UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 2017, |
For the fiscal year ended December 31, 2019,or
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-10587
FULTON FINANCIAL CORPORATIONCORPORATION
(Exact name of registrant as specified in its charter)
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Pennsylvania | | 23-2195389 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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One Penn Square | P. O. Box 4887 | Lancaster, | Pennsylvania | | 17604 |
(Address of principal executive offices) | | (Zip Code) |
(717) (717) 291-2411
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol | | Name of exchange on which registered |
Common Stock, $2.50 par value | | FULT | | The NASDAQNasdaq Stock Market, LLC |
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Securities registered pursuant to Section 12(g) of the Act: |
None |
Indicate by checkmarkcheck mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx No ¨
Indicate by checkmarkcheck mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨Nox
Indicate by checkmarkcheck mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
Indicate by checkmarkcheck mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No ¨
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by checkmarkcheck mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," and"accelerated filer," "smaller reporting company," and " emerging growth company" in Rule 12b-2 of the Exchange Act. (Check One):
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Large accelerated filer | x | Accelerated filer | ¨ | Emerging growth company | ¨☐ |
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Non-accelerated filer | ¨ | Smaller reporting company | ¨☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by checkmarkcheck mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No x
The aggregate market value of the voting Common Stock held by non-affiliates of the registrant, based on the average bid and asked prices on June 30, 2017,2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $3.2$2.6 billion. The number of shares of the registrant’s Common Stock outstanding on February 15, 20187, 2020 was 175,289,000.164,294,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 21, 201819, 2020 are incorporated by reference in Part III.
TABLE OF CONTENTS
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Description | | Page |
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PART I | | |
Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II | | |
Item 5. | | |
Item 6. | | |
Item 7. | | |
Item 7A. | | |
Item 8. | | |
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Item 9. | | |
Item 9A. | | |
Item 9B. | | |
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PART III | | |
Item 10. | | |
Item 11. | | |
Item 12. | | |
Item 13. | | |
Item 14. | | |
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PART IV | | |
Item 15. | | |
Item 16. | | |
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PART I
Item 1. Business
General
Fulton Financial Corporation (the "Corporation") was incorporated under the laws of Pennsylvania on February 8, 1982 and became a bank holding company through the acquisition of all of the outstanding stock of Fulton Bank, N.A. ("Fulton Bank") on June 30, 1982. In this Report, "the Corporation" refers to Fulton Financial Corporation and its subsidiaries that are consolidated for financial reporting purposes, except that when referring to Fulton Financial Corporation as a public company, as a bank holding company or as a financial holding company, or to the common stock or other securities issued by Fulton Financial Corporation, references to "the Corporation" refer solely to Fulton Financial Corporation. References to "the Parent Company" refer solely to Fulton Financial Corporation. In 2000, the Corporation became a financial holding company as defined in the Gramm-Leach-BlileyGLB Act, ("GLB Act"), which gave the Corporation the ability to expand its financial services activities under its holding company structure. See "Competition" and "Supervision and Regulation." The Corporation directly owns 100% of the common stock of six community banksFulton Bank and eight non-bank entities. As of December 31, 2017,2019, the Corporation had approximately 3,7003,500 full-time equivalent employees.
The common stock of the Corporation is listed for quotation on the Global Select Market of The NASDAQNasdaq Stock Market under the symbol FULT. The Corporation’sCorporation's Internet address is www.fult.com. Electronic copies of the Corporation’s 2017Corporation's 2019 Annual Report on Form 10-K are available free of charge by visiting "Investor Relations" at www.fult.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this Internet address. These reports, as well as any amendments thereto, are posted on the Corporation's website as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission ("SEC").
BankBanking and Financial Services SubsidiariesSubsidiary
The Corporation’s sixCorporation, through its banking subsidiary, banks are located primarily in suburban or semi-rural geographic markets throughout aFulton Bank, delivers financial services within its five-state regionmarket area (Pennsylvania, Delaware, Maryland, New Jersey and Virginia). Each of these banking subsidiaries delivers financial services in a highly personalized, community-oriented style that emphasizes relationship banking. Where appropriate, operations are centralized through common platforms and back-office functions. TheAs recently as 2018, the Corporation has announced that it is developing plans to seek regulatory approval to beginhad six banking subsidiaries. During 2018, the Corporation began the process of consolidating its six subsidiary banksbanking subsidiaries into Fulton Bank, which was completed in connection with a transition to a business model that will be less oriented on geographic boundaries and will instead focus more on alignment with the customer segments the Corporation serves.September 2019. The Corporation also believes that consolidating its subsidiary banks will enhance its ability to manage risk more efficiently and effectively through a centralized risk management and compliance function. This multi-yearconsolidation process is expected to eventually resultresulted in the Corporation conducting its core banking business through a single bank subsidiary, bank. The timingFulton Bank, which reduced the number of government agencies that regulate the commencement of this process will depend significantly on the Corporation and itsCorporation's banking subsidiaries making necessary progress in enhancing a largely centralized compliance program designed to comply with the requirements of the Bank Secrecy Act ("BSA"), as amended by the USA Patriot Act of 2001, as well as related anti-money laundering ("AML") laws and regulations. See Item 1A. "Risk Factors - Legal, Compliance and Reputational Risks - operations.
The Corporation intends to seek regulatory approval of the consolidation of our bank subsidiaries, which could result in significant implementation costs and impact our long-term compliance obligations" and "Risk Factors - Legal, Compliance and Reputational Risks - The Corporation and three of its bank subsidiaries are subject to regulatory enforcement orders requiring improvement in compliance functions and remedial actions."
The Corporation’s subsidiary banks are locatedoperates in areas that are home to a wide range of manufacturing, distribution, health care and other service companies. The Corporation and its banks areis not dependent upon one or a few customers or any one industry, and the loss of any single customer or a few customers would not have a material adverse impact on any of the subsidiary banks.Corporation. However, a large portion of the Corporation’sCorporation's loan portfolio is comprised of commercial loans, commercial mortgage loans and construction loans. See Item 1A. "Risk Factors - Economic and Credit Risks - Economic downturns and theThe composition of the Corporation’sCorporation's loan and lease portfolio and competition for loans and leases subject the Corporation to credit risk."
Each of the subsidiary banksThe Corporation offers a full range of consumer and commercial banking products and services in its local market area. Personal banking services include various checking account and savings deposit products, certificates of deposit and individual retirement accounts. The subsidiary banks offerCorporation offers a variety of consumer lending products to creditworthy customers in theirits market areas. Secured consumer loan products include home equity loans and lines of credit, which are underwritten based on loan-to-value limits specified in the Corporation's lending policy. The subsidiary banksCorporation also offeroffers a variety of fixed, variable and adjustable rate products, including construction loans and jumbo residential mortgage loans. Residential mortgages are offered through Fulton Mortgage Company, which operates as a division of each subsidiary bank.Fulton Bank. Consumer loan products also include automobile loans, automobile and equipment leases, personal lines of credit and checking account overdraft protection.
Commercial banking services are provided to small and medium sized businesses (generally with sales of less than $150 million) in the subsidiary banks’Corporation's market areas.area. The Corporation's policies limit the maximum total lending commitment to a single borrower to $50.0$55.0 million as of December 31, 2017,2019, which is significantly below the Corporation’sCorporation's regulatory lending limit. In addition, the Corporation
has established lower total lending limits based on the Corporation's internal risk rating of the borrower and for certain types of lending commitments. Commercial lending products include commercial, financial, agricultural and real estate loans. Variable, adjustable and fixed rate loans are provided, with variable and adjustable rate loans generally tied to an index, such as the Prime Rate or the London Interbank Offered Rate ("LIBOR"), as well as interest rate swaps. The Corporation's commercial lending policy of the Corporation's subsidiary banks encourages relationship banking and provides strict guidelines related to customer creditworthiness and collateral requirements for secured loans. In addition, equipment finance leasing, letters of credit, cash management services and traditional deposit products are offered to commercial customers.
Investment
Wealth management services, which include investment management, trust, brokerage, insurance and investment advisory services, are offered to consumer and commercial banking customers in the Corporation's market areas serviced by the Corporation's subsidiary banksarea by Fulton Financial Advisors, (aa division of the Corporation's largest subsidiary, Fulton Bank).Bank.
The Corporation’s subsidiary banks deliver theirCorporation delivers products and services through traditional branch banking, with a network of full service branch offices. Electronic delivery channels include a network of automated teller machines, telephone banking, mobile banking and online banking. The variety of available delivery channels allows customers to access their account information and perform certain transactions, such as depositing checks, transferring funds and paying bills, at virtually any time of the day.
The following table provides certain information for the Corporation’s banking subsidiaries as of December 31, 2017: Fulton Bank has 230 branches, not including remote service facilities (mainly stand-alone automated teller machines), and its main office is located in Lancaster, Pennsylvania.
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Subsidiary | | Main Office Location | | Total Assets | | Total Deposits | | Branches (1) |
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Fulton Bank, N.A. | | Lancaster, PA | | $ | 11,494 |
| | $ | 8,649 |
| | 112 |
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Fulton Bank of New Jersey | | Mt. Laurel, NJ | | 4,069 |
| | 3,480 |
| | 64 |
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The Columbia Bank | | Columbia, MD | | 2,411 |
| | 1,910 |
| | 31 |
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Lafayette Ambassador Bank | | Bethlehem, PA | | 1,577 |
| | 1,340 |
| | 21 |
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FNB Bank, N.A. | | Danville, PA | | 354 |
| | 291 |
| | 6 |
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Swineford National Bank | | Middleburg, PA | | 328 |
| | 286 |
| | 7 |
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| | | | | | | | 241 |
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(1) |
Remote service facilities (mainly stand-alone automated teller machines) are excluded. See additional information in Item 2. "Properties." |
Non-Bank Subsidiaries
The Corporation owns 100% of the common stock of five non-bank subsidiaries, which are consolidated for financial reporting purposes: (i) Fulton Financial Realty Company, which holds title to or leases certain properties where Corporation branch offices and other facilities are located; (ii) Central Pennsylvania Financial Corp., which owns limited partnership interests in partnerships invested primarily in low- and moderate-income housing projects; (iii) FFC Management, Inc., which owns certain investment securities and other passive investments; (iv) FFC Penn Square, Inc., which owns trust preferred securities ("TruPS") issued by a subsidiary of Fulton Bank; and (v) Fulton Insurance Services Group, Inc., which engages in the sale of various life insurance products.
The Corporation also owns 100% of the common stock of three non-bank subsidiaries which are not consolidated for financial reporting purposes. The following table provides information for these non-bank subsidiaries, whose sole assets consist of junior subordinated deferrable interest debentures issued by the Corporation, as of December 31, 2017:2019:
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Subsidiary | State of Incorporation | | Total Assets |
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Columbia Bancorp Statutory Trust | Delaware | | $ | 6,186 |
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Columbia Bancorp Statutory Trust II | Delaware | | 4,124 |
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Columbia Bancorp Statutory Trust III | Delaware | | 6,186 |
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Competition
The banking and financial services industries are highly competitive. Within its geographic region, the Corporation’s subsidiaries faceCorporation faces direct competition from other commercial banks, varying in size from local community banks to larger regional and national
banks, credit unions and non-bank entities. As a result of the wide availability of electronic delivery channels, the subsidiary banksCorporation also facefaces competition from financial institutions that do not have a physical presence in the Corporation’sCorporation's geographic markets.
The industry is also highly competitive due to the various types of entities that now compete aggressively for customers that were traditionally served only by the banking industry. Under the current financial services regulatory framework, banks, insurance companies and securities firms may affiliate under a financial holding company structure, allowing their expansion into non-banking financial services activities that had previously been restricted. These activities include a full range of banking, securities and insurance activities, including securities and insurance underwriting, issuing and selling annuities and merchant banking activities. Moreover, the Corporation and its subsidiaries facefaces increased competition from certain non-bank entities, such as financial technology companies and marketplace lenders, which may or mayin many cases are not be subject to the same regulatory compliance obligations as the Corporation. While the Corporation does not currently engage in many of the activities described above, further entry into these businesses may enhance the ability of the Corporation to compete in the future.
Market Share
Deposit market share information is compiled as of June 30 of each year by the Federal Deposit Insurance Corporation ("FDIC"). The Corporation’s banks maintain branch offices in 52 counties across five states. In 15 of these counties, the Corporation ranked in the top five in deposit market share (based on deposits as of June 30, 2017). The following table summarizes information about the counties in which the Corporation has branch offices and its market position in each county:
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| | | | | | | | No. of Financial Institutions | | Deposit Market Share (June 30, 2017) |
County | | State | | Population (2018 Est.) | | Banking Subsidiary | | Banks/ Thrifts | | Credit Unions | | Rank | | % |
Lancaster | | PA | | 543,000 |
| | Fulton Bank, N.A. | | 20 |
| | 13 |
| | 1 |
| | 27.3 | % |
Berks | | PA | | 415,000 |
| | Fulton Bank, N.A. | | 18 |
| | 11 |
| | 8 |
| | 3.6 | % |
Bucks | | PA | | 626,000 |
| | Fulton Bank, N.A. | | 34 |
| | 15 |
| | 14 |
| | 2.1 | % |
Centre | | PA | | 163,000 |
| | Fulton Bank, N.A. | | 16 |
| | 4 |
| | 10 |
| | 3.2 | % |
Chester | | PA | | 520,000 |
| | Fulton Bank, N.A. | | 29 |
| | 8 |
| | 13 |
| | 2.9 | % |
Columbia | | PA | | 66,000 |
| | FNB Bank, N.A. | | 6 |
| | 3 |
| | 5 |
| | 4.0 | % |
Cumberland | | PA | | 252,000 |
| | Fulton Bank, N.A. | | 17 |
| | 5 |
| | 12 |
| | 1.9 | % |
Dauphin | | PA | | 275,000 |
| | Fulton Bank, N.A. | | 17 |
| | 10 |
| | 6 |
| | 5.2 | % |
Delaware | | PA | | 564,000 |
| | Fulton Bank, N.A. | | 30 |
| | 13 |
| | 27 |
| | 0.3 | % |
Lebanon | | PA | | 140,000 |
| | Fulton Bank, N.A. | | 12 |
| | 6 |
| | 1 |
| | 31.7 | % |
Lehigh | | PA | | 366,000 |
| | Lafayette Ambassador Bank | | 21 |
| | 12 |
| | 7 |
| | 4.6 | % |
Lycoming | | PA | | 114,000 |
| | FNB Bank, N.A. | | 11 |
| | 10 |
| | 14 |
| | 1.0 | % |
Montgomery | | PA | | 826,000 |
| | Fulton Bank, N.A. | | 39 |
| | 28 |
| | 22 |
| | 0.5 | % |
Montour | | PA | | 18,000 |
| | FNB Bank, N.A. | | 6 |
| | 3 |
| | 2 |
| | 22.1 | % |
Northampton | | PA | | 304,000 |
| | Lafayette Ambassador Bank | | 17 |
| | 12 |
| | 3 |
| | 13.1 | % |
Northumberland | | PA | | 92,000 |
| | FNB Bank, N.A. | | 19 |
| | 5 |
| | 7 |
| | 3.9 | % |
| | | | | | Swineford National Bank | | | | | | 13 |
| | 2.3 | % |
Schuylkill | | PA | | 142,000 |
| | Fulton Bank, N.A. | | 13 |
| | 2 |
| | 10 |
| | 4.1 | % |
Snyder | | PA | | 41,000 |
| | Swineford National Bank | | 8 |
| | 1 |
| | 2 |
| | 26.0 | % |
Union | | PA | | 46,000 |
| | Swineford National Bank | | 10 |
| | 3 |
| | 5 |
| | 7.1 | % |
York | | PA | | 446,000 |
| | Fulton Bank, N.A. | | 15 |
| | 13 |
| | 3 |
| | 11.3 | % |
New Castle | | DE | | 561,000 |
| | Fulton Bank, N.A. | | 21 |
| | 18 |
| | 11 |
| | 1.2 | % |
Sussex | | DE | | 227,000 |
| | Fulton Bank, N.A. | | 17 |
| | 5 |
| | 3 |
| | 8.8 | % |
Anne Arundel | | MD | | 575,000 |
| | The Columbia Bank | | 28 |
| | 10 |
| | 18 |
| | 0.6 | % |
Baltimore | | MD | | 835,000 |
| | The Columbia Bank | | 32 |
| | 16 |
| | 21 |
| | 0.8 | % |
Baltimore City | | MD | | 610,000 |
| | The Columbia Bank | | 26 |
| | 14 |
| | 11 |
| | 0.4 | % |
Cecil | | MD | | 103,000 |
| | The Columbia Bank | | 7 |
| | 4 |
| | 2 |
| | 13.8 | % |
Frederick | | MD | | 251,000 |
| | The Columbia Bank | | 17 |
| | 5 |
| | 15 |
| | 0.9 | % |
Howard | | MD | | 324,000 |
| | The Columbia Bank | | 20 |
| | 5 |
| | 4 |
| | 8.6 | % |
Montgomery | | MD | | 1,058,000 |
| | The Columbia Bank | | 30 |
| | 25 |
| | 29 |
| | 0.2 | % |
Prince George's | | MD | | 916,000 |
| | The Columbia Bank | | 19 |
| | 24 |
| | 21 |
| | 0.6 | % |
Washington | | MD | | 151,000 |
| | The Columbia Bank | | 11 |
| | 4 |
| | 2 |
| | 21.3 | % |
Atlantic | | NJ | | 269,000 |
| | Fulton Bank of New Jersey | | 14 |
| | 7 |
| | 11 |
| | 1.8 | % |
Burlington | | NJ | | 449,000 |
| | Fulton Bank of New Jersey | | 20 |
| | 11 |
| | 14 |
| | 1.2 | % |
Camden | | NJ | | 509,000 |
| | Fulton Bank of New Jersey | | 21 |
| | 11 |
| | 11 |
| | 2.4 | % |
Cumberland | | NJ | | 152,000 |
| | Fulton Bank of New Jersey | | 12 |
| | 5 |
| | 13 |
| | 1.9 | % |
Gloucester | | NJ | | 293,000 |
| | Fulton Bank of New Jersey | | 23 |
| | 5 |
| | 2 |
| | 13.8 | % |
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| | | | | | | | No. of Financial Institutions | | Deposit Market Share (June 30, 2017) |
County | | State | | Population (2018 Est.) | | Banking Subsidiary | | Banks/ Thrifts | | Credit Unions | | Rank | | % |
Hunterdon | | NJ | | 124,000 |
| | Fulton Bank of New Jersey | | 17 |
| | 7 |
| | 9 |
| | 2.7 | % |
Mercer | | NJ | | 371,000 |
| | Fulton Bank of New Jersey | | 25 |
| | 20 |
| | 17 |
| | 0.9 | % |
Middlesex | | NJ | | 841,000 |
| | Fulton Bank of New Jersey | | 45 |
| | 26 |
| | 27 |
| | 0.3 | % |
Monmouth | | NJ | | 625,000 |
| | Fulton Bank of New Jersey | | 27 |
| | 11 |
| | 25 |
| | 0.7 | % |
Morris | | NJ | | 499,000 |
| | Fulton Bank of New Jersey | | 35 |
| | 16 |
| | 14 |
| | 1.4 | % |
Ocean | | NJ | | 597,000 |
| | Fulton Bank of New Jersey | | 20 |
| | 8 |
| | 15 |
| | 1.2 | % |
Salem | | NJ | | 63,000 |
| | Fulton Bank of New Jersey | | 7 |
| | 4 |
| | 1 |
| | 26.9 | % |
Somerset | | NJ | | 335,000 |
| | Fulton Bank of New Jersey | | 26 |
| | 11 |
| | 10 |
| | 2.3 | % |
Warren | | NJ | | 106,000 |
| | Fulton Bank of New Jersey | | 12 |
| | 3 |
| | 5 |
| | 7.7 | % |
Chesapeake City | | VA | | 242,000 |
| | Fulton Bank, N.A. | | 13 |
| | 7 |
| | 10 |
| | 1.6 | % |
Fairfax | | VA | | 1,146,000 |
| | Fulton Bank, N.A. | | 37 |
| | 29 |
| | 42 |
| | — | % |
Henrico | | VA | | 328,000 |
| | Fulton Bank, N.A. | | 24 |
| | 14 |
| | 23 |
| | 0.5 | % |
Manassas | | VA | | 42,000 |
| | Fulton Bank, N.A. | | 12 |
| | 4 |
| | 10 |
| | 1.9 | % |
Newport News | | VA | | 183,000 |
| | Fulton Bank, N.A. | | 12 |
| | 7 |
| | 12 |
| | 0.7 | % |
Richmond City | | VA | | 227,000 |
| | Fulton Bank, N.A. | | 16 |
| | 10 |
| | 15 |
| | 0.2 | % |
Virginia Beach | | VA | | 456,000 |
| | Fulton Bank, N.A. | | 15 |
| | 13 |
| | 10 |
| | 1.6 | % |
Supervision and Regulation
The Corporation and its subsidiaries operateoperates in an industry that is subject to laws and regulations that are enforced by a number of federal and state agencies. Changes in these laws and regulations, including interpretation and enforcement activities, could impact the cost of operating in the financial services industry, limit or expand permissible activities or affect competition among banks and other financial institutions.
The Corporation is a registered bank holding company, and has elected to be treated as a financial holding company, under the Bank Holding Company Act of 1956, as amended ("BHCA") and. The Corporation is regulated, supervised and examined by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). The Corporation's subsidiary banks are depository institutions whose deposits are insuredFulton Bank is a national banking association chartered
under the laws of the United States and is primarily regulated by the FDIC. The following table summarizes the charter types and primary regulators for eachOffice of the Corporation’s subsidiary banks:Comptroller of the Currency ("OCC"). In addition, the Consumer Financial Protection Bureau ("CFPB") examines Fulton Bank for compliance with most federal consumer financial protection laws, including the laws relating to fair lending and prohibiting unfair, deceptive or abusive acts or practices in connection with the offer, sale or provision of consumer financial products or services, and for enforcing such laws with respect to Fulton Bank and its affiliates.
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Subsidiary | Charter | | Primary Regulator(s) |
Fulton Bank, N.A. | National | | OCC |
Fulton Bank of New Jersey | NJ | | NJ/FDIC |
The Columbia Bank | MD | | MD/FDIC |
Lafayette Ambassador Bank | PA | | PA/Federal Reserve |
FNB Bank, N.A. | National | | OCC |
Swineford National Bank | National | | OCC |
OCC - Office of the Comptroller of the Currency
Federal statutes that apply to the Corporation and its subsidiaries include the Gramm-Leach-Bliley Act ("GLB Act,Act"), the BHCA, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), the Federal Reserve Act, the National Bank Act and the Federal Deposit Insurance Act, among others. In general, these statutes, regulations promulgated thereunder, and related interpretations establish the eligible business activities of the Corporation, certain acquisition and merger restrictions, limitations on intercompany transactions such(such as loans and dividends,dividends), cash reserve requirements, lending limitations, compliance with unfair, deceptive and abusive acts and practices prohibitions, limitations on investments, and capital adequacy requirements, among other things. Such laws and regulations are intended primarily for the protection of depositors, customers and the Federal Deposit Insurance Fund ("DIF"), as well as to minimize risk to the banking system as a whole, and not for the protection of the Corporation's shareholders or non-depository creditors.
The following discussion is general in nature and seeks to highlight some of the more significant of the regulatory requirements to which the Corporation and its subsidiaries areis subject, but does not purport to be complete or to describe all applicable laws and regulations that are applicable.regulations.
BHCA - The Corporation is subject to regulation and examination by the Federal Reserve Board, and is required to file periodic reports and to provide additional information that the Federal Reserve Board may require. The BHCA regulates activities of bank holding companies, including requirements and limitations relating to capital, transactions with officers, directors and affiliates, securities issuances, dividend payments and extensions of credit, among others. The BHCA permits the Federal Reserve Board, in certain circumstances, to issue cease and desist orders and other enforcement actions against bank holding companies (and their non-banking affiliates) to correct or curtail unsafe or unsound banking practices. In addition, the Federal Reserve Board must approve certain proposed changes in organizational structure or other business activities before they occur. The BHCA imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of, or direct or indirect ownership or control of, any bank for which it is not already the majority owner. In addition, under the Dodd-Frank Act and longstanding
Source of Strength - Federal Reserve Board policy,banking law requires bank holding companies are requiredsuch as the Corporation to act as a source of financial strength and to commit capital and other financial resources to each of their banking subsidiaries pursuant to which such holding companysubsidiaries. This support may be required at times when the Corporation may not be able to commit financial resourcesprovide such support without adversely affecting its ability to support such subsidiaries in circumstancesmeet other obligations, or when, absent such requirements, theythe Corporation might not otherwise do so.
Dodd-Frank Act - The Dodd-Frank Act was enacted in July 2010 and resulted in significant financial regulatory reform. The Dodd-Frank Act also changedchoose to provide such support. If the responsibilitiesCorporation is unable to provide such support, the Federal Reserve Board could instead require the divestiture of the currentCorporation's subsidiaries and impose operating restrictions pending the divestiture. If a bank holding company commits to a federal banking regulators.bank regulator that it will maintain the capital of its bank subsidiary, whether in response to the Federal Reserve Board's invoking its source of strength authority or in response to other regulatory measures, that commitment will be assumed by the bankruptcy trustee and the bank will be entitled to priority payment in respect of that commitment.
The Economic Growth, Regulatory Relief, and Consumer Protection Act - In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act ("Economic Growth Act") became law. Among other things, the Economic Growth Act amended certain provisions of the Dodd-Frank Act establishedto raise the total asset threshold for mandatory applicability of enhanced prudential standards for bank holding companies to $250 billion and to allow the Federal Reserve Board to apply enhanced prudential standards to bank holding companies with between $100 billion and $250 billion in total assets to address financial stability risks or safety and soundness concerns. The Economic Growth Act's increased compliance obligations across a number of areas of the banking business and created the Financial Stability Oversight Council, with oversight authoritythreshold took effect immediately for monitoring systemically important financial institutions ("SIFIs") and regulating systemic risk, and the Consumer Financial Protection Bureau ("CFPB"), which has broad regulatory and enforcement powers over consumer financial products and services. The CFPB is responsible for administering and enforcing numerous federal consumer financial laws enumerated in the Dodd-Frank Act. The CFPB has exclusive or primary supervision, examination and enforcement authority over banksbank holding companies with total assets of moreless than $100 billion, including the Corporation.
The Economic Growth Act also enacted other important changes, for which the banking agencies issued certain corresponding proposed and interim final rules, including:
Raising the total asset threshold for Dodd-Frank Act company-run stress tests from $10 billion with respect to compliance with$250 billion;
Prohibiting federal consumer financial laws. Asbanking agencies from imposing higher capital requirements for High Volatility Commercial Real Estate ("HVCRE") exposures unless such exposures meet the statutory definition for high volatility acquisition, development or construction ("ADC") loans in the Economic Growth Act;
Exempting from appraisal requirements certain transactions involving real property in rural areas and valued at less than $400,000;
Providing that reciprocal deposits are not treated as brokered deposits in the case of March 31, 2017, the Corporation's largest subsidiary bank, Fulton Bank, had $10.8 billion in total assets and had total assets in excess of $10 billion for the previous four consecutive quarters, and accordingly, it and the Corporation's other subsidiary banks are subjecta "well capitalized" institution that received a "outstanding" or "good" rating on its most recent examination to the supervision, examination and enforcement jurisdictionextent the amount of such deposits does not exceed the lesser of $5 billion or 20% of the bank's total liabilities;
Directing the CFPB with respect to federal consumer financial laws.
Stress Testing - In accordance with Federal Reserve Board rules governing company-run stress testing,provide guidance on the Corporation is required to conduct an annual stress test in the manner specified, and using assumptions for baseline, adverse and severely adverse scenarios announced by the Federal Reserve Board. The stress test is designed to assess the potential impactapplicability of the various scenariosTILA-RESPA Integrated Disclosure rule to mortgage assumption transactions and construction-to-permanent home loans, as well the extent to which lenders can rely on the Corporation's earnings, capital levels and capital ratios overmodel disclosures that do not reflect recent regulatory changes.
Given Fulton Bank's size, a nine-quarter time horizon. The Corporation's boardnumber of directors and its senior managementadditional benefits afforded to community banks under applicable asset thresholds are requirednot available to consider the results of the stress test in the normal course of business, including as part of the Corporation's capital planning process and the evaluation of the adequacy of its capital, and to disclose summary stress test results to the public. The Corporation believes that both the quality and magnitude of its capital base are sufficient to support its current operations given its risk profile. The results of the annual stress testing process did not lead the Corporation to raise additional capital or alter the mix of its capital components. Pursuant to final rules published in October 2014 and December 2015, the Federal Reserve Board modified the start date of the stress test cycles so that, beginning in 2016, stress tests must be conducted using financial data as of December 31 of the prior year, the results of the stress test must be reported to the Federal Reserve Board on or before July 31 and a summary of the results of the stress test must be publicly disclosed between October 15 and October 31. The Corporation timely submitted its stress test report to the Federal Reserve Board before its required date of July 31, 2017, and a summary of the results was publicly disclosed on October 18, 2017, as required by the final rules.Fulton Bank.
Under similar rules adopted by the Office of the Comptroller of the Currency ("OCC"), the primary regulator of Fulton Bank, national banks with total consolidated assets of more than $10 billion are also required to conduct annual stress tests. A national bank becomes subject to the annual stress testing requirement when the institution's total consolidated assets, calculated as the average of the institution's total consolidated assets, as reported on the institution's quarterly Call Reports, for the most recent four consecutive quarters exceeds $10 billion. As of March 31, 2017, Fulton Bank had $10.8 billion in total consolidated assets and had maintained a level of assets in excess of $10 billion for four consecutive quarters. Accordingly, Fulton Bank is required to conduct annual stress tests in accordance with the OCC rules and as a result, will be required to submit its first stress test report to the OCC on or before July 31, 2018.
Consumer Financial Protection Laws and Enforcement - The CFPB and the federal banking agencies continue to focus attention on consumer protection laws and regulations. The CFPB is responsible for promoting fairness and transparency for mortgages, credit cards, deposit accounts and other consumer financial products and services and for interpreting and enforcing the federal consumer financial laws that govern the provision of such products and services. Federal consumer financial laws enforced by the CFPB include, but are not limited to, the Equal Credit Opportunity Act ("ECOA"), Truth in Lending Act ("TILA"), the Truth in Savings Act, HMDA,Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act ("RESPA"), the Fair Debt Collection Practices Act, and the Fair Credit Reporting Act. The CFPB is also authorized to prevent any institution under its authority from engaging in an unfair, deceptive, or abusive act or practice in connection with consumer financial products and services. As a residential mortgage lender,
the Corporation and its bank subsidiaries areis subject to multiple federal consumer protection statutes and regulations, including, but not limited to, those referenced above.
In particular, fair lending laws prohibit discrimination in the provision of banking services, and the enforcement of these laws has been an increasing focus for the CFPB, the Department of Housing and Urban Development ("HUD"), and other regulators.services. Fair lending laws include ECOA and the Fair Housing Act ("FHA"), which outlaw discrimination in credit and residential real estate transactions on the basis of prohibited factors including, among others, race, color, national origin, gender, and religion. A lender may be liable for policies that result in a disparate treatment of, or have a disparate impact on, a protected class of applicants or borrowers. If a pattern or practice of lending discrimination is alleged by a regulator, then that agency may refer the matter to the U.S. Department of Justice ("DOJ") for investigation. Failure to comply with these and similar statutes and regulations can result in the Corporation and its bank subsidiaries becoming subject to formal or informal enforcement actions, the imposition of civil money penalties and consumer litigation.
The CFPB has exclusive examination and primary enforcement authority with respect to compliance with federal consumer financial protection laws and regulations by institutions under its supervision and is authorized, individually or jointly with the federal bank regulatorybanking agencies, to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations. The CFPB may bring an administrative enforcement proceeding or civil action in federal district court. In addition, in accordance with a memorandum of understanding entered into between the CFPB and the DOJ, the two agencies have agreed to coordinate efforts related to enforcing the fair lending laws, which includes information sharing and conducting joint investigations; however, the extent to which such coordination may actually occur is unpredictable and may change over time as athe result of recenta number of factors, including changes in leadership changes at the DOJ and CFPB, as well as changes in the enforcement policies and priorities of each agency, the extent to which such coordination will continue to occur in the near term is uncertain.agency. As an independent bureau funded by the Federal Reserve Board, the CFPB may impose requirements that are more stringent than those of the other bank regulatory agencies.
As an insured depository institution with total assets of more than $10 billion, Fulton Bank and the Corporation's other subsidiary banks areis subject to the CFPB’sCFPB's supervisory and enforcement authorities. The Dodd-Frank Act also permits states to adopt stricter consumer protection laws and state attorneys general to enforce consumer protection rules issued by the CFPB. As a result, the Corporation's subsidiary banks operateFulton Bank operates in a stringent consumer compliance environment and may incur additional costs related to consumer protection compliance, including but not limited to potential costs associated with CFPB examinations, regulatory and enforcement actions and consumer-oriented litigation. The CFPB, other financial regulatory agencies, including the OCC, as well as the DOJ, have, over the past several years, pursued a number of enforcement actions against depository institutions with respect to compliance with fair lending laws.environment.
Ability-to-pay rules and qualified mortgages - As required by the Dodd-Frank Act, theUnder CFPB issued a series of final rules amending Regulation Z, implementingthat implement TILA, which require mortgage lenders are required to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a residential mortgage loan has a reasonable ability to repay the loan according to its terms. These final rules prohibit creditors, such as the Corporation's bank subsidiaries,Fulton Bank, from extending residential mortgage loans without regard for the consumer's ability to repay and add restrictions and requirements to residential mortgage origination and servicing practices. In addition, these rules restrict the imposition of prepayment penalties and compensation practices relating to residential mortgage loan origination. Mortgage lenders are required to determine consumers’consumers' ability to repay in one of two ways. The first alternative requires the mortgage lender to consider eight underwriting factors when making the credit decision. The mortgage lender may also originate "qualified mortgages," which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a qualified mortgage is a residential mortgage loan that does not have certain high risk features, such as negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount, and the borrower’sborrower's total debt-to-income ratio must be no higher than 43% (subject to certain limited exceptions for loans eligible for purchase, guarantee or insurance by a government sponsored enterprise or a federal agency).
Integrated disclosures under the Real Estate Settlement Procedures Act and the Truth in Lending Act - AsUnder CFPB rules, mortgage lenders are required by the Dodd-Frank Act, the CFPB issued final rules revising and integrating previously separate disclosures required under RESPA and TILA in connection with certain closed-end consumer mortgage loans. These final rules became effective August 1, 2015 and require lenders to provide a new loan estimate, combining content from the former good faith estimate required under RESPA and the initial disclosures required under TILA, not later than the third business day after submission of a loan application, and a new closing disclosure combining content of the former HUD-1 Settlement Statement required under RESPA and the final disclosures required under TILA, at least three days prior to the loan closing. The CFPB issued proposed amendmentsloan estimate must detail the terms of the loan, including, among other things, expenses, projected monthly mortgage payments and estimated closing costs. The closing disclosure must include, among other things, closing costs and a comparison of costs reported on the loan estimate to the requirements in July 2016, which were finalized in July 2017.actual charges to be applied at closing.
Volcker Rule - As mandated by Section 619Provisions of the Dodd-Frank Act, (thecommonly known as the "Volcker Rule"),Rule," prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds and other private funds that are, among other things, offered within specified exemptions to the Investment Company Act, known as "covered funds," subject to certain exemptions. In October 2019, the federal banking agencies, the SEC and Commodity Futures Trading Commission and the SEC (the "Volcker Rule Regulators") finalized amendments, effective on January 1, 2020, but with a required compliance date of January 1, 2021, to their regulations implementing the Volcker Rule, tailoring compliance requirements based on the size and scope of a banking entity's trading activities and clarifying and amending certain definitions, requirements and exemptions. In January 2020, the Volcker Rule Regulators issued finala proposal intended to clarify and amend certain definitions, requirements and exemptions relating to covered funds and the currently effective regulations. The Corporation is currently evaluating the potential impact of the recently finalized and proposed amendments, and the ultimate impact of the amendments on the Corporation's investing and trading activities will depend on, among other things, further rulemaking and guidance from the Volcker Rule Regulators and the development of market practices and standards.
Capital Requirements - The Corporation and Fulton Bank are subject to risk-based requirements and rules in December 2013issued by the federal banking agencies (the "Final"Basel III Rules") that prohibit banking entities
from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in, and relationships with, hedge funds or private equity funds, which are referred to as "covered funds." The Final Rules generally treat as a covered fund any entity that, absentbased upon the applicability of a separate exclusion, would be an "investment company" under the Investment Company Act of 1940 (the "1940 Act") but for the applicationfinal framework of the exemptions from SEC registration set forthBasel Committee for strengthening capital and liquidity regulation. Under the Basel III Rules, the Corporation and Fulton Bank apply the standardized approach in Section 3(c)(1) (fewer than 100 beneficial owners) or Section 3(c)(7) (qualified purchasers) ofmeasuring their risk-weighted assets ("RWA") and regulatory capital.
Under the 1940 Act. The FinalBasel III Rules, also require regulated entities to establish an internal compliance program that is consistent with the extent to which it engages in proprietary tradingCorporation and covered fund activities covered by the Volcker Rule. Although the Final Rules provide some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Corporation. In December 2014, the Federal Reserve Board extended, until July 21, 2016, the date by which banking entities must conform their covered fund activities and investments to the requirements of the Final Rules, and in July 2016, the Federal Reserve Board granted an additional one-year extension of the conformance period to July 21, 2017.
In addition, in August 2017, the OCC published a notice and request for comment on whether certain aspects of the Volcker Rule should be revised to better accomplish the purposes the Dodd-Frank Act while decreasing the compliance burden on banking organizations and fostering economic growth. The request for comment invited input on ways in which to tailor the Volcker Rule’s requirements and clarify key provisions that define prohibited and permissible activities, as well as input on how the federal regulatory agencies could implement the existing Volcker Rule more effectively without revising the Final Rules. Specifically, the OCC requested comments on the scope of entitiesFulton Bank are subject to the Volcker Rule, the proprietary trading prohibition, the covered funds prohibition, and the compliance program and metrics reporting requirements. We cannot predict whether regulations that would simplify compliance with the Final Rules will be adopted or, if such regulations were to be adopted, the extent to which they would reduce our compliance burdens.following minimum capital ratios:
The Corporation does not engage in proprietary trading or in any other activities prohibited by the Final Rules, and, based on the Corporation's evaluation of its investments, none fell within the definition of a "covered fund" and none needed to be disposed of by July 31, 2017. The Corporation does not currently expect that the Final Rules will have a material effect on its business, financial condition or results of operations.
Capital Requirements - There are a number of restrictions on financial and bank holding companies and FDIC-insured depository subsidiaries that are designed to minimize potential loss to depositors and the FDIC insurance funds. Also, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the Federal Reserve Board has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company.
The Basel Committee on Banking Supervision ("Basel") is a committee of central banks and bank regulators from major industrialized countries that develops broad policy guidelines for use by each country’s regulators with the purpose of ensuring that financial institutions have adequate capital given the risk levels of assets and off-balance sheet financial instruments. In December 2010, Basel released frameworks for strengthening international capital and liquidity regulations, referred to as Basel III.
In July 2013, the Federal Reserve Board approved final rules (the "U.S. Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel's December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions.
The minimum regulatory capital requirements established by the U.S. Basel III Capital Rules became effective for the Corporation on January 1, 2015, and will be fully phased in on January 1, 2019.
The U.S. Basel III Capital Rules require the Corporation and its bank subsidiaries to:
Meet aA minimum Common Equity Tier 1 ("CET1") capital ratio of 4.50% of risk-weighted assets and aRWA;
A minimum Tier 1 capital ratio of 6.00% of risk-weighted assets;RWA,; and
Continue to require aA minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets; andRWA.
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, have been phased out as a component of Tier 1 capital for institutions of the Corporation's size.
The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expand the risk-weightings for assets and off balance sheet exposures from the previous 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and off-balance sheet exposures and resulting in higher risk weights for a variety of asset categories. In November 2017, the federal banking agencies adopted a final rule to extend the regulatory capital treatment applicable during 2017 under Basel III for certain items, including regulatory capital deductions, risk weights, and certain minority interest limitations. The relief provided under the final rule applies to banking organizations that are not subject to the capital rules’ advanced approaches, such as the Corporation. Specifically, the final rule extends the current regulatory capital treatment of mortgage servicing assets ("MSAs"), deferred tax assets ("DTAs") arising from temporary differences that could not be realized through net operating loss carrybacks, significant investments in the capital of unconsolidated financial institutions in the form of common stock, non-significant investments in the capital of unconsolidated financial institutions, significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock, and CET1 minority interest, tier 1 minority interest, and total capital minority interest exceeding applicable minority interest limitations.
When fully phased in on January 1, 2019, the Corporation and its bank subsidiaries will also be required to maintaininclude a "capital conservation buffer" of 2.50%2.5%, composed entirely of CET1 capital, in addition to the minimum capital to RWA ratios outlined above, resulting in effective minimum CET1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a capital ratio above the minimum, risk-based capital requirements. The required minimum capitalbut below the conservation buffer, began to be phased in incrementally, starting at 0.625%,will face constraints on January 1, 2016, increasing to 1.25%dividends, equity repurchases, and compensation based on January 1, 2017,the amount of the shortfall and will continue to increase, to 1.875% on January 1, 2018 and 2.50% on January 1, 2019. The rules provide that the failure to maintain the "capital conservation buffer" will result in restrictions on capitalinstitution's "eligible retained income" (that is, four quarter trailing net income, net of distributions and discretionary cash bonus payments to executive officers. As a result, under the U.S. Basel III Capital Rules, if any of the Corporation's bank subsidiariestax effects not reflected in net income). If Fulton Bank fails to maintain the required minimum capital conservation buffer, the Corporation will be subject to limits, and possibly prohibitions, on its ability to obtain capital distributions from such subsidiaries.Fulton Bank. If the Corporation does not receive sufficient cash dividends from its bank subsidiaries,Fulton Bank, it may not have sufficient funds to pay dividends on its capital stock, service its debt obligations or repurchase its common stock. In addition, the restrictions on payments of discretionary cash bonuses to executive officers may make it more difficult for the Corporation to retain key personnel. As of December 31, 2017,2019, the Corporation and Fulton Bank met the fully-phased in minimum capital requirements, including the new capital conservation buffer, as prescribed in the U.S. Basel III Capital Rules.
In October 2017, the federal banking agencies issuedThe Corporation and Fulton Bank are also required to maintain a noticeminimum Tier 1 leverage ratio (Tier 1 capital to a quarterly average of proposed rulemaking on simplifications to Basel III, a majoritynon-risk weighted total assets) of which would apply solely to banking organizations that4%. The Corporation and Fulton Bank are not subject to the advanced approachesBasel III Rules' countercyclical buffer or the supplementary leverage ratio.
The Basel III Rules provide for a number of deductions from and adjustments to CET1. These include, for example, goodwill, other intangible assets, and deferred tax assets ("DTAs") that arise from net operating loss and tax credit carryforwards net of any related valuation allowance. Mortgage servicing rights ("MSRs"), DTAs arising from temporary differences that could not be realized through net operating loss carrybacks and investments in non-consolidated financial institutions must also be deducted from CET1 to the extent that they exceed certain thresholds. In July 2019, the federal banking agencies adopted final rules intended to simplify the capital rules. Under the proposed rulemaking, non-advanced approachestreatment for certain DTAs, MSRs, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Corporation and Fulton Bank, would apply a simpler regulatory capital treatmentthat are not subject to the advanced approaches framework (the "Capital Simplification Rules"). The Capital Simplification Rules were effective for MSAs, certain DTAs, investments in the capitalCorporation as of unconsolidated financial institutions,January 1, 2020.
The Corporation and capital issued by a consolidated subsidiary of a banking organization and held by third parties. Specifically, the proposed rulemaking would eliminate: (i) the 10 percent CET1 capital deduction threshold that applies individually to MSAs, temporary difference DTAs, and significant investments in the capital of unconsolidated financial institutions in the form of common stock; (ii) the aggregate 15 percent CET1 capital deduction threshold that subsequently applies on a collective basis across such items; (iii) the 10 percent CET1 capital deduction threshold for non-significant investments in the capital of unconsolidated financial institutions; and (iv) the deduction treatment for significant investments in the capital of unconsolidated financial institutions not in the form of common stock. Basel III would no longer have distinct treatments for significant and non-significant investments in the capital of unconsolidated financial institutions, but instead would require thatFulton Bank, as non-advanced approaches banking organizations, deduct from CET1made a one-time, permanent election under the Basel III Rules to exclude the effects of certain components of accumulated other comprehensive income ("AOCI") included in shareholders' equity under U.S. GAAP in determining regulatory capital any amountratios.
Under the Basel III Rules, certain off-balance sheet commitments and obligations are converted into RWA, that together with on-balance sheet assets, are the base against which regulatory capital is measured. The Basel III Rule defined the risk-weighting categories for bank holding companies and banks that follow the standardized approach, such as the Corporation and Fulton Bank, based on a risk-sensitive analysis, depending on the nature of MSAs, temporary difference DTAs, and investmentsthe exposure.
The Capital Simplifications Rules adopted in July 2019 eliminated the standalone prior approval requirement in the capitalBasel III Capital Rules for any repurchase of unconsolidated financial institutions that individually exceeds 25 percentcommon stock. In certain circumstances, the Corporation's repurchases of CET1 capital. The proposed rulemaking also includes revisionsits common stock may be subject to a prior approval or notice requirement under other regulations or policies of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the treatmentprior approval of certain acquisition, development, or construction exposures that are designed to address comments regarding the current definition of high volatility commercial real estate exposure under the capital rule’s standardized approach.Federal Reserve Board.
In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred to as "Basel IV." TheAmong other things, these standards revise the Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of risk-weighted assets, which will be accomplished by enhancing the robustness and risk sensitivity of theCommittee's standardized approachesapproach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card and home equity lines of credit) and provides a new standardized approach for operational risk whichcapital. Under the Basel framework, these standards will facilitategenerally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the comparability of banks’current U.S. capital ratios; constraining the use of internally-modeled approaches; and complementing the risk-weightedrules, operational risk capital ratio with a finalized leverage ratiorequirements and a revisedcapital floor apply only to advanced approaches institutions, and robustnot to the Corporation or Fulton Bank. The impact of Basel IV on the Corporation and Fulton Bank will depend on the manner in which it is implemented by the federal banking agencies.
As noted above, the federal banking agencies have implemented the provisions of the Economic Growth Act that provide certain capital floor. Leadershiprelief pursuant a new and narrower definition of HVCRE exposures that are subject to a heightened risk weight.
Stress Testing and Capital Planning - As a result of the Economic Growth Act and implementing regulations adopted by the Federal Reserve Board OCC, and FDIC, who are tasked with implementing Basel IV, supported the revisions. Although it is uncertain at this time, we anticipate some, if not all, of the Basel IV accord may be incorporated into the capital requirements framework applicable toOCC, the Corporation and Fulton Bank.
The Basel III liquidity framework also includes new liquidityBank are no longer subject to company-run stress testing requirements that require financial institutions to maintain increased levels of liquid assets or alter their strategies for liquidity management.under the Dodd-Frank Act. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific ratios. In September 2014, the Federal Reserve Board approved final rules (the "U.S. Liquidity Coverage Ratio Rule"continues to supervise the Corporation's capital planning and risk management practices through the regular supervisory process.
Current Expected Credit Losses Transitional Provisions - In June 2016, the Financial Accounting Standards Board ("FASB") implementing portionsissued an accounting standard update, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the Basel III liquidity frameworkexisting "incurred loss" model for large, internationally active banking organizations, generally those having $250 billion or more in total assets, and similar, but less stringent, rules, applicable to bank holding companiesrecognizing credit losses with consolidated assets of $50 billion or more. The U.S. Liquidity Coverage Ratio Rule requires banking organizations to maintain a Liquidity Coverage Ratio ("LCR") that is designed to ensure that sufficient
high quality liquid resources are available for a one month period in case of a stress scenario. Impacted financial institutions were required to be compliant with the U.S. Liquidity Coverage Ratio Rule by January 1, 2017. The Corporation’s total assets and the scope of its operations do not currently meet the thresholds set forth in the U.S. Liquidity Coverage Ratio Rule, and, as a result of which the Corporation is not currently required to maintain a minimum LCR.
The Basel III liquidity framework also introduced a second ratio,an "expected loss" model referred to as the Net Stable Funding RatioCurrent Expected Credit Loss ("NSFR"CECL"), which model. Under the CECL model, the Corporation is designedrequired to promote funding resiliency over longer-term time horizons by creating additional incentivespresent certain financial assets carried at amortized cost, such as loans held for banksinvestment and held-to-maturity debt securities, at the net amount expected to fund their activities with more stable sourcesbe collected. The measurement of fundingexpected credit losses is based on an ongoing structural basis. Theinformation about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In December 2018, the federal banking agencies publishedapproved a noticefinal rule modifying their regulatory capital rules and providing an option to phase in over a period of proposed rulemaking regardingthree years the NSFR in May 2016. In June 2017,day-one regulatory capital effects of the U.S. Treasury Department ("UST") recommended a delayCECL model. The final rule also revises the agencies' other rules to reflect the update to the accounting standards.The new CECL standard became effective for the Corporation on January 1, 2020. See "Note 1 - Summary of Significant Accounting Policies - Recently Issued Accounting Standards" in the implementation of the proposed NSFR out of concern that the rule could be duplicative of the liquidity requirements discussed aboveNotes to Consolidated Financial Statements in Item 8. "Financial Statements and could therefore impose unnecessary compliance costs upon banking organizations. Accordingly, the prospectsSupplementary Data" for final implementation of the federal banking agencies’ proposed NSFR are uncertain at this time. Because ofadditional information on CECL and its impact on the Corporation's size, neither the U.S. Liquidity Coverage Ratio Rule nor any additional proposed rules under the Basel III liquidity framework are applicable to it.allowance for credit losses and regulatory capital.
Prompt Corrective Regulatory Action - The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") established a system of prompt corrective action to attempt to resolve the problems of undercapitalized institutions. Under this system, the federal bank regulators are required to take certain, and authorized to takeThe FDICIA, among other supervisory actions against undercapitalized institutions, based uponthings, establishes five capital categories of capitalization which FDICIA created:for FDIC-insured banks: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized,"undercapitalized" and "critically undercapitalized,undercapitalized." the severity of which depends upon the institution’s degree of capitalization. Generally, a capital restoration plan must be filed with the institution’s primary federal regulator within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," and the plan must be guaranteed by any parent holding company. In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion. An insured depository institution is treated as well capitalized if its total risk-based capital ratio is 10.00% or greater, its Tier 1 risk-based capital ratio is 8.00% or greater, its CET1 risk-based capital ratio is 6.50% or greater and its Tier 1 leverage capital ratio is 5.00% or greater, and it is not subject to any order or directive to meet a specific capital level. As of December 31, 2017, each of the Corporation’s bank subsidiaries’2019, Fulton Bank's capital ratios waswere above the minimum levels required to be considered "well capitalized" by itsthe OCC.
Under this system, the federal banking agencies are required to take certain, and authorized to take other, prompt corrective actions against undercapitalized institutions, the severity of which increase as the capital category of an institution declines, including restrictions on growth of assets and other forms of expansion. Generally, a capital restoration plan must be filed with the institution's primary federal regulator.regulator within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Although prompt corrective action regulations apply only to depository institutions and not to bank holding companies, the holding company must guarantee any such capital restoration plan in certain circumstances. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank's assets at the time it became "undercapitalized" or the amount needed to comply. The parent holding company might also
be liable for civil money damages for failure to fulfill that guarantee. In the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors.
In addition, regulators consider both risk-based capital ratios and other factors that can affect a bank's financial condition, including (i) concentrations of credit risk, (ii) interest rate risk, and (iii) risks from non-traditional activities, along with an institution's ability to manage those risks, when determining capital adequacy. This evaluation is made during the institution's safety and soundness examination. An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
Brokered Deposits - The FDICIA and FDIC regulations limit the ability of an insured depository institution, such as Fulton Bank, to accept, renew or roll over brokered deposits unless the institution is well-capitalized under the prompt corrective action framework described above, or unless it is adequately capitalized and obtains a waiver from the FDIC. In addition, less than well-capitalized banks are subject to restrictions on the interest rates they may pay on deposits. In December 2019, the FDIC issued a proposed rule that seeks to bring brokered deposits regulations in line with modern deposit taking methods and that may reduce the amount of deposits that would be classified as brokered. The impact on the Corporation and Fulton Bank from any changes to the brokered deposit regulations will depend on the final form of the proposed rule and the development of market practices and structures.
Loans and Dividends from Bank Subsidiary Banks - There are various restrictions on the extent to which the Corporation's bank subsidiariesFulton Bank can make loans orand other extensions of credit (including credit exposure arising from repurchase and reverse repurchase agreements, securities borrowing and derivative transactions) to, or enter into certain transactions with, its affiliates, which would include the Corporation and its non-bankingnon-bank subsidiaries. In general, these restrictions require that such loans be secured by designated amounts of specified collateral,transactions: are limited, as to any one of the Corporation or its non-bank subsidiaries, to 10% of the lending bank’sFulton Bank's regulatory capital (20% in the aggregate to all such entities) and; satisfy certain qualitative limitations, including that any covered extension of credittransaction be made on an arm’sarm's length basis. The Dodd-Frank Act expanded these restrictions to cover securities lending, repurchase agreementbasis; and, derivatives activities thatin the Corporation’s bank subsidiaries may have with an affiliate.case of extensions of credit, be secured by designated amounts of specified collateral.
For safety and soundness reasons, banking regulations also limit the amount of cash that can be transferred from subsidiary banksFulton Bank to the parent companyParent Company in the form of dividends. Dividend limitations vary, depending onGenerally, dividends are limited to the subsidiary bank’s charter and whether or not it is a memberlesser of the Federal Reserve System. Generally, subsidiariesamounts calculated under an earnings retention test and an undivided profits test. Under the earnings retention test, without the prior approval of the OCC, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year's net income combined with the retained net income of the two preceding years. Under the undivided profits test, a dividend may not be paid in excess of a bank's undivided profits. In addition, banks are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits may exist on paying dividends in excess of net income for specified periods. See "Note 11 - Regulatory Matters," in the Notes to Consolidated Financial Statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding regulatory capital and dividend and loan limitations.
Federal Deposit Insurance - Substantially all of theThe deposits of the Corporation’s subsidiary banksFulton Bank are insured up to the applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC,DIF, generally up to $250,000 per insured depositor. The Corporation’s subsidiary banks payFulton Bank pays deposit insurance premiums based on assessment rates established by the FDIC. The FDIC has established a risk-based assessment system under which institutions are classified and pay premiums according to their perceived risk to the DIF. An institution’s base assessment rate is generally subject to following adjustments: (1) a decrease for the institution’s long-term unsecured debt, including most senior and subordinated debt, (2) an increase for brokered deposits above a threshold amount and (3) an increase for unsecured debt held that is issued by another insured depository institution. In addition, the FDIC possesses backup enforcement authority over a depository institution holding company, such as the Corporation, if the conduct or threatened conduct of such holding company poses a risk to the DIF, although such authority may not be used if the holding company is generally in sound condition and does not pose a foreseeable and material risk to the DIF.
On April 1, 2011, as required by the Dodd-Frank Act, the deposit insuranceFDIC assessment base changed from total domestic deposits to average total assets, minus average tangible equity. In addition, the FDIC also created a two scorecard system, onerates for large
depository institutions that have $10 billion or more in assets and another for highly complex institutions that have $50 billion or more in assets. As of July 1, 2017, the Corporation’s largest subsidiary bank, Fulton Bank, became subject to a modified methodology for calculating FDIC insurance assessments and potentially higher assessment rates as a result of institutions with $10 billion or more in assets being required to bear the cost of raising the FDIC reserve ratio to 1.35% as required by the Dodd-Frank Act.
The FDIC annually establishes for the DIF a designated reserve ratio, or DRR, of estimated insured deposits. The FDIC has announced that the DRR for 2018 will remain at 2.00%, which is the same ratio that has been in effect since January 1, 2011. The FDIC is authorized to change deposit insurance assessment rates as necessary to maintain the DRR, without further notice-and-comment rulemaking, provided that: (1) no such adjustment can be greater than three basis points from one quarter to the next, (2) adjustments cannot result in rates more than three basis points above or below the base rates and (3) rates cannot be negative.
The Dodd-Frank Act increased the minimum DIF reserve ratio to 1.35% of insured deposits, which must be reached by September 30, 2020, and provides that, in setting the assessment rates necessary to meet the new requirement, the FDIC shall offset the effect of this provision on insured depository institutions with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be borne by the institutions with more than $10 billion in assets. In October 2010,assets, such as Fulton Bank, are calculated based on a "scorecard" methodology that seeks to capture both the FDIC adopted a restoration plan to ensureprobability that an individual large institution will fail and the magnitude of the impact on the DIF reserve ratio reaches 1.35% by September 30, 2020.
On October 22, 2015,if such a failure occurs, based primarily on the difference between the institution's average of total assets and average tangible equity. The FDIC issued a proposalhas the ability to increase the reserve ratio for the DIFmake discretionary adjustments to the minimum level of 1.35% as required bytotal score, up or down, based upon significant risk factors that are not adequately captured in the Reform Act. The FDIC adoptedscorecard. For large institutions, including Fulton Bank, after accounting for potential base-rate adjustments, the final rule, which became effective on July 1, 2016, that imposes on insured depository institutions with $10 billion or more in total consolidated assets (such as Fulton Bank) a quarterly surcharge equalassessment rate could range from 1.5 to an annual rate of 4.540 basis points applied to the deposit insuranceon an annualized basis. An institution's assessment is determined by multiplying its assessment rate by its assessment base, after making certain adjustments. In addition, thewhich is asset based.
The Tax Cuts and Jobs Act of 2017 (the "Tax Act"), which was signed into law on December 22, 2017, disallows the deduction of FDIC deposit insurance premium payments for banking organizations with total consolidated assets of $50 billion or more. For banks with less than $50 billion in total consolidated assets, such as Fulton Bank, the premium deduction is phased out based on the proportion of the bank’sbank's assets exceeding $10 billion. See discussion under Item 1.A. "Risk Factors - The financial services industry, as well as the broader economy, may be subject to new legislation which could result in significant changes in banking and financial services regulation."
AMLAnti-Money Laundering Requirements and the USA Patriot Act - Anti-terrorism legislation enacted under theThe USA PatriotPATRIOT Act of 2001 ("Patriot Act"), which amended the BSABank Secrecy Act of 1970 ("BSA"), and expanded the scope of AMLother anti-money laundering ("AML") laws and regulations imposing significant new compliance obligations for financial institutions, including the Corporation’s subsidiary banks. The Patriot Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened AML requirements. By way of amendments to the BSA, Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, these regulations impose affirmative
obligations on a wide range of financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.
Among other requirements, the Patriot Act and the related regulations impose the following requirements with respect toon financial institutions:
Establishment of AML programs;
Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time;
Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering; and
Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks.
Failure to comply with the requirements of the Patriot Act and other AML laws and regulations could have serious legal, financial, regulatory and reputational consequences. In addition, bank regulators will consider a holding company’scompany's effectiveness in combating money laundering when ruling on BHCA and Bank Merger Act applications. In May 2016, the regulations implementing the BSA were amendedaddition, financial institutions are subject to explicitly include risk-based procedures for conducting ongoing customer due diligence to include understandingrequirements, issued by the nature and purpose of customer relationships for the purpose of developing a customer risk profile. In addition, banks mustFinancial Crimes Enforcement Network, to identify and verify the identity of thenatural persons, known as beneficial owners, of allwho own, control, and profit from legal entity customers (other thanwhen those that are excluded) at the time a new account is opened (other than accounts that are exempted). The Corporation and its banking subsidiaries must comply with these amendments and new requirements by May 11, 2018.customers open accounts. The Corporation has adopted policies, procedures and controls to address compliance with the Patriot Act and other AML laws and regulations, and will continue to revise and update its policies, procedures and controls to reflect required changes (including the May 2016 amendments).
The Corporation and three of its banking subsidiaries are currently subject to regulatory enforcement orders (the "Consent Orders") issued by bank regulatory agencies relating to identified deficiencies in a largely centralized compliance program (the "BSA/AML Compliance Program") designed to comply with the BSA, the Patriot Act and related anti-money laundering regulations (the "BSA/AML Requirements"). The Consent Orders require, among other things, that the Corporation and its banking subsidiaries review, assess and take actions to strengthen and enhance the BSA/AML Compliance Program, and, in some cases, conduct retrospective reviews of past account activity and transactions, as well as certain reports filed in accordance with the BSA/AML Requirements, to determine whether suspicious activity and certain transactions in currency were properly identified and reported in accordance with the BSA/AML Requirements.changes. See Item 1A. "Risk Factors - Legal, Compliance and Reputational Risks - "TheFailure to comply with the BSA, the Patriot Act and related AML requirements, or with sanctions laws, could subject the Corporation to enforcement actions, fines, penalties, sanctions and three of its bank subsidiaries are subject to regulatory enforcement orders requiring improvement in compliance functions andother remedial actions;" and Note-17 Commitments and Contingencies - Legal Proceedings," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data.actions."
Commercial Real Estate Guidance - In December 2015,Under guidance issued by the federal banking agencies, released a statement entitled "Statement on Prudent Risk Management for Commercial Real Estate Lending" (the "CRE Statement"). In the CRE Statement, the agencies expresshave expressed concerns with institutions whichthat ease commercial real estate underwriting standards, directand have directed financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicate that they will continue to pay special attention to commercial real estate lending activities and concentrations going forward.risks. The agencies previouslyhave also issued guidance in December 2006, entitled "Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices," which states that requires a financial institution to employ enhanced risk management practices if the institution is exposed to significant concentration risk. Under that guidance, an institution is potentially exposed to significant concentration risk if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development, and other land loans otherwise sensitive to the general commercial real estate concentration risk, and should employ enhanced risk management practices, where (1) totalmarket, including loans to commercial real estate loans representsrelated entities, represent 300% or more of its total capital, and (2) the outstanding balance of suchthe institution's commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.
Community Reinvestment - Under the Community Reinvestment Act of 1977 ("CRA"), each of the Corporation’s subsidiary banksFulton Bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to ascertain and meet the credit needs of its entire community, including lowlow- and moderate incomemoderate-income areas. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires an institution’sinstitution's primary federal regulator, in connection with its examination of the institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The assessment focuses on three tests: (1) a lending test, to evaluate the institution’sinstitution's record of making loans, including community development loans, in its designated assessment areas; (2) an investment test, to evaluate the institution’sinstitution's record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and areas and small businesses; and (3) a service test, to evaluate the institution’sinstitution's delivery of banking services throughout its CRA assessment area, including low- and moderate-income areas. The CRA also requires all institutions to make public disclosure of their CRA ratings. As of December 31, 2017, all of the Corporation’s subsidiary banks are2019, Fulton Bank was rated at least as "satisfactory." Regulations require that the Corporation’s subsidiary banksFulton Bank publicly disclose certain agreements that are in fulfillment of CRA. None of the Corporation’s subsidiary banks areFulton Bank is not a party to any such agreements at this time.
In December 2019, the OCC and the FDIC issued a notice of proposed rulemaking with the stated intention to (i) clarify which activities qualify for CRA credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. However, the Federal Reserve Board has not joined the proposed rulemaking. The impact on Fulton Bank from any changes to the CRA regulations will depend on the final form of the proposed rule and how it is implemented and applied.
Standards for Safety and Soundness - Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994 ("Riegle-Neal Act"), the federal bank regulatory agencies adopted guidelines establishing
general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. AnIn addition, the agencies have adopted regulations that authorize, but do not require, an agency to order an institution must submit a compliance plan to its regulator if it is notifiedthat has been given notice by an agency that it is not satisfying any of such safety and soundness standards.standards to submit a compliance plan. If the institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the regulator must issue an order directing corrective actions and may issue an order directing other actions of the types to which a significantly undercapitalized institution is subject under the "prompt corrective action" provisions of FDICIA. If the institution fails to comply with such an order, the regulator may seek to enforce such order in judicial proceedings and to impose civil money penalties.
The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In July 2010, theThe federal banking agencies have issued Guidance on Sound Incentive Compensation Policies ("Guidance")guidance that applies to all banking organizations supervised by the agencies (thereby including both the Corporation and its banking subsidiaries). Pursuant to the Guidance,provides that, to be consistent with safety and soundness principles, a banking organization’sorganization's incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance, including active and effective oversight by the banking organization’sorganization's board of directors. Monitoring methods and processes used by a
banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.
Section 956During the second quarter of 2016, as required by the Dodd-Frank Act, requires the federal bankingbank regulatory agencies and the SEC to establish joint regulations or guidelines prohibitingproposed revised rules on incentive-based paymentcompensation arrangements at specified regulated entities that encourage inappropriate risk-taking by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. The federal banking agencies issued such proposed rules in April 2011 and issued a revised proposed rule in June 2016, implementing the requirements and prohibitions set forth in Section 956. The revised proposed rule would apply to all banks, among other institutions, withhaving at least $1 billion in average total consolidated assets for which it would go beyond(including the existing Guidance to (i) prohibit certain typesCorporation and features of incentive-based compensation arrangements for senior executive officers, (ii) require incentive-based compensation arrangements to adhere to certain basic principles to avoid a presumption of encouraging inappropriate risk, (iii) require appropriate board or committee oversight, (iv) establish minimum record keeping and (v) mandate disclosures to the appropriate federal banking agency.Fulton Bank), but these proposed rules have not been finalized.
Privacy Protection and Cybersecurity - The Corporation’s bank subsidiaries areFulton Bank is subject to regulations implementing the privacy protection provisions of the GLB Act. These regulations require each of the Corporation’s bank subsidiariesFulton Bank to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require each bankFulton Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not covered by an exception, each bankFulton Bank is required to provide its customers with the ability to "opt-out" of having the bankFulton Bank share their nonpublic personal information with unaffiliated third parties.
The Corporation’s bank subsidiaries areFulton Bank is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the GLB Act. The guidelines describe the federal bank regulatory agencies’agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. In October 2016, the federal banking agencies issued an advance notice of proposed rulemaking on enhanced cybersecurity risk-management and resilience standards that would apply to large and interconnected banking organizations and to services provided by third parties to these firms. TheseAs proposed, these enhanced standards would apply only to depository institutions and depository institution holding companies with total consolidated assets of $50 billion or more.more; however, it is possible that if these enhanced standards are implemented, the Federal Reserve Board will consider them in connection with the examination and supervision of banking organizations below the $50 billion threshold. The federal banking agencies have not yet taken further action on these proposed standards.
In addition, certain states have enacted laws establishing consumer privacy protections and data security requirements in their respective states. For example, the California Consumer Privacy Act (“CCPA”) gives California residents new rights to receive certain disclosures regarding the collection, use, and sharing of “Personal Information,” as well as rights to access, delete, and restrict the sale of certain personal information collected about them. The CCPA went into effect on January 1, 2020, and Fulton Bank will need to comply with the CCPA in serving the small number of its customers that are residents of California. Privacy and data security legislation remained a priority issue in 2019. Attempts by state and local governments to regulate consumer privacy have the potential to create a patchwork of differing and/or conflicting state regulations.
Federal Reserve System - Federal Reserve Board regulations require depository institutions to maintain cash reserves against theirspecified deposit liabilities. The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to an institution's reservable liabilities (primarily net transaction
accounts (primarilysuch as NOW and demand deposit accounts). A reserve of 3% must be maintained against aggregate transaction account balances of between $16$16.9 million and $122.3$127.5 million (subject to adjustment by the Federal Reserve Board) plus a reserve of 10% (subject to adjustment by the Federal Reserve Board within a range of between 8% and 14%) against that portion of total transaction account balances in excess of $122.3$127.5 million. The first $16$16.9 million of otherwise reservable balances (subject to adjustment by the Federal Reserve Board) isare exempt from the reserve requirements. Each of the Corporation’s bank subsidiariesFulton Bank is in compliance with the foregoing requirements.
Required reserves must be maintained in the form of either vault cash, an account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board. Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal Reserve Banks pay interest on depository institutions’institutions' required and excess reserve balances. The interest rate paid on required reserve balances is currently the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest target federal funds rate in effect during the reserve maintenance period.
Activities and Acquisitions - The BHC ActBHCA requires a bank holding company to obtain the prior approval of the Federal Reserve Board before:
the company may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition the bank holding company will directly or indirectly own or control more than five percent of any class of voting securities of the institution;
any of the company’scompany's subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or savings and loan association; or
the company may merge or consolidate with any other bank or financial holding company.
The Riegle-Neal ActPrior regulatory approval is also generally permitsrequired for mergers, acquisitions and consolidations involving other insured depository institutions. In reviewing acquisition and merger applications, the bank holding companies to acquire banks in any state, and preempts all state laws restrictingregulatory authorities will consider, among other things, the ownership by a holding company of banks in more than one state. The Riegle-Neal Act also permits a bank to merge with an out-of-state bank and convert any offices into branchescompetitive effect of the resulting bank, acquire branches from an out-of-state bank,transaction, financial and establishmanagerial issues, including the capital position of the combined organization, convenience and operate de novo interstate branches wheneverneeds factors, including the host state permits de novo branchingapplicant's CRA record, the effectiveness of its own state-chartered banks.
Bankthe subject organizations in combating money laundering activities, and the transaction's effect on the stability of the U.S. banking or financial holding companies and banks seeking to engage in mergers authorized by the Reigle-Neal Act must be at least adequately capitalized as of the date that the application is filed, and the resulting institution must be well-capitalized and managed upon consummation of the transaction.system.
The Change in Bank Control Act prohibits a person, entity or group of persons or entities acting in concert, from acquiring "control" of a bank holding company or bank unless the Federal Reserve Board has been given prior notice and has not objected to the transaction. Under Federal Reserve Board regulations, the acquisition of 10% or more (but less than 25%) of the voting stock of a corporation would, under the circumstances set forth in the regulations, create a rebuttable presumption of acquisition of control of the corporation.
Permissible Activities - As a bank holding company, the Corporation may engage in the business of banking, managing or controlling banks, performing servicing activities for subsidiaries, and engaging in activities that the Federal Reserve Board has determined, by order or regulation, are so closely related to banking as to be a proper incident thereto. As a financial holding company, the Corporation may also may engage in or acquire and retain the shares of a company engaged in activities that are financial in nature or incidental or complementary to activities that are financial in nature as long as the Corporation continues to meet the eligibility requirements for financial holding companies, including that the Corporation and each of its U.S. depository institution subsidiaries remain "well-capitalized" and "well-managed."
A depository institution is considered "well-capitalized" if it satisfies the requirements of the Prompt Corrective Action framework described above. A depository institution is considered "well-managed" if it received a composite rating and management rating of at least "satisfactory" in its most recent examination. If a financial holding company ceases to be well-capitalized and well-managed, the financial holding company must enter into a non-public confidential agreement with the Federal Reserve Board to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the Federal Reserve Board may impose limitations or conditions on the conduct of its activities, and the company may not commence any new non-banking financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve Board. If the company does not timely return to compliance, the Federal Reserve Board may require divestiture of the financial holding company's banking subsidiaries. Bank holding companies and banks must also be well-capitalized and well-managed in order to acquire banks located outside their home state. A financial holding company will also be limited in its ability to commence non-banking financial activities or acquire a company engaged in such financial activities if any of its insured depository institution subsidiaries fails to maintain a "satisfactory" rating under the CRA.
Activities that are "financial in nature" include securities underwriting, dealing and market making, advising mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature or incidental to such financial activity.
"Complementary activities" are activities that the Federal Reserve Board determines upon application to be complementary to a financial activity and that do not pose a safety and soundness issue.
Enforcement Powers of Federal Banking Regulators - The Federal Reserve Board and other U.S. banking agencies have broad enforcement powers with respect to an insured depository institution and its holding company, including the power to (i) impose cease and desist orders, substantial fines and other civil penalties, (ii) terminate deposit insurance, and (iii) appoint a conservator or receiver. Failure to comply with applicable laws or regulations could subject the Corporation or Fulton Bank, as well as their officers and directors, to administrative sanctions and potentially substantial civil and criminal penalties.
In addition, under the BHCA, the Federal Reserve Board has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company.
Federal Securities Laws - The Corporation is subject to the periodic reporting, proxy solicitation, tender offer, insider trading, corporate governance and other requirements under the Securities Exchange Act of 1934. Among other things, the federal securities laws require management to issue a report on the effectiveness of its internal controls over financial reporting. In addition, the Corporation’sCorporation's independent registered public accountants are required to issue an opinion on the effectiveness of the Corporation’sCorporation's internal control over financial reporting. These reports can be found in Part II, Item 8, "Financial Statements and Supplementary Data." Certifications of the Chief Executive Officer and the Chief Financial Officer as required by the Sarbanes-Oxley Act of 2002 and the resulting SEC rules can be found in the "Signatures" and "Exhibits" sections.
Executive Officers
The executive officers of the Corporation are as follows:
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E. Philip Wenger | | 6062 | | Director of the Corporation since 2009.2009 and Director of Fulton Bank, N.A since 2019. Chairman of the Board and Chief Executive Officer of the Corporation since January 2013. Mr. Wenger previously served as President of the Corporation from 2008 to 2017, Chief Operating Officer of the Corporation from 2008 to 2012, a Director of Fulton Bank, N.A. from 2003 to 2009, Chairman of Fulton Bank, N.A. from 2006 to 2009 and has been employed by the Corporation in a number of positions since 1979. |
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Philmer H. RohrbaughMark R. McCollom | | 6555 | | Senior Executive Vice President and interim Chief Financial Officer of the Corporation effective December 6, 2016. Hesince March of 2018. Mr. McCollom joined the Corporation in November 20122017 as Senior Executive Vice President and Chief Risk Officer and became Senior Executive Vice President and Chief Operating Officer effective June 1, 2016. Mr. Rohrbaugh was a managing partner of KPMG, LLP's Chicago office from 2009 to 2012; Vice Chairman Industries and part of the U.S. Management Committee of KPMG from 2006 to 2009; he joined KPMG in 2002. He has more than 35 years of experience in public accounting with substantial audit experience serving public and private companies, including financial institutions, and advising companies on accounting, financial reporting matters, equity and debt offerings, and merger and acquisition transactions. Mr. Rohrbaugh currently serves as a director of a public manufacturing company and a national department store chain.
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Mark R. McCollom | | 53 | | Senior Executive Vice President of the Corporation, and Chief Financial Officer Designee since November 2017. Mr. McCollomDesignee. Before joining the corporation he was a Senior Managing Director, Chief Administrative Officer and CEOCOO of Griffin Financial Group, LLC prior to joining the Corporation.LLC. Prior to his role at Griffin Financial Group, Mr. McCollom was the Chief Financial Officer of Sovereign Bancorp, Inc. He has over 30 years of experience in the financial services industry.
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Curtis J. Myers | | 4951 | | Director of the Corporation since 2019 and Director of Fulton Bank, N.A. since 2009. President and Chief Operating Officer of the Corporation since January 1, 2018. Chairman and Chief Executive Officer of Fulton Bank, N.A. since May 2018. Mr. Myers served as Senior Executive Vice President of the Corporation from July 2013 to December 2017. President and Chief Operating Officer of Fulton Bank, N.A. since February 2009. He served as Executive Vice President of the Corporation since August 2011. Mr. Myers has been employed by Fulton Bank, N.A. in a number of positions since 1990. |
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David M. Campbell | | 5658 | | Senior Executive Vice President, and Director of Strategic Initiatives and Operations since December 2014. Mr. Campbell joined the Corporation as Chief Administrative Officer of Fulton Financial Advisors, a division of Fulton Bank, N.A. in 2009, and was promoted to President of Fulton Financial Advisors in 2010. He has more than 30 years of experience in financial services.
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Beth Ann L. Chivinski | | 5759 | | Senior Executive Vice President and Chief Risk Officer of the Corporation effective June 1, 2016. ShePreviously, she served as the Corporation’s Chief Audit Executive April 2013 -to June 2016 and was promoted to Senior Executive Vice President of the Corporation in 2014. Prior to that, she served as the Corporation’s Executive Vice President, Controller and Chief Accounting Officer from June 2004 to March 31, 2013. Ms. Chivinski has worked in various positions with the Corporation since June of 1994. She is a Certified Public Accountant.
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Meg R. Mueller | | 5355 | | Senior Executive Vice President and Head of Commercial Business since January 1, 2018. Ms. Mueller served as Chief Credit Officer of the Corporation from 2010 - 2017 and was promoted to Senior Executive Vice President of the Corporation in 2013. Ms. Mueller has been employed by the Corporation in a number of positions since 1996.
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Craig A. Roda | | 61 | | Senior Executive Vice President of Community Banking of the Corporation since July 2011; and Chairman and Chief Executive Officer of Fulton Bank, N.A., since February 2009. Chief Executive Officer and President of Fulton Bank, N.A. from 2006 to 2009. Mr. Roda has been employed by the Corporation in a number of positions since 1979.
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Angela M. Sargent | | 5052 | | Senior Executive Vice President and Chief Information Officer of the Corporation since July 2013. Ms. Sargent served as Executive Vice President and Chief Information Officer from 2002 -to 2013 and has been employed by the Corporation in a number of positions since 1992.
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Name | | Age (1)
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Angela M. Snyder | | 5355 | | Senior Executive Vice President and Head of Consumer Banking since January 1, 2018. She heads the Corporation's Consumer Banking line of business. Ms. Snyder also serves as Chairwoman, CEO and President of Fulton Bank of New Jersey. In 2002, Angela Snyder began her career withjoined the Corporation in 2002 as President of Woodstown National Bank nowshe then served as Chairwoman, President and CEO of Fulton Bank of New Jersey. Ms.Jersey until 2019, when the Corporation consolidated that bank into Fulton Bank, N.A. Ms Snyder served as the Chairwoman of the New Jersey Bankers Association in 2017. She has more than 30 years of experience in the financial services industry.
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Daniel R. Stolzer | | 6163 | | Senior Executive Vice President, Chief Legal Officer and Corporate Secretary since January 1, 2018. Mr. Stolzer joined the Corporation in 2013 as Executive Vice President, General Counsel and Corporate Secretary. Prior to joining the Corporation, Mr. Stolzer began his career with a large New York law firm and then served as chief counsel special projects at PNC Financial Services Group in Pittsburgh, PA and deputy general counsel and chief counsel at several large regional bank holding companies.KeyCorp in Cleveland, OH. He has more than 30 years of experience working in financial services law.law beginning with work at several law firms, including Cadwalader, Wickersham & Taft in New York City where he was a member of the Corporate Securities and Capital Markets practice groups.
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Bernadette M. Taylor | | 5658 | | Senior Executive Vice President, and Chief Human Resource Officer since May 2015. In 2001, she was promoted to Senior Vice President of employee services. She served as Executive Vice President of employee services, employment, and director of human resources before her promotion in 2015 to Chief Human Resources Officer. Ms.Dr. Taylor joined the Corporation in 1994 as Corporate Training Director at Fulton Financial Corporation. |
(1) As of December 31, 20172019
Item 1A. Risk Factors
An investment in the Corporation's securities involves certain risks, including, among others, the risks described below. In addition to the other information contained in this report, you should carefully consider the following risk factors.
ECONOMIC AND CREDIT RISKS.
Difficult conditions in the economy and the capitalfinancial markets may materially adversely affect the Corporation's business and results of operations.
The Corporation's results of operations and financial condition are affected by conditions in the economy and the capitalfinancial markets generally. The Corporation's financial performance is highly dependent upon the business environment in the markets where the Corporation operates and in the U.S.United States as a whole. Unfavorable or uncertain economic and market conditions can be caused byby: declines in economic growth, business activity or investor or business confidence,confidence; limitations on the availability, or increases in the cost, of credit and capital,capital; changes in the rate of inflation or in interest rates; high unemployment; governmental fiscal and monetary policies; the level of, or changes in, interest rates, high unemployment,prices of raw materials, goods or commodities; global economic conditions; trade policies and tariffs affecting other countries as well as retaliatory policies and tariffs by such countries; geopolitical events; natural disasters,disasters; public health crises, such as epidemics and pandemics; acts of war or terrorism, global economic conditions and geopolitical factors,terrorism; or a combination of these or other factors.
Specifically, the business environment impacts the ability of borrowers to pay interest on, and repay principal of, outstanding loans and leases and the value of collateral, if any, securing those loans and leases, as well as demand for loans, leases and other products and services the Corporation offers. If the quality of the Corporation’sCorporation's loan and lease portfolio declines, the Corporation may have to increase its provision for credit losses, which would negatively impact its results of operations, and could result in charge-offs of a higher percentage of its loans. Unlike large, national institutions, the Corporation is not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies and geographic locations. If the communities in which the Corporation operates do not grow, or if prevailing economic conditions locally or nationally are unfavorable, its business could be adversely affected. In addition, increased market competition in a lower demand environment could adversely affect the profit potential of the Corporation.
The Corporation is subject to certain risks in connection with the establishment and level of its allowance for credit losses.
The allowance for credit losses consists of the allowance for loan and lease losses, which is recorded as a reduction to loans and leases on the consolidated balance sheet, and the reserve for unfunded lending commitments.commitments, which is included in other liabilities on the consolidated balance sheet. While the Corporation believes that its allowance for credit losses as of December 31, 2017 is2019 was sufficient to cover incurred losses in the loan and lease portfolio on that date, the Corporation may need to increase its provision for credit losses in future periods due to changes in the risk characteristics of the loan and lease portfolio, thereby negatively impacting its results of operations.
The allowance for loancredit losses represents management’smanagement's estimate of losses inherent in the loan and lease portfolio as of the balance sheet date and is recorded as a reduction to loans. Management’sdate. Management's estimate of losses inherent in the loan and lease portfolio is dependent on the proper application of its methodology for determining its allowance needs. The most critical judgments underpinning that methodology include: the ability to identify potential problem loans and leases in a timely manner; proper collateral valuation of loans and leases evaluated for impairment; proper measurement of allowance needs for pools of loans and leases evaluated for impairment; and an overall assessment of the risk profile of the loan and lease portfolio.
The Corporation determines the appropriate level of the allowance for credit losses based on many quantitative and qualitative factors, including, but not limited to: the size and composition of the loan and lease portfolio; changes in risk ratings; changes in collateral values; delinquency levels; historical losses; and economic conditions. In addition, as the Corporation’sCorporation's loan and lease portfolio grows, it will generally be necessary to increase the allowance for credit losses through additional provisions for credit losses, which will impact the Corporation’sCorporation's operating results.
If the Corporation’sCorporation's assumptions and judgments regarding such matters prove to be inaccurate, its allowance for credit losses might not be sufficient, and additional provisions for credit losses may be necessary. Depending on the amount of such provisions for credit losses, the adverse impact on the Corporation's earnings could be material.
Furthermore, banking regulators may require the Corporation to make additional provisions for credit losses or otherwise recognize further loan and lease charge-offs or impairments following their periodic reviews of the Corporation's loan and lease portfolio, underwriting procedures and allowance for credit losses. Any increase in the Corporation's allowance for credit losses or loan and lease charge-offs as required by such regulatory agencies could have a material adverse effect on the Corporation's financial
condition and results of operations. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-Provision and Allowance for Credit Losses."
The FASB's Accounting Standards Update 2016-13, effective for the Corporation as of January 1, 2020, substantially changes the accounting for credit losses on loans, leases and other financial assets held by banks, financial institutions and other organizations. The new standard requires the recognition of credit losses on loans, leases and other financial assets based on an entity's current estimate of expected losses over the lifetime of each loan, lease or other financial asset, referred to as the Current Expected Credit Loss ("CECL") model, as opposed to the existing "incurred loss" model, which required recognition of losses on loans, leases and other financial assets only when those losses were "probable." In December 2018, the bank regulatory agencies approved a final rule modifying the agencies' regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of adoption of the CECL model. The Corporation expects to recognize a one-time cumulative-effect adjustment to the allowance for credit losses as of the date of adoption of the CECL model. The determination of the one-time cumulative-effect adjustment, and the determination of the allowance for credit losses in future periods, under the CECL model depend significantly upon the Corporation's assumptions and judgments with respect to a variety of factors, including the performance of the loan and lease portfolio, the weighted-average remaining lives of different classifications of loans and leases within the loan and lease portfolio and current and forecasted economic conditions, as well as changes in the rate of growth in the loan and lease portfolio and changes in the composition of the loan and lease portfolio, among other factors. As under the existing incurred loss model, if the Corporation's assumptions and judgments regarding such matters prove to be inaccurate, its allowance for credit losses might not be sufficient, and additional provisions for credit losses might need to be made. Depending on the amount of such provisions for credit losses, the adverse impact on the Corporation’sCorporation's earnings could be material.
Furthermore, banking regulators may require the Corporation to make additional provisions for credit losses or otherwise recognize further loan charge-offs or impairments following their periodic reviews See "Note 1 - Summary of the Corporation’s loan portfolio, underwriting procedures and allowance for credit losses. Any increaseSignificant Accounting Policies - Recently Issued Accounting Standards" in the Corporation’s allowance for credit losses or loan charge-offs as required by such regulatory agencies could have a material adverse effect on the Corporation’s financial conditionNotes to Consolidated Financial Statements in Item 8. "Financial Statements and results of operations. See Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-Provision and Allowance for Credit Losses.Supplementary Data."
The composition of the Corporation’sCorporation's loan and lease portfolio and competition for loans and leases subject the Corporation to credit risk.
Approximately 74.0%72% of the Corporation’sCorporation's loan and lease portfolio was in commercial loans, commercial mortgage loans, and construction loans at December 31, 2017.2019. Commercial loans, commercial mortgage loans and construction loans generally involve a greater degree of credit risk than residential mortgage loans and consumer loans because they typically have larger balances and are likely to be more sensitive to broader economic factors and conditions. Because payments on these loans often depend on the successful operation and management of businesses and properties, repayment of such loans may be affected by factors outside the borrower’sborrower's control, such as adverse conditions in the real estate markets, adverse economic conditions or changes in governmentgovernmental regulation. In recent years, commercial real estate markets have been experiencing substantial growth, and increased competitive pressures have contributed significantly to historically low capitalization rates and rising property values. Commercial real estate prices, according to many U.S. commercial real estate indices, are currently above the 2007 peak levels that contributed to the financial crisis. Accordingly, the federal bank regulatory agencies have expressed concerns about weaknesses in the current commercial real estate market and the extent to which prevailing underwriting standards have been eased by lenders. The Corporation’s failure to adequately implement enhanced risk management policies, procedures and controls could adversely affect its ability to increase this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio.
Furthermore, intense competition among both bank and non-bank lenders, coupled with moderate levels of recent economic growth, cancould increase pressure on the Corporation to relax its credit standards and/or underwriting criteria in order to achieve the Corporation’sCorporation's loan growth targets. A relaxation of credit standards or underwriting criteria could result in greater challenges in the repayment or collection of loans should economic conditions, or individual borrower performance, deteriorate to a degree that could impact loan performance. Additionally, competitive pressures could drive the Corporation to consider loans and customer relationships that are outside of the Corporation’sCorporation's established risk appetite or target customer base. See Item 7. "Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-Loans.Condition-Loans and Leases."
MARKET RISKS.
The Corporation is subject to interest rate risk.
The Corporation cannot predict or control changes in interest rates. The Corporation is affected by fiscal and monetary policies of the federal government, including those of the Federal Reserve Board, which regulates the national money supply and engages in other lending and investment activities in order to manage recessionary and inflationary pressures, many of which affect interest rates charged on loans and leases and paid on deposits.
Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is the most significant component of the Corporation's net income, accounting for approximately 74%75% of total revenues in 2017. In recent years,2019. Changes in market interest rates, in the narrowingshape of the yield curve or in spreads between different market interest rate spreads,rates can have a material effect on the Corporation's net interest margin, or the difference between interest rates earned on loans, leases and investments and interest rates paid on deposits and borrowings, has adversely affected the Corporation's net interest income.
Comparatively low market interestborrowings. The rates have pressured the net interest margin in recent years. Interest-earningon some interest-earning assets, such as loans, leases and investments, have been originated, acquired or repriced at lower rates, reducing the average rate earned on those assets. While the average rate paid onand interest-bearing liabilities, such as deposits and borrowings, has also declined, the decline hasadjust concurrently with, or within a brief period after, changes in market interest rates, while others adjust only periodically or not always occurred at the same pace as the declineall during their terms. Thus, changes in market interest rates might, for example, result in a decrease in the average rateinterest earned on interest-earning assets resultingthat is not
accompanied by a corresponding decrease in the interest paid on interest-bearing liabilities, or the decrease in interest paid might be at a slower pace, or in a narrowing ofsmaller amount, than the decrease in interest earned, reducing the Corporation's net interest income and/or net interest margin. See Item 7. "Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations-Net Interest Income."
Changes in interest rates may also affect the average life of loans and certain investment securities, most notably mortgage-backed securities. Decreases in interest rates can result in increased prepayments of loans and certain investment securities, as borrowers or issuers refinance to reduce their borrowing costs. Under those circumstances, the Corporation would be subject to reinvestment risk to the extent that it is not able to reinvest the cash received from such prepayments at rates that are comparable to the rates on the loans and investment securities which are prepaid. Conversely, increases in interest rates may extend the average life of fixed rate assets, which could restrict the Corporation’sCorporation's ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates. The Federal Open Market Committee ("FOMC") of the Federal Reserve Board increased the federal funds rate three times during 2017, and recent statements from the FOMC have caused research analysts and economists to expect additional increases in 2018. In addition, the bond markets have experienced rate increases for medium- and longer-term instruments.
Changes in interest rates also affect the fair value of interest-earning investment securities. Generally, the value of interest-earning investment securities moves inversely with changes in interest rates. In the event that the fair value of an investment security declines below its amortized cost, the Corporation is required to determine whether the decline constitutes an other-than-temporary impairment. The determination of whether a decline in fair value is other-than-temporary depends on a number of factors, including whether the Corporation has the intent and ability to retain the investment security for a period of time sufficient to allow for any anticipated recovery in fair value. If a determination is made that a decline is other-than-temporary, an other-than-temporary impairment charge is recorded.
The planned phasing out of LIBOR as a financial benchmark presents risks to the financial instruments originated or held by the Corporation.
The London Interbank Offered Rate ("LIBOR") is the reference rate used for many of the Corporation's transactions, including variable and adjustable rate loans, derivative contracts, borrowings and other financial instruments. However, a reduced volume of interbank unsecured term borrowing, coupled with legal and regulatory proceedings related to rate manipulation by certain financial institutions, has led to international reconsideration of LIBOR as a financial benchmark. The United Kingdom Financial Conduct Authority ("FCA"), which regulates the process for establishing LIBOR, announced in July 2017 that the FCA intends to stop persuading, or compelling, banks to submit rates for the calculation of LIBOR after 2021.
Regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments. The uncertainty surrounding potential reforms, including the use of alternative reference rates and changes to the methods and processes used to calculate rates, may have an adverse effect on the trading market for LIBOR-based securities, loan yields, and the amounts received and paid on derivative contracts and other financial instruments. In addition, the implementation of LIBOR reform proposals may result in increased compliance and operational costs.
Changes in interest rates can affect demand for the Corporation’sCorporation's products and services.
Movements in interest rates can cause demand for some of the Corporation’sCorporation's products and services to be cyclical. For example, demand for residential mortgage loans has historically tended to increase during periods when interest rates were declining and to decrease during periods when interest rates were rising. As a result, the Corporation may need to periodically increase or decrease the size of certain of its businesses, including its personnel, to more appropriately match increases and decreases in demand and volume. The need to change the scale of these businesses is challenging, and there is often a lag between changes in the businesses and the Corporation’sCorporation's reaction to these changes. For example, demand for residential mortgage loans has historically tended to increase during periods when interest rates were declining and to decrease during periods when interest rates were rising.
Price fluctuations in securities markets, as well as other market events, such as a disruption in credit and other markets and the abnormal functioning of markets for securities, could have an impact on the Corporation's results of operations.
The market value of the Corporation's securities investments, which include mortgage-backed securities, state and municipal securities, auction rate securities, and corporate debt securities, as well as the revenues the Corporation earns from its trust and investment management services business, are particularly sensitive to price fluctuations and market events. Declines in the values
of the Corporation’sCorporation's securities holdings, combined with adverse changes in the expected cash flows from these investments, could result in other-than-temporary impairment charges.
The Corporation's investment management and trust services revenue, which is partially based on the value of the underlying investment portfolios, can also be impacted by fluctuations in the securities markets. If the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation's revenue could be negatively impacted. In addition, the Corporation's ability to sell its brokerage services is dependent, in part, upon consumers' level of confidence in securities markets. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk."
LIQUIDITY RISK.
Changes in interest rates or disruption in liquidity markets may adversely affect the Corporation’sCorporation's sources of funding.
The Corporation must maintain sufficient sources of liquidity to meet the demands of its depositors and borrowers, support its operations and meet regulatory expectations. The Corporation’sCorporation's liquidity management policies and practices emphasize core deposits and repayments and maturities of loans, leases and investments as its primary sources of liquidity. These primary sources of liquidity can be supplemented by Federal Home Loan Bank ("FHLB") advances, borrowings from the Federal Reserve Bank, proceeds from the sales of loans and use of liquidity resources of the holding company,Corporation, including capital markets funding. Lower-cost, core deposits may be adversely affected by changes in interest rates, and secondary sources of liquidity can be more costly to the Corporation than funding provided by deposit account balances having similar maturities. In addition, adverse changes in the Corporation’sCorporation's results of operations or financial condition, downgrades in the Corporation’sCorporation's credit ratings, regulatory actions involving the Corporation, or changes in regulatory, industry or market conditions could lead to increases in the cost of these secondary sources of liquidity, the inability to refinance or replace these secondary funding sources as they mature, or the withdrawal of unused borrowing capacity under these secondary funding sources.
WhileThe Corporation relies on customer deposits as its primary source of funding. A substantial majority of the Corporation attempts to manage its liquidity through various techniques,Corporation's deposits are in non-maturing accounts, which deposit customers can withdraw on demand or upon several days' notice. Factors, many of which are outside the assumptionsCorporation's control, can cause fluctuations in both the level and estimates used do not always accurately forecastcost of customer deposits. These factors include competition for customer deposits from other financial institutions and non-bank competitors, changes in interest rates, the impactrates of return available from alternative investments or asset classes, changes in customer behavior. For example,confidence in the Corporation may face limitations on its ability to fund loan growth if customers move funds outor in financial institutions generally, and the liquidity needs of the Corporation’s bank subsidiaries’Corporation's deposit accounts in response to increases in interest rates. In the years following the 2008 financial crisis, even as the general level of market interest rates remained low by historical standards, depositors frequently avoided higher-yielding and higher-risk alternative investments, in favor of the safety and liquidity of non-maturing deposit accounts. These circumstances contributed to significant growth in non-maturing deposit account balances at the Corporation, and at depository financial institutions generally.customers. Further, deposits from state and municipal entities, primarily in non-maturing, interest-bearing accounts, are a significant source of deposit funding for the Corporation, representing approximately 13%12% of total deposits at December 31, 2017.2019. State and municipal customers frequently maintain large deposit account balances substantially in excess of the per depositorper-depositor limit of FDIC insurance. Shouldinsurance, and may be more sensitive than other depositors to changes in interest rates continueand the other factors discussed above. Advances in technology, such as online banking, mobile banking, digital payment platforms and the acceleration of financial technology innovation, have also made it easier to rise, customers, including state and municipal entities, may become more sensitive to interest rates when making
deposit decisions and considering alternative opportunities. This increased sensitivity to interest rates could causemove money, potentially causing customers to move funds into higher-yielding deposit accountsswitch financial institutions or into alternative investments.switch to non-bank competitors. Movement of customer deposits into higher-yielding deposit accounts offered by the Corporation’s bank subsidiaries,Corporation, the need to offer higher interest rates on deposit accounts to retain customer deposits, or the movement of customer deposits into alternative investments or deposits of other banks or non-bank providers could increase the Corporation’sCorporation's funding costs, reduce its net interest margin and/or create liquidity challenges.
Market conditions have been negatively impacted by disruptions in the liquidity markets in the past, and such disruptions or an adverse change in the Corporation's results of operations or financial condition could, in the future, have a negative impact on secondary sources of liquidity. If the Corporation is not able to continue to rely primarily on customer deposits to meet its liquidity and funding needs, continue to access secondary, non-deposit funding sources on favorable terms or otherwise fails to manage its liquidity effectively, the Corporation’sCorporation's ability to continue to grow may be constrained, and the Corporation’sCorporation's liquidity, operating margins, results of operations and financial condition may be materially adversely affected. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk, Asset/Liability Management and Liquidity."
LEGAL, COMPLIANCE AND REPUTATIONAL RISKS.
The Corporation and its bank subsidiariesFulton Bank are subject to extensive regulation and supervision and may be adversely affected by changes in laws and regulations or any failure to comply with laws and regulations.
Virtually every aspect of the Corporation's and its bank subsidiaries’Fulton Bank's operations is subject to extensive regulation and supervision by federal and state regulatory agencies, including the Federal Reserve Board, OCC, FDIC, CFPB, DOJ, UST, SEC, HUD, state attorneys general and state banking, financial services, securities and insurance regulators. Under this regulatory framework,
regulatory agencies have broad authority in carrying out their supervisory, examination and enforcement responsibilities to address compliance with applicable laws and regulations, including laws and regulations relating to capital adequacy, asset quality, liquidity, risk management and financial accounting and reporting, as well as laws and regulations governing consumer protection, fair lending, privacy, information security and cybersecurity risk management, third-party vendor risk management, and AML and anti-terrorism laws, among other aspects of the Corporation’sCorporation's business. Failure to comply with these regulatory requirements, including inadvertent or unintentional violations, may result in the assessment of fines and penalties, or the commencement of further informal or formal regulatory enforcement actions against the Corporation or its bank subsidiaries.Fulton Bank. Other negative consequences can also result from such failures, including regulatory restrictions on the Corporation's activities, including restrictions on the Corporation’sCorporation's ability to grow through acquisition, reputational damage, restrictions on the ability of institutional investment managers to invest in the Corporation's securities and increases in the Corporation's costs of doing business.
The occurrenceU.S. Congress and state legislatures and federal and state regulatory agencies continually review banking and other laws, regulations and policies for possible changes. Changes in applicable federal or state laws, regulations or governmental policies may affect the Corporation and its business. The effects of onesuch changes are difficult to predict and may produce unintended consequences. New laws, regulations or morechanges in the regulatory environment could limit the types of these eventsfinancial services and products the Corporation may have a material adverse effect onoffer, alter demand for existing products and services, increase the ability of non-banks to offer competing financial services and products, increase compliance burdens, or otherwise adversely affect the Corporation's business, financial condition and/or results of operations.operations or financial condition.
Compliance with banking and financial services statutes and regulations is also important to the Corporation’sCorporation's ability to engage in new activities or to expand upon existing activities. Regulators continue to scrutinize banks through longer and more intensive examinations. Federal and state banking agencies possess broad powers to take supervisory actions, as they deem appropriate. These supervisory actions may result in higher capital requirements, higher deposit insurance premiums and limitations on the Corporation’sCorporation's operations and expansion activities that could have a material adverse effect on its business and profitability. As noted below and as examples of such limitations, the regulatory enforcement orders to which the Corporation and three of its bank subsidiaries are subject impose certain restrictions on the expansion activities of the Corporation and those bank subsidiaries.
The Corporation intends to seek regulatory approval of the consolidation of our bank subsidiaries, which could result in significant implementation costs and impact our long-term compliance obligations.
The Corporation has six bank subsidiaries,dedicated significant time, effort, and expense over time to comply with regulatory and supervisory standards and requirements imposed by the Corporation's regulators, and the Corporation and its subsidiaries are subject to regulation by a relatively large number of federal and state regulatory agencies. This corporate structure presents challenges, specifically, the need for compliance with different, and potentially inconsistent, regulatory requirements and expectations. The time, expense and internal and external resources associated with regulatory complianceexpects that it will continue to increase, and balancing the need to address regulatory changes and effectively manage overall non-interest expenses has become more challenging than it has been in the past. As a result, the Corporation’scompliance obligations increase the Corporation's expense, require increasing amounts of management's attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors and larger bank competitors with more extensive resources.
The Corporation has announced that it is developing plans to seek regulatory approval to begin the process of consolidating its six bank subsidiaries. This multi-year consolidation process is expected to eventually result indo so. If the Corporation conducting its core banking business throughfails to develop at a single bank subsidiary, which would reducereasonable cost the number of government agencies that regulate the Corporation’s banking operations. The timing of the commencement of this consolidation process will depend significantly on
the Corporationsystems and its bank subsidiaries makingprocesses necessary progress in enhancing a largely centralized compliance program designed to comply with the standards and requirements imposed by these rules, it could have a material adverse effect on the Corporation's business, financial condition, or results of operations.
Failure to comply with the BSA, the Patriot Act and related anti-money laundering regulations (collectively,AML requirements, or with sanctions laws, could subject the "BSA/AML Requirements")Corporation to enforcement actions, fines, penalties, sanctions and the corresponding requirements of the regulatory enforcement orders described below. There is no assurance that the regulatory approvals required for such consolidation can be obtained or that such consolidation would significantly reduce the time, expense and internal and external resources associated with regulatory compliance.
The Corporation and three of its bank subsidiaries are subject to regulatory enforcement orders requiring improvement in compliance functions andother remedial actions.
In recent years, a combination of financial reform legislationRegulators have broad authority to enforce AML and heightened scrutiny by banking regulators have significantly increased expectations regarding what constitutes an effective risk and compliance management infrastructure. To keep pace with these expectations, the Corporation has invested considerable resources in initiatives designed to strengthen its risk management framework and regulatory compliance programs, including those designedsanctions laws. Failure to comply with AML and sanctions laws or to maintain an adequate compliance program can lead to significant monetary penalties and reputational damage, and federal regulators evaluate the BSA/effectiveness of an applicant in combating money laundering when considering approval of applications to acquire, merge, or consolidate with another banking institution, or to engage in other expansionary activities. There have been a number of significant enforcement actions by regulators, as well as state attorneys general and the DOJ, against banks, broker-dealers and non-bank financial institutions with respect to AML Requirements.
Nonetheless, as mentioned above,and sanctions laws and some have resulted in substantial penalties, including criminal pleas. Enforcement actions have included the Federal Reserve Board's Consent Order against the Corporation and three of its bank subsidiaries are subject to regulatory enforcement orders issued duringin 2014 and 2015 by their respective Federal and state bank regulatory agencies relating to identified(the "Consent Order"), which was terminated in May 2019, in connection with alleged deficiencies in the Corporation’s centralized BSA and anti-money launderingCorporation's BSA/AML compliance program (the "BSA/AML Compliance Program"), which was designed to comply with the BSA/AML Requirements.
The regulatory enforcement orders, which are in the formprogram. Any violation of consent orderslaw or orders to cease and desist issued upon consent (the "Consent Orders"), generally require, among other things, that the Corporation and the affected bank subsidiaries undertake a number of required actions to strengthen and enhance the BSA/AML Compliance Program, and, in some cases, conduct retrospective reviews of past account activity and transactions, as well as certain reports filed in accordance with the BSA/AML Requirements, to determine whether suspicious activity and certain transactions in currency were properly identified and reported in accordance with the BSA/AML Requirements.
In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the Consent Orders remain in effect, the Corporation is subject to certain restrictions on expansion activities, such as growth through acquisitionregulation, possibly even inadvertent or branching to supplement organic growth of the Corporation and the affected bank subsidiaries. Further, any failure to comply with the requirements of any of the Consent Orders involving the Corporation or those bank subsidiariesunintentional violations, could result in further enforcement actions, the imposition offines, sanctions or other penalties described above, including one or more additional material restrictions on the activities ofconsent orders against Fulton Bank or the Corporation, which could have significant reputational or its bank subsidiaries, or the assessmentother consequences and could have a material adverse effect on our business, financial condition and results of fines or penalties.operations.
Additional expenses and investments have been incurred in recent years as the Corporation expanded its hiring of personnel and use of outside professionals, such as consulting and legal services, and made capital investments in operating systems to strengthen and support the Corporation's BSA/AML Compliance Program,compliance program, as well as the Corporation’sCorporation's broader compliance and risk management infrastructures. The expense and capital investment associated with all of these efforts, including those undertaken in connection with the Consent Orders,Order, have had an adverse effect on the Corporation’sCorporation's results of operations in recent periods and could have a material adverse effect on the Corporation’sCorporation's results of operations in one or more future periods.
Finally, due to the existence of the Consent Orders, some counterparties may not be permitted to, due to their internal policies, or may choose not to do business with the Corporation or its bank subsidiaries. Should counterparties upon which the Corporation or its bank subsidiaries rely for the conduct of their business become unwilling to do business with the Corporation or its bank subsidiaries, the Corporation’s results of operations and/or financial condition could be materially adversely effected.
While the Corporation believes that it has made significant progress in improving its BSA/AML Compliance Program, there is no assurance as to when the Consent Orders will be terminated.
The Corporation's largest subsidiary, Fulton Bank, has total assets of more than $10 billion and is subject to additional regulation and increased supervision.
The Dodd-Frank Act imposes additional regulatory requirements on institutions with $10 billion or more in assets. The Corporation's largest bank subsidiary, Fulton Bank, has total assets of more than $10 billion and, as of March 31, 2017, became subject to the following:
Supervision, examination and enforcement jurisdiction by the CFPB with respect to consumer financial protection laws;
Additional stress testing requirements;
A modified methodology for calculating FDIC insurance assessments and potentially higher assessment rates as a result of institutions with $10 billion or more in assets being required to bear the cost of raising the FDIC reserve ratio to 1.35% as required by the Dodd-Frank Act;
Heightened compliance standards under the Volcker Rule;
Enhanced bank regulatory supervision as a larger financial institution; and
Electronic fund transfer interchange fee standards.
In addition, the Corporation’s other bank subsidiaries also became subject to the supervision, examination and enforcement jurisdiction by the CFPB with respect to consumer financial protection laws. See Item 1. "Business-Supervision and Regulation."
The Dodd-Frank Act continues to have a significant impact on the Corporation's business and results of operations.
The Dodd-Frank Act has had a substantial impact on many aspects of the financial services industry. The Corporation has been impacted, and will likely continue to be impacted in the future, by the so-called Durbin Amendment to the Dodd-Frank Act, which reduced debit card interchange revenue of banks, and revised FDIC deposit insurance assessments. The Corporation has also been
impacted by the Dodd-Frank Act in the areas of corporate governance, capital requirements, risk management stress testing and regulation under federal consumer protection laws.
The Dodd-Frank Act established the CFPB, which was given rulemaking authority over most providers of consumer financial services inestablished pursuant to the U.S., examination and enforcement authority over the consumer operations of large banks, as well as interpretive authority with respect to numerous existing consumer financial services regulations. As an independent bureau funded by the Federal Reserve Board, the CFPBDodd-Frank Act, has imposed requirements more stringent than those imposed by the bank regulatory agencies that were previously responsible for consumer financial protection. The CFPB has also been directed to write and enforce rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.
The CFPB has initiated enforcement actions against a variety of bank and non-bank market participants with respect to a number of consumer financial products and services that hasservices. These actions have resulted in those participants expending significant time, money and resources to adjust to the initiatives being pursued by the CFPB. These enforcement actions may serve as precedent for how the CFPB interprets and enforces consumer protection laws, including practices or acts that are deemed to be unfair, deceptive or abusive, with respect to all supervised institutions, which may result in the imposition of higher standards of compliance with such laws. In connection with such actions, the CFPB has developed a number of new enforcement theories and applications of federal consumer financial laws. Other federal financial regulatory agencies, including the OCC, as well as state attorneys general and state banking agencies and other state financial regulators, also have been increasingly active in this area with respect to institutions over which they have jurisdiction. See Item 1. "Business-Supervision and Regulation."
Fulton Bank and the Corporation’s other bank subsidiaries became, as of March 31, 2017, subject to supervision and examination by the CFPB for compliance with the CFPB’s regulations and policies. The costs and limitations related to this additional regulatory regimen have yet to be fully determined, however they could result in material adverse effects on the Corporation’s profitability.
The financial services industry, as well as the broader economy, may be subject to new legislation which could result in significant changes in banking and financial services regulation.
The U.S. Congress and state legislatures and federal and state regulatory agencies continually review banking and other laws, regulations and policies for possible changes. Changes in federal or state laws, regulations or governmental policies may affect the Corporation and its business. The effects of such changes are difficult to predict and may produce unintended consequences. New laws, regulations or changes in the regulatory environment could limit the types of financial services and products the Corporation may offer, alter demand for existing products and services, increase the ability of non-banks to offer competing
financial services and products, increase compliance burdens, or otherwise adversely affect the Corporation’s business, results of operations or financial condition.
It remains difficult to predict the legislative and regulatory changes that will result from the fact that both Houses of Congress have majority memberships from the same political party as the President. Both the President and senior members of Congress have advocated for significant reduction of financial services regulation, to include amendments to the Dodd-Frank Act and structural changes to the CFPB. In 2017, the UST, in response to an Executive Order issued by the President, released a report on the Administration’s Core Principles for Regulation the United States Financial System. The report detailed several findings and recommendations, including but not limited to, that capital, liquidity and leverage rules should be simplified to promote the flow of credit, that consumer regulation and the structure and authority of the CFPB are in need of reform, that the regulatory burden on community financial institutions should be eased, and that Congress should play a more significant role in overseeing the federal banking agencies to ensure that regulations are better-tailored, more efficient and more effective.
Although significant changes to existing laws, regulations and policies may be finalized by Congress and/or the federal banking agencies and the CFPB, it is difficult to predict with precision what changes, if any, will be implemented into law and when such changes may occur. Accordingly, the impact of any legislative or regulatory changes on the Corporation, our competitors and on the financial services industry as a whole cannot be determined at this time. In any event, the laws and regulations to which we are subject are constantly under review by Congress, federal regulatory agencies, and state authorities. These laws and regulations could be changed significantly in the future, which could affect our profitability, our ability to compete effectively, or the composition of the financial services industry in which we compete.
The financial services industry is experiencing leadership changes at the federal banking agencies, which may impact regulations and government policies applicable to us.
As a result of the change of Administration and the current composition and recent actions of Congress, it is possible that certain aspects of the existing banking and financial services regulatory framework, as amended by the Dodd-Frank Act, will be repealed or modified in the near-term. For example, the President, senior members of the Administration, and senior members of Congress have advocated for substantial changes to the regulations implementing the Dodd-Frank Act. The federal banking agencies are presently experiencing leadership changes which could impact the supervision, enforcement and rulemaking policies of such agencies. In 2017 and early 2018, Congress confirmed a new Chairman of the Federal Reserve Board, a new Comptroller of the Currency and a new Vice Chairman for Supervision at the Federal Reserve Board. In addition, the President nominated a new Chairwoman of the FDIC and the Director of the CFPB resigned and was replaced by an interim Director. Consistent with the views of the Administration and Congress, certain members of this new leadership group have advocated for a reduction in financial services regulation, supervision and enforcement. Moreover, the senior staffs of these agencies charged with carrying out agency policies and responsibilities have experienced significant turnover as a result of these changes. Consequently, certain new regulatory initiatives may be delayed or suspended and existing regulations may be re-evaluated, modified or repealed. At this time, however, the full impact of these and other pending leadership changes, as well as the potential impact to financial services regulation to result from such changes, is uncertain. It is also difficult to predict the impact that any legislative or regulatory changes will have on the Corporation, our competitors and on the financial services industry as a whole. Our results of operations also could be adversely affected by changes in the way in which existing statutes, regulations, and laws are interpreted or applied by courts and government agencies.
Changes in U.S. federal, state or local tax laws may negatively impact ourthe Corporation's financial performance.
We areThe Corporation is subject to changes in tax law that could increase ourthe Corporation's effective tax rates. These law changes may be retroactive to previous periods and as a result could negatively affect ourthe Corporation's current and future financial performance. In December 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law, enacting the mostwhich resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended (the "Code"), in more than 30 years.. The full impact of the Tax Act onreduced the Corporation is subject to further evaluation and analysis, although it is likely to have both positive and negative effects on our financial performance. For example, the Tax Act reduces ourCorporation's Federal corporate income tax rate to 21% beginning in 2018, which will have a favorable impact on our earnings and capital generation abilities.2018. However, the Tax Act also imposesimposed limitations on ourthe Corporation's ability to take certain deductions, such as the deduction for FDIC deposit insurance premiums, which will partially offset the anticipated increase in net earningsincome from the lower tax rate.
In addition, as a result of the lower corporate tax rate, we were required under GAAP to re-measure the value of our deferred tax assets and liabilities utilizing the lower tax rate during the fourth quarter of 2017, and, as a result, recorded a $15.6 million charge to income tax expense. The ultimate impact of the Tax Act may differ from the foregoing description, possibly materially, due to changes in interpretations or in assumptions that we have made, guidance or regulations that may be promulgated, and other actions that we may take as a result of the Tax Act.
At this early stage, it is difficult to predict how the many changes made to the Code will affect the Corporation’s business, its customers and the broader economy. For example, the Tax Act may affect the Corporation’s customers in various ways that could have a corresponding effect on the Corporation and the economy as a whole, including in the following ways:
The limitation of the ability of individual taxpayers to claim an itemized deduction for interest paid on qualifying home equity indebtedness may affect demand for, and utilization of, home equity-related credit. In addition, consumers seeking credit may look to alternative credit products, some of which might not be offered by the Corporation, or for which there may be significantly greater competition, or which expose the Corporation to greater credit or other risks.
The reduction to the maximum amount of residential acquisition indebtedness as to which interest payments can be taken as an itemized deduction from $1 million to $750,000 may affect the demand for residential mortgage loans, particularly in geographic areas characterized by relatively high housing costs. The reduction in the acquisition indebtedness limit might also have an impact on housing prices in those geographic areas.
The significant increase in the standard deduction for individual taxpayers is expected to result in a reduction in the number of individual taxpayers that itemize deductions, including deductions for charitable contributions. It is unclear what, if any, impact this change will have on individual charitable giving. A reduction in charitable giving to charitable organizations that are customers of the Corporation could affect their ability to repay their loans.
New limits on the maximum level of business interest that may be deducted as an expense in determining taxable income may affect the demand for loans the Corporation offers to businesses.
The reduction in the maximum corporate tax rate from 35% to 21% may affect the demand for various types of tax-free financing if lenders increase the rates that are charged on those financings to maintain comparable taxable-equivalent yields. This could, in turn, lead to higher interest expense for borrowers of tax-free financing, which could affect their ability to repay those financings. Similarly, issuers of municipal debt securities held in the Corporation’s investment portfolio could face higher interest expenses, which could affect their ability to make payments on those securities.
The foregoing description of the impact of the Tax Act and its impact on us should be read in conjunction with our Notes to Consolidated Financial Statements. Finally, a number of the changes to the Code are set to expire in future years. There is substantial uncertainty concerning whether those expiring provisions will be extended, or whether future legislation will further revise the Code.
Negative publicity could damage the Corporation’sCorporation's reputation and business.
Reputation risk, or the risk to the Corporation's earnings and capital from negative public opinion, is inherent in the Corporation's business. Negative public opinion could result from the Corporation's actual, alleged or perceived conduct in any number of activities, including lending practices, litigation, corporate governance, regulatory, compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government agencies and community organizations in response to that conduct. In addition, unfavorable public opinion regarding the broader financial services industry, or arising from the actions of individual financial institutions, can have an adverse effect on the Corporation’sCorporation's reputation. Because the Corporation conducts the majority of its businesses under the "Fulton" brand, negative public opinion about one line of business could affect the Corporation's other lines of businesses. Further, the increased use of social media platforms facilitates the rapid and widespread dissemination of information, including inaccurate, misleading, or false information, which could magnify the potential harm to the Corporation's reputation. Any of these or other events that impair the Corporation’sCorporation's reputation can affect the Corporation’sCorporation's ability to attract and retain customers and employees, and access sources of funding and capital, any of which could have materially adverse effect on the Corporation’sCorporation's results of operations and financial condition.
From time to time the Corporation and its subsidiaries may be the subject of litigation and governmental or administrative proceedings. Adverse outcomes of any such litigation or proceedings may have a material adverse impact on the Corporation’sCorporation's business and results of operations as well as its reputation.
Many aspects of the Corporation’sCorporation's business involve substantial risk of legal liability. From time to time, the Corporation and its subsidiaries havehas been named or threatened to be named as defendantsdefendant in various lawsuits arising from its business activities (and in some cases from the activities of companies that were acquired). In addition, the Corporation and its bank subsidiaries are regularlyis periodically the subject of governmental investigations and other forms of regulatory or governmental inquiry. For example, the Corporation is cooperating with the DOJ inresponding to an investigation regarding potential violationsby the staff of the fair lending laws by Fulton Bank, Fulton BankDivision of New Jersey, The Columbia BankEnforcement of the U.S. Securities and Lafayette Ambassador Bank due to potential lending discrimination onExchange Commission regarding certain accounting determinations that could have impacted the basis of race and national origin.Corporation's reported earnings per share. Like other large financial institutions, the Corporation is also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. These lawsuits, investigations, inquiries and other matters
could lead to administrative, civil or criminal proceedings, or result in adverse judgments, settlements, fines, penalties, restitution, injunctions or other relief.types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices. Substantial legal liability or significant regulatory actions against usthe Corporation could materially adversely affect ourthe Corporation's business, financial condition or results of operations and/or cause significant reputational harm to our business.harm. The Corporation establishes reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated by the Corporation, no loss reserve is established. However, the Corporation may still incur potentially significant legal costs for a matter, even if a reserve has not been established.
Currently, the Corporation and three of its bank subsidiaries are the subject of regulatory proceedings in the form of the Consent Orders.
The Corporation can provide no assurance as to the outcome or resolution of legal or administrative actions or investigations, and such actions and investigations may result in judgments against usthe Corporation for significant damages or the imposition of regulatory restrictions on ourthe Corporation's operations. Resolution of these types of matters can be prolonged and costly, and the ultimate results or judgments are uncertain due to the inherent uncertainty in the outcomes of litigation and other proceedings.
STRATEGIC AND EXTERNAL RISKS.
The Corporation may not be able to achieve its growth plans.
The Corporation's business plan includes the pursuit of profitable growth. Under current economic, competitive and regulatory conditions, profitable growth may be difficult to achieve due to one or more of the following factors:
In the current interest rate environment, it may become more difficult for the Corporation to further increase its net interest margin or its net interest margin may come under downward pressure. As a result, income growth will likely need to come from growth in the volume of earning assets, particularly loans, and an increase in non-interest income. However, customer demand and competition could make such income growth difficult to achieve; and
The Corporation may seek to supplement organic growth through acquisitions, but may not be able to identify suitable acquisition opportunities, obtain the required regulatory approvals or successfully integrate acquired businesses.
To achieve profitable growth, the Corporation may pursue new lines of business or offer new products or services, all of which can involve significant costs, uncertainties and risks. Any new activity the Corporation pursues may require a significant investment of time and resources, and may not generate the anticipated return on that investment. Sustainable growth requires that the Corporation manage risks by balancing loan and deposit growth at acceptable levels of risk, maintaining adequate liquidity and capital, hiring and retaining qualified employees, successfully managing the costs and implementation risks with respect to strategic projects and initiatives, and integrating acquisition targets while managing costs. In addition, the Corporation may not be able to effectively implement and manage any new activities. External factors, such as the need to comply with additional regulations, the availability, or introduction, of competitive alternatives in the market, and changes in customer preferences may also impact the successful implementation of any new activity. Any new activity could have a significant impact on the effectiveness of the Corporation's system of internal controls. If the Corporation is not able to adequately identify and manage the risks associated with new activities, the Corporation's business, results of operations and financial condition could be materially and adversely impacted.
The Corporation faces a variety of risks in connection with completed and potential acquisitions.
The Corporation may seek to supplement organic growth through acquisitions of banks or branches, or other financial businesses or assets. Acquiring other banks, branches, financial businesses or assets involves a variety of risks commonly associated with acquisitions, including, among other things:
The possible loss of key employees and customers of the acquired business;
Potential disruption of the acquired business and the Corporation's business;
Exposure to potential asset quality issues of the acquired business;
Potential exposure to unknown or contingent liabilities of the acquired business including, without limitation, liabilities for regulatory and compliance issues;
Potential changes in banking or tax laws or regulations that may affect the acquired business; and
Potential difficulties in integrating the acquired business, resulting in the diversion of resources from the operation of the Corporation's existing businesses.
Acquisitions typically involve the payment of a premium over book and market values, and therefore, some dilution of the Corporation's tangible book value and net income per common share may occur in connection with any future transaction. Failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on the Corporation's business, financial condition and results of operations. In addition, the Corporation faces significant competition from other financial services institutions, some of which may have greater financial resources than the Corporation, when considering acquisition opportunities. Accordingly, attractive opportunities may not be available and there can be no assurance that the Corporation will be successful in identifying, completing or integrating future acquisitions.
The competition the Corporation faces is significant and may reduce the Corporation's customer base and negatively impact the Corporation's results of operations.
There is significant competition among commercial banks in the market areas served by the Corporation. In addition, the Corporation also competes with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulation than the Corporation and have different cost structures. Some of the Corporation's competitors have greater resources, higher lending limits, lower cost of funds and may offer other services not offered by the Corporation. The Corporation also experiences competition from a variety of institutions outside its market areas. Some of these institutions conduct business primarily over the Internet and, as a result, may be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as funds transfers, payment services, residential mortgage loans, consumer loans and wealth and investment management services. Competition with non-banks, including technology companies, to provide financial products and services is intensifying. In particular, the activity of financial technology companies ("Fintechs") has grown significantly over recent years and is expected to continue to grow. Fintechs have and may continue to offer bank or bank-like products.
Competition may adversely affect the rates the Corporation pays on deposits and charges on loans, and could result in the loss of fee income, as well as the loss of customer deposits and the income generated from those deposits, thereby potentially adversely affecting the Corporation's profitability and its ability to continue to grow. The Corporation's profitability and continued growth depends upon its continued ability to successfully compete in the market areas it serves. See Item 1. "Business-Competition."
If the goodwill that the Corporation has recorded or records in the future in connection with its acquisitions becomes impaired, it could have a negative impact on the Corporation's results of operations.
In the past, the Corporation supplemented its internal growth with strategic acquisitions of banks, branches and other financial services companies. In the future, the Corporation may seek to supplement organic growth through additional acquisitions. If the purchase price of an acquired company exceeds the fair value of the company's net assets, the excess is carried on the acquirer's balance sheet as goodwill. As of December 31, 2019, the Corporation had $532.7 million of goodwill recorded on its balance sheet. The Corporation is required to evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to earnings in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in impairment charges.
Changes in accounting policies, standards, and interpretations could materially affect how the Corporation reports its financial condition and results of operations.
The preparation of the Corporation's financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as revenues and expenses during the period. A summary of the accounting policies that the Corporation considers to be most important to the presentation of its financial condition and results of operations, because they require management's most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain, including those related to the allowance for credit losses, goodwill, income taxes, and fair value measurements, is set forth in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" and within "Note 1-Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
A variety of factors could affect the ultimate values of assets, liabilities, income and expenses recognized and reported in the Corporation's financial statements, and these ultimate values may differ materially from those determined based on management's estimates and assumptions. In addition, the FASB, regulatory agencies, and other bodies that establish accounting standards from time to time change the financial accounting and reporting standards governing the preparation of the Corporation's financial statements. For example, see "The Corporation is subject to certain risks in connection with the establishment and level of its allowance for credit losses" above for a discussion of CECL and its impact on the Corporation's allowance for credit losses. Further, those bodies that establish and interpret the accounting standards (such as the FASB, the Securities and Exchange Commission, and banking regulators) may change prior interpretations or positions regarding how these standards should be applied. These changes can be difficult to predict and can materially affect how the Corporation records and reports its financial condition and results of operations.
OPERATIONAL RISKS.
The Corporation is exposed to many types of operational and other risks, and the Corporation's framework for managing risks may not be effective in mitigating risk.
The Corporation is exposed to many types of operational risk, including the risk of human error or fraud by employees and other third parties, intentional and inadvertent misrepresentation by loan applicants, borrowers or guarantors, unsatisfactory performance by employees and vendors, clerical and record-keeping errors, computer and telecommunications systems malfunctions or failures and reliance on data that may be faulty or incomplete. In an environment characterized by continual, rapid technological change, as discussed below, when the Corporation introduces new products and services, or makes changes to its information technology systems and processes, these operational risks are increased. Any of these operational risks could result in the Corporation's diminished ability to operate one or more of its businesses, financial loss, potential liability to customers, inability to secure insurance, reputational damage and regulatory intervention, which could materially adversely affect the Corporation.
The Corporation's risk management framework is subject to inherent limitations, and risks may exist, or develop in the future, that the Corporation has not anticipated or identified. If the Corporation's risk management framework proves to be ineffective, the Corporation could suffer unexpected losses and could be materially adversely affected.
The Corporation's operational risks include risks associated with third-party vendors and other financial institutions.
The Corporation relies upon certain third-party vendors to provide products and services necessary to maintain its day-to-day operations, including, notably, responsibility for the core processing system that services Fulton Bank. Accordingly, the Corporation's operations are exposed to the risk that these vendors might not perform in accordance with applicable contractual arrangements or service level agreements. The failure of an external vendor to perform in accordance with applicable contractual arrangements or service level agreements could be disruptive to the Corporation's operations, which could have a material adverse effect on the Corporation's financial condition or results of operations, and damage its reputation. Further, third-party vendor risk management has become a point of regulatory emphasis recently. A failure of the Corporation to follow applicable regulatory guidance in this area could expose the Corporation to regulatory sanctions.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, execution of transactions or other relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This risk is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Corporation interacts on a daily basis, and therefore could adversely affect the Corporation.
Any of these operational or other risks could result in the Corporation's diminished ability to operate one or more of its businesses, financial loss, potential liability to customers, inability to secure insurance, reputational damage and regulatory intervention, which could materially adversely affect the Corporation.
The Corporation's internal controls may be ineffective.
One critical component of the Corporation's risk management framework is its system of internal controls. Management regularly reviews and updates the Corporation's internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide reasonable, but not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of the Corporation's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation's business, results of operations, financial condition and reputation. See Item 9A. "Controls and Procedures."
Loss of, or failure to adequately safeguard, confidential or proprietary information may adversely affect the Corporation's operations, net income or reputation.
The Corporation's business is highly dependent on information systems and technology and the ability to collect, process, transmit and store significant amounts of confidential information regarding customers, employees and others on a daily basis. While the Corporation performs some of the functions required to operate its business directly, it also outsources significant business functions, such as processing customer transactions, maintenance of customer-facing websites, including its online and mobile banking functions, and developing software for new products and services, among others. These relationships require the Corporation to allow third parties to access, store, process and transmit customer information. As a result, the Corporation may be subject to cyber
security risks directly, as well as indirectly through the vendors to whom it outsources business functions and the downstream service providers of those vendors. The increased use of smartphones, tablets and other mobile devices, as well as cloud computing, may also heighten these and other operational risks. Cyber threats could result in unauthorized access, loss or destruction of confidential information or customer data, unavailability, degradation or denial of service, introduction of computer viruses or ransomware and other adverse events, causing the Corporation to incur additional costs (such as repairing systems or adding new personnel or protection technologies). Cyber threats may also subject the Corporation to regulatory investigations, litigation or enforcement actions require the payment of regulatory fines or penalties or undertaking costly remediation efforts with respect to third parties affected by a cyber security incident, all or any of which could adversely affect the Corporation's business, financial condition or results of operations and damage its reputation.
Like other financial institutions, the Corporation continuously experiences malicious cyber activity directed at its websites, computer systems, software, networks and its users. This malicious activity includes attempts at unauthorized access, implantation of computer viruses or malware, and denial-of-service attacks. The Corporation also experiences large volumes of phishing and other forms of social engineering attempted for the purpose of perpetrating fraud against the Corporation, its employees or its customers. While, to date, malicious cyber activity, cyber attacks and other information security breaches have not had a material adverse impact on the Corporation, there can be no assurance that such events will not have a material adverse impact on the Corporation’s business, results of operations, financial condition or reputation in the future.
The Corporation uses monitoring and preventive controls to detect and respond to data breaches and cyber threats involving its own systems before they become significant. The Corporation regularly evaluates its systems and controls and implements upgrades as necessary. The Corporation also attempts to reduce its exposure to its vendors' data privacy and cyber incidents by performing initial vendor due diligence that is updated periodically for critical vendors, negotiating service level standards with vendors, negotiating for indemnification from vendors for confidentiality and data breaches, and limiting third-party access to the least privileged level necessary to perform outsourced functions, among other things. The additional cost to the Corporation of data and cyber security monitoring and protection systems and controls includes the cost of hardware and software, third party technology providers, consulting and forensic testing firms, insurance premium costs and legal fees, in addition to the incremental cost of personnel who focus a substantial portion of their responsibilities on data and cyber security.
There can be no assurance that the measures employed by the Corporation to detect and combat direct or indirect cyber threats will be effective. In addition, because the methods of cyber attacks change frequently or, in some cases, are not recognized until launched, the Corporation may be unable to implement effective preventive control measures or proactively address these methods and the probability of a successful attack cannot be predicted. The Corporation's or a vendor's failure to promptly identify and counter a cyber attack may result in increased costs and other negative consequences, such as the loss of, or inability to access, data, degradation or denial of service and introduction of computer viruses. Although the Corporation maintains insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be inapplicable or otherwise insufficient to cover any or all losses. Further, a successful cyber security attack that results in a significant loss of customer data or compromises the Corporation's ability to function would have a material adverse effect on the Corporation's business, reputation, financial condition and results of operation.
Account data compromise events at large retailers, health insurers, a national consumer credit reporting agency and others in recent years have resulted in heightened legislative and regulatory focus on privacy, data protection and information security. New or revised laws and regulations may significantly impact the Corporation's current and planned privacy, data protection and information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities. Compliance with current or future privacy, data protection and information security laws to which the Corporation is subject could result in higher compliance and technology costs and could restrict the Corporation's ability to provide certain products and services, which could materially and adversely affect the Corporation's profitability. The Corporation's failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and governmental investigations and/or actions, litigation, fines, sanctions and damage to the Corporation's reputation and its brand.
The Corporation is subject to a variety of risks in connection with origination and sale of loans.
The Corporation originates residential mortgage loans and other loans, such as loans guaranteed, in part, by the U.S. Small Business Administration, all or portions of which are later sold in the secondary market to government sponsored enterprises or agencies, such as the Federal National Mortgage Association (Fannie Mae), and other non-government sponsored investors. In connection with such sales, the Corporation makes certain representations and warranties with respect to matters such as the underwriting, origination, documentation or other characteristics of the loans sold. The Corporation may be required to repurchase a loan, or to reimburse the purchaser of a loan for any related losses, if it is determined that the loan sold was in violation of representations or warranties made at the time of the sale, and, in some cases, if there is evidence of borrower fraud, in the event of early payment
default by the borrower on the loan, or for other reasons. The Corporation maintains reserves for potential losses on certain loans sold, however, it is possible that losses incurred in connection with loan repurchases and reimbursement payments may be in excess of any applicable reserves, and the Corporation may be required to increase reserves and may sustain additional losses associated with such loan repurchases and reimbursement payments in the future, which could have a material adverse effect on the Corporation’sCorporation's financial condition or results of operations.
In addition, the sale of residential mortgage loans and other loans in the secondary market serves as a source of non-interest income and liquidity for the Corporation, and can reduce its exposure to risks arising from changes in interest rates. Efforts to reform government sponsored enterprises and agencies, changes in the types of, or standards for, loans purchasespurchased by government sponsored enterprises or agencies and other investors, or the Corporation’sCorporation's failure to maintain its status as an eligible seller of such loans may limit the Corporation’sCorporation's ability to sell these loans. The inability of the Corporation to continue to sell these loans could reduce the Corporation’sCorporation's non-interest income, limit the Corporation’sCorporation's ability to originate and fund these loans in the future, and make managing interest rate risk more challenging, any of which could have a material adverse effect on the Corporation’sCorporation's results of operations and financial condition.
STRATEGIC AND EXTERNAL RISKS.
The Corporation is in the process of transforming its business model and this transformation may not be successful.
The Corporation historically has followed a "super-community" banking strategy under which the Corporation has operated its bank subsidiaries autonomously to maximize the advantages of the community banking model in serving the needs of its customers. Reliance on this model has posed challenges to the Corporation's efforts to manage risk efficiently and effectively through a centralized risk management and compliance function. As a result of these challenges and a desire to refine its business strategy, the Corporation is in the process of transitioning to a business model that is primarily focused on alignment of services with the customer segments the Corporation serves and less oriented to geographic boundaries.
The transformation of the Corporation’s business model, which is being implemented over a period of several years, may have some or all of the following unintended effects:
The efficiencies sought may not be achieved;
Some customers may not receive the change in business model in a positive manner, and relationships with these customers may be jeopardized;
The changes in organizational structure and the evolution of the Corporation’s culture that will be required to support the transition to the new business model may lead to dissatisfaction among employees, which could make it more difficult for the Corporation to retain key employees;
The transition to the new business model may create operational and other challenges that are disruptive to the Corporation’s business; and
Expenses will be incurred in the implementation of the new business model, and the implementation process may distract the Corporation from achieving other fundamental business objectives.
The Corporation may not be able to achieve its growth plans.
The Corporation’s business plan includes the pursuit of profitable growth. Under current economic, competitive and regulatory conditions, profitable growth may be difficult to achieve due to one or more of the following factors:
In the current, prolonged low interest rate environment, the Corporation’s net interest margin has been compressed, and it is possible that a net interest margin that is lower than historical levels could continue for some time. As a result, income growth will likely need to come from growth in the volume of earning assets, particularly loans, and an increase in non-interest income. However, customer demand and competition could make such income growth difficult to achieve;
Operating expenses, particularly in the compliance and risk management areas, have been elevated, and such expenses may continue to increase in the future, as a result of Fulton Bank surpassing the $10 billion in assets threshold; and
Growth through acquisition to supplement organic growth is unlikely to occur while the Consent Orders referenced above are in place, due to an inability to obtain the required regulatory approvals.
To achieve profitable growth, the Corporation may pursue new lines of business or offer new products or services, all of which can involve significant costs, uncertainties and risks. Any new activity the Corporation pursues may require a significant investment of time and resources, and may not generate the anticipated return on that investment. In addition, the Corporation may not be able to effectively implement and manage any new activities. External factors, such as the need to comply with additional regulations, the availability, or introduction, of competitive alternatives in the market, and changes in customer preferences may also impact the successful implementation of any new activity. Any new activity could have a significant impact on the effectiveness of the Corporation’s system of internal controls. If the Corporation is not able to adequately identify and manage the risks associated with new activities, the Corporation’s business, results of operations and financial condition could be materially and adversely impacted.
The competition the Corporation faces is significant and may reduce the Corporation's customer base and negatively impact the Corporation's results of operations.
There is significant competition among commercial banks in the market areas served by the Corporation. In addition, the Corporation also competes with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulation than the Corporation is with respect to the products and services they provide and have different cost structures. Some of the Corporation's competitors have greater resources, higher lending limits, lower cost of funds and may offer other services not offered by the Corporation. The Corporation also experiences competition from a variety of institutions outside its market areas. Some of these institutions conduct business primarily over the Internet and, as a result, may be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as funds transfers, payment services, residential mortgage loans, consumer loans and wealth and investment management services.
Competition may adversely affect the rates the Corporation pays on deposits and charges on loans, and could result in the loss of fee income, as well as the loss of customer deposits and the income generated from those deposits, thereby potentially adversely affecting the Corporation's profitability and its ability to continue to grow. The Corporation's profitability and continued growth depends upon its continued ability to successfully compete in the market areas it serves. See Item 1. "Business-Competition."
If the goodwill that the Corporation has recorded in connection with its acquisitions becomes impaired, it could have a negative impact on the Corporation's results of operations.
In the past, the Corporation supplemented its internal growth with strategic acquisitions of banks, branches and other financial services companies. If the purchase price of an acquired company exceeds the fair value of the company's net assets, the excess is carried on the acquirer's balance sheet as goodwill. As of December 31, 2017, the Corporation had $530.6 million of goodwill recorded on its balance sheet. The Corporation is required to evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to earnings in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in impairment charges.
Changes in accounting policies, standards, and interpretations could materially affect how we report our financial condition and results of operations.
The preparation of the Corporation’s financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as revenues and expenses during the period. A summary of the accounting policies that the Corporation considers to be most important to the presentation of its financial condition and results of operations, because they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain, including those related to the allowance for credit losses, goodwill, income taxes, and fair value measurements, is set forth in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" and within "Note 1-Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
A variety of factors could affect the ultimate values of assets, liabilities, income and expenses recognized and reported in the Corporation’s financial statements, and these ultimate values may differ materially from those determined based on management’s estimates and assumptions. In addition, the Financial Accounting Standards Board ("FASB"), regulatory agencies, and other bodies that establish accounting standards from time to time change the financial accounting and reporting standards governing the preparation of the Corporation’s financial statements. Further, those bodies that establish and interpret the accounting standards (such as the FASB, the Securities and Exchange Commission, and banking regulators) may change prior interpretations or positions regarding how these standards should be applied. These changes can be difficult to predict and can materially affect how the Corporation records and reports its financial condition and results of operations. For example, during 2016, the FASB issued a new accounting standard, Accounting Standards Update 2016-13, that will require the recognition of credit losses on loans and other financial assets based on an entity’s current estimate of expected losses over the lifetime of each loan or other financial asset, referred to as the current expected credit loss ("CECL") model, as opposed to current accounting standards, which require recognition of losses on loans and other financial assets only when those losses are "probable." The Corporation’s adoption of this accounting standard, which is required for interim and annual reporting periods beginning after December 15, 2019, could materially affect the Corporation’s allowance for credit losses methodology, financial condition, capital levels and results of operations, including expenses the Corporation may incur in implementing this accounting standard. See "Note 1 - Summary of Significant Accounting Policies - Recently Issued Accounting Standards" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
OPERATIONAL RISKS.
The Corporation is exposed to many types of operational and other risks and the Corporation's framework for managing risks may not be effective in mitigating risk.
The Corporation is exposed to many types of operational risk, including the risk of human error or fraud by employees and other third parties, intentional and inadvertent misrepresentation by loan applicants, unsatisfactory performance by employees and vendors, clerical and record-keeping errors, computer and telecommunications systems malfunctions or failures and reliance on data that may be faulty or incomplete. In an environment characterized by continual, rapid technological change, as discussed below, when the Corporation introduces new products and services, or makes changes to its information technology systems and processes, these operational risks are increased. Any of these operational risks could result in the Corporation's diminished ability to operate one or more of its businesses, financial loss, potential liability to customers, inability to secure insurance, reputational damage and regulatory intervention, which could materially adversely affect the Corporation.
The Corporation’s risk management framework is subject to inherent limitations, and risks may exist, or develop in the future, that the Corporation has not anticipated or identified. If the Corporation's risk management framework proves to be ineffective, the Corporation could suffer unexpected losses and could be materially adversely affected. As noted above, the Corporation’s historical decentralized banking strategy further challenges the Corporation's efforts to manage risk efficiently and effectively through a centralized risk management and compliance function.
The Corporation’s operational risks include risks associated with third-party vendors and other financial institutions.
The Corporation relies upon certain third-party vendors to provide products and services necessary to maintain its day-to-day operations, including, notably, responsibility for the core processing system that services all of the Corporation’s bank subsidiaries. Accordingly, the Corporation’s operations are exposed to the risk that these vendors might not perform in accordance with applicable contractual arrangements or service level agreements. The failure of an external vendor to perform in accordance with applicable contractual arrangements or service level agreements could be disruptive to the Corporation’s operations, which could have a material adverse effect on the Corporation’s financial condition and/or results of operations. Further, third-party vendor risk
management has become a point of regulatory emphasis recently. A failure of the Corporation to follow applicable regulatory guidance in this area could expose the Corporation to regulatory sanctions.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, execution of transactions or other relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This risk is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Corporation interacts on a daily basis, and therefore could adversely affect the Corporation.
Any of these operational or other risks could result in the Corporation's diminished ability to operate one or more of its businesses, financial loss, potential liability to customers, inability to secure insurance, reputational damage and regulatory intervention, which could materially adversely affect the Corporation.
The Corporation’s internal controls may be ineffective.
One critical component of the Corporation’s risk management framework is its system of internal controls. Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide reasonable, but not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business, results of operations, financial condition and reputation. See Item 9A. "Controls and Procedures."
Loss of, or failure to adequately safeguard, confidential or proprietary information may adversely affect the Corporation's operations, net income or reputation.
The Corporation’s business is highly dependent on information systems and technology and the ability to collect, process, transmit and store significant amounts of confidential information regarding customers, employees and others on a daily basis. While the Corporation performs some of the functions required to operate its business directly, it also outsources significant business functions, such as processing customer transactions, maintenance of customer-facing websites, including its online banking function, and developing software for new products and services, among others. These relationships require the Corporation to allow third parties to access, store, process and transmit customer information. As a result, the Corporation may be subject to cyber security risks directly, as well as indirectly through the vendors to whom it outsources business functions. The increased use of smartphones, tablets and other mobile devices, as well as cloud computing, may also heighten these and other operational risks. Cyber threats could result in unauthorized access, loss or destruction of customer data, unavailability, degradation or denial of service, introduction of computer viruses and other adverse events, causing the Corporation to incur additional costs (such as repairing systems or adding new personnel or protection technologies). Cyber threats may also subject the Company to regulatory investigations, litigation or enforcement require the payment of regulatory fines or penalties or undertaking costly remediation efforts with respect to third parties affected by a cyber security incident, all or any of which could adversely affect the Corporation’s business, financial condition or results of operations and damage its reputation.
The Corporation attempts to reduce its exposure to its vendors’ cyber incidents by performing initial vendor due diligence that is updated periodically for critical vendors, negotiating service level standards with vendors, negotiating for indemnification from vendors for confidentiality and data breaches, and limiting third-party access to the least privileged level necessary to perform outsourced functions, among other things. The Corporation also uses monitoring and preventive controls to detect and respond to cyber threats to its own systems before they become significant. The Corporation regularly evaluates its systems and controls and implements upgrades as necessary. The additional cost to the Corporation of our cyber security monitoring and protection systems and controls includes the cost of hardware and software, third party technology providers, consulting and forensic testing firms, insurance premium costs and legal fees, in addition to the incremental cost of our personnel who focus a substantial portion of their responsibilities on cyber security.
There can be no assurance that the measures employed by the Corporation to combat direct or indirect cyber threats will be effective. In addition, because the methods of cyber attacks change frequently or, in some cases, are not recognized until launched, the Corporation may be unable to implement effective preventive control measures or proactively address these methods and the probability of a successful attack cannot be predicted. The Corporation’s or a vendor’s failure to promptly identify and counter a cyber attack may result in increased costs and consequences of a successful cyber attack. Although the Corporation maintains insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be inapplicable or otherwise insufficient to cover any or all losses. Further, a successful cyber security attack that results in
a significant loss of customer data or compromises our ability to function would have a material adverse effect on our business, reputation, financial condition and results of operation.
Account data compromise events at large retailers, health insurers, a national consumer credit reporting agency and others in recent years have resulted in heightened legislative and regulatory focus on privacy, data protection and information security. New or revised laws and regulations may significantly impact the Corporation’s current and planned privacy, data protection and information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities. Compliance with current or future privacy, data protection and information security laws to which the Corporation is subject could result in higher compliance and technology costs and could restrict the Corporation’s ability to provide certain products and services, which could materially and adversely affect the Corporation’s profitability. The Corporation’s failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and governmental investigations and/or actions, litigation, fines, sanctions and damage to the Corporation’s reputation and its brand.
The Corporation continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Corporation’sCorporation's future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’sCorporation's operations. The costs of new technology, including personnel, can be high, in both absolute and relative terms. Many of the Corporation’sCorporation's financial institution competitors have substantially greater resources to invest in technological improvements. In addition, new payment, credit and investment and wealth management services developed and offered by non-bank or non-traditional competitors pose an increasing threat to the products and services traditionally provided by financial institutions like the Corporation. The Corporation may not be able to effectively implement new technology-driven products and services, be successful in marketing these products and services to its customers, or effectively deploy new technologies to improve the efficiency of its operations. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Corporation’sCorporation's business, financial condition and results of operations.
There can be no assurance, given the past pace of change and innovation, that the Corporation’sCorporation's technology, either purchased or developed internally, will meet or continue to meet the needs of the Corporation and the needs of its customers.
In addition, advances in technology, as well as changing customer preferences favoring access to the Corporation’sCorporation's products and services through digital channels, could decrease the value of the Corporation’sCorporation's branch network and other assets. If customers increasingly choose to access the Corporation’sCorporation's products and services through digital channels, the Corporation may find it necessary to consolidate, close or sell branch locations or restructure its branch network. These actions could lead to losses on assets, expenses to reconfigure branches and the loss of customers in affected markets. As a result, the Corporation’sCorporation's business, financial condition or results of operations may be adversely affected.
The Corporation may not be able to attract and retain skilled people.
The Corporation’sCorporation's success depends, in large part, on its ability to attract and retain skilled people. Competition for talented personnel in most activities engaged in by the Corporation can be intense, and the Corporation may not be able to hire sufficiently skilled people or to retain them. The unexpected loss of services of one or more of the Corporation’sCorporation's key personnel could have a material adverse impact on the Corporation’sCorporation's business because of their skills, knowledge of the Corporation’sCorporation's markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
RISKS RELATED TO AN INVESTMENT IN THE CORPORATION’SCORPORATION'S SECURITIES.
The Corporation's future growth may require the Corporation to raise additional capital in the future, but that capital may not be available when it is needed or may be available only at an excessive cost.
The Corporation is required by regulatory agencies to maintain adequate levels of capital to support its operations. The Corporation anticipates that current capital levels will satisfy regulatory requirements for the foreseeable future. The Corporation, however, may at some point choose to raise additional capital to support future growth. The Corporation's ability to raise additional capital will depend, in part, on conditions in the capitalfinancial markets at that time, which are outside of the Corporation's control. Accordingly, the Corporation may be unable to raise additional capital, if and when needed, on terms acceptable to the Corporation, or at all.
If the Corporation cannot raise additional capital when needed, its ability to expand operations through internal growth and
acquisitions could be materially impacted. In the event of a material decrease in the Corporation's stock price, future issuances of equity securities could result in dilution of existing shareholder interests.
Capital planning has taken on more importance duerequirements have been adopted by U.S. banking regulators that may limit the Corporation's ability to regulatoryreturn earnings to shareholders or operate or invest in its business.
The Corporation and Fulton Bank are subject to capital requirements andunder the Basel III capital standards.
Consistent with current regulatory guidance, the Corporation conducts an annual stress test using internal financial data and different economic scenarios provided by the Federal Reserve Board, and reports the results of the stress test to the Federal Reserve Board. The Corporation's board of directors and its senior management are required to consider the results of the annual stress test in the normal course of business, including as part of its capital planning process and the evaluation of the adequacy of its capital. The results of future stress testing processes may lead the Corporation to retain additional capital or alter the mix of its capital components. In addition, the implementation of certain regulations with regard to regulatory capital could disproportionately affect the Corporation's regulatory capital position relative to that of its competitors, including those who may not be subject to the same regulatory requirements.
The fully phased-in capital standards under the U.S. Basel III Capital Rules require banks to maintain more capital than the minimum levels required under former regulatory capital standards. The new minimum regulatory capital requirements began to apply to the Corporation on January 1, 2015. The required minimum capital conservation buffer began to be phased in incrementally on January 1, 2016 and will be fully phased in on January 1, 2019. The failureRules. Failure to meet the established capital requirements could result in the federal banking regulators placing limitations or conditions on the activities of the Corporation or its bank subsidiariesFulton Bank or restricting the commencement of new activities, and such failure could subject the Corporation or its bank subsidiariesFulton Bank to a variety of enforcement remedies, including limiting the ability of the Corporation or its bank subsidiariesFulton Bank to pay dividends, issuing a directive to increase capital and terminating FDIC deposit insurance. In addition, the failure to comply with the capital conservation buffer will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers. As of December 31, 2017,2019, the Corporation's current capital levels met the fully phased-in minimum capital requirements, including the capital conservation buffers,buffer, as set forth in the U.S. Basel III Capital Rules. See Item 1. "Business-Supervision and Regulation-Capital Requirements."
In addition, the implementation of certain regulations with regard to regulatory capital could disproportionately affect the Corporation's regulatory capital position relative to that of its competitors, including those who may not be subject to the same regulatory requirements.
The Corporation is a holding company and relies on dividends and other payments from its subsidiaries for substantially all of its revenue and its ability to make dividend payments, distributions and other payments.
TheFulton Financial Corporation is a separate and distinct legal entity from its bank and nonbanknon-bank subsidiaries, and depends on the payment of dividends and other payments and distributions from its subsidiaries, principally its bank subsidiaries,Fulton Bank, for substantially all of its revenues. As a result, the Corporation's ability to make dividend payments on its common stock depends primarily on certaincompliance with applicable federal and state regulatory considerationsrequirements and the receipt of dividends and other distributions from its subsidiaries. There are various regulatory and prudential supervisory restrictions, which may change from time to time, that impact the ability of the Corporation’s bank subsidiariesFulton Bank to pay dividends or make other payments to it.the Corporation. There can be no assurance that the Corporation’s bank subsidiariesFulton Bank will be able to pay dividends at past levels, or at all, in the future. If the Corporation does not receive sufficient cash dividends or is unable to borrow from its bank subsidiaries,Fulton Bank, then the Corporation may not have sufficient funds to pay dividends to its shareholders, repurchase its common stock or service its debt obligations. See Item 1. "Business-Supervision and Regulation-Loans and Dividends from Subsidiary Banks.Bank Subsidiary."
In addition, as noted above, liquidity and capital planning at both the bank and holding company levels has become an area of increased regulatory emphasis. In recent years, the Corporation has pursued a strategy of capital management under which it has sought to deploy its capital, through stock repurchases, increased regular dividends and special dividends, in a manner that is beneficial to the Corporation’sCorporation's shareholders. This capital management strategy is subject to regulatory supervision. In July 2019, the Federal Reserve Board eliminated the standalone prior approval requirement in the capital rules for repurchase or redemption of common stock. In certain circumstances, however, the Corporation's repurchases of its common stock may be subject to a prior approval or notice requirement under the regulations or policies of the Federal Reserve Board. As a result, the Corporation may not be able to enter the market for stock repurchases on a timely basis when the Corporation's board of directors and management believe such repurchases to be most opportune, or at all.
A downgrade in the credit ratings of the Corporation or its bank subsidiariesFulton Bank could have a material adverse impact on the Corporation.
Fitch, Inc., Moody's Investors Service, Inc. and DBRS, Inc. continuously evaluate the Corporation and its subsidiaries,Fulton Bank, and their ratings of the CorporationCorporation's and its subsidiary'sFulton Bank's long-term and short-term debt are based on a number of factors, including financial strength, as well as factors not entirely within the Corporation’sCorporation's and its subsidiaries'Fulton Bank's control, such as conditions affecting the financial services industry generally. In light of these reviews and the continued focus on the financial services industry generally, the Corporation and its subsidiariesFulton Bank may not be able to maintain their current respective ratings. Ratings downgrades by any of these credit rating agencies could have a significant and immediate impact on the Corporation's funding and liquidity through cash obligations, reduced funding capacity and collateral triggers. A reduction in the Corporation's or its subsidiaries'Fulton Bank's credit ratings could also increase the Corporation's and Fulton Bank's borrowing costs and limit itstheir access to the capital markets.
Downgrades in the credit or financial strength ratings assigned to the counterparties with whom the Corporation transacts could create the perception that the Corporation's financial condition will be adversely impacted as a result of potential future defaults by such counterparties. Additionally, the Corporation could be adversely affected by a general, negative perception of financial institutions caused by the downgrade of other financial institutions. Accordingly, ratings downgrades for other financial institutions could affect the market price of the Corporation's stock and could limit the Corporation's access to or increase its cost of capital.
Anti-takeover provisions could negatively impact the Corporation's shareholders.
Provisions of banking laws, Pennsylvania corporate law and of the Corporation's Amended and Restated Articles of Incorporation and Bylaws could make it more difficult for a third party to acquire control of the Corporation or have the effect of discouraging a third party from attempting to acquire control of the Corporation. To the extent that these provisions discourage such a transaction, holders of the Corporation's common stock may not have an opportunity to dispose of part or all of their stock at a higher price than that prevailing in the market. These provisions may also adversely affect the market price of the Corporation’sCorporation's stock. In addition, some of these provisions make it more difficult to remove, and thereby may serve to entrench, the Corporation's incumbent directors and officers, even if their removal would be regarded by some shareholders as desirable.
Certain provisions of Pennsylvania corporate law applicable to the Corporation and the Corporation's Amended and Restated Articles of Incorporation and Bylaws include provisions which may be considered to be "anti-takeover" in nature because they may have the effect of discouraging or making more difficult the acquisition of control of the Corporation by means of a hostile tender offer, exchange offer, proxy contest or similar transaction. These provisions are intended to protect the Corporation's shareholders by providing a measure of assurance that the Corporation's shareholders will be treated fairly in the event of an unsolicited takeover bid and by preventing a successful takeover bidder from exercising its voting control to the detriment of the other shareholders. However, these provisions, taken as a whole, may also discourage a hostile tender offer, exchange offer, proxy solicitation or similar transaction relating to the Corporation's common stock, even if the accomplishment of a given transaction may be favorable to the interests of shareholders.
The ability of a third party to acquire the Corporation is also limited under applicable banking regulations. The BHCA requires any "bank holding company" (as defined in that Act) to obtain the approval of the Federal Reserve Board prior to acquiring more than 5% of the Corporation’sCorporation's outstanding common stock. Any person other than a bank holding company is required to obtain prior approval of the Federal Reserve Board to acquire 10% or more of the Corporation’sCorporation's outstanding common stock under the Change in Bank Control Act of 1978 and, under certain circumstances, such approvals are required at an even lower ownership percentage. Any holder of 25% or more of the Corporation’sCorporation's outstanding common stock, other than an individual, is subject to regulation as a bank holding company under the BHCA. In addition, the delays associated with obtaining necessary regulatory approvals for acquisitions of interests in bank holding companies also tend to make more difficult certain methods of effecting acquisitions. While these provisions do not prohibit an acquisition, they would likely act as deterrents to an unsolicited takeover attempt.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following table summarizes the Corporation’sCorporation's full-service banking branch properties by subsidiary bank, as of December 31, 2017.2019 totaled 230 branches. Of those branches, 96 were owned and 134 were leased. Remote service facilities (mainly stand-alone automated teller machines) are excluded.excluded from these totals. The Corporate headquarters is located in Lancaster, Pennsylvania. The Corporation owns two dedicated operations centers, located in East Petersburg, Pennsylvania and Mantua, New Jersey.
|
| | | | | | | | | |
Subsidiary Bank | | Owned | | Leased | | Total Branches |
Fulton Bank, N.A. | | 44 |
| | 68 |
| | 112 |
|
Fulton Bank of New Jersey | | 35 |
| | 29 |
| | 64 |
|
The Columbia Bank | | 6 |
| | 25 |
| | 31 |
|
Lafayette Ambassador Bank | | 4 |
| | 17 |
| | 21 |
|
FNB Bank, N.A. | | 5 |
| | 1 |
| | 6 |
|
Swineford National Bank | | 5 |
| | 2 |
| | 7 |
|
Total | | 99 |
| | 142 |
| | 241 |
|
The following table summarizes the Corporation’s other significant administrative properties. Banking subsidiaries also maintain administrative offices at their respective main banking branches, which are included within the preceding table.
|
| | | | | | |
Entity | | Property | | Location | | Owned/Leased |
Fulton Bank, N.A./Fulton Financial Corporation | | Corporate Headquarters | | Lancaster, PA | | (1) |
Fulton Financial Corporation | | Operations Center | | East Petersburg, PA | | Owned |
Fulton Bank, N.A. | | Operations Center | | Mantua, NJ | | Owned |
| |
(1) | Includes approximately 100,000 square feet which is owned by an independent third party who financed the construction through a loan from Fulton Bank, N.A. The Corporation is leasing this space from the third party in an arrangement accounted for as a capital lease. The lease term expires in 2027. The Corporation owns the remainder of the Corporate Headquarters location. This property also includes a Fulton Bank, N.A. branch, which is included in the preceding table. |
Item 3. Legal Proceedings
The information presented in the "Legal Proceedings" section of "Note 1718 - CommitmentCommitments and Contingencies" in the Notes to Consolidated Financial Statements is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
As of December 31, 2017,2019, the Corporation had 175.2164.2 million shares of $2.50 par value common stock outstanding held byapproximately 32,00029,000 holders of record. The closing price per share of the Corporation’s common stock on February 15, 201814, 2020 was $18.60.$16.82. The common stock of the Corporation is traded on the Global Select Market of The NASDAQNasdaq Stock Market under the symbol FULT.
The following table presents the quarterly high and low prices of the Corporation’s stock and per share cash dividends declared for each of the quarterly periods in 20172019 and 2016:2018:
| | | | Price Range | | Per Share Dividend | | Price Range | | Per Share Dividend |
| | High | | Low | | | High | | Low | |
2017 | | | | | | | |
2019 | | | | | | | |
First Quarter | | $ | 19.75 |
| | $ | 16.90 |
| | $ | 0.11 |
| | $ | 17.39 |
| | $ | 14.85 |
| | $ | 0.13 |
|
Second Quarter | | 19.90 |
| | 16.85 |
| | 0.11 |
| | 17.57 |
| | 15.49 |
| | 0.13 |
|
Third Quarter | | 19.50 |
| | 16.45 |
| | 0.11 |
| | 17.28 |
| | 15.23 |
| | 0.13 |
|
Fourth Quarter | | 19.45 |
| | 17.30 |
| | 0.14 |
| | 18.00 |
| | 15.28 |
| | 0.17 |
|
2016 | | | | | | | |
2018 | | | | | | | |
First Quarter | | $ | 13.74 |
| | $ | 11.48 |
| | $ | 0.09 |
| | $ | 19.55 |
| | $ | 17.05 |
| | $ | 0.12 |
|
Second Quarter | | 14.35 |
| | 12.66 |
| | 0.10 |
| | 18.02 |
| | 16.50 |
| | 0.12 |
|
Third Quarter | | 14.86 |
| | 12.91 |
| | 0.10 |
| | 18.45 |
| | 15.05 |
| | 0.12 |
|
Fourth Quarter | | 19.45 |
| | 14.04 |
| | 0.12 |
| | 17.60 |
| | 14.38 |
| | 0.16 |
|
Restrictions on the Payments of Dividends
The Corporation is a separate and distinct legal entity from its banking and nonbanking subsidiaries, and depends on the payment of dividends from its subsidiaries, principally its banking subsidiaries,subsidiary, for substantially all of its revenues. As a result, the Corporation's ability to make dividend payments on its common stock depends primarily on certaincompliance with applicable federal and state regulatory considerationsrequirements and the receipt of dividends and other distributions from its subsidiaries. There are various regulatory and prudential supervisory restrictions, which may change from time to time, that impact the ability of its banking subsidiaries to pay dividends or make other payments to the Corporation. For additional information regarding the regulatory restrictions applicable to the Corporation and its subsidiaries, see "Supervision and Regulation," in Item 1. "Business;" Item 1A. "Risk Factors - The Corporation is a holding company and relies on dividends and other payments from its subsidiaries for substantially all of its revenue and its ability to make dividend payments, distributions and other payments," under "Risks Related to an Investment in the Corporation’s Securities;" and "Note 11 - Regulatory Matters," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about options outstanding under the Corporation’s Amended and Restated Equity and Cash Incentive Compensation Plan ("Employee Equity Plan") and the number of securities remaining available for future issuance under the Employee Equity Plan, the 2011Amended and Restated Directors' Equity Participation Plan and the Employee Stock Purchase Plan as of December 31, 2017:2019:
| | Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | | Weighted-average exercise price of outstanding options, warrants and rights (2) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) (3) | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | | Weighted-average exercise price of outstanding options, warrants and rights (2) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) (3) |
Equity compensation plans approved by security holders | | 2,185,139 |
| | $ | 10.66 |
| | 13,307,915 |
| | 1,872,596 |
| | $ | 11.12 |
| | 12,021,567 |
|
Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | 2,185,139 |
| | $ | 10.66 |
| | 13,307,915 |
| | 1,872,596 |
| | $ | 11.12 |
| | 12,021,567 |
|
(1) The number of securities to be issued upon exercise of outstanding options, warrants and rights includes 840,358865,068performance-based restricted stock units ("PSUs"), which is the target number of PSUs that are payable under the Employee Equity Plan, though no shares will be issued until achievement of applicable performance goals, and includes 466,579507,268 time-vested restricted stock units ("RSUs") granted under the Employee Equity Plan.
(2) The weighted-average exercise price of outstanding options, warrants and rights does not take into account outstanding PSUs and RSUs granted under the Employee Equity Plan.
(3) Consists of 11,076,43010,137,000 shares that may be awarded under the Employee Equity Plan, 359,761259,599 shares that may be awarded under the 2011Amended and Restated Directors' Equity Participation Plan and 1,871,724 of1,624,968 shares that may be purchased under the Employee Stock Purchase Plan. Excludes accrued purchase rights under the Employee Stock Purchase Plan as of December 31, 20172019 as the number of shares to be purchased is indeterminable until the time shares are issued.
Performance Graph
The following graph shows cumulative total shareholder return (i.e., price change, plus reinvestment of dividends) on the common stock of Fulton Financial Corporation during the five-year period ended December 31, 2017,2019, compared with (1) the NASDAQ Bank Index and (2) the Standard and Poor's 500 index ("S&P 500"). The graph is not indicative of future price performance.
The graph below is furnished under this Part II, Item 5 of this Form 10-K and shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
| | | | Year Ending December 31 | | Year Ending December 31 |
Index | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
Fulton Financial Corporation | | $ | 100.00 |
| | $ | 139.83 |
| | $ | 135.84 |
| | $ | 147.31 |
| | $ | 218.78 |
| | $ | 213.66 |
| | $ | 100.00 |
| | $ | 108.44 |
| | $ | 161.06 |
| | $ | 157.29 |
| | $ | 140.33 |
| | $ | 163.49 |
|
S&P 500 | | $ | 100.00 |
| | $ | 132.39 |
| | $ | 150.51 |
| | $ | 152.59 |
| | $ | 170.84 |
| | $ | 208.14 |
| | $ | 100.00 |
| | $ | 101.38 |
| | $ | 113.51 |
| | $ | 138.29 |
| | $ | 132.23 |
| | $ | 173.86 |
|
NASDAQ Bank Index | | $ | 100.00 |
| | $ | 136.62 |
| | $ | 152.77 |
| | $ | 156.15 |
| | $ | 197.60 |
| | $ | 233.94 |
| | $ | 100.00 |
| | $ | 102.21 |
| | $ | 129.34 |
| | $ | 153.13 |
| | $ | 128.02 |
| | $ | 175.61 |
|
Item 6. Selected Financial Data
5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data)
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
SUMMARY OF INCOME | | | | | | | | | | | | | | | | | | |
Interest income | $ | 668,866 |
| | $ | 603,100 |
| | $ | 583,789 |
| | $ | 596,078 |
| | $ | 609,689 |
| $ | 825,306 |
| | $ | 758,514 |
| | $ | 668,866 |
| | $ | 603,100 |
| | $ | 583,789 |
|
Interest expense | 93,502 |
| | 82,328 |
| | 83,795 |
| | 81,211 |
| | 82,495 |
| 176,917 |
| | 128,058 |
| | 93,502 |
| | 82,328 |
| | 83,795 |
|
Net interest income | 575,364 |
| | 520,772 |
| | 499,994 |
| | 514,867 |
| | 527,194 |
| 648,389 |
| | 630,456 |
| | 575,364 |
| | 520,772 |
| | 499,994 |
|
Provision for credit losses | 23,305 |
| | 13,182 |
| | 2,250 |
| | 12,500 |
| | 40,500 |
| 32,825 |
| | 46,907 |
| | 23,305 |
| | 13,182 |
| | 2,250 |
|
Investment securities gains, net | 9,071 |
| | 2,550 |
| | 9,066 |
| | 2,041 |
| | 8,004 |
| 4,733 |
| | 37 |
| | 9,071 |
| | 2,550 |
| | 9,066 |
|
Non-interest income, excluding investment securities gains | 198,903 |
| | 187,628 |
| | 172,773 |
| | 165,338 |
| | 179,660 |
| |
Non-interest income, excluding net investment securities gains | | 211,427 |
| | 195,488 |
| | 198,903 |
| | 187,628 |
| | 172,773 |
|
Loss on redemption of trust preferred securities | — |
| | — |
| | 5,626 |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 5,626 |
|
Non-interest expense, excluding loss on redemption of trust preferred securities | 525,579 |
| | 489,519 |
| | 474,534 |
| | 459,246 |
| | 461,433 |
| |
Prepayment penalty on FHLB advances | | 4,326 |
| | — |
| | — |
| | — |
| | — |
|
Non-interest expense (1) | | 563,410 |
| | 546,104 |
| | 525,579 |
| | 489,519 |
| | 474,534 |
|
Income before income taxes | 234,454 |
| | 208,249 |
| | 199,423 |
| | 210,500 |
| | 212,925 |
| 263,988 |
| | 232,970 |
| | 234,454 |
| | 208,249 |
| | 199,423 |
|
Income taxes | 62,701 |
| | 46,624 |
| | 49,921 |
| | 52,606 |
| | 51,085 |
| 37,649 |
| | 24,577 |
| | 62,701 |
| | 46,624 |
| | 49,921 |
|
Net income | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,502 |
| | $ | 157,894 |
| | $ | 161,840 |
| $ | 226,339 |
| | $ | 208,393 |
| | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,502 |
|
PER COMMON SHARE | | | | | | | | | | |
PER SHARE | | | | | | | | | | |
Net income (basic) | $ | 0.98 |
| | $ | 0.93 |
| | $ | 0.85 |
| | $ | 0.85 |
| | $ | 0.84 |
| $ | 1.36 |
| | $ | 1.19 |
| | $ | 0.98 |
| | $ | 0.93 |
| | $ | 0.85 |
|
Net income (diluted) | 0.98 |
| | 0.93 |
| | 0.85 |
| | 0.84 |
| | 0.83 |
| 1.35 |
| | 1.18 |
| | 0.98 |
| | 0.93 |
| | 0.85 |
|
Cash dividends | 0.47 |
| | 0.41 |
| | 0.38 |
| | 0.34 |
| | 0.32 |
| 0.56 |
| | 0.52 |
| | 0.47 |
| | 0.41 |
| | 0.38 |
|
RATIOS | | | | | | | | | | | | | | | | | | |
Return on average assets | 0.88 | % | | 0.88 | % | | 0.86 | % | | 0.93 | % | | 0.96 | % | 1.06 | % | | 1.03 | % | | 0.88 | % | | 0.88 | % | | 0.86 | % |
Return on average equity | 7.83 |
| | 7.69 |
| | 7.38 |
| | 7.62 |
| | 7.88 |
| 9.81 |
| | 9.24 |
| | 7.83 |
| | 7.69 |
| | 7.38 |
|
Return on average tangible equity (1) | 10.33 |
| | 10.30 |
| | 10.01 |
| | 10.31 |
| | 10.76 |
| |
Return on average tangible equity (2) | | 12.84 |
| | 12.09 |
| | 10.33 |
| | 10.30 |
| | 10.01 |
|
Net interest margin | 3.28 |
| | 3.18 |
| | 3.21 |
| | 3.39 |
| | 3.50 |
| 3.36 |
| | 3.40 |
| | 3.28 |
| | 3.18 |
| | 3.21 |
|
Efficiency ratio (1) | 64.5 |
| | 67.2 |
| | 68.6 |
| | 65.7 |
| | 63.4 |
| |
Efficiency ratio (2) | | 63.7 |
| | 63.8 |
| | 64.5 |
| | 67.2 |
| | 68.6 |
|
Dividend payout ratio | 48.0 |
| | 44.1 |
| | 44.7 |
| | 40.5 |
| | 38.6 |
| 41.5 |
| | 44.1 |
| | 48.0 |
| | 44.1 |
| | 44.7 |
|
PERIOD-END BALANCES | | | | | | | | | | | | | | | | | | |
Total assets | $ | 20,036,905 |
| | $ | 18,944,247 |
| | $ | 17,914,718 |
| | $ | 17,124,767 |
| | $ | 16,934,634 |
| $ | 21,886,040 |
| | $ | 20,682,152 |
| | $ | 20,036,905 |
| | $ | 18,944,247 |
| | $ | 17,914,718 |
|
Investment securities | 2,547,956 |
| | 2,559,227 |
| | 2,484,773 |
| | 2,323,371 |
| | 2,568,434 |
| 2,867,378 |
| | 2,686,973 |
| | 2,547,956 |
| | 2,559,227 |
| | 2,484,773 |
|
Loans, net of unearned income | 15,768,247 |
| | 14,699,272 |
| | 13,838,602 |
| | 13,111,716 |
| | 12,782,220 |
| |
Loans and leases, net of unearned income | | 16,837,526 |
| | 16,165,800 |
| | 15,768,247 |
| | 14,699,272 |
| | 13,838,602 |
|
Deposits | 15,797,532 |
| | 15,012,864 |
| | 14,132,317 |
| | 13,367,506 |
| | 12,491,186 |
| 17,393,913 |
| | 16,376,159 |
| | 15,797,532 |
| | 15,012,864 |
| | 14,132,317 |
|
Short-term borrowings | 617,524 |
| | 541,317 |
| | 497,663 |
| | 329,719 |
| | 1,258,629 |
| 883,241 |
| | 754,777 |
| | 617,524 |
| | 541,317 |
| | 497,663 |
|
FHLB advances and long-term debt | 1,038,346 |
| | 929,403 |
| | 949,542 |
| | 1,139,413 |
| | 883,584 |
| 881,769 |
| | 992,279 |
| | 1,038,346 |
| | 929,403 |
| | 949,542 |
|
Shareholders’ equity | 2,229,857 |
| | 2,121,115 |
| | 2,041,894 |
| | 1,996,665 |
| | 2,063,187 |
| 2,342,176 |
| | 2,247,573 |
| | 2,229,857 |
| | 2,121,115 |
| | 2,041,894 |
|
AVERAGE BALANCES | | | | | | | | | | | | | | | | | | |
Total assets | $ | 19,580,367 |
| | $ | 18,371,173 |
| | $ | 17,406,843 |
| | $ | 16,959,507 |
| | $ | 16,811,337 |
| $ | 21,258,040 |
| | $ | 20,183,202 |
| | $ | 19,580,367 |
| | $ | 18,371,173 |
| | $ | 17,406,843 |
|
Investment securities | 2,547,914 |
| | 2,469,564 |
| | 2,347,810 |
| | 2,485,292 |
| | 2,715,546 |
| 2,778,846 |
| | 2,662,800 |
| | 2,547,914 |
| | 2,469,564 |
| | 2,347,810 |
|
Loans, net of unearned income | 15,236,612 |
| | 14,128,064 |
| | 13,330,973 |
| | 12,885,180 |
| | 12,578,524 |
| |
Loans and leases, net of unearned income | | 16,430,347 |
| | 15,815,263 |
| | 15,236,612 |
| | 14,128,064 |
| | 13,330,973 |
|
Deposits | 15,481,221 |
| | 14,585,545 |
| | 13,747,113 |
| | 12,867,663 |
| | 12,473,184 |
| 16,766,561 |
| | 15,832,606 |
| | 15,481,221 |
| | 14,585,545 |
| | 13,747,113 |
|
Short-term borrowings | 533,564 |
| | 395,727 |
| | 323,772 |
| | 832,839 |
| | 1,196,323 |
| 849,679 |
| | 785,923 |
| | 533,564 |
| | 395,727 |
| | 323,772 |
|
FHLB advances and long-term debt | 1,034,444 |
| | 959,142 |
| | 1,023,972 |
| | 965,601 |
| | 889,461 |
| 942,600 |
| | 977,573 |
| | 1,034,444 |
| | 959,142 |
| | 1,023,972 |
|
Shareholders’ equity | 2,193,863 |
| | 2,100,634 |
| | 2,026,883 |
| | 2,071,640 |
| | 2,053,821 |
| 2,306,070 |
| | 2,255,764 |
| | 2,193,863 |
| | 2,100,634 |
| | 2,026,883 |
|
| |
(1) | Excluding loss on redemption of trust preferred securities and prepayment penalty on FHLB advances. |
| |
(2) | Ratio represents a financial measure derived by methods other than Generally Accepted Accounting Principles ("GAAP"). See reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure under the following heading, "Supplemental Reporting of Non-GAAP Based Financial Measures" below. |
Supplemental Reporting of Non-GAAP Based Financial Measures
This Annual Report on Form 10-K contains supplemental financial information, as detailed below, which has been derived by methods other than Generally Accepted Accounting Principles ("GAAP"). The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Corporation's industry. Management believes that these non-GAAP financial measures, in addition to GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-GAAP financial measures might not be comparable to similarly-titled measures of other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety. Following are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure as of and for the year ended December 31:
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (in thousands, except per share data and percentages) | (in thousands, except per share data and percentages) |
Return on average tangible equity | Net income | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,502 |
| | $ | 157,894 |
| | $ | 161,840 |
| $ | 226,339 |
| | $ | 208,393 |
| | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,502 |
|
Plus: Intangible amortization, net of tax | — |
| | — |
| | 161 |
| | 818 |
| | 1,584 |
| 1,127 |
| | — |
| | — |
| | — |
| | 161 |
|
Numerator | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,663 |
| | $ | 158,712 |
| | $ | 163,424 |
| $ | 227,466 |
| | $ | 208,393 |
| | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,663 |
|
| | | | | | | | | | | | | | | | | | |
Average common shareholders' equity | $ | 2,193,863 |
| | $ | 2,100,634 |
| | $ | 2,026,883 |
| | $ | 2,071,640 |
| | $ | 2,053,821 |
| $ | 2,306,070 |
| | $ | 2,255,764 |
| | $ | 2,193,863 |
| | $ | 2,100,634 |
| | $ | 2,026,883 |
|
Less: Average goodwill and intangible assets | (531,556 | ) | | (531,556 | ) | | (531,618 | ) | | (532,425 | ) | | (534,431 | ) | (534,120 | ) | | (531,556 | ) | | (531,556 | ) | | (531,556 | ) | | (531,618 | ) |
Average tangible shareholders' equity (denominator) | $ | 1,662,307 |
| | $ | 1,569,078 |
| | $ | 1,495,265 |
| | $ | 1,539,215 |
| | $ | 1,519,390 |
| $ | 1,771,950 |
| | $ | 1,724,208 |
| | $ | 1,662,307 |
| | $ | 1,569,078 |
| | $ | 1,495,265 |
|
| | | | | | | | | | | | | | | | | | |
Return on average tangible equity | 10.33 | % | | 10.30 | % | | 10.01 | % | | 10.31 | % | | 10.76 | % | 12.84 | % | | 12.09 | % | | 10.33 | % | | 10.30 | % | | 10.01 | % |
| | | | | | | | | | | | | | | | | | |
Efficiency ratio | | | | | | | | | | | | | | | | | | |
Non-interest expense | $ | 525,579 |
| | $ | 489,519 |
| | $ | 480,160 |
| | $ | 459,246 |
| | $ | 461,433 |
| $ | 567,736 |
| | $ | 546,104 |
| | $ | 525,579 |
| | $ | 489,519 |
| | $ | 480,160 |
|
Less: Amortization of tax credit investments | (11,028 | ) | | — |
| | — |
| | — |
| | — |
| (6,021 | ) | | (11,449 | ) | | (11,028 | ) | | — |
| | — |
|
Less: Intangible amortization | — |
| | — |
| | (247 | ) | | (1,259 | ) | | (2,438 | ) | (1,427 | ) | | — |
| | — |
| | — |
| | (247 | ) |
Less: Loss on redemption of trust preferred securities | — |
| | — |
| | (5,626 | ) | | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | (5,626 | ) |
Less: Prepayment penalty on FHLB advances | | (4,326 | ) | | — |
| | — |
| | — |
| | — |
|
Numerator | $ | 514,551 |
| | $ | 489,519 |
| | $ | 474,287 |
| | $ | 457,987 |
| | $ | 458,995 |
| $ | 555,962 |
| | $ | 534,655 |
| | $ | 514,551 |
| | $ | 489,519 |
| | $ | 474,287 |
|
| | | | | | | | | | | | | | | | | | |
Net interest income (fully taxable equivalent) (1) | $ | 598,565 |
| | $ | 541,271 |
| | $ | 518,464 |
| | $ | 532,322 |
| | $ | 544,474 |
| $ | 661,356 |
| | $ | 642,577 |
| | $ | 598,565 |
| | $ | 541,271 |
| | $ | 518,464 |
|
Plus: Total Non-interest income | 207,974 |
| | 190,178 |
| | 181,839 |
| | 167,379 |
| | 187,664 |
| |
Plus: Total non-interest income | | 216,160 |
| | 195,525 |
| | 207,974 |
| | 190,178 |
| | 181,839 |
|
Less: Investment securities gains, net | (9,071 | ) | | (2,550 | ) | | (9,066 | ) | | (2,041 | ) | | (8,004 | ) | (4,733 | ) | | (37 | ) | | (9,071 | ) | | (2,550 | ) | | (9,066 | ) |
Denominator | $ | 797,468 |
| | $ | 728,899 |
| | $ | 691,237 |
| | $ | 697,660 |
| | $ | 724,134 |
| $ | 872,783 |
| | $ | 838,065 |
| | $ | 797,468 |
| | $ | 728,899 |
| | $ | 691,237 |
|
| | | | | | | | | | | | | | | | | | |
Efficiency ratio | 64.5 | % | | 67.2 | % | | 68.6 | % | | 65.6 | % | | 63.4 | % | 63.7 | % | | 63.8 | % | | 64.5 | % | | 67.2 | % | | 68.6 | % |
| | | | | | | | | | | | | | | | | | |
Non-performing assets to tangible equity and allowance for credit losses | |
Non-performing assets to tangible shareholders' equity and allowance for credit losses ("Texas Ratio") | | Non-performing assets to tangible shareholders' equity and allowance for credit losses ("Texas Ratio") |
Non-performing assets (numerator) | $ | 144,582 |
| | $ | 144,453 |
| | $ | 155,913 |
| | $ | 150,504 |
| | $ | 169,329 |
| $ | 147,986 |
| | $ | 150,196 |
| | $ | 144,582 |
| | $ | 144,453 |
| | $ | 155,913 |
|
| | | | | | | | | | | | | | | | | | |
Tangible equity | $ | 1,698,301 |
| | $ | 1,589,559 |
| | $ | 1,510,338 |
| | $ | 1,464,862 |
| | $ | 1,530,111 |
| $ | 1,806,873 |
| | $ | 1,716,017 |
| | $ | 1,698,301 |
| | $ | 1,589,559 |
| | $ | 1,510,338 |
|
Plus: Allowance for credit losses | 176,084 |
| | 171,325 |
| | 171,412 |
| | 185,931 |
| | 204,917 |
| 166,209 |
| | 169,410 |
| | 176,084 |
| | 171,325 |
| | 171,412 |
|
Tangible equity and allowance for credit losses (denominator) | $ | 1,874,385 |
| | $ | 1,760,884 |
| | $ | 1,681,750 |
| | $ | 1,650,793 |
| | $ | 1,735,028 |
| |
Non-performing assets to tangible common shareholders' equity and allowance for credit losses | 7.71 | % | | 8.20 | % | | 9.27 | % | | 9.12 | % | | 9.76 | % | |
Tangible shareholders' equity and allowance for credit losses (denominator) | | $ | 1,973,082 |
| | $ | 1,885,427 |
| | $ | 1,874,385 |
| | $ | 1,760,884 |
| | $ | 1,681,750 |
|
Texas Ratio | | 7.50 | % | | 7.97 | % | | 7.71 | % | | 8.20 | % | | 9.27 | % |
(1) Presented on a fully taxable equivalent basis, using a 35% Federal21% federal tax rate for 2018 through 2019 and statutory interest expense disallowances.35% for 2015 through 2017.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Management’s Discussion") relates to Fulton Financial Corporation (the "Corporation"), a financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. Management’s Discussion should be read in conjunction with the consolidated financial statements and other financial information presented in this report.
