ASSOCIATED BANC-CORP (ASB) FY 2021 MD&A

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is management’s analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of the Corporation. It should be read in conjunction with the consolidated financial statements and footnotes and the selected financial data presented elsewhere in this report. Within the tables presented, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes.

The detailed financial discussion that follows focuses on 2021 results compared to 2020. For a discussion of 2020 results compared to 2019, see the Corporation's Annual Report on Form 10-K for the year ended December 31, 2020.

Overview

The Corporation is a bank holding company headquartered in Wisconsin, providing a broad array of banking and nonbanking products and services to businesses and consumers primarily within our three-state footprint. The Corporation’s primary sources of revenue, through the Bank, are net interest income (predominantly from loans and investment securities) and noninterest income (principally fees and other revenue from financial services provided to customers or ancillary services tied to loans and deposits).

Performance Summary and 2022 Outlook

•Diluted earnings per common share of $2.18 in 2021 increased $0.32, or 17%, from 2020.

•Average loans of $24.1 billion for 2021 decreased $480 million, or 2%, from a year ago, driven by decreases in residential mortgages and PPP loans. For 2022, the Corporation expects auto finance loan growth of more than $1.2 billion and commercial loan growth, including asset-based lending and equipment finance, of $750 million to $1.0 billion.

•Average deposits of $27.7 billion for 2021 increased $1.7 billion, or 6%, from a year ago, driven by increases in low cost deposits partially offset by decreases in higher cost deposits.

•Net interest income of $726 million in 2021 decreased $37 million, or 5%, from 2020. Net interest margin of 2.39% in 2021 decreased 14 bp from 2.53% in 2020. The decrease was primarily driven by the continued low interest rate environment and increased liquidity during 2021. For 2022, the Corporation expects net interest income of more than $800 million.

•Provision for credit losses had a release of $88 million in 2021, compared to provision of $174 million in 2020. For 2022, the Corporation expects to adjust the provision to reflect changes to risk grades, economic conditions, loan volumes, and other indications of credit quality.

•Noninterest income of $332 million in 2021 decreased $182 million, or 35%, from 2020, primarily due to a $163 million gain on the sale of ABRC during the second quarter of 2020, and a reduction of $45 million in insurance revenue in 2021, resulting from the sale of the business. For 2022, the Corporation expects noninterest income of more than $300 million.

•Noninterest expense of $710 million in 2021 decreased $66 million, or 9%, from 2020, primarily driven by a $45 million loss on prepayment of FHLB advances during the third quarter of 2020, and a $5 million reduction in personnel expense. For 2022, the Corporation expects noninterest expense will be approximately $725 million to $740 million.

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Income Statement Analysis

Net Interest Income

Table 2 Net Interest Income Analysis

(a) The yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 21% and is net of the effects of certain disallowed interest deductions.

(b) Nonaccrual loans and loans held for sale have been included in the average balances.

(c) Interest income includes amortization of net deferred loan origination costs and net accreted purchase loan discount.

Net interest income is the primary source of the Corporation’s revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, re-pricing frequencies, loan prepayment behavior, and the use of interest rate derivative financial instruments.

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Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because net free funds, principally noninterest-bearing demand deposits and stockholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt loans and investment securities is computed on a fully tax-equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a fully tax-equivalent basis.

Table 2 provides average balances of earning assets and interest-bearing liabilities, the associated interest income and expense, and the corresponding interest rates earned and paid, as well as net interest income, interest rate spread, and net interest margin on a fully tax-equivalent basis for the years ended December 31, 2021, 2020, and 2019. Table 3 presents additional information to facilitate the review and discussion of fully tax-equivalent net interest income, interest rate spread, and net interest margin.

Notable Contributions to the Change in 2021 Net Interest Income

•Net interest income on the consolidated statements of income (which excludes the fully tax-equivalent adjustment) was $726 million in 2021 compared to $763 million in 2020. Fully tax-equivalent net interest income of $743 million for 2021 was $36 million, or 5%, lower than 2020. The decrease was attributable to the continued low interest rate environment. See sections Interest Rate Risk and Quantitative and Qualitative Disclosures about Market Risk for a discussion of interest rate risk and market risk.

