FULTON FINANCIAL CORPORATION
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, 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, and the direct and indirect impacts of the pandemic on the Corporation, its customers and third parties. •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 andFulton 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 from regulatory violations, investigations and examinations, or failure to comply with the BSA, the Patriot Act and related AML requirements, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions and the need to undertake remedial actions; •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 theFederal Reserve Board and other government agencies, that impact money supply and market interest rates; •the effects of changes inU.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; 45 -------------------------------------------------------------------------------- •completed and potential acquisitions may affect costs and the Corporation may not be able to successfully integrate the acquired business or realize the anticipated benefits from such acquisitions; •the effects of competition on deposit rates and growth, loan rates and growth and net interest margin; •the Corporation's ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment; •the effects of changes in accounting policies, standards, and interpretations on the Corporation's reporting of its financial condition and results of operations; •the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework; •the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements; •the failure or circumvention of the Corporation's system of internal controls; •the loss of, or failure to safeguard, confidential or proprietary information; •the Corporation's failure to identify and to address cyber-security risks, including data breaches and cyber-attacks; •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 orFulton 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 endedDecember 31, 2019 , Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 and elsewhere in this Report, including in Note 13 "Commitments and Contingencies." 46 --------------------------------------------------------------------------------
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, non-interest expenses and income taxes.
The following table presents a summary of the Corporation's earnings and selected performance ratios:
Three months ended June 30 Six months ended June 30
2020 2019 2020 2019
Net income (in thousands) $39,559 $59,779 $65,606 $116,442
Diluted net income per share $0.24 $0.35 $0.40 $0.68
Return on average assets 0.66% 1.14% 0.57% 1.12%
Return on average shareholders' equity 6.89% 10.42% 5.68% 10.28%
Return on average tangible shareholders' equity (1) 8.99% 13.60% 7.40% 13.44%
Net interest margin (2) 2.81% 3.44% 3.01% 3.46%
Efficiency ratio (1) 66.4% 64.2% 65.4% 64.1%
Non-performing assets to total assets 0.59% 0.73% 0.59% 0.73%
Annualized net charge-offs (recoveries) to average loans 0.09%
(0.04)% 0.17% 0.03%
(1)Ratio represents a financial measure derived by methods other than GAAP. See
reconciliation of this non-GAAP financial measure to the most 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 disruption in economic and social activity, both globally and in the
United States . The spread of COVID-19, and the related government actions to
mandate or encourage temporary closures of businesses, quarantines, social
distancing, "stay at home" orders, have caused severe disruptions in the U.S.
economy, which has, in turn, disrupted, and will likely continue to disrupt the
business and other restrictions on in-person operations, activities, and
operations of the Company's customers, as well as the Company's own business and
operations. The resulting impacts of COVID-19 on consumers, including the
sudden, significant increase in the unemployment rate, is expected to cause
changes in consumer and business spending, borrowing needs and saving habits,
which will likely affect the demand for loans and other products and services
the Company offers, as well as the creditworthiness of current and prospective
borrowers. The significant decrease in commercial activity and disruptions in
supply chains associated with the pandemic, both nationally and in the Company's
markets, may cause customers, vendors, and counterparties to be unable to meet
existing payment or other obligations to the Company. If borrowers are unable to
meet their payment obligations, the Company will be required to increase the ACL
through provisions for credit losses.
The Company expects COVID-19 to limit, at least for a period 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
most locations to drive-up and ATM services, with lobby access available by
appointment only, reduced hours of operation at some locations, temporarily
closed some locations and encouraged the Company'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 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 progression
of COVID-19 and governmental restrictions and recommendations, and include the
addition of new
47
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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.
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 adversely affect net interest income and margins and 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 who meet the
necessary eligibility requirements in order to keep their workers on the
payroll. As of June 30, 2020 , under the PPP the Company funded approximately
10,000 new loans totaling $1.9 billion .
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. The
eventual 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, either of which could require the
Company to increase the ACL through provisions for credit losses.
The impact of COVID-19 on the Company's financial results is evolving and
uncertain. The Company has limited exposure to some of the industries that were
initially most significantly impacted by COVID-19, such as accommodation and
food services, energy and entertainment, and most of these loans are secured by
real estate and other forms of collateral. However, the overall slowing of the
economy and lack of growth in gross domestic product may result in a decreased
demand for the Company'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'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 effectiveJanuary 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost, and OBS credit exposures. Results for reporting periods beginning afterJanuary 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 onJanuary 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 onJanuary 1, 2020 , representing the cumulative effect of adoption.
