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 six 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.
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. |
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 Jun 30, | | Six Months Ended Jun 30, |
(In Thousands, except per share data) | 2022 | | 2021 | | 2022 | 2021 |
Net income | $ | 86,824 | | | $ | 91,007 | | | $ | 161,086 | | $ | 185,307 | |
Preferred stock dividends | (2,875) | | | (4,875) | | | (5,750) | | (10,082) | |
Net income available to common equity | $ | 83,949 | | | $ | 86,131 | | | $ | 155,336 | | $ | 175,226 | |
Common shareholder dividends | (30,126) | | | (27,620) | | | (60,499) | | (55,280) | |
Unvested share-based payment awards | (205) | | | (203) | | | (415) | | (412) | |
Undistributed earnings | $ | 53,618 | | | $ | 58,309 | | | $ | 94,422 | | $ | 119,533 | |
Undistributed earnings allocated to common shareholders | $ | 53,257 | | | $ | 57,887 | | | $ | 93,807 | | $ | 118,722 | |
Undistributed earnings allocated to unvested share-based payment awards | 361 | | | 422 | | | 615 | | 810 | |
Undistributed earnings | $ | 53,618 | | | $ | 58,309 | | | $ | 94,422 | | $ | 119,533 | |
Basic | | | | | | |
Distributed earnings to common shareholders | $ | 30,126 | | | $ | 27,620 | | | $ | 60,499 | | $ | 55,280 | |
Undistributed earnings allocated to common shareholders | 53,257 | | | 57,887 | | | 93,807 | | 118,722 | |
Total common shareholders earnings, basic | $ | 83,383 | | | $ | 85,506 | | | $ | 154,306 | | $ | 174,002 | |
Diluted | | | | | | |
Distributed earnings to common shareholders | $ | 30,126 | | | $ | 27,620 | | | $ | 60,499 | | $ | 55,280 | |
Undistributed earnings allocated to common shareholders | 53,257 | | | 57,887 | | | 93,807 | | 118,722 | |
Total common shareholders earnings, diluted | $ | 83,383 | | | $ | 85,506 | | | $ | 154,306 | | $ | 174,002 | |
Weighted average common shares outstanding | 149,083 | | | 152,042 | | | 148,933 | | 152,198 | |
Effect of dilutive common stock awards | 1,121 | | | 1,339 | | | 1,332 | | 1,275 | |
| | | | | | |
Diluted weighted average common shares outstanding | 150,203 | | | 153,381 | | | 150,265 | | 153,473 | |
Basic earnings per common share | $ | 0.56 | | | $ | 0.56 | | | $ | 1.04 | | $ | 1.14 | |
Diluted earnings per common share | $ | 0.56 | | | $ | 0.56 | | | $ | 1.03 | | $ | 1.13 | |
Anti-dilutive common stock options of approximately 3 million for the three and six months ended June 30, 2022 and 2021 were excluded from the earnings per common share calculation.
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 six months ended June 30, 2022 is presented below: | | | | | | | | | | | | | | |
Stock Options | Shares(a) | Weighted Average 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 | 367 | | 17.64 | | | |
| | | | |
Outstanding at June 30, 2022 | 4,447 | | $ | 20.97 | | 5.56 years | $ | 1,770 | |
Options Exercisable at June 30, 2022 | 3,805 | | $ | 21.28 | | 5.24 years | $ | 1,341 | |
(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 six months ended June 30, 2022, the intrinsic value of stock options exercised was $3 million compared to $6 million for the six months ended June 30, 2021. For the six months ended June 30, 2022, the total fair value of stock options vested was $2 million compared to $3 million for the six months ended June 30, 2021.
The Corporation recognized compensation expense for the vesting of stock options of approximately $469,000 for the six months ended June 30, 2022, compared to approximately $755,000 for the six months ended June 30, 2021. Compensation expense for the six months ended June 30, 2022 related to accelerated vesting of stock options for retirement eligible colleagues was immaterial. At June 30, 2022, the Corporation had approximately $855,000 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 six months ended June 30, 2022: | | | | | | | | |
Restricted Stock Awards | Shares(a) | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2021 | 2,635 | | $ | 19.87 | |
Granted | 673 | | 23.44 | |
Vested | 754 | | 23.16 | |
Forfeited | 22 | | 21.35 | |
Outstanding at June 30, 2022 | 2,532 | | $ | 20.64 | |
(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 $10 million was recorded for the six months ended June 30, 2022 and $8 million was recorded for the six months ended June 30, 2021. Included in compensation expense for the first six months of 2022 was $3 million of expense for the accelerated vesting of restricted stock awards granted to retirement eligible colleagues. The Corporation had $27 million of unrecognized compensation costs related to restricted stock awards at June 30, 2022 that are expected to be recognized over the remaining requisite service periods that extend predominately through the first quarter of 2026.
The Corporation has the ability to issue shares from treasury or new shares upon the exercise of stock options or the granting of restricted stock awards. The Board of Directors has authorized management to repurchase shares of the Corporation’s common stock in the market, to be made available for issuance in connection with the Corporation’s employee incentive plans and for other corporate purposes. The repurchase of shares, if any, will be based on market and investment opportunities, capital levels, growth prospects, and regulatory constraints. Such repurchases may occur from time to time in open market purchases, block transactions, private transactions, accelerated share repurchase programs, or similar facilities.
Note 6 Investment Securities
Investment securities are designated as AFS, HTM, or equity on the consolidated balance sheets at the time of purchase. The amortized cost and fair values of AFS and HTM securities at June 30, 2022 were as follows: | | | | | | | | | | | | | | |
($ in Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value |
|
|
AFS investment securities | | | | |
U. S. Treasury securities | $ | 124,365 | | $ | — | | $ | (11,256) | | $ | 113,109 | |
Agency securities | 15,000 | | — | | (1,041) | | 13,959 | |
Obligations of state and political subdivisions (municipal securities) | 361,712 | | 648 | | (3,518) | | 358,842 | |
Residential mortgage-related securities | | | | |
FNMA / FHLMC | 1,959,641 | | 547 | | (148,585) | | 1,811,603 | |
GNMA | 87,779 | | — | | (1,542) | | 86,238 | |
| | | | |
Commercial mortgage-related securities | | | | |
FNMA / FHLMC | 19,207 | | — | | (601) | | 18,606 | |
GNMA | 108,153 | | — | | (2,473) | | 105,680 | |
Asset backed securities | | | | |
FFELP | 168,357 | | — | | (7,092) | | 161,264 | |
SBA | 5,287 | | 40 | | (45) | | 5,281 | |
| | | | |
Other debt securities | 3,000 | | — | | (71) | | 2,929 | |
Total AFS investment securities | $ | 2,852,501 | | $ | 1,234 | | $ | (176,224) | | $ | 2,677,511 | |
HTM investment securities | | | | |
U. S. Treasury securities | $ | 998 | | $ | — | | $ | (44) | | $ | 955 | |
Obligations of state and political subdivisions (municipal securities) | 1,717,627 | | 4,002 | | (161,116) | | 1,560,514 | |
Residential mortgage-related securities | | | | |
FNMA / FHLMC | 967,421 | | 34,108 | | (125,444) | | 876,085 | |
GNMA | 42,248 | | 37 | | (1,637) | | 40,649 | |
Private-label | 375,638 | | 12,693 | | (54,490) | | 333,841 | |
Commercial mortgage-related securities | | | | |
FNMA/FHLMC | 762,086 | | 16,835 | | (131,851) | | 647,070 | |
GNMA | 79,250 | | 799 | | (4,970) | | 75,079 | |
Total HTM investment securities | $ | 3,945,269 | | $ | 68,474 | | $ | (479,551) | | $ | 3,534,192 | |
During the first quarter of 2022, the Corporation redesignated approximately $1.6 billion of mortgage-related securities from AFS to HTM. The reclassification of these investment securities was accounted for at fair value. Management elected to transfer these investment securities as the Corporation has the positive intent and ability to hold these investment securities to maturity. See Note 16 for additional information on the unrealized losses on investment securities transferred from AFS to HTM.
The amortized cost and fair values of AFS and HTM securities at December 31, 2021 were as follows: | | | | | | | | | | | | | | |
($ in Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (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 June 30, 2022, are shown below: | | | | | | | | | | | | | | |
| AFS | HTM |
($ in Thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
Due in one year or less | $ | 6,905 | | $ | 6,895 | | $ | 15,582 | | $ | 15,627 | |
Due after one year through five years | 98,473 | | 94,572 | | 34,915 | | 35,027 | |
Due after five years through ten years | 361,344 | | 350,609 | | 169,413 | | 167,713 | |
Due after ten years | 37,355 | | 36,762 | | 1,498,715 | | 1,343,101 | |
Total debt securities | 504,077 | | 488,839 | | 1,718,625 | | 1,561,468 | |
Residential mortgage-related securities | | | | |
FNMA / FHLMC | 1,959,641 | | 1,811,603 | | 967,421 | | 876,085 | |
GNMA | 87,779 | | 86,238 | | 42,248 | | 40,649 | |
Private-label | — | | — | | 375,638 | | 333,841 | |
Commercial mortgage-related securities | | | | |
FNMA / FHLMC | 19,207 | | 18,606 | | 762,086 | | 647,070 | |
GNMA | 108,153 | | 105,680 | | 79,250 | | 75,079 | |
Asset backed securities | | | | |
FFELP | 168,357 | | 161,264 | | — | | — | |
SBA | 5,287 | | 5,281 | | — | | — | |
| | | | |
Total investment securities | $ | 2,852,501 | | $ | 2,677,511 | | $ | 3,945,269 | | $ | 3,534,192 | |
Ratio of fair value to amortized cost | | 93.9 | % | | 89.6 | % |
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 June 30, 2022: | | | | | | | | | | | | | | | | | | | | |
($ in Thousands) | AAA | AA | A | | | | Not Rated | Total |
U. S. Treasury securities | $ | 998 | | $ | — | | $ | — | | | | | $ | — | | $ | 998 | |
Obligations of state and political subdivisions (municipal securities) | 799,925 | | 908,098 | | 8,710 | | | | | 894 | | 1,717,627 | |
Residential mortgage-related securities | | | | | | | | |
FNMA / FHLMC | 967,421 | | — | | — | | | | | — | | 967,421 | |
GNMA | 42,248 | | — | | — | | | | | — | | 42,248 | |
Private-label | 375,638 | | — | | — | | | | | — | | 375,638 | |
Commercial mortgage-related securities | | | | | | | | |
FNMA / FHLMC | 762,086 | | — | | — | | | | | — | | 762,086 | |
GNMA | 79,250 | | — | | — | | | | | — | | 79,250 | |
Total HTM securities | $ | 3,027,567 | | $ | 908,098 | | $ | 8,710 | | | | | $ | 894 | | $ | 3,945,269 | |
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 | |
Investment securities gains (losses), net includes proceeds from the sale of AFS investment securities. The proceeds from the sale of AFS investment securities for the three and six months ended June 30, 2022 and 2021, are shown below: | | | | | | | | | | | | | | |
| Three Months Ended Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
Gross gains on AFS securities | $ | — | | $ | 386 | | $ | 21 | | $ | 421 | |
| | | | |
| | | | |
Gross (losses) on AFS securities | (8) | | (362) | | (8) | | (437) | |
| | | | |
| | | | |
| | | | |
Investment securities gains (losses), net | $ | (8) | | $ | 24 | | $ | 12 | | $ | (16) | |
Proceeds from sales of AFS investment securities | $ | 327 | | $ | 107,412 | | $ | 1,061 | | $ | 158,708 | |
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 $2.6 billion and $2.3 billion at June 30, 2022 and December 31, 2021, respectively, were pledged to secure certain deposits or for other purposes.
Accrued interest receivable on HTM securities totaled $18 million and $15 million at June 30, 2022 and December 31, 2021, respectively. Accrued interest receivable on AFS securities totaled $7 million and $9 million at June 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 June 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 June 30, 2022 and December 31, 2021, the Corporation had no past due HTM securities.
The allowance for credit losses on HTM securities was approximately $63,000 at June 30, 2022 and approximately $55,000 at December 31, 2021, attributable entirely to the Corporation's municipal securities, included in HTM investment securities, net, at amortized cost on the consolidated balance sheets. The Corporation also holds U.S. Treasury, municipal and mortgage-related securities issued by the U.S. government or a GSE which are backed by the full faith and credit of the U.S. government and, as a result, no allowance for credit losses has been recorded related to these securities.