•Average earning assets of $31.1 billion in 2021 were $291 million, or 1%, higher than 2020. The increase in average earning assets was driven by an increase of $770 million, or 12%, in investments and other short-term investments primarily driven by excess liquidity at the Federal Reserve Bank which is part of short term investments, offset by a $480 million, or 2%, decrease in average loans, primarily driven by decreases of $343 million, or 4%, in residential mortgages and $229 million, or 33%, in PPP loans, partially offset by CRE loans increasing $345 million, or 6%.

•Average interest-bearing liabilities of $21.9 billion in 2021 were down $1.1 billion, or 5%, versus 2020. On average, short and long-term funding decreased $1.6 billion, or 41%, with FHLB advances down $912 million, or 36%, due to the prepayment of $950 million of long-term FHLB advances in the third quarter of 2020 and PPPLF funding was down $565 million as a result of paying off the PPPLF line in the fourth quarter of 2020. Interest-bearing deposits increased $494 million, or 3%, primarily driven by increases in low cost deposits, partially offset by decreases in higher cost deposits. Average noninterest-bearing demand deposits of $8.1 billion were up $1.2 billion, or 17%, over 2020. This increase is primarily attributed to customers holding proceeds from government stimulus programs in their deposit accounts.

•The average cost of interest-bearing liabilities was 0.33% in 2021, 32 bp lower than 2020. The decrease was due to a 26 bp decrease in the average cost of interest-bearing deposits to 0.09%, while short and long-term funding increased 22 bp to 2.35%.

•The Federal Funds rate on December 31, 2021 was in the range of 0.00% to 0.25 %, which was unchanged from the previous year ended December 31, 2020.

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Table 3 Rate/Volume Analysis(a)

(a) The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.

(b) The yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 21% and is net of the effects of certain disallowed interest deductions.

Provision for Credit Losses

The provision for credit losses is predominantly a function of the Corporation’s reserving methodology and judgments as to other qualitative and quantitative factors used to determine the appropriate level of the ACLL, which focuses on changes in the size and character of the loan portfolio, changes in levels of individually evaluated and other nonaccrual loans, historical losses and delinquencies in each portfolio category, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions and economic forecasts, the fair value of underlying collateral, and other factors which could affect potential credit losses. The forecast the Corporation used for December 31, 2021 was the Moody's baseline scenario from December 2021 over a 2 year reasonable and supportable period with straight-line reversion to historical losses over the second year of the period. See additional discussion under the sections titled Loans, Credit Risk, Nonperforming Assets, and Allowance for Credit Losses on Loans.

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Noninterest Income

Table 4 Noninterest Income

N/M = Not Meaningful

(a) Includes trust, asset management, brokerage, and annuity fees.

(b) Includes mortgage origination and servicing fees, net of mortgage servicing rights amortization.

(c) 2020 includes a gain of $163 million from the sale of ABRC.

(d) Includes the deposit premium on the sale of branches net of miscellaneous costs to sell. See Note 2 Acquisitions and Dispositions for addition details on the branch sales.

(e) $ in millions. Excludes assets held in brokerage accounts.

Notable Contributions to the Change in 2021 Noninterest Income

•Service charges and deposit account fees increased from 2020 as a result of service charges that were waived during 2020 in response to the COVID-19 pandemic.

•Mortgage banking, net increased compared to 2020 due to a $16 million recovery of MSRs impairment during 2021 as a result of market rates recovering, compared to impairment of $18 million during 2020 partially offset by decreased gains on sold loans due to lower mortgage settlements as well as contracting margins on the loans sold.

•Insurance commissions and fees decreased from 2020, driven by the sale of ABRC during the second quarter of 2020 which largely eliminated the source of noninterest income.

•Asset gains, net was down from 2020, primarily driven by a gain of $163 million from the sale of ABRC during the second quarter of 2020, offset by a gain of $2 million from the sale of Whitnell and higher gains from private equity investments during 2021.

