UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 2020,2021, or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-10587
FULTON FINANCIAL CORPORATION
(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 | Lancaster, | Pennsylvania | | 17602 |
(Address of principal executive offices) | | (Zip Code) |
(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(s) | Name of each exchange on which registered |
Common Stock, par value $2.50 | FULT | The Nasdaq Stock Market, LLC |
Depositary Shares, Each Representing 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A*A | FULTP | The Nasdaq Stock Market, LLC |
*Denotes class of security issued and outstanding on the date this report is filed, but not at September 30, 2020.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value –162,250,000–163,075,000 shares outstanding as of OctoberJuly 30, 2020.2021.
FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021
INDEX
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Description | Page |
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Glossary of Terms | |
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PART I. FINANCIAL INFORMATION | |
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(b) | | |
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(c) | | |
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(d) | | |
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(e) | | |
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(f) | | |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 3. Defaults Upon Senior Securities - (not applicable) | |
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Item 4. Mine Safety Disclosures - (not applicable) | |
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Item 5. Other Information - (none to be reported) | |
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FULTON FINANCIAL CORPORATION |
GLOSSARY OF DEFINED ACRONYMS AND TERMS |
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ACL | | Allowance for Credit Lossescredit losses |
AFS | | Available for Salesale |
ALCO | | Asset/Liability Management Committee |
AML | | Anti-Money Laundering |
AOCI | | Accumulated other comprehensive income |
ARC | | Auction Rate Securityrate security |
ASC | | Accounting Standards Codification |
ASU | | Accounting Standards Update |
bp | | basisBasis point(s) |
BSA | | Bank Secrecy Act |
CARES Act | | Coronavirus Aid, Relief, and Economic Security Act |
CECL | | Current Expected Credit Lossesexpected credit losses |
Corporation or Company | | Fulton Financial Corporation |
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COVID-19 | | Coronavirus |
ETR | | Effective Tax Ratetax rate |
Exchange Act | | Securities Exchange Act of 1934 |
EAD | | Exposure at default |
FASB | | Financial Accounting Standards Board |
FDIC | | Federal Deposit Insurance Corporation |
Fed Funds Rate | | Target Federal Funds Ratefederal funds rate |
FHLB | | Federal Home Loan Bank |
FOMC | | Federal Open Market Committee |
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FRB | | Federal Reserve Bank |
FTE | | Fully Taxable-Equivalenttaxable-equivalent |
Fulton Bank or the Bank | | Fulton Bank, N.A. |
GAAP | | U.S. Generally Accepted Accounting Principles |
HTM | | Held to Maturitymaturity |
LGD | | Loss given default |
LIBOR | | London Interbank Offered Rate |
MSRs | | Mortgage Servicing Rightsservicing rights |
NIM | | Net Interest Margininterest margin |
N/M | | Not meaningful |
Net Loans | | Loans and lease receivables, (net of unearned income) |
OBS | | Off-Balance-SheetOff-balance-sheet |
OCI | | Other comprehensive income |
OREO | | Other Real Estate Ownedreal estate owned |
OTTI | | Other-than-temporary impairment |
PD | | Probability of default |
PPP | | Paycheck Protection Program |
PSU | | Performance-Based Restricted Stock UnitPerformance-based restricted stock unit |
RSU | | Restricted Stock Unitstock unit |
SBA | | Small Business Administration |
SEC | | United States Securities and Exchange Commission |
TCI | | Tax Credit Investmentcredit investment |
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TDR | | Troubled Debt Restructuringdebt restructuring |
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TruPS | | Trust Preferred Securities |
Visa Shares | | Visa, Inc. Class B restricted shares |
Note: Some numbers contained in the document may not sum due to rounding
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share data)
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | (unaudited) | | | (unaudited) | |
ASSETS | ASSETS | | | | ASSETS | | | |
Cash and due from banks | Cash and due from banks | $ | 139,304 | | | $ | 132,283 | | Cash and due from banks | $ | 143,002 | | | $ | 120,462 | |
Interest-bearing deposits with other banks | Interest-bearing deposits with other banks | 1,395,586 | | | 385,508 | | Interest-bearing deposits with other banks | 1,761,057 | | | 1,727,370 | |
Cash and cash equivalents | Cash and cash equivalents | 1,534,890 | | | 517,791 | | Cash and cash equivalents | 1,904,059 | | | 1,847,832 | |
FRB and FHLB stock | FRB and FHLB stock | 93,964 | | | 97,422 | | FRB and FHLB stock | 62,631 | | | 92,129 | |
Loans held for sale | Loans held for sale | 93,621 | | | 37,828 | | Loans held for sale | 41,924 | | | 83,886 | |
Investment securities: | Investment securities: | | Investment securities: | |
AFS, at estimated fair value | AFS, at estimated fair value | 2,793,480 | | | 2,497,537 | | AFS, at estimated fair value | 3,097,375 | | | 3,062,143 | |
HTM, at amortized cost | HTM, at amortized cost | 304,241 | | | 369,841 | | HTM, at amortized cost | 824,283 | | | 278,281 | |
Loans | 19,028,621 | | | 16,837,526 | | |
Net Loans | | Net Loans | 18,586,756 | | | 18,900,820 | |
Less: ACL - loans | Less: ACL - loans | (266,825) | | | (163,622) | | Less: ACL - loans | (255,032) | | | (277,567) | |
Net Loans | 18,761,796 | | | 16,673,904 | | |
Premises and equipment | 236,943 | | | 240,046 | | |
Loans, net | | Loans, net | 18,331,724 | | | 18,623,253 | |
Net premises and equipment | | Net premises and equipment | 228,353 | | | 231,480 | |
Accrued interest receivable | Accrued interest receivable | 70,766 | | | 60,898 | | Accrued interest receivable | 63,232 | | | 72,942 | |
Goodwill and intangible assets | Goodwill and intangible assets | 534,907 | | | 535,303 | | Goodwill and intangible assets | 536,847 | | | 536,659 | |
Other assets | Other assets | 1,118,673 | | | 855,470 | | Other assets | 989,346 | | | 1,078,128 | |
Total Assets | Total Assets | $ | 25,543,281 | | | $ | 21,886,040 | | Total Assets | $ | 26,079,774 | | | $ | 25,906,733 | |
LIABILITIES | LIABILITIES | | | | LIABILITIES | | | |
Deposits: | Deposits: | | Deposits: | |
Noninterest-bearing | Noninterest-bearing | $ | 6,378,077 | | | $ | 4,453,324 | | Noninterest-bearing | $ | 7,442,132 | | | $ | 6,531,002 | |
Interest-bearing | Interest-bearing | 14,351,974 | | | 12,940,589 | | Interest-bearing | 14,282,180 | | | 14,308,205 | |
Total Deposits | Total Deposits | 20,730,051 | | | 17,393,913 | | Total Deposits | 21,724,312 | | | 20,839,207 | |
| Short-term borrowings | Short-term borrowings | 611,727 | | | 883,241 | | Short-term borrowings | 533,749 | | | 630,066 | |
Accrued interest payable | Accrued interest payable | 9,123 | | | 8,834 | | Accrued interest payable | 7,322 | | | 10,365 | |
Long-term borrowings | Long-term borrowings | 1,296,012 | | | 881,769 | | Long-term borrowings | 627,213 | | | 1,296,263 | |
Other liabilities | Other liabilities | 506,107 | | | 376,107 | | Other liabilities | 494,220 | | | 514,004 | |
Total Liabilities | Total Liabilities | 23,153,020 | | | 19,543,864 | | Total Liabilities | 23,386,816 | | | 23,289,905 | |
SHAREHOLDERS’ EQUITY | SHAREHOLDERS’ EQUITY | | | | SHAREHOLDERS’ EQUITY | | | |
Common stock, $2.50 par value, 600 million shares authorized, 223.1 million shares issued in 2020 and 222.4 million issued in 2019 | 557,718 | | | 556,110 | | |
Preferred stock, no par value, 10,000,000 shares authorized; Series A, 200,000 shares authorized and issued in 2020, liquidation preference of $1,000 per share | | Preferred stock, no par value, 10,000,000 shares authorized; Series A, 200,000 shares authorized and issued in 2020, liquidation preference of $1,000 per share | 192,878 | | | 192,878 | |
Common stock, $2.50 par value, 600.0 million shares authorized, 223.8 million shares issued in 2021 and 223.2 million issued in 2020 | | Common stock, $2.50 par value, 600.0 million shares authorized, 223.8 million shares issued in 2021 and 223.2 million issued in 2020 | 559,485 | | | 557,917 | |
Additional paid-in capital | Additional paid-in capital | 1,505,730 | | | 1,499,681 | | Additional paid-in capital | 1,513,645 | | | 1,508,117 | |
Retained earnings | Retained earnings | 1,099,684 | | | 1,079,391 | | Retained earnings | 1,208,086 | | | 1,120,781 | |
Accumulated other comprehensive gain (loss) | 56,954 | | | (137) | | |
Treasury stock, at cost, 61.0 million shares in 2020 and 58.3 million shares in 2019 | (829,825) | | | (792,869) | | |
Accumulated other comprehensive gain | | Accumulated other comprehensive gain | 47,201 | | | 65,091 | |
Treasury stock, at cost, 60.8 million shares in 2021 and in 2020 | | Treasury stock, at cost, 60.8 million shares in 2021 and in 2020 | (828,337) | | | (827,956) | |
Total Shareholders’ Equity | Total Shareholders’ Equity | 2,390,261 | | | 2,342,176 | | Total Shareholders’ Equity | 2,692,958 | | | 2,616,828 | |
Total Liabilities and Shareholders’ Equity | Total Liabilities and Shareholders’ Equity | $ | 25,543,281 | | | $ | 21,886,040 | | Total Liabilities and Shareholders’ Equity | $ | 26,079,774 | | | $ | 25,906,733 | |
| See Notes to Consolidated Financial Statements | See Notes to Consolidated Financial Statements | | See Notes to Consolidated Financial Statements | |
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| (in thousands, except per-share data) | (in thousands, except per-share data) | Three months ended September 30 | | Nine months ended September 30 | (in thousands, except per-share data) | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
INTEREST INCOME | | | | | | | | |
Interest Income | | Interest Income | | | | | | | |
Loans, including fees | Loans, including fees | $ | 158,804 | | | $ | 186,001 | | | $ | 493,256 | | | $ | 558,055 | | Loans, including fees | $ | 155,080 | | | $ | 158,928 | | | $ | 319,065 | | | $ | 334,452 | |
Investment securities: | Investment securities: | | Investment securities: | |
Taxable | Taxable | 13,150 | | | 15,565 | | | 44,615 | | | 46,935 | | Taxable | 13,898 | | | 15,171 | | | 27,588 | | | 31,465 | |
Tax-exempt | Tax-exempt | 5,449 | | | 3,673 | | | 15,481 | | | 10,222 | | Tax-exempt | 5,921 | | | 5,323 | | | 11,574 | | | 10,031 | |
| Loans held for sale | Loans held for sale | 728 | | | 466 | | | 1,557 | | | 1,056 | | Loans held for sale | 199 | | | 509 | | | 671 | | | 829 | |
Other interest income | Other interest income | 1,028 | | | 2,709 | | | 4,324 | | | 6,879 | | Other interest income | 1,575 | | | 766 | | | 2,711 | | | 3,297 | |
Total Interest Income | Total Interest Income | 179,159 | | | 208,414 | | | 559,233 | | | 623,147 | | Total Interest Income | 176,673 | | | 180,697 | | | 361,609 | | | 380,074 | |
INTEREST EXPENSE | | |
Interest Expense | | Interest Expense | |
Deposits | Deposits | 14,631 | | | 35,737 | | | 58,189 | | | 97,974 | | Deposits | 7,982 | | | 17,118 | | | 17,584 | | | 43,558 | |
Short-term borrowings | Short-term borrowings | 370 | | | 4,156 | | | 4,960 | | | 12,200 | | Short-term borrowings | 137 | | | 517 | | | 325 | | | 4,590 | |
Long-term borrowings | Long-term borrowings | 10,042 | | | 7,260 | | | 28,468 | | | 23,854 | | Long-term borrowings | 6,155 | | | 10,307 | | | 16,853 | | | 18,426 | |
Total Interest Expense | Total Interest Expense | 25,043 | | | 47,153 | | | 91,617 | | | 134,028 | | Total Interest Expense | 14,274 | | | 27,942 | | | 34,762 | | | 66,574 | |
Net Interest Income | Net Interest Income | 154,116 | | | 161,260 | | | 467,616 | | | 489,119 | | Net Interest Income | 162,399 | | | 152,755 | | | 326,847 | | | 313,500 | |
Provision for credit losses | Provision for credit losses | 7,080 | | | 2,170 | | | 70,680 | | | 12,295 | | Provision for credit losses | (3,500) | | | 19,570 | | | (9,000) | | | 63,600 | |
Net Interest Income After Provision for Credit Losses | Net Interest Income After Provision for Credit Losses | 147,036 | | | 159,090 | | | 396,936 | | | 476,824 | | Net Interest Income After Provision for Credit Losses | 165,899 | | | 133,185 | | | 335,847 | | | 249,900 | |
NON-INTEREST INCOME | | |
Wealth management | 14,943 | | | 13,867 | | | 43,405 | | | 41,259 | | |
Non-Interest Income | | Non-Interest Income | |
Commercial banking | Commercial banking | 18,311 | | | 18,788 | | | 53,477 | | | 53,055 | | Commercial banking | 17,129 | | | 16,748 | | | 33,471 | | | 35,167 | |
Consumer banking | Consumer banking | 10,423 | | | 13,333 | | | 30,800 | | | 37,077 | | Consumer banking | 10,860 | | | 9,138 | | | 21,614 | | | 20,377 | |
Wealth management | | Wealth management | 17,634 | | | 13,407 | | | 34,981 | | | 28,462 | |
Mortgage banking | Mortgage banking | 16,801 | | | 6,658 | | | 32,998 | | | 18,023 | | Mortgage banking | 2,838 | | | 9,964 | | | 16,798 | | | 16,198 | |
Other | Other | 2,769 | | | 2,675 | | | 10,080 | | | 6,733 | | Other | 3,393 | | | 3,660 | | | 6,912 | | | 7,311 | |
Non-Interest Income Before Investment Securities Gains | Non-Interest Income Before Investment Securities Gains | 63,246 | | | 55,321 | | | 170,761 | | | 156,147 | | Non-Interest Income Before Investment Securities Gains | 51,854 | | | 52,917 | | | 113,776 | | | 107,515 | |
Investment securities gains, net | Investment securities gains, net | 2 | | | 4,492 | | | 3,053 | | | 4,733 | | Investment securities gains, net | 36 | | | 3,005 | | | 33,511 | | | 3,051 | |
Total Non-Interest Income | Total Non-Interest Income | 63,248 | | | 59,813 | | | 173,814 | | | 160,879 | | Total Non-Interest Income | 51,890 | | | 55,922 | | | 147,287 | | | 110,566 | |
NON-INTEREST EXPENSE | | |
Non-Interest Expense | | Non-Interest Expense | |
Salaries and employee benefits | Salaries and employee benefits | 79,227 | | | 78,211 | | | 240,467 | | | 234,959 | | Salaries and employee benefits | 78,367 | | | 81,012 | | | 160,953 | | | 161,240 | |
Data processing and software | | Data processing and software | 13,932 | | | 12,193 | | | 27,493 | | | 23,838 | |
Net occupancy | Net occupancy | 13,221 | | | 12,368 | | | 39,851 | | | 39,746 | | Net occupancy | 12,494 | | | 13,144 | | | 26,476 | | | 26,630 | |
Data processing and software | 12,285 | | | 11,590 | | | 36,123 | | | 33,211 | | |
Other outside services | Other outside services | 7,617 | | | 12,163 | | | 23,098 | | | 31,774 | | Other outside services | 8,178 | | | 7,600 | | | 16,668 | | | 15,481 | |
State taxes | | State taxes | 4,384 | | | 3,088 | | | 8,889 | | | 5,891 | |
Equipment | | Equipment | 3,424 | | | 3,193 | | | 6,852 | | | 6,611 | |
Professional fees | Professional fees | 2,879 | | | 3,331 | | | 10,412 | | | 10,261 | | Professional fees | 2,651 | | | 3,331 | | | 5,430 | | | 7,533 | |
Equipment | 3,711 | | | 3,459 | | | 10,322 | | | 10,100 | | |
State taxes | 2,692 | | | 2,523 | | | 8,583 | | | 7,005 | | |
FDIC insurance | FDIC insurance | 1,578 | | | 239 | | | 6,519 | | | 5,603 | | FDIC insurance | 2,282 | | | 2,133 | | | 4,906 | | | 4,941 | |
Amortization of TCI | | Amortization of TCI | 1,563 | | | 1,450 | | | 3,094 | | | 2,900 | |
Marketing | Marketing | 1,147 | | | 3,322 | | | 4,029 | | | 8,345 | | Marketing | 1,348 | | | 1,303 | | | 2,350 | | | 2,882 | |
Amortization of TCI | 1,694 | | | 1,533 | | | 4,594 | | | 4,516 | | |
Intangible amortization | Intangible amortization | 132 | | | 1,071 | | | 397 | | | 1,285 | | Intangible amortization | 178 | | | 132 | | | 293 | | | 264 | |
Prepayment penalty on FHLB advances | 0 | | | 4,326 | | | 2,878 | | | 4,326 | | |
Debt extinguishment | | Debt extinguishment | 412 | | | 2,878 | | | 32,575 | | | 2,878 | |
Other | Other | 12,962 | | | 12,634 | | | 37,431 | | | 37,631 | | Other | 11,618 | | | 11,549 | | | 23,236 | | | 24,469 | |
Total Non-Interest Expense | Total Non-Interest Expense | 139,147 | | | 146,770 | | | 424,705 | | | 428,762 | | Total Non-Interest Expense | 140,831 | | | 143,006 | | | 319,215 | | | 285,558 | |
Income Before Income Taxes | Income Before Income Taxes | 71,137 | | | 72,133 | | | 146,045 | | | 208,941 | | Income Before Income Taxes | 76,958 | | | 46,101 | | | 163,919 | | | 74,909 | |
Income taxes | Income taxes | 9,529 | | | 10,025 | | | 18,832 | | | 30,391 | | Income taxes | 11,994 | | | 6,542 | | | 25,892 | | | 9,303 | |
Net Income | Net Income | $ | 61,607 | | | $ | 62,108 | | | $ | 127,213 | | | $ | 178,550 | | Net Income | 64,964 | | | 39,559 | | | 138,027 | | | 65,606 | |
Preferred stock dividends | | Preferred stock dividends | (2,562) | | | 0 | | | (5,153) | | | 0 | |
Net Income Available to Common Shareholders | | Net Income Available to Common Shareholders | $ | 62,402 | | | $ | 39,559 | | | $ | 132,874 | | | $ | 65,606 | |
| PER SHARE: | PER SHARE: | | | | | | | | PER SHARE: | |
Net Income (Basic) | $ | 0.38 | | | $ | 0.38 | | | $ | 0.78 | | | $ | 1.06 | | |
Net Income (Diluted) | 0.38 | | | 0.37 | | | 0.78 | | | 1.06 | | |
Net Income Available to Common Shareholders (Basic) | | Net Income Available to Common Shareholders (Basic) | $ | 0.38 | | | $ | 0.24 | | | $ | 0.81 | | | $ | 0.40 | |
Net Income Available to Common Shareholders (Diluted) | | Net Income Available to Common Shareholders (Diluted) | 0.38 | | | 0.24 | | | 0.81 | | | 0.40 | |
Cash Dividends | Cash Dividends | 0.13 | | | 0.13 | | | 0.39 | | | 0.39 | | Cash Dividends | 0.14 | | | 0.13 | | | 0.28 | | | 0.26 | |
See Notes to Consolidated Financial Statements | See Notes to Consolidated Financial Statements | | See Notes to Consolidated Financial Statements | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
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| Three months ended September 30 | | Nine months ended September 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
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Net Income | $ | 61,607 | | | $ | 62,108 | | | $ | 127,213 | | | $ | 178,550 | |
Other Comprehensive Income, net of tax: | | | | | | | |
Unrealized gain on securities | 4,333 | | | 18,029 | | | 56,186 | | | 63,244 | |
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Reclassification adjustment for securities gains included in net income | (1) | | | (3,498) | | | (2,377) | | | (3,686) | |
Amortization of net unrealized losses on AFS securities transferred to HTM | 928 | | | 3,430 | | | 2,517 | | | 5,425 | |
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Non-credit related unrealized loss on other-than-temporarily impaired debt securities | 0 | | | 0 | | | 0 | | | (682) | |
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Amortization of net unrecognized pension and postretirement income | 255 | | | 277 | | | 765 | | | 843 | |
Other Comprehensive Income | 5,515 | | | 18,238 | | | 57,091 | | | 65,144 | |
Total Comprehensive Income | $ | 67,122 | | | $ | 80,346 | | | $ | 184,304 | | | $ | 243,694 | |
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See Notes to Consolidated Financial Statements | | | | | | | |
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| Three months ended June 30 | | Six months ended June 30 |
| 2021 | | 2020 | | 2021 | | 2020 |
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Net Income | $ | 64,964 | | | $ | 39,559 | | | $ | 138,027 | | | $ | 65,606 | |
Other Comprehensive Income (Loss), net of tax: | | | | | | | |
Unrealized gain (loss) on securities | 19,298 | | | 34,424 | | | (20,701) | | | 51,853 | |
Reclassification adjustment for securities (gains) losses included in net income | (28) | | | (2,341) | | | 349 | | | (2,376) | |
Amortization of net unrealized (gains) losses on AFS securities transferred to HTM | (270) | | | 793 | | | 1,517 | | | 1,589 | |
Net unrealized gain on interest rate swaps used in cash flow hedges | 2,074 | | | 0 | | | 367 | | | 0 | |
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Amortization of net unrecognized pension and postretirement income | 289 | | | 255 | | | 578 | | | 510 | |
Other Comprehensive Income (Loss) | 21,363 | | | 33,131 | | | (17,890) | | | 51,576 | |
Total Comprehensive Income | $ | 86,327 | | | $ | 72,690 | | | $ | 120,137 | | | $ | 117,182 | |
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See Notes to Consolidated Financial Statements | | | | | | | |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except per-share data)
| | | Common Stock | | Retained Earnings | | | Treasury Stock | | Total | | Preferred Stock | | Common Stock | | Additional | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
| | Shares Outstanding | | Amount | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | | Shares | | Amount | | Shares | | Amount | | Paid-in Capital | |
Three months ended September 30, 2020 | | |
Balance at June 30, 2020 | 161,958 | | | $ | 557,569 | | | $ | 1,503,750 | | | $ | 1,059,160 | | | $ | 51,439 | | | $ | (831,417) | | | $ | 2,340,501 | | |
Three months ended June 30, 2021 | | Three months ended June 30, 2021 | | | | | | | | | | | | | | | | |
Balance at March 31, 2021 | | Balance at March 31, 2021 | 200 | | | $ | 192,878 | | | 162,517 | | | $ | 558,116 | | | $ | 1,511,101 | | | $ | 1,168,491 | | | $ | 25,838 | | | $ | (826,769) | | | $ | 2,629,655 | |
Net income | Net income | | 61,607 | | | 61,607 | | Net income | | 64,964 | | | 64,964 | |
Other comprehensive income | Other comprehensive income | | 5,515 | | | 5,515 | | Other comprehensive income | | 21,363 | | | 21,363 | |
Stock issued | 176 | | | 149 | | | 105 | | | 1,592 | | | 1,846 | | |
| Common stock issued | | Common stock issued | | 471 | | | 1,369 | | | 446 | | | (1,568) | | | 247 | |
Stock-based compensation awards | | Stock-based compensation awards | | 2,098 | | | 2,098 | |
| Preferred stock dividend | | Preferred stock dividend | | (2,562) | | | (2,562) | |
Common stock cash dividends - $0.14 per share | | Common stock cash dividends - $0.14 per share | | (22,807) | | | (22,807) | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | 200 | | | $ | 192,878 | | | 162,988 | | | $ | 559,485 | | | $ | 1,513,645 | | | $ | 1,208,086 | | | $ | 47,201 | | | $ | (828,337) | | | $ | 2,692,958 | |
| Three months ended June 30, 2020 | | Three months ended June 30, 2020 | |
Balance at March 31, 2020 | | Balance at March 31, 2020 | 0 | | | $ | 0 | | | 161,435 | | | $ | 556,243 | | | $ | 1,502,189 | | | $ | 1,040,646 | | | $ | 18,308 | | | $ | (831,638) | | | $ | 2,285,748 | |
Net income | | Net income | | 39,559 | | | 39,559 | |
Other comprehensive income | | Other comprehensive income | | 33,131 | | | 33,131 | |
| Common stock issued | | Common stock issued | | 523 | | | 1,326 | | | (350) | | | 221 | | | 1,197 | |
Stock-based compensation awards | Stock-based compensation awards | | 1,875 | | | 1,875 | | Stock-based compensation awards | | 1,911 | | | 1,911 | |
| Common stock cash dividends - $0.13 per share | | (21,083) | | | (21,083) | | |
Balance at September 30, 2020 | 162,134 | | | $ | 557,718 | | | $ | 1,505,730 | | | $ | 1,099,684 | | | $ | 56,954 | | | $ | (829,825) | | | $ | 2,390,261 | | |
| Three months ended September 30, 2019 | | |
Balance at June 30, 2019 | 166,903 | | | $ | 555,690 | | | $ | 1,493,628 | | | $ | 1,018,736 | | | $ | (12,157) | | | $ | (747,099) | | | $ | 2,308,798 | | |
Net income | | 62,108 | | | 62,108 | | |
Other comprehensive income | | 18,238 | | | 18,238 | | |
Stock issued | 157 | | | 198 | | | 919 | | | 1,043 | | | 2,160 | | |
Stock-based compensation awards | | 2,110 | | | 2,110 | | |
Acquisition of treasury stock | (3,024) | | | (48,071) | | | (48,071) | | |
| Common stock cash dividends - $0.13 per share | Common stock cash dividends - $0.13 per share | | (21,327) | | | (21,327) | | Common stock cash dividends - $0.13 per share | | (21,045) | | | (21,045) | |
Balance at September 30, 2019 | 164,036 | | | $ | 555,888 | | | $ | 1,496,657 | | | $ | 1,059,517 | | | $ | 6,081 | | | $ | (794,127) | | | $ | 2,324,016 | | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | 0 | | | $ | 0 | | | 161,958 | | | $ | 557,569 | | | $ | 1,503,750 | | | $ | 1,059,160 | | | $ | 51,439 | | | $ | (831,417) | | | $ | 2,340,501 | |
| Nine months ended September 30, 2020 | | |
Six months ended June 30, 2021 | | Six months ended June 30, 2021 | |
Balance at December 31, 2020 | | Balance at December 31, 2020 | 200 | | | $ | 192,878 | | | 162,350 | | | $ | 557,917 | | | $ | 1,508,117 | | | $ | 1,120,781 | | | $ | 65,091 | | | $ | (827,956) | | | $ | 2,616,828 | |
Net income | | Net income | | 138,027 | | | 138,027 | |
Other comprehensive loss | | Other comprehensive loss | | (17,890) | | | (17,890) | |
| Common stock issued | | Common stock issued | | 638 | | | 1,568 | | | 1,528 | | | (381) | | | 2,715 | |
Stock-based compensation awards | | Stock-based compensation awards | | 4,000 | | | 4,000 | |
| Preferred stock dividend | | Preferred stock dividend | | (5,153) | | | (5,153) | |
Common stock cash dividends - $0.28 per share | | Common stock cash dividends - $0.28 per share | | (45,569) | | | (45,569) | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | 200 | | | $ | 192,878 | | | 162,988 | | | $ | 559,485 | | | $ | 1,513,645 | | | $ | 1,208,086 | | | $ | 47,201 | | | $ | (828,337) | | | $ | 2,692,958 | |
| Six months ended June 30, 2020 | | Six months ended June 30, 2020 | |
Balance at December 31, 2019 | Balance at December 31, 2019 | 164,218 | | | $ | 556,110 | | | $ | 1,499,681 | | | $ | 1,079,391 | | | $ | (137) | | | $ | (792,869) | | | $ | 2,342,176 | | Balance at December 31, 2019 | 0 | | | $ | 0 | | | 164,218 | | | $ | 556,110 | | | $ | 1,499,681 | | | $ | 1,079,391 | | | $ | (137) | | | $ | (792,869) | | | $ | 2,342,176 | |
Net income | Net income | | 127,213 | | | 127,213 | | Net income | | 65,606 | | | 65,606 | |
Other comprehensive income | Other comprehensive income | | 57,091 | | | 57,091 | | Other comprehensive income | | 51,576 | | | 51,576 | |
Stock issued | 824 | | | 1,608 | | | 646 | | | 2,792 | | | 5,046 | | |
| Common stock issued | | Common stock issued | | 648 | | | 1,459 | | | 540 | | | 1,200 | | | 3,198 | |
Stock-based compensation awards | Stock-based compensation awards | | 5,403 | | | 5,403 | | Stock-based compensation awards | | 3,530 | | | 3,530 | |
Adjustment for CECL (1) | | Adjustment for CECL (1) | | (43,807) | | | (43,807) | |
Acquisition of treasury stock | Acquisition of treasury stock | (2,908) | | | (39,748) | | | (39,748) | | Acquisition of treasury stock | | (2,908) | | | (39,748) | | | (39,748) | |
| Impact of adopting CECL (1) | | (43,807) | | | (43,807) | | |
Common stock cash dividends - $0.39 per share | | (63,113) | | | (63,113) | | |
Balance at September 30, 2020 | 162,134 | | | $ | 557,718 | | | $ | 1,505,730 | | | $ | 1,099,684 | | | $ | 56,954 | | | $ | (829,825) | | | $ | 2,390,261 | | |
| Nine months ended September 30, 2019 | | |
Balance at December 31, 2018 | 170,184 | | | $ | 554,377 | | | $ | 1,489,703 | | | $ | 946,032 | | | $ | (59,063) | | | $ | (683,476) | | | $ | 2,247,573 | | |
Net income | | 178,550 | | | 178,550 | | |
Other comprehensive income | | 65,144 | | | 65,144 | | |
Stock issued | 701 | | | 1,511 | | | 1,496 | | | 806 | | | 3,813 | | |
Stock-based compensation awards | | 5,458 | | | 5,458 | | |
Acquisition of treasury stock | (6,849) | | | (111,457) | | | (111,457) | | |
| Common stock cash dividends - $0.39 per share | | (65,065) | | | (65,065) | | |
Balance at September 30, 2019 | 164,036 | | | $ | 555,888 | | | $ | 1,496,657 | | | $ | 1,059,517 | | | $ | 6,081 | | | $ | (794,127) | | | $ | 2,324,016 | | |
Common stock cash dividends - $0.26 per share | | Common stock cash dividends - $0.26 per share | | (42,030) | | | (42,030) | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | 0 | | | $ | 0 | | | 161,958 | | | $ | 557,569 | | | $ | 1,503,750 | | | $ | 1,059,160 | | | $ | 51,439 | | | $ | (831,417) | | | $ | 2,340,501 | |
| See Notes to Consolidated Financial Statements | See Notes to Consolidated Financial Statements | | See Notes to Consolidated Financial Statements | |
|
(1) The Corporation adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments on January 1, 2020. See Note 1, "Basis of Presentation" to the Consolidated Financial Statements for further details.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| (in thousands) | (in thousands) | Nine months ended September 30 | (in thousands) | Six months ended June 30 |
| | 2020 | | 2019 | | 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net Income | Net Income | $ | 127,213 | | | $ | 178,550 | | Net Income | $ | 138,027 | | | $ | 65,606 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Provision for credit losses | Provision for credit losses | 70,680 | | | 12,295 | | Provision for credit losses | (9,000) | | | 63,600 | |
Depreciation and amortization of premises and equipment | Depreciation and amortization of premises and equipment | 21,653 | | | 20,984 | | Depreciation and amortization of premises and equipment | 13,775 | | | 14,331 | |
Amortization of TCI | Amortization of TCI | 22,883 | | | 24,608 | | Amortization of TCI | 14,002 | | | 15,237 | |
Net amortization of investment securities premiums | Net amortization of investment securities premiums | 8,722 | | | 6,861 | | Net amortization of investment securities premiums | 7,546 | | | 5,599 | |
Investment securities gains, net | Investment securities gains, net | (3,053) | | | (4,733) | | Investment securities gains, net | (33,511) | | | (3,051) | |
Gain on sales of mortgage loans held for sale | Gain on sales of mortgage loans held for sale | (42,208) | | | (13,822) | | Gain on sales of mortgage loans held for sale | (14,094) | | | (22,728) | |
Proceeds from sales of mortgage loans held for sale | Proceeds from sales of mortgage loans held for sale | 1,113,671 | | | 672,314 | | Proceeds from sales of mortgage loans held for sale | 554,406 | | | 584,924 | |
Originations of mortgage loans held for sale | Originations of mortgage loans held for sale | (1,127,256) | | | (665,338) | | Originations of mortgage loans held for sale | (498,350) | | | (601,783) | |
Intangible amortization | Intangible amortization | 397 | | | 1,285 | | Intangible amortization | 293 | | | 264 | |
Amortization of issuance costs and discounts on long-term debt | 836 | | | 632 | | |
Amortization of issuance costs and discounts on long-term borrowings | | Amortization of issuance costs and discounts on long-term borrowings | 1,378 | | | 543 | |
Debt extinguishment costs | | Debt extinguishment costs | 32,575 | | | 2,878 | |
Stock-based compensation | Stock-based compensation | 5,403 | | | 5,458 | | Stock-based compensation | 4,000 | | | 3,530 | |
| Other changes, net | Other changes, net | (169,447) | | | (195,560) | | Other changes, net | 22,537 | | | (161,412) | |
Total adjustments | Total adjustments | (97,719) | | | (135,016) | | Total adjustments | 95,557 | | | (98,068) | |
Net cash provided by operating activities | 29,494 | | | 43,534 | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | 233,584 | | | (32,462) | |
CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | CASH FLOWS FROM INVESTING ACTIVITIES: | |
Proceeds from sales of AFS securities | Proceeds from sales of AFS securities | 215,150 | | | 697,634 | | Proceeds from sales of AFS securities | 125,811 | | | 187,819 | |
Proceeds from principal repayments and maturities of AFS securities | Proceeds from principal repayments and maturities of AFS securities | 282,832 | | | 169,380 | | Proceeds from principal repayments and maturities of AFS securities | 246,740 | | | 147,551 | |
Proceeds from principal repayments and maturities of HTM securities | Proceeds from principal repayments and maturities of HTM securities | 67,268 | | | 62,320 | | Proceeds from principal repayments and maturities of HTM securities | 58,470 | | | 40,374 | |
Purchase of AFS securities | Purchase of AFS securities | (728,937) | | | (838,634) | | Purchase of AFS securities | (766,574) | | | (418,395) | |
| Sale (purchase) of FRB and FHLB stock | 3,458 | | | (15,274) | | |
Net increase in loans | (2,203,974) | | | (529,974) | | |
Purchase of HTM securities | | Purchase of HTM securities | (227,687) | | | 0 | |
Sale of Visa Shares | | Sale of Visa Shares | 33,962 | | | 0 | |
Sale of FRB and FHLB stock | | Sale of FRB and FHLB stock | 29,498 | | | 6,380 | |
Net decrease (increase) in loans | | Net decrease (increase) in loans | 300,929 | | | (1,882,433) | |
Net purchases of premises and equipment | Net purchases of premises and equipment | (18,550) | | | (23,799) | | Net purchases of premises and equipment | (10,648) | | | (13,881) | |
Net cash paid for acquisition | Net cash paid for acquisition | 0 | | | (3,907) | | Net cash paid for acquisition | 292 | | | 0 | |
Net change in tax credit investments | Net change in tax credit investments | (9,585) | | | (14,715) | | Net change in tax credit investments | (8,065) | | | (4,873) | |
Net cash used in investing activities | Net cash used in investing activities | (2,392,338) | | | (496,969) | | Net cash used in investing activities | (217,272) | | | (1,937,458) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | CASH FLOWS FROM FINANCING ACTIVITIES: | |
Net increase in demand and savings deposits | Net increase in demand and savings deposits | 3,669,990 | | | 627,958 | | Net increase in demand and savings deposits | 1,234,732 | | | 2,678,900 | |
Net (decrease) increase in time deposits | (333,852) | | | 338,600 | | |
Net (decrease) increase in short-term borrowings | (271,514) | | | 78,083 | | |
Additions to long-term debt | 495,898 | | | 305,000 | | |
Repayments of long-term debt | (82,491) | | | (571,197) | | |
Net decrease in time deposits | | Net decrease in time deposits | (349,627) | | | (188,604) | |
Net decrease in short-term borrowings | | Net decrease in short-term borrowings | (96,317) | | | (310,690) | |
Proceeds from long-term borrowings | | Proceeds from long-term borrowings | 620 | | | 495,898 | |
Repayments of long-term borrowings | | Repayments of long-term borrowings | (703,624) | | | (85,893) | |
Net proceeds from issuance of common stock | Net proceeds from issuance of common stock | 5,046 | | | 3,813 | | Net proceeds from issuance of common stock | 2,715 | | | 3,198 | |
| Dividends paid | Dividends paid | (63,387) | | | (64,439) | | Dividends paid | (48,584) | | | (42,333) | |
Acquisition of treasury stock | Acquisition of treasury stock | (39,748) | | | (111,457) | | Acquisition of treasury stock | 0 | | | (39,748) | |
Net cash provided by financing activities | Net cash provided by financing activities | 3,379,942 | | | 606,361 | | Net cash provided by financing activities | 39,915 | | | 2,510,728 | |
Net Increase in Cash and Cash Equivalents | Net Increase in Cash and Cash Equivalents | 1,017,099 | | | 152,926 | | Net Increase in Cash and Cash Equivalents | 56,227 | | | 540,808 | |
Cash and Cash Equivalents at Beginning of Period | Cash and Cash Equivalents at Beginning of Period | 517,791 | | | 445,687 | | Cash and Cash Equivalents at Beginning of Period | 1,847,832 | | | 517,791 | |
Cash and Cash Equivalents at End of Period | Cash and Cash Equivalents at End of Period | $ | 1,534,890 | | | $ | 598,613 | | Cash and Cash Equivalents at End of Period | $ | 1,904,059 | | | $ | 1,058,599 | |
Supplemental Disclosures of Cash Flow Information: | Supplemental Disclosures of Cash Flow Information: | | | | Supplemental Disclosures of Cash Flow Information: | | | |
Cash paid during the period for: | Cash paid during the period for: | | Cash paid during the period for: | |
Interest | Interest | $ | 91,328 | | | $ | 134,935 | | Interest | $ | 37,805 | | | $ | 63,837 | |
Income taxes | Income taxes | 12,118 | | | 7,966 | | Income taxes | 8,127 | | | 11,051 | |
Supplemental schedule of certain noncash activities: | | |
Supplemental Schedule of Certain Noncash Activities: | | Supplemental Schedule of Certain Noncash Activities: | |
Transfer of AFS securities to HTM securities | | Transfer of AFS securities to HTM securities | $ | 376,165 | | | $ | 0 | |
| Transfer of HTM securities to AFS securities | $ | 0 | | | $ | 158,898 | | |
See Notes to Consolidated Financial Statements | See Notes to Consolidated Financial Statements | | See Notes to Consolidated Financial Statements | |
FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 – Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of the Corporation have been prepared in conformity with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2019.2020. Operating results for the three and ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the SEC.
CECL Adoption and Updated Significant Accounting Policy
On January 1, 2020, the Corporation adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments,Instruments. which replaces the incurred loss methodology, and is referred to as CECL. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities. It also applies to OBS credit exposures, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, and net investments in leases recognized by a lessor in accordance with ASC Topic 842.
The Corporation adopted CECL using the modified retrospective method for all financial assets measured at amortized cost, net of investments in leases and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under CECL, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Corporation recorded an increase of $58.3 million to the ACL on January 1, 2020 as a result of the adoption of CECL. Retained earnings decreased $43.8 million and deferred tax assets increased by $12.4 million. Included in the $58.3 million increase to the ACL was $2.1 million for certain OBS credit exposures that was previously recognized in other liabilities before the adoption of CECL.
Loans: Loans 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, loans are placed on non-accrual status once they become 90 days delinquent as to principal or interest. In certain cases a loan 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 agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans may be restored to accrual status when all delinquent principalCARES Act and interest has been paid currently for six consecutive months or the loan is considered secured and in the process of collection. The Corporation generally applies payments received on non-accruing loans 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 will ultimately be collected, payments received subsequent to its classification as a non-accrual loan are allocated between interest income and principal.
A loan that is 90 days delinquent may continue to accrue interest if the loan 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 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 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 deemed to be a loss are written off through a charge against the ACL. Closed-end consumer loans are generally charged off when they become 120 days past due (180 days for open-end consumer loans) if they are not adequately secured by real
estate. All other loans 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, if any. Principal recoveries of loans previously charged off are recorded as increases to the ACL.
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 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, as components of mortgage banking.
Loan origination fees and the related direct origination costs for loans originated under the PPP loan program are amortized on a straight-line basis over the repayment period of the loan. To the extent that a PPP loan is forgiven, the unamortized fees and costs will be recorded at the time of forgiveness.
Troubled Debt Restructurings: Loans are accounted for and reported as TDRs when, for economic or legal reasons, the Corporation grants a concession to a borrower experiencing financial difficulty that it would not otherwise consider. 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.Consolidated Appropriations Act - 2021
On March 27, 2020 the CARES Act was signed into law. The CARES Act includes an option for financial institutions to suspend the requirements of GAAP for certain loan modifications that would otherwise be categorized as a TDR. Certain conditions must be met with respect to the loan modification including that the modification is related to COVID-19 and the modified loan was not more than 30 days past due on December 31, 20192019. On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law and this Act extended the modificationrelief for TDR treatment that was executed between March 1,set to expire on December 31, 2020 andto the earlier of (a) 60 days after the date of the COVID-19 national emergency comes to an endtermination date or (b) December 31, 2020.January 1, 2022. The Corporation is applying the option under the CARES act for all loan modifications that qualify.
On April 7, 2020, Troubled Debt Restructurings: Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by COVID-19 was issued by the federal banking regulatory agencies. Included in the Interagency Statement were provisions permitting banks that grant loan modifications to customers impacted by COVID-19 to exclude those modifications from loans categorized as TDRs. The Corporation is adopting the guidance in this Interagency Statement effective for COVID-19-related modifications occurring subsequent to March 13, 2020.
Allowance for Credit Losses: The discussion that follows describes the methodology for determining the ACL under the CECL model that was adopted January 1, 2020. The allowance methodology for prior periods is disclosed in the Corporation’s 2019 Annual Report on Form 10-K.
The Corporation has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income.
Loans: The ACL for loans is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for expected credit losses.
Loans Evaluated Collectively: Loans evaluated collectively for expected credit losses include loans on accrual status, excluding accruing TDRs, and loans initially evaluated individually, but determined not to have enhanced credit risk characteristics. This category includes loans on non-accrual status and TDRs where the total commitment amount is less than $1 million. The ACL is estimated by applying a probability of default (PD) and loss given default (LGD) to the exposure at default (EAD) at the loan or lease level. In order to determine the PD, LGD, and EAD inputs:
•Loans are aggregated into pools based on similar risk characteristics.
•The PD and LGD model components are determined based on loss estimates driven by historical credit loss experience for each pool of loans.
•The PD model components use econometric regression models that use the Corporation’s historical credit loss experience and economic variable inputs to estimate a PD for each loan pool. The LGD model component calculates a lifetime LGD estimate across each pool of loans utilizing a loss rate approach based on the Corporation’s historical charge-off and the balance at the time of loan default adjusted for the Corporation’s recovery experience.
•Reasonable and supportable economic variable forecasts are incorporated into the PD model components.
•Reasonable and supportable forecast periods are based on different economic forecasts and scenarios sourced from an external third party. A future loss forecast over the reasonable and supportable forecast period is based on the projected performance of specific economic variables that statistically correlate loss experience in the various loan pools.
•After the reasonable and supportable forecast period, economic variable forecasts naturally revert, at the input level,to a long-run average.
•To calculate the EAD model component, cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate. In addition, a constant prepayment rate is calculated for each loan pool.
Loans Evaluated Individually: Loans evaluated individually for expected credit losses include loans on non-accrual status and TDRs where the commitment amount equals or exceeds $1.0 million. The required ACL for such loans is determined using either the present value of expected future cash flows, observable market price or the fair value of collateral.
Loans evaluated individually may have specific allocations assigned if the measured value of the loan using one of the noted techniques is less than its current carrying value. For loans measured using the fair value of collateral, if the analysis determines that sufficient collateral value would be available for repayment of the debt, then no allocations would be assigned to those loans. Collateral could be in the form of real estate 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 estate.
For loans secured by real estate, estimated fair values are determined primarily through appraisals performed by 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 is 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 third-party appraisers for impaired loans secured predominantly by real estate every 12 months.
When updated appraisals are not obtained for loans 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 there has not been a significant deterioration in the collateral value since the original appraisal was performed.
For loans with principal balances greater than or equal to $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.
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. 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 ACL methodology for these loans, which bases the PD on this migration. Assigning risk ratings involves judgment. Risk ratings may be changed based on ongoing monitoring procedures, 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.
•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.
The allocation of the ACL 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.
Qualitative and Other Adjustments to ACL: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These qualitative factors include changes in lending policy, the nature and volume of the portfolio, overall business conditions in the economy, credit concentrations, specific industry risks, competition, model imprecision and legal and regulatory requirements. Qualitative adjustments are judgmental and are based on management’s knowledge of the portfolio and the markets in which the Corporation operates. Qualitative adjustments are evaluated and approved on a quarterly basis. Additionally, the ACL includes other allowance categories that are not directly incorporated in the quantitative results. These categories include but are not limited to loans-in-process, trade acceptances and overdrafts.
OBS Credit Exposures:The ACL for OBS credit exposures is recorded in other liabilities on the consolidated balance sheets. This portion of the ACL represents management’s estimate of expected losses in its unfunded loan commitments and other OBS credit exposures. The ACL specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The ACL for OBS credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses.
HTM Debt Securities:Expected credit losses on HTM debt securities would be recorded in the ACL on HTM debt securities. As of September 30, 2020, no HTM debt securities required an ACL as these investments consist solely of government guaranteed residential mortgage-backed securities.
