied portfolio is spread over a diverse range of industries, none of which exceed 2% of total loan exposure.
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The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.
Commercial real estate - investor: CRE-investor is comprised of loans secured by various non-owner occupied or investor income producing property types.
Table 8 Largest Commercial Real Estate Investor Property Type Exposures
September 30, 2022 % of Total Loan Exposure % of Total Commercial Real Estate - Investor Loan Exposure
Multi-Family 4 % 33 %
Office 3 % 23 %
Industrial 3 % 23 %
The remaining CRE-investor portfolio is spread over various other property types, none of which exceed 2% of total loan exposure.
Credit risk is managed in a similar manner to commercial and business lending by employing sound underwriting guidelines, lending primarily to borrowers in local markets and businesses, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationship on an ongoing basis.
Real estate construction: Real estate construction loans are primarily short-term or interim loans that provide financing for the acquisition or development of commercial income properties, multi-family projects, or residential development, both single family and condominium. Real estate construction loans are made to developers and project managers who are generally well known to the Corporation and have prior successful project experience. The credit risk associated with real estate construction loans is generally confined to specific geographic areas but is also influenced by general economic conditions. The Corporation controls the credit risk on these types of loans by making loans in familiar markets to developers, reviewing the merits of individual projects, controlling loan structure, and monitoring project progress and construction advances.
Table 9 Largest Real Estate Construction Property Type Exposures
September 30, 2022 % of Total Loan Exposure % of Total Real Estate Construction Loan Exposure
Multi-Family 4 % 37 %
Industrial 3 % 26 %
Single Family 3 % 21 %
The remaining real estate construction portfolio is spread over various other property types, none of which exceed 2% of total loan exposure.
The Corporation’s current lending standards for CRE and real estate construction lending are determined by property type and specifically address many criteria, including: maximum loan amounts, maximum LTV, requirements for pre-leasing and / or presales, minimum borrower equity, and maximum loan-to-cost. Currently, the maximum standard for LTV is 80%, with lower limits established for certain higher risk types, such as raw land that has a 50% LTV maximum. The Corporation’s LTV guidelines are in compliance with regulatory supervisory limits. In most cases, for real estate construction loans, the loan amounts include interest reserves, which are built into the loans and sized to fund loan payments through construction and lease up and / or sell out.
Residential mortgages: Residential mortgage loans are primarily first lien home mortgages with a maximum loan-to-collateral value without credit enhancement (e.g. private mortgage insurance) of 80%. The residential mortgage portfolio is focused primarily in the Corporation's three-state branch footprint, with approximately 87% of the outstanding loan balances in the Corporation's branch footprint at September 30, 2022. The rates on adjustable rate 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. Most of the adjustable rate mortgages have an initial fixed rate term of 3, 5, 7 or 10 years.
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 mortgage loan production on its balance sheet. See section Loans for additional information on loans.
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The Corporation’s underwriting and risk-based pricing guidelines for residential mortgage loans include minimum borrower FICO score and maximum LTV of the property securing the loan. Residential mortgage products generally are underwritten using FHLMC and FNMA secondary marketing guidelines.
Home equity: Home equity consists of both home equity lines of credit and closed-end home equity loans. The Corporation’s credit risk monitoring guidelines for home equity are 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 score and the original cumulative LTV against the property securing the loan. Currently, the Corporation's policy sets the maximum acceptable LTV at 90%. The Corporation's current home equity line of credit offering is priced based on floating rate indices and generally allows 10 years of interest-only payments followed by a 20-year amortization of the outstanding balance. The loans in the Corporation's portfolio generally have an original term of 20 years with principal and interest payments required. See section Loans for additional information on loans.
Indirect Auto: The Corporation currently purchases retail auto sales contracts via a network of approved auto dealerships across 13 states throughout the Northeast, Mid-Atlantic and Midwestern United States. The auto dealerships finance the sale of automobiles as the initial lender and then assign the contracts to the Corporation pursuant to dealer agreements. The Corporation’s underwriting and pricing guidelines are based on a dual risk grade derived from a combination of FICO auto score and proprietary internal custom score. Minimum grade and FICO score standards ensure the credit risk is appropriately managed to the Corporation’s risk appetite. Further, the grade influences loan-specific parameters such as vehicle age, term, LTV, loan amount, mileage, payment and debt service thresholds, and pricing. Maximum loan terms offered are 84 months on select grades with vehicle age, mileage, and other limitations in place to qualify. The program is designed to capture primarily prime and super prime contracts. Over time, the Corporation expects roughly 60% of originations to be secured by used vehicles.
Other consumer: Other consumer consists of student loans, short-term personal installment loans, and credit cards. The Corporation had $85 million and $101 million of student loans at September 30, 2022 and December 31, 2021, respectively, the majority of which are government guaranteed. Currently, there is federal student loan relief in effect through December 31, 2022. Credit risk for non-government guaranteed student loans, short-term personal installment loans, and credit cards is influenced by general economic conditions, the characteristics of individual borrowers, and the nature of the loan collateral. Risks of loss are generally on smaller average balances per loan spread over many borrowers. Once charged off, there is usually less opportunity for recovery of these smaller consumer loans. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and guarantee positions. The student loan portfolio is in run-off and no new student loans are being originated.