•Investment securities gains (losses), net decreased due to more securities sales in 2020 to reposition the portfolio based on prepayment expectations.

•Gains on sale of branches, net decreased from 2020 primarily due to branch sales resulting in higher deposit premiums in 2020.

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Noninterest Expense

Table 5 Noninterest Expense

N/M = Not Meaningful

(a) Average FTEs without overtime

Notable Contributions to the Change in 2021 Noninterest Expense

•Personnel costs decreased from 2020, primarily due to having fewer employees as a result of the sales of ABRC and Whitnell, corporate restructurings, and branch sales, partially offset by an increase in funding for the management incentive plan.

•Loan and foreclosure costs decreased from 2020 driven by lower costs associated with collections on loans.

•During the third quarter of 2020, the Corporation prepaid $950 million of long-term FHLB advances and incurred a loss of $45 million on the prepayment.

Income Taxes

The Corporation recognized income tax expense of $85 million for 2021, compared to income tax expense of $20 million for 2020. The Corporation's effective tax rate was 19.55% for 2021, compared to an effective tax rate of 6.18% for 2020. The increase in income tax expense during 2021 was primarily driven by an increase in income in 2021 and by tax planning strategies which occurred during the third quarter of 2020. The increase in the effective tax rate during 2021 was primarily driven by the tax planning strategies which occurred in 2020.

See Note 1 Summary of Significant Accounting Policies of the notes to consolidated financial statements for the Corporation’s income tax accounting policy. Income tax expense recorded on the consolidated statements of income involves the interpretation and application of certain accounting pronouncements and federal and state tax laws and regulations. The Corporation is subject to examination by various taxing authorities. Examination by taxing authorities may impact the amount of tax expense and/or the reserve for uncertainty in income taxes if their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. See Note 13 Income Taxes of the notes to consolidated financial statements for more information.

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Balance Sheet Analysis

•At December 31, 2021, total assets were $35.1 billion, up $1.7 billion, or 5%, from December 31, 2020.

•Interest-bearing deposits in other financial institutions were $682 million at December 31, 2021, up $383 million from December 31, 2020, due to excess liquidity being held at the Federal Reserve Bank.

•At December 31, 2021, total investment securities were $6.6 billion, up $1.6 billion, or 32%, from December 31, 2020, resulting from the deployment of cash into higher yielding assets. See section Investment Securities Portfolio and Note 3 Investment Securities of the notes to consolidated financial statements for additional information on investment securities.

•At December 31, 2021, total deposits of $28.5 billion were up $2.0 billion, or 7%, from December 31, 2020, driven by increases in demand deposits and savings deposits of $1.8 billion and $760 million, respectively. See section Deposits and Customer Funding and Note 8 Deposits of the notes to consolidated financial statements for additional information on deposits.

•Other long-term funding was $249 million at December 31, 2021, down $300 million, or 55%, from December 31, 2020, primarily driven by the redemption of the Bank's senior notes on July 13, 2021. See section Other Funding Sources and Note 9 Short and Long-Term Funding of the notes to consolidated financial statements for additional details on funding.

•At December 31, 2021, preferred equity was $193 million, down $160 million, or 45%, from December 31, 2020, as a result of the redemption of the Corporation's Series C Preferred Stock during the second quarter of 2021 and the redemption of the Corporation's Series D Preferred Stock during the third quarter of 2021. See Note 10 Stockholders' Equity of the notes to consolidated financial statements for additional information on the Corporation's preferred stock.

Loans

Table 6 Period End Loan Composition

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The Corporation has long-term guidelines relative to the proportion of Commercial and Business, CRE, and Consumer loans within the overall loan portfolio, with each targeted to represent 30-40% of the overall loan portfolio. The targeted long-term guidelines were unchanged during 2021 and 2020. Furthermore, certain sub-asset classes within the respective portfolios are further defined and dollar limitations are placed on these sub-portfolios. These guidelines and limits are reviewed quarterly and approved annually by the Enterprise Risk Committee of the Corporation’s Board of Directors. These guidelines and limits are designed to create balance and diversification within the loan portfolios.