AFS Debt Securities: The ACL approach for AFS debt securities differs from the CECL approach used for HTM debt securities as AFS debt securities are carried at fair value rather than amortized cost. Prior to the adoption of CECL, credit losses on AFS debt securities were determined using an OTTI approach. Under CECL, the concept of OTTI has been eliminated, but the general approach to determining credit losses is largely consistent with the OTTI method. Under CECL, credit losses on AFS debt securities are recognized through an ACL rather than through a direct write-down of the security. As of September 30, 2020, no AFS debt securities required an ACL.
Other Recently Adopted Accounting Standards
On January 1, 2020,2021, the Corporation adoptedASC Update 2018-13 - Fair Value Measurement2019-12 Income Taxes (Topic 820)740): Disclosure Framework - Changes toSimplifying the Disclosure RequirementsAccounting for Fair Value Measurement. Income Taxes.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.
The Corporation adopted this standards update effective with its March 31, 20202021 quarterly report on Form 10-Q and it did not have a material impact on itsthe consolidated financial statements.
On January 1, 2020,2021, the Corporation adopted ASC Update 2018-15 - Intangibles - Goodwill and Other - Internal-Use Software2021-01 Reference Rate Reform (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. 848). This update requires a customerpermits entities to apply optional expedients in a cloud computing arrangementTopic 848 to derivative instruments modified because of LIBOR transition affected by changes to the interest rates used for discounting, margining or contract price alignment due to reference rate reform. This update was effective upon issuance and entities may elect to apply the guidance to modifications either retrospectively, as of any date from the beginning of any interim period that includes or is a service contractsubsequent to follow the internal-use software guidanceMarch 12, 2020, or prospectively to new modifications from any date in ASC Subtopic 350-40an interim period that includes or is subsequent to determine which implementation costs to capitalize as assets.
January 7, 2021. The Corporation adopted this standards update retrospectively effective with its March 31, 20202021 quarterly report on Form 10-Q and itthe adoption did not have a material impact on its consolidated financial statements
In March 2020, the Corporation adopted ASC Update 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standards update provided optional guidance for a limited time to ease the potential burden in accounting for reference rate reform, specific to those using LIBOR or another reference rate expected to be discontinued due to this reform.
The Corporation adopted this standards update effective with its March 31, 2020 quarterly report on Form 10-Q and it did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Standards
| | | | | | | | | | | |
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 fiscal years ending after December 15, 2020. Early adoption is permitted.
| Fiscal Year 2020 | The Corporation intends to adopt this standards update effective with its December 31, 2020 annual report on Form 10-K. 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 the 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. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.
This update is effective for public companies for fiscal years, and interim periods within those fiscal years, 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 update is not expected to have a material impact on the consolidated financial statements. |
Reclassifications
Certain amounts in the 20192020 consolidated financial statements and notes have been reclassified to conform to the 20202021 presentation.
NOTE 2 – Restrictions on Cash and Cash Equivalents
The Bank is required to maintain reserves against its deposit liabilities. Prior to March 2020, reserves were in the form of cash and balances with the FRB. The FRB suspended cash reserve requirements effective March 26, 2020. The amount of such reserves as of December 31, 2019 was $218.9 million.
In addition, cash collateral is posted by the Corporation with counterparties to secure derivative and other contracts. The amounts of such cash collateral as of SeptemberJune 30, 20202021 and December 31, 20192020 were $460.3$269.6 million and $199.6$408.1 million, respectively.
NOTE 3 – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities for the periods presented:
| | | September 30, 2020 | | June 30, 2021 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available for Sale | Available for Sale | (in thousands) | Available for Sale | (in thousands) |
| U.S. Government securities | | U.S. Government securities | $ | 153,885 | | | $ | 0 | | | $ | (340) | | | $ | 153,545 | |
U.S. Government sponsored agency securities | | U.S. Government sponsored agency securities | 62,529 | | | 0 | | | (98) | | | 62,431 | |
State and municipal securities | State and municipal securities | $ | 880,495 | | | $ | 46,216 | | | $ | (157) | | | $ | 926,554 | | State and municipal securities | 1,002,146 | | | 53,924 | | | (608) | | | 1,055,462 | |
Corporate debt securities | Corporate debt securities | 327,143 | | | 16,724 | | | (1,309) | | | 342,558 | | Corporate debt securities | 354,593 | | | 16,876 | | | (88) | | | 371,381 | |
Collateralized mortgage obligations | Collateralized mortgage obligations | 516,312 | | | 16,207 | | | (46) | | | 532,473 | | Collateralized mortgage obligations | 299,333 | | | 7,965 | | | (133) | | | 307,165 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 318,343 | | | 3,409 | | | (57) | | | 321,695 | | Residential mortgage-backed securities | 201,654 | | | 1,641 | | | (1,748) | | | 201,547 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 548,076 | | | 24,136 | | | (2) | | | 572,210 | | Commercial mortgage-backed securities | 858,574 | | | 14,338 | | | (1,902) | | | 871,010 | |
Auction rate securities | Auction rate securities | 101,510 | | | 0 | | | (3,520) | | | 97,990 | | Auction rate securities | 76,350 | | | 0 | | | (1,516) | | | 74,834 | |
| Total | Total | $ | 2,691,879 | | | $ | 106,692 | | | $ | (5,091) | | | $ | 2,793,480 | | Total | $ | 3,009,064 | | | $ | 94,744 | | | $ | (6,433) | | | $ | 3,097,375 | |
| Held to Maturity | Held to Maturity | | Held to Maturity | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | $ | 304,241 | | | $ | 20,699 | | | $ | 0 | | | $ | 324,940 | | Residential mortgage-backed securities | $ | 439,220 | | | $ | 15,470 | | | $ | (5,019) | | | $ | 449,671 | |
| Commercial mortgage-backed securities | | Commercial mortgage-backed securities | 385,063 | | | 0 | | | (7,802) | | | 377,261 | |
Total | | Total | $ | 824,283 | | | $ | 15,470 | | | $ | (12,821) | | | $ | 826,932 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available for Sale | (in thousands) |
| | | | | | | |
| | | | | | | |
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 | | | 0 | | | (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 | | | $ | 0 | | | $ | 383,705 | |
| | | | | | | |
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 ASU 2019-04. The amortized cost of the securities transferred was $158.9 million and the estimated fair value was $168.5 million. | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available for Sale | (in thousands) |
| | | | | | | |
| | | | | | | |
State and municipal securities | $ | 891,327 | | | $ | 61,286 | | | $ | 0 | | | $ | 952,613 | |
Corporate debt securities | 348,391 | | | 19,445 | | | (691) | | | 367,145 | |
Collateralized mortgage obligations | 491,321 | | | 12,560 | | | (115) | | | 503,766 | |
Residential mortgage-backed securities | 373,779 | | | 4,246 | | | (27) | | | 377,998 | |
Commercial mortgage-backed securities | 741,172 | | | 22,384 | | | (1,141) | | | 762,415 | |
Auction rate securities | 101,510 | | | 0 | | | (3,304) | | | 98,206 | |
Total | $ | 2,947,500 | | | $ | 119,921 | | | $ | (5,278) | | | $ | 3,062,143 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Held to Maturity | | | | | | | |
| | | | | | | |
Residential mortgage-backed securities | $ | 278,281 | | | $ | 18,576 | | | $ | 0 | | | $ | 296,857 | |
| | | | | | | |
Securities carried at $568.4 million$2.0 billion at SeptemberJune 30, 20202021 and $462.6$520.5 million at December 31, 20192020 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 SeptemberJune 30, 2020,2021, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities as certain investment securities are subject to call or prepayment with or without call or prepayment penalties.
| | | September 30, 2020 | | June 30, 2021 |
| | Available for Sale | | Held to Maturity | | Available for Sale | | Held to Maturity |
| | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| | (in thousands) | | (in thousands) |
Due in one year or less | Due in one year or less | | $ | 11,252 | | | $ | 11,388 | | | $ | 0 | | | $ | 0 | | Due in one year or less | | $ | 8,212 | | | $ | 8,240 | | | $ | 0 | | | $ | 0 | |
Due from one year to five years | Due from one year to five years | | 32,118 | | | 33,397 | | | 0 | | | 0 | | Due from one year to five years | | 253,200 | | | 253,976 | | | 0 | | | 0 | |
Due from five years to ten years | Due from five years to ten years | | 315,094 | | | 330,233 | | | 0 | | | 0 | | Due from five years to ten years | | 353,124 | | | 371,026 | | | 0 | | | 0 | |
Due after ten years | Due after ten years | | 950,684 | | | 992,084 | | | 0 | | | 0 | | Due after ten years | | 1,034,967 | | | 1,084,411 | | | 0 | | | 0 | |
| | 1,309,148 | | | 1,367,102 | | | 0 | | | 0 | | | 1,649,503 | | | 1,717,653 | | | 0 | | | 0 | |
Residential mortgage-backed securities(1) | Residential mortgage-backed securities(1) | | 318,343 | | | 321,695 | | | 304,241 | | | 324,940 | | Residential mortgage-backed securities(1) | | 201,654 | | | 201,547 | | | 439,220 | | | 449,671 | |
Commercial mortgage-backed securities(1) | Commercial mortgage-backed securities(1) | | 548,076 | | | 572,210 | | | 0 | | | 0 | | Commercial mortgage-backed securities(1) | | 858,574 | | | 871,010 | | | 385,063 | | | 377,261 | |
Collateralized mortgage obligations(1) | Collateralized mortgage obligations(1) | | 516,312 | | | 532,473 | | | 0 | | | 0 | | Collateralized mortgage obligations(1) | | 299,333 | | | 307,165 | | | 0 | | | 0 | |
Total | Total | | $ | 2,691,879 | | | $ | 2,793,480 | | | $ | 304,241 | | | $ | 324,940 | | Total | | $ | 3,009,064 | | | $ | 3,097,375 | | | $ | 824,283 | | | $ | 826,932 | |
| (1) Mortgage-backed securities and collateralized mortgage obligations do not have stated maturities and are dependent upon the interest rate environment and prepayments on the underlying loans. | (1) Mortgage-backed securities and collateralized mortgage obligations do not have stated maturities and are dependent upon the interest rate environment and prepayments on the underlying loans. | (1) Mortgage-backed securities and collateralized mortgage obligations do not have stated maturities and are dependent upon the interest rate environment and prepayments on the underlying loans. |
The following table presents information related to the gross realized gains and losses on the sales of investment securities for the periods presented:
| | | | | | | | | | | | | | | | | | | |
| Gross Realized Gains | | Gross Realized Losses | | | | Net Gains |
Three months ended | (in thousands) |
September 30, 2020 | $ | 94 | | | $ | (92) | | | | | $ | 2 | |
September 30, 2019 | 7,938 | | | (3,446) | | | | | 4,492 | |
| | | | | | | |
Nine months ended | | | | | | | |
September 30, 2020 | $ | 6,545 | | | $ | (3,492) | | | | | $ | 3,053 | |
September 30, 2019 | 11,207 | | | (6,474) | | | | | 4,733 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Gross Realized Gains | | Gross Realized Losses | | | | Net Gains |
Three months ended | (in thousands) |
June 30, 2021 | $ | 465 | | | $ | (429) | | | | | $ | 36 | |
June 30, 2020 | 6,334 | | | (3,329) | | | | | 3,005 | |
| | | | | | | |
Six months ended | | | | | | | |
June 30, 2021 | $ | 34,481 | | | $ | (970) | | | | | $ | 33,511 | |
June 30, 2020 | 6,451 | | | (3,400) | | | | | 3,051 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
During the secondfirst quarter of 2020, the Corporation completed a limited balance sheet restructuring that included the sale of investment securities, with an amortized cost $79.0 million and an estimated fair value of $82.0 million, resulting in net investment securities gains of $3.0 million. Offsetting these gains were $2.9 million of prepayment penalties recorded in non-interest expense for the redemption of FHLB advances.
During the third quarter of 2019,2021, the Corporation completed a balance sheet restructuring that included a $34.0 million gain on the sale of investmentVisa Shares, offset by net losses on other securities of $400,000, primarily in connection with an amortized costthe sale of $409.2 million and an estimated fair value of $413.7 million, resulting in net investment securities gains of $4.5 million. Offsetting these gains were $4.3$24.6 million of prepayment penalties recordedARCs. In addition, debt extinguishment costs of $32.2 million included in non-interest expense and a write-off of $841,000 in unamortized discounts was recognized in net interest income in connection with the cash tender offer for certain of its outstanding senior and subordinated notes and the redemptionprepayment of certain term FHLB advances. See Note 14, "Long-Term Debt" for further details.
The following tables present the gross unrealized losses and estimated fair values of investment securities, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position for the periods presented:
| | | September 30, 2020 | | June 30, 2021 |
| | Less than 12 months | | 12 months or longer | | Total | | 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 | | Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
| Available for Sale | Available for Sale | | (in thousands) | Available for Sale | | (in thousands) |
| U.S. Government securities | | U.S. Government securities | 2 | | $ | 153,545 | | | $ | (340) | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 153,545 | | | $ | (340) | |
U.S. Government sponsored agency securities | | U.S. Government sponsored agency securities | 1 | | 62,431 | | | (98) | | | 0 | | | 0 | | | 0 | | | 62,431 | | | (98) | |
State and municipal securities | State and municipal securities | 6 | | | $ | 25,372 | | | $ | (157) | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 25,372 | | | $ | (157) | | State and municipal securities | 12 | | | 46,851 | | | (608) | | | 0 | | | 0 | | | 0 | | | 46,851 | | | (608) | |
Corporate debt securities | Corporate debt securities | 16 | | | 67,030 | | | (965) | | | 1 | | | 6,847 | | | (344) | | | 73,877 | | | (1,309) | | Corporate debt securities | 5 | | | 19,921 | | | (88) | | | 0 | | | 0 | | | 0 | | | 19,921 | | | (88) | |
Collateralized mortgage obligations | Collateralized mortgage obligations | 1 | | | 25,489 | | | (46) | | | 0 | | | 0 | | | 0 | | | 25,489 | | | (46) | | Collateralized mortgage obligations | 1 | | | 30,402 | | | (133) | | | 0 | | | 0 | | | 0 | | | 30,402 | | | (133) | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 4 | | | 75,876 | | | (57) | | | 0 | | | 0 | | | 0 | | | 75,876 | | | (57) | | Residential mortgage-backed securities | 7 | | | 154,928 | | | (1,748) | | | 0 | | | 0 | | | 0 | | | 154,928 | | | (1,748) | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 1 | | | 9,322 | | | (2) | | | 0 | | | 0 | | | 0 | | | 9,322 | | | (2) | | Commercial mortgage-backed securities | 15 | | | 241,220 | | | (1,902) | | | 0 | | | 0 | | | 0 | | | 241,220 | | | (1,902) | |
Auction rate securities | Auction rate securities | 0 | | | 0 | | | 0 | | | 162 | | | 97,990 | | | (3,520) | | | 97,990 | | | (3,520) | | Auction rate securities | 0 | | | 0 | | | 0 | | | 118 | | | 74,834 | | | (1,516) | | | 74,834 | | | (1,516) | |
Total available for sale(1) | 28 | | | $ | 203,089 | | | $ | (1,227) | | | 163 | | | $ | 104,837 | | | $ | (3,864) | | | $ | 307,926 | | | $ | (5,091) | | |
Total available for sale | | Total available for sale | 43 | | | $ | 709,298 | | | $ | (4,917) | | | 118 | | | $ | 74,834 | | | $ | (1,516) | | | $ | 784,132 | | | $ | (6,433) | |
| Held to Maturity | | Held to Maturity | |
| Residential mortgage-backed securities | | Residential mortgage-backed securities | 12 | | | $ | 203,077 | | | $ | (5,019) | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 203,077 | | | $ | (5,019) | |
Commercial mortgage-backed securities | | Commercial mortgage-backed securities | 21 | | | 377,261 | | | (7,802) | | | 0 | | | 0 | | | 0 | | | 377,261 | | | (7,802) | |
Total | | Total | 33 | | | $ | 580,338 | | | $ | (12,821) | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 580,338 | | | $ | (12,821) | |
| | | December 31, 2019 | | December 31, 2020 |
| | Less than 12 months | | 12 months or longer | | Total | | 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 | | Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
Available for Sale | Available for Sale | (in thousands) | Available for Sale | (in thousands) |
| State and municipal securities | 44 | | | $ | 136,344 | | | $ | (1,024) | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 136,344 | | | $ | (1,024) | | |
| Corporate debt securities | Corporate debt securities | 5 | | | 30,719 | | | (346) | | | 8 | | | 18,759 | | | (1,188) | | | 49,478 | | | (1,534) | | Corporate debt securities | 9 | | | $ | 44,528 | | | $ | (377) | | | 1 | | | $ | 6,871 | | | $ | (314) | | | $ | 51,399 | | | $ | (691) | |
Collateralized mortgage obligations | Collateralized mortgage obligations | 5 | | | 33,865 | | | (190) | | | 1 | | | 5,330 | | | (125) | | | 39,195 | | | (315) | | Collateralized mortgage obligations | 3 | | | 57,601 | | | (115) | | | 0 | | | 0 | | | 0 | | | 57,601 | | | (115) | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 5 | | | 12,247 | | | (40) | | | 26 | | | 127,373 | | | (909) | | | 139,620 | | | (949) | | Residential mortgage-backed securities | 1 | | | 20,124 | | | (27) | | | 0 | | | 0 | | | 0 | | | 20,124 | | | (27) | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 7 | | | 121,340 | | | (1,777) | | | 0 | | | 0 | | | 0 | | | 121,340 | | | (1,777) | | Commercial mortgage-backed securities | 9 | | | 144,383 | | | (1,141) | | | 0 | | | 0 | | | 0 | | | 144,383 | | | (1,141) | |
Auction rate securities | Auction rate securities | 0 | | | 0 | | | 0 | | | 177 | | | 101,926 | | | (5,484) | | | 101,926 | | | (5,484) | | Auction rate securities | 0 | | | 0 | | | 0 | | | 162 | | | 98,206 | | | (3,304) | | | 98,206 | | | (3,304) | |
Total available for sale(1) | Total available for sale(1) | 66 | | | $ | 334,515 | | | $ | (3,377) | | | 212 | | | $ | 253,388 | | | $ | (7,706) | | | $ | 587,903 | | | $ | (11,083) | | Total available for sale(1) | 22 | | | $ | 266,636 | | | $ | (1,660) | | | 163 | | | $ | 105,077 | | | $ | (3,618) | | | $ | 371,713 | | | $ | (5,278) | |
| | |
(1) No HTM securities were in an unrealized loss position as of September 30, 2020 or December 31, 2019.2020.
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. The change in fair value of these securities is attributable to changes in interest rates and not credit quality. 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. Therefore, the Corporation does not have an ACL for these investments as of SeptemberJune 30, 2020.2021.
Based on management’s evaluations, no ACL was required for ARCs ormunicipal securities, corporate debt securities or ARCs as of SeptemberJune 30, 2020.2021. 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 Allowance for Credit Losses and Asset Quality
Net Loans are summarized as follows:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | (in thousands) | | (in thousands) |
Real estate - commercial mortgage | Real estate - commercial mortgage | $ | 7,046,330 | | | $ | 6,700,776 | | Real estate - commercial mortgage | $ | 7,152,932 | | | $ | 7,105,092 | |
Commercial and industrial(1) | Commercial and industrial(1) | 5,968,154 | | | 4,446,701 | | Commercial and industrial(1) | 4,985,414 | | | 5,670,828 | |
Real-estate - residential mortgage | Real-estate - residential mortgage | 3,061,835 | | | 2,641,465 | | Real-estate - residential mortgage | 3,555,897 | | | 3,141,915 | |
Real-estate - home equity | Real-estate - home equity | 1,222,709 | | | 1,314,944 | | Real-estate - home equity | 1,136,128 | | | 1,202,913 | |
Real-estate - construction | Real-estate - construction | 1,007,534 | | | 971,079 | | Real-estate - construction | 1,070,755 | | | 1,047,218 | |
Consumer | Consumer | 469,551 | | | 463,164 | | Consumer | 448,433 | | | 466,772 | |
Equipment lease financing and other | Equipment lease financing and other | 274,570 | | | 322,625 | | Equipment lease financing and other | 254,550 | | | 284,377 | |
Overdrafts | Overdrafts | 1,694 | | | 3,582 | | Overdrafts | 1,843 | | | 4,806 | |
Gross loans | Gross loans | 19,052,377 | | | 16,864,336 | | Gross loans | 18,605,952 | | | 18,923,921 | |
Unearned income | Unearned income | (23,756) | | | (26,810) | | Unearned income | (19,196) | | | (23,101) | |
Net Loans | Net Loans | $ | 19,028,621 | | | $ | 16,837,526 | | Net Loans | $ | 18,586,756 | | | $ | 18,900,820 | |
(1) Includes PPP loans totaling $1.1 billion and $1.6 billion as of June 30, 2021 and December 31, 2020, respectively.
The Corporation segments its loan portfolio by "portfolio segments," as presented in the table above. Certain portfolio segments are further disaggregated by "class segment" for the purpose of estimating credit losses. See "Allowance for Credit Losses" below for further discussion regarding portfolio and class segments and their impact on the determination of the ACL.
Allowance for Credit Losses effective January 1, 2020
As discussed in Note 1, "BasisThe Corporation has elected to exclude accrued interest receivable from the measurement of Presentation," the Corporation adopted CECL effective January 1, 2020. CECL requires estimated credit lossesits ACL. When a loan is placed on loans to be determined based on an expected life of loan model, as compared to an incurred loss model (in effect for periods prior to 2020). Accordingly, ACL disclosures subsequent to January 1, 2020 are not always comparable to prior periods. In addition, certain new disclosures required under CECL are not applicable to prior periods. As a result, the following tables present disclosures separately for each period, where appropriate. New disclosures required under CECL are only shown for the current period and are noted. See Note 1, "Basis of Presentation", for a summary of the impact of adopting CECL on January 1, 2020.non-accrual status, any outstanding accrued interest is reversed against interest income.
Under CECL,Loans: The ACL for loans is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for impairment consist ofexpected credit losses.
Loans Evaluated Collectively: Loans evaluated collectively for expected credit losses include loans on accrual status, excluding accruing TDRs, and loans initially evaluated individually, but determined not to have enhanced credit risk characteristics. This category includes loans on non-accrual loansstatus and TDRs. UnderTDRs where the incurred loss model in effect priortotal commitment amount is less than $1 million. The ACL is estimated by applying a PD and LGD to the adoptionEAD at the loan level. In order to determine the PD, LGD, and EAD calculation inputs:
•Loans are aggregated into pools based on similar risk characteristics.
•The PD and LGD rates are determined by historical credit loss experience for each pool of CECL, loansloans.
•The loan segment PD rates are estimated using six econometric regression models that use the Corporation’s historical credit loss experience and incorporate reasonable and supportable economic forecasts for various macroeconomic variables that are statistically correlated with expected loss behavior in the loan segment.
•The reasonable and supportable forecast for each macroeconomic variable is sourced from an external third party and is applied over the contractual term of the Corporation’s loan portfolio. The Corporation’s economic forecast considers the general health of the economy, the interest rate environment, real estate pricing and market risk.
•A single baseline forecast scenario is used for each macroeconomic variable.
•The loan segment lifetime LGD rates are estimated using a loss rate approach based on the Corporation’s historical charge-off experience and the balance at the time of loan default.
•The LGD rates are adjusted for the Corporation’s recovery experience.
•To calculate the EAD, the corporation estimates contractual cash flows over the remaining life of each loan. Certain cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate. In addition, a prepayment rate is used in determining the EAD estimate.
Loans Evaluated Individually: Loans evaluated individually for impairment were referredexpected credit losses include loans on non-accrual status and TDRs where the commitment amount equals or exceeds $1.0 million. The required ACL for such loans is determined using either the present value of expected future cash flows, observable market price or the fair value of collateral.
Loans evaluated individually may have specific allocations of the ACL assigned if the measured value of the loan using one of the noted techniques is less than its current carrying value. For loans measured using the fair value of collateral, if the analysis determines that sufficient collateral value would be available for repayment of the debt, then no allocations would be assigned to those loans. Collateral could be in the form of real estate 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 estate.
For loans secured by real estate, estimated fair values are determined primarily through appraisals performed by 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 is 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 third-party appraisers for impaired loans secured predominantly by real estate every 12 months.
When updated appraisals are not obtained for loans 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 there has not been a significant deterioration in the collateral value since the original appraisal was performed.
For loans with principal balances greater than or equal to $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.
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. 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 ACL methodology for these loans, which bases the PD on this migration. Assigning risk ratings involves judgment. Risk ratings may be changed based on ongoing monitoring procedures, or if specific loan review assessments identify a deterioration or an improvement in the loan.
The ACL relatedis reviewed to loans consistsevaluate 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.
Qualitative and Other Adjustments to ACL: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These qualitative factors include changes in lending policy, the nature and individually for expected credit losses. The ACL related to loans represents an estimate of expected credit losses over the expected lifevolume of the loans asportfolio, overall business conditions in the economy, credit concentrations, specific industry risks, competition, model imprecision and legal and regulatory requirements. Qualitative adjustments are judgmental and are based on management’s knowledge of the balance sheet dateportfolio and is recorded asthe markets in which the Corporation operates. Qualitative adjustments are evaluated and approved on a reductionquarterly basis. Additionally, the ACL includes other allowance categories that are not directly incorporated in the quantitative results. These categories include but are not limited to Net Loans.loans-in-process, trade acceptances and overdrafts.
OBS Credit Exposures: The ACL for OBS credit exposures includes estimatedis recorded in other liabilities on the consolidated balance sheets. This portion of the ACL represents management’s estimate of expected losses onin its unfunded loan commitments letters of credit and other OBS credit exposures. The total ACL specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The ACL for OBS credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The following table presents the components of the ACL under CECL:
| | | | | | | |
| | | |
| September 30, 2020 | | |
| (in thousands) | | |
ACL - loans | $ | 266,825 | | | |
ACL - OBS credit exposure | 15,533 | | | |
Total ACL | $ | 282,358 | | | |
losses.
The following table presents the components of the ACL:
| | | | | | | | | | | |
| | | |
| June 30, 2021 | | December 31, 2020 |
| (in thousands) |
ACL - loans | $ | 255,032 | | | $ | 277,567 | |
ACL - OBS credit exposure | 14,773 | | | 14,373 | |
Total ACL | $ | 269,805 | | | $ | 291,940 | |
The following table presents the activity in the ACL in 2020:ACL:
| | | | | | Three months ended June 30 | | Six months ended June 30 |
| | Three months ended September 30, 2020 | | Nine months ended September 30, 2020 | | | 2021 | | 2020 | | | 2021 | | 2020 |
| | (in thousands) | | | (in thousands) | | | | | |
Balance at beginning of period | Balance at beginning of period | $ | 272,920 | | | $ | 166,209 | | | Balance at beginning of period | $ | 280,259 | | | $ | 257,471 | | | | $ | 291,940 | | | $ | 166,209 | |
Impact of adopting CECL on January 1, 2020 (1) | Impact of adopting CECL on January 1, 2020 (1) | 0 | | | 58,348 | | | Impact of adopting CECL on January 1, 2020 (1) | 0 | | | 0 | | | | 0 | | | 58,348 | |
Loans charged off | Loans charged off | (5,489) | | | (27,539) | | | Loans charged off | (9,522) | | | (8,047) | | | | (17,724) | | | (22,050) | |
Recoveries of loans previously charged off | Recoveries of loans previously charged off | 7,847 | | | 14,660 | | | Recoveries of loans previously charged off | 2,568 | | | 3,926 | | | | 4,589 | | | 6,813 | |
Net loans recovered (charged off) | 2,358 | | | (12,879) | | | |
Net loans charged off | | Net loans charged off | (6,954) | | | (4,121) | | | | (13,135) | | | (15,237) | |
Provision for credit losses (2) | Provision for credit losses (2) | 7,080 | | | 70,680 | | | Provision for credit losses (2) | (3,500) | | | 19,570 | | | | (9,000) | | | 63,600 | |
Balance at end of period | Balance at end of period | $ | 282,358 | | | $ | 282,358 | | | Balance at end of period | $ | 269,805 | | | $ | 272,920 | | | | $ | 269,805 | | | $ | 272,920 | |
(1) Includes $12.6 million of reserves for OBS credit exposures as of January 1, 2020.
(2) Includes $850,000$500,000 and $320,000$(2.6) million related to OBS credit exposures for the three and nine months ended SeptemberJune 30, 2021 and 2020, respectively, and includes $400,000 and $1.2 million related to OBS credit exposure for the six months ended June 30, 2021 and 2020, respectively.
The following table presents the activity in the ACL - loans by portfolio segment, for the three and nine months ended September 30, 2020:segment:
| | | Real Estate - Commercial Mortgage | | Commercial and Industrial | | Real Estate - Home Equity | | Real Estate - Residential Mortgage | | Real Estate - Construction | | Consumer | | Equipment lease financing, other and overdrafts | | | Total | | Real Estate - Commercial Mortgage | | Commercial and Industrial | | Real Estate - Home Equity | | Real Estate - Residential Mortgage | | Real Estate - Construction | | Consumer | | Equipment lease financing, other and overdrafts | | Total |
| | (in thousands) | | (in thousands) |
Three months ended September 30, 2020 | | | | |
Balance at June 30, 2020 | $ | 102,695 | | | $ | 61,447 | | | $ | 16,391 | | | $ | 46,443 | | | $ | 12,314 | | | $ | 10,299 | | | $ | 6,948 | | | | $ | 256,537 | | |
| Three months ended June 30, 2021 | | Three months ended June 30, 2021 | |
Balance at March 31, 2021 | | Balance at March 31, 2021 | $ | 100,976 | | | $ | 71,194 | | | $ | 13,730 | | | $ | 49,995 | | | $ | 15,079 | | | $ | 9,412 | | | $ | 5,600 | | | $ | 265,986 | |
Loans charged off | Loans charged off | (746) | | | (2,969) | | | (393) | | | (198) | | | 0 | | | (701) | | | (483) | | | | (5,489) | | Loans charged off | (6,506) | | | (954) | | | (212) | | | (496) | | | 0 | | | (918) | | | (436) | | | (9,522) | |
Recoveries of loans previously charged off | Recoveries of loans previously charged off | 100 | | | 2,103 | | | 44 | | | 95 | | | 4,873 | | | 447 | | | 185 | | | | 7,847 | | Recoveries of loans previously charged off | 729 | | | 693 | | | 58 | | | 105 | | | 254 | | | 576 | | | 153 | | | 2,568 | |
Net loans recovered (charged off) | Net loans recovered (charged off) | (646) | | | (866) | | | (349) | | | (103) | | | 4,873 | | | (254) | | | (298) | | | | 2,358 | | Net loans recovered (charged off) | (5,777) | | | (261) | | | (154) | | | (391) | | | 254 | | | (342) | | | (283) | | | (6,954) | |
Provision for loan losses (1) | Provision for loan losses (1) | 9,806 | | | (1,743) | | | 256 | | | 2,013 | | | (2,177) | | | 260 | | | (484) | | | | 7,930 | | Provision for loan losses (1) | 182 | | | (5,529) | | | (983) | | | 4,584 | | | (2,679) | | | 331 | | | 94 | | | (4,000) | |
Balance at September 30, 2020 | $ | 111,855 | | | $ | 58,838 | | | $ | 16,298 | | | $ | 48,353 | | | $ | 15,010 | | | $ | 10,305 | | | $ | 6,166 | | | | $ | 266,825 | | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | 95,381 | | | $ | 65,404 | | | $ | 12,593 | | | $ | 54,188 | | | $ | 12,654 | | | $ | 9,401 | | | $ | 5,411 | | | $ | 255,032 | |
Three months ended June 30, 2020 | | Three months ended June 30, 2020 | | | | | | | | | | | | | | | |
Balance at March 31, 2020 | | Balance at March 31, 2020 | $ | 90,319 | | | $ | 63,606 | | | $ | 15,253 | | | $ | 42,427 | | | $ | 8,398 | | | $ | 9,865 | | | $ | 8,640 | | | $ | 238,508 | |
Loans charged off | | Loans charged off | (2,324) | | | (3,480) | | | (458) | | | (235) | | | (17) | | | (845) | | | (688) | | | (8,047) | |
Recoveries of loans previously charged off | | Recoveries of loans previously charged off | 95 | | | 2,978 | | | 44 | | | 112 | | | 0 | | | 605 | | | 92 | | | 3,926 | |
Net loans recovered (charged off) | | Net loans recovered (charged off) | (2,229) | | | (502) | | | (414) | | | (123) | | | (17) | | | (240) | | | (596) | | | (4,121) | |
Provision for loan and lease losses (1) | | Provision for loan and lease losses (1) | 14,605 | | | (1,657) | | | 1,552 | | | 4,139 | | | 3,933 | | | 674 | | | (1,096) | | | 22,150 | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | $ | 102,695 | | | $ | 61,447 | | | $ | 16,391 | | | $ | 46,443 | | | $ | 12,314 | | | $ | 10,299 | | | $ | 6,948 | | | $ | 256,537 | |
Six months ended June 30, 2021 | | Six months ended June 30, 2021 | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | Balance at December 31, 2020 | $ | 103,425 | | | $ | 74,771 | | | $ | 14,232 | | | $ | 51,995 | | | $ | 15,608 | | | $ | 10,905 | | | $ | 6,631 | | | $ | 277,567 | |
| Nine months ended September 30, 2020 | | | | | | | | | | | | | | | | | |
Loans charged off | | Loans charged off | (8,343) | | | (5,273) | | | (424) | | | (688) | | | (39) | | | (1,553) | | | (1,404) | | | (17,724) | |
Recoveries of loans previously charged off | | Recoveries of loans previously charged off | 903 | | | 1,462 | | | 109 | | | 200 | | | 638 | | | 965 | | | 312 | | | 4,589 | |
Net loans (charged off) recovered | | Net loans (charged off) recovered | (7,440) | | | (3,811) | | | (315) | | | (488) | | | 599 | | | (588) | | | (1,092) | | | (13,135) | |
Provision for loan losses (1) | | Provision for loan losses (1) | (604) | | | (5,556) | | | (1,324) | | | 2,681 | | | (3,553) | | | (916) | | | (128) | | | (9,400) | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | 95,381 | | | $ | 65,404 | | | $ | 12,593 | | | $ | 54,188 | | | $ | 12,654 | | | $ | 9,401 | | | $ | 5,411 | | | $ | 255,032 | |
Six months ended June 30, 2020 | | Six months ended June 30, 2020 | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | Balance at December 31, 2019 | $ | 45,610 | | | $ | 68,602 | | | $ | 17,744 | | | $ | 19,771 | | | $ | 4,443 | | | $ | 3,762 | | | $ | 3,690 | | | | $ | 163,622 | | Balance at December 31, 2019 | $ | 45,610 | | | $ | 68,602 | | | $ | 17,744 | | | $ | 19,771 | | | $ | 4,443 | | | $ | 3,762 | | | $ | 3,690 | | | $ | 163,622 | |
Impact of adopting CECL on January 1, 2020 | Impact of adopting CECL on January 1, 2020 | 29,361 | | | (18,576) | | | (65) | | | 21,235 | | | 4,015 | | | 5,969 | | | 3,784 | | | | 45,723 | | Impact of adopting CECL on January 1, 2020 | 29,361 | | | (18,576) | | | (65) | | | 21,235 | | | 4,015 | | | 5,969 | | | 3,784 | | | 45,723 | |
Loans charged off | Loans charged off | (3,925) | | | (17,348) | | | (1,138) | | | (620) | | | (17) | | | (2,788) | | | (1,704) | | | | (27,539) | | Loans charged off | (3,179) | | | (14,379) | | | (745) | | | (422) | | | (17) | | | (2,087) | | | (1,221) | | | (22,050) | |
Recoveries of loans previously charged off | Recoveries of loans previously charged off | 439 | | | 6,815 | | | 305 | | | 292 | | | 4,943 | | | 1,481 | | | 385 | | | | 14,660 | | Recoveries of loans previously charged off | 339 | | | 4,712 | | | 261 | | | 197 | | | 70 | | | 1,034 | | | 200 | | | 6,813 | |
Net loans recovered (charged off) | Net loans recovered (charged off) | (3,486) | | | (10,533) | | | (833) | | | (328) | | | 4,926 | | | (1,307) | | | (1,319) | | | | (12,879) | | Net loans recovered (charged off) | (2,840) | | | (9,667) | | | (484) | | | (225) | | | 53 | | | (1,053) | | | (1,021) | | | (15,237) | |
Provision for loan losses (1) | Provision for loan losses (1) | 40,370 | | | 19,345 | | | (548) | | | 7,675 | | | 1,626 | | | 1,881 | | | 11 | | | | 70,359 | | Provision for loan losses (1) | 30,564 | | | 21,088 | | | (804) | | | 5,662 | | | 3,803 | | | 1,621 | | | 495 | | | 62,429 | |
Balance at September 30, 2020 | $ | 111,855 | | | $ | 58,838 | | | $ | 16,298 | | | $ | 48,353 | | | $ | 15,010 | | | $ | 10,305 | | | $ | 6,166 | | | | $ | 266,825 | | |
| Balance at June 30, 2020 | | Balance at June 30, 2020 | $ | 102,695 | | | $ | 61,447 | | | $ | 16,391 | | | $ | 46,443 | | | $ | 12,314 | | | $ | 10,299 | | | $ | 6,948 | | | $ | 256,537 | |
(1) Provision included in the table only includes the portion related to Net Loans.
Several factors as of the end of the second quarter of 2021 in comparison to the end of the fourth quarter of 2020, including improved economic forecasts, reduced the level of the ACL determined to be necessary as of June 30, 2021, resulting in the negative provision for credit losses for the both the three and six months ended June 30, 2021. The higher provision expense during the first ninesix months of 2020 was largely driven by the overall downturn in economic forecasts due to COVID-19, resulting in higher expected future credit losses under CECL. The ACL includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative models. Qualitative adjustments include and consider changes in international, national, regional and local economic and business conditions, an assessmentduring the first six months of the lending environment, including underwriting standards and other factors affecting credit quality. Qualitative adjustments used in determining the ACL2020 increased compared to those at the time of the adoption of CECL on January 1, 2020 primarily as a result of uncertainties related to forecasted economic variables due to the economic impact of COVID-19 andCOVID-19. These uncertainties included consideration for the future performance of loans that received deferrals or forbearances due to COVID-19.
Allowance for Credit Losses, prior to January 1, 2020
Prior to January 1, 2020, the ACL consistedas a result of the allowance for loan lossesCOVID-19 and the reserve for unfunded lending commitments. The allowance for loan losses represented management’s estimateimpact COVID-19 had on certain industries where the quantitative models did not appear to be fully capturing the appropriate level of incurred losses inrisk at that time. PPP loans issued are fully guaranteed by the loan portfolioSBA and, as of the balance sheet date and is recorded as a reduction to Net Loans. The reserve for unfunded lending commitments represented management’s estimate of incurred losses in unfunded loan commitments and letters of credit, andsuch, no ACL was recorded in other liabilities onagainst the consolidated balance sheets. The ACL was increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The following table presents the components of the ACL:
| | | | | |
| December 31, 2019 |
| (in thousands) |
Allowance for loan losses | $ | 163,622 | |
Reserve for unfunded lending commitments | 2,587 | |
ACL | $ | 166,209 | |
The following table presents the activity in the ACL for the periods indicated in 2019:
| | | | | | | | | | | |
| Three months ended September 30, 2019 | | Nine months ended September 30, 2019 |
| (in thousands) |
Balance at beginning of period | $ | 176,941 | | | $ | 169,410 | |
Loans charged off | (10,128) | | | (20,208) | |
Recoveries of loans previously charged off | 3,814 | | | 11,300 | |
Net loans charged off | (6,314) | | | (8,908) | |
Provision for credit losses(1) | 2,170 | | | 12,295 | |
Balance at end of period | $ | 172,797 | | | $ | 172,797 | |
(1) Includes ($46,000) and ($2.2 million) related to reserve for unfunded lending commitments for the three and nine months ended September 30, 2019, respectively.
The following table presents the activity in the allowance forPPP loan losses, by portfolio segment, for the three and nine months ended September 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate - Commercial Mortgage | | Commercial & Industrial | | Real Estate - Home Equity | | Real Estate - Residential Mortgage | | Real Estate - Construction | | Consumer | | Equipment lease financing, other and overdrafts | | Total |
| (in thousands) |
Three months ended September 30, 2019 | | | | | | | | | | | | | | | |
Balance at June 30, 2019 | $ | 54,859 | | | $ | 66,341 | | | $ | 18,981 | | | $ | 18,892 | | | $ | 4,928 | | | $ | 3,363 | | | $ | 2,869 | | | $ | 170,233 | |
Loans charged off | (394) | | | (7,181) | | | (498) | | | (533) | | | (45) | | | (877) | | | (600) | | | (10,128) | |
Recoveries of loans previously charged off | 444 | | | 2,311 | | | 132 | | | 440 | | | 164 | | | 216 | | | 107 | | | 3,814 | |
Net loans recovered (charged off) | 50 | | | (4,870) | | | (366) | | | (93) | | | 119 | | | (661) | | | (493) | | | (6,314) | |
Provision for loan losses(1) | (5,529) | | | 7,710 | | | (662) | | | (109) | | | (664) | | | 798 | | | 672 | | | 2,216 | |
Balance at September 30, 2019 | $ | 49,380 | | | $ | 69,181 | | | $ | 17,953 | | | $ | 18,690 | | | $ | 4,383 | | | $ | 3,500 | | | $ | 3,048 | | | $ | 166,135 | |
Nine months ended September 30, 2019 | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | $ | 52,889 | | | $ | 58,868 | | | $ | 18,911 | | | $ | 18,921 | | | $ | 5,061 | | | $ | 3,217 | | | $ | 2,670 | | | $ | 160,537 | |
Loans charged off | (1,769) | | | (11,863) | | | (923) | | | (1,322) | | | (143) | | | (2,355) | | | (1,833) | | | (20,208) | |
Recoveries of loans previously charged off | 749 | | | 6,234 | | | 552 | | | 783 | | | 1,493 | | | 1,005 | | | 484 | | | 11,300 | |
Net loans recovered (charged off) | (1,020) | | | (5,629) | | | (371) | | | (539) | | | 1,350 | | | (1,350) | | | (1,349) | | | (8,908) | |
Provision for loan losses(1) | (2,489) | | | 15,942 | | | (587) | | | 308 | | | (2,028) | | | 1,633 | | | 1,727 | | | 14,506 | |
Balance at September 30, 2019 | $ | 49,380 | | | $ | 69,181 | | | $ | 17,953 | | | $ | 18,690 | | | $ | 4,383 | | | $ | 3,500 | | | $ | 3,048 | | | $ | 166,135 | |
(1)The provision in the table only includes the portion related to Net Loans.
Non-accrual Loans
All loans individually evaluated for impairment are measured for losses on a quarterly basis. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, substantially all of the Corporation’s individually evaluated loans with total commitments greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral, if any. Collateral could be in the form of real estate, in the case of 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 estate.
As of both SeptemberJune 30, 20202021 and December 31, 2019,2020, approximately 93%81% and 83%, respectively, of loans evaluated individually for impairment with principal balances greater than or equal to $1.0 million, whose primary collateral isconsisted of real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated in the preceding 12 months.
The following table presents total non-accrual loans, by class segment:
| | | September 30, 2020 | | December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Non-accrual Loans | | Non-accrual Loans | | June 30, 2021 | | December 31, 2021 |
| | With a Related Allowance | | Without a Related Allowance | | Total | | Total | | With a Related Allowance | | Without a Related Allowance | | Total | | With a Related Allowance | | Without a Related Allowance | | Total |
| | (in thousands) | | (in thousands) |
Real estate - commercial mortgage | Real estate - commercial mortgage | $ | 15,145 | | | $ | 25,781 | | | $ | 40,926 | | | $ | 33,166 | | Real estate - commercial mortgage | $ | 22,516 | | | $ | 30,912 | | | $ | 53,428 | | | $ | 19,909 | | | $ | 31,561 | | | $ | 51,470 | |
Commercial and industrial | Commercial and industrial | 14,326 | | | 20,948 | | | 35,274 | | | 48,106 | | Commercial and industrial | 15,142 | | | 18,039 | | | 33,181 | | | 13,937 | | | 18,056 | | | 31,993 | |
Real estate - residential mortgage | Real estate - residential mortgage | 23,637 | | | 1,256 | | | 24,893 | | | 16,676 | | Real estate - residential mortgage | 32,577 | | | 2,198 | | | 34,775 | | | 24,590 | | | 1,517 | | | 26,107 | |
Real estate - home equity | Real estate - home equity | 8,682 | | | 0 | | | 8,682 | | | 7,004 | | Real estate - home equity | 9,279 | | | 0 | | | 9,279 | | | 9,398 | | | 190 | | | 9,588 | |
Real estate - construction | Real estate - construction | 607 | | | 1,014 | | | 1,621 | | | 3,618 | | Real estate - construction | 173 | | | 843 | | | 1,016 | | | 437 | | | 958 | | | 1,395 | |
Consumer | Consumer | 235 | | | 0 | | | 235 | | | 0 | | Consumer | 287 | | | 0 | | | 287 | | | 332 | | | 0 | | | 332 | |
Equipment lease financing and other | Equipment lease financing and other | 0 | | | 16,690 | | | 16,690 | | | 16,528 | | Equipment lease financing and other | 6,643 | | | 9,255 | | | 15,898 | | | 0 | | | 16,313 | | | 16,313 | |
| | $ | 62,632 | | | $ | 65,689 | | | $ | 128,321 | | | $ | 125,098 | | | $ | 86,617 | | | $ | 61,247 | | | $ | 147,864 | | | $ | 68,603 | | | $ | 68,595 | | | $ | 137,198 | |
|
As of SeptemberJune 30, 2021 and December 31, 2020, there were $65.7$61.2 million and $68.6 million, respectively,of non-accrual loans that did not have a related allowance for credit losses. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.
Asset Quality
Maintaining an appropriate ACL is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, residential construction, commercial and industrial, and commercial real estate, 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 ACL methodology for these loans, under both the CECL and incurred loss models, 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 loans.
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.
•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.