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition, and results of operations.operations and business. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends""intends," "projects," the negative of these terms and similar expressions whichother comparable terminology. These forward looking statements may include projections of, or guidance on, the Corporation’s future financial performance, expected levels of future expenses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation’s business or financial results.
Forward-looking statements are intended to identify forward-looking statements.
Theseneither historical facts, nor assurance of future performance. Instead, they are based on current beliefs, expectations and assumptions regarding the future of the Corporation’s business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements are not guarantees ofrelate to the future, performance andthey are subject to inherent uncertainties, risks and uncertainties, somechanges in circumstances that are difficult to predict and many of which are beyondoutside of the Corporation'sCorporation’s control, and ability to predict, that could cause actual results toand financial condition may differ materially from those expressedindicated in the forward-looking statements. Therefore, you should not unduly rely on any of these forward-looking statements. Any forward-looking statement is based only on information currently available and speaks only as of the date when made. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Many factors could affect future financial results including, without limitation:
the impact of adverse conditions in the economy and capitalfinancial markets on the performance of the Corporation’s loan and lease portfolio and demand for the Corporation’s products and services;
increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge off loans and leases and incur elevated collection and carrying costs related to such non-performing assets;
investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;
the effects of market interest rates, and the relative balances of interest rate-sensitive assets to interest rate-sensitive liabilities, on net interest margin and net interest income;
the planned phasing out of LIBOR as a benchmark reference rate;
the effects of changes in interest rates on demand for the Corporation’s products and services;
the effects of changes in interest rates or disruptions in liquidity markets on the Corporation’s sources of funding;
the effects of the extensive level of regulation and supervision to which the Corporation and its bank subsidiariesFulton Bank, N.A. ("Fulton Bank" or "the Bank") are subject;
the effects of the increasingsignificant amounts of time and expense associated with regulatory compliance and risk management;
the potential for negative consequences from regulatory violations, investigations and examinations, or failure to comply with the BSA, the Patriot Act and related AML requirements, including potential supervisory actions, and the assessment of fines and penalties;
penalties, the additional time, expense and investment required to comply with,imposition of sanctions and the restrictions on potential growth and investment activities resulting from, the existing enforcement orders applicableneed to the Corporation and three of its bank subsidiaries by federal and state bank regulatory agencies requiring improvement in compliance functions and otherundertake remedial actions, or any future enforcement orders;actions;
the continuing impact of the Dodd-Frank Act on the Corporation'sCorporation’s business and results of operations;
the effects of, and uncertainty surrounding, new legislation, changes in regulation and government policy, and changes in leadership at the federal banking agencies, which could result in significant changes in banking and financial services regulation;
the effects of actions by the federal government, including those of the Federal Reserve Board and other government agencies, that impact money supply and market interest rates;
the effects of changes in U.S. federal, state or local tax laws;
the effects of negative publicity on the Corporation’s reputation;
the effects of adverse outcomes in litigation and governmental or administrative proceedings;
the potential to incur losses in connection with repurchase and indemnification payments related to sold loans;
the Corporation's ability to obtain regulatory approvals to consolidate its bank subsidiaries and achieve intended reductions in the time, expense and resources associated with regulatory compliance from such consolidations;
the Corporation’s ability to successfully transform its business model;
the Corporation’s ability to achieve its growth plans;
completed and potential acquisitions may affect costs and the Corporation may not be able to successfully integrate the acquired business or realize the anticipated benefits from such acquisitions;
the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;
the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment;
the effects of changes in accounting policies, standards, and interpretations on the Corporation'sCorporation’s reporting of its financial condition and results of operations;
the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;
the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements;
the failure or circumvention of the Corporation’s system of internal controls;
the loss of, or failure to safeguard, confidential or proprietary information;
the Corporation’s failure to identify and to address cyber-security risks, including data breaches and cyber attacks;cyber-attacks;
the Corporation’s ability to keep pace with technological changes;
the Corporation’s ability to attract and retain talented personnel;
capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements, and the Corporation’s ability to generate capital internally or raise capital on favorable terms;
the Corporation’s reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions; and
the effects of any downgrade in the Corporation’s or Fulton Bank’s credit ratings on itstheir borrowing costs or access to capital markets.
OVERVIEW
The Corporation is a financial holding company, comprised of sixwhich, through its wholly owned banking subsidiaries which providesubsidiary, provides a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. During 2018, the Corporation consolidated two of its wholly owned banking subsidiaries into its lead bank, Fulton Bank, and during 2019, the remaining three wholly owned banking subsidiaries were consolidated into Fulton Bank.
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/orand maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent, or "FTE") as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments and properties. Offsetting these revenue sources are provisions for credit losses on loans and leases and off-balance sheet credit risks, non-interest expenses and income taxes.
The following table presents a summary of the Corporation’s earnings and selected performance ratios:
| | | 2017 | | 2016 | 2019 | | 2018 |
Net income (in thousands) | $ | 171,753 |
| | $ | 161,625 |
| $ | 226,339 |
| | $ | 208,393 |
|
Diluted net income per share | $ | 0.98 |
| | $ | 0.93 |
| $ | 1.35 |
| | $ | 1.18 |
|
Return on average assets | 0.88 | % | | 0.88 | % | 1.06 | % | | 1.03 | % |
Return on average equity | 7.83 | % | | 7.69 | % | 9.81 | % | | 9.24 | % |
Return on average tangible equity (1) | 10.33 | % | | 10.30 | % | 12.84 | % | | 12.09 | % |
Net interest margin (2) | 3.28 | % | | 3.18 | % | 3.36 | % | | 3.40 | % |
Efficiency ratio (1) | 64.5 | % | | 67.2 | % | 63.7 | % | | 63.8 | % |
Non-performing assets to total assets | 0.72 | % | | 0.76 | % | 0.68 | % | | 0.73 | % |
Annualized net charge-offs to average loans | 0.12 | % | | 0.09 | % | |
Annualized net charge-offs to average loans and leases | | 0.22 | % | | 0.34 | % |
| |
(1) | Ratio represents a financial measure derived by methods other than U.S. Generally Accepted Accounting Principles ("GAAP"). See reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures," in Item 6. Selected Financial Data. |
| |
(2) | Presented on an FTE basis, using a 35%21% Federal tax rate and statutory interest expense disallowances. See also the "Net Interest Income" section of Management’s Discussion. |
Following is a summary of the financial highlights for the year ended December 31, 2017:2019:
| |
• | Net Income Per Share Growth - Diluted net income per share increased $0.17, or 14.4%, to $1.35 in 2019 compared to $1.18 in 2018. The growth in net income per share was due to a $17.9 million, or 8.6%, increase in net income and the impact of an 8.8 million, or 5.0%, decrease in weighted average diluted shares outstanding in comparison to 2018. The increase in net income was driven by a $17.9 million, or 2.8%, increase in net interest income, a $14.1 million decrease in the provision for credit losses, a $15.9 million, or 8.1%, increase in non-interest income, and a $4.7 million increase in investment securities gains, partially offset by a $21.6 million, or 4.0%, increase in non-interest expense and a $13.1 million increase in income taxes. |
| |
• | Net Interest Income Growth- The $17.9 million increase in net interest income resulted from growth in interest-earning assets, partially offset by the impact of a lower net interest margin. |
Net Income Per Share Growth - Diluted net income per share increased $0.05, or 5.4%, to $0.98 per diluted share, compared to $0.93 in 2016. This increase was due to an increase in net income of $10.1 million, or 6.3%, partially offset by a $1.5 million, or 0.9%, increase in weighted average diluted shares outstanding in comparison to 2016. The increase in net income was driven by a $54.6 million, or 10.5%, increase in net interest income and a $17.8 million, or 9.4%, increase in non-interest income, including a $6.5 million increase in investment securities gains, which were offset by a $10.1 million increase in the provision for credit losses, a $36.1 million, or 7.4%, increase in non-interest expense and a $15.6 million income tax expense charge arising from tax reform legislation enacted late in the fourth quarter, as further discussed below.
Net Interest Income Growth- The $54.6 million increase in net interest income resulted from growth in interest-earning assets and the impact of a 10 basis point increase in the net interest margin, reflecting the impact of multiple rate increases by the Federal Reserve Bank (FRB) in 2016 and 2017.
| |
◦ | Net Interest Margin- For the year ended December 31, 2017,2019, the net interest margin increased 10decreased 4 basis points, or 3.1%1.2%, in comparison to 2016,2018, driven by a 13an 18 basis point increase in yields on interest-earning assets, partiallybeing more than offset by a 322 basis point increase in the cost of funds. |
| |
◦ | Loan and Lease Growth- Average loans and leases increased $1.1 billion,$615.1 million, or 7.8%3.9%, in comparison to 2016,2018, with notable increases in residential and commercial mortgages and residential mortgages, commercial - industrial, financialloans. Loan and agricultural, and construction loans. The Corporation's loanlease growth occurred throughout all of its geographic markets. |
| |
◦ | Deposit Growth - Average deposits increased $895.7$934.0 million, or 6.1%5.9%, in comparison to 2016.2018. The increase was the result of growth in demand and savings accounts, partially offset by a decrease in time deposits.all deposit types. At December 31, 2017,2019, the loan-to-deposit ratio was to 99.8%96.8%, as compared to 97.9%98.7% at December 31, 2016.2018. |
| |
• | Provision for Credit Losses- The provision for credit losses decreased $14.1 million, to $32.8 million, for the year ended December 31, 2019. During 2018, the Corporation recorded a $36.8 million provision related to fraud committed by a single, large commercial relationship ("Commercial Relationship"). In 2019, the Corporation recorded a $20.0 million provision for a certain commercial borrower. |
| |
• | Non-Interest Income - Non-interest income, excluding securities gains, increased $15.9 million, or 8.2%, in comparison to 2018. Increases were experienced in wealth management, commercial and consumer banking and mortgage banking. |
| |
• | Investment Securities Gains - Investment securities gains totaled $4.7 million in 2019, as compared to $37,000 in 2018. During the third quarter of 2019, the Corporation completed a balance sheet restructuring, which included the sale of approximately $400 million of investment securities and a corresponding prepayment of Federal Home Loan Bank ("FHLB") advances. As a result of these transactions, $4.5 million of investment securities gains were realized. See Note 3, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details. |
| |
• | Non-Interest Expense- Non-interest expense increased $21.6 million, or 4.0%, in comparison to 2018, driven largely by higher salaries and employee benefits expense, other outside services and data processing and software expenses. Partially offsetting these increases was a reduction in amortization of tax credit investments, FDIC insurance expense due to the recognition of $3.2 million in assessment credits in 2019 and professional fees. In addition, the Corporation recorded $4.3 million of prepayment penalties on certain FHLB advances in conjunction with the above-mentioned balance sheet restructuring. |
Provision for credit losses- The provision for credit losses increased $10.1In connection with the consolidation of the Corporation's subsidiary banks into Fulton Bank ("Charter Consolidation"), expenses totaling $10.9 million to $23.3 million for the year ended December 31, 2017, primarily driven by growth in the loan portfolio and an increase in the reserve for unfunded lending commitments.
Non-Interest Income - Non-interest income, excluding securities gains, increased $11.3 million, or 6.0%, in comparison to 2016, primarily driven by a $5.1 million net gain recognized on the settlement of litigation, and increases in investment management and trust services income, Small Business Administration ("SBA") lending income, debit and credit card income and merchant fees.
Investment Securities Gains - Investment securities gains totaled $9.1 million in comparison to $2.6 million in 2016. Gains on the sales of financial institution common stocks of $13.6$3.6 million were partially offset by approximately $4.5 million of losses on debt securities sales as a result of repositioning the investment portfolio.incurred in 2019 and 2018, respectively.
| |
• | Income Taxes - Income tax expense for 2019 resulted in an effective tax rate ("ETR") of 14.3%, as compared to 10.5% for 2018. The increase in the ETR was primarily a result of higher income before income taxes and from realizing a one-time tax benefit associated with legislative changes enacted in New Jersey in the third quarter of 2018. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs. |
Non-Interest Expense- Non-interest expense increased $36.1 million, or 7.4%, in comparison to 2016, driven largely by the amortization of tax credit investments, higher salaries and employee benefits expense, state taxes, other outside services and the write-off of certain accumulated capital expenditures related to technology initiatives in commercial banking.
Income Taxes - Income tax expense for 2017 resulted in an effective tax rate ("ETR") of 26.7%, as compared to 22.4% for 2016. Included in 2017 income tax expense was a charge of $15.6 million, or 6.7%, of income before income taxes. This amount reflects an estimated reduction in the value of the net deferred tax asset as a result of the U.S. corporate income tax rate decrease included in the Tax Cuts and Jobs Act of 2017 ("Tax Act"). Absent the impact of the rate reduction, income tax expense for 2017 would have been approximately $47.1 million, or 20.1%, of income before income taxes. The decrease in the ETR, absent the $15.6 million charge, from 2016 to 2017, was related to increases in tax credit investments and related net tax credits and the impact of the adoption of the Financial Accounting Standards Board ("FASB") Accounting Standard Update ("ASU") 2016-09, Improvements to Employee Share-based Payments Accounting, in the first quarter of 2017. See "Note 1 - Summary of Significant Accounting Policies," in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
CRITICAL ACCOUNTING POLICIES
The following is a summary of those accounting policies that the Corporation considers to be most important to the presentation of its financial condition and results of operations, asbecause they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain. See additional information regarding these critical accounting policies in "Note 1 - Summary of Significant Accounting Policies," in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Allowance for Credit Losses - The allowance for credit losses consists of the allowance for loan and lease losses and the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of incurred losses in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans.loans and/or leases. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan and lease commitments and letters of credit and is recorded in other liabilities on the consolidated balance sheet.
The Corporation’s allowance for loan and lease losses includes: 1) specific allowances allocated to loans and leases evaluated for impairment under the Financial Accounting Standards Board's Accounting Standards Codification ("FASB ASC") Section 310-10-35; and 2) allowances calculated for pools of loans and leases evaluated for impairment under FASB ASC Subtopic 450-20.
Management's estimate of incurred losses in the loan and lease portfolio is based on a methodology that includes the following critical judgments:
Identification of potential problem loans in a timely manner.For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk rating categories is a significant component of the allowance for credit loss methodology for these loans, which bases the probability of default on this migration. Assigning risk ratings involves judgment. The Corporation's loan review officers provide an independent assessment of risk rating accuracy. Ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review assessments identify a deterioration or an improvement in the loan.
| |
• | Identification of potential problem loans and leases in a timely manner.For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk rating categories is a significant component of the allowance for credit losses methodology for these loans, which bases the probability of default on this migration. Assigning risk ratings involves judgment. The Corporation's loan review officers provide an independent assessment of risk rating accuracy. Ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review assessments identify a deterioration or an improvement in the loan. |
The Corporation does not assign internal risk ratings for residential mortgages, home equity loans, consumer loans, lease receivables, and construction loans to individuals secured by residential real estate, as these portfolios consist of a larger number of loans with smaller balances. Instead, these portfolios are evaluated for risk through the monitoring of delinquency status.
| |
• | Proper collateral valuation of impaired loans and leases evaluated for impairment under ASC Section 310-10-35.Substantially all of the Corporation’s impaired loans and leases to borrowers with total outstanding loan and lease balances greater than or equal to $1.0 million are measured based on the estimated fair value of each loan and lease’s collateral. Collateral could be in the form of real estate, in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial loans. Commercial loans may also be secured by real property. |
Proper collateral valuation of impaired loans evaluated for impairment under FASB ASC Section 310-10-35.Substantially all of the Corporation’s impaired loans to borrowers with total outstanding loan balances greater than or equal to $1.0 million are measured based on the estimated fair value of each loan’s collateral. Collateral could be in the form of real estate, in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial loans. Commercial loans may also be secured by real property.
For loans secured by real estate, estimated fair values are determined primarily through appraisals performed by state certified third-party appraisers, discounted to arrive at expected net sale proceeds. For collateral-dependent loans, estimated real estate fair values are also net of estimated selling costs. When a real estate securedestate-secured loan becomes impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the Corporation’s experience and knowledge of the real estate market; the purpose of the loan; market factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Corporation generally obtains updated appraisals performed by state certified third-party appraisers for impaired loans secured predominately by real estate every 12 months.
When updated appraisals are not obtained for loans evaluated for impairment under FASB ASC Section 310-10-35 that are secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and, in the opinion of the Corporation's internal credit administration staff, there has not been a significant deterioration in the collateral value since the original appraisal was performed. Original appraisals are typically used only when the estimated collateral value, as adjusted appropriately for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70%.
Proper measurement of allowance needs for pools of loans evaluated for impairment under FASB ASC Subtopic 450-20. | |
• | Proper measurement of allowance needs for pools of loans and leases under FASB ASC Subtopic 450-20. For loan and lease loss allocation purposes, loans and leases are segmented into pools with similar characteristics. These pools are established by general loan and lease type, or "portfolio segments," as presented in the table under the heading, "Loans |
and Leases, net of unearned income," within "Note 4 - Loans and Leases and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on "class segments," which are largely based on the type of collateral underlying each loan.loan or lease. For commercial loans, class segments include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Consumer loan class segments are based on collateral types and include direct consumer installment loans, home equity loans and indirect automobile loans.
Equipment lease financing includes commercial vehicle, construction, manufacturing and medical equipment leases.Commercial loans, commercial mortgages and construction loans to commercial borrowers are further segmented into separate pools based on internally assigned risk ratings. Residential mortgages, home equity loans, consumer loans, and lease receivables are further segmented into separate pools based on delinquency status.
A loss rate is calculated for each pool through a migration analysis based on historical losses as loans and leases migrate through the various risk rating or delinquency categories. Estimated loss rates are based on a probability of default and a loss given default. The loss rate is adjusted to consider qualitative factors, such as economic conditions and trends.
Overall assessment of the risk profile of the loan portfolio. The allocation of the allowance for credit losses is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Corporation considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type. Prior to 2017, the Corporation maintained an unallocated allowance for credit losses for factors and conditions that exist at the balance sheet date, but are not specifically identifiable, and to recognize the inherent imprecision in estimating and measuring loss exposure. In 2017, enhancements were made to allow for the impact of these factors and conditions to be quantified in the allowance allocation process. Accordingly, an unallocated allowance for credit losses is no longer necessary.
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• | Overall assessment of the risk profile of the loan and lease portfolio. The allocation of the allowance for credit losses is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan and lease portfolio. The Corporation considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans and leases; the diversity of borrower industry types; and the composition of the portfolio by loan and lease type. Prior to 2017, the Corporation maintained an unallocated allowance for credit losses for factors and conditions that exist at the balance sheet date, but are not specifically identifiable, and to recognize the inherent imprecision in estimating and measuring loss exposure. In 2017, enhancements were made to allow for the impact of these factors and conditions to be quantified in the allowance allocation process. Accordingly, an unallocated allowance for credit losses is no longer necessary. |
For additional details related to the allowance for credit losses, see "Note 4 - Loans and Leases and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Goodwill - Goodwill recorded in connection with acquisitions is not amortized to expense, but is tested at least annually for impairment. A quantitative annual impairment test is not required if, based on a qualitative analysis, the Corporation determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. The Corporation completes its annual goodwill impairment test as ofin October 31st of each year. The Corporation tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill through an impairment charge to non-interest expense is necessary. If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill.
Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments. Among these are future growth rates for the reporting units, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting units and could result in impairment charges.
For additional details related to the annual goodwill impairment test, see "Note 6 - Goodwill and Intangible Assets," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Income Taxes – The provision for income taxes is based upon income before income taxes, adjusted for the effect of certain tax-exempt income, non-deductible expenses and credits. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The Corporation must also evaluate the likelihood that deferred tax assets will be recovered through future taxable income. If any such assets are more likely than not to not be recovered, a valuation allowance must be recognized. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Corporation’s consolidated financial statements.
On a periodic basis, the Corporation evaluates its income tax positions based on tax laws, regulations and financial reporting considerations, and records adjustments as appropriate. Recognition and measurement of tax positions is based upon management’s evaluations of current taxing authorities’ examinations of the Corporation’s tax returns, recent positions taken by the taxing authorities on similar transactions and the overall tax environment.
Fair Value Measurements – FASB ASC Topic 820 establishesAssets and liabilities are categorized in a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value based on the following three categories (from highest to lowest priority):
Level 1 – Inputs that represent quoted prices for identical instruments in active markets.
Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
The Corporation has categorized all assets and liabilities measured at fair value either on a recurring or nonrecurring basis into the above three levels.
The determination of fair value for assets categorized as Level 3 items involves a great deal of subjectivity due to the use of unobservable inputs. In addition, determining when a market is no longer active and placing little or no reliance on distressed market prices requires the use of management’s judgment. The Corporation's Level 3 assets include available for sale debt securities in the form of pooled trust preferred securities, certain single-issuer trust preferred securities issued by financial institutions and auction rate securities. The Corporation also categorizes impaired loans and leases, net of allowance, allocations, other real estate owned ("OREO") and mortgage servicing rights ("MSRs") as Level 3 assets measured at fair value on a nonrecurring basis.
The Corporation engages third-party valuation experts to assist in valuing interest rate swap derivatives and most available-for-sale investment securities, both measured at fair value on a recurring basis, and MSRs, which are measured at fair value on a non-recurring basis. The pricing data and market quotes the Corporation obtains from outside sources are reviewed internally for reasonableness.
For additional details see "Note 1819 - Fair Value Measurements," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for the disclosures required by FASB ASC Topic 820.Data."
NewRecently Issued Accounting Standards
For a description of new accounting standards recently issued, but not yet adopted by the Corporation, see "New"Recently Issued Accounting Standards," in "Note 1 - Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporation’s net income. The Corporation manages the risk associated with changes in interest rates through the techniques described within Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."
The following table provides a comparative average balance sheet and net interest income analysis for 20172019 compared to 20162018 and 2015.2017. Interest income and yields are presented on an FTE basis, using a 35%21% federal tax rate for 2019 and 2018 and 35% for 2017, as well as statutory interest expense disallowances. The discussion following this table is based on these tax-equivalent amounts.
| | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Average Balance | | Interest (1) | | Yield/ Rate | | Average Balance | | Interest (1) | | Yield/ Rate | | Average Balance | | Interest (1) | | Yield/ Rate | Average Balance | | Interest (1) | | Yield/ Rate | | Average Balance | | Interest (1) | | Yield/ Rate | | Average Balance | | Interest (1) | | Yield/ Rate |
| (dollars in thousands) | (dollars in thousands) |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans, net of unearned income (2) | $ | 15,236,612 |
| | $ | 620,803 |
| | 4.07 | % | | $ | 14,128,064 |
| | $ | 558,472 |
| | 3.95 | % | | $ | 13,330,973 |
| | $ | 537,979 |
| | 4.04 | % | |
Loans and leases, net of unearned income (2) | | $ | 16,430,347 |
| | $ | 747,119 |
| | 4.55 | % | | $ | 15,815,263 |
| | $ | 691,954 |
| | 4.38 | % | | $ | 15,236,612 |
| | $ | 620,803 |
| | 4.07 | % |
Taxable investment securities (3) | 2,132,426 |
| | 47,029 |
| | 2.21 |
| | 2,128,497 |
| | 44,975 |
| | 2.11 |
| | 2,093,829 |
| | 45,279 |
| | 2.16 |
| 2,278,448 |
| | 62,556 |
| | 2.74 |
| | 2,246,555 |
| | 56,039 |
| | 2.49 |
| | 2,132,426 |
| | 47,029 |
| | 2.21 |
|
Tax-exempt investment securities (3) | 407,157 |
| | 17,794 |
| | 4.37 |
| | 327,098 |
| | 14,865 |
| | 4.54 |
| | 230,633 |
| | 12,120 |
| | 5.26 |
| 500,398 |
| | 17,998 |
| | 3.57 |
| | 416,119 |
| | 15,285 |
| | 3.65 |
| | 407,157 |
| | 17,794 |
| | 4.37 |
|
Equity securities (3) | 8,331 |
| | 500 |
| | 6.00 |
| | 13,969 |
| | 780 |
| | 5.58 |
| | 23,348 |
| | 1,295 |
| | 5.54 |
| — |
| | — |
| | — |
| | 126 |
| | 5 |
| | 3.97 |
| | 8,331 |
| | 500 |
| | 6.00 |
|
Total investment securities | 2,547,914 |
| | 65,323 |
| | 2.56 |
| | 2,469,564 |
| | 60,620 |
| | 2.45 |
| | 2,347,810 |
| | 58,694 |
| | 2.50 |
| 2,778,846 |
| | 80,554 |
| | 2.89 |
| | 2,662,800 |
| | 71,329 |
| | 2.68 |
| | 2,547,914 |
| | 65,323 |
| | 2.56 |
|
Loans held for sale | 20,008 |
| | 876 |
| | 4.38 |
| | 19,697 |
| | 728 |
| | 3.70 |
| | 19,937 |
| | 801 |
| | 4.02 |
| 25,795 |
| | 1,351 |
| | 5.24 |
| | 22,970 |
| | 1,159 |
| | 5.05 |
| | 20,008 |
| | 876 |
| | 4.38 |
|
Other interest-earning assets | 451,015 |
| | 5,066 |
| | 1.12 |
| | 407,471 |
| | 3,779 |
| | 0.93 |
| | 447,354 |
| | 4,785 |
| | 1.07 |
| 445,008 |
| | 9,249 |
| | 2.08 |
| | 382,569 |
| | 6,193 |
| | 1.62 |
| | 451,015 |
| | 5,066 |
| | 1.12 |
|
Total interest-earning assets | 18,255,549 |
| | 692,068 |
| | 3.79 |
| | 17,024,796 |
| | 623,599 |
| | 3.66 |
| | 16,146,074 |
| | 602,259 |
| | 3.73 |
| 19,679,996 |
| | 838,273 |
| | 4.26 |
| | 18,883,602 |
| | 770,635 |
| | 4.08 |
| | 18,255,549 |
| | 692,068 |
| | 3.79 |
|
Noninterest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | 108,523 |
| | | | | | 104,772 |
| | | | | | 105,359 |
| | | | | 119,144 |
| | | | | | 104,595 |
| | | | | | 108,523 |
| | | | |
Premises and equipment | 219,960 |
| | | | | | 227,047 |
| | | | | | 226,436 |
| | | | | 239,376 |
| | | | | | 231,762 |
| | | | | | 219,960 |
| | | | |
Other assets (3) | 1,168,759 |
| | | | | | 1,179,437 |
| | | | | | 1,103,427 |
| | | | | 1,385,689 |
| | | | | | 1,123,857 |
| | | | | | 1,168,759 |
| | | | |
Less: Allowance for loan losses | (172,424 | ) | | | | | | (164,879 | ) | | | | | | (174,453 | ) | | | | | |
Less: Allowance for loan and lease losses | | (166,165 | ) | | | | | | (160,614 | ) | | | | | | (172,424 | ) | | | | |
Total Assets | $ | 19,580,367 |
| | | | | | $ | 18,371,173 |
| | | | | | $ | 17,406,843 |
| | | | | $ | 21,258,040 |
| | | | | | $ | 20,183,202 |
| | | | | | $ | 19,580,367 |
| | | | |
LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | $ | 3,831,865 |
| | $ | 12,976 |
| | 0.34 | % | | $ | 3,552,886 |
| | $ | 6,654 |
| | 0.19 | % | | $ | 3,255,192 |
| | $ | 4,299 |
| | 0.13 | % | $ | 4,384,059 |
| | $ | 33,348 |
| | 0.76 | % | | $ | 4,063,929 |
| | $ | 22,789 |
| | 0.56 | % | | $ | 3,831,865 |
| | $ | 12,976 |
| | 0.34 | % |
Savings deposits | 4,468,205 |
| | 13,477 |
| | 0.30 |
| | 4,054,970 |
| | 7,981 |
| | 0.20 |
| | 3,677,079 |
| | 5,435 |
| | 0.15 |
| 5,018,381 |
| | 41,823 |
| | 0.83 |
| | 4,684,023 |
| | 27,226 |
| | 0.58 |
| | 4,468,205 |
| | 13,477 |
| | 0.30 |
|
Brokered deposits | 49,126 |
| | 613 |
| | 1.25 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 245,483 |
| | 5,779 |
| | 2.35 |
| | 121,863 |
| | 2,480 |
| | 2.04 |
| | 49,126 |
| | 613 |
| | 1.25 |
|
Time deposits | 2,721,724 |
| | 30,726 |
| | 1.13 |
| | 2,825,722 |
| | 30,058 |
| | 1.06 |
| | 2,988,648 |
| | 30,748 |
| | 1.03 |
| 2,869,344 |
| | 50,825 |
| | 1.77 |
| | 2,675,670 |
| | 35,217 |
| | 1.32 |
| | 2,721,724 |
| | 30,726 |
| | 1.13 |
|
Total interest-bearing deposits | 11,070,920 |
| | 57,792 |
| | 0.52 |
| | 10,433,578 |
| | 44,693 |
| | 0.43 |
| | 9,920,919 |
| | 40,482 |
| | 0.41 |
| 12,517,267 |
| | 131,775 |
| | 1.05 |
| | 11,545,485 |
| | 87,712 |
| | 0.76 |
| | 11,070,920 |
| | 57,792 |
| | 0.52 |
|
Short-term borrowings | 533,564 |
| | 2,779 |
| | 0.52 |
| | 395,727 |
| | 855 |
| | 0.21 |
| | 323,772 |
| | 372 |
| | 0.11 |
| 849,679 |
| | 14,543 |
| | 1.70 |
| | 785,923 |
| | 8,489 |
| | 1.07 |
| | 533,564 |
| | 2,779 |
| | 0.52 |
|
Long-term debt | 1,034,444 |
| | 32,932 |
| | 3.18 |
| | 959,142 |
| | 36,780 |
| | 3.83 |
| | 1,023,972 |
| | 42,941 |
| | 4.19 |
| |
FHLB advances and long-term debt | | 942,600 |
| | 30,599 |
| | 3.25 |
| | 977,573 |
| | 31,857 |
| | 3.26 |
| | 1,034,444 |
| | 32,932 |
| | 3.18 |
|
Total interest-bearing liabilities | 12,638,928 |
| | 93,503 |
| | 0.74 |
| | 11,788,447 |
| | 82,328 |
| | 0.70 |
| | 11,268,663 |
| | 83,795 |
| | 0.74 |
| 14,309,546 |
| | 176,917 |
| | 1.24 |
| | 13,308,981 |
| | 128,058 |
| | 0.96 |
| | 12,638,928 |
| | 93,503 |
| | 0.74 |
|
Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | 4,410,301 |
| | | | | | 4,151,967 |
| | | | | | 3,826,194 |
| | | | | 4,249,294 |
| | | | | | 4,287,121 |
| | | | | | 4,410,301 |
| | | | |
Other | 337,275 |
| | | | | | 330,125 |
| | | | | | 285,103 |
| | | | | |
Total deposits | | 16,766,561 |
| | | | | | 15,832,606 |
| | | | | | 15,481,221 |
| | | | |
Other liabilities | | 393,130 |
| | | | | | 331,336 |
| | | | | | 337,275 |
| | | | |
Total Liabilities | 17,386,504 |
| | | | | | 16,270,539 |
| | | | | | 15,379,960 |
| | | | | 18,951,970 |
| | | | | | 17,927,438 |
| | | | | | 17,386,504 |
| | | | |
Total Interest-bearing liabilities and non interest-bearing deposits ("Cost of Funds") | | 18,558,840 |
| | | | 0.95 |
| | 17,596,102 |
| | | | 0.73 |
| | 17,049,229 |
| | | | 0.55 |
|
Shareholders’ equity | 2,193,863 |
| | | | | | 2,100,634 |
| | | | | | 2,026,883 |
| | | | | 2,306,070 |
| | | | | | 2,255,764 |
| | | | | | 2,193,863 |
| | | | |
Total Liabilities and Shareholders' Equity | $ | 19,580,367 |
| | | | | | $ | 18,371,173 |
| | | | | | $ | 17,406,843 |
| | | | | $ | 21,258,040 |
| | | | | | $ | 20,183,202 |
| | | | | | $ | 19,580,367 |
| | | | |
Net interest income/net interest margin (FTE) | | | 598,565 |
| | 3.28 | % | | | | 541,271 |
| | 3.18 | % | | | | 518,464 |
| | 3.21 | % | | | 661,356 |
| | 3.36 | % | | | | 642,577 |
| | 3.40 | % | | | | 598,565 |
| | 3.28 | % |
Tax equivalent adjustment | | | (23,201 | ) | | | | | | (20,499 | ) | | | | | | (18,470 | ) | | | | | (12,967 | ) | | | | | | (12,121 | ) | | | | | | (23,201 | ) | | |
Net interest income | | | $ | 575,364 |
| | | | | | $ | 520,772 |
| | | | | | $ | 499,994 |
| | | | | $ | 648,389 |
| | | | | | $ | 630,456 |
| | | | | | $ | 575,364 |
| | |
(1)Includes dividends earned on equity securities.
(2)IncludesAverage balances include non-performing loans.loans and leases.
(3)IncludesAverage balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.
Note: The weighted average interest rate on total average interest-bearing liabilities and average non-interest bearing demand deposits (“cost of funds”) was 0.55%, 0.52% and 0.56% for the years ended December 31, 2017, 2016 and 2015 respectively.
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volumes) and changes in rates:
| | | 2017 vs. 2016 Increase (decrease) due to change in | | 2016 vs. 2015 Increase (decrease) due to change in | 2019 vs. 2018 Increase (decrease) due to change in | | 2018 vs. 2017 Increase (decrease) due to change in |
| Volume | | Rate | | Net | | Volume | | Rate | | Net | Volume | | Rate | | Net | | Volume | | Rate | | Net |
| | | | | (in thousands) | | | | | | | | | (in thousands) | | | | |
Interest income on: | | | | | | | | | | | | | | | | | | | | | | |
Loans and leases | $ | 44,822 |
| | $ | 17,509 |
| | $ | 62,331 |
| | $ | 31,676 |
| | $ | (11,183 | ) | | $ | 20,493 |
| $ | 27,465 |
| | $ | 27,702 |
| | $ | 55,167 |
| | $ | 24,166 |
| | $ | 46,985 |
| | $ | 71,151 |
|
Taxable investment securities | 83 |
| | 1,971 |
| | 2,054 |
| | 743 |
| | (1,047 | ) | | (304 | ) | 797 |
| | 5,720 |
| | 6,517 |
| | 2,622 |
| | 6,388 |
| | 9,010 |
|
Tax-exempt investment securities | 3,268 |
| | (339 | ) | | 2,929 |
| | 4,551 |
| | (1,806 | ) | | 2,745 |
| 2,744 |
| | (31 | ) | | 2,713 |
| | 395 |
| | (2,904 | ) | | (2,509 | ) |
Equity securities | (309 | ) | | 29 |
| | (280 | ) | | (524 | ) | | 10 |
| | (514 | ) | (5 | ) | | — |
| | (5 | ) | | (368 | ) | | (127 | ) | | (495 | ) |
Loans held for sale | 12 |
| | 136 |
| | 148 |
| | (10 | ) | | (63 | ) | | (73 | ) | 148 |
| | 44 |
| | 192 |
| | 139 |
| | 144 |
| | 283 |
|
Other interest-earning assets | 433 |
| | 854 |
| | 1,287 |
| | (404 | ) | | (603 | ) | | (1,007 | ) | 1,117 |
| | 1,939 |
| | 3,056 |
| | (854 | ) | | 1,981 |
| | 1,127 |
|
Total interest income | $ | 48,309 |
| | $ | 20,160 |
| | $ | 68,469 |
| | $ | 36,032 |
| | $ | (14,692 | ) | | $ | 21,340 |
| $ | 32,266 |
| | $ | 35,374 |
| | $ | 67,640 |
| | $ | 26,100 |
| | $ | 52,467 |
| | $ | 78,567 |
|
Interest expense on: | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | $ | 562 |
| | $ | 5,760 |
| | $ | 6,322 |
| | $ | 423 |
| | $ | 1,932 |
| | $ | 2,355 |
| $ | 1,912 |
| | $ | 8,647 |
| | $ | 10,559 |
| | $ | 842 |
| | $ | 8,971 |
| | $ | 9,813 |
|
Savings deposits | 884 |
| | 4,612 |
| | 5,496 |
| | 603 |
| | 1,943 |
| | 2,546 |
| 2,055 |
| | 12,542 |
| | 14,597 |
| | 683 |
| | 13,066 |
| | 13,749 |
|
Brokered deposits | 613 |
| | — |
| | 613 |
| | — |
| | — |
| | — |
| 2,870 |
| | 429 |
| | 3,299 |
| | 1,311 |
| | 556 |
| | 1,867 |
|
Time deposits | (781 | ) | | 1,449 |
| | 668 |
| | (1,711 | ) | | 1,021 |
| | (690 | ) | 2,740 |
| | 12,868 |
| | 15,608 |
| | (527 | ) | | 5,018 |
| | 4,491 |
|
Short-term borrowings | 379 |
| | 1,545 |
| | 1,924 |
| | 106 |
| | 377 |
| | 483 |
| 735 |
| | 5,319 |
| | 6,054 |
| | 1,746 |
| | 3,964 |
| | 5,710 |
|
Long-term debt | 1,732 |
| | (5,580 | ) | | (3,848 | ) | | (2,620 | ) | | (3,541 | ) | | (6,161 | ) | |
FHLB advances and long-term debt | | (1,126 | ) | | (132 | ) | | (1,258 | ) | | (1,839 | ) | | 764 |
| | (1,075 | ) |
Total interest expense | $ | 3,389 |
| | $ | 7,786 |
| | $ | 11,175 |
| | $ | (3,199 | ) | | $ | 1,732 |
| | $ | (1,467 | ) | $ | 9,186 |
| | $ | 39,673 |
| | $ | 48,859 |
| | $ | 2,216 |
| | $ | 32,339 |
| | $ | 34,555 |
|
|
| |
Note: | Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of the direct changes that are attributable to each component. |
Comparison of 20172019 to 20162018
The Federal Open Market Committee ("FOMC") increased the target federal funds rate ("Fed Funds Rate") by 25 basis points in each of March, June, September and December of 2018. During 2019, the FOMC decreased the Fed Funds Rate by 25 basis points in each of August, September and October. These changes in the Fed Funds Rate resulted in corresponding increases or decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and the London Interbank Offered Rate ("LIBOR") as well as for certain interest-bearing liabilities.
FTE net interest income increased $57.3$18.8 million, or 10.6%2.9%, to $598.6$661.4 million in 2017.2019. Net interest margin increased 10decreased 4 basis points to 3.28%3.36% in 20172019 from 3.18%3.40% in 2016.
2018. As summarized above, FTE interest income increased $48.3$35.4 million as the result of a $1.2 billion, or 7.2%, increase in average interest-earning assets, primarily loans. The 13an 18 basis point increase in the yield on interest-earning assets, resulted inand increased $32.3 million as the result of a $20.2$796.4 million, or 4.2%, increase in FTE interest income.average interest-earning assets, primarily loans and leases. The average yield on the loan and lease portfolio increased 1217 basis points, to 4.07%4.55%, largely due to the 25 basis pointaforementioned increases in the federal fundsFed Funds Rate in 2018 and corresponding increases to loan index rates. All variable and certain adjustable rate that occurredloans repriced to higher rates as a result of these interest rate increases, and yields on new loan originations exceeded the average yield on the loan portfolio. Adjustable rate loans reprice on dates specified in eachthe loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease. Therefore, the benefit of December 2016 and March and June 2017.increases or the reverse effect of decreases in index rates on adjustable rate loans may not be fully realized until future periods.
Interest expense increased $11.2$48.9 million, with a 428 basis point increase in the rate on average interest-bearing liabilities contributing $7.8$39.7 million to this increase.The rates on average interest-bearing time, savings accounts and demand deposits increased 45, 25 and 20 basis points, respectively. These rate increases contributed $12.9 million, $12.5 million and $8.6 million, respectively, to the increase in interest expense. In addition, the cost of interest-bearing liabilities reflects a 963 basis point increase in the cost of interest-bearing deposits primarily duerates on short-term borrowings contributed $5.3 million to promotional campaigns and increasing interest rates for deposit balances for which the interest rate is linked to an index, which was partially offset by lower long-term borrowing costs due to debt refinancings in 2017 and prior years. In addition, the $850.5 million, or 7.2%, increase in average interest-bearing liabilities accounted for $3.4 million of the increase in interest expense.
Assuming no further changes in the Fed Funds Rate, as a result of the interest rate decreases in the second half of 2019, yields on the loan portfolio are likely to decrease in the future. Deposit cost changes typically lag the changes in the loan yields as most deposit rates are not directly tied to an index.
Average loans and leases and average FTE yields, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | Increase (Decrease) in Balance |
| 2017 | | 2016 | | Increase (Decrease) in Balance | 2019 | | 2018 | |
| Balance | | Yield | | Balance | | Yield | | $ | | % | Balance | | Yield | | Balance | | Yield | | $ | | % |
| (dollars in thousands) | (dollars in thousands) |
Real estate - commercial mortgage | $ | 6,161,731 |
| | 4.04 | % | | $ | 5,636,696 |
| | 3.98 | % | | $ | 525,035 |
| | 9.3 | % | $ | 6,463,783 |
| | 4.56 | % | | $ | 6,314,349 |
| | 4.38 | % | | $ | 149,434 |
| | 2.4 | % |
Commercial - industrial, financial and agricultural | 4,236,810 |
| | 4.01 |
| | 4,080,854 |
| | 3.78 |
| | 155,956 |
| | 3.8 |
| 4,473,549 |
| | 4.52 |
| | 4,314,584 |
| | 4.32 |
| | 158,965 |
| | 3.7 |
|
Real estate - residential mortgage | 1,779,270 |
| | 3.80 |
| | 1,464,744 |
| | 3.77 |
| | 314,526 |
| | 21.5 |
| 2,441,684 |
| | 4.05 |
| | 2,085,258 |
| | 3.93 |
| | 356,426 |
| | 17.1 |
|
Real estate - home equity | 1,582,705 |
| | 4.38 |
| | 1,651,112 |
| | 4.08 |
| | (68,407 | ) | | (4.1 | ) | 1,382,908 |
| | 5.23 |
| | 1,493,620 |
| | 4.91 |
| | (110,712 | ) | | (7.4 | ) |
Real estate - construction | 921,879 |
| | 4.08 |
| | 824,182 |
| | 3.79 |
| | 97,697 |
| | 11.9 |
| 928,183 |
| | 4.79 |
| | 965,835 |
| | 4.45 |
| | (37,652 | ) | | (3.9 | ) |
Consumer | 304,162 |
| | 4.99 |
| | 276,792 |
| | 5.36 |
| | 27,370 |
| | 9.9 |
| 448,205 |
| | 4.42 |
| | 361,186 |
| | 4.54 |
| | 87,019 |
| | 24.1 |
|
Leasing and other | 250,055 |
| | 5.10 |
| | 193,684 |
| | 5.83 |
| | 56,371 |
| | 29.1 |
| |
Total | $ | 15,236,612 |
| | 4.07 | % | | $ | 14,128,064 |
| | 3.95 | % | | $ | 1,108,548 |
| | 7.8 | % | |
Equipment lease financing | | 279,489 |
| | 4.40 |
| | 270,967 |
| | 4.60 |
| | 8,522 |
| | 3.1 |
|
Other | | 12,546 |
| | N/A | | 9,464 |
| | N/A | | 3,082 |
| | 32.6 |
|
Total loans and leases | | $ | 16,430,347 |
| | 4.55 | % | | $ | 15,815,263 |
| | 4.38 | % | | $ | 615,084 |
| | 3.9 | % |
N/A - Not applicable
Average loans and leases increased $1.1 billion,$615.1 million, or 7.8%3.9%, which contributed $44.8$27.5 million to the increase in FTE interest income.In addition, the average yield on the loan and lease portfolio increased 1217 basis points, contributing $17.5$27.7 million to the increase in FTE interest income. As mentioned above, the increase in average yields on loans and leases was driven by the repricing of existing variable and adjustable rate loans as a result of increases in the prime rate and LIBOR during 2018 that were only partially offset by decreases in those same rates that occurred in the second half of 2019.
Average investment securities increased $116.0 million, or 4.4%, in comparison to 2018, which contributed $9.2 million to the increase in FTE interest income. The average yield on investment securities increased 21 basis points, contributing $5.7 million to the increase in FTE interest income. Other interest-earning assets increased $62.4 million, or 16.3%, primarily the result of an increase in cash pledged with counterparties for commercial loan interest rate swap contracts. The yield on other interest-earning assets increased 46 basis points in comparison to 2018, as a result of the Fed Funds Rate increases during 2018 that were only partially offset by the decreases during 2019, resulting in a $1.9 million increase in FTE interest income.
Average deposits and interest rates, by type, are summarized in the following table:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Increase (Decrease) in Balance |
| 2019 | | 2018 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 4,249,294 |
| | — | % | | $ | 4,287,121 |
| | — | % | | $ | (37,827 | ) | | (0.9 | )% |
Interest-bearing demand | 4,384,059 |
| | 0.76 |
| | 4,063,929 |
| | 0.56 |
| | 320,130 |
| | 7.9 |
|
Savings and money market accounts | 5,018,381 |
| | 0.83 |
| | 4,684,023 |
| | 0.58 |
| | 334,358 |
| | 7.1 |
|
Total demand and savings | 13,651,734 |
| | 0.44 |
| | 13,035,073 |
| | 0.38 |
| | 616,661 |
| | 4.7 |
|
Brokered deposits | 245,483 |
| | 2.35 | — |
| 121,863 |
| | 2.04 |
| | 123,620 |
| | 101.4 |
|
Time deposits | 2,869,344 |
| | 1.77 | | 2,675,670 |
| | 1.32 |
| | 193,674 |
| | 7.2 |
|
Total deposits | $ | 16,766,561 |
| | 0.79 | % | | $ | 15,832,606 |
| | 0.55 | % | | $ | 933,955 |
| | 5.9 | % |
Average interest-bearing deposits contributed $44.1 million to the increase in interest expense, increasing $971.8 million, or 8.4%, in comparison to 2018.The average cost of interest-bearing deposits increased 29 basis points to 1.05% in 2019 from 0.76% in 2018, due to increases in the rates on all types of interest-bearing deposits as a result of the Fed Funds Rate increases and related market competition that occurred in 2018, and was only partially impacted by decreases to the Fed Funds Rate that occurred in 2019.
Average brokered deposits increased $123.6 million, to $245.5 million, as a result of continued growth of brokered deposit programs introduced in 2018.
Average borrowings and interest rates, by type, are summarized in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Increase (Decrease) in Balance |
| 2019 | | 2018 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Short-term borrowings: | | | | �� | | | | | | | |
Total short-term customer funding (1) | 355,983 |
| | 0.77 |
| | 446,668 |
| | 0.48 |
| | (90,685 | ) | | (20.3 | )% |
Federal funds purchased | 132,578 |
| | 2.20 |
| | 229,715 |
| | 1.70 |
| | (97,137 | ) | | (42.3 | ) |
Short-term FHLB advances and other borrowings (2) | 361,118 |
| | 2.43 |
| | 109,540 |
| | 2.20 |
| | 251,578 |
| | 229.7 |
|
Total short-term borrowings | 849,679 |
| | 1.70 |
| | 785,923 |
| | 1.07 |
| | 63,756 |
| | 8.1 |
|
FHLB advances and other long-term debt: | | | | | | | | | | | |
FHLB advances | 555,229 |
| | 2.38 |
| | 590,948 |
| | 2.46 |
| | (35,719 | ) | | (6.0 | ) |
Other long-term debt | 387,371 |
| | 4.48 |
| | 386,625 |
| | 4.47 |
| | 746 |
| | 0.2 |
|
Total FHLB advances and other long-term debt | 942,600 |
| | 3.25 |
| | 977,573 |
| | 3.26 |
| | (34,973 | ) | | (3.6 | ) |
Total borrowings | $ | 1,792,279 |
| | 2.51 | % | | $ | 1,763,496 |
| | 2.29 | % | | $ | 28,783 |
| | 1.6 | % |
(1) Includes repurchase agreements and short-term promissory notes.
(2) Represents "FHLB" advances with an original maturity term of less than one year.
Total average borrowings increased $28.8 million, or 1.6%, while the total average cost of these funds increased 22 basis points, to 2.51%. Total average short-term borrowings increased $63.8 million, or 8.1%, due to an increase in short-term FHLB advances and other borrowings, partially offset by decreases in average short-term customer funding and federal funds purchased. The cost of average short-term borrowings increased 63 basis points to 1.70% in 2019, largely due to the annual average impact of Fed Funds Rate increases.
Average FHLB advances decreased $35.7 million, or 6.0%, and the average rate decreased 8 basis points as higher rate advances were paid off or matured and replaced with advances at lower average rates.
Comparison of 2018 to 2017
FTE net interest income increased $44.0 million, or 7.4%, to $642.6 million in 2018. Net interest margin increased 12 basis points to 3.40% in 2018 from 3.28% in 2017. Interest rate increases on both interest-earning assets and interest-bearing liabilities and the corresponding increases in FTE interest income and interest expense were largely the result of 25 basis point rate increases to the Fed Funds Rate in December of 2017 and March, June and September of 2018. The additional 25 basis point increase to the Fed Funds Rate in December of 2018 did not have a significant impact on the Corporation's financial results for the year ended December 31, 2018. The increases in the Fed Funds Rate resulted in corresponding increases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and LIBOR.
As summarized above, FTE interest income increased $52.5 million as the result of a 29 basis point increase in the yield on interest-earning assets, and increased $26.1 million as the result of a $628.1 million, or 3.4%, increase in average interest-earning assets, primarily loans. The average yield on the loan portfolio increased 31 basis points, to 4.38%, largely due to the aforementioned increases in the Fed Funds Rate and corresponding increases to loan index rates. All variable and certain adjustable rate loans repriced to higher rates during 2018, and yields on new loan originations exceeded the average yield on the loan portfolio. Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease. Therefore, the benefit of increases in index rates on adjustable rate loans may not be fully realized until future periods.
Interest expense increased $34.6 million, with a 22 basis point increase in the rate on average interest-bearing liabilities contributing $32.3 million to this increase.The rates on average interest-bearing demand deposits and savings accounts increased 22 basis points and 28 basis points, respectively. These rate increases contributed $9.0 million and $13.1 million to the increase in interest expense, respectively. In addition, the 19 basis point and 55 basis point increases in the rates on time deposits and short-term borrowings contributed $5.0 million and $4.0 million, respectively, to the increase in interest expense.
Average loans and leases and average FTE yields, by type, are summarized in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Increase (Decrease) in Balance |
| 2018 | | 2017 | |
| Balance | | Yield | | Balance | | Yield | | $ | | % |
| (dollars in thousands) |
Real estate - commercial mortgage | $ | 6,314,349 |
| | 4.38 | % | | $ | 6,161,731 |
| | 4.04 | % | | $ | 152,618 |
| | 2.5 | % |
Commercial - industrial, financial and agricultural | 4,314,584 |
| | 4.32 |
| | 4,236,810 |
| | 4.01 |
| | 77,774 |
| | 1.8 |
|
Real estate - home equity | 1,493,620 |
| | 4.91 |
| | 1,582,705 |
| | 4.38 |
| | (89,085 | ) | | (5.6 | ) |
Real estate - residential mortgage | 2,085,258 |
| | 3.93 |
| | 1,779,270 |
| | 3.80 |
| | 305,988 |
| | 17.2 |
|
Real estate - construction | 965,835 |
| | 4.45 |
| | 921,879 |
| | 4.08 |
| | 43,956 |
| | 4.8 |
|
Consumer | 361,186 |
| | 4.54 |
| | 304,162 |
| | 4.99 |
| | 57,024 |
| | 18.7 |
|
Equipment lease financing | 270,967 |
| | 4.60 |
| | 244,740 |
| | 4.45 |
| | 26,227 |
| | 10.7 |
|
Other | 9,464 |
| | N/A | | 5,315 |
| | N/A | | 4,149 |
| | 78.1 |
|
Total loans and leases | $ | 15,815,263 |
| | 4.38 | % | | $ | 15,236,612 |
| | 4.07 | % | | $ | 578,651 |
| | 3.8 | % |
N/A - Not applicable
Average loans and leases increased $578.7 million, or 3.8%, which contributed $24.2 million to the increase in FTE interest income. In addition, the average yield on the loan and lease portfolio increased 31 basis points, contributing $47.0 million to the increase in FTE interest income. As mentioned above, the increase in average yields on loans was driven by the repricing of existing variable and adjustable rate loans as a result of increases in the prime rate and the London Interbank Offered Rate ("LIBOR"), which are the indexes used to determine the interest rates on many of the loans in the Corporation's portfolio.LIBOR.
The increase in average loans resulted from growth in the commercial mortgage and residential mortgage portfolios, as well as the commercial loan, construction and leasing portfolios.The $525.0 million, or 9.3%, growth in commercial mortgages occurred in both owner-occupied and investment property types and was realized in all geographic markets, but largely in Pennsylvania.The $314.5 million, or 21.5%, increase in residential mortgages was also realized across all geographic markets, with the most significant increases occurring in Maryland, Virginia and Pennsylvania. This growth was, in part, related to new product offerings and marketing efforts focused on specific customer segments, including loans to low- to moderate-income and minority borrowers, and loans to borrowers located in low- to moderate-income and majority-minority geographies.The $156.0 million, or 3.8%, increase in commercial loans was spread across a broad range of industries and concentrated in Pennsylvania.
Average investment securities increased $78.4$114.9 million, or 3.2%4.5%, in comparison to 2016,2017, which contributed $3.0$2.6 million to the increase in FTE interest income. The average yield on investment securities increased 1112 basis points, contributing $1.7$3.4 million to the increase in FTE interest income. Other interest-earning assets increased $43.5decreased $68.4 million, or 10.7%15.2%, andreflecting lower balances on deposit with the Federal Reserve Bank ("FRB"). The yield on other interest-earning assets increased 1950 basis points in comparison to 2016. Combined, these2017, as a result of the Fed Funds Rate increases, contributed $1.3resulting in a $1.1 million to the increase in FTE interest income.
Interest-bearing deposits contributed $13.1 million to the increase in interest expense, increasing $637.3 million, or 6.1%, in comparison to 2016 showing a 15 and 10 basis point increase, respectively, in the rate on average interest-bearing demand and savings deposits. These increases contributed $6.3 million and $5.5 million, respectively, to the increase in interest expense.
The average cost of interest-bearing deposits increased 9 basis points to 0.52% in 2017 from 0.43% in 2016, due to increases in the rates on all types of interest-bearing deposits.
Average deposits and interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | Increase (Decrease) in Balance |
| 2017 | | 2016 | | Increase (Decrease) in Balance | 2018 | | 2017 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % | Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) | (dollars in thousands) |
Noninterest-bearing demand | $ | 4,410,301 |
| | — | % | | $ | 4,151,967 |
| | — | % | | $ | 258,334 |
| | 6.2 | % | $ | 4,287,121 |
| | — | % | | $ | 4,410,301 |
| | — | % | | $ | (123,180 | ) | | (2.8 | )% |
Interest-bearing demand | 3,831,865 |
| | 0.34 |
| | 3,552,886 |
| | 0.19 |
| | 278,979 |
| | 7.9 |
| 4,063,929 |
| | 0.56 |
| | 3,831,865 |
| | 0.34 |
| | 232,064 |
| | 6.1 |
|
Savings and money market accounts | 4,468,205 |
| | 0.30 |
| | 4,054,970 |
| | 0.20 |
| | 413,235 |
| | 10.2 |
| 4,684,023 |
| | 0.58 |
| | 4,468,205 |
| | 0.30 |
| | 215,818 |
| | 4.8 |
|
Total demand and savings | 12,710,371 |
| | 0.12 |
| | 11,759,823 |
| | 0.12 |
| | 950,548 |
| | 8.1 |
| 13,035,073 |
| | 0.38 |
| | 12,710,371 |
| | 0.12 |
| | 324,702 |
| | 2.6 |
|
Brokered deposits | 49,126 |
| | 1.25 |
| — |
| — |
| | — |
| | 49,126 |
| | N/M |
| 121,863 |
| 1.25 | 2.04 |
| 49 |
| 49,126 |
| 2.04 | 1.25 |
| | 72,737 |
| | 148.1 |
|
Time deposits | 2,721,724 |
| | 1.13 |
| | 2,825,722 |
| | 1.06 |
| | (103,998 | ) | | (3.7 | ) | 2,675,670 |
| | 1.32 |
| | 2,721,724 |
| | 1.13 |
| | (46,054 | ) | | (1.7 | ) |
Total deposits | $ | 15,481,221 |
| | 0.37 | % | | $ | 14,585,545 |
| | 0.31 | % | | $ | 895,676 |
| | 6.1 | % | $ | 15,832,606 |
| | 0.55 | % | | $ | 15,481,221 |
| | 0.37 | % | | $ | 351,385 |
| | 2.3 | % |
N/M - Not meaningful
Average interest-bearing deposits contributed $29.9 million to the increase in interest expense, increasing $474.6 million, or 4.3%, in comparison to 2017.The average cost of interest-bearing deposits increased 24 basis points, to 0.76%, in 2018 from 0.52% in 2017, due to increases in the rates on all types of interest-bearing deposits.
The $950.5$324.7 million, or 8.1%2.6%, increase in average total demand and savings account balances was primarily due to a $549.9$388.4 million, or 10.1%6.5%, increase in personal account balances, a $242.8$147.0 million increase in other account balances partially offset by decreases of $173.9 million, or 5.7%3.9%, increaseand $36.8 million, or 1.9%, in business account balances and a $147.7 million, or 7.4%, increase in state and municipal account balances.balances, respectively.
During the third quarter of 2017, the Corporation began accepting deposits under an agreement with a non-bank third party pursuant to which excess cash in the accounts of customers of the third party is swept on a collective basis, as frequently as every business day, by the third party, into omnibus deposit accounts maintained by one of the Corporation’s subsidiary banks. Under the agreement with the third party, generally, no more than $100 million of excess cash in accounts of customers of the third party may be swept into the omnibus deposit accounts. The average balance in the omnibus accounts was $49.1 million in 2017 and is shown as “brokered deposits” in the above table. This source of customer funding is considered to be both geographically diverse and relatively stable, with balances in the omnibus deposit accounts bearing interest at a rate based on the federal funds rate.
Total average short-term borrowings and long-term debt increased $213.1$195.5 million, or 15.7%12.5%, while the total average cost of these funds decreased 50increased one basis pointspoint to 2.28%2.29%. The net effect of these offsetting changes was a $1.9 million decrease in interest expense. The increase in average balancesshort-term borrowings reflects the need for additional funding to support average loan growth, aswhich outpaced increases in average deposits were somewhat lower.deposits.
Average borrowings and interest rates, by type, are summarized in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | Increase in Balance |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Short-term borrowings: | | | | | | | | | | | |
Customer repurchase agreements | $ | 188,769 |
| | 0.12 | % | | $ | 184,978 |
| | 0.11 | % | | $ | 3,791 |
| | 2.0 | % |
Customer short-term promissory notes | 108,649 |
| | 0.31 |
| | 72,224 |
| | 0.03 |
| | 36,425 |
| | 50.4 |
|
Total short-term customer funding | 297,418 |
| | 0.19 |
| | 257,202 |
| | 0.09 |
| | 40,216 |
| | 15.6 |
|
Federal funds purchased | 163,102 |
| | 0.92 |
| | 127,604 |
| | 0.45 |
| | 35,498 |
| | 27.8 |
|
Short-term FHLB advances (1) | 73,044 |
| | 0.94 |
| | 10,921 |
| | 0.43 |
| | 62,123 |
| | N/M |
|
Total short-term borrowings | 533,564 |
| | 0.52 |
| | 395,727 |
| | 0.21 |
| | 137,837 |
| | 34.8 |
|
Long-term debt: | | | | | | | | | | | |
FHLB Advances | 640,737 |
| | 2.31 |
| | 597,211 |
| | 3.12 |
| | 43,526 |
| | 7.3 |
|
Other long-term debt | 393,707 |
| | 4.61 |
| | 361,931 |
| | 5.01 |
| | 31,776 |
| | 8.8 |
|
Total long-term debt | 1,034,444 |
| | 3.18 |
| | 959,142 |
| | 3.83 |
| | 75,302 |
| | 7.9 |
|
Total | $ | 1,568,008 |
| | 2.28 | % | | $ | 1,354,869 |
| | 2.78 | % | | $ | 213,139 |
| | 15.7 | % |
N/M - Not meaningful |
| | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2017 | | Increase in Balance |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Short-term borrowings: | | | | | | | | | | | |
Total short-term customer funding (1) | 446,668 |
| | 0.48 |
| | 297,418 |
| | 0.19 |
| | 149,250 |
| | 50.2 | % |
Federal funds purchased | 229,715 |
| | 1.70 |
| | 163,102 |
| | 0.92 |
| | 66,613 |
| | 40.8 |
|
Short-term FHLB advances (2) | 109,540 |
| | 2.20 |
| | 73,044 |
| | 0.94 |
| | 36,496 |
| | 50.0 |
|
Total short-term borrowings | 785,923 |
| | 1.07 |
| | 533,564 |
| | 0.52 |
| | 252,359 |
| | 47.3 |
|
FHLB advances and other long-term debt: | | | | | | | | | | | |
FHLB Advances | 590,948 |
| | 2.46 |
| | 640,737 |
| | 2.31 |
| | (49,789 | ) | | (7.8 | ) |
Other long-term debt | 386,625 |
| | 4.47 |
| | 393,707 |
| | 4.61 |
| | (7,082 | ) | | (1.8 | ) |
Total FHLB advances and other long-term debt | 977,573 |
| | 3.26 |
| | 1,034,444 |
| | 3.18 |
| | (56,871 | ) | | (5.5 | ) |
Total borrowings | $ | 1,763,496 |
| | 2.29 | % | | $ | 1,568,008 |
| | 2.28 | % | | $ | 195,488 |
| | 12.5 | % |
(1) Includes repurchase agreements and short-term promissory notes.
(2) Represents FHLB advances with an original maturity term of less than one year.
Total average short-term borrowings increased $137.8$252.4 million, or 34.8%47.3%, due to an increase in average short-term FHLB advances, customer short-term promissory notes, and federal funds purchased.purchased and short-term FHLB advances. The cost of average short-term borrowings increased 3155 basis points, to 0.52%1.07%, in 2017,2018, largely due to the FRB rateFed Funds Rate increases.
Average FHLB advances and other long-term debt increased $31.8decreased $56.9 million due mainly to the issuance of $125.0 million of senior notes in March 2017, partially offset by the repayment of $100.0 million of 10-year subordinated notes, which matured on May 1, 2017. The 65 basis point, or 17.0%, decrease in the average rate on long-term debt was the result of the interest rate differential on the senior notes and subordinated notes, and $200 million of FHLB advances that were refinanced in December of 2016, which reduced the weighted average rate on these advances from 4.03% to 2.40%.
Comparison of 2016 to 2015
FTE net interest income increased $22.8 million, or 4.4%, to $541.3 million in 2016. Net interest margin decreased 3 basis points, to 3.18% in 2016 from 3.21% in 2015.
As summarized above, FTE interest income increased $36.0 million as the result of an $878.7 million, or 5.4%, increase in average interest-earning assets. This increase was partially offset by a $14.7 million decrease resulting from a 7 basis point decline in average yields on interest earning assets.
Average loans and average FTE yields, by type, are summarized in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 | | Increase (Decrease) in Balance |
| Balance | | Yield | | Balance | | Yield | | $ | | % |
| (dollars in thousands) |
Real estate - commercial mortgage | $ | 5,636,696 |
| | 3.98 | % | | $ | 5,246,054 |
| | 4.13 | % | | $ | 390,642 |
| | 7.4 | % |
Commercial - industrial, financial and agricultural | 4,080,854 |
| | 3.78 |
| | 3,882,998 |
| | 3.80 |
| | 197,856 |
| | 5.1 |
|
Real estate - home equity | 1,651,112 |
| | 4.08 |
| | 1,700,851 |
| | 4.10 |
| | (49,739 | ) | | (2.9 | ) |
Real estate - residential mortgage | 1,464,744 |
| | 3.77 |
| | 1,371,321 |
| | 3.81 |
| | 93,423 |
| | 6.8 |
|
Real estate - construction | 824,182 |
| | 3.79 |
| | 726,914 |
| | 3.88 |
| | 97,268 |
| | 13.4 |
|
Consumer | 276,792 |
| | 5.36 |
| | 265,688 |
| | 5.57 |
| | 11,104 |
| | 4.2 |
|
Leasing and other | 193,684 |
| | 5.83 |
| | 137,147 |
| | 6.76 |
| | 56,537 |
| | 41.2 |
|
Total | $ | 14,128,064 |
| | 3.95 | % | | $ | 13,330,973 |
| | 4.04 | % | | $ | 797,091 |
| | 6.0 | % |
Average loans increased $797.1 million, or 6.0%, which contributed $31.7 million to the increase in FTE interest income. This increase was partially offset by an $11.2$49.8 million decrease in FTE interest income as a result of a 9 basis point decline in the average yield on the loan portfolio. The increase in average loans was driven largely by growth in the commercial mortgage, commercial loan, construction, residential mortgage and leasing portfolios. The commercial mortgage growth was realized in all geographic markets, but largely in Pennsylvania. The decrease in average yields on loans was attributable to repayments of higher-yielding loans, refinancing activity at lower rates, and new loan production at rates lower than the overall portfolio yield.
Average investment securities increased $121.8 million, or 5.2%, in comparison to 2015.FHLB advances. The average yieldrate on investment securities decreased 5 basis points to 2.45% in 2016 from 2.50% in 2015. Other interest earning assets decreased $39.9 million, or 8.9%.
Interest expense decreased $1.5 million, or 1.8%, to $82.3 million in 2016 from $83.8 million in 2015, despite an increase in total average interest-bearing liabilities of $519.8 million, or 4.6%, compared to 2015. The impact of the increase in average balances of interest-bearing liabilities was more than offset by a 4 basis point decrease in the average cost of these interest-bearing liabilities. This decrease resulted from a shift in funding mix that was more concentrated in lower-cost deposits and short-term borrowings, as well as the impact of long-term debt refinancing activities.
Average deposits and interest rates, by type, are summarized in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 | | Increase (Decrease) in Balance |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 4,151,967 |
| | — | % | | $ | 3,826,194 |
| | — | % | | $ | 325,773 |
| | 8.5 | % |
Interest-bearing demand | 3,552,886 |
| | 0.19 |
| | 3,255,192 |
| | 0.13 |
| | 297,694 |
| | 9.1 |
|
Savings and money market accounts | 4,054,970 |
| | 0.20 |
| | 3,677,079 |
| | 0.15 |
| | 377,891 |
| | 10.3 |
|
Total demand and savings | 11,759,823 |
| | 0.12 |
| | 10,758,465 |
| | 0.09 |
| | 1,001,358 |
| | 9.3 |
|
Time deposits | 2,825,722 |
| | 1.06 |
| | 2,988,648 |
| | 1.03 |
| | (162,926 | ) | | (5.5 | ) |
Total deposits | $ | 14,585,545 |
| | 0.31 | % | | $ | 13,747,113 |
| | 0.29 | % | | $ | 838,432 |
| | 6.1 | % |
The $1.0 billion, or 9.3%, increase in average total demand and savings account balances was primarily due to a $500.8 million, or 10.1%, increase in personal account balances, a $342.1 million, or 8.7%, increase in business account balances, and a $159.4 million, or 8.6%, increase in state and municipal account balances.
The average cost of interest-bearing deposits increased 2 basis points to 0.43% in 2016 from 0.41% in 2015, primarily due to an increase in the rates on all interest-bearing deposits.
Average borrowings and interest rates, by type, are summarized in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 | | Increase (Decrease) in Balance |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Short-term borrowings: | | | | | | | | | | | |
Customer repurchase agreements | $ | 184,978 |
| | 0.11 | % | | $ | 161,093 |
| | 0.10 | % | | $ | 23,885 |
| | 14.8 | % |
Customer short-term promissory notes | 72,224 |
| | 0.03 |
| | 81,530 |
| | 0.02 |
| | (9,306 | ) | | (11.4 | ) |
Total short-term customer funding | 257,202 |
| | 0.09 |
| | 242,623 |
| | 0.07 |
| | 14,579 |
| | 6.0 |
|
Federal funds purchased | 127,604 |
| | 0.45 |
| | 65,779 |
| | 0.21 |
| | 61,825 |
| | 94.0 |
|
Short-term FHLB advances (1) | 10,921 |
| | 0.43 |
| | 15,370 |
| | 0.33 |
| | (4,449 | ) | | (28.9 | ) |
Total short-term borrowings | 395,727 |
| | 0.21 |
| | 323,772 |
| | 0.11 |
| | 71,955 |
| | 22.2 |
|
Long-term debt: | | | | | | | | | | | |
FHLB Advances | 597,211 |
| | 3.12 |
| | 622,978 |
| | 3.43 |
| | (25,767 | ) | | (4.1 | ) |
Other long-term debt | 361,931 |
| | 5.01 |
| | 400,994 |
| | 5.38 |
| | (39,063 | ) | | (9.7 | ) |
Total long-term debt | 959,142 |
| | 3.83 |
| | 1,023,972 |
| | 4.19 |
| | (64,830 | ) | | (6.3 | ) |
Total | $ | 1,354,869 |
| | 2.78 | % | | $ | 1,347,744 |
| | 3.21 | % | | $ | 7,125 |
| | 0.5 | % |
(1) Represents FHLB advances with an original maturity term of less than one year.
Total average short-term borrowings increased $72.0 million, or 22.2%, primarily due to an increase in Federal funds purchased. Total long-term debt decreased $64.8 millionas the result of maturing FHLB advances and the maturity of $100.0 million of subordinated debt in April 2015.
The cost of average short-term borrowings increased 10 basis points, to 0.21% in 2016, largely due to the FRB increasing the federal funds interest rate by 25 basis points in December 2015. The cost of average long-term debt decreased 36 basis points, to 3.83% in 2016, as the result of certain refinancing activities for FHLB advances and other long-term debt.
In June 2015,debt increased 8 basis points, the Corporation issued $150 millionnet result of subordinated debt at an effectivea 15 basis point increase on the rate of 4.69%. The proceeds of this issuance were used to redeem $150 million of trust preferred securities, with an effective rate of 6.52%, in July 2015.
In the third quarter of 2015, the Corporation executed two transactions to restructure its long-term FHLB advances. First, $200 million of FHLB advances, withlargely due to the Fed Funds Rate increases, and a weighted average rate of 4.45% which matured14 basis point decrease in the first quarter of 2017, were refinanced with new advances maturing from September 2019 to December 2020, at a weighted average rate of 2.95%. This transaction reduced interest expense on a quarterly basis by approximately $750,000, beginning in the fourth quarter of 2015. Second, forwardother long-term debt.
agreements were executed to refinance an additional $200 million of FHLB advances which matured in December 2016. These new advances have maturity dates from March 2021 to December 2021 and will reduce the weighted average rate on these advances from 4.03% to 2.40% and decreased interest expense on a quarterly basis by approximately $800,000 beginning in the first quarter of 2017.
Provision for Credit Losses
The provision for credit losses was $23.3decreased $14.1 million, in 2017, an increase of $10.1to $32.8 million, in comparisonfor the year ended December 31, 2019. During 2018, the Corporation recorded a $36.8 million provision related to 2016. Thefraud committed by the Commercial Relationship. In 2019, the Corporation recorded a $20.0 million provision for credit lossesa certain commercial borrower. See additional details under "Provision and Allowance for 2016 was $13.2 million, an increase of $10.9 million in comparison to 2015. The increaseCredit Losses" in the provision for credit losses was primarily driven by loan growth and a $3.5 million increase in loss allocations for off balance sheet exposures."Financial Condition" section below.
The provision for credit losses is recognized as an expense in the consolidated statements of income and is the amount necessary to adjust the allowance for credit losses to its appropriate balance, as determined through the Corporation's allowance methodology. The Corporation determines the appropriate level of the allowance for credit losses based on many quantitative and qualitative factors, including, but not limited to: the size and composition of the loan and lease portfolio, changes in risk ratings, changes in collateral values, delinquency levels, historical losses and economic conditions. See further discussion of the Corporation's allowance methodology under the heading "Critical Accounting Policies" above. For details related to the Corporation's allowance and provision for credit losses, see "Provision and Allowance for Credit Losses," under "Financial Condition" below.
Non-Interest Income and Expense
Comparison of 20172019 to 2016
Non-Interest Income
The following table presents the components of non-interest income for 2017 and 2016:
|
| | | | | | | | | | | | | | |
| | | | | Increase (Decrease) |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Other service charges and fees: | | | | | | | |
Merchant fees | 16,845 |
| | 16,136 |
| | 709 |
| | 4.4 |
|
Debit card income | 11,905 |
| | 11,236 |
| | 669 |
| | 6.0 |
|
Commercial loan interest rate swap fees | 11,694 |
| | 11,560 |
| | 134 |
| | 1.2 |
|
Letter of credit fees | 4,403 |
| | 4,504 |
| | (101 | ) | | (2.2 | ) |
Foreign exchange income | 1,759 |
| | 1,555 |
| | 204 |
| | 13.1 |
|
Other | 6,253 |
| | 6,482 |
| | (229 | ) | | (3.5 | ) |
Total other service charges and fees | 52,859 |
| | 51,473 |
| | 1,386 |
| | 2.7 |
|
Service charges on deposit accounts: | | | | | | | |
Overdraft fees | $ | 22,569 |
| | $ | 22,175 |
| | $ | 394 |
| | 1.8 | % |
Cash management fees | 14,444 |
| | 14,183 |
| | 261 |
| | 1.8 |
|
Other | 13,993 |
| | 14,988 |
| | (995 | ) | | (6.6 | ) |
Total service charges on deposit accounts | 51,006 |
| | 51,346 |
| | (340 | ) | | (0.7 | ) |
Investment management and trust services | 49,249 |
| | 45,270 |
| | 3,979 |
| | 8.8 |
|
Mortgage banking income: | | | | | | | |
Gain on sales of mortgage loans | 13,036 |
| | 15,685 |
| | (2,649 | ) | | (16.9 | ) |
Mortgage servicing income | 6,892 |
| | 3,730 |
| | 3,162 |
| | 84.8 |
|
Total mortgage banking income | 19,928 |
| | 19,415 |
| | 513 |
| | 2.6 |
|
Other non-interest income: | | | | | | | |
Credit card income | 10,920 |
| | 10,252 |
| | 668 |
| | 6.5 |
|
SBA lending income | 3,511 |
| | 2,425 |
| | 1,086 |
| | N/M |
|
Other income | 11,430 |
| | 7,447 |
| | 3,983 |
| | 53.5 |
|
Total other income | 25,861 |
| | 20,124 |
| | 5,737 |
| | 28.5 |
|
Total, excluding investment securities gains | 198,903 |
| | 187,628 |
| | 11,275 |
| | 6.0 |
|
Investment securities gains | 9,071 |
| | 2,550 |
| | 6,521 |
| | N/M |
|
Total | $ | 207,974 |
| | $ | 190,178 |
| | $ | 17,796 |
| | 9.4 | % |
N/M - Not meaningful
Excluding investment securities gains, non-interest income increased $11.3 million, or 6.0%, for the year ended December 31, 2017, as compared to the same period in 2016. In the fourth quarter of 2017, the Corporation recognized a net gain of $5.1 million upon the settlement of litigation, included in other income in the table above. Excluding this settlement, non-interest income increased $6.2 million, or 3.3%, in 2017.
Other service charges and fees increased $1.4 million, or 2.7%, mainly due to increases in merchant fees and debit card income, as transaction volumes increased.
Investment management and trust services income increased $4.0 million, or 8.8%, with growth in both trust and brokerage income, due to overall market performance and an increase in assets under management to $7.1 billion at December 31, 2017, compared to $6.2 billion at December 31, 2016.
Gains on sales of mortgage loans decreased $2.6 million, or 16.9%, compared to the same period in 2016, as both volumes and pricing spreads decreased. Mortgage servicing income increased $3.2 million compared to the same period in 2016 due mainly to a $1.3 million reduction to the MSR valuation allowance in 2017, as compared to net increases to the valuation allowance of $1.3 million in 2016, recorded as reductions to servicing income. Excluding the impact of the MSR valuation allowance adjustments
in both periods, mortgage servicing income increased $560,000, or 11.1%, reflecting lower MSR amortization due to slowing prepayments. For more information, see Note 7, "Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Investment securities gains totaled $9.1 million, in comparison to $2.6 million in 2016, as the Corporation recognized gains on the sales of financial institution common stocks. These gains were partially offset by approximately $4.5 million of pre-tax net losses as result of the Corporation repositioning its investment portfolio through the sale of certain debt securities during 2017. See Note 4, "Investment Securities," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional details.
Non-Interest Expense
The following table presents the components of non-interest expense for 2017 and 2016:
|
| | | | | | | | | | | | | | |
| | | | | Increase |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Salaries and employee benefits | $ | 290,130 |
| | $ | 283,353 |
| | $ | 6,777 |
| | 2.4 | % |
Net occupancy expense | 49,708 |
| | 47,611 |
| | 2,097 |
| | 4.4 |
|
Data processing and software | 38,735 |
| | 36,919 |
| | 1,816 |
| | 4.9 |
|
Other outside services | 27,501 |
| | 23,883 |
| | 3,618 |
| | 15.1 |
|
Equipment expense | 12,935 |
| | 12,788 |
| | 147 |
| | 1.1 |
|
Professional fees | 12,688 |
| | 11,004 |
| | 1,684 |
| | 15.3 |
|
FDIC insurance | 11,049 |
| | 9,767 |
| | 1,282 |
| | 13.1 |
|
Amortization of tax credit investments | 11,028 |
| | — |
| | 11,028 |
| | N/M |
|
State taxes | 10,051 |
| | 6,405 |
| | 3,646 |
| | 56.9 |
|
Marketing | 8,034 |
| | 7,044 |
| | 990 |
| | 14.1 |
|
Operating risk loss | 4,342 |
| | 2,815 |
| | 1,527 |
| | 54.2 |
|
Other | 49,378 |
| | 47,930 |
| | 1,448 |
| | 3.0 |
|
Total | $ | 525,579 |
| | $ | 489,519 |
| | $ | 36,060 |
| | 7.4 | % |
| | | | | | | |
N/M - Not meaningful
The $6.8 million, or 2.4%, increase in salaries and employee benefits during the year ended December 31, 2017, in comparison to the same period during 2016, primarily resulted from a $7.5 million, or 3.2%, increase in salaries, resulting from annual merit increases and an increase in staffing levels. The average number of full-time equivalent employees increased 2.3%, to 3,569, in 2017, as compared to 3,490 in 2016. These increases were partially offset by decreases in incentive compensation.
The $2.1 million, or 4.4%, increase in net occupancy expense was primarily driven by increases in rent expense, property tax expense and other occupancy expenses.
The $1.8 million, or 4.9%, increase in data processing and software resulted from higher transaction volumes, contractual increases in third-party service provider costs and the implementation of additional systems.
Other outside services increased $3.6 million, or 15.1%, largely due to consulting services related to pre-bank consolidation efforts, technology initiatives and continued investments in commercial banking technology initiatives.
Professional fees consist of legal and audit fees. Increases were realized mainly in legal fees in 2017 as a result of various legal proceedings, including those discussed in Note 17 "Commitments and Contingencies" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
FDIC insurance expense increased $1.3 million, or 13.1%, reflecting the Corporation's largest banking subsidiary exceeding $10 billion in assets and becoming subject to the higher premium assessments applicable to institutions of that size, and balance sheet growth.
As a result of changes in the types of tax credit investments and related accounting requirements, amortization expense for certain types of tax credit investments, totaling $11.0 million, is now classified in non-interest expense, rather than income taxes.
State taxes increased $3.6 million, or 56.9%, due to legislated increases in the Pennsylvania bank shares tax rate and certain sales tax liabilities.
Marketing expense increased $990,000, or 14.1%, compared to the same period in 2016, due to an increase in the number of marketing promotions. In 2017, many of these promotions were focused on deposit generation.
The $1.4 million increase in other expense was primarily driven by the $3.4 million write-off of certain accumulated capital expenditures related to in-process technology initiatives in commercial banking due to a strategic shift to an alternative solution. This compares to $1.8 million of property write-downs in 2016 related to a branch closure and the reconfiguration of a building as part of a long-term facilities plan.