The following represents gross unrealized losses and the related fair value of AFS and HTM securities, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position, at June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | 12 months or more | Total |
($ in Thousands) | Number of Securities | Unrealized (Losses) | Fair Value | Number of Securities | Unrealized (Losses) | Fair Value | Unrealized (Losses) | Fair Value |
AFS investment securities | | | | | | | | |
U.S. Treasury securities | 5 | | $ | (10,141) | | $ | 104,289 | | 2 | | $ | (1,115) | | $ | 8,820 | | $ | (11,256) | | $ | 113,109 | |
Agency securities | 1 | | (1,041) | | 13,959 | | — | | — | | — | | (1,041) | | 13,959 | |
Obligations of state and political subdivisions (municipal securities) | 373 | | (3,518) | | 224,804 | | — | | — | | — | | (3,518) | | 224,804 | |
Residential mortgage-related securities | | | | | | | | |
FNMA / FHLMC | 95 | | (125,142) | | 1,554,774 | | 8 | | (23,443) | | 222,626 | | (148,585) | | 1,777,400 | |
GNMA | 17 | | (1,542) | | 86,238 | | — | | — | | — | | (1,542) | | 86,238 | |
| | | | | | | | |
Commercial mortgage-related securities | | | | | | | | |
FNMA / FHLMC | 1 | | (601) | | 18,606 | | — | | — | | — | | (601) | | 18,606 | |
GNMA | 35 | | (2,473) | | 105,680 | | — | | — | | — | | (2,473) | | 105,680 | |
Asset backed securities | | | | | | | | |
FFELP | 6 | | (2,905) | | 72,610 | | 9 | | (4,187) | | 88,655 | | (7,092) | | 161,264 | |
SBA | — | | — | | — | | 7 | | (45) | | 2,456 | | (45) | | 2,456 | |
Other debt securities | 3 | | (71) | | 2,929 | | — | | — | | — | | (71) | | 2,929 | |
| | | | | | | | |
Total | 536 | | $ | (147,433) | | $ | 2,183,889 | | 26 | | $ | (28,791) | | $ | 322,556 | | $ | (176,224) | | $ | 2,506,446 | |
HTM investment securities | | | | | | | | |
U.S. Treasury securities | 1 | | $ | (44) | | $ | 955 | | — | | $ | — | | $ | — | | $ | (44) | | $ | 955 | |
Obligations of state and political subdivisions (municipal securities) | 717 | | (156,757) | | 1,127,009 | | 9 | | (4,359) | | 11,242 | | (161,116) | | 1,138,251 | |
Residential mortgage-related securities | | | | | | | | |
FNMA / FHLMC | 81 | | (125,444) | | 872,561 | | — | | — | | — | | (125,444) | | 872,561 | |
GNMA | 74 | | (1,637) | | 40,113 | | — | | — | | — | | (1,637) | | 40,113 | |
Private-label | 18 | | (54,490) | | 333,841 | | — | | — | | — | | (54,490) | | 333,841 | |
Commercial mortgage-related securities | | | | | | | | |
FNMA / FHLMC | 15 | | (119,046) | | 313,359 | | 7 | | (12,804) | | 68,980 | | (131,851) | | 382,339 | |
GNMA | 33 | | (4,970) | | 339,810 | | — | | — | | — | | (4,970) | | 339,810 | |
Total | 939 | | $ | (462,387) | | $ | 3,027,647 | | 16 | | $ | (17,163) | | $ | 80,222 | | $ | (479,551) | | $ | 3,107,869 | |
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 |
($ in Thousands) | Number of Securities | Unrealized (Losses) | Fair Value | Number of Securities | Unrealized (Losses) | Fair Value | Unrealized (Losses) | Fair 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 June 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 $151 million and $82 million at June 30, 2022 and December 31, 2021, respectively. The Corporation had Federal Reserve Bank stock of $87 million at both June 30, 2022 and December 31, 2021. Accrued interest receivable on FHLB stock totaled $1 million and approximately $975,000 at June 30, 2022 and December 31, 2021, respectively. There was no accrued interest receivable on Federal Reserve Bank stock at both June 30, 2022 and 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 June 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 approximately 78,000 Visa Class B restricted shares, was carried at $14 million at both June 30, 2022 and December 31, 2021.
Note 7 Loans
The period end loan composition was as follows: | | | | | | | | |
($ in Thousands) | Jun 30, 2022 | Dec 31, 2021 |
PPP | $ | 9,514 | | $ | 66,070 | |
Asset-based lending & equipment finance(a) | 263,044 | | 178,027 | |
Commercial and industrial | 8,984,127 | | 8,208,289 | |
Commercial real estate — owner occupied | 928,152 | | 971,326 | |
Commercial and business lending | 10,184,836 | | 9,423,711 | |
Commercial real estate — investor | 4,790,241 | | 4,384,569 | |
Real estate construction | 1,775,648 | | 1,808,976 | |
Commercial real estate lending | 6,565,889 | | 6,193,545 | |
Total commercial | 16,750,726 | | 15,617,256 | |
Residential mortgage | 8,002,943 | | 7,567,310 | |
Auto finance | 847,969 | | 143,045 | |
Home equity | 592,843 | | 595,615 | |
Other consumer | 300,217 | | 301,723 | |
Total consumer | 9,743,972 | | 8,607,693 | |
Total loans | $ | 26,494,698 | | $ | 24,224,949 | |
(a) Dec 31, 2021 does not include equipment finance.
Accrued interest receivable on loans totaled $68 million at June 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 $44,000 and $139,000 for the three and six months ended June 30, 2022, respectively, and approximately $140,000 and $238,000 for the three and six months ended June 30, 2021, respectively.
The following table presents commercial and consumer loans by credit quality indicator by vintage year at June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Term Loans Amortized Cost Basis by Origination Year(a) | |
($ 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 | $ | — | | $ | — | | $ | 49 | | $ | 8,527 | | $ | 891 | | $ | — | | $ | — | | $ | — | | $ | 9,467 | |
| | | | | | | | | |
Potential Problem | — | | — | | 47 | | — | | — | | — | | — | | — | | 47 | |
| | | | | | | | | |
PPP | $ | — | | $ | — | | $ | 96 | | $ | 8,527 | | $ | 891 | | $ | — | | $ | — | | $ | — | | $ | 9,514 | |
Asset-based lending & equipment finance: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | — | | $ | 19,968 | | $ | 77,441 | | $ | 100,349 | | $ | 44,012 | | $ | 977 | | $ | 192 | | $ | 8 | | $ | 242,947 | |
Special Mention | — | | — | | — | | — | | 285 | | — | | — | | — | | 285 | |
Potential Problem | — | | 1,563 | | 1,500 | | — | | 16,750 | | — | | — | | — | | 19,813 | |
| | | | | | | | | |
Asset-based lending & equipment finance | $ | — | | $ | 21,531 | | $ | 78,941 | | $ | 100,349 | | $ | 61,047 | | $ | 977 | | $ | 192 | | $ | 8 | | $ | 263,044 | |
Commercial and industrial: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | — | | $ | 2,252,288 | | $ | 1,499,191 | | $ | 2,520,309 | | $ | 695,696 | | $ | 772,615 | | $ | 541,349 | | $ | 542,828 | | $ | 8,824,277 | |
Special Mention | — | | 16,663 | | 1,500 | | 5,242 | | 17,308 | | — | | — | | 33,509 | | 74,222 | |
Potential Problem | 71 | | 10,237 | | 17,655 | | 1,312 | | 3,751 | | 44,715 | | 175 | | 6,940 | | 84,785 | |
Nonaccrual | — | | — | | — | | — | | 843 | | — | | — | | — | | 843 | |
Commercial and industrial | $ | 71 | | $ | 2,279,187 | | $ | 1,518,346 | | $ | 2,526,863 | | $ | 717,599 | | $ | 817,331 | | $ | 541,524 | | $ | 583,277 | | $ | 8,984,127 | |
Commercial real estate - owner occupied: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | — | | $ | 6,344 | | $ | 57,860 | | $ | 251,874 | | $ | 170,340 | | $ | 173,189 | | $ | 95,730 | | $ | 126,926 | | $ | 882,263 | |
Special Mention | — | | — | | — | | — | | 7,260 | | — | | — | | — | | 7,260 | |
Potential Problem | — | | 211 | | 898 | | 8,779 | | 3,752 | | 9,073 | | 5,282 | | 10,634 | | 38,628 | |
| | | | | | | | | |
Commercial real estate - owner occupied | $ | — | | $ | 6,555 | | $ | 58,757 | | $ | 260,653 | | $ | 181,352 | | $ | 182,262 | | $ | 101,012 | | $ | 137,560 | | $ | 928,152 | |
Commercial and business lending: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | — | | $ | 2,278,600 | | $ | 1,634,541 | | $ | 2,881,059 | | $ | 910,939 | | $ | 946,782 | | $ | 637,271 | | $ | 669,762 | | $ | 9,958,954 | |
Special Mention | — | | 16,663 | | 1,500 | | 5,242 | | 24,853 | | — | | — | | 33,509 | | 81,767 | |
Potential Problem | 71 | | 12,010 | | 20,100 | | 10,091 | | 24,253 | | 53,788 | | 5,457 | | 17,574 | | 143,273 | |
Nonaccrual | — | | — | | — | | — | | 843 | | — | | — | | — | | 843 | |
Commercial and business lending | $ | 71 | | $ | 2,307,273 | | $ | 1,656,141 | | $ | 2,896,392 | | $ | 960,888 | | $ | 1,000,570 | | $ | 642,728 | | $ | 720,844 | | $ | 10,184,836 | |
Commercial real estate - investor: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | 38,623 | | $ | 91,473 | | $ | 1,069,896 | | $ | 1,488,158 | | $ | 731,756 | | $ | 569,142 | | $ | 274,865 | | $ | 294,879 | | $ | 4,520,168 | |
Special Mention | — | | — | | — | | 69,497 | | — | | 20,906 | | — | | 212 | | 90,615 | |
Potential Problem | — | | — | | 267 | | 48,237 | | 28,728 | | 25,497 | | 18,746 | | 11,161 | | 132,635 | |
Nonaccrual | — | | — | | 814 | | 37,922 | | 7,642 | | 444 | | — | | — | | 46,823 | |
Commercial real estate - investor | $ | 38,623 | | $ | 91,473 | | $ | 1,070,977 | | $ | 1,643,814 | | $ | 768,126 | | $ | 615,989 | | $ | 293,611 | | $ | 306,252 | | $ | 4,790,241 | |
Real estate construction: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | — | | $ | 27,288 | | $ | 263,216 | | $ | 962,486 | | $ | 375,197 | | $ | 65,237 | | $ | 23,355 | | $ | 11,039 | | $ | 1,727,819 | |
Special Mention | — | | — | | — | | 941 | | 11,929 | | 34,274 | | — | | — | | 47,144 | |
Potential Problem | — | | — | | — | | 82 | | — | | — | | — | | — | | 82 | |
Nonaccrual | — | | — | | — | | — | | — | | — | | — | | 604 | | 604 | |
Real estate construction | $ | — | | $ | 27,288 | | $ | 263,216 | | $ | 963,509 | | $ | 387,126 | | $ | 99,511 | | $ | 23,355 | | $ | 11,643 | | $ | 1,775,648 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | $ | 118,762 | | $ | 1,333,112 | | $ | 2,450,644 | | $ | 1,106,953 | | $ | 634,379 | | $ | 298,220 | | $ | 305,917 | | $ | 6,247,987 | |
Special Mention | — | | — | | — | | 70,438 | | 11,929 | | 55,180 | | — | | 212 | | 137,758 | |
Potential Problem | — | | — | | 267 | | 48,318 | | 28,728 | | 25,497 | | 18,746 | | 11,161 | | 132,717 | |
Nonaccrual | — | | — | | 814 | | 37,922 | | 7,642 | | 444 | | — | | 604 | | 47,427 | |
Commercial real estate lending | $ | 38,623 | | $ | 118,762 | | $ | 1,334,193 | | $ | 2,607,322 | | $ | 1,155,252 | | $ | 715,500 | | $ | 316,966 | | $ | 317,895 | | $ | 6,565,889 | |
Total commercial: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | 38,623 | | $ | 2,397,362 | | $ | 2,967,653 | | $ | 5,331,703 | | $ | 2,017,892 | | $ | 1,581,161 | | $ | 935,492 | | $ | 975,679 | | $ | 16,206,941 | |
Special Mention | — | | 16,663 | | 1,500 | | 75,680 | | 36,782 | | 55,180 | | — | | 33,721 | | 219,525 | |
Potential Problem | 71 | | 12,010 | | 20,367 | | 58,409 | | 52,981 | | 79,285 | | 24,203 | | 28,735 | | 275,990 | |
Nonaccrual | — | | — | | 814 | | 37,922 | | 8,485 | | 444 | | — | | 604 | | 48,270 | |