The following table summarizes designated internal risk rating categories by portfolio segment and loan class, by origination year, in the current period :period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Cost Basis | Cost Basis | Total |
Real estate - construction(1) | | | | | | | | | |
| Pass | $ | 94,758 | | $ | 243,614 | | $ | 196,393 | | $ | 138,308 | | $ | 44,315 | | $ | 114,228 | | $ | 47,594 | | $ | 0 | | $ | 879,210 | |
| Special Mention | 0 | | 241 | | 0 | | 0 | | 7,103 | | 6,106 | | 0 | | 0 | | 13,450 | |
| Substandard or Lower | 0 | | 448 | | 0 | | 0 | | 760 | | 5,822 | | 943 | | 0 | | 7,973 | |
| Total real estate - construction | 94,758 | | 244,303 | | 196,393 | | 138,308 | | 52,178 | | 126,156 | | 48,537 | | 0 | | 900,633 | |
Real estate - construction(1) | | | | | | | | |
| Current period gross charge-offs | 0 | | 0 | | 0 | | 0 | | 0 | | (17) | | 0 | | 0 | | (17) | |
| Current period recoveries | 0 | | 0 | | 0 | | 0 | | 68 | | 4,875 | | 0 | | 0 | | 4,943 | |
| Total net (charge-offs) recoveries | 0 | | 0 | | 0 | | 0 | | 68 | | 4,858 | | 0 | | 0 | | 4,926 | |
Commercial and industrial | | | | | | | | |
| Pass | 2,409,273 | | 540,493 | | 330,516 | | 229,184 | | 216,228 | | 635,782 | | 1,256,763 | | 0 | | 5,618,239 | |
| Special Mention | 52,203 | | 13,653 | | 7,618 | | 10,886 | | 13,693 | | 29,919 | | 50,673 | | 0 | | 178,645 | |
| Substandard or Lower | 38,983 | | 1,125 | | 15,819 | | 11,797 | | 13,422 | | 25,081 | | 64,089 | | 954 | | 171,270 | |
| Total commercial and industrial | 2,500,459 | | 555,271 | | 353,953 | | 251,867 | | 243,343 | | 690,782 | | 1,371,525 | | 954 | | 5,968,154 | |
Commercial and industrial | | | | | | | | |
| Current period gross charge-offs | 0 | | (106) | | (10) | | (102) | | (388) | | (117) | | (16,625) | | 0 | | (17,348) | |
| Current period recoveries | | 39 | | 364 | | 207 | | 91 | | 1,704 | | 4,410 | | 0 | | 6,815 | |
| Total net (charge-offs) recoveries | 0 | | (67) | | 354 | | 105 | | (297) | | 1,587 | | (12,215) | | 0 | | (10,533) | |
Real estate - commercial mortgage | | | | | | | | |
| Pass | 702,768 | | 933,999 | | 792,029 | | 850,926 | | 871,759 | | 2,381,373 | | 88,116 | | 327 | | 6,621,297 | |
| Special Mention | 13,247 | | 13,505 | | 19,298 | | 33,245 | | 46,354 | | 139,832 | | 3,502 | | 0 | | 268,983 | |
| Substandard or Lower | 1,119 | | 2,409 | | 13,665 | | 39,467 | | 9,375 | | 88,671 | | 1,344 | | 0 | | 156,050 | |
| Total real estate - commercial mortgage | 717,134 | | 949,913 | | 824,992 | | 923,638 | | 927,488 | | 2,609,876 | | 92,962 | | 327 | | 7,046,330 | |
Real estate - commercial mortgage | | | | | | | | |
| Current period gross charge-offs | 0 | | (16) | | (36) | | (2,515) | | (29) | | (1,312) | | (17) | | 0 | | (3,925) | |
| Current period recoveries | 0 | | 0 | | 0 | | 0 | | 1 | | 438 | | 0 | | 0 | | 439 | |
| Total net (charge-offs) recoveries | 0 | | (16) | | (36) | | (2,515) | | (28) | | (874) | | (17) | | 0 | | (3,486) | |
Total | | | | | | | | |
| Pass | $ | 3,206,799 | | $ | 1,718,106 | | $ | 1,318,938 | | $ | 1,218,418 | | $ | 1,132,302 | | $ | 3,131,383 | | $ | 1,392,473 | | $ | 327 | | $ | 13,118,746 | |
| Special Mention | 65,450 | | 27,399 | | 26,916 | | 44,131 | | 67,150 | | 175,857 | | 54,175 | | 0 | | 461,078 | |
| Substandard or Lower | 40,102 | | 3,982 | | 29,484 | | 51,264 | | 23,557 | | 119,574 | | 66,376 | | 954 | | 335,293 | |
| Total | $ | 3,312,351 | | $ | 1,749,487 | | $ | 1,375,338 | | $ | 1,313,813 | | $ | 1,223,009 | | $ | 3,426,814 | | $ | 1,513,024 | | $ | 1,281 | | $ | 13,915,117 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Cost Basis | Cost Basis | Total |
Real estate - construction(1) | | | | | | | | | |
| Pass | $ | 55,746 | | $ | 259,489 | | $ | 203,753 | | $ | 163,203 | | $ | 34,926 | | $ | 132,581 | | $ | 39,453 | | $ | 0 | | $ | 889,151 | |
| Special Mention | 4,386 | | 0 | | 285 | | 0 | | 0 | | 14,421 | | 0 | | 0 | | 19,092 | |
| Substandard or Lower | 0 | | 0 | | 153 | | 0 | | 1,952 | | 1,598 | | 239 | | 0 | | 3,942 | |
| Total real estate - construction | 60,132 | | 259,489 | | 204,191 | | 163,203 | | 36,878 | | 148,600 | | 39,692 | | 0 | | 912,185 | |
Real estate - construction(1) | | | | | | | | |
| Current period gross charge-offs | 0 | | 0 | | (39) | | 0 | | 0 | | 0 | | 0 | | 0 | | (39) | |
| Current period recoveries | 0 | | 0 | | 39 | | 0 | | 0 | | 599 | | 0 | | 0 | | 638 | |
| Total net (charge-offs) recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 599 | | 0 | | 0 | | 599 | |
Commercial and industrial | | | | | | | | |
| Pass | 1,094,643 | | 890,179 | | 474,995 | | 252,445 | | 190,560 | | 659,879 | | 1,127,132 | | 0 | | 4,689,833 | |
| Special Mention | 286 | | 12,141 | | 21,656 | | 16,478 | | 9,393 | | 39,229 | | 44,015 | | 0 | | 143,198 | |
| Substandard or Lower | 4,933 | | 6,987 | | 15,496 | | 23,258 | | 13,193 | | 41,750 | | 44,881 | | 1,885 | | 152,383 | |
| Total commercial and industrial | 1,099,862 | | 909,307 | | 512,147 | | 292,181 | | 213,146 | | 740,858 | | 1,216,028 | | 1,885 | | 4,985,414 | |
Commercial and industrial | | | | | | | | |
| Current period gross charge-offs | 0 | | (50) | | (70) | | (91) | | (130) | | (472) | | (4,460) | | 0 | | (5,273) | |
| Current period recoveries | 0 | | 0 | | 22 | | 249 | | 58 | | 640 | | 493 | | 0 | | 1,462 | |
| Total net (charge-offs) recoveries | 0 | | (50) | | (48) | | 158 | | (72) | | 168 | | (3,967) | | 0 | | (3,811) | |
Real estate - commercial mortgage | | | | | | | | |
| Pass | 433,412 | | 953,225 | | 924,009 | | 629,504 | | 749,132 | | 2,622,402 | | 61,387 | | 0 | | 6,373,071 | |
| Special Mention | 204 | | 43,125 | | 30,204 | | 93,345 | | 79,800 | | 294,149 | | 841 | | 105 | | 541,773 | |
| Substandard or Lower | 0 | | 3,453 | | 24,239 | | 15,881 | | 40,407 | | 151,580 | | 2,491 | | 37 | | 238,088 | |
| Total real estate - commercial mortgage | 433,616 | | 999,803 | | 978,452 | | 738,730 | | 869,339 | | 3,068,131 | | 64,719 | | 142 | | 7,152,932 | |
Real estate - commercial mortgage | | | | | | | | |
| Current period gross charge-offs | 0 | | 0 | | 0 | | (25) | | (6,603) | | (1,517) | | (198) | | 0 | | (8,343) | |
| Current period recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 903 | | 0 | | 0 | | 903 | |
| Total net (charge-offs) recoveries | 0 | | 0 | | 0 | | (25) | | (6,603) | | (614) | | (198) | | 0 | | (7,440) | |
Total | | | | | | | | |
| Pass | $ | 1,583,801 | | $ | 2,102,893 | | $ | 1,602,757 | | $ | 1,045,152 | | $ | 974,618 | | $ | 3,414,862 | | $ | 1,227,972 | | $ | 0 | | $ | 11,952,055 | |
| Special Mention | 4,876 | | 55,266 | | 52,145 | | 109,823 | | 89,193 | | 347,799 | | 44,856 | | 105 | | 704,063 | |
| Substandard or Lower | 4,933 | | 10,440 | | 39,888 | | 39,139 | | 55,552 | | 194,928 | | 47,611 | | 1,922 | | 394,413 | |
| Total | $ | 1,593,610 | | $ | 2,168,599 | | $ | 1,694,790 | | $ | 1,194,114 | | $ | 1,119,363 | | $ | 3,957,589 | | $ | 1,320,439 | | $ | 2,027 | | $ | 13,050,531 | |
(1) Excludes real estate - construction - other.
The information presented in the table above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, internal credit risk ratings for the indicated loan class segments:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Pass | | Special Mention | | Substandard or Lower | | Total |
| (dollars in thousands) |
Real estate - commercial mortgage | $ | 6,429,407 | | | $ | 137,163 | | | $ | 134,206 | | | $ | 6,700,776 | |
Commercial and industrial - secured | 3,830,847 | | | 171,442 | | | 195,884 | | | 4,198,173 | |
Commercial and industrial - unsecured | 234,987 | | | 9,665 | | | 3,876 | | | 248,528 | |
Total commercial and industrial | 4,065,834 | | | 181,107 | | | 199,760 | | | 4,446,701 | |
Construction - commercial residential | 100,808 | | | 2,897 | | | 3,461 | | | 107,166 | |
Construction - commercial | 765,562 | | | 1,322 | | | 2,676 | | | 769,560 | |
Total construction (excluding construction - other) | 866,370 | | | 4,219 | | | 6,137 | | | 876,726 | |
| $ | 11,361,611 | | | $ | 322,489 | | | $ | 340,103 | | | $ | 12,024,203 | |
% of Total | 94.5 | % | | 2.7 | % | | 2.8 | % | | 100.0 | % |
The Corporation does not assign internal risk ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, construction loans to individuals secured by residential real estate, consumer and equipment lease financing. For these loans, the most relevant credit quality indicator is delinquency status. The migration of loans through the various delinquency status categories is a significant component of the ACL methodology for those loans, under both the CECL and incurred loss models, which basebases the PD on this migration.
The following table summarizes designated internal risk rating categories by portfolio segment and loan class, by origination year, in the prior period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Cost Basis | Cost Basis | Total |
Real estate - construction(1) | | | | | | | | |
| Pass | $ | 185,883 | | $ | 229,097 | | $ | 217,604 | | $ | 81,086 | | $ | 37,976 | | $ | 110,470 | | $ | 38,026 | | $ | 0 | | $ | 900,142 | |
| Special Mention | 0 | | 0 | | 0 | | 0 | | 7,047 | | 6,212 | | 0 | | 0 | | 13,259 | |
| Substandard or Lower | 0 | | 447 | | 0 | | 2,000 | | 753 | | 1,637 | | 632 | | 0 | | 5,469 | |
| Total real estate - construction | 185,883 | | 229,544 | | 217,604 | | 83,086 | | 45,776 | | 118,319 | | 38,658 | | 0 | | 918,870 | |
Real estate - construction(1) | | | | | | | | |
| Current period gross charge-offs | 0 | | 0 | | 0 | | 0 | | 0 | | (17) | | 0 | | 0 | | (17) | |
| Current period recoveries | 0 | | 0 | | 0 | | 0 | | 68 | | 5,054 | | 0 | | 0 | | 5,122 | |
| Total net (charge-offs) recoveries | 0 | | 0 | | 0 | | 0 | | 68 | | 5,037 | | 0 | | 0 | | 5,105 | |
Commercial and industrial | | | | | | | | |
| Pass | 2,283,533 | | 508,541 | | 298,567 | | 214,089 | | 208,549 | | 596,646 | | 1,278,689 | | 0 | | 5,388,614 | |
| Special Mention | 6,633 | | 23,834 | | 29,167 | | 10,945 | | 11,506 | | 25,960 | | 45,994 | | 0 | | 154,039 | |
| Substandard or Lower | 3,221 | | 5,947 | | 8,434 | | 11,251 | | 11,192 | | 23,852 | | 64,278 | | 0 | | 128,175 | |
| Total commercial and industrial | 2,293,387 | | 538,322 | | 336,168 | | 236,285 | | 231,247 | | 646,458 | | 1,388,961 | | 0 | | 5,670,828 | |
Commercial and industrial | | | | | | | | |
| Current period gross charge-offs | 0 | | (114) | | (30) | | (488) | | (393) | | (520) | | (17,370) | | 0 | | (18,915) | |
| Current period recoveries | 0 | | 43 | | 486 | | 216 | | 162 | | 4,531 | | 5,958 | | 0 | | 11,396 | |
| Total net (charge-offs) recoveries | 0 | | (71) | | 456 | | (272) | | (231) | | 4,011 | | (11,412) | | 0 | | (7,519) | |
Real estate - commercial mortgage | | | | | | | | |
| Pass | 973,664 | | 917,510 | | 708,946 | | 794,955 | | 783,094 | | 2,213,343 | | 53,041 | | 404 | | 6,444,957 | |
| Special Mention | 13,639 | | 40,874 | | 84,047 | | 80,705 | | 89,112 | | 167,424 | | 2,364 | | 0 | | 478,165 | |
| Substandard or Lower | 1,238 | | 6,681 | | 6,247 | | 39,027 | | 22,605 | | 103,007 | | 2,225 | | 940 | | 181,970 | |
| Total real estate - commercial mortgage | 988,541 | | 965,065 | | 799,240 | | 914,687 | | 894,811 | | 2,483,774 | | 57,630 | | 1,344 | | 7,105,092 | |
Real estate - commercial mortgage | | | | | | | | |
| Current period gross charge-offs | (60) | | (21) | | (36) | | (2,515) | | (29) | | (1,547) | | (17) | | 0 | | (4,225) | |
| Current period recoveries | 0 | | 6 | | 0 | | 0 | | 1 | | 1,020 | | 0 | | 0 | | 1,027 | |
| Total net (charge-offs) recoveries | (60) | | (15) | | (36) | | (2,515) | | (28) | | (527) | | (17) | | 0 | | (3,198) | |
Total | | | | | | | | |
| Pass | $ | 3,443,080 | | $ | 1,655,148 | | $ | 1,225,117 | | $ | 1,090,130 | | $ | 1,029,619 | | $ | 2,920,459 | | $ | 1,369,756 | | $ | 404 | | $ | 12,733,713 | |
| Special Mention | 20,272 | | 64,708 | | 113,214 | | 91,650 | | 107,665 | | 199,596 | | 48,358 | | 0 | | 645,463 | |
| Substandard or Lower | 4,459 | | 13,075 | | 14,681 | | 52,278 | | 34,550 | | 128,496 | | 67,135 | | 940 | | 315,614 | |
| Total | $ | 3,467,811 | | $ | 1,732,931 | | $ | 1,353,012 | | $ | 1,234,058 | | $ | 1,171,834 | | $ | 3,248,551 | | $ | 1,485,249 | | $ | 1,344 | | $ | 13,694,790 | |
(1) Excludes real estate - construction - other.
The Corporation considers the performance of the loan portfolio and its impact on the ACL. For certain loansloan classes, the Corporation evaluates credit quality based on the aging status of the loan. The following table presentstables present the amortized cost of these loans based on payment activity, by origination year, for the current period:periods shown:
| | | September 30, 2020 | | June 30, 2021 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | | | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | | | (dollars in thousands) | Amortized | |
| | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Cost Basis | Total | | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Cost Basis | Total |
Real estate - home equity | Real estate - home equity | | Real estate - home equity | |
| | Performing | $ | 21,247 | | $ | 8,297 | | $ | 14,573 | | $ | 12,064 | | $ | 13,006 | | $ | 140,145 | | $ | 995,811 | | $ | 5,485 | | $ | 1,210,628 | | | Performing | $ | 14,248 | | $ | 27,159 | | $ | 7,757 | | $ | 11,063 | | $ | 8,898 | | $ | 112,798 | | $ | 940,727 | | $ | 2,502 | | $ | 1,125,152 | |
| | Nonperforming | 0 | | 0 | | 153 | | 256 | | 225 | | 2,354 | | 8,764 | | 329 | | 12,081 | | | Nonperforming | 0 | | 0 | | 0 | | 23 | | 233 | | 2,489 | | 8,231 | | 0 | | 10,976 | |
| | Total real estate - home equity | 21,247 | | 8,297 | | 14,726 | | 12,320 | | 13,231 | | 142,499 | | 1,004,575 | | 5,814 | | 1,222,709 | | | Total real estate - home equity | 14,248 | | 27,159 | | 7,757 | | 11,086 | | 9,131 | | 115,287 | | 948,958 | | 2,502 | | 1,136,128 | |
Real estate - home equity | Real estate - home equity | | Real estate - home equity | |
| | Current period gross charge-offs | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | (1,137) | | 0 | | (1,137) | | | Current period gross charge-offs | 0 | | 0 | | (41) | | 0 | | 0 | | (171) | | (212) | | 0 | | (424) | |
| | Current period recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 123 | | 182 | | 0 | | 305 | | | Current period recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 58 | | 51 | | 0 | | 109 | |
| | Total net (charge-offs) recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 123 | | (955) | | 0 | | (832) | | | Total net (charge-offs) recoveries | 0 | | 0 | | (41) | | 0 | | 0 | | (113) | | (161) | | 0 | | (315) | |
Real estate - residential mortgage | Real estate - residential mortgage | | Real estate - residential mortgage | |
| | Performing | 953,063 | | 649,475 | | 268,809 | | 383,345 | | 294,005 | | 484,717 | | 0 | | 0 | | 3,033,414 | | | Performing | 916,128 | | 1,203,025 | | 435,125 | | 148,034 | | 251,748 | | 563,509 | | 0 | | 0 | | 3,517,569 | |
| | Nonperforming | 0 | | 832 | | 2,437 | | 2,611 | | 723 | | 21,818 | | 0 | | 0 | | 28,421 | | | Nonperforming | 0 | | 6,259 | | 2,412 | | 3,232 | | 2,934 | | 23,491 | | 0 | | 0 | | 38,328 | |
| | Total real estate - residential mortgage | 953,063 | | 650,307 | | 271,246 | | 385,956 | | 294,728 | | 506,535 | | 0 | | 0 | | 3,061,835 | | | Total real estate - residential mortgage | 916,128 | | 1,209,284 | | 437,537 | | 151,266 | | 254,682 | | 587,000 | | 0 | | 0 | | 3,555,897 | |
Real estate - residential mortgage | Real estate - residential mortgage | | Real estate - residential mortgage | |
| | Current period gross charge-offs | 0 | | (68) | | (101) | | (190) | | (7) | | (254) | | 0 | | 0 | | (620) | | | Current period gross charge-offs | 0 | | (49) | | (143) | | (125) | | (4) | | (367) | | 0 | | 0 | | (688) | |
| | Current period recoveries | 0 | | 0 | | 13 | | 1 | | 0 | | 278 | | 0 | | 0 | | 292 | | | Current period recoveries | 0 | | 0 | | 0 | | 12 | | 0 | | 96 | | 92 | | 0 | | 200 | |
| | Total net (charge-offs) recoveries | 0 | | (68) | | (88) | | (189) | | (7) | | 24 | | 0 | | 0 | | (328) | | | Total net (charge-offs) recoveries | 0 | | (49) | | (143) | | (113) | | (4) | | (271) | | 92 | | 0 | | (488) | |
Consumer | Consumer | | Consumer | |
| | Performing | 93,208 | | 106,797 | | 104,984 | | 48,281 | | 27,828 | | 38,319 | | 49,594 | | 0 | | 469,011 | | | Performing | 62,507 | | 95,909 | | 81,669 | | 75,781 | | 33,021 | | 51,329 | | 47,785 | | 0 | | 448,001 | |
| | Nonperforming | 123 | | 68 | | 56 | | 62 | | 47 | | 162 | | 22 | | 0 | | 540 | | | Nonperforming | 0 | | 150 | | 24 | | 74 | | 34 | | 102 | | 48 | | 0 | | 432 | |
| | Total consumer | 93,331 | | 106,865 | | 105,040 | | 48,343 | | 27,875 | | 38,481 | | 49,616 | | 0 | | 469,551 | | | Total consumer | 62,507 | | 96,059 | | 81,693 | | 75,855 | | 33,055 | | 51,431 | | 47,833 | | 0 | | 448,433 | |
Consumer | Consumer | | Consumer | |
| | Current period gross charge-offs | 0 | | (500) | | (425) | | (346) | | (433) | | (642) | | (442) | | 0 | | (2,788) | | | Current period gross charge-offs | (12) | | (208) | | (225) | | (154) | | (172) | | (157) | | (625) | | 0 | | (1,553) | |
| | Current period recoveries | 0 | | 48 | | 148 | | 116 | | 177 | | 891 | | 101 | | 0 | | 1,481 | | | Current period recoveries | 0 | | 87 | | 85 | | 52 | | 43 | | 523 | | 175 | | 0 | | 965 | |
| | Total net (charge-offs) recoveries | 0 | | (452) | | (277) | | (230) | | (256) | | 249 | | (341) | | 0 | | (1,307) | | | Total net (charge-offs) recoveries | (12) | | (121) | | (140) | | (102) | | (129) | | 366 | | (450) | | 0 | | (588) | |
Equipment lease financing and other | Equipment lease financing and other | | Equipment lease financing and other | |
| | Performing | 69,512 | | 71,629 | | 53,733 | | 39,888 | | 18,481 | | 6,219 | | 0 | | 0 | | 259,462 | | | Performing | 31,408 | | 70,990 | | 55,764 | | 41,562 | | 26,647 | | 14,115 | | 0 | | 0 | | 240,486 | |
| | Nonperforming | 0 | | 0 | | 190 | | 16,054 | | 272 | | 286 | | 0 | | 0 | | 16,802 | | | Nonperforming | 0 | | 0 | | 157 | | 0 | | 15,750 | | 0 | | 0 | | 0 | | 15,907 | |
| | Total leasing and other | 69,512 | | 71,629 | | 53,923 | | 55,942 | | 18,753 | | 6,505 | | 0 | | 0 | | 276,264 | | | Total leasing and other | 31,408 | | 70,990 | | 55,921 | | 41,562 | | 42,397 | | 14,115 | | 0 | | 0 | | 256,393 | |
Equipment lease financing and other | Equipment lease financing and other | | Equipment lease financing and other | |
| | Current period gross charge-offs | (1,463) | | (241) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | (1,704) | | | Current period gross charge-offs | (128) | | (1,276) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | (1,404) | |
| | Current period recoveries | 187 | | 136 | | 17 | | 16 | | 9 | | 20 | | 0 | | 0 | | 385 | | | Current period recoveries | 0 | | 239 | | 58 | | 6 | | 5 | | 4 | | 0 | | 0 | | 312 | |
| | Total net (charge-offs) recoveries | (1,276) | | (105) | | 17 | | 16 | | 9 | | 20 | | 0 | | 0 | | (1,319) | | | Total net (charge-offs) recoveries | (128) | | (1,037) | | 58 | | 6 | | 5 | | 4 | | 0 | | 0 | | (1,092) | |
Construction - other | Construction - other | | Construction - other | |
| | Performing | 45,386 | | 36,764 | | 6,614 | | 0 | | 16 | | 0 | | 17,940 | | 0 | | 106,720 | | | Performing | 52,082 | | 94,302 | | 7,085 | | 4,912 | | 0 | | 16 | | 0 | | 0 | | 158,397 | |
| | Nonperforming | 0 | | 0 | | 0 | | 181 | | 0 | | 0 | | 0 | | 0 | | 181 | | | Nonperforming | 0 | | 0 | | 0 | | 0 | | 173 | | 0 | | 0 | | 0 | | 173 | |
| | Total construction - other | 45,386 | | 36,764 | | 6,614 | | 181 | | 16 | | 0 | | 17,940 | | 0 | | 106,901 | | | Total construction - other | 52,082 | | 94,302 | | 7,085 | | 4,912 | | 173 | | 16 | | 0 | | 0 | | 158,570 | |
Construction - other | Construction - other | | Construction - other | |
| | Current period gross charge-offs | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | Current period gross charge-offs | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| | Current period recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | Current period recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| | Total net (charge-offs) recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | Total net (charge-offs) recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Total | Total | | Total | |
| | Performing | $ | 1,182,416 | | $ | 872,962 | | $ | 448,713 | | $ | 483,578 | | $ | 353,336 | | $ | 669,400 | | $ | 1,063,345 | | $ | 5,485 | | $ | 5,079,235 | | | Performing | $ | 1,076,373 | | $ | 1,491,385 | | $ | 587,400 | | $ | 281,352 | | $ | 320,314 | | $ | 741,767 | | $ | 988,512 | | $ | 2,502 | | $ | 5,489,605 | |
| | Nonperforming | 123 | | 900 | | 2,836 | | 19,164 | | 1,267 | | 24,620 | | 8,786 | | 329 | | 58,025 | | | Nonperforming | 0 | | 6,409 | | 2,593 | | 3,329 | | 19,124 | | 26,082 | | 8,279 | | 0 | | 65,816 | |
| | Total | $ | 1,182,539 | | $ | 873,862 | | $ | 451,549 | | $ | 502,742 | | $ | 354,603 | | $ | 694,020 | | $ | 1,072,131 | | $ | 5,814 | | $ | 5,137,260 | | | Total | $ | 1,076,373 | | $ | 1,497,794 | | $ | 589,993 | | $ | 284,681 | | $ | 339,438 | | $ | 767,849 | | $ | 996,791 | | $ | 2,502 | | $ | 5,555,421 | |
The information presented in the table above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, a summary of performing, delinquent and non-performing loans for the indicated class segments:
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 |
| | December 31, 2019 | | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | Performing | | Delinquent (1) | | Non-performing (2) | | Total | | (dollars in thousands) | Amortized | |
| | (dollars in thousands) | | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Cost Basis | Total |
Real estate - home equity | Real estate - home equity | $ | 1,292,035 | | | $ | 12,341 | | | $ | 10,568 | | | $ | 1,314,944 | | Real estate - home equity | |
| | | Performing | $ | 31,445 | | $ | 8,176 | | $ | 13,906 | | $ | 11,024 | | $ | 11,667 | | $ | 126,749 | | $ | 982,285 | | $ | 5,321 | | $ | 1,190,573 | |
| | | Nonperforming | 0 | | 88 | | 23 | | 233 | | 221 | | 2,290 | | 9,485 | | 0 | | 12,340 | |
| | | Total real estate - home equity | 31,445 | | 8,264 | | 13,929 | | 11,257 | | 11,888 | | 129,039 | | 991,770 | | 5,321 | | 1,202,913 | |
Real estate - home equity | | Real estate - home equity | |
| | | Current period gross charge-offs | 0 | | 0 | | 0 | | 0 | | 0 | | (34) | | (1,159) | | 0 | | (1,193) | |
| | | Current period recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 138 | | 366 | | 0 | | 504 | |
| | | Total net (charge-offs) recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 104 | | (793) | | 0 | | (689) | |
Real estate - residential mortgage | Real estate - residential mortgage | 2,584,763 | | | 34,291 | | | 22,411 | | | 2,641,465 | | Real estate - residential mortgage | |
Construction - other | 92,649 | | | 895 | | | 809 | | | 94,353 | | |
Consumer - direct | 63,582 | | | 465 | | | 190 | | | 64,237 | | |
Consumer - indirect | 393,974 | | | 4,685 | | | 268 | | | 398,927 | | |
Total consumer | 457,556 | | | 5,150 | | | 458 | | | 463,164 | | |
| | | Performing | 1,255,532 | | 585,878 | | 228,398 | | 341,563 | | 264,990 | | 434,889 | | 0 | | 0 | | 3,111,250 | |
| | | Nonperforming | 217 | | 2,483 | | 3,177 | | 2,483 | | 722 | | 21,583 | | 0 | | 0 | | 30,665 | |
| | | Total real estate - residential mortgage | 1,255,749 | | 588,361 | | 231,575 | | 344,046 | | 265,712 | | 456,472 | | 0 | | 0 | | 3,141,915 | |
Real estate - residential mortgage | | Real estate - residential mortgage | |
| | | Current period gross charge-offs | 0 | | (68) | | (101) | | (190) | | (7) | | (254) | | 0 | | 0 | | (620) | |
| | | Current period recoveries | 0 | | 68 | | 16 | | 1 | | 1 | | 405 | | 0 | | 0 | | 491 | |
| | | Total net (charge-offs) recoveries | 0 | | 0 | | (85) | | (189) | | (6) | | 151 | | 0 | | 0 | | (129) | |
Consumer | | Consumer | |
| | | Performing | 114,399 | | 98,587 | | 95,072 | | 43,334 | | 25,804 | | 36,086 | | 52,698 | | 42 | | 466,022 | |
| | | Nonperforming | 168 | | 19 | | 124 | | 141 | | 114 | | 150 | | 34 | | 0 | | 750 | |
| | | Total consumer | 114,567 | | 98,606 | | 95,196 | | 43,475 | | 25,918 | | 36,236 | | 52,732 | | 42 | | 466,772 | |
Consumer | | Consumer | |
| | | Current period gross charge-offs | (134) | | (542) | | (524) | | (444) | | (489) | | (769) | | (498) | | 0 | | (3,400) | |
| | | Current period recoveries | 0 | | 64 | | 165 | | 159 | | 94 | | 101 | | 1,292 | | 0 | | 1,875 | |
| | | Total net (charge-offs) recoveries | (134) | | (478) | | (359) | | (285) | | (395) | | (668) | | 794 | | 0 | | (1,525) | |
Equipment lease financing and other | Equipment lease financing and other | 278,743 | | | 4,012 | | | 16,642 | | | 299,397 | | Equipment lease financing and other | |
| | $ | 4,705,746 | | | $ | 56,689 | | | $ | 50,888 | | | $ | 4,813,323 | | | Performing | 102,324 | | 65,303 | | 49,453 | | 34,995 | | 15,631 | | 5,040 | | 0 | | 0 | | 272,746 | |
% of Total | 97.8 | % | | 1.2 | % | | 1.0 | % | | 100 | % | |
| | | Nonperforming | 0 | | 0 | | 30 | | 15,983 | | 142 | | 282 | | 0 | | 0 | | 16,437 | |
| | | Total leasing and other | 102,324 | | 65,303 | | 49,483 | | 50,978 | | 15,773 | | 5,322 | | 0 | | 0 | | 289,183 | |
Equipment lease financing and other | | Equipment lease financing and other | |
| | | Current period gross charge-offs | (606) | | (1,581) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | (2,187) | |
| | | Current period recoveries | 185 | | 349 | | 21 | | 18 | | 11 | | 21 | | 0 | | 0 | | 605 | |
| | | Total net (charge-offs) recoveries | (421) | | (1,232) | | 21 | | 18 | | 11 | | 21 | | 0 | | 0 | | (1,582) | |
Construction - other | | Construction - other | |
| | | Performing | 96,444 | | 24,888 | | 6,822 | | 0 | | 16 | | 0 | | 0 | | 0 | | 128,170 | |
| | | Nonperforming | 0 | | 0 | | 0 | | 178 | | 0 | | 0 | | 0 | | 0 | | 178 | |
| | | Total construction - other | 96,444 | | 24,888 | | 6,822 | | 178 | | 16 | | 0 | | 0 | | 0 | | 128,348 | |
Construction - other | | Construction - other | |
| | | Current period gross charge-offs | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| | | Current period recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| | | Total net (charge-offs) recoveries | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Total | | Total | |
| | | Performing | $ | 1,600,144 | | $ | 782,832 | | $ | 393,651 | | $ | 430,916 | | $ | 318,108 | | $ | 602,764 | | $ | 1,034,983 | | $ | 5,363 | | $ | 5,168,761 | |
| | | Nonperforming | 385 | | 2,590 | | 3,354 | | 19,018 | | 1,199 | | 24,305 | | 9,519 | | 0 | | 60,370 | |
| | | Total | $ | 1,600,529 | | $ | 785,422 | | $ | 397,005 | | $ | 449,934 | | $ | 319,307 | | $ | 627,069 | | $ | 1,044,502 | | $ | 5,363 | | $ | 5,229,131 | |
(1)Includes all accruing loans 30 days to 89 days past due.
(2)Includes all accruing loans 90 days or more past due and all non-accrual loans.
The following table presents non-performing assets:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | (in thousands) | | (in thousands) |
Non-accrual loans | Non-accrual loans | $ | 128,321 | | | $ | 125,098 | | Non-accrual loans | $ | 147,864 | | | $ | 137,198 | |
Loans 90 days or more past due and still accruing | Loans 90 days or more past due and still accruing | 13,761 | | | 16,057 | | Loans 90 days or more past due and still accruing | 5,865 | | | 9,929 | |
Total non-performing loans | Total non-performing loans | 142,082 | | | 141,155 | | Total non-performing loans | 153,729 | | | 147,127 | |
OREO (1) | OREO (1) | 4,565 | | | 6,831 | | OREO (1) | 2,779 | | | 4,178 | |
Total non-performing assets | Total non-performing assets | $ | 146,647 | | | $ | 147,986 | | Total non-performing assets | $ | 156,508 | | | $ | 151,305 | |
(1) Excludes $9.6$7.4 million and $8.1 million of residential mortgage properties for which formal foreclosure proceedings were in process as of SeptemberJune 30, 2020.2021 and December 31, 2020, respectively.
The following tables present the aging of the amortized cost basis of loans, by class segment:
| | | 30-59 | | 60-89 | | ≥ 90 Days | | | | | 30-59 | | 60-89 | | ≥ 90 Days | | | |
| | Days Past | | Days Past | | Past Due | | | Non- | | | Days Past | | Days Past | | Past Due | | | Non- | |
| | Due | | Due | | and Accruing | | | Accrual | | Current | | Total | | Due | | Due | | and Accruing | | | Accrual | | Current | | Total |
| | (in thousands) | | (in thousands) |
September 30, 2020 | | | | |
June 30, 2021 | | June 30, 2021 | | | |
Real estate – commercial mortgage | Real estate – commercial mortgage | $ | 11,867 | | | $ | 3,702 | | | $ | 2,499 | | | | $ | 40,926 | | | $ | 6,987,336 | | | $ | 7,046,330 | | Real estate – commercial mortgage | $ | 5,341 | | | $ | 40 | | | $ | 265 | | | | $ | 53,428 | | | $ | 7,093,858 | | | $ | 7,152,932 | |
Commercial and industrial | Commercial and industrial | 5,326 | | | 1,228 | | | 1,950 | | | | 35,274 | | | 5,924,376 | | | 5,968,154 | | Commercial and industrial | 7,136 | | | 1,406 | | | 171 | | | | 33,181 | | | 4,943,520 | | | 4,985,414 | |
Real estate – residential mortgage | Real estate – residential mortgage | 10,686 | | | 1,180 | | | 3,394 | | | | 24,893 | | | 3,021,682 | | | 3,061,835 | | Real estate – residential mortgage | 13,753 | | | 611 | | | 3,398 | | | | 34,775 | | | 3,503,360 | | | 3,555,897 | |
Real estate – home equity | Real estate – home equity | 3,966 | | | 902 | | | 3,070 | | | | 8,682 | | | 1,206,089 | | | 1,222,709 | | Real estate – home equity | 2,883 | | | 774 | | | 1,698 | | | | 9,279 | | | 1,121,494 | | | 1,136,128 | |
Real estate – construction | Real estate – construction | 0 | | | 0 | | | 2,430 | | | | 1,621 | | | 1,003,483 | | | 1,007,534 | | Real estate – construction | 666 | | | 0 | | | 0 | | | | 1,016 | | | 1,069,073 | | | 1,070,755 | |
Consumer | Consumer | 1,648 | | | 436 | | | 306 | | | | 235 | | | 466,926 | | | 469,551 | | Consumer | 1,935 | | | 456 | | | 144 | | | | 287 | | | 445,611 | | | 448,433 | |
Equipment lease financing and other | Equipment lease financing and other | 250 | | | 110 | | | 112 | | | | 16,690 | | | 235,346 | | | 252,508 | | Equipment lease financing and other | 33 | | | 257 | | | 189 | | | | 15,898 | | | 220,820 | | | 237,197 | |
Total | Total | $ | 33,743 | | | $ | 7,558 | | | $ | 13,761 | | | | $ | 128,321 | | | $ | 18,845,238 | | | $ | 19,028,621 | | Total | $ | 31,747 | | | $ | 3,544 | | | $ | 5,865 | | | | $ | 147,864 | | | $ | 18,397,736 | | | $ | 18,586,756 | |
| | | 30-59 Days Past Due | | 60-89 Days Past Due | | ≥ 90 Days Past Due and Accruing | | Non- accrual | | 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) |
December 31, 2019 | | |
December 31, 2020 | | December 31, 2020 | |
Real estate – commercial mortgage | Real estate – commercial mortgage | $ | 10,912 | | | $ | 1,543 | | | $ | 4,113 | | | $ | 33,166 | | | $ | 6,651,042 | | | $ | 6,700,776 | | Real estate – commercial mortgage | $ | 14,999 | | | $ | 9,273 | | | $ | 1,177 | | | $ | 51,470 | | | $ | 7,028,173 | | | $ | 7,105,092 | |
Commercial and industrial | Commercial and industrial | 2,302 | | | 2,630 | | | 1,385 | | | 48,106 | | | 4,392,278 | | | 4,446,701 | | Commercial and industrial | 11,285 | | | 1,068 | | | 616 | | | 31,993 | | | 5,625,866 | | | 5,670,828 | |
Real estate – residential mortgage | Real estate – residential mortgage | 26,982 | | | 7,309 | | | 5,735 | | | 16,676 | | | 2,584,763 | | | 2,641,465 | | Real estate – residential mortgage | 22,281 | | | 7,675 | | | 4,687 | | | 26,107 | | | 3,081,165 | | | 3,141,915 | |
Real estate – home equity | Real estate – home equity | 9,635 | | | 2,706 | | | 3,564 | | | 7,004 | | | 1,292,035 | | | 1,314,944 | | Real estate – home equity | 5,622 | | | 1,654 | | | 2,753 | | | 9,588 | | | 1,183,296 | | | 1,202,913 | |
Real estate – construction | Real estate – construction | 1,715 | | | 900 | | | 688 | | | 3,618 | | | 964,158 | | | 971,079 | | Real estate – construction | 1,938 | | | 0 | | | 155 | | | 1,395 | | | 1,043,730 | | | 1,047,218 | |
Consumer | Consumer | 4,228 | | | 922 | | | 458 | | | 0 | | | 457,556 | | | 463,164 | | Consumer | 3,036 | | | 501 | | | 417 | | | 332 | | | 462,486 | | | 466,772 | |
Equipment lease financing and other | Equipment lease financing and other | 552 | | | 3,460 | | | 114 | | | 16,528 | | | 278,743 | | | 299,397 | | Equipment lease financing and other | 838 | | | 150 | | | 124 | | | 16,313 | | | 248,657 | | | 266,082 | |
Total | Total | $ | 56,326 | | | $ | 19,470 | | | $ | 16,057 | | | $ | 125,098 | | | $ | 16,620,575 | | | $ | 16,837,526 | | Total | $ | 59,999 | | | $ | 20,321 | | | $ | 9,929 | | | $ | 137,198 | | | $ | 18,673,373 | | | $ | 18,900,820 | |
|
Collateral-Dependent Loans
A financial asset is considered to be collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of financial assets deemed collateral-dependent, the Corporation elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, the Corporation records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral supporting collateral-dependent financial assets consists
of various types of real estate, including residential properties;properties, commercial properties, such as retail centers, office buildings, and lodging;lodging, agriculture land;land, and vacant land.
Troubled Debt Restructurings
The following table presents TDRs, by class segment:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | (in thousands) | | (in thousands) |
Real estate - commercial mortgage | | Real estate - commercial mortgage | $ | 14,651 | | | $ | 28,451 | |
Commercial and industrial | | Commercial and industrial | 6,765 | | | 6,982 | |
Real estate - residential mortgage | Real estate - residential mortgage | $ | 19,427 | | | $ | 21,551 | | Real estate - residential mortgage | 16,861 | | | 18,602 | |
Real estate - commercial mortgage | 28,558 | | | 13,330 | | |
Real estate - home equity | Real estate - home equity | 14,875 | | | 15,068 | | Real estate - home equity | 13,566 | | | 14,391 | |
Commercial and industrial | 7,328 | | | 5,193 | | |
| Real estate - construction | | Real estate - construction | 153 | | | 0 | |
Consumer | Consumer | 0 | | | 8 | | Consumer | 4 | | | 0 | |
| Total accruing TDRs | Total accruing TDRs | 70,188 | | | 55,150 | | Total accruing TDRs | 52,000 | | | 68,426 | |
Non-accrual TDRs (1) | Non-accrual TDRs (1) | 37,025 | | | 20,825 | | Non-accrual TDRs (1) | 60,504 | | | 35,755 | |
Total TDRs | Total TDRs | $ | 107,213 | | | $ | 75,975 | | Total TDRs | $ | 112,504 | | | $ | 104,181 | |
(1)Included in non-accrual loans in the preceding table detailing non-performing assets.
The following table presents TDRs, by class segment, for loans that were modified during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
| | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| | (dollars in thousands) | | (dollars in thousands) |
Commercial and industrial | | Commercial and industrial | 0 | | | $ | 0 | | | 13 | | | $ | 1,304 | | | 4 | | | $ | 1,894 | | | 14 | | | $ | 1,378 | |
Real estate - commercial mortgage | | Real estate - commercial mortgage | 3 | | | 2,729 | | | 6 | | | 16,082 | | | 5 | | | 6,891 | | | 7 | | | 16,474 | |
Real estate - residential mortgage | Real estate - residential mortgage | 8 | | | $ | 1,351 | | | 1 | | | $ | 830 | | | 48 | | | $ | 10,516 | | | 6 | | | $ | 2,263 | | Real estate - residential mortgage | 14 | | | 3,101 | | | 33 | | | 8,505 | | | 37 | | | 10,728 | | | 40 | | | 9,165 | |
Real estate - commercial mortgage | 5 | | | 8,394 | | | 1 | | | 81 | | | 12 | | | 24,868 | | | 1 | | | 81 | | |
| Real estate - home equity | Real estate - home equity | 13 | | | 1,370 | | | 12 | | | 327 | | | 40 | | | 3,556 | | | 46 | | | 2,281 | | Real estate - home equity | 11 | | | 598 | | | 19 | | | 1,609 | | | 16 | | | 746 | | | 27 | | | 2,186 | |
Commercial and industrial | 4 | | | 3,021 | | | 3 | | | 97 | | | 18 | | | 4,399 | | | 13 | | | 4,928 | | |
Real estate - construction | | Real estate - construction | 0 | | | 0 | | | 0 | | | 0 | | | 1 | | | 154 | | | 0 | | | 0 | |
Consumer | Consumer | 3 | | | 53 | | | 0 | | | 0 | | | 11 | | | 238 | | | 0 | | | 0 | | Consumer | 0 | | | 0 | | | 8 | | | 185 | | | 0 | | | 0 | | | 8 | | | 185 | |
Total | Total | 33 | | | $ | 14,189 | | | 17 | | | $ | 1,335 | | | 129 | | | $ | 43,577 | | | 66 | | | $ | 9,553 | | Total | 28 | | | $ | 6,428 | | | 79 | | | $ | 27,685 | | | 63 | | | $ | 20,413 | | | 96 | | | $ | 29,388 | |
Restructured loan modifications may include payment schedule modifications, interest rate concessions, bankruptcies, principal reduction or some combination of these concessions. The restructured loan modifications primarily included maturity date extensions, rate modifications and payment schedule modifications.
In accordance with regulatory guidance, payment schedule modifications granted after March 13, 2020 to borrowers impacted by the effects of the COVID-19 pandemic and who were not delinquent at the time of the payment schedule modifications have been excluded from TDRs. For the nine months ended SeptemberAs of June 30, 2021 and 2020, payment schedule modifications since the inception of this guidance having a recorded investment of $3.8$3.5 billion and $3.9 billion, respectively, were excluded from TDRs based on this regulatory guidance.TDRs.
NOTE 5 – Mortgage Servicing Rights
The following table summarizes the changes in MSRs, which are included in other assets on the consolidated balance sheets:
| | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) | | (in thousands) |
Amortized cost: | Amortized cost: | | Amortized cost: | |
Balance at beginning of period | Balance at beginning of period | $ | 38,692 | | | $ | 38,826 | | | $ | 39,267 | | | $ | 38,573 | | Balance at beginning of period | $ | 37,803 | | | $ | 38,854 | | | $ | 38,745 | | | $ | 39,267 | |
Originations of MSRs | Originations of MSRs | 4,319 | | | 2,499 | | | 8,569 | | | 5,585 | | Originations of MSRs | 1,457 | | | 2,772 | | | 4,268 | | | 4,250 | |
Amortization | Amortization | (4,129) | | | (1,970) | | | (8,954) | | | (4,803) | | Amortization | (3,198) | | | (2,934) | | | (6,951) | | | (4,825) | |
Balance at end of period | Balance at end of period | $ | 38,882 | | | $ | 39,355 | | | $ | 38,882 | | | $ | 39,355 | | Balance at end of period | $ | 36,062 | | | $ | 38,692 | | | $ | 36,062 | | | $ | 38,692 | |
| Valuation allowance: | Valuation allowance: | | Valuation allowance: | |
Balance at beginning of period | Balance at beginning of period | $ | (7,700) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | Balance at beginning of period | $ | (4,400) | | | $ | (1,100) | | | $ | (10,500) | | | $ | 0 | |
Additions to valuation allowance | (1,500) | | | 0 | | | (9,200) | | | 0 | | |
Reduction (addition) to valuation allowance | | Reduction (addition) to valuation allowance | (2,200) | | | (6,600) | | | 3,900 | | | (7,700) | |
Balance at end of period | Balance at end of period | $ | (9,200) | | | $ | 0 | | | $ | (9,200) | | | $ | 0 | | Balance at end of period | $ | (6,600) | | | $ | (7,700) | | | $ | (6,600) | | | $ | (7,700) | |
| Net MSRs at end of period | Net MSRs at end of period | $ | 29,682 | | | $ | 39,355 | | | $ | 29,682 | | | $ | 39,355 | | Net MSRs at end of period | $ | 29,462 | | | $ | 30,992 | | | $ | 29,462 | | | $ | 30,992 | |
Estimated fair value of MSRs at end of period | $ | 29,682 | | | $ | 43,968 | | | $ | 29,682 | | | $ | 43,968 | | |
|
MSRs represent the economic value of contractual rights to service mortgage loans that have been sold. The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $4.8$4.4 billion and $4.9$4.7 billion as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. Actual and expected prepayments of the underlying mortgage loans can impact the fair values of the 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. The fair values of MSRs were $29.7$29.5 million and $45.2$28.2 million at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. Based on its fair value analysis as of SeptemberJune 30, 2020,2021, the Corporation determined that a $1.5$2.2 million increase to the valuation allowance was required for the three months ended SeptemberJune 30, 2020,2021, resulting in a total valuation allowance of $9.2$6.6 million for the nine months ended Septemberas of June 30, 2020.2021. The increases$2.2 million increase to the valuation allowance werewas recorded as reductionsa reduction to mortgage banking income on the consolidated statements of income for the three and nine months ended SeptemberJune 30, 2020.2021. Based on its fair value analysis as of March 31, 2021 the Corporation had determined that a $6.1 million reduction to the valuation allowance was required as of March 31, 2021; the net $3.9 million decrease to the valuation allowance was recorded as an increase to mortgage banking income on the consolidated statements of income for the six months ended June 30, 2021.