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Nonperforming Assets
Management is committed to a proactive nonaccrual and problem loan identification philosophy. This philosophy is implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified quickly and the risk of loss is minimized. Table 10 provides detailed information regarding NPAs, which include nonaccrual loans, OREO, and repossessed assets:
Table 10 Nonperforming Assets
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
($ in Thousands) 2022 2022 2022 2021 2021
Nonperforming assets
PPP $ — $ — $ 41 $ 46 $ —
Commercial and industrial 15,576 843 225 6,233 8,497
Commercial real estate — owner occupied — — — — 7
Commercial and business lending 15,576 843 266 6,279 8,504
Commercial real estate — investor 37,479 46,823 80,886 60,677 61,504
Real estate construction 141 604 609 177 247
Commercial real estate lending 37,620 47,427 81,495 60,855 61,751
Total commercial 53,196 48,270 81,761 67,134 70,256
Residential mortgage 55,485 52,840 53,827 55,362 56,678
Auto finance 302 53 49 52 67
Home equity 7,325 7,100 7,490 7,726 7,838
Other consumer 98 83 95 170 222
Total consumer 63,210 60,075 61,460 63,309 64,806
Total nonaccrual loans 116,406 108,345 143,221 130,443 135,062
Commercial real estate owned 325 957 861 984 1,005
Residential real estate owned 2,560 3,042 2,209 3,666 2,126
Bank properties real estate owned (a) 13,487 13,880 15,123 24,969 30,724
OREO 16,373 17,879 18,194 29,619 33,855
Repossessed assets 299 102 — — —
Total nonperforming assets $ 133,078 $ 126,327 $ 161,414 $ 160,062 $ 168,917
Accruing loans past due 90 days or more
Commercial $ 121 $ 133 $ 125 $ 151 $ 98
Consumer 1,297 1,422 1,470 1,111 932
Total accruing loans past due 90 days or more $ 1,417 $ 1,555 $ 1,595 $ 1,263 $ 1,029
Restructured loans (accruing)
Commercial $ 16,097 $ 15,425 $ 10,127 $ 22,763 $ 25,582
Consumer 19,036 18,828 19,876 19,768 18,917
Total restructured loans (accruing) $ 35,132 $ 34,253 $ 30,003 $ 42,530 $ 44,499
Nonaccrual restructured loans (included in nonaccrual loans) $ 21,650 $ 22,172 $ 19,352 $ 17,426 $ 15,226
Ratios
Nonaccrual loans to total loans 0.42 % 0.41 % 0.58 % 0.54 % 0.57 %
NPAs to total loans plus OREO and repossessed assets 0.48 % 0.48 % 0.66 % 0.66 % 0.71 %
NPAs to total assets 0.35 % 0.34 % 0.46 % 0.46 % 0.49 %
Allowance for credit losses on loans to nonaccrual loans 285.79 % 293.09 % 221.92 % 245.16 % 246.02 %
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Table 10 Nonperforming Assets (continued)
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
($ in Thousands) 2022 2022 2022 2021 2021
Accruing loans 30-89 days past due
PPP $ 252 $ 1,475 $ 1 $ 83 $ 568
Commercial and industrial 1,609 167 1,085 632 1,229
Commercial real estate — owner occupied — — 198 163 30
Commercial and business lending 1,861 1,642 1,284 878 1,827
Commercial real estate — investor — 5,484 — 616 17,021
Real estate construction 43 — — 1,620 —
Commercial real estate lending 43 5,484 — 2,236 17,021
Total commercial 1,904 7,126 1,284 3,114 18,848
Residential mortgage 6,517 5,315 4,957 6,169 7,095
Auto finance 6,206 2,906 949 11 10
Home equity 4,234 2,961 4,207 3,711 2,931
Other consumer 1,592 1,365 1,232 2,307 1,272
Total consumer 18,549 12,547 11,345 12,198 11,308
Total accruing loans 30-89 days past due $ 20,452 $ 19,673 $ 12,629 $ 15,312 $ 30,156
Potential problem loans
PPP (b) $ 40 $ 47 $ 54 $ 2,000 $ 4,160
Asset-based lending & equipment finance (c) 19,266 19,813 19,057 17,697 —
Commercial and industrial 89,250 84,785 93,396 120,561 124,990
Commercial real estate — owner occupied 28,287 38,628 24,005 26,723 21,241
Commercial and business lending 136,843 143,273 136,513 166,981 150,391
Commercial real estate — investor 117,982 132,635 130,792 106,138 78,962
Real estate construction — 82 200 21,408 19,187
Commercial real estate lending 117,982 132,717 130,992 127,546 98,150
Total commercial 254,825 275,990 267,505 294,527 248,541
Residential mortgage 2,845 3,297 3,032 2,214 2,374
Home equity 185 188 156 165 171
Total consumer 3,030 3,486 3,188 2,379 2,546
Total potential problem loans $ 257,855 $ 279,475 $ 270,693 $ 296,905 $ 251,087
(a) Primarily closed branches and other bank operated real estate facilities, pending disposition.
(b) 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.
(c) Periods prior to March 31, 2022 do not include equipment finance .
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 sections Credit Risk and Allowance for Credit Losses on Loans.
Accruing loans past due 90 days or more: Loans past due 90 days or more but still accruing interest are classified as such where the underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection.
Restructured loans: Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. See also Note 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 ACLL. Potential problem loans are generally defined by management to include loans rated as substandard by management that are collectively evaluated (not nonaccrual loans or accruing TDRs); however, there are circumstances present to create doubt as to the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that the Corporation expects losses to occur, but that management recognizes a higher degree of risk associated with these loans.
OREO: Management actively seeks to ensure OREO properties held are monitored to minimize the Corporation’s risk of loss.
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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 for August 2022 which was compared to the September 2022 forecast for material updates, in the allowance model. The forecast is applied over a 2 year reasonable and supportable period with straight-line reversion to historical losses over the second year of the period. Assessing these factors involves significant judgment. Because each of the criteria used is subject to change, the ACLL is not necessarily indicative of the trend of future credit losses on loans in any particular segment. Therefore, management considers the ACLL a critical accounting estimate, see section Critical Accounting Estimates for additional information on the ACLL. See section Nonperforming Assets for a detailed discussion on asset quality. See also Note 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 10 provides additional information regarding NPAs, and Table 11 and Table 12 provide additional information regarding activity in the ACLL.
The loan segmentation used in calculating the ACLL at September 30, 2022 and December 31, 2021 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 risk rating 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. 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.