Total commercial | $ | 38,694 | | $ | 2,426,035 | | $ | 2,990,334 | | $ | 5,503,714 | | $ | 2,116,140 | | $ | 1,716,070 | | $ | 959,695 | | $ | 1,038,739 | | $ | 16,750,726 | |
Residential mortgage: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | — | | $ | — | | $ | 825,055 | | $ | 1,959,667 | | $ | 1,789,114 | | $ | 865,412 | | $ | 389,154 | | $ | 2,118,258 | | $ | 7,946,661 | |
Special Mention | — | | — | | — | | — | | 99 | | — | | — | | 46 | | 145 | |
Potential Problem | — | | — | | 330 | | 462 | | 96 | | 754 | | 633 | | 1,022 | | 3,297 | |
Nonaccrual | — | | — | | 3,839 | | 1,925 | | 3,497 | | 3,928 | | 6,295 | | 33,355 | | 52,840 | |
Residential mortgage | $ | — | | $ | — | | $ | 829,224 | | $ | 1,962,054 | | $ | 1,792,807 | | $ | 870,095 | | $ | 396,082 | | $ | 2,152,682 | | $ | 8,002,943 | |
Auto finance: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | — | | $ | — | | $ | 719,132 | | $ | 125,195 | | $ | 476 | | $ | 1,904 | | $ | 760 | | $ | 179 | | $ | 847,646 | |
Special Mention | — | | — | | 130 | | 140 | | — | | — | | — | | — | | 271 | |
| | | | | | | | | |
Nonaccrual | — | | — | | — | | 21 | | — | | 21 | | 11 | | — | | 53 | |
Auto finance | $ | — | | $ | — | | $ | 719,263 | | $ | 125,356 | | $ | 476 | | $ | 1,925 | | $ | 771 | | $ | 179 | | $ | 847,969 | |
Home equity: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | 5,461 | | $ | 493,282 | | $ | 9,466 | | $ | 3,966 | | $ | 1,675 | | $ | 6,664 | | $ | 7,840 | | $ | 62,133 | | $ | 585,026 | |
Special Mention | 109 | | 65 | | — | | — | | 33 | | 26 | | 39 | | 366 | | 529 | |
Potential Problem | — | | — | | — | | — | | — | | 35 | | 7 | | 146 | | 188 | |
Nonaccrual | 759 | | 8 | | — | | 15 | | 68 | | 165 | | 346 | | 6,497 | | 7,100 | |
Home equity | $ | 6,328 | | $ | 493,356 | | $ | 9,466 | | $ | 3,981 | | $ | 1,776 | | $ | 6,890 | | $ | 8,232 | | $ | 69,143 | | $ | 592,843 | |
Other consumer: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | 111 | | $ | 190,483 | | $ | 4,065 | | $ | 6,704 | | $ | 3,204 | | $ | 1,786 | | $ | 307 | | $ | 93,134 | | $ | 299,685 | |
Special Mention | 1 | | 430 | | — | | 18 | | — | | — | | — | | 1 | | 449 | |
| | | | | | | | | |
Nonaccrual | 15 | | 14 | | — | | — | | 29 | | 9 | | 5 | | 27 | | 83 | |
Other consumer | $ | 127 | | $ | 190,927 | | $ | 4,065 | | $ | 6,723 | | $ | 3,233 | | $ | 1,795 | | $ | 312 | | $ | 93,162 | | $ | 300,217 | |
Total consumer: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | 5,572 | | $ | 683,766 | | $ | 1,557,718 | | $ | 2,095,532 | | $ | 1,794,469 | | $ | 875,766 | | $ | 398,061 | | $ | 2,273,705 | | $ | 9,679,017 | |
Special Mention | 109 | | 495 | | 130 | | 159 | | 131 | | 26 | | 39 | | 413 | | 1,394 | |
Potential Problem | — | | — | | 330 | | 462 | | 96 | | 789 | | 640 | | 1,168 | | 3,486 | |
Nonaccrual | 774 | | 22 | | 3,839 | | 1,961 | | 3,594 | | 4,123 | | 6,657 | | 39,880 | | 60,075 | |
Total consumer | $ | 6,455 | | $ | 684,283 | | $ | 1,562,017 | | $ | 2,098,113 | | $ | 1,798,292 | | $ | 880,705 | | $ | 405,397 | | $ | 2,315,166 | | $ | 9,743,972 | |
Total loans: | | | | | | | | | |
Risk rating: | | | | | | | | | |
Pass | $ | 44,195 | | $ | 3,081,128 | | $ | 4,525,371 | | $ | 7,427,234 | | $ | 3,812,361 | | $ | 2,456,927 | | $ | 1,333,552 | | $ | 3,249,384 | | $ | 25,885,958 | |
Special Mention | 109 | | 17,158 | | 1,630 | | 75,838 | | 36,913 | | 55,206 | | 39 | | 34,134 | | 220,919 | |
Potential Problem | 71 | | 12,010 | | 20,697 | | 58,871 | | 53,077 | | 80,074 | | 24,843 | | 29,903 | | 279,475 | |
Nonaccrual | 774 | | 22 | | 4,653 | | 39,883 | | 12,079 | | 4,567 | | 6,657 | | 40,484 | | 108,345 | |
Total loans | $ | 45,149 | | $ | 3,110,318 | | $ | 4,552,351 | | $ | 7,601,827 | | $ | 3,914,431 | | $ | 2,596,775 | | $ | 1,365,091 | | $ | 3,353,905 | | $ | 26,494,698 | |
(a) Revolving loans converted to term loans 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.
The following table presents commercial and consumer loans by credit quality indicator by vintage 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 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.
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 June 30, 2022: | | | | | | | | | | | | | | | | | | | | |
| Accruing | | |
($ in Thousands) | Current | 30-59 Days Past Due | 60-89 Days Past Due | 90+ Days Past Due | Nonaccrual(a)(b) | Total |
PPP | $ | 8,039 | | $ | 1,361 | | $ | 113 | | $ | — | | $ | — | | $ | 9,514 | |
Asset-based lending & equipment finance | 263,044 | | — | | — | | — | | — | | 263,044 | |
Commercial and industrial | 8,982,984 | | 106 | | 61 | | 133 | | 843 | | 8,984,127 | |
Commercial real estate - owner occupied | 928,152 | | — | | — | | — | | — | | 928,152 | |
Commercial and business lending | 10,182,219 | | 1,467 | | 174 | | 133 | | 843 | | 10,184,836 | |
Commercial real estate - investor | 4,737,934 | | 5,484 | | — | | — | | 46,823 | | 4,790,241 | |
Real estate construction | 1,775,044 | | — | | — | | — | | 604 | | 1,775,648 | |
Commercial real estate lending | 6,512,978 | | 5,484 | | — | | — | | 47,427 | | 6,565,889 | |
Total commercial | 16,695,197 | | 6,952 | | 174 | | 133 | | 48,270 | | 16,750,726 | |
Residential mortgage | 7,944,365 | | 5,213 | | 102 | | 423 | | 52,840 | | 8,002,943 | |
Auto finance | 845,010 | | 2,635 | | 271 | | — | | 53 | | 847,969 | |
Home equity | 582,782 | | 2,448 | | 514 | | — | | 7,100 | | 592,843 | |
Other consumer | 297,770 | | 807 | | 557 | | 999 | | 83 | | 300,217 | |
Total consumer | 9,669,928 | | 11,104 | | 1,444 | | 1,422 | | 60,075 | | 9,743,972 | |
Total loans | $ | 26,365,125 | | $ | 18,055 | | $ | 1,618 | | $ | 1,555 | | $ | 108,345 | | $ | 26,494,698 | |
(a) Of the total nonaccrual loans, $65 million, or 60%, were current with respect to payment at June 30, 2022.
(b) No interest income was recognized on nonaccrual loans for the three and six months ended June 30, 2022. In addition, there were $15 million of nonaccrual loans for which there was no related ACLL at June 30, 2022.
The following table presents loans by past due status at December 31, 2021: | | | | | | | | | | | | | | | | | | | | |
| Accruing | | |
($ in Thousands) | Current | 30-59 Days Past Due | 60-89 Days Past Due | 90+ Days 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 $9 million of nonaccrual loans for which there was no related ACLL at December 31, 2021.
(c) Includes equipment finance.
Troubled Debt Restructurings
Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty.
The following table presents nonaccrual and performing restructured loans by loan portfolio: | | | | | | | | | | | | | | | | | | |
| Jun 30, 2022 | Dec 31, 2021 | | |
($ in Thousands) | Performing Restructured Loans | Nonaccrual Restructured Loans(a) | Performing Restructured Loans | Nonaccrual Restructured Loans(a) | | | | |
| | | | | | | | |
| | | | | | | | |
Commercial and industrial | $ | 13,882 | | $ | — | | $ | 8,687 | | $ | — | | | | | |
Commercial real estate — owner occupied | 421 | | — | | 967 | | — | | | | | |
Commercial real estate — investor | 943 | | 4,266 | | 12,866 | | 3,093 | | | | | |
Real estate construction | 179 | | 43 | | 242 | | 45 | | | | | |
Residential mortgage | 15,829 | | 16,854 | | 16,316 | | 13,483 | | | | | |
| | | | | | | | |
Home equity | 2,246 | | 1,009 | | 2,648 | | 806 | | | | | |
Other consumer | 753 | | — | | 803 | | — | | | | | |
Total restructured loans | $ | 34,253 | | $ | 22,172 | | $ | 42,530 | | $ | 17,426 | | | | | |
(a) Nonaccrual restructured loans have been included within nonaccrual loans. The Corporation had a recorded investment of $9 million in loans modified as TDRs during the six months ended June 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 $8 million were in nonaccrual within the credit quality tables, pending a sustained period of repayment. The following table provides the number of loans modified in a TDR by loan portfolio, the recorded investment, and unpaid principal balance for the six months ended June 30, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
($ in Thousands) | Number of Loans | Recorded Investment(a) | Unpaid Principal Balance(b) | Number of Loans | Recorded Investment(a) | Unpaid Principal Balance(b) |
| | | | | | |
Commercial and industrial | 2 | | $ | 275 | | $ | 275 | | 2 | | $ | 128 | | $ | 129 | |
| | | | | | |
Commercial real estate — investor | 1 | | $ | 553 | | $ | 573 | | 4 | | $ | 1,690 | | $ | 1,690 | |
| | | | | | |
Residential mortgage | 35 | | 8,149 | | 8,315 | | 37 | | 7,424 | | 7,450 | |
Home equity | 8 | | 291 | | 312 | | 4 | | 566 | | 603 | |
| | | | | | |
Total loans modified | 46 | | $ | 9,267 | | $ | 9,474 | | 47 | | $ | 9,808 | | $ | 9,871 | |
(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
combination of these concessions. During the six months ended June 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 six months ended June 30, 2022.
The following table provides the number of loans modified in a TDR during the previous twelve months which subsequently defaulted during the six months ended June 30, 2022 and 2021, and the recorded investment in these restructured loans as of June 30, 2022 and 2021: | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
($ in Thousands) | Number of Loans | Recorded Investment | Number of Loans | Recorded Investment |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Residential mortgage | 4 | | $ | 1,178 | | 1 | | $ | 97 | |
| | | | |
| | | | |
| | | | |
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 June 30, 2022, the Corporation had no loans meeting this classification compared to $7 million at December 31, 2021.
Allowance for Credit Losses on Loans
The ACLL is comprised of the allowance for loan losses and the allowance for unfunded commitments. The level of the ACLL represents management’s estimate of an amount appropriate to provide for expected lifetime credit losses in the loan portfolio at the balance sheet date. The expected lifetime credit losses are the product of multiplying the Corporation's estimates of probability of default, loss given default, and the individual loan level exposure at default on an undiscounted basis. A main factor in the determination of the ACLL is the economic forecast. The Corporation utilized Moody's baseline forecast, updated during May 2022 and reviewed against the June 2022 forecast for material updates, in the allowance model. The forecast is applied over a 2 year reasonable and supportable period with straight-line reversion to the historical losses over the second year of the period. The allowance for unfunded commitments is maintained at a level believed by management to be sufficient to absorb expected lifetime losses related to unfunded credit facilities (including unfunded loan commitments and letters of credit). See Note 12 for additional information on the change in the allowance for unfunded commitments.