Summary of Financial Results for the three and six months ended
•Net Income and Net Income Per Share - Net income was$39.6 million and$65.6 million for the three and six months endedJune 30, 2020 , respectively. For the three months endedJune 30, 2020 , net income decreased$20.2 million , or 33.8%, compared to the same period in 2019. Diluted net income per share was$0.24 , an$0.11 , or 31.4%, decrease compared to the same period in 2019. Net income for the six months endedJune 30, 2020 decreased$50.8 million , or 43.7%, compared to the same period in 2019, and diluted net income per share was$0.40 , a$0.28 , or 41.2%, decrease compared to the same period in 2019. The decreases in net income for both periods were primarily a result of lower net interest income, and a higher provision for credit losses, as a result of the adoption of CECL and deteriorating economic assumptions resulting from COVID-19. •Net Interest Income- Net interest income decreased$11.8 million , or 7.2%, and$14.4 million , or 4.4%, for the three and six months endedJune 30, 2020 , 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 63 bp and 45 bp for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. •Net Interest Margin - For the three and six months endedJune 30, 2020 , the decreases in the net interest margin reflect the net impact of a 105 bp and a 73 bp decrease in yields on interest-earning assets, respectively, partially offset by a 40 bp and 31 bp decrease in the cost of funds, respectively. 48 -------------------------------------------------------------------------------- •Loan Growth - Average Net Loans grew by$2.0 billion , or 12.4%, and$1.3 billion , or 8.2%, for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. The increases were driven largely by the issuance of PPP loans and were partially offset by a reduction in utilization of lines of credit by customers who received the PPP loans. •Deposit Growth - Average deposits grew$2.9 billion , or 17.7%, and$1.9 billion , or 11.5%, for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. 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 PPP loans, which largely remained in customer deposit accounts during the second quarter as well as reduced consumer spending and government stimulus payments which also largely remained in customer deposit accounts during the second quarter. •Long-term Debt - InMarch 2020 , the Corporation issued a total of$375.0 million of subordinated notes, with$200.0 million of subordinated notes due in 2030 having a fixed-to-floating rate of 3.25% and an effective rate of 3.35% and$175.0 million of subordinated notes due in 2035 having a fixed-to-floating rate of 3.75% and an effective rate of 3.85%. •Asset Quality - Non-performing assets decreased$2.8 million as ofJune 30, 2020 compared toDecember 31, 2019 . Annualized net charge-offs to average loans outstanding were 0.09% and 0.17% for the three and six months endedJune 30, 2020 , respectively, compared to net recoveries of (0.04)% and net charge-offs of 0.03% for the same periods in 2019, respectively. The provisions for credit losses for the three and six months endedJune 30, 2020 were$19.6 million and$63.6 million , respectively, compared to$5.0 million and$10.1 million , respectively, for the same periods in 2019. The higher provision during the first six 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 increased compared to those at the time of adoption of CECL onJanuary 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. •Non-interest Income - For the three and six months endedJune 30, 2020 , non-interest income, excluding net investment securities gains, decreased$1.2 million , or 2.3%, and increased$6.7 million , or 6.6%, respectively, as compared to the same periods in 2019. For the three months endedJune 30, 2020 , decreases were experienced in all categories except for mortgage banking which increased$3.4 million , or 51.1%, driven by an increase in gains on sales of mortgage loans, partially offset by a$6.6 million increase to the valuation allowance for MSRs and other income, which increased$1.7 million . For the six months endedJune 30, 2020 , increases were experienced in mortgage banking, partially offset by a$7.7 million increase to the valuation allowance for MSRs, commercial banking and wealth management. •Non-interest Expense - Non-interest expense decreased$1.2 million , or 0.8%, and increased$3.6 million , or 1.3%, for the three and six months endedJune 30, 2020 , respectively, in comparison to the same periods in 2019. The decrease during the three months endedJune 30, 2020 was primarily the result of lower outside services, marketing and net occupancy, partially offset by higher salaries