Comparison of 2016 to 2015
2018
Non-Interest Income
The following table presents the components of non-interest income:
|
| | | | | | | | | | | | | | |
| | | | | Increase (Decrease) |
| 2016 | | 2015 | | $ | | % |
| (dollars in thousands) |
Other service charges and fees: | | | | | | | |
Merchant fees | 16,136 |
| | 15,037 |
| | 1,099 |
| | 7.3 |
|
Commercial loan interest rate swap fees | 11,560 |
| | 5,518 |
| | 6,042 |
| | 109.5 |
|
Debit card income | 11,236 |
| | 10,748 |
| | 488 |
| | 4.5 |
|
Letter of credit fees | 4,504 |
| | 4,809 |
| | (305 | ) | | (6.3 | ) |
Foreign currency processing income | 1,555 |
| | 1,436 |
| | 119 |
| | 8.3 |
|
Other | 6,482 |
| | 6,444 |
| | 38 |
| | 0.6 |
|
Total other service charges and fees | 51,473 |
| | 43,992 |
| | 7,481 |
| | 17.0 |
|
Service charges on deposit accounts: | | | | | | | |
Overdraft fees | $ | 22,175 |
| | $ | 21,500 |
| | $ | 675 |
| | 3.1 | % |
Cash management fees | 14,183 |
| | 13,342 |
| | 841 |
| | 6.3 |
|
Other | 14,988 |
| | 15,255 |
| | (267 | ) | | (1.8 | ) |
Total service charges on deposit accounts | 51,346 |
| | 50,097 |
| | 1,249 |
| | 2.5 |
|
Investment management and trust services | 45,270 |
| | 44,056 |
| | 1,214 |
| | 2.8 |
|
Mortgage banking income: | | | | | | | |
Gain on sales of mortgage loans | 15,685 |
| | 13,264 |
| | 2,421 |
| | 18.3 |
|
Mortgage servicing income | 3,730 |
| | 4,944 |
| | (1,214 | ) | | (24.6 | ) |
Total mortgage banking income | 19,415 |
| | 18,208 |
| | 1,207 |
| | 6.6 |
|
Other non-interest income: | | | | | | | |
Credit card income | 10,252 |
| | 9,638 |
| | 614 |
| | 6.4 |
|
SBA lending income | 2,425 |
| | 100 |
| | 2,325 |
| | N/M |
|
Other income | 7,447 |
| | 6,682 |
| | 765 |
| | 11.4 |
|
Total other income | 20,124 |
| | 16,420 |
| | 3,704 |
| | 22.6 |
|
Total, excluding investment securities gains | 187,628 |
| | 172,773 |
| | 14,855 |
| | 8.6 |
|
Investment securities gains | 2,550 |
| | 9,066 |
| | (6,516 | ) | | (71.9 | ) |
Total | $ | 190,178 |
| | $ | 181,839 |
| | $ | 8,339 |
| | 4.6 | % |
|
| | | | | | | | | | | | | | |
| | | | | Increase (Decrease) |
| 2019 | | 2018 | | $ | | % |
| (dollars in thousands) |
Wealth management | $ | 55,678 |
| | $ | 52,148 |
| | $ | 3,530 |
| | 6.8 | % |
Commercial banking: | | | | | | | |
Merchant and card | 24,077 |
| | 23,427 |
| | 650 |
| | 2.8 |
|
Cash management | 18,392 |
| | 17,581 |
| | 811 |
| | 4.6 |
|
Commercial loan interest rate swap | 14,875 |
| | 9,831 |
| | 5,044 |
| | 51.3 |
|
Other | 13,773 |
| | 13,090 |
| | 683 |
| | 5.2 |
|
Total commercial banking | 71,117 |
| | 63,929 |
| | 7,188 |
| | 11.2 |
|
Consumer banking: | | | | | | | |
Card | 20,515 |
| | 19,497 |
| | 1,018 |
| | 5.2 |
|
Overdraft | 17,949 |
| | 17,606 |
| | 343 |
| | 2.0 |
|
Other | 11,039 |
| | 11,319 |
| | (280 | ) | | (2.5 | ) |
Total consumer banking | 49,503 |
| | 48,422 |
| | 1,081 |
| | 2.2 |
|
Mortgage banking: | | | | | | | |
Gain on sales of mortgage loans | 17,881 |
| | 13,021 |
| | 4,860 |
| | 37.3 |
|
Mortgage servicing | 5,218 |
| | 6,005 |
| | (787 | ) | | (13.1 | ) |
Total mortgage banking | 23,099 |
| | 19,026 |
| | 4,073 |
| | 21.4 |
|
Other | 12,030 |
| | 11,963 |
| | 67 |
| | 0.6 |
|
Total, excluding net investment securities gains | 211,427 |
| | 195,488 |
| | 15,939 |
| | 8.2 |
|
Investment securities gains, net | 4,733 |
| | 37 |
| | 4,696 |
| | N/M |
|
Total non-interest income | $ | 216,160 |
| | $ | 195,525 |
| | $ | 20,635 |
| | 10.6 | % |
N/M - Not meaningful
The $675,000,Excluding net investment securities gains, non-interest income increased $15.9 million, or 3.1%8.2%, increase in overdraft fee income duringfor the year ended December 31, 2016, in comparison2019, as compared to the same period in 2015, consisted of a $461,000 increase in fees assessed on personal accounts and a $214,000 increase in fees assessed on commercial accounts, due to higher volumes. Cash2018, with increases across all major categories
Wealth management fees increased $841,000,$3.5 million, or 6.3%6.8%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance, as well as the acquisitions of two small wealth management firms in 2019.
Total commercial banking income increased $7.2 million, or 11.2%, compared to 2015 due to higher transaction volumes and fee increases implemented in 2016.
The $1.1 million, or 7.3%, increase in merchant fee income, the $488,000, or 4.5%, increase in debit card income and the $614,000, or 6.4%, increase in credit card income were all due to increases in the volumes of transactions in comparison to 2015.
The $6.0 million2018, driven mainly by an increase in commercial loan interest rate swap fees wasalong with increases in merchant and card income and cash management fees.
Total consumer banking increased $1.1 million, or 2.2%, compared to 2018, driven primarily by card income.
Mortgage banking income increased $4.1 million, or 21.4%, mainly due to growth in commercial loans and the attractiveness of interest rate swaps in the current rate environment, whereby borrowers executed swaps to lock in fixed rates, while the Corporation continues to earn a floating rate. See "Note 10 - Derivative Financial Instruments," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional details.
The $1.2 million, or 2.8%, increase in investment management and trust services income reflected a $1.6 million, or 6.4%, increase in trust commissions and money market income, partially offset by a $355,000, or 1.8%, decrease in brokerage fees. The increase in trust commission income was driven by a 9.3% in increase assets under management, as well as improvements in market values of existing assets.
Gainsgains on sales of mortgage loans increased $2.4 million, or 18.3%, due to a 23.7%loans. The increase in pricinggains resulted from both higher volumes of loans sold and higher spreads compared to the prior year, partially offset by a $43.3 million, or 4.4%, decrease in new loan volumes. Mortgage servicing income decreased $1.2 million, or 24.6%, mainly due to a $1.3 million net valuation allowance recognized in 2016. See "Note 7 - Mortgage Servicing Rights," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional details regarding the impairment charge.on sales.
SBA lending incomeInvestment securities gains increased $1.8$4.7 million compared to 2015. Other income increased $1.32018 mainly attributed to the sale of approximately $400 million or 20.2%, due mainly to an increase in the cash surrender value of insurance contracts on directors and employees.
Gains on sales of investment securities decreased $6.5 million compared to 2015.and a corresponding prepayment of FHLB advances. This balance sheet restructuring occurred in the third quarter of 2019. See "NoteNote 3, - Investment"Investment Securities," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional details.
Non-Interest Expense
The following table presents the components of non-interest expense:
| | | | | | | Increase (Decrease) | | | | | Increase (Decrease) |
| 2016 | | 2015 | | $ | | % | 2019 | | 2018 | | $ | | % |
| (dollars in thousands) | (dollars in thousands) |
Salaries and employee benefits | $ | 283,353 |
| | $ | 260,832 |
| | $ | 22,521 |
| | 8.6 | % | $ | 311,934 |
| | $ | 303,202 |
| | $ | 8,732 |
| | 2.9 | % |
Net occupancy expense | 47,611 |
| | 47,777 |
| | (166 | ) | | (0.3 | ) | |
Net occupancy | | 52,826 |
| | 51,678 |
| | 1,148 |
| | 2.2 |
|
Data processing and software | | 44,679 |
| | 41,286 |
| | 3,393 |
| | 8.2 |
|
Other outside services | 23,883 |
| | 27,785 |
| | (3,902 | ) | | (14.0 | ) | 39,989 |
| | 33,758 |
| | 6,231 |
| | 18.5 |
|
Data processing and software | 36,919 |
| | 34,640 |
| | 2,279 |
| | 6.6 |
| |
Equipment expense | 12,788 |
| | 14,514 |
| | (1,726 | ) | | (11.9 | ) | |
FDIC insurance | 9,767 |
| | 11,470 |
| | (1,703 | ) | | (14.8 | ) | |
Equipment | | 13,575 |
| | 13,243 |
| | 332 |
| | 2.5 |
|
Professional fees | 11,004 |
| | 11,244 |
| | (240 | ) | | (2.1 | ) | 13,134 |
| | 14,161 |
| | (1,027 | ) | | (7.3 | ) |
Marketing | 7,044 |
| | 7,324 |
| | (280 | ) | | (3.8 | ) | 9,848 |
| | 8,854 |
| | 994 |
| | 11.2 |
|
Loss on redemption of trust preferred securities | — |
| | 5,626 |
| | (5,626 | ) | | N/M |
| |
State taxes | | 8,894 |
| | 9,590 |
| | (696 | ) | | (7.3 | ) |
FDIC insurance | | 7,780 |
| | 10,993 |
| | (3,213 | ) | | (29.2 | ) |
Amortization of tax credit investments | | 6,021 |
| | 11,449 |
| | (5,428 | ) | | (47.4 | ) |
Prepayment penalty on FHLB advances | | 4,326 |
| | — |
| | 4,326 |
| | N/M |
|
Intangible amortization | | 1,427 |
| | — |
| | 1,427 |
| | N/M |
|
Other | 57,150 |
| | 58,948 |
| | (1,798 | ) | | (3.1 | ) | 53,303 |
| | 47,890 |
| | 5,413 |
| | 11.3 |
|
Total | $ | 489,519 |
| | $ | 480,160 |
| | $ | 9,359 |
| | 1.9 | % | $ | 567,736 |
| | $ | 546,104 |
| | $ | 21,632 |
| | 4.0 | % |
| | | | | | | | |
N/M - Not meaningful
In 2019, $10.9 million of expenses were incurred related to Charter Consolidation, as compared to $3.6 million in 2018, a $7.3 million increase. The 2019 expenses were primarily in salaries and benefits ($1.9 million of severance expense), other outside services ($6.6 million), intangible amortization ($1.0 million write-off) and advertising ($650,000).
The $22.5following provides explanations for the more significant fluctuations in expense levels, excluding charter consolidation costs, by category:
Salaries and employee benefits increased $6.8 million (excluding charter consolidation costs) mainly due to an increase in employee salaries (annual merit increases). Healthcare and 401(k) plan matching expense also increased, but were partially offset by lower defined benefit pension expense driven by changes in the discount rate compared to 2018.
Net occupancy expense increased $1.1 million, or 8.6%2.2%, due mainly to the addition of new properties.
Data processing and software increased $3.4 million, or 8.2%, reflecting higher transaction volumes and costs related to growth and technology initiatives.
Marketing increased $1.0 million, or 11.2%, due to additional promotions, primarily related to deposits.
FDIC insurance expense decreased $3.2 million, or 29.2%, due to the recognition of assessment credits in 2019.
Amortization of tax credit investments decreased $5.4 million as 2018 included amortization for one significant investment which generated a corresponding credit to income taxes.
2019 includes approximately $4.3 million of penalties related to the prepayment of certain FHLB advances in conjunction with the previously mentioned balance sheet restructuring.
Other expenses increased $5.4 million due to losses on sale of fixed assets, telecommunications expense and operating risk losses.
Comparison of 2018 to 2017
Non-Interest Income
The following table presents the components of non-interest income:
|
| | | | | | | | | | | | | | |
| | | | | Increase (Decrease) |
| 2018 | | 2017 | | $ | | % |
| (dollars in thousands) |
Wealth management | $ | 52,148 |
| | $ | 49,249 |
| | $ | 2,899 |
| | 5.9 | % |
Commercial banking: | | | | | | | |
Merchant and card | 23,427 |
| | 21,191 |
| | 2,236 |
| | 10.6 |
|
Cash management | 17,581 |
| | 14,444 |
| | 3,137 |
| | 21.7 |
|
Commercial loan interest rate swap | 9,831 |
| | 11,694 |
| | (1,863 | ) | | (15.9 | ) |
Other | 13,090 |
| | 18,400 |
| | (5,310 | ) | | (28.9 | ) |
Total commercial banking | 63,929 |
| | 65,729 |
| | (1,800 | ) | | (2.7 | ) |
Consumer banking: | | | | | | | |
Card | 19,497 |
| | 18,479 |
| | 1,018 |
| | 5.5 |
|
Overdraft | 17,606 |
| | 18,717 |
| | (1,111 | ) | | (5.9 | ) |
Other | 11,319 |
| | 11,723 |
| | (404 | ) | | (3.4 | ) |
Total consumer banking | 48,422 |
| | 48,919 |
| | (497 | ) | | (1.0 | ) |
Mortgage banking: | | | | | | | |
Gain on sales of mortgage loans | 13,021 |
| | 13,036 |
| | (15 | ) | | (0.1 | ) |
Mortgage servicing | 6,005 |
| | 6,892 |
| | (887 | ) | | (12.9 | ) |
Total mortgage banking | 19,026 |
| | 19,928 |
| | (902 | ) | | (4.5 | ) |
Other | 11,963 |
| | 15,078 |
| | (3,115 | ) | | (20.7 | ) |
Total, excluding net investment securities gains | 195,488 |
| | 198,903 |
| | (3,415 | ) | | (1.7 | ) |
Investment securities gains, net | 37 |
| | 9,071 |
| | (9,034 | ) | | N/M |
|
Total non-interest income | $ | 195,525 |
| | $ | 207,974 |
| | $ | (12,449 | ) | | (6.0 | )% |
N/M - Not meaningful
Excluding investment securities gains, non-interest income decreased $3.4 million, or 1.7%, for the year ended December 31, 2018, as compared to the same period in 2017.
Wealth management fees increased $2.9 million, or 5.9%, with growth in both trust commissions and brokerage income, due to overall market performance and continued focus on asset gathering.
Total commercial banking income decreased $1.8 million, or 2.7%, primarily due to decreases in commercial loan interest rate swaps, resulting from lower new commercial loan originations in 2018, and other commercial banking income being partially offset by increases in merchant and card income and cash management fees.
Total commercial banking income decreased $497,000, or 1.0%, primarily due to decreases in overdraft fees, which were partially offset by an increase in card income.
Mortgage servicing income decreased $887,000, or 12.9%, due to the inclusion in 2017 of a $1.3 million reduction to the MSR valuation allowance, recorded as an increase to mortgage servicing income.
Other income decreased $3.1 million, or 20.7%, as 2017 included a $5.1 million litigation settlement gain.
Investment securities gains decreased $9.0 million, as 2017 included gains on sales of financial institution common stocks.
Non-Interest Expense
The following table presents the components of non-interest expense:
|
| | | | | | | | | | | | | | |
| | | | | Increase (Decrease) |
| 2018 | | 2017 | | $ | | % |
| (dollars in thousands) |
Salaries and employee benefits | $ | 303,202 |
| | $ | 290,130 |
| | $ | 13,072 |
| | 4.5 | % |
Net occupancy | 51,678 |
| | 49,708 |
| | 1,970 |
| | 4.0 |
|
Data processing and software | 41,286 |
| | 38,735 |
| | 2,551 |
| | 6.6 |
|
Other outside services | 33,758 |
| | 27,501 |
| | 6,257 |
| | 22.8 |
|
Professional fees | 14,161 |
| | 12,688 |
| | 1,473 |
| | 11.6 |
|
Equipment | 13,243 |
| | 12,935 |
| | 308 |
| | 2.4 |
|
Amortization of tax credit investments | 11,449 |
| | 11,028 |
| | 421 |
| | 3.8 |
|
FDIC insurance | 10,993 |
| | 11,049 |
| | (56 | ) | | (0.5 | ) |
State Taxes | 9,590 |
| | 10,051 |
| | (461 | ) | | (4.6 | ) |
Marketing | 8,854 |
| | 8,034 |
| | 820 |
| | 10.2 |
|
Other | 47,890 |
| | 53,720 |
| | (5,830 | ) | | (10.9 | ) |
Total | $ | 546,104 |
| | $ | 525,579 |
| | $ | 20,525 |
| | 3.9 | % |
The $13.1 million, or 4.5%, increase in salaries and employee benefits during the year ended December 31, 2016expense was primarily driven by an $18.8a $13.3 million, or 8.6%5.4%, increase in salaries, resulting from higher average salaries per full-time equivalent employee, normalreflecting annual merit increases and an increasehigher incentive and stock compensation. In addition, expenses for stock compensation and certain incentive compensation plans were higher in incentive compensation.2018. Benefits expenses decreased slightly, as severance costs were more than offset by lower defined benefit pension expense, as a result of interest rate increases, and lower health insurance costs, as a result of more favorable claims experience.
Net occupancy expenses increased $2.0 million, or 4.0%, primarily due to higher snow removal and utilities costs, and additional depreciation and amortization related to branch renovations.
Data processing and software expense increased $2.6 million, or 6.6%, reflecting higher transaction volumes, new processing platforms and contractual increases in fees and charges. In addition, 2017 expense was lower as a result of renegotiated contracts.
Other outside services increased $6.3 million, or 22.8%, largely due to consulting services related to various banking and technology initiatives, as well as costs associated with the Charter Consolidation.
Professional fees increased $1.5 million, or 11.6%, driven by higher legal expenses. The average numberCorporation incurs fees related to various legal matters in the normal course of full-time equivalent employees increasedbusiness. These fees can fluctuate based on the timing and extent of these matters.
Other expenses decreased $5.8 million, or 10.9%, due to 3,490a $2.3 million decrease in write-offs of accumulated capital expenditures related to in-process technology initiatives in commercial banking in 2017 as well as a decrease in operating risk loss and other real estate expenses.
Income Taxes
Income tax expense for the year ended December 31, 2016, compared to 3,4602019 was $37.6 million, a $13.1 million, or 53.2%, increase from $24.6 million for the same period in 2018. The Corporation’s ETR was 14.3% for the year ended December 31, 2015. Benefits expenses increased $3.7 million, or 8.9%, due2019, as compared to an10.5% in the same period of 2018. The increase in health careincome tax expense employer contributions toand the Corporation's 401(k) retirement plan, definedETR primarily resulted from higher income before income taxes and from realizing a one-time tax benefit plan expense, employee education and other employee benefits.
The $3.9 million, or 14.0%, decrease in other outside services in comparison to 2015 was due to lower expenses associated with the Corporation's BSA/AML compliance program remediation efforts, and lower costs for information technology and human resources initiatives.
The $2.2 million, or 14.6%, increaselegislative changes enacted in software resulted from investmentsNew Jersey in technology, which are reflected in higher amortization, as well as increases in maintenance costs.
Equipment expense decreased $1.7 million, or 11.9%, primarily due to lower depreciation expense, as certain assets became fully depreciated. FDIC insurance expense decreased $1.7 million, or 14.8%, due to a reduction in the assessment rate beginning in the the third quarter of 2016. Other real estate owned and repossession expense decreased $1.7 million, or 46.9%, when compared to 2015, due to lower holding costs and an increase in net gains on sales. This expense category can experience volatility from period to period based on the timing of foreclosures and sales of properties and payments of expenses.
In July 2015, the Corporation redeemed $150.0 million of TruPS. In connection with this redemption, a loss of $5.6 million was recognized as a component of non-interest expense with no comparable expense in 2016.
Other non-interest expense increased $1.5 million mainly as a result of $1.8 million of property write downs related to a branch closure and the reconfiguration of a building as part of a long-term facilities plan.
Income Taxes
On December 22, 2017, the President signed the Tax Act. The Tax Act, among other things; lowers the U.S. corporate income tax rate from a top rate of 35% to a flat rate of 21%, limits the deductibility of FDIC insurance premiums, and eliminates the exception under prior law that permitted publicly held corporations to deduct compensation paid to certain executive officers in excess of $1 million if that compensation was performance based. Based on the Corporation's projections for 2018, it anticipates the new limitations on the deductibility of FDIC insurance premiums and certain compensation paid to the Corporation's executive officers will have an immaterial impact on its effective tax rate.
Income taxes for the year ended December 31, 2017 totaled $62.7 million, an increase of $16.1 million, or 34.5%, from 2016. This increase was primarily a result of recording in the fourth quarter of 2017 a charge of $15.6 million for the re-measurement of the net deferred tax asset due to the reduction of the U.S. corporate income tax rate as a result of the passage of the Tax Act. This increase in income tax was partially offset by increases in tax credit investments and related net tax credits and the adoption of the FASB ASU 2016-09, "Improvements to Employee Share-based Payments Accounting," in the first quarter of 2017. The Corporation’s ETR was 26.7% for the year ended December 31, 2017, as compared to 22.4% in 2016 and 25.0% in 2015. Absent the $15.6 million charge, the ETR would have been 20.1% in 2017.2018. The ETR is generally lower than the federal statutory rate of 35%21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities credits earned fromand investments in community development projects that generate tax credits under various federal programs and excess tax benefits realized on stock-based compensation. In 2017, amortization of certain new tax credit investments was recorded in non-interest expense, rather than as a component of income tax expense.programs.
The Corporation is evaluating the impact of the Tax Act on its 2018 ETR. While the ETR is expected to be lower than in 2017 as a result of the decrease in the U.S. corporate statutory tax rate, the level of tax credit investment amortization and related tax credits may impact the ETR.
For additional information regarding income taxes and further discussion regarding the impact of the Tax Act, see "Note 12 - Income Taxes," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."48
FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets.
| | | December 31, | | Increase (Decrease) | December 31, | | Increase (Decrease) |
| 2017 | | 2016 | | $ | | % | 2019 | | 2018 | | $ | | % |
| (dollars in thousands) | (dollars in thousands) |
Assets | | | | | | | | | | | | | | |
Cash and due from banks | $ | 108,291 |
| | $ | 118,763 |
| | $ | (10,472 | ) | | (8.8 | )% | |
Other interest-earning assets | 354,566 |
| | 291,252 |
| | 63,314 |
| | 21.7 |
| |
Cash and cash equivalents | | $ | 517,791 |
| | $ | 445,687 |
| | $ | 72,104 |
| | 16.2 | % |
FRB and FHLB stock | | 97,422 |
| | 79,283 |
| | 18,139 |
| | 22.9 |
|
Loans held for sale | 31,530 |
| | 28,697 |
| | 2,833 |
| | 9.9 |
| 37,828 |
| | 27,099 |
| | 10,729 |
| | 39.6 |
|
Investment securities | 2,547,956 |
| | 2,559,227 |
| | (11,271 | ) | | (0.4 | ) | 2,867,378 |
| | 2,686,973 |
| | 180,405 |
| | 6.7 |
|
Loans, net of allowance | 15,598,337 |
| | 14,530,593 |
| | 1,067,744 |
| | 7.3 |
| |
Loans and leases, net of allowance | | 16,673,904 |
| | 16,005,263 |
| | 668,641 |
| | 4.2 |
|
Premises and equipment | 222,802 |
| | 217,806 |
| | 4,996 |
| | 2.3 |
| 240,046 |
| | 234,529 |
| | 5,517 |
| | 2.4 |
|
Goodwill and intangible assets | 531,556 |
| | 531,556 |
| | — |
| | — |
| |
Goodwill and intangibles | | 535,303 |
| | 531,556 |
| | 3,747 |
| | 0.7 |
|
Other assets | 641,867 |
| | 666,353 |
| | (24,486 | ) | | (3.7 | ) | 916,368 |
| | 671,762 |
| | 244,606 |
| | 36.4 |
|
Total Assets | $ | 20,036,905 |
| | $ | 18,944,247 |
| | $ | 1,092,658 |
| | 5.8 | % | $ | 21,886,040 |
| | $ | 20,682,152 |
| | $ | 1,203,888 |
| | 5.8 | % |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | |
Deposits | $ | 15,797,532 |
| | $ | 15,012,864 |
| | $ | 784,668 |
| | 5.2 | % | $ | 17,393,913 |
| | $ | 16,376,159 |
| | $ | 1,017,754 |
| | 6.2 | % |
Short-term borrowings | 617,524 |
| | 541,317 |
| | 76,207 |
| | 14.1 |
| 883,241 |
| | 754,777 |
| | 128,464 |
| | 17.0 |
|
Long-term debt | 1,038,346 |
| | 929,403 |
| | 108,943 |
| | 11.7 |
| |
FHLB advances and long-term debt | | 881,769 |
| | 992,279 |
| | (110,510 | ) | | (11.1 | ) |
Other liabilities | 353,646 |
| | 339,548 |
| | 14,098 |
| | 4.2 |
| 384,941 |
| | 311,364 |
| | 73,577 |
| | 23.6 |
|
Total Liabilities | 17,807,048 |
| | 16,823,132 |
| | 983,916 |
| | 5.8 |
| 19,543,864 |
| | 18,434,579 |
| | 1,109,285 |
| | 6.0 |
|
Total Shareholders’ Equity | 2,229,857 |
| | 2,121,115 |
| | 108,742 |
| | 5.1 |
| 2,342,176 |
| | 2,247,573 |
| | 94,603 |
| | 4.2 |
|
Total Liabilities and Shareholders’ Equity | $ | 20,036,905 |
| | $ | 18,944,247 |
| | $ | 1,092,658 |
| | 5.8 | % | $ | 21,886,040 |
| | $ | 20,682,152 |
| | $ | 1,203,888 |
| | 5.8 | % |
Other Interest-Earning AssetsCash and Cash Equivalents
The $63.3$72.1 million, or 21.7%16.2%, increase in other interest-earning assets was primarilycash and cash equivalents mainly resulted from additional collateral required to be posted with counterparties for derivative contracts.
FRB and FHLB Stock
FRB and FHLB stock increased $18.1 million, or 22.9%, due to higher balances on deposit witha $19.6 million increase in FRB stock partially offset by a $1.5 million decrease in FHLB stock. Additional FRB stock was required to be purchased as a result of the FRB and higher interest-bearing deposits with other banks.Charter Consolidation.
Investment Securities
The following table presents the carrying amount of investment securities which were all classified as available for sale, as of December 31:
| | | 2017 | | 2016 | | 2015 | 2019 | | 2018 |
| (in thousands) | (in thousands) |
Available for Sale | | | | |
U.S. Government sponsored agency securities | $ | 5,938 |
| | $ | 134 |
| | $ | 25,136 |
| $ | — |
| | $ | 31,632 |
|
State and municipal securities | 408,949 |
| | 391,641 |
| | 262,765 |
| 652,927 |
| | 279,095 |
|
Corporate debt securities | 97,309 |
| | 109,409 |
| | 96,955 |
| 377,357 |
| | 109,533 |
|
Collateralized mortgage obligations | 602,623 |
| | 593,860 |
| | 821,509 |
| 693,718 |
| | 832,080 |
|
Residential mortgage-backed securities | 1,120,796 |
| | 1,317,838 |
| | 1,158,835 |
| 177,312 |
| | 463,344 |
|
Commercial mortgage-backed securities | 212,755 |
| | 24,563 |
| | — |
| 494,297 |
| | 261,616 |
|
Auction rate securities | 98,668 |
| | 97,256 |
| | 98,059 |
| 101,926 |
| | 102,994 |
|
Total debt securities | 2,547,038 |
| | 2,534,701 |
| | 2,463,259 |
| |
Equity securities | 918 |
| | 24,526 |
| | 21,514 |
| |
Total | $ | 2,547,956 |
| | $ | 2,559,227 |
| | $ | 2,484,773 |
| |
Total available for sale securities | | $ | 2,497,537 |
| | $ | 2,080,294 |
|
| | | | |
Held to Maturity | | | | |
State and municipal securities | | $ | — |
| | $ | 156,134 |
|
Residential mortgage-backed securities | | 369,841 |
| | 450,545 |
|
Total held to maturity securities | | $ | 369,841 |
| | $ | 606,679 |
|
Total investmentavailable for sale securities decreased $11.3increased $417.2 million, or 0.4%20.1%, to $2.5 billion at December 31, 2017. Residential2019. Cash flows from maturities, sales and repayments of residential mortgage-backed securities, decreased $197.0 million, or 15.0%, as the Corporation began investingU.S. Government sponsored agency securities and securities with shorter expected durations were reinvested in U.S. agency-backed commercial mortgage-backed securitiesother investment categories in order to diversify the investment portfolio. U.S. agency-backed commercialportfolio into securities with longer expected durations to reduce the Corporation's asset-sensitive interest rate risk profile. Total held to maturity securities decreased $236.8 million, or 39.0%, primarily as a result of the transfer of state and municipal securities from the held to maturity classification to the available for sale classification as permitted through the early adoption of ASU 2019-04, as disclosed in "Note 1 - Basis of Presentation" and "Note 3 -Investment Securities" in the Notes to Consolidated Financial Statements. The $80.7 million, or 17.9%, decrease in residential mortgage-backed securities increased $188.2 million comparedwas the result of principal repayments and premium amortization. There were no purchases or transfers into held to December 31, 2016. Equitymaturity securities decreased $23.6 million as the Corporation sold holdings in its financial institutions stocks to take advantage of increases in values. The net pre-tax unrealized loss on availableduring 2019.
for sale investment securities was $27.8 million as of December 31, 2017, compared to $35.0 million as of December 31, 2016.The improvement in the unrealized loss reflected, in part, the realized loss of $4.6 million on the sale of certain collateralized mortgage obligations as part of repositioning investments in that sector. In addition, there was significant improvement in municipal bond pricing at the end of 2017 due to anomalous trading activity in that sector corresponding to the impact of the Tax Act on tax-free bond issuance, which offset the adverse pricing impact of rising rates on other components of the portfolio.
Loans and Leases
The following table presents ending loans and leases outstanding, by type, as of the dates shown, and the changes in balances for the most recent year:
| | | December 31, | | 2017 vs. 2016 Increase (Decrease) | December 31, | | 2019 vs. 2018 Increase (Decrease) |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | $ | | % | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | $ | | % |
| (dollars in thousands) | (dollars in thousands) |
Real estate – commercial mortgage | $ | 6,364,804 |
| | $ | 6,018,582 |
| | $ | 5,462,330 |
| | $ | 5,197,155 |
| | $ | 5,101,922 |
| | $ | 346,222 |
| | 5.8 | % | $ | 6,700,776 |
| | $ | 6,434,285 |
| | $ | 6,364,804 |
| | $ | 6,018,582 |
| | $ | 5,462,330 |
| | $ | 266,491 |
| | 4.1 | % |
Commercial – industrial, financial and agricultural | 4,300,297 |
| | 4,087,486 |
| | 4,088,962 |
| | 3,725,567 |
| | 3,628,420 |
| | 212,811 |
| | 5.2 |
| 4,446,701 |
| | 4,404,548 |
| | 4,300,297 |
| | 4,087,486 |
| | 4,088,962 |
| | 42,153 |
| | 1.0 |
|
Real estate – residential mortgage | 1,954,711 |
| | 1,601,994 |
| | 1,376,160 |
| | 1,377,068 |
| | 1,337,380 |
| | 352,717 |
| | 22.0 |
| 2,641,465 |
| | 2,251,044 |
| | 1,954,711 |
| | 1,601,994 |
| | 1,376,160 |
| | 390,421 |
| | 17.3 |
|
Real estate – home equity | 1,559,719 |
| | 1,625,115 |
| | 1,684,439 |
| | 1,736,688 |
| | 1,764,197 |
| | (65,396 | ) | | (4.0 | ) | 1,314,944 |
| | 1,452,137 |
| | 1,559,719 |
| | 1,625,115 |
| | 1,684,439 |
| | (137,193 | ) | | (9.4 | ) |
Real estate – construction | 1,006,935 |
| | 843,649 |
| | 799,988 |
| | 690,601 |
| | 573,672 |
| | 163,286 |
| | 19.4 |
| 971,079 |
| | 916,599 |
| | 1,006,935 |
| | 843,649 |
| | 799,988 |
| | 54,480 |
| | 5.9 |
|
Consumer | 313,783 |
| | 291,470 |
| | 268,588 |
| | 265,431 |
| | 283,124 |
| | 22,313 |
| | 7.7 |
| 463,164 |
| | 419,186 |
| | 313,783 |
| | 291,470 |
| | 268,588 |
| | 43,978 |
| | 10.5 |
|
Leasing, other and overdrafts | 295,669 |
| | 250,366 |
| | 173,651 |
| | 131,583 |
| | 103,301 |
| | 45,303 |
| | 18.1 |
| |
Gross loans | 15,795,918 |
| | 14,718,662 |
| | 13,854,118 |
| | 13,124,093 |
| | 12,792,016 |
| | 1,077,256 |
| | 7.3 |
| |
Equipment lease financing and other | | 322,625 |
| | 311,866 |
| | 291,556 |
| | 246,704 |
| | 170,914 |
| | 10,759 |
| | 3.4 |
|
Overdrafts | | 3,582 |
| | 2,774 |
| | 4,113 |
| | 3,662 |
| | 2,737 |
| | 808 |
| | 29.1 |
|
Loans and leases, gross of unearned income | | 16,864,336 |
| | 16,192,439 |
| | 15,795,918 |
| | 14,718,662 |
| | 13,854,118 |
| | 671,897 |
| | 4.1 |
|
Unearned income | (27,671 | ) | | (19,390 | ) | | (15,516 | ) | | (12,377 | ) | | (9,796 | ) | | (8,281 | ) | | 42.7 |
| (26,810 | ) | | (26,639 | ) | | (27,671 | ) | | (19,390 | ) | | (15,516 | ) | | (171 | ) | | 0.6 |
|
Loans, net of unearned income | $ | 15,768,247 |
| | $ | 14,699,272 |
| | $ | 13,838,602 |
| | $ | 13,111,716 |
| | $ | 12,782,220 |
| | $ | 1,068,975 |
| | 7.3 | % | |
Loans and leases, net of unearned income | | $ | 16,837,526 |
| | $ | 16,165,800 |
| | $ | 15,768,247 |
| | $ | 14,699,272 |
| | $ | 13,838,602 |
| | $ | 671,726 |
| | 4.2 | % |
Total loans and leases, net of unearned income, increased $1.1 billion,$671.7 million, or 7.3%4.2%, as of December 31, 20172019 compared to December 31, 2016, largely as the result of improved business activity across all markets2018, primarily due to growth in the Corporation's footprint. Commercialresidential and commercial mortgage loans, increased $346.2 million, or 5.8%,partially offset by a decline in comparison to December 31, 2016 across all geographic markets, but primarily in Pennsylvania. Commercial loans increased $212.8 million, or 5.2%, primarily in Pennsylvania. Residential mortgages increased $352.7 million, or 22.0%, across all geographic markets. Construction loans increased $163.3 million, or 19.4%, also across all geographic markets with the largest increases recognized in Maryland and New Jersey.home equity loans.
The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographic location within its footprint. As of December 31, 2017,2019, approximately $7.4$7.7 billion, or 46.8%45.6%, of the loan and lease portfolio was comprised of commercial mortgage and construction loans. The Corporation's policies limit the maximum total lending commitment to an individual borrower to $50.0$55.0 million as of December 31, 2017.2019. In addition, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrower at the time the lending commitment is approved. As of December 31, 2017,2019, the Corporation had 140172 relationships with total borrowing commitments between $20.0 million and $50.0$55.0 million.
The following table summarizes the industry concentrations within the commercial mortgage and the commercial-industrial, financial and agricultural loan portfolioportfolios as of December 31:
|
| | | | | |
| 2017 | | 2016 |
Services | 22.9 | % | | 21.8 | % |
Retail | 15.4 |
| | 15.1 |
|
Manufacturing | 9.5 |
| | 9.2 |
|
Health care | 9.1 |
| | 10.5 |
|
Construction (1) | 8.3 |
| | 9.0 |
|
Wholesale | 7.4 |
| | 7.0 |
|
Real estate (2) | 6.2 |
| | 6.7 |
|
Agriculture | 5.2 |
| | 5.0 |
|
Arts and entertainment | 2.4 |
| | 2.6 |
|
Transportation | 2.2 |
| | 2.3 |
|
Financial services | 2.2 |
| | 2.1 |
|
Other | 9.2 |
| | 8.7 |
|
Total | 100.0 | % | | 100.0 | % |
|
| | | | | |
| 2019 | | 2018 |
Real estate (1) | 41.4 | % | | 35.9 | % |
Health care | 8.1 |
| | 7.8 |
|
Agriculture | 7.1 |
| | 7.3 |
|
Construction (2) | 6.2 |
| | 5.7 |
|
Manufacturing | 6.0 |
| | 5.5 |
|
Other services (except public administration) | 4.7 |
| | 4.5 |
|
Retail | 4.2 |
| | 4.6 |
|
Educational services | 4.1 |
| | 4.6 |
|
Accommodation and food services | 4.1 |
| | 3.7 |
|
Wholesale trade | 3.6 |
| | 3.5 |
|
Professional, scientific, and technical services | 2.9 |
| | 2.8 |
|
Arts, entertainment, and recreation | 2.2 |
| | 2.3 |
|
Public administration | 2.0 |
| | 2.3 |
|
Transportation and warehousing | 1.2 |
| | 1.3 |
|
Other | 2.2 |
| | 8.2 |
|
Total | 100.0 | % | | 100.0 | % |
| |
(1) | Includes commercial loans to borrowers engaged in the construction industry. |
| |
(2) | Includes commercial loans to borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate. |
| |
(2) | Includes commercial loans to borrowers engaged in the construction industry. |
Commercial loans and commercial mortgage loans also include shared national credits, which are participations in loans or loan commitments of at least $20$100 million that are shared by three or more banks. The Corporation only participates in shared national credits to borrowers located in its geographic markets. Below is a summary ofmarkets and these are subject to the Corporation's outstanding purchased shared national credits asstandard underwriting policies. As of December 31:
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Commercial - industrial, financial and agricultural | $ | 156,277 |
| | $ | 155,353 |
|
Real estate - commercial mortgage | 110,658 |
| | 81,573 |
|
Total | $ | 266,935 |
| | $ | 236,926 |
|
Total31, 2019, commercial loan shared national credits increased $30.0$4.6 million, or 12.7%6.8%, in comparison to 2016.2018, to $72.1 million. As of December 31, 2017,2019 and 2018 none of the shared national credits were past due.
Construction loans include loans to commercial borrowers secured by residential real estate, loans to commercial borrowers secured by commercial real estate and other construction loans, which represent loans to individuals secured by residential real estate.
The following table presents outstanding construction loans and delinquency rates, by class segment, as of December 31: |
| | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| $ | | Delinquency Rate | | % of Total | | $ | | Delinquency Rate | | % of Total |
| (dollars in thousands) |
Commercial | $ | 765,816 |
| | 0.1 | % | | 76.1 | % | | $ | 644,490 |
| | 0.2 | % | | 76.4 | % |
Commercial - residential | 163,102 |
| | 7.5 |
| | 16.2 |
| | 142,189 |
| | 6.0 |
| | 16.9 |
|
Other | 78,017 |
| | 0.8 |
| | 7.7 |
| | 56,970 |
| | 1.9 |
| | 6.7 |
|
Total Real estate - construction | $ | 1,006,935 |
| | 1.3 | % | | 100.0 | % | | $ | 843,649 |
| | 1.3 | % | | 100.0 | % |
Provision and Allowance for Credit Losses
The Corporation accounts for the credit risk associated with lending activities through the allowance for credit losses and the provision for credit losses.
A summary of the Corporation’s loancredit loss experience follows:
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (dollars in thousands) | (dollars in thousands) |
Loans, net of unearned income outstanding at end of year | $ | 15,768,247 |
| | $ | 14,699,272 |
| | $ | 13,838,602 |
| | $ | 13,111,716 |
| | $ | 12,782,220 |
| |
Average balance of loans, net of unearned income | $ | 15,236,612 |
| | $ | 14,128,064 |
| | $ | 13,330,973 |
| | $ | 12,885,180 |
| | $ | 12,578,524 |
| |
Loans and leases, net of unearned income outstanding at end of year | | $ | 16,837,526 |
| | $ | 16,165,800 |
| | $ | 15,768,247 |
| | $ | 14,699,272 |
| | $ | 13,838,602 |
|
Average balance of loans and leases, net of unearned income | | $ | 16,430,347 |
| | $ | 15,815,263 |
| | $ | 15,236,612 |
| | $ | 14,128,064 |
| | $ | 13,330,973 |
|
Balance of allowance for credit losses at beginning of year | $ | 171,325 |
| | $ | 171,412 |
| | $ | 185,931 |
| | $ | 204,917 |
| | $ | 225,439 |
| $ | 169,410 |
| | $ | 176,084 |
| | $ | 171,325 |
| | $ | 171,412 |
| | $ | 185,931 |
|
Loans charged off: | | | | | | | | | | |
Loans and leases charged off: | | | | | | | | | | |
Commercial – industrial, financial and agricultural | 19,067 |
| | 15,276 |
| | 15,639 |
| | 24,516 |
| | 30,383 |
| 42,410 |
| | 52,441 |
| | 19,067 |
| | 15,276 |
| | 15,639 |
|
Real estate - home equity and consumer | 4,567 |
| | 7,712 |
| | 5,831 |
| | 7,811 |
| | 10,070 |
| 4,694 |
| | 6,127 |
| | 4,567 |
| | 7,712 |
| | 5,831 |
|
Equipment lease financing and other | | 2,560 |
| | 2,521 |
| | 3,035 |
| | 3,815 |
| | 2,656 |
|
Real estate – commercial mortgage | 2,169 |
| | 3,580 |
| | 4,218 |
| | 6,004 |
| | 20,829 |
| 1,837 |
| | 2,045 |
| | 2,169 |
| | 3,580 |
| | 4,218 |
|
Real estate – residential mortgage | | 1,545 |
| | 1,574 |
| | 687 |
| | 2,326 |
| | 3,612 |
|
Real estate – construction | 3,765 |
| | 1,218 |
| | 201 |
| | 1,209 |
| | 6,572 |
| 143 |
| | 1,368 |
| | 3,765 |
| | 1,218 |
| | 201 |
|
Leasing, other and overdrafts | 3,035 |
| | 3,815 |
| | 2,656 |
| | 2,135 |
| | 2,653 |
| |
Real estate – residential mortgage | 687 |
| | 2,326 |
| | 3,612 |
| | 2,918 |
| | 9,705 |
| |
Total loans charged off | 33,290 |
| | 33,927 |
| | 32,157 |
| | 44,593 |
| | 80,212 |
| |
Recoveries of loans previously charged off: | | | | | | | | | | |
Total charged off | | 53,189 |
| | 66,076 |
| | 33,290 |
| | 33,927 |
| | 32,157 |
|
Recoveries of loans and leases previously charged off: | | | | | | | | | | |
Commercial – industrial, financial and agricultural | 7,771 |
| | 8,981 |
| | 5,264 |
| | 4,256 |
| | 9,281 |
| 8,721 |
| | 4,994 |
| | 7,771 |
| | 8,981 |
| | 5,264 |
|
Real estate - home equity and consumer | 1,969 |
| | 2,466 |
| | 2,492 |
| | 2,347 |
| | 2,378 |
| 1,994 |
| | 2,393 |
| | 1,969 |
| | 2,466 |
| | 2,492 |
|
Real estate – construction | | 2,591 |
| | 1,829 |
| | 1,582 |
| | 3,924 |
| | 2,824 |
|
Real estate – commercial mortgage | 1,668 |
| | 3,373 |
| | 2,801 |
| | 1,960 |
| | 3,494 |
| 2,202 |
| | 1,622 |
| | 1,668 |
| | 3,373 |
| | 2,801 |
|
Real estate – construction | 1,582 |
| | 3,924 |
| | 2,824 |
| | 3,177 |
| | 2,682 |
| |
Leasing, other and overdrafts | 968 |
| | 842 |
| | 685 |
| | 916 |
| | 807 |
| |
Equipment lease financing and other | | 666 |
| | 1,037 |
| | 968 |
| | 842 |
| | 685 |
|
Real estate – residential mortgage | 786 |
| | 1,072 |
| | 1,322 |
| | 451 |
| | 548 |
| 989 |
| | 620 |
| | 786 |
| | 1,072 |
| | 1,322 |
|
Total recoveries | 14,744 |
| | 20,658 |
| | 15,388 |
| | 13,107 |
| | 19,190 |
| 17,163 |
| | 12,495 |
| | 14,744 |
| | 20,658 |
| | 15,388 |
|
Net loans charged off | 18,546 |
| | 13,269 |
| | 16,769 |
| | 31,486 |
| | 61,022 |
| |
Net loans and leases charged off | | 36,026 |
| | 53,581 |
| | 18,546 |
| | 13,269 |
| | 16,769 |
|
Provision for credit losses | 23,305 |
| | 13,182 |
| | 2,250 |
| | 12,500 |
| | 40,500 |
| 32,825 |
| | 46,907 |
| | 23,305 |
| | 13,182 |
| | 2,250 |
|
Balance at end of year | $ | 176,084 |
| | $ | 171,325 |
| | $ | 171,412 |
| | $ | 185,931 |
| | $ | 204,917 |
| $ | 166,209 |
| | $ | 169,410 |
| | $ | 176,084 |
| | $ | 171,325 |
| | $ | 171,412 |
|
Components of Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | $ | 169,910 |
| | $ | 168,679 |
| | $ | 169,054 |
| | $ | 184,144 |
| | $ | 202,780 |
| |
Allowance for loan and lease losses | | $ | 163,622 |
| | $ | 160,537 |
| | $ | 169,910 |
| | $ | 168,679 |
| | $ | 169,054 |
|
Reserve for unfunded lending commitments (1) | 6,174 |
| | 2,646 |
| | 2,358 |
| | 1,787 |
| | 2,137 |
| 2,587 |
| | 8,873 |
| | 6,174 |
| | 2,646 |
| | 2,358 |
|
Allowance for credit losses | $ | 176,084 |
| | $ | 171,325 |
| | $ | 171,412 |
| | $ | 185,931 |
| | $ | 204,917 |
| $ | 166,209 |
| | $ | 169,410 |
| | $ | 176,084 |
| | $ | 171,325 |
| | $ | 171,412 |
|
Selected Asset Quality Ratios: | | | | | | | | | | | | | | | | | | |
Net charge-offs to average loans | 0.12 | % | | 0.09 | % | | 0.13 | % | | 0.24 | % | | 0.49 | % | |
Allowance for loan losses to loans outstanding | 1.08 | % | | 1.15 | % | | 1.22 | % | | 1.40 | % | | 1.59 | % | |
Allowance for credit losses to loans outstanding | 1.12 | % | | 1.17 | % | | 1.24 | % | | 1.42 | % | | 1.60 | % | |
Net charge-offs to average loans and leases | | 0.22 | % | | 0.34 | % | | 0.12 | % | | 0.09 | % | | 0.13 | % |
Allowance for loan losses to total loans and leases | | 0.97 | % | | 0.99 | % | | 1.08 | % | | 1.15 | % | | 1.22 | % |
Allowance for credit losses to total loans and leases | | 0.99 | % | | 1.05 | % | | 1.12 | % | | 1.17 | % | | 1.24 | % |
Non-performing assets (2) to total assets | 0.72 | % | | 0.76 | % | | 0.87 | % | | 0.88 | % | | 1.00 | % | 0.68 | % | | 0.73 | % | | 0.72 | % | | 0.76 | % | | 0.87 | % |
Non-performing assets (2) to total loans and OREO | 0.92 | % | | 0.98 | % | | 1.13 | % | | 1.15 | % | | 1.32 | % | |
Non-accrual loans to total loans | 0.79 | % | | 0.82 | % | | 0.94 | % | | 0.92 | % | | 1.05 | % | |
Allowance for credit losses to non-performing loans | 130.67 | % | | 130.15 | % | | 118.37 | % | | 134.26 | % | | 132.82 | % | |
Non-performing assets (2) to tangible equity and allowance for credit losses (3) | 7.71 | % | | 8.20 | % | | 9.27 | % | | 9.12 | % | | 9.76 | % | |
Non-performing assets (2) to total loans and leases and OREO | | 0.88 | % | | 0.93 | % | | 0.92 | % | | 0.98 | % | | 1.13 | % |
Non-accrual loans to total loans and leases | | 0.74 | % | | 0.80 | % | | 0.79 | % | | 0.82 | % | | 0.94 | % |
Allowance for credit losses to non-performing loans and leases | | 117.75 | % | | 121.29 | % | | 130.67 | % | | 130.15 | % | | 118.37 | % |
Non-performing assets (2) to tangible shareholders' equity and allowance for credit losses (3) ("Texas Ratio") | | 7.50 | % | | 7.97 | % | | 7.71 | % | | 8.20 | % | | 9.27 | % |
(1)Reserve for unfunded lending commitments is recorded within other liabilities on the consolidated balance sheets.
(2)Includes accruing loans and leases past due 90 days or more.
| |
(3) | Ratio represents a financial measure derived by methods other than Generally Accepted Accounting Principles ("GAAP"). See reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures," in Item 6. "Selected Financial Data." |
The provision for credit losses increased $10.1decreased $14.1 million in comparison to 2016 due mainly2018. In 2019, the Corporation recorded a $20.0 million provision for a certain commercial borrower, which was subsequently charged off in 2019. In 2018, the Corporation recorded a provision of $36.8 million for a credit loss related to loan growththe Commercial Relationship and an increaserecorded a $33.9 million charge-off.
The following table presents the changes in non-accrual loans and leases for the reserve for unfunded lending commitments. Theyears ended December 31: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial - Industrial, Financial and Agricultural | | Real Estate - Commercial Mortgage | | Real Estate - Construction | | Real Estate - Residential Mortgage | | Real Estate - Home Equity | | Consumer | | Equipment Lease Financing | | Total |
| (in thousands) |
Balance of non-accrual loans and leases at December 31, 2017 | $ | 52,904 |
| | $ | 34,822 |
| | $ | 12,197 |
| | $ | 15,691 |
| | $ | 9,135 |
| | $ | — |
| | $ | — |
| | $ | 124,749 |
|
Additions | 91,057 |
| | 19,507 |
| | 1,433 |
| | 3,707 |
| | 5,252 |
| | 3,040 |
| | 20,243 |
| | 144,239 |
|
Payments | (39,887 | ) | | (15,961 | ) | | (4,872 | ) | | (1,120 | ) | | (1,951 | ) | | — |
| | — |
| | (63,791 | ) |
Charge-offs (1) | (52,441 | ) | | (2,045 | ) | | (1,368 | ) | | (1,574 | ) | | (3,087 | ) | | (3,040 | ) | | (974 | ) | | (64,529 | ) |
Transfers to OREO | (1,027 | ) | | (3,206 | ) | | — |
| | (1,999 | ) | | (1,982 | ) | | — |
| | — |
| | (8,214 | ) |
Transfers to accrual status | (457 | ) | | (2,728 | ) | | — |
| | (37 | ) | | (660 | ) | | — |
| | — |
| | (3,882 | ) |
Balance of non-accrual loans and leases at December 31, 2018 | 50,149 |
| | 30,389 |
| | 7,390 |
| | 14,668 |
| | 6,707 |
| | — |
| | 19,269 |
| | 128,572 |
|
Additions | 65,893 |
| | 35,369 |
| | 100 |
| | 8,384 |
| | 4,851 |
| | 3,403 |
| | 1,334 |
| | 119,334 |
|
Payments | (24,810 | ) | | (28,770 | ) | | (3,588 | ) | | (2,341 | ) | | (2,276 | ) | | — |
| | (3,157 | ) | | (64,942 | ) |
Charge-offs (1) | (42,410 | ) | | (1,837 | ) | | (143 | ) | | (1,545 | ) | | (1,291 | ) | | (3,403 | ) | | (918 | ) | | (51,547 | ) |
Transfers to OREO | (144 | ) | | (680 | ) | | (124 | ) | | (2,433 | ) | | (582 | ) | | — |
| | — |
| | (3,963 | ) |
Transfers to accrual status | (572 | ) | | (1,305 | ) | | (17 | ) | | (57 | ) | | (405 | ) | | — |
| | — |
| | (2,356 | ) |
Balance of non-accrual loans and leases at December 31, 2019 | $ | 48,106 |
| | $ | 33,166 |
| | $ | 3,618 |
| | $ | 16,676 |
| | $ | 7,004 |
| | $ | — |
| | $ | 16,528 |
| | $ | 125,098 |
|
(1) Excludes charge-offs of loans and leases on accrual status.
Non-accrual loans and leases decreased $3.5 million, increaseor 2.7%, in the reserve for unfunded lending commitments in 20172019. Non-accrual loans and leases to total loans and leases decreased to 0.74% at December 31, 2019, as compared to 2016 resulted from a single relationship that experienced financial difficulty, increasing the likelihood that the Corporation would need to fund letters of credit. Net charge-offs increased $5.3 million, or 39.8%, to $18.5 million in 2017 from $13.3 million in 2016. This increase was primarily due to a $5.0 million, or 79.4%, increase in commercial loan net charge-offs,0.80% at December 31, 2018.
and a $4.9 million increase in construction loan net charge-offs, partially offset by decreases in net charge-offs in consumer and home equity loans of $2.6 million, or 50.5%, and a $1.4 million decrease in residential mortgage loan net charge-offs. The $18.5 million of net charge-offs were primarily in the Pennsylvania ($16.9 million, or 91.3% of the total), and New Jersey ($1.5 million, or 8.2% of the total) markets, partially offset by net recoveries in the Virginia and Delaware markets.
The following table presents non-performing assets as of December 31:
|
| | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (in thousands) |
Non-accrual loans (1) (2) (3) | $ | 124,749 |
| | $ | 120,133 |
| | $ | 129,523 |
| | $ | 121,080 |
| | $ | 133,753 |
|
Loans 90 days or more past due and still accruing (2) | 10,010 |
| | 11,505 |
| | 15,291 |
| | 17,402 |
| | 20,524 |
|
Total non-performing loans | 134,759 |
| | 131,638 |
| | 144,814 |
| | 138,482 |
| | 154,277 |
|
OREO | 9,823 |
| | 12,815 |
| | 11,099 |
| | 12,022 |
| | 15,052 |
|
Total non-performing assets | $ | 144,582 |
| | $ | 144,453 |
| | $ | 155,913 |
| | $ | 150,504 |
| | $ | 169,329 |
|
|
| | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (in thousands) |
Non-accrual loans and leases (1) (2) (3) | $ | 125,098 |
| | $ | 128,572 |
| | $ | 124,749 |
| | $ | 120,133 |
| | $ | 129,523 |
|
Loans and leases 90 days or more past due and still accruing (2) | 16,057 |
| | 11,106 |
| | 10,010 |
| | 11,505 |
| | 15,291 |
|
Total non-performing loans and leases | 141,155 |
| | 139,678 |
| | 134,759 |
| | 131,638 |
| | 144,814 |
|
OREO | 6,831 |
| | 10,518 |
| | 9,823 |
| | 12,815 |
| | 11,099 |
|
Total non-performing assets | $ | 147,986 |
| | $ | 150,196 |
| | $ | 144,582 |
| | $ | 144,453 |
| | $ | 155,913 |
|
| |
(1) | In 2017,2019, the total interest income that would have been recorded if non-accrual loans and leases had been current in accordance with their original terms was approximately $6.2$7.0 million. The amount of interest income on non-accrual loans and leases that was recognized in 20172019 was approximately $4.4$4.7 million. |
| |
(2) | Accrual of interest is generally discontinued when a loan or lease becomes 90 days past due. In certain cases a loan or lease may be placed on non-accrual status prior to being 90 days delinquent if there is an indication that the borrower is having difficulty making payments, or the Corporation believes it is probable that all amounts will not be collected according to the contractual terms of the agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans and leases may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan or lease is considered to be adequately secured and in the process of collection. Certain loans and leases, primarily adequately collateralized residential mortgage loans, may continue to accrue interest after reaching 90 days past due. |
| |
(3) | Excluded from non-performing assets as of December 31, 20172019 were $66.4$55.2 million of loans modified under trouble debt restructurings ("TDRs"). These loans were evaluated for impairment under FASB ASC Section 310-10-35, but continue to accrue interest and are, therefore, not included in non-accrual loans.loans and leases. |
The following table presents non-performing loans and leases, by type, as of the dates shown, and the changes in non-performing loans and leases for the most recent year:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2019 vs. 2018 Increase (Decrease) |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | $ | | % |
| (dollars in thousands) |
Commercial – industrial, financial and agricultural | $ | 49,491 |
| | $ | 51,269 |
| | $ | 54,309 |
| | $ | 43,460 |
| | $ | 44,071 |
| | $ | (1,778 | ) | | (3.5 | )% |
Real estate – commercial mortgage | 37,279 |
| | 32,153 |
| | 35,447 |
| | 39,319 |
| | 41,170 |
| | 5,126 |
| | 15.9 |
|
Real estate – residential mortgage | 22,411 |
| | 19,101 |
| | 20,971 |
| | 23,655 |
| | 28,484 |
| | 3,310 |
| | 17.3 |
|
Real estate – home equity | 10,568 |
| | 9,769 |
| | 11,507 |
| | 13,154 |
| | 14,683 |
| | 799 |
| | 8.2 |
|
Real estate – construction | 4,306 |
| | 7,390 |
| | 12,197 |
| | 9,842 |
| | 12,460 |
| | (3,084 | ) | | (41.7 | ) |
Consumer | 458 |
| | 409 |
| | 296 |
| | 1,891 |
| | 2,440 |
| | 49 |
| | 12.0 |
|
Equipment lease financing | 16,642 |
| | 19,587 |
| | 32 |
| | 317 |
| | 1,506 |
| | (2,945 | ) | | (15.0 | ) |
Total non-performing loans and leases | $ | 141,155 |
| | $ | 139,678 |
| | $ | 134,759 |
| | $ | 131,638 |
| | $ | 144,814 |
| | $ | 1,477 |
| | 1.1 | % |
Non-performing loans and leases increased $1.5 million, or 1.1%, in comparison to December 31, 2018. As a percentage of total loans, non-performing loans and leases were 0.84% at December 31, 2019, a decrease from 0.86% at December 31, 2018.
The following table presents TDRs as of December 31:
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (in thousands) | (in thousands) |
Real estate – residential mortgage | $ | 26,016 |
| | $ | 27,617 |
| | $ | 28,511 |
| | $ | 31,308 |
| | $ | 28,815 |
| $ | 21,551 |
| | $ | 24,102 |
| | $ | 26,016 |
| | $ | 27,617 |
| | $ | 28,511 |
|
Real estate - home equity | 15,558 |
| | 8,594 |
| | 4,556 |
| | 2,975 |
| | 1,365 |
| |
Real estate – home equity | | 15,068 |
| | 16,665 |
| | 15,558 |
| | 8,594 |
| | 4,556 |
|
Real estate – commercial mortgage | 13,959 |
| | 15,957 |
| | 17,563 |
| | 18,822 |
| | 19,758 |
| 13,330 |
| | 15,685 |
| | 13,959 |
| | 15,957 |
| | 17,563 |
|
Commercial – industrial, financial and agricultural | 10,820 |
| | 6,627 |
| | 5,953 |
| | 5,237 |
| | 8,045 |
| 5,193 |
| | 5,143 |
| | 10,820 |
| | 6,627 |
| | 5,953 |
|
Consumer | 26 |
| | 39 |
| | 33 |
| | 38 |
| | 11 |
| 8 |
| | 10 |
| | 26 |
| | 39 |
| | 33 |
|
Real estate – construction | — |
| | 726 |
| | 3,942 |
| | 9,241 |
| | 10,117 |
| — |
| | — |
| | — |
| | 726 |
| | 3,942 |
|
Total accruing TDRs | 66,379 |
| | 59,560 |
| | 60,558 |
| | 67,621 |
| | 68,111 |
| 55,150 |
| | 61,605 |
| | 66,379 |
| | 59,560 |
| | 60,558 |
|
Non-accrual TDRs (1) | 29,051 |
| | 27,850 |
| | 31,035 |
| | 24,616 |
| | 30,209 |
| 20,825 |
| | 28,659 |
| | 29,051 |
| | 27,850 |
| | 31,035 |
|
Total TDRs | $ | 95,430 |
| | $ | 87,410 |
| | $ | 91,593 |
| | $ | 92,237 |
| | $ | 98,320 |
| $ | 75,975 |
| | $ | 90,264 |
| | $ | 95,430 |
| | $ | 87,410 |
| | $ | 91,593 |
|
| |
(1) | Included within non-accrual loans in the preceding table. |
Total TDRs modified during 20172019 and still outstanding as of December 31, 20172019 were $29.6$10.6 million. Of these loans, $5.9$2.0 million, or 19.8%18.5%, had a payment default during 2017,2019, which the Corporation defines as a single missed scheduled payment, subsequent to modification. TDRs modified during 20162018 and still outstanding as of December 31, 20162018 totaled $12.4$18.4 million. Of these loans, $6.0$5.0 million, or 48.4%27.0%, had a payment default subsequent to modification during 2016.2018.
The following table presents the changes in non-accrual loans for the years ended December 31: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial - Industrial, Financial and Agricultural | | Real Estate - Commercial Mortgage | | Real Estate - Construction | | Real Estate - Residential Mortgage | | Real Estate - Home Equity | | Consumer | | Leasing | | Total |
| (in thousands) |
Balance of non-accrual loans at December 31, 2015 | $ | 42,199 |
| | $ | 40,731 |
| | $ | 12,044 |
| | $ | 21,914 |
| | $ | 11,210 |
| | $ | — |
| | $ | 1,425 |
| | $ | 129,523 |
|
Additions | 32,831 |
| | 25,151 |
| | 6,921 |
| | 5,611 |
| | 8,983 |
| | 2,803 |
| | 808 |
| | 83,108 |
|
Payments | (14,328 | ) | | (14,682 | ) | | (6,257 | ) | | (3,532 | ) | | (2,512 | ) | | (1 | ) | | (24 | ) | | (41,336 | ) |
Charge-offs (1) | (15,276 | ) | | (3,580 | ) | | (1,218 | ) | | (2,326 | ) | | (4,912 | ) | | (2,800 | ) | | (2,209 | ) | | (32,321 | ) |
Transfers to OREO | (552 | ) | | (2,992 | ) | | (1,684 | ) | | (2,925 | ) | | (1,199 | ) | | — |
| | — |
| | (9,352 | ) |
Transfers to accrual status | (2,525 | ) | | (5,692 | ) | | — |
| | (311 | ) | | (959 | ) | | (2 | ) | | — |
| | (9,489 | ) |
Balance of non-accrual loans at December 31, 2016 | 42,349 |
| | 38,936 |
| | 9,806 |
| | 18,431 |
| | 10,611 |
| | — |
| | — |
| | 120,133 |
|
Additions | 48,717 |
| | 20,596 |
| | 10,657 |
| | 3,817 |
| | 5,264 |
| | 2,227 |
| | 1,553 |
| | 92,831 |
|
Payments | (19,092 | ) | | (20,164 | ) | | (4,352 | ) | | (2,848 | ) | | (1,518 | ) | | — |
| | — |
| | (47,974 | ) |
Charge-offs (1) | (19,067 | ) | | (2,169 | ) | | (3,765 | ) | | (687 | ) | | (2,340 | ) | | (2,227 | ) | | (1,553 | ) | | (31,808 | ) |
Transfers to OREO | (3 | ) | | (1,464 | ) | | (149 | ) | | (2,729 | ) | | (1,895 | ) | | — |
| | — |
| | (6,240 | ) |
Transfers to accrual status | — |
| | (913 | ) | | — |
| | (293 | ) | | (987 | ) | | — |
| | — |
| | (2,193 | ) |
Balance of non-accrual loans at December 31, 2017 | $ | 52,904 |
| | $ | 34,822 |
| | $ | 12,197 |
| | $ | 15,691 |
| | $ | 9,135 |
| | $ | — |
| | $ | — |
| | $ | 124,749 |
|
(1) Excludes charge-offs of loans on accrual status.
Non-accrual loans increased $4.6 million, or 3.8%, in 2017 due mainly to an increase in non-accrual loan additions from $83.1 million in 2016 to $92.8 million in 2017. The non-accrual loan additions occurred mostly in commercial and construction loans, and were not driven by one specific account or event. Non-accrual loan balances continued to be reduced through payments, return to accrual status and charge-offs. Non-accrual loans to total loans decreased to 0.79% at December 31, 2017 from 0.82% in 2016.
The following table presents non-performing loans, by type, as of the dates shown, and the changes in non-performing loans for the most recent year:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2017 vs. 2016 Increase (Decrease) |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | $ | | % |
| (dollars in thousands) |
Commercial – industrial, financial and agricultural | $ | 54,309 |
| | $ | 43,460 |
| | $ | 44,071 |
| | $ | 30,388 |
| | $ | 38,021 |
| | $ | 10,849 |
| | 25.0 | % |
Real estate – commercial mortgage | 35,447 |
| | 39,319 |
| | 41,170 |
| | 45,237 |
| | 44,068 |
| | (3,872 | ) | | (9.8 | ) |
Real estate – residential mortgage | 20,971 |
| | 23,655 |
| | 28,484 |
| | 28,995 |
| | 31,347 |
| | (2,684 | ) | | (11.3 | ) |
Real estate – home equity | 11,507 |
| | 13,154 |
| | 14,683 |
| | 14,740 |
| | 16,983 |
| | (1,647 | ) | | (12.5 | ) |
Real estate – construction | 12,197 |
| | 9,842 |
| | 12,460 |
| | 16,399 |
| | 21,267 |
| | 2,355 |
| | 23.9 |
|
Consumer | 296 |
| | 1,891 |
| | 2,440 |
| | 2,590 |
| | 2,543 |
| | (1,595 | ) | | (84.3 | ) |
Leasing | 32 |
| | 317 |
| | 1,506 |
| | 133 |
| | 48 |
| | (285 | ) | | (89.9 | ) |
Total non-performing loans | $ | 134,759 |
| | $ | 131,638 |
| | $ | 144,814 |
| | $ | 138,482 |
| | $ | 154,277 |
| | $ | 3,121 |
| | 2.4 | % |
Non-performing loans increased $3.1 million, or 2.4%, in comparison to December 31, 2016. As a percentage of total loans, non-performing loans were 0.85% in 2017 and 0.90% in 2016.
Non-performing commercial loans increased $10.8 million, or 25.0%, in comparison to December 31, 2016. The increase occurred mainly in the Pennsylvania market ($11.2 million, or 44.7%) and was partially offset by decreases in the Delaware and Maryland markets. In comparison to December 31, 2016, non-performing construction loans increased $2.4 million, or 23.9%. Geographically, the increase occurred mainly in the New Jersey ($2.0 million) and Virginia ($1.4 million) markets, partially offset by decreases in the Delaware and Maryland markets.
These increases in commercial and construction non-performing loans were partially offset by decreases in commercial and residential mortgages, home equity, consumer loans and leasing. Non-performing commercial mortgages decreased $3.9 million,
or 9.8%, with decreases occurring in the Maryland ($2.7 million, or 73.8%), Delaware ($1.6 million, or 23.2%) and New Jersey ($1.6 million, or 10.6%) markets, partially offset by increases in the Virginia and Pennsylvania markets.
Residential mortgage loans decreased $2.7 million, or 11.3%, in comparison to December 31, 2016. Geographically, the decrease occurred mainly in the New Jersey ($1.9 million, or 28.8%) and Maryland ($1.2 million, or 58.1%) markets.
In comparison to December 31, 2016, non-performing home equity, consumer loans and leases decreased $3.5 million, or 23.0%. Geographically, the decrease occurred mainly in the Pennsylvania market.
The following table summarizes OREO, by property type, as of December 31:
| | | 2017 | | 2016 | 2019 | | 2018 |
| (in thousands) | (in thousands) |
Residential properties | $ | 4,562 |
| | $ | 7,655 |
| $ | 3,078 |
| | $ | 3,665 |
|
Commercial properties | 3,331 |
| | 2,651 |
| 2,058 |
| | 4,127 |
|
Undeveloped land | 1,930 |
| | 2,509 |
| 1,695 |
| | 2,726 |
|
Total OREO | $ | 9,823 |
| | $ | 12,815 |
| $ | 6,831 |
| | $ | 10,518 |
|
Total OREO as of December 31, 2017 decreased $3.0 million, or 23.3%, compared to December 31, 2016 as a result of various factors related to general economic conditions but largely an increase in buyer activity resulting in OREO properties selling in a shorter period of time.
As noted under the heading "Critical Accounting Policies" within Management's Discussion, the Corporation's ability to identify potential problem loans and leases in a timely manner is key to maintaining an adequate allowance for credit losses. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. For a complete description of the Corporation's risk ratings, refer to the "Allowance for Credit Losses" section within "Note 1 - Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." The evaluation of credit risk for residential mortgages, home equity loans, construction
loans to individuals, consumer loans and equipment lease receivablesfinancing is based on aggregate payment history, through the monitoring of delinquency levels and trends.
Total internally risk rated loans were $11.6$12.0 billion and $10.9$11.7 billion as of December 31, 20172019 and 2016,2018, respectively. The following table presents criticized loans, or those with internal risk ratings of special mention or lower for commercial loans, commercial mortgages and construction loans to commercial borrowers, by class segment, as of December 31:
| | | Special Mention | | 2017 vs. 2016 Increase (Decrease) | | Substandard or Lower | | 2017 vs. 2016 Increase (Decrease) | | Total Criticized Loans | Special Mention | | 2019 vs. 2018 Increase (Decrease) | | Substandard or Lower | | 2019 vs. 2018 Increase (Decrease) | | Total Criticized Loans |
| 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 |
| (dollars in thousands) | (dollars in thousands) |
Real estate - commercial mortgage | $ | 147,604 |
| | $ | 132,484 |
| | $ | 15,120 |
| | 11.4 | % | | $ | 150,804 |
| | $ | 122,976 |
| | $ | 27,828 |
| | 22.6 | % | | $ | 298,408 |
| | $ | 255,460 |
| $ | 137,163 |
| | $ | 170,827 |
| | $ | (33,664 | ) | | (19.7 | )% | | $ | 134,206 |
| | $ | 133,995 |
| | $ | 211 |
| | 0.2 | % | | $ | 271,369 |
| | $ | 304,822 |
|
Commercial - secured | 121,842 |
| | 128,873 |
| | (7,031 | ) | | (5.5 | ) | | 179,113 |
| | 118,527 |
| | 60,586 |
| | 51.1 |
| | 300,955 |
| | 247,400 |
| 171,442 |
| | 193,470 |
| | (22,028 | ) | | (11.4 | ) | | 195,884 |
| | 129,026 |
| | 66,858 |
| | 51.8 |
| | 367,326 |
| | 322,496 |
|
Commercial -unsecured | 5,478 |
| | 4,481 |
| | 997 |
| | 22.2 |
| | 2,759 |
| | 3,531 |
| | (772 | ) | | (21.9 | ) | | 8,237 |
| | 8,012 |
| |
Commercial - unsecured | | 9,665 |
| | 4,016 |
| | 5,649 |
| | 140.7 |
| | 3,876 |
| | 3,963 |
| | (87 | ) | | (2.2 | ) | | 13,541 |
| | 7,979 |
|
Total commercial - industrial, financial and agricultural | 127,320 |
| | 133,354 |
| | (6,034 | ) | | (4.5 | ) | | 181,872 |
| | 122,058 |
| | 59,814 |
| | 49.0 |
| | 309,192 |
| | 255,412 |
| 181,107 |
| | 197,486 |
| | (16,379 | ) | | (8.3 | ) | | 199,760 |
| | 132,989 |
| | 66,771 |
| | 50.2 |
| | 380,867 |
| | 330,475 |
|
Construction - commercial residential | 5,259 |
| | 15,447 |
| | (10,188 | ) | | (66.0 | ) | | 14,084 |
| | 13,172 |
| | 912 |
| | 6.9 |
| | 19,343 |
| | 28,619 |
| 2,897 |
| | 6,912 |
| | (4,015 | ) | | (58.1 | ) | | 3,461 |
| | 6,881 |
| | (3,420 | ) | | (49.7 | ) | | 6,358 |
| | 13,793 |
|
Construction - commercial | 846 |
| | 3,412 |
| | (2,566 | ) | | (75.2 | ) | | 3,752 |
| | 5,115 |
| | (1,363 | ) | | (26.6 | ) | | 4,598 |
| | 8,527 |
| 1,322 |
| | 1,163 |
| | 159 |
| | 13.7 |
| | 2,676 |
| | 2,533 |
| | 143 |
| | 5.6 |
| | 3,998 |
| | 3,696 |
|
Total real estate - construction (excluding construction - other) | 6,105 |
| | 18,859 |
| | (12,754 | ) | | (67.6 | ) | | 17,836 |
| | 18,287 |
| | (451 | ) | | (2.5 | ) | | 23,941 |
| | 37,146 |
| |
Total construction (excluding construction - other) | | 4,219 |
| | 8,075 |
| | (3,856 | ) | | (47.8 | ) | | 6,137 |
| | 9,414 |
| | (3,277 | ) | | (34.8 | ) | | 10,356 |
| | 17,489 |
|
Total | $ | 281,029 |
| | $ | 284,697 |
| | $ | (3,668 | ) | | (1.3 | )% | | $ | 350,512 |
| | $ | 263,321 |
| | $ | 87,191 |
| | 33.1 | % | | $ | 631,541 |
| | $ | 548,018 |
| $ | 322,489 |
| | $ | 376,388 |
| | $ | (53,899 | ) | | (14.3 | )% | | $ | 340,103 |
| | $ | 276,398 |
| | $ | 63,705 |
| | 23.0 | % | | $ | 662,592 |
| | $ | 652,786 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
% of total risk rated loans | 2.4 | % | | 2.6 | % | | | | | | 3.0 | % | | 2.4 | % | | | | | | 5.4 | % | | 5.0 | % | 2.7 | % | | 3.2 | % | | | | | | 2.8 | % | | 2.4 | % | | | | | | 5.5 | % | | 5.6 | % |
As of December 31, 2017,2019, total loans with risk ratings of special mention decreased by $53.9 million, and total loans with a risk rating of substandard or lower were $83.5increased by $63.7 million, resulting in an overall increase in total criticized loans of $9.8 million, or 15.2%1.5%, higher than 2016,2018. The decrease in special mention loans was driven by certain large-pay offs as well as the shifting of loans into the sub-standard or lower rating in both real estate commercial mortgage and commercial secured loans. The $66.9 million increase in commercial secured was primarily the result of downgrades across various industries and geographic marketsthe aforementioned shifts from special mention as part of the Corporation's normal credit risk management processes.well other commercial relationships now being classified as substandard or lower during 2019.
The following table presents, by class segment, a summary of delinquency status and rates, as a percentage of total loans and leases, for loans and leases that do not have internal risk ratings as of December 31:
| | | Delinquent (1) | | Non-performing (2) | | Total Past Due | Delinquent (1) | | Non-performing (2) | | Total |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % |
| (dollars in thousands) | (dollars in thousands) |
Real estate - home equity | $ | 12,655 |
| | 0.81 | % | | $ | 9,274 |
| | 0.57 | % | | $ | 11,507 |
| | 0.74 | % | | $ | 13,154 |
| | 0.81 | % | | $ | 24,162 |
| | 1.55 | % | | $ | 22,428 |
| | 1.38 | % | $ | 12,341 |
| | 0.94 | % | | $ | 10,702 |
| | 0.74 | % | | $ | 10,568 |
| | 0.80 | % | | $ | 9,769 |
| | 0.67 | % | | $ | 22,909 |
| | 1.74 | % | | $ | 20,471 |
| | 1.41 | % |
Real estate - residential mortgage | 18,852 |
| | 0.97 |
| | 20,344 |
| | 1.27 |
| | 20,971 |
| | 1.07 |
| | 23,655 |
| | 1.48 |
| | 39,823 |
| | 2.04 |
| | 43,999 |
| | 2.75 |
| 34,291 |
| | 1.30 |
| | 28,988 |
| | 1.29 |
| | 22,411 |
| | 0.85 |
| | 19,101 |
| | 0.85 |
| | 56,702 |
| | 2.15 |
| | 48,089 |
| | 2.14 |
|
Real estate - construction - other | 203 |
| | 0.26 |
| | — |
| | — |
| | 411 |
| | 0.53 |
| | 1,096 |
| | 1.92 |
| | 614 |
| | 0.79 |
| | 1,096 |
| | 1.92 |
| 895 |
| | 0.95 |
| | — |
| | — |
| | 809 |
| | 0.86 |
| | 490 |
| | 0.68 |
| | 1,704 |
| | 1.81 |
| | 490 |
| | 0.68 |
|
Consumer - direct | 315 |
| | 0.57 |
| | 1,752 |
| | 1.81 |
| | 70 |
| | 0.13 |
| | 1,563 |
| | 1.61 |
| | 385 |
| | 0.70 |
| | 3,315 |
| | 3.42 |
| 465 |
| | 0.72 |
| | 338 |
| | 0.60 |
| | 190 |
| | 0.30 |
| | 66 |
| | 0.12 |
| | 655 |
| | 1.02 |
| | 404 |
| | 0.72 |
|
Consumer - indirect | 3,681 |
| | 1.42 |
| | 3,599 |
| | 1.85 |
| | 226 |
| | 0.09 |
| | 328 |
| | 0.17 |
| | 3,907 |
| | 1.51 |
| | 3,927 |
| | 2.02 |
| 4,685 |
| | 1.17 |
| | 3,405 |
| | 0.94 |
| | 268 |
| | 0.07 |
| | 343 |
| | 0.09 |
| | 4,953 |
| | 1.24 |
| | 3,748 |
| | 1.03 |
|
Total Consumer | 3,996 |
| | 1.28 |
| | 5,351 |
| | 1.83 |
| | 296 |
| | 0.09 |
| | 1,891 |
| | 0.65 |
| | 4,292 |
| | 1.37 |
| | 7,242 |
| | 2.48 |
| 5,150 |
| | 1.11 |
| | 3,743 |
| | 0.89 |
| | 458 |
| | 0.10 |
| | 409 |
| | 0.10 |
| | 5,608 |
| | 1.21 |
| | 4,152 |
| | 0.99 |
|
Leasing, other and Overdrafts | 855 |
| | 0.32 |
| | 1,068 |
| | 0.46 |
| | 32 |
| | 0.01 |
| | 317 |
| | 0.14 |
| | 887 |
| | 0.33 |
| | 1,385 |
| | 0.60 |
| |
Equipment lease financing | | 4,012 |
| | 1.34 |
| | 1,302 |
| | 0.45 |
| | 16,642 |
| | 5.56 |
| | 19,587 |
| | 6.80 |
| | 20,654 |
| | 6.90 |
| | 20,889 |
| | 7.25 |
|
Total | $ | 36,561 |
| | 0.87 | % | | $ | 36,037 |
| | 0.95 | % | | $ | 33,217 |
| | 0.80 | % | | $ | 40,113 |
| | 1.05 | % | | $ | 69,778 |
| | 1.67 | % | | $ | 76,150 |
| | 2.00 | % | $ | 56,689 |
| | 1.19 | % | | $ | 44,735 |
| | 1.00 | % | | $ | 50,888 |
| | 1.06 | % | | $ | 49,356 |
| | 1.10 | % | | $ | 107,577 |
| | 2.24 | % | | $ | 94,091 |
| | 2.10 | % |
(1)Includes all accruing loans 30and leases P30D days to 89P89D days past due.
(2)Includes all accruing loans 90and leases P90D days or more past due and all non-accrual loans.loans and leases.
Total non-risk weighted loans increased $13.5 million, or 14.3%.
The following table summarizes the allocation of the allowance for loan and lease losses:
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Allowance | | % of Loans In Each Category | | Allowance | | % of Loans In Each Category | | Allowance | | % of Loans In Each Category | | Allowance | | % of Loans In Each Category | | Allowance | | % of Loans In Each Category | Allowance | | % In Each Category (1) | | Allowance | | % In Each Category (1) | | Allowance | | % In Each Category (1) | | Allowance | | % In Each Category (1) | | Allowance | | % In Each Category (1) |
| (dollars in thousands) | (dollars in thousands) |
Real estate - commercial mortgage | $ | 58,793 |
| | 40.3 | % | | $ | 46,842 |
| | 40.9 | % | | $ | 47,866 |
| | 39.5 | % | | $ | 53,493 |
| | 39.6 | % | | $ | 55,659 |
| | 39.9 | % | $ | 45,610 |
| | 39.6 | % | | $ | 52,889 |
| | 39.7 | % | | $ | 58,793 |
| | 40.3 | % | | $ | 46,842 |
| | 40.9 | % | | $ | 47,866 |
| | 39.5 | % |
Commercial - industrial, financial and agricultural | 66,280 |
| | 27.2 |
| | 54,353 |
| | 27.8 |
| | 57,098 |
| | 29.5 |
| | 51,378 |
| | 28.4 |
| | 50,330 |
| | 28.4 |
| 68,602 |
| | 26.4 |
| | 58,868 |
| | 27.2 |
| | 66,280 |
| | 27.2 |
| | 54,353 |
| | 27.8 |
| | 57,098 |
| | 29.5 |
|
Real estate - residential mortgage | 16,088 |
| | 12.4 |
| | 22,929 |
| | 10.9 |
| | 21,375 |
| | 9.9 |
| | 29,072 |
| | 10.5 |
| | 33,082 |
| | 10.5 |
| 19,771 |
| | 15.7 |
| | 18,921 |
| | 13.9 |
| | 16,088 |
| | 12.4 |
| | 22,929 |
| | 10.9 |
| | 21,375 |
| | 9.9 |
|
Consumer, home equity, leasing & other | 22,129 |
| | 13.7 |
| | 33,567 |
| | 14.7 |
| | 27,458 |
| | 15.3 |
| | 33,085 |
| | 16.2 |
| | 34,852 |
| | 16.7 |
| |
Consumer, home equity, equipment lease financing | | 25,196 |
| | 12.5 |
| | 24,798 |
| | 13.5 |
| | 22,129 |
| | 13.7 |
| | 33,567 |
| | 14.7 |
| | 27,458 |
| | 15.3 |
|
Real estate - construction | 6,620 |
| | 6.4 |
| | 6,455 |
| | 5.7 |
| | 6,529 |
| | 5.8 |
| | 9,756 |
| | 5.3 |
| | 12,649 |
| | 4.5 |
| 4,443 |
| | 5.8 |
| | 5,061 |
| | 5.7 |
| | 6,620 |
| | 6.4 |
| | 6,455 |
| | 5.7 |
| | 6,529 |
| | 5.8 |
|
Unallocated | — |
| | N/A |
| | 4,533 |
| | N/A |
| | 8,728 |
| | N/A |
| | 7,360 |
| | N/A |
| | 16,208 |
| | N/A |
| — |
| | N/A |
| | — |
| | N/A |
| | — |
| | N/A |
| | 4,533 |
| | N/A |
| | 8,728 |
| | N/A |
|
| $ | 169,910 |
| | 100.0 | % | | $ | 168,679 |
| | 100.0 | % | | $ | 169,054 |
| | 100.0 | % | | $ | 184,144 |
| | 100.0 | % | | $ | 202,780 |
| | 100.0 | % | |
Total | | $ | 163,622 |
| | 100.0 | % | | $ | 160,537 |
| | 100.0 | % | | $ | 169,910 |
| | 100.0 | % | | $ | 168,679 |
| | 100.0 | % | | $ | 169,054 |
| | 100.0 | % |
N/A – Not applicable
(1) Represents the percentage of loans and/or leases in each category
Management believes that the $169.9$163.6 million allowance for loan losses as of December 31, 2017 is2019 was sufficient to cover incurred losses in the loan portfolio. See additional disclosures in "Note 1 - Summary of Significant Accounting Policies," and "Note 4 - Loans and Leases and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data;" and "Critical Accounting Policies" above.
Goodwill and Intangible Assets
Goodwill and intangible assets, net of amortization, increased $3.7 million, or 0.7%, as a result of the acquisitions of the assets of two wealth management business with approximately $320 million in assets under management or administration in 2019, partially offset by approximately $1.0 million trade name intangible write-off due to the Charter Consolidation.
Other Assets
Other assets decreased $24.5increased $244.6 million, or 3.7%36.4%, to $641.9$916.4 million as of December 31, 2017,2019, primarily driven by right-of-use assets recorded as a $15.6 million decreaseresult of the adoption of ASU 2016-02 ($102.8 million), additional investments in net deferred tax assetsbank-owned life insurance ($100.0 million) and higher fair values of commercial loan interest rate swap derivatives ($82.8 million). See Note 1, "Summary of Significant Accounting Policies," and Note 17, "Leases," in the Notes to Consolidated Financial Statements for additional disclosures resulting from the Tax Act.ASU 2016-02 adoption.
Deposits and Borrowings
The following table summarizes the increase inpresents ending deposits, by type:type, as of December 31:
| | | | | | | Increase (Decrease) | | | | | Increase |
| 2017 | | 2016 | | $ | | % | 2019 | | 2018 | | $ | | % |
| (dollars in thousands) | (dollars in thousands) |
Noninterest-bearing demand | $ | 4,437,294 |
| | $ | 4,376,137 |
| | $ | 61,157 |
| | 1.4 | % | $ | 4,453,324 |
| | $ | 4,310,105 |
| | $ | 143,219 |
| | 3.3 | % |
Interest-bearing demand | 4,018,107 |
| | 3,703,712 |
| | 314,395 |
| | 8.5 |
| 4,720,188 |
| | 4,240,974 |
| | 479,214 |
| | 11.3 |
|
Savings and money market accounts | 4,586,746 |
| | 4,179,773 |
| | 406,973 |
| | 9.7 |
| 5,153,941 |
| | 4,926,937 |
| | 227,004 |
| | 4.6 |
|
Total demand, savings and money market accounts | 13,042,147 |
| | 12,259,622 |
| | 782,525 |
| | 6.4 |
| |
Total demand and savings | | 14,327,453 |
| | 13,478,016 |
| | 849,437 |
| | 6.3 |
|
Brokered deposits | 90,473 |
| | — |
| | 90,473 |
| | N/M |
| 264,531 |
| | 176,239 |
| | 88,292 |
| | 50.1 |
|
Time deposits | 2,664,912 |
| | 2,753,242 |
| | (88,330 | ) | | (3.2 | ) | 2,801,929 |
| | 2,721,904 |
| | 80,025 |
| | 2.9 |
|
Total deposits | $ | 15,797,532 |
| | $ | 15,012,864 |
| | $ | 784,668 |
| | 5.2 | % | $ | 17,393,913 |
| | $ | 16,376,159 |
| | $ | 1,017,754 |
| | 6.2 | % |
N/M - Not meaningful
The following table presents ending borrowings, by type as of December 31:
Noninterest-bearing demand deposits |
| | | | | | | | | | | | | | |
| | | | | Increase (Decrease) |
| 2019 | | 2018 | | $ | | % |
| (dollars in thousands) |
Short-term borrowings: | | | | | | | |
Total short-term customer funding (1) | $ | 383,241 |
| | $ | 369,777 |
| | $ | 13,464 |
| | 3.6 | % |
Short-term FHLB advances (2) | 500,000 |
| | 385,000 |
| | 115,000 |
| | 29.9 |
|
Total short-term borrowings | 883,241 |
| | 754,777 |
| | 128,464 |
| | 17.0 |
|
FHLB advances and other long-term debt: | | | | | | | |
FHLB advances | 491,024 |
| | 601,978 |
| | (110,954 | ) | | (18.4 | ) |
Other long-term debt | 390,745 |
| | 390,301 |
| | 444 |
| | 0.1 |
|
Total FHLB advances and other long-term debt | 881,769 |
| | 992,279 |
| | (110,510 | ) | | (11.1 | ) |
Total borrowings | $ | 1,765,010 |
| | $ | 1,747,056 |
| | $ | 17,954 |
| | 1.0 | % |
(1) Includes repurchase agreements and short-term promissory notes.
(2) Represents FHLB advances with an original maturity term of less than one year.
Total short-term borrowings increased $61.2 million, or 1.4%, primarily due to a $60.1 million increase in personal account balances and a $56.8 million increase in business account balances, partially offset by a $63.6 million decrease in state and municipal account balances. Interest-bearing demand accounts increased $314.4 million, or 8.5%, due to a $234.8 million, or 18.0%, increase in state and municipal account balances, a $70.8 million, or 3.4%, increase in personal account balances, and an $8.8 million, or 2.7%, increase in business account balances. The $407.0 million, or 9.7%, increase in savings and money market account balances was primarily due to a $478.0$128.5 million, or 17.0%, mainly due to a $115.0 million increase in personal account balances, largely driven by promotional efforts throughoutshort-term FHLB advances. The decrease in total FHLB advances and other long-term debt was the year.result of a $111.0 million decrease in long-term FHLB advances as a result of pay-offs and maturing advances that were not replaced, but resulted in the increase to short-term borrowings.