NOTE 6 – Derivative Financial Instruments
The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. NoneCertain of the Corporation's outstanding derivative contracts are designated as hedges, and none are entered into for speculative purposes. Derivative instrumentsThe Corporation does enter into derivative contracts that are carriedintended to economically hedge certain of its risks, even if hedge accounting does not apply or the Corporation elects not to apply hedge accounting.
The Corporation records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value withof derivatives depends on the intended use of the derivative, whether the Corporation has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For derivatives where hedge accounting is applied, changes in fair value are recognized in other comprehensive income. For derivatives where hedge accounting does not apply, changes in fair value are recognized in earnings as components of interest income, 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.
For each of the derivatives, gross derivative assets and liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets. Related gains and losses on these derivative instruments are recorded in other changes, net on the consolidated statement of cash flows.
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.
Interest Rate Swaps - Non-Designated Hedges
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. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. The Corporation’s existing credit derivatives result from participations in interest rate swaps provided by external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain lenders which participate in loans.The Corporation is required to clear all eligible interest rate swap contracts with a clearing agent and is subject to the regulations of the Commodity Futures Trading Commission.
Cash Flow Hedges of Interest Rate Risk
The Corporation’s objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Corporation primarily uses interest rate swaps as part of its interest rate risk management strategy. During the first quarter of 2021, the Corporation entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Corporation making floating-rate payments over the life of the agreements without exchange of the underlying notional amount.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Corporation’s variable-rate liabilities. During the next twelve months, the Corporation estimates that an additional $3.4 million will be reclassified as an increase to interest income.
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 limits its foreign exchange exposure with customers by entering into contracts with institutional 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.
The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | Notional Amount | | Asset (Liability) Fair Value | | Notional Amount | | Asset (Liability) Fair Value | | Notional Amount | | Asset (Liability) Fair Value | | Notional Amount | | Asset (Liability) Fair Value |
| | (in thousands) | | (in thousands) |
Interest Rate Locks with Customers | Interest Rate Locks with Customers | | Interest Rate Locks with Customers | |
Positive fair values | Positive fair values | $ | 446,268 | | | $ | 11,994 | | | $ | 132,260 | | | $ | 1,123 | | Positive fair values | $ | 335,010 | | | $ | 3,595 | | | $ | 382,903 | | | $ | 8,034 | |
Negative fair values | Negative fair values | 4,611 | | | (61) | | | 9,783 | | | (53) | | Negative fair values | 1,688 | | | (10) | | | 3,154 | | | (35) | |
| Forward Commitments | Forward Commitments | | Forward Commitments | |
Positive fair values | Positive fair values | 0 | | | 0 | | | 75,000 | | | 63 | | Positive fair values | 0 | | | 0 | | | 0 | | | 0 | |
Negative fair values | Negative fair values | 414,110 | | | (1,644) | | | 180,000 | | | (371) | | Negative fair values | 54,000 | | | (211) | | | 292,262 | | | (2,263) | |
| Interest Rate Swaps with Customers | Interest Rate Swaps with Customers | | Interest Rate Swaps with Customers | |
Positive fair values | Positive fair values | 3,777,684 | | | 375,567 | | | 2,903,489 | | | 143,484 | | Positive fair values | 3,315,775 | | | 210,570 | | | 3,834,062 | | | 330,951 | |
Negative fair values | Negative fair values | 12,288 | | | (2) | | | 376,705 | | | (695) | | Negative fair values | 542,265 | | | (1,301) | | | 45,640 | | | (2) | |
| Interest Rate Swaps with Dealer Counterparties | Interest Rate Swaps with Dealer Counterparties | | Interest Rate Swaps with Dealer Counterparties | |
Positive fair values | Positive fair values | 12,288 | | | 2 | | | 376,705 | | | 695 | | Positive fair values | 542,265 | | | 1,301 | | | 45,640 | | | 2 | |
Negative fair values | Negative fair values | 3,777,684 | | | (183,225) | | | 2,903,489 | | | (75,327) | | Negative fair values | 3,315,775 | | | (105,883) | | | 3,834,062 | | | (165,205) | |
| Interest Rate Swaps used in Cash Flow Hedges | | Interest Rate Swaps used in Cash Flow Hedges | |
Positive fair values | | Positive fair values | 500,000 | | | 235 | | | 0 | | | 0 | |
Negative fair values | | Negative fair values | 0 | | | 0 | | | 0 | | | 0 | |
Foreign Exchange Contracts with Customers | Foreign Exchange Contracts with Customers | | Foreign Exchange Contracts with Customers | |
Positive fair values | Positive fair values | 2,947 | | | 32 | | | 3,373 | | | 38 | | Positive fair values | 11,672 | | | 143 | | | 1,121 | | | 5 | |
Negative fair values | Negative fair values | 5,885 | | | (280) | | | 7,283 | | | (154) | | Negative fair values | 1,463 | | | (48) | | | 5,963 | | | (275) | |
| Foreign Exchange Contracts with Correspondent Banks | Foreign Exchange Contracts with Correspondent Banks | | Foreign Exchange Contracts with Correspondent Banks | |
Positive fair values | Positive fair values | 7,325 | | | 340 | | | 9,028 | | | 192 | | Positive fair values | 5,582 | | | 89 | | | 6,372 | | | 318 | |
Negative fair values | Negative fair values | 2,653 | | | (19) | | | 4,976 | | | (45) | | Negative fair values | 10,942 | | | (145) | | | 1,422 | | | (5) | |
|
The following table presents the effect of fair value and cash flow hedge accounting on AOCI:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in OCI on Derivative | | Amount of Gain (Loss) Recognized in OCI Included Component | | Amount of Gain or (Loss) Recognized in OCI Excluded Component | | Location of Gain or (Loss) Recognized from AOCI into Income | | Amount of Gain Reclassified from AOCI into Income | | Amount of Gain Reclassified from AOCI into Income Included Component | | Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component |
| (in thousands) |
Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | |
Three months ended June 30, 2021 | | | | | | | | | | | | |
Interest Rate Products | $ | 3,560 | | | $ | 3,560 | | | $ | 0 | | | Interest income | | $ | 877 | | | $ | 877 | | | $ | 0 | |
Six months ended June 30, 2021 | | | | | | | | | | | | |
Interest Rate Products | $ | 1,495 | | | $ | 1,495 | | | $ | 0 | | | Interest income | | $ | 1,021 | | | $ | 1,021 | | | $ | 0 | |
The following table presents the effect of fair value and cash flow hedge accounting:
| | | | | | | | | | | | | | |
| | | | |
| | | | |
| Consolidated Statements of Income Classification |
| Interest Income | | |
| Three months ended | | | Six months ended |
| June 30, 2021 | | | June 30, 2021 | | |
| (in thousands) |
Total amounts of income line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded | $ | 877 | | | | $ | 1,021 | | | |
The effects of fair value and cash flow hedging: | | | | | | |
Gain or (loss) on cash flow hedging relationships | — | | | | | | |
Interest contracts: | | | | | | |
Amount of gain reclassified from AOCI into income | 877 | | | | 1,021 | | | |
Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring | — | | | | — | | | |
Amount of Gain Reclassified from AOCI into Income - Included Component | 877 | | | | 1,021 | | | |
Amount of Gain or (Loss) Reclassified from AOCI into Income - Excluded Component | 0 | | | | 0 | | | |
The following table presents a summary of the fair value gains (losses) on derivative financial instruments:
| | | Consolidated Statements of Income Classification | | Three months ended September 30 | | Nine months ended September 30 | | Consolidated Statements of Income Classification | | Three months ended June 30 | | Six months ended June 30 |
| | | | 2020 | | 2019 | | 2020 | | 2019 | | | | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) | | (in thousands) |
Mortgage banking derivatives (1) | Mortgage banking derivatives (1) | Mortgage banking income | | $ | 1,783 | | | $ | 843 | | | $ | 9,527 | | | $ | 1,457 | | Mortgage banking derivatives (1) | Mortgage banking income | | $ | (3,158) | | | $ | 6,704 | | | $ | (2,362) | | | $ | 7,744 | |
| Interest rate swaps | Interest rate swaps | Other expense | | (12) | | | 51 | | | 70 | | | 198 | | Interest rate swaps | Other expense | | (104) | | | 10 | | | (208) | | | 82 | |
| Foreign exchange contracts | Foreign exchange contracts | Other income | | 25 | | | 10 | | | 42 | | | 44 | | Foreign exchange contracts | Other income | | (12) | | | (102) | | | (4) | | | 17 | |
| Net fair value gains on derivative financial instruments | Net fair value gains on derivative financial instruments | | $ | 1,796 | | | $ | 904 | | | $ | 9,639 | | | $ | 1,699 | | Net fair value gains on derivative financial instruments | | $ | (3,274) | | | $ | 6,612 | | | $ | (2,574) | | | $ | 7,843 | |
(1) Includes interest rate locks with customers and forward commitments.
Fair Value Option
The Corporation has elected to measure 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 the periods shown:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | (in thousands) | | (in thousands) |
Amortized cost (1) | Amortized cost (1) | $ | 90,416 | | | $ | 37,396 | | Amortized cost (1) | $ | 40,923 | | | $ | 80,662 | |
Fair value | Fair value | 93,621 | | | 37,828 | | Fair value | 41,924 | | | 83,886 | |
(1) Cost basis of mortgage loans held for sale represents the unpaid principal balance.
Gains related to changes in fair values of mortgage loans held for sale were $658,000$711,000 and $2.8$1.4 million for the three and nine months ended SeptemberJune 30, 2021 and 2020, respectively. During the three and ninesix months ended SeptemberJune 30, 2019,2021, losses related to changes in fair values of mortgage loans held for sale were $499,000 and $174,000, respectively.$2.2 million compared to gains of $2.1 million for the six months ended June 30, 2020.
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 swaps with dealerfinancial 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 daily through a clearing agent. As a result, the total fair values of interest rate swap derivative assets and liabilities recognized on the consolidated balance sheet 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 swaps, 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.
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 AFS investment securities on the consolidated balance sheets. The Corporation has no intent to setintention of setting off these amounts, therefore, these repurchase agreements are not eligible for offset.
As of June 30, 2021, the fair value of derivatives were in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements and as such the Corporation did not post any collateral to its derivative counterparty.
The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:
| | | 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) |
September 30, 2020 | | |
June 30, 2021 | | June 30, 2021 | |
Interest rate swap derivative assets | | Interest rate swap derivative assets | $ | 212,106 | | | $ | (2,506) | | | $ | 0 | | | $ | 209,600 | |
| Foreign exchange derivative assets with correspondent banks | | Foreign exchange derivative assets with correspondent banks | 89 | | | (89) | | | 0 | | | 0 | |
Total | | Total | $ | 212,195 | | | $ | (2,595) | | | $ | 0 | | | $ | 209,600 | |
| Interest rate swap derivative liabilities | | Interest rate swap derivative liabilities | $ | 107,184 | | | $ | (2,506) | | | $ | (103,435) | | | $ | 1,243 | |
| Foreign exchange derivative liabilities with correspondent banks | | Foreign exchange derivative liabilities with correspondent banks | 145 | | | (89) | | | 0 | | | 56 | |
Total | | Total | $ | 107,329 | | | $ | (2,595) | | | $ | (103,435) | | | $ | 1,299 | |
| December 31, 2020 | | December 31, 2020 | |
Interest rate swap derivative assets | Interest rate swap derivative assets | $ | 375,569 | | | $ | (2) | | | $ | 0 | | | $ | 375,567 | | Interest rate swap derivative assets | $ | 330,951 | | | $ | (2) | | | $ | 0 | | | $ | 330,949 | |
Foreign exchange derivative assets with correspondent banks | Foreign exchange derivative assets with correspondent banks | 340 | | | (19) | | | 0 | | | 321 | | Foreign exchange derivative assets with correspondent banks | 318 | | | (5) | | | 0 | | | 313 | |
Total | Total | $ | 375,909 | | | $ | (21) | | | $ | 0 | | | $ | 375,888 | | Total | $ | 331,269 | | | $ | (7) | | | $ | 0 | | | $ | 331,262 | |
| Interest rate swap derivative liabilities | Interest rate swap derivative liabilities | $ | 183,230 | | | $ | (2) | | | $ | (183,228) | | | $ | 0 | | Interest rate swap derivative liabilities | $ | 165,205 | | | $ | (2) | | | $ | (165,203) | | | $ | 0 | |
Foreign exchange derivative liabilities with correspondent banks | Foreign exchange derivative liabilities with correspondent banks | 19 | | | (19) | | | 0 | | | 0 | | Foreign exchange derivative liabilities with correspondent banks | 5 | | | (5) | | | 0 | | | 0 | |
Total | Total | $ | 183,249 | | | $ | (21) | | | $ | (183,228) | | | $ | 0 | | Total | $ | 165,210 | | | $ | (7) | | | $ | (165,203) | | | $ | 0 | |
| December 31, 2019 | | |
Interest rate swap derivative assets | $ | 144,179 | | | $ | (757) | | | $ | 0 | | | $ | 143,422 | | |
Foreign exchange derivative assets with correspondent banks | 192 | | | (45) | | | 0 | | | 147 | | |
Total | $ | 144,371 | | | $ | (802) | | | $ | 0 | | | $ | 143,569 | | |
| Interest rate swap derivative liabilities | $ | 76,022 | | | $ | (757) | | | $ | (75,265) | | | $ | 0 | | |
Foreign exchange derivative liabilities with correspondent banks | 45 | | | (45) | | | 0 | | | 0 | | |
Total | $ | 76,067 | | | $ | (802) | | | $ | (75,265) | | | $ | 0 | | |
(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 received from the counterparty or posted by the Corporation 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 7 – Tax Credit Investments
TCIs are primarily for investments promoting qualified affordable housing projects and investments in community development entities. Investments in these projects generate a return primarily through the realization of federal income tax credits and deductions for operating losses over a specified time period.
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:
| | | September 30, | | December 31, | | June 30, | | December 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Included in other assets: | Included in other assets: | | (in thousands) | Included in other assets: | | (in thousands) |
Affordable housing tax credit investment, net | Affordable housing tax credit investment, net | | $ | 145,415 | | | $ | 153,351 | | Affordable housing tax credit investment, net | | $ | 162,431 | | | $ | 152,203 | |
Other tax credit investments, net | Other tax credit investments, net | | 70,379 | | | 64,354 | | Other tax credit investments, net | | 50,577 | | | 59,224 | |
| | Total TCIs, net | | $ | 215,794 | | | $ | 217,705 | | | Total TCIs, net | | $ | 213,008 | | | $ | 211,427 | |
Included in other liabilities: | Included in other liabilities: | | | | | Included in other liabilities: | | | | |
Unfunded affordable housing tax credit commitments | Unfunded affordable housing tax credit commitments | | $ | 22,591 | | | $ | 16,684 | | Unfunded affordable housing tax credit commitments | | $ | 47,354 | | | $ | 31,562 | |
Other tax credit liabilities | Other tax credit liabilities | | 60,585 | | | 55,105 | | Other tax credit liabilities | | 41,217 | | | 49,491 | |
| | Total unfunded tax credit commitments and liabilities | | $ | 83,176 | | | $ | 71,789 | | | Total unfunded tax credit commitments and liabilities | | $ | 88,571 | | | $ | 81,053 | |
The following table presents other information relating to the Corporation's TCIs:
| | | Three Months Ended | | Nine Months Ended | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30 | | September 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Components of income taxes: | Components of income taxes: | | (in thousands) | Components of income taxes: | | (in thousands) |
Affordable housing tax credits and other tax benefits | Affordable housing tax credits and other tax benefits | | $ | (7,290) | | | $ | (7,852) | | | $ | (21,678) | | | $ | (23,002) | | Affordable housing tax credits and other tax benefits | | $ | (6,543) | | | $ | (7,194) | | | $ | (13,031) | | | $ | (14,388) | |
Other tax credit investment credits and tax benefits | Other tax credit investment credits and tax benefits | | (1,240) | | | (1,136) | | | (3,122) | | | (3,407) | | Other tax credit investment credits and tax benefits | | (722) | | | (941) | | | (1,445) | | | (1,882) | |
Amortization of affordable housing investments, net of tax benefit | Amortization of affordable housing investments, net of tax benefit | | 5,024 | | | 5,649 | | | 15,071 | | | 16,638 | | Amortization of affordable housing investments, net of tax benefit | | 4,323 | | | 5,023 | | | 8,689 | | | 10,047 | |
Deferred tax expense | Deferred tax expense | | 275 | | | 238 | | | 691 | | | 715 | | Deferred tax expense | | 160 | | | 208 | | | 320 | | | 416 | |
| | Total net reduction in income tax expense | | $ | (3,231) | | | $ | (3,101) | | | $ | (9,038) | | | $ | (9,056) | | | Total net reduction in income tax expense | | $ | (2,782) | | | $ | (2,904) | | | $ | (5,467) | | | $ | (5,807) | |
Amortization of TCIs: | Amortization of TCIs: | | | | | | | | | Amortization of TCIs: | | | | | | | | |
Affordable housing tax credits investment | Affordable housing tax credits investment | | $ | 1,021 | | | $ | 863 | | | $ | 3,065 | | | $ | 2,508 | | Affordable housing tax credits investment | | $ | 1,018 | | | $ | 1,022 | | | $ | 2,004 | | | $ | 2,044 | |
Other tax credit investment amortization | Other tax credit investment amortization | | 673 | | | 670 | | | 1,529 | | | 2,008 | | Other tax credit investment amortization | | 545 | | | 428 | | | 1,090 | | | 856 | |
| | Total amortization of TCIs | | $ | 1,694 | | | $ | 1,533 | | | $ | 4,594 | | | $ | 4,516 | | | Total amortization of TCIs | | $ | 1,563 | | | $ | 1,450 | | | $ | 3,094 | | | $ | 2,900 | |
NOTE 8 – Accumulated Other Comprehensive Income (Loss)
The following table presents changes in other comprehensive income:income(loss):
| | | Before-Tax Amount | | Tax Effect | | Net of Tax Amount | | Before-Tax Amount | | Tax Effect | | Net of Tax Amount |
Three months ended September 30, 2020 | (in thousands) | |
Three months ended June 30, 2021 | | Three months ended June 30, 2021 | (in thousands) |
Unrealized gain on securities | Unrealized gain on securities | $ | 5,565 | | | $ | (1,232) | | | $ | 4,333 | | Unrealized gain on securities | $ | 24,968 | | | $ | (5,670) | | | $ | 19,298 | |
| Reclassification adjustment for securities gains included in net income (1) | Reclassification adjustment for securities gains included in net income (1) | (2) | | | 1 | | | (1) | | Reclassification adjustment for securities gains included in net income (1) | (36) | | | 8 | | | (28) | |
| Amortization of net unrealized gains on AFS securities transferred to HTM (2) | | Amortization of net unrealized gains on AFS securities transferred to HTM (2) | (349) | | | 79 | | | (270) | |
Net unrealized gain on interest rate swaps used in cash flow hedges (3) | | Net unrealized gain on interest rate swaps used in cash flow hedges (3) | 2,683 | | | (609) | | | 2,074 | |
| Amortization of net unrecognized pension and postretirement items (4) | | Amortization of net unrecognized pension and postretirement items (4) | 370 | | | (81) | | | 289 | |
Total OCI | | Total OCI | $ | 27,636 | | | $ | (6,273) | | | $ | 21,363 | |
Three months ended June 30, 2020 | | Three months ended June 30, 2020 | | | | | |
Unrealized gain on securities | | Unrealized gain on securities | $ | 44,199 | | | $ | (9,775) | | | $ | 34,424 | |
| Reclassification adjustment for securities gains included in net income (1) | | Reclassification adjustment for securities gains included in net income (1) | (3,005) | | | 664 | | | (2,341) | |
Amortization of net unrealized losses on AFS securities transferred to HTM (2) | | Amortization of net unrealized losses on AFS securities transferred to HTM (2) | 1,019 | | | (226) | | | 793 | |
| Amortization of net unrecognized pension and postretirement items (4) | | Amortization of net unrecognized pension and postretirement items (4) | 328 | | | (73) | | | 255 | |
Total OCI | | Total OCI | $ | 42,541 | | | $ | (9,410) | | | $ | 33,131 | |
| Six months ended June 30, 2021 | | Six months ended June 30, 2021 | |
Unrealized loss on securities | | Unrealized loss on securities | $ | (26,783) | | | $ | 6,082 | | | $ | (20,701) | |
| Reclassification adjustment for securities losses included in net income (1) | | Reclassification adjustment for securities losses included in net income (1) | 451 | | | (102) | | | 349 | |
| Amortization of net unrealized losses on AFS securities transferred to HTM (2) | | Amortization of net unrealized losses on AFS securities transferred to HTM (2) | 1,963 | | | (446) | | | 1,517 | |
| Net unrealized gain on interest rate swaps used in cash flow hedges (3) | | Net unrealized gain on interest rate swaps used in cash flow hedges (3) | 474 | | | (107) | | | 367 | |
Amortization of net unrecognized pension and postretirement items (3) | | Amortization of net unrecognized pension and postretirement items (3) | 740 | | | (162) | | | 578 | |
Total OCI | | Total OCI | $ | (23,155) | | | $ | 5,265 | | | $ | (17,890) | |
| Six months ended June 30, 2020 | | Six months ended June 30, 2020 | |
Unrealized gain on securities (4) | | Unrealized gain on securities (4) | $ | 66,581 | | | $ | (14,728) | | | $ | 51,853 | |
Reclassification adjustment for securities gains included in net income (1) | | Reclassification adjustment for securities gains included in net income (1) | (3,051) | | | 675 | | | (2,376) | |
| | Amortization of net unrealized losses on AFS securities transferred to HTM (2) | Amortization of net unrealized losses on AFS securities transferred to HTM (2) | 1,192 | | | (264) | | | 928 | | Amortization of net unrealized losses on AFS securities transferred to HTM (2) | 2,040 | | | (451) | | | 1,589 | |
| Amortization of net unrecognized pension and postretirement items (3) | Amortization of net unrecognized pension and postretirement items (3) | 329 | | | (73) | | | 255 | | Amortization of net unrecognized pension and postretirement items (3) | 656 | | | (146) | | | 510 | |
Total Other Comprehensive Income | $ | 7,083 | | | $ | (1,568) | | | $ | 5,515 | | |
Three months ended September 30, 2019 | | | | | | |
Unrealized gain on securities (4) | $ | 23,150 | | | $ | (5,121) | | | $ | 18,029 | | |
| Reclassification adjustment for securities gains included in net income (1) | (4,492) | | | 994 | | | (3,498) | | |
Amortization of net unrealized losses on AFS securities transferred to HTM (2) | 4,405 | | | (974) | | | 3,430 | | |
| Amortization of net unrecognized pension and postretirement items (3) | 357 | | | (80) | | | 277 | | |
Total Other Comprehensive Income | $ | 23,419 | | | $ | (5,181) | | | $ | 18,238 | | |
| Nine months ended September 30, 2020 | | |
Unrealized gain on securities | $ | 72,146 | | | $ | (15,960) | | | $ | 56,186 | | |
| Reclassification adjustment for securities gains included in net income (1) | (3,053) | | | 676 | | | (2,377) | | |
| Amortization of net unrealized losses on AFS securities transferred to HTM (2) | 3,232 | | | (715) | | | 2,517 | | |
| Amortization of net unrecognized pension and postretirement items (3) | 984 | | | (219) | | | 765 | | |
Total Other Comprehensive Income | $ | 73,309 | | | $ | (16,218) | | | $ | 57,091 | | |
| Nine months ended September 30, 2019 | | |
Unrealized gain on securities (4) | $ | 81,207 | | | $ | (17,963) | | | $ | 63,244 | | |
Reclassification adjustment for securities gains included in net income (1) | (4,733) | | | 1,047 | | | (3,686) | | |
| Amortization of net unrealized losses on AFS securities transferred to HTM (2) | 6,966 | | | (1,541) | | | 5,425 | | |
Non-credit related unrealized losses on other-than-temporarily impaired debt securities | (875) | | | 193 | | | (682) | | |
| Amortization of net unrecognized pension and postretirement items (3) | 1,083 | | | (240) | | | 843 | | |
Total Other Comprehensive Income | $ | 83,648 | | | $ | (18,504) | | | $ | 65,144 | | |
Total OCI | | Total OCI | $ | 66,226 | | | $ | (14,650) | | | $ | 51,576 | |
(1) Amounts reclassified out of accumulated other comprehensive income.AOCI. 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.AOCI. Before-tax amounts included as a reduction to "Interest Income" on the Consolidated Statements of Income.
(3) Amounts reclassified out of accumulated other comprehensive income.AOCI. Before-tax amounts included in "Interest Income" on the Consolidated Statements of Income.
(4) Amounts reclassified out of AOCI. Before-tax amounts included in "Salaries and employee benefits" on the Consolidated Statements of Income. See Note 12, "Employee Benefit Plans," for additional details.
(4) Before-Tax amount includes a $3.7 million reclassification of unrealized loss related to the early adoption of ASU 2019-04.
The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains (Losses) on Investment Securities | | Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities | | | | Unrecognized Pension and Postretirement Plan Income (Costs) | | Total |
| (in thousands) |
Three months ended September 30, 2020 | | | | | | | | | |
Balance at June 30, 2020 | $ | 65,930 | | | $ | 0 | | | | | $ | (14,491) | | | $ | 51,439 | |
Other comprehensive income before reclassifications | 4,333 | | | 0 | | | | | 0 | | | 4,333 | |
Amounts reclassified from accumulated other comprehensive income | (1) | | | 0 | | | | | 255 | | | 254 | |
Amortization of net unrealized losses on AFS securities transferred to HTM | 928 | | | 0 | | | | | 0 | | | 928 | |
| | | | | | | | | |
Balance at September 30, 2020 | $ | 71,190 | | | $ | 0 | | | | | $ | (14,236) | | | $ | 56,954 | |
Three months ended September 30, 2019 | | | | | | | | | |
Balance at June 30, 2019 | $ | 2,368 | | | $ | (2) | | | | | $ | (14,523) | | | $ | (12,157) | |
Other comprehensive income before reclassifications | 18,029 | | | 0 | | | | | 0 | | | 18,029 | |
Amounts reclassified from accumulated other comprehensive income (loss) | (3,498) | | | 0 | | | | | 277 | | | (3,221) | |
Amortization of net unrealized losses on AFS securities transferred to HTM | 3,430 | | | 0 | | | | | 0 | | | 3,430 | |
| | | | | | | | | |
Balance at September 30, 2019 | $ | 20,329 | | | $ | (2) | | | | | $ | (14,246) | | | $ | 6,081 | |
| | | | | | | | | |
Nine months ended September 30, 2020 | | | | | | | | | |
Balance at December 31, 2019 | $ | 14,864 | | | $ | 0 | | | | | $ | (15,001) | | | $ | (137) | |
Other comprehensive income before reclassifications | 56,186 | | | 0 | | | | | 0 | | | 56,186 | |
Amounts reclassified from accumulated other comprehensive income (loss) | (2,377) | | | 0 | | | | | 765 | | | (1,612) | |
Amortization of net unrealized losses on AFS securities transferred to HTM | 2,517 | | | 0 | | | | | 0 | | | 2,517 | |
| | | | | | | | | |
Balance at September 30, 2020 | $ | 71,190 | | | $ | 0 | | | | | $ | (14,236) | | | $ | 56,954 | |
Nine months ended September 30, 2019 | | | | | | | | | |
Balance at December 31, 2018 | $ | (44,654) | | | $ | 680 | | | | | $ | (15,089) | | | $ | (59,063) | |
Other comprehensive income before reclassifications | 63,244 | | | (682) | | | | | 0 | | | 62,562 | |
Amounts reclassified from accumulated other comprehensive income (loss) | (3,686) | | | 0 | | | | | 843 | | | (2,843) | |
Amortization of net unrealized losses on AFS securities transferred to HTM | 5,425 | | | 0 | | | | | 0 | | | 5,425 | |
| | | | | | | | | |
Balance at September 30, 2019 | $ | 20,329 | | | $ | (2) | | | | | $ | (14,246) | | | $ | 6,081 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains (Losses) on Investment Securities | | Net Unrealized (Loss) Gain on Interest Rate Swaps used in Cash Flow Hedges | | | | Unrecognized Pension and Postretirement Plan Income (Costs) | | Total |
| (in thousands) |
Three months ended June 30, 2021 | | | | | | | | | |
Balance at March 31, 2021 | $ | 43,769 | | | $ | (1,707) | | | | | $ | (16,224) | | | $ | 25,838 | |
OCI before reclassifications | 19,298 | | | 0 | | | | | 0 | | | 19,298 | |
Amounts reclassified from AOCI | (28) | | | 2,074 | | | | | 289 | | | 2,335 | |
Amortization of net unrealized gains on AFS securities transferred to HTM | (270) | | | 0 | | | | | 0 | | | (270) | |
| | | | | | | | | |
Balance at June 30, 2021 | $ | 62,769 | | | $ | 367 | | | | | $ | (15,935) | | | $ | 47,201 | |
Three months ended June 30, 2020 | | | | | | | | | |
Balance at March 31, 2020 | $ | 33,054 | | | $ | 0 | | | | | $ | (14,746) | | | $ | 18,308 | |
OCI before reclassifications | 34,424 | | | 0 | | | | | 0 | | | 34,424 | |
Amounts reclassified from AOCI | (2,341) | | | 0 | | | | | 255 | | | (2,086) | |
Amortization of net unrealized losses on AFS securities transferred to HTM | 793 | | | 0 | | | | | 0 | | | 793 | |
| | | | | | | | | |
Balance at June 30, 2020 | $ | 65,930 | | | $ | 0 | | | | | $ | (14,491) | | | $ | 51,439 | |
| | | | | | | | | |
Six months ended June 30, 2021 | | | | | | | | | |
Balance at December 31, 2020 | $ | 81,604 | | | $ | 0 | | | | | $ | (16,513) | | | $ | 65,091 | |
OCI before reclassifications | (20,701) | | | 0 | | | | | 0 | | | (20,701) | |
Amounts reclassified from AOCI | 349 | | | 367 | | | | | 578 | | | 1,294 | |
Amortization of net unrealized losses on AFS securities transferred to HTM | 1,517 | | | 0 | | | | | 0 | | | 1,517 | |
| | | | | | | | | |
Balance at June 30, 2021 | $ | 62,769 | | | $ | 367 | | | | | $ | (15,935) | | | $ | 47,201 | |
Six months ended June 30, 2020 | | | | | | | | | |
Balance at December 31, 2019 | $ | 14,864 | | | $ | 0 | | | | | $ | (15,001) | | | $ | (137) | |
OCI before reclassifications | 51,853 | | | 0 | | | | | 0 | | | 51,853 | |
Amounts reclassified from AOCI | (2,376) | | | 0 | | | | | 510 | | | (1,866) | |
Amortization of net unrealized losses on AFS securities transferred to HTM | 1,589 | | | 0 | | | | | 0 | | | 1,589 | |
| | | | | | | | | |
Balance at June 30, 2020 | $ | 65,930 | | | $ | 0 | | | | | $ | (14,491) | | | $ | 51,439 | |
NOTE 9 – Fair Value Measurements
FASB ASC Topic 820 establishes 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.
All assets and liabilities measured at fair value on both a recurring and nonrecurring basis have been categorized into the above three levels. The following tables present assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
| | | September 30, 2020 | | June 30, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in thousands) | | (in thousands) |
Loans held for sale | Loans held for sale | $ | 0 | | | $ | 93,621 | | | $ | 0 | | | $ | 93,621 | | Loans held for sale | $ | 0 | | | $ | 41,924 | | | $ | 0 | | | $ | 41,924 | |
Available for sale investment securities: | Available for sale investment securities: | | Available for sale investment securities: | |
| U.S. Government securities | | U.S. Government securities | 153,545 | | | 0 | | | 0 | | | 153,545 | |
U.S. Government sponsored agency securities | | U.S. Government sponsored agency securities | 0 | | | 62,431 | | | 0 | | | 62,431 | |
State and municipal securities | State and municipal securities | 0 | | | 926,554 | | | 0 | | | 926,554 | | State and municipal securities | 0 | | | 1,055,462 | | | 0 | | | 1,055,462 | |
Corporate debt securities | Corporate debt securities | 0 | | | 342,558 | | | 0 | | | 342,558 | | Corporate debt securities | 0 | | | 371,381 | | | 0 | | | 371,381 | |
Collateralized mortgage obligations | Collateralized mortgage obligations | 0 | | | 532,473 | | | 0 | | | 532,473 | | Collateralized mortgage obligations | 0 | | | 307,165 | | | 0 | | | 307,165 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 0 | | | 321,695 | | | 0 | | | 321,695 | | Residential mortgage-backed securities | 0 | | | 201,547 | | | 0 | | | 201,547 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 0 | | | 572,210 | | | 0 | | | 572,210 | | Commercial mortgage-backed securities | 0 | | | 871,010 | | | 0 | | | 871,010 | |
Auction rate securities | Auction rate securities | 0 | | | 0 | | | 97,990 | | | 97,990 | | Auction rate securities | 0 | | | 0 | | | 74,834 | | | 74,834 | |
Total available for sale investment securities | Total available for sale investment securities | 0 | | | 2,695,490 | | | 97,990 | | | 2,793,480 | | Total available for sale investment securities | 153,545 | | | 2,868,996 | | | 74,834 | | | 3,097,375 | |
Other assets: | Other assets: | | Other assets: | |
Investments held in Rabbi Trust | Investments held in Rabbi Trust | 21,828 | | | 0 | | | 0 | | | 21,828 | | Investments held in Rabbi Trust | 27,142 | | | 0 | | | 0 | | | 27,142 | |
Derivative assets | Derivative assets | 372 | | | 387,563 | | | 0 | | | 387,935 | | Derivative assets | 232 | | | 215,701 | | | 0 | | | 215,933 | |
Total assets | Total assets | $ | 22,200 | | | $ | 3,176,674 | | | $ | 97,990 | | | $ | 3,296,864 | | Total assets | $ | 180,919 | | | $ | 3,126,621 | | | $ | 74,834 | | | $ | 3,382,374 | |
Other liabilities: | Other liabilities: | | | | | | | | Other liabilities: | | | | | | | |
Deferred compensation liabilities | Deferred compensation liabilities | $ | 21,828 | | | $ | 0 | | | $ | 0 | | | $ | 21,828 | | Deferred compensation liabilities | $ | 27,142 | | | $ | 0 | | | $ | 0 | | | $ | 27,142 | |
Derivative liabilities | Derivative liabilities | 299 | | | 184,932 | | | 0 | | | 185,231 | | Derivative liabilities | 193 | | | 107,405 | | | 0 | | | 107,598 | |
Total liabilities | Total liabilities | $ | 22,127 | | | $ | 184,932 | | | $ | 0 | | | $ | 207,059 | | Total liabilities | $ | 27,335 | | | $ | 107,405 | | | $ | 0 | | | $ | 134,740 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
Loans held for sale | $ | 0 | | | $ | 83,886 | | | $ | 0 | | | $ | 83,886 | |
Available for sale investment securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
State and municipal securities | 0 | | | 952,613 | | | 0 | | | 952,613 | |
Corporate debt securities | 0 | | | 367,145 | | | 0 | | | 367,145 | |
Collateralized mortgage obligations | 0 | | | 503,766 | | | 0 | | | 503,766 | |
Residential mortgage-backed securities | 0 | | | 377,998 | | | 0 | | | 377,998 | |
Commercial mortgage-backed securities | 0 | | | 762,415 | | | 0 | | | 762,415 | |
Auction rate securities | 0 | | | 0 | | | 98,206 | | | 98,206 | |
Total available for sale investment securities | 0 | | | 2,963,937 | | | 98,206 | | | 3,062,143 | |
Other assets: | | | | | | | |
Investments held in Rabbi Trust | 24,383 | | | 0 | | | 0 | | | 24,383 | |
Derivative assets | 323 | | | 338,987 | | | 0 | | | 339,310 | |
Total assets | $ | 24,706 | | | $ | 3,386,810 | | | $ | 98,206 | | | $ | 3,509,722 | |
Other liabilities: | | | | | | | |
Deferred compensation liabilities | $ | 24,383 | | | $ | 0 | | | $ | 0 | | | $ | 24,383 | |
Derivative liabilities | 280 | | | 167,505 | | | 0 | | | 167,785 | |
Total liabilities | $ | 24,663 | | | $ | 167,505 | | | $ | 0 | | | $ | 192,168 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
Loans held for sale | $ | 0 | | | $ | 37,828 | | | $ | 0 | | | $ | 37,828 | |
Available for sale investment securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
State and municipal securities | 0 | | | 652,927 | | | 0 | | | 652,927 | |
Corporate debt securities | 0 | | | 374,957 | | | 2,400 | | | 377,357 | |
Collateralized mortgage obligations | 0 | | | 693,718 | | | 0 | | | 693,718 | |
Residential mortgage-backed securities | 0 | | | 177,312 | | | 0 | | | 177,312 | |
Commercial mortgage-backed securities | 0 | | | 494,297 | | | 0 | | | 494,297 | |
Auction rate securities | 0 | | | 0 | | | 101,926 | | | 101,926 | |
Total available for sale investment securities | 0 | | | 2,393,211 | | | 104,326 | | | 2,497,537 | |
Other assets: | | | | | | | |
Investments held in Rabbi Trust | 22,213 | | | 0 | | | 0 | | | 22,213 | |
Derivative assets | 230 | | | 145,365 | | | 0 | | | 145,595 | |
Total assets | $ | 22,443 | | | $ | 2,576,404 | | | $ | 104,326 | | | $ | 2,703,173 | |
Other liabilities: | | | | | | | |
Deferred compensation liabilities | $ | 22,213 | | | $ | 0 | | | $ | 0 | | | $ | 22,213 | |
Derivative liabilities | 199 | | | 76,447 | | | 0 | | | 76,646 | |
Total liabilities | $ | 22,412 | | | $ | 76,447 | | | $ | 0 | | | $ | 98,859 | |
The valuation techniques used to measure fair value for the items in the preceding tables are as follows:
Loans held for sale – This category includes mortgage loans held for sale that are measured at fair value. Fair values as of SeptemberJune 30, 20202021 and December 31, 20192020 were based on the price that secondary market investors were offering for loans with similar characteristics. See "Note 6 - Derivative Financial Instruments" 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 debt securities. Level 2 investment securities are valued by a third-party pricing service. 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.
•U.S. Government securities – These securities are classified as Level 1. Fair values are based on quoted prices with active markets.
•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. Fair values are determined by a third-party pricing service, as detailed above.
•Corporate debt securities – This category consists of subordinated debt and senior debt issued by financial institutions ($338.2367.0 million at SeptemberJune 30, 20202021 and $362.3$362.8 million at December 31, 2019), single-issuer trust preferred securities issued by financial institutions ($0 at September 30, 2020 and $11.2 million at December 31, 2019)2020) and other corporate debt issued by non-financial institutions ($4.44.3 million at SeptemberJune 30, 20202021 and $3.9$4.4 million at December 31, 2019)2020). As noted in "Note 3 - Investment Securities", several corporate debt securities were sold in the second quarter of 2020. Refer to the specific note for further information.
Level 2 investment securities include the Corporation’s holdings of subordinated debt and senior debt, other corporate debt issued by non-financial institutions and $0 and $8.8 million of single-issuer TruPS held at September 30, 2020 and December 31, 2019, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.
Level 3 investment securities include the Corporation’s investments in certain single-issuer TruPS ($0 at September 30, 2020 and $2.4 million at December 31, 2019). 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 investment securities 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 in 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. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. Level 3 fair 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 represent 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 ($372,000232,000 at SeptemberJune 30, 20202021 and $230,000$323,000 at December 31, 2019)2020). 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 ($12.03.6 million at SeptemberJune 30, 20202021 and $1.2$8.0 million at December 31, 2019)2020) and the fair value of interest rate swaps ($375.6212.1 million at SeptemberJune 30, 20202021 and $144.2$331.0 million at December 31, 2019)2020). The fair values of the Corporation’s 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 6 - Derivative Financial Instruments," for additional information.
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 ($299,000193,000 at SeptemberJune 30, 20202021 and $199,000$280,000 at December 31, 2019)2020).
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 ($1.7221,000 at June 30, 2021 and $2.3 million at September 30, 2020 and $424,000 at December 31, 2019)2020) and the fair value of interest rate swaps ($183.2107.2 million at SeptemberJune 30, 20202021 and $76.0$165.2 million at December 31, 2019)2020).
The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Derivative assets" above.
The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):
| | | Pooled Trust Preferred Securities | | Single-issuer Trust Preferred Securities | | ARCs | | | | Single-issuer Trust Preferred Securities | | ARCs |
Three months ended September 30, 2020 | (in thousands) | |
Balance at June 30, 2020 | $ | 0 | | | $ | 0 | | | $ | 100,859 | | |
Three months ended June 30, 2021 | | Three months ended June 30, 2021 | | (in thousands) |
Balance at March 31, 2021 | | Balance at March 31, 2021 | | | $ | 0 | | | $ | 76,204 | |
| Unrealized adjustment to fair value (1) | | Unrealized adjustment to fair value (1) | | | 0 | | | (1,370) | |
| Balance at June 30, 2021 | | Balance at June 30, 2021 | | | $ | 0 | | | $ | 74,834 | |
| Three months ended June 30, 2020 | | Three months ended June 30, 2020 | | |
Balance at March 31, 2020 | | Balance at March 31, 2020 | | | $ | 2,160 | | | $ | 93,666 | |
Sales | Sales | 0 | | | 0 | | | 0 | | Sales | | | (2,160) | | | 0 | |
| Unrealized adjustment to fair value (1) | Unrealized adjustment to fair value (1) | 0 | | | 0 | | | (2,869) | | Unrealized adjustment to fair value (1) | | | 0 | | | 7,193 | |
| Balance at September 30, 2020 | $ | 0 | | | $ | 0 | | | $ | 97,990 | | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | | | $ | 0 | | | $ | 100,859 | |
| Three months ended September 30, 2019 | | |
Balance at June 30, 2019 | $ | 0 | | | $ | 2,370 | | | $ | 103,365 | | |
| Six months ended June 30, 2021 | | Six months ended June 30, 2021 | | |
Balance at December 31, 2020 | | Balance at December 31, 2020 | | | $ | 0 | | | $ | 98,206 | |
Sales | | Sales | | | 0 | | | (24,619) | |
| Unrealized adjustment to fair value (1) | Unrealized adjustment to fair value (1) | 0 | | | (2) | | | (67) | | Unrealized adjustment to fair value (1) | | | 0 | | | 1,247 | |
| Discount accretion | 0 | | | 2 | | | 0 | | |
Balance at September 30, 2019 | $ | 0 | | | $ | 2,370 | | | $ | 103,298 | | |
| Nine months ended September 30, 2020 | | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | | | $ | 0 | | | $ | 74,834 | |
| Six months ended June 30, 2020 | | Six months ended June 30, 2020 | | |
Balance at December 31, 2019 | Balance at December 31, 2019 | $ | 0 | | | $ | 2,400 | | | $ | 101,926 | | Balance at December 31, 2019 | | | $ | 2,400 | | | $ | 101,926 | |
Sales | Sales | 0 | | | (2,160) | | | 0 | | Sales | | | (2,160) | | | 0 | |
| Unrealized adjustment to fair value (1) | Unrealized adjustment to fair value (1) | 0 | | | (242) | | | (3,936) | | Unrealized adjustment to fair value (1) | | | (242) | | | (1,067) | |
| Discount accretion | Discount accretion | 0 | | | 2 | | | 0 | | Discount accretion | | | 2 | | | 0 | |
Balance at September 30, 2020 | $ | 0 | | | $ | 0 | | | $ | 97,990 | | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | | | $ | 0 | | | $ | 100,859 | |
| Nine months ended September 30, 2019 | | |
Balance at December 31, 2018 | $ | 875 | | | $ | 2,400 | | | $ | 102,994 | | |
Sales | (770) | | | 0 | | | 0 | | |
| Unrealized adjustment to fair value (1) | (105) | | | (32) | | | 304 | | |
| Discount accretion | 0 | | | 2 | | | 0 | | |
Balance at September 30, 2019 | $ | 0 | | | $ | 2,370 | | | $ | 103,298 | | |
|
(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.
Certain assets 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 Level 3 financial assets measured at fair value on a nonrecurring basis:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | (in thousands) | | (in thousands) |
Net Loans | $ | 113,073 | | | $ | 144,807 | | |
Loans, net | | Loans, net | $ | 129,542 | | | $ | 116,584 | |
OREO | OREO | 4,565 | | | 6,831 | | OREO | 2,779 | | | 4,178 | |
MSRs (1) | MSRs (1) | 29,682 | | | 45,193 | | MSRs (1) | 29,462 | | | 28,245 | |
Total assets | Total assets | $ | 147,320 | | | $ | 196,831 | | Total assets | $ | 161,783 | | | $ | 149,007 | |
(1)Amounts shown are estimated fair value. MSRs are recorded on the Corporation's consolidated balance sheets at the lower of amortized cost or fair value. 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 – This category consists of loans that were individually evaluated for impairment and have been classified as Level 3 assets. In 2020, the amount shown is the balance of nonaccrual loans, net of the related ACL. In 2019, the
amount shown is the balance of impaired loans, net of the related ACL. See "Note 4 - Loans and Allowance for Credit Losses, and Asset Quality," 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 by product type 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 SeptemberJune 30, 20202021 valuation were 17.7%17.8% and 9.5%9.0%, respectively. Management reviews the reasonableness of the significant inputs to the third-party valuation in comparison to market data. See "Note 5 - Mortgage Servicing Rights," for additional information.