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Table 11 Allowance for Credit Losses on Loans
YTD Quarter Ended
Sep 30, Sep 30, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
($ in Thousands) 2022 2021 2022 2022 2022 2021 2021
Allowance for Loan Losses
Balance at beginning of period $ 280,015 $ 383,702 $ 280,771 $ 279,058 $ 280,015 $ 290,997 $ 318,811
Provision for loan losses 13,000 (75,500) 14,000 2,000 (3,000) (4,500) (20,000)
Charge offs (7,165) (31,784) (3,346) (1,791) (2,028) (8,869) (10,929)
Recoveries 7,054 14,579 1,478 1,504 4,072 2,387 3,115
Net (charge offs) recoveries (111) (17,205) (1,867) (287) 2,044 (6,482) (7,814)
Balance at end of period $ 292,904 $ 290,997 $ 292,904 $ 280,771 $ 279,058 $ 280,015 $ 290,997
Allowance for Unfunded Commitments
Balance at beginning of period $ 39,776 $ 47,776 $ 36,776 $ 38,776 $ 39,776 $ 41,276 $ 45,276
Provision for unfunded commitments — (6,500) 3,000 (2,000) (1,000) (1,500) (4,000)
Balance at end of period $ 39,776 $ 41,276 $ 39,776 $ 36,776 $ 38,776 $ 39,776 $ 41,276
Allowance for credit losses on loans $ 332,680 $ 332,273 $ 332,680 $ 317,547 $ 317,835 $ 319,791 $ 332,273
Provision for credit losses on loans 13,000 (82,000) 17,000 — (4,000) (6,000) (24,000)
Net loan (charge offs) recoveries
Asset-based lending & equipment finance (a) $ — $ 385 $ — $ — $ — $ 27 $ 91
Commercial and industrial 512 (6,743) (897) (444) 1,854 (6,669) (9,149)
Commercial real estate — owner occupied 10 115 3 4 3 4 106
Commercial and business lending 523 (6,242) (894) (440) 1,857 (6,638) (8,951)
Commercial real estate — investor — (11,293) — — — 109 181
Real estate construction 43 69 9 2 32 52 18
Commercial real estate lending 43 (11,224) 9 2 32 162 199
Total commercial 565 (17,467) (885) (439) 1,889 (6,476) (8,752)
Residential mortgage 465 (32) (42) 220 288 (6) 300
Auto finance (175) 20 (165) (14) 4 (11) 8
Home equity 675 1,640 (101) 461 315 546 959
Other consumer (1,642) (1,366) (675) (516) (451) (534) (329)
Total consumer (676) 262 (983) 151 155 (6) 938
Total net (charge offs) recoveries $ (111) $ (17,205) $ (1,867) $ (287) $ 2,044 $ (6,482) $ (7,814)
Ratios
Allowance for credit losses on loans to total loans 1.20 % 1.20 % 1.30 % 1.32 % 1.41 %
Allowance for credit losses on loans to net charge offs (annualized) N/M 14.4x 44.9x N/M N/M 12.4x 10.7x
Loan Evaluation Method for ACLL
Individually evaluated for impairment $ 15,739 $ 10,068 $ 13,625 $ 15,194 $ 19,913
Collectively evaluated for impairment 316,942 307,480 304,210 304,597 312,359
Total ACLL $ 332,680 $ 317,547 $ 317,835 $ 319,791 $ 332,273
Loan Balance
Individually evaluated for impairment $ 87,712 $ 81,457 $ 110,445 $ 115,643 $ 131,484
Collectively evaluated for impairment 27,729,568 26,413,241 24,421,481 24,109,306 23,490,189
Total loan balance $ 27,817,280 $ 26,494,698 $ 24,531,926 $ 24,224,949 $ 23,621,673
N/M = Not Meaningful
(a) Periods prior to March 31, 2022 do not include equipment finance.
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Table 12 Annualized Net (Charge Offs) Recoveries (a)
YTD Quarter Ended
Sep 30, Sep 30, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
(In basis points) 2022 2021 2022 2022 2022 2021 2021
Net loan (charge offs) recoveries
Asset-based lending & equipment finance (b) — 43 — — — 9 36
Commercial and industrial 1 (12) (4) (2) 10 (34) (47)
Commercial real estate — owner occupied — 2 — — — — 5
Commercial and business lending 1 (9) (3) (2) 8 (29) (40)
Commercial real estate — investor — (35) — — — 1 2
Real estate construction — — — — 1 1 —
Commercial real estate lending — (24) — — — 1 1
Total commercial — (15) (2) (1) 5 (17) (23)
Residential mortgage 1 — — 1 2 — 2
Auto finance (4) 31 (7) (1) 1 (9) 43
Home equity 15 34 (7) 32 22 36 61
Other consumer (74) (62) (89) (70) (62) (71) (44)
Total consumer (1) — (4) 1 1 — 4
Total net (charge offs) recoveries — (10) (3) — 3 (11) (13)
(a) Annualized ratio of net charge offs to average loans by loan type.
(b) Periods prior to March 31, 2022 do not include equipment finance.
Notable Contributions to the Change in the Allowance for Credit Losses on Loans
• Potential problem loans decreased $39 million, or 13%, from December 31, 2021, and increased $7 million, or 3%, from September 30, 2021. The decrease from December 31, 2021 was primarily driven by decreases in commercial and industrial and real estate construction lending, partially offset by an increase in CRE-investor lending. The increase from September 30, 2021 was primarily driven by increases in CRE-investor and asset-based lending and equipment finance, partially offset by decreases in commercial and industrial and real estate construction lending. See Table 10 for additional information regarding potential problem loans.
• Total nonaccrual loans decreased $14 million, or 11%, from December 31, 2021, and decreased $19 million, or 14%, from September 30, 2021. The decreases from both December 31, 2021 and September 30, 2021 were primarily due to a decrease in CRE-investor lending, partially offset by an increase in commercial and industrial lending. See Note 7 Loans of the notes to consolidated financial statements and Table 10 for additional disclosures on the changes in asset quality.
• YTD net charge offs decreased $17 million from September 30, 2021, primarily driven by no charge offs in the CRE-investor portfolio in the current period, combined with a net recovery within the commercial portfolio. See Table 11 and Table 12 for additional information on the activity in the ACLL.
Management believes the level of ACLL to be appropriate at September 30, 2022.
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Deposits and Customer Funding
The following table summarizes the composition of our deposits and customer funding:
Table 13 Period End Deposit and Customer Funding Composition
Sep 30, 2022 Jun 30, 2022 Mar 31, 2022 Dec 31, 2021 Sep 30, 2021
% of % of % of % of % of
($ in Thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
Noninterest-bearing demand $ 8,224,579 28 % $ 8,085,702 28 % $ 8,315,699 29 % $ 8,504,077 30 % $ 8,170,105 29 %
Savings 4,708,720 16 % 4,708,156 16 % 4,661,232 16 % 4,410,198 15 % 4,278,453 15 %
Interest-bearing demand 7,122,218 24 % 6,789,722 24 % 6,616,767 23 % 7,019,782 25 % 6,407,844 23 %
Money market 7,909,232 27 % 7,769,415 27 % 7,522,797 26 % 7,185,111 25 % 7,583,978 27 %
Time deposits 1,233,833 4 % 1,223,581 4 % 1,288,913 5 % 1,347,262 5 % 1,410,886 5 %
Total deposits $ 29,198,581 100 % $ 28,576,577 100 % $ 28,405,409 100 % $ 28,466,430 100 % $ 27,851,266 100 %
Customer funding (a) 283,856 296,440 299,301 354,142 322,081
Total deposits and customer funding $ 29,482,437 $ 28,873,017 $ 28,704,710 $ 28,820,572 $ 28,173,348
Network transaction deposits (b) $ 864,086 $ 891,902 $ 762,680 $ 766,965 $ 929,174
Net deposits and customer funding (total deposits and customer funding, excluding network transaction deposits) 28,618,351 27,981,114 27,942,029 28,053,607 27,244,174
Time deposits of more than $250,000 222,318 180,705 209,208 215,100 223,075
(a) Securities sold under agreement to repurchase and commercial paper.