Brokered deposits totaled $90.5Other Liabilities
Other liabilities increased $73.6 million, or 23.6%, to $384.9 million as of December 31, 2017. As previously noted, during2019. The increase resulted primarily
from the third quarterrecognition of 2017,a lease liability of $109.6 million as a result of the Corporation began accepting deposits pursuant to an agreement with a non-bank third party, which are considered to be brokered deposits. For more details, see "Net Interest Income" under "Resultsadoption of Operations" above.
The following table summarizes the changes in ending borrowings, by type:
|
| | | | | | | | | | | | | | |
| | | | | Increase (Decrease) |
| 2017 | | 2016 | | $ | | % |
| (dollars in thousands) |
Short-term borrowings: | | | | | | | |
Customer repurchase agreements | $ | 172,017 |
| | $ | 195,734 |
| | $ | (23,717 | ) | | (12.1 | )% |
Customer short-term promissory notes | 225,507 |
| | 67,013 |
| | 158,494 |
| | N/M |
|
Total short-term customer funding | 397,524 |
| | 262,747 |
| | 134,777 |
| | 51.3 |
|
Federal funds purchased | 220,000 |
| | 278,570 |
| | (58,570 | ) | | (21.0 | ) |
Total short-term borrowings | 617,524 |
| | 541,317 |
| | 76,207 |
| | 14.1 |
|
Long-term debt: | | | | | | | |
FHLB advances | 652,113 |
| | 567,240 |
| | 84,873 |
| | 15.0 |
|
Other long-term debt | 261,233 |
| | 362,163 |
| | (100,930 | ) | | (27.9 | ) |
Total long-term debt | 913,346 |
| | 929,403 |
| | (16,057 | ) | | (1.7 | ) |
Total borrowings | $ | 1,530,870 |
| | $ | 1,470,720 |
| | $ | 60,150 |
| | 4.1 | % |
N/M - Not meaningful
The $76.2 million, or 14.1%, increase in total short-term borrowings resulted from a $158.5 million increase in customer short-term promissory notes,ASU 2016-02, partially offset by a $23.7 million, or 12.1%, and a $58.6 million, or 21.0%, decrease in customer repurchase agreements and Federal funds purchased, respectively. The $84.9 million increase in FHLB advances providedthe defined benefit plan obligation as a result of additional funding in 2019. See Note 1, "Summary of Significant Accounting Policies," and Note 17, "Leases," in the Notes to support loan growth. The increase in other long-term debt was primarily the result of the issuance of $125.0 million of senior notes in March of 2017, partially offset by the repayment of the $100.0 million of 10-year subordinated notes, which matured on May 1, 2017.Consolidated Financial Statements for additional disclosures resulting from ASU 2016-02 adoption.
Other Liabilities
Other liabilities increased $14.1 million, or 4.2%, to $353.6 million as of December 31, 2017. The increase resulted primarily from a $28.2 million increase in commitments to fund tax credit investments.
Shareholders’ Equity
Total shareholders’ equity increased $108.7$94.6 million, or 5.1%4.2%, to $2.2$2.3 billion, or 11.1%,10.7% of total assets, as of December 31, 2017.2019. The increase was due primarily to $171.8$226.3 million of net income, $8.5 million of common stock issued and a $5.5$58.9 million net increase in accumulated other comprehensive income, $7.4 million of stock-based compensation awards and $6.4 million of common stock issued, partially offset by $82.2$111.5 million of common stock repurchases and $93.0 million of common stock cash dividends.
In November 2017,See "Note 14 - Shareholders' Equity" in the Corporation's board of directors approved an extensionNotes to a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $50.0 million of its outstanding shares of common stock, or approximately 2.3% of its outstanding shares, through December 31, 2018. As of December 31, 2017, 1.5 million shares had been repurchased under this programConsolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." for a total cost of approximately $18.5 million, or $12.48 per share. Up to an additional $31.5 milliondetails of the Corporation's commonshare repurchase programs and activities. Under all repurchase programs, repurchased shares are added to treasury stock, at cost. As permitted by securities laws and other legal requirements, and subject to market conditions and other factors, purchases may be repurchased under this programmade from time to time in open market or privately negotiated transactions, including, without limitation, through December 31, 2018.accelerated share repurchase transactions.
The Corporation and its wholly owned subsidiary banksbank, Fulton Bank, are subject to regulatory capital requirements administered by various banking regulators. Failure to meet minimum capital requirements can trigger certain actions by regulators that could have a material effect on the Corporation’s financial statements. The regulations require that banks and bank holding companies maintain minimum amounts and ratios of total, Tier I and Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined).
The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements at December 31:
| | | 2017 | | 2016 | | Regulatory Minimum for Capital Adequacy | | Fully Phased-in, with Capital Conservation Buffers | 2019 | | 2018 | | Regulatory Minimum for Capital Adequacy | | Regulatory Minimum with Capital Conservation Buffers |
Total capital (to risk-weighted assets) | 13.0% | | 13.2% | | 8.0% | | 10.5% | 11.8% | | 12.8% | | 8.0% | | 10.5% |
Tier I capital (to risk-weighted assets) | 10.4% | | 10.4% | | 6.0% | | 8.5% | 9.7% | | 10.2% | | 6.0% | | 8.5% |
Common equity tier I (to risk-weighted assets) | 10.4% | | 10.4% | | 4.5% | | 7.0% | 9.7% | | 10.2% | | 4.5% | | 7.0% |
Tier I capital (to average assets) | 8.9% | | 9.0% | | 4.0% | | 4.0% | |
Tier leverage capital (to average assets) | | 8.4% | | 9.0% | | 4.0% | | 4.0% |
In July 2013, the FRB approved final rules (the "U.S. Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions.
The minimum regulatory capital requirements established by the U.S. Basel III Capital Rules became effective for the Corporation on January 1, 2015, and will be fully phased in on January 1, 2019.
The U.S. Basel III Capital Rules require the Corporation and its bank subsidiariessubsidiary to:
Meet a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;
Continue to require a minimum Total capital ratio of 8.00% of risk-weighted assets and a Tier 1 leverage capital ratio of 4.00% of average assets; and
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses as a result of which certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size.
When fully phased in onAs of January 1, 2019, the Corporation and its bank subsidiaries willsubsidiary were also be required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments.
The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expand the risk-weightings for assets and off-balance sheet exposures from the previous 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number
of categories, depending on the nature of the assets and off-balance sheet exposures, resulting in higher risk weights for a variety of asset categories.
As of December 31, 2017,2019, Fulton Bank was well capitalized under the Corporationregulatory framework for prompt corrective action based on its capital ratio calculations. To be categorized as well capitalized, the bank must maintain minimum total risk-based, Tier I risk-based, Common Equity Tier I risk-based and each of its bank subsidiaries met the minimum requirements of the U.S. Basel III Capital Rules, and each of the Corporation’s bank subsidiaries’ capitalTier I leverage ratios exceeded the amounts required to be considered "well capitalized" as definedset forth in the regulations. As oftable above. There are no conditions or events since December 31, 2017,2019 that management believes have changed the Corporation's capital levels also met the fully-phased in minimum capital requirements, including the capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.institution's categories. See "Note 11 - Regulatory Matters," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Contractual Obligations and Off-Balance Sheet Arrangements
The Corporation has various financial obligations that require future cash payments. These obligations include payments for liabilities recorded on the Corporation’s consolidated balance sheets as well as contractual obligations for purchased services or for operating leases.services.
The following table summarizes the Corporation's significant contractual obligations to third parties, by type, that were fixed and determinable as of December 31, 2017:2019:
| | | Payments Due In | Payments Due In |
| One Year or Less | | One to Three Years | | Three to Five Years | | Over Five Years | | Total | One Year or Less | | One to Three Years | | Three to Five Years | | Over Five Years | | Total |
| (in thousands) | (in thousands) |
Deposits with no stated maturity (1) | $ | 13,132,620 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13,132,620 |
| $ | 14,591,984 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 14,591,984 |
|
Time deposits (2) | 1,085,369 |
| | 1,302,923 |
| | 199,478 |
| | 77,142 |
| | 2,664,912 |
| 1,633,430 |
| | 966,287 |
| | 152,185 |
| | 47,100 |
| | 2,799,002 |
|
Short-term borrowings (3) | 617,524 |
| | — |
| | — |
| | — |
| | 617,524 |
| 883,241 |
| | — |
| | — |
| | — |
| | 883,241 |
|
Long-term debt (3) | 99,217 |
| | 344,313 |
| | 329,129 |
| | 265,685 |
| | 1,038,344 |
| — |
| | 258,636 |
| | 604,230 |
| | 18,903 |
| | 881,769 |
|
Operating leases (4) | 17,417 |
| | 30,322 |
| | 23,751 |
| | 45,905 |
| | 117,395 |
| |
Lease liabilities (4) | | 18,695 |
| | 33,860 |
| | 26,516 |
| | 42,394 |
| | 121,465 |
|
Purchase obligations (5) | 26,825 |
| | 43,884 |
| | 10,204 |
| | — |
| | 80,913 |
| 20,160 |
| | 41,848 |
| | 1,801 |
| | — |
| | 63,809 |
|
Uncertain tax positions (6) | 2,550 |
| | — |
| | — |
| | — |
| | 2,550 |
| 3,214 |
| | — |
| | — |
| | — |
| | 3,214 |
|
| |
(1) | Includes demand deposits, savings accounts and brokered deposits, which can be withdrawn at any time. |
| |
(2) | See additional information regarding time deposits in "Note 8 - Deposits," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." |
| |
(3) | See additional information regarding borrowings in "Note 9 - Short-Term Borrowings and Long-Term Debt," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." |
| |
(4) | See additional information regarding operating leases in "Note 1617 - Leases," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." |
| |
(5) | Includes information technology, telecommunication and data processing outsourcing contracts. |
| |
(6) | Includes accrued interest. See additional information related to uncertain tax positions in "Note 12 - Income Taxes," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." |
In addition to the contractual obligations listed in the preceding table, the Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit and interest rate risk that are not recognized on the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. Commercial letters of credit are conditional commitments issued to facilitate foreign or domestic trade transactions for customers. Commitments and standby and commercial letters of credit do not necessarily represent future cash needs, as they may expire without being drawn.
The following table presents the Corporation’s commitments to extend credit and letters of credit as of December 31, 20172019 (in thousands):
| | Commercial and other | $ | 3,689,700 |
| |
Home equity | 1,422,284 |
| |
Commercial mortgage and construction | 1,093,045 |
| |
Commercial, industrial, financial, and agricultural | | $ | 3,997,401 |
|
Real estate - home equity | | 1,523,494 |
|
Real estate - commercial mortgage and real estate - construction | | 1,168,624 |
|
Total commitments to extend credit | $ | 6,205,029 |
| $ | 6,689,519 |
|
| | |
Standby letters of credit | $ | 326,973 |
| $ | 303,020 |
|
Commercial letters of credit | 41,801 |
| 50,432 |
|
Total letters of credit | $ | 368,774 |
| $ | 353,452 |
|
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency price risk and commodity price risk. Due to the nature of its operations, foreign currency price risk and commodity price risk are not significant to the Corporation.
Interest Rate Risk, Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee ("ALCO") is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.
The Corporation uses two complementary methods to measure and manage interest rate risk. They are simulation of net interest income and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates.
Simulation of net interest income is performed for the next 12-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income, in a non-parallel instantaneous shock, to 10% of the base case net interest income for a 100 basis point shock in interest rates, 15% for a 200 basis point shock and 20% for a 300 basis point shock. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet, nor does it take into account the potential effects of competition on the pricing of deposits and loans over the forward 12-month period.
Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options within the investment portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to timing, amount and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
The following table summarizes the expected impact of abrupt interest rate changes, i.e. a non-parallel instantaneous shock, on net interest income as of December 31, 2019 (due to the current level of interest rates, the 200 and 300 basis point downward shock scenarios arescenario is not shown) as of December 31, 2017::
|
| | | |
Rate Shock(1) | Annual change in net interest income | | % Change in net interest income |
+300 bp | + $92.2$68.0 million | | + 14.7%10.3% |
+200 bp | + $63.5$46.3 million | | + 10.1%7.0% |
+100 bp | + $32.6$23.7 million | | + 5.2%3.6% |
–100 bp | – $50.4$37.1 million | | – 8.0%5.6% |
–200 bp | – $79.6 million | | – 12.1% |
| |
(1) | These results include the effect of implicit and explicit interest rate floors that limit further reduction in interest rates. |
Economic value of equity estimates the discounted present value of asset and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Abrupt changes or "shocks" in interest rates, both upward and downward, are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of the base case
economic value of equity for a 100 basis point shock in interest rates, 20% for a 200 basis point shock and 30% for a 300 basis
point shock. As of December 31, 2017,2019, the Corporation was within economic value of equity policy limits for every 100 basis point shock.
Commercial Interest Rate Swaps
The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments thatand the gross fair values are recorded at their fair value in other assets and liabilities on the consolidated balance sheets. Changessheets, with changes in fair value during the period are recorded in other non-interest expense on the consolidated statements of income.
Liquidity
The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on investments and outstanding loans and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.
The Corporation maintains liquidity sources in the form of demand and savings deposits, brokered deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing the rates of interest paid on those accounts and borrowings. The positive impact to liquidity resulting from paying higher interest rates could have a detrimental impact on the net interest margin and net interest income if rates on interest-earning assets do not increase in proportion.experience a proportionate increase. Borrowing availability with the FHLB and the FRB, along with Federalfederal funds lines at various correspondent banks, provides the Corporation with additional liquidity.
Each of the Corporation’s subsidiary banksFulton Bank is a member of the FHLB and has access to FHLB overnight and term credit facilities.As of December 31, 2017,2019, the Corporation had $652.1$991.0 million of short- and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $3.6$3.7 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.
As of December 31, 2017,2019, the Corporation had aggregate availability under federal funds lines of $1.2$1.7 billion, with $220.0 million borrowedno outstanding borrowings against that amount. A combination of commercial real estate loans, commercial loans and securities are pledged to the FRB of Philadelphia to provide access to FRB Discount Window borrowings. As of December 31, 2017,2019, the Corporation had $617.4$334.3 million of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.
Liquidity must also be managed at the Corporation parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. See "Note 11 - Regulatory Matters - Dividend and Loan Limitations" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional information concerning limitations on the dividends that may be paid to the Corporation, and loans that may be granted to the Corporation and its affiliates, by the Corporation's subsidiary banks.Corporation. Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.
The Corporation’s sources and uses of funds were discussed in general terms in the "Net Interest Income" section of Management’s Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operatingactivities during 20172019 generated $258.8$127.7 million of cash, mainly due to net income.income of $226.3 million, partially offset by the net impact of other operating activities of $98.6 million as a result of increases in bank-owned life insurance and net changes to fair values of derivative assets and liabilities. Cash used in investing activities was $1.2 billion,$893.3 million, due to net increases in loansinvestments and investment securities.loans. Net cash provided by financing activities was $897.1$837.7 million due mainly to increases in deposits.deposits exceeding the net decrease in long-term debt and the acquisition of treasury stock.
The following table presents the expected maturities of available for sale investment securities, at estimated fair value, and held to maturity investment securities, at amortized cost, as of December 31, 20172019 and the weighted average yields ofon such securities (calculated based on historical cost):
| | | Maturing | Maturing |
| Within One Year | | After One But Within Five Years | | After Five But Within Ten Years | | After Ten Years | Within One Year | | After One But Within Five Years | | After Five But Within Ten Years | | After Ten Years |
| Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield |
| (dollars in thousands) | |
U.S. Government sponsored agency securities | $ | 1 |
| | 1.29 | % | | $ | 3 |
| | 1.91 | % | | $ | 5,934 |
| | 2.53 | % | | $ | — |
| | — | % | |
Available for sale | | (dollars in thousands) |
State and municipal (1) | 13,771 |
| | 3.90 |
| | 24,115 |
| | 3.91 |
| | 40,081 |
| | 5.69 |
| | 330,982 |
| | 4.78 |
| $ | 675 |
| | 3.02 | % | | $ | 15,963 |
| | 4.21 | % | | $ | 7,423 |
| | 6.43 | % | | $ | 628,866 |
| | 3.97 | % |
Corporate debt securities | | 2,155 |
| | 2.01 |
| | 18,287 |
| | 3.58 |
| | 348,465 |
| | 3.80 |
| | 101,926 |
| | 3.06 |
|
Auction rate securities (2) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 98,668 |
| | 2.90 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,450 |
| | 4.10 |
|
Corporate debt securities | 3,148 |
| | 8.09 |
| | 9,447 |
| | 3.18 |
| | 67,149 |
| | 3.84 |
| | 17,565 |
| | 4.28 |
| |
Total | $ | 16,920 |
| | 4.67 | % | | $ | 33,565 |
| | 3.71 | % | | $ | 113,164 |
| | 4.41 | % | | $ | 447,215 |
| | 4.31 | % | $ | 2,830 |
| | 2.25 | % | | $ | 34,250 |
| | 3.87 | % | | $ | 355,888 |
| | 3.85 | % | | $ | 739,242 |
| | 3.83 | % |
Held to maturity | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities (3) | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 156,134 |
| | 4.16 | % |
Available for sale | | | | | | | | | | | | | | | | |
Collateralized mortgage obligations (3) | $ | 602,623 |
| | 2.18 | % | | | | | | | | | | | | | $ | 693,719 |
| | 2.89 | % | | | | | | | | | | | | |
Residential mortgage-backed securities (3) | $ | 1,120,796 |
| | 2.24 | % | | | | | | | | | | | | | 177,312 |
| | 2.45 | % | | | | | | | | | | | | |
Commercial mortgage-backed securities (3) | $ | 212,755 |
| | 2.34 | % | | | | | | | | | | | | | 494,297 |
| | 2.72 | % | | | | | | | | | | | | |
Held to maturity | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities (3) | | $ | 369,841 |
| | 2.08 | % | | | | | | | | | | | | |
| |
(1) | Weighted average yields on tax-exempt securities have been computed on a fully taxable-equivalent basis assuming a federal tax rate of 35%21% and statutory interest expense disallowances. |
| |
(2) | Maturities of auction rate securities are based on contractual maturities. |
| |
(3) | Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans. For the purpose of this table, all balances and weighted average rates are shown in one period. As of December 31, 2017,2019, the weighted average remaining lives of collateralized mortgage obligations and mortgage-backed securities were four and fivesix years, respectively. |
The Corporation’s investment portfolio consists mainly of mortgage-backed securities and collateralized mortgage obligations which have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase.
The following table presents the approximate contractual maturities of fixed rate loans and loan types subject to changes in interest rates as of December 31, 2017:2019:
| | | One Year or Less | | One Through Five Years | | More Than Five Years | | Total | One Year or Less | | One Through Five Years | | More Than Five Years | | Total |
| (in thousands) | (in thousands) |
Commercial - industrial, financial and agricultural | | | | | | | | | | | | | | |
Adjustable and floating rate | $ | 947,790 |
| | $ | 2,069,501 |
| | $ | 441,292 |
| | $ | 3,458,583 |
| $ | 743,150 |
| | $ | 2,050,214 |
| | $ | 423,071 |
| | $ | 3,216,435 |
|
Fixed rate | 219,626 |
| | 335,488 |
| | 286,600 |
| | 841,714 |
| 591,667 |
| | 562,871 |
| | 75,728 |
| | 1,230,266 |
|
Total | $ | 1,167,416 |
| | $ | 2,404,989 |
| | $ | 727,892 |
| | $ | 4,300,297 |
| $ | 1,334,817 |
| | $ | 2,613,085 |
| | $ | 498,799 |
| | $ | 4,446,701 |
|
Real estate – mortgage (1): | | | | | | | | | | | | | | |
Adjustable and floating rate | $ | 1,383,727 |
| | $ | 4,016,947 |
| | $ | 2,306,955 |
| | $ | 7,707,629 |
| $ | 1,408,557 |
| | $ | 4,571,459 |
| | $ | 2,487,116 |
| | $ | 8,467,132 |
|
Fixed rate | 506,451 |
| | 1,109,590 |
| | 555,564 |
| | 2,171,605 |
| 626,095 |
| | 1,081,456 |
| | 482,502 |
| | 2,190,053 |
|
Total | $ | 1,890,178 |
| | $ | 5,126,537 |
| | $ | 2,862,519 |
| | $ | 9,879,234 |
| $ | 2,034,652 |
| | $ | 5,652,915 |
| | $ | 2,969,618 |
| | $ | 10,657,185 |
|
Real estate – construction: | | | | | | | | | | | | | | |
Adjustable and floating rate | $ | 295,248 |
| | $ | 356,802 |
| | $ | 238,650 |
| | $ | 890,700 |
| $ | 279,844 |
| | $ | 354,663 |
| | $ | 230,064 |
| | $ | 864,571 |
|
Fixed rate | 89,667 |
| | 10,048 |
| | 16,520 |
| | 116,235 |
| 96,543 |
| | 7,383 |
| | 2,582 |
| | 106,508 |
|
Total | $ | 384,915 |
| | $ | 366,850 |
| | $ | 255,170 |
| | $ | 1,006,935 |
| $ | 376,387 |
| | $ | 362,046 |
| | $ | 232,646 |
| | $ | 971,079 |
|
(1) Includes commercial mortgages, residential mortgages and home equity loans.
Contractual maturities of time deposits as of December 31, 20172019 were as follows (in thousands):
| | Year | | |
2018 | $ | 1,085,369 |
| |
2019 | 866,233 |
| |
2020 | 436,690 |
| $ | 1,636,357 |
|
2021 | 122,516 |
| 529,378 |
|
2022 | 76,962 |
| 436,909 |
|
2023 | | 109,044 |
|
2024 | | 43,141 |
|
Thereafter | 77,142 |
| 47,100 |
|
| $ | 2,664,912 |
| $ | 2,801,929 |
|
Contractual maturities of time deposits of $100,000 or more outstanding, included in the table above, as of December 31, 20172019 were as follows (in thousands):
|
| | | |
Three months or less | $ | 147,094 |
|
Over three through six months | 111,628 |
|
Over six through twelve months | 194,555 |
|
Over twelve months | 728,579 |
|
Total | $ | 1,181,856 |
|
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. The Corporation's exposure to equity market price risk has been greatly reduced over the past several years. The fair value of equity investments in the investments securities portfolio were $918,000 at December 31, 2017.
In addition to its equity portfolio, investment management and trust services income may be impacted by fluctuations in the equity markets. A portion of this revenue is based on the value of the underlying investment portfolios, many of which include equity investments. If the values of those investment portfolios decrease, whether due to factors influencing the U.S. or international securities markets in general or otherwise, the Corporation’s revenue would be negatively impacted. Total assets under management were $7.1 billion at December 31, 2017. In addition, the Corporation’s ability to sell its brokerage services in the future will be dependent, in part, upon consumers’ level of confidence in financial markets. |
| | | |
Three months or less | $ | 239,122 |
|
Over three through six months | 202,469 |
|
Over six through twelve months | 378,698 |
|
Over twelve months | 546,961 |
|
Total | $ | 1,367,250 |
|
Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government debt securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.
State and Municipal Securities
As of December 31, 2017,2019, the Corporation owned state and municipal securities issued by various states and municipalities with a total fair value of $408.9$652.9 million. Ongoing uncertaintyUncertainty with respect to the financial strength of state and municipal bond insurers places much greater emphasis on the underlying strength of issuers. Continued pressurePressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the underlying creditworthiness of the issuing state or municipality and then, to a lesser extent, on any credit enhancement. State and municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the securities to be repaid by any means available to the issuing state or municipality. As of December 31, 2017,2019, approximately 98%99% of state and municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 61%55% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.
Auction Rate Securities
As of December 31, 2017,2019, the Corporation’s investments in student loan auction rate securities, also known as auction rate certificates ("ARCs"), had a cost basis of $107.4 million and an estimated fair value of $98.7$101.9 million. The fair values of the ARCs currently in the portfolio were derived using significant unobservable inputs based on an expected cash flows model which produced fair values that may not represent those that could be expected from settlement of these investments in the current market. The expected cash flows model produced fair values which assumed a return to market liquidity sometime within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.
The credit quality of the underlying debt associated with the ARCs is also a factor in the determination of their estimated fair value. As of December 31, 2017,2019, all of the ARCs were rated above investment grade, with approximately $5.6 million, or 6%, "AAA" rated and $93.0 million, or 94%, "AA" rated.grade. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. At December 31, 2017,2019, all of the Corporation's ARCs were current and making scheduled interest payments.
Corporate Debt Securities
The Corporation holds corporate debt securities in the form of single-issuer trust preferred securities and subordinated debt and senior debt issued by financial institutions. As of December 31, 2017,2019, these securities had an amortized cost of $96.4$370.4 million and an estimated fair value of $97.3$377.4 million.
See "Note 3 - Investment Securities," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for further discussion related to the Corporation’s other-than-temporary impairment evaluations for debt securities, and see "Note 1819 - Fair Value Measurements," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for further discussion related to the fair values of debt securities.
Item 8. Financial Statements and Supplementary Data
|
| | | | |
CONSOLIDATED BALANCE SHEETS |
(dollars in thousands, except per-share data) |
| | | December 31, | December 31, |
| 2017 | | 2016 | 2019 | | 2018 |
Assets | | | | | | |
Cash and due from banks | $ | 108,291 |
| | $ | 118,763 |
| $ | 132,283 |
| | $ | 103,436 |
|
Interest-bearing deposits with other banks | 293,805 |
| | 233,763 |
| 385,508 |
| | 342,251 |
|
Total Cash and Cash Equivalents | | 517,791 |
| | 445,687 |
|
Federal Reserve Bank and Federal Home Loan Bank stock | 60,761 |
| | 57,489 |
| 97,422 |
| | 79,283 |
|
Loans held for sale | 31,530 |
| | 28,697 |
| 37,828 |
| | 27,099 |
|
Available for sale investment securities | 2,547,956 |
| | 2,559,227 |
| |
Loans, net of unearned income | 15,768,247 |
| | 14,699,272 |
| |
Allowance for loan losses | (169,910 | ) | | (168,679 | ) | |
Net Loans | 15,598,337 |
| | 14,530,593 |
| |
Investment securities: | | | | |
Available for sale, at estimated fair value | | 2,497,537 |
| | 2,080,294 |
|
Held to maturity, at amortized cost | | 369,841 |
| | 606,679 |
|
Loans and leases, net of unearned income | | 16,837,526 |
| | 16,165,800 |
|
Allowance for loan and lease losses | | (163,622 | ) | | (160,537 | ) |
Net Loans and Leases | | 16,673,904 |
| | 16,005,263 |
|
Premises and equipment | 222,802 |
| | 217,806 |
| 240,046 |
| | 234,529 |
|
Accrued interest receivable | 52,910 |
| | 46,294 |
| 60,898 |
| | 58,879 |
|
Goodwill and intangible assets | 531,556 |
| | 531,556 |
| |
Goodwill and intangibles | | 535,303 |
| | 531,556 |
|
Other assets | 588,957 |
| | 620,059 |
| 855,470 |
| | 612,883 |
|
Total Assets | $ | 20,036,905 |
| | $ | 18,944,247 |
| $ | 21,886,040 |
| | $ | 20,682,152 |
|
Liabilities | | | | | | |
Deposits: | | | | | | |
Noninterest-bearing | $ | 4,437,294 |
| | $ | 4,376,137 |
| $ | 4,453,324 |
| | $ | 4,310,105 |
|
Interest-bearing | 11,360,238 |
| | 10,636,727 |
| 12,940,589 |
| | 12,066,054 |
|
Total Deposits | 15,797,532 |
| | 15,012,864 |
| 17,393,913 |
| | 16,376,159 |
|
Short-term borrowings: | | | | |
Federal funds purchased | 220,000 |
| | 278,570 |
| |
Other short-term borrowings | 397,524 |
| | 262,747 |
| |
Total Short-Term Borrowings | 617,524 |
| | 541,317 |
| |
Short-term borrowings | | 883,241 |
| | 754,777 |
|
Accrued interest payable | 9,317 |
| | 9,632 |
| 8,834 |
| | 10,529 |
|
Federal Home Loan Bank advances and long-term debt | | 881,769 |
| | 992,279 |
|
Other liabilities | 344,329 |
| | 329,916 |
| 376,107 |
| | 300,835 |
|
Federal Home Loan Bank advances and long-term debt | 1,038,346 |
| | 929,403 |
| |
Total Liabilities | 17,807,048 |
| | 16,823,132 |
| 19,543,864 |
| | 18,434,579 |
|
Shareholders’ Equity | | | | | | |
Common stock, $2.50 par value, 600 million shares authorized, 220.9 million shares issued in 2017 and 219.9 million shares issued in 2016 | 552,232 |
| | 549,707 |
| |
Common stock, $2.50 par value, 600 million shares authorized, 222.4 million shares issued in 2019 and 221.8 million shares issued in 2018 | | 556,110 |
| | 554,377 |
|
Additional paid-in capital | 1,478,389 |
| | 1,467,602 |
| 1,499,681 |
| | 1,489,703 |
|
Retained earnings | 821,619 |
| | 732,099 |
| 1,079,391 |
| | 946,032 |
|
Accumulated other comprehensive loss | (32,974 | ) | | (38,449 | ) | (137 | ) | | (59,063 | ) |
Treasury stock, 45.7 million shares in 2017 and 45.8 million shares in 2016 | (589,409 | ) | | (589,844 | ) | |
Treasury stock, 58.2 million shares in 2019 and 51.6 million shares in 2018 | | (792,869 | ) | | (683,476 | ) |
Total Shareholders’ Equity | 2,229,857 |
| | 2,121,115 |
| 2,342,176 |
| | 2,247,573 |
|
Total Liabilities and Shareholders’ Equity | $ | 20,036,905 |
| | $ | 18,944,247 |
| $ | 21,886,040 |
| | $ | 20,682,152 |
|
| | | | | | |
See Notes to Consolidated Financial Statements | | | | | | |
|
| | | | |
CONSOLIDATED STATEMENTS OF INCOME |
(dollars in thousands, except per-share data) |
| | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
Interest Income | | | | | | | | | | |
Loans, including fees | $ | 603,961 |
| | $ | 543,385 |
| | $ | 524,060 |
| $ | 737,932 |
| | $ | 683,042 |
| | $ | 603,961 |
|
Investment securities: | | | | | | | | | | |
Taxable | 47,028 |
| | 44,975 |
| | 45,279 |
| 62,556 |
| | 56,039 |
| | 47,028 |
|
Tax-exempt | 11,566 |
| | 9,662 |
| | 7,879 |
| 14,218 |
| | 12,076 |
| | 11,566 |
|
Dividends | 369 |
| | 571 |
| | 985 |
| — |
| | 5 |
| | 369 |
|
Loans held for sale | 876 |
| | 728 |
| | 801 |
| 1,351 |
| | 1,159 |
| | 876 |
|
Other interest income | 5,066 |
| | 3,779 |
| | 4,785 |
| 9,249 |
| | 6,193 |
| | 5,066 |
|
Total Interest Income | 668,866 |
| | 603,100 |
| | 583,789 |
| 825,306 |
| | 758,514 |
| | 668,866 |
|
Interest Expense | | | | | | | | | | |
Deposits | 57,791 |
| | 44,693 |
| | 40,482 |
| 131,775 |
| | 87,712 |
| | 57,791 |
|
Short-term borrowings | 2,779 |
| | 855 |
| | 372 |
| 14,543 |
| | 8,489 |
| | 2,779 |
|
Long-term debt | 32,932 |
| | 36,780 |
| | 42,941 |
| 30,599 |
| | 31,857 |
| | 32,932 |
|
Total Interest Expense | 93,502 |
| | 82,328 |
| | 83,795 |
| 176,917 |
| | 128,058 |
| | 93,502 |
|
Net Interest Income | 575,364 |
| | 520,772 |
| | 499,994 |
| 648,389 |
| | 630,456 |
| | 575,364 |
|
Provision for credit losses | 23,305 |
| | 13,182 |
| | 2,250 |
| 32,825 |
| | 46,907 |
| | 23,305 |
|
Net Interest Income After Provision for Credit Losses | 552,059 |
| | 507,590 |
| | 497,744 |
| 615,564 |
| | 583,549 |
| | 552,059 |
|
Non-Interest Income | | | | | | | | | | |
Other service charges and fees | 52,859 |
| | 51,473 |
| | 43,992 |
| |
Service charges on deposit accounts | 51,006 |
| | 51,346 |
| | 50,097 |
| |
Investment management and trust services | 49,249 |
| | 45,270 |
| | 44,056 |
| |
Mortgage banking income | 19,928 |
| | 19,415 |
| | 18,208 |
| |
Wealth management | | 55,678 |
| | 52,148 |
| | 49,249 |
|
Commercial banking | | 71,117 |
| | 63,929 |
| | 65,730 |
|
Consumer banking | | 49,503 |
| | 48,422 |
| | 48,918 |
|
Mortgage banking | | 23,099 |
| | 19,026 |
| | 19,928 |
|
Other | 25,861 |
| | 20,124 |
| | 16,420 |
| 12,030 |
| | 11,963 |
| | 15,078 |
|
Non-interest income before investment securities gains | 198,903 |
| | 187,628 |
| | 172,773 |
| 211,427 |
| | 195,488 |
| | 198,903 |
|
Investment securities gains, net | 9,071 |
| | 2,550 |
| | 9,066 |
| 4,733 |
| | 37 |
| | 9,071 |
|
Total Non-Interest Income | 207,974 |
| | 190,178 |
| | 181,839 |
| 216,160 |
| | 195,525 |
| | 207,974 |
|
Non-Interest Expense | | | | | | | | | | |
Salaries and employee benefits | 290,130 |
| | 283,353 |
| | 260,832 |
| 311,934 |
| | 303,202 |
| | 290,130 |
|
Net occupancy expense | 49,708 |
| | 47,611 |
| | 47,777 |
| |
Net occupancy | | 52,826 |
| | 51,678 |
| | 49,708 |
|
Data processing and software | 38,735 |
| | 36,919 |
| | 34,640 |
| 44,679 |
| | 41,286 |
| | 38,735 |
|
Other outside services | 27,501 |
| | 23,883 |
| | 27,785 |
| 39,989 |
| | 33,758 |
| | 27,501 |
|
Equipment expense | 12,935 |
| | 12,788 |
| | 14,514 |
| |
Professional fees | 12,688 |
| | 11,004 |
| | 11,244 |
| |
FDIC insurance expense | 11,049 |
| | 9,767 |
| | 11,470 |
| |
Equipment | | 13,575 |
| | 13,243 |
| | 12,935 |
|
Professional | | 13,134 |
| | 14,161 |
| | 12,688 |
|
Federal Deposit Insurance Corporation ("FDIC") | | 7,780 |
| | 10,993 |
| | 11,049 |
|
Amortization of tax credit investments | 11,028 |
| | — |
| | — |
| 6,021 |
| | 11,449 |
| | 11,028 |
|
State taxes | 10,051 |
| | 6,405 |
| | 7,297 |
| |
Marketing | 8,034 |
| | 7,044 |
| | 7,324 |
| |
Loss on redemption of trust preferred securities | — |
| | — |
| | 5,626 |
| |
Prepayment penalty on Federal Home Loan Bank ("FHLB") advances | | 4,326 |
| | — |
| | — |
|
Intangible amortization | | 1,427 |
| | — |
| | — |
|
Other | 53,720 |
| | 50,745 |
| | 51,651 |
| 72,045 |
| | 66,334 |
| | 71,805 |
|
Total Non-Interest Expense | 525,579 |
| | 489,519 |
| | 480,160 |
| 567,736 |
| | 546,104 |
| | 525,579 |
|
Income Before Income Taxes | 234,454 |
| | 208,249 |
| | 199,423 |
| 263,988 |
| | 232,970 |
| | 234,454 |
|
Income taxes | 62,701 |
| | 46,624 |
| | 49,921 |
| 37,649 |
| | 24,577 |
| | 62,701 |
|
Net Income | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,502 |
| $ | 226,339 |
| | $ | 208,393 |
| | $ | 171,753 |
|
| | | | | | | | | | |
Per Share: | | | | | | | | | | |
Net Income (Basic) | $ | 0.98 |
| | $ | 0.93 |
| | $ | 0.85 |
| $ | 1.36 |
| | $ | 1.19 |
| | $ | 0.98 |
|
Net Income (Diluted) | 0.98 |
| | 0.93 |
| | 0.85 |
| 1.35 |
| | 1.18 |
| | 0.98 |
|
Cash Dividends | 0.47 |
| | 0.41 |
| | 0.38 |
| 0.56 |
| | 0.52 |
| | 0.47 |
|
| | | | | | | | | | |
See Notes to Consolidated Financial Statements | | | | | | | | | | |
|
| | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(in thousands) |
| | | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Net Income | | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,502 |
| | $ | 226,339 |
| | $ | 208,393 |
| | $ | 171,753 |
|
Other Comprehensive Income (Loss), net of tax: | | | | | | | |
Unrealized (losses) gains on available for sale investment securities: | | | | | | | |
Other Comprehensive (Loss) Income, net of tax: | | | | | | | |
Unrealized gains (losses) on available for sale investment securities: | | | | | | | |
Unrealized gain (loss) on securities | | 10,432 |
| | (14,891 | ) | | (7,717 | ) | | 56,919 |
| | (24,326 | ) | | 10,432 |
|
Reclassification adjustment for securities gains included in net income | | (5,894 | ) | | (1,657 | ) | | (5,892 | ) | | (3,686 | ) | | (30 | ) | | (5,894 | ) |
Non-credit related unrealized gain (loss) on other-than-temporarily impaired debt securities | | 185 |
| | (185 | ) | | 239 |
| |
Amortization of net unrealized losses on securities transferred to held to maturity | | | 6,285 |
| | 2,098 |
| | — |
|
Non-credit related unrealized (loss) gain on other-than-temporarily impaired debt securities | | | (680 | ) | | 222 |
| | 185 |
|
Net unrealized gains (losses) on available for sale investment securities | | 4,723 |
| | (16,733 | ) | | (13,370 | ) | | 58,838 |
| | (22,036 | ) | | 4,723 |
|
Unrealized gains on derivative financial instruments: | | | | | | | |
Amortization of unrealized loss on derivative financial instruments | | — |
| | 16 |
| | 75 |
| |
Reclassification adjustment for loss on derivative financial instruments included in net income | | — |
| | — |
| | 2,456 |
| |
Net unrealized gains on derivative financial instruments | | — |
| | 16 |
| | 2,531 |
| |
Defined benefit pension plan and postretirement benefits: | | | | | | | | | | | | |
Unrecognized pension and postretirement (cost) income | | (609 | ) | | (931 | ) | | 4,680 |
| | (937 | ) | | 1,400 |
| | (609 | ) |
Amortization of net unrecognized pension and postretirement income | | 1,361 |
| | 1,216 |
| | 1,864 |
| | 1,025 |
| | 1,648 |
| | 1,361 |
|
Net unrealized gains on defined benefit pension and postretirement plans | | 752 |
| | 285 |
| | 6,544 |
| | 88 |
| | 3,048 |
| | 752 |
|
Other Comprehensive Income (Loss) | | 5,475 |
| | (16,432 | ) | | (4,295 | ) | | 58,926 |
| | (18,988 | ) | | 5,475 |
|
Total Comprehensive Income | | $ | 177,228 |
| | $ | 145,193 |
| | $ | 145,207 |
| | $ | 285,265 |
| | $ | 189,405 |
| | $ | 177,228 |
|
| | | | | | | | | | | | |
See Notes to Consolidated Financial Statements |
|
| | | | |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
(in thousands, except per share data) |
| | | Common Stock | | Additional Paid-in Capital | | | | Accumulated Other Comprehensive Income (Loss) | | | | | Common Stock | | Additional Paid-in Capital | | | | Accumulated Other Comprehensive (Loss) Income | | | | |
| Shares Outstanding | | Amount | | Retained Earnings | | Treasury Stock | | Total | Shares Outstanding | | Amount | | Retained Earnings | | Treasury Stock | | Total |
| | |
Balance at December 31, 2014 | 178,924 |
| | $ | 545,555 |
| | $ | 1,420,523 |
| | $ | 558,810 |
| | $ | (17,722 | ) | | $ | (510,501 | ) | | $ | 1,996,665 |
| |
Balance at December 31, 2016 | | 174,040 |
| | $ | 549,707 |
| | $ | 1,467,602 |
| | $ | 732,099 |
| | $ | (38,449 | ) | | $ | (589,844 | ) | | $ | 2,121,115 |
|
Net income | | | | | | | | 171,753 |
| | | | | | 171,753 |
|
Other comprehensive income | | | | | | | | | | 5,475 |
| | | | 5,475 |
|
Stock issued, including related tax benefits | | 1,130 |
| | 2,525 |
| | 5,578 |
| | | | | | 435 |
| | 8,538 |
|
Stock-based compensation awards | | | | | | 5,209 |
| | | | | | | | 5,209 |
|
Common stock cash dividends - $0.47 per share | | | | | | | | (82,233 | ) | | | | | | (82,233 | ) |
Balance at December 31, 2017 | | 175,170 |
| | $ | 552,232 |
| | $ | 1,478,389 |
| | $ | 821,619 |
| | $ | (32,974 | ) | | $ | (589,409 | ) | | $ | 2,229,857 |
|
Net income | | | | | | | 149,502 |
| | | | | | 149,502 |
| | | | | | | 208,393 |
| | | | | | 208,393 |
|
Other comprehensive loss | | | | | | | | | (4,295 | ) | | | | (4,295 | ) | | | | | | | | | (18,988 | ) | | | | (18,988 | ) |
Stock issued, including related tax benefits | 1,018 |
| | 1,586 |
| | 4,229 |
| | | | | | 4,993 |
| | 10,808 |
| |
Stock issued | | 977 |
| | 2,062 |
| | 3,432 |
| | | | | | 1,241 |
| | 6,735 |
|
Stock-based compensation awards | | | | | 5,938 |
| | | | | | | | 5,938 |
| 33 |
| | 83 |
| | 7,882 |
| | | | | | | | 7,965 |
|
Acquisition of treasury stock | (3,976 | ) | | | | | | | | | | (50,000 | ) | | (50,000 | ) | (5,996 | ) | | | |
|
| | | | | | (95,308 | ) | | (95,308 | ) |
Settlement of accelerated stock repurchase agreement | (1,790 | ) | | | | 20,000 |
| | | | | | (20,000 | ) | | — |
| |
Common stock cash dividends - $0.38 per share | | | | | | | (66,724 | ) | | | | | | (66,724 | ) | |
Balance at December 31, 2015 | 174,176 |
| | $ | 547,141 |
| | $ | 1,450,690 |
| | $ | 641,588 |
| | $ | (22,017 | ) | | $ | (575,508 | ) | | $ | 2,041,894 |
| |
Net income | | | | | | | 161,625 |
| | | | | | 161,625 |
| |
Other comprehensive loss | | | | | | | | | (16,432 | ) | | | | (16,432 | ) | |
Stock issued, including related tax benefits | 1,350 |
| | 2,566 |
| | 10,356 |
| | | | | | 4,209 |
| | 17,131 |
| |
Stock-based compensation awards | | | | | 6,556 |
| | | | | | | | 6,556 |
| |
Acquisition of treasury stock | (1,486 | ) | | | |
|
| | | | | | (18,545 | ) | | (18,545 | ) | |
Common stock cash dividends - $0.41 per share | | | | | | | (71,114 | ) | | | | | | (71,114 | ) | |
Balance at December 31, 2016 | 174,040 |
| | $ | 549,707 |
| | $ | 1,467,602 |
| | $ | 732,099 |
| | $ | (38,449 | ) | | $ | (589,844 | ) | | $ | 2,121,115 |
| |
Reclassification of stranded tax effects (1) | | | | | | | | 7,101 |
| | (7,101 | ) | | | | — |
|
Common stock cash dividends - $0.52 per share | | | | | | | | (91,081 | ) | | | | | | (91,081 | ) |
Balance at December 31, 2018 | | 170,184 |
| | $ | 554,377 |
| | $ | 1,489,703 |
| | $ | 946,032 |
| | $ | (59,063 | ) | | $ | (683,476 | ) | | $ | 2,247,573 |
|
Net income | | | | | | | 171,753 |
| | | | | | 171,753 |
| | | | | | | 226,339 |
| | | | | | 226,339 |
|
Other comprehensive income | | | | | | | | | 5,475 |
| | | | 5,475 |
| | | | | | | | | 58,926 |
| | | | 58,926 |
|
Stock issued | 1,130 |
| | 2,525 |
| | 5,578 |
| | | | | | 435 |
| | 8,538 |
| 883 |
| | 1,733 |
| | 2,565 |
| | | | | | 2,064 |
| | 6,362 |
|
Stock-based compensation awards | | | | | 5,209 |
| | | | | | | | 5,209 |
|
| |
| | 7,413 |
| | | | | | | | 7,413 |
|
Common stock cash dividends - $0.47 per share | | | | | | | (82,233 | ) | | | | | | (82,233 | ) | |
Balance at December 31, 2017 | 175,170 |
| | $ | 552,232 |
| | $ | 1,478,389 |
| | $ | 821,619 |
| | $ | (32,974 | ) | | $ | (589,409 | ) | | $ | 2,229,857 |
| |
Acquisition of treasury stock | | (6,849 | ) | | | | | | | | | | (111,457 | ) | | (111,457 | ) |
Common stock cash dividends - $0.56 per share | | | | | | | | (92,980 | ) | | | | | | (92,980 | ) |
Balance at December 31, 2019 | | 164,218 |
| | $ | 556,110 |
| | $ | 1,499,681 |
| | $ | 1,079,391 |
| | $ | (137 | ) | | $ | (792,869 | ) | | $ | 2,342,176 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements |
(1) Result of adoption of Accounting Standard Update ("ASU") 2018-02. See Note 1 to Consolidated Financial Statements for further details.
|
| | | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(in thousands) |
| | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | |
Net Income | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,502 |
| $ | 226,339 |
| | $ | 208,393 |
| | $ | 171,753 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Provision for credit losses | 23,305 |
| | 13,182 |
| | 2,250 |
| 32,825 |
| | 46,907 |
| | 23,305 |
|
Depreciation and amortization of premises and equipment | 28,096 |
| | 27,403 |
| | 27,605 |
| 28,200 |
| | 28,156 |
| | 28,096 |
|
Amortization of tax credit investments | | 32,810 |
| | 38,606 |
| | 37,185 |
|
Net amortization of investment security premiums | 10,107 |
| | 10,430 |
| | 7,330 |
| 9,387 |
| | 9,297 |
| | 10,107 |
|
Deferred income tax expense | 24,896 |
| | 11,054 |
| | 13,424 |
| |
Deferred income tax (benefit) expense | | (165 | ) | | (15,749 | ) | | 24,896 |
|
Re-measurement of net deferred tax asset | 15,635 |
| | — |
| | — |
| — |
| | (809 | ) | | 15,635 |
|
Investment securities gains, net | (9,071 | ) | | (2,550 | ) | | (9,066 | ) | (4,733 | ) | | (37 | ) | | (9,071 | ) |
Gains on sales of mortgage loans held for sale | (13,036 | ) | | (15,685 | ) | | (13,264 | ) | |
Gain on sales of mortgage loans held for sale | | (17,882 | ) | | (13,021 | ) | | (13,036 | ) |
Proceeds from sales of mortgage loans held for sale | 644,400 |
| | 709,316 |
| | 757,850 |
| 916,725 |
| | 795,756 |
| | 644,400 |
|
Originations of mortgage loans held for sale | (634,197 | ) | | (705,442 | ) | | (743,950 | ) | (909,572 | ) | | (778,304 | ) | | (634,197 | ) |
Amortization of intangible assets | — |
| | — |
| | 247 |
| |
Amortization of issuance costs and discount of long-term debt | 845 |
| | 617 |
| | 582 |
| |
Intangible amortization | | 1,427 |
| | — |
| | — |
|
Amortization of issuance costs and discounts on long-term debt | | 842 |
| | 813 |
| | 845 |
|
Stock-based compensation | 5,209 |
| | 6,556 |
| | 5,938 |
| 7,413 |
| | 7,965 |
| | 5,209 |
|
Excess tax benefits from stock-based compensation | — |
| | (964 | ) | | (201 | ) | |
Increase in accrued interest receivable | (6,616 | ) | | (3,527 | ) | | (949 | ) | |
Loss on redemption of trust preferred securities | — |
| | — |
| | 5,626 |
| |
Decrease (increase) in other assets | 29,227 |
| | (29,940 | ) | | (22,987 | ) | |
Decrease in accrued interest payable | (315 | ) | | (1,092 | ) | | (7,321 | ) | |
(Decrease) increase in other liabilities | (31,412 | ) | | 4,427 |
| | 4,928 |
| |
Other changes, net | | (195,903 | ) | | (31,153 | ) | | (17,369 | ) |
Total adjustments | 87,073 |
| | 23,785 |
| | 28,042 |
| (98,626 | ) | | 88,427 |
| | 116,005 |
|
Net cash provided by operating activities | 258,826 |
| | 185,410 |
| | 177,544 |
| 127,713 |
| | 296,820 |
| | 287,758 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | |
Proceeds from sales of securities available for sale | 184,734 |
| | 115,844 |
| | 66,480 |
| |
Proceeds from maturities and paydowns of securities available for sale | 417,673 |
| | 558,854 |
| | 439,533 |
| |
Purchase of securities available for sale | (584,921 | ) | | (782,765 | ) | | (683,839 | ) | |
(Increase) decrease in short-term investments | (63,314 | ) | | 1,264 |
| | 130,567 |
| |
Net increase in loans | (1,087,521 | ) | | (873,939 | ) | | (743,655 | ) | |
Proceeds from sales of available for sale securities | | 710,739 |
| | 54,638 |
| | 184,734 |
|
Proceeds from paydowns and maturities of held to maturity securities | | 83,121 |
| | 35,900 |
| | — |
|
Proceeds from principal repayments and maturities of available for sale securities | | 234,702 |
| | 290,681 |
| | 417,673 |
|
Purchases of securities available for sale | | (1,138,070 | ) | | (558,949 | ) | | (584,921 | ) |
Purchase of Federal Reserve Bank and Federal Home Loan Bank stock | | (18,139 | ) | | (18,522 | ) | | (3,272 | ) |
Net increase in loans and leases | | (708,048 | ) | | (447,849 | ) | | (1,087,521 | ) |
Net purchases of premises and equipment | (33,092 | ) | | (19,674 | ) | | (27,113 | ) | (33,717 | ) | | (39,883 | ) | | (33,092 | ) |
Net cash paid for acquisitions | | (5,174 | ) | | — |
| | — |
|
Net change in tax credit investments | | (18,760 | ) | | (56,733 | ) | | (28,932 | ) |
Net cash used in investing activities | (1,166,441 | ) | | (1,000,416 | ) | | (818,027 | ) | (893,346 | ) | | (740,717 | ) | | (1,135,331 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | |
Net increase in demand and savings deposits | 782,525 |
| | 992,253 |
| | 971,312 |
| 849,437 |
| | 435,872 |
| | 782,525 |
|
Net increase (decrease) in time deposits | 2,143 |
| | (111,706 | ) | | (206,501 | ) | |
Net increase in time deposits | | 168,317 |
| | 142,755 |
| | 2,143 |
|
Increase in short-term borrowings | 76,207 |
| | 43,654 |
| | 167,944 |
| 128,464 |
| | 137,253 |
| | 76,207 |
|
Additions to long-term debt | 223,251 |
| | 215,884 |
| | 347,778 |
| 485,000 |
| | 50,000 |
| | 223,251 |
|
Repayments of long-term debt | (115,153 | ) | | (236,640 | ) | | (540,079 | ) | (596,056 | ) | | (100,165 | ) | | (115,153 | ) |
Net proceeds from issuance of common stock | 8,538 |
| | 16,167 |
| | 10,607 |
| 6,362 |
| | 6,735 |
| | 8,538 |
|
Excess tax benefits from stock-based compensation | — |
| | 964 |
| | 201 |
| |
Dividends paid | (80,368 | ) | | (69,382 | ) | | (65,361 | ) | (92,330 | ) | | (89,654 | ) | | (80,368 | ) |
Acquisition of treasury stock | — |
| | (18,545 | ) | | (50,000 | ) | (111,457 | ) | | (95,308 | ) | | — |
|
Net cash provided by financing activities | 897,143 |
| | 832,649 |
| | 635,901 |
| 837,737 |
| | 487,488 |
| | 897,143 |
|
Net (decrease) increase in Cash and Due From Banks | (10,472 | ) | | 17,643 |
| | (4,582 | ) | |
Cash and Due From Banks at Beginning of Year | 118,763 |
| | 101,120 |
| | 105,702 |
| |
Cash and Due From Banks at End of Year | $ | 108,291 |
| | $ | 118,763 |
| | $ | 101,120 |
| |
Net Increase in Cash and Cash Equivalents | | 72,104 |
| | 43,591 |
| | 49,570 |
|
Cash and Cash Equivalents at Beginning of Year | | 445,687 |
| | 402,096 |
| | 352,526 |
|
Cash and Cash Equivalents at End of Year | | $ | 517,791 |
| | $ | 445,687 |
| | $ | 402,096 |
|
Supplemental Disclosures of Cash Flow Information | | | | | | | | | | |
Cash paid during period for: | | | | | | | | | | |
Interest | $ | 93,817 |
| | $ | 83,420 |
| | $ | 91,116 |
| $ | 178,612 |
| | $ | 126,846 |
| | $ | 93,817 |
|
Income taxes | 6,537 |
| | 16,193 |
| | 13,378 |
| 9,193 |
| | 13,547 |
| | 6,537 |
|
| | | | | | |
Supplemental schedule of certain noncash activities | | | | | | |
Transfer of available for sale securities to held to maturity securities | | $ | — |
| | $ | 641,672 |
| | $ | — |
|
Transfer of held to maturity securities to available for sale securities | | 158,898 |
| | — |
| | — |
|
See Notes to Consolidated Financial Statements | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | |
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business: Fulton Financial Corporation ("ParentCorporation" or "Parent Company") is a multi-bank financial holding company which provides a full range of banking and financial services to businesses and consumers through its sixwholly owned banking subsidiaries:subsidiary, Fulton Bank, N.A., ("Fulton Bank of New Jersey, The Columbia Bank, Lafayette Ambassador Bank, FNB Bank, N.A. and Swineford National Bank.Bank" or the "Bank"). In addition, the Parent Company owns the following non-bank subsidiaries: Fulton Financial Realty Company, Central Pennsylvania Financial Corp., FFC Management, Inc., FFC Penn Square, Inc. and Fulton Insurance Services Group, Inc. Collectively, the Parent Company and its subsidiaries are referred to as the Corporation.
The Corporation’s primary sources of revenue are interest income on loans, investment securities and other interest-earning assets and fee income earned on its products and services. Its expenses consist of interest expense on deposits and borrowed funds, provision for credit losses, other operating expenses and income taxes. The Corporation’s primary competition is other financial services providers operating in its region. Competitors also include financial services providers located outside the Corporation’s geographic market as a result of the growth in electronic delivery systems.channels. The Corporation is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by such regulatory authorities.
The Corporation offers, through its banking subsidiaries,subsidiary, a full range of retail and commercial banking services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Industry diversity is the key to the economic well-being of these markets and the Corporation is not dependent upon any single customer or industry. In 2017, the Corporation had 6 banking subsidiaries. During 2018, the Corporation consolidated two of its wholly owned banking subsidiaries into its lead bank, Fulton Bank, and during 2019, the remaining three wholly-owned banking subsidiaries were consolidated into Fulton Bank.
Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and include the accounts of the Parent Company and all wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amount of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Corporation evaluates subsequent events through the date of the filing of this report with the Securities and Exchange Commission ("SEC").
Cash and Cash Equivalents and Restricted Cash: Cash and cash equivalents consists of cash and due from banks and interest bearing deposits with other banks, which includes restricted cash. Restricted cash comprises cash balances required to be maintained with the Federal Reserve Bank ("FRB"), based on customer transaction deposit account levels, and Federal Home Loancash balances provided as collateral on derivative contracts and other contracts. See Note 2, "Restrictions on Cash and Cash Equivalents" for additional information.
FRB and FHLBStock: The Bank Stock: Certain of the Corporation's wholly owned banking subsidiaries are membersis a member of the FRB and Federal Home Loan BankFHLB and areis required by federal law to hold stock in these institutions according to predetermined formulas. These restricted investments are carried at cost on the consolidated balance sheets and are periodically evaluated for impairment. Each of the Corporation’s subsidiary banks is a member of the Federal Home Loan Bank for the region encompassing the headquarters of the subsidiary bank. Memberships are maintained with the Atlanta, New York and Pittsburgh regional Federal Home Loan Banks (collectively referred to as the "FHLB").
Investments: Debt securities are classified as held to maturity ("HTM") at the time of purchase when the Corporation has both the intent and ability to hold these investments until they mature. Such debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the effective yield method. The Corporation does not engage in trading activities,activities; however, since the investment portfolio serves as a source of liquidity, allmost debt securities and marketable equity securities are classified as available for sale. Securities available for sale ("AFS"). AFS securities are carried at estimated fair value with the related unrealized holding gains and losses reported in shareholders’ equity as a component of other comprehensive income, net of tax. Realized securities gains and losses are computed using the specific identification method and are recorded on a trade date basis.
Securities are evaluated periodically to determine whether declines in value are other-than-temporary. For its investments in equity securities, most notably its investments in stocks of financial institutions, the Corporation evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Equity securities with fair values less than cost are considered to be other-than-temporarily impaired if the Corporation does not have the ability and intent to hold the investments for a reasonable period of time that would be sufficient for a recovery of fair value.
Impaired debt securities are determined to be other-than-temporarily impaired if the Corporation concludes at the balance sheet date that it has the intent to sell, or believes it will more likely than not be required to sell, an impaired debt security before a recovery of its amortized cost basis. Credit losses on other-than-temporarily impaired debt securities are recorded through earnings, regardless of the intent or the requirement to sell. Credit loss is measured as the difference between the present value of an impaired debt security’s expected cash flows and its amortized cost. Non-credit related other-than-temporary impairment ("OTTI") charges are recorded as decreases
as decreases to accumulated other comprehensive income as long as the Corporation has no intent or expected requirement to sell the impaired debt security before a recovery of its amortized cost basis.
The Corporation early adopted ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivative and Hedging, and Topic 825, Financial Instruments," in the third quarter of 2019, which permitted the one-time reclassification of certain HTM securities to AFS under Topic 815, specific to the transition guidance of ASU update 2017-12, which the Corporation adopted on January 1, 2019. See “Note 3 - Investment Securities” for additional information on this reclassification. The portion of this standards update related to codification improvements specific to Topic 326 will be implemented upon the Corporation’s adoption of ASU 2016-13 in the first quarter of 2020. Additional codification improvements to Topic 825, specifically ASU 2016-01, which the Corporation adopted as of January 1, 2018, did not have an impact on the Corporation's consolidated financial statements.
Fair Value Option: The Corporation has elected to measure mortgage loans held for sale at fair value. Derivative financial instruments related to mortgage banking activities are also recorded at fair value, as detailed under the heading "Derivative Financial Instruments," below. The Corporation determines fair value for its mortgage loans held for sale based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Changes in fair values during the period are recorded as components of mortgage banking income on the consolidated statements of income. Interest income earned on mortgage loans held for sale is classified in interest income on the consolidated statements of income.
Loans and Revenue RecognitionLease Receivables: Loan and lease financing receivablesleases are stated at their principal amount outstanding, except for mortgage loans held for sale, which are carried at fair value. Interest income on loans is accrued as earned. Unearned income on lease financing receivables is recognized on a basis which approximates the effective yield method.
In general, a loan or lease is placed on non-accrual status once it becomes 90 days delinquent as to principal or interest. In certain cases a loan or lease may be placed on non-accrual status prior to being 90 days delinquent if there is an indication that the borrower is having difficulty making payments, or the Corporation believes it is probable that all amounts will not be collected according to the contractual terms of the loan or lease agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans and leases may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan or lease is considered secured and in the process of collection. The Corporation generally applies payments received on non-accruing loans and leases to principal until such time as the principal is paid off, after which time any payments received are recognized as interest income. If the Corporation believes that all amounts outstanding on a non-accrual loan or lease will ultimately be collected, payments received subsequent to its classification as a non-accrual loan or lease are allocated between interest income and principal.
A loan or lease that is 90 days delinquent may continue to accrue interest if the loan or lease is both adequately secured and is in the process of collection. Past due status is determined based on contractual due dates for loan payments. An adequately secured loan or lease is one that has collateral with a supported fair value that is sufficient to discharge the debt, and/or has an enforceable guarantee from a financially responsible party. A loan or lease is considered to be in the process of collection if collection is proceeding through legal action or through other activities that are reasonably expected to result in repayment of the debt or restoration to current status in the near future.
Loans and lease financing receivablesleases deemed to be a loss are written off through a charge against the allowance for loan or lease losses. Closed-end consumer loans are generally charged off when they become 120 days past due (180(180 days for open-end consumer loans) if they are not adequately secured by real estate. All other loans and leases are evaluated for possible charge-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral. Principal recoveries of loans or leases previously charged off are recorded as increases to the allowance for loan or lease losses.
Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are deferred and amortized over the life of the loan as an adjustment to interest income generally using the effective yield method. For mortgage loans sold, net loan origination fees and costs are included in the gain or loss on sale of the related loan.loan, as components of mortgage banking.
Troubled Debt Restructurings ("TDRs"): Loans whose terms are modified are classified as TDRs if the Corporation grants the borrowers concessions and it is determined that those borrowers are experiencing financial difficulty.difficulty and the Corporation grants the borrowers concessions. Concessions, whether negotiated or imposed by bankruptcy, granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date or a reduction in the interest rate. Non-accrual TDRs can be restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
Allowance for Credit Losses: The allowance for credit losses consists of the allowance for loan and lease losses and the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of incurred losses in the loan and lease portfolio as of the balance sheet date and is recorded as a reduction to loans.loans and leases. The reserve for unfunded lending commitments represents management’s estimate of incurred losses in its unfunded loan commitments and other off-balance sheet credit exposures, such as letters of credit, and is recorded in other liabilities on the consolidated balance sheets. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries. Management believes that the allowance for loan and lease losses and the reserve for unfunded lending commitments are adequate as of the balance sheet date; however, future changes to the allowance or reserve may be necessary based on changes in any of the factors discussed in the following paragraphs.
Maintaining an appropriate allowance for credit losses is dependent upon various factors, including the ability to identify potential problem loans and leases in a timely manner. For commercial loans, commercial mortgages and construction loans to commercial borrowers,
an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk rating categories is a significant component of the allowance for credit loss methodology for these loans, which bases the probability of default on this migration. Assigning risk ratings involves judgment. The Corporation's loan review officers provide a separate assessment of risk rating accuracy. Risk ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review assessments identify a deterioration or an improvement in the loan.
The following is a summary of the Corporation's internal risk rating categories:
| |
• | Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk. |
Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.
| |
• | Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak. |
| |
• | Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt. |
Special Mention: These loans have an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak.
Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.
The Corporation does not assign internal risk ratings for smaller balance, homogeneous loans and leases, such as:as home equity, residential mortgage, consumer, lease receivables and construction loans to individuals secured by residential real estate. For these loans and leases, the most relevant credit quality indicator is delinquency status. The migration of loans and leases through the various delinquency status categories is a significant component of the allowance for credit loss methodology for these loans and leases, which bases the probability of default on this migration.
The Corporation’s allowance for loan and lease losses includes: 1) specific allowances allocated to loans and leases evaluated for impairment under the Financial Accounting Standards Board's Accounting Standards Codification ("FASB ASC") Section 310-10-35; and 2) allowances calculated for pools of loans evaluated for impairment under FASB ASC Subtopic 450-20.
A loan or lease is considered to be impaired if it is probable that all amounts will not be collected according to the contractual terms of the loan or lease agreement. Impaired loans and leases consist of all loans and leases on non-accrual status and accruing TDRs. An allowance for loan and lease losses is established for an impaired loan or lease if its carrying value exceeds its estimated fair value. Impaired loans and leases to borrowers with total outstanding commitments greater than or equal to $1.0 million are evaluated individually for impairment. Impaired loans and leases to borrowers with total outstanding commitments less than $1.0 million are pooled and evaluated for impairment collectively.
All loans and leases evaluated for impairment under FASB ASC Section 310-10-35 are measured for losses on a quarterly basis. As of December 31, 20172019 and 2016,2018, substantially all of the Corporation’s impaired loans and leases to borrowers with total outstanding loan or lease balances greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’sloan or lease’s collateral. Collateral could be in the form of real estate, in the case of impaired commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real property.
For loans and leases secured by real estate, estimated fair values are determined primarily through appraisals performed by state certified third-party appraisers, discounted to arrive at expected net sale proceeds. For collateral dependent loans, estimated real estate fair values are also net of estimated selling costs. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the
Corporation’s experience and knowledge of the real estate market; the purpose of the loan;loan or lease; market factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Corporation generally obtains updated appraisals performed by state certified third-party appraisers for impaired loans and leases secured predominantly by real estate every 12 months.
As of December 31, 20172019 and 2016,2018, approximately 94%93% and 62%89%, respectively, of impaired loans or leases with principal balances greater than or equal to $1.0$1.0 million,, whose primary collateral is real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated within the preceding 12 months.
When updated appraisals are not obtained for loans and leases secured by real estate and evaluated for impairment under FASB ASC Section 310-10-35, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and, in the opinion of the Corporation's internal credit administration staff, there has not been a significant deterioration in the collateral value since the original appraisal was performed. Original appraisals are typically used only when the estimated collateral value, as adjusted appropriately for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70%.
For impaired loans and leases with principal balances greater than or equal to $1.0$1.0 million secured by non-real estate collateral, such as accounts receivable or inventory, estimated fair values are determined based on borrower financial statements, inventory listings, accounts receivable agings or borrowing base certificates. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Liquidation or collection discounts are applied to these assets based upon existing loan evaluation policies.
All loans and leases not evaluated for impairment under FASB ASC Section 310-10-35 are evaluated for impairment under FASB ASC Subtopic 450-20, using a pooled loss evaluation approach. In general,Loans and leases are segmented into pools with similar characteristics and a consistently developed loss factor is then applied to all loans in these pools. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on class segments. For commercial loans, class segments include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate, loans to commercial borrowers secured by residential mortgages,real estate and loans to individuals secured by residential real estate. Consumer loan class segments are based on collateral types and include direct consumer installment loans, home equity loans consumer loans, and lease receivables. Accruing commercial loans, commercial mortgages and construction loans are also evaluated for impairment under FASB ASC Subtopic 450-20.indirect automobile loans.
The Corporation segments its loan and lease portfolio by general loan and lease type, or "portfolio segments," as presented in the table under the heading, "Loans and leases, net of unearned income," within Note 4, "Loans and Leases and Allowance for Credit Losses." Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on "class segments," which are largely based on the type of collateral underlying each loan.loan and lease. For commercial loans, class segments include loans secured by collateral and unsecured loans. Construction loan class segments include loans secured by commercial real estate, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Consumer loan class segments are based on collateral types and include direct consumer installment loans and indirect automobile loans.
The Corporation calculates allowance for loan and lease loss allocation needs for loans evaluated under FASB ASC Subtopic 450-20 through the following procedures:
The loans and leases are segmented into pools with similar characteristics, as noted above. Commercial loans, commercial mortgages and construction loans to commercial borrowers are further segmented into separate pools based on internally assigned risk ratings. Residential mortgages, home equity loans, consumer loans, and lease receivables are further segmented into separate pools based on delinquency status.status;
A loss rate is calculated for each pool through an analysis of historical losses as loans and leases migrate through the various risk rating or delinquency categories. Estimated loss rates are based on a probability of default and a loss rate forecast.forecast;
The loss rate is adjusted to consider qualitative factors, such as economic conditions and trends.trends; and
The resulting adjusted loss rate is applied to the balance of the loans and leases in the pool to arrive at the allowance allocation for the pool.
The allocation of the allowance for credit losses is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan and lease portfolio. The Corporation considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans;loans and leases; the diversity of borrower industry types; and the composition of the portfolio by loan type. Prior to 2017, the Corporation maintained an unallocated allowance for credit losses for factors and conditions that exist at the balance sheet date, but are not specifically identifiable, and to recognize the inherent imprecision in estimating and measuring loss exposure. In 2017, enhancements were made to allow for the impact of these factors and conditions to be quantified in the allowance allocation process. Accordingly, an unallocated allowance for credit losses is no longer necessary. This change did not have a material impact.lease type.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is generally computed using the straight-line method over the estimated useful lives of the related assets, which are a maximum of 50 years for buildings and improvements, 8 years for furniture and 5 years for equipment. Leasehold improvements are amortized over the shorter of the useful life or the non-cancelable lease term. See Note 5, "Premises and Equipment" for additional information.
Other Real Estate Owned ("OREO"): Assets acquired in settlement of mortgage loan indebtedness are recorded as OREO and are included in other assets on the consolidated balance sheets, initially at the lower of the estimated fair value of the asset, less estimated selling costs, or the carrying amount of the loan. Costs to maintain the assets and subsequent gains and losses on sales are included in other non-interest expense on the consolidated statements of income.
Mortgage Servicing Rights ("MSRs"): The estimated fair value of MSRs related to residential mortgage loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans.
MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined through a discounted cash flows valuation completed by a third-party valuation expert. Significant inputs to the valuation include expected net servicing income, the discount rate and the expected lives of the underlying loans. Expected
life is based on the contractual terms of the loans, as adjusted for prepayment projections. To the extent the amortized cost of the MSRs exceeds their estimated fair value, a valuation allowance is established through a charge against servicing income, included as a component of mortgage banking income on the consolidated statements of income. If subsequent valuations indicate that impairment no longer exists, the valuation allowance is reduced through an increase to servicing income. See Note 7, "Mortgage Servicing Rights" for additional information.
Derivative Financial Instruments: The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. None of the Corporation's outstanding derivative contracts are designated as hedges and none are entered into for speculative purposes. Derivative instruments are carried at fair value, with changes in fair value recognized in earnings as components of non-interest income or non-interest expense on the consolidated statements of income.
Derivative contracts create counterparty credit risk with both the Corporation's customers and with institutional derivative counterparties. The Corporation manages counterparty credit risk through its credit approval processes, monitoring procedures and obtaining adequate collateral, when the Corporation determines it is appropriate to do so and in accordance with counterparty contracts.
Mortgage Banking Derivatives
In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Gross derivative assets and liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets, with changes in fair values during the period recorded in mortgage banking income on the consolidated statements of income.
Interest Rate Swaps
The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments and the gross fair values are recorded in other assets and other liabilities on the consolidated balance sheets, with changes in fair value during the period recorded in other non-interest expense on the consolidated statements of income. FultonThe Bank N.A. ("Fulton Bank"), the Corporation's largest banking subsidiary, exceededexceeds $10 billion in total assets as of December 31, 2016 and wasis required to clear all eligible interest rate swap contracts with a central counterparty, effective January 1, 2017.counterparty. As a result, Fultonthe Bank becameis subject to the regulations of the Commodity Futures Trading Commission ("CFTC") on that date.Commission.
Foreign Exchange Contracts
The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a specific date at a contractual price. The Corporation offsetslimits its foreign exchange exposure with customers by entering into contracts with correspondent financial institutionsinstitutional counterparties to mitigate its foreign exchange risk. The Corporation also holds certain amounts of foreign currency with international correspondent banks ("Foreign Currency Nostro
Accounts"). The Corporation limits the total overnight net foreign currency open positions, which is defined as an aggregate of all outstanding contracts and Foreign Currency Nostro Account balances, to $500,000. Gross fair values are recorded in other assets and other liabilities on the consolidated balance sheets, with changes in fair values during the period recorded in other service charges and fees on the consolidated statements of income.See "Note 10 - Derivative Financial Instruments" for additional information.
Balance Sheet Offsetting: Although certain financial assets and liabilities may be eligible for offset on the consolidated balance sheets because they are subject to master netting arrangements or similar agreements, the Corporation elects to not offset such qualifying assets and liabilities.
The Corporation is a party to interest rate swap transactions with financial institution counterparties and customers. Under these agreements, the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. Cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default. A daily settlement occurs through a clearing agent for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through a daily clearing agent. As a result, the total fair values of
interest rate swap derivative assets and derivative liabilities recognized on the consolidated balance sheetsheets are not equal and offsetting.
The Corporation is also a party to foreign currency exchange contracts with financial institution counterparties, under which the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. As with interest rate swap contracts, cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the foreign currency exchange contracts in the event of default. For additional details, see "Note 10 - Derivative Financial Instruments."
The Corporation also enters into agreements with customers in which it sells securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements. Under these agreements, the Corporation may transfer legal control over the assets but still maintain effective control through agreements that both entitle and obligate the Corporation to repurchase the assets. Therefore, repurchase agreements are reported as secured borrowings, classified in short-term borrowings on the consolidated balance sheets, while the securities underlying the repurchase agreements remain classified with investment securities on the consolidated balance sheets. The Corporation has no intention of setting off these amounts, therefore, these repurchase agreements are not eligible for offset. For additional details on balance sheet offsetting, see "Note 10 - Derivative Financial Instruments."
Income Taxes:The Corporation accountsutilizes the asset and liability method in accounting for income taxes in accordance with FASB ASC Topic 740, "Income Taxes" ("ASC Topic 740").taxes. Under ASC Topic 740,this method, deferred tax assets and liabilities are determined based onupon the differencesdifference between the financial statement carrying amounts andvalues of the tax bases of existing assets and liabilities as reflected in the financial statements and are measured at the prevailingtheir related tax basis using enacted tax rates that will be in effect when thesefor the year in which the differences are settledexpected to be recovered or realized. ASC Topic 740 also requires thatsettled. As changes in tax law or rates are enacted, deferred tax assets be reduced by a valuation allowance ifand liabilities are adjusted through the provision for income taxes. In assessing the realizability of deferred tax assets ("DTAs"), management considers whether it is more likely than not that some portion or all of the deferred tax assetsDTAs will not be realized.
The realizabilityultimate realization of DTAs is dependent upon the netgeneration of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets is evaluated quarterly by assessing the valuation allowance and by adjustingliabilities, the amount of the allowance, if necessary. The Corporation considers alltaxes paid in available positive and negative evidence includingcarryback years, projected future taxable income, and, availableif necessary, tax planning strategies that could be implemented to realize the netin making this assessment. A valuation allowance is provided against deferred tax assets. The evaluation of both positive and negative evidence is a requirement pursuant to ASC Topic 740 in determining whetherassets unless it is more-likely-than-not the netmore likely than not that such deferred tax assets will be realized. In the event the Corporation determines that the deferred income tax assets would be realized in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded, which would reduce the provision for income taxes.
ASC Topic 740, also"Income Taxes" creates a single model to address uncertainty in tax positions, and clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in an enterprise's financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The liability for unrecognized tax benefits is included in other liabilities within the consolidated balance sheetssheets.
Effective January 1, 2018, the Corporation adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This standards update permits a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects resulting from the application of the Tax Cuts and Jobs Act of 2017 ("Tax Act"), which changed the federal corporate income tax rate from a top rate of 35% to a flat rate of 21%. Upon adoption, the Corporation elected to reclassify $7.1 million of stranded tax effects from AOCI to retained earnings at December 31, 2017the beginning of the period of adoption. The Corporation's policy for releasing income tax effects from accumulated other comprehensive income is to release them as investments are sold or mature and 2016.as pension and post-retirement liabilities are extinguished. See Note 12, "Income Taxes" for additional information.
Stock-Based Compensation: The Corporation grants equity awards to employees, consisting of stock options, restricted stock, restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") under its Amended and Restated Equity
and Cash Incentive Compensation Plan ("Employee Equity Plan"). In addition, employees may purchase stock under the Corporation’s Employee Stock Purchase Plan ("ESPP").
The Corporation also grants stock equity awards to non-employee members of its board of directors and subsidiary bank board of directors under the 2011 Directors’ Equity Participation Plan, which was amended and approved by shareholders as the Amended and Restated Directors’ Equity Participation Plan in 2019 ("Directors’ Plan"). Under the Directors’ Plan, the Corporation can grant equity awards to non-employee holding company and subsidiary bank directors in the form of stock options, restricted stock, RSUs or common stock. Recent grants of equity awards under the Directors’ Plan have been limited to RSUs.
Stock option fair values are estimated through the use of the Black-Scholes valuation methodology as of the date of grant. Stock options carry terms of up to ten years. The fair value of restricted stock, RSUs and a majority of PSUs are based on the trading price of the Corporation's stock on the date of grant. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant.
Equity awards issued under the Employee Equity Plan are generally granted annually and become fully vested over or after a three-year vesting period. The vesting period for non-performance-based awards represents the period during which employees are required to provide service in exchange for such awards. Equity awards under the Directors' Plan are generally vest immediately upon grant.granted annually and become fully vested after a one-year vesting period. Certain events, as defined in the Employee Equity Plan and the Directors' Plan, result in the acceleration of the vesting of equity awards. Restricted stock, RSUs and PSUs earn dividends during the vesting period, which are forfeitable if the awards do not vest.
The fair value of stock options, restricted stock and RSUs granted to employees is recognized as compensation expense over the vesting period for such awards. Compensation expense for PSUs is also recognized over the vesting period, however, compensation expense for PSUs may vary based on the expectations for actual performance relative to defined performance measures.
Net Income Per Share: Basic net income per common share is calculated as net income divided by the weighted average numberThe fair value of shares outstanding.
Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options, restricted stock, RSUs and PSUs.a majority of PSUs are required to be included in weighted average diluted shares outstanding if performance measures, as defined in each PSU award agreement,based on the trading price of the Corporation's stock on the date of grant. The fair value of certain PSUs are metestimated through the use of the Monte Carlo valuation methodology as of the enddate of the period.
A reconciliation of weighted average common shares outstanding used to calculate basic and diluted net income per share follows:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Weighted average common shares outstanding (basic) | 174,721 |
| | 173,325 |
| | 175,721 |
|
Impact of common stock equivalents | 1,211 |
| | 1,093 |
| | 1,053 |
|
Weighted average common shares outstanding (diluted) | 175,932 |
| | 174,418 |
| | 176,774 |
|
In 2016 and 2015, 534,000 and 1.7 milliongrant. See Note 15, "Stock-Based Compensation Plans" for additional information. The Corporation has not issued stock options respectively, were excluded from the diluted earnings per share computation as their effect would have been anti-dilutive. There weresince 2014 and accordingly, there is no stock options excluded from the diluted net income per share computation in 2017.compensation expense for this instrument.
Disclosures about Segments of an Enterprise and Related Information: The Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owns six separate banks, each engages in similar activities, provides similar products and services, and operates in the same general geographic area. The Corporation’s non-banking activities are immaterial and, therefore, separate information is not required to be disclosed.
Financial Guarantees: Financial guarantees, which consist primarily of standby and commercial letters of credit, are accounted for by recognizing a liability equal to the fair value of the guarantees and crediting the liability to income over the term of the guarantee. Fair value is estimated based on the fees currently charged to enter into similar agreements with similar terms.
Business CombinationsGoodwill and Intangible Assets: The Corporation accounts for its acquisitions using the purchase accounting method. Purchase accounting requires that all assets acquired and liabilities assumed, including certain intangible assets that must be recognized, be recorded at their estimated fair values as of the acquisition date. Any purchase price exceeding the fair value of net assets acquired is recorded as goodwill.
During the fourth quarter of 2019, the Corporation early adopted ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This standards update eliminates the requirement to perform the “step two” impairment test, which the Corporation has not needed to perform since its impairment test completed in 2012. The Corporation performed a qualitative analysis, as permitted in Topic 350, in 2019 and no impairment indicators were identified through this analysis.
Goodwill is not amortized to expense, but is tested for impairment at least annually. A quantitative annual impairment test is not required if, based on a qualitative analysis, the Corporation determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. Write-downs of the balance, if necessary as a result of the impairment test, are charged to expense in the period in which goodwill is determined to be impaired. The Corporation performs its annual test of goodwill impairment as of October 31st of each year. If certain events occur which indicate goodwill might be impaired between annual tests, goodwill mustwould be tested when such events occur. Based on the results of its annual impairment tests, the Corporation concluded that there was no impairment in 2017, 2016 or 2015. See "Note 6 - Goodwill and Intangible Assets," for additional details.
Intangible assets are amortized over their estimated lives. Some intangible assets have indefinite lives and are, therefore, not amortized. All intangible assets must be evaluated for impairment if certain events occur. Any impairment write-downs are recognized as non-interest expense on the consolidated statements of income. See "Note 6 - Goodwill and Intangible Assets," for additional details.
Variable Interest Entities ("VIEs"): FASB ASC Topic 810 provides guidance on when to consolidate certain VIEs in the financial statements of the Corporation. VIEs are entities in which equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance activities without additional financial support from other parties. VIEs are assessed for consolidation under ASC Topic 810 when the Corporation holds variable interests in these entities. The Corporation consolidates VIEs when it is deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party
that has the power to make decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.
Subsidiary Trusts
The Parent Company owns all of the common stock of three3 subsidiary trusts, which have issued securities (Trust Preferred Securities) in conjunction with the Parent Company issuing junior subordinated deferrable interest debentures to the trusts. The terms of the junior subordinated deferrable interest debentures are the same as the terms of the Trust Preferred Securities ("TruPS"). The Parent Company’s obligations under the debentures constitute a full and unconditional guarantee by the Parent Company of the obligations of the trusts. The provisions of ASC Topic 810 related to subsidiary trusts, as interpreted by the SEC, disallow consolidation of subsidiary trusts in the financial statements of the Corporation. As a result, TruPS are not included on the Corporation’s consolidated balance sheets. The junior subordinated debentures issued by the Parent Company to the subsidiary trusts, which have the same total balance and rate as the combined equity securities and TruPS issued by the subsidiary trusts, remain in long-term debt. See "Note 9 - Short-Term Borrowings and Long-Term Debt," for additional information.
Tax Credit Investments
The Corporation makes investments in certain community development projects, thatthe majority of which, generate tax credits under various federal programs, including qualified affordable housing projects, New Markets Tax Credit Investments ("NMTC") projects and historic rehabilitation projects (collectively, "Tax Credit Investments" or "TCIs"). These investments are made throughout the Corporation's market area as a means of supporting the communities it serves. The Corporation typically acts as a limited partner or member of a limited liability company in its Tax Credit InvestmentsTCIs and does not exert control over the operating or financial policies of the partnership or limited liability company. Tax credits earned are subject to recapture by federal taxing authorities based upon compliance requirements to be met at the project level. As of December 31, 2017 and 2016, the Corporation’s Tax Credit Investments, included in other assets on the consolidated balance sheets and representing total committed equity investments, totaled $205.8 million and $186.4 million, respectively. As of December 31, 2017, the Corporation had future funding commitments, included in other liabilities on the consolidated balance sheets, of approximately $68.8 million.
Because the Corporation owns 100% of the equity interests in its New Markets Tax Credit investments,NMTC, these investments were consolidated based on FASB ASC Topic 810 as of December 31, 20172019 and 2016.2018. Investments in affordable housing projects were not consolidated based on management's assessment of the provisions of FASB ASC Topic 810.
Tax Credit InvestmentsTCIs are tested for impairment when events or changes in circumstances indicate that it is more likely than not that the carrying amount of the investment will not be realized. An impairment loss is measured as the amount by which the current carrying value exceeds its aggregated remaining value of the tax benefits of the investment. There were no impairment losses recognized for the Corporation’s Tax Credit InvestmentsTCIs in 2017, 20162019, 2018 or 2015.2017. For additional details, see "Note 12 - Income Taxes."
Amortization expense for qualified affordable housing projects is recorded as a component of income taxes on the consolidated statements of income. This expense, net of federal tax benefits, totaled $13.4 million, $11.2 million and $9.8 million in 2017, 2016 and 2015, respectively.
Amortization expense for NMTC and historical rehabilitation investments entered into prior to 2017 was recorded as a component of income taxes on the consolidated statements of income. The expense on these prior investments, net of federal tax benefits, totaled $2.2 million, $3.1 million and $2.6 million in 2017, 2016 and 2015, respectively. Amortization expense for these types of investments entered into after 2016 is recorded in non-interest expense on the consolidation statement of income. This expense totaled $11.0 million in 2017.
The income tax credits earned on Tax Credit Investments, recorded as a reduction to income taxes on the consolidated statements of income, were $41.4 million in 2017, $31.8 million in 2016 and $26.0 million in 2015.
Fair Value Measurements: FASB ASC Topic 820 establishes Assets and liabilities are categorized in a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):
Level 1 –- Inputs that represent quoted prices for identical instruments in active markets.
Level 2 –- Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
Level 3 –- Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
The Corporation has categorized all assets and liabilities required to be measured at fair value on both a recurring and nonrecurring basis into the above three levels. See "Note 1819 - Fair Value Measurements," for additional details.
Recently Adopted Accounting Standards: In March 2016,2008, the FASB issuedCorporation received Class B restricted shares of Visa, Inc. ("Visa") as part of Visa’s initial public offering. In accordance with ASC Update 2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting."2016-01, these securities are considered equity securities without readily determinable fair values. As such, the approximately 133,000 Visa Class B shares owned as of December 31, 2019 were carried at a zero cost basis.
Revenue Recognition: The purpose of this standards update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. ASC Update 2016-09 was effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. For the Corporation this standards update was effective with its March 31, 2017 quarterly report on Form 10-Q. As a result of adopting ASC Update 2016-09, excess tax benefits from stock-based compensation totaling $1.3 million were recognized in 2017 as a reduction to income taxes, rather then as an adjustment to additional paid-in capital.
Recently Issued Accounting Standards: In May 2014, the FASB issuedadopted ASC Update 2014-09, "Revenue from Contracts with Customers."Customers" using the modified retrospective method applied to all open contracts as of January 1, 2018 with no material impact on its consolidated financial statements. This standards update establishesestablished a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle prescribed by this standards update is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The standard appliessources of revenue for the Corporation are interest income from loans, leases and investments, net of interest expense on deposits and borrowings, and non-interest income. Non-interest income is earned from various banking and financial services that the Corporation offers through its subsidiary bank. Revenue is recognized as earned based on contractual terms, as transactions occur, or as services are provided. Following is further detail of the various types of revenue the Corporation earns and when it is recognized:
Interest income: Interest income is recognized on an accrual basis according to allloan and lease agreements, securities contracts with customers, except thoseor other such written contracts.
Wealth management services: Consists of trust commission income, brokerage income, money market income and insurance commission income. Trust commission income consists of advisory fees that are withinbased on market values of clients' managed portfolios and transaction fees for fiduciary services performed, both of which are recognized as earned. Brokerage income includes advisory fees which are recognized as earned on a monthly basis and transaction fees that are recognized when transactions occur. Money market income is based on the scopebalances held in trust accounts and is recognized monthly. Insurance commission income is earned and recognized when policies are originated. Currently, no investment management and trust service income is based on performance or investment results.