In 2008,2007, the Corporation received Class B restricted shares ofthe Visa Shares in connection with a corporate restructuring undertaken by Visa, Inc. ("Visa") as partin contemplation of Visa’sits initial public offering. These securities arewere considered equity securities without readily determinable fair values. As such, the approximately 133,000 Visa Class B sharesShares owned as of September 30, 2020 were carried at a zero cost basis.
During the first quarter of 2021, the Corporation sold all of its Visa Shares and recognized a $34.0 million gain.The following tables present the carrying amounts and estimated fair values of the Corporation’s financial instruments as offor the periods shown.current period. A general description of the methods and assumptions used to estimate such fair values follows:
| | | September 30, 2020 | | June 30, 2021 |
| | | Estimated Fair Value | | | Estimated Fair Value |
| | Carrying Amount | Level 1 | Level 2 | Level 3 | Total | | Carrying Amount | Level 1 | Level 2 | Level 3 | Total |
| | (in thousands) | | (in thousands) |
FINANCIAL ASSETS | FINANCIAL ASSETS | | FINANCIAL ASSETS | |
Cash and cash equivalents | Cash and cash equivalents | $ | 1,534,890 | | $ | 1,534,890 | | $ | 0 | | $ | 0 | | $ | 1,534,890 | | Cash and cash equivalents | $ | 1,904,059 | | $ | 1,904,059 | | $ | 0 | | $ | 0 | | $ | 1,904,059 | |
FRB and FHLB stock | FRB and FHLB stock | 93,964 | | 0 | | 93,964 | | 0 | | 93,964 | | FRB and FHLB stock | 62,631 | | 0 | | 62,631 | | 0 | | 62,631 | |
Loans held for sale | Loans held for sale | 93,621 | | 0 | | 93,621 | | 0 | | 93,621 | | Loans held for sale | 41,924 | | 0 | | 41,924 | | 0 | | 41,924 | |
AFS securities | AFS securities | 2,793,480 | | 0 | | 2,695,490 | | 97,990 | | 2,793,480 | | AFS securities | 3,097,375 | | 153,545 | | 2,868,996 | | 74,834 | | 3,097,375 | |
HTM securities | HTM securities | 304,241 | | 0 | | 324,940 | | 0 | | 324,940 | | HTM securities | 824,283 | | 0 | | 826,932 | | 0 | | 826,932 | |
Net Loans | Net Loans | 18,761,796 | | 0 | | 0 | | 18,514,547 | | 18,514,547 | | Net Loans | 18,331,724 | | 0 | | 0 | | 17,963,518 | | 17,963,518 | |
Accrued interest receivable | Accrued interest receivable | 70,766 | | 70,766 | | 0 | | 0 | | 70,766 | | Accrued interest receivable | 63,232 | | 63,232 | | 0 | | 0 | | 63,232 | |
Other assets | Other assets | 694,442 | | 272,632 | | 387,563 | | 34,247 | | 694,442 | | Other assets | 542,967 | | 295,025 | | 215,701 | | 32,241 | | 542,967 | |
FINANCIAL LIABILITIES | FINANCIAL LIABILITIES | | | | FINANCIAL LIABILITIES | | | |
Demand and savings deposits | Demand and savings deposits | $ | 17,997,443 | | $ | 17,997,443 | | $ | 0 | | $ | 0 | | $ | 17,997,443 | | Demand and savings deposits | $ | 19,514,090 | | $ | 19,514,090 | | $ | 0 | | $ | 0 | | $ | 19,514,090 | |
Brokered deposits | Brokered deposits | 317,588 | | 275,719 | | 41,869 | | 0 | | 317,588 | | Brokered deposits | 277,444 | | 257,444 | | 20,830 | | 0 | | 278,274 | |
Time deposits | Time deposits | 2,415,020 | | 0 | | 2,442,422 | | 0 | | 2,442,422 | | Time deposits | 1,932,778 | | 0 | | 1,942,321 | | 0 | | 1,942,321 | |
Short-term borrowings | Short-term borrowings | 611,727 | | 611,727 | | 0 | | 0 | | 611,727 | | Short-term borrowings | 533,749 | | 533,749 | | 0 | | 0 | | 533,749 | |
Accrued interest payable | Accrued interest payable | 9,123 | | 9,123 | | 0 | | 0 | | 9,123 | | Accrued interest payable | 7,322 | | 7,322 | | 0 | | 0 | | 7,322 | |
FHLB advances and long-term debt | 1,296,012 | | 0 | | 1,342,192 | | 0 | | 1,342,192 | | |
Long-term borrowings | | Long-term borrowings | 627,213 | | — | | 617,167 | | 0�� | | 617,167 | |
Other liabilities | Other liabilities | 352,740 | | 152,272 | | 184,935 | | 15,533 | | 352,740 | | Other liabilities | 312,700 | | 190,522 | | 107,405 | | 14,773 | | 312,700 | |
| | December 31, 2019 | |
| | Estimated Fair Value | |
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total | |
| (in thousands) | |
FINANCIAL ASSETS | | |
Cash and cash equivalents | $ | 517,791 | | $ | 517,791 | | $ | 0 | | $ | 0 | | $ | 517,791 | | |
FRB and FHLB stock | 97,422 | | 0 | | 97,422 | | 0 | | 97,422 | | |
Loans held for sale | 37,828 | | 0 | | 37,828 | | 0 | | 37,828 | | |
AFS securities | 2,497,537 | | 0 | | 2,393,211 | | 104,326 | | 2,497,537 | | |
HTM securities | 369,841 | | 0 | | 383,705 | | 0 | | 383,705 | | |
Net Loans | 16,673,904 | | 0 | | 0 | | 16,485,122 | | 16,485,122 | | |
Accrued interest receivable | 60,898 | | 60,898 | | 0 | | 0 | | 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 | | $ | 0 | | $ | 0 | | $ | 14,327,453 | | |
Brokered deposits | 264,531 | | 223,982 | | 40,549 | | 0 | | 264,531 | | |
Time deposits | 2,801,930 | | 0 | | 2,828,988 | | 0 | | 2,828,988 | | |
Short-term borrowings | 883,241 | | 883,241 | | 0 | | 0 | | 883,241 | | |
Accrued interest payable | 8,834 | | 8,834 | | 0 | | 0 | | 8,834 | | |
FHLB advances and long-term debt | 881,769 | | 0 | | 878,385 | | 0 | | 878,385 | | |
Other liabilities | 221,542 | | 142,508 | | 76,447 | | 2,587 | | 221,542 | | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | Estimated Fair Value |
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total |
| (in thousands) |
FINANCIAL ASSETS | | | | | |
Cash and cash equivalents | $ | 1,847,832 | | $ | 1,847,832 | | $ | 0 | | $ | 0 | | $ | 1,847,832 | |
FRB and FHLB stock | 92,129 | | 0 | | 92,129 | | 0 | | 92,129 | |
Loans held for sale | 83,886 | | 0 | | 83,886 | | 0 | | 83,886 | |
AFS securities | 3,062,143 | | 0 | | 2,963,937 | | 98,206 | | 3,062,143 | |
HTM securities | 278,281 | | 0 | | 296,857 | | 0 | | 296,857 | |
Net Loans | 18,623,253 | | 0 | | 0 | | 18,354,532 | | 18,354,532 | |
Accrued interest receivable | 72,942 | | 72,942 | | 0 | | 0 | | 72,942 | |
Other assets | 650,425 | | 279,015 | | 338,987 | | 32,423 | | 650,425 | |
FINANCIAL LIABILITIES | | | | | |
Demand and savings deposits | $ | 18,279,358 | | $ | 18,279,358 | | $ | 0 | | $ | 0 | | $ | 18,279,358 | |
Brokered deposits | 335,185 | | 295,185 | | 41,206 | | 0 | | 336,391 | |
Time deposits | 2,224,664 | | 0 | | 2,246,457 | | 0 | | 2,246,457 | |
Short-term borrowings | 630,066 | | 630,066 | | 0 | | 0 | | 630,066 | |
Accrued interest payable | 10,365 | | 10,365 | | 0 | | 0 | | 10,365 | |
Long-term borrowings | 1,296,263 | | 0 | | 1,332,041 | | 0 | | 1,332,041 | |
Other liabilities | 338,747 | | 156,869 | | 167,505 | | 14,373 | | 338,747 | |
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.
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.cost on the consolidated balance sheets, which is a reasonable estimate of fair value.
As of SeptemberJune 30, 2020,2021, fair values for loans and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans also include estimated credit losses that would be assumed in a market transaction, which represents estimated exit prices.
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 of these deposits are determined in a manner consistent with the respective type of deposits discussed above.
NOTE 10 – Net Income Per Share
Basic net income per share is calculated as net income available to common shareholders divided by the weighted average number of shares outstanding.
Diluted net income per share is calculated as net income available to common shareholders 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 shares outstanding used to calculate basic net income per share and diluted net income per share follows (in thousands, except per share data):
| | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Weighted average shares outstanding (basic) | Weighted average shares outstanding (basic) | 162,061 | | | 165,324 | | | 162,416 | | | 167,834 | | Weighted average shares outstanding (basic) | 162,785 | | | 161,715 | | | 162,614 | | | 162,582 | |
Impact of common stock equivalents | Impact of common stock equivalents | 518 | | | 802 | | | 667 | | | 888 | | Impact of common stock equivalents | 1,073 | | | 552 | | | 1,124 | | | 744 | |
Weighted average shares outstanding (diluted) | Weighted average shares outstanding (diluted) | 162,579 | | | 166,126 | | | 163,083 | | | 168,722 | | Weighted average shares outstanding (diluted) | 163,858 | | | 162,267 | | | 163,738 | | | 163,326 | |
Per share: | Per share: | | | | | | | | Per share: | | | | | | | |
Basic | Basic | $ | 0.38 | | | $ | 0.38 | | | $ | 0.78 | | | $ | 1.06 | | Basic | $ | 0.38 | | | $ | 0.24 | | | $ | 0.81 | | | $ | 0.40 | |
Diluted | Diluted | 0.38 | | | 0.37 | | | 0.78 | | | 1.06 | | Diluted | 0.38 | | | 0.24 | | | 0.81 | | | 0.40 | |
NOTE 11 – Stock-Based Compensation
The Corporation grants equity awards to employees in the form of stock options, restricted stock, RSUs or PSUs under its Amended and Restated Equity and Cash Incentive Compensation Plan ("Employee Equity Plan"). Recent grants of equity awards under the Employee Equity Plan have generally been limited to RSUs and PSUs. In addition, employees may purchase stock under the Corporation’s Employee Stock Purchase Plan. The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for
such awards. Compensation expense for PSUs is also recognized over the period during which employees are required to provide service in exchange for such awards, however, compensation expense may vary based on the expectations for actual performance relative to defined performance measures.
The Corporation also grants equity awards to non-employee members of its board of directors and subsidiary bank boards 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.
Equity awards 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 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.
Fair values for RSUs and a majority of PSUs are based on the trading price of the Corporation’s stock on the date of grant and earn dividend equivalents during the vesting period, which are forfeitable if the awards do not vest. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant.
As of SeptemberJune 30, 2020,2021, the Employee Equity Plan had 9.38.8 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 180,000126,000 shares reserved for future grants through 2029.
The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
| | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) | | (in thousands) |
Compensation expense | Compensation expense | $ | 1,875 | | | $ | 2,110 | | | $ | 5,403 | | | $ | 5,458 | | Compensation expense | $ | 2,098 | | | $ | 1,911 | | | $ | 4,000 | | | $ | 3,530 | |
Tax benefit | Tax benefit | (397) | | | (451) | | | (1,144) | | | (1,194) | | Tax benefit | (457) | | | (403) | | | (870) | | | (747) | |
Stock-based compensation expense, net of tax benefit | Stock-based compensation expense, net of tax benefit | $ | 1,478 | | | $ | 1,659 | | | $ | 4,259 | | | $ | 4,264 | | Stock-based compensation expense, net of tax benefit | $ | 1,641 | | | $ | 1,508 | | | $ | 3,130 | | | $ | 2,783 | |
NOTE 12 – Employee Benefit Plans
The net periodic pension cost for the Corporation’s Defined Benefit Pension Plan ("Pension Plan") consisted of the following components:
| | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) | | (in thousands) |
| Interest cost | Interest cost | $ | 681 | | | $ | 813 | | | $ | 2,043 | | | $ | 2,443 | | Interest cost | $ | 561 | | | $ | 681 | | | $ | 1,122 | | | $ | 1,362 | |
Expected return on plan assets | Expected return on plan assets | (982) | | | (688) | | | (2,946) | | | (2,066) | | Expected return on plan assets | (1,011) | | | (982) | | | (2,022) | | | (1,964) | |
Net amortization and deferral | Net amortization and deferral | 465 | | | 496 | | | 1,395 | | | 1,486 | | Net amortization and deferral | 504 | | | 465 | | | 1,008 | | | 930 | |
Net periodic pension cost | Net periodic pension cost | $ | 164 | | | $ | 621 | | | $ | 492 | | | $ | 1,863 | | Net periodic pension cost | $ | 54 | | | $ | 164 | | | $ | 108 | | | $ | 328 | |
|
The components of the net benefit for the Corporation’s Postretirement Benefits Plan ("Postretirement Plan") consisted of the following components:
| | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) | | (in thousands) |
Interest cost | Interest cost | $ | 11 | | | $ | 15 | | | $ | 33 | | | $ | 45 | | Interest cost | $ | 8 | | | $ | 11 | | | $ | 16 | | | $ | 22 | |
| Net accretion and deferral | Net accretion and deferral | (137) | | | (139) | | | (411) | | | (417) | | Net accretion and deferral | (134) | | | (137) | | | (268) | | | (274) | |
Net periodic benefit | Net periodic benefit | $ | (126) | | | $ | (124) | | | $ | (378) | | | $ | (372) | | Net periodic benefit | $ | (126) | | | $ | (126) | | | $ | (252) | | | $ | (252) | |
The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the change in that funded status through other comprehensive income.
NOTE 13 – 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.
Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on the Corporation’s consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments.
The outstanding amounts of commitments to extend credit and letters of credit were as follows:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (in thousands) |
Commitments to extend credit | $ | 8,325,169 | | | $ | 6,689,519 | |
Standby letters of credit | 294,429 | | | 303,020 | |
Commercial letters of credit | 54,112 | | | 50,432 | |
The Corporation records a reserve for unfunded lending commitments, included in ACL - OBS credit exposures, which represents management’s estimate of credit losses associated with unused commitments to extend credit and letters of credit. As of June 30, 2021 and December 31, 2020, the ACL - OBS credit exposures for unfunded lending commitments was $10.1 million and $9.1 million, respectively. See "Note 4 - Loans and Allowance for Credit Losses, and Asset Quality," for additional details.
The following table presents the Corporation's commitments to extend credit and letters of credit:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| (in thousands) |
Commitments to extend credit | $ | 9,003,425 | | | $ | 8,651,055 | |
Standby letters of credit | 314,921 | | | 298,750 | |
Commercial letters of credit | 56,862 | | | 56,229 | |
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 losses related to loans sold to investors.investors in other liabilities. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the total reserve for losses on residential mortgage loans sold was $1.1$1.3 million and $3.2$1.1 million, respectively, including reserves for both representation and warranty and credit loss exposures. With the adoptionIn addition, a component of CECL on January 1, 2020 the reserve for estimated losses on certain residential mortgage loans sold to investors was reclassified to ACL - OBS credit exposures. This reclassification resulted in a $2.1 million increase to ACL - OBS credit exposures of $4.7 million and a corresponding decrease to the reserve for estimated losses$5.3 million, as of June 30, 2021 and December 31, 2020, respectively, related to loans sold to investors in the first quarter of 2020.additional credit exposures for potential loan repurchases.
Legal Proceedings
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. Actuallosses 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 restrictions, 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
As disclosed in the Corporation’s Current Report on Form 8-K filed with the SEC on September 28, 2020, on September 28, 2020, the SEC announced that it has accepted an Offer of Settlement submitted by the Corporation to resolve the previously disclosed 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. Under the settlement, without admitting or denying the SEC’s findings in this matter, the Corporation consented to the entry of an administrative civil cease-and-desist order by the SEC with respect to certain violations of the federal securities laws in the fourth quarter of 2016 through the second quarter of 2017, and the payment of a civil monetary penalty of $1.5 million.
Kress v. Fulton Bank, N.A.
On October 15, 2019, a former Fulton Bank teller supervisor, D. Kress filed a putative collective and class action lawsuit on behalf of herself and other teller supervisors, tellers, and other similar non-exempt 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 summons without a formal service of process on January 20, 2020. The lawsuit alleges that Fulton Bank did not record or otherwise account for the amount of time D. Kress and putative collective and class members 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. Following the submission of a formal demand for damages by CounselThe Corporation and counsel representing plaintiffs ("Plaintiffs’ Counsel"), the Corporation and Plaintiffs’ Counsel engaged in negotiations regarding the potential settlement of this lawsuit on a collective and class basis. While the negotiations are ongoing, the Corporation and Plaintiffs’ Counsel have reached and executed a tentative agreement with respect to the financial terms of a potential settlementformal Settlement Agreement to resolve this lawsuit. If Plaintiffs’ Counsel has filed a Motion for Preliminary Approval of Class and Collective Settlement and Provisional Certification of Settlement Class and Collective ("the parties are able to reach a formal settlement agreement, that settlement agreement would be subject to approval byMotion") with the U.S. District Court for the District of New Jersey.Jersey ("the Court"). The Corporation is not able to provide any assurance that a formal settlement agreementthe Court will grant the Motion. If the Court does grant the Motion, the Settlement Agreement will be reached, or thatadministered according to its terms and thereafter subject to final approval by the District Court will approve the settlement agreement.Court. The financial terms of the potential settlement involve an amount that isSettlement Agreement are not expected to be material to the Corporation. The Corporation established an accrued liability during the third quarter of 2020 for the amount ofcosts expected to be incurred in connection with the potential settlement.Settlement Agreement.
NOTE 14 – Long-Term Borrowings
On March 30, 2021, pursuant to a cash tender offer, the Corporation purchased $75.0 million and $60.0 million of its subordinated notes which mature on November 15, 2024 and its senior notes which mature on March 16, 2022, respectively. The subordinated notes carry a fixed rate of 4.50% and an effective rate of 4.87% and the senior notes carry a fixed rate of 3.60% and an effective rate of 3.95%. The Corporation incurred $11.3 million in debt extinguishment costs and expensed $841,000 of unamortized discount costs. In addition, during the first quarter of 2021, the Corporation prepaid $536.0 million of long-term FHLB advances and incurred $20.9 million in prepayment penalties.
NOTE 14 – Long-Term Debt
In March 2020, the Corporation issued $200.0 million and $175.0 million of subordinated notes due in 2030 and 2035, respectively. The subordinated notes maturing in 2030 were issued with a fixed-to-floating rate of 3.25% and an effective rate of 3.35%, due to issuance costs, and the subordinated notes maturing in 2035 were issued with a fixed-to-floating rate of 3.75% and an effective rate of 3.85%, due to issuance costs.
NOTE 15 – Subsequent Event
On October 29, 2020 the Corporation issued 8,000,000 depositary shares ("Depositary Shares"), each representing a 1/40th interest in a share of Fulton’s 5.125% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, with a liquidation preference of $1,000 per share (equivalent to $25.00 per Depositary Share), for an aggregate offering amount of $200 million. The Corporation received net proceeds from the offering of $193.7 million, after deducting underwriting discounts and commissions and before deducting transaction expenses payable by the Corporation.
Item 2. 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, 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, results of 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," "projects," the negative of these terms and other comparable terminology. These forward-looking statements may include projections of, or guidance on, the Corporation's future financial performance, expected levels of future expenses, including future credit losses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation's business or financial results.
Forward-looking statements are neither 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 relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Corporation's control, and actual results and financial condition may differ materially from those indicated 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 financial markets on the performance of the Corporation’s loan and lease portfolio and demand for the Corporation’s products and services;
•the scope and duration of the COVID-19 pandemic, actions taken by governmental authorities in response to the pandemic, the Corporation’s participation in the PPP and other COVID-19 relief programs, and the direct and indirect impacts of the pandemic on the Corporation, its customers and third parties;
•the determination of the ACL, which depends significantly upon assumptions and judgments with respect to a variety of factors, including the performance of the loan portfolio, the weighted-average remaining lives of different classifications of loans within the loan portfolio and current and forecasted economic conditions, among other factors;
•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 Fulton Bank N.A. are subject;
•the effects of the significant amounts of time and expense associated with regulatory compliance and risk management;
•the potential for negative consequences resulting from regulatory violations, investigations and examinations, or failure to comply with theBSA, the Patriot Act and related AML requirements, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions or restrictions, the need to undertake remedial actions and possible damage to the Corporation’s reputation;
•the continuing impact of the Dodd-Frank Act on the Corporation’s business and results of operations;
•the effects of, and uncertainty surrounding, new legislation, changes in regulation and government policy, 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 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 potential effects of climate change and related government policies on the Corporation’s business and results of operations;•the Corporation’s ability to achieveimplement, from time to time, measures intended to manage growth in non-interest expenses and improve the expected cost savings, and the timing of such savings, associated with the Corporation’s recently announced plans to consolidate certainefficiency of its financial service officesoperations and implement other cost-saving measures;realize the intended effects of those initiatives;
•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’s reporting of its financial condition and results of operations, including the Corporation’s adoption of ASU 2016-13, Financial Instruments – Credit Losses (CECL);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;
•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 their borrowing costs or access to capital markets.
Additional information regarding these as well as other factors that could affect future financial results can be found in the sections entitled "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, Quarterly Report on Form 10-Q for the quarter ended March 31, 20202021 and elsewhere in this Report, including in Note 13 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements and in Item 1A. "Risk Factors".
RESULTS OF OPERATIONS
Overview
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans, investments and other interest-earning assets, and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the net interest margin, which is FTE net interest income 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, or properties. Offsetting these revenue sources are provisions for credit losses on loans and OBS credit risks, non-interest expenses and income taxes.
The following table presents a summary of the Corporation’s earnings and selected performance ratios:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Net income (in thousands) | $61,607 | | $62,108 | | $127,213 | | $178,550 |
Diluted net income per share | $0.38 | | $0.37 | | $0.78 | | $1.06 |
Return on average assets | 0.97% | | 1.15% | | 0.71% | | 1.13% |
Return on average shareholders' equity | 10.32% | | 10.64% | | 7.26% | | 10.41% |
Return on average tangible shareholders' equity (1) | 13.50% | | 14.03% | | 9.44% | | 13.64% |
Net interest margin (2) | 2.70% | | 3.31% | | 2.90% | | 3.41% |
Efficiency ratio (1) | 62.3% | | 63.6% | | 64.4% | | 63.9% |
Non-performing assets to total assets | 0.57% | | 0.66% | | 0.57% | | 0.66% |
Annualized net (recoveries) charge-offs to average loans | (0.05)% | | 0.15% | | 0.10% | | 0.07% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Six months ended June 30 |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| | | | | | | |
Net income available to common shareholders (in thousands) | $62,402 | | $39,559 | | $132,874 | | $65,606 |
Diluted net income available to common shareholders per share | $0.38 | | $0.24 | | $0.81 | | $0.40 |
Return on average assets, annualized | 1.00% | | 0.66% | | 1.07% | | 0.57% |
Return on average common shareholders' equity, annualized | 9.38% | | 6.89% | | 10.10% | | 5.68% |
Return on average common shareholders' equity (tangible), annualized (1) | 12.93% | | 8.99% | | 13.95% | | 7.40% |
Net interest margin (2) | 2.73% | | 2.81% | | 2.76% | | 3.01% |
Efficiency ratio (1) | 63.8% | | 66.4% | | 63.4% | | 65.4% |
Non-performing assets to total assets | 0.60% | | 0.59% | | 0.60% | | 0.60% |
Annualized net charge-offs to average loans | 0.15% | | 0.09% | | 0.14% | | 0.17% |
(1)Ratio represents a financial measure derived by methods other than 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" at the end of this "Overview" section of Management’s Discussion.
(2)Presented on an FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.
COVID-19 Pandemic
Beginning in the first quarter of 2020, the COVID-19 pandemic has caused substantial disruptiondisruptions in economic and social activity, both globally and in the United States. The spread of COVID-19, and the related governmentgovernmental actions to mandate or encourage temporary closures of businesses, quarantines, social distancing, "stay at home" orders and other restrictions on in-person operations activities, and operations,activities, have caused severe disruptions in the U.S. economy, which, has, in turn, disrupted and will likely continue to disrupt the business, activities, and operations of the Company'sCorporation’s customers, as well as the Company'sCorporation’s own business and operations. The resulting impacts of COVID-19the pandemic on consumers, including the sudden, significant increaseelevated levels of unemployment and changes in the unemployment rate, has causedconsumer behavior, as well as disruptions in national and global supply chains, have continued to cause changes in consumer and business spending, borrowing needs and saving habits, which have and will likely continue to affect the demand for loans and other products and services the CompanyCorporation offers, as well as the creditworthiness of currentits borrowers.
While economic activity has rebounded as much of the national economy has “reopened,” there is still significant uncertainty concerning the breadth and prospective borrowers. The significant decrease in commercial activityduration of business disruptions related to the COVID-19 pandemic, as well as their impact on the U.S. economy and disruptions in supply chains associated with the pandemic, both nationally and in the Company’s markets, may causeCorporation’s customers, vendors and counterpartiescounterparties. The extent to which the pandemic impacts the Corporation’s results will depend on future developments, which are highly uncertain and cannot be unablepredicted, including new information which may emerge concerning the continuing severity of the COVID-19 pandemic, whether there are additional outbreaks of COVID-19 or the emergence of more virulent COVID-19 variants, and the actions taken to meet existing payment or other obligationsrespond to any such future developments. Moreover, although multiple COVID-19 vaccines have received regulatory approval and are currently being distributed, it is too early to know how quickly and broadly these vaccines can be distributed and will be accepted and how effective they will be in mitigating the Company.adverse social and economic effects of the COVID-19 pandemic.
The Company expectsCorporation’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. In an effort to mitigate the spread of COVID-19, to limit,the Corporation adjusted service models at least for a periodcertain of time, customer demand for many banking products and services. Many companies and residents in the Company's market areas were subject to mandatory "non-essential business" shut-downs and stay at home orders, which reduced banking activity across its market areas. In response to these mandates, the Company temporarily limited mostfinancial center locations, including limiting some locations to drive-up and ATM services withonly, offering lobby access available by
appointment only, reduced hours of operation at some locations, temporarily closed some locations and encouragedencouraging the Company’sCorporation’s customers to use electronic banking platforms. In addition, a significant portion of the Company’s employees have transitioned to working remotely as a result of COVID-19.
As the COVID-19 pandemic began to subside within the Company’s markets and governmental restrictions began to be lifted or eased, the Company adopted a phased approach to restoring regular lobby access at most of its locations and returning employees currently working remotely to the Company’s offices. The timing and scope of these processes are adaptable to respond to changes in the evolution of COVID-19 and governmental restrictions and recommendations, and include the addition of new physical and procedural safeguards designed to protect the health and safety of the Company’s employees and
customers and comply with governmental requirements and recommendations. Approximately 25% of the Company’sCorporation’s locations are expected to provide lobby access by appointment only on a long-term basis.
As the COVID-19 pandemic unfolded in the first quarter of 2020, a significant portion of the Corporation’s employees transitioned to working remotely as a result of the COVID-19 pandemic, which, in addition to requiring added support from the Corporation’s information technology infrastructure, increases cybersecurity risks. The Corporation has announced plans for the majority of its employees currently working remotely to return to onsite or hybrid onsite-remote working arrangements late in the third quarter of 2021.
COVID-19 has significantly affected the financial markets and has resulted in a number of responses by the U.S. government, including reductions in interest rates by the FOMC. These reductions in interest rates, especially if prolonged, could continue to adversely affect the Company'sCorporation’s net interest income and margins and the Corporation’s profitability.
The CARES Act was enacted in March 2020 and, among other provisions, authorized the SBA to guarantee loans under the PPP for small businesses whothat meet the necessary eligibility requirements in order to keep their workers on the payroll. Aspayroll and fund specified operating expenses. Subsequent legislation extended the authority of September 30,the SBA to guaranty loans under the PPP through August 8, 2020. In December 2020, the Company funded approximately 10,000Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act reauthorized the SBA to guarantee loans totaling $2.0 billion under the PPP through March 31, 2021, and the PPP Extension Act of 2021 extended that authorization through June 30, 2021 for applications received by the SBA prior to June 1, 2021. From the inception of the PPP through June 30, 2021, the Corporation funded a total of approximately $2.7 billion of loans under the PPP. Through June 30, 2021, a total of $1.6 billion of those PPP loans have qualified for loan forgiveness and have been repaid by the SBA.
StimulusA series of stimulus payments to eligible consumers, enhanced unemployment benefits provided by the federal government and traditional, state-provided unemployment compensation, as well as other forms of relief provided to consumers and businesses, have helped to limit some of the adverse impacts of COVID-19.COVID-19 and, together with other factors, have contributed to significant growth in the Corporation’s customer deposit balances since the pandemic began. The reduction, expiration or discontinuation of these measures may adversely impact the recovery of economic activity and the ability of borrowers to meet their payment and other obligations to the Company,Corporation, either of which could require the CompanyCorporation to increase the ACL through provisions for credit losses. Further, if economic activity continues to recover, and consumer spending and business investment increase, customers may be less likely to maintain deposit balances with the Corporation at recent levels, which might require the Corporation to increase its reliance on alternative or higher-cost sources of funding.
The impact of COVID-19 on the Company’sCorporation’s financial results is evolving and uncertain. The CompanyCorporation has limited exposure to some of the industries that were initially most significantly impacted by COVID-19, such as hospitality and food services, energy and entertainment, and most of these loans are secured by real estate and other forms of collateral. While many areas of the economy begancontinue to exhibit signs of recovery, during the third quarter of 2020, the lingering effects of the pandemic, particularly in certain sectors of the economy, or a resurgence in COVID-19 infections that prompts the continuation or imposition of governmental restrictions on activities, may result in decreased demand for the Company’sCorporation’s loan products. In addition, the decline in economic activity occurring due to COVID-19 and the actions by the FOMC with respect to interest rates are likely to affect the Company’sCorporation’s net interest income, non-interest income and credit-related losses for an uncertain period of time. As a result, the Company has taken steps to maintain liquidity and conserve capital during this period of uncertainty. The Company has been holding excess cash reserves since the middle of March, has additional liquidity available through borrowing arrangements and other sources and has suspended its share repurchase program until there is more clarity surrounding the economic conditions. See additional discussion in "Results of Operations" and "Financial Condition" of Management's Discussion.
Adoption of CECL
The Corporation adopted CECL effective January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost, and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under CECL, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Corporation recorded an increase of $58.3 million to the ACL on January 1, 2020 primarily as a result of the adoption of CECL. Retained earnings decreased $43.8 million and deferred tax assets increased by $12.4 million on January 1, 2020, representing the cumulative effect of adoption.Financial Highlights
SummaryFollowing is a summary of Financial Resultsthe financial highlights for the three and ninesix months ended SeptemberJune 30, 20202021:
•Net Income Available to Common Shareholders and Net Income Per Share - Net income available to common shareholders was $61.6 million and $127.2$62.4 million for the three and nine months ended SeptemberJune 30, 2020, respectively. For the three months ended September 30, 2020, net income decreased $500,0002021, a $22.8 million increase compared to $39.6 million for the same period in 2019.of 2020. Diluted net income per share was $0.38, a $0.01, or 2.7%,$0.14 increase compared to the same period in 2019.2020. The increase in dilutednet income during the second quarter of 2021 was primarily a result of a negative provision for credit losses, an increase in net interest income and lower non-interest expenses, partially offset by lower non-interest income, net investment securities gains, higher income taxes and the preferred stock dividend as discussed below.
Net income available to common shareholders was $132.9 million for the six months ended June 30, 2021, a $67.3 million increase compared to $65.6 million for the same period of 2020. Diluted net income per share was the result of lower weighted average diluted shares outstanding for the three months ended September 30, 2020$0.81, a $0.41 increase compared to the same period in 2019. Net income for the nine months ended September 30, 2020 decreased $51.3 million, or 28.8%, compared to the same period in 2019, and diluted net income per share was $0.78, a $0.28, or 26.4%, decrease compared to the same period in 2019.2020. The decreasesincrease in net income for both periods wereduring thesix months ended June 30, 2021was primarily a result of lower net interest income, and a highernegative provision for credit losses, as a result of the adoption of CECLan increase in net interest income, non-
interest income, and deteriorating economic assumptions resulting from COVID-19,net investment securities gains, partially offset by higher non-interest expenses, higher income taxes and lower non-interest expense.the preferred stock dividend as discussed below.
•Net Interest Income- Net interest income decreased $7.1increased $9.6 million, or 4.4%, and $21.5 million, or 4.4%6.3%, for the three and nine months ended SeptemberJune 30, 2020,2021 and increased $13.0 million, or 4.3% for the six months ended June 30, 2021 compared to the same periods in 2020. The increases resulted from reduced long-term borrowings, lower rates on interest-bearing liabilities and higher volumes of interest-earning assets, primarily loans, partially offset by lower yields on interest-earning assets. Overall, the net interest margin decreased 8 bp and 25 bp for the three and six months ended June 30, 2021, respectively compared to the same periods in 2019. The decreases resulted from lower yields on interest-earning assets, partially offset by balance sheet growth and the impact of lower funding costs. Overall, the net interest margin decreased 61 bp and 51 bp for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.2020.
◦Net Interest Margin - For the three and ninesix months ended SeptemberJune 30, 2020,2021, the decreases in the net interest margin reflectreflected the net impact of a 11235 bp and a 8858 bp, decreaserespectively, decreases in yields on interest-earning assets, respectively, partially offset by a 5528 bp and 3935 bp, decreaserespectively, decreases in the cost of funds, respectively.funds.
◦Loan Growth - Average Net Loans grew by $2.4$574.8 million, or 3.1%, and $1.3 billion, or 14.9%, and $1.7 billion, or 10.5%7.7%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, compared to the same periods in 2019.2020. The increases were driven largely by the issuance of PPP loans and growth in the real estate commercial and residential mortgage portfolios.
◦Deposit Growth - Average deposits grew $3.4$2.5 billion, or 20.3%12.9%, and $2.4$3.2 billion, or 14.5%17.8%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively compared to the same periods in 2019.2020. The increases were driven by growth in all deposit categories except time deposits. The increases in average total demand and savings accounts were driven by the funding of various government stimulus programs, which largely remained instrong customer deposit accounts during the second and third quarters as well as seasonal increases in municipal accounts.liquidity.
•Long-term DebtProvision for Credit Losses - - InThe provision for credit losses was a negative $3.5 million and a negative $9.0 million for the three and six months ended June 30, 2021, respectively, decreases of $23.1 million and $72.6 million, respectively, from the same periods of 2020. As of June 30, 2021, improved economic forecasts and other factors compared to those as of both March 31, 2021, for the three months ended June 30, 2021, and December 31, 2020, for the Corporation issued a totalsix months ended June 30, 2021, reduced the level of $375.0 millionthe ACL determined to be necessary at the end of subordinated notes, with $200.0 millionthe second quarter of subordinated notes due2021. The higher provision for credit losses in 2030 having a fixed-to-floating ratethe first half of 3.25% and an effective rate2020 was primarily driven by the assessment of 3.35% and $175.0 millionthe initial estimated impacts of subordinated notes dueCOVID-19, as reflected in 2035 having a fixed-to-floating rateeconomic forecasts, on the level of 3.75% and an effective rate of 3.85%.expected credit losses.
•Asset Quality - Non-performing assets decreased $1.3increased $5.2 million, or 3.4%, as of SeptemberJune 30, 20202021 compared to December 31, 2019.2020, and were 0.60% and 0.58% of total assets, respectively, as of those dates. Annualized net recoveriescharge-offs to average loans outstanding were 0.05%0.15% for the three months ended SeptemberJune 30, 2021 compared to 0.09% for the same period in 2020. For the six months ended June 30, 2021 and 2020, and annualized net charge-offs to average loans outstanding were 0.10% for0.14% and 0.17%, respectively.
•Balance Sheet Restructuring - During the nine months ended September 30, 2020, compared to net charge-offsfirst quarter of 0.15% and 0.07% for2021, the same periods in 2019, respectively. The provisions for creditCorporation completed a balance sheet restructuring that included a $34.0 million gain on sale of Visa Shares, offset by other securities losses for the three and nine months ended September 30, 2020 were $7.1of $400,000, debt extinguishment costs of $32.6 million and $70.7 million, respectively, compared to $2.2 milliona write-off of $841,000 recognized in net interest income in connection with the cash tender offer for certain of its outstanding senior and $12.3 million, respectively, for the same periods in 2019. The higher provision during the first nine months of 2020 was largely driven by the overall downturn in economic forecasts due to COVID-19, resulting in higher expected future credit losses under CECL. Qualitative adjustments used in determining the ACL increased compared to those at the time of adoption of CECL on January 1, 2020 primarily as a result of uncertainties related to forecasted economic variables due to the economic impact of COVID-19subordinated notes and the future performanceprepayment of loans that received deferrals or forbearances duecertain term FHLB advances. See Note 14, "Long-Term Debt," in the Notes to COVID-19.Consolidated Financial Statements for further details on the tender of certain outstanding senior and subordinated notes.
•Non-interest Income - For the three and nine months ended SeptemberJune 30, 2020,2021, non-interest income, excluding net investment securities gains, increased $7.9decreased $1.1 million, or 14.3%2.0%, and $14.6 million, or 9.4%, respectively, as compared to the same periodsperiod in 2019.2020. The increase duringdecrease in the three months ended September 30, 2020,2021 period was primarily the result of mortgage banking income, which increased $10.1decreased $7.1 million, driven by an increasea reduction in gains on salesgain-on-sale spreads of mortgage loans, partially offset bymortgages sold as well as a $1.5$2.2 million increaseaddition to the valuation allowance for MSRs. In additionPartially offsetting this decrease were wealth management fees, which increased $1.0$4.2 million, or 31.5%, resulting from an increase in client asset levels and overall market performance. performance, and higher. commercial and consumer banking revenues.
For the ninesix months ended SeptemberJune 30, 2020, mortgage banking2021, non-interest income, excluding net investment securities gains, increased $15.0$6.3 million, net of a $9.2 million increaseor 5.8%, as compared to the valuation allowance for MSRs. Increases were also experiencedsame period in 2020. The increase in the 2021 period was primarily the result of wealth management fees, which increased $6.5 million, or 22.9%, resulting from an increase in client asset levels and overall market performance, consumer banking revenues and mortgage banking income, partially offset by lower commercial banking.banking income, driven primarily by a decrease in capital markets income, consisting primarily of fees earned on commercial loan interest rate swaps.
•Non-interest Expense - Non-interest expense decreased $7.6$2.2 million, or 5.2%, and $4.1 million, or 0.9%1.5%, for the three and nine months ended SeptemberJune 30, 2020, respectively, in comparison2021 compared to the same periodsperiod in 2019.2020. The decrease during the three months ended September 30, 2020quarter was primarily the result oflargely driven by lower outside services, marketing and professional fees, partially offset by higher FDIC insurance and salaries and employee benefits. During 2019 in connection with the consolidation of the Corporation's subsidiary banks into Fulton Bank ("Charter Consolidation"), expenses, primarily outside services, totaling $5.2 million and $11.7 million were incurred for the three and nine months ended September 30, 2019, respectively. In addition during the third quarter of 2019, the Corporation recorded $4.3 million of prepayment penalties on certain FHLB advances in conjunction with a balance sheet restructuring. The decrease during the nine months ended September 30, 2020 was primarily the result of decreases in outside services and marketing, and lower prepayment penalties on FHLB advances, partially offset by higher salaries and employee benefits increasesand lower debt extinguishment costs. In the second quarter of 2020, the Corporation redeemed long-term FHLB advances, which resulted in prepayment penalties of $2.9 million. Increases were recognized in data processing and software expenses and state taxes.
AsNon-interest expense increased $33.7 million, or 11.8%, for the six months ended June 30, 2021 compared to the same period in 2020. The increase was largely driven by debt extinguishment costs recorded in the first quarter of 2021, in connection with the balance sheet restructuring discussed above, compared to $2.9 million of debt extinguishment costs recognized in the second quarter of 2020. Higher data processing and software, state taxes and other outside services also contributed to the increase, partially offset by lower professional fees.
In 2020, the Corporation completed a result of a recent strategic operating expense review, announcedwhich resulted in October of 2020, the Corporation is undertaking a number of cost-saving initiatives that arewere expected to result in annual expense savings of $25 million.million, these expense reductions were fully realized by the end of the second quarter of 2021. The expense reductions occurred primarily within salaries and employee benefits and net occupancy expense categories. The Corporation expects to reinvesthas been reinvesting a portion of the cost savings to accelerate digital transformation initiatives. It is expected that the cost savings will not be fully realized until mid-2021. In addition, it is expected that a pre-tax charge within the range of $17 to $19 million will be realized for this initiative for employee severance, fixed asset write-offs
and lease termination charges, among others. Of this charge, $800,000 for severance expense in connection with the closure and consolidation of 21 financial centers expected to be completed in early 2021 was incurred in the third quarter of 2020, $16 to $17 million is expected to be incurred in the fourth quarter of 2020, with the remaining charges of up to approximately $1 million being recognized in the first quarter of 2021.
•Income Taxes - Income taxes were $9.5tax expense for the three months ended June 30, 2021 was $12.0 million, and $18.8a $5.5 million increase from $6.5 million for the same period in 2020. The Corporation’s ETR was 15.6% for the three and nine months ended SeptemberJune 30, 2020, respectively, resulting in ETRs of 13.4% and 12.9%, respectively, as2021, compared to 13.9% and 14.5%14.2% in the same period of 2020. Income tax expense for the six months ended June 30, 2021 was $25.9 million, a $16.6 million increase from $9.3 million for the same periodsperiod in 2019, respectively.2020. The Corporation’s ETR was lower mainly due15.8% for the six months ended June 30, 2021, compared to lower12.4% in the same period of 2020. The increase in income tax expense primarily resulted from an increase in income before income taxes.taxes, while net favorable permanent differences were relatively the same compared to the same periods of 2020. 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.
Supplemental Reporting of Non-GAAP Based Financial Measures
This Quarterly Report on Form 10-Q contains supplemental financial information, as detailed below, which has been derived by methods other than 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.operations and financial condition. 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 the Corporation and 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 at 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:
| | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (dollars in thousands) | | (dollars in thousands) |
Return on average tangible shareholders' equity | |
Net income | $ | 61,607 | | | $ | 62,108 | | | $ | 127,213 | | | $ | 178,550 | | |
Return on average common shareholders' equity (tangible) | | Return on average common shareholders' equity (tangible) |
Net income available to common shareholders | | Net income available to common shareholders | $ | 62,402 | | | $ | 39,558 | | | $ | 132,874 | | | $ | 65,606 | |
Plus: Intangible amortization, net of tax | Plus: Intangible amortization, net of tax | 103 | | | 846 | | | 312 | | | 1,016 | | Plus: Intangible amortization, net of tax | 140 | | | 104 | | | 230 | | | 208 | |
Numerator | Numerator | $ | 61,711 | | | $ | 62,954 | | | $ | 127,525 | | | $ | 179,566 | | Numerator | $ | 62,542 | | | $ | 39,662 | | | $ | 133,104 | | | $ | 65,814 | |
| Average common shareholders' equity | Average common shareholders' equity | $ | 2,374,091 | | | $ | 2,315,585 | | | $ | 2,340,204 | | | $ | 2,294,165 | | Average common shareholders' equity | $ | 2,669,413 | | | $ | 2,309,133 | | | $ | 2,653,345 | | | $ | 2,323,074 | |
Less: Average goodwill and intangible assets | Less: Average goodwill and intangible assets | (534,971) | | | (535,184) | | | (535,103) | | | (534,097) | | Less: Average goodwill and intangible assets | (536,470) | | | (535,103) | | | (536,536) | | | (535,169) | |
Less: Average preferred stock | | Less: Average preferred stock | (192,878) | | | — | | | (192,878) | | | — | |
Denominator | Denominator | $ | 1,839,120 | | | $ | 1,780,401 | | | $ | 1,805,101 | | | $ | 1,760,068 | | Denominator | $ | 1,940,065 | | | $ | 1,774,030 | | | $ | 1,923,931 | | | $ | 1,787,905 | |
| Return on average tangible shareholders' equity, annualized | 13.50 | % | | 14.03 | % | | 9.44 | % | | 13.64 | % | |
Return on average common shareholders' equity (tangible), annualized | | Return on average common shareholders' equity (tangible), annualized | 12.93 | % | | 8.99 | % | | 13.95 | % | | 7.40 | % |
| Efficiency ratio | Efficiency ratio | | Efficiency ratio | |
Non-interest expense | Non-interest expense | $ | 139,147 | | | $ | 146,770 | | | $ | 424,705 | | | $ | 428,762 | | Non-interest expense | $ | 140,831 | | | $ | 143,006 | | | $ | 319,215 | | | $ | 285,558 | |
Less: Prepayment penalty on FHLB advances | — | | | (4,326) | | | (2,878) | | | (4,326) | | |
Less: Debt extinguishment cost | | Less: Debt extinguishment cost | (412) | | | (2,878) | | | (32,575) | | | (2,878) | |
Less: Amortization of tax credit investments | Less: Amortization of tax credit investments | (1,694) | | | (1,533) | | | (4,594) | | | (4,516) | | Less: Amortization of tax credit investments | (1,563) | | | (1,450) | | | (3,094) | | | (2,900) | |
Less: Intangible amortization | Less: Intangible amortization | (132) | | | (1,071) | | | (397) | | | (1,285) | | Less: Intangible amortization | (178) | | | (132) | | | (293) | | | (264) | |
Numerator | Numerator | $ | 137,321 | | | $ | 139,840 | | | $ | 416,836 | | | $ | 418,635 | | Numerator | $ | 138,678 | | | $ | 138,546 | | | $ | 283,253 | | | $ | 279,516 | |
| Net interest income (FTE) (1) | $ | 157,106 | | | $ | 164,517 | | | $ | 476,931 | | | $ | 498,877 | | |
Net interest income | | Net interest income | $ | 162,399 | | | $ | 152,754 | | | $ | 326,847 | | | $ | 313,500 | |
Tax equivalent adjustment (1) | | Tax equivalent adjustment (1) | 3,018 | | | 3,100 | | | 5,998 | | | 6,325 | |
Plus: Total non-interest income | Plus: Total non-interest income | 63,248 | | | 59,813 | | | 173,814 | | | 160,879 | | Plus: Total non-interest income | 51,890 | | | 55,922 | | | 147,287 | | | 110,565 | |
Less: Investment securities gains, net | Less: Investment securities gains, net | (2) | | | (4,492) | | | (3,053) | | | (4,733) | | Less: Investment securities gains, net | (36) | | | (3,005) | | | (33,511) | | | (3,051) | |
Denominator | Denominator | $ | 220,353 | | | $ | 219,838 | | | $ | 647,692 | | | $ | 655,023 | | Denominator | $ | 217,271 | | | $ | 208,771 | | | $ | 446,621 | | | $ | 427,339 | |
| Efficiency ratio | Efficiency ratio | 62.3 | % | | 63.6 | % | | 64.4 | % | | 63.9 | % | Efficiency ratio | 63.8 | % | | 66.4 | % | | 63.4 | % | | 65.4 | % |
(1) Presented on a FTE basis,Calculated using a 21% federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion and Analysis.