(b) Included above in interest-bearing demand and money market.
• Total deposits, which are the Corporation's largest source of funds, increased $732 million, or 3%, from December 31, 2021, and increased $1.3 billion, or 5%, from September 30, 2021.
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. At September 30, 2022, the Corporation was in compliance with its internal liquidity objectives and had 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 6 Investment Securities of the notes to consolidated financial statements for additional information on the Corporation's investment securities portfolio, including pledged investment securities.
• Pledgeable loan collateral, which is eligible collateral with both the Federal Reserve Bank and the FHLB under established lines of credit. Based on the amount of collateral pledged, the FHLB established a collateral value from which the Bank may draw advances, and issue letters of credit in favor of public fund depositors, against the collateral. As of September 30, 2022, the Bank had $1.4 billion available for future funding. The Federal Reserve Bank also establishes a collateral value of assets to support borrowings from the discount window. As of September 30, 2022, the Bank had $566 million available for discount window borrowings.
• A $200 million Parent Company commercial paper program, of which $8 million was outstanding as of September 30, 2022.
• Dividends and service fees from subsidiaries, as well as the proceeds from issuance of capital, which are also funding sources for the Parent Company.
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• Acquisition related equity issuances by the Parent Company; the Corporation has filed a shelf registration statement with the SEC under which the Parent Company may, from time to time, offer shares of the Corporation’s common stock in connection with acquisitions of businesses, assets, or securities of other companies.
• Other issuances by the Parent Company; the Corporation maintains on file with the SEC a universal shelf registration statement, under which the Parent Company may offer the following securities, either separately or in units: debt securities, preferred stock, depositary shares, common stock, and warrants.
• Bank issuances; the Bank may also issue institutional CDs, network transaction deposits, and brokered CDs.
• Global Bank Note Program issuances; the Bank has implemented a program pursuant to which it may from time to time offer up to $2.0 billion aggregate principal amount of its unsecured senior and subordinated notes.
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 at September 30, 2022 are displayed below:
Table 14 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, 2022, net cash provided by operating and financing activities was $722 million and $2.7 billion, respectively, while net cash used in investing activities was $4.0 billion, for a net decrease in cash and cash equivalents of $523 million since year-end 2021. At September 30, 2022, assets of $38.0 billion increased $2.9 billion, or 8%, from year-end 2021, primarily due to loan growth. On the funding side, deposits of $29.2 billion increased $732 million, or 3%, from year-end 2021 and FHLB advances increased $2.2 billion, or 133%, to fund loan growth.
For the nine months ended September 30, 2021, net cash provided by operating activities and financing activities was $364 million and $768 million, respectively, while net cash used in investing activities was $162 million, for a net increase in cash and cash equivalents of $970 million from year-end 2020. At September 30, 2021, assets of $34.4 billion increased $1.0 billion, or 3%, from year-end 2020, primarily driven by a $983 million increase in interest-bearing deposits in other financial institutions and an increase of $808 million, or 26%, in AFS investment securities, at fair value, partially offset by a $830 million, or 3%, decrease in loans. On the funding side, deposits of $27.9 billion increased $1.4 billion, or 5%, from year-end 2020 related to deposit inflows from government stimulus programs and changing customer savings habits.
Quantitative and Qualitative Disclosures about Market Risk
Market risk and interest rate risk are managed centrally. Market risk is the potential for loss arising from adverse changes in the fair value of fixed-income securities, equity securities, other earning assets and derivative financial instruments as a result of changes in interest rates or other factors. Interest rate risk is the potential for reduced net interest income resulting from adverse changes in the level of interest rates. As a financial institution that engages in transactions involving an array of financial products, the Corporation is exposed to both market risk and interest rate risk. In addition to market risk, interest rate risk is measured and managed through a number of methods. The Corporation uses financial modeling simulation techniques that measure the sensitivity of future earnings due to changing rate environments to measure interest rate risk.
Policies established by the Corporation’s ALCO and approved by the Board of Directors are intended to limit these risks. The Board has delegated day-to-day responsibility for managing market and interest rate risk to ALCO. The primary objectives of market risk management are to minimize any adverse effect that changes in market risk factors may have on net interest income and to offset the risk of price changes for certain assets recorded at fair value.
Interest Rate Risk
The primary goal of interest rate risk management is to control exposure to interest rate risk within policy limits approved by the Board of Directors. These limits and guidelines reflect the Corporation's risk appetite for interest rate risk over both short-term and long-term horizons. No interest rate limit breaches occurred during the first nine months of 2022.
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The major sources of the Corporation's non-trading interest rate risk are timing differences in the maturity and re-pricing characteristics of assets and liabilities, changes in the shape of the yield curve, and the potential exercise of explicit or embedded options. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models which are employed by management to understand NII at risk, interest rate sensitive EAR, and MVE at risk. The Corporation’s interest rate risk profile is such that a higher or steeper yield curve adds to income while a flatter yield curve is relatively neutral, and a lower or inverted yield curve generally has a negative impact on earnings. The Corporation's EAR profile is asset sensitive at September 30, 2022.
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 2021 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 more significant impact.
Table 15 Estimated % Change in Rate Sensitive Earnings at Risk Over 12 Months
Sep 30, 2022 Dec 31, 2021
Dynamic Forecast Static Forecast Dynamic Forecast Static Forecast
Gradual Rate Change
100 bp increase in interest rates 4.6 % 3.4 % 5.0 % 5.4 %
200 bp increase in interest rates 9.2 % 6.8 % 10.6 % 11.7 %
At September 30, 2022, the MVE profile indicates a decrease in net balance sheet value due to instantaneous upward changes in rates.
Table 16 Market Value of Equity Sensitivity
Sep 30, 2022 Dec 31, 2021
Instantaneous Rate Change
100 bp increase in interest rates (4.2) % (1.8) %
200 bp increase in interest rates (8.2) % (3.7) %
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.
In 2014, the Financial Stability Oversight Council and Financial Stability Board raised concerns about the reliability and robustness of LIBOR and called for the development of alternative interest rate benchmarks. The ARRC, through authority from the Federal Reserve, has selected SOFR as the alternative rate and developed a paced transition plan which addresses the risk that LIBOR may not exist beyond June 2023.
As part of the Corporation's efforts to limit exposure to LIBOR based loans, performing borrowers can modify or refinance their residential mortgage loans to a fixed interest rate or an adjustable rate mortgage tied to the one-year treasury adjusted to a constant maturity of one year with an appropriate margin. This provides the Bank and borrower with greater certainty around the loan structure. The Bank has not booked a LIBOR adjustable rate mortgage since the first quarter of 2020.