The Corporation's loan distribution and interest rate sensitivity as of December 31, 2021 are summarized in the following table:

Table 7 Loan Distribution and Interest Rate Sensitivity

(a) Demand loans, past due loans, overdrafts, and credit cards are reported in the “Within 1 Year” category.

(b) Includes asset-based lending.

At December 31, 2021, $17.5 billion, or 72%, of the total loans outstanding and $14.3 billion, or 91%, of the commercial loans outstanding were floating rate, adjustable rate, re-pricing within one year, or maturing within one year.

Credit Risk

An active credit risk management process is used for commercial loans to ensure that sound and consistent credit decisions are made. Credit risk is controlled by detailed underwriting procedures, comprehensive loan administration, and periodic review of borrowers’ outstanding loans and commitments. Borrower relationships are formally reviewed and graded on an ongoing basis for early identification of potential problems. Further analysis by customer, industry, and geographic location are performed to monitor trends, financial performance, and concentrations. See Note 4 Loans of the notes to consolidated financial statements for additional information on managing overall credit quality.

The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within the Corporation's branch footprint. Significant loan concentrations are considered to exist when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2021, no significant concentrations existed in the Corporation’s loan portfolio in excess of 10% of total loans.

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Commercial and business lending: The commercial and business lending classification primarily includes commercial loans to large corporations, middle market companies, small businesses, and lease financing.

Table 8 Largest Commercial and Industrial Industry Group Exposures, by NAICS Subsector

(a) Includes mortgage warehouse lines

(b) Includes REIT lines

(c) 60% of the total exposure supports wind and solar projects

The remaining commercial and industrial portfolio is spread over a diverse range of industries, none of which exceed 2% of total loan exposure.

The CRE-owner occupied portfolio is spread over a diverse range of industries, none of which exceed 2% of total loan exposure.

The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Commercial real estate - investor: CRE-investor is comprised of loans secured by various non-owner occupied or investor income producing property types.

Table 9 Largest Commercial Real Estate Investor Property Type Exposures

The remaining CRE-investor portfolio is spread over various other property types, none of which exceed 2% of total loan exposure.

Credit risk is managed in a similar manner to commercial and business lending by employing sound underwriting guidelines, lending primarily to borrowers in local markets and businesses, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationship on an ongoing basis.

Real estate construction: Real estate construction loans are primarily short-term or interim loans that provide financing for the acquisition or development of commercial income properties, multi-family projects or residential development, both single family and condominium. Real estate construction loans are made to developers and project managers who are generally well known to the Corporation and have prior successful project experience. The credit risk associated with real estate construction loans is generally confined to specific geographic areas but is also influenced by general economic conditions. The Corporation controls the credit risk on these types of loans by making loans in familiar markets to developers, reviewing the merits of individual projects, controlling loan structure, and monitoring project progress and construction advances.

Table 10 Largest Real Estate Construction Property Type Exposures

The remaining real estate construction portfolio is spread over various other property types, none of which exceed 2% of total loan exposure.

The Corporation’s current lending standards for CRE and real estate construction lending are determined by property type and specifically address many criteria, including: maximum loan amounts, maximum LTV, requirements for pre-leasing and / or presales, minimum borrower equity, and maximum loan-to-cost. Currently, the maximum standard for LTV is 80%, with lower limits established for certain higher risk types, such as raw land that has a 50% LTV maximum. The Corporation’s LTV guidelines are in compliance with regulatory supervisory limits. In most cases, for real estate construction loans, the loan

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amounts include interest reserves, which are built into the loans and sized to fund loan payments through construction and lease up and/or sell out.