CRITICAL ACCOUNTING POLICIES
The Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 includes a summary of critical 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.
The following discussion addresses the critical accounting policies related to the application of CECL, which was adopted on January 1, 2020.
ALLOWANCE FOR CREDIT LOSSES
The Corporation adopted new accounting guidance for estimating credit losses, known as CECL, in the first quarter of 2020. In accordance with CECL, the ACL, which includes both the ACL - loans and the ACL - OBS credit exposures, is calculated with the objective of maintaining a reserve for CECL over the remaining expected life of the portfolio. Management's determination of the appropriateness of the reserve is based on periodic evaluations of the loan portfolio, lending-related commitments, current as well as forecasted economic factors and other relevant factors.
In determining the ACL, the Corporation uses three independent components. These components are PD, which measures the likelihood that a borrower will be unable to meet its debt obligations, LGD, which measures the share of an asset that is lost if a borrower defaults, and EAD which measures the gross exposure under a facility upon default. The PD models were developed based on historical default data. Both internal variables and external variables are evaluated in the process. The main internal variables are risk rating (commercial loans) or delinquency history (consumer loans) and the external variables are economic variables obtained from external forecasts. Management applies risk rating transition matrices to pools of loans and lending-related commitments with similar risk characteristics to determine default probabilities, calibrates using economic forecasts, applies modeled LGD results to associated EAD and incorporates modeled overlays and qualitative adjustments to estimate ACL. As such, the calculation of ACL is inherently subjective and requires management to exercise significant judgment.
The ACL is estimated over a reasonable and supportable forecast period based on the projected performance of specific economic variables that statistically correlate with PD rates. As economic variables revert to long-term averages through the forecast process, externally developed long-term economic forecasts are used to establish the impacts of the economic scenario, reversion, and long-term averages in the development of losses over the expected life of the assets being modeled. The CECL estimate is highly sensitive to the economic forecasts used to develop the estimate. Due to the high level of uncertainty regarding significant assumptions, such as the ultimate impact of COVID-19 and effectiveness of the related government response, since the beginning of 2020 the Corporation has evaluated a range of economic scenarios, including more and less severe economic deteriorations, with varying speeds of recovery.
The ACL includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative models. Qualitative adjustments include and consider changes in international, national, regional and local economic and business conditions, an assessment of the lending environment, including underwriting standards and other factors affecting credit quality. Qualitative adjustments have increased compared to those at the time of adoption of CECL on January 1, 2020 primarily as a result of uncertainties related to forecasted economic variables due to the economic impact of COVID-19 and the future performance of loans that received deferrals or forbearances due to COVID-19.
For further discussion of the methodology used in the determination of the ACL, refer to Note 1, "Basis of Presentation" to the Consolidated Financial Statements. To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods.
Three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020
Net Interest Income
FTE net interest income decreased $7.4increased $9.6 million, to $157.1$165.4 million, for the three months ended SeptemberJune 30, 2020,2021, from $164.5$155.9 million in the same period in 2019.2020. The NIM decreased 618 bp, or 18.4%2.8%, to 2.70%2.73%, compared to 3.31%2.81% for the same period in 2019.2020. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.
| | | Three months ended September 30 | | Three months ended June 30 |
| | 2020 | | 2019 | | 2021 | | 2020 |
| | Average Balance | | Interest | | Yield/ Rate | | Average Balance | | Interest | | Yield/ Rate | | Average Balance | | Interest | | Yield/ Rate | | Average Balance | | Interest | | Yield/ Rate |
ASSETS | ASSETS | (dollars in thousands) | ASSETS | (dollars in thousands) |
Interest-earning assets: | Interest-earning assets: | | Interest-earning assets: | |
Net Loans (1) | Net Loans (1) | $ | 18,880,519 | | | $ | 160,344 | | | 3.38 | % | | $ | 16,436,507 | | | $ | 188,280 | | | 4.55 | % | Net Loans (1) | $ | 18,906,556 | | | $ | 156,525 | | | 3.32 | % | | $ | 18,331,797 | | | $ | 160,613 | | | 3.52 | % |
Taxable investment securities (2) | Taxable investment securities (2) | 2,011,893 | | | 13,150 | | | 2.61 | | | 2,282,292 | | | 15,565 | | | 2.73 | | Taxable investment securities (2) | 2,630,090 | | | 13,898 | | | 1.93 | | | 2,200,870 | | | 15,171 | | | 2.76 | |
Tax-exempt investment securities (2) | Tax-exempt investment securities (2) | 861,764 | | | 6,899 | | | 3.19 | | | 516,907 | | | 4,650 | | | 3.57 | | Tax-exempt investment securities (2) | 961,141 | | | 7,494 | | | 3.11 | | | 830,836 | | | 6,737 | | | 3.23 | |
| Total investment securities | Total investment securities | 2,873,657 | | | 20,049 | | | 2.79 | | | 2,799,199 | | | 20,215 | | | 2.88 | | Total investment securities | 3,591,231 | | | 21,392 | | | 2.38 | | | 3,031,706 | | | 21,908 | | | 2.89 | |
Loans held for sale | Loans held for sale | 79,999 | | | 728 | | | 3.64 | | | 31,898 | | | 466 | | | 5.83 | | Loans held for sale | 31,948 | | | 199 | | | 2.49 | | | 55,608 | | | 509 | | | 3.66 | |
Other interest-earning assets | Other interest-earning assets | 1,387,327 | | | 1,028 | | | 0.30 | | | 509,579 | | | 2,709 | | | 2.12 | | Other interest-earning assets | 1,752,549 | | | 1,575 | | | 0.16 | | | 815,910 | | | 766 | | | 0.38 | |
Total interest-earning assets | Total interest-earning assets | 23,221,502 | | | 182,149 | | | 3.13 | | | 19,777,183 | | | 211,670 | | | 4.25 | | Total interest-earning assets | 24,282,284 | | | 179,691 | | | 2.97 | | | 22,235,021 | | | 183,796 | | | 3.32 | |
Noninterest-earning assets: | Noninterest-earning assets: | | Noninterest-earning assets: | |
Cash and due from banks | Cash and due from banks | 138,567 | | | 120,967 | | | Cash and due from banks | 129,927 | | | 153,728 | | |
Premises and equipment | Premises and equipment | 239,183 | | | 240,383 | | | Premises and equipment | 229,047 | | | 240,417 | | |
Other assets | Other assets | 1,835,190 | | | 1,491,115 | | | Other assets | 1,643,410 | | | 1,761,038 | | |
Less: ACL - loans (3) | Less: ACL - loans (3) | (264,934) | | | (171,848) | | | Less: ACL - loans (3) | (267,126) | | | (251,088) | | |
Total Assets | Total Assets | $ | 25,169,508 | | | $ | 21,457,800 | | | Total Assets | $ | 26,017,542 | | | $ | 24,139,116 | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Interest-bearing liabilities: | Interest-bearing liabilities: | | Interest-bearing liabilities: | |
Demand deposits | Demand deposits | $ | 5,591,548 | | | $ | 1,913 | | | 0.14 | % | | $ | 4,448,112 | | | $ | 9,163 | | | 0.82 | % | Demand deposits | $ | 5,979,855 | | | $ | 932 | | | 0.06 | % | | $ | 5,103,419 | | | $ | 2,219 | | | 0.17 | % |
Savings deposits | Savings deposits | 5,716,050 | | | 2,347 | | | 0.16 | | | 5,026,316 | | | 11,059 | | | 0.87 | | Savings deposits | 6,280,629 | | | 1,363 | | | 0.09 | | | 5,446,368 | | | 3,331 | | | 0.25 | |
Brokered deposits | Brokered deposits | 314,721 | | | 440 | | | 0.56 | | | 253,426 | | | 1,536 | | | 2.40 | | Brokered deposits | 297,815 | | | 253 | | | 0.34 | | | 312,121 | | | 422 | | | 0.54 | |
Time deposits | Time deposits | 2,495,445 | | | 9,931 | | | 1.58 | | | 2,974,993 | | | 13,979 | | | 1.86 | | Time deposits | 2,003,606 | | | 5,434 | | | 1.09 | | | 2,624,962 | | | 11,145 | | | 1.71 | |
Total interest-bearing deposits | Total interest-bearing deposits | 14,117,764 | | | 14,631 | | | 0.41 | | | 12,702,847 | | | 35,737 | | | 1.12 | | Total interest-bearing deposits | 14,561,905 | | | 7,982 | | | 0.22 | | | 13,486,870 | | | 17,118 | | | 0.51 | |
Short-term borrowings | Short-term borrowings | 613,127 | | | 370 | | | 0.24 | | | 919,697 | | | 4,156 | | | 1.78 | | Short-term borrowings | 514,025 | | | 137 | | | 0.11 | | | 707,771 | | | 517 | | | 0.29 | |
FHLB advances and long-term debt | 1,295,515 | | | 10,042 | | | 3.10 | | | 842,706 | | | 7,260 | | | 3.44 | | |
Long-term borrowings | | Long-term borrowings | 626,795 | | | 6,155 | | | 3.93 | | | 1,361,421 | | | 10,307 | | | 3.03 | |
Total interest-bearing liabilities | Total interest-bearing liabilities | 16,026,406 | | | 25,043 | | | 0.62 | | | 14,465,250 | | | 47,153 | | | 1.29 | | Total interest-bearing liabilities | 15,702,725 | | | 14,274 | | | 0.36 | | | 15,556,062 | | | 27,942 | | | 0.72 | |
Noninterest-bearing liabilities: | Noninterest-bearing liabilities: | | Noninterest-bearing liabilities: | |
Demand deposits | Demand deposits | 6,270,683 | | | 4,247,820 | | | Demand deposits | 7,203,696 | | | 5,789,788 | | |
Total Deposits/Cost of deposits | 20,388,447 | | | 0.29 | | | 16,950,667 | | | 0.84 | | |
Other liabilities | Other liabilities | 498,328 | | | 429,145 | | | Other liabilities | 441,708 | | | 484,133 | | |
Total Liabilities | Total Liabilities | 22,795,417 | | | 19,142,215 | | | Total Liabilities | 23,348,129 | | | 21,829,983 | | |
Total Deposits/Cost of deposits | | Total Deposits/Cost of deposits | 21,765,601 | | | 0.15 | | | 19,276,658 | | | 0.36 | |
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds | Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds | 22,297,089 | | | 0.45 | | | 18,713,070 | | | 1.00 | | Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds | 22,906,421 | | | 0.25 | | | 21,345,850 | | | 0.53 | |
Shareholders’ equity | Shareholders’ equity | 2,374,091 | | | 2,315,585 | | | Shareholders’ equity | 2,669,413 | | | 2,309,133 | | |
Total Liabilities and Shareholders’ Equity | Total Liabilities and Shareholders’ Equity | $ | 25,169,508 | | | $ | 21,457,800 | | | Total Liabilities and Shareholders’ Equity | $ | 26,017,542 | | | $ | 24,139,116 | | |
Net interest income/FTE NIM | Net interest income/FTE NIM | | | 157,106 | | | 2.70 | % | | | | 164,517 | | | 3.31 | % | Net interest income/FTE NIM | | | 165,417 | | | 2.73 | % | | | | 155,854 | | | 2.81 | % |
Tax equivalent adjustment | Tax equivalent adjustment | | (2,990) | | | | | (3,257) | | | | Tax equivalent adjustment | | (3,018) | | | | | (3,100) | | | |
Net interest income | Net interest income | | $ | 154,116 | | | $ | 161,260 | | | Net interest income | | $ | 162,399 | | | $ | 152,754 | | |
(1)Average balance includes non-performing loans.
(2)Balances include amortized historical cost for AFS. The related unrealized holding gains (losses) are included in other assets.
(3)ACL - loans relates to the ACL specifically for Net Loans and does not include the ACL for OBS credit exposures, which is included in other liabilities.
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended SeptemberJune 30, 20202021 in comparison to the same period in 2019:2020:
| | | 2020 vs. 2019 Increase (Decrease) due to change in | | 2021 vs. 2020 Increase (Decrease) due to change in |
| | Volume | | Rate | | Net | | Volume | | Rate | | Net |
| | (in thousands) | | (in thousands) |
FTE Interest income on: | FTE Interest income on: | | FTE Interest income on: | |
Net Loans (1) | Net Loans (1) | $ | 24,784 | | | $ | (52,720) | | | $ | (27,936) | | Net Loans (1) | $ | 5,075 | | | $ | (9,163) | | | $ | (4,088) | |
Taxable investment securities | Taxable investment securities | (1,961) | | | (454) | | | (2,415) | | Taxable investment securities | 3,072 | | | (4,345) | | | (1,273) | |
Tax-exempt investment securities | Tax-exempt investment securities | 2,783 | | | (534) | | | 2,249 | | Tax-exempt investment securities | 1,012 | | | (255) | | | 757 | |
| Loans held for sale | Loans held for sale | 487 | | | (225) | | | 262 | | Loans held for sale | (177) | | | (133) | | | (310) | |
Other interest-earning assets | Other interest-earning assets | 1,957 | | | (3,638) | | | (1,681) | | Other interest-earning assets | 1,124 | | | (315) | | | 809 | |
Total interest income | Total interest income | $ | 28,050 | | | $ | (57,571) | | | $ | (29,521) | | Total interest income | $ | 10,106 | | | $ | (14,211) | | | $ | (4,105) | |
Interest expense on: | Interest expense on: | | | | | | Interest expense on: | | | | | |
Demand deposits | Demand deposits | $ | 1,569 | | | $ | (8,819) | | | $ | (7,250) | | Demand deposits | $ | 317 | | | $ | (1,604) | | | $ | (1,287) | |
Savings deposits | Savings deposits | 1,303 | | | (10,014) | | | (8,711) | | Savings deposits | 450 | | | (2,418) | | | (1,968) | |
Brokered deposits | Brokered deposits | 232 | | | (1,328) | | | (1,096) | | Brokered deposits | (21) | | | (148) | | | (169) | |
Time deposits | Time deposits | (2,094) | | | (1,955) | | | (4,049) | | Time deposits | (2,256) | | | (3,455) | | | (5,711) | |
Short-term borrowings | Short-term borrowings | (1,054) | | | (2,732) | | | (3,786) | | Short-term borrowings | (115) | | | (265) | | | (380) | |
Long-term borrowings | Long-term borrowings | 3,550 | | | (768) | | | 2,782 | | Long-term borrowings | (6,612) | | | 2,460 | | | (4,152) | |
Total interest expense | Total interest expense | $ | 3,507 | | | $ | (25,617) | | | $ | (22,110) | | Total interest expense | $ | (8,237) | | | $ | (5,430) | | | $ | (13,667) | |
(1)Average balance includes non-performing loans.
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 direct changes that are attributable to each component.
The general level of interest rates has remained at or near historic lows since March 2020 as a result of the FOMC decreasedreducing the Fed Funds Rate by 25 bp in each of August, Septemberto near zero and October of 2019. In March 2020, the FOMC decreased the Fed Funds Rate by a total of 150 bptaking other monetary policy actions in response to COVID-19. These changes in the Fed Funds Rate resulted in corresponding decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and LIBOR as well as for certain interest-bearing liabilities.
As summarized in the preceding table, the 11235 bp decrease in the yield on average interest-earning assets drove a $57.6$14.2 million decrease in FTE interest income butthat was partially offset by the impact of a $3.4$2.0 billion, or 17.4%9.2%, increase in average interest-earning assets, primarily PPP loans, which contributed $28.1$10.1 million to FTE interest income. The yield on the loan portfolio decreased 11720 bp, or 25.7%5.7%, from the thirdsecond quarter of 2019,2020, as all variable and certain adjustable rate loans repriced to lower rates, and yields on new loan originations generally were lower than 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. As such,a result, the impact of changes in index rates, primarily the prime rate and LIBOR, on adjustable rate loans may not be fully realized until future periods.
Interest expense decreased $22.1$13.7 million primarily due to the 6736 bp decrease in the rate on average interest-bearing liabilities. The rates on average interest-bearing demand deposits and savings deposits decreased 6811 bp and 7116 bp, respectively, which contributed $8.8$1.6 million and $10.0$2.4 million to the decrease in interest expense, respectively. Brokered deposit rates The cost of average time depositsdecreased 18462 bp and the average balance of time deposits decreased $621.4 million, which contributed $1.3$3.5 million and $2.3 million to the decrease in interest expense. expense, respectively.In addition, the 154 bp$734.6 million decrease in the rates on short-term borrowings contributed $2.7 million to the decrease in interest expense. The $452.8 million increase in average long-term borrowings contributed $3.6resulted in a $6.6 million of additionaldecrease in interest expense, partially offset by the 90 bp increase in the average rate on long-term borrowings, which contributed $2.5 million of additional interest expense. As discussed in the "Overview" section of Management's Discussion, the Corporation completed a $768,000balance sheet restructuring in March of 2021, which included the prepayment of $535.0 million of FHLB advances and the cash tender offer for $75.0 million and $60.0 million of subordinated debt and senior notes, respectively.
Average loans and average FTE yields, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) |
| 2021 | | 2020 | | in Balance |
| Balance | | Yield | | Balance | | Yield | | $ | | % |
| (dollars in thousands) |
Real estate – commercial mortgage | $ | 7,177,622 | | | 3.16 | % | | $ | 6,875,872 | | | 3.47 | % | | $ | 301,750 | | | 4.4 | % |
Commercial and industrial (1) | 5,445,160 | | | 2.58 | | | 5,710,145 | | | 3.35 | | | (264,985) | | | (4.6) | |
Real estate – residential mortgage | 3,396,690 | | | 3.39 | | | 2,769,682 | | | 3.88 | | | 627,008 | | | 22.6 | |
Real estate – home equity | 1,139,558 | | | 3.71 | | | 1,271,190 | | | 3.91 | | | (131,632) | | | (10.4) | |
Real estate – construction | 1,054,469 | | | 3.05 | | | 941,079 | | | 3.53 | | | 113,390 | | | 12.0 | |
Consumer | 451,486 | | | 3.89 | | | 465,728 | | | 4.17 | | | (14,242) | | | (3.1) | |
Equipment lease financing | 256,248 | | | 3.74 | | | 284,658 | | | 3.44 | | | (28,410) | | | (10.0) | |
Other (2) | (14,677) | | | — | | | 13,443 | | | — | | | (28,120) | | | N/M |
Total loans | $ | 18,906,556 | | | 3.32 | % | | $ | 18,331,797 | | | 3.52 | % | | $ | 574,759 | | | 3.1 | % |
(1) Includes average PPP loans of $1.5 billion and $1.3 billion for the three months ended June 30, 2021 and 2020, respectively.
(2) Consists of overdrafts and net origination fees and costs.
Average loans increased $574.8 million, or 3.1%, compared to the same period of 2020. The increase was driven largely by growth in the commercial and residential mortgage and construction portfolios, partially offset by decreases in the commercial and industrial and home equity portfolios. The decrease in additionalthe commercial and industrial portfolio was the net result of the forgiveness of $639.0 million of loans originated under the PPP and the origination of $60.0 million of new PPP loans, as well as reduced utilization of lines of credit.
Average deposits and average interest expenserates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) in Balance |
| 2021 | | 2020 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 7,203,696 | | | — | % | | $ | 5,789,788 | | | — | % | | $ | 1,413,908 | | | 24.4 | % |
Interest-bearing demand | 5,979,855 | | | 0.06 | | | 5,103,419 | | | 0.17 | | | 876,436 | | | 17.2 | |
Savings | 6,280,629 | | | 0.09 | | | 5,446,368 | | | 0.25 | | | 834,261 | | | 15.3 | |
Total demand and savings | 19,464,180 | | | 0.05 | | | 16,339,575 | | | 0.14 | | | 3,124,605 | | | 19.1 | |
Brokered deposits | 297,815 | | | 0.34 | | | 312,121 | | | 0.54 | | | (14,306) | | | (4.6) | |
Time deposits | 2,003,606 | | | 1.09 | | | 2,624,962 | | | 1.71 | | | (621,356) | | | (23.7) | |
Total deposits | $ | 21,765,601 | | | 0.15 | % | | $ | 19,276,658 | | | 0.36 | % | | $ | 2,488,943 | | | 12.9 | % |
The average cost of total deposits decreased 21 bp, to 0.15%, for the second quarter of 2021, compared to 0.36% for the same period of 2020, mainly as a result of 34 bpreductions in deposit rates, due to the continued low interest rate environment, and growth in noninterest-bearing demand deposits. This decrease in the average rate.cost of deposits contributed $7.6 million to the reduction of interest expense. Average total deposits increased $2.5 billion, or 12.9%, primarily driven by increases in noninterest-bearing demand deposits, interest-bearing demand and saving accounts, partially offset by a $621.4 million, or 23.7%, decrease in time deposits.
Average borrowings and interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) |
| 2021 | | 2020 | | in Balance |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
Short-term borrowings: | (dollars in thousands) |
| | | | | | | | | | | |
| | | | | | | | | | | |
Customer funding(1) | $ | 514,025 | | | 0.11 | % | | $ | 546,716 | | | 0.23 | % | | $ | (32,691) | | | (6.0) | % |
Federal funds purchased | — | | | — | | | 74,231 | | | 0.06 | | | (74,231) | | | (100.0) | |
FHLB advances and other borrowings (2) | — | | | — | | | 86,824 | | | 0.90 | | | (86,824) | | | (100.0) | |
Total short-term borrowings | 514,025 | | | 0.11 | | | 707,771 | | | 0.29 | | | (193,746) | | | (27.4) | |
Long-term borrowings: | | | | | | | | | | | |
FHLB advances | — | | | — | | | 601,938 | | | 1.88 | | | (601,938) | | | (100.0) | |
Other long-term debt | 626,795 | | | 3.93 | | | 759,483 | | | 3.94 | | | (132,688) | | | (17.5) | |
Total long-term borrowings | 626,795 | | | 3.93 | | | 1,361,421 | | | 3.03 | | | (734,626) | | | (54.0) | |
Total borrowings | $ | 1,140,820 | | | 2.21 | % | | $ | 2,069,192 | | | 2.10 | % | | $ | (928,372) | | | (44.9) | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
(1) Includes repurchase agreements and short-term promissory notes.
(2) Consists of FHLB advances and other borrowings with original terms of less than one year.
Average total short-term borrowings decreased $193.7 million, or 27.4%, in the second quarter of 2021, compared to the same period of 2020, primarily as a result of excess funding provided by higher deposit balances.
Average total long-term borrowings decreased $734.6 million, or 54.0%, in the second quarter of 2021, compared to the same period of 2020, primarily as a result of the balance sheet restructuring completed in March of 2021, which included the prepayment of $536.0 million of long-term FHLB advances and the cash tender offer for $75.0 million and $60.0 million of the Corporation's outstanding subordinated and senior notes, respectively. This reduction in long-term borrowings contributed $6.6 million to the reduction of interest expense during the second quarter of 2021 compared to the same period a year ago.
Provision for Credit Losses
The provision for credit losses was a negative $3.5 million for the second quarter of 2021, a decrease of $23.1 million from the same period of 2020. Several factors as of the end of the second quarter of 2021 in comparison to the end of the fourth quarter of 2020, including improved economic forecasts, reduced the level of the ACL determined to be necessary at the end of the second quarter of 2021, resulting in the negative provision for credit losses for the second quarter of 2021. The $19.6 million provision expense for credit losses in the second quarter of 2020 was the result of several factors, most notably, the overall uncertainty in economic forecasts due to COVID-19.
Average loans and average FTE yields, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (Decrease) |
| 2020 | | 2019 | | in Balance |
| Balance | | Yield | | Balance | | Yield | | $ | | % |
| (dollars in thousands) |
Real estate – commercial mortgage | $ | 6,986,528 | | | 3.27 | % | | $ | 6,489,456 | | | 4.57 | % | | $ | 497,072 | | | 7.7 | % |
Commercial and industrial (1) | 5,983,872 | | | 2.53 | | | 4,414,406 | | | 4.57 | | | 1,569,466 | | | 35.6 | |
Real estate – residential mortgage | 2,975,516 | | | 3.73 | | | 2,512,899 | | | 4.06 | | | 462,617 | | | 18.4 | |
Real estate – home equity | 1,237,602 | | | 3.87 | | | 1,364,161 | | | 5.27 | | | (126,559) | | | (9.3) | |
Real estate – construction | 981,589 | | | 3.84 | | | 905,060 | | | 4.68 | | | 76,529 | | | 8.5 | |
Consumer | 464,851 | | | 4.07 | | | 457,524 | | | 4.36 | | | 7,327 | | | 1.6 | |
Equipment lease financing | 279,217 | | | 3.96 | | | 277,555 | | | 4.41 | | | 1,662 | | | 0.6 | |
Other (2) | (28,656) | | | — | | | 15,446 | | | — | | | (44,102) | | | N/M |
Total loans | $ | 18,880,519 | | | 3.38 | % | | $ | 16,436,507 | | | 4.55 | % | | $ | 2,444,012 | | | 14.9 | % |
(1) Includes average PPP loans of $2.0 billion for the three months ended September 30, 2020.
(2) Consists of overdrafts and net origination fees and costs.
N/M - Not meaningfulNon-Interest Income
Average loansThe following table presents the components of non-interest income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) |
| 2021 | | 2020 | | $ | | % |
| (dollars in thousands) |
Commercial banking: | | | | | | | |
Merchant and card | $ | 6,786 | | | $ | 5,326 | | | $ | 1,460 | | | 27.4 | % |
Cash management | 5,341 | | | 4,503 | | | 838 | | | 18.6 | |
Capital markets | 1,536 | | | 5,004 | | | (3,468) | | | (69.3) | |
Other commercial banking | 3,466 | | | 1,914 | | | 1,552 | | | 81.1 | |
Total commercial banking | 17,129 | | | 16,748 | | | 381 | | | 2.3 | |
Consumer banking: | | | | | | | |
Card | 5,733 | | | 4,966 | | | 767 | | | 15.4 | |
Overdraft | 2,750 | | | 2,107 | | | 643 | | | 30.5 | |
Other consumer banking | 2,377 | | | 2,065 | | | 312 | | | 15.1 | |
Total consumer banking | 10,860 | | | 9,138 | | | 1,722 | | | 18.8 | |
Wealth management fees | 17,634 | | | 13,407 | | | 4,227 | | | 31.5 | |
Mortgage banking: | | | | | | | |
Gains on sales of mortgage loans | 5,438 | | | 16,547 | | | (11,109) | | | (67.1) | |
Mortgage servicing income | (2,601) | | | (6,584) | | | 3,983 | | | (60.5) | |
Total mortgage banking | 2,838 | | | 9,964 | | | (7,126) | | | (71.5) | |
Other | 3,393 | | | 3,660 | | | (267) | | | (7.3) | |
Non-interest income before investment securities gains | 51,854 | | | 52,917 | | | (1,063) | | | (2.0) | |
Investment securities gains, net | 36 | | | 3,005 | | | (2,969) | | | (98.8) | |
Total Non-Interest Income | $ | 51,890 | | | $ | 55,922 | | | $ | (4,032) | | | (7.2) | % |
Non-interest income, before net investment securities gains, decreased $1.1 million, or 2.0%, in the second quarter of 2021 as compared to the same period in 2020.
Total commercial banking increased $2.4 billion,$381,000, or 14.9%2.3%, compared to the same period of 2019. The increase wasin 2020, driven largely by growthincreases in theother commercial banking income, primarily SBA income and industrial portfolio as a result of loans originated under the PPP. Excluding loans originated under the PPP, commercialmerchant and industrial loan balances declined. Commercial and residential mortgage loan portfolios, as well as the construction, consumer and equipment lease financing portfolios, experienced growth,card income, partially offset by decreases in the home equitycapital markets revenue, which consists primarily of commercial loan portfolio.interest rate swaps.
Average depositsTotal consumer banking income increased $1.7 million, or 18.8%, compared to the same period in 2020, primarily driven by higher overdraft fees and average interest rates, by type, are summarizedan increase in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (Decrease) in Balance |
| 2020 | | 2019 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 6,270,683 | | | — | % | | $ | 4,247,820 | | | — | % | | $ | 2,022,863 | | | 47.6 | % |
Interest-bearing demand | 5,591,548 | | | 0.14 | | | 4,448,112 | | | 0.82 | | | 1,143,436 | | | 25.7 | |
Savings | 5,716,050 | | | 0.16 | | | 5,026,316 | | | 0.87 | | | 689,734 | | | 13.7 | |
Total demand and savings | 17,578,281 | | | 0.1 | | | 13,722,248 | | | 0.58 | | | 3,856,033 | | | 28.1 | |
Brokered deposits | 314,721 | | | 0.56 | | | 253,426 | | | 2.40 | | | 61,295 | | | 24.2 | |
Time deposits | 2,495,445 | | | 1.58 | | | 2,974,993 | | | 1.86 | | | (479,548) | | | (16.1) | |
Total deposits | $ | 20,388,447 | | | 0.29 | % | | $ | 16,950,667 | | | 0.84 | % | | $ | 3,437,780 | | | 20.3 | % |
card income.
Average total demand and savings accountsWealth management revenues increased $3.9 billion,$4.2 million, or 28.1%31.5%, primarily resulting from growth in brokerage income due to an increase in client asset levels andimproved overall market performance.
Mortgage banking income decreased $7.1 million, or 71.5%, as a result of decreased gains on sales of mortgage loans, driven by increaseslower mortgage sales and gain-on-sale spreads on loans sold. This was slightly offset by an increase in noninterest-bearing demand deposits as well as interest-bearing demand and saving accounts. The increasesmortgage servicing income, which was negatively impacted by a $2.2 million addition to the valuation allowance for MSRs in average total demand and savings accounts resulted from the fundingsecond quarter of various government stimulus programs, which largely remained in customer deposit accounts2021 compared to a $6.6 million addition during the same period last year.
Net investment securities gain were $3.0 million lower compared to the second quarter as well as seasonal increases in municipal accounts.of 2020.
Non-Interest Expense
The average costfollowing table presents the components of total depositsnon-interest expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) |
| 2021 | | 2020 | | $ | | % |
| (dollars in thousands) |
Salaries and employee benefits | $ | 78,367 | | | $ | 81,012 | | | $ | (2,645) | | | (3.3) | % |
Data processing and software | 13,932 | | | 12,193 | | | 1,739 | | | 14.3 | |
Net occupancy | 12,494 | | | 13,144 | | | (650) | | | (4.9) | |
Other outside services | 8,178 | | | 7,600 | | | 578 | | | 7.6 | |
State taxes | 4,384 | | | 3,088 | | | 1,296 | | | 42.0 | |
Equipment | 3,424 | | | 3,193 | | | 231 | | | 7.2 | |
Professional fees | 2,651 | | | 3,331 | | | (680) | | | (20.4) | |
FDIC insurance | 2,282 | | | 2,133 | | | 149 | | | 7.0 | |
Amortization of TCI | 1,563 | | | 1,450 | | | 113 | | | 7.8 | |
Marketing | 1,348 | | | 1,303 | | | 45 | | | 3.5 | |
Intangible amortization | 178 | | | 132 | | | 46 | | | 34.8 | |
Debt extinguishment | 412 | | | 2,878 | | | (2,466) | | | (85.7) | |
Other | 11,618 | | | 11,549 | | | 69 | | | 0.6 | |
Total non-interest expense | $ | 140,831 | | | $ | 143,006 | | | $ | (2,175) | | | (1.5) | % |
Salaries and employee benefits decreased 55 bp,$2.6 million, or 3.3%, primarily the result of lower salary expenses due to 0.29%a lower number of full-time equivalent employees.
Data processing and software increased $1.7 million, or 14.3%, reflecting costs related to technology initiatives.
State taxes increased $1.3 million, or 42.0%, primarily as a result of an increase in the accrual for PA shares tax expense resulting from increased capital levels.
Professional fees decreased $680,000, or 20.4%, primarily due to a decrease in legal fees. The Corporation incurs fees related to various legal matters in the thirdnormal course of business. These fees can fluctuate based on timing and the extent of these matters.
Debt extinguishment costs decreased $2.5 million in the second quarter of 2021. In the second quarter of 2020, compared to 0.84%the Corporation redeemed long-term FHLB advances, which resulted in prepayment penalties of $2.9 million.
Income Taxes
Income tax expense for the three months ended June 30, 2021 was $12.0 million, a $5.5 million increase from $6.5 million for the same period in 2020. The Corporation’s ETR was 15.6% for the three months ended June 30, 2021, compared to 14.2% in the same period of 2019, mainly as a result of reductions2020. The increase in deposit ratesincome tax expense and the ETR primarily resulted from an increase in responseincome before taxes, while net favorable permanent differences were relatively the same compared to the FOMC reductions to the Fed Funds Rate and also as a resultsame period of deposit rate decreases implemented after the Fed Funds Rate cuts during the second half of 2019.2020.
Six months ended June 30, 2021 compared to the six months ended June 30, 2020
Net Interest Income
FTE net interestincome increased $13.0 million to $332.8 million for the six months ended June 30, 2021, up from $319.8 million in the same period in 2020. The NIM decreased 25 bp, or 8.3%, to 2.76%, compared to 3.01% for the same period in 2020.The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 |
| 2021 | | 2020 |
| Average Balance | | Interest | | Yield/ Rate | | Average Balance | | Interest | | Yield/ Rate |
ASSETS | (dollars in thousands) |
Interest-earning assets: | | | | | | | | | | | |
Net Loans(1) | $ | 18,943,367 | | | $ | 321,987 | | | 3.42 | % | | $ | 17,595,932 | | | $ | 338,110 | | | 3.86 | % |
Taxable investment securities (2) | 2,534,821 | | | 27,588 | | | 2.00 | | | 2,242,663 | | | 31,465 | | | 2.81 | |
Tax-exempt investment securities (2) | 936,531 | | | 14,651 | | | 3.12 | | | 775,530 | | | 12,698 | | | 3.26 | |
| | | | | | | | | | | |
Total investment securities | 3,471,352 | | | 42,239 | | | 2.43 | | | 3,018,193 | | | 44,163 | | | 2.92 | |
Loans held for sale | 42,647 | | | 671 | | | 3.14 | | | 41,393 | | | 829 | | | 4.00 | |
Other interest-earning assets | 1,825,966 | | | 2,711 | | | 0.19 | | | 709,091 | | | 3,297 | | | 4.31 | |
Total interest-earning assets | 24,283,332 | | | 367,607 | | | 3.05 | | | 21,364,609 | | | 386,399 | | | 3.63 | |
Noninterest-earning assets: | | | | | | | | | | | |
Cash and due from banks | 125,081 | | | | | | | 145,988 | | | | | |
Premises and equipment | 229,843 | | | | | | | 240,019 | | | | | |
Other assets | 1,685,708 | | | | | | | 1,675,849 | | | | | |
Less: ACL - loans(3) | (273,965) | | | | | | | (230,858) | | | | | |
Total Assets | $ | 26,049,999 | | | | | | | $ | 23,195,607 | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | $ | 5,906,423 | | | $ | 2,092 | | | 0.07 | % | | $ | 4,876,662 | | | $ | 8,020 | | | 0.33 | % |
Savings and money market deposits | 6,209,253 | | | 2,890 | | | 0.09 | | | 5,287,015 | | | 10,441 | | | 0.40 | |
Brokered deposits | 311,016 | | | 647 | | | 0.42 | | | 293,756 | | | 1,495 | | | 1.02 | |
Time deposits | 2,076,681 | | | 11,955 | | | 1.16 | | | 2,693,202 | | | 23,602 | | | 1.76 | |
Total interest-bearing deposits | 14,503,373 | | | 17,584 | | | 0.24 | | | 13,150,635 | | | 43,558 | | | 0.67 | |
Short-term borrowings | 542,243 | | | 325 | | | 0.12 | | | 1,005,409 | | | 4,590 | | | 0.91 | |
FHLB advances and other long-term debt | 947,203 | | | 16,853 | | | 3.56 | | | 1,212,318 | | | 18,426 | | | 3.04 | |
Total interest-bearing liabilities | 15,992,819 | | | 34,762 | | | 0.44 | | | 15,368,362 | | | 66,574 | | | 0.87 | |
Noninterest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | 6,939,731 | | | | | | | 5,048,408 | | | | | |
Other liabilities | 464,104 | | | | | | | 455,763 | | | | | |
Total Liabilities | 23,396,654 | | | | | | | 20,872,533 | | | | | |
Total Deposits/Cost of deposits | 21,443,104 | | | | | 0.17 | | | 18,199,043 | | | | | 0.48 | |
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds | 22,932,550 | | | | | 0.30 | | | 20,416,770 | | | | | 0.65 | |
Shareholders’ equity | 2,653,345 | | | | | | | 2,323,074 | | | | | |
Total Liabilities and Shareholders’ Equity | $ | 26,049,999 | | | | | | | $ | 23,195,607 | | | | | |
Net interest income/FTE NIM | | | 332,845 | | | 2.76 | % | | | | 319,825 | | | 3.01 | % |
Tax equivalent adjustment | | | (5,998) | | | | | | | (6,325) | | | |
Net interest income | | | $ | 326,847 | | | | | | | $ | 313,500 | | | |
(1) Average balance includes non-performing loans. (2) Balances include amortized historical cost for AFS. The related unrealized holding gains (losses) are included in other assets.
(3) ACL - loans relates to the ACL specifically for "Net Loans" and does not include the ACL for OBS credit exposures, which is included in other liabilities.
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average
balances (volume) and changes in rates for the six months ended June 30, 2021 in comparison to the same period in 2020:
| | | | | | | | | | | | | | | | | |
| 2021 vs. 2020 Increase (Decrease) due to change in |
| Volume | | Rate | | Net |
| (in thousands) |
FTE interest income on: | | | | | |
Net Loans (1) | $ | 24,330 | | | $ | (40,453) | | | $ | (16,123) | |
Taxable investment securities | 4,378 | | | (8,255) | | | (3,877) | |
Tax-exempt investment securities | 2,750 | | | (797) | | | 1,953 | |
| | | | | |
Loans held for sale | 24 | | | (183) | | | (158) | |
Other interest-earning assets | 3,090 | | | (3,676) | | | (586) | |
Total interest income | $ | 34,572 | | | $ | (53,364) | | | $ | (18,792) | |
Interest expense on: | | | | | |
Demand deposits | $ | 1,405 | | | $ | (7,333) | | | $ | (5,928) | |
Savings deposits | 1,553 | | | (9,104) | | | (7,550) | |
Brokered deposits | 112 | | | (960) | | | (848) | |
Time deposits | (4,679) | | | (6,968) | | | (11,647) | |
Short-term borrowings | (1,479) | | | (2,786) | | | (4,265) | |
Long-term borrowings | (4,387) | | | 2,814 | | | (1,573) | |
Total interest expense | $ | (7,475) | | | $ | (24,337) | | | $ | (31,812) | |
(1)Average balance includes non-performing loans.
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 direct changes that are attributable to each component.
The general level of interest rates has remained at or near historic lows since March 2020 as a result of the FOMC reducing the Fed Funds Rate to near zero and taking other monetary policy actions in response to COVID-19. As summarized in the preceding table, the 58 bp decrease in the yield on average interest-earning assets drove a $53.4 million decrease in FTE interest income that was partially offset by the impact of a $2.9 billion, or 13.7%, increase in average interest-earning assets which contributed $34.6 million to FTE interest income.The yield on the loan portfolio decreased 44 bp, or 11.3%, from the same period of 2020, as variable and certain adjustable rate loans repriced to lower rates and yields on new loan originations generally were lower than 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. As a result, the impact of changes in index rates, primarily the prime rate and LIBOR, on adjustable rate loans may not be fully realized until future periods.
Interest expense decreased $31.8 million primarily due to the 43 bp decrease in the rate on average interest-bearing liabilities.The rates on average interest-bearing demand deposits and savings deposits decreased 26 bp and 31 bp, respectively, which contributed $7.3 million and $9.1 million to the decrease in interest expense, respectively. The cost of average time depositsdecreased 60 bp and the average balance of time deposits decreased $616.5 million, which contributed $7.0 million and $4.7 million to the decrease in interest expense, respectively.In addition, the $463.2 million decrease in average short-term borrowings and the $265.1 million decrease in average long-term borrowings resulted in $4.3 million and $1.6 million decreases in interest expense, respectively. As discussed in the "Overview" section of Management's Discussion, the Corporation completed a balance sheet restructuring in March of 2021, which included the prepayment of $535.0 million of FHLB advances and the cash tender offer for $75.0 million and $60.0 million of subordinated debt and senior notes, respectively.
Average loans and average FTE yields, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) in Balance |
| 2021 | | 2020 | |
| Balance | | Yield | | Balance | | Yield | | $ | | % |
| (dollars in thousands) |
Real estate – commercial mortgage | $ | 7,153,444 | | | 3.16 | % | | $ | 6,811,318 | | | 3.83 | % | | $ | 342,126 | | | 5.0 | % |
Commercial and industrial (1) | 5,582,855 | | | 3.73 | | | 5,078,448 | | | 3.73 | | | 504,407 | | | 9.9 | |
Real estate – residential mortgage | 3,290,726 | | | 3.46 | | | 2,719,851 | | | 3.93 | | | 570,875 | | | 21.0 | |
Real estate – home equity | 1,157,289 | | | 3.73 | | | 1,285,661 | | | 4.32 | | | (128,372) | | | (10.0) | |
Real estate – construction | 1,054,593 | | | 3.07 | | | 935,304 | | | 3.83 | | | 119,289 | | | 12.8 | |
Consumer | 455,241 | | | 4.01 | | | 466,071 | | | 4.25 | | | (10,830) | | | (2.3) | |
Equipment lease financing | 261,300 | | | 3.93 | | | 284,612 | | | 3.88 | | | (23,312) | | | (8.2) | |
Other (2) | (12,081) | | | — | | | 14,667 | | | — | | | (26,748) | | | N/M |
Total loans | $ | 18,943,367 | | | 3.42 | % | | $ | 17,595,932 | | | 3.86 | % | | $ | 1,347,435 | | | 7.7 | % |
(1) Includes average PPP loans of $1.6 billion and $629.5 million for the six months ended June 30, 2021 and 2020, respectively.
(2) Consists of overdrafts and net origination fees and costs.
Average loans increased $1.3 billion, or 7.7%, compared to the same period of 2020. The increase was driven largely by growth in the commercial and residential mortgage portfolios, the commercial and industrial portfolio, as a result of loans originated under the PPP, and construction portfolio. Excluding loans originated under the PPP, commercial and industrial loan balances declined. The increases were partially offset by decreases in the home equity, equipment lease financing and consumer portfolios as well as other loans.
Average deposits and average interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) in Balance |
| 2021 | | 2020 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 6,939,731 | | | — | % | | $ | 5,048,408 | | | — | % | | $ | 1,891,323 | | | 37.5 | % |
Interest-bearing demand | 5,906,423 | | | 0.07 | | | 4,876,662 | | | 0.33 | | | 1,029,761 | | | 21.1 | |
Savings | 6,209,253 | | | 0.09 | | | 5,287,015 | | | 0.40 | | | 922,238 | | | 17.4 | |
Total demand and savings | 19,055,407 | | | 0.05 | | | 15,212,085 | | | 0.24 | | | 3,843,322 | | | 25.3 | |
Brokered deposits | 311,016 | | | 0.42 | | | 293,756 | | | 1.02 | | | 17,260 | | | 5.9 | |
Time deposits | 2,076,681 | | | 1.16 | | | 2,693,202 | | | 1.76 | | | (616,521) | | | (22.9) | |
Total deposits | $ | 21,443,104 | | | 0.17 | % | | $ | 18,199,043 | | | 0.48 | % | | $ | 3,244,061 | | | 17.8 | % |
The average cost of total deposits decreased 31 bp to 0.17% for the first half of 2021 compared to 0.48% for the same period of 2020, mainly as a result of reductions in deposit rates due to the continued low interest rate environment, and growth in noninterest-bearing demand deposits. This decrease in the average cost of deposits contributed $24.4 million to the reduction of interest expense. Average total deposits increased $3.2 billion, or 17.8%, primarily driven by increases in noninterest-bearing demand deposits, interest-bearing demand and saving accounts, partially offset by a $616.5 million, or 22.9%, decrease in time deposits.