Additionally, the Corporation has been monitoring its volume of commercial credits and derivatives tied to LIBOR. In 2021, the Corporation began prioritizing SOFR, Prime and Ameribor as the preferred alternative reference rates and ceased booking LIBOR based commitments after the end of 2021. Loans with a maturity after June 2023 are being reviewed and monitored to ensure there is appropriate fallback language in place when LIBOR is no longer published. Loans with a maturity date before that time should naturally mature and be re-underwritten with an appropriate alternative index rate.
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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, 2022, at those amounts contractually due to the recipient, including any unamortized premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments.
Table 17 Contractual Obligations and Other Commitments
One Year One to Three to Over
($ in Thousands) Note Reference or Less Three Years Five Years Five Years Total
Time deposits $ 982,413 $ 211,002 $ 40,412 $ 5 $ 1,233,833
Short-term funding 9 284,361 — — — 284,361
FHLB advances 9 2,583,485 393,670 605,195 195,129 3,777,478
Other long-term funding 9 85 249,170 182 46 249,484
Operating leases 18 5,679 9,640 7,659 6,920 29,897
Total $ 3,856,023 $ 863,482 $ 653,448 $ 202,100 $ 5,575,052
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 derivatives and lending-related commitments. Additional discussion of these instruments can be found in Note 10 Derivative and Hedging Activities and Note 12 Commitments, Off-Balance Sheet Arrangements, Legal Proceedings, Regulatory Matters and Operational Matters of the notes to consolidated financial statements, respectively. The Corporation also has obligations under its retirement plans as described in Note 14 Retirement Plans of the notes to the consolidated financial statements.
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, 2022, the capital ratios of the Corporation and its banking subsidiaries were in excess of regulatory minimum requirements. The Corporation’s capital ratios are summarized in the following table.
Table 18 Capital Ratios
YTD Quarter Ended
Sep 30, Sep 30, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
($ in Thousands) 2022 2021 2022 2022 2022 2021 2021
Risk-based Capital (a)
CET1 $ 2,955,710 $ 2,896,675 $ 2,837,789 $ 2,808,289 $ 2,779,943
Tier 1 capital 3,149,822 3,089,593 3,030,579 3,001,074 2,972,622
Total capital 3,582,099 3,506,864 3,448,108 3,570,026 3,550,556
Total risk-weighted assets 31,405,843 29,863,512 27,780,642 27,242,735 26,303,703
Modified CECL transitional amount 67,276 67,276 67,276 89,702 92,822
CET1 capital ratio 9.41 % 9.70 % 10.22 % 10.31 % 10.57 %
Tier 1 capital ratio 10.03 % 10.35 % 10.91 % 11.02 % 11.30 %
Total capital ratio 11.41 % 11.74 % 12.41 % 13.10 % 13.50 %
Tier 1 leverage ratio 8.66 % 8.87 % 8.86 % 8.83 % 8.81 %
Selected Equity and Performance Ratios
Total stockholders’ equity / assets 10.39 % 10.63 % 11.30 % 11.47 % 11.60 %
Dividend payout ratio (b) 36.14 % 32.94 % 32.26 % 35.71 % 41.67 % 40.82 % 35.71 %
Return on average assets 0.95 % 1.07 % 1.02 % 0.97 % 0.86 % 0.87 % 1.01 %
Annualized noninterest expense / average assets 2.04 % 2.06 % 2.08 % 2.04 % 2.00 % 2.06 % 2.03 %
(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.
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 2022.
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Non-GAAP Measures
Table 19 Non-GAAP Measures
YTD Quarter Ended
Sep 30, Sep 30, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
($ in Thousands) 2022 2021 2022 2022 2022 2021 2021
Selected equity and performance ratios (a)(b)(c)
Tangible common equity / tangible assets 7.06 % 7.23 % 7.68 % 7.86 % 7.92 %
Return on average equity 8.67 % 8.93 % 9.59 % 8.85 % 7.55 % 7.62 % 8.63 %
Return on average tangible common equity 12.96 % 13.56 % 14.32 % 13.29 % 11.26 % 11.34 % 12.97 %
Return on average CET1 11.60 % 12.62 % 12.69 % 11.77 % 10.27 % 10.50 % 12.11 %
Return on average tangible assets 1.00 % 1.13 % 1.08 % 1.03 % 0.90 % 0.92 % 1.07 %
Average stockholders' equity / average assets 11.00 % 11.98 % 10.69 % 11.02 % 11.33 % 11.43 % 11.74 %
Tangible common equity reconciliation (a)
Common equity $ 3,759,840 $ 3,766,187 $ 3,755,092 $ 3,831,658 $ 3,801,766
Goodwill and other intangible assets, net (1,156,477) (1,158,680) (1,160,883) (1,163,085) (1,165,288)
Tangible common equity $ 2,603,363 $ 2,607,507 $ 2,594,209 $ 2,668,573 $ 2,636,478
Tangible assets reconciliation (a)
Total assets $ 38,049,607 $ 37,235,990 $ 34,955,900 $ 35,104,253 $ 34,439,666
Goodwill and other intangible assets, net (1,156,477) (1,158,680) (1,160,883) (1,163,085) (1,165,288)
Tangible assets $ 36,893,130 $ 36,077,310 $ 33,795,017 $ 33,941,167 $ 33,274,378
Average tangible common equity and average CET1 reconciliation (a)
Common equity $ 3,776,296 $ 3,782,141 $ 3,791,396 $ 3,743,919 $ 3,793,597 $ 3,810,668 $ 3,807,083
Goodwill and other intangible assets, net (1,159,982) (1,169,964) (1,157,754) (1,160,035) (1,162,204) (1,164,394) (1,166,589)
Tangible common equity 2,616,314 2,612,177 2,633,642 2,583,884 2,631,393 2,646,273 2,640,494
Modified CECL transitional amount 67,276 106,277 67,276 67,276 67,276 90,528 97,420
Accumulated other comprehensive loss (income) 147,258 (4,589) 189,935 170,253 80,383 18,513 (5,320)
Deferred tax assets, net 36,085 40,135 29,875 39,072 39,411 39,640 39,893
Average CET1 $ 2,866,934 $ 2,754,000 $ 2,920,729 $ 2,860,485 $ 2,818,464 $ 2,794,954 $ 2,772,487
Average tangible assets reconciliation (a)
Total assets $ 36,075,770 $ 34,278,268 $ 37,271,779 $ 35,732,583 $ 35,200,182 $ 35,016,159 $ 34,759,489
Goodwill and other intangible assets, net (1,159,982) (1,169,964) (1,157,754) (1,160,035) (1,162,204) (1,164,394) (1,166,589)
Tangible assets $ 34,915,788 $ 33,108,304 $ 36,114,025 $ 34,572,548 $ 34,037,978 $ 33,851,765 $ 33,592,900
Adjusted net income reconciliation (b)
Net income $ 257,360 $ 274,117 $ 96,275 $ 86,824 $ 74,262 $ 76,877 $ 88,809
Other intangible amortization, net of tax 4,956 4,981 1,652 1,652 1,652 1,652 1,652
Adjusted net income $ 262,316 $ 279,098 $ 97,927 $ 88,476 $ 75,914 $ 78,529 $ 90,461
Adjusted net income available to common equity reconciliation (b)
Net income available to common equity $ 248,735 $ 259,880 $ 93,400 $ 83,949 $ 71,387 $ 74,002 $ 84,655
Other intangible amortization, net of tax 4,956 4,981 1,652 1,652 1,652 1,652 1,652
Adjusted net income available to common equity $ 253,691 $ 264,861 $ 95,052 $ 85,601 $ 73,039 $ 75,654 $ 86,307
Efficiency ratio reconciliation (d)