Residential mortgages: Residential mortgage loans are primarily first lien home mortgages with a maximum loan-to-collateral value without credit enhancement (e.g., private mortgage insurance) of 80%. The residential mortgage portfolio is focused primarily in the Corporation's three-state branch footprint, with approximately 87% of the outstanding loan balances in the Corporation's branch footprint at December 31, 2021. The majority of the on balance sheet residential mortgage portfolio consists of constant maturity treasury based, hybrid, adjustable rate mortgage loans with initial fixed-rate terms of 3, 5, 7, or 10 years. The rates on these mortgages adjust based upon the movement in the underlying index which is then added to a margin and rounded to the nearest 0.125%. That result is then subjected to any periodic caps to produce the borrower's interest rate for the coming term.

The Corporation generally retains certain fixed-rate residential real estate mortgages in its loan portfolio, including retail and private banking jumbo mortgages and CRA-related mortgages. As part of management's historical practice of originating and servicing residential mortgage loans, generally the Corporation's 30 year, agency conforming, fixed-rate residential real estate mortgage loans have been sold in the secondary market with servicing rights retained. Subject to management's analysis of the current interest rate environment, among other market factors, the Corporation may choose to retain 30 year mortgage loan production on its balance sheet. See section Loans for additional information on loans.

The Corporation’s underwriting and risk-based pricing guidelines for residential mortgage loans include minimum borrower FICO score and maximum LTV of the property securing the loan. Residential mortgage products generally are underwritten using FHLMC and FNMA secondary marketing guidelines.

Home equity: Home equity consists of both home equity lines of credit and closed-end home equity loans. The Corporation’s credit risk monitoring guidelines for home equity is based on an ongoing review of loan delinquency status, as well as a quarterly review of FICO score deterioration and property devaluation. The Corporation does not routinely obtain appraisals on performing loans to update LTV ratios after origination; however, the Corporation monitors the local housing markets by reviewing the various home price indices and incorporates the impact of the changing market conditions in its ongoing credit monitoring process. For junior lien home equity loans, the Corporation is unable to track the performance of the first lien loan if it does not own or service the first lien loan. However, the Corporation obtains a refreshed FICO score on a quarterly basis and monitors this as part of its assessment of the home equity portfolio.

The Corporation’s underwriting and risk-based pricing guidelines for home equity lines and loans consist of a combination of both borrower FICO score and the original cumulative LTV against the property securing the loan. Currently, the Corporation's policy sets the maximum acceptable LTV at 90% and the minimum acceptable FICO score at 670. The Corporation's current home equity line of credit offering is priced based on floating rate indices and generally allows 10 years of interest-only payments followed by a 20-year amortization of the outstanding balance. The loans in the Corporation's portfolio generally have an original term of 20 years with principal and interest payments required. See section Loans for additional information on loans.

Indirect Auto: The Corporation currently purchases retail auto sales contracts via a network of 665 approved auto dealerships across 13 states throughout the Northeast, Mid-Atlantic and Mid-Western United States. The auto dealerships finance the sale of automobiles as the initial lender and then assign the contracts to the Corporation pursuant to dealer agreements. The Corporation’s underwriting and pricing guidelines are based on a dual risk grade derived from a combination of FICO auto score and proprietary internal custom score. Minimum grade and FICO score standards ensure the credit risk is appropriately managed to the Corporation’s risk appetite. Further, the grade influences loan-specific parameters such as vehicle age, term, LTV, loan amount, mileage, payment and debt service thresholds and pricing. Maximum loan terms offered are 84 months on select grades with vehicle age, mileage and other limitations in place to qualify. The program is designed to capture primarily prime and super prime contracts. Over time, the Corporation expects roughly 60% of originations to be secured by used vehicles.

Other consumer: Other consumer consists of student loans, short-term personal installment loans, and credit cards. The Corporation had $101 million and $118 million of student loans at December 31, 2021 and December 31, 2020, respectively, the majority of which are government guaranteed. As a result of the COVID-19 pandemic, the passage of the CARES Act, and subsequent executive orders, the federal student loan relief was extended through May 1, 2022. Credit risk for non-government guaranteed student loans, short-term personal installment loans, and credit cards is influenced by general economic conditions, the characteristics of individual borrowers, and the nature of the loan collateral. Risks of loss are generally on smaller average balances per loan spread over many borrowers. Once charged off, there is usually less opportunity for recovery of these smaller consumer loans. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment

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histories, and taking appropriate collateral and guarantee positions. The student loan portfolio is in run-off and no new student loans are being originated.