The following table presents a summary of the changes in the ACLL by portfolio segment for the six months ended June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | |
($ in Thousands) | Dec 31, 2021 | Charge offs | Recoveries | Net Charge offs | | Provision for credit losses | Jun 30, 2022 | ACLL / Loans |
Allowance for loan losses | | | | | | | |
PPP | $ | 51 | | $ | — | | $ | — | | $ | — | | | $ | (45) | | $ | 6 | | |
Asset-based lending & equipment finance | 4,182 | | — | | — | | — | | | 450 | | 4,632 | | |
Commercial and industrial | 85,624 | | (1,895) | | 3,305 | | 1,410 | | | 5,018 | | 92,052 | | |
Commercial real estate — owner occupied | 11,473 | | — | | 7 | | 7 | | | (1,074) | | 10,406 | | |
Commercial and business lending | 101,330 | | (1,895) | | 3,312 | | 1,417 | | | 4,349 | | 107,096 | | |
Commercial real estate — investor | 72,803 | | — | | — | | — | | | (8,412) | | 64,391 | | |
Real estate construction | 37,643 | | — | | 33 | | 33 | | | (1,537) | | 36,139 | | |
Commercial real estate lending | 110,446 | | — | | 33 | | 33 | | | (9,949) | | 100,531 | | |
Total commercial | 211,776 | | (1,895) | | 3,346 | | 1,450 | | | (5,600) | | 207,626 | | |
Residential mortgage | 40,787 | | (138) | | 646 | | 508 | | | (2,444) | | 38,851 | | |
Auto finance | 1,999 | | (60) | | 49 | | (10) | | | 8,440 | | 10,428 | | |
Home equity | 14,011 | | (195) | | 971 | | 776 | | | (1,496) | | 13,291 | | |
Other consumer | 11,441 | | (1,531) | | 564 | | (967) | | | 100 | | 10,574 | | |
Total consumer | 68,239 | | (1,924) | | 2,230 | | 306 | | | 4,600 | | 73,145 | | |
Total loans | $ | 280,015 | | $ | (3,819) | | $ | 5,576 | | $ | 1,757 | | | $ | (1,000) | | $ | 280,771 | | |
Allowance for unfunded commitments | | | | | | | |
| | | | | | | | |
Asset-based lending & equipment finance | $ | 857 | | $ | — | | $ | — | | $ | — | | | $ | (124) | | $ | 733 | | |
Commercial and industrial | 17,601 | | — | | — | | — | | | (2,949) | | 14,652 | | |
Commercial real estate — owner occupied | 208 | | — | | — | | — | | | (94) | | 114 | | |
Commercial and business lending | 18,667 | | — | | — | | — | | | (3,167) | | 15,500 | | |
Commercial real estate — investor | 936 | | — | | — | | — | | | (287) | | 649 | | |
Real estate construction | 15,586 | | — | | — | | — | | | 901 | | 16,487 | | |
Commercial real estate lending | 16,522 | | — | | — | | — | | | 614 | | 17,136 | | |
Total commercial | 35,189 | | — | | — | | — | | | (2,553) | | 32,636 | | |
| | | | | | | | |
| | | | | | | | |
Home equity | 2,592 | | — | | — | | — | | | (150) | | 2,441 | | |
Other consumer | 1,995 | | — | | — | | — | | | (296) | | 1,698 | | |
Total consumer | 4,587 | | — | | — | | — | | | (447) | | 4,140 | | |
Total loans | $ | 39,776 | | $ | — | | $ | — | | $ | — | | | $ | (3,000) | | $ | 36,776 | | |
Allowance for credit losses on loans | | | | | | | |
PPP | $ | 51 | | $ | — | | $ | — | | $ | — | | | $ | (45) | | $ | 6 | | 0.06 | % |
Asset-based lending & equipment finance | 5,040 | | — | | — | | — | | | 325 | | 5,365 | | 2.04 | % |
Commercial and industrial | 103,225 | | (1,895) | | 3,305 | | 1,410 | | | 2,069 | | 106,704 | | 1.19 | % |
Commercial real estate — owner occupied | 11,681 | | — | | 7 | | 7 | | | (1,167) | | 10,520 | | 1.13 | % |
Commercial and business lending | 119,997 | | (1,895) | | 3,312 | | 1,417 | | | 1,182 | | 122,595 | | 1.20 | % |
Commercial real estate — investor | 73,739 | | — | | — | | — | | | (8,699) | | 65,040 | | 1.36 | % |
Real estate construction | 53,229 | | — | | 33 | | 33 | | | (636) | | 52,627 | | 2.96 | % |
Commercial real estate lending | 126,968 | | — | | 33 | | 33 | | | (9,335) | | 117,667 | | 1.79 | % |
Total commercial | 246,965 | | (1,895) | | 3,346 | | 1,450 | | | (8,153) | | 240,262 | | 1.43 | % |
Residential mortgage | 40,787 | | (138) | | 646 | | 508 | | | (2,444) | | 38,851 | | 0.49 | % |
Auto finance | 1,999 | | (60) | | 49 | | (10) | | | 8,440 | | 10,428 | | 1.23 | % |
Home equity | 16,603 | | (195) | | 971 | | 776 | | | (1,647) | | 15,732 | | 2.65 | % |
Other consumer | 13,436 | | (1,531) | | 564 | | (967) | | | (196) | | 12,273 | | 4.09 | % |
Total consumer | 72,825 | | (1,924) | | 2,230 | | 306 | | | 4,153 | | 77,284 | | 0.79 | % |
Total loans | $ | 319,791 | | $ | (3,819) | | $ | 5,576 | | $ | 1,757 | | | $ | (4,000) | | $ | 317,547 | | 1.20 | % |
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.
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 six months of 2022.
The Corporation had goodwill of $1.1 billion at both June 30, 2022 and December 31, 2021.
Other Intangible Assets
The Corporation has CDIs and historically had other intangible assets, both of which are amortized. For CDIs and other intangibles, changes in the gross carrying amount, accumulated amortization, and net book value were as follows: | | | | | | | | |
($ in Thousands) | Six Months Ended June 30, 2022 | Year Ended Dec 31, 2021 |
Core deposit intangibles | | |
Gross carrying amount at the beginning of period | $ | 88,109 | | $ | 88,109 | |
| | |
Accumulated amortization | (34,422) | | (30,016) | |
Net book value | $ | 53,687 | | $ | 58,093 | |
Amortization during the period | $ | 4,405 | | $ | 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 six months ended June 30, 2022 is as follows:
| | | | | | |
($ in Thousands) | Six Months Ended June 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 | 5,231 | | |
Paydowns | (5,220) | | |
Valuation: | | |
Change in fair value model assumptions | 6,034 | | |
Changes in fair value of asset | 13,366 | | |
| | |
| | |
Mortgage servicing rights at end of period | $ | 76,570 | | |
| | |
| | |
| | |
| | |
| | |
Portfolio of residential mortgage loans serviced for others (“servicing portfolio”) | $ | 6,910,382 | | |
Mortgage servicing rights to servicing portfolio | 1.11 | % | |
| | |
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 June 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 amortizing intangible assets: | | | | | | | | | |
($ in Thousands) | Core Deposit Intangibles | | Mortgage Servicing Rights |
Six months ended December 31, 2022 | $ | 4,405 | | | $ | 6,511 | |
2023 | 8,811 | | | 12,413 | |
2024 | 8,811 | | | 10,884 | |
2025 | 8,811 | | | 9,535 | |
2026 | 8,811 | | | 8,275 | |
2027 | 8,811 | | | 7,198 | |
Beyond 2027 | 5,227 | | | 21,752 | |
Total Estimated Amortization Expense | $ | 53,687 | | | $ | 76,570 | |
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) | Jun 30, 2022 | Dec 31, 2021 |
Short-Term Funding | | |
Federal funds purchased | $ | 409,180 | | $ | 120 | |
Securities sold under agreements to repurchase | 273,659 | | 319,412 | |
Federal funds purchased and securities sold under agreements to repurchase | 682,839 | | 319,532 | |
Commercial paper | 22,781 | | 34,730 | |
Total short-term funding | $ | 705,620 | | $ | 354,262 | |
Long-Term Funding | | |
| | |
| | |
Corporation subordinated notes, at par, due 2025 | $ | 250,000 | | $ | 250,000 | |
| | |
Capitalized costs | (691) | | (839) | |
Finance leases | 511 | | 163 | |
Total long-term funding | 249,820 | | 249,324 | |
| | |
Total short and long-term funding, excluding FHLB advances | $ | 955,440 | | $ | 603,587 | |
FHLB Advances | | |
Short-term FHLB advances | $ | 2,045,000 | | $ | — | |
Long-term FHLB advances | 1,213,039 | | 1,621,047 | |
Total FHLB advances | 3,258,039 | | 1,621,047 | |
| | |
Total short and long-term funding | $ | 4,213,479 | | $ | 2,224,633 | |
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 June 30, 2022, the Corporation had pledged securities valued at 133% 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 June 30, 2022 and December 31, 2021 are presented in the following table: | | | | | | | | | | | | |
| Overnight and Continuous | | | | |
($ in Thousands) | Jun 30, 2022 | Dec 31, 2021 | | | | |
Repurchase agreements | | | | | | |
Agency mortgage-related securities | $ | 273,659 | | $ | 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.
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 value 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 $73 million and $71 million of investment securities as collateral at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, the Corporation posted immaterial required cash collateral 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 (CME) and the London Clearing House (LCH) 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.
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 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.
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 and TBA securities 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 June 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 June 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. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Jun 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 |
Not designated as hedging instruments | | | | | | | | | |
Interest rate-related instruments | | $ | 4,116,939 | | $ | 34,184 | | $ | 4,116,939 | | $ | 173,955 | | $ | 3,874,781 | | $ | 83,626 | | $ | 3,874,781 | | $ | 26,231 | |
Foreign currency exchange forwards | | 509,404 | | 4,190 | | 498,773 | | 3,764 | | 490,057 | | 5,490 | | 478,745 | | 5,441 | |
Commodity contracts | | — | | — | | — | | — | | 3,894 | | 1,264 | | 3,910 | | 1,248 | |
Mortgage banking(a)(b) | | 76,824 | | 1,033 | | 105,000 | | 113 | | 133,990 | | 2,647 | | 245,016 | | — | |
| | | | | | | | |
Gross derivatives before netting | | | $ | 39,407 | | | $ | 177,833 | | | $ | 93,026 | | | $ | 32,921 | |
Less: Legally enforceable master netting agreements | 4,369 | | | 4,369 | | | 2,143 | | | 2,143 | |
Less: Cash collateral pledged/received | 22,756 | | | — | | | 1,313 | | | 11,357 | |
Total derivative instruments, after netting | $ | 12,281 | | | $ | 173,464 | | | $ | 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 December 31, 2021, the mortgage derivative asset included approximately $30,000 of forward commitments fair value. The Corporation terminated its $500 million fair value hedge during the fourth quarter of 2019. At June 30, 2022, the amortized cost basis of the closed portfolios which had previously been used in the terminated hedging relationship was $362 million and is included in loans on the consolidated balance sheets. This amount includes $2 million of hedging adjustments on the discontinued hedging relationships.
The table below identifies the effect of fair value hedge accounting on the Corporation's consolidated statements of income for the three and six months ended June 30, 2022 and 2021: | | | | | | | | | | | | | | | | | | |
| Location and Amount of Gain or (Loss) Recognized on the Consolidated Statements of Income in Fair Value and Cash Flow Hedging Relationships |
| Three months ended Jun 30, | Six Months Ended Jun 30, |
| 2022 | 2021 | 2022 | 2021 |
($ in Thousands) | Interest Income | | Interest Income | |
Total amounts of income presented on the consolidated statements of income in which the effects of the fair value hedge is recorded | $ | (129) | | | $ | (352) | | | $ | (308) | | | $ | (837) | | |
The effects of fair value hedging: (Loss) on fair value hedging relationships in Subtopic 815-20 | | | | | | | | |
Interest contracts | | | | | | | | |
Hedged items | (129) | | | (352) | | | (308) | | | (837) | | |
| | | | | | | | |
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 six months ended June 30, 2022 and 2021: | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Income Category of Gain / (Loss) Recognized in Income | Three Months Ended Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
Derivative Instruments | | | | | |
Interest rate-related instruments — customer and mirror, net | Capital markets, net | $ | 8 | | $ | (950) | | $ | 581 | | $ | 1,989 | |
Interest rate-related instruments — MSRs hedge | Mortgage banking, net | (5,346) | | — | | (9,012) | | — | |
Foreign currency exchange forwards | Capital markets, net | 254 | | (25) | | 377 | | 118 | |
Commodity contracts | Capital markets, net | — | | (512) | | (16) | | (1,132) | |
Interest rate lock commitments (mortgage) | Mortgage banking, net | 1,210 | | (373) | | (1,631) | | (3,081) | |
Forward commitments (mortgage) | Mortgage banking, net | 4,885 | | 4,685 | | 128 | | (1,616) | |
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 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 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 June 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 | | |
($ in Thousands) | Derivative Liabilities Offset | Cash Collateral Received | |
Derivative assets | | | | | | |
June 30, 2022 | $ | 27,214 | | $ | (4,369) | | $ | (22,756) | | $ | 89 | | | |
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 | | |
($ in Thousands) | Derivative Assets Offset | Cash Collateral Pledged | |
Derivative liabilities | | | | | | |
June 30, 2022 | $ | 4,618 | | $ | (4,369) | | $ | — | | $ | 249 | | | |
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) | Jun 30, 2022 | Dec 31, 2021 |
Commitments to extend credit, excluding commitments to originate residential mortgage loans held for sale(a)(b) | $ | 11,483,648 | | $ | 10,848,136 | |
Commercial letters of credit(a) | 5,152 | | 5,992 | |
Standby letters of credit(c) | 274,324 | | 248,292 | |
(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 June 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) The Corporation has established a liability of $3 million and $2 million for June 30, 2022 and December 31, 2021, respectively, as an estimate of the fair value of these financial instruments.