Federal Reserve efficiency ratio 62.32 % 65.98 % 60.32 % 61.53 % 65.71 % 67.36 % 65.43 %
Fully tax-equivalent adjustment (0.98) % (1.02) % (0.87) % (0.98) % (1.13) % (1.10) % (1.01) %
Other intangible amortization (0.75) % (0.84) % (0.67) % (0.76) % (0.84) % (0.82) % (0.83) %
Fully tax-equivalent efficiency ratio 60.60 % 64.13 % 58.79 % 59.80 % 63.76 % 65.46 % 63.61 %
Provision for unfunded commitments adjustment — % 0.81 % (0.90) % 0.67 % 0.37 % 0.55 % 1.48 %
Asset gains, net adjustment 0.13 % 0.82 % — % 0.34 % 0.05 % 0.24 % 1.29 %
Acquisitions, branch sales, and initiatives (0.20) % (0.22) % (0.53) % — % — % (1.43) % (0.91) %
Adjusted efficiency ratio 60.53 % 65.54 % 57.36 % 60.82 % 64.18 % 64.82 % 65.46 %
(a) Tangible common equity and tangible assets exclude goodwill and other intangible assets, net.
(b) Adjusted net income and adjusted net income available to common equity, which are used in the calculation of return on average tangible assets and return on average tangible common equity, respectively, add back other intangible amortization, net of tax.
(c) These capital measurements are used by management, regulators, investors, and analysts to assess, monitor and compare the quality and composition of our capital with the capital of other financial services companies.
(d) The efficiency ratio as defined by the Federal Reserve guidance is noninterest expense (which includes the provision for unfunded commitments) divided by the sum of net interest income plus noninterest income, excluding investment securities gains (losses), net. The fully tax-equivalent efficiency ratio is noninterest expense (which includes the provision for unfunded commitments), excluding other intangible amortization, divided by the sum of fully tax-equivalent net interest income plus noninterest income, excluding investment securities gains (losses), net. The adjusted efficiency ratio is noninterest expense, which excludes the provision for unfunded commitments, other intangible amortization, acquisition related costs, and announced initiatives, divided by the sum of fully tax-equivalent net interest income plus noninterest income, excluding investment securities gains (losses), net, asset gains, net, and gain on sale of branches, net. Management believes the adjusted efficiency ratio is a meaningful measure as it enhances the comparability of net interest income arising from taxable and tax-exempt sources and provides a better measure as to how the Corporation is managing its expenses by adjusting for acquisition related costs, provision for unfunded commitments, asset gains, net, branch sales, and announced initiatives.
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Sequential Quarter Results
The Corporation reported net income of $96 million for the third quarter of 2022, compared to net income of $87 million for the second quarter of 2022. Net income available to common equity was $93 million for the third quarter of 2022, or $0.62 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the second quarter of 2022 was $84 million, or $0.56 for both basic and diluted earnings per common share (see Table 1).
Fully tax-equivalent net interest income for the third quarter of 2022 was $269 million, $48 million, or 22%, higher than the second quarter of 2022. The net interest margin in the third quarter of 2022 was up 42 bp to 3.13%. The increases in net interest income and net interest margin were due to increased earning assets as well as higher interest on earning assets resulting from the Federal Reserve increasing their federal funds target rate. Average earning assets increased $1.6 billion, or 5%, to $34.2 billion in the third quarter of 2022. Average loans increased $1.7 billion, or 7%, driven by growth across nearly all loan categories. On the funding side, average FHLB advances increased $860 million, or 35%, and total interest-bearing deposits increased $718 million, or 4% (see Table 2).
The provision for credit losses had a $17 million provision for the third quarter of 2022, compared to a negligible release for the second quarter of 2022 (see Table 11). See discussion under sections: Provision for Credit Losses, Nonperforming Assets, and Allowance for Credit Losses on Loans.
Noninterest income for the third quarter of 2022 was $71 million, down $5 million, or 6%, from the second quarter of 2022, driven by lower mortgage banking, net, bank owned life insurance income, and asset gains, net, partially offset by higher investment securities gains (losses), net (see Table 3).
Noninterest expense for the third quarter of 2022 was $196 million, up $14 million, or 8%, from the second quarter of 2022, driven by a $6 million contribution to the Corporation's charitable remainder trust and higher personnel expense (see Table 4).
For the third quarter of 2022, the Corporation recognized income tax expense of $26 million, compared to income tax expense of $23 million for the second quarter of 2022. See Income Taxes section for a detailed discussion on income taxes.
Comparable Quarter Results
The Corporation reported net income of $96 million for the third quarter of 2022, compared to $89 million for the third quarter of 2021. Net income available to common equity was $93 million for the third quarter of 2022, or $0.62 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the third quarter of 2021 was $85 million, or $0.56 for both basic and diluted earnings per share (see Table 1).
Fully tax-equivalent net interest income for the third quarter of 2022 was $269 million, $81 million, or 43%, higher than the third quarter of 2021. The net interest margin between the comparable quarters was up 75 bp, to 3.13% in the third quarter of 2022. The increases in net interest income and net interest margin were due to increased earning assets as well as higher interest on earning assets resulting from the Federal Reserve increasing their federal funds target rate. Average earning assets increased $2.8 billion, or 9%, to $34.2 billion in the third quarter of 2022 as average loans increased $3.2 billion, or 13%, driven by growth across nearly all loan categories, while investments and other decreased $345 million, or 5%. On the funding side, average interest-bearing deposits increased $822 million, or 4%, from the third quarter of 2021, due to increases in lower cost deposits, partially offset by a decrease in higher cost deposits. Average short and long-term funding increased $1.7 billion, or 78% (see Table 2), primarily driven by an increase in FHLB advances.