SBA Loans under the PPP:

The Corporation began submitting PPP forgiveness applications to the SBA on behalf of our customers on September 14, 2020. On December 27, 2020, the Economic Aid Act was signed into law, which included another round of PPP funding. The Corporation began originating the new round of PPP loans in January 2021 until the statutory end of the program in May 2021.

The following table summarizes the balance segmentation of the PPP loans and associated deferred fees as of December 31, 2021:

Table 11 Paycheck Protection Program Loan Segmentation

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Nonperforming Assets

Management is committed to a proactive nonaccrual and problem loan identification philosophy. This philosophy is implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified quickly and the risk of loss is minimized. Table 12 provides detailed information regarding NPAs, which include nonaccrual loans, OREO, and other NPAs:

Table 12 Nonperforming Assets

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Table 12 Nonperforming Assets (continued)

(a) Primarily closed branches and other bank operated real estate facilities, pending disposition.

(b) Does not include any restructured loans related to the COVID-19 pandemic in accordance with Section 4013 of the CARES Act.

(c) The Corporation's policy is to assign risk ratings at the borrower level. PPP loans are 100% guaranteed by the SBA and therefore the Corporation considers these loans to have a risk profile similar to pass rated loans.

Nonaccrual loans: Nonaccrual loans are considered to be one indicator of potential future loan losses. See management’s accounting policy for nonaccrual loans in Note 1 Summary of Significant Accounting Policies and Note 4 Loans of the notes to consolidated financial statements for additional nonaccrual loan disclosures. See also sections Credit Risk and Allowance for Credit Losses on Loans.

Accruing loans past due 90 days or more: Loans past due 90 days or more but still accruing interest are classified as such where the underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection.

Restructured loans: Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. See also Note 4 Loans of the notes to consolidated financial statements for additional restructured loans disclosures.

Potential problem loans: The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ACLL. Potential problem loans are generally defined by management to include loans rated as substandard by management that are collectively evaluated (not nonaccrual loans or accruing TDRs); however, there are circumstances present to create doubt as to the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that the Corporation expects losses to occur, but that management recognizes a higher degree of risk associated with these loans.

OREO: Management actively seeks to ensure OREO properties held are monitored to minimize the Corporation's risk of loss.

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Foregone Loan Interest: The following table shows, for those loans accounted for on a nonaccrual basis and restructured loans for the years ended as indicated, the approximate gross interest that would have been recorded if the loans had been current in accordance with their original terms and the amount of interest income that was included in interest income for the period:

Table 13 Foregone Loan Interest

Allowance for Credit Losses on Loans

Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and the minimization of loan losses. Credit risk management for each loan type is discussed in the section entitled Credit Risk. See Note 4 Loans of the notes to consolidated financial statements for additional disclosures on the ACLL.

To assess the appropriateness of the ACLL, the Corporation focuses on the evaluation of many factors, including but not limited to: evaluation of facts and issues related to specific loans, management’s ongoing review and grading of the loan portfolio, credit report refreshes, consideration of historical loan loss and delinquency experience on each portfolio category, trends in past due and nonaccrual loans, the level of potential problem loans, the risk characteristics of the various classifications of loan segments, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and economic forecasts, the fair value of underlying collateral, funding assumptions on lines, and other qualitative and quantitative factors which could affect potential credit losses. The Corporation utilized the Moody's baseline forecast for December 2021 in the allowance model. The forecast is applied over a 2 year reasonable and supportable period with straight-line reversion to historical losses over the second year of the period. Assessing these factors involves significant judgment. Because each of the criteria used is subject to change, the ACLL is not necessarily indicative of the trend of future credit losses on loans in any particular segment. Therefore, management considers the ACLL a critical accounting estimate, see section Critical Accounting Estimates for additional information on the ACLL. See section Nonperforming Assets for a detailed discussion on asset quality. See also Note 4 Loans of the notes to consolidated financial statements for additional ACLL disclosures. Table 6 provides information on loan growth and period end loan composition, Table 12 provides additional information regarding NPAs, and Table 14 and Table 15 provide additional information regarding activity in the ACLL.