Lending-related Commitments
As a financial services provider, the Corporation routinely enters into commitments to extend credit. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Corporation, with each customer’s creditworthiness evaluated on a case-by-case basis. The commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of those instruments. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the customer. Since a significant portion of commitments to extend credit are subject to specific restrictive loan covenants or may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. An allowance for unfunded commitments is maintained at a level believed by management to be sufficient to absorb expected lifetime losses related to unfunded commitments (including unfunded loan commitments and letters of credit).
The following table presents a summary of the changes in the allowance for unfunded commitments: | | | | | | | | |
($ in Thousands) | Six Months Ended June 30, 2022 | Year Ended December 31, 2021 |
Allowance for Unfunded Commitments | | |
Balance at beginning of period | $ | 39,776 | | $ | 47,776 | |
| | |
| | |
Provision for unfunded commitments | (3,000) | | (8,000) | |
| | |
Balance at end of period | $ | 36,776 | | $ | 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 and TBA securities 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 June 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 $16 million for both the six months ended June 30, 2022 and June 30, 2021, and $8 million for both the three months ended June 30, 2022 and June 30, 2021. The Corporation's remaining investment in qualified affordable housing projects accounted for under the proportional amortization method totaled $245 million at June 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 $44 million at June 30, 2022 and $80 million at December 31, 2021.
For the six months ended June 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 June 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 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, seek an accounting and disgorgement of certain profits, as well as certain equitable restitution and equitable monetary relief. The Corporation intends to vigorously defend against this lawsuit. It is not possible for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss at this time with respect to this lawsuit.
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, 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 $3 million and $8 million for the six months ended June 30, 2022 and the year ended December 31, 2021, respectively. There were no loss reimbursement and settlement claims paid in the six months ended June 30, 2022, and approximately $114,000 of such claims were paid for the year ended December 31, 2021. Make whole requests during 2021 and the first six months of 2022 generally arose from loans originated during the period of January 1, 2017 to December 31, 2021. Since January 1, 2017, loans sold totaled $7.4 billion at the time of sale, and consisted primarily of loans sold to GSEs. As of June 30, 2022, $4.6 billion of loans originated since January 1, 2017 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 June 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 June 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 June 30, 2022 and December 31, 2021, there were $22 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.
The table below presents the Corporation’s financial instruments measured at fair value on a recurring basis as of June 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 | Jun 30, 2022 | Dec 31, 2021 |
Assets | | | |
AFS investment securities | | | |
U.S. Treasury securities | Level 1 | $ | 113,109 | | $ | 122,957 | |
Agency securities | Level 2 | 13,959 | | 14,897 | |
Obligations of state and political subdivisions (municipal securities) | Level 2 | 358,842 | | 400,457 | |
Residential mortgage-related securities | | | |
FNMA / FHLMC | Level 2 | 1,811,603 | | 2,691,879 | |
GNMA | Level 2 | 86,238 | | 67,780 | |
Private-label | Level 2 | — | | 329,724 | |
Commercial mortgage-related securities | | | |
FNMA / FHLMC | Level 2 | 18,606 | | 350,623 | |
GNMA | Level 2 | 105,680 | | 166,799 | |
Asset backed securities | | | |
FFELP | Level 2 | 161,264 | | 177,325 | |
SBA | Level 2 | 5,281 | | 6,580 | |
Other debt securities | Level 2 | 2,929 | | 2,994 | |
| | | |
Total AFS investment securities | Level 1 | $ | 113,109 | | $ | 122,957 | |
Total AFS investment securities | Level 2 | 2,564,402 | | 4,209,058 | |
| | | |
Equity securities with readily determinable fair values | Level 1 | 5,502 | | 4,810 | |
Residential loans held for sale | Level 2 | 42,676 | | 136,638 | |
Mortgage servicing rights, net(a) | Level 3 | 76,570 | | N/A |
Interest rate-related instruments(b) | Level 2 | 34,184 | | 83,626 | |
Foreign currency exchange forwards(b) | Level 2 | 4,190 | | 5,490 | |
| | | |
Commodity contracts(b) | Level 2 | — | | 1,264 | |
| | | |
| | | |
Interest rate lock commitments to originate residential mortgage loans held for sale | Level 3 | 986 | | 2,617 | |
Forward commitments on residential mortgage loans | Level 3 | — | | 30 | |
Forward commitments on TBA securities | Level 3 | 47 | | — | |
Liabilities | | | |
Interest rate-related instruments(b) | Level 2 | $ | 173,955 | | $ | 26,231 | |
Foreign currency exchange forwards(b) | Level 2 | 3,764 | | 5,441 | |
Commodity contracts(b) | Level 2 | — | | 1,248 | |
| | | |
| | | |
| | | |
| | | |
Forward commitments on residential mortgage loans | Level 3 | 113 | | — | |
(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 six months ended June 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 and TBA securities | 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 | $ | 7,237 | | $ | (1,083) | | $ | 8,320 | |
Closed loans / settlements | 637 | | 20,035 | | (19,398) | |
Other | (9,505) | | (18,856) | | 9,351 | |
Change in mortgage derivative | (1,631) | | 96 | | (1,727) | |
| | | |
Balance June 30, 2022 | $ | 986 | | $ | 66 | | $ | 920 | |
The following table presents the carrying value of equity securities without readily determinable fair values as of June 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 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 June 30, 2022: | | | | | |
($ in Thousands) | |
Equity securities without readily determinable fair values | |
Carrying value as of December 31, 2021 | $ | 13,542 | |
| |
Additions | 4 | |
Sales | (8) | |
| |
Carrying value as of June 30, 2022 | $ | 13,538 | |
| |
Cumulative upward carrying value changes between January 1, 2018 and June 30, 2022 | $ | 13,444 | |
Cumulative downward carrying value changes/impairment between January 1, 2018 and June 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(c) |
June 30, 2022 | | | | |
Assets | | | |
| | | | |
Individually evaluated loans(a) | Level 3 | $ | 35,906 | | Provision for credit losses | $ | (2,260) | |
OREO(b) | Level 2 | 2,098 | | Other noninterest expense / provision for credit losses(d) | 496 | |
| | | | |
December 31, 2021 | | | | |
Assets | | | | |
| | | | |
| | | | |
Individually evaluated loans(a) | Level 3 | $ | 69,917 | | Provision for credit losses | $ | (3,045) | |
OREO(b) | 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 probable TDRs which are individually analyzed, net of the related ACLL, of which there were none at June 30, 2022.
(b) 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.
(c) Includes the full year impact on the consolidated statements of income.
(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: | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | Valuation Technique | Significant Unobservable Input | Range of Inputs | Weighted Average Input Applied |
Mortgage servicing rights | Discounted cash flow | Option adjusted spread | 8% | - | 10% | 8% |
Mortgage servicing rights | Discounted cash flow | Constant prepayment rate | —% | - | 100% | 8% |
Individually evaluated loans | Appraisals / Discounted cash flow | Collateral / Discount factor | 27% | - | 29% | 27% |
Interest rate lock commitments to originate residential mortgage loans held for sale | Discounted cash flow | Closing Ratio | 32% | - | 100% | 86% |
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: | | | | | | | | | | | | | | | | | |
| | Jun 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 | $ | 397,364 | | $ | 397,364 | | $ | 343,831 | | $ | 343,831 | |
Interest-bearing deposits in other financial institutions | Level 1 | 436,887 | | 436,887 | | 681,684 | | 681,684 | |
Federal funds sold and securities purchased under agreements to resell | Level 1 | 32,820 | | 32,820 | | — | | — | |
AFS investment securities | Level 1 | 113,109 | | 113,109 | | 122,957 | | 122,957 | |
AFS investment securities | Level 2 | 2,564,402 | | 2,564,402 | | 4,209,058 | | 4,209,058 | |
HTM investment securities, net | Level 1 | 998 | | 955 | | 1,000 | | 1,001 | |
HTM investment securities, net | Level 2 | 3,944,208 | | 3,533,175 | | 2,237,947 | | 2,347,608 | |
| | | | | |
Equity securities with readily determinable fair values | Level 1 | 5,502 | | 5,502 | | 4,810 | | 4,810 | |
Equity securities without readily determinable fair values | Level 3 | 13,538 | | 13,538 | | 13,542 | | 13,542 | |
FHLB and Federal Reserve Bank stocks | Level 2 | 237,616 | | 237,616 | | 168,281 | | 168,281 | |
Residential loans held for sale | Level 2 | 42,676 | | 42,676 | | 136,638 | | 136,638 | |
Commercial loans held for sale | Level 2 | 44,721 | | 44,721 | | — | | — | |
Loans, net | Level 3 | 26,213,927 | | 25,322,573 | | 23,944,934 | | 23,980,330 | |
Bank and corporate owned life insurance | Level 2 | 675,347 | | 675,347 | | 680,021 | | 680,021 | |
| | | | | |
Mortgage servicing rights, net(a) | Level 3 | 76,570 | | 76,570 | | 54,862 | | 57,259 | |
Derivatives (other assets)(b) | Level 2 | 38,374 | | 38,374 | | 90,379 | | 90,379 | |
Interest rate lock commitments to originate residential mortgage loans held for sale (other assets) | Level 3 | 986 | | 986 | | 2,617 | | 2,617 | |
Forward commitments on residential mortgage loans (other assets) | Level 3 | — | | — | | 30 | | 30 | |
Forward commitments on TBA securities (other assets) | Level 3 | 47 | | 47 | | — | | — | |
Financial liabilities | | | | | |
Noninterest-bearing demand, savings, interest-bearing demand, and money market accounts | Level 3 | $ | 27,352,996 | | $ | 27,352,996 | | $ | 27,119,167 | | $ | 27,119,167 | |
Time deposits(c) | Level 2 | 1,223,581 | | 1,223,581 | | 1,347,262 | | 1,347,262 | |
Short-term funding | Level 2 | 705,620 | | 705,216 | | 354,262 | | 354,248 | |
FHLB advances | Level 2 | 3,258,039 | | 3,250,216 | | 1,621,047 | | 1,680,814 | |
Other long-term funding | Level 2 | 249,820 | | 250,571 | | 249,324 | | 265,545 | |
| | | | | |
Standby letters of credit(d) | Level 2 | 2,617 | | 2,617 | | 2,367 | | 2,367 | |
| | | | | |
Derivatives (accrued expenses and other liabilities)(b) | Level 2 | 177,720 | | 177,720 | | 32,921 | | 32,921 | |
| | | | | |
| | | | | |
Forward commitments on residential mortgage loans (accrued expenses and other liabilities) | Level 3 | 113 | | 113 | | — | | — | |
| | | | | |
(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 $274 million at June 30, 2022 and $248 million at December 31, 2021. See Note 12 for additional information on the standby letters of credit and for information on the fair value of lending-related commitments. Note 14 Retirement Plans
The Corporation has a noncontributory defined benefit RAP, covering substantially all employees who meet participation requirements. The benefits are based primarily on years of service and the employee’s compensation paid. Employees of acquired entities generally participate in the RAP after consummation of the business combinations. Any retirement plans of acquired entities are typically merged into the RAP after completion of the mergers, and credit is usually given to employees for years of service at the acquired institution for vesting and eligibility purposes.
The Corporation also provides legacy healthcare access to a limited group of retired employees from a previous acquisition in the Postretirement Plan. There are no other active retiree healthcare plans.