Average borrowings and interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (Decrease) |
| 2020 | | 2019 | | in Balance |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
Short-term borrowings: | (dollars in thousands) |
| | | | | | | | | | | |
| | | | | | | | | | | |
Customer funding(1) | $ | 613,127 | | | 0.24 | % | | $ | 332,893 | | | 0.80 | % | | $ | 280,234 | | | 84.2 | % |
Federal funds purchased | — | | | — | | | 101,022 | | | 2.11 | | | (101,022) | | | N/M |
FHLB advances and other borrowings (2) | — | | | — | | | 485,782 | | | 2.38 | | | (485,782) | | | N/M |
Total short-term borrowings | 613,127 | | | 0.24 | | | 919,697 | | | 1.78 | | | (306,570) | | | (33.3) | |
Long-term borrowings: | | | | | | | | | | | |
FHLB advances | 535,992 | | | 1.81 | | | 455,264 | | | 2.55 | | | 80,728 | | | 17.7 | |
Other long-term debt | 759,523 | | | 4.00 | | | 387,442 | | | 4.48 | | | 372,081 | | | 96.0 | |
Total long-term borrowings | 1,295,515 | | | 3.10 | | | 842,706 | | | 3.44 | | | 452,809 | | | 53.7 | |
Total borrowings | $ | 1,908,642 | | | 2.18 | % | | $ | 1,762,403 | | | 2.57 | % | | $ | 146,239 | | | 8.3 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) in Balance |
| 2021 | | 2020 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
Short-term borrowings: | (dollars in thousands) |
Customer funding(1) | $ | 542,243 | | | 0.12 | % | | $ | 487,478 | | | 0.38 | % | | $ | 54,765 | | | 11.2 | % |
Federal funds purchased | — | | | — | | | 130,549 | | | 0.82 | | | (130,549) | | | (100.0) | |
FHLB advances and other borrowings(2) | — | | | — | | | 387,382 | | | 1.61 | | | (387,382) | | | (100.0) | |
Total short-term borrowings | 542,243 | | | 0.12 | | | 1,005,409 | | | 0.91 | | | (463,166) | | | (46.1) | |
Long-term borrowings: | | | | | | | | | | | |
FHLB advances | 255,453 | | | 1.80 | | | 579,445 | | | 1.91 | | | (323,992) | | | (55.9) | |
Other long-term debt | 691,750 | | | 4.21 | | | 632,873 | | | 4.09 | | | 58,877 | | | 9.3 | |
Total long-term borrowings | 947,203 | | | 3.56 | | | 1,212,318 | | | 3.04 | | | (265,115) | | | (21.9) | |
Total borrowings | $ | 1,489,446 | | | 2.31 | % | | $ | 2,217,727 | | | 2.08 | % | | $ | (728,281) | | | (32.8) | % |
(1) Includes repurchase agreements and short-term promissory notes.
(2) Consists of FHLB borrowings with original term of less than one year.
Average total short-term borrowings decreased $306.6$463.2 million, or 33.3%46.1%, during the first six months of 2021, compared to the same period of 2020 primarily as a result of a $485.8 million decrease in FHLB advances and other borrowings and a $101.0 million decrease in federal funds purchased, partially offset by a $280.2 million increase in customer funding. These decreases resulted from excess funding provided by higher deposits. The average cost of short-term borrowings decreased 154 bp, mainly due to the net impact of changesgrowth in the Fed Funds Rate.deposit balances.
Average total long-term borrowings increased $452.8decreased $265.1 million, or 53.7%21.9%, duringin the third quarterfirst half of 2020,2021, compared to the same period of 2019,2020 primarily as a result of the issuance of $375.0 million of subordinated notesbalance sheet restructuring competed in March of 2020. The 742021, which included the prepayment of $536.0 million of long-term FHLB advances and the cash tender offer for $75.0 million and $60.0 million of the Corporation's outstanding subordinated and senior notes, respectively. This reduction in long-term borrowings contributed $4.4 million to the reduction of interest expense, partially offset by the impact of a 52 bp decreaseincrease in the rate on FHLB advances reflectsaverage long-term borrowings during the impactfirst half of restructurings.2021.
Provision for Credit Losses
The provision for credit losses was $7.1a negative $9.0 million for the third quarterfirst six months of 2020, an increase2021, a decrease of $4.9$72.6 million from the same period of 2019.2020. Several factors as of the six months ended June 30, 2021 in comparison to the end of the fourth quarter of 2020, including improved economic forecasts, reduced the level of the ACL determined to be necessary at the end of the six months ended June 30, 2021. The increase$63.6 million provision for credit losses during the six months ended June 30, 2020 was the result of several factors, most notably, the overall uncertainty in economic forecasts due to COVID-19.
Non-Interest Income
The following table presents the components of non-interest income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (Decrease) |
| 2020 | | 2019 | | $ | | % |
| (dollars in thousands) |
Wealth management fees | $ | 14,943 | | | $ | 13,867 | | | $ | 1,076 | | | 7.8 | % |
Commercial banking: | | | | | | | |
Merchant and card | 6,237 | | | 6,166 | | | 71 | | | 1.2 | |
Cash management | 4,742 | | | 4,696 | | | 46 | | | 1.0 | |
Capital markets | 4,696 | | | 4,448 | | | 248 | | | 5.6 | |
Other commercial banking | 2,636 | | | 3,478 | | | (842) | | | (24.2) | |
Total commercial banking | 18,311 | | | 18,788 | | | (477) | | | (2.5) | |
Consumer banking: | | | | | | | |
Card | 5,002 | | | 5,791 | | | (789) | | | (13.6) | |
Overdraft | 3,015 | | | 4,682 | | | (1,667) | | | (35.6) | |
Other consumer banking | 2,406 | | | 2,860 | | | (454) | | | (15.9) | |
Total consumer banking | 10,423 | | | 13,333 | | | (2,910) | | | (21.8) | |
Mortgage banking: | | | | | | | |
Gains on sales of mortgage loans | 19,480 | | | 5,520 | | | 13,960 | | | N/M |
Mortgage servicing income | (2,679) | | | 1,138 | | | (3,817) | | | N/M |
Total mortgage banking | 16,801 | | | 6,658 | | | 10,143 | | | N/M |
Other | 2,769 | | | 2,675 | | | 94 | | | 3.5 | |
Non-interest income before investment securities gains | 63,246 | | | 55,321 | | | 7,925 | | | 14.3 | |
Investment securities gains, net | 2 | | | 4,492 | | | (4,490) | | | N/M |
Total Non-Interest Income | $ | 63,248 | | | $ | 59,813 | | | $ | 3,435 | | | 5.7 | % |
N/M - Not meaningful | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) |
| 2021 | | 2020 | | $ | | % |
| (dollars in thousands) |
Commercial banking: | | | | | | | |
Merchant and card | $ | 12,554 | | | $ | 10,950 | | | $ | 1,604 | | | 14.6 | % |
Cash management | 10,262 | | | 9,245 | | | 1,017 | | | 11.0 | |
Capital markets | 4,336 | | | 10,079 | | | (5,743) | | | (57.0) | |
Other commercial banking | 6,319 | | | 4,892 | | | 1,427 | | | 29.2 | |
Total commercial banking | 33,471 | | | 35,167 | | | (1,696) | | | (4.8) | |
Consumer banking: | | | | | | | |
Card | 11,611 | | | 9,651 | | | 1,960 | | | 20.3 | |
Overdraft | 5,474 | | | 6,165 | | | (691) | | | (11.2) | |
Other consumer banking | 4,529 | | | 4,561 | | | (32) | | | (0.7) | |
Total consumer banking | 21,614 | | | 20,377 | | | 1,237 | | | 6.1 | |
Wealth management fees | 34,981 | | | 28,462 | | | 6,519 | | | 22.9 | |
Mortgage banking: | | | | | | | |
Gains on sales of mortgage loans | 14,094 | | | 22,728 | | | (8,634) | | | (38.0) | |
Mortgage servicing income | 2,704 | | | (6,530) | | | 9,234 | | | (141.4) | |
Total mortgage banking | 16,798 | | | 16,198 | | | 600 | | | 3.7 | |
Other | 6,912 | | | 7,311 | | | (399) | | | (5.5) | |
Non-interest income before investment securities gains, net | 113,776 | | | 107,515 | | | 6,261 | | | 5.8 | |
Investment securities gains, net | 33,511 | | | 3,051 | | | 30,460 | | | N/M |
Total Non-Interest Income | $ | 147,287 | | | $ | 110,566 | | | $ | 36,721 | | | 33.2 | % |
Non-interest income, before net investment securities gains, increased $7.9$6.3 million, or 14.3%5.8%, induring the third quarter of 2020six months ended June 30, 2021 as compared to the same period in 2019. 2020.
Commercial banking decreased $1.7 million, or 4.8%, compared to the same period in 2020, driven by a decrease in capital markets revenue, which consists primarily of fees earned on commercial loan interest rate swaps, partially offset by increases in merchant and card, cash management and other commercial banking.
Consumer banking increased $1.2 million, or 6.1%, compared to the same period in 2020, primarily driven by an increase in card income.
Wealth management revenues increased $1.1$6.5 million, or 7.8%22.9%, primarily resulting from growth in brokerage income due to an increase in client asset levels and improved overall market performance.
Total commercial banking income decreased $477,000, or 2.5%, compared to the same period in 2019, driven by decreases in other commercial banking income (primarily other services charges on deposits and Small Business Administration income) as a result of COVID-19.
Total consumer banking income decreased $2.9 million, or 21.8%, compared to the same period in 2019, primarily driven by lower overdraft fees.
Mortgage banking income increased $10.1 million,$600,000, or 3.7%, driven by an increase in mortgage servicing income, partially offset by a decrease in gains on sales of mortgage loans, partially offset by a decreaseloans. The increase in mortgage servicing income.income was driven by a $3.9 million decrease to the valuation allowance for MSRs compared to a $7.7 million increase to the valuation allowance for the same period in 2020. The increasedecrease in gains on sales of mortgage loans reflected increasesdecreases in both the volume of loans sold and higherlower spreads realized on sales. The decrease in mortgage servicing income was driven by a $1.5 million increase to the valuation allowance for MSRs in the third quarter of 2020, and higher MSR amortization due to higher prepayments.mortgages sold.
Investment securities gains, net, were lower compared to$33.5 million in the same period of 2019six months ended June 30, 2021 as a result of a $34.0 million gain on the sale of the Visa Shares that was part of the balance sheet restructuring involvingas discussed in the sale"Overviews" section of approximately $400 million of investment securities and a corresponding prepayment of FHLB advances completed during the third quarter of 2019. As a result of these transactions, $4.5 million of investment securities gains were realized during the third quarter of 2019.Management's Discussion.
Non-Interest Expense
The following table presents the components of non-interest expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (Decrease) |
| 2020 | | 2019 | | $ | | % |
| (dollars in thousands) |
Salaries and employee benefits | $ | 79,227 | | | $ | 78,211 | | | $ | 1,016 | | | 1.3 | % |
Net occupancy | 13,221 | | | 12,368 | | | 853 | | | 6.9 | |
Data processing and software | 12,285 | | | 11,590 | | | 695 | | | 6.0 | |
Other outside services | 7,617 | | | 12,163 | | | (4,546) | | | (37.4) | |
Professional fees | 2,879 | | | 3,331 | | | (452) | | | (13.6) | |
Equipment | 3,711 | | | 3,459 | | | 252 | | | 7.3 | |
State taxes | 2,692 | | | 2,523 | | | 169 | | | 6.7 | |
FDIC insurance | 1,578 | | | 239 | | | 1,339 | | | N/M |
Marketing | 1,147 | | | 3,322 | | | (2,175) | | | (65.5) | |
Amortization of TCI | 1,694 | | | 1,533 | | | 161 | | | 10.5 | |
Intangible amortization | 132 | | | 1,071 | | | (939) | | | (87.7) | |
Prepayment penalty on FHLB advances | — | | | 4,326 | | | (4,326) | | | N/M |
Other | 12,962 | | | 12,634 | | | 328 | | | 2.6 | |
Total non-interest expense | $ | 139,147 | | | $ | 146,770 | | | $ | (7,623) | | | (5.2) | % |
N/M - Not meaningful | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) |
| 2021 | | 2020 | | $ | | % |
| (dollars in thousands) |
Salaries and employee benefits | $ | 160,953 | | | $ | 161,240 | | | $ | (287) | | | (0.2) | % |
Data processing and software | 27,493 | | | 23,838 | | | 3,655 | | | 15.3 | |
Net occupancy | 26,476 | | | 26,630 | | | (154) | | | (0.6) | |
Other outside services | 16,668 | | | 15,481 | | | 1,187 | | | 7.7 | |
State taxes | 8,889 | | | 5,891 | | | 2,998 | | | 50.9 | |
Equipment | 6,852 | | | 6,611 | | | 241 | | | 3.6 | |
Professional fees | 5,430 | | | 7,533 | | | (2,103) | | | (27.9) | |
FDIC insurance | 4,906 | | | 4,941 | | | (35) | | | (0.7) | |
Amortization of TCI | 3,094 | | | 2,900 | | | 194 | | | 6.7 | |
Marketing | 2,350 | | | 2,882 | | | (532) | | | (18.5) | |
Intangible amortization | 293 | | | 264 | | | 29 | | | 11.0 | |
Debt extinguishment | 32,575 | | | 2,878 | | | 29,697 | | | N/M |
Other | 23,236 | | | 24,469 | | | (1,233) | | | (5.0) | |
Total non-interest expense | $ | 319,215 | | | $ | 285,558 | | | $ | 33,657 | | | 11.8 | % |
The $1.0Data processing and software increased $3.7 million, or 1.3%15.3%, increase in salaries and employee benefits reflected an $800,000 severance expense incurred in connection with the 21 financial center closures and consolidations expectedreflecting costs related to be completed in early 2021.technology initiatives.
Other outside services decreased $4.5State taxes increased $3.0 million, or 37.4%50.9%, as 2019 included $2.6 million of expense associated with the Charter Consolidation.
Marketing expense declined $2.2 million, or 65.5%,primarily as a result of reduced marketing campaigns duringan increase in the quarter.accrual for PA shares tax expense resulting from increased capital levels.
Professional fees decreased $452,000,$2.1 million, or 13.6%27.9%, primarily due to a decrease in legal fees. The Corporation incurs fees related to various legal matters in the normal course of business. These fees can fluctuate based on timing and the extent of these matters.
FDIC insuranceDebt extinguishment costs increased $1.3$29.7 million compared to the same period in 2019. FDIC insurance expense was reduced in the third quarter of 2019 as a result of the receipt of assessment credits.
The third quarter of 2019 included approximately $4.3$20.9 million ofin prepayment penalties related toincurred upon the prepayment of certainlong-term FHLB advances in conjunctionand $11.3 million of expenses associated with the 2019cash tender offer to purchase subordinated and senior notes as part of the balance sheet restructuring mentioned above.discussed in the "Overview" section of Management's Discussion.
Income Taxes
Income tax expense for the threesix months ended SeptemberJune 30, 20202021 was $9.5$25.9 million, a $500,000 decrease$16.6 million increase from $10.0$9.3 million for the same period in 2019.2020. The Corporation’s ETR was 13.4%15.8% for the threesix months ended SeptemberJune 30, 2020,2021, as compared to 13.9%12.4% in the same period of 2019.2020. The decreaseincrease in income tax expense and the ETR primarily resulted from a decreasean increase in income before taxes. The ETR is generally lower thantaxes, while net favorable permanent differences were relatively the federal statutory ratesame compared to the same period 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.2020.
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
Net Interest Income
FTE net interest income decreased $21.9 million, to $476.9 million for the nine months ended September 30, 2020, from $498.9 million for the same period in 2019. The NIM decreased 51 bp, or 15.0%, to 2.90% compared to 3.41% for the same period in 2019. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 |
| 2020 | | 2019 |
| Average Balance | | Interest | | Yield/ Rate | | Average Balance | | Interest | | Yield/ Rate |
ASSETS | (dollars in thousands) |
Interest-earning assets: | | | | | | | | | | | |
Net Loans(1) | $ | 18,027,253 | | | $ | 498,455 | | | 3.69 | % | | $ | 16,316,540 | | | $ | 565,095 | | | 4.63 | % |
Taxable investment securities (2) | 2,165,180 | | | 44,615 | | | 2.75 | | | 2,305,472 | | | 46,935 | | | 2.71 | |
Tax-exempt investment securities (2) | 804,484 | | | 19,596 | | | 3.24 | | | 468,689 | | | 12,940 | | | 3.66 | |
| | | | | | | | | | | |
Total investment securities | 2,969,664 | | | 64,211 | | | 2.88 | | | 2,774,161 | | | 59,875 | | | 2.87 | |
Loans held for sale | 54,355 | | | 1,557 | | | 3.82 | | | 24,357 | | | 1,056 | | | 5.78 | |
Other interest-earning assets | 936,819 | | | 4,325 | | | 0.62 | | | 428,982 | | | 6,879 | | | 2.14 | |
Total interest-earning assets | 21,988,091 | | | 568,548 | | | 3.45 | | | 19,544,040 | | | 632,905 | | | 4.33 | |
Noninterest-earning assets: | | | | | | | | | | | |
Cash and due from banks | 143,496 | | | | | | | 116,019 | | | | | |
Premises and equipment | 239,739 | | | | | | | 239,402 | | | | | |
Other assets | 1,729,351 | | | | | | | 1,337,482 | | | | | |
Less: ACL - loans(3) | (242,300) | | | | | | | (165,733) | | | | | |
Total Assets | $ | 23,858,377 | | | | | | | $ | 21,071,210 | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | $ | 5,116,696 | | | $ | 9,933 | | | 0.26 | % | | $ | 4,263,869 | | | $ | 24,854 | | | 0.78 | % |
Savings and money market deposits | 5,431,071 | | | 12,788 | | | 0.31 | | | 4,955,403 | | | 31,570 | | | 0.85 | |
Brokered deposits | 300,795 | | | 1,935 | | | 0.86 | | | 240,045 | | | 4,500 | | | 2.51 | |
Time deposits | 2,626,802 | | | 33,533 | | | 1.71 | | | 2,853,147 | | | 37,050 | | | 1.74 | |
Total interest-bearing deposits | 13,475,364 | | | 58,189 | | | 0.58 | | | 12,312,464 | | | 97,974 | | | 1.06 | |
Short-term borrowings | 873,694 | | | 4,960 | | | 0.76 | | | 894,116 | | | 12,200 | | | 1.81 | |
FHLB advances and other long-term debt | 1,240,253 | | | 28,468 | | | 3.06 | | | 965,111 | | | 23,854 | | | 3.30 | |
Total interest-bearing liabilities | 15,589,311 | | | 91,617 | | | 0.78 | | | 14,171,691 | | | 134,028 | | | 1.26 | |
Noninterest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | 5,458,807 | | | | | | | 4,223,927 | | | | | |
Total Deposits/Cost of deposits | 18,934,171 | | | | | 0.41 | | | 16,536,391 | | | | | 0.79 | |
Other liabilities | 470,055 | | | | | | | 381,427 | | | | | |
Total Liabilities | 21,518,173 | | | | | | | 18,777,045 | | | | | |
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds | 21,048,118 | | | | | 0.58 | | | 18,395,618 | | | | | 0.97 | |
Shareholders’ equity | 2,340,204 | | | | | | | 2,294,165 | | | | | |
Total Liabilities and Shareholders’ Equity | $ | 23,858,377 | | | | | | | $ | 21,071,210 | | | | | |
Net interest income/FTE NIM | | | 476,931 | | | 2.90 | % | | | | 498,877 | | | 3.41 | % |
Tax equivalent adjustment | | | (9,315) | | | | | | | (9,758) | | | |
Net interest income | | | $ | 467,616 | | | | | | | $ | 489,119 | | | |
(1)Average balance includes non-performing loans.
(2)Balances include amortized historical cost for AFS. The related unrealized holding gains (losses) are included in other assets.
(3)ACL - loans relates to the ACL specifically for Net Loans and does not include the ACL for OBS credit exposures, which is included in other liabilities.
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the nine months ended September 30, 2020 in comparison to the same period in 2019:
| | | | | | | | | | | | | | | | | |
| 2020 vs. 2019 Increase (Decrease) due to change in |
| Volume | | Rate | | Net |
FTE Interest income on: | (in thousands) |
Net Loans (1) | $ | 3,192 | | | $ | (69,832) | | | $ | (66,640) | |
Taxable investment securities | (2,213) | | | (108) | | | (2,320) | |
Tax-exempt investment securities | 6,580 | | | 76 | | | 6,656 | |
| | | | | |
Loans held for sale | 579 | | | (78) | | | 501 | |
Other interest-earning assets | 436 | | | (2,990) | | | (2,554) | |
Total interest income | $ | 8,575 | | | $ | (72,932) | | | $ | (64,357) | |
Interest expense on: | | | | | |
Demand deposits | $ | (1,303) | | | $ | (13,618) | | | $ | (14,921) | |
Savings deposits | (732) | | | (18,050) | | | (18,782) | |
Brokered deposits | (228) | | | (2,336) | | | (2,565) | |
Time deposits | (1,161) | | | (2,355) | | | (3,517) | |
Short-term borrowings | (273) | | | (6,967) | | | (7,240) | |
Long-term borrowings | 4,594 | | | 20 | | | 4,614 | |
Total interest expense | $ | 896 | | | $ | (43,307) | | | $ | (42,411) | |
| | | | | |
(1)Average balance includes non-performing loans.
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 direct changes that are attributable to each component.FINANCIAL CONDITION
The FOMC decreased the Fed Funds Rate by 25 bp in each of August, Septembertable below presents condensed consolidated ending balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 | | Increase (Decrease) |
| | | $ | | % |
Assets | (dollars in thousands) |
Cash and cash equivalents | $ | 1,904,059 | | | $ | 1,847,832 | | | $ | 56,227 | | | 3.0 | % |
FRB and FHLB Stock | 62,631 | | | 92,129 | | | (29,498) | | | (32.0) | |
Loans held for sale | 41,924 | | | 83,886 | | | (41,962) | | | (50.0) | |
Investment securities | 3,921,658 | | | 3,340,424 | | | 581,234 | | | 17.4 | |
Net Loans | 18,331,724 | | | 18,623,253 | | | (291,529) | | | (1.6) | |
Premises and equipment | 228,353 | | | 231,480 | | | (3,127) | | | (1.4) | |
Goodwill and intangibles | 536,847 | | | 536,659 | | | 188 | | | — | |
Other assets | 1,052,578 | | | 1,151,070 | | | (98,492) | | | (8.6) | |
Total Assets | $ | 26,079,774 | | | $ | 25,906,733 | | | $ | 173,041 | | | 0.7 | % |
Liabilities and Shareholders’ Equity | | | | | | | |
Deposits | $ | 21,724,312 | | | $ | 20,839,207 | | | $ | 885,105 | | | 4.2 | % |
Short-term borrowings | 533,749 | | | 630,066 | | | (96,317) | | | (15.3) | |
Long-term borrowings | 627,213 | | | 1,296,263 | | | (669,050) | | | (51.6) | |
Other liabilities | 501,542 | | | 524,369 | | | (22,827) | | | (4.4) | |
Total Liabilities | 23,386,816 | | | 23,289,905 | | | 96,911 | | | 0.4 | |
Total Shareholders’ Equity | 2,692,958 | | | 2,616,828 | | | 76,130 | | | 2.9 | |
Total Liabilities and Shareholders’ Equity | $ | 26,079,774 | | | $ | 25,906,733 | | | $ | 173,041 | | | 0.7 | % |
Cash and October of 2019. In March 2020, the FOMC decreased the Fed Funds Rate by a total of 150 bp in response to COVID-19. These changes in the Fed Funds Rate resulted in corresponding decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and LIBOR as well as for certain interest-bearing liabilities.Cash Equivalents
The 88 bp$56.2 million, or 3.0%, increase in cash and cash equivalents mainly resulted from additional cash maintained at the FRB due to the Corporation's excess liquidity position.
FRB and FHLB Stock
The $29.5 million, or 32.0%, decrease in FRB and FHLB stock was the result of a decrease in FHLB stock required due to the prepayment of long-term FHLB advances, as mentioned in the "Overview" section of Management's Discussion, and a decrease in the yield on average interest-earning assets droveusage of FHLB letters of credit.
Loans Held for Sale
Loans held for sale decreased $42.0 million, or 50.0%, primarily as the result of the Corporation's decision to hold a $72.9 million decreasegreater proportion of the residential mortgage loans it originated in FTE interest income, but was partially offset by the impact of a $2.4 billion, or 12.5%, increase in average interest-earning assets, primarily loans, which contributed $8.6 million to FTE interest income. The yield on the loan portfolio, decreased 94 bp, or 20.2%, from the same period of 2019, as all variable and certain adjustable raterather than selling those loans repriced to lower rates, and yields on new loan originations generally were lower than 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. As such, the impact of changes in index rates on adjustable rate loans may not be fully realized until future periods.
Interest expense decreased $42.4 million primarily due to the 48 bp decrease in the rate on average interest-bearing liabilities. The rates on average interest-bearing demand deposits and savings deposits decreased 52 bp and 54 bp, respectively, which contributed $13.6 million and $18.1 million to the decrease in interest expense, respectively. In addition, the 105 bp decrease in the rates on short-term borrowings contributed $7.0 million to the decrease in interest expense.secondary market.
Average loans and average FTE yields, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 | | Increase (Decrease) |
| 2020 | | 2019 | | in Balance |
| Balance | | Yield | | Balance | | Yield | | $ | | % |
| (dollars in thousands) |
Real estate – commercial mortgage | $ | 6,870,148 | | | 3.64 | % | | $ | 6,431,012 | | | 4.64 | % | | $ | 439,136 | | | 6.8 | % |
Commercial and industrial (1) | 5,382,459 | | | 3.10 | | | 4,438,894 | | | 4.65 | | | 943,565 | | | 21.3 | |
Real estate – residential mortgage | 2,805,694 | | | 3.86 | | | 2,386,264 | | | 4.07 | | | 419,430 | | | 17.6 | |
Real estate – home equity | 1,269,525 | | | 4.17 | | | 1,400,371 | | | 5.32 | | | (130,846) | | | (9.3) | |
Real estate – construction | 950,845 | | | 3.83 | | | 926,036 | | | 4.94 | | | 24,809 | | | 2.7 | |
Consumer | 465,661 | | | 4.19 | | | 442,678 | | | 4.41 | | | 22,983 | | | 5.2 | |
Equipment lease financing | 282,800 | | | 3.91 | | | 278,463 | | | 4.42 | | | 4,337 | | | 1.6 | |
Other (2) | 121 | | | — | | | 12,822 | | | — | | | (12,701) | | | (99.1) | |
Total loans | $ | 18,027,253 | | | 3.69 | % | | $ | 16,316,540 | | | 4.63 | % | | $ | 1,710,713 | | | 10.5 | % |
(1) Includes average PPP loans of $1.1 billion for the nine months ended September 30, 2020.
(2) Consists of overdrafts and net origination fees and costs.
Average loans increased $1.7 billion, or 10.5%, compared to the same period of 2019. The increase was driven largely by growth in the commercial and industrial portfolio, which was primarily attributable to the origination of PPP loans in the second quarter of 2020. Excluding loans originated under the PPP, commercial and industrial loan balances declined as a result of the overall slowing of the economy. Commercial and residential mortgage loan portfolios, as well as the construction, consumer and equipment lease financing portfolios experienced growth, partially offset by decreases in the home equity loan portfolio.
Average deposits and average interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 | | Increase (Decrease) in Balance |
| 2020 | | 2019 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 5,458,807 | | | — | % | | $ | 4,223,927 | | | — | % | | $ | 1,234,880 | | | 29.2 | % |
Interest-bearing demand | 5,116,696 | | | 0.26 | | | 4,263,869 | | | 0.78 | | | 852,827 | | | 20.0 | |
Savings | 5,431,071 | | | 0.31 | | | 4,955,403 | | | 0.85 | | | 475,668 | | | 9.6 | |
Total demand and savings | 16,006,574 | | | 0.19 | | | 13,443,199 | | | 0.56 | | | 2,563,375 | | | 19.1 | |
Brokered deposits | 300,795 | | | 0.86 | | | 240,045 | | | 2.51 | | | 60,750 | | | 25.3 | |
Time deposits | 2,626,802 | | | 1.71 | | | 2,853,147 | | | 1.74 | | | (226,345) | | | (7.9) | |
Total deposits | $ | 18,934,171 | | | 0.41 | % | | $ | 16,536,391 | | | 0.79 | % | | $ | 2,397,780 | | | 14.5 | % |
Average total demand and savings accounts increased $2.6 billion, or 19.1%, driven by increases in noninterest-bearing demand deposits, interest-bearing demand deposits and saving accounts. The primary reason for the increases in average total demand and savings accounts were the result of the funding of various government stimulus programs, which largely remained in customer deposit accounts during the period as well as seasonal increases in municipal accounts.
The average cost of total deposits decreased 38 bp, to 0.41%, for the first nine months of 2020, compared to 0.79% for the same period of 2019, mainly as a result of reductions in deposit rates in response to the FOMC reductions to the Fed Funds Rate as well as deposit rate decreases implemented after the Fed Funds Rate cuts during the second half of 2019. The majority of deposit rates are discretionary, with the exception of indexed municipal balances. The average cost of interest-bearing deposits decreased in all non-maturity deposit categories.
Average borrowings and interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 | | Increase (Decrease) |
| 2020 | | 2019 | | in Balance |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
Short-term borrowings: | (dollars in thousands) |
Customer funding(1) | $ | 529,667 | | | 0.33 | % | | $ | 541,237 | | | 1.39 | % | | $ | (11,570) | | | (2.1) | % |
Federal funds purchased | 86,715 | | | 0.82 | | | 146,432 | | | 2.35 | | | (59,717) | | | (40.8) | |
FHLB advances and other borrowings(2) | 257,312 | | | 1.61 | | | 206,447 | | | 2.55 | | | 50,865 | | | 24.6 | |
Total short-term borrowings | 873,694 | | | 0.76 | | | 894,116 | | | 1.81 | | | (20,422) | | | (2.3) | |
Long-term borrowings: | | | | | | | | | | | |
FHLB advances | 564,855 | | | 1.88 | | | 577,835 | | | 2.50 | | | (12,980) | | | (2.2) | |
Other long-term debt | 675,398 | | | 4.05 | | | 387,276 | | | 4.49 | | | 288,122 | | | 74.4 | |
Total long-term borrowings | 1,240,253 | | | 3.06 | | | 965,111 | | | 3.30 | | | 275,142 | | | 28.5 | |
Total borrowings | $ | 2,113,947 | | | 2.11 | % | | $ | 1,859,227 | | | 2.58 | % | | $ | 254,720 | | | 13.7 | % |
(1) Includes repurchase agreements and short-term promissory notes.
(2) Consists of FHLB borrowings with original term of less than one year.
Average total short-term borrowings decreased $20.4 million, or 2.3%, primarily as a result of a $59.7 million, or 40.8%, decrease in federal funds purchased partially offset by a $50.9 million increase in short-term FHLB advances and other borrowings. The average cost of short-term borrowings decreased 105 bp, mainly due to the net impact of changes in the Fed Funds Rate.
Average total long-term borrowings increased $275.1 million, or 28.5%, during the first nine months of 2020, compared to the same period of 2019, as a result of the issuance of $375.0 million of subordinated notes in March of 2020, partially offset by a decrease in average FHLB advances.
Provision for Credit Losses
The provision for credit losses was $70.7 million for first nine months of 2020, an increase of $58.4 million from the same period of 2019. The increase was the result of several factors, most notably, the overall uncertainty in economic forecasts due to COVID-19.
Non-Interest Income
The following table presents the components of non-interest income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 | | Increase (Decrease) |
| 2020 | | 2019 | | $ | | % |
| (dollars in thousands) |
Wealth management fees | $ | 43,405 | | | $ | 41,259 | | | $ | 2,146 | | | 5.2 | % |
Commercial banking: | | | | | | | |
Merchant and card | 17,187 | | | 18,236 | | | (1,049) | | | (5.8) | |
Cash management | 13,987 | | | 13,695 | | | 292 | | | 2.1 | |
Capital markets | 14,775 | | | 11,015 | | | 3,760 | | | 34.1 | |
Other commercial banking | 7,528 | | | 10,109 | | | (2,581) | | | (25.5) | |
Total commercial banking | 53,477 | | | 53,055 | | | 422 | | | 0.8 | |
Consumer banking: | | | | | | | |
Card | 14,653 | | | 15,524 | | | (871) | | | (5.6) | |
Overdraft | 9,180 | | | 13,199 | | | (4,019) | | | (30.4) | |
Other consumer banking | 6,967 | | | 8,354 | | | (1,387) | | | (16.6) | |
Total consumer banking | 30,800 | | | 37,077 | | | (6,277) | | | (16.9) | |
Mortgage banking: | | | | | | | |
Gains on sales of mortgage loans | 42,208 | | | 13,822 | | | 28,386 | | | N/M |
Mortgage servicing income | (9,210) | | | 4,203 | | | (13,413) | | | N/M |
Total mortgage banking | 32,998 | | | 18,023 | | | 14,975 | | | 83.1 | |
Other | 10,080 | | | 6,733 | | | 3,347 | | | 49.7 | |
Non-interest income before investment securities gains | 170,761 | | | 156,147 | | | 14,614 | | | 9.4 | |
Investment securities gains, net | 3,053 | | | 4,733 | | | (1,680) | | | (35.5) | |
Total Non-Interest Income | $ | 173,814 | | | $ | 160,879 | | | $ | 12,935 | | | 8.0 | % |
N/M - Not meaningful
Wealth management revenues increased $2.1 million, or 5.2%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance.
Total commercial banking income increased $422,000, or 0.8%, compared to the same period in 2019, driven by increases in capital markets revenues, primarily commercial loan interest rate swap income, partially offset by decreases in other commercial banking income, primarily other services charges on deposits and Small Business Administration income, and merchant and card income as a result of COVID-19.
Total consumer banking income decreased $6.3 million, or 16.9%, compared to the same period in 2019, primarily driven by lower overdraft fees activity.
Mortgage banking income increased $15.0 million, or 83.1%, driven by an increase in gains on sales of mortgage loans, partially offset by a decrease in mortgage servicing income. The increase in gains on sales of mortgage loans reflected increases in both the volume of loans sold and higher spreads on sales. The decrease in mortgage servicing income was driven by a $9.2 million increase to the valuation allowance for MSRs.
Other income increased $3.3 million, or 49.7%, as a result of additional investments made in bank owned life insurance in 2019 and gains on sales of certain properties.
Investment securities gains, net were $3.0 million as the result of a limited balance sheet restructuring that included the sale of investment securities, with an amortized cost of $79.0 million and an estimated fair value of $82.0 million that the Corporation completed during the second quarter of 2020. Offsetting these gains were $2.9 million of prepayment penalties recorded in non-interest expense for the redemption of FHLB advances.
During the third quarter of 2019, the Corporation completed a balance sheet restructuring involving the sale of approximately $400 million of investment securities and a corresponding prepayment of FHLB advances. As a result of these transactions, $4.5 million of investment securities gains were realized during the third quarter of 2019. Offsetting these gains were $4.3 million of prepayment penalties recorded in non-interest expense for the redemption of FHLB advances.
Non-Interest Expense
The following table presents the components of non-interest expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 | | Increase (Decrease) |
| 2020 | | 2019 | | $ | | % |
| (dollars in thousands) |
Salaries and employee benefits | $ | 240,467 | | | $ | 234,959 | | | $ | 5,508 | | | 2.3 | % |
Net occupancy | 39,851 | | | 39,746 | | | 105 | | | 0.3 | |
Data processing and software | 36,123 | | | 33,211 | | | 2,912 | | | 8.8 | |
Other outside services | 23,098 | | | 31,774 | | | (8,676) | | | (27.3) | |
Professional fees | 10,412 | | | 10,261 | | | 151 | | | 1.5 | |
Equipment | 10,322 | | | 10,100 | | | 222 | | | 2.2 | |
State taxes | 8,583 | | | 7,005 | | | 1,578 | | | 22.5 | |
FDIC insurance | 6,519 | | | 5,603 | | | 916 | | | 16.3 | |
Marketing | 4,029 | | | 8,345 | | | (4,316) | | | (51.7) | |
Amortization of tax credit investments | 4,594 | | | 4,516 | | | 78 | | | 1.7 | |
Intangible amortization | 397 | | | 1,285 | | | (888) | | | (69.1) | |
Prepayment penalty on FHLB advances | 2,878 | | | 4,326 | | | (1,448) | | | (33.5) | |
Other | 37,431 | | | 37,631 | | | (200) | | | (0.5) | |
Total non-interest expense | $ | 424,705 | | | $ | 428,762 | | | $ | (4,057) | | | (0.9) | % |
The $5.5 million, or 2.3%, increase in salaries and benefits reflects the net impact of changes in various items, including increases in salaries expense (due to normal merit increases) overtime expense, incentive compensation, health insurance expense and commissions (primarily mortgage banking). These increases were partially offset by higher deferrals of direct origination costs as a result of higher loan origination volumes and lower defined benefit plan expense.
Data processing and software increased $2.9 million, or 8.8%, reflecting higher transaction volumes and costs related to technology initiatives.
Other outside services decreased $8.7 million, or 27.3%, as the 2019 period included $6.6 million of expense associated with Charter Consolidation. Marketing expense also declined $4.3 million, or 51.7%, due to higher marketing expense associated with the Charter Consolidation in 2019.
State taxes increased $1.6 million, or 22.5%, primarily driven by an increase in Pennsylvania Bank Shares and Virginia franchise tax expenses, both due to growth in total assets and equity.
FDIC insurance increased $916,000, or 16.3%, compared to the same period in 2019, which included the recognition of assessment credits in the third quarter.
The Corporation redeemed certain long-term FHLB advances in the second quarter of 2020, which resulted in prepayment penalties of $2.9 million compared to 2019, which included approximately $4.3 million of penalties related to the prepayment of certain FHLB advances in conjunction with the balance sheet restructuring that was completed in the third quarter of 2019.
Income Taxes
Income tax expense for the nine months ended September 30, 2020 was $18.8 million, an $11.6 million decrease from $30.4 million for the same period in 2019. The Corporation’s ETR was 12.9% for the nine months ended September 30, 2020, as compared to 14.5% in the same period of 2019. The decrease in income tax expense and the ETR primarily resulted from a
decrease in income before taxes. 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.
FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | Increase (Decrease) |
| | | $ | | % |
Assets | (dollars in thousands) |
Cash and cash equivalents | $ | 1,534,890 | | | $ | 517,791 | | | $ | 1,017,099 | | | N/M |
FRB and FHLB Stock | 93,964 | | | 97,422 | | | (3,458) | | | (3.5) | |
Loans held for sale | 93,621 | | | 37,828 | | | 55,793 | | | 147.5 | |
Investment securities | 3,097,721 | | | 2,867,378 | | | 230,343 | | | 8.0 | |
Net Loans | 18,761,796 | | | 16,673,904 | | | 2,087,892 | | | 12.5 | |
Premises and equipment | 236,943 | | | 240,046 | | | (3,103) | | | (1.3) | |
Goodwill and intangibles | 534,907 | | | 535,303 | | | (396) | | | (0.1) | |
Other assets | 1,189,439 | | | 916,368 | | | 273,071 | | | 29.8 | |
Total Assets | $ | 25,543,281 | | | $ | 21,886,040 | | | $ | 3,657,241 | | | 16.7 | % |
Liabilities and Shareholders’ Equity | | | | | | | |
Deposits | $ | 20,730,051 | | | $ | 17,393,913 | | | $ | 3,336,138 | | | 19.2 | % |
Short-term borrowings | 611,727 | | | 883,241 | | | (271,514) | | | (30.7) | |
Long-term borrowings | 1,296,012 | | | 881,769 | | | 414,243 | | | 47.0 | |
Other liabilities | 515,230 | | | 384,941 | | | 130,289 | | | 33.8 | |
Total Liabilities | 23,153,020 | | | 19,543,864 | | | 3,609,156 | | | 18.5 | |
Total Shareholders’ Equity | 2,390,261 | | | 2,342,176 | | | 48,085 | | | 2.1 | |
Total Liabilities and Shareholders’ Equity | $ | 25,543,281 | | | $ | 21,886,040 | | | $ | 3,657,241 | | | 16.7 | % |
N/M - Not meaningful
Cash and Cash Equivalents
The $1.0 billion increase in cash and cash equivalents mainly resulted from additional cash maintained at the FRB due to deposit growth as well as additional collateral required to be posted with counterparties for derivative contracts.
Loans held for sale
Loans held for sale increased $55.8 million, or 147.5%, primarily as the result of an increase in the volume of residential mortgage originations due to higher refinancing activity.
Investment Securities
The following table presents the carrying amount of investment securities:
| | | September 30, 2020 | | December 31, 2019 | | Increase (Decrease) | | June 30, 2021 | | December 31, 2020 | | Increase (Decrease) |
| | | $ | | % | | | $ | | % |
Available for Sale | Available for Sale | (dollars in thousands) | Available for Sale | (dollars in thousands) |
| U.S. Government securities | | U.S. Government securities | $ | 153,545 | | | $ | — | | | $ | 153,545 | | | N/M |
U.S. Government sponsored agency securities | | U.S. Government sponsored agency securities | 62,431 | | | — | | | 62,431 | | | N/M |
State and municipal securities | State and municipal securities | $ | 926,554 | | | $ | 652,927 | | | $ | 273,627 | | | 41.9 | % | State and municipal securities | 1,055,462 | | | 952,613 | | | 102,849 | | | 10.8 | % |
Corporate debt securities | Corporate debt securities | 342,558 | | | 377,357 | | | (34,799) | | | (9.2) | | Corporate debt securities | 371,381 | | | 367,145 | | | 4,236 | | | 1.2 | |
Collateralized mortgage obligations | Collateralized mortgage obligations | 532,473 | | | 693,718 | | | (161,245) | | | (23.2) | | Collateralized mortgage obligations | 307,165 | | | 503,766 | | | (196,601) | | | (39.0) | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 321,695 | | | 177,312 | | | 144,383 | | | 81.4 | | Residential mortgage-backed securities | 201,547 | | | 377,998 | | | (176,451) | | | (46.7) | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 572,210 | | | 494,297 | | | 77,913 | | | 15.8 | | Commercial mortgage-backed securities | 871,010 | | | 762,415 | | | 108,595 | | | 14.2 | |
Auction rate securities | Auction rate securities | 97,990 | | | 101,926 | | | (3,936) | | | (3.9) | | Auction rate securities | 74,834 | | | 98,206 | | | (23,372) | | | (23.8) | |
| Total available for sale securities | Total available for sale securities | 2,793,480 | | | 2,497,537 | | | 295,943 | | | 11.8 | | Total available for sale securities | $ | 3,097,375 | | | $ | 3,062,143 | | | $ | 35,232 | | | 1.2 | % |
Held to Maturity | Held to Maturity | | Held to Maturity | | | | | | | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | 304,241 | | | 369,841 | | | (65,600) | | | (17.7) | | Residential mortgage-backed securities | $ | 439,220 | | | $ | 278,281 | | | $ | 160,939 | | | 57.8 | % |
| Commercial mortgage-backed securities | | Commercial mortgage-backed securities | 385,063 | | | — | | | 385,063 | | | N/M |
Total held to maturity securities | | Total held to maturity securities | $ | 824,283 | | | $ | 278,281 | | | $ | 546,002 | | | N/M |
| Total Investment Securities | Total Investment Securities | $ | 3,097,721 | | | $ | 2,867,378 | | | $ | 230,343 | | | 8.0 | % | Total Investment Securities | $ | 3,921,658 | | | $ | 3,340,424 | | | $ | 581,234 | | | 17.4 | % |
Total AFS securities increased $295.9$35.2 million, or 11.8%1.2%, primarily due toas the investment of a portionresult of the proceeds from the issuancepurchase of $375.0$153.5 million and $62.4 million of subordinated notes,U.S. Government securities and U.S. Government sponsored agency securities, respectively. The increase was partially offset by $376.2 million of residential and commercial mortgage backed securities transferred from the sale of investment securities,AFS classification to the HTM classification. In addition, the Corporation sold ARCs with an estimated fair value of $82.0$24.6 million completed during the secondfirst quarter of 2020 as part of a limited balance sheet restructuring that included the redemption of FHLB advances. See Note 14, "Long-Term Debt," in the Notes to Consolidated Financial Statements for additional detail on the subordinated notes issuance. 2021.
Total HTM securities decreased $65.6increased $546.0 million, or 17.7%, primarily as a result of principal repayments and premium amortization. There were nothe above mentioned transfer of AFS securities as well as purchases of or transfers into HTM securities during the periods presented.additional mortgage-backed securities.
Loans
The following table presents ending balances of Net Loans:
| | | September 30, 2020 | | December 31, 2019 | | Increase (Decrease) | | June 30, 2021 | | December 31, 2020 | | 2021 vs. 2020 Increase (Decrease) |
| | $ | | % | | $ | | % |
| | (dollars in thousands) | | (dollars in thousands) |
Real estate – commercial mortgage | Real estate – commercial mortgage | $ | 7,046,330 | | | $ | 6,700,776 | | | $ | 345,554 | | | 5.2 | % | Real estate – commercial mortgage | $ | 7,152,932 | | | $ | 7,105,092 | | | $ | 47,840 | | | 0.7 | % |
Commercial and industrial (1) | Commercial and industrial (1) | 5,968,154 | | | 4,446,701 | | | 1,521,453 | | | 34.2 | | Commercial and industrial (1) | 4,985,414 | | | 5,670,828 | | | (685,414) | | | (12.1) | |
Real estate – residential mortgage | Real estate – residential mortgage | 3,061,835 | | | 2,641,465 | | | 420,370 | | | 15.9 | | Real estate – residential mortgage | 3,555,897 | | | 3,141,915 | | | 413,982 | | | 13.2 | |
Real estate – home equity | Real estate – home equity | 1,222,709 | | | 1,314,944 | | | (92,235) | | | (7.0) | | Real estate – home equity | 1,136,128 | | | 1,202,913 | | | (66,785) | | | (5.6) | |
Real estate – construction | Real estate – construction | 1,007,534 | | | 971,079 | | | 36,455 | | | 3.8 | | Real estate – construction | 1,070,755 | | | 1,047,218 | | | 23,537 | | | 2.2 | |
Consumer | Consumer | 469,551 | | | 463,164 | | | 6,387 | | | 1.4 | | Consumer | 448,433 | | | 466,772 | | | (18,339) | | | (3.9) | |
Equipment lease financing and other | Equipment lease financing and other | 274,570 | | | 322,625 | | | (48,055) | | | (14.9) | | Equipment lease financing and other | 254,550 | | | 284,377 | | | (29,827) | | | (10.5) | |
Overdrafts | Overdrafts | 1,694 | | | 3,582 | | | (1,888) | | | (52.7) | | Overdrafts | 1,843 | | | 4,806 | | | (2,963) | | | (61.7) | |
Gross loans | Gross loans | 19,052,377 | | | 16,864,336 | | | 2,188,041 | | | 13.0 | | Gross loans | 18,605,952 | | | 18,923,921 | | | (317,969) | | | (1.7) | |
Unearned income | Unearned income | (23,756) | | | (26,810) | | | 3,054 | | | (11.4) | | Unearned income | (19,196) | | | (23,101) | | | 3,905 | | | (16.9) | |
Net Loans | Net Loans | $ | 19,028,621 | | | $ | 16,837,526 | | | $ | 2,191,095 | | | 13.0 | % | Net Loans | $ | 18,586,756 | | | $ | 18,900,820 | | | $ | (314,064) | | | (1.7) | % |
(1) Includes PPP loans totaling $2.0$1.1 billion for the nine months ended Septemberand $1.6 billion as of June 30, 2021 and December 31, 2020, respectively.