Commercial and consumer banking income: Consists of cash management, overdraft, non-sufficient fund fees and other topics inservice charges on deposit accounts as well as branch fees, automated teller machine fees, debit and credit card income and merchant services fees. Also included are letter of credit fees, foreign exchange income and commercial loan interest rate swap fees. Revenue is primarily transactional and recognized when earned, at the FASB ASC. The standard also requires significantly expanded disclosures about revenue recognition. The FASB has issued amendments to this standard (ASC Updates 2016-08, 2016-10, 2016-11, 2016-12time the transactions occur.
Mortgage banking income: Consists of gains or losses on the sale of residential mortgage loans and 2017-13). These amendments provide further clarification to the standard. For public business entities, ASC Update 2014-09 is effective for interimmortgage loan servicing income.
Other Income: Includes gains on sales of Small Business Association loans, cash surrender value of life insurance, and annual reporting periods beginning after December 15, 2017. Forother miscellaneous income.
Leases: Effective January 1, 2019, the Corporation this standards update is effective with its March 31, 2018 quarterly report on Form 10-Q. The Corporation evaluated the impact of the adoption of ASC Update 2014-09 on its consolidated financial statements and did not identify any significant changes in the timing of revenue recognition as a result of this amended guidance. The Corporation adopted this standards update on January 1, 2018, under the modified retrospective approach, and the adoption of ASC Update 2014-09 did not have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASC Update 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." ASC Update 2016-01 provides guidance regarding the income statement impact of equity investments held by an entity and the recognition of changes in fair value of financial liabilities when the fair value option is elected. This standards update will require equity investments to be measured at fair value, with changes recorded in net income. ASC Update 2016-01 is effective for public business entities' annual and interim reporting periods beginning after December 15, 2017, with earlier adoption permitted.The Corporation adopted this standards update on January 1, 2018 and the adoption of ASC Update 2016-01 did not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASC UpdateASU 2016-02, "Leases."Leases (Topic 842)." This standards update requires a lessee to recognize the assets and liabilities that arise fromfor all leases with aan initial term greater than 12 months. The core principle requirestwelve months: (1) a right-of-use ("ROU") asset, which is an asset that represents the lesseelessee’s right to recognizeuse, or control the use of, a specified asset for the lease term; and (2) a lease liability, which is a lessee’s obligation to make lease payments andarising from a "right-of-use" asset.lease, each measured on a discounted basis. The accounting applied by the lessor is relatively unchanged. The standards update also requires expanded qualitative and quantitative disclosures. In September of 2017, the FASB issued clarifying guidance to this standard (ASC Update 2017-13). For public business entities, ASC Update 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. ASC Update 2016-02 mandates a modified retrospective transition for all entities, which requires restatement of all comparative periods in the year of adoption. Early adoption is permitted. For the Corporation adopted this standards update is effective with its March 31,in the first quarter of 2019 quarterly report on Form 10-Q. The Corporation is currently evaluatingusing the impact ofmodified retrospective method, which eliminates the adoption of ASC Update 2016-02 on its consolidatedrequirement to restate the earliest prior period presented in an entity’s financial statements. The Corporation currently operatesAs such, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019 and continue to be reported in accordance with previous guidance (Topic 840). This standards update provides for a number of practical expedients in transition. The Corporation elected to apply the package of practical expedients permitted within the new standard, which, among other things, allowed it to carryforward the prior conclusions on lease identification, lease classification and initial direct costs. In addition, the Corporation elected to not separate lease and non-lease components. The Corporation did not elect the practical expedient to apply hindsight in determining the lease term and in assessing impairment of the ROU assets.
As a lessee, the majority of the operating lease portfolio consists of real estate leases for the Corporation's branches, that are leased, withland and office space. The operating leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases accounted for as operating leases that are not recognized on the consolidated balance sheet. Under ASC Update 2016-02, right-of-use5 years or more. ROU assets and lease liabilities will needare not recognized for leases with an initial term of 12 months or less. The Corporation does not have any finance leases as the lessee.
Certain real estate leases have lease payments that adjust based on annual changes in the Consumer Price Index ("CPI"). The leases that are dependent upon CPI are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability.
Operating lease expense represents fixed lease payments for operating leases recognized on a straight-line basis over the applicable lease term. Variable lease expense represents the payment of real estate taxes, insurance and common area maintenance based on the Corporation's pro-rata share.
Sublease income consists mostly of operating leases for space within the Corporation's offices and branches and is recorded as a reduction to be recognizednet occupancy expense on the consolidated balance sheetstatements of income. See "Note 17 - Leases" for these branches, whichadditional information and expanded lessee disclosures.
Defined Benefit Pension Plan: Net periodic pension costs are funded based on the requirements of federal laws and regulations. The determination of net periodic pension costs is based on assumptions about future events that will also haveaffect the amount and timing of required benefit payments under the plan. These assumptions include demographic assumptions such as retirement age and mortality, a discount rate used to determine the current benefit obligation, form of payment election and a long-term expected rate of return on plan assets. Net periodic pension expense includes interest cost, based on the assumed discount rate, an impactexpected return on regulatory capital ratios. The recognitionplan assets, amortization of operating leasesprior service cost or credit and amortization of net actuarial gains or losses. For the Corporation, there is no service cost as the plan was curtailed in 2008, with no additional benefits accruing. Net periodic pension cost is recognized in salaries and employee benefits on the consolidated balance sheet is expected to be the most significant impactstatements of the adoptionincome. For additional details, see "Note 16 - Employee Benefit Plans."
Recently Issued Accounting Standards:
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Standard | Description | Date of Anticipated Adoption | Effect on Financial Statements |
ASC Update 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and HTM investments). The recognition of credit losses would be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or "CECL"), as opposed to recognition of losses only when they are probable under current GAAP. This update also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This adjustment will also be recognized in regulatory capital. This update is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
In November 2018, ASC Update 2018-19, "Codifications Improvements to Topic 326, Financial Instruments - Credit Losses" was issued which clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments.
ASC Update 2019-04, 2019-05 and 2019-11 were issued to provide certain clarifications and transition relief to adopting this standards update.
| First Quarter of 2020 | The Corporation intends to adopt these standards updates effective with its March 31, 2020 quarterly report on Form 10-Q.
The allowance for credit losses ("ACL") will be based on the Corporation’s historical loss experience, borrower characteristics, forecasts of future economic conditions and other relevant factors.
The Corporation will use models and other loss estimation techniques that are responsive to changes in forecasted economic conditions to interpret borrower and economic factors in order to estimate the ACL. The Corporation will also apply qualitative factors to account for information that may not be reflected in quantitatively derived results, or other relevant factors to ensure the ACL reflects the best estimate of current expected credit losses.
Preliminary expected loss estimates have been determined and the Corporation believes that the total allowance for credit losses will increase between 25% to 35% as a result of the adoption of CECL.
The Corporation is in the process of finalizing the review of the most recent model run, conducting scenario testing, and finalizing certain assumptions including economic forecasts and qualitative adjustments.
The Corporation will be adopting the option to phase in over a three-year period the day-one impact of this standards update on regulatory capital afforded to it in the Final Rule published in the Federal Register on February 14, 2019 by Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation.
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ASC Update 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement | This update changes the fair value measurement disclosure requirements of ASC Topic 820 "Fair Value Measurement." Among other things, the update modifies the disclosure objective paragraphs of ASC 820 to eliminate: (1) "at a minimum" from the phrase "an entity shall disclose at a minimum;" and (2) other similar disclosure requirements to promote the appropriate exercise of discretion by entities. | First Quarter 2020 | The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q. This standard will impact the Corporation's disclosures relating to fair value measurement. The Corporation does not expect the adoption of this update to have a material impact on its consolidated financial statements. |
In June 2016, the FASB issued ASC Update 2016-13, "Financial Instruments - Credit Losses." The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and investments). The recognition of credit losses would be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or "CECL"), as opposed to recognition of losses only when they are probable (current practice). ASC Update 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-13 on its consolidated financial statements.
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Standard | Description | Date of Anticipated Adoption | Effect on Financial Statements |
ASC Update 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans | This update amends ASC Topic 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. This update is effective for annual reporting periods beginning after December 15, 2020. Early adoption is permitted. | First Quarter 2021 | The Corporation intends to adopt this standards update effective with its March 31, 2021 quarterly report on Form 10-Q. This standard will impact the Corporation's disclosure relating to employee benefit plans, but the Corporation does not expect the adoption of this update to have a material impact on its consolidated financial statements. |
ASC Update 2018-15 Intangibles - Goodwill and Other - Internal Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract | This update requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Subtopic 350-40 to determine which implementation costs to capitalize as assets. This update is effective for annual or interim reporting periods beginning after December 15, 2019. Early adoption is permitted. | First Quarter 2020 | The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q and does not expect the adoption of this update to have a material impact on its consolidated financial statements. |
ASC Update 2019-12 Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes | This update simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. It also improves consistent application of, and simplifies GAAP for, other areas of Topic 740 by clarifying and amending existing guidance. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted. | First Quarter 2021 | The Corporation intends to adopt this standards update effective with its March 31, 2021 quarterly report on Form 10-Q and does not expect the adoption of this update to have a material impact on its consolidated financial statements. |
In August 2016, the FASB issued ASC Update 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." This standards update provides guidance regarding the presentation of certain cash receipts and cash payments in the statement of cash flows, addressing eight specific cash flow classification issues, in order to reduce existing diversity in practice. ASC Update 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2016-15 to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASC Update 2016-18, "Statement of Cash Flows - Restricted Cash." This standards update provides guidance regarding the presentation of restricted cash in the statement of cash flows. The updaterequires companies to include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. It also requires an entity to disclose the nature of the restrictions on cash and cash equivalents. ASC Update 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2016-18 to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASC Update 2017-04, "Intangibles - Goodwill and Other." This standards update eliminates Step 2 of the goodwill impairment test which measures the impairment amount. Identifying and measuring impairment will take place in a single quantitative step. In addition, no separate qualitative assessment for reporting units with zero or negative carrying amount is required. Entities must disclose the existence of these reporting units and the amount of goodwill allocated to them. This update should be applied on a prospective basis, and an entity is required to disclose the nature of and reason for the change in accounting principle upon transition. ASC Update 2017-04 is effective for annual or interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its 2020 goodwill impairment test and does not expect the adoption of ASC Update 2017-04 to have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASC Update 2017-07, "Improving the Presentation of Net Periodic Pension Costs and Net Periodic Benefit Cost." This standards update requires a company to present service cost separately from the other components of net benefit cost. In addition, the update provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. ASC Update 2017-07 is effective for annual or interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2017-07 to have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASC Update 2017-08, "Premium Amortization on Purchased Callable Debt Securities." This standards update requires that a company amortize the premium on callable debt securities to the earliest call date versus current U.S. GAAP, which requires amortization over the contractual life of the securities. The amortization period for callable debt securities purchased at a discount would not be impacted by the new accounting standards update. This amendment is to be adopted on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. ASC Update 2017-08 is effective for annual or interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2019 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2017-08 to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASC Update 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This standards update permits a reclassification from accumulated other comprehensive income to retained earnings of the stranded tax effects resulting from the application of the new federal corporate income tax rate. ASC Update 2018-02 is effective for annual or interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2018-02 to have a material impact on its consolidated financial statements.
Reclassifications: Certain amounts in the 20162018 and 20152017 consolidated financial statements and notes have been reclassified to conform to the 20172019 presentation.
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NOTE 2 – RESTRICTIONS ON CASH AND DUE FROM BANKSCASH EQUIVALENTS |
The Corporation’s subsidiary banks areCorporation is required to maintain reserves against theirits deposit liabilities. These reserves are in the form of cash and balances with the FRB, included in interest-bearing"interest-bearing deposits with other banks. The" On the consolidated balance sheets, the amounts of such reserves as of December 31, 20172019 and 20162018 were $124.4$218.9 million and $113.3$156.8 million,, respectively.
In addition, collateral is posted by the Corporation with counterparties to secure derivative contracts and other contracts, which is included in "interest-bearing deposits with other banks". On the consolidated balance sheets, the amounts of such collateral as of December 31, 2019 and 2018 were $199.6 million and $45.1 million, respectively.
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NOTE 3 – INVESTMENT SECURITIES |
The following tables present the amortized cost and estimated fair values of investment securities, which were all classified as of December 31:
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| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| (in thousands) |
2019 | | | | | | | |
Available for Sale | | | | | | | |
State and municipal securities | $ | 638,125 |
| | $ | 15,826 |
| | $ | (1,024 | ) | | $ | 652,927 |
|
Corporate debt securities | 370,401 |
| | 8,490 |
| | (1,534 | ) | | 377,357 |
|
Collateralized mortgage obligations | 682,307 |
| | 11,726 |
| | (315 | ) | | 693,718 |
|
Residential mortgage-backed securities | 177,183 |
| | 1,078 |
| | (949 | ) | | 177,312 |
|
Commercial mortgage-backed securities | 489,603 |
| | 6,471 |
| | (1,777 | ) | | 494,297 |
|
Auction rate securities | 107,410 |
| | — |
| | (5,484 | ) | | 101,926 |
|
Total | $ | 2,465,029 |
| | $ | 43,591 |
| | $ | (11,083 | ) | | $ | 2,497,537 |
|
| | | | | | | |
Held to Maturity | | | | | | | |
Residential mortgage-backed securities | $ | 369,841 |
| | $ | 13,864 |
| | $ | — |
| | $ | 383,705 |
|
Total | $ | 369,841 |
| | $ | 13,864 |
| | $ | — |
| | $ | 383,705 |
|
| | | | | | | |
2018 | | | | | | | |
Available for Sale | | | | | | | |
U.S. Government sponsored agency securities | $ | 31,586 |
| | $ | 185 |
| | $ | (139 | ) | | $ | 31,632 |
|
State and municipal securities | 282,383 |
| | 2,178 |
| | (5,466 | ) | | 279,095 |
|
Corporate debt securities | 111,454 |
| | 1,432 |
| | (3,353 | ) | | 109,533 |
|
Collateralized mortgage obligations | 841,294 |
| | 2,758 |
| | (11,972 | ) | | 832,080 |
|
Residential mortgage-backed securities | 476,973 |
| | 1,583 |
| | (15,212 | ) | | 463,344 |
|
Commercial mortgage-backed securities | 264,165 |
| | 524 |
| | (3,073 | ) | | 261,616 |
|
Auction rate securities | 107,410 |
| | — |
| | (4,416 | ) | | 102,994 |
|
Total | $ | 2,115,265 |
| | $ | 8,660 |
| | $ | (43,631 | ) | | $ | 2,080,294 |
|
| | | | | | | |
Held to Maturity | | | | | | | |
State and municipal securities | $ | 156,134 |
| | $ | 1,166 |
| | $ | (93 | ) | | $ | 157,207 |
|
Residential mortgage-backed securities | 450,545 |
| | 3,667 |
| | — |
| | 454,212 |
|
Total | $ | 606,679 |
| | $ | 4,833 |
| | $ | (93 | ) | | $ | 611,419 |
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| | | | | | | |
On July 1, 2019, the Corporation transferred state and municipal securities from the held to maturity classification to the available for sale classification as permitted through the early adoption of December 31:ASU 2019-04, as disclosed in "Note 1 - Basis of Presentation." The amortized cost of the securities transferred was $158.9 million and the estimated fair value was $168.5 million. The Corporation has the positive intent and ability to hold the remainder of the held to maturity portfolio, consisting of residential mortgage-backed securities, to maturity.
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| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| (in thousands) |
2017 | | | | | | | |
U.S. Government sponsored agency securities | $ | 5,962 |
| | $ | 2 |
| | $ | (26 | ) | | $ | 5,938 |
|
State and municipal securities | 405,860 |
| | 5,638 |
| | (2,549 | ) | | 408,949 |
|
Corporate debt securities | 96,353 |
| | 2,832 |
| | (1,876 | ) | | 97,309 |
|
Collateralized mortgage obligations | 611,927 |
| | 491 |
| | (9,795 | ) | | 602,623 |
|
Residential mortgage-backed securities | 1,132,080 |
| | 3,957 |
| | (15,241 | ) | | 1,120,796 |
|
Commercial mortgage-backed securities | 215,351 |
| | — |
| | (2,596 | ) | | 212,755 |
|
Auction rate securities | 107,410 |
| | — |
| | (8,742 | ) | | 98,668 |
|
Total debt securities | 2,574,943 |
| | 12,920 |
| | (40,825 | ) | | 2,547,038 |
|
Equity securities | 776 |
| | 142 |
| | — |
| | 918 |
|
Total | $ | 2,575,719 |
| | $ | 13,062 |
| | $ | (40,825 | ) | | $ | 2,547,956 |
|
| | | | | | | |
2016 | | | | | | | |
U.S. Government sponsored agency securities | $ | 132 |
| | $ | 2 |
| | $ | — |
| | $ | 134 |
|
State and municipal securities | 405,274 |
| | 2,043 |
| | (15,676 | ) | | 391,641 |
|
Corporate debt securities | 112,016 |
| | 1,978 |
| | (4,585 | ) | | 109,409 |
|
Collateralized mortgage obligations | 604,095 |
| | 1,943 |
| | (12,178 | ) | | 593,860 |
|
Residential mortgage-backed securities | 1,328,192 |
| | 6,546 |
| | (16,900 | ) | | 1,317,838 |
|
Commercial mortgage-backed securities | 25,100 |
| | — |
| | (537 | ) | | 24,563 |
|
Auction rate securities | 107,215 |
| | — |
| | (9,959 | ) | | 97,256 |
|
Total debt securities | 2,582,024 |
| | 12,512 |
| | (59,835 | ) | | 2,534,701 |
|
Equity securities | 12,231 |
| | 12,295 |
| | — |
| | 24,526 |
|
Total | $ | 2,594,255 |
| | $ | 24,807 |
| | $ | (59,835 | ) | | $ | 2,559,227 |
|
On August 1, 2018, the Corporation transferred debt securities with an amortized cost of $665.5 million and an estimated fair value of $641.7 million from the available for sale classification to the held to maturity classification. These securities consisted of residential mortgage-backed securities ($505.5 million amortized cost and $485.3 million estimated fair value) and state and municipal securities ($160.0 million amortized cost and $156.4 million estimated fair value) and were transferred as the Corporation had the positive intent and ability to hold these securities to maturity. The transfer of debt securities into the held to maturity category from the available for sale category was recorded at fair value on the date of transfer. The net unrealized gains or losses at the transfer date are included in AOCI and are being amortized over the remaining lives of the securities. This amortization is expected to offset the amortization of the related premium or discount created by the investment securities transfer into the held to maturity classification, with no expected impact on future net income.
Securities carried at $1.8 billion$462.6 million at both December 31, 20172019 and 2016$973.4 million at December 31, 2018, were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
The amortized cost and estimated fair values of debt securities as of December 31, 2017,2019, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
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| | | | | | | | | | | | | | | |
| Available for Sale | | Held to Maturity |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (in thousands) |
| | | | | |
Due in one year or less | $ | 2,830 |
| | $ | 2,830 |
| | $ | — |
| | $ | — |
|
Due from one year to five years | 33,027 |
| | 34,250 |
| | — |
| | — |
|
Due from five years to ten years | 348,800 |
| | 355,888 |
| | — |
| | — |
|
Due after ten years | 731,279 |
| | 739,242 |
| | — |
| | — |
|
| 1,115,936 |
| | 1,132,210 |
| | — |
| | — |
|
Residential mortgage-backed securities(1) | 177,183 |
| | 177,312 |
| | 369,841 |
| | 383,705 |
|
Commercial mortgage-backed securities(1) | 489,603 |
| | 494,297 |
| | — |
| | — |
|
Collateralized mortgage obligations (1) | 682,307 |
| | 693,718 |
| | — |
| | — |
|
Total | $ | 2,465,029 |
| | $ | 2,497,537 |
| | $ | 369,841 |
| | $ | 383,705 |
|
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (in thousands) |
| |
Due in one year or less | $ | 16,837 |
| | $ | 16,920 |
|
Due from one year to five years | 33,191 |
| | 33,565 |
|
Due from five years to ten years | 112,181 |
| | 113,164 |
|
Due after ten years | 453,376 |
| | 447,215 |
|
| 615,585 |
| | 610,864 |
|
Residential mortgage-backed securities(1) | 1,132,080 |
| | 1,120,796 |
|
Commercial mortgage-backed securities(1) | 215,351 |
| | 212,755 |
|
Collateralized mortgage obligations (1) | 611,927 |
| | 602,623 |
|
Total debt securities | $ | 2,574,943 |
| | $ | 2,547,038 |
|
| |
(1) | Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans. |
The following table presents information related to gross gains and losses on the sales of equity and debt securities:
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| | | | | | | | | | | |
| Gross Realized Gains | | Gross Realized Losses | | Net Gains (Losses) |
| (in thousands) |
2019: | | | | | |
Debt securities | $ | 11,554 |
| | $ | (6,821 | ) | | $ | 4,733 |
|
Total | $ | 11,554 |
| | $ | (6,821 | ) | | $ | 4,733 |
|
2018: | | | | | |
Equity securities | $ | 9 |
| | $ | — |
| | $ | 9 |
|
Debt securities | 1,656 |
| | (1,628 | ) | | 28 |
|
Total | $ | 1,665 |
| | $ | (1,628 | ) | | $ | 37 |
|
2017: | | | | | |
Equity securities | $ | 13,558 |
| | $ | — |
| | $ | 13,558 |
|
Debt securities | 315 |
| | (4,802 | ) | | (4,487 | ) |
Total | $ | 13,873 |
| | $ | (4,802 | ) | | $ | 9,071 |
|
|
| | | | | | | | | | | |
| Gross Realized Gains | | Gross Realized Losses | | Net Gains (Losses) |
| (in thousands) |
2017: | | | | | |
Equity securities | $ | 13,558 |
| | $ | — |
| | $ | 13,558 |
|
Debt securities | 315 |
| | (4,802 | ) | | (4,487 | ) |
Total | $ | 13,873 |
| | $ | (4,802 | ) | | $ | 9,071 |
|
2016: | | | | | |
Equity securities | $ | 2,005 |
| | $ | (10 | ) | | $ | 1,995 |
|
Debt securities | 581 |
| | (26 | ) | | 555 |
|
Total | $ | 2,586 |
| | $ | (36 | ) | | $ | 2,550 |
|
2015: | | | | | |
Equity securities | $ | 6,496 |
| | $ | (1 | ) | | $ | 6,495 |
|
Debt securities | 2,571 |
| | — |
| | 2,571 |
|
Total | $ | 9,067 |
| | $ | (1 | ) | | $ | 9,066 |
|
The following table presents a summary of the cumulative credit related other-than-temporary impairmentOTTI charges, recognized as components of earnings, for debt securities held by the Corporation at December 31:31, 2019 and 2018:
|
| | | | | | | |
| Year ended December 31 |
| 2019 | | 2018 |
Balance of cumulative credit losses on debt securities, beginning of period | $ | (11,510 | ) | | $ | (11,510 | ) |
Reductions for securities sold during the period | 10,520 |
| | — |
|
Balance of cumulative credit losses on debt securities, end of period | $ | (990 | ) | | $ | (11,510 | ) |
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Balance of cumulative credit losses on debt securities, beginning of year | $ | (11,510 | ) | | $ | (11,510 | ) | | $ | (16,242 | ) |
Reductions for securities sold during the period | — |
| | — |
| | 4,730 |
|
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security | — |
| | — |
| | 2 |
|
Balance of cumulative credit losses on debt securities, end of year | $ | (11,510 | ) | | $ | (11,510 | ) | | $ | (11,510 | ) |
The credit related other-than-temporary impairment charges for debt securities were determined based on expected cash flows models.
The following table presentstables present the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2017. There31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 months | | 12 Months or Longer | | Total |
| Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
2019 | (dollars in thousands) |
Available for Sale | | | | | | | | | | | | | | | |
State and municipal securities | 44 |
| | $ | 136,344 |
| | $ | (1,024 | ) | | — |
| | $ | — |
| | $ | — |
| | $ | 136,344 |
| | $ | (1,024 | ) |
Corporate debt securities | 5 |
| | 30,719 |
| | (346 | ) | | 8 |
| | 18,759 |
| | (1,188 | ) | | 49,478 |
| | (1,534 | ) |
Collateralized mortgage obligations | 5 |
| | 33,865 |
| | (190 | ) | | 1 |
| | 5,330 |
| | (125 | ) | | 39,195 |
| | (315 | ) |
Residential mortgage-backed securities | 5 |
| | 12,247 |
| | (40 | ) | | 26 |
| | 127,373 |
| | (909 | ) | | 139,620 |
| | (949 | ) |
Commercial mortgage-backed securities | 7 |
| | 121,340 |
| | (1,777 | ) | | — |
| | — |
| | — |
| | 121,340 |
| | (1,777 | ) |
Auction rate securities | — |
| | — |
| | — |
| | 177 |
| | 101,926 |
| | (5,484 | ) | | 101,926 |
| | (5,484 | ) |
Total available for sale (1) | 66 |
| | $ | 334,515 |
| | $ | (3,377 | ) | | 212 |
| | $ | 253,388 |
| | $ | (7,706 | ) | | $ | 587,903 |
| | $ | (11,083 | ) |
(1)No held to maturity securities were no grossin an unrealized losses on equity securitiesloss position as of December 31, 2017.
2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 months | | | | 12 Months or Longer | | Total |
| Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
2018 | (dollars in thousands) |
Available for Sale | | | | | | | | | | | | | | | |
U.S. Government sponsored agency securities | 1 |
| | $ | 4,961 |
| | $ | (31 | ) | | 1 |
| | $ | 5,770 |
| | $ | (108 | ) | | $ | 10,731 |
| | $ | (139 | ) |
State and municipal securities | 33 |
| | 72,950 |
| | (1,292 | ) | | 38 |
| | 83,770 |
| | (4,174 | ) | | 156,720 |
| | (5,466 | ) |
Corporate debt securities | 8 |
| | 24,419 |
| | (227 | ) | | 14 |
| | 25,642 |
| | (3,126 | ) | | 50,061 |
| | (3,353 | ) |
Collateralized mortgage obligations | 39 |
| | 136,563 |
| | (1,050 | ) | | 89 |
| | 388,173 |
| | (10,922 | ) | | 524,736 |
| | (11,972 | ) |
Residential mortgage-backed securities | 17 |
| | 18,220 |
| | (222 | ) | | 110 |
| | 402,779 |
| | (14,990 | ) | | 420,999 |
| | (15,212 | ) |
Commercial mortgage-backed securities | 1 |
| | 9,778 |
| | (35 | ) | | 25 |
| | 197,326 |
| | (3,038 | ) | | 207,104 |
| | (3,073 | ) |
Auction rate securities | — |
| | — |
| | — |
| | 177 |
| | 102,994 |
| | (4,416 | ) | | 102,994 |
| | (4,416 | ) |
Total available for sale | 99 |
| | $ | 266,891 |
| | $ | (2,857 | ) | | 454 |
| | $ | 1,206,454 |
| | $ | (40,774 | ) | | $ | 1,473,345 |
| | $ | (43,631 | ) |
Held to maturity | | | | | | | | | | | | | | | |
State and municipal securities | 6 |
| | 20,601 |
| | (93 | ) | | — |
| | — |
| | — |
| | 20,601 |
| | (93 | ) |
Total | 105 |
| | $ | 287,492 |
| | $ | (2,950 | ) | | 454 |
| | $ | 1,206,454 |
| | $ | (40,774 | ) | | $ | 1,493,946 |
| | $ | (43,724 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 months | | 12 Months or Longer | | Total |
| Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
| (in thousands) |
U.S. Government sponsored agency securities | $ | 5,830 |
| | $ | (26 | ) | | $ | — |
| | $ | — |
| | $ | 5,830 |
| | $ | (26 | ) |
State and municipal securities | 11,650 |
| | (50 | ) | | 118,297 |
| | (2,499 | ) | | 129,947 |
| | (2,549 | ) |
Corporate debt securities | 4,544 |
| | (48 | ) | | 32,163 |
| | (1,828 | ) | | 36,707 |
| | (1,876 | ) |
Collateralized mortgage obligations | 303,932 |
| | (2,408 | ) | | 187,690 |
| | (7,387 | ) | | 491,622 |
| | (9,795 | ) |
Residential mortgage-backed securities | 511,378 |
| | (4,348 | ) | | 500,375 |
| | (10,893 | ) | | 1,011,753 |
| | (15,241 | ) |
Commercial mortgage-backed securities | 190,985 |
| | (2,118 | ) | | 21,770 |
| | (478 | ) | | 212,755 |
| | (2,596 | ) |
Auction rate securities | — |
| | — |
| | 98,668 |
| | (8,742 | ) | | 98,668 |
| | (8,742 | ) |
Total | $ | 1,028,319 |
| | $ | (8,998 | ) | | $ | 958,963 |
| | $ | (31,827 | ) | | $ | 1,987,282 |
| | $ | (40,825 | ) |
For comparative purposes, the following table presents gross unrealized losses and the estimated fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 months | | 12 Months or Longer | | Total |
| Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
| (in thousands) |
State and municipal securities | $ | 247,509 |
| | $ | (15,676 | ) | | $ | — |
| | $ | — |
| | $ | 247,509 |
| | $ | (15,676 | ) |
Corporate debt securities | 11,922 |
| | (110 | ) | | 34,629 |
| | (4,475 | ) | | 46,551 |
| | (4,585 | ) |
Collateralized mortgage obligations | 166,905 |
| | (3,899 | ) | | 258,237 |
| | (8,279 | ) | | 425,142 |
| | (12,178 | ) |
Mortgage-backed securities | 1,137,510 |
| | (17,437 | ) | | — |
| | — |
| | 1,137,510 |
| | (17,437 | ) |
Auction rate securities | — |
| | — |
| | 97,256 |
| | (9,959 | ) | | 97,256 |
| | (9,959 | ) |
Total | $ | 1,563,846 |
| | $ | (37,122 | ) | | $ | 390,122 |
| | $ | (22,713 | ) | | $ | 1,953,968 |
| | $ | (59,835 | ) |
The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in fair
value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation did not consider these investments to be other-than-temporarily impaired as of December 31, 2017.2019.
As of December 31, 2017,2019, all student loan auction rate certificates ("ARCs") were rated above investment grade. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. All of the loans were current and making scheduled payments and, based on management’s evaluations, were not subject to any other-than-temporary impairmentOTTI charges as of December 31, 2017.2019. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
The majority of the Corporation’s available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair values of corporate debt securities as of December 31:
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (in thousands) |
Single-issuer trust preferred securities | $ | 31,335 |
| | $ | 30,703 |
| | $ | 43,746 |
| | $ | 39,829 |
|
Subordinated debt | 49,013 |
| | 49,533 |
| | 46,231 |
| | 46,723 |
|
Senior notes | 12,031 |
| | 12,392 |
| | 18,037 |
| | 18,433 |
|
Pooled trust preferred securities | — |
| | 707 |
| | — |
| | 422 |
|
Corporate debt securities issued by financial institutions | 92,379 |
| | 93,335 |
| | 108,014 |
| | 105,407 |
|
Other corporate debt securities | 3,974 |
| | 3,974 |
| | 4,002 |
| | 4,002 |
|
Available for sale corporate debt securities | $ | 96,353 |
| | $ | 97,309 |
| | $ | 112,016 |
| | $ | 109,409 |
|
Single-issuer trust preferred securities had an unrealized loss of $632,000 as of December 31, 2017. Four of the 18 single-issuer trust preferred securities held were rated below investment grade by at least one ratings agency, with an amortized cost of $4.9 million and an estimated fair value of $4.7 million as of December 31, 2017. All of the single-issuer trust preferred securities rated below investment grade were rated "BB" or "Ba." Two single-issuer trust preferred securities with an amortized cost of $3.8 million and an estimated fair value of $3.1 million as of December 31, 2017 were not rated by any ratings agency.
Based on management’s evaluations, no corporate debt securities were subject to any other-than-temporary impairmentOTTI charges
as of December 31, 2017.2019. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
|
| | | | |
NOTE 4 – LOANS AND LEASES AND ALLOWANCE FOR CREDIT LOSSES |
Loans and leases, net of unearned income
Loans and leases, net of unearned income are summarized as follows as of December 31:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Real estate – commercial mortgage | $ | 6,700,776 |
| | $ | 6,434,285 |
|
Commercial – industrial, financial and agricultural | 4,446,701 |
| | 4,404,548 |
|
Real estate – residential mortgage | 2,641,465 |
| | 2,251,044 |
|
Real estate – home equity | 1,314,944 |
| | 1,452,137 |
|
Real estate – construction | 971,079 |
| | 916,599 |
|
Consumer | 463,164 |
| | 419,186 |
|
Equipment lease financing | 322,625 |
| | 311,866 |
|
Overdrafts | 3,582 |
| | 2,774 |
|
Loans and leases, gross of unearned income | 16,864,336 |
| | 16,192,439 |
|
Unearned income | (26,810 | ) | | (26,639 | ) |
Loans and leases, net of unearned income | $ | 16,837,526 |
| | $ | 16,165,800 |
|
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Real estate – commercial mortgage | $ | 6,364,804 |
| | $ | 6,018,582 |
|
Commercial – industrial, financial and agricultural | 4,300,297 |
| | 4,087,486 |
|
Real estate – residential mortgage | 1,954,711 |
| | 1,601,994 |
|
Real estate – home equity | 1,559,719 |
| | 1,625,115 |
|
Real estate – construction | 1,006,935 |
| | 843,649 |
|
Consumer | 313,783 |
| | 291,470 |
|
Leasing and other | 291,556 |
| | 246,704 |
|
Overdrafts | 4,113 |
| | 3,662 |
|
Loans, gross of unearned income | 15,795,918 |
| | 14,718,662 |
|
Unearned income | (27,671 | ) | | (19,390 | ) |
Loans, net of unearned income | $ | 15,768,247 |
| | $ | 14,699,272 |
|
The Corporation has extended credit to the officers and directors of the Corporation and to their associates. These related-party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collection. The aggregate dollar amount of these loans, including unadvanced commitments, was $113.6$90.1 million and $154.4$116.4 million as of December 31, 20172019 and 2016,2018, respectively. During 2017,2019, additions totaled $4.9$4.2 million and repayments totaled $45.8$30.5 million infor related-party loans.
The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $4.6 billion and $4.7 billion as of December 31, 2017 and 2016, respectively.
Allowance for Credit Losses
The following table presents the components of the allowance for credit losses as of December 31:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Allowance for loan and lease losses | $ | 163,622 |
| | $ | 160,537 |
| | $ | 169,910 |
|
Reserve for unfunded lending commitments | 2,587 |
| | 8,873 |
| | 6,174 |
|
Allowance for credit losses | $ | 166,209 |
| | $ | 169,410 |
| | $ | 176,084 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Allowance for loan losses | $ | 169,910 |
| | $ | 168,679 |
| | $ | 169,054 |
|
Reserve for unfunded lending commitments | 6,174 |
| | 2,646 |
| | 2,358 |
|
Allowance for credit losses | $ | 176,084 |
| | $ | 171,325 |
| | $ | 171,412 |
|
The following table presents the activity in the allowance for credit losses for the years ended December 31:
| | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| (in thousands) | (in thousands) |
Balance at beginning of year | $ | 171,325 |
| | $ | 171,412 |
| | $ | 185,931 |
| $ | 169,410 |
| | $ | 176,084 |
| | $ | 171,325 |
|
Loans charged off | (33,290 | ) | | (33,927 | ) | | (32,157 | ) | |
Recoveries of loans previously charged off | 14,744 |
| | 20,658 |
| | 15,388 |
| |
Net loans charged off | (18,546 | ) | | (13,269 | ) | | (16,769 | ) | |
Loans and leases charged off | | (53,189 | ) | | (66,076 | ) | | (33,290 | ) |
Recoveries of loans and leases previously charged off | | 17,163 |
| | 12,495 |
| | 14,744 |
|
Net loans and leases charged off | | (36,026 | ) | | (53,581 | ) | | (18,546 | ) |
Provision for credit losses | 23,305 |
| | 13,182 |
| | 2,250 |
| 32,825 |
| | 46,907 |
| | 23,305 |
|
Balance at end of year | $ | 176,084 |
| | $ | 171,325 |
| | $ | 171,412 |
| $ | 166,209 |
| | $ | 169,410 |
| | $ | 176,084 |
|
The following table presentstables present the activity in the allowance for loan and lease losses by portfolio segment for the years ended December 31 and loans and leases, net of unearned income, and their related allowance for loan and lease losses, by portfolio segment, as of December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate - Commercial Mortgage | | Commercial - Industrial, Financial and Agricultural | | Real Estate - Home Equity | | Real Estate - Residential Mortgage | | Real Estate - Construction | | Consumer | | Equipment lease financing and other | | Total |
| (in thousands) |
Balance at December 31, 2017 | $ | 58,793 |
| | $ | 66,280 |
| | $ | 18,127 |
| | $ | 16,088 |
| | $ | 6,620 |
| | $ | 2,045 |
| | $ | 1,957 |
| | $ | 169,910 |
|
Loans and leases charged off | (2,045 | ) | | (52,441 | ) | | (3,087 | ) | | (1,574 | ) | | (1,368 | ) | | (3,040 | ) | | (2,521 | ) | | (66,076 | ) |
Recoveries of loans and leases previously charged off | 1,622 |
| | 4,994 |
| | 1,127 |
| | 620 |
| | 1,829 |
| | 1,266 |
| | 1,037 |
| | 12,495 |
|
Net loans and leases (charged off) recovered | (423 | ) | | (47,447 | ) | | (1,960 | ) | | (954 | ) | | 461 |
| | (1,774 | ) | | (1,484 | ) | | (53,581 | ) |
Provision for loan and lease losses (1) | (5,481 | ) | | 40,035 |
| | 2,744 |
| | 3,787 |
| | (2,020 | ) | | 2,946 |
| | 2,197 |
| | 44,208 |
|
Balance at December 31, 2018 | 52,889 |
| | 58,868 |
| | 18,911 |
| | 18,921 |
| | 5,061 |
| | 3,217 |
| | 2,670 |
| | 160,537 |
|
Loans and leases charged off | (1,837 | ) | | (42,410 | ) | | (1,291 | ) | | (1,545 | ) | | (143 | ) | | (3,403 | ) | | (2,560 | ) | | (53,189 | ) |
Recoveries of loans and leases previously charged off | 2,202 |
| | 8,721 |
| | 688 |
| | 989 |
| | 2,591 |
| | 1,306 |
| | 666 |
| | 17,163 |
|
Net loans and leases (charged off) recovered | 365 |
| | (33,689 | ) | | (603 | ) | | (556 | ) | | 2,448 |
| | (2,097 | ) | | (1,894 | ) | | (36,026 | ) |
Provision for loan and lease losses (1) | (7,644 | ) | | 43,423 |
| | (564 | ) | | 1,406 |
| | (3,066 | ) | | 2,642 |
| | 2,914 |
| | 39,111 |
|
Balance at December 31, 2019 | $ | 45,610 |
| | $ | 68,602 |
| | $ | 17,744 |
| | $ | 19,771 |
| | $ | 4,443 |
| | $ | 3,762 |
| | $ | 3,690 |
| | $ | 163,622 |
|
| | | | | | | | | | | | | | | |
Allowance for loan and lease losses at December 31, 2019 | | | | | | | | | | | | |
Collectively evaluated for impairment | $ | 39,683 |
| | $ | 58,487 |
| | $ | 7,938 |
| | $ | 10,562 |
| | $ | 4,066 |
| | $ | 3,756 |
| | $ | 3,690 |
| | $ | 128,182 |
|
Individually evaluated for impairment | 5,927 |
| | 10,115 |
| | 9,806 |
| | 9,209 |
| | 377 |
| | 6 |
| | — |
| | 35,440 |
|
| $ | 45,610 |
| | $ | 68,602 |
| | $ | 17,744 |
| | $ | 19,771 |
| | $ | 4,443 |
| | $ | 3,762 |
| | $ | 3,690 |
| | $ | 163,622 |
|
Loans and leases, net of unearned income | | | | | | | | | | | | |
Collectively evaluated for impairment | $ | 6,654,280 |
| | $ | 4,393,402 |
| | $ | 1,292,872 |
| | $ | 2,603,239 |
| | $ | 967,461 |
| | $ | 463,156 |
| | $ | 282,869 |
| | $ | 16,657,279 |
|
Individually evaluated for impairment | 46,496 |
| | 53,299 |
| | 22,072 |
| | 38,226 |
| | 3,618 |
| | 8 |
| | 16,528 |
| | 180,247 |
|
| $ | 6,700,776 |
| | $ | 4,446,701 |
| | $ | 1,314,944 |
| | $ | 2,641,465 |
| | $ | 971,079 |
| | $ | 463,164 |
| | $ | 299,397 |
| | $ | 16,837,526 |
|
Allowance for loan and lease losses at December 31, 2018 | | | | | | | | | | | | |
Collectively evaluated for impairment | $ | 45,634 |
| | $ | 46,355 |
| | $ | 8,541 |
| | $ | 9,527 |
| | $ | 4,268 |
| | $ | 3,210 |
| | $ | 2,670 |
| | $ | 120,205 |
|
Individually evaluated for impairment | 7,255 |
| | 12,513 |
| | 10,370 |
| | 9,394 |
| | 793 |
| | 7 |
| | — |
| | 40,332 |
|
| $ | 52,889 |
| | $ | 58,868 |
| | $ | 18,911 |
| | $ | 18,921 |
| | $ | 5,061 |
| | $ | 3,217 |
| | $ | 2,670 |
| | $ | 160,537 |
|
Loans and leases, net of unearned income | | | | | | | | | | | | |
Collectively evaluated for impairment | $ | 6,388,212 |
| | $ | 4,349,255 |
| | $ | 1,428,764 |
| | $ | 2,212,274 |
| | $ | 909,209 |
| | $ | 419,175 |
| | $ | 268,733 |
| | $ | 15,975,622 |
|
Individually evaluated for impairment | 46,073 |
| | 55,293 |
| | 23,373 |
| | 38,770 |
| | 7,390 |
| | 11 |
| | 19,268 |
| | 190,178 |
|
| $ | 6,434,285 |
| | $ | 4,404,548 |
| | $ | 1,452,137 |
| | $ | 2,251,044 |
| | $ | 916,599 |
| | $ | 419,186 |
| | $ | 288,001 |
| | $ | 16,165,800 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate - Commercial Mortgage | | Commercial - Industrial, Financial and Agricultural | | Real Estate - Home Equity | | Real Estate - Residential Mortgage | | Real Estate - Construction | | Consumer | | Leasing and other and Overdrafts | | Unallocated | | Total |
| (in thousands) |
Balance at December 31, 2015 | $ | 47,866 |
| | $ | 57,098 |
| | $ | 22,405 |
| | $ | 21,375 |
| | $ | 6,529 |
| | $ | 2,585 |
| | $ | 2,468 |
| | $ | 8,728 |
| | $ | 169,054 |
|
Loans charged off | (3,580 | ) | | (15,276 | ) | | (4,912 | ) | | (2,326 | ) | | (1,218 | ) | | (2,800 | ) | | (3,815 | ) | | — |
| | (33,927 | ) |
Recoveries of loans previously charged off | 3,373 |
| | 8,981 |
| | 1,171 |
| | 1,072 |
| | 3,924 |
| | 1,295 |
| | 842 |
| | — |
| | 20,658 |
|
Net loans charged off | (207 | ) | | (6,295 | ) | | (3,741 | ) | | (1,254 | ) | | 2,706 |
| | (1,505 | ) | | (2,973 | ) | | — |
| | (13,269 | ) |
Provision for loan losses (1) | (817 | ) | | 3,550 |
| | 8,137 |
| | 2,808 |
| | (2,780 | ) | | 2,494 |
| | 3,697 |
| | (4,195 | ) | | 12,894 |
|
Balance at December 31, 2016 | 46,842 |
| | 54,353 |
| | 26,801 |
| | 22,929 |
| | 6,455 |
| | 3,574 |
| | 3,192 |
| | 4,533 |
| | 168,679 |
|
Loans charged off | (2,169 | ) | | (19,067 | ) | | (2,340 | ) | | (687 | ) | | (3,765 | ) | | (2,227 | ) | | (3,035 | ) | | — |
| | (33,290 | ) |
Recoveries of loans previously charged off | 1,668 |
| | 7,771 |
| | 813 |
| | 786 |
| | 1,582 |
| | 1,156 |
| | 968 |
| | — |
| | 14,744 |
|
Net loans charged off | (501 | ) | | (11,296 | ) | | (1,527 | ) | | 99 |
| | (2,183 | ) | | (1,071 | ) | | (2,067 | ) | | — |
| | (18,546 | ) |
Provision for loan losses (1) | 12,452 |
| | 23,223 |
| | (7,147 | ) | | (6,940 | ) | | 2,348 |
| | (458 | ) | | 832 |
| | (4,533 | ) | | 19,777 |
|
Balance at December 31, 2017 | $ | 58,793 |
| | $ | 66,280 |
| | $ | 18,127 |
| | $ | 16,088 |
| | $ | 6,620 |
| | $ | 2,045 |
| | $ | 1,957 |
| | $ | — |
| | $ | 169,910 |
|
| | | | | | | | | | | | | | | | | |
Allowance for loan losses at December 31, 2017 | | | | | | | | | | | | | | |
Evaluated for impairment under FASB ASC Subtopic 450-20 | $ | 50,681 |
| | $ | 54,874 |
| | $ | 7,003 |
| | $ | 6,193 |
| | $ | 5,653 |
| | $ | 2,028 |
| | $ | 1,957 |
| | $ | — |
| | $ | 128,389 |
|
Evaluated for impairment under FASB ASC Section 310-10-35 | 8,112 |
| | 11,406 |
| | 11,124 |
| | 9,895 |
| | 967 |
| | 17 |
| | — |
| | N/A |
| | 41,521 |
|
| $ | 58,793 |
| | $ | 66,280 |
| | $ | 18,127 |
| | $ | 16,088 |
| | $ | 6,620 |
| | $ | 2,045 |
| | $ | 1,957 |
| | $ | — |
| | $ | 169,910 |
|
Loans, net of unearned income at December 31, 2017 | | | | | | | | | | | | | | |
Evaluated for impairment under FASB ASC Subtopic 450-20 | $ | 6,316,023 |
| | $ | 4,236,572 |
| | $ | 1,535,026 |
| | $ | 1,913,004 |
| | $ | 994,738 |
| | $ | 313,757 |
| | $ | 267,998 |
| | N/A |
| | $ | 15,577,118 |
|
Evaluated for impairment under FASB ASC Section 310-10-35 | 48,781 |
| | 63,725 |
| | 24,693 |
| | 41,707 |
| | 12,197 |
| | 26 |
| | — |
| | N/A |
| | 191,129 |
|
| $ | 6,364,804 |
| | $ | 4,300,297 |
| | $ | 1,559,719 |
| | $ | 1,954,711 |
| | $ | 1,006,935 |
| | $ | 313,783 |
| | $ | 267,998 |
| | N/A |
| | $ | 15,768,247 |
|
Allowance for loan losses at December 31, 2016 | | | | | | | | | | | | | | |
Evaluated for impairment under FASB ASC Subtopic 450-20 | $ | 36,680 |
| | $ | 40,700 |
| | $ | 17,290 |
| | $ | 11,032 |
| | $ | 4,587 |
| | $ | 3,548 |
| | $ | 3,192 |
| | $ | 4,533 |
| | $ | 121,562 |
|
Evaluated for impairment under FASB ASC Section 310-10-35 | 10,162 |
| | 13,653 |
| | 9,511 |
| | 11,897 |
| | 1,868 |
| | 26 |
| | — |
| | N/A |
| | 47,117 |
|
| $ | 46,842 |
| | $ | 54,353 |
| | $ | 26,801 |
| | $ | 22,929 |
| | $ | 6,455 |
| | $ | 3,574 |
| | $ | 3,192 |
| | $ | 4,533 |
| | $ | 168,679 |
|
Loans, net of unearned income at December 31, 2016 | | | | | | | | | | | | | | |
Evaluated for impairment under FASB ASC Subtopic 450-20 | $ | 5,963,689 |
| | $ | 4,038,511 |
| | $ | 1,605,910 |
| | $ | 1,555,946 |
| | $ | 833,117 |
| | $ | 291,430 |
| | $ | 230,976 |
| | N/A |
| | $ | 14,519,579 |
|
Evaluated for impairment under FASB ASC Section 310-10-35 | 54,893 |
| | 48,975 |
| | 19,205 |
| | 46,048 |
| | 10,532 |
| | 40 |
| | — |
| | N/A |
| | 179,693 |
|
| $ | 6,018,582 |
| | $ | 4,087,486 |
| | $ | 1,625,115 |
| | $ | 1,601,994 |
| | $ | 843,649 |
| | $ | 291,470 |
| | $ | 230,976 |
| | N/A |
| | $ | 14,699,272 |
|
| |
(1) | For the year ended December 31, 2017,2019, the provision for loan and lease losses excluded a $3.5$6.3 million increasedecrease in the reserve for unfunded lending commitments. The total provision for credit losses, comprised of allocations for both funded and unfunded loans, was $23.3$32.8 million for the year ended December 31, 2017.2019. For the year ended December 31, 2016,2018, the provision for loan losses excluded a $288,000$2.7 million increase in the reserve for unfunded lending commitments.The total provision for credit losses was $13.2$46.9 million for the year ended December 31, 2016. 2018. |
N/A – Not applicable.
Impaired Loans
The following table presents total impaired loans and leases by class segment as of December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| Unpaid Principal Balance | | Recorded Investment | | Related Allowance | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| (in thousands) |
With no related allowance recorded: | | | | | | | | | | | |
Real estate - commercial mortgage | $ | 26,728 |
| | $ | 22,886 |
| | $ | — |
| | $ | 28,757 |
| | $ | 25,447 |
| | $ | — |
|
Commercial - secured | 44,936 |
| | 39,550 |
| | — |
| | 29,296 |
| | 25,526 |
| | — |
|
Real estate - residential mortgage | 4,575 |
| | 4,575 |
| | — |
| | 4,689 |
| | 4,689 |
| | — |
|
Construction - commercial residential | 12,477 |
| | 8,100 |
| | — |
| | 6,271 |
| | 4,795 |
| | — |
|
| 88,716 |
| | 75,111 |
| | | | 69,013 |
| | 60,457 |
| | |
With a related allowance recorded: | | | | | | | | | | | |
Real estate - commercial mortgage | 33,710 |
| | 25,895 |
| | 8,112 |
| | 37,132 |
| | 29,446 |
| | 10,162 |
|
Commercial - secured | 28,819 |
| | 23,442 |
| | 11,013 |
| | 27,767 |
| | 22,626 |
| | 13,198 |
|
Commercial - unsecured | 997 |
| | 733 |
| | 393 |
| | 1,122 |
| | 823 |
| | 455 |
|
Real estate - home equity | 28,282 |
| | 24,693 |
| | 11,124 |
| | 23,971 |
| | 19,205 |
| | 9,511 |
|
Real estate - residential mortgage | 42,597 |
| | 37,132 |
| | 9,895 |
| | 48,885 |
| | 41,359 |
| | 11,897 |
|
Construction - commercial residential | 6,846 |
| | 3,667 |
| | 813 |
| | 10,103 |
| | 4,206 |
| | 1,300 |
|
Construction - commercial | 45 |
| | 19 |
| | 7 |
| | 681 |
| | 435 |
| | 145 |
|
Construction - other | 417 |
| | 411 |
| | 147 |
| | 1,096 |
| | 1,096 |
| | 423 |
|
Consumer - indirect | 11 |
| | 11 |
| | 7 |
| | 19 |
| | 19 |
| | 12 |
|
Consumer - direct | 15 |
| | 15 |
| | 10 |
| | 21 |
| | 21 |
| | 14 |
|
| 141,739 |
| | 116,018 |
| | 41,521 |
| | 150,797 |
| | 119,236 |
| | 47,117 |
|
Total | $ | 230,455 |
| | $ | 191,129 |
| | $ | 41,521 |
| | $ | 219,810 |
| | $ | 179,693 |
| | $ | 47,117 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
| Unpaid Principal Balance | | Recorded Investment | | Related Allowance | | Unpaid Principal Balance | | Recorded Investment | | Related Allowance |
| (in thousands) |
With no related allowance recorded: | | | | | | | | | | | |
Real estate - commercial mortgage | $ | 25,005 |
| | $ | 22,702 |
| | $ | — |
| | $ | 25,095 |
| | $ | 23,481 |
| | $ | — |
|
Commercial | 53,533 |
| | 30,208 |
| | — |
| | 33,493 |
| | 26,585 |
| | — |
|
Real estate - residential mortgage | 4,494 |
| | 4,332 |
| | — |
| | 3,149 |
| | 3,149 |
| | — |
|
Real estate - construction | 6,338 |
| | 2,487 |
| | — |
| | 8,980 |
| | 5,083 |
| | — |
|
Equipment lease financing | 19,269 |
| | 16,528 |
| | — |
| | 19,269 |
| | 19,268 |
| | — |
|
| 108,639 |
| | 76,257 |
| | | | 89,986 |
| | 77,566 |
| | |
With a related allowance recorded: | | | | | | | | | | | |
Real estate - commercial mortgage | 29,581 |
| | 23,794 |
| | 5,927 |
| | 29,005 |
| | 22,592 |
| | 7,255 |
|
Commercial | 37,992 |
| | 23,091 |
| | 10,115 |
| | 37,706 |
| | 28,708 |
| | 12,513 |
|
Real estate - home equity | 25,039 |
| | 22,072 |
| | 9,806 |
| | 26,599 |
| | 23,373 |
| | 10,370 |
|
Real estate - residential mortgage | 38,483 |
| | 33,894 |
| | 9,209 |
| | 39,972 |
| | 35,621 |
| | 9,394 |
|
Real estate - construction | 3,875 |
| | 1,131 |
| | 377 |
| | 5,984 |
| | 2,307 |
| | 793 |
|
Consumer | 8 |
| | 8 |
| | 6 |
| | 11 |
| | 11 |
| | 7 |
|
| 134,978 |
| | 103,990 |
| | 35,440 |
| | 139,277 |
| | 112,612 |
| | 40,332 |
|
Total | $ | 243,617 |
| | $ | 180,247 |
| | $ | 35,440 |
| | $ | 229,263 |
| | $ | 190,178 |
| | $ | 40,332 |
|
As of December 31, 20172019 and 2016,2018, there were $75.1$76.3 million and $60.5$77.6 million, respectively, of impaired loans and leases that did not have a related allowance for loan loss. The estimated fair values of the collateral securing these loans and leases exceeded their carrying amount, or the loans and leases have been charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.
The following table presents average impaired loans and leases, by class segment, for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Average Recorded Investment | | Interest Income Recognized (1) | | Average Recorded Investment | | Interest Income Recognized (1) | | Average Recorded Investment | | Interest Income Recognized (1) |
| (in thousands) |
With no related allowance recorded: | | | | | | | | | | | |
Real estate - commercial mortgage | $ | 26,163 |
| | $ | 368 |
| | $ | 25,258 |
| | $ | 368 |
| | $ | 22,793 |
| | $ | 281 |
|
Commercial | 25,777 |
| | 122 |
| | 33,395 |
| | 259 |
| | 31,357 |
| | 182 |
|
Real estate - residential mortgage | 3,875 |
| | 94 |
| | 3,727 |
| | 91 |
| | 4,631 |
| | 107 |
|
Real estate - construction | 3,559 |
| | — |
| | 6,943 |
| | — |
| | 7,255 |
| | 12 |
|
Equipment lease financing | 17,814 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 77,188 |
| | 584 |
| | 69,323 |
| | 718 |
| | 66,036 |
| | 582 |
|
With a related allowance recorded: | | | | | | | | | | | |
Real estate - commercial mortgage | 25,428 |
| | 351 |
| | 24,300 |
| | 345 |
| | 27,193 |
| | 338 |
|
Commercial | 25,717 |
| | 126 |
| | 24,888 |
| | 185 |
| | 24,112 |
| | 137 |
|
Real estate - home equity | 23,004 |
| | 845 |
| | 24,426 |
| | 794 |
| | 21,704 |
| | 534 |
|
Real estate - residential mortgage | 34,407 |
| | 829 |
| | 36,387 |
| | 896 |
| | 39,093 |
| | 903 |
|
Real estate - construction | 1,573 |
| | — |
| | 2,683 |
| | — |
| | 6,160 |
| | 11 |
|
Consumer | 9 |
| | — |
| | 16 |
| | 1 |
| | 33 |
| | 2 |
|
Equipment lease financing | 83 |
| | — |
| | 3,854 |
| | — |
| | 285 |
| | — |
|
| 110,221 |
| | 2,151 |
| | 116,554 |
| | 2,221 |
| | 118,580 |
| | 1,925 |
|
Total | $ | 187,409 |
| | $ | 2,735 |
| | $ | 185,877 |
| | $ | 2,939 |
| | $ | 184,616 |
| | $ | 2,507 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Average Recorded Investment | | Interest Income Recognized (1) | | Average Recorded Investment | | Interest Income Recognized (1) | | Average Recorded Investment | | Interest Income Recognized (1) |
| (in thousands) |
With no related allowance recorded: | | | | | | | | | | | |
Real estate - commercial mortgage | $ | 22,793 |
| | $ | 281 |
| | $ | 24,232 |
| | $ | 294 |
| | $ | 25,345 |
| | $ | 315 |
|
Commercial - secured | 31,357 |
| | 182 |
| | 19,825 |
| | 104 |
| | 15,654 |
| | 97 |
|
Commercial - unsecured | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
Real estate - residential mortgage | 4,631 |
| | 107 |
| | 5,598 |
| | 126 |
| | 5,389 |
| | 124 |
|
Construction - commercial residential | 7,016 |
| | 12 |
| | 6,285 |
| | 48 |
| | 11,685 |
| | 148 |
|
Construction - commercial | 239 |
| | — |
| | — |
| | — |
| | 915 |
| | — |
|
| 66,036 |
| | 582 |
| | 55,940 |
| | 572 |
| | 59,005 |
| | 684 |
|
With a related allowance recorded: | | | | | | | | | | | |
Real estate - commercial mortgage | 27,193 |
| | 338 |
| | 31,737 |
| | 384 |
| | 39,232 |
| | 475 |
|
Commercial - secured | 23,321 |
| | 135 |
| | 25,857 |
| | 130 |
| | 25,660 |
| | 150 |
|
Commercial - unsecured | 791 |
| | 2 |
| | 887 |
| | 4 |
| | 1,749 |
| | 6 |
|
Real estate - home equity | 21,704 |
| | 534 |
| | 17,912 |
| | 285 |
| | 13,887 |
| | 144 |
|
Real estate - residential mortgage | 39,093 |
| | 903 |
| | 42,191 |
| | 908 |
| | 46,252 |
| | 1,041 |
|
Construction - commercial residential | 5,051 |
| | 11 |
| | 5,295 |
| | 41 |
| | 6,455 |
| | 79 |
|
Construction - commercial | 152 |
| | — |
| | 524 |
| | — |
| | 931 |
| | — |
|
Construction - other | 957 |
| | — |
| | 682 |
| | — |
| | 263 |
| | — |
|
Consumer - indirect | 15 |
| | 1 |
| | 15 |
| | 1 |
| | 16 |
| | 1 |
|
Consumer - direct | 18 |
| | 1 |
| | 18 |
| | 1 |
| | 17 |
| | 1 |
|
Leasing, other and overdrafts | 285 |
| | — |
| | 854 |
| | — |
| | 285 |
| | — |
|
| 118,580 |
| | 1,925 |
| | 125,972 |
| | 1,754 |
| | 134,747 |
| | 1,897 |
|
Total | $ | 184,616 |
| | $ | 2,507 |
| | $ | 181,912 |
| | $ | 2,326 |
| | $ | 193,752 |
| | $ | 2,581 |
|
| |
(1) | All impaired loans and leases, excluding accruing TDRs, were non-accrual loans and leases. Interest income recognized for the years ended December 31, 2017, 20162019, 2018 and 20152017 represents amounts earned on accruing TDRs. Impaired loans consist of loans on non-accrual status and accruing TDRs. |
Credit Quality Indicators and Non-performing Assets
The following table presents internal credit risk ratings for the indicated loan class segments as of December 31:
| |
| Pass | | Special Mention | | Substandard or Lower | | Total | Pass | | Special Mention | | Substandard or Lower | | Total |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| (dollars in thousands) | (dollars in thousands) |
Real estate - commercial mortgage | $ | 6,066,396 |
| | $ | 5,763,122 |
| | $ | 147,604 |
| | $ | 132,484 |
| | $ | 150,804 |
| | $ | 122,976 |
| | $ | 6,364,804 |
| | $ | 6,018,582 |
| $ | 6,429,407 |
| | $ | 6,129,463 |
| | $ | 137,163 |
| | $ | 170,827 |
| | $ | 134,206 |
| | $ | 133,995 |
| | $ | 6,700,776 |
| | $ | 6,434,285 |
|
Commercial - secured | 3,831,485 |
| | 3,686,152 |
| | 121,842 |
| | 128,873 |
| | 179,113 |
| | 118,527 |
| | 4,132,440 |
| | 3,933,552 |
| 3,830,847 |
| | 3,902,484 |
| | 171,442 |
| | 193,470 |
| | 195,884 |
| | 129,026 |
| | 4,198,173 |
| | 4,224,980 |
|
Commercial -unsecured | 159,620 |
| | 145,922 |
| | 5,478 |
| | 4,481 |
| | 2,759 |
| | 3,531 |
| | 167,857 |
| | 153,934 |
| 234,987 |
| | 171,589 |
| | 9,665 |
| | 4,016 |
| | 3,876 |
| | 3,963 |
| | 248,528 |
| | 179,568 |
|
Total commercial - industrial, financial and agricultural | 3,991,105 |
| | 3,832,074 |
| | 127,320 |
| | 133,354 |
| | 181,872 |
| | 122,058 |
| | 4,300,297 |
| | 4,087,486 |
| 4,065,834 |
| | 4,074,073 |
| | 181,107 |
| | 197,486 |
| | 199,760 |
| | 132,989 |
| | 4,446,701 |
| | 4,404,548 |
|
Construction - commercial residential | 143,759 |
| | 113,570 |
| | 5,259 |
| | 15,447 |
| | 14,084 |
| | 13,172 |
| | 163,102 |
| | 142,189 |
| 100,808 |
| | 104,079 |
| | 2,897 |
| | 6,912 |
| | 3,461 |
| | 6,881 |
| | 107,166 |
| | 117,872 |
|
Construction - commercial | 761,218 |
| | 635,963 |
| | 846 |
| | 3,412 |
| | 3,752 |
| | 5,115 |
| | 765,816 |
| | 644,490 |
| 765,562 |
| | 723,030 |
| | 1,322 |
| | 1,163 |
| | 2,676 |
| | 2,533 |
| | 769,560 |
| | 726,726 |
|
Total real estate - construction (excluding construction - other) | 904,977 |
| | 749,533 |
| | 6,105 |
| | 18,859 |
| | 17,836 |
| | 18,287 |
| | 928,918 |
| | 786,679 |
| |
Total construction (excluding construction - other) | | 866,370 |
| | 827,109 |
| | 4,219 |
| | 8,075 |
| | 6,137 |
| | 9,414 |
| | 876,726 |
| | 844,598 |
|
Total | $ | 10,962,478 |
| | $ | 10,344,729 |
| | $ | 281,029 |
| | $ | 284,697 |
| | $ | 350,512 |
| | $ | 263,321 |
| | $ | 11,594,019 |
| | $ | 10,892,747 |
| $ | 11,361,611 |
| | $ | 11,030,645 |
| | $ | 322,489 |
| | $ | 376,388 |
| | $ | 340,103 |
| | $ | 276,398 |
| | $ | 12,024,203 |
| | $ | 11,683,431 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
% of Total | 94.6 | % | | 95.0 | % | | 2.4 | % | | 2.6 | % | | 3.0 | % | | 2.4 | % | | 100.0 | % | | 100.0 | % | 94.5 | % | | 94.4 | % | | 2.7 | % | | 3.2 | % | | 2.8 | % | | 2.4 | % | | 100.0 | % | | 100.0 | % |
The following table presents delinquency and non-performing status for loans and leases that dodid not have internal credit risk ratings, by class segment, as of December 31:
| | | Performing | | Delinquent (1) | | Non-performing (2) | | Total | Performing | | Delinquent (1) | | Non-performing (2) | | Total |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| (dollars in thousands) | (dollars in thousands) |
Real estate - home equity | $ | 1,535,557 |
| | $ | 1,602,687 |
| | $ | 12,655 |
| | $ | 9,274 |
| | $ | 11,507 |
| | $ | 13,154 |
| | $ | 1,559,719 |
| | $ | 1,625,115 |
| $ | 1,292,035 |
| | $ | 1,431,666 |
| | $ | 12,341 |
| | $ | 10,702 |
| | $ | 10,568 |
| | $ | 9,769 |
| | $ | 1,314,944 |
| | $ | 1,452,137 |
|
Real estate - residential mortgage | 1,914,888 |
| | 1,557,995 |
| | 18,852 |
| | 20,344 |
| | 20,971 |
| | 23,655 |
| | 1,954,711 |
| | 1,601,994 |
| 2,584,763 |
| | 2,202,955 |
| | 34,291 |
| | 28,988 |
| | 22,411 |
| | 19,101 |
| | 2,641,465 |
| | 2,251,044 |
|
Real estate - construction - other | 77,403 |
| | 55,874 |
| | 203 |
| | — |
| | 411 |
| | 1,096 |
| | 78,017 |
| | 56,970 |
| 92,649 |
| | 71,511 |
| | 895 |
| | — |
| | 809 |
| | 490 |
| | 94,353 |
| | 72,001 |
|
Consumer - direct | 54,828 |
| | 93,572 |
| | 315 |
| | 1,752 |
| | 70 |
| | 1,563 |
| | 55,213 |
| | 96,887 |
| 63,582 |
| | 55,629 |
| | 465 |
| | 338 |
| | 190 |
| | 66 |
| | 64,237 |
| | 56,033 |
|
Consumer - indirect | 254,663 |
| | 190,656 |
| | 3,681 |
| | 3,599 |
| | 226 |
| | 328 |
| | 258,570 |
| | 194,583 |
| 393,974 |
| | 359,405 |
| | 4,685 |
| | 3,405 |
| | 268 |
| | 343 |
| | 398,927 |
| | 363,153 |
|
Total consumer | 309,491 |
| | 284,228 |
| | 3,996 |
| | 5,351 |
| | 296 |
| | 1,891 |
| | 313,783 |
| | 291,470 |
| 457,556 |
| | 415,034 |
| | 5,150 |
| | 3,743 |
| | 458 |
| | 409 |
| | 463,164 |
| | 419,186 |
|
Leasing, other and overdrafts | 267,111 |
| | 229,591 |
| | 855 |
| | 1,068 |
| | 32 |
| | 317 |
| | 267,998 |
| | 230,976 |
| |
Equipment lease financing | | 278,743 |
| | 267,112 |
| | 4,012 |
| | 1,302 |
| | 16,642 |
| | 19,587 |
| | 299,397 |
| | 288,001 |
|
Total | $ | 4,104,450 |
| | $ | 3,730,375 |
| | $ | 36,561 |
| | $ | 36,037 |
| | $ | 33,217 |
| | $ | 40,113 |
| | $ | 4,174,228 |
| | $ | 3,806,525 |
| $ | 4,705,746 |
| | $ | 4,388,278 |
| | $ | 56,689 |
| | $ | 44,735 |
| | $ | 50,888 |
| | $ | 49,356 |
| | $ | 4,813,323 |
| | $ | 4,482,369 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
% of Total | 98.3 | % | | 98.0 | % | | 0.9 | % | | 0.9 | % | | 0.8 | % | | 1.1 | % | | 100.0 | % | | 100.0 | % | 97.8 | % | | 97.9 | % | | 1.2 | % | | 1.0 | % | | 1.0 | % | | 1.1 | % | | 100.0 | % | | 100.0 | % |
(1)Includes all accruing loans and leases 30 days to 89 days past due.
(2)Includes all accruing loans and leases 90 days or more past due and all non-accrual loans.
The following table presents total non-performing assets as of December 31:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Non-accrual loans and leases | $ | 125,098 |
| | $ | 128,572 |
|
Loans and leases 90 days or more past due and still accruing | 16,057 |
| | 11,106 |
|
Total non-performing loans and leases | 141,155 |
| | 139,678 |
|
OREO | 6,831 |
| | 10,518 |
|
Total non-performing assets | $ | 147,986 |
| | $ | 150,196 |
|
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Non-accrual loans | $ | 124,749 |
| | $ | 120,133 |
|
Loans 90 days or more past due and still accruing | 10,010 |
| | 11,505 |
|
Total non-performing loans | 134,759 |
| | 131,638 |
|
Other real estate owned | 9,823 |
| | 12,815 |
|
Total non-performing assets | $ | 144,582 |
| | $ | 144,453 |
|
The following table presents past due status and non-accrual loans and leases, by portfolio segment and class segment, as of December 31:
| | | 2017 | 2019 |
| 30-59 Days Past Due | | 60-89 Days Past Due | | ≥ 90 Days Past Due and Accruing | | Non- accrual | | Total ≥ 90 Days | | Total Past Due | | Current | | Total | 30-59 Days Past Due | | 60-89 Days Past Due | | ≥ 90 Days Past Due and Accruing | | Non- accrual | | Current | | Total |
| (in thousands) | (in thousands) |
Real estate - commercial mortgage | $ | 9,456 |
| | $ | 4,223 |
| | $ | 625 |
| | $ | 34,822 |
| | $ | 35,447 |
| | $ | 49,126 |
| | $ | 6,315,678 |
| | $ | 6,364,804 |
| $ | 10,912 |
| | $ | 1,543 |
| | $ | 4,113 |
| | $ | 33,166 |
| | $ | 6,651,042 |
| | $ | 6,700,776 |
|
Commercial - secured | 4,778 |
| | 5,254 |
| | 1,360 |
| | 52,255 |
| | 53,615 |
| | 63,647 |
| | 4,068,793 |
| | 4,132,440 |
| 2,062 |
| | 2,296 |
| | 986 |
| | 47,506 |
| | 4,145,323 |
| | 4,198,173 |
|
Commercial - unsecured | 305 |
| | 10 |
| | 45 |
| | 649 |
| | 694 |
| | 1,009 |
| | 166,848 |
| | 167,857 |
| 240 |
| | 334 |
| | 399 |
| | 600 |
| | 246,955 |
| | 248,528 |
|
Total Commercial - industrial, financial and agricultural | 5,083 |
| | 5,264 |
| | 1,405 |
| | 52,904 |
| | 54,309 |
| | 64,656 |
| | 4,235,641 |
| | 4,300,297 |
| 2,302 |
| | 2,630 |
| | 1,385 |
| | 48,106 |
| | 4,392,278 |
| | 4,446,701 |
|
Real estate - home equity | 9,640 |
| | 3,015 |
| | 2,372 |
| | 9,135 |
| | 11,507 |
| | 24,162 |
| | 1,535,557 |
| | 1,559,719 |
| 9,635 |
| | 2,706 |
| | 3,564 |
| | 7,004 |
| | 1,292,035 |
| | 1,314,944 |
|
Real estate - residential mortgage | 11,961 |
| | 6,891 |
| | 5,280 |
| | 15,691 |
| | 20,971 |
| | 39,823 |
| | 1,914,888 |
| | 1,954,711 |
| 26,982 |
| | 7,309 |
| | 5,735 |
| | 16,676 |
| | 2,584,763 |
| | 2,641,465 |
|
Construction - commercial | 483 |
| | — |
| | — |
| | 19 |
| | 19 |
| | 502 |
| | 765,314 |
| | 765,816 |
| — |
| | 900 |
| | — |
| | 19 |
| | 768,641 |
| | 769,560 |
|
Construction - commercial residential | — |
| | 439 |
| | — |
| | 11,767 |
| | 11,767 |
| | 12,206 |
| | 150,896 |
| | 163,102 |
| 820 |
| | — |
| | 64 |
| | 3,414 |
| | 102,868 |
| | 107,166 |
|
Construction - other | 203 |
| | — |
| | — |
| | 411 |
| | 411 |
| | 614 |
| | 77,403 |
| | 78,017 |
| 895 |
| | — |
| | 624 |
| | 185 |
| | 92,649 |
| | 94,353 |
|
Total Real estate - construction | 686 |
| | 439 |
| | — |
| | 12,197 |
| | 12,197 |
| | 13,322 |
| | 993,613 |
| | 1,006,935 |
| 1,715 |
| | 900 |
| | 688 |
| | 3,618 |
| | 964,158 |
| | 971,079 |
|
Consumer - direct | 260 |
| | 55 |
| | 70 |
| | — |
| | 70 |
| | 385 |
| | 54,828 |
| | 55,213 |
| 278 |
| | 187 |
| | 190 |
| | — |
| | 63,582 |
| | 64,237 |
|
Consumer - indirect | 3,055 |
| | 626 |
| | 226 |
| | — |
| | 226 |
| | 3,907 |
| | 254,663 |
| | 258,570 |
| 3,950 |
| | 735 |
| | 268 |
| | — |
| | 393,974 |
| | 398,927 |
|
Total Consumer | 3,315 |
| | 681 |
| | 296 |
| | — |
| | 296 |
| | 4,292 |
| | 309,491 |
| | 313,783 |
| 4,228 |
| | 922 |
| | 458 |
| | — |
| | 457,556 |
| | 463,164 |
|
Leasing, other and overdrafts | 568 |
| | 287 |
| | 32 |
| | — |
| | 32 |
| | 887 |
| | 267,111 |
| | 267,998 |
| |
| $ | 40,709 |
| | $ | 20,800 |
| | $ | 10,010 |
| | $ | 124,749 |
| | $ | 134,759 |
| | $ | 196,268 |
| | $ | 15,571,979 |
| | $ | 15,768,247 |
| |
Equipment lease financing | | 552 |
| | 3,460 |
| | 114 |
| | 16,528 |
| | 278,743 |
| | 299,397 |
|
Total | | $ | 56,326 |
| | $ | 19,470 |
| | $ | 16,057 |
| | $ | 125,098 |
| | $ | 16,620,575 |
| | $ | 16,837,526 |
|
| | | 2016 | 2018 |
| 30-59 Days Past Due | | 60-89 Days Past Due | | ≥ 90 Days Past Due and Accruing | | Non- accrual | | Total ≥ 90 Days | | Total Past Due | | Current | | Total | 30-59 Days Past Due | | 60-89 Days Past Due | | ≥ 90 Days Past Due and Accruing | | Non- accrual | | Current | | Total |
| (in thousands) | (in thousands) |
Real estate - commercial mortgage | $ | 6,254 |
| | $ | 1,622 |
| | $ | 383 |
| | $ | 38,936 |
| | $ | 39,319 |
| | $ | 47,195 |
| | $ | 5,971,387 |
| | $ | 6,018,582 |
| $ | 12,206 |
| | $ | 1,500 |
| | $ | 1,765 |
| | $ | 30,388 |
| | $ | 6,388,426 |
| | $ | 6,434,285 |
|
Commercial - secured | 6,660 |
| | 2,616 |
| | 959 |
| | 41,589 |
| | 42,548 |
| | 51,824 |
| | 3,881,728 |
| | 3,933,552 |
| 5,227 |
| | 938 |
| | 1,068 |
| | 49,299 |
| | 4,168,448 |
| | 4,224,980 |
|
Commercial - unsecured | 898 |
| | 35 |
| | 152 |
| | 760 |
| | 912 |
| | 1,845 |
| | 152,089 |
| | 153,934 |
| 1,598 |
| | — |
| | 51 |
| | 851 |
| | 177,068 |
| | 179,568 |
|
Total Commercial - industrial, financial and agricultural | 7,558 |
| | 2,651 |
| | 1,111 |
| | 42,349 |
| | 43,460 |
| | 53,669 |
| | 4,033,817 |
| | 4,087,486 |
| 6,825 |
| | 938 |
| | 1,119 |
| | 50,150 |
| | 4,345,516 |
| | 4,404,548 |
|
Real estate - home equity | 6,596 |
| | 2,678 |
| | 2,543 |
| | 10,611 |
| | 13,154 |
| | 22,428 |
| | 1,602,687 |
| | 1,625,115 |
| 7,144 |
| | 3,558 |
| | 3,061 |
| | 6,708 |
| | 1,431,666 |
| | 1,452,137 |
|
Real estate - residential mortgage | 15,600 |
| | 4,744 |
| | 5,224 |
| | 18,431 |
| | 23,655 |
| | 43,999 |
| | 1,557,995 |
| | 1,601,994 |
| 20,796 |
| | 8,192 |
| | 4,433 |
| | 14,668 |
| | 2,202,955 |
| | 2,251,044 |
|
Construction - commercial | 743 |
| | — |
| | — |
| | 435 |
| | 435 |
| | 1,178 |
| | 643,312 |
| | 644,490 |
| — |
| | — |
| | — |
| | 19 |
| | 726,707 |
| | 726,726 |
|
Construction - commercial residential | 233 |
| | 51 |
| | 36 |
| | 8,275 |
| | 8,311 |
| | 8,595 |
| | 133,594 |
| | 142,189 |
| 2,489 |
| | — |
| | — |
| | 6,881 |
| | 108,502 |
| | 117,872 |
|
Construction - other | — |
| | — |
| | — |
| | 1,096 |
| | 1,096 |
| | 1,096 |
| | 55,874 |
| | 56,970 |
| — |
| | — |
| | — |
| | 490 |
| | 71,511 |
| | 72,001 |
|
Total Real estate - construction | 976 |
| | 51 |
| | 36 |
| | 9,806 |
| | 9,842 |
| | 10,869 |
| | 832,780 |
| | 843,649 |
| 2,489 |
| | — |
| | — |
| | 7,390 |
| | 906,720 |
| | 916,599 |
|
Consumer - direct | 1,211 |
| | 541 |
| | 1,563 |
| | — |
| | 1,563 |
| | 3,315 |
| | 93,572 |
| | 96,887 |
| 267 |
| | 71 |
| | 66 |
| | — |
| | 55,629 |
| | 56,033 |
|
Consumer - indirect | 3,200 |
| | 399 |
| | 328 |
| | — |
| | 328 |
| | 3,927 |
| | 190,656 |
| | 194,583 |
| 2,908 |
| | 497 |
| | 343 |
| | — |
| | 359,405 |
| | 363,153 |
|
Total Consumer | 4,411 |
| | 940 |
| | 1,891 |
| | — |
| | 1,891 |
| | 7,242 |
| | 284,228 |
| | 291,470 |
| 3,175 |
| | 568 |
| | 409 |
| | — |
| | 415,034 |
| | 419,186 |
|
Leasing, other and overdrafts | 543 |
| | 525 |
| | 317 |
| | — |
| | 317 |
| | 1,385 |
| | 229,591 |
| | 230,976 |
| |
| $ | 41,938 |
| | $ | 13,211 |
| | $ | 11,505 |
| | $ | 120,133 |
| | $ | 131,638 |
| | $ | 186,787 |
| | $ | 14,512,485 |
| | $ | 14,699,272 |
| |
Equipment lease financing | | 1,005 |
| | 297 |
| | 319 |
| | 19,268 |
| | 267,112 |
| | 288,001 |
|
Total | | $ | 53,640 |
| | $ | 15,053 |
| | $ | 11,106 |
| | $ | 128,572 |
| | $ | 15,957,429 |
| | $ | 16,165,800 |
|
The following table presents TDRs as of December 31:
| | | 2017 | | 2016 | 2019 | | 2018 |
| (in thousands) | (in thousands) |
Real-estate - residential mortgage | $ | 26,016 |
| | $ | 27,617 |
| $ | 21,551 |
| | $ | 24,102 |
|
Real estate - home equity | 15,558 |
| | 8,594 |
| 15,068 |
| | 16,665 |
|
Real-estate - commercial mortgage | | 13,330 |
| | 15,685 |
|
Commercial | 10,820 |
| | 6,627 |
| 5,193 |
| | 5,143 |
|
Real-estate - commercial mortgage | 13,959 |
| | 15,957 |
| |
Consumer - direct | 26 |
| | 39 |
| |
Construction - commercial residential | — |
| | 726 |
| |
Consumer | | 8 |
| | 10 |
|
Total accruing TDRs | 66,379 |
| | 59,560 |
| 55,150 |
| | 61,605 |
|
Non-accrual TDRs (1) | 29,051 |
| | 27,850 |
| 20,825 |
| | 28,659 |
|
Total TDRs | $ | 95,430 |
| | $ | 87,410 |
| $ | 75,975 |
| | $ | 90,264 |
|
(1)Included within non-accrual loans in the preceding table.
As of December 31, 2017 and 2016, there were $8.6 million and $3.6 million, respectively, of commitments to lend additional funds to borrowers whose loans were modified under TDRs.
The following table presents TDRs by class segment and type of concession for loans that were modified during the years ended December 31, 2017, 2016 and 2015:31:
|
| | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Number of Loans | | Post-Modification Recorded Investment | | Number of Loans | | Post-Modification Recorded Investment | | Number of Loans | | Post-Modification Recorded Investment |
| (dollars in thousands) |
| Commercial | 16 |
| | $ | 5,378 |
| | 8 |
| | $ | 4,226 |
| | 24 |
| | $ | 15,548 |
|
| Real estate - commercial mortgage | 2 |
| | 263 |
| | 6 |
| | 8,261 |
| | 10 |
| | 2,911 |
|
| Real estate - home equity | 59 |
| | 2,706 |
| | 96 |
| | 5,087 |
| | 97 |
| | 7,656 |
|
| Real estate - residential mortgage | 6 |
| | 2,252 |
| | 7 |
| | 801 |
| | 10 |
| | 1,904 |
|
| Real estate - construction | — |
| | — |
| | — |
| | — |
| | 2 |
| | 1,615 |
|
Total | 83 |
| | $ | 10,599 |
| | 117 |
| | $ | 18,375 |
| | 143 |
| | $ | 29,634 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Number of Loans | | Post-Modification Recorded Investment | | Number of Loans | | Post-Modification Recorded Investment | | Number of Loans | | Post-Modification Recorded Investment |
| (dollars in thousands) |
Commercial: | | | | | | | | | | | |
| Extend maturity with rate concession | — |
| | $ | — |
| | — |
| | $ | — |
| | 2 |
| | $ | 127 |
|
| Extend maturity without rate concession | 23 |
| | 15,058 |
| | 12 |
| | 3,904 |
| | 10 |
| | 3,823 |
|
| Bankruptcy | 1 |
| | 490 |
| | — |
| | — |
| | — |
| | — |
|
Real estate - commercial mortgage: | | | | | | | | | | | |
| Extend maturity with rate concession | — |
| | — |
| | — |
| | — |
| | 5 |
| | 2,014 |
|
| Extend maturity without rate concession | 9 |
| | 2,899 |
| | — |
| | — |
| | 4 |
| | 639 |
|
| Bankruptcy | 1 |
| | 12 |
| | — |
| | — |
| | — |
| | — |
|
Real estate - home equity: | | | | | | | | | | | |
| Extend maturity with rate concession | — |
| | — |
| | — |
| | — |
| | 2 |
| | 36 |
|
| Extend maturity without rate concession | 69 |
| | 5,843 |
| | 89 |
| | 4,484 |
| | 3 |
| | 203 |
|
| Bankruptcy | 28 |
| | 1,813 |
| | 47 |
| | 2,671 |
| | 52 |
| | 2,501 |
|
Real estate – residential mortgage:
| | | | | | | | | | | |
| Extend maturity with rate concession | 2 |
| | 468 |
| | — |
| | — |
| | 4 |
| | 750 |
|
| Extend maturity without rate concession | 5 |
| | 1,044 |
| | 2 |
| | 315 |
| | 3 |
| | 262 |
|
| Bankruptcy | 3 |
| | 392 |
| | 6 |
| | 981 |
| | 7 |
| | 2,508 |
|
Construction - commercial residential: | | | | | | | | | | | |
| Extend maturity without rate concession | 1 |
| | 1,204 |
| | — |
| | — |
| | 1 |
| | 1,535 |
|
| Bankruptcy | 1 |
| | 411 |
| | — |
| | — |
| | — |
| | — |
|
Consumer: | | | | | | | | | | | |
| Bankruptcy | — |
| | — |
| | 2 |
| | 23 |
| | 3 |
| | 18 |
|
| | | | | | | | | | | | |
Total | 143 |
| | $ | 29,634 |
| | 158 |
| | $ | 12,378 |
| | 96 |
| | $ | 14,416 |
|
The following table presents TDRs, by class segment, that were modified during the years ended December 31, 2019, 2018 and 2017 2016 and 2015 andthat had a post-modification payment default during their respective year of modification. The Corporation defines aA payment default is defined as a single missed scheduled payment:
|
| | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| (dollars in thousands) |
Real estate -construction | — |
| | — |
| | 2 |
| | 448 |
| | 4 |
| | 2,152 |
|
Real estate - residential mortgage | 2 |
| | 521 |
| | 5 |
| | 717 |
| | 5 |
| | 577 |
|
Commercial | 5 |
| | 442 |
| | 1 |
| | 2,163 |
| | 6 |
| | 1,571 |
|
Real estate - home equity | 18 |
| | 1,003 |
| | 30 |
| | 1,635 |
| | 25 |
| | 1,575 |
|
Total | 25 |
| | $ | 1,966 |
| | 38 |
| | $ | 4,963 |
| | 40 |
| | $ | 5,875 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| (dollars in thousands) |
Construction - commercial residential | 1 |
| | $ | 1,192 |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
Construction - other | 1 |
| | 411 |
| | — |
| | — |
| | — |
| | — |
|
Real estate - commercial mortgage | 2 |
| | 549 |
| | 1 |
| | 118 |
| | 4 |
| | 359 |
|
Real estate - residential mortgage | 5 |
| | 577 |
| | 8 |
| | 1,500 |
| | 4 |
| | 445 |
|
Commercial | 6 |
| | 1,571 |
| | 7 |
| | 2,523 |
| | 8 |
| | 3,549 |
|
Real estate - home equity | 25 |
| | 1,575 |
| | 28 |
| | 1,836 |
| | 13 |
| | 763 |
|
Consumer | — |
| | — |
| | 1 |
| | 19 |
| | — |
| | — |
|
Total | 40 |
| | $ | 5,875 |
| | 45 |
| | $ | 5,996 |
| | 29 |
| | $ | 5,116 |
|
|
| | | | |
NOTE 5 – PREMISES AND EQUIPMENT |
The following is a summary of premises and equipment as of December 31:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Land | $ | 38,836 |
| | $ | 35,160 |
|
Buildings and improvements | 350,609 |
| | 325,831 |
|
Furniture and equipment | 158,064 |
| | 150,566 |
|
Construction in progress | 9,594 |
| | 24,993 |
|
| 557,103 |
| | 536,550 |
|
Less: Accumulated depreciation and amortization | (317,057 | ) | | (302,021 | ) |
Total | $ | 240,046 |
| | $ | 234,529 |
|
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Land | $ | 35,560 |
| | $ | 36,097 |
|
Buildings and improvements | 307,332 |
| | 293,836 |
|
Furniture and equipment | 150,876 |
| | 137,282 |
|
Construction in progress | 19,916 |
| | 21,096 |
|
| 513,684 |
| | 488,311 |
|
Less: Accumulated depreciation and amortization | (290,882 | ) | | (270,505 | ) |
| $ | 222,802 |
| | $ | 217,806 |
|
|
| | | | |
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS |
Goodwill totaled $532.7 million and $530.6 million as of December 31, 2019 and 2018, respectively. A non-amortizing trade name intangible assetsasset that totaled $963,000$1.0 million as of both December 31, 2017 and 2016. All2018 was written off during 2019 as a result of the consolidation of the Corporation's banking subsidiaries into Fulton Bank. The increase in total goodwill of $2.1 million was the result of acquisitions of the assets of two wealth management businesses in 2019. The Corporation’s reporting units passed the 20172019 goodwill impairment test, resulting in no0 goodwill impairment charges in 2017. All reporting units, with total allocated goodwill of $530.6 million, had fair values that exceeded net book values by approximately 75% in the aggregate.2019.