The loan segmentation used in calculating the ACLL at December 31, 2021 and December 31, 2020 was generally comparable. The methodology to calculate the ACLL consists of the following components: a valuation allowance estimate is established for commercial and consumer loans determined by the Corporation to be individually evaluated, using discounted cash flows, estimated fair value of underlying collateral, and/or other data available. Loans are segmented for criticized loan pools by loan type as well as for non-criticized loan pools by loan type, primarily based on historical loss rates after considering loan type, historical loss and delinquency experience, credit quality, and industry classifications. Loans that have been criticized are considered to have a higher risk of default than non-criticized loans, as circumstances were present to support the lower loan grade, warranting higher loss factors. The loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels or other risks. Additionally, management allocates ACLL to absorb losses that may not be provided for by the other components due to qualitative factors evaluated by management, such as limitations within the credit risk grading process, known current economic or business conditions that may not yet show in trends, industry or other concentrations with current issues that impose higher inherent risks than are reflected in the loss factors, and other relevant considerations. The total allowance is available to absorb losses from any segment of the loan portfolio.

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Table 14 Allowance for Credit Losses on Loans

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Table 14 Allowance for Credit Losses on Loans (continued)

Table 15 Net (Charge Offs) Recoveries(a)

(a) Ratio of net charge offs to average loans by loan type

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Notable Contributions to the Change in the Allowance for Credit Losses on Loans

•Loans decreased $227 million, or 1%, from December 31, 2020, primarily driven by decreases in PPP, residential mortgage, and home equity, which were partially offset by increases in the commercial and industrial and auto portfolios. See section Loans for additional information on the changes in the loan portfolio and see section Credit Risk for discussion about credit risk management for each loan type.

•Potential problem loans increased $15 million, or 5%, from December 31, 2020, largely driven by increases in potential problem loans across the Corporation's commercial and industrial and CRE-investor portfolios, which were partially offset by a decrease in PPP loans. See also Note 4 Loans of the notes to consolidated financial statements and section Nonperforming Assets for additional disclosures on the changes in asset quality.

•For the year ended December 31, 2021, net charge offs decreased $77 million, or 76%, from December 31, 2020, primarily driven by decreased charge off amounts in the commercial and industrial portfolio, due to better performance within the remaining oil and gas portfolio, as well as lower charge offs in the CRE-investor portfolio. See Tables 14 and 15 for additional information regarding the activity in the ACLL.

•Total nonaccrual loans decreased $80 million, or 38%, from December 31, 2020, primarily driven by decreases in nonaccrual commercial and industrial, over half of the decrease was due to better performance within the remaining oil and gas portfolio, and CRE-investor loans, stemming in part from the economic recovery seen throughout 2021. See also Note 4 Loans of the notes to consolidated financial statements and section Nonperforming Assets for additional disclosures on the changes in asset quality.

Management believes the level of ACLL to be appropriate at December 31, 2021.

Consolidated net income and stockholders’ equity could be affected if management’s estimate of the ACLL is subsequently materially different, requiring additional or less provision for credit losses to be recorded. Management carefully considers numerous detailed and general factors, its assumptions, and the likelihood of materially different conditions that could alter its assumptions. While management uses currently available information to recognize losses on loans, future adjustments to the ACLL may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions that affect our customers. Additionally, larger credit relationships do not inherently create more risk, but can create wider fluctuations in net charge offs and asset quality measures. As an integral part of their examination processes, various federal and state regulatory agencies also review the ACLL. These agencies may require additions to the ACLL or may require that certain loan balances be charged off or downgraded into criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examinations.