The provision for credit losses had a $17 million provision for the third quarter of 2022, compared to a release of $24 million for the third quarter of 2021, (see Table 11). See discussion under sections: Provision for Credit Losses, Nonperforming Assets, and Allowance for Credit Losses on Loans.
Noninterest income for the third quarter of 2022 was $71 million, down $11 million, or 14%, compared to the third quarter of 2021, primarily due to lower income in mortgage banking, net and asset gains, net, partially offset by higher investment securities gains (losses), net (see Table 3).
Noninterest expense increased $18 million, or 10%, to $196 million for the third quarter of 2022, primarily due to higher personnel expenses and a $6 million contribution to the Corporation's charitable remainder trust (see Table 4).
The Corporation recognized income tax expense of $26 million for the third quarter of 2022, compared to an income tax expense of $23 million for the third quarter of 2021. See section Income Taxes for a detailed discussion on income taxes.
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Segment Review
As discussed in Note 15 Segment Reporting of the notes to consolidated financial statements, the Corporation’s reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer, and the distribution of those products and services are similar. The reportable segments are Corporate and Commercial Specialty; Community, Consumer and Business; and Risk Management and Shared Services.
Table 20 Selected Segment Financial Data
Three Months Ended Sep 30, Nine Months Ended Sep 30,
($ in Thousands) 2022 2021 % Change 2022 2021 % Change
Corporate and Commercial Specialty
Total revenue (a) $ 158,808 $ 136,601 16 % $ 440,981 $ 404,394 9 %
Provision for credit losses 11,904 14,349 (17) % 36,803 46,745 (21) %
Noninterest expense 58,934 56,209 5 % 172,141 165,568 4 %
Income tax expense 16,420 11,920 38 % 42,692 35,021 22 %
Net income 71,551 54,123 32 % 189,346 157,060 21 %
Average earning assets 16,123,187 14,111,675 14 % 15,213,821 14,062,442 8 %
Average loans 16,118,417 14,110,630 14 % 15,210,316 14,061,619 8 %
Average deposits 9,256,598 8,888,016 4 % 9,139,639 8,690,457 5 %
Average allocated capital (Average CET1) (b) 1,606,052 1,403,893 14 % 1,514,786 1,402,580 8 %
Return on average allocated capital (b) 17.67 % 15.30 % N/M 16.71 % 14.97 % 174 bp
Community, Consumer, and Business
Total revenue $ 163,476 $ 125,952 30 % $ 424,817 $ 382,384 11 %
Provision for credit losses 5,378 4,748 13 % 14,958 15,955 (6) %
Noninterest expense 107,782 98,172 10 % 311,210 300,913 3 %
Income tax expense 10,567 4,837 118 % 20,716 13,758 51 %
Net income 39,749 18,196 118 % 77,933 51,758 51 %
Average earning assets 10,416,253 9,108,909 14 % 9,796,760 9,365,653 5 %
Average loans 10,416,253 9,108,909 14 % 9,796,760 9,365,653 5 %
Average deposits 18,636,223 18,194,868 2 % 18,532,576 17,714,096 5 %
Average allocated capital (Average CET1) (b) 640,571 529,609 21 % 583,265 547,471 7 %
Return on average allocated capital (b) 24.62 % 13.63 % N/M 17.86 % 12.64 % N/M
Risk Management and Shared Services
Total revenue $ 12,943 $ 3,199 N/M $ 23,247 $ 3,176 N/M
Provision for credit losses (283) (43,107) (99) % (38,756) (144,717) (73) %
Noninterest expense 29,076 23,512 24 % 67,153 61,233 10 %
Income tax expense (benefit) (824) 6,304 N/M 4,769 21,363 (78) %
Net income (loss) (15,025) 16,490 N/M (9,918) 65,298 N/M
Average earning assets 7,675,157 8,166,891 (6) % 7,944,848 7,495,515 6 %
Average loans 521,033 664,419 (22) % 520,961 719,246 (28) %
Average deposits 981,535 991,490 (1) % 892,773 1,049,953 (15) %
Average allocated capital (Average CET1) (b) 674,106 838,985 (20) % 768,883 803,950 (4) %
Return on average allocated capital (b) (10.54) % 5.83 % N/M (3.22) % 8.49 % N/M
Consolidated Total
Total revenue (a) $ 335,227 $ 265,752 26 % $ 889,045 $ 789,954 13 %
Return on average allocated capital (b) 12.69 % 12.11 % 58 bp 11.60 % 12.62 % -102 bp
N//M = Not meaningful
(a) For the nine months ended September 30, 2021, the Corporation recognized a $2 million pre-tax gain on sale of Whitnell.
(b) The Federal Reserve establishes capital adequacy requirements for the Corporation, including CET1. For segment reporting purposes, the ROCET1 reflects return on average allocated CET1. The ROCET1 for the Risk Management and Shared Services segment and the Consolidated Total is inclusive of the annualized effect of the preferred stock
dividends.
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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.
• Total revenue increased $37 million from the nine months ended September 30, 2021 and increased $22 million from the three months ended September 30, 2021, primarily attributable to higher loan volumes and interest rates.
• Provision for credit losses decreased $10 million from the nine months ended September 30, 2021 and decreased $2 million from the three months ended September 30, 2021, as a result of improving credit quality.
• Average loans increased $1.1 billion from the nine months ended September 30, 2021 and increased $2.0 billion from the three months ended September 30, 2021, driven by loan growth across all categories.
• Average deposits increased $449 million from the nine months ended September 30, 2021 and increased $369 million from the three months ended September 30, 2021, primarily driven by increases in lower cost interest bearing deposits and money market accounts, respectively.
The Community, Consumer, and Business segment consists of lending and deposit solutions to individuals and small to mid-sized businesses.
• Total revenue increased $42 million from the nine months ended September 30, 2021 and increased $38 million from the three months ended September 30, 2021, as a result of receiving FTP credit for providing funding for the Corporation's loan growth.
• Average loans increased $431 million from the nine months ended September 30, 2021 and increased $1.3 billion from the three months ended September 30, 2021, primarily driven by growth in auto finance and residential mortgage lending within the consumer portfolio.
• Noninterest expense increased $10 million from both the nine and three months ended September 30, 2021, driven by increased personnel expense largely driven by hiring related to previously announced initiatives and continued investment in our employees.