The components of net periodic pension cost and net periodic benefit cost for the RAP and Postretirement Plan for the three and six months ended June 30, 2022 and 2021 were as follows: | | | | | | | | | | | | | | |
| Three Months Ended Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
Components of Net Periodic Benefit Cost | | | | |
RAP | | | | |
Service cost | $ | 923 | | $ | 2,075 | | $ | 1,847 | | $ | 4,151 | |
Interest cost | 1,772 | | 1,623 | | 3,545 | | 3,245 | |
Expected return on plan assets | (6,736) | | (6,430) | | (13,472) | | (12,861) | |
Amortization of prior service cost | (63) | | (18) | | (125) | | (37) | |
Amortization of actuarial loss | 74 | | 1,050 | | 147 | | 2,100 | |
Total net periodic pension cost | $ | (4,029) | | $ | (1,701) | | $ | (8,059) | | $ | (3,402) | |
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Postretirement Plan | | | | |
Interest cost | $ | 13 | | $ | 13 | | $ | 27 | | $ | 26 | |
Amortization of prior service cost | (19) | | (19) | | (38) | | (38) | |
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Total net periodic benefit cost | $ | (6) | | $ | (6) | | $ | (11) | | $ | (12) | |
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 six months ended June 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
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 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 Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
Net interest income | $ | 111,359 | | $ | 90,039 | | $ | 201,992 | | $ | 179,700 | |
Net intersegment interest income (expense) | (5,301) | | 4,324 | | 3,224 | | 8,994 | |
Segment net interest income | 106,058 | | 94,363 | | 205,216 | | 188,694 | |
Noninterest income(a) | 39,133 | | 37,281 | | 76,923 | | 79,109 | |
Total revenue | 145,191 | | 131,643 | | 282,139 | | 267,803 | |
Provision for credit losses | 12,246 | | 15,716 | | 24,900 | | 32,395 | |
Noninterest expense | 56,847 | | 53,902 | | 113,406 | | 109,349 | |
Income before income taxes | 76,098 | | 62,026 | | 143,833 | | 126,058 | |
Income tax expense | 13,919 | | 11,214 | | 26,232 | | 23,106 | |
Net income | $ | 62,179 | | $ | 50,812 | | $ | 117,601 | | $ | 102,953 | |
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Allocated goodwill | | | $ | 525,836 | | $ | 525,836 | |
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| Community, Consumer, and Business |
| Three Months Ended Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
Net interest income | $ | 76,999 | | $ | 73,477 | | $ | 146,543 | | $ | 145,253 | |
Net intersegment interest income | 30,638 | | 15,992 | | 49,470 | | 30,881 | |
Segment net interest income | 107,636 | | 89,470 | | 196,013 | | 176,134 | |
Noninterest income | 32,121 | | 32,967 | | 65,327 | | 80,298 | |
Total revenue | 139,757 | | 122,437 | | 261,341 | | 256,432 | |
Provision for credit losses | 4,924 | | 5,279 | | 9,580 | | 11,207 | |
Noninterest expense | 105,139 | | 101,735 | | 203,802 | | 202,086 | |
Income before income taxes | 29,695 | | 15,424 | | 47,959 | | 43,139 | |
Income tax expense | 6,236 | | 3,239 | | 10,071 | | 9,059 | |
Net income | $ | 23,459 | | $ | 12,185 | | $ | 37,888 | | $ | 34,080 | |
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Allocated goodwill | | | $ | 579,156 | | $ | 579,156 | |
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| Risk Management and Shared Services |
| Three Months Ended Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
Net interest income | $ | 27,789 | | $ | 15,999 | | $ | 55,358 | | $ | 30,464 | |
Net intersegment (expense) | (25,337) | | (20,316) | | (52,694) | | (39,875) | |
Segment net interest income (loss) | 2,452 | | (4,318) | | 2,664 | | (9,412) | |
Noninterest income | 4,204 | | 3,195 | | 7,675 | | 9,379 | |
Total revenue | 6,656 | | (1,123) | | 10,339 | | (33) | |
Provision for credit losses | (17,172) | | (55,999) | | (38,472) | | (101,610) | |
Noninterest expense | 19,434 | | 18,839 | | 37,505 | | 38,386 | |
Income before income taxes | 4,394 | | 36,037 | | 11,307 | | 63,191 | |
Income tax expense | 3,209 | | 8,027 | | 5,710 | | 14,917 | |
Net income | $ | 1,186 | | $ | 28,010 | | $ | 5,597 | | $ | 48,274 | |
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Allocated goodwill | | | $ | — | | $ | — | |
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| Consolidated Total |
| Three Months Ended Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
Net interest income | $ | 216,146 | | $ | 179,515 | | $ | 403,893 | | $ | 355,416 | |
Net intersegment interest income | — | | — | | — | | — | |
Segment net interest income | 216,146 | | 179,515 | | 403,893 | | 355,416 | |
Noninterest income(a) | 75,458 | | 73,443 | | 149,925 | | 168,786 | |
Total revenue | 291,604 | | 252,957 | | 553,819 | | 524,202 | |
Provision for credit losses | (2) | | (35,004) | | (3,992) | | (58,009) | |
Noninterest expense | 181,420 | | 174,475 | | 354,712 | | 349,821 | |
Income before income taxes | 110,187 | | 113,487 | | 203,099 | | 232,389 | |
Income tax expense | 23,363 | | 22,480 | | 42,013 | | 47,082 | |
Net income | $ | 86,824 | | $ | 91,007 | | $ | 161,086 | | $ | 185,307 | |
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Allocated goodwill | | | $ | 1,104,992 | | $ | 1,104,992 | |
(a) For the six months ended June 30, 2021, the Corporation recognized a $2 million pre-tax gain on sale of Whitnell.
Note 16 Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of accumulated other comprehensive income (loss) at June 30, 2022 and 2021, including changes during the preceding three and six month periods as well as any reclassifications out of accumulated other comprehensive income (loss): | | | | | | | | | | | |
($ in Thousands) | AFS Investment Securities | Defined Benefit Pension and Postretirement Obligations | Accumulated Other Comprehensive Income (Loss) |
Balance December 31, 2021 | $ | (5,266) | | $ | (5,051) | | $ | (10,317) | |
Other comprehensive (loss) before reclassifications | (168,321) | | — | | (168,321) | |
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 | 4,381 | | — | | 4,381 | |
Personnel expense | — | | (163) | | (163) | |
Other expense | — | | 147 | | 147 | |
Income tax benefit | 59,096 | | 4 | | 59,100 | |
Net other comprehensive (loss) during period | (172,460) | | (12) | | (172,472) | |
Balance June 30, 2022 | $ | (177,726) | | $ | (5,062) | | $ | (182,788) | |
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Balance December 31, 2020 | $ | 41,325 | | $ | (28,707) | | $ | 12,618 | |
Other comprehensive (loss) before reclassifications | (16,002) | | — | | (16,002) | |
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Amounts reclassified from accumulated other comprehensive income (loss) | | | |
Investment securities losses, net | 16 | | — | | 16 | |
HTM investment securities, net, at amortized cost | 1,163 | | — | | 1,163 | |
Personnel expense | — | | (74) | | (74) | |
Other expense | — | | 2,100 | | 2,100 | |
Income tax (expense) benefit | 3,574 | | (506) | | 3,068 | |
Net other comprehensive income (loss) during period | (11,249) | | 1,519 | | (9,729) | |
Balance June 30, 2021 | $ | 30,076 | | $ | (27,187) | | $ | 2,889 | |
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($ in Thousands) | AFS Investments Securities | Defined Benefit Pension and Post Retirement Obligations | Accumulated Other Comprehensive Income (Loss) |
Balance March 31, 2022 | $ | (131,968) | | $ | (5,057) | | $ | (137,024) | |
Other comprehensive (loss) before reclassifications | (65,038) | | — | | (65,038) | |
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Amounts reclassified from accumulated other comprehensive income (loss) | | | |
Investment securities losses, net | 8 | | — | | 8 | |
HTM investment securities, net, at amortized cost | 3,273 | | — | | 3,273 | |
Personnel expense | — | | (81) | | (81) | |
Other expense | — | | 74 | | 74 | |
Income tax benefit | 15,998 | | 2 | | 16,000 | |
Net other comprehensive (loss) during period | (45,758) | | (6) | | (45,764) | |
Balance June 30, 2022 | $ | (177,726) | | $ | (5,062) | | $ | (182,788) | |
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Balance March 31, 2021 | $ | 23,754 | | $ | (27,947) | | $ | (4,193) | |
Other comprehensive income before reclassifications | 7,978 | | — | | 7,978 | |
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Amounts reclassified from accumulated other comprehensive income (loss) | | | |
Investment securities (gains), net | (24) | | — | | (24) | |
HTM investment securities, net, at amortized cost | 645 | | — | | 645 | |
Personnel expense | — | | (37) | | (37) | |
Other expense | — | | 1,050 | | 1,050 | |
Income tax (expense) | (2,277) | | (253) | | (2,530) | |
Net other comprehensive income during period | 6,322 | | 760 | | 7,082 | |
Balance June 30, 2021 | $ | 30,076 | | $ | (27,187) | | $ | 2,889 | |
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 Jun 30, | Six Months Ended Jun 30, | | | |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 | | | |
Wealth management fees | $ | 21,332 | | $ | 22,706 | | $ | 43,735 | | $ | 45,120 | | | | |
Service charges and deposit account fees | 3,724 | | 3,859 | | 7,508 | | 7,800 | | | | |
Card-based fees(a) | 327 | | 295 | | 744 | | 640 | | | | |
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Other revenue | 658 | | 1,151 | | 1,893 | | 1,814 | | | | |
Noninterest income (in-scope of Topic 606) | $ | 26,041 | | $ | 28,010 | | $ | 53,881 | | $ | 55,375 | | | | |
Noninterest income (out-of-scope of Topic 606)(b) | 13,092 | | 9,271 | | 23,042 | | 23,734 | | | | |
Total noninterest income | $ | 39,133 | | $ | 37,281 | | $ | 76,923 | | $ | 79,109 | | | | |
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| Community, Consumer, and Business | | | |
| Three Months Ended Jun 30, | Six Months Ended Jun 30, | | | |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 | | | |
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Service charges and deposit account fees | $ | 12,777 | | $ | 11,683 | | $ | 25,846 | | $ | 22,583 | | | | |
Card-based fees(a) | 11,135 | | 10,709 | | 20,659 | | 20,123 | | | | |
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Other revenue | 1,770 | | 2,801 | | 3,632 | | 6,476 | | | | |
Noninterest income (in-scope of Topic 606) | $ | 25,683 | | $ | 25,193 | | $ | 50,138 | | $ | 49,181 | | | | |
Noninterest income (out-of-scope of Topic 606) | 6,438 | | 7,774 | | 15,189 | | 31,116 | | | | |
Total noninterest income | $ | 32,121 | | $ | 32,967 | | $ | 65,327 | | $ | 80,298 | | | | |
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| Risk Management and Shared Services |
| Three Months Ended Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
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Service charges and deposit account fees | $ | 5 | | $ | 7 | | $ | 8 | | $ | 22 | |
Card-based fees(a) | 10 | | 5 | | 17 | | 9 | |
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Other revenue | (120) | | 307 | | (81) | | 697 | |
Noninterest income (in-scope of Topic 606) | $ | (105) | | $ | 319 | | $ | (56) | | $ | 728 | |
Noninterest income (out-of-scope of Topic 606) | 4,310 | | 2,876 | | 7,731 | | 8,651 | |
Total noninterest income | $ | 4,204 | | $ | 3,195 | | $ | 7,675 | | $ | 9,379 | |
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| Consolidated Total |
| Three Months Ended Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
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Wealth management fees | $ | 21,332 | | $ | 22,706 | | $ | 43,735 | | $ | 45,120 | |
Service charges and deposit account fees | 16,506 | | 15,549 | | 33,363 | | 30,404 | |
Card-based fees(a) | 11,472 | | 11,009 | | 21,421 | | 20,773 | |
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Other revenue | 2,309 | | 4,258 | | 5,444 | | 8,987 | |
Noninterest income (in-scope of Topic 606) | $ | 51,619 | | $ | 53,522 | | $ | 103,963 | | $ | 105,284 | |
Noninterest income (out-of-scope of Topic 606)(b) | 23,840 | | 19,921 | | 45,962 | | 63,502 | |
Total noninterest income | $ | 75,458 | | $ | 73,443 | | $ | 149,925 | | $ | 168,786 | |
(a) Certain card-based fees are out-of-scope of Topic 606.
(b) For the six months ended June 30, 2021, the Corporation recognized a $2 million pre-tax gain on the sale of Whitnell.