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Investment Securities Portfolio

Management of the investment securities portfolio involves the maximization of income while actively monitoring the portfolio's liquidity, market risk, quality of the investment securities, and its role in balance sheet and capital management. The Corporation classifies its investment securities as AFS, HTM, or equity securities on the consolidated balance sheets at the time of purchase or adoption of a new accounting standard. Securities classified as AFS may be sold from time to time in order to help manage interest rate risk, liquidity, credit quality, capital levels, or to take advantage of relative value opportunities in the marketplace. Investment securities classified as AFS and equity are carried at fair value on the consolidated balance sheets, while investment securities classified as HTM are carried at amortized cost on the consolidated balance sheets.

Table 16 Investment Securities Portfolio

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Table 16 Investment Securities Portfolio (continued)

At December 31, 2021, the Corporation’s investment securities portfolio did not contain securities of any single non-government or non-GSE issuer that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 5% of stockholders’ equity.

The Corporation did not recognize any credit-related write-downs to the allowance for credit losses on investments during 2021 or 2020, or any other than temporary impairment write-downs in 2019. See Note 1 Summary of Significant Accounting Policies for management's accounting policy for investment securities and Note 3 Investment Securities of the notes to consolidated financial statements for additional investment securities disclosures.

AFS Securities

U.S. Treasury Securities: U.S. Treasury Securities, including Treasury bills, notes, and bonds, are debt obligations issued by the U.S. Department of the Treasury and are backed by the full faith and credit of the U.S. government.

Municipal Securities: The municipal securities relate to various state and political subdivisions and school districts. The municipal securities portfolio is regularly assessed for credit quality and deterioration.

Agency Securities: Agency securities are debt obligations that are issued by a U.S. GSE or other federally related entity, and have an implied guarantee from the U.S. government.

Agency Residential and Agency Commercial Mortgage-Related Securities: Residential and commercial mortgage-related securities include predominantly GNMA, FNMA, and FHLMC MBS and CMOs. The fair value of these mortgage-related securities is subject to inherent risks, such as prepayment risk and interest rate changes. The Corporation regularly assesses valuation of these securities.

Private Label Residential Mortgage-Related Securities: Private label residential mortgage-related securities are the most senior AAA-rated tranche CMO securities issued by a non-agency sponsor and collateralized by Prime Jumbo residential mortgage loans.

FFELP Asset Backed Securities: FFELP asset backed securities are collateralized with government guaranteed student loans.

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SBA Asset Backed Securities: SBA asset backed securities are securities whose underlying assets are loans from the SBA. These loans are backed by the U.S. government.

Other Debt Securities: Other debt securities are primarily comprised of debt securities that mature within 3 years and have a rating of A.

HTM Securities

Municipal Securities: The municipal securities relate to various state and political subdivisions and school districts. The municipal securities portfolio is regularly assessed for credit quality and deterioration.

Agency Residential and Agency Commercial Mortgage-Related Securities: Residential and commercial mortgage-related securities in HTM are comprised of select MBS and CMOs, such as when a component qualifies for CRA purposes.

Equity Securities

Equity Securities with Readily Determinable Fair Values: The Corporation's portfolio of equity securities with readily determinable fair values is primarily comprised of CRA Qualified Investment mutual funds and other mutual funds.

Equity Securities without Readily Determinable Fair Values: The Corporation's portfolio of equity securities without readily determinable fair values primarily consists of Visa Class B restricted shares that the Corporation received in 2008 as part of Visa's initial public offering as well as additional Visa Class B restricted shares that were acquired during the acquisition of First Staunton during the first quarter of 2020.

Regulatory Stock (FHLB and Federal Reserve System)

In addition to the AFS, HTM, and equity investment securities noted above, the Corporation is also required to hold certain regulatory stock. The Corporation is required to maintain Federal Reserve Bank stock and FHLB stock as member banks of both the Federal Reserve System and the FHLB, and in amounts as required by these institutions. See Note 3 Investment Securities of the notes to consolidated financial statements for additional information on the regulatory stock.

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Table 17 Investment Securities Portfolio Maturity Distribution(a)