• Average deposits increased $818 million from the nine months ended September 30, 2021 and increased $441 million from the three months ended September 30, 2021, as a result of customers holding higher savings account balances.
The Risk Management and Shared Services segment includes key shared Corporate functions, Parent Company activity, intersegment eliminations, and residual revenues and expenses.
• Revenues increased $20 million from the nine months ended September 30, 2021 and increased $10 million from the three months ended September 30, 2021, primarily driven by increased interest income as a result of higher investment income due to the current rate environment, as well as increased investment holdings after deploying excess cash into higher yielding securities earlier in 2022.
• Provision for credit losses increased $106 million from the nine months ended September 30, 2021 and increased $43 million from the three months ended September 30, 2021, driven by larger provision releases during 2021.
• Average loans decreased $198 million from the nine months ended September 30, 2021 and decreased $143 million from the three months ended September 30, 2021, primarily driven by decreases in commercial and business lending.
• Average deposits decreased $157 million from the nine months ended September 30, 2021 and decreased $10 million from the three months ended September 30, 2021, primarily driven by decreases in network deposits.
Critical Accounting Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the ACLL and MSRs valuation. A discussion of these estimates can be found in the Critical Accounting Estimates section in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Corporation’s 2021 Annual Report on Form 10-K. There has been one change in the Corporation's application of critical
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accounting estimates since December 31, 2021 driven by the irrevocable election to account for MSRs under the fair value measurement methodology.
Mortgage Servicing Rights Valuation: We have a significant investment in MSRs. Our MSRs are primarily retained from sales in the secondary market of residential mortgage loans we have originated or purchased from correspondent lenders. MSRs are initially recognized and subsequently carried at fair value. Changes in fair value are recognized in earnings as they occur through mortgage banking, net on the consolidated statements of income.
MSRs are not traded in active markets. The fair value of MSRs is determined by discounting the projected cash flows. Certain significant assumptions and estimates used in valuing MSRs are based on current market sources including projected prepayment speeds, assumed servicing costs, ancillary income, costs to service delinquent loans, costs of foreclosure, and discount rates with option-adjusted spreads. Assumptions used to value our MSRs are considered significant unobservable inputs and represent our best estimate of assumptions that market participants would use to value this asset. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated periodically for changes in market conditions and adjusted to better correlate with actual performance of our servicing portfolio. The option-adjusted spread is added to the discount rate across all interest rate paths generated in a stochastic process, which will properly capture the embedded options for MSRs cash flows.
The assumptions used in this model are primarily based on mortgage interest rates. Evaluation of the effect of a change in one assumption without considering the effect of that change on other assumptions is not meaningful. Considering all related assumptions, we expect a 50 basis point increase in the yield curve to increase the fair value of our servicing rights by $3 million and decrease the value of the hedge by $3 million. Likewise, we expect a 50 basis point decrease in the yield curve to decrease the fair value of our servicing rights by $4 million and increase the value of our hedge by $3 million.
Recent Developments
On October 25, 2022, the Corporation’s Board of Directors declared a regular quarterly cash dividend of $0.21 per common share, payable on December 15, 2022 to shareholders of record at the close of business on December 1, 2022. This is an increase of $0.01 from the previous quarterly cash dividend of $0.20 per common share. 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 on December 15, 2022 to shareholders of record at the close of business on December 1, 2022. 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 on December 15, 2022 to shareholders of record at the close of business on December 1, 2022.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is set forth in Item 2 under the captions Quantitative and Qualitative Disclosures about Market Risk and Interest Rate Risk.
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ITEM 4. Controls and Procedures
The Corporation maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended, that are designed to ensure that information required to be disclosed in the Corporation's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2022, the Corporation’s management carried out an evaluation, under the supervision and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2022.
No changes were made to the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act of 1934) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The information required by this item is set forth in Part I, Item 1 under Note 12 Commitments, Off-Balance Sheet Arrangements, Legal Proceedings, Regulatory Matters and Operational Matters of the notes to consolidated financial statements.
ITEM 1A. Risk Factors
There have been no material changes in the Risk Factors described in the Corporation’s 2021 Annual Report on Form 10-K other than as set out in the Corporation's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, in Item 1A of Part II.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the third quarter of 2022, the Corporation repurchased approximately $181,000 of common stock, or approximately 9,000 shares, all of which were repurchases related to tax withholding on equity compensation with no open market purchases during the quarter. The repurchase details are presented in the table below:
Common Stock Purchases
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Total Number of Average Price Announced Plans the Plans
Shares Purchased (a) Paid per Share or Programs or Programs (b)
Period
July 1, 2022 - July 31, 2022 4,612 $ 18.53 — —
August 1, 2022 - August 31, 2022 4,024 20.30 — —
September 1, 2022 - September 30, 2022 703 20.08 — —
Total 9,339 $ 19.41 — 3,966,430
(a) During the third quarter of 2022, the Corporation repurchased 9,339 common shares for minimum tax withholding settlements on equity compensation. These purchases do not count against the maximum value of shares remaining available for purchase under the Board of Directors' authorization.
(b) At September 30, 2022, there remained $80 million authorized to be repurchased in the aggregate. Approximately 4 million shares of common stock remained available to be repurchased under this Board authorization given the closing share price on September 30, 2022.
Repurchases under Board authorized repurchase programs are subject to any necessary regulatory approvals and other limitations and may occur from time to time in open market purchases, block transactions, private transactions, accelerated share repurchases, or similar facilities.
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ITEM 6. Exhibits
(a) Exhibits:
Exhibit (10.1), Separation Agreement between Associated Banc-Corp and Michael Meinolf, dated September 30, 2022.
Exhibit (31.1), Certification Under Section 302 of Sarbanes-Oxley by Andrew J. Harmening, Chief Executive Officer.
Exhibit (31.2), Certification Under Section 302 of Sarbanes-Oxley by Derek S. Meyer, Chief Financial Officer.
Exhibit (32), Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley.
Exhibit (101), Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Changes in Stockholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
Exhibit (104), The cover page from the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 has been formatted in Inline XBRL (Inline Extensible Business Reporting Language) and contained in Exhibits in 101.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ASSOCIATED BANC-CORP
(Registrant)
Date: October 27, 2022 /s/ Andrew J. Harmening
Andrew J. Harmening
President and Chief Executive Officer
Date: October 27, 2022 /s/ Derek S. Meyer
Derek S. Meyer
Chief Financial Officer
Date: October 27, 2022 /s/ Tammy C. Stadler
Tammy C. Stadler
Chief Accounting Officer
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