Below is a listing of performance obligations for the Corporation's main revenue streams: | | | | | |
Revenue Stream | Noninterest income in-scope of Topic 606 |
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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 Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | 2022 | 2021 |
Operating lease costs | $ | 1,926 | | $ | 2,243 | | $ | 3,724 | | $ | 4,483 | |
Finance lease costs | 32 | | 19 | | 73 | | 58 | |
Operating lease cash flows | 2,327 | | 2,777 | | 4,735 | | 5,740 | |
Finance lease cash flows | 37 | | 40 | | 80 | | 80 | |
The lease classifications on the consolidated balance sheets were as follows: | | | | | | | | | | | |
($ in Thousands) | Consolidated Balance Sheets Category | Jun 30, 2022 | Dec 31, 2021 |
Operating lease right-of-use asset | Premises and equipment | $ | 26,621 | | $ | 28,299 | |
Finance lease right-of-use asset | Other assets | 498 | | 143 | |
Operating lease liability | Accrued expenses and other liabilities | 29,627 | | 31,345 | |
Finance lease liability | Other long-term funding | 511 | | 163 | |
The lease payment obligations, weighted-average remaining lease term, and weighted-average original discount rate were as follows: | | | | | | | | | | | | | | | | | | | | |
| Jun 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 | | | | | | |
Equipment | $ | 191 | | 1.00 | 0.44 | % | $ | 192 | | 1.50 | 0.45 | % |
Retail and corporate offices | 26,553 | | 5.71 | 2.28 | % | 29,008 | | 5.56 | 3.26 | % |
Land | 5,160 | | 7.93 | 3.13 | % | 5,551 | | 8.29 | 3.12 | % |
Total operating leases | $ | 31,904 | | 6.02 | 2.41 | % | $ | 34,751 | | 5.94 | 3.22 | % |
Finance leases | | | | | | |
Retail and corporate offices | $ | 530 | | 5.75 | 1.32 | % | $ | 112 | | 1.25 | 1.32 | % |
Land | — | | 0.00 | — | % | 51 | | 0.67 | 1.07 | % |
Total finance leases | $ | 530 | | 5.75 | 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 |
Six months ended December 31, 2022 | $ | 3,515 | | $ | 45 | | $ | 3,560 | |
2023 | 6,240 | | 92 | | 6,332 | |
2024 | 5,650 | | 93 | | 5,742 | |
2025 | 4,387 | | 93 | | 4,479 | |
2026 | 3,823 | | 93 | | 3,915 | |
Beyond 2026 | 8,290 | | 116 | | 8,406 | |
Total lease payments | $ | 31,904 | | $ | 530 | | $ | 32,434 | |
Less: interest | 2,276 | | 19 | | 2,296 | |
Present value of lease payments | $ | 29,627 | | $ | 511 | | $ | 30,138 | |
As of June 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 June 30, 2022 will commence between July 2022 and October 2023 with lease terms of 1 year to 6 years.
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 six months of 2022.
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 June 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 | | | | | | | | | | | | | | |
| Jun 30, 2022 | Dec 31, 2021 |
| Dynamic Forecast | Static Forecast | Dynamic Forecast | Static Forecast |
Gradual Rate Change | | | | |
100 bp increase in interest rates | 5.4 | % | 4.1 | % | 5.0 | % | 5.4 | % |
200 bp increase in interest rates | 10.8 | % | 8.2 | % | 10.6 | % | 11.7 | % |
At June 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 | | | | | | | | |
| Jun 30, 2022 | Dec 31, 2021 |
Instantaneous Rate Change | | |
100 bp increase in interest rates | (3.0) | % | (1.8) | % |
200 bp increase in interest rates | (6.0) | % | (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 the SOFR as the alternative rate and developed a paced transition plan which addresses the risk that LIBOR may not exist beyond June 2023.
As part of the Corporation's efforts to limit exposure to LIBOR based loans, performing borrowers can modify or refinance their residential mortgage loans to a fixed interest rate or an adjustable rate mortgage tied to the one-year treasury adjusted to a constant maturity of one year with an appropriate margin. This provides the Bank and borrower with greater certainty around the loan structure. The Bank has not booked a LIBOR adjustable rate mortgage since the first quarter of 2020.
Additionally, the Corporation has been monitoring its volume of commercial credits 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.
Contractual Obligations, Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities
The following table summarizes significant contractual obligations and other commitments at June 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 | | | | | | | | | | | | | | | | | | | | |
($ in Thousands) | Note Reference | One Year or Less | One to Three Years | Three to Five Years | Over Five Years | Total |
Time deposits | | $ | 987,686 | | $ | 191,715 | | $ | 44,175 | | $ | 5 | | $ | 1,223,581 | |
Short-term funding | 9 | 705,620 | | — | | — | | — | | 705,620 | |
FHLB advances | 9 | 2,050,140 | | 400,633 | | 605,227 | | 202,039 | | 3,258,039 | |
| | | | | | |
Other long-term funding | 9 | 84 | | 249,485 | | 181 | | 69 | | 249,820 | |
| | | | | | |
Operating leases | 18 | 6,112 | | 10,106 | | 7,219 | | 6,191 | | 29,627 | |
| | | | | | |
Total | | $ | 3,749,642 | | $ | 851,939 | | $ | 656,802 | | $ | 208,304 | | $ | 5,466,687 | |
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 June 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 |
($ in Thousands) | Jun 30, 2022 | Jun 30, 2021 | Jun 30, 2022 | Mar 31, 2022 | Dec 31, 2021 | Sep 30, 2021 | Jun 30, 2021 |
Risk-based Capital(a) | | | | | | | |
CET1 | | | $ | 2,896,675 | | $ | 2,837,789 | | $ | 2,808,289 | | $ | 2,779,943 | | $ | 2,790,392 | |
Tier 1 capital | | | 3,089,593 | | 3,030,579 | | 3,001,074 | | 2,972,622 | | 3,080,015 | |
Total capital | | | 3,506,864 | | 3,448,108 | | 3,570,026 | | 3,550,556 | | 3,655,411 | |
Total risk-weighted assets | | | 29,863,512 | | 27,780,642 | | 27,242,735 | | 26,303,703 | | 26,072,881 | |
Modified CECL transitional amount | | | 67,276 | | 67,276 | | 89,702 | | 92,822 | | 100,776 | |
CET1 capital ratio | | | 9.70 | % | 10.22 | % | 10.31 | % | 10.57 | % | 10.70 | % |
Tier 1 capital ratio | | | 10.35 | % | 10.91 | % | 11.02 | % | 11.30 | % | 11.81 | % |
Total capital ratio | | | 11.74 | % | 12.41 | % | 13.10 | % | 13.50 | % | 14.02 | % |
Tier 1 leverage ratio | | | 8.87 | % | 8.86 | % | 8.83 | % | 8.81 | % | 9.23 | % |
Selected Equity and Performance Ratios | | | | | | | |
Total stockholders’ equity / assets | | | 10.63 | % | 11.30 | % | 11.47 | % | 11.60 | % | 12.03 | % |
Dividend payout ratio(b) | 38.46 | % | 31.58 | % | 35.71 | % | 41.67 | % | 40.82 | % | 35.71 | % | 32.14 | % |
Return on average assets | 0.92 | % | 1.10 | % | 0.97 | % | 0.86 | % | 0.87 | % | 1.01 | % | 1.06 | % |
Annualized noninterest expense / average assets | 2.02 | % | 2.07 | % | 2.04 | % | 2.00 | % | 2.06 | % | 2.03 | % | 2.04 | % |
(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 second quarter of 2022.
Non-GAAP Measures
Table 19 Non-GAAP Measures | | | | | | | | | | | | | | | | | | | | | | | |
| YTD | Quarter Ended |
($ in Thousands) | Jun 30, 2022 | Jun 30, 2021 | Jun 30, 2022 | Mar 31, 2022 | Dec 31, 2021 | Sep 30, 2021 | Jun 30, 2021 |
Selected equity and performance ratios(a)(b)(c) | | | | | | | |
Tangible common equity / tangible assets | | | 7.23 | % | 7.68 | % | 7.86 | % | 7.92 | % | 8.04 | % |
Return on average equity | 8.20 | % | 9.08 | % | 8.85 | % | 7.55 | % | 7.62 | % | 8.63 | % | 8.84 | % |
Return on average tangible common equity | 12.27 | % | 13.86 | % | 13.29 | % | 11.26 | % | 11.34 | % | 12.97 | % | 13.44 | % |
Return on average CET1 | 11.03 | % | 12.87 | % | 11.77 | % | 10.27 | % | 10.50 | % | 12.11 | % | 12.51 | % |
| | | | | | | |
Return on average tangible assets | 0.97 | % | 1.16 | % | 1.03 | % | 0.90 | % | 0.92 | % | 1.07 | % | 1.12 | % |
Average stockholders' equity / average assets | 11.17 | % | 12.10 | % | 11.02 | % | 11.33 | % | 11.43 | % | 11.74 | % | 12.01 | % |
Tangible common equity reconciliation(a) | | | | | | | |
Common equity | | | $ | 3,766,187 | | $ | 3,755,092 | | $ | 3,831,658 | | $ | 3,801,766 | | $ | 3,819,852 | |
Goodwill and other intangible assets, net | | | (1,158,680) | | (1,160,883) | | (1,163,085) | | (1,165,288) | | (1,167,491) | |
Tangible common equity | | | $ | 2,607,507 | | $ | 2,594,209 | | $ | 2,668,573 | | $ | 2,636,478 | | $ | 2,652,361 | |
Tangible assets reconciliation(a) | | | | | | | |
Total assets | | | $ | 37,235,990 | | $ | 34,955,900 | | $ | 35,104,253 | | $ | 34,439,666 | | $ | 34,152,625 | |
Goodwill and other intangible assets, net | | | (1,158,680) | | (1,160,883) | | (1,163,085) | | (1,165,288) | | (1,167,491) | |
Tangible assets | | | $ | 36,077,310 | | $ | 33,795,017 | | $ | 33,941,167 | | $ | 33,274,378 | | $ | 32,985,134 | |
Average tangible common equity and average CET1 reconciliation(a) | | | | | | | |
Common equity | $ | 3,768,621 | | $ | 3,769,463 | | $ | 3,743,919 | | $ | 3,793,597 | | $ | 3,810,668 | | $ | 3,807,083 | | $ | 3,788,237 | |
Goodwill and other intangible assets, net | (1,161,114) | | (1,171,679) | | (1,160,035) | | (1,162,204) | | (1,164,394) | | (1,166,589) | | (1,168,774) | |
Tangible common equity | 2,607,507 | | 2,597,783 | | 2,583,884 | | 2,631,393 | | 2,646,273 | | 2,640,494 | | 2,619,464 | |
Modified CECL transitional amount | 67,276 | | 110,778 | | 67,276 | | 67,276 | | 90,528 | | 97,420 | | 105,961 | |
Accumulated other comprehensive loss (income) | 125,566 | | (4,218) | | 170,253 | | 80,383 | | 18,513 | | (5,320) | | (3,111) | |
Deferred tax assets, net | 39,241 | | 40,260 | | 39,072 | | 39,411 | | 39,640 | | 39,893 | | 39,915 | |
Average CET1 | $ | 2,839,591 | | $ | 2,744,603 | | $ | 2,860,485 | | $ | 2,818,464 | | $ | 2,794,954 | | $ | 2,772,487 | | $ | 2,762,229 | |
Average tangible assets reconciliation(a) | | | | | | | |
Total assets | $ | 35,467,853 | | $ | 34,033,816 | | $ | 35,732,583 | | $ | 35,200,182 | | $ | 35,016,159 | | $ | 34,759,489 | | $ | 34,379,647 | |
Goodwill and other intangible assets, net | (1,161,114) | | (1,171,679) | | (1,160,035) | | (1,162,204) | | (1,164,394) | | (1,166,589) | | (1,168,774) | |
Tangible assets | $ | 34,306,740 | | $ | 32,862,137 | | $ | 34,572,548 | | $ | 34,037,978 | | $ | 33,851,765 | | $ | 33,592,900 | | $ | 33,210,873 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Adjusted net income reconciliation(b) | | | | | | | |
Net income | $ | 161,086 | | $ | 185,307 | | $ | 86,824 | | $ | 74,262 | | $ | 76,877 | | $ | 88,809 | | $ | 91,007 | |
Other intangible amortization, net of tax | 3,304 | | 3,329 | | 1,652 | | 1,652 | | 1,652 | | 1,652 | | 1,652 | |
Adjusted net income | $ | 164,390 | | $ | 188,637 | | $ | 88,476 | | $ | 75,914 | | $ | 78,529 | | $ | 90,461 | | $ | 92,659 | |
Adjusted net income available to common equity reconciliation(b) | | | | | | | |
Net income available to common equity | $ | 155,336 | | $ | 175,226 | | $ | 83,949 | | $ | 71,387 | | $ | 74,002 | | $ | 84,655 | | $ | 86,131 | |
Other intangible amortization, net of tax | 3,304 | | 3,329 | | 1,652 | | 1,652 | | 1,652 | | 1,652 | | 1,652 | |
Adjusted net income available to common equity | $ | 158,640 | | $ | 178,555 | | $ | 85,601 | | $ | 73,039 | | $ | 75,654 | | $ | 86,307 | | $ | 87,784 | |
Efficiency ratio reconciliation(d) | | | | | | | |
Federal Reserve efficiency ratio | 63.51 | % | 66.26 | % | 61.53 | % | 65.71 | % | 67.36 | % | 65.43 | % | 66.81 | % |
Fully tax-equivalent adjustment | (1.05) | % | (1.02) | % | (0.98) | % | (1.13) | % | (1.10) | % | (1.01) | % | (1.07) | % |
Other intangible amortization | (0.80) | % | (0.85) | % | (0.76) | % | (0.84) | % | (0.82) | % | (0.83) | % | (0.87) | % |
Fully tax-equivalent efficiency ratio | 61.68 | % | 64.40 | % | 59.80 | % | 63.76 | % | 65.46 | % | 63.61 | % | 64.88 | % |
Provision for unfunded commitments adjustment | 0.53 | % | 0.47 | % | 0.67 | % | 0.37 | % | 0.55 | % | 1.48 | % | 2.14 | % |
Asset gains, net adjustment | 0.21 | % | 0.59 | % | 0.34 | % | 0.05 | % | 0.24 | % | 1.29 | % | — | % |
Acquisitions, branch sales, and initiatives | — | % | 0.12 | % | — | % | — | % | (1.43) | % | (0.91) | % | 0.01 | % |
Adjusted efficiency ratio | 62.42 | % | 65.58 | % | 60.82 | % | 64.18 | % | 64.82 | % | 65.46 | % | 67.02 | % |
(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 (losses), net, and gain on sale of branches, net. Management believes the adjusted efficiency ratio is a meaningful measure as it enhances the comparability of net interest income arising from taxable and tax-exempt sources and provides a better measure as to how the Corporation is managing its expenses by adjusting for acquisition related costs, provision for unfunded commitments, asset gains (losses), net, branch sales, and announced initiatives.