Net Loans increased $2.2 billion,decreased $314.1 million, or 13.0%1.7%, in comparison to December 31, 2019,2020, primarily due to growththe forgiveness of approximately $1.2 billion PPP loans during the first six months of 2021. Growth in commercial and industrial loans andthe commercial and residential mortgage portfolios and construction loans partially offset by decreases in home equity loansthe commercial and equipment lease financing. industrial and other loan portfolios.
The increase in the residential mortgage portfolio was the result of continued growth in originations and the strategic decision by the Corporation to hold a greater proportion of the originations on its balance sheet. The decrease in the commercial and industrial loansloan portfolio was impacted by the net effect of the forgiveness of approximately $2.0$1.2 billion of PPP loans.loans and the origination of approximately $753 million of new PPP loans during the first six months of 2021.
Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which are loans to individuals secured by residential real estate. Approximately $8.1$8.2 billion, or 42.3%44.2%, of the loan portfolio was in commercial mortgage and construction loans as of
September June 30, 2020.2021. The Corporation's internal policy limited its maximum total lending commitment to an individual borrowing relationship to $55 million as of SeptemberJune 30, 2020.2021. 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 borrowing relationship at the time the lending commitment is approved.
The Corporation has limited exposure to some of the industries that were initially most significantly impacted by COVID-19, such as hospitality, energy and entertainment, and most of these loans are secured by real estate and other forms of collateral. The following table summarizes the industry concentrations within the commercial mortgage and the commercial and industrial loan portfolios:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Real estate (1) | Real estate (1) | 39.4 | % | | 41.4 | % | Real estate (1) | 44.7 | % | | 41.4 | % |
Health care | Health care | 7.3 | | | 8.1 | | Health care | 7.6 | | | 8.7 | |
Agriculture | Agriculture | 5.9 | | | 7.1 | | Agriculture | 6.3 | | | 6.4 | |
Construction (2) | 4.4 | | | 6.2 | | |
Manufacturing | Manufacturing | 4.9 | | | 6.0 | | Manufacturing | 5.2 | | | 6.3 | |
Other services (3) | Other services (3) | 4.5 | | | 4.7 | | Other services (3) | 5.2 | | | 5.1 | |
Construction (2) | | Construction (2) | 4.3 | | | 6.4 | |
Hospitality and food services | | Hospitality and food services | 4.0 | | | 4.2 | |
Educational services | | Educational services | 3.1 | | | 3.3 | |
Retail | Retail | 3.3 | | | 4.2 | | Retail | 3.0 | | | 3.8 | |
Hospitality and food services | 3.6 | | | 4.1 | | |
Wholesale trade | Wholesale trade | 2.4 | | | 3.6 | | Wholesale trade | 3.0 | | | 3.3 | |
Educational services | 2.8 | | | 4.1 | | |
Arts, entertainment and recreation | | Arts, entertainment and recreation | 2.7 | | | 2.4 | |
Professional, scientific and technical services | Professional, scientific and technical services | 2.0 | | | 2.9 | | Professional, scientific and technical services | 2.2 | | | 3.6 | |
Arts, entertainment and recreation | 2.2 | | | 2.2 | | |
Public administration | Public administration | 1.6 | | | 2.0 | | Public administration | 1.5 | | | 1.7 | |
Transportation and warehousing | Transportation and warehousing | 1.3 | | | 1.2 | | Transportation and warehousing | 1.4 | | | 1.7 | |
Other (4) | 14.4 | | | 2.2 | | |
Other (4) (5) | | Other (4) (5) | 5.8 | | | 1.7 | |
Total | Total | 100.0 | % | | 100.0 | % | Total | 100.0 | % | | 100.0 | % |
(1) 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.
(3) Excludes public administration.
(4) Includes the energy sector and $2.0 billionsector.
(5)Includes $790.7 million of PPP loans.
loans, consisting primarily of loans originated during the six months ended June 30, 2021, as of June 30, 2021 and $136.7 million of PPP loans as of December 31, 2020. The remaining PPP loans were included within their respective industry classification above as of both June 30, 2021 and December 31, 2020.
The following table presents the changes in non-accrual loans for the three and ninesix months ended SeptemberJune 30, 2020:2021:
| | | Commercial and Industrial | | Real Estate - Commercial Mortgage | | Real Estate - Construction | | Real Estate - Residential Mortgage | | Real Estate - Home Equity | | Consumer | | Equipment Lease Financing | | Total | | Commercial and Industrial | | Real Estate - Commercial Mortgage | | Real Estate - Construction | | Real Estate - Residential Mortgage | | Real Estate - Home Equity | | Consumer | | Equipment Lease Financing | | Total |
| | (in thousands) | | (in thousands) |
Three months ended September 30, 2020 | | |
Balance at June 30, 2020 | $ | 39,379 | | | $ | 40,775 | | | $ | 3,482 | | | $ | 16,890 | | | $ | 7,723 | | | $ | — | | | $ | 16,823 | | | $ | 125,072 | | |
Three months ended June 30, 2021 | | Three months ended June 30, 2021 | |
Balance at March 31, 2021 | | Balance at March 31, 2021 | $ | 31,652 | | | $ | 51,977 | | | $ | 1,441 | | | $ | 33,401 | | | $ | 9,368 | | | $ | 301 | | | $ | 15,749 | | | $ | 143,889 | |
Additions | | Additions | 8,153 | | | 18,395 | | | — | | | 2,779 | | | 607 | | | 924 | | | 309 | | | 31,167 | |
Payments | | Payments | (5,670) | | | (9,982) | | | (425) | | | (909) | | | (484) | | | (20) | | | (32) | | | (17,522) | |
Charge-offs | | Charge-offs | (954) | | | (6,506) | | | — | | | (496) | | | (212) | | | (918) | | | (128) | | | (9,214) | |
| Transfers to OREO | | Transfers to OREO | — | | | (456) | | | — | | | — | | | — | | | — | | | — | | | (456) | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | 33,181 | | | $ | 53,428 | | | $ | 1,016 | | | $ | 34,775 | | | $ | 9,279 | | | $ | 287 | | | $ | 15,898 | | | $ | 147,864 | |
| Six months ended June 30, 2021 | | Six months ended June 30, 2021 | |
Balance at December 31, 2020 | | Balance at December 31, 2020 | $ | 31,993 | | | $ | 51,470 | | | $ | 1,395 | | | $ | 26,107 | | | $ | 9,588 | | | $ | 332 | | | $ | 16,312 | | | $ | 137,197 | |
Additions | Additions | 4,585 | | | 5,703 | | | 150 | | | 8,624 | | | 1,778 | | | 936 | | | 230 | | | 22,006 | | Additions | 18,063 | | | 24,457 | | | 404 | | | 10,423 | | | 1,228 | | | 1,549 | | | 482 | | | 56,606 | |
Payments | Payments | (5,721) | | | (4,775) | | | (2,010) | | | (186) | | | (276) | | | — | | | (133) | | | (13,101) | | Payments | (11,540) | | | (13,231) | | | (744) | | | (1,067) | | | (839) | | | (41) | | | (84) | | | (27,546) | |
Charge-offs | Charge-offs | (2,969) | | | (746) | | | — | | | (198) | | | (393) | | | (701) | | | (230) | | | (5,237) | | Charge-offs | (5,273) | | | (8,343) | | | (39) | | | (688) | | | (424) | | | (1,553) | | | (812) | | | (17,132) | |
Transfers to accrual status | Transfers to accrual status | — | | | (31) | | | — | | | (237) | | | (150) | | | — | | | — | | | (418) | | Transfers to accrual status | — | | | — | | | — | | | — | | | (274) | | | — | | | — | | | (274) | |
Transfers to OREO | Transfers to OREO | — | | | — | | | (1) | | | — | | | — | | | — | | | — | | | (1) | | Transfers to OREO | (62) | | | (925) | | | — | | | — | | | — | | | — | | | — | | | (987) | |
Balance at September 30, 2020 | $ | 35,274 | | | $ | 40,926 | | | $ | 1,621 | | | $ | 24,893 | | | $ | 8,682 | | | $ | 235 | | | $ | 16,690 | | | $ | 128,321 | | |
| Nine months ended September 30, 2020 | | |
Balance at December 31, 2019 | $ | 48,106 | | | $ | 33,166 | | | $ | 3,618 | | | $ | 16,676 | | | $ | 7,004 | | | $ | — | | | $ | 16,528 | | | $ | 125,098 | | |
Additions | 31,088 | | | 22,409 | | | 153 | | | 10,661 | | | 4,123 | | | 2,994 | | | 1,688 | | | 73,116 | | |
Payments | (26,572) | | | (10,677) | | | (2,132) | | | (729) | | | (1,051) | | | — | | | (828) | | | (41,989) | | |
Charge-offs | (17,348) | | | (3,925) | | | (17) | | | (620) | | | (1,167) | | | (2,759) | | | (698) | | | (26,534) | | |
Transfers to accrual status | — | | | (31) | | | — | | | (237) | | | (227) | | | — | | | — | | | (495) | | |
Transfers to OREO | — | | | (16) | | | (1) | | | (858) | | | — | | | — | | | — | | | (875) | | |
Balance at September 30, 2020 | $ | 35,274 | | | $ | 40,926 | | | $ | 1,621 | | | $ | 24,893 | | | $ | 8,682 | | | $ | 235 | | | $ | 16,690 | | | $ | 128,321 | | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | 33,181 | | | $ | 53,428 | | | $ | 1,016 | | | $ | 34,775 | | | $ | 9,279 | | | $ | 287 | | | $ | 15,898 | | | $ | 147,864 | |
Non-accrual loans increased approximately $3.2$4.0 million, or 2.6%2.8%, in comparison to both June 30, 2020 and DecemberMarch 31, 20192021, primarily as a result of additions to non-accrual loans during the respective periods,period, partially offset by payments and charge-offs.
The following table summarizes non-performing assets as of the indicated dates:
| | | September 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 | |
| | (dollars in thousands) | | (dollars in thousands) |
Non-accrual loans | Non-accrual loans | $ | 128,321 | | | $ | 125,098 | | | Non-accrual loans | $ | 147,864 | | | $ | 137,198 | | |
Loans 90 days or more past due and still accruing | Loans 90 days or more past due and still accruing | 13,761 | | | 16,057 | | | Loans 90 days or more past due and still accruing | 5,865 | | | 9,929 | | |
Total non-performing loans | Total non-performing loans | 142,082 | | | 141,155 | | | Total non-performing loans | 153,729 | | | 147,127 | | |
OREO (1) | OREO (1) | 4,565 | | | 6,831 | | | OREO (1) | 2,779 | | | 4,178 | | |
Total non-performing assets | Total non-performing assets | $ | 146,647 | | | $ | 147,986 | | | Total non-performing assets | $ | 156,508 | | | $ | 151,305 | | |
| Non-performing loans to total loans | Non-performing loans to total loans | 0.75 | % | | 0.84 | % | | Non-performing loans to total loans | 0.83 | % | | 0.78 | % | |
Non-performing assets to total assets | Non-performing assets to total assets | 0.57 | % | | 0.68 | % | | Non-performing assets to total assets | 0.60 | % | | 0.58 | % | |
| ACL - loans to non-performing loans | ACL - loans to non-performing loans | 188 | % | | 116 | % | | ACL - loans to non-performing loans | 166 | % | | 189 | % | |
(1) Excludes $9.6$7.4 million and $8.1 million of residential mortgage properties for which formal foreclosure proceedings were in process as of SeptemberJune 30, 2020.2021 and December 31, 2020, respectively
Non-performing loans increased $927,000,$6.6 million, or 0.7%4.5%, in comparison to December 31, 2019.2020. Non-performing loans as a percentage of total loans were 0.75%0.83% at SeptemberJune 30, 20202021 in comparison to 0.84%0.78% at December 31, 2019.2020. See Note 4, "Allowance"Loans and Allowance for Credit Losses, and Asset Quality," in the Notes to Consolidated Financial Statements for further details on non-performing loans.
The following table presents loans whose terms have been modified under TDRs, by type, as of the indicated dates:
| | | September 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 | |
| | (in thousands) | | (in thousands) |
Real estate - commercial mortgage | | Real estate - commercial mortgage | $ | 14,651 | | | $ | 28,451 | | |
Commercial and industrial | | Commercial and industrial | 6,765 | | | 6,982 | | |
Real estate - residential mortgage | Real estate - residential mortgage | $ | 19,427 | | | $ | 21,551 | | | Real estate - residential mortgage | 16,861 | | | 18,602 | | |
Real estate - home equity | Real estate - home equity | 14,875 | | | 15,068 | | | Real estate - home equity | 13,566 | | | 14,391 | | |
Real estate - commercial mortgage | 28,558 | | | 13,330 | | | |
Commercial and industrial | 7,328 | | | 5,193 | | | |
Real estate - construction | | Real estate - construction | 153 | | | — | | |
Consumer | | Consumer | 4 | | | — | | |
| Consumer | — | | | 8 | | | |
Total accruing TDRs | Total accruing TDRs | 70,188 | | | 55,150 | | | Total accruing TDRs | 52,000 | | | 68,426 | | |
Non-accrual TDRs (1) | Non-accrual TDRs (1) | 37,025 | | | 20,825 | | | Non-accrual TDRs(1) | 60,504 | | | 35,755 | | |
Total TDRs | Total TDRs | $ | 107,213 | | | $ | 75,975 | | | Total TDRs | $ | 112,504 | | | $ | 104,181 | | |
(1) Included with non-accrual loans in the preceding table.
The Company has adopted a disaster relief and assistance program and has provided assistance through payment deferrals and forbearances to consumer, small business and commercial customers that have been impacted by COVID-19.
The ability to identify potential problem loans in a timely manner is important to maintaining an adequate ACL. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals and consumer loans is based on payment history, through the monitoring of delinquency levels and trends. For a description of the Corporation's risk ratings, see Note 4, "Allowance"Loans and Allowance for Credit Losses, and Asset Quality," in the Notes to Consolidated Financial Statements.
Total internally risk-rated loans were $13.9$13.1 billion, of which $796.4 million$1.1 billion were criticized and classified, as of SeptemberJune 30, 2020,2021, and $12.0$13.7 billion, of which $662.6$961.1 million were criticized and classified, as of December 31, 2019.2020. The following table presents internal risk ratings for commercial and industrial loans, real estate - commercial mortgages and real estate - construction loans to commercial borrowers with internal risk ratings of Special Mention (1) or Substandard or lower (2):
| | | Special Mention (1) | | Increase (Decrease) | | Substandard or Lower (2) | | Increase (Decrease) | | Total Criticized and Classified Loans | | Special Mention (1) | | Increase (Decrease) | | Substandard or Lower (2) | | Increase (Decrease) | | Total Criticized and Classified Loans |
| | September 30, 2020 | | December 31, 2019 | | $ | | % | | September 30, 2020 | | December 31, 2019 | | $ | | % | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 | | $ | | % | | June 30, 2021 | | December 31, 2020 | | $ | | % | | June 30, 2021 | | December 31, 2020 |
| | (dollars in thousands) | | (dollars in thousands) |
Real estate - commercial mortgage | Real estate - commercial mortgage | $ | 268,983 | | | $ | 137,163 | | | $ | 131,820 | | | 96.1 | % | | $ | 156,050 | | | $ | 134,206 | | | $ | 21,844 | | | 16.3 | % | | $ | 425,033 | | | $ | 271,369 | | Real estate - commercial mortgage | $ | 541,773 | | $ | 478,165 | | $ | 63,608 | | 13.3% | | $ | 238,088 | | $ | 181,970 | | $ | 56,118 | | 30.8% | | $ | 779,861 | | $ | 660,135 |
Commercial and industrial | Commercial and industrial | 178,645 | | | 181,107 | | | (2,462) | | | (1.4) | | | 171,270 | | | 199,760 | | | (28,490) | | | (14.3) | | | 349,915 | | | 380,867 | | Commercial and industrial | 143,198 | | 154,039 | | (10,841) | | (7.0) | | 152,383 | | 128,175 | | 24,208 | | 18.9 | | 295,581 | | 282,214 |
Real estate - construction (3) | Real estate - construction (3) | 13,450 | | | 4,219 | | | 9,231 | | | N/M | | 7,973 | | | 6,137 | | | 1,836 | | | 29.9 | | | 21,423 | | | 10,356 | | Real estate - construction (3) | 19,092 | | 13,259 | | 5,833 | | 44.0 | | 3,942 | | 5,469 | | (1,527) | | (27.9) | | 23,034 | | 18,728 |
Total | Total | $ | 461,078 | | | $ | 322,489 | | | $ | 138,589 | | | 43.0 | % | | $ | 335,293 | | | $ | 340,103 | | | $ | (4,810) | | | (1.4) | % | | $ | 796,371 | | | $ | 662,592 | | Total | $ | 704,063 | | $ | 645,463 | | $ | 58,600 | | 9.1% | | $ | 394,413 | | $ | 315,614 | | $ | 78,799 | | 25.0% | | $ | 1,098,476 | | $ | 961,077 |
| % of total risk rated loans | % of total risk rated loans | 3.3 | % | | 2.7 | % | | 2.4 | % | | 2.8 | % | | 5.7 | % | | 5.5 | % | % of total risk rated loans | 5.4 | % | | 4.7 | % | | 3.0 | % | | 2.3 | % | | 8.4 | % | | 7.0 | % |
(1) Considered "criticized" loans by banking regulators
(2) Considered "classified" loans by banking regulators
(3) Excludes construction - other
N/M - Not meaningful
The increase in loans with internal risk ratings of substandard or lower that occurred during the six months ended June 30, 2021 was attributed to risk rating downgrades due to COVID-19 related shutdowns and restrictions on operations, mostly impacting the hospitality and food services and arts, entertainment and recreation sectors.
Provision and Allowance for Credit Losses
The following table presents the components of the ACL:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | (dollars in thousands) | | (dollars in thousands) |
ACL - loans | ACL - loans | $ | 266,825 | | | $ | 163,622 | | ACL - loans | $ | 255,032 | | | $ | 277,567 | |
ACL - OBS credit exposure (1) | ACL - OBS credit exposure (1) | 15,533 | | | 2,587 | | ACL - OBS credit exposure (1) | 14,773 | | | 14,373 | |
Total ACL | Total ACL | $ | 282,358 | | | $ | 166,209 | | Total ACL | $ | 269,805 | | | $ | 291,940 | |
| ACL - loans to net loans outstanding | 1.40 | % | | 0.97 | % | |
| |
(1) Included in "other liabilities" on the consolidated balance sheet.
The following table presents the activity in the ACL related to loans:
| | | Three months ended September 30 | | Nine months ended September 30 | | Three months ended June 30 | | Six months ended June 30 |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (dollars in thousands) | | (dollars in thousands) |
Average balance of net loans | $ | 18,880,519 | | | $ | 16,436,507 | | | $ | 18,027,253 | | | $ | 16,316,540 | | |
Average balance of Net Loans | | Average balance of Net Loans | $ | 18,906,556 | | | $ | 18,331,797 | | | $ | 18,943,367 | | | $ | 17,595,932 | |
| Balance of ACL - loans at beginning of period | $ | 256,537 | | | $ | 170,233 | | | $ | 163,622 | | | $ | 160,537 | | |
Balance of ACL at beginning of period | | Balance of ACL at beginning of period | $ | 265,986 | | | $ | 238,508 | | | $ | 277,567 | | | $ | 163,622 | |
Impact of adopting CECL on January 1, 2020 | Impact of adopting CECL on January 1, 2020 | — | | | — | | | 45,723 | | | — | | Impact of adopting CECL on January 1, 2020 | — | | | — | | | — | | | 45,723 | |
Loans charged off: | Loans charged off: | | Loans charged off: | |
Real estate – commercial mortgage | | Real estate – commercial mortgage | 6,506 | | | 2,324 | | | 8,343 | | | 3,179 | |
Commercial and industrial | Commercial and industrial | 2,969 | | | 7,181 | | | 17,348 | | | 11,863 | | Commercial and industrial | 954 | | | 3,480 | | | 5,273 | | | 14,379 | |
Real estate – residential mortgage | | Real estate – residential mortgage | 496 | | | 235 | | | 688 | | | 422 | |
Real estate – home equity | | Real estate – home equity | 212 | | | 458 | | | 424 | | | 745 | |
Real estate – construction | | Real estate – construction | — | | | 17 | | | 39 | | | 17 | |
Consumer | Consumer | 701 | | | 877 | | | 2,788 | | | 2,355 | | Consumer | 918 | | | 845 | | | 1,553 | | | 2,087 | |
Real estate – commercial mortgage | 746 | | | 394 | | | 3,925 | | | 1,769 | | |
Real estate – home equity | 393 | | | 498 | | | 1,138 | | | 923 | | |
Real estate – residential mortgage | 198 | | | 533 | | | 620 | | | 1,322 | | |
Real estate – construction | — | | | 45 | | | 17 | | | 143 | | |
Equipment lease financing and other | Equipment lease financing and other | 483 | | | 600 | | | 1,704 | | | 1,833 | | Equipment lease financing and other | 436 | | | 688 | | | 1,404 | | | 1,221 | |
Total loans charged off | Total loans charged off | 5,490 | | | 10,128 | | | 27,540 | | | 20,208 | | Total loans charged off | 9,522 | | | 8,047 | | | 17,724 | | | 22,050 | |
Recoveries of loans previously charged off: | Recoveries of loans previously charged off: | | Recoveries of loans previously charged off: | |
Real estate – commercial mortgage | | Real estate – commercial mortgage | 729 | | | 95 | | | 903 | | | 339 | |
Commercial and industrial | Commercial and industrial | 2,103 | | | 2,311 | | | 6,815 | | | 6,234 | | Commercial and industrial | 693 | | | 2,978 | | | 1,462 | | | 4,712 | |
Real estate – commercial mortgage | 100 | | | 444 | | | 439 | | | 749 | | |
Real estate – residential mortgage | | Real estate – residential mortgage | 105 | | | 112 | | | 200 | | | 197 | |
Real estate – home equity | Real estate – home equity | 44 | | | 132 | | | 305 | | | 552 | | Real estate – home equity | 58 | | | 44 | | | 109 | | | 261 | |
Real estate – residential mortgage | 95 | | | 440 | | | 292 | | | 783 | | |
Real estate – construction | Real estate – construction | 4,873 | | | 164 | | | 4,943 | | | 1,493 | | Real estate – construction | 254 | | | — | | | 638 | | | 70 | |
Consumer | Consumer | 447 | | | 216 | | | 1,481 | | | 1,005 | | Consumer | 576 | | | 605 | | | 965 | | | 1,034 | |
Equipment lease financing and other | Equipment lease financing and other | 185 | | | 107 | | | 385 | | | 484 | | Equipment lease financing and other | 153 | | | 92 | | | 312 | | | 200 | |
Total recoveries | Total recoveries | 7,847 | | | 3,814 | | | 14,660 | | | 11,300 | | Total recoveries | 2,568 | | | 3,926 | | | 4,589 | | | 6,813 | |
Net loans (recovered) charged off | (2,357) | | | 6,314 | | | 12,880 | | | 8,908 | | |
Net loan charged off | | Net loan charged off | 6,954 | | | 4,121 | | | 13,135 | | | 15,237 | |
Provision for credit losses (1) | Provision for credit losses (1) | 7,930 | | | 2,170 | | | 70,359 | | | 12,295 | | Provision for credit losses (1) | (4,000) | | | 22,150 | | | (9,400) | | | 62,429 | |
Balance of ACL - loans at end of period | $ | 266,825 | | | $ | 166,135 | | | $ | 266,825 | | | $ | 166,135 | | |
Balance of ACL at end of period | | Balance of ACL at end of period | $ | 255,032 | | | $ | 256,537 | | | $ | 255,032 | | | $ | 256,537 | |
| Net (recoveries) charge-offs to average loans (annualized) | (0.05) | % | | 0.15 | % | | 0.10 | % | | 0.07 | % | |
Net charge-offs to average loans (annualized) | | Net charge-offs to average loans (annualized) | 0.15 | % | | 0.09 | % | | 0.14 | % | | 0.17 | % |
(1) Provision for credit losses included in the table only includes the portion related to loans.
The provision for credit losses, specific to loans, for the three and ninesix months ended SeptemberJune 30, 2021 was negative $4.0 million and negative $9.4 million, respectively, compared to a provision expense of $22.2 million and $62.4 million, respectively, recorded in the same periods of 2020. Several factors during the first six months of 2021 in comparison to the end of the fourth quarter of 2020, including improved economic forecasts, reduced the level of the ACL determined to be necessary at the end of both the first and second quarters of 2021. The higher provision during the first six months of 2020 was $7.9 million and $70.4 million, respectively. Prior periods did not incorporate "life of loan"largely driven by the overall downturn in economic forecasts due to COVID-19, resulting in higher expected future credit losses under CECL and applied an incurred loss model, which would not have considered economic forecasts or forward-looking consideration over the remaining expectedCECL. The
lives of loans. The amounts recorded for the three and nine months ended September 30, 2020 were primarily driven by economic assumptions, which consideredACL includes qualitative adjustments, as appropriate, intended to capture the impact of COVID-19.uncertainties not reflected in the quantitative models. See Note 4, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements for further details on the provision for credit losses.
In addition, net recoveriesloan charge offs in the three months ended SeptemberJune 30, 2020 were an improvement of $8.72021 increased $2.8 million compared to the same period of 2019, primarily due to real estate construction recoveries of $4.9 million. However, net charge-offs in2020. For the ninesix months ended SeptemberJune 30, 2020 were $4.02021, net loan charge offs decreased $2.1 million higher compared to the same period of 2019. Annualized net (recoveries) charge-offs as a percentage of average loans for the three and nine months ended September 30, 2020 were (0.05)% and 0.10%, respectively, as compared to 0.15% and 0.07% during the same periods of 2019.2020.
The following table summarizes the allocation of the ACL - loans:
| | | September 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 | |
| | ACL - loans | | % In Each Loan Category (1) | | ACL - loans | | % In Each Loan Category (1) | | | ACL - loans | | % In Each Loan Category (1) | | ACL - loans | | % In Each Loan Category (1) | |
| | (dollars in thousands) | | (dollars in thousands) |
Real estate - commercial mortgage | Real estate - commercial mortgage | $ | 111,855 | | | 37.0 | % | | $ | 45,610 | | | 39.7 | % | | Real estate - commercial mortgage | $ | 95,381 | | | 38.3 | % | | $ | 103,425 | | | 37.6 | % | |
Commercial and industrial | Commercial and industrial | 58,838 | | | 31.3 | | | 68,602 | | | 26.4 | | | Commercial and industrial | 65,404 | | | 26.8 | | | 74,771 | | | 30.0 | | |
Real estate - residential mortgage | Real estate - residential mortgage | 48,353 | | | 16.1 | | | 19,771 | | | 15.7 | | | Real estate - residential mortgage | 54,188 | | | 19.1 | | | 51,995 | | | 16.6 | | |
Real estate - home equity | 16,298 | | | 6.4 | | | 17,744 | | | 7.8 | | | |
Consumer | 10,305 | | | 2.5 | | | 3,762 | | | 2.7 | | | |
Consumer, home equity, equipment lease financing | | Consumer, home equity, equipment lease financing | 27,405 | | | 9.9 | | | 31,770 | | | 10.3 | | |
Real estate - construction | Real estate - construction | 15,010 | | | 5.3 | | | 4,443 | | | 5.8 | | | Real estate - construction | 12,654 | | | 5.8 | | | 15,608 | | | 5.5 | | |
Equipment lease financing and other | 6,166 | | | 1.4 | | | 3,690 | | | 1.9 | % | | |
| Total ACL - loans | Total ACL - loans | $ | 266,825 | | | 100.0 | % | | $ | 163,622 | | | 100.0 | % | | Total ACL - loans | $ | 255,032 | | | 100.0 | % | | $ | 277,567 | | | 100.0 | % | |
(1) Ending loan balances as a % of total loans for the periods presented.
Other Assets
Other assets increased $273.1 million, or 29.8%, primarily due to higher fair values of derivative contracts for commercial loan interest rate swaps, an increase in the net deferred tax asset as the result of the adoption of CECL and a reclassification from accrued federal income tax, partially offset by the increase to the valuation allowance for MSRs.
Deposits and Borrowings
The following table presents ending deposits, by type:
| | | September 30, 2020 | | December 31, 2019 | | Increase (Decrease) | | June 30, 2021 | | December 31, 2020 | | Increase (Decrease) |
| | $ | | % | | $ | | % |
| | (dollars in thousands) | | (dollars in thousands) |
Noninterest-bearing demand | Noninterest-bearing demand | $ | 6,378,077 | | | $ | 4,453,324 | | | $ | 1,924,753 | | | 43.2 | % | Noninterest-bearing demand | $ | 7,442,132 | | | $ | 6,531,002 | | | $ | 911,130 | | | 14.0 | % |
Interest-bearing demand | Interest-bearing demand | 5,813,935 | | | 4,720,188 | | | 1,093,747 | | | 23.2 | | Interest-bearing demand | 5,795,404 | | | 5,818,564 | | | (23,160) | | | (0.4) | |
Savings | Savings | 5,805,431 | | | 5,153,941 | | | 651,490 | | | 12.6 | | Savings | 6,276,554 | | | 5,929,792 | | | 346,762 | | | 5.8 | |
Total demand and savings | Total demand and savings | 17,997,443 | | | 14,327,453 | | | 3,669,990 | | | 25.6 | | Total demand and savings | 19,514,090 | | | 18,279,358 | | | 1,234,732 | | | 6.8 | |
Brokered deposits | Brokered deposits | 317,588 | | | 264,531 | | | 53,057 | | | 20.1 | | Brokered deposits | 277,444 | | | 335,185 | | | (57,741) | | | (17.2) | |
Time deposits | Time deposits | 2,415,020 | | | 2,801,929 | | | (386,909) | | | (13.8) | | Time deposits | 1,932,778 | | | 2,224,664 | | | (291,886) | | | (13.1) | |
Total deposits | Total deposits | $ | 20,730,051 | | | $ | 17,393,913 | | | $ | 3,336,138 | | | 19.2 | % | Total deposits | $ | 21,724,312 | | | $ | 20,839,207 | | | $ | 885,105 | | | 4.2 | % |
Total demand and savings accounts increased $3.7$1.2 billion, or 25.6%6.8%, driven by increases in all categoriesnoninterest-bearing demand and savings accounts, primarily as the result of the funding of various government stimulus programs, which largely remainedstrong customer liquidity. These increases were partially offset by decreases in customer deposit accounts during the secondinterest-bearing demand, brokered and third quarters, and seasonal increases in municipal accounts.time deposits.
The following table presents ending borrowings, by type:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | Increase (Decrease) |
| | | $ | | % |
| (dollars in thousands) |
Short-term borrowings: | | | | | | | |
Customer funding(1) | $ | 611,727 | | | $ | 383,241 | | | $ | 228,486 | | | 59.6 | % |
| | | | | | | |
FHLB advances and other borrowings (2) | — | | | 500,000 | | | (500,000) | | | N/M |
Total short-term borrowings | 611,727 | | | 883,241 | | | (271,514) | | | (30.7) | |
Long-term borrowings: | | | | | | | |
FHLB advances | 535,986 | | | 491,024 | | | 44,962 | | | 9.2 | |
Other long-term debt | 760,026 | | | 390,745 | | | 369,281 | | | 94.5 | |
Total long-term borrowings | 1,296,012 | | | 881,769 | | | 414,243 | | | 47.0 | |
Total borrowings | $ | 1,907,739 | | | $ | 1,765,010 | | | $ | 142,729 | | | 8.1 | % |
| | | | | | | |
N/M - Not meaningful | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 | | Increase (Decrease) |
| | | $ | | % |
| (dollars in thousands) |
Short-term borrowings: | | | | | | | |
Customer funding (1) | $ | 533,749 | | | $ | 630,066 | | | $ | (96,317) | | | (15.3) | % |
| | | | | | | |
| | | | | | | |
Total short-term borrowings | 533,749 | | | 630,066 | | | (96,317) | | | (15.3) | |
Long-term borrowings: | | | | | | | |
FHLB advances | — | | | 535,973 | | | (535,973) | | | (100.0) | |
Other long-term borrowings | 627,213 | | | 760,290 | | | (133,077) | | | (17.5) | |
Total long-term borrowings | 627,213 | | | 1,296,263 | | | (669,050) | | | (51.6) | |
Total borrowings | $ | 1,160,962 | | | $ | 1,926,329 | | | $ | (765,367) | | | (39.7) | % |
| | | | | | | |
(1) Includes repurchase agreements and short-term promissory notes.
(2) Consists of FHLB borrowings with an original maturity term of less than one year.
Total short-term borrowings decreased $271.5$96.3 million, or 30.7%, due to a $500.0 million decrease in short-term FHLB advances and other borrowings partially offset by an increase of $228.5 million, or 59.6%, in customer funding.15.3%. The decrease in short-term borrowings was a result of higher balances of deposits, and the increase in long-term borrowings, reducing the need for short-term borrowings. Long-term FHLB advances increased $45.0 million, or 9.2%, and otherTotal long-term debt increased $369.3 million as the result of the issuance of $375.0 million of subordinated notes in March 2020 asborrowings decreased $669.1 million. As discussed in the "Overview" section of Management's Discussion.
Other Liabilities
Other liabilities increased $130.3Discussion, as part of a balance sheet restructuring, the Corporation prepaid $536.0 million or 33.8%, primarily as the result of an increaselong-term FHLB advances and completed a cash tender offer for $75.0 million of 4.50% subordinated debt due in 2024 and $60.0 million of 3.60% senior notes due in 2022. Also, See Note 14, "Long-Term Debt," in the fair values of derivative contracts relatedNotes to commercial loan interest rate swaps.Consolidated Financial Statements for further details.
Shareholders' Equity
Total shareholders’ equity increased $48.1$76.1 million during the first ninesix months of 2020.2021. The increase was due primarily to $127.2$138.0 million of net income, andpartially offset by $45.6 million of common stock cash dividends, a $57.1$17.9 million increasedecrease in accumulated other comprehensive income,AOCI, mainly due to improvementsdeclines in fair values of AFS securities, partially offset by a $43.8 million reduction to retained earnings as a result of the adoption of CECL on January 1, 2020, $39.7and $5.2 million of commonpreferred stock repurchases and $63.1 million of common stock cash dividends.
In October 2019,February 2021, the Corporation's board of directors approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $100.0$75.0 million of its outstanding shares of common stock, or approximately 3.9%3.2% of its outstanding shares, through December 31, 20202021. During the first quarter of 2020, 2.9 million shares were repurchased at a total cost of $39.7 million, or $13.65 per share, under this program. Up to an additional $60.3 million of the Corporation's common stock may be repurchased under this program. Under the repurchase program, repurchased shares wereare 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, through accelerated share repurchase transactions. The repurchase program may be discontinued at any time and was suspended in mid-March in order to preserve liquidity in response to potential unknown economic impactstime. No repurchases of common stock were made under this program during the COVID-19 pandemic.six months ended June 30, 2021.
Regulatory Capital
The Corporation and its subsidiary bank, Fulton Bank, are subject to regulatory capital requirements ("Capital Rules") administered by banking regulators. Failure to meet minimum capital requirements could result in certain actions by regulators that could have a material effect on the Corporation’s financial statements.
The Capital Rules require the Corporation and Fulton Bank 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 requireMeet a minimum Tier 1 Leverage capital ratio of 4.00% of average assets;
•Meet a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00%6.00% of averagerisk-weighted assets; and
•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, have been phased outare excluded as a component of Tier 1 capital for institutions of the Corporation's size.
The Corporation and Fulton Bank are also 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 Capital Rules use a standardized approach for risk weightings that expands 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 weightings for a variety of asset categories.
As of SeptemberJune 30, 2020,2021, the Corporation's capital levels met the fully phased-in minimum capital requirements, including the new capital conservation buffers, as prescribed in the Capital Rules.
In March 2020, the banking regulators amended the optional CECL Transition Rule to allow banks to add back to regulatory capital the decrease recorded to retained earnings at the CECL adoption date, or January 1, 2020 for the Corporation, plus 25% of additions to the ACL over the next two years. These amounts will then be phased in as reductions to regulatory capital over the following three years, or 2022 - 2024. Prior to this amendment, the regulatory capital impact of adopting CECL was to be phased in over a 3-year period beginning in 2020. The Corporation has elected to apply the amended rule to the regulatory capital treatment for the adoption of CECL.
As of SeptemberJune 30, 2020,2021, Fulton Bank met the well capitalized requirements under the regulatory framework for prompt corrective action. 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 Tier I leverage ratios as set forth in the regulation. In October 2020, the Corporation issued 8,000,000 depositary shares of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, and received net proceeds from the offering of $193.7 million, after deducting underwriting discounts and commissions and before deducting transaction expenses payable by the Corporation. See Note 15, "Subsequent Event," in the Notes to Consolidated Financial Statements for additional details. Preferred stock is included in both Tier 1 and Tier 2 regulatory capital, and would have the effect of increasing the Total Capital, Tier 1 Capital and Tier I Leverage Capital ratios by approximately 1.00%. There were no other conditions or events since SeptemberJune 30, 20202021 that management believes have changed the Corporation's capital categories.
The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:
| | | September 30, 2020 | | December 31, 2019 | | Regulatory Minimum for Capital Adequacy | | Fully Phased-in, with Capital Conservation Buffers | | June 30, 2021 | | December 31, 2020 | | Regulatory Minimum for Capital Adequacy | | Fully Phased-in, with Capital Conservation Buffers |
Total Capital (to Risk-Weighted Assets) | Total Capital (to Risk-Weighted Assets) | 13.8 | % | | 11.8 | % | | 8.0 | % | | 10.5 | % | Total Capital (to Risk-Weighted Assets) | 14.5 | % | | 14.4 | % | | 8.0 | % | | 10.5 | % |
Tier I Capital (to Risk-Weighted Assets) | Tier I Capital (to Risk-Weighted Assets) | 9.6 | % | | 9.7 | % | | 6.0 | % | | 8.5 | % | Tier I Capital (to Risk-Weighted Assets) | 11.0 | % | | 10.5 | % | | 6.0 | % | | 8.5 | % |
Common Equity Tier I (to Risk-Weighted Assets) | Common Equity Tier I (to Risk-Weighted Assets) | 9.6 | % | | 9.7 | % | | 4.5 | % | | 7.0 | % | Common Equity Tier I (to Risk-Weighted Assets) | 10.0 | % | | 9.5 | % | | 4.5 | % | | 7.0 | % |
Tier I Leverage Capital (to Average Assets) | Tier I Leverage Capital (to Average Assets) | 7.5 | % | | 8.4 | % | | 4.0 | % | | 4.0 | % | Tier I Leverage Capital (to Average Assets) | 8.5 | % | | 8.2 | % | | 4.0 | % | | 4.0 | % |
The increase in the total capital ratio from December 31, 2019 to September 30, 2020 was mainly due to the issuance of $375.0 million of subordinated notes, which is a component of Tier 2 Capital, in March 2020, as discussed in the "Overview" of Management's Discussion, partially offset by common stock repurchases during the quarter. The decrease in the Tier 1 Leverage Capital ratio was mainly due to growth in average assets.
Item 3. 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 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 bp shock in interest rates, 15% for a 200 bp shock, and 20% for a 300 bp shock and 25% for a 400 bp 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, that is, a non-parallel instantaneous shock, on net interest income as of SeptemberJune 30, 20202021 (due to the current level of interest rates, the downward shock scenarios are not shown):
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Rate Shock(1) | Annual change in net interest income | | % change in net interest income |
+400 bp | + $116.3$186.1 million | | 18.7%30.4% |
+300 bp | + $87.5$139.5 million | | 14.1%22.7% |
+200 bp | + $58.0$92.4 million | | 9.3%15.1% |
+100 bp | + $27.3$44.6 million | | 4.4%7.3% |
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(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 bp shock in interest rates, 20% for a 200 bp shock and 30% for a 300 bp shock. As of September 30, 2020, the Corporation was within economic value of equity policy limits for every 100 bp shock.
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 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.
Cash Flow Hedges of Interest Rate Risk
The Corporation’s objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Corporation primarily uses interest rate swaps as part of its interest rate risk management strategy. During the first quarter of 2021, the Corporation entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Corporation making floating-rate payments over the life of the agreements without exchange of the underlying notional amount.
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 demandinterest-bearing deposits and savings deposits, brokered deposits, time deposits, repurchasecustomer funding (repurchase agreements and short-term promissory notes.notes). The Corporation can access additional liquidity from these sources, if necessary, by increasing the rates of interest paid on those accounts and borrowings.instruments. 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 experience a proportionate increase. Borrowing availability with the FHLB and the FRB, along with federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.
Fulton Bank is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of SeptemberJune 30, 2020,2021, the Corporation had $539.0$3.0 million of borrowings outstanding from the FHLB with an additional borrowing capacity of approximately $3.8 $5.4billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.
As of SeptemberJune 30, 2020,2021, the Corporation had aggregate federal funds lines of $1.8$2.1 billion, with no outstanding borrowings. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve BankFRB of Philadelphia to provide access to Federal Reserve BankFRB Discount Window borrowings. As of SeptemberJune 30, 2020,2021, the Corporation had $373$799.2 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 a subsidiary bank to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary bank's regulatory capital levels and its net income. Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain sufficiently 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 operating activities during the first ninesix months of 20202021 provided $29.5$233.6 million of cash, mainly due to net income of $127.2$138.0 million, partially offsetand by the net impact of other operating activities. Cash used in investing activities was $2.4 billion,$217.3 million, mainly due to net increases in loans and investments.investments, partially offset by net decreases in loans. Cash provided by financing activities was $3.4 billion$39.9 million due mainly to increases in demand and savings deposits.deposits, partially offset by the repayments of long-term borrowings and decreases in time deposits and short-term borrowings.
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 residential mortgage-backed and commercial 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 residential mortgage-backed securitiesand commercial mortgage-backed and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.
State and Municipal Securities
As of SeptemberJune 30, 2020,2021, the Corporation owned securities issued by various states orand municipalities with a total cost basis of $880.5 million and a fair value of $926.6 million. Downward pressure$1.1 billion. Uncertainty with respect to the financial strength of state and municipal bond insurers places emphasis on the underlying strength of issuers. Pressure 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 underlying credit enhancement. State orand 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 SeptemberJune 30, 2020, approximately2021, substantially all of state and municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 64%65% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.
Corporate DebtAuction Rate Securities
The Corporation holds corporate debt securities in the form of subordinated debt and senior debt issued by financial institutions. As of SeptemberJune 30, 2020, these securities2021, the Corporation’s investments in ARCs had an amortizeda cost basis of $327.1$76.4 million and an estimated fair value of $342.6$74.8 million. During the second quarter of 2020, the Corporation sold corporate debt securities with an amortized cost of $66.8 million and an estimated fair value of $66.9 million.
See "Note 9 - Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to theThe 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 securities.associated with the ARCs is also a factor in the determination of their estimated fair value. As of June 30, 2021, all of the ARCs were rated above investment grade. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. At June 30, 2021, all of the Corporation's ARCs were current and making scheduled interest payments.
PART II – OTHER INFORMATION
Item 4. 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 the design and operation of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-15, promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, 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 Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.
There have been no changes in the Corporation’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The information presented in the "Legal Proceedings" section of Note 13 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements is incorporated herein by reference.
Item 4. 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 the design and operation of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-15, promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, 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 Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.
Changes in Internal Control over Financial Reporting
During the first quarter of 2020, the Corporation implemented new CECL accounting policies, procedures, and controls as part of its adoption of ASU No. 2016-13 and subsequent ASUs issued to amend ASC Topic 326. There were no other changes made to the Corporation’s internal control over financial reporting that materially affected, or would be reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Item 1A. Risk Factors
Item 1A. Risk Factors of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2019 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 include a discussion of the material risks and uncertainties that could adversely affect the Corporation's business, results of operations and financial condition. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in the Annual Report on Form 10-K and Quarterly Report on Form 10-Q.
The Corporation may not be able to achieve the reductions in non-interest expenses expected to result from the recently announced plans to consolidate certain of its financial center offices and other cost-saving initiatives in the amount, or within the timeframe, anticipated, and those initiatives may have an adverse impact on the Corporation’s competitive position and ability to achieve its growth plans.
It is possible that the Corporation will not be able to implement its previously announced plans to consolidate certain of its financial center offices and other cost-saving initiatives as planned, achieve the reductions in non-interest expenses expected to result from these initiatives in the amount, or within the timeframe, anticipated, or create the cost efficiencies intended through these initiatives.Moreover, these initiatives could adversely impact the retention of customers and deposit balances, harm the Corporation’s relationships with its customers, weaken the Corporation’s competitive position, or make it more difficult for the Corporation to achieve its growth plans.Any of these circumstances, should they arise, could have a material adverse effect on the Corporation’s business or results of operations.
There have been no other material changes to the risk factors previously disclosed in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c) In October 2019,On February 9, 2021, the Corporation'sCorporation announced that its board of directors approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $100.0$75.0 million of its outstanding shares of common stock, or approximately 3.9%3.2% of its outstanding shares, through December 31, 20202021. During the first quarter of 2020, 2.9 million shares were repurchased at a total cost of $39.7 million, or $13.65 per share. Up to an additional $60.3 million of the Corporation's common stock may be repurchased under this program through December 31, 2020. Under the repurchase program, repurchased shares wereare 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, through accelerated share repurchase transactions. The repurchase program may be discontinued at any time and was suspended in mid-Marchtime. No repurchases of 2020 in order to preserve liquidity in response to potential unknown economic impacts due tocommon stock were made under this program during the COVID-19 pandemic.six months ended June 30, 2021.
Item 6. Exhibits
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101 | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. | |
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104 | | | Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101) | |
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FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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FULTON FINANCIAL CORPORATION | | |
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Date: | | November 6, 2020August 9, 2021 | | /s/ E. Philip Wenger |
| | | | E. Philip Wenger |
| | | | Chairman and Chief Executive Officer |
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Date: | | November 6, 2020August 9, 2021 | | /s/ Mark R. McCollom |
| | | | Mark R. McCollom |
| | | | Senior Executive Vice President and Chief Financial Officer |
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