The estimated fair values of the Corporation’s reporting units are subject to uncertainty, including future changes in fair values of banks in general and future operating results of reporting units, which could differ significantly from the assumptions used in the current valuation of reporting units.
|
| | | | |
NOTE 7 – MORTGAGE SERVICING RIGHTS |
The following table summarizes the changes in MSRs, which are included in other assets on the consolidated balance sheets:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Amortized cost: | | | |
Balance at beginning of year | $ | 38,573 |
| | $ | 37,663 |
|
Originations of MSRs | 7,546 |
| | 6,756 |
|
Amortization | (6,852 | ) | | (5,846 | ) |
Balance at end of year | $ | 39,267 |
| | $ | 38,573 |
|
| | | |
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Amortized cost: | | | |
Balance at beginning of year | $ | 38,822 |
| | $ | 40,944 |
|
Originations of mortgage servicing rights | 4,968 |
| | 5,485 |
|
Amortization expense | (6,127 | ) | | (7,607 | ) |
Balance at end of year | $ | 37,663 |
| | $ | 38,822 |
|
| | | |
Valuation allowance: | | | |
Balance at beginning of year | $ | (1,291 | ) | | $ | — |
|
Net deductions (additions) to the valuation allowance | 1,291 |
| | (1,291 | ) |
Balance at end of year | $ | — |
| | $ | (1,291 | ) |
| | | |
Net MSRs at end of year | $ | 37,663 |
| | $ | 37,531 |
|
MSRs represent the economic value of existing contractual rights to service mortgage loans that have been sold. Accordingly, actualThe total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $4.9 billion and $4.8 billion as of December 31, 2019 and 2018, respectively. Actual and expected prepayments of the underlying mortgage loans can impact the value of MSRs. The Corporation accounts for MSRs at the lower of amortized cost or fair value.
The fair value of MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. Based on itsThe fair value analysis, the Corporation determined that a valuation allowance was no longer necessary as of December 31, 2017 and reduced it by $1.3 million net additions recorded in 2016. Reductions and additions to the valuation allowance are recorded as increases and decreases, respectively, to mortgage banking income on the consolidated statements of income.
The estimated fair valuevalues of MSRs was $41.6were $45.2 million and $38.2$50.2 million as of December 31, 20172019 and 2016,2018, respectively.
Total MSR amortization expense, recognized as a reduction to mortgage banking income in the consolidated statements of income, was $6.1$6.9 million and $7.6$5.8 million in 20172019 and 2016,2018, respectively. Estimated MSR amortization expense for the next five years, based on balances as of December 31, 20172019 and the estimated remaining lives of the underlying loans, follows (in thousands):
|
| | | |
Year | |
2020 | $ | 6,591 |
|
2021 | 6,144 |
|
2022 | 5,648 |
|
2023 | 5,101 |
|
2024 | 4,499 |
|
|
| | | |
Year | |
2018 | $ | 6,342 |
|
2019 | 5,905 |
|
2020 | 5,423 |
|
2021 | 4,893 |
|
2022 | 4,311 |
|
Deposits consisted of the following as of December 31:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Noninterest-bearing demand | $ | 4,453,324 |
| | $ | 4,310,105 |
|
Interest-bearing demand | 4,720,188 |
| | 4,240,974 |
|
Savings and money market accounts | 5,153,941 |
| | 4,926,937 |
|
Total demand and savings | 14,327,453 |
| | 13,478,016 |
|
Brokered deposits | 264,531 |
| | 176,239 |
|
Time deposits | 2,801,929 |
| | 2,721,904 |
|
Total Deposits | $ | 17,393,913 |
| | $ | 16,376,159 |
|
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Noninterest-bearing demand | $ | 4,437,294 |
| | $ | 4,376,137 |
|
Interest-bearing demand | 4,018,107 |
| | 3,703,712 |
|
Savings and money market accounts | 4,586,746 |
| | 4,179,773 |
|
Total demand and savings | 13,042,147 |
| | 12,259,622 |
|
Brokered deposits | 90,473 |
| | — |
|
Time deposits | 2,664,912 |
| | 2,753,242 |
|
Total Deposits | $ | 15,797,532 |
| | $ | 15,012,864 |
|
The scheduled maturities of time deposits as of December 31, 2019 were as follows (in thousands):
|
| | | |
Year | |
2020 | $ | 1,636,357 |
|
2021 | 529,378 |
|
2022 | 436,909 |
|
2023 | 109,044 |
|
2024 | 43,141 |
|
Thereafter | 47,100 |
|
| $ | 2,801,929 |
|
Included in time deposits were certificates of deposit equal to or greater than $100,000 of $1.4 billion and $1.2 billion as of both December 31, 20172019 and 2016.2018, respectively. Time deposits of $250,000 or more were $373.9$472.8 millionand $374.4$425.1 million as of December 31, 20172019 and 2016,2018, respectively.The scheduled maturities of time deposits as of December 31, 2017 were as follows (in thousands):
|
| | | |
Year | |
2018 | $ | 1,085,369 |
|
2019 | 866,233 |
|
2020 | 436,690 |
|
2021 | 122,516 |
|
2022 | 76,962 |
|
Thereafter | 77,142 |
|
| $ | 2,664,912 |
|
|
| | | | |
NOTE 9 – SHORT-TERM BORROWINGS AND LONG-TERM DEBT |
Short-term borrowings as of December 31, 2017, 20162019, 2018 and 20152017 and the related maximum amounts outstanding at the end of any month in each of the three years then ended are presented below. The securities underlying the repurchase agreements remain in available for sale investment securities.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | Maximum Outstanding |
| 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| (in thousands) |
Federal funds purchased | $ | — |
| | $ | — |
| | $ | 220,000 |
| | $ | 274,998 |
| | $ | 525,000 |
| | $ | 387,110 |
|
Short-term FHLB advances (1) | 500,000 |
| | 385,000 |
| | — |
| | 825,000 |
| | 385,000 |
| | 250,000 |
|
Customer repurchase agreements | 56,707 |
| | 43,500 |
| | 172,017 |
| | 64,745 |
| | 181,989 |
| | 233,274 |
|
Customer short-term promissory notes | 326,534 |
| | 326,277 |
| | 225,507 |
| | 339,461 |
| | 365,689 |
| | 237,298 |
|
Total Short-term borrowings | $ | 883,241 |
| | $ | 754,777 |
| | $ | 617,524 |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | Maximum Outstanding |
| 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| (in thousands) |
Federal funds purchased | $ | 220,000 |
| | $ | 278,570 |
| | $ | 197,235 |
| | $ | 387,110 |
| | $ | 449,184 |
| | $ | 266,338 |
|
Short-term FHLB advances (1) | — |
| | — |
| | 110,000 |
| | 250,000 |
| | — |
| | 200,000 |
|
Customer repurchase agreements | 172,017 |
| | 195,734 |
| | 111,496 |
| | 233,274 |
| | 221,989 |
| | 212,509 |
|
Customer short-term promissory notes | 225,507 |
| | 67,013 |
| | 78,932 |
| | 237,298 |
| | 77,887 |
| | 93,176 |
|
| $ | 617,524 |
| | $ | 541,317 |
| | $ | 497,663 |
| | | | | | |
(1) Represents FHLB advances with an original maturity term of less than one year.
As of December 31, 2017,2019, the Corporation had aggregate availability under Federalfederal funds lines of $1.2 billion, with $220.0 million borrowed against that amount.$1.7 billion. A combination of commercial real estate loans, commercial loans and securities were pledged to the FRB of Philadelphia to provide access to FRB Discount Window borrowings.As of December 31, 20172019 and 2016,2018, the Corporation had $617.4$334.3 million and $1.2 billion,$505.2 million, respectively, of collateralized borrowing availability at the FRB Discount Window, and no outstanding borrowings.
The following table presents information related to customer repurchase agreements:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (dollars in thousands) |
Amount outstanding as of December 31 | $ | 56,707 |
| | $ | 43,500 |
| | $ | 172,017 |
|
Weighted average interest rate as of December 31 | 0.69 | % | | 0.25 | % | | 0.13 | % |
Average amount outstanding during the year | $ | 58,383 |
| | $ | 138,198 |
| | $ | 188,974 |
|
Weighted average interest rate during the year | 0.67 | % | | 0.21 | % | | 0.12 | % |
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (dollars in thousands) |
Amount outstanding as of December 31 | $ | 172,017 |
| | $ | 195,734 |
| | $ | 111,496 |
|
Weighted average interest rate as of December 31 | 0.13 | % | | 0.10 | % | | 0.15 | % |
Average amount outstanding during the year | $ | 188,974 |
| | $ | 184,978 |
| | $ | 161,093 |
|
Weighted average interest rate during the year | 0.12 | % | | 0.11 | % | | 0.10 | % |
FHLB advances with an original maturity of one year or more and long-term debt included the following as of December 31:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
FHLB advances | $ | 491,024 |
| | $ | 601,978 |
|
Subordinated debt | 250,000 |
| | 250,000 |
|
Senior notes | 125,000 |
| | 125,000 |
|
Junior subordinated deferrable interest debentures | 16,496 |
| | 16,496 |
|
Unamortized discounts and issuance costs | (751 | ) | | (1,195 | ) |
| $ | 881,769 |
| | $ | 992,279 |
|
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
FHLB advances | $ | 652,113 |
| | $ | 567,240 |
|
Subordinated debt | 250,000 |
| | 350,000 |
|
Senior notes | 125,000 |
| | — |
|
Junior subordinated deferrable interest debentures | 16,496 |
| | 16,496 |
|
Unamortized discounts and issuance costs | (5,263 | ) | | (4,333 | ) |
| $ | 1,038,346 |
| | $ | 929,403 |
|
Excluded from the preceding table is the Parent Company’s revolving line of credit with one of its subsidiary banks.Fulton Bank. As of December 31, 20172019 and 2016,2018, there were no amounts outstanding under this line of credit. This line of credit, with a total commitment of $75.0$75.0 million,, is secured by insurance investments and equity securities and bears interest at the London Interbank Offered Rate ("LIBOR") for maturities of one month plus 2.00%. The amount that the Corporation is permitted to borrow under this commitment at any given time is subject to a formula based on a percentage of the value of the collateral pledged. Although balances drawn on the line of credit and related interest income and expense are eliminated in the consolidated financial statements, this borrowing arrangement is senior to the subordinated debt and the junior subordinated deferrable interest debentures.
FHLB advances mature through March 2027 and carry a weighted average interest rate of 2.31%1.94%. As of December 31, 2017,2019, the Corporation had additional borrowing capacity of approximately $3.6$3.7 billion with the FHLB. Advances from the FHLB are secured by FHLB stock, qualifying residential mortgages, investments and other assets.
The following table summarizes the scheduled maturities of FHLB advances with an original maturity of one year or more and long-term debt as of December 31, 20172019 (in thousands):
|
| | | |
Year | |
2020 | $ | — |
|
2021 | 48,441 |
|
2022 | 210,195 |
|
2023 | 214,536 |
|
2024 | 389,694 |
|
Thereafter | 18,903 |
|
| $ | 881,769 |
|
|
| | | |
Year | |
2018 | $ | 99,217 |
|
2019 | 202,275 |
|
2020 | 142,039 |
|
2021 | 199,054 |
|
2022 | 130,076 |
|
Thereafter | 265,685 |
|
| $ | 1,038,346 |
|
In March 2017, the Corporation issued $125.0 million of senior notes, with a fixed rate of 3.60% and an effective rate of 3.95%, as a result of discounts and issuance costs, which mature on March 16, 2022. Interest is paid semi-annually in September and March. In June 2015, the Corporation issued $150.0 million of ten-year subordinated notes, which mature on November 15, 2024 and carry a fixed rate of 4.50% and an effective rate of approximately 4.69% as a result of discounts and issuance costs. Interest is paid semi-annually in May and November. In November 2014, the Corporation issued $100.0 million of ten-year subordinated notes, which mature on November 15, 2024 and carry a fixed rate of 4.50% and an effective rate of approximately 4.87% as a result of discounts and issuance costs. Interest is paid semi-annually in May and November.
On May 1, 2017, $100.0 million of the Corporation's outstanding ten-year subordinated notes originally issued in May 2007 with an effective rate of approximately 5.96%, matured and were fully repaid.
During the third quarter of 2015, $150.0 million of TruPS, with a scheduled maturity of February 1, 2036 and an effective rate of approximately 6.52%, were redeemed. As a result of this transaction, the Corporation recorded a $5.6 million loss on redemption,
included as a component of non-interest expense. The loss on redemption consisted of $1.8 million of unamortized issuance costs and $2.5 million, net of a $1.3 million tax effect, of unamortized losses on a cash flow hedge recorded in accumulated other comprehensive income.
As of December 31, 2017,2019, the Parent Company owned all of the common stock of three3 subsidiary trusts, which have issued TruPS in conjunction with the Parent Company issuing junior subordinated deferrable interest debentures to the trusts. The TruPS are redeemable on specified dates, or earlier if certain events arise.
The following table provides details of the debentures as of December 31, 20172019 (dollars in thousands):
|
| | | | | | | | | | | | | | |
Debentures Issued to | Fixed/ Variable | | Interest Rate | | Amount | | Maturity | | Callable | | Call Price |
Columbia Bancorp Statutory Trust | Variable | | 4.59 | % | | $ | 6,186 |
| | 06/30/34 | | 03/31/20 | | 100.0 |
Columbia Bancorp Statutory Trust II | Variable | | 3.78 | % | | 4,124 |
| | 03/15/35 | | 03/15/20 | | 100.0 |
Columbia Bancorp Statutory Trust III | Variable | | 3.66 | % | | 6,186 |
| | 06/15/35 | | 03/15/20 | | 100.0 |
| | | | | $ | 16,496 |
| | | | | | |
|
| | | | | | | | | | | | | | |
Debentures Issued to | Fixed/ Variable | | Interest Rate | | Amount | | Maturity | | Callable | | Call Price |
Columbia Bancorp Statutory Trust | Variable | | 3.99 | % | | $ | 6,186 |
| | 06/30/34 | | 03/31/18 | | 100.0 |
Columbia Bancorp Statutory Trust II | Variable | | 3.48 | % | | 4,124 |
| | 03/15/35 | | 03/31/18 | | 100.0 |
Columbia Bancorp Statutory Trust III | Variable | | 3.36 | % | | 6,186 |
| | 06/15/35 | | 03/31/18 | | 100.0 |
| | | | | $ | 16,496 |
| | | | | | |
|
| | | | |
NOTE 10 – DERIVATIVE FINANCIAL INSTRUMENTS |
The following table presents the notional amounts and fair values of derivative financial instruments as of December 31:31:
|
| | | | | | | | | | | | | | | |
| 2019 | | 2018 |
| Notional Amount | | Asset (Liability) Fair Value | | Notional Amount | | Asset (Liability) Fair Value |
| (in thousands) |
Interest Rate Locks with Customers | | | | | | | |
Positive fair values | $ | 132,260 |
| | $ | 1,123 |
| | $ | 101,700 |
| | $ | 1,148 |
|
Negative fair values | 9,783 |
| | (53 | ) | | 1,646 |
| | (12 | ) |
Forward Commitments | | | | | | | |
Positive fair values | 75,000 |
| | 63 |
| | 1,540 |
| | 3 |
|
Negative fair values | 180,000 |
| | (371 | ) | | 83,562 |
| | (1,066 | ) |
Interest Rate Swaps with Customers | | | | | | | |
Positive fair values | 2,903,489 |
| | 143,484 |
| | 1,185,144 |
| | 33,258 |
|
Negative fair values | 376,705 |
| | (695 | ) | | 1,386,046 |
| | (30,769 | ) |
Interest Rate Swaps with Dealer Counterparties | | | | | | | |
Positive fair values | 376,705 |
| | 695 |
| | 1,386,046 |
| | 28,143 |
|
Negative fair values | 2,903,489 |
| | (75,327 | ) | | 1,185,144 |
| | (16,338 | ) |
Foreign Exchange Contracts with Customers | | | | | | | |
Positive fair values | 3,373 |
| | 38 |
| | 5,881 |
| | 105 |
|
Negative fair values | 7,283 |
| | (154 | ) | | 9,690 |
| | (251 | ) |
Foreign Exchange Contracts with Correspondent Banks | | | | | | | |
Positive fair values | 9,028 |
| | 192 |
| | 9,220 |
| | 287 |
|
Negative fair values | 4,976 |
| | (45 | ) | | 6,831 |
| | (130 | ) |
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| Notional Amount | | Asset (Liability) Fair Value | | Notional Amount | | Asset (Liability) Fair Value |
| (in thousands) |
Interest Rate Locks with Customers | | | | | | | |
Positive fair values | $ | 129,469 |
| | $ | 1,059 |
| | $ | 87,119 |
| | $ | 863 |
|
Negative fair values | 8,957 |
| | (59 | ) | | 18,239 |
| | (227 | ) |
Net interest rate locks with customers | | | 1,000 |
| | | | 636 |
|
Forward Commitments | | | | | | | |
Positive fair values | 3,856 |
| | 34 |
| | 70,031 |
| | 2,223 |
|
Negative fair values | 100,808 |
| | (213 | ) | | 19,964 |
| | (112 | ) |
Net forward commitments | | | (179 | ) | | | | 2,111 |
|
Interest Rate Swaps with Customers | | | | | | | |
Positive fair values | 1,316,548 |
| | 24,505 |
| | 876,744 |
| | 24,397 |
|
Negative fair values | 716,634 |
| | (18,978 | ) | | 583,060 |
| | (16,998 | ) |
Net interest rate swaps with customers | | | 5,527 |
| | | | 7,399 |
|
Interest Rate Swaps with Dealer Counterparties | | | | | | | |
Positive fair values(1) (3) | 716,634 |
| | 18,941 |
| | 583,060 |
| | 16,998 |
|
Negative fair values(2) (3) | 1,316,548 |
| | (19,764 | ) | | 876,744 |
| | (24,397 | ) |
Net interest rate swaps with dealer counterparties | | | (823 | ) | | | | (7,399 | ) |
Foreign Exchange Contracts with Customers | | | | | | | |
Positive fair values | 4,852 |
| | 276 |
| | 11,674 |
| | 504 |
|
Negative fair values | 5,914 |
| | (119 | ) | | 4,659 |
| | (221 | ) |
Net foreign exchange contracts with customers | | | 157 |
| | | | 283 |
|
Foreign Exchange Contracts with Correspondent Banks | | | | | | | |
Positive fair values | 7,960 |
| | 184 |
| | 7,040 |
| | 241 |
|
Negative fair values | 6,048 |
| | (255 | ) | | 12,869 |
| | (447 | ) |
Net foreign exchange contracts with correspondent banks | | | (71 | ) | | | | (206 | ) |
Net derivative fair value asset | | | $ | 5,611 |
| | | | $ | 2,824 |
|
(1) Includes centrally cleared interest rate swaps with a notional amount of $24.4 million and a fair value of $0 as of December 31, 2017.
(2) Includes centrally cleared interest rate swaps with a notional amount of $377.1 million and a fair value of $0 as of December 31, 2017.
(3) The variation margin posted as collateral on centrally cleared interest rate swaps, which represents the fair value of such swaps, is legally characterized as settlements of the outstanding derivative contracts instead of cash collateral. Accordingly, the fair values of centrally cleared interest rate swaps were offset by variation margins totaling $4.6 million as of December 31, 2017, reducing the fair value of such swaps to $0. There were no centrally cleared interest rate swaps as of December 31, 2016.
The following table presents the fair value gains and losses(losses) on derivative financial instruments for the years ended December 31:
|
| | | | | | | | | | | | | |
| Statement of Income Classification | | 2019 | | 2018 | | 2017 |
| | | (in thousands) |
Mortgage banking derivatives (1) | Mortgage banking | | $ | 689 |
| | $ | (748 | ) | | $ | (1,926 | ) |
Interest rate swaps | Other expense | | 122 |
| | 1 |
| | (89 | ) |
Foreign exchange contracts | Other income | | 20 |
| | (75 | ) | | 9 |
|
Net fair value gains on derivative financial instruments | | | $ | 831 |
| | $ | (822 | ) | | $ | (2,006 | ) |
|
| | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 | | Statement of Income Classification |
| (in thousands) | | |
Interest rate locks with customers | $ | 364 |
| | $ | (639 | ) | | $ | (110 | ) | | Mortgage banking income |
Forward commitments | (2,290 | ) | | 1,930 |
| | 1,345 |
| | Mortgage banking income |
Interest rate swaps with customers (1) | (1,872 | ) | | (25,461 | ) | | 13,342 |
| | Other non-interest expense |
Interest rate swaps with counterparties (1) | 6,576 |
| | 25,461 |
| | (13,342 | ) | | Other non-interest expense |
Foreign exchange contracts with customers | (126 | ) | | 353 |
| | (439 | ) | | Other service charges and fees |
Foreign exchange contracts with correspondent banks | 135 |
| | (487 | ) | | 711 |
| | Other service charges and fees |
Net fair value gains on derivative financial instruments | $ | 2,787 |
| | $ | 1,157 |
| | $ | 1,507 |
| | |
(1) Not included is the $4.6 million expense related to the variation margin settlement.Includes interest rate locks with customers and forward commitments.
Fair Value Option
The Corporation has elected to recordmeasure mortgage loans held for sale at fair value. The following table presents a summary of mortgage loans held for sale and the impact of the fair value election on the consolidated financial statements as of December 31,:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Amortized cost (1) | $ | 37,396 |
| | $ | 26,407 |
|
Fair value | 37,828 |
| | 27,099 |
|
(1) Cost basis of mortgage loans held for sale represents the unpaid principal balance.
Losses related to changes in fair values of mortgage loans held for sale were $260,000 for the year ended December 31, 2019 and gains related to changes in fair values of mortgage loans held for sale were $231,000 and $472,000 for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| Cost (1) | | Fair Value | | Balance Sheet Classification | | Fair Value Gain (Loss) | | Statement of Income Classification |
| (in thousands) |
December 31, 2017: | | | | | | | | | |
Mortgage loans held for sale | $ | 31,069 |
| | $ | 31,530 |
| | Loans held for sale | | $ | 472 |
| | Mortgage banking income |
December 31, 2016: | | | | | | | | | |
Mortgage loans held for sale | 28,708 |
| | 28,697 |
| | Loans held for sale | | (313 | ) | | Mortgage banking income |
| |
(1) | Cost basis of mortgage loans held for sale represents the unpaid principal balance. |
2018 and 2017, respectively, which are recorded on the consolidated income statements as an adjustment to mortgage banking income.
Balance Sheet Offsetting
The fair values of interest rate swap agreements and foreign exchange contracts the Corporation enters into with customers and dealer counterparties may be eligible for offset on the consolidated balance sheets asif they are subject to master netting arrangements or similar agreements. The Corporation elects to not offset assets and liabilities subject to such arrangements on the consolidated financial statements. The following table presents the financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets as of December 31:
| | | Gross Amounts | | Gross Amounts Not Offset | | | Gross Amounts | | Gross Amounts Not Offset | | |
| Recognized | | on the Consolidated | | | Recognized | | on the Consolidated | | |
| on the | | Balance Sheets | | | on the | | Balance Sheets | | |
| Consolidated | | Financial | | Cash | | Net | Consolidated | | Financial | | Cash | | Net |
| Balance Sheets | | Instruments (1) | | Collateral (2) | | Amount | Balance Sheets | | Instruments (1) | | Collateral (2) | | Amount |
| (in thousands) | (in thousands) |
2017 | | | | | | | | |
2019 | | | | | | | | |
Interest rate swap derivative assets | $ | 43,446 |
| | $ | (16,844 | ) | | $ | — |
| | $ | 26,602 |
| $ | 144,179 |
| | $ | (757 | ) | | $ | — |
| | $ | 143,422 |
|
Foreign exchange derivative assets with correspondent banks | 184 |
| | (184 | ) | | — |
| | — |
| 192 |
| | (45 | ) | | — |
| | 147 |
|
Total | $ | 43,630 |
| | $ | (17,028 | ) | | $ | — |
| | $ | 26,602 |
| $ | 144,371 |
| | $ | (802 | ) | | $ | — |
| | $ | 143,569 |
|
| | | | | | | | | | | | | | |
Interest rate swap derivative liabilities | $ | 38,742 |
| | $ | (16,844 | ) | | $ | (6,588 | ) | | $ | 15,310 |
| $ | 76,022 |
| | $ | (757 | ) | | $ | (75,265 | ) | | $ | — |
|
Foreign exchange derivative liabilities with correspondent banks | 255 |
| | (184 | ) | | — |
| | 71 |
| 45 |
| | (45 | ) | | — |
| | — |
|
Total | $ | 38,997 |
| | $ | (17,028 | ) | | $ | (6,588 | ) | | $ | 15,381 |
| $ | 76,067 |
| | $ | (802 | ) | | $ | (75,265 | ) | | $ | — |
|
| | | | | | | | | | | | | | |
2016 | | | | | | | | |
2018 | | | | | | | | |
Interest rate swap derivative assets | $ | 41,395 |
| | $ | (15,117 | ) | | $ | — |
| | $ | 26,278 |
| $ | 61,401 |
| | $ | (12,955 | ) | | $ | (23,270 | ) | | $ | 25,176 |
|
Foreign exchange derivative assets with correspondent banks | 241 |
| | (241 | ) | | — |
| | — |
| 287 |
| | (130 | ) | | — |
| | 157 |
|
Total | $ | 41,636 |
| | $ | (15,358 | ) | | $ | — |
| | $ | 26,278 |
| $ | 61,688 |
| | $ | (13,085 | ) | | $ | (23,270 | ) | | $ | 25,333 |
|
| | | | | | | | | | | | | | |
Interest rate swap derivative liabilities | $ | 41,395 |
| | $ | (15,117 | ) | | $ | (4,010 | ) | | $ | 22,268 |
| $ | 47,107 |
| | $ | (22,786 | ) | | $ | (22,786 | ) | | $ | 1,535 |
|
Foreign exchange derivative liabilities with correspondent banks | 447 |
| | (241 | ) | | (206 | ) | | — |
| 130 |
| | (130 | ) | | — |
| | — |
|
Total | $ | 41,842 |
| | $ | (15,358 | ) | | $ | (4,216 | ) | | $ | 22,268 |
| $ | 47,237 |
| | $ | (22,916 | ) | | $ | (22,786 | ) | | $ | 1,535 |
|
| |
(1) | For interest rate swap assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For interest rate swap liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default. |
| |
(2) | Amounts represent cash collateral (posted(pledged by the Corporation) or received from the counterparty on interest rate swap transactions and foreign exchange contracts with financial institution counterparties. Interest rate swaps with customers are collateralized by the same collateral securing the underlying loans to those borrowers. Cash and securities collateral amounts are included in the table only to the extent of the net derivative fair values. |
|
| | | | |
NOTE 11 – REGULATORY MATTERS |
Regulatory Capital Requirements
The Corporation’s subsidiary banksCorporation and the Bank are subject to regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can trigger certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the subsidiary banksBank must meet specific capital guidelines that involve quantitative measures of the subsidiary banks’its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The subsidiary banks’Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
U.S. Basel III Capital Rules
In July 2013, the Federal Reserve BoardFRB approved final rules (the "U.S. Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions.
The minimum regulatory capital requirements established by the U.S. Basel III Capital Rules became effective for the Corporation on January 1, 2015, and becomebecame fully phased in on January 1, 2019. When fully phased in, theThe U.S. Basel III Capital Rules will require the Corporation and its bank subsidiariesthe Bank to:
Meet a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a minimum Tier 1 capital of 6.00% of risk-weighted assets;
Continue to requireMeet a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets;
Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and
Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, will beare excluded as a component of Tier 1 capital for institutions of the Corporation's size.
The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expand the risk-weightings for assets and off-balance sheet exposures from the previous 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and off-balance sheet exposures, resulting in higher risk weights for a variety of asset categories.
When fully phased in onEffective January 1, 2019, the Corporation and its bank subsidiaries willthe Bank were also be required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements. The required minimum capital conservation buffer began to be phased in incrementally, starting at 0.625%, on January 1, 2016, and increasing to 1.25% on January 1, 2017, and will continue to increase to 1.875% on January 1, 2018 and 2.50% on January 1, 2019. The rules provide that the failure to maintain the "capital conservation buffer" will resultresults in restrictions on capital distributions and discretionary cash bonus payments to executive officers. As a result, under the U.S. Basel III Capital Rules, if any of the Corporation's bank subsidiariesBank fails to maintain the required minimum capital conservation buffer, the Corporation will be subject to limits, and possibly prohibitions, on its ability to obtain capital distributions from such subsidiaries. If the Corporation does not receive sufficient cash dividends from its bank subsidiaries,the Bank, it may not have sufficient funds to pay dividends on its capitalcommon stock, service its debt obligations or repurchase its common stock. In addition, the restrictions on payments of discretionary cash bonuses to executive officers may make it more difficult for the Corporation to retain key personnel.
As of December 31, 2017,2019, the Corporation's capital levels meetmet the fully phased-in minimum capital requirements, including the new capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.
As of December 31, 2017 and 2016,2019, the Bank was well capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculation. As of December 31, 2018, each of the Corporation’s subsidiary banks was well capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculations. To be categorized as well capitalized, these banks mustwere required to maintain minimum total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since December 31, 20172019 that management believes have changed the institutions’ categories.
The following table presentstables present the Total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage requirements for the Corporation and its four significant subsidiaries with total assets in excess of $1 billion, as of December 31, 2017, under the U.S. Basel III Capital Rules:Rules, as of December 31:
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 |
| Actual | | For Capital Adequacy Purposes | | Well Capitalized |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| (dollars in thousands) |
Total Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 2,179,147 |
| | 13.0 | % | | $ | 1,338,560 |
| | 8.0 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A. | 1,234,536 |
| | 12.3 |
| | 805,125 |
| | 8.0 |
| | $ | 1,006,406 |
| | 10.0 | % |
Fulton Bank of New Jersey | 385,858 |
| | 12.4 |
| | 248,640 |
| | 8.0 |
| | 310,801 |
| | 10.0 |
|
The Columbia Bank | 234,647 |
| | 12.2 |
| | 153,441 |
| | 8.0 |
| | 191,801 |
| | 10.0 |
|
Lafayette Ambassador Bank | 173,097 |
| | 14.6 |
| | 94,720 |
| | 8.0 |
| | 118,400 |
| | 10.0 |
|
Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 1,737,060 |
| | 10.4 | % | | $ | 1,003,920 |
| | 6.0 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A | 1,142,230 |
| | 11.3 |
| | 603,843 |
| | 6.0 |
| | $ | 805,125 |
| | 8.0 | % |
Fulton Bank of New Jersey | 346,867 |
| | 11.2 |
| | 186,480 |
| | 6.0 |
| | 248,640 |
| | 8.0 |
|
The Columbia Bank | 215,651 |
| | 11.2 |
| | 115,081 |
| | 6.0 |
| | 153,441 |
| | 8.0 |
|
Lafayette Ambassador Bank | 162,292 |
| | 13.7 |
| | 71,040 |
| | 6.0 |
| | 94,720 |
| | 8.0 |
|
Common Equity Tier I Capital (to Risk-weighted Assets): | | | | | | | | | | | |
Corporation | $ | 1,737,060 |
| | 10.4 | % | | $ | 752,940 |
| | 4.5 | % | | N/A |
| | N/A |
Fulton Bank, N.A | 1,098,230 |
| | 10.9 |
| | 452,883 |
| | 4.5 |
| | $ | 654,164 |
| | 6.5 | % |
Fulton Bank of New Jersey | 346,867 |
| | 11.2 |
| | 139,860 |
| | 4.5 |
| | 202,020 |
| | 6.5 |
|
The Columbia Bank | 215,651 |
| | 11.2 |
| | 86,310 |
| | 4.5 |
| | 124,671 |
| | 6.5 |
|
Lafayette Ambassador Bank | 162,292 |
| | 13.7 |
| | 53,280 |
| | 4.5 |
| | 76,960 |
| | 6.5 |
|
Tier I Capital (to Average Assets): | | | | | | | | | | | |
Corporation | $ | 1,737,060 |
| | 8.9 | % | | $ | 778,451 |
| | 4.0 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A | 1,142,230 |
| | 10.0 |
| | 458,016 |
| | 4.0 |
| | $ | 572,520 |
| | 5.0 | % |
Fulton Bank of New Jersey | 346,867 |
| | 8.8 |
| | 158,027 |
| | 4.0 |
| | 197,534 |
| | 5.0 |
|
The Columbia Bank | 215,651 |
| | 9.3 |
| | 92,797 |
| | 4.0 |
| | 115,996 |
| | 5.0 |
|
Lafayette Ambassador Bank | 162,292 |
| | 10.1 |
| | 64,191 |
| | 4.0 |
| | 80,239 |
| | 5.0 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| 2019 |
| Actual | | For Capital Adequacy Purposes | | Well Capitalized |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| (dollars in thousands) |
Total Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 2,179,197 |
| | 11.8 | % | | $ | 1,481,425 |
| | 8.0 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A. | 2,224,505 |
| | 12.1 |
| | 1,473,880 |
| | 8.0 |
| | $ | 1,842,350 |
| | 10.0 | % |
Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 1,796,987 |
| | 9.7 | % | | $ | 1,111,068 |
| | 6.0 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A | 2,058,295 |
| | 11.2 |
| | 1,105,410 |
| | 6.0 |
| | $ | 1,473,880 |
| | 8.0 | % |
Common Equity Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 1,796,987 |
| | 9.7 | % | | $ | 833,301 |
| | 4.5 | % | | N/A |
| | N/A |
Fulton Bank, N.A | 2,014,295 |
| | 10.9 |
| | 829,057 |
| | 4.5 |
| | $ | 1,197,527 |
| | 6.5 | % |
Tier I Leverage Capital (to Average Assets): | | | | | | | | | | | |
Corporation | $ | 1,796,987 |
| | 8.4 | % | | $ | 850,727 |
| | 4.0 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A | 2,058,295 |
| | 9.8 |
| | 844,341 |
| | 4.0 |
| | $ | 1,055,426 |
| | 5.0 | % |
N/A – Not applicable as "well capitalized" applies to banks only.
The following table presents the Total risk-based, Tier I risk-based, Common Equity Tier 1 risk-based and Tier I leverage requirements as of December 31, 2016, under U.S. Basel III Capital Rules:
| | | 2016 | 2018 |
| Actual | | For Capital Adequacy Purposes | | Well Capitalized | Actual | | For Capital Adequacy Purposes | | Well Capitalized |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| (dollars in thousands) | (dollars in thousands) |
Total Capital (to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | | | | | |
Corporation | $ | 2,074,526 |
| | 13.2 | % | | $ | 1,255,292 |
| | 8.0 | % | | N/A |
| | N/A |
| $ | 2,200,257 |
| | 12.8 | % | | $ | 1,380,905 |
| | 8.0 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A. | 1,142,326 |
| | 12.2 |
| | 747,359 |
| | 8.0 |
| | $ | 934,199 |
| | 10.0 | % | 1,319,090 |
| | 12.1 |
| | 871,413 |
| | 8.0 |
| | $ | 1,089,267 |
| | 10.0 | % |
Fulton Bank of New Jersey | 385,807 |
| | 13.1 |
| | 234,782 |
| | 8.0 |
| | 293,427 |
| | 10.0 |
| 418,207 |
| | 13.3 |
| | 250,999 |
| | 8.0 |
| | 313,748 |
| | 10.0 |
|
The Columbia Bank | 203,890 |
| | 12.2 |
| | 133,836 |
| | 8.0 |
| | 167,294 |
| | 10.0 |
| 266,661 |
| | 12.9 |
| | 165,676 |
| | 8.0 |
| | 207,094 |
| | 10.0 |
|
Lafayette Ambassador Bank | 175,254 |
| | 14.6 |
| | 96,100 |
| | 8.0 |
| | 120,125 |
| | 10.0 |
| 180,604 |
| | 16.0 |
| | 90,077 |
| | 8.0 |
| | 112,596 |
| | 10.0 |
|
Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | | | | | |
Corporation | $ | 1,637,150 |
| | 10.4 | % | | $ | 941,469 |
| | 6.0 | % | | N/A |
| | N/A |
| $ | 1,764,847 |
| | 10.2 | % | | $ | 1,035,679 |
| | 6.0 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A | 1,050,175 |
| | 11.2 |
| | 560,519 |
| | 6.0 |
| | $ | 747,359 |
| | 8.0 | % | 1,225,797 |
| | 11.3 |
| | 653,560 |
| | 6.0 |
| | $ | 871,413 |
| | 8.0 | % |
Fulton Bank of New Jersey | 348,992 |
| | 11.9 |
| | 176,086 |
| | 6.0 |
| | 234,782 |
| | 8.0 |
| 378,962 |
| | 12.1 |
| | 188,249 |
| | 6.0 |
| | 250,999 |
| | 8.0 |
|
The Columbia Bank | 185,983 |
| | 11.1 |
| | 100,377 |
| | 6.0 |
| | 133,836 |
| | 8.0 |
| 242,668 |
| | 11.7 |
| | 124,257 |
| | 6.0 |
| | 165,676 |
| | 8.0 |
|
Lafayette Ambassador Bank | 166,186 |
| | 13.8 |
| | 72,075 |
| | 6.0 |
| | 96,100 |
| | 8.0 |
| 169,835 |
| | 15.1 |
| | 67,558 |
| | 6.0 |
| | 90,077 |
| | 8.0 |
|
Common Equity Tier I Capital (to Risk-weighted Assets): | | | | | | | | | | | | |
Common Equity Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | | |
Corporation | $ | 1,637,150 |
| | 10.4 | % | | $ | 706,102 |
| | 4.5 | % | | N/A |
| | N/A |
| $ | 1,764,847 |
| | 10.2 | % | | $ | 776,759 |
| | 4.5 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A | 1,006,175 |
| | 10.8 |
| | 420,389 |
| | 4.5 |
| | $ | 607,229 |
| | 6.5 | % | 1,181,797 |
| | 10.8 |
| | 490,170 |
| | 4.5 |
| | $ | 708,023 |
| | 6.5 | % |
Fulton Bank of New Jersey | 348,992 |
| | 11.9 |
| | 132,065 |
| | 4.5 |
| | 190,760 |
| | 6.5 |
| 378,962 |
| | 12.1 |
| | 141,187 |
| | 4.5 |
| | 203,936 |
| | 6.5 |
|
The Columbia Bank | 185,983 |
| | 11.1 |
| | 72,282 |
| | 4.5 |
| | 108,741 |
| | 6.5 |
| 242,668 |
| | 11.7 |
| | 93,192 |
| | 4.5 |
| | 134,611 |
| | 6.5 |
|
Lafayette Ambassador Bank | 166,186 |
| | 13.8 |
| | 54,056 |
| | 4.5 |
| | 78,081 |
| | 6.5 |
| 169,835 |
| | 15.1 |
| | 50,668 |
| | 4.5 |
| | 73,187 |
| | 6.5 |
|
Tier I Capital (to Average Assets): | | | | | | | | | | | | |
Tier I Leverage Capital (to Average Assets): | | | | | | | | | | | | |
Corporation | $ | 1,637,150 |
| | 9.0 | % | | $ | 727,745 |
| | 4.0 | % | | N/A |
| | N/A |
| $ | 1,764,847 |
| | 9.0 | % | | $ | 783,118 |
| | 4.0 | % | | N/A |
| | N/A |
|
Fulton Bank, N.A | 1,050,175 |
| | 10.1 |
| | 415,981 |
| | 4.0 |
| | $ | 519,977 |
| | 5.0 | % | 1,225,797 |
| | 10.0 |
| | 487,992 |
| | 4.0 |
| | $ | 609,989 |
| | 5.0 | % |
Fulton Bank of New Jersey | 348,992 |
| | 9.4 |
| | 148,472 |
| | 4.0 |
| | 185,590 |
| | 5.0 |
| 378,962 |
| | 9.4 |
| | 162,098 |
| | 4.0 |
| | 202,623 |
| | 5.0 |
|
The Columbia Bank | 185,983 |
| | 8.6 |
| | 86,310 |
| | 4.0 |
| | 107,888 |
| | 5.0 |
| 242,668 |
| | 10.1 |
| | 96,269 |
| | 4.0 |
| | 120,336 |
| | 5.0 |
|
Lafayette Ambassador Bank | 166,186 |
| | 10.9 |
| | 61,129 |
| | 4.0 |
| | 76,412 |
| | 5.0 |
| 169,835 |
| | 10.9 |
| | 62,520 |
| | 4.0 |
| | 78,150 |
| | 5.0 |
|
N/A – Not applicable as "well capitalized" applies to banks only.
Dividend and Loan Limitations
The dividends that may be paid by subsidiary banksthe Bank to the Parent Company are subject to certain legal and regulatory limitations. Dividend limitations vary, depending on the subsidiary bank’s charter and primary regulator and whether or not it is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits may exist on paying dividends in excess of net income for specified periods. The total amount available for payment of dividends by subsidiary banksthe Bank to the Corporation was approximately $283$150 million as of December 31, 2017,2019, based on the subsidiary banksBank maintaining enough capital to be considered well capitalized under the U.S. Basel III Capital Rules.
Under current Federal Reserve regulations, the subsidiary banks areBank is limited in the amount theyit may loan to theirits affiliates, including the Parent Company. Loans to a single affiliate may not exceed 10%, and the aggregate of loans to all affiliates may not exceed 20% of each bank subsidiary’sthe Bank's regulatory capital.
On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017 ("Tax Act"), which among other things, lowered the U.S. corporate income tax rate from a top rate of 35% to a flat rate of 21%. The reduction of the U.S. corporate income tax rate required the Corporation to re-measure its deferred tax assets and liabilities utilizing the lower tax rate as of December 22, 2017. As of December 31, 2017, the Corporation had not completed its accounting for the tax effects of the Tax Act; however, the Corporation was able to reasonably estimate the effects of the re-measurement of its deferred tax balances and recorded a charge of $15.6 million to income tax expense.
The components of the provision for income taxes are as follows:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Current tax expense: |
| |
| |
|
Federal | $ | 32,610 |
| | $ | 35,783 |
| | $ | 19,553 |
|
State | 5,204 |
| | 5,352 |
| | 2,617 |
|
| 37,814 |
| | 41,135 |
| | 22,170 |
|
Deferred tax (benefit) expense: |
|
| |
|
| |
|
|
Federal | (1,271 | ) | | (16,841 | ) | | 39,885 |
|
State | 1,106 |
| | 283 |
| | 646 |
|
| (165 | ) | | (16,558 | ) | | 40,531 |
|
Total income tax expense | $ | 37,649 |
| | $ | 24,577 |
| | $ | 62,701 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current tax expense: |
| |
| |
|
Federal | $ | 19,553 |
| | $ | 33,872 |
| | $ | 34,455 |
|
State | 2,617 |
| | 1,698 |
| | 2,042 |
|
| 22,170 |
| | 35,570 |
| | 36,497 |
|
Deferred tax expense: |
|
| |
|
| |
|
|
Federal | 39,885 |
| | 7,968 |
| | 12,752 |
|
State | 646 |
| | 3,086 |
| | 672 |
|
| 40,531 |
| | 11,054 |
| | 13,424 |
|
Income tax expense | $ | 62,701 |
| | $ | 46,624 |
| | $ | 49,921 |
|
The differences between the effective income tax rate and the federal statutory income tax rate are as follows:
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Statutory tax rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
Tax credit investments | (4.6 | ) | | (6.1 | ) | | (7.8 | ) |
Tax-exempt income | (3.9 | ) | | (4.1 | ) | | (6.6 | ) |
Bank owned life insurance | (0.4 | ) | | (0.4 | ) | | (0.4 | ) |
State income taxes, net of federal benefit | 0.2 |
| | 2.0 |
| | (0.5 | ) |
Change in valuation allowance | 1.8 |
| | (0.1 | ) | | 1.2 |
|
Re-measurement of net deferred tax asset due to the Tax Act | — |
| | (0.3 | ) | | 6.7 |
|
Executive compensation | — |
| | 0.1 |
| | 0.1 |
|
Other, net | 0.2 |
| | (1.6 | ) | | (1.0 | ) |
Effective income tax rate | 14.3 | % | | 10.5 | % | | 26.7 | % |
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Tax credit investments | (7.8 | ) | | (7.0 | ) | | (5.2 | ) |
Tax-exempt income | (6.6 | ) | | (6.5 | ) | | (6.0 | ) |
State income taxes, net of federal benefit | (0.5 | ) | | 1.2 |
| | 1.9 |
|
Bank owned life insurance | (0.4 | ) | | (0.6 | ) | | (0.6 | ) |
Re-measurement of net deferred tax asset due to the Tax Act | 6.7 |
| | — |
| | — |
|
Change in valuation allowance | 1.2 |
| | 0.3 |
| | (0.9 | ) |
Executive compensation | 0.1 |
| | 0.1 |
| | 0.1 |
|
Other, net | (1.0 | ) | | (0.1 | ) | | 0.7 |
|
Effective income tax rate | 26.7 | % | | 22.4 | % | | 25.0 | % |
The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences as of December 31:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Deferred tax assets: | | | |
Tax credit carryforwards | $ | 43,133 |
| | $ | 27,615 |
|
Allowance for credit losses | 37,081 |
| | 37,906 |
|
State loss carryforwards | 16,324 |
| | 11,605 |
|
Other accrued expenses | 8,797 |
| | 7,232 |
|
Deferred compensation | 7,752 |
| | 7,064 |
|
Tax credit investments | 6,799 |
| | 4,529 |
|
Stock-based compensation | 2,930 |
| | 2,743 |
|
Postretirement and defined benefit plans | 599 |
| | 5,079 |
|
OTTI | 462 |
| | 1,803 |
|
Unrealized holding losses on securities | — |
| | 12,489 |
|
Other | 3,784 |
| | 3,855 |
|
Total gross deferred tax assets | 127,661 |
| | 121,920 |
|
Deferred tax liabilities: | | | |
Equipment lease financing | 42,273 |
| | 31,466 |
|
MSRs | 8,686 |
| | 8,560 |
|
Premises and equipment | 6,282 |
| | 3,579 |
|
Acquisition premiums/discounts | 5,266 |
| | 5,294 |
|
Unrealized holding gains on securities available for sale | 4,223 |
| | — |
|
Intangible assets | 1,136 |
| | 1,292 |
|
Other | 12,387 |
| | 12,178 |
|
Total gross deferred tax liabilities | 80,253 |
| | 62,369 |
|
Net deferred tax asset, before valuation allowance | 47,408 |
| | 59,551 |
|
Valuation allowance | (16,324 | ) | | (11,605 | ) |
Net deferred tax asset | $ | 31,084 |
| | $ | 47,946 |
|
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets: | | | |
Allowance for credit losses | $ | 40,554 |
| | $ | 62,726 |
|
State loss carryforwards | 11,855 |
| | 9,820 |
|
Deferred compensation | 7,663 |
| | 12,017 |
|
Postretirement and defined benefit plans | 7,274 |
| | 12,659 |
|
Other accrued expenses | 6,977 |
| | 9,520 |
|
Unrealized holding losses on securities available for sale | 5,830 |
| | 12,260 |
|
Other-than-temporary impairment of investments | 2,045 |
| | 5,187 |
|
Other | 6,742 |
| | 8,500 |
|
Total gross deferred tax assets | 88,940 |
| | 132,689 |
|
Deferred tax liabilities: | | | |
Direct leasing | 21,917 |
| | 27,663 |
|
Mortgage servicing rights | 8,204 |
| | 13,369 |
|
Acquisition premiums/discounts | 6,030 |
| | 9,167 |
|
Premises and equipment | 3,099 |
| | 5,625 |
|
Intangible assets | 1,155 |
| | 1,810 |
|
Other | 10,420 |
| | 12,530 |
|
Total gross deferred tax liabilities | 50,825 |
| | 70,164 |
|
Net deferred tax asset, before valuation allowance | 38,115 |
| | 62,525 |
|
Valuation allowance | (11,855 | ) | | (8,950 | ) |
Net deferred tax asset | $ | 26,260 |
| | $ | 53,575 |
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and/or capital gain income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, such as those that may be implemented to generate capital gains, in making this assessment.
The valuation allowance relates to state deferred tax assets and net operating loss carryforwards for which realizability is uncertain.As of December 31, 20172019 and 2016,2018, the Corporation had state net operating loss carryforwards of approximately $369$392.0 million and $391$347.3 million,, respectively, which are available to offset future state taxable income, and expire at various dates through 2037.2038.
The Corporation has $2.0 million of deferred tax assets resulting from unrealized other-than-temporary impairment losses on investment securities, which would be characterized as capital losses for tax purposes. If realized, the income tax benefits of these potential capital losses can only be recognized for tax purposes to the extent of capital gains generated during carryback and carryforward periods. The Corporation currently believes that it has the ability to generate sufficient offsetting capital gains in future periods through the execution of certain tax planning strategies, which may include the sale and leaseback of some or all of its branch and office properties. As such, no valuation allowance for the deferred tax assets related to the realized or unrealized capital losses is considered to be necessary as of December 31, 2017.
Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation will realize the benefits of its deferred tax assets, net of the valuation allowance, as of December 31, 2017.2019.
As of December 31, 2019, the Corporation had tax credit carryforwards related to TCIs of approximately $43 million. The corporation recorded a deferred tax asset of $43.1 million, reflecting the benefit of these tax credit carryforwards. Such deferred tax asset will begin to expire in 2038 if not yet utilized.
Uncertain Tax Positions
The following table summarizes the changes in unrecognized tax benefits for the years ended December 31:31:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Balance at beginning of year | $ | 2,726 |
| | $ | 2,550 |
| | $ | 2,438 |
|
Current period tax positions | 292 |
| | 593 |
| | 523 |
|
Lapse of statute of limitations | (501 | ) | | (417 | ) | | (411 | ) |
Balance at end of year | $ | 2,517 |
| | $ | 2,726 |
| | $ | 2,550 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Balance at beginning of year | $ | 2,438 |
| | $ | 2,373 |
| | $ | 1,944 |
|
Current period tax positions | 523 |
| | 456 |
| | 492 |
|
Lapse of statute of limitations | (411 | ) | | (391 | ) | | (63 | ) |
Balance at end of year | $ | 2,550 |
| | $ | 2,438 |
| | $ | 2,373 |
|
Virtually all of the Corporation’s unrecognized tax benefits are for positions that are taken on an annual basis on state tax returns. Increases to unrecognized tax benefits will occur as a result of accruing for the nonrecognition of the position for the current year.
Decreases will occur as a result of the lapsing of the statute of limitations for the oldest outstanding year which includes the position. These offsetting increases and decreases are likely to continue in the future, including over the next twelve months. While the net effect on total unrecognized tax benefits during this period cannot be reasonably estimated, approximately $460,000 is expected to reverse in 2020 due to lapsing of the statute of limitations. Decreases can also occur throughout the settlement of positions with taxing authorities.
As of December 31, 2017,2019, if recognized, all of the Corporation’s unrecognized tax benefitswould impact the effective tax rate.Not included in the table above is $540,000$549,000 of federal income tax benefit on unrecognized state tax benefits which, if recognized, would also impact the effective tax rate. Interest accrued related to unrecognized tax benefits is recorded as a component of income tax expense.Penalties, if incurred, would also be recognized in income tax expense. The Corporation recognized approximately $42,000$22,000 and $43,000$59,000 in 20172019 and 2016,2018, respectively, for interest and penalties in income tax expense related to unrecognized tax positions. As of December 31, 20172019 and 2016,2018, total accrued interest and penalties related to unrecognized tax positions were approximately $616,000$697,000 and $574,000,$675,000, respectively.
The Corporation and its subsidiaries filefiles income tax returns in the federal and various state jurisdictions. In most cases, unrecognized tax benefits are related to tax years that remain subject to examination by the relevant taxing authorities. With few exceptions, the Corporation is no longer subject to federal, state and local examinations by tax authorities for years before 2014.2016.
Tax Credit Investments ("TCIs")
The TCIs are included in other assets, with any unfunded equity commitments recorded in other liabilities on the consolidated balance sheets. Certain TCIs qualify for the proportional amortization method and are amortized over the period the Corporation expects to receive the tax credits, with the expense included within income taxes on the consolidated statements of income. Other TCIs are accounted for under the equity method of accounting, with amortization included within non-interest expense on the consolidated statements of income. This amortization includes equity in partnership losses and the systematic write-down of investments over the period in which income tax credits are earned. All of the TCIs are evaluated for impairment at the end of each reporting period.
The following table presents the balances of the Corporation's TCIs and related unfunded commitments as of December 31:
|
| | | | | | | | | |
| | | 2019 | | 2018 |
Included in other assets: | | (in thousands) |
Affordable housing tax credit investments, net | | $ | 153,351 |
| | $ | 170,401 |
|
Other tax credit investments, net | | 64,354 |
| | 72,584 |
|
| Total TCIs, net | | $ | 217,705 |
| | $ | 242,985 |
|
Included in other liabilities: | | | | |
Unfunded affordable housing tax credit commitments | | $ | 16,684 |
| | $ | 23,196 |
|
Other tax credit liabilities | | 55,105 |
| | 59,823 |
|
| Total unfunded tax credit commitments and liabilities | | $ | 71,789 |
| | $ | 83,019 |
|
The following table presents other information relating to the Corporation's TCIs for the years ended December 31:
|
| | | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| | | (in thousands) |
Components of income taxes: | | | | | | |
Affordable housing tax credits and other tax benefits | | $ | (30,642 | ) | | $ | (30,721 | ) | | $ | (25,642 | ) |
Other tax credit investment credits and tax benefits | | (4,542 | ) | | (6,385 | ) | | (15,791 | ) |
Amortization of affordable housing investments, net of tax benefit | | 22,184 |
| | 21,569 |
| | 16,958 |
|
Deferred tax expense | | 954 |
| | 1,341 |
| | 6,201 |
|
| Total reduction in income tax expense | | $ | (12,046 | ) | | $ | (14,196 | ) | | $ | (18,274 | ) |
Amortization of TCIs: | | | | | | |
Affordable housing tax credits investment | | $ | 3,344 |
| | $ | 3,355 |
| | $ | — |
|
Other tax credit investment amortization | | 2,677 |
| | 8,094 |
| | 11,028 |
|
| Total amortization of TCIs | | $ | 6,021 |
| | $ | 11,449 |
| | $ | 11,028 |
|
| | | | | | | |
|
| | | | |
NOTE 13 – NET INCOME PER SHARE |
Basic net income per common share is calculated as net income divided by the weighted average number of shares outstanding.
Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options, restricted stock, RSUs and PSUs. PSUs are required to be included in weighted average diluted shares outstanding if performance measures, as defined in each PSU award agreement, are met as of the end of the period.
A reconciliation of weighted average common shares outstanding used to calculate basic and diluted net income per share follows:
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Weighted average common shares outstanding (basic) | 166,902 |
| | 175,395 |
| | 174,721 |
|
Impact of common stock equivalents | 890 |
| | 1,148 |
| | 1,211 |
|
Weighted average common shares outstanding (diluted) | 167,792 |
| | 176,543 |
| | 175,932 |
|
|
| | | | |
NOTE 13 – EMPLOYEE BENEFIT PLANS |
The following summarizes the Corporation’s expense under its retirement plans for the years ended December 31:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
401(k) Retirement Plan | $ | 8,121 |
| | $ | 7,418 |
| | $ | 6,423 |
|
Pension Plan | 4,168 |
| | 4,310 |
| | 4,102 |
|
| $ | 12,289 |
| | $ | 11,728 |
| | $ | 10,525 |
|
The 401(k) Retirement Plan is a defined contribution plan under which eligible employees may defer a portion of their pre-tax covered compensation on an annual basis, with employer matches of up to 5% of employee compensation. Employee and employer contributions under these features are 100% vested. Prior to January 1, 2015, this plan also included a profit sharing component whereby additional employer contributions not to exceed 5% of each eligible employee’s covered compensation, were provided for certain employees.
Contributions to the Defined Benefit Pension Plan ("Pension Plan") are actuarially determined and funded annually, if necessary. The Corporation recognizes the funded status of its Pension Plan on the consolidated balance sheets and recognizes the changes in that funded status through other comprehensive income. The Pension Plan has been curtailed, with no additional benefits accruing to participants.
Pension Plan
The net periodic pension cost for the Pension Plan, as determined by consulting actuaries, consisted of the following components for the years ended December 31:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Service cost (1) | $ | — |
| | $ | 688 |
| | $ | 579 |
|
Interest cost | 3,320 |
| | 3,520 |
| | 3,405 |
|
Expected return on assets | (1,804 | ) | | (2,318 | ) | | (3,009 | ) |
Net amortization and deferral | 2,652 |
| | 2,420 |
| | 3,127 |
|
Net periodic pension cost | $ | 4,168 |
| | $ | 4,310 |
| | $ | 4,102 |
|
| |
(1) | The Pension Plan was curtailed effective January 1, 2008. Pension plan service cost for all years presented was related to administrative costs associated with the plan and not due to the accrual of additional participant benefits. Beginning January 1, 2017 the administrative costs were netted with the expected return on assets. |
The following table summarizes the changes in the projected benefit obligation and fair value of plan assets for the plan years ended December 31:
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Projected benefit obligation at beginning of year | $ | 85,363 |
| | $ | 84,736 |
|
Service cost (1) | — |
| | 688 |
|
Interest cost | 3,320 |
| | 3,520 |
|
Benefit payments | (3,751 | ) | | (5,172 | ) |
Change in assumptions | 5,008 |
| | 1,635 |
|
Experience gain | (458 | ) | | (44 | ) |
Projected benefit obligation at end of year | $ | 89,482 |
| | $ | 85,363 |
|
| | | |
Fair value of plan assets at beginning of year | $ | 48,684 |
| | $ | 46,971 |
|
Employer contributions (2) | 3,816 |
| | 5,169 |
|
Actual return on plan assets | 5,312 |
| | 1,716 |
|
Benefit payments | (3,751 | ) | | (5,172 | ) |
Fair value of plan assets at end of year | $ | 54,061 |
| | $ | 48,684 |
|
(1) The Pension Plan was curtailed effective January 1, 2008. Pension plan service cost for all years presented was related to administrative costs associated with the plan and not due to the accrual of additional participant benefits. Beginning January 1, 2017 the administrative costs were netted with the expected return on assets.
| |
(2) | The Corporation funds at least the minimum amount required by federal law and regulations. The Corporation contributed $3.8 million and $5.2 million to the Pension Plan during 2017 and 2016, respectively. |
The following table presents the funded status of the Pension Plan, included in other liabilities on the consolidated balance sheets, as of December 31:
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Projected benefit obligation | $ | (89,482 | ) | | $ | (85,363 | ) |
Fair value of plan assets | 54,061 |
| | 48,684 |
|
Funded status | $ | (35,421 | ) | | $ | (36,679 | ) |
The following table summarizes the changes in the unrecognized net loss included as a component of accumulated other comprehensive loss:
|
| | | | | | | |
| Unrecognized Net Loss |
| Before tax | | Net of tax |
| (in thousands) |
Balance as of December 31, 2015 | $ | 30,396 |
| | $ | 19,758 |
|
Recognized as a component of 2016 periodic pension cost | (2,420 | ) | | (1,573 | ) |
Unrecognized gains arising in 2016 | 2,193 |
| | 1,425 |
|
Balance as of December 31, 2016 | 30,169 |
| | 19,610 |
|
Recognized as a component of 2017 periodic pension cost | (2,652 | ) | | (1,724 | ) |
Unrecognized losses arising in 2017 | 1,042 |
| | 678 |
|
Balance as of December 31, 2017 | $ | 28,559 |
| | $ | 18,564 |
|
The total amount of unrecognized net loss that will be amortized as a component of net periodic pension cost in 2018 is expected to be $2.8 million.
Thefollowingrateswereusedtocalculatenetperiodicpensioncost and the present value of benefit obligationsasof December 31:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Discount rate-projected benefit obligation | 3.50 | % | | 4.00 | % | | 4.25 | % |
Expected long-term rate of return on plan assets | 5.00 | % | | 5.00 | % | | 6.00 | % |
The discount rates used were determined using the Citigroup Average Life discount rate table, as adjusted based on the Pension Plan's expected benefit payments and rounded to the nearest 0.25%.
The 5.00% long-term rate of return on plan assets used to calculate the net periodic pension cost was based on historical returns, adjusted for expectations of long-term asset returns based on the December 31, 2017 weighted average asset allocations. The expected long-term return is considered to be appropriate based on the asset mix and the historical returns realized.
The following table presents a summary of the fair values of the Pension Plan’s assets as of December 31:
|
| | | | | | | | | | | | | |
| 2017 | | 2016 |
| Estimated Fair Value | | % of Total Assets | | Estimated Fair Value | | % of Total Assets |
| (dollars in thousands) |
Equity mutual funds | $ | 19,219 |
| |
| | $ | 12,689 |
| |
|
Equity common trust funds | 9,612 |
| |
| | 7,936 |
| |
|
Equity securities | 28,831 |
| | 53.3 | % | | 20,625 |
| | 42.4 | % |
Cash and money market funds | 5,675 |
| |
| | 7,149 |
| |
|
Fixed income mutual funds | 11,136 |
| |
| | 10,540 |
| |
|
Corporate debt securities | 2,999 |
| |
| | 3,252 |
| |
|
U.S. Government agency securities | 249 |
| |
|
| | 496 |
| |
|
|
Fixed income securities and cash | 20,059 |
| | 37.1 | % | | 21,437 |
| | 44.0 | % |
Other alternative investment funds | 5,171 |
| | 9.6 | % | | 6,622 |
| | 13.6 | % |
| $ | 54,061 |
| | 100.0 | % | | $ | 48,684 |
| | 100.0 | % |
Investment allocation decisions are made by a retirement plan committee. The goal of the investment allocation strategy is to match certain benefit obligations with maturities of fixed income securities. Pension Plan assets are invested with a balanced objective, with target asset allocations of approximately 50% in equities, 40% in fixed income securities and cash and 10% in alternative investments. Alternative investments may include managed futures, commodities, real estate investment trusts, master limited partnerships, and long-short strategies with traditional stocks and bonds. All alternative investments are in the form of mutual funds, not individual contracts, to enable daily liquidity.
The fair values for all assets held by the Pension Plan, excluding equity common trust funds, are based on quoted prices for identical instruments and would be categorized as Level 1 assets under FASB ASC Topic 810. Equity common trust funds would be categorized as Level 2 assets under FASB ASC Topic 810.
Estimated future benefit payments are as follows (in thousands):
|
| | | |
Year | |
2018 | $ | 3,773 |
|
2019 | 3,858 |
|
2020 | 4,220 |
|
2021 | 4,424 |
|
2022 | 4,530 |
|
2023 – 2027 | 24,571 |
|
| $ | 45,376 |
|
Postretirement Benefits
The Corporation provides medical benefits and life insurance benefits under a postretirement benefits plan ("Postretirement Plan") to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998. Prior to February 1, 2014, certain full-time employees became eligible for these discretionary benefits if they reached retirement age while working for the Corporation. The Corporation recognizes the funded status of the postretirement plan on the consolidated balance sheets and recognizes the changes in that funded status through other comprehensive income.
In 2015, the Corporation amended the postretirement plan to eliminate a death benefit provision and to fix the cost of health insurance premiums paid for by each participant. This amendment resulted in a $2.5 million decrease in the postretirement benefit obligation that will be amortized to income over the estimated average remaining life of plan participants, or approximately 14 years.
The components of the net (benefit) expense for postretirement benefits other than pensions are as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Interest cost | $ | 68 |
| | $ | 85 |
| | $ | 206 |
|
Net amortization and deferral | (565 | ) | | (551 | ) | | (258 | ) |
Net postretirement benefit | $ | (497 | ) | | $ | (466 | ) | | $ | (52 | ) |
The following table summarizes the changes in the accumulated postretirement benefit obligation and fair value of plan assets for the years ended December 31:
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Accumulated postretirement benefit obligation at beginning of year | $ | 1,926 |
| | $ | 2,875 |
|
Interest cost | 68 |
| | 85 |
|
Benefit payments | (216 | ) | | (282 | ) |
Experience gain | (104 | ) | | (732 | ) |
Change in assumptions | 26 |
| | (20 | ) |
Accumulated postretirement benefit obligation at end of year | $ | 1,700 |
| | $ | 1,926 |
|
| | | |
Fair value of plan assets at beginning of year | $ | 3 |
| | $ | 15 |
|
Employer contributions | 213 |
| | 270 |
|
Benefit payments | (216 | ) | | (282 | ) |
Fair value of plan assets at end of year | $ | — |
| | $ | 3 |
|
The following table presents the funded status of the Postretirement Plan, included in other liabilities on the consolidated balance sheets as of December 31:
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Accumulated postretirement benefit obligation | $ | (1,700 | ) | | $ | (1,926 | ) |
Fair value of plan assets | — |
| | 3 |
|
Funded status | $ | (1,700 | ) | | $ | (1,923 | ) |
The following table summarizes the changes in items recognized as a component of accumulated other comprehensive loss:
|
| | | | | | | | | | | | | | | |
| Before tax | | |
| Unrecognized Prior Service Cost | | Unrecognized Net Loss (Gain) | | Total | | Net of tax |
| (in thousands) |
Balance as of December 31, 2015 | $ | (5,334 | ) | | $ | (508 | ) | | $ | (5,842 | ) | | $ | (3,798 | ) |
Recognized as a component of 2016 postretirement benefit cost | 465 |
| | 86 |
| | 551 |
| | 358 |
|
Unrecognized gains arising in 2016 | — |
| | (761 | ) | | (761 | ) | | (495 | ) |
Balance as of December 31, 2016 | (4,869 | ) | | (1,183 | ) | | (6,052 | ) | | (3,935 | ) |
Recognized as a component of 2017 postretirement benefit cost | 465 |
| | 101 |
| | 566 |
| | 368 |
|
Unrecognized gains arising in 2017 | — |
| | (77 | ) | | (77 | ) | | (50 | ) |
Balance as of December 31, 2017 | $ | (4,404 | ) | | $ | (1,159 | ) | | $ | (5,563 | ) | | $ | (3,617 | ) |
The following rates were used to calculate net periodic postretirement benefit cost and the present value of benefit obligations as of December 31:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Discount rate-projected benefit obligation | 3.50 | % | | 4.25 | % | | 4.25 | % |
Expected long-term rate of return on plan assets | 3.00 | % | | 3.00 | % | | 3.00 | % |
The discount rates used to calculate the accumulated postretirement benefit obligation were determined using the Citigroup Average Life discount rate table, as adjusted based on the Postretirement Plan's expected benefit payments and rounded to the nearest 0.25%.
Estimated future benefit payments under the Postretirement Plan are as follows (in thousands):
|
| | | |
Year | |
2018 | $ | 196 |
|
2019 | 184 |
|
2020 | 171 |
|
2021 | 159 |
|
2022 | 147 |
|
2023 – 2027 | 574 |
|
| $ | 1,431 |
|
|
| | | | |
NOTE 14 – SHAREHOLDERS’ EQUITY |
Accumulated Other Comprehensive Income (Loss)
The following table presents the components of other comprehensive income (loss) for the years ended December 31:
|
| | | | | | | | | | | |
| Before-Tax Amount | | Tax Effect | | Net of Tax Amount |
| (in thousands) |
2019: | | | | | |
Unrealized gain on AFS securities | $ | 73,085 |
| | $ | (16,166 | ) | | $ | 56,919 |
|
Reclassification adjustment for available for sale securities gains included in net income (1) | (4,733 | ) | | 1,047 |
| | (3,686 | ) |
Amortization of net unrealized losses on available for sale securities transferred to HTM (2) (3) | 8,070 |
| | (1,785 | ) | | 6,285 |
|
Non-credit related unrealized loss on other-than-temporarily impaired debt securities | (873 | ) | | 193 |
| | (680 | ) |
Unrecognized pension and postretirement cost | (1,203 | ) | | 266 |
| | (937 | ) |
Amortization of net unrecognized pension and postretirement income (4) | 1,316 |
| | (291 | ) | | 1,025 |
|
Total Other Comprehensive Income | $ | 75,662 |
| | $ | (16,736 | ) | | $ | 58,926 |
|
2018: | | | | | |
Unrealized loss on AFS securities | $ | (31,235 | ) | | $ | 6,909 |
| | $ | (24,326 | ) |
Reclassification adjustment for available for sale securities gains included in net income (1) | (37 | ) | | 7 |
| | (30 | ) |
Amortization of net unrealized losses on available for sale securities transferred to HTM (2) | 2,694 |
| | (596 | ) | | 2,098 |
|
Non-credit related unrealized loss on other-than-temporarily impaired debt securities | 285 |
| | (63 | ) | | 222 |
|
Unrecognized pension and postretirement income | 1,798 |
| | (398 | ) | | 1,400 |
|
Amortization of net unrecognized pension and postretirement income (4) | 2,116 |
| | (468 | ) | | 1,648 |
|
Total Other Comprehensive Loss | $ | (24,379 | ) | | $ | 5,391 |
| | $ | (18,988 | ) |
2017: | | | | | |
Unrealized gain on AFS securities | $ | 16,051 |
| | $ | (5,619 | ) | | $ | 10,432 |
|
Reclassification adjustment for available for sale securities gains included in net income (1) | (9,071 | ) | | 3,177 |
| | (5,894 | ) |
Non-credit related unrealized loss on other-than-temporarily impaired debt securities | 285 |
| | (100 | ) | | 185 |
|
Unrecognized pension and postretirement cost | (937 | ) | | 328 |
| | (609 | ) |
Amortization of net unrecognized pension and postretirement income (4) | 2,092 |
| | (731 | ) | | 1,361 |
|
Total Other Comprehensive Income | $ | 8,420 |
| | $ | (2,945 | ) | | $ | 5,475 |
|
|
| | | | | | | | | | | |
| Before-Tax Amount | | Tax Effect | | Net of Tax Amount |
| (in thousands) |
2017: | | | | | |
Unrealized gain on securities | $ | 16,051 |
| | $ | (5,619 | ) | | $ | 10,432 |
|
Reclassification adjustment for securities gains included in net income (1) | (9,071 | ) | | 3,177 |
| | (5,894 | ) |
Non-credit related unrealized loss on other-than-temporarily impaired debt securities | 285 |
| | (100 | ) | | 185 |
|
Unrecognized pension and postretirement cost | (937 | ) | | 328 |
| | (609 | ) |
Amortization of net unrecognized pension and postretirement income (2) | 2,092 |
| | (731 | ) | | 1,361 |
|
Total Other Comprehensive Income | $ | 8,420 |
| | $ | (2,945 | ) | | $ | 5,475 |
|
2016: | | | | | |
Unrealized loss on securities | $ | (22,907 | ) | | $ | 8,016 |
| | $ | (14,891 | ) |
Reclassification adjustment for securities gains included in net income (1) | (2,550 | ) | | 893 |
| | (1,657 | ) |
Non-credit related unrealized loss on other-than-temporarily impaired debt securities | (285 | ) | | 100 |
| | (185 | ) |
Amortization of unrealized loss on derivative financial instruments (3) | 25 |
| | (9 | ) | | 16 |
|
Unrecognized pension and postretirement cost | (1,432 | ) | | 501 |
| | (931 | ) |
Amortization of net unrecognized pension and postretirement income (2) | 1,869 |
| | (653 | ) | | 1,216 |
|
Total Other Comprehensive Loss | $ | (25,280 | ) | | $ | 8,848 |
| | $ | (16,432 | ) |
2015: | | | | | |
Unrealized loss on securities | $ | (11,872 | ) | | $ | 4,155 |
| | $ | (7,717 | ) |
Reclassification adjustment for securities gains included in net income (1) | (9,066 | ) | | 3,174 |
| | (5,892 | ) |
Reclassification adjustment for loss on derivative financial instruments included in net income (2) | 3,778 |
| | (1,322 | ) | | 2,456 |
|
Non-credit related unrealized gains on other-than-temporarily impaired debt securities | 368 |
| | (129 | ) | | 239 |
|
Amortization of unrealized loss on derivative financial instruments (3) | 115 |
| | (40 | ) | | 75 |
|
Unrecognized pension and postretirement income | 7,200 |
| | (2,520 | ) | | 4,680 |
|
Amortization of net unrecognized pension and postretirement income (2) | 2,869 |
| | (1,005 | ) | | 1,864 |
|
Total Other Comprehensive Loss | $ | (6,608 | ) | | $ | 2,313 |
| | $ | (4,295 | ) |
| |
(1) | Amounts reclassified out of accumulated other comprehensive income (loss). Before-tax amounts included in "Investment securities gains, net" on the consolidated statements of income. See "Note 3 - Investment Securities," for additional details. |
| |
(2) | Amounts reclassified out of accumulated other comprehensive income (loss). Before-tax amounts included as a reduction to "Interest Income" on the consolidated statements of income. See "Note 3, - Investment Securities," for additional details. |
| |
(3) | Before-Tax amount includes a $3.7 million reclassification of unrealized loss related to the early adoption of ASU 2019-04, as disclosed in "Note 1 - Summary of Significant Accounting Policies" from "Amortization of net unrealized losses on available for sale securities transferred to HTM" to "Unrealized gain on securities." |
| |
(4) | Amounts reclassified out of accumulated other comprehensive income (loss). Before-tax amounts included in "Salaries and employee benefits" on the consolidated statements of income. See "Note 13 - Employee Benefit Plans," for additional details. |
| |
(3) | Amounts reclassified out of accumulated other comprehensive income (loss). Before-tax amounts included in "Interest Expense" on the consolidated statements of income. |
The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31:
|
| | | | | | | | | | | | | | | |
| Unrealized Gain (Losses) on Investment Securities Not Other-Than-Temporarily Impaired | | Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities | | Unrecognized Pension and Postretirement Plan Income (Cost) | | Total |
| (in thousands) |
Balance as of December 31, 2016 | $ | (23,047 | ) | | $ | 273 |
| | $ | (15,675 | ) | | $ | (38,449 | ) |
Other comprehensive income before reclassifications | 10,432 |
| | 185 |
| | (609 | ) | | 10,008 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | (5,894 | ) | | — |
| | 1,361 |
| | (4,533 | ) |
Balance as of December 31, 2017 | (18,509 | ) | | 458 |
| | (14,923 | ) | | (32,974 | ) |
Other comprehensive loss before reclassifications | (24,326 | ) | | 222 |
| | 1,400 |
| | (22,704 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | (30 | ) | | — |
| | 1,648 |
| | 1,618 |
|
Amortization of net unrealized losses on AFS transferred to HTM | 2,098 |
| | — |
| | — |
| | 2,098 |
|
Reclassification of stranded tax effects | (3,887 | ) | | — |
| | (3,214 | ) | | (7,101 | ) |
Balance as of December 31, 2018 | (44,654 | ) | | 680 |
| | (15,089 | ) | | (59,063 | ) |
Other comprehensive gain before reclassifications | 56,919 |
| | (680 | ) | | (937 | ) | | 55,302 |
|
Amounts reclassified from accumulated other comprehensive (loss) income | (3,686 | ) | | — |
| | 1,025 |
| | (2,661 | ) |
Amortization of net unrealized losses on AFS securities transferred to HTM | 6,285 |
| | — |
| | — |
| | 6,285 |
|
Balance as of December 31, 2019 | $ | 14,864 |
| | $ | — |
| | $ | (15,001 | ) | | $ | (137 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Unrealized Gain (Losses) on Investment Securities Not Other-Than-Temporarily Impaired | | Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities | | Unrealized Effective Portions of Losses on Forward-Starting Interest Rate Swaps | | Unrecognized Pension and Postretirement Plan Income (Cost) | | Total |
| (in thousands) |
Balance as of December 31, 2014 | $ | 5,980 |
| | $ | 1,349 |
| | $ | (2,546 | ) | | $ | (22,505 | ) | | $ | (17,722 | ) |
Other comprehensive income (loss) before reclassifications | (7,717 | ) | | 239 |
| | — |
| | 4,680 |
| | (2,798 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | (4,762 | ) | | (1,130 | ) | | 75 |
| | 1,864 |
| | (3,953 | ) |
Reclassification adjustment for loss on derivative financial instruments | — |
| | — |
| | 2,456 |
| | — |
| | 2,456 |
|
Balance as of December 31, 2015 | (6,499 | ) | | 458 |
| | (15 | ) | | (15,961 | ) | | (22,017 | ) |
Other comprehensive loss before reclassifications | (14,891 | ) | | (185 | ) | | — |
| | (931 | ) | | (16,007 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | (1,657 | ) | | — |
| | 15 |
| | 1,217 |
| | (425 | ) |
Balance as of December 31, 2016 | (23,047 | ) | | 273 |
| | — |
| | (15,675 | ) | | (38,449 | ) |
Other comprehensive income before reclassifications | 10,432 |
| | 185 |
| | — |
| | (609 | ) | | 10,008 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | (5,894 | ) | | — |
| | — |
| | 1,361 |
| | (4,533 | ) |
Balance as of December 31, 2017 | $ | (18,509 | ) | | $ | 458 |
| | $ | — |
| | $ | (14,923 | ) | | $ | (32,974 | ) |
Common Stock Repurchase Plans
In November 2017,October 2019, the Corporation's board of directors approved an extension to a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $50.0$100.0 million of its outstanding shares of common stock, or approximately 2.3%3.9% of its outstanding shares, through December 31, 20182020. RepurchasedNaN shares will be added to treasury stock, at cost. As permitted by securities laws and other legal requirements, and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including, without limitation,had been repurchased under this program through accelerated share repurchase transactions. TheDecember 31, 2019.
In March 2019, the Corporation's board of directors approved a share repurchase program may be discontinued at any time. Aspursuant to which the Corporation was authorized to repurchase up to $100.0 million of its outstanding shares of common stock, or approximately 3.5% of its outstanding shares, through December 31, 2017, 1.52019. During 2019, the Corporation repurchased approximately 6.1 million shares had been repurchased under this program for a total cost of $18.5$100.0 million, or $12.48$16.28 per share. Upshare, completing this program.
In November 2018, the Corporation's board of directors approved a share repurchase program pursuant to an additional $31.5which the Corporation was authorized to repurchase up to $75.0 million of the Corporation'sits outstanding shares of common stock, may beor approximately 2.7% of its outstanding shares, through December 31, 2019. During 2019 and 2018, the Corporation repurchased approximately 706,000 and 4.1 million shares, respectively, under this program through December 31, 2018.for a total cost of $75.0 million, or $15.57 per share, completing this program.
In April 2015,November 2017, the Corporation announced that itsCorporation's board of directors had approved an extension to a share repurchase program pursuant to which the Corporation was authorized to repurchase up to $50.0 million of its outstanding shares of common stock, or approximately 2.3% of its outstanding shares, through December 31, 2015.2018. During 2015, 2018, the Corporation repurchased approximately 4.01.9 million shares under this program for a total cost of $50.0approximately $31.5 million, or $12.57$16.71 per share, completing this program.
|
| | | | |
NOTE 15 – STOCK-BASED COMPENSATION PLANS |
The following table presents compensation expense and related tax benefits for all equity awards recognized in the consolidated statements of income:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Compensation expense | $ | 7,413 |
| | $ | 7,965 |
| | $ | 5,209 |
|
Tax benefit | (1,610 | ) | | (2,625 | ) | | (3,994 | ) |
Total stock-based compensation, net of tax | $ | 5,803 |
| | $ | 5,340 |
| | $ | 1,215 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Compensation expense | $ | 5,209 |
| | $ | 6,556 |
| | $ | 5,938 |
|
Tax benefit | (3,994 | ) | | (2,679 | ) | | (2,011 | ) |
Stock-based compensation, net of tax | $ | 1,215 |
| | $ | 3,877 |
| | $ | 3,927 |
|
The tax benefits as a percentage of compensation expense, as shown in the preceding table, were 76.7%21.7%, 40.9%33.0% and 33.9%76.7% in 2017, 20162019, 2018 and 2015,2017, respectively. These percentages differ from the Corporation’s 35%statutory federal tax rate.rates of 21% for 2019 and 2018 and 35% for 2017 ("Tax Rates"). Tax benefits are only recognized over the vesting period for awards that ordinarily will generate a tax deduction when exercised, in the case of non-qualified stock options, or upon vesting, in the case of restricted stock, RSUs and PSUs. Tax benefits less than the 35% statutory federal tax rate resulted from incentive stock options, for which a tax benefit is not recognized during the vesting period. Tax benefits in excess of the 35% statutory federal tax rateTax Rates resulted from incentive stock option exercises that triggered a tax deduction when they were exercised, and excess tax benefits realized on vesting RSUs and PSUs during the period.
The following table presents compensation expense and related tax benefits for restricted stock awards, RSUs and PSUs recognized in the consolidated statements of income, and included as a component of total stock-based compensation in the preceding table:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Compensation expense | $ | 6,621 |
| | $ | 7,124 |
| | $ | 4,922 |
|
Tax benefit | (1,509 | ) | | (1,585 | ) | | (1,559 | ) |
Stock-based compensation, net of tax | $ | 5,112 |
| | $ | 5,539 |
| | $ | 3,363 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Compensation expense | $ | 4,922 |
| | $ | 6,165 |
| | $ | 4,646 |
|
Tax benefit | (1,559 | ) | | (2,158 | ) | | (1,626 | ) |
Restricted stock compensation, net of tax | $ | 3,363 |
| | $ | 4,007 |
| | $ | 3,020 |
|
The following table provides information about stock option activity for the year ended December 31, 20172019:
|
| | | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (in millions) |
Outstanding and exercisable as of December 31, 2018 | 658,768 |
| | $ | 10.75 |
| | | | |
Exercised | (150,296 | ) | | 9.73 |
| | | | |
Forfeited | (4,128 | ) | | 11.31 |
| | | | |
Expired | (4,084 | ) | | 5.27 |
| | | | |
Outstanding and exercisable as of December 31, 2019 | 500,260 |
| | $ | 11.12 |
| | 3.1 years | | $ | 3.2 |
|
|
| | | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (in millions) |
Outstanding as of December 31, 2016 | 1,330,183 |
| | $ | 10.98 |
| | | | |
Exercised | (411,292 | ) | | 11.45 |
| | | | |
Forfeited | (14,574 | ) | | 10.64 |
| | | | |
Expired | (26,115 | ) | | 13.97 |
| | | | |
Outstanding as of December 31, 2017 | 878,202 |
| | $ | 10.66 |
| | 4.1 years | | $ | 6.4 |
|
Exercisable as of December 31, 2017 | 878,202 |
| | $ | 10.66 |
| | 4.1 years | | $ | 6.4 |
|
The following table provides information about nonvested stock options, restricted stock, RSUs and PSUs granted under the Employee Equity Plan and Directors' Plan for the year ended December 31, 20172019:
|
| | | | | | | |
| | Restricted Stock/RSUs/PSUs(1) |
| | Shares | | Weighted Average Grant Date Fair Value |
Nonvested as of December 31, 2018 | | 1,368,493 |
| | $ | 15.49 |
|
Granted | | 454,951 |
| | 15.51 |
|
Vested | | (407,872 | ) | | 12.38 |
|
Forfeited | | (43,236 | ) | | 16.61 |
|
Nonvested as of December 31, 2019 | | 1,372,336 |
| | $ | 16.39 |
|
|
| | | | | | | | | | | | | |
| Nonvested Stock Options | | Restricted Stock/RSUs/PSUs |
| Options | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Nonvested as of December 31, 2016 | 82,447 |
| | $ | 3.14 |
| | 1,525,715 |
| | $ | 12.74 |
|
Granted | — |
| | — |
| | 501,664 |
| | 15.85 |
|
Vested | (81,847 | ) | | 3.14 |
| | (603,308 | ) | | 12.51 |
|
Forfeited | (600 | ) | | 3.14 |
| | (117,134 | ) | | 14.15 |
|
Nonvested as of December 31, 2017 | — |
| | $ | — |
| | 1,306,937 |
| | $ | 13.91 |
|
The vested and forfeited stock option shown in the table above were granted in 2014.(1) There were no nonvested stock options granted in 2017, 2016,at December 31, 2019 or 2015. The fair value of stock options granted in 2014 was estimated on the grant date using the Black-Scholes valuation methodology.2018.
As of December 31, 20172019, there was $7.4$10.1 million of total unrecognized compensation cost (pre-tax) related to restricted stock, RSUs and PSUs that will be recognized as compensation expense over a weighted average period of two years. As of December 31, 20172019, the Employee Equity Plan had 11.110.1 million shares reserved for future grants through 2023,, and the Directors’ Plan had 360,000260,000 shares reserved for future grants through 2021.2021.
The following table presents information about stock options exercised:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (dollars in thousands) |
Number of options exercised | 150,296 |
| | 214,845 |
| | 411,292 |
|
Total intrinsic value of options exercised | $ | 1,028 |
| | $ | 1,616 |
| | $ | 2,955 |
|
Cash received from options exercised | $ | 1,446 |
| | $ | 2,210 |
| | $ | 4,644 |
|
Tax benefit from options exercised | $ | 188 |
| | $ | 291 |
| | $ | 989 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (dollars in thousands) |
Number of options exercised | 411,292 |
| | 920,924 |
| | 490,151 |
|
Total intrinsic value of options exercised | $ | 2,955 |
| | $ | 4,619 |
| | $ | 1,442 |
|
Cash received from options exercised | $ | 4,644 |
| | $ | 10,240 |
| | $ | 4,936 |
|
Tax deduction realized from options exercised | $ | 2,825 |
| | $ | 4,328 |
| | $ | 1,389 |
|
Upon exercise, the Corporation issues shares from its authorized, but unissued, common stock to satisfy the options.
The fair value of certain PSUs with market-based performance conditions granted under the Employee Equity Plan was estimated on the grant date using the Monte Carlo valuation methodology performed by a third-party valuation expert. This valuation is dependent upon certain assumptions, as summarized in the following table:
|
| | | | | | | | |
| 2019 |
| | 2018 |
| | 2017 |
|
Risk-free interest rate | 2.27 | % | | 2.63 | % | | 1.43 | % |
Volatility of Corporation’s stock | 23.00 | % | | 23.50 | % | | 22.45 | % |
Expected life of PSUs | 3 Years |
| | 3 Years |
| | 3 Years |
|
|
| | | | | | | | |
| 2017 |
| | 2016 |
| | 2015 |
|
Risk-free interest rate | 1.43 | % | | 0.92 | % | | 0.86 | % |
Volatility of Corporation’s stock | 22.45 | % | | 20.75 | % | | 20.08 | % |
Expected life of PSUs | 3 Years |
| | 3 Years |
| | 3 Years |
|
The expected life of the PSUs with fair values measured using the Monte Carlo valuation methodology was based on the defined performance period of three years. Volatility of the Corporation’s stock was based on historical volatility for the period commensurate with the expected life of the PSUs. The risk-free interest rate is the zero-coupon U.S. Treasury rate commensurate with the expected life of the PSUs on the date of the grant. Based on the assumptions above, the Corporation calculated an estimated fair value per PSU with market-based performance conditions granted in 2019, 2018 and 2017 2016of $16.83, $12.92 and 2015 of $17.25, $11.23 and $10.66, respectively.