Sequential Quarter Results
The Corporation reported net income of $87 million for the second quarter of 2022, compared to net income of $74 million for the first quarter of 2022. Net income available to common equity was $84 million for the second quarter of 2022, or $0.56 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the first quarter of 2022 was $71 million, or $0.48 for basic and $0.47 for diluted earnings per common share (see Table 1).
Fully tax-equivalent net interest income for the second quarter of 2022 was $221 million, $29 million, or 15%, higher than the first quarter of 2022. The net interest margin in the second quarter of 2022 was up 29 bp to 2.71%. The increase in net interest income and net interest margin was due to higher interest on earning assets due to the Federal Reserve increasing their federal funds target rate. Average earning assets increased $625 million, or 2%, to $32.6 billion in the second quarter of 2022. Average loans increased $1.3 billion, or 5%. On the funding side, FHLB advances increased $813 million, or 50%, and total interest-bearing deposits decreased $294 million, or 1% (see Table 2).
The provision for credit losses had a negligible release for the second quarter of 2022, compared to a release of $4 million for the first 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 second quarter of 2022 was $75 million, up $1 million, or 1%, from the first quarter of 2022, driven by higher bank owned life insurance policy redemptions and card-based fees, partially offset by lower mortgage banking, net income (see Table 3).
Noninterest expense for the second quarter of 2022 was $181 million, up $8 million, or 5%, from the first quarter of 2022, driven by higher personnel expenses (see Table 4).
For the second quarter of 2022, the Corporation recognized income tax expense of $23 million, compared to income tax expense of $19 million for the first quarter of 2022. See Income Taxes section for a detailed discussion on income taxes.
Comparable Quarter Results
The Corporation reported net income of $87 million for the second quarter of 2022, compared to $91 million for the second quarter of 2021. Net income available to common equity was $84 million for the second quarter of 2022, or $0.56 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the second quarter of 2021 was $86 million, or $0.56 for both basic and diluted earnings per share (see Table 1).
Fully tax-equivalent net interest income for the second quarter of 2022 was $221 million, $37 million, or 20%, higher than the second quarter of 2021. The net interest margin between the comparable quarters was up 34 bp, to 2.71% in the second quarter of 2022. The increase in net interest income and net interest margin was due to higher interest on earning assets due to the Federal Reserve increasing their federal funds target rate. Average earning assets increased $1.6 billion, or 5%, to $32.6 billion in the second quarter of 2022 as average loans increased $1.3 billion, or 5%, and investments and other increased by $287 million, or 4%. On the funding side, average interest-bearing deposits increased $636 million, or 3%, from the second 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 $769 million, or 32% (see Table 2), primarily driven by an increase in FHLB advances.
The provision for credit losses had a negligible release for the second quarter of 2022, compared to a release of $35 million for the second quarter of 2021, as a result of improving credit quality within the loan portfolio (see Table 11). See discussion under sections: Provision for Credit Losses, Nonperforming Assets, and Allowance for Credit Losses on Loans.
Noninterest income for the second quarter of 2022 was $75 million, up $2 million, or 3%, compared to the second quarter of 2021, primarily due to higher capital markets, net (see Table 3).
Noninterest expense increased $7 million, or 4%, to $181 million for the second quarter of 2022 primarily due to higher personnel expenses (see Table 4).
The Corporation recognized income tax expense of $23 million for the second quarter of 2022, compared to an income tax expense of $22 million for the second quarter of 2021. See section Income Taxes for a detailed discussion on income taxes.
Segment Review
As discussed in Note 15 Segment Reporting of the notes to consolidated financial statements, the Corporation’s reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer, and the distribution of those products and services are similar. The reportable segments are Corporate and Commercial Specialty; Community, Consumer and Business; and Risk Management and Shared Services.
Table 20 Selected Segment Financial Data | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended Jun 30, | Six Months Ended Jun 30, |
($ in Thousands) | 2022 | 2021 | % Change | 2022 | 2021 | % Change |
Corporate and Commercial Specialty | | | | | | |
Total revenue(a) | $ | 145,191 | | $ | 131,643 | | 10 | % | $ | 282,139 | | $ | 267,803 | | 5 | % |
Provision for credit losses | 12,246 | | 15,716 | | (22) | % | 24,900 | | 32,395 | | (23) | % |
Noninterest expense | 56,847 | | 53,902 | | 5 | % | 113,406 | | 109,349 | | 4 | % |
Income tax expense | 13,919 | | 11,214 | | 24 | % | 26,232 | | 23,106 | | 14 | % |
Net income | 62,179 | | 50,812 | | 22 | % | 117,601 | | 102,953 | | 14 | % |
Average earning assets | 15,083,176 | | 14,024,769 | | 8 | % | 14,751,601 | | 14,037,418 | | 5 | % |
Average loans | 15,079,176 | | 14,023,611 | | 8 | % | 14,748,739 | | 14,036,707 | | 5 | % |
Average deposits | 8,752,899 | | 8,646,551 | | 1 | % | 9,080,190 | | 8,590,041 | | 6 | % |
Average allocated capital (Average CET1)(b) | 1,515,244 | | 1,406,646 | | 8 | % | 1,468,386 | | 1,401,915 | | 5 | % |
Return on average allocated capital(b) | 16.46 | % | 14.49 | % | 197 bp | 16.15 | % | 14.81 | % | 134 bp |
Community, Consumer, and Business | | | | | | |
Total revenue | $ | 139,757 | | $ | 122,437 | | 14 | % | $ | 261,341 | | $ | 256,432 | | 2 | % |
Provision for credit losses | 4,924 | | 5,279 | | (7) | % | 9,580 | | 11,207 | | (15) | % |
Noninterest expense | 105,139 | | 101,735 | | 3 | % | 203,802 | | 202,086 | | 1 | % |
Income tax expense | 6,236 | | 3,239 | | 93 | % | 10,071 | | 9,059 | | 11 | % |
Net income | 23,459 | | 12,185 | | 93 | % | 37,888 | | 34,080 | | 11 | % |
Average earning assets | 9,784,918 | | 9,379,435 | | 4 | % | 9,481,879 | | 9,496,153 | | — | % |
Average loans | 9,784,918 | | 9,379,435 | | 4 | % | 9,481,879 | | 9,496,153 | | — | % |
Average deposits | 18,544,542 | | 17,825,851 | | 4 | % | 18,479,893 | | 17,469,726 | | 6 | % |
Average allocated capital (Average CET1)(b) | 593,296 | | 543,810 | | 9 | % | 554,137 | | 556,549 | | — | % |
Return on average allocated capital(b) | 15.86 | % | 8.99 | % | N/M | 13.79 | % | 12.35 | % | 144 bp |
Risk Management and Shared Services | | | | | | |
Total revenue | $ | 6,656 | | $ | (1,123) | | N/M | $ | 10,339 | | $ | (33) | | N/M |
Provision for credit losses | (17,172) | | (55,999) | | (69) | % | (38,472) | | (101,610) | | (62) | % |
Noninterest expense | 19,434 | | 18,839 | | 3 | % | 37,505 | | 38,386 | | (2) | % |
Income tax expense | 3,209 | | 8,027 | | (60) | % | 5,710 | | 14,917 | | (62) | % |
Net income | 1,186 | | 28,010 | | (96) | % | 5,597 | | 48,274 | | (88) | % |
Average earning assets | 7,758,257 | | 7,635,545 | | 2 | % | 8,081,928 | | 7,154,263 | | 13 | % |
Average loans | 534,069 | | 695,568 | | (23) | % | 520,924 | | 747,114 | | (30) | % |
Average deposits | 873,301 | | 998,231 | | (13) | % | 847,656 | | 1,079,669 | | (21) | % |
Average allocated capital (Average CET1)(b) | 751,945 | | 811,773 | | (7) | % | 817,067 | | 786,139 | | 4 | % |
Return on average allocated capital(b) | (0.90) | % | 11.43 | % | N/M | (0.04) | % | 9.80 | % | N/M |
Consolidated Total | | | | | | |
Total revenue(a) | $ | 291,604 | | $ | 252,957 | | 15 | % | $ | 553,819 | | $ | 524,202 | | 6 | % |
Return on average allocated capital(b) | 11.77 | % | 12.51 | % | -74 bp | 11.03 | % | 12.87 | % | -184 bp |
N//M = Not meaningful
(a) For the six months ended June 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.
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 $14 million from the three and six months ended June 30, 2021 as a result of loan growth and increasing interest rates.
•Provision for credit losses decreased $7 million from the six months ended June 30, 2021 and decreased $3 million from the three months ended June 30, 2021 as a result of improving credit quality.
•Average loans increased $712 million from the six months ended June 30, 2021 and increased $1.1 billion from the three months ended June 30, 2021, primarily driven by growth within the commercial and business lending portfolio.
•Average deposits increased $490 million from the six months ended June 30, 2021 and increased $106 million from the three months ended June 30, 2021, primarily driven by increases in low-cost interest bearing deposits.
The Community, Consumer, and Business segment consists of lending and deposit solutions to individuals and small to mid-sized businesses.
•Total revenue increased $5 million from the six months ended June 30, 2021 and increased $17 million from the three months ended June 30, 2021 as a result of receiving FTP credit for providing funding for the Corporation's loan growth.
•Provision for credit losses decreased $2 million from the six months ended June 30, 2021 as a result of improving credit quality.
•Average loans increased $405 million from the three months ended June 30, 2021, driven by growth in auto finance lending within the consumer portfolio.
•Average deposits increased $1.0 billion from the six months ended June 30, 2021 and increased $719 million from the three months ended June 30, 2021 as a result of customers holding higher deposit balances in every category except time deposits.
The Risk Management and Shared Services segment includes key shared Corporate functions, Parent Company activity, intersegment eliminations, and residual revenues and expenses.
•Revenues increased $10 million from the six months ended June 30, 2021 and increased $8 million from the three months ended June 30, 2021, primarily driven by increased interest income as a result of higher investment income due to the current rate environment.
•Provision for credit losses increased $63 million from the six months ended June 30, 2021 and increased $39 million from the three months ended June 30, 2021, driven by larger provision releases during 2021.
•Average earning assets increased $928 million from the six months ended June 30, 2021 and increased $123 million from the three months ended June 30, 2021, driven by investment purchases throughout the past year.
•Average loans decreased $226 million from the six months ended June 30, 2021 and decreased $161 million from the three months ended June 30, 2021, primarily driven by decreases in commercial and business lending.
•Average deposits decreased $232 million from the six months ended June 30, 2021 and decreased $125 million from the three months ended June 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
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 $4 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 $4 million.
Recent Developments
On July 26, 2022, the Corporation’s Board of Directors declared a regular quarterly cash dividend of $0.20 per common share, payable on September 15, 2022 to shareholders of record at the close of business on September 1, 2022. 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 September 15, 2022 to shareholders of record at the close of business on September 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 September 15, 2022 to shareholders of record at the close of business on September 1, 2022.
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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.