Under the ESPP, eligible employees can purchase stock of the Corporation at 85% of the fair market value of the stock on the date of purchase. The ESPP is considered to be a compensatory plan and, as such, compensation expense is recognized for the 15% discount on shares purchased. The following table summarizes activity under the ESPP:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
ESPP shares purchased | 136,576 |
| | 110,200 |
| | 98,000 |
|
Average purchase price per share (85% of market value) | $ | 14.03 |
| | $ | 14.74 |
| | $ | 15.28 |
|
Compensation expense recognized (in thousands) | $ | 338 |
| | $ | 287 |
| | $ | 261 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
ESPP shares purchased | 98,000 |
| | 109,665 |
| | 121,890 |
|
Average purchase price per share (85% of market value) | $ | 15.28 |
| | $ | 12.37 |
| | $ | 10.86 |
|
Compensation expense recognized (in thousands) | $ | 261 |
| | $ | 240 |
| | $ | 234 |
|
|
| | | | |
NOTE 16 – LEASESEMPLOYEE BENEFIT PLANS |
Certain branch officesThe following summarizes retirement plan expense for the years ended December 31:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
401(k) Retirement Plan | $ | 8,976 |
| | $ | 8,482 |
| | $ | 8,121 |
|
Pension Plan | 2,484 |
| | 3,435 |
| | 4,168 |
|
| $ | 11,460 |
| | $ | 11,917 |
| | $ | 12,289 |
|
The 401(k) Retirement Plan is a defined contribution plan under which eligible employees may defer a portion of their pre-tax covered compensation on an annual basis, with employer matches of up to 5% of employee compensation. Employee and equipmentemployer contributions under these features are leased under agreements100% vested.
Contributions to the Defined Benefit Pension Plan ("Pension Plan") are actuarially determined and funded annually, if necessary. The Corporation recognizes the funded status of its Pension Plan on the consolidated balance sheets and recognizes the changes in that expire at varying datesfunded status through 2036. Most leases contain renewal provisions at the Corporation’s option. Total rental expense was approximately $18.7 million in 2017, $18.4 million in 2016 and $18.1 million in 2015.other comprehensive income. The Pension Plan has been curtailed, with no additional benefits accruing to participants.
Future minimum payments
Pension Plan
The net periodic pension cost for the Pension Plan, as determined by consulting actuaries, consisted of the following components for the years ended December 31:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Interest cost | $ | 3,257 |
| | $ | 3,053 |
| | $ | 3,320 |
|
Expected return on assets | (2,754 | ) | | (2,047 | ) | | (1,804 | ) |
Net amortization and deferral | 1,981 |
| | 2,429 |
| | 2,652 |
|
Net periodic pension cost | $ | 2,484 |
| | $ | 3,435 |
| | $ | 4,168 |
|
The following table summarizes the changes in the projected benefit obligation and fair value of plan assets for the plan years ended December 31:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Projected benefit obligation at beginning of year | $ | 79,426 |
| | $ | 89,482 |
|
Interest cost | 3,257 |
| | 3,053 |
|
Benefit payments | (4,114 | ) | | (5,796 | ) |
Change in assumptions | 8,259 |
| | (8,051 | ) |
Experience (loss) gain | (624 | ) | | 738 |
|
Projected benefit obligation at end of year | $ | 86,204 |
| | $ | 79,426 |
|
| | | |
Fair value of plan assets at beginning of year | $ | 57,825 |
| | $ | 54,061 |
|
Employer contributions (1) | 20,755 |
| | 13,042 |
|
Actual return on plan assets | 9,210 |
| | (3,482 | ) |
Benefit payments | (4,114 | ) | | (5,796 | ) |
Fair value of plan assets at end of year | $ | 83,676 |
| | $ | 57,825 |
|
| |
(1) | The Corporation funds at least the minimum amount required by federal law and regulations. The Corporation contributed $20.8 million and $13.0 million to the Pension Plan during 2019 and 2018, respectively. |
The following table presents the funded status of the Pension Plan, included in other liabilities on the consolidated balance sheets, as of December 31:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Projected benefit obligation | $ | (86,204 | ) | | $ | (79,426 | ) |
Fair value of plan assets | 83,676 |
| | 57,825 |
|
Funded status | $ | (2,528 | ) | | $ | (21,601 | ) |
The following table summarizes the changes in the unrecognized net loss included as a component of accumulated other comprehensive income (loss):
|
| | | | | | | |
| Unrecognized Net Loss |
| Before tax | | Net of tax |
| (in thousands) |
Balance as of December 31, 2017 | $ | 28,559 |
| | $ | 18,564 |
|
Recognized as a component of 2018 periodic pension cost | (2,429 | ) | | (1,892 | ) |
Unrecognized gains arising in 2018 | (1,783 | ) | | (1,389 | ) |
Re-measurement adjustments for tax rate changes | — |
| | 3,678 |
|
Balance as of December 31, 2018 | 24,347 |
| | 18,961 |
|
Recognized as a component of 2019 periodic pension cost | (1,981 | ) | | (1,543 | ) |
Unrecognized losses arising in 2019 | 1,180 |
| | 919 |
|
Balance as of December 31, 2019 | $ | 23,546 |
| | $ | 18,337 |
|
The total amount of unrecognized net loss that will be amortized as a component of net periodic pension cost in 2020 is expected to be $2.1 million.
Thefollowingrateswereusedtocalculatenetperiodicpensioncost and the present value of benefit obligationsasof December 31:
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Discount rate-projected benefit obligation | 3.25 | % | | 4.25 | % | | 3.50 | % |
Expected long-term rate of return on plan assets | 5.00 | % | | 5.00 | % | | 5.00 | % |
The discount rates used were determined using the Citigroup Average Life discount rate table, as adjusted based on the Pension Plan's expected benefit payments and rounded to the nearest 0.25%.
The 5.00% long-term rate of return onplan assets used to calculate the net periodic pension cost was based on historical returns, adjusted for expectations of long-term asset returns based on the December 31, 20172019 weighted average asset allocations. The expected long-term return is considered to be appropriate based on the asset mix and the historical returns realized.
The following table presents a summary of the fair values of the Pension Plan’s assets as of December 31:
|
| | | | | | | | | | | | | |
| 2019 | | 2018 |
| Estimated Fair Value | | % of Total Assets | | Estimated Fair Value | | % of Total Assets |
| (dollars in thousands) |
Equity mutual funds | $ | 26,377 |
| |
| | $ | 18,532 |
| |
|
Equity common trust funds | 11,810 |
| |
| | 9,062 |
| |
|
Equity securities | 38,187 |
| | 45.6 | % | | 27,594 |
| | 47.7 | % |
Cash and money market funds | 21,182 |
| |
| | 10,754 |
| |
|
Fixed income mutual funds | 14,370 |
| |
| | 11,523 |
| |
|
Corporate debt securities | 3,124 |
| |
| | 2,985 |
| |
|
U.S. Government agency securities | 3,078 |
| |
|
| | — |
| |
|
|
Fixed income securities and cash | 41,754 |
| | 49.9 | % | | 25,262 |
| | 43.7 | % |
Other alternative investment funds | 3,735 |
| | 4.5 | % | | 4,969 |
| | 8.6 | % |
Total | $ | 83,676 |
| | 100.0 | % | | $ | 57,825 |
| | 100.0 | % |
Investment allocation decisions are made by a retirement plan committee. The goal of the investment allocation strategy is to match certain benefit obligations with maturities of fixed income securities. Alternative investments may include managed futures, commodities, real estate investment trusts, master limited partnerships, and long-short strategies with traditional stocks and bonds. All alternative investments are in the form of mutual funds, not individual contracts, to enable daily liquidity.
The fair values for all assets held by the Pension Plan, excluding equity common trust funds, are based on quoted prices for identical instruments and would be categorized as Level 1 assets under non-cancelable operating leases with initial terms exceeding one yearthe fair value hierarchy. Equity common trust funds would be categorized as Level 2 assets under the fair value hierarchy.
Estimated future benefit payments are as follows (in thousands):
|
| | | |
Year | |
2020 | $ | 4,239 |
|
2021 | 4,395 |
|
2022 | 4,454 |
|
2023 | 4,569 |
|
2024 | 4,651 |
|
2025 – 2029 | 24,330 |
|
| $ | 46,638 |
|
|
| | | |
Year | |
2018 | $ | 17,417 |
|
2019 | 15,730 |
|
2020 | 14,592 |
|
2021 | 12,988 |
|
2022 | 10,763 |
|
Thereafter | 45,905 |
|
| $ | 117,395 |
|
Postretirement Benefits
The Corporation provides medical benefits and life insurance benefits under a postretirement benefits plan ("Postretirement Plan") to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998. Prior to February 1, 2014, certain full-time employees became eligible for these discretionary benefits if they reached retirement age while working for the Corporation. The Corporation recognizes the funded status of the postretirement plan on the consolidated balance sheets and recognizes the changes in that funded status through other comprehensive income.
The components of the net benefit for postretirement benefits other than pensions are as follows:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Interest cost | $ | 61 |
| | $ | 57 |
| | $ | 68 |
|
Net amortization and deferral | (556 | ) | | (559 | ) | | (565 | ) |
Net postretirement benefit | $ | (495 | ) | | $ | (502 | ) | | $ | (497 | ) |
This table summarizes the changes in the accumulated postretirement benefit obligation for the years ended December 31:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Accumulated postretirement benefit obligation at beginning of year | $ | 1,520 |
| | $ | 1,700 |
|
Interest cost | 61 |
| | 57 |
|
Benefit payments | (187 | ) | | (205 | ) |
Experience gain | 17 |
| | 35 |
|
Change in assumptions | 39 |
| | (67 | ) |
Accumulated postretirement benefit obligation at end of year | $ | 1,450 |
| | $ | 1,520 |
|
The fair values of the plan assets were $0 as of both December 31, 2019 and 2018. The funded status of the Postretirement Plan, included in other liabilities on the consolidated balance sheets as of both December 31, 2019 and 2018 was $1.5 million.
The following table summarizes the changes in items recognized as a component of accumulated other comprehensive income (loss):
|
| | | | | | | | | | | | | | | |
| Before tax | | |
| Unrecognized Prior Service Cost | | Unrecognized Net Loss (Gain) | | Total | | Net of tax |
| (in thousands) |
Balance as of December 31, 2017 | $ | (4,404 | ) | | $ | (1,159 | ) | | $ | (5,563 | ) | | $ | (3,617 | ) |
Recognized as a component of 2018 postretirement benefit cost | 464 |
| | 95 |
| | 559 |
| | 435 |
|
Unrecognized gains arising in 2018 | — |
| | (32 | ) | | (32 | ) | | (25 | ) |
Re-measurement adjustments for tax rate changes in 2018 | — |
| | — |
| | — |
| | (721 | ) |
Balance as of December 31, 2018 | (3,940 | ) | | (1,096 | ) | | (5,036 | ) | | (3,928 | ) |
Recognized as a component of 2019 postretirement benefit cost | 464 |
| | 92 |
| | 556 |
| | 433 |
|
Unrecognized gains arising in 2019 | — |
| | 56 |
| | 56 |
| | 44 |
|
Balance as of December 31, 2019 | $ | (3,476 | ) | | $ | (948 | ) | | $ | (4,424 | ) | | $ | (3,451 | ) |
The following rates were used to calculate net periodic postretirement benefit cost and the present value of benefit obligations as of December 31:
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Discount rate-projected benefit obligation | 3.25 | % | | 4.25 | % | | 3.50 | % |
Expected long-term rate of return on plan assets | 3.00 | % | | 3.00 | % | | 3.00 | % |
The discount rates used to calculate the accumulated postretirement benefit obligation were determined using the Citigroup Average Life discount rate table, as adjusted based on the Postretirement Plan's expected benefit payments and rounded to the nearest 0.25%.
Estimated future benefit payments under the Postretirement Plan are as follows (in thousands):
|
| | | |
Year | |
2020 | $ | 178 |
|
2021 | 165 |
|
2022 | 153 |
|
2023 | 140 |
|
2024 | 128 |
|
2025 – 2029 | 481 |
|
| $ | 1,245 |
|
|
| | | | |
NOTE 17 – COMMITMENTS AND CONTINGENCIESLEASES |
Commitments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.has operating leases for branches, corporate offices and land.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments is expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, equipment and income producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. Commercial letters of credit are conditional commitments issued to facilitate foreign and domestic trade transactions for customers. The credit risk involved in issuing letters of credit is similar to that involved in extending loan facilities. These obligations are underwritten consistently with commercial lending standards. The maximum exposure to loss for standby and commercial letters of credit is equal to the contractual (or notional) amount of the instruments.
The Corporation records a reserve for unfunded commitments, included in other liabilities on the consolidated balance sheets, which represents management’s estimate of losses inherent in commitments to extend credit and letters of credit. See "Note 4 - Loans and Allowance for Credit Losses," for additional information.
The following table presents commitmentsthe components of lease expense, which is included in net occupancy expense on the consolidated statements of income (in thousands):
|
| | | | |
| | 2019 |
Operating lease expense | $ | 18,852 |
|
Variable lease expense | 2,924 |
|
Sublease income | (791 | ) |
Total lease expense | $ | 20,985 |
|
Supplemental consolidated balance sheet information related to extend credit and letters of credit:leases was as follows (dollars in thousands):
|
| | | | | | |
Operating Leases | | Balance Sheet Classification | | 2019 |
ROU assets | | Other assets | | $ | 102,779 |
|
Lease liabilities | | Other liabilities | | $ | 109,608 |
|
Weighted average remaining lease term | | | | 8.1 years |
|
Weighted average discount rate | | | | 3.05 | % |
|
| | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Commercial and other | $ | 3,689,700 |
| | $ | 3,673,815 |
|
Home equity | 1,422,284 |
| | 1,368,465 |
|
Commercial mortgage and construction | 1,093,045 |
| | 1,033,287 |
|
Total commitments to extend credit | $ | 6,205,029 |
| | $ | 6,075,567 |
|
| | | |
Standby letters of credit | $ | 326,973 |
| | $ | 356,359 |
|
Commercial letters of credit | 41,801 |
| | 38,901 |
|
Total letters of credit | $ | 368,774 |
| | $ | 395,260 |
|
Residential Lending
Residential mortgages are originated and sold by the Corporation and consist primarily of conforming, prime loans sold to government sponsored agencies such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The Corporation also sells certain residential mortgages to non-government sponsored agency investors.
The Corporation provides customary representationsdiscount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and warrantiesas of the lease commencement or modification date for leases subsequently entered into.
Supplemental cash flow information related to government sponsored agenciesoperating leases was as follows (in thousands):
|
| | | |
| 2019 |
Cash paid for amounts included in the measurement of lease liabilities | $ | 18,563 |
|
ROU assets obtained in exchange for lease obligations | 117,496 |
|
Lease payment obligations for each of the next five years and investors that specify, among other things, that the loans have been underwrittenthereafter, with a reconciliation to the standards established by the government sponsored agency or investor. The Corporation may be required to repurchase a loan or reimburse the government sponsored agency or investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. As of December 31, 2017 and 2016, total outstanding repurchase requests totaled approximately $543,000.Corporation's lease liability were as follows (in thousands):
|
| | | |
Year | Operating Leases |
2020 | $ | 18,695 |
|
2021 | 17,582 |
|
2022 | 16,278 |
|
2023 | 14,106 |
|
2024 | 12,410 |
|
Thereafter | 42,394 |
|
Total lease payments | 121,465 |
|
Less: imputed interest | (11,857 | ) |
Present value of lease liabilities | $ | 109,608 |
|
From 2000 to 2011, the Corporation sold loans to the FHLB of Pittsburgh under its Mortgage Partnership Finance Program ("MPF Program"). No loans were sold under this program since 2011. The Corporation provided a "credit enhancement" for residential mortgage loans sold under the MPF Program whereby it would assume credit losses in excess of a defined "First Loss Account," or "FLA" balance, up to specified amounts. The FLA is funded by the FHLB of Pittsburgh based on a percentage of the outstanding principal balance of loans sold. As of December 31, 2017, the unpaid principal balance of loans sold under the MPF Program was approximately $84 million. As of December 31, 2017 and 2016, the reserves for estimated credit losses related to loans sold under the MPF Program were $1.2 million and $1.7 million, respectively. Required reserves are calculated based on delinquency status and estimated loss rates established through the Corporation's existing allowance for credit loss methodology for residential mortgage loans.
As of December 31, 2017 and 2016,2019, the reserveCorporation had not entered into any material leases that have not yet commenced.
In 2018, under Topic 840, future minimum lease payments for losses on residential mortgage loans sold was $2.1 million and $2.5 million, respectively, including both reserves for credit losses under the MPF Program and reserves for representation and warranty exposures. Management believes that the reserves recordedoperating leases having initial or remaining noncancellable lease terms in excess of one year as of December 31, 2017 are adequate. However, declines in collateral values, the identification of additional loans to be repurchased, or a deterioration in the credit quality of loans sold under the MPF Program could necessitate additional reserves, established2018 were $18.0 million, $17.3 million, $15.7 million, $13.7 million, $11.4 million for years 2019 through charges to earnings, in the future.
Legal Proceedings
The Corporation2023, respectively, and its subsidiaries are involved in various legal proceedings in the ordinary course of business of the Corporation. The Corporation periodically evaluates the possible impact of pending litigation matters based on, among other factors, the advice of counsel, available insurance coverage and recorded liabilities and reserves for probable legal liabilities and costs. In addition, from time to time, the Corporation is the subject of investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other industry participants. These inquiries could lead to administrative, civil or criminal proceedings, and could possibly result in fines, penalties, restitution or the need to alter the Corporation’s business practices, and cause the Corporation to incur additional costs. The Corporation’s practice is to cooperate fully with regulatory and governmental investigations.
As of the date of this report, the Corporation believes that any liabilities, individually or$43.3 million in the aggregate which may result from the final outcomes of pending proceedings will not have a material adverse effect on the financial condition of the Corporation. However, legal proceedings are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.all years thereafter.
BSA/AML Enforcement Orders
The Corporation and three of its bank subsidiaries are subject to regulatory enforcement orders issued during 2014 and 2015 by their respective federal and state bank regulatory agencies relating to identified deficiencies in the Corporation’s centralized Bank Secrecy Act and anti-money laundering compliance program (the "BSA/AML Compliance Program"), which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the "BSA/AML Requirements"). The regulatory enforcement orders, which are in the form of consent orders or orders to cease and desist issued upon consent ("Consent Orders"), generally require, among other things, that the Corporation and the affected bank subsidiaries undertake a number of required actions to strengthen and enhance the BSA/AML Compliance Program, and, in some cases, conduct retrospective reviews of past account activity and transactions, as well as certain reports filed in accordance with the BSA/AML Requirements, to determine whether suspicious activity and certain transactions in currency were properly identified and reported in accordance with the BSA/AML Requirements. The Corporation and the affected bank subsidiaries have implemented numerous enhancements to the BSA/AML Compliance Program, completed the retrospective
reviews required under the Consent Orders, and continue to strengthen and refine the BSA/AML Compliance Program to achieve a sustainable program in accordance with the BSA/AML Requirements. In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the Consent Orders remain in effect, the Corporation is subject to certain restrictions on expansion activities of the Corporation and its bank subsidiaries. Further, any failure to comply with the requirements of any of the Consent Orders involving the Corporation or the affected bank subsidiaries could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or its bank subsidiaries, or the assessment of fines or penalties.
As previously disclosed, on October 27, 2017, the Office of the Comptroller of the Currency (the "OCC") terminated the Consent Orders that it issued on July 14, 2014 to three of the Corporation's bank subsidiaries, Fulton Bank, N.A., FNB Bank, N.A. and Swineford National Bank, relating to deficiencies in the BSA/AML Compliance Programs at those bank subsidiaries.
Fair Lending Investigation
During the second quarter of 2015, Fulton Bank, N.A., the Corporation’s largest bank subsidiary, received a letter from the U.S. Department of Justice (the "Department") indicating that the Department had initiated an investigation regarding potential violations of fair lending laws (specifically, the Equal Credit Opportunity Act and the Fair Housing Act) by Fulton Bank, N.A. in certain geographies. Fulton Bank, N.A. has been and is cooperating with the Department and responding to the Department’s requests for information. During the third quarter of 2016, the Department informed the Corporation, Fulton Bank, N.A., and three of the Corporation’s other bank subsidiaries, Fulton Bank of New Jersey, The Columbia Bank and Lafayette Ambassador Bank, that the Department was expanding its investigation of potential lending discrimination on the basis of race and national origin to encompass additional geographies that were not included in the initial letter from the Department. In addition to requesting information concerning the lending activities of these bank subsidiaries, the Department also requested information concerning the Corporation and the residential mortgage lending activities conducted under the Fulton Mortgage Company brand, the trade name used by all of the Corporation’s bank subsidiaries for residential mortgage lending. The investigation relates to lending activities during the period January 1, 2009 to the present. The Corporation and the identified bank subsidiaries are cooperating with the Department and responding to the Department’s requests for information. The Corporation and its bank subsidiaries are not able at this time to determine the terms on which this investigation will be resolved or the timing of such resolution, or to reliably estimate the amounts of any settlement, fines or other penalties or the cost of any other remedial actions, if enforcement action is taken. In addition, should the investigation result in an enforcement action against the Corporation or its bank subsidiaries, or a settlement with the Department, the ability of the Corporation and its bank subsidiaries to engage in certain expansion or other activities may be restricted.
Agostino, et al. Litigation
Fulton Bank, N.A. (the "Bank"), the Corporation’s largest bank subsidiary, and two unrelated, third-party defendants, Ameriprise Financial Services, Inc. ("Ameriprise") and Riverview Bank ("Riverview"), were named as defendants in a lawsuit brought on behalf of a group of 67 plaintiffs filed on March 31, 2016, in the Court of Common Pleas for Dauphin County, Pennsylvania (Agostino, et al. v. Ameriprise Financial Services, Inc., et al., No. 2016-CV-2048-CV). The plaintiffs in this action were clients of Jeffrey M. Mottern, a now-deceased attorney, who is alleged to have operated a fraud scheme over a period of years through the sale of fictitious high-yield investments or by otherwise misappropriating funds entrusted to Mr. Mottern. The lawsuit sought damages from the defendants, including the Bank, alleged to be in excess of $11.3 million, treble damages and attorneys’ fees with respect to alleged violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, punitive damages, plus interest and costs.
In October 2017, the Bank and the plaintiffs agreed to settle the lawsuit. Pursuant to the terms of the settlement agreement between the Bank and the plaintiffs, the claims against the Bank were dismissed with prejudice on December 13, 2017, and the Bank made the agreed-upon settlement payment. Also during December 2017, the Corporation received reimbursement from the Corporation’s insurance carrier for the full amount of the agreed-upon settlement payment.
|
| | | | |
NOTE 18 – COMMITMENTS AND CONTINGENCIES |
Commitments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments is expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, equipment and income producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. Commercial letters of credit are conditional commitments issued to facilitate foreign and domestic trade transactions for customers. The credit risk involved in issuing letters of credit is similar to that involved in extending loan facilities. These obligations are underwritten consistently with commercial lending standards. The maximum exposure to loss for standby and commercial letters of credit is equal to the contractual (or notional) amount of the instruments.
The Corporation records a reserve for unfunded commitments, included in other liabilities on the consolidated balance sheets, which represents management’s estimate of losses inherent in commitments to extend credit and letters of credit. See "Note 4 - Loans and Leases and Allowance for Credit Losses," for additional information.
The following table presents the Corporation’s commitments to extend credit and letters of credit:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Commercial, industrial, financial and agricultural | $ | 3,997,401 |
| | $ | 3,642,545 |
|
Real estate - home equity | 1,523,494 |
| | 1,475,066 |
|
Real estate - commercial mortgage and real estate - construction | 1,168,624 |
| | 1,188,972 |
|
Total commitments to extend credit | $ | 6,689,519 |
| | $ | 6,306,583 |
|
| | | |
Standby letters of credit | $ | 303,020 |
| | $ | 309,352 |
|
Commercial letters of credit | 50,432 |
| | 48,682 |
|
Total letters of credit | $ | 353,452 |
| | $ | 358,034 |
|
Residential Lending
The Corporation originates and sells residential mortgages to secondary market investors. The Corporation provides customary representations and warranties to secondary market investors that specify, among other things, that the loans have been underwritten to the standards of the secondary market investor. The Corporation may be required to repurchase specific loans, or reimburse the investor for a credit loss incurred on a sold loan if it is determined that the representations and warranties have not been met. Under some agreements with secondary market investors, the Corporation may have additional credit exposure beyond customary representations and warranties, based on the specific terms of those agreements.
The Corporation maintains a reserve for estimated credit losses related to loans sold to investors. As of December 31, 2019 and 2018, the total reserve for losses on residential mortgage loans sold was $3.2 million and $2.1 million, respectively, including reserves for both representation and warranty and credit loss exposures.
Legal Proceedings
The Corporation is involved in various pending and threatened claims and other legal proceedings in the ordinary course of its business activities. The Corporation evaluates the possible impact of these matters, taking into consideration the most recent information available. A loss reserve is established for those matters for which the Corporation believes a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual
losses with respect to any such matter may be more or less than the amount estimated by the Corporation. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated by the Corporation, no loss reserve is established.
In addition, from time to time, the Corporation is involved in investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other companies. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving the Corporation, and could result in fines, penalties, restitution, other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices. The Corporation’s practice is to cooperate fully with regulatory and governmental inquiries and investigations.
As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending legal proceedings, or regulatory or governmental inquiries or investigations, will not have a material adverse effect on the financial condition of the Corporation. However, legal proceedings, inquiries and investigations are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of operations in any future period, depending, in part, upon the size of the loss or liability imposed and the operating results for the period, and could have a material adverse effect on the Corporation’s business. In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause the Corporation to incur additional expenses, which could be significant, and possibly material, to the Corporation’s results of operations in any future period.
SEC Investigation
The Corporation is responding to an investigation by the staff of the Division of Enforcement of the SEC regarding certain accounting determinations that could have impacted the Corporation’s reported earnings per share. The Corporation believes that its financial statements filed with the SEC in Forms 10-K and 10-Q present fairly, in all material respects, its financial condition, results of operations and cash flows as of or for the periods ending on their respective dates. The Corporation is cooperating fully with the SEC and at this time cannot predict when or how the investigation will be resolved.
Kress v. Fulton Bank, N.A.
On October 15, 2019, a former Fulton Bank teller supervisor, D. Kress filed a putative class action lawsuit on behalf of herself and other similarly situated non-exempt, hourly employees in the U.S. District Court for the District of New Jersey, D. Kress v. Fulton Bank, N.A., Case No. 1:19-cv-18985. Fulton Bank accepted service of process on January 20, 2020. The lawsuit alleges that Fulton Bank did not record or otherwise account for the amount of time which non-exempt employees who are paid based on their time worked, spent conducting branch opening security procedures. The allegation is that, as a result, Fulton Bank did not properly compensate those employees for their regular and overtime wages. The lawsuit alleges that by doing so, Fulton violated: (i) the federal Fair Labor Standards Act and seeks back overtime wages for a period of three years, liquidated damages and attorney fees and costs; (ii) the New Jersey State Wage and Hour Law and seeks back overtime wages for a period of six years, treble damages and attorney fees and costs; and (iii) the New Jersey Wage Payment Law and seeks back wages for a period of six years, treble damages and attorney fees and costs. The lawsuit also asserts New Jersey common law claims seeking compensatory damages and interest.
|
| | | | |
NOTE 19 – FAIR VALUE MEASUREMENTS |
All assets and liabilities measured at fair value on both a recurring and nonrecurring basis have been categorized based on the method of their fair value determination.
The following tables summarizes the Corporation’spresent assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets as of December 31:
sheets:
|
| | | | | | | | | | | | | | | |
| 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
Loans held for sale | $ | — |
| | $ | 37,828 |
| | $ | — |
| | $ | 37,828 |
|
Available for sale investment securities: |
| |
| |
| |
|
State and municipal securities | — |
| | 652,927 |
| | — |
| | 652,927 |
|
Corporate debt securities | — |
| | 374,957 |
| | 2,400 |
| | 377,357 |
|
Collateralized mortgage obligations | — |
| | 693,718 |
| | — |
| | 693,718 |
|
Residential mortgage-backed securities | — |
| | 177,312 |
| | — |
| | 177,312 |
|
Commercial mortgage-backed securities | — |
| | 494,297 |
| | — |
| | 494,297 |
|
Auction rate securities | — |
| | — |
| | 101,926 |
| | 101,926 |
|
Total available for sale investment securities | — |
| | 2,393,211 |
| | 104,326 |
| | 2,497,537 |
|
Other assets: | | | | | | | |
Investments held in Rabbi Trust | 22,213 |
| | — |
| | — |
| | 22,213 |
|
Derivative assets | 230 |
| | 145,365 |
| | — |
| | 145,595 |
|
Total assets | $ | 22,443 |
| | $ | 2,576,404 |
| | $ | 104,326 |
| | $ | 2,703,173 |
|
Other Liabilities | | | | | | | |
Deferred compensation liabilities | $ | 22,213 |
| | $ | — |
| | $ | — |
| | $ | 22,213 |
|
Derivative liabilities | 199 |
| | 76,447 |
| | — |
| | 76,646 |
|
Total liabilities | $ | 22,412 |
| | $ | 76,447 |
| | $ | — |
| | $ | 98,859 |
|
| | | | | | | |
| 2018 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
Loans held for sale | $ | — |
| | $ | 27,099 |
| | $ | — |
| | $ | 27,099 |
|
Available for sale investment securities: |
| |
| |
| |
|
U.S. Government sponsored agency securities | — |
| | 31,632 |
| | — |
| | 31,632 |
|
State and municipal securities | — |
| | 279,095 |
| | — |
| | 279,095 |
|
Corporate debt securities | — |
| | 106,258 |
| | 3,275 |
| | 109,533 |
|
Collateralized mortgage obligations | — |
| | 832,080 |
| | — |
| | 832,080 |
|
Residential mortgage-backed securities | — |
| | 463,344 |
| | — |
| | 463,344 |
|
Commercial mortgage-backed securities | — |
| | 261,616 |
| | — |
| | 261,616 |
|
Auction rate securities | — |
| | — |
| | 102,994 |
| | 102,994 |
|
Total available for sale investment securities | — |
| | 1,974,025 |
| | 106,269 |
| | 2,080,294 |
|
Other assets: | | | | | | | |
Investments held in Rabbi Trust | 18,415 |
| | — |
| |
|
| | 18,415 |
|
Derivative assets | 392 |
| | 62,552 |
| | — |
| | 62,944 |
|
Total assets | $ | 18,807 |
| | $ | 2,063,676 |
| | $ | 106,269 |
| | $ | 2,188,752 |
|
Other Liabilities | | | | | | | |
Deferred compensation liabilities | $ | 18,415 |
| | $ | — |
| | $ | — |
| | $ | 18,415 |
|
Derivative liabilities | 381 |
| | 48,185 |
| | — |
| | 48,566 |
|
Total liabilities | $ | 18,796 |
| | $ | 48,185 |
| | $ | — |
| | $ | 66,981 |
|
|
| | | | | | | | | | | | | | | |
| 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
Mortgage loans held for sale | $ | — |
| | $ | 31,530 |
| | $ | — |
| | $ | 31,530 |
|
Available for sale investment securities: |
| |
| |
| |
|
Equity securities | 918 |
| | — |
| | — |
| | 918 |
|
U.S. Government sponsored agency securities | — |
| | 5,938 |
| | — |
| | 5,938 |
|
State and municipal securities | — |
| | 408,949 |
| | — |
| | 408,949 |
|
Corporate debt securities | — |
| | 93,552 |
| | 3,757 |
| | 97,309 |
|
Collateralized mortgage obligations | — |
| | 602,623 |
| | — |
| | 602,623 |
|
Residential mortgage-backed securities | — |
| | 1,120,796 |
| | — |
| | 1,120,796 |
|
Commercial mortgage-backed securities | — |
| | 212,755 |
| | — |
| | 212,755 |
|
Auction rate securities | — |
| | — |
| | 98,668 |
| | 98,668 |
|
Total available for sale investment securities | 918 |
| | 2,444,613 |
| | 102,425 |
| | 2,547,956 |
|
Other assets | 19,451 |
| | 44,539 |
| | — |
| | 63,990 |
|
Total assets | $ | 20,369 |
| | $ | 2,520,682 |
| | $ | 102,425 |
| | $ | 2,643,476 |
|
Other liabilities | $ | 19,357 |
| | $ | 39,014 |
| | $ | — |
| | $ | 58,371 |
|
| | | | | | | |
| 2016 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
Mortgage loans held for sale | $ | — |
| | $ | 28,697 |
| | $ | — |
| | $ | 28,697 |
|
Available for sale investment securities: |
| |
| |
| |
|
Equity securities | 24,526 |
| | — |
| | — |
| | 24,526 |
|
U.S. Government sponsored agency securities | — |
| | 134 |
| | — |
| | 134 |
|
State and municipal securities | — |
| | 391,641 |
| | — |
| | 391,641 |
|
Corporate debt securities | — |
| | 106,537 |
| | 2,872 |
| | 109,409 |
|
Collateralized mortgage obligations | — |
| | 593,860 |
| | — |
| | 593,860 |
|
Residential mortgage-backed securities | — |
| | 1,317,838 |
| | — |
| | 1,317,838 |
|
Commercial mortgage-backed securities | — |
| | 24,563 |
| | — |
| | 24,563 |
|
Auction rate securities | — |
| | — |
| | 97,256 |
| | 97,256 |
|
Total available for sale investment securities | 24,526 |
| | 2,434,573 |
| | 100,128 |
| | 2,559,227 |
|
Other assets | 17,111 |
| | 44,481 |
| | — |
| | 61,592 |
|
Total assets | $ | 41,637 |
| | $ | 2,507,751 |
| | $ | 100,128 |
| | $ | 2,649,516 |
|
Other liabilities | $ | 17,032 |
| | $ | 41,734 |
| | $ | — |
| | $ | 58,766 |
|
The valuation techniques used to measure fair value for the items in the table abovepreceding tables are as follows:
Mortgage loans held for sale – This category consists of mortgage loans held for sale that the Corporation has elected to measure at fair value. Fair values as of December 31, 2017 and 2016 were measured as the price that secondary market investors were offering for loans with similar characteristics. See "Note 1 - Summary of Significant Accounting Policies" for details related to the Corporation’s election to measure assets and liabilities at fair value.
Available for sale investment securities – Included within | |
• | Loans held for sale – This category includes mortgage loans held for sale that are measured at fair value. Fair values as of December 31, 2019 and 2018 were measured as the price that secondary market investors were offering for loans with similar characteristics. See "Note 1 - Summary of Significant Accounting Policies" for details related to the Corporation’s election to measure assets and liabilities at fair value. |
| |
• | Available for sale investment securities – Included in this asset category are both equity and debt securities. Level 2 available for sale debt securities are valued by a third-party pricing service commonly used in the banking industry. The pricing service commonly used in the banking industry. The pricing service |
uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings and matrix pricing.
Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.
Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is doneperformed for approximately 80%95% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.
Equity securities – Equity securities consist of stocks of financial institutions ($7,000 at December 31, 2017 and $23.5 million at December 31, 2016) and other equity investments ($911,000 at December 31, 2017 and $1.0 million at December 31, 2016). These Level 1 investments are measured at fair value based on quoted prices for identical securities in active markets.
U.S. Government securities/U.S. Government sponsored agency securities/State and municipal securities/Collateralized mortgage obligations/Residential mortgage-backed securities/Commercial mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above.
Corporate debt securities – This category consists of subordinated and senior debt issued by financial institutions ($61.9 million at December 31, 2017 and $65.2 million at December 31, 2016), single-issuer trust preferred securities issued by financial institutions ($30.7 million at December 31, 2017 and $39.8 million at December 31, 2016), pooled trust preferred securities issued by financial institutions ($707,000 at December 31, 2017 and $422,000 at December 31, 2016) and other corporate debt issued by non-financial institutions ($4.0 million at December 31, 2017 and 2016).
| |
• | State and municipal securities/Collateralized mortgage obligations/Residential mortgage-backed securities/Commercial mortgage-backed securities – These debt securities are classified as Level 2 investments. Fair values are determined by a third-party pricing service, as detailed above. |
| |
• | Corporate debt securities – This category consists of subordinated and senior debt issued by financial institutions ($362.3 million at December 31, 2019 and $86.1 million at December 31, 2018), single-issuer trust preferred securities issued by financial institutions ($11.2 million at December 31, 2019 and $18.6 million at December 31, 2018), pooled trust preferred securities issued by financial institutions ($0 at December 31, 2019 and $875,000 at December 31, 2018) and other corporate debt issued by non-financial institutions ($3.9 million at December 31, 2019 and December 31, 2018). |
Level 2 investments include subordinated debt and senior debt, other corporate debt issued by non-financial institutions and $27.7$8.8 million and $37.3$16.3 million of single-issuer trust preferred securities held at December 31, 20172019 and 2016,2018, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.
Level 3 investments include the Corporation's investments in pooled trust preferred securities ($707,0000 at December 31, 20172019 and $422,000$875,000 at December 31, 2016)2018) and certain single-issuer trust preferred securities ($3.12.4 million at December 31, 20172019 and $2.5 million at December 31, 2016)2018). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive markets for similar investments. Level 3 values are tested by management primarily through trend analysis, by comparing current values to those reported at the end of the preceding calendar quarter, and determining if they are reasonable based on price and spread movements for this asset class.
Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime within the next five years. If the assumed return to market liquidity was lengthened beyond the next five years, this would result in a decrease in the fair value of these ARCs. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid. Level 3 values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.
Other assets – Included within this category are the following:
Level 1 assets, consisting of mutual funds that are held in trust for employee deferred compensation plans ($19.0 million at December 31, 2017 and $16.4 million at December 31, 2016) and the fair value of foreign currency exchange contracts ($460,000 at December 31, 2017 and $745,000 at December 31, 2016). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets. | |
• | Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime within the next five years. If the assumed return to market liquidity was lengthened beyond the next five years, this would result in a decrease in the fair value of these ARCs. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid. Level 3 values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels. |
| |
• | Investments held in Rabbi Trust - This category consists of mutual funds that are held in trust for employee deferred compensation plans that the Corporation has elected to measure at fair value. Shares of mutual funds are valued based on net asset value, which represents quoted market prices for the underlying shares held in the mutual funds, and as such, are classified as Level 1. |
| |
• | Derivative assets - Fair value of foreign currency exchange contracts classified as Level 1 assets ($230,000 at December 31, 2019 and $392,000 at December 31, 2018). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets. |
Level 2 assets, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($1.11.2 million at December 31, 20172019 and $3.1$1.2 million at December 31, 2016)2018) and the fair value of interest rate swaps ($43.4144.2 million at December 31, 20172019 and $41.4
$61.4 million at December 31, 2016)2018). The fair values of the interest rate locks, forward commitments and interest rate
swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See "Note 10 - Derivative Financial Instruments," for additional information.
Other liabilities – Included within this category are the following:
Level 1 employee deferred compensation liabilities which represent amounts due to employees under deferred compensation plans ($19.0 million at December 31, 2017 and $16.4 million at December 31, 2016) and the fair value of foreign currency exchange contracts ($374,000 at December 31, 2017 and $668,000 at December 31, 2016). The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Other assets," | |
• | Deferred compensation liabilities – Fair value of amounts due to employees under deferred compensation plans, classified as Level 1 liabilities and are included in other liabilities on the consolidated balance sheets. The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Investments held in Rabbi Trust" above. |
| |
• | Derivative liabilities - Level 1 liabilities, representing the fair value of foreign currency exchange contracts ($199,000 at December 31, 2019 and $381,000 at December 31, 2018). The fair values of these liabilities are determined in the same manner as the related assets. |
Level 2 liabilities, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($272,000424,000 at December 31, 20172019 and $339,000$1.1 million at December 31, 2016)2018) and the fair value of interest rate swaps ($38.776.0 million at December 31, 20172019 and $41.4$47.1 million at December 31, 2016)2018).
The fair values of these liabilities are determined in the same manner as the related assets, which are described under the heading "Other"Derivative assets" above.
The following table presents the changes in available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the years ended December 31:
|
| | | | | | | | | | | |
| Pooled Trust Preferred Securities | | Single-issuer Trust Preferred Securities | | Auction Rate Securities |
| (in thousands) |
Balance as of December 31, 2017 | $ | 707 |
| | $ | 3,050 |
| | $ | 98,668 |
|
Realized adjustments to fair value | — |
| | 71 |
| | — |
|
Unrealized adjustments to fair value (1) | 168 |
| | 221 |
| | 4,326 |
|
Settlements - calls | — |
| | (950 | ) | | — |
|
Discount accretion (2) | — |
| | 8 |
| | — |
|
Balance as of December 31, 2018 | $ | 875 |
| | $ | 2,400 |
| | $ | 102,994 |
|
Sales | (770 | ) | | — |
| | — |
|
Unrealized adjustments to fair value (1) | (105 | ) | | (4 | ) | | (1,068 | ) |
Discount accretion (2) | — |
| | 4 |
| | — |
|
Balance as of December 31, 2019 | $ | — |
| | $ | 2,400 |
| | $ | 101,926 |
|
|
| | | | | | | | | | | |
| Pooled Trust Preferred Securities | | Single-issuer Trust Preferred Securities | | Auction Rate Securities |
| (in thousands) |
Balance as of December 31, 2015 | $ | 706 |
| | $ | 2,630 |
| | $ | 98,059 |
|
Unrealized adjustments to fair value (1) | (286 | ) | | (190 | ) | | (1,246 | ) |
Discount accretion (2) | 2 |
| | 10 |
| | 443 |
|
Balance as of December 31, 2016 | 422 |
| | 2,450 |
| | 97,256 |
|
Unrealized adjustments to fair value (1) | 285 |
| | 588 |
| | 1,217 |
|
Discount accretion (2) | — |
| | 12 |
| | 195 |
|
Balance as of December 31, 2017 | $ | 707 |
| | $ | 3,050 |
| | $ | 98,668 |
|
| |
(1) | Pooled trust preferred securities, single-issuer trust preferred securities and ARCs are classified as available for sale investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of "available for sale at estimated fair value" on the consolidated balance sheets. |
unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of available for sale investment securities on the consolidated balance sheets.
| |
(2) | Included as a component of net"net interest incomeincome" on the consolidated statements of income. |
Certain assetsfinancial instruments are not measured at fair value on an ongoing basis but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents the Corporation's assetsLevel 3 financial instruments measured at fair value on a nonrecurring basis and reported on the consolidated balance sheets at December 31:basis:
|
| | | | | | | |
| 2019 | | 2018 |
| (in thousands) |
Net loans and leases | $ | 144,807 |
| | $ | 149,846 |
|
OREO | 6,831 |
| | 10,518 |
|
MSRs(1) | 45,193 |
| | 50,200 |
|
Total assets | $ | 196,831 |
| | $ | 210,564 |
|
|
| | | | | | | | |
| 2017 | | 2016 |
| (in thousands) |
Net loans | | $ | 149,608 |
| | $ | 132,576 |
|
OREO | | 9,823 |
| | 12,815 |
|
MSRs | | 37,663 |
| | 37,532 |
|
Total assets | | $ | 197,094 |
| | $ | 182,923 |
|
| |
(1) | Amounts shown are estimated fair value. MSRs are recorded on the Corporation's consolidated balance sheets at amortized cost. See "Note 5 - Mortgage Servicing Rights" for additional information. |
The valuation techniques used to measure fair value for the items in the table above are as follows:
| |
• | Net loans and leases – This category consists of loans and leases that were individually evaluated for impairment and have been classified as Level 3 assets. The amount shown is the balance of impaired loans and leases, net of the related allowance for loan losses. See "Note 4 - Loans and Leases and Allowance for Credit Losses," for additional details. |
| |
• | OREO – This category consists of OREO classified as Level 3 assets, for which the fair values were based on estimated selling prices less estimated selling costs for similar assets in active markets. |
| |
• | MSRs - This category consists of MSRs, which were initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors, and subsequently carried at the lower of amortized cost or fair value. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the December 31, 2019 valuation were 10.5% and 9.5%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data. |
Net loans – This category consists of loans that were evaluated for impairment under FASB ASC Section 310-10-35 and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See "Note 4 - Loans and Allowance for Credit Losses," for additional details.
OREO – This category includes OREO ($9.8 million at December 31, 2017 and $12.8 million at December 31, 2016) classified as Level 3 assets. Fair values for OREO were based on estimated selling prices less estimated selling costs for similar assets in active markets.
MSRs - This category includes MSRs ($37.7 million at December 31, 2017 and $37.5 million at December 31, 2016), classified as Level 3 assets. MSRs are initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the December 31, 2017 valuation were 11.7% and 9.5%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data.
As required by FASB ASC Section 825-10-50, theThe following table details the book values and the estimated fair values of the Corporation’s financial instruments as of December 31, 20172019 and 2016.2018. A general description of the methods and assumptions used to estimate such fair values is also provided.
|
| | | | | | | | | | | | | | | | | | | |
| 2019 |
| Estimated Fair Value |
| Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total |
FINANCIAL ASSETS | (in thousands) |
Cash and cash equivalents | $ | 517,791 |
| | $ | 517,791 |
| | $ | — |
| | $ | — |
| | $ | 517,791 |
|
FRB and FHLB stock | 97,422 |
| | — |
| | 97,422 |
| | — |
| | 97,422 |
|
Loans held for sale | 37,828 |
| | — |
| | 37,828 |
| | — |
| | 37,828 |
|
Available for sale investment securities | 2,497,537 |
| | — |
| | 2,393,211 |
| | 104,326 |
| | 2,497,537 |
|
Held to maturity investment securities | 369,841 |
| | — |
| | 383,705 |
| | — |
| | 383,705 |
|
Net loans and leases | 16,673,904 |
| | — |
| | — |
| | 16,485,122 |
| | 16,485,122 |
|
Accrued interest receivable | 60,898 |
| | 60,898 |
| | — |
| | — |
| | 60,898 |
|
Other assets | 431,565 |
| | 234,176 |
| | 145,365 |
| | 52,024 |
| | 431,565 |
|
FINANCIAL LIABILITIES | | | | | | | | | |
Demand and savings deposits | $ | 14,327,453 |
| | $ | 14,327,453 |
| | $ | — |
| | $ | — |
| | $ | 14,327,453 |
|
Brokered deposits | 264,531 |
| | 223,982 |
| | 40,549 |
| | — |
| | 264,531 |
|
Time deposits | 2,801,930 |
| | — |
| | 2,828,988 |
| | — |
| | 2,828,988 |
|
Short-term borrowings | 883,241 |
| | 883,241 |
| | — |
| | — |
| | 883,241 |
|
Accrued interest payable | 8,834 |
| | 8,834 |
| | — |
| | — |
| | 8,834 |
|
FHLB advances and long-term debt | 881,769 |
| | — |
| | 878,385 |
| | — |
| | 878,385 |
|
Other liabilities | 221,542 |
| | 142,508 |
| | 76,447 |
| | 2,587 |
| | 221,542 |
|
| | | | | | | | | |
| 2018 |
| Estimated Fair Value |
| Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
FINANCIAL ASSETS | | | | | | | | | |
Cash and cash equivalents | $ | 445,687 |
| | $ | 445,687 |
| | $ | — |
| | $ | — |
| | $ | 445,687 |
|
FRB and FHLB stock | 79,283 |
| | — |
| | 79,283 |
| | — |
| | 79,283 |
|
Loans held for sale | 27,099 |
| | — |
| | 27,099 |
| | — |
| | 27,099 |
|
Available for sale investment securities | 2,080,294 |
| | — |
| | 1,974,025 |
| | 106,269 |
| | 2,080,294 |
|
Held to maturity investment securities | 606,679 |
| | 611,419 |
| | — |
| | — |
| | 611,419 |
|
Net loans and leases | 16,005,263 |
| | — |
| | — |
| | 15,446,895 |
| | 15,446,895 |
|
Accrued interest receivable | 58,879 |
| | 58,879 |
| | — |
| | — |
| | 58,879 |
|
Other assets | 235,782 |
| | 124,138 |
| | 62,552 |
| | 49,092 |
| | 235,782 |
|
FINANCIAL LIABILITIES | | | | | | | | | |
Demand and savings deposits | $ | 13,478,016 |
| | $ | 13,478,016 |
| | $ | — |
| | $ | — |
| | $ | 13,478,016 |
|
Brokered deposits | 176,239 |
| | 176,239 |
| | — |
| | — |
| | 176,239 |
|
Time deposits | 2,721,904 |
| | — |
| | 2,712,296 |
| | — |
| | 2,712,296 |
|
Short-term borrowings | 754,777 |
| | 754,777 |
| | — |
| | — |
| | 754,777 |
|
Accrued interest payable | 10,529 |
| | 10,529 |
| | — |
| | — |
| | 10,529 |
|
FHLB advances and long-term debt | 992,279 |
| | — |
| | 970,985 |
| | — |
| | 970,985 |
|
Other liabilities | 218,061 |
| | 161,003 |
| | 48,185 |
| | 8,873 |
| | 218,061 |
|
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| Book Value | | Estimated Fair Value | | Book Value | | Estimated Fair Value |
| (in thousands) |
FINANCIAL ASSETS | | | | | | | |
Cash and due from banks (1) | $ | 108,291 |
| | $ | 108,291 |
| | $ | 118,763 |
| | $ | 118,763 |
|
Interest-bearing deposits with other banks (1) | 293,805 |
| | 293,805 |
| | 233,763 |
| | 233,763 |
|
FRB and FHLB stock (2) | 60,761 |
| | 60,761 |
| | 57,489 |
| | 57,489 |
|
Loans held for sale (3) | 31,530 |
| | 31,530 |
| | 28,697 |
| | 28,697 |
|
Available for sale investment securities (2) | 2,547,956 |
| | 2,547,956 |
| | 2,559,227 |
| | 2,559,227 |
|
Net Loans (4) | 15,598,337 |
| | 15,380,974 |
| | 14,530,593 |
| | 14,387,454 |
|
Accrued interest receivable (1) | 52,910 |
| | 52,910 |
| | 46,294 |
| | 46,294 |
|
Other financial assets (1) | 215,464 |
| | 215,464 |
| | 206,132 |
| | 206,132 |
|
FINANCIAL LIABILITIES | | | | | | | |
Demand and savings deposits (1) | $ | 13,042,147 |
| | $ | 13,042,147 |
| | $ | 12,259,622 |
| | $ | 12,259,622 |
|
Brokered deposits (1) | 90,473 |
| | 90,473 |
| | — |
| | — |
|
Time deposits (5) | 2,664,912 |
| | 2,673,359 |
| | 2,753,242 |
| | 2,769,757 |
|
Short-term borrowings (1) | 617,524 |
| | 617,524 |
| | 541,317 |
| | 541,317 |
|
Accrued interest payable (1) | 9,317 |
| | 9,317 |
| | 9,632 |
| | 9,632 |
|
Other financial liabilities (3) | 227,569 |
| | 227,569 |
| | 216,080 |
| | 216,080 |
|
FHLB advances and long-term debt (5) | 1,038,346 |
| | 1,025,640 |
| | 929,403 |
| | 928,167 |
|
| |
(1) | Short-term financial instrument, defined as those with remaining maturities of 90 days or less and excluding those recorded at fair value on the consolidated balance sheets. Book value is considered to be a reasonable estimate of fair value. |
| |
(2) | Restricted investments, carried at cost on the consolidated balance sheets. |
| |
(3) | These financial instruments, or certain financial instruments within these categories, are measured at fair value on the consolidated balance sheets. Descriptions of the fair value determinations for these financial instruments are disclosed above. |
| |
(4) | Fair value measured using unobservable inputs (level 3). Includes impaired loans, which are measured on a nonrecurring basis. |
| |
(5) | Fair value measured using observable inputs (level 2). |
Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.
Fair
For short-term financial instruments, defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation’s consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.
The following instruments are predominantly short-term:
|
| | |
Assets | | Liabilities |
Cash and cash equivalents | | Demand and savings deposits |
Accrued interest receivable | | Short-term borrowings |
| | Accrued interest payable |
FRB and FHLB stock represent restricted investments and are carried at cost on the consolidated balance sheets, which is a reasonable estimate of fair value.
As of December 31, 2019, fair values for loans and leases and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans and leases would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans and leases also include estimated credit losses that would be assumed in this manner do not fully incorporate ana market transaction, which represents estimated exit price approach toprices.
Brokered deposits consists of demand and saving deposits, which are classified as level 1, and time deposits, which are classified as Level 2. The fair value as definedof these deposits are determined in FASB ASC Topic 820.a manner consistent with the respective type of deposits discussed above.
The fair values of time deposits and FHLB advances and long-term debt were estimated by discounting the remaining contractual cash flows using a rate at which instruments with similar remaining maturities could be issued as of the balance sheet date. These would be categorized within Level 2 liabilities under FASB ASC Topic 820.
|
| | | | |
NOTE 19 – CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY |
CONDENSED BALANCE SHEETS
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
ASSETS | | | |
Cash | $ | 22,857 |
| | $ | 8,568 |
|
Other assets | 5,959 |
| | 5,648 |
|
Receivable from subsidiaries | 53,880 |
| | 46,715 |
|
Investments in: | | | |
Bank subsidiaries | 2,399,053 |
| | 2,265,264 |
|
Non-bank subsidiaries | 426,846 |
| | 417,615 |
|
Total Assets | $ | 2,908,595 |
| | $ | 2,743,810 |
|
LIABILITIES AND EQUITY | | | |
Long-term debt | $ | 386,101 |
| | $ | 362,005 |
|
Payable to non-bank subsidiaries | 206,766 |
| | 183,152 |
|
Other liabilities | 85,871 |
| | 77,538 |
|
Total Liabilities | 678,738 |
| | 622,695 |
|
Shareholders’ equity | 2,229,857 |
| | 2,121,115 |
|
Total Liabilities and Shareholders’ Equity | $ | 2,908,595 |
| | $ | 2,743,810 |
|
CONDENSED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Income: | | | | | |
Dividends from subsidiaries | $ | 66,500 |
| | $ | 115,000 |
| | $ | 114,000 |
|
Other (1) | 171,490 |
| | 148,577 |
| | 141,241 |
|
| 237,990 |
| | 263,577 |
| | 255,241 |
|
Expenses | 199,981 |
| | 177,835 |
| | 176,457 |
|
Income before income taxes and equity in undistributed net income of subsidiaries | 38,009 |
| | 85,742 |
| | 78,784 |
|
Income tax benefit | (5,448 | ) | | (10,543 | ) | | (11,834 | ) |
| 43,457 |
| | 96,285 |
| | 90,618 |
|
Equity in undistributed net income (loss) of: | | | | | |
Bank subsidiaries | 111,226 |
| | 58,477 |
| | 60,806 |
|
Non-bank subsidiaries | 17,070 |
| | 6,863 |
| | (1,922 | ) |
Net Income | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,502 |
|
(1) Consists primarily of management fees received from subsidiary banks.
CONDENSED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Cash Flows From Operating Activities: | | | | | |
Net Income | $ | 171,753 |
| | $ | 161,625 |
| | $ | 149,502 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Amortization of issuance costs and discount of long-term debt | 845 |
| | — |
| | — |
|
Stock-based compensation | 4,740 |
| | 6,556 |
| | 5,938 |
|
Excess tax benefits from stock-based compensation | — |
| | (964 | ) | | (201 | ) |
Increase in other assets | (17,882 | ) | | (16,585 | ) | | 2,806 |
|
Equity in undistributed net income of subsidiaries | (128,298 | ) | | (65,340 | ) | | (58,884 | ) |
Loss on redemption of trust preferred securities | — |
| | — |
| | 5,626 |
|
Increase (decrease) in other liabilities and payable to non-bank subsidiaries | 31,241 |
| | (5,928 | ) | | 106,490 |
|
Total adjustments | (109,354 | ) | | (82,261 | ) | | 61,775 |
|
Net cash provided by operating activities | 62,399 |
| | 79,364 |
| | 211,277 |
|
Cash Flows From Investing Activities | — |
| | — |
| | — |
|
Cash Flows From Financing Activities: | | | | | |
Repayments of long-term debt | (100,000 | ) | | — |
| | (254,640 | ) |
Additions to long-term debt | 123,251 |
| | — |
| | 147,779 |
|
Net proceeds from issuance of common stock | 9,007 |
| | 16,167 |
| | 10,607 |
|
Excess tax benefits from stock-based compensation | — |
| | 964 |
| | 201 |
|
Dividends paid | (80,368 | ) | | (69,382 | ) | | (65,361 | ) |
Acquisition of treasury stock | — |
| | (18,545 | ) | | (50,000 | ) |
Net cash used in financing activities | (48,110 | ) | | (70,796 | ) | | (211,414 | ) |
Net Increase (Decrease) in Cash and Cash Equivalents | 14,289 |
| | 8,568 |
| | (137 | ) |
Cash and Cash Equivalents at Beginning of Year | 8,568 |
| | — |
| | 137 |
|
Cash and Cash Equivalents at End of Year | $ | 22,857 |
| | $ | 8,568 |
| | $ | — |
|
Management Report on Internal Control Over Financial Reporting
The management of Fulton Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Fulton Financial Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2017, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that, as of December 31, 2017, the Corporation’s internal control over financial reporting is effective based on those criteria.
|
|
/s/ E. PHILIP WENGER
|
E. Philip Wenger
Chairman and Chief Executive Officer
|
|
/s/ PHILMER H. ROHRBAUGH
|
Philmer H. Rohrbaugh
Senior Executive Vice President
and Chief Financial Officer
|
Report of Independent Registered Public Accounting Firm
To the shareholders and board of directors
Fulton Financial Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Fulton Financial Corporation and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
|
|
Philadelphia, Pennsylvania |
March 1, 2018 |
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
(in thousands, except per-share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31 | | June 30 | | September 30 | | December 31 |
2017 | | | | | | | |
Interest income | $ | 158,487 |
| | $ | 163,881 |
| | $ | 171,511 |
| | $ | 174,987 |
|
Interest expense | 20,908 |
| | 22,318 |
| | 24,702 |
| | 25,574 |
|
Net interest income | 137,579 |
| | 141,563 |
| | 146,809 |
| | 149,413 |
|
Provision for credit losses | 4,800 |
| | 6,700 |
| | 5,075 |
| | 6,730 |
|
Non-interest income | 46,673 |
| | 52,371 |
| | 51,974 |
| | 56,956 |
|
Non-interest expenses | 122,275 |
| | 132,695 |
| | 132,157 |
| | 138,452 |
|
Income before income taxes | 57,177 |
| | 54,539 |
| | 61,551 |
| | 61,187 |
|
Income tax expense | 13,797 |
| | 9,072 |
| | 12,646 |
| | 27,186 |
|
Net income | $ | 43,380 |
| | $ | 45,467 |
| | $ | 48,905 |
| | $ | 34,001 |
|
Per share data: | | | | | | | |
Net income (basic) | $ | 0.25 |
| | $ | 0.26 |
| | $ | 0.28 |
| | $ | 0.19 |
|
Net income (diluted) | 0.25 |
| | 0.26 |
| | 0.28 |
| | 0.19 |
|
Cash dividends | 0.11 |
| | 0.11 |
| | 0.11 |
| | 0.14 |
|
2016 | | | | | | | |
Interest income | $ | 149,311 |
| | $ | 149,309 |
| | $ | 151,468 |
| | $ | 153,012 |
|
Interest expense | 20,257 |
| | 20,393 |
| | 20,903 |
| | 20,775 |
|
Net interest income | 129,054 |
| | 128,916 |
| | 130,565 |
| | 132,237 |
|
Provision for credit losses | 1,530 |
| | 2,511 |
| | 4,141 |
| | 5,000 |
|
Non-interest income | 43,137 |
| | 46,137 |
| | 48,149 |
| | 52,755 |
|
Non-interest expenses | 120,413 |
| | 121,637 |
| | 119,848 |
| | 127,621 |
|
Income before income taxes | 50,248 |
| | 50,905 |
| | 54,725 |
| | 52,371 |
|
Income tax expense | 11,991 |
| | 11,155 |
| | 13,257 |
| | 10,221 |
|
Net income | $ | 38,257 |
| | $ | 39,750 |
| | $ | 41,468 |
| | $ | 42,150 |
|
Per share data: | | | | | | | |
Net income (basic) | $ | 0.22 |
| | $ | 0.23 |
| | $ | 0.24 |
| | $ | 0.24 |
|
Net income (diluted) | 0.22 |
| | 0.23 |
| | 0.24 |
| | 0.24 |
|
Cash dividends | 0.09 |
| | 0.10 |
| | 0.10 |
| | 0.12 |
|
|
| | | | |
NOTE 20 – CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY |
Item 9. Changes
CONDENSED BALANCE SHEETS
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (in thousands) |
ASSETS | | | |
Cash and cash equivalents | $ | 10,841 |
| | $ | 30,941 |
|
Other assets | 1,087 |
| | 7,072 |
|
Receivable from subsidiaries | 78,025 |
| | 51,646 |
|
Investments in: | | | |
Bank subsidiary (1) | 2,555,448 |
| | 2,451,651 |
|
Non-bank subsidiaries | 419,145 |
| | 425,670 |
|
Total Assets | $ | 3,064,546 |
| | $ | 2,966,980 |
|
LIABILITIES AND EQUITY | | | |
Long-term debt | $ | 387,756 |
| | $ | 386,913 |
|
Payable to non-bank subsidiaries | 276,768 |
| | 247,801 |
|
Other liabilities | 57,846 |
| | 84,693 |
|
Total Liabilities | 722,370 |
| | 719,407 |
|
Shareholders’ equity | 2,342,176 |
| | 2,247,573 |
|
Total Liabilities and Shareholders’ Equity | $ | 3,064,546 |
| | $ | 2,966,980 |
|
(1) Consisted of one bank in 2019 and Disagreements with Accountants on Accounting and Financial Disclosure2018 consisted of multiple banks which have been consolidated into one bank in 2019.
Not applicable.
CONDENSED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Income: | | | | | |
Dividends from subsidiaries | $ | 209,000 |
| | $ | 150,000 |
| | $ | 66,500 |
|
Other (1) | 191,978 |
| | 188,165 |
| | 171,490 |
|
| 400,978 |
| | 338,165 |
| | 237,990 |
|
Expenses | 218,837 |
| | 210,333 |
| | 199,981 |
|
Income before income taxes and equity in undistributed net income of subsidiaries | 182,141 |
| | 127,832 |
| | 38,009 |
|
Income tax benefit | (5,798 | ) | | (7,100 | ) | | (5,448 | ) |
| 187,939 |
| | 134,932 |
| | 43,457 |
|
Equity in undistributed net income (loss) of: | | | | | |
Bank subsidiary (1) | 44,926 |
| | 74,631 |
| | 111,226 |
|
Non-bank subsidiaries | (6,526 | ) | | (1,170 | ) | | 17,070 |
|
Net Income | $ | 226,339 |
| | $ | 208,393 |
| | $ | 171,753 |
|
(1) Consists primarily of management fees received from subsidiary bank(s) which consisted of one bank in 2019 and 2018 consisted of multiple banks which have been consolidated into one bank in 2019.
CONDENSED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| (in thousands) |
Cash Flows From Operating Activities: | | | | | |
Net Income | $ | 226,339 |
| | $ | 208,393 |
| | $ | 171,753 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Amortization of issuance costs and discount of long-term debt | 842 |
| | 813 |
| | 845 |
|
Stock-based compensation | 7,413 |
| | 7,967 |
| | 4,740 |
|
(Increase) decrease in other assets | (20,449 | ) | | 6,327 |
| | (17,882 | ) |
Equity in undistributed net income of subsidiaries | (38,400 | ) | | (73,460 | ) | | (128,298 | ) |
Increase in other liabilities and payable to non-bank subsidiaries | 1,580 |
| | 36,273 |
| | 31,241 |
|
Total adjustments | (49,014 | ) | | (22,080 | ) | | (109,354 | ) |
Net cash provided by operating activities | 177,325 |
| | 186,313 |
| | 62,399 |
|
Cash Flows From Investing Activities | — |
| | — |
| | — |
|
Cash Flows From Financing Activities: | | | | | |
Repayments of long-term debt | — |
| | — |
| | (100,000 | ) |
Additions to long-term debt | — |
| | — |
| | 123,251 |
|
Net proceeds from issuance of common stock | 6,362 |
| | 6,733 |
| | 9,007 |
|
Dividends paid | (92,330 | ) | | (89,654 | ) | | (80,368 | ) |
Acquisition of treasury stock | (111,457 | ) | | (95,308 | ) | | — |
|
Net cash used in financing activities | (197,425 | ) | | (178,229 | ) | | (48,110 | ) |
Net (Decrease) Increase in Cash and Cash Equivalents | (20,100 | ) | | 8,084 |
| | 14,289 |
|
Cash and Cash Equivalents at Beginning of Year | 30,941 |
| | 22,857 |
| | 8,568 |
|
Cash and Cash Equivalents at End of Year | $ | 10,841 |
| | $ | 30,941 |
| | $ | 22,857 |
|
Management Report on Internal Control Over Financial Reporting
The management of Fulton Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Fulton Financial Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2019, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that, as of December 31, 2019, the Corporation’s internal control over financial reporting is effective based on those criteria.
|
|
/s/ E. PHILIP WENGER |
E. Philip Wenger Chairman and Chief Executive Officer |
|
/s/ MARK R. MCCOLLOM |
Mark R. McCollom Senior Executive Vice President and Chief Financial Officer |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Fulton Financial Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Fulton Financial Corporation and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for loan losses related to loans collectively evaluated for impairment
As discussed in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for loan losses related to non-impaired and impaired loans collectively evaluated for impairment (ALL) was $128.2 million and $35.4 million, respectively, of a total allowance for loan losses of $163.6 million as of December 31, 2019. Impaired loans with total outstanding commitments of less than $1.0 million, and non-impaired loans are pooled and evaluated for impairment collectively based on historical losses. The Company estimated the ALL using a historical loss methodology that calculates a loss rate for each pool of loans, segmented by loan type, based on a probability of default (PD) and loss given default (LGD). The PD is based on the historical migration of loans through risk rating categories for commercial loans, commercial mortgages and construction loans, and based on historical migration of loans through delinquency categories for residential mortgages, home equity loans, consumer loans and leases. The LGD is based on historical losses. Such amounts are adjusted for certain qualitative factors.
We identified the assessment of the ALL as a critical audit matter because it involved significant measurement uncertainty requiring complex auditor judgment, and knowledge and experience in the industry. This assessment encompassed the evaluation of the ALL methodology, inclusive of the methodologies used to estimate (1) the PD and LGD and their key factors and assumptions, including the risk ratings for commercial loans, commercial mortgages, and construction loans, (2) how loans with similar characteristics are pooled, and (3) the assumptions and methodologies used to estimate the allocation for qualitative factors.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the development and approval of the ALL methodology, and determination of the key factors and assumptions used to estimate historical losses and qualitative factors. We tested the Company’s process to develop the ALL estimate. Specifically, we tested the sources of data, factors, and assumptions used by considering the relevance and reliability, and considering additional factors and alternative assumptions. We involved credit risk professionals with industry knowledge and experience who assisted in:
Evaluating the Company’s ALL methodology for compliance with U.S. generally accepted accounting principles,
Evaluating the assumptions and methodologies used in calculating the PD and LGD,
Determining whether loans are pooled by similar risk characteristics, and
Evaluating the methodology used to develop the resulting qualitative factors and the effect of those factors on the ALL compared with relevant credit risk factors and consistency with credit trends.
In addition, we tested individual loan risk ratings for a selection of commercial loans, commercial mortgages and construction loans by involving credit risk professionals with industry knowledge and experience.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
|
|
Philadelphia, Pennsylvania |
February 21, 2020 |
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
(in thousands, except per-share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31 | | June 30 | | September 30 | | December 31 |
2019 | | | | | | | |
Interest income | $ | 204,700 |
| | $ | 210,034 |
| | $ | 208,414 |
| | $ | 202,159 |
|
Interest expense | 41,385 |
| | 45,490 |
| | 47,153 |
| | 42,889 |
|
Net interest income | 163,315 |
| | 164,544 |
| | 161,261 |
| | 159,270 |
|
Provision for credit losses | 5,100 |
| | 5,025 |
| | 2,170 |
| | 20,530 |
|
Non-interest income | 46,751 |
| | 54,315 |
| | 59,813 |
| | 55,281 |
|
Non-interest expenses | 137,824 |
| | 144,168 |
| | 146,770 |
| | 138,974 |
|
Income before income taxes | 67,142 |
| | 69,666 |
| | 72,133 |
| | 55,047 |
|
Income tax expense | 10,479 |
| | 9,887 |
| | 10,025 |
| | 7,258 |
|
Net income | $ | 56,663 |
| | $ | 59,779 |
| | $ | 62,108 |
| | $ | 47,789 |
|
Per share data: | | | | | | | |
Net income (basic) | $ | 0.33 |
| | $ | 0.36 |
| | $ | 0.38 |
| | $ | 0.29 |
|
Net income (diluted) | 0.33 |
| | 0.35 |
| | 0.37 |
| | 0.29 |
|
Cash dividends | 0.13 |
| | 0.13 |
| | 0.13 |
| | 0.17 |
|
2018 | | | | | | | |
Interest income | $ | 177,687 |
| | $ | 186,170 |
| | $ | 194,048 |
| | $ | 200,609 |
|
Interest expense | 26,369 |
| | 30,103 |
| | 33,921 |
| | 37,665 |
|
Net interest income | 151,318 |
| | 156,067 |
| | 160,127 |
| | 162,944 |
|
Provision for credit losses | 3,970 |
| | 33,117 |
| | 1,620 |
| | 8,200 |
|
Non-interest income | 45,875 |
| | 49,094 |
| | 51,033 |
| | 49,523 |
|
Non-interest expenses | 136,661 |
| | 133,345 |
| | 135,413 |
| | 140,685 |
|
Income before income taxes | 56,562 |
| | 38,699 |
| | 74,127 |
| | 63,582 |
|
Income tax expense | 7,082 |
| | 3,502 |
| | 8,494 |
| | 5,499 |
|
Net income | $ | 49,480 |
| | $ | 35,197 |
| | $ | 65,633 |
| | $ | 58,083 |
|
Per share data: | | | | | | | |
Net income (basic) | $ | 0.28 |
| | $ | 0.20 |
| | $ | 0.37 |
| | $ | 0.33 |
|
Net income (diluted) | 0.28 |
| | 0.20 |
| | 0.37 |
| | 0.33 |
|
Cash dividends | 0.12 |
| | 0.12 |
| | 0.12 |
| | 0.16 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 20172019, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
The "Management Report on Internal Control over Financial Reporting" and the "Report of Independent Registered Public Accounting Firm" may be found in Item 8, "Financial Statements and Supplementary Data" of this document.
Changes in Internal Controls
There was no change in the Corporation’s "internal control over financial reporting" (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Incorporated by reference herein is the information appearing under the headings "Information about Nominees, Directors and Independence Standards," "Related Person Transactions," "Section 16(a) Beneficial Ownership Reporting Compliance," "Code of Conduct," "Procedure for Shareholder Nominations," and "Other Board Committees" within the Corporation’s 20182020 Proxy Statement. The information concerning executive officers required by this Item is provided under the caption "Executive Officers" within Item 1, Part I, "Business" in this Annual Report.
The Corporation has adopted a code of ethics (Code of Conduct) that applies to all directors, officers and employees, including the Chief Executive Officer, the Chief Financial Officerand the Corporate Controller. A copy of the Code of Conduct may be obtained free of charge by writing to the Corporate Secretary at Fulton Financial Corporation, P.O. Box 4887, Lancaster, Pennsylvania 17604-4887, and is also available via the internetInternet at www.fult.com.
Item 11. Executive Compensation
Incorporated by reference herein is the information appearing under the headings "Information Concerning Executive Compensation" and "Human Resources Committee Interlocks and Insider Participation" within the Corporation’s 20182020 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference herein is the information appearing under the heading "Security Ownership of Directors, Nominees, Management and Certain Beneficial Owners" within the Corporation’s 20182020 Proxy Statement, and information appearing under the heading "Securities Authorized for Issuance under Equity Compensation Plans" within Item 5, "Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities" in this Annual Report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference herein is the information appearing under the headings "Related Person Transactions" and "Information about Nominees, Directors and Independence Standards" within the Corporation’s 20182020 Proxy Statement, and the information appearing in "Note 4 - Loans and Leases and Allowance for Credit Losses," of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" in this Annual Report.
Item 14. Principal Accounting Fees and Services
Incorporated by reference herein is the information appearing under the heading "Relationship With Independent Public Accountants" within the Corporation’s 20182020 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
|
| | | |
1. |
| Financial Statements — The following consolidated financial statements of Fulton Financial Corporation and subsidiaries are incorporated herein by reference in response to Item 8 above: |
| (i) | Consolidated Balance Sheets - December 31, 20172019 and 2016.2018. |
| (ii) | Consolidated Statements of Income - Years ended December 31, 2017, 20162019, 2018 and 2015.2017. |
| (iii) | Consolidated Statements of Comprehensive Income - Years ended December 31, 2017, 20162019, 2018 and 2015.2017. |
| (iii) | Consolidated Statements of Shareholders’ Equity - Years ended December 31, 2017, 20162019, 2018 and 2015.2017. |
| (iv) | Consolidated Statements of Cash Flows - Years ended December 31, 2017, 20162019, 2018 and 2015.2017. |
| (v) | Notes to Consolidated Financial Statements. |
| (vi) | Report of Independent Registered Public Accounting Firm. |
2. |
| Financial Statement Schedules — All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have therefore been omitted. |
3.1 |
| | |
3.2 |
| | |
4.1 |
| | |
4.2 |
| | |
4.3 |
| | |
4.4 |
| | |
4.5 |
| | |
4.6 |
| | |
4.7 |
| | |
10.1 |
| | |
10.2 |
| | |
10.3 |
| | |
10.4 |
| | |
10.4.110.2.1 |
| | |
10.510.3 |
| | |
|
| | | |
10.5.110.3.1 |
| | |
10.610.4 |
| | |
10.710.5 |
| | |
10.810.6 |
| | |
10.910.7 |
| | |
10.1010.8 |
| | Form of Option Award and Form of Restricted Stock Award under the Fulton Financial Corporation Amended and Restated Equity and Cash Incentive Compensation Plan between Fulton Financial Corporation and Officers of the Corporation – Incorporated by reference to Exhibits 10.1 and 10.2, respectively, of the Fulton Financial Corporation Current Report on Form 8-K filed June 19, 2013. |
10.1110.9 |
| | |
10.1210.10 |
| | |
10.11 |
| | |
10.12 |
| | |
10.13 |
| | |
10.14 |
| | |
10.15 |
| | |
10.16 |
| | |
10.1610.17 |
| | |
10.1710.18 |
| | |
10.1810.19 |
| | |
12 |
| | |
21 |
| | |
23 |
| | |
31.1 |
| | |
31.2 |
| | |
32.1 |
| | |
32.2 |
| | |
101 |
| | Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language):files pursuant to Rule 405 of Regulation S-T (i) the Consolidated Balance Sheets, at December 31, 2017 and December 31, 2016; (ii) the Consolidated Statements of Income, for the years ended December 31, 2017, 2016 and 2015; (iii) the Consolidated Statements of Comprehensive Income, for the years ended December 31, 2017, 2016 and 2015;(iv) the Consolidated Statements of Shareholders’ Equity, for the years ended December 31, 2017, 2016 and 2015; (v) the Consolidated Statements of Cash Flows, for the years ended December 31, 2017, 2016 and 2015; and, (iv) the(vi) Notes to Consolidated Financial Statements – filed herewith.Statements. |
104 |
| | Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101) |
Item 16. Form 10-K Summary
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | |
| | FULTON FINANCIAL CORPORATION |
| | (Registrant) |
| | | |
Dated: | March 1, 2018February 21, 2020 | By: | /S/ E. PHILIP WENGER |
| | | E. Philip Wenger, Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | | | |
Signature | | Capacity | | Date |
| | | | |
/S/ JENNIFER CRAIGHEAD CAREY | | Director | | February 21, 2020 |
Jennifer Craighead Carey | | | | |
| | | | |
/S/ LISA CRUTCHFIELD | | Director | | February 21, 2020 |
Lisa Crutchfield | | | | |
| | | | |
/S/ MICHAEL J. DEPORTER | | Executive Vice President and Controller (Principal Accounting Officer) | | February 21, 2020 |
Michael J. DePorter | | | |
| | | |
/S/ DENISE L. DEVINE | | Director | | February 21, 2020 |
Denise L. Devine | | | | |
| | | | |
/S/ STEVEN S. ETTER | | Director | | February 21, 2020 |
Steven S. Etter | | | | |
| | | | |
/S/ PATRICK J. FREER | | Director | | February 21, 2020 |
Patrick J. Freer | | | | |
| | | | |
/S/ CARLOS E. GRAUPERA | | Director | | February 21, 2020 |
Carlos E. Graupera | | | | |
| | | | |
/S/ GEORGE W. HODGES | | Director | | February 21, 2020 |
George W. Hodges | | | | |
| | | | |
/S/ MARK R. MCCOLLOM | | Senior Executive Vice President | | February 21, 2020 |
Mark R. McCollom | | and Chief Financial Officer
| | |
| | (Principal Financial Officer) | | |
| | | | |
|
| | | | |
Signature | | Capacity | | Date |
| | | | |
/S/ LISA CRUTCHFIELDJAMES R. MOXLEY, III | | Director | | March 1, 2018 |
Lisa Crutchfield | | | | |
| | | | |
/S/ MICHAEL J. DEPORTER
| | Executive Vice President and Controller
(Principal Accounting Officer)
| | March 1, 2018 |
Michael J. DePorter | | | |
| | | |
/S/ DENISE L. DEVINE
| | Director | | March 1, 2018 |
Denise L. Devine | | | | |
| | | | |
/S/ PATRICK J. FREER
| | Director | | March 1, 2018 |
Patrick J. Freer | | | | |
| | | | |
/S/ GEORGE W. HODGES
| | Director | | March 1, 2018 |
George W. Hodges | | | | |
| | | | |
/S/ ALBERT MORRISON, III
| | Director | | March 1, 2018 |
Albert Morrison, III | | | | |
| | | | |
/S/ JAMES R. MOXLEY, III
| | Director | | March 1, 2018February 21, 2020 |
James R. Moxley, III | | | | |
| | | | |
/S/ PHILMER HCURTIS J. ROHRBAUGH | | Senior Executive Vice President | | March 1, 2018 |
Philmer H. Rohrbaugh | | and Chief Financial Officer
| | |
| | (Principal Financial Officer) | | |
| | | | |
|
| | | | |
Signature | | Capacity | | Date |
| | | | |
/S/ R. SCOTT SMITH, JR.MYERS
| | Director, President and Chief | | March 1, 2018February 21, 2020 |
R. Scott Smith, Jr.Curtis J. Myers | | Operating Officer
| | |
| | | | |
/S/ SCOTT A. SNYDER | | Director | | March 1, 2018February 21, 2020 |
Scott A. Snyder | | | | |
| | | | |
/S/ RONALD H. SPAIR | | Director | | March 1, 2018February 21, 2020 |
Ronald H. Spair | | | | |
| | | | |
/S/ MARK F. STRAUSS | | Director | | March 1, 2018February 21, 2020 |
Mark F. Strauss | | | | |
| | | | |
/S/ ERNEST J. WATERS | | Director | | March 1, 2018February 21, 2020 |
Ernest J. Waters | | | | |
| | | | |
/S/ E. PHILIP WENGER | | Chairman and Chief Executive Officer (Principal Executive Officer) | | March 1, 2018February 21, 2020 |
E. Philip Wenger | | | |
EXHIBIT INDEX
Exhibits Required Pursuant to Item 601 of Regulation S-K |
| | | |
3.1 |
| | Articles of Incorporation, as amended and restated, of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report Form 8-K filed June 24, 2011. |
3.2 |
| | Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K/A filed September 23, 2014. |
4.1 |
| | An Indenture entered into on November 17, 2014 between Fulton Financial Corporation and Wilmington Trust, National Association as trustee, relating to the issuance by Fulton Financial Corporation of $250 million aggregate principal amount of 4.50% subordinated notes due November 15, 2024 – Incorporated by reference to Exhibit 4.1 of the Fulton Financial Corporation Current Report on Form 8-K filed November 17, 2014. |
4.2 |
| | First Supplemental Indenture entered into on November 17, 2014 between Fulton Financial Corporation and Wilmington Trust, National Association as trustee, relating to the issuance by Fulton Financial Corporation of $250 million aggregate principal amount of 4.50% subordinated notes due November 15, 2024 - Incorporated by reference to Exhibit 4.2 of the Fulton Financial Corporation Current Report on Form 8-K filed November 17, 2014. |
4.3 |
| | Form of Note (Included in Exhibit 4.2). |
4.4 |
| | An Indenture entered into on March 16, 2017 between Fulton Financial Corporation and Wilmington Trust, National Association as trustee, relating to the issuance by Fulton Financial Corporation of $125 million aggregate principal amount of 3.60% senior notes due March 16, 2022 - Incorporated by reference to Exhibit 4.1 of the Fulton Financial Corporation Current Report on Form 8-K filed March 16, 2017. |
4.5 |
| | First Supplemental Indenture entered into on March 16, 2017 between Fulton Financial Corporation and Wilmington Trust Company as trustee, relating to the issuance by Fulton Financial Corporation of $125 million aggregate principal amount of 3.60% senior notes due March 16, 2022 - Incorporated by reference to Exhibit 4.2 of the Fulton Financial Corporation Current Report on Form 8-K filed March 16, 2017. |
4.6 |
| | Form of Note (Included in Exhibit 4.2). |
4.7 |
| | Description of Fulton Financial Corporation Securities - filed herewith. |
10.1 |
| | Amended Employment Agreement between Fulton Financial Corporation and E. Philip Wenger dated November 12, 2008 – Incorporated by reference to Exhibit 10.5 of the Fulton Financial Corporation Current Report on Form 8-K filed November 14, 2008. |
10.2 |
| | Employment Agreement between Fulton Financial Corporation and Craig A. Roda dated August 1, 2011 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K filed August 5, 2011. |
10.3 |
| | Employment Agreement between Fulton Financial Corporation and Philmer H. Rohrbaugh dated November 1, 2012 – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K filed October 22, 2012. |
10.4 |
| | Form of Executive Employment Agreement between Fulton Financial Corporation and certain Executive Officers of Fulton Financial Corporation - Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K filed January 4, 2018. |
10.4.110.2.1 |
| | Schedule of Executive Employment Agreements between Fulton Financial Corporation and certain Executive Officers of Fulton Financial Corporation - filed herewith.Incorporated by reference to Exhibit 10.4.1 of the Fulton Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2017. |
10.510.3 |
| | Form of Key Employee Change in Control Agreement between Fulton Financial Corporation and certain Executive Officers of Fulton Financial Corporation, Incorporated by reference to Exhibit 10.2 of the Fulton Financial Corporation Current Report on Form 8-K filed January 4, 2018. |
|
| | | |
10.5.110.3.1 |
| | Schedule of Key Employee Change in Control Agreements between Fulton Financial Corporation and certain Executive Officers of Fulton Financial Corporation - filed herewith.Incorporated by reference to Exhibit 10.5.1 of the Fulton Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2017. |
10.610.4 |
| | Form of Death Benefit Only Agreement to Senior Management - Incorporated by reference to Exhibit 10.9 of the Fulton Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2006. |
10.710.5 |
| | Fulton Financial Corporation Amended and Restated Equity and Cash Incentive Compensation Plan – Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K filed May 3, 2013. |
10.810.6 |
| | Amendment No. 1 to Fulton Financial Corporation Amended and Restated Equity and Cash Incentive Compensation Plan - Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016. |
10.910.7 |
| | Amendment No. 2 to Fulton Financial Corporation Amended and Restated Equity and Cash Incentive Compensation Plan - filed herewith.Incorporated by reference to Exhibit 10.9 of the Fulton Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2017. |
10.1010.8 |
| | Form of Option Award and Form of Restricted Stock Award under the Fulton Financial Corporation Amended and Restated Equity and Cash Incentive Compensation Plan between Fulton Financial Corporation and Officers of the Corporation – Incorporated by reference to Exhibits 10.1 and 10.2, respectively, of the Fulton Financial Corporation Current Report on Form 8-K filed June 19, 2013. |
10.1110.9 |
| | Amended and Restated Fulton Financial Corporation Employee Stock Purchase Plan – Incorporated by reference to Exhibit A to Fulton Financial Corporation’s definitive proxy statement, filed March 26, 2014. |
10.1210.10 |
| | Amendment No. 1 to the Amended and Restated Fulton Financial Corporation Employee Stock Purchase Plan - filed herewith. |
10.11 |
| | Fulton Financial Corporation Deferred Compensation Plan, as amended and restated effective December 1, 2015 – Incorporated by reference to Exhibit 10.12 of the Fulton Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2015. |
10.12 |
| | First Amendment effective January 1, 2019 to the Fulton Financial Corporation Deferred Compensation Plan -Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019. |
10.13 |
| | Agreement between Fulton Financial Corporation and Fiserv Solutions, Inc. dated July 11, 2016 - Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016. Portions of this exhibit have been redacted and are subject to a confidential treatment request filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The redacted material was filed separately with the Securities and Exchange Commission. |
10.14 |
| | Fulton Financial Corporation 2011Amended and Restated Directors' Equity Participation Plan – Incorporated by reference to Exhibit A to10.1 of Fulton Financial Corporation’s definitive proxy statement,Current Report on Form 8-K filed March 24, 2011.May 23, 2019. |
10.15 |
| | Amendment No. 1 to Fulton Financial Corporation 2011 Directors' Equity Participation PlanNon-Employee Director Compensation - filed herewith. |
10.16 |
| | Form of Director Stock Unit Award Agreement under the Directors' Equity Participation Plan, as amended - Incorporated by reference to Exhibit 10.15 of the Fulton Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2018. |
10.17 |
| | Form of Restricted Stock Award Agreement between Fulton Financial Corporation and Directors of the Corporation as of July 1, 2011 – Incorporated by reference to Exhibit 10.2 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for quarterly period ended June 30, 2011. |
10.1710.18 |
| | Forms of Time-Vested Restricted Stock Unit Award Agreement and Performance Share Restricted Stock Unit Award Agreement between Fulton Financial Corporation and Certain Employees of the Corporation as of March 18, 2014 – Incorporated by reference to Exhibits 10.1 and 10.2, respectively, of the Fulton Financial Corporation Current Report on Form 8-K filed March 24, 2014. |
10.1810.19 |
| | Form of Master Confirmation between Fulton Financial Corporation and Goldman, Sachs & Co. - Incorporated by reference to Exhibit 10.1 of the Fulton Financial Corporation Current Report on Form 8-K filed November 17, 2014. |
12 |
| | Computation of Consolidated Ratios of Earnings to Fixed Charges - filed herewith. |
21 |
| | Subsidiaries of the Registrant. |
23 |
| | Consent of Independent Registered Public Accounting Firm. |
31.1 |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 |
| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 |
| | Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language):files pursuant to Rule 405 of Regulation S-T (i) the Consolidated Balance Sheets, at December 31, 2017 and December 31, 2016; (ii) the Consolidated Statements of Income, for the years ended December 31, 2017, 2016 and 2015; (iii) the Consolidated Statements of Comprehensive Income, for the years ended December 31, 2017, 2016 and 2015;(iv) the Consolidated Statements of Shareholders’ Equity, for the years ended December 31, 2017, 2016 and 2015; (v) the Consolidated Statements of Cash Flows, for the years ended December 31, 2017, 2016 and 2015; and, (iv) the(vi) Notes to Consolidated Financial Statements – filed herewith.Statements. |
104 |
| | Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101) |