and employee benefits and a prepayment penalty of$2.9 million for the early termination of some long-term FHLB advances. The increase during the six months endedJune 30, 2020 was primarily the result of higher salaries and employee benefits, the prepayment penalty and increases in data processing and software expenses, partially offset by decreases in outside services and marketing. •Income Taxes - Income taxes were$6.5 million and$9.3 million for the three and six months endedJune 30, 2020 , respectively, resulting in ETRs, or income taxes as a percentage of income before income taxes, of 14.2% and 12.4%, respectively, as compared to 14.2% and 14.9% for the same periods in 2019, respectively. The ETR was lower for the six months endedJune 30, 2020 mainly due to lower income before income 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. 49 --------------------------------------------------------------------------------
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. 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:
Six months ended June
Three months ended June 30 30
2020 2019 2020 2019
(dollars in thousands)
Return on average tangible shareholders' equity
Net income $ 39,559 $ 59,779 $ 65,606 $ 116,442
Plus: Intangible amortization, net of tax 104 85 208 170
Numerator $ 39,663 $
59,864
Average common shareholders' equity
(535,103) (535,301) (535,169) (533,544)
Average tangible shareholders' equity
(denominator) $ 1,774,030 $
1,765,957
Return on average tangible shareholders' equity, annualized 8.99 % 13.60 % 7.40 % 13.44 % Efficiency ratio Non-interest expense$ 143,006 $
144,168
- (2,878) -
Less: Amortization of tax credit
investments (1,450) (1,492) (2,900) (2,983)
Less: Intangible amortization (132) (107) (264) (214)
Numerator $ 138,546 $ 142,569 $ 279,516 $ 278,795
Net interest income (FTE) (1) $ 155,854 $
167,796
55,922 54,315 110,566 101,066
Less: Investment securities gains, net (3,005) (176) (3,051) (241)
Denominator $ 208,771 $ 221,935 $ 427,340 $ 435,185
Efficiency ratio 66.4 % 64.2 % 65.4 % 64.1 %
(1) Presented on a FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. See also the "Net Interest Income" section of Management's Discussion and Analysis.
50
--------------------------------------------------------------------------------CRITICAL ACCOUNTING POLICIES
The Corporation's Annual Report on Form 10-K for the fiscal year endedDecember 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
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 government stimulus, the Corporation evaluated a range of economic scenarios, including more and less severe economic deteriorations in the second quarter of 2020, with varying speeds of recovery. In isolation, assuming a more prolonged recession through 2021 with elevated unemployment levels through the latter half of 2022, the CECL estimate may have resulted in a significantly higher ACL. However, because qualitative adjustments are a part of the allowance methodology, the actual impact of a change in assumptions is not determinable. 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 onJanuary 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.
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Three months ended
Net Interest Income FTE net interest income decreased$11.9 million , to$155.9 million , for the three months endedJune 30, 2020 , from$167.8 million in the same period in 2019. The NIM decreased 63 bp, or 18.2%, to 2.81%, compared to 3.44% for the same period in 2019. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. Three months ended June 30 2020 2019 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ASSETS (dollars in thousands) Interest-earning assets: Net Loans (1)$ 18,331,797 $ 160,613 3.52 %$ 16,316,076 $ 190,694 4.69 % Taxable investment securities (2) 2,200,870 15,171 2.76 2,348,443 15,935
2.71
Tax-exempt investment securities (2) 830,836 6,737 3.23 444,227 4,141 3.70 Total investment securities 3,031,706 21,908 2.89 2,792,670 20,076 2.87 Loans held for sale 55,608 509 3.66 24,568 350 5.71 Other interest-earning assets 815,910 766 0.38 409,617 2,168
2.12
Total interest-earning assets 22,235,021 183,796 3.32 19,542,931 213,288 4.37 Noninterest-earning assets: Cash and due from banks 153,728 116,285 Premises and equipment 240,417 240,666 Other assets 1,761,038 1,321,057 Less: ACL - loans (3) (251,088) (163,909) Total Assets$ 24,139,116 $ 21,057,030 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand deposits$ 5,103,419 $ 2,219 0.17 %$ 4,186,280 $ 8,173 0.78 % Savings deposits 5,446,368 3,331 0.25 4,925,788 10,550 0.86 Brokered deposits 312,121 422 0.54 246,154 1,582 2.58 Time deposits 2,624,962 11,145 1.71 2,816,424 12,245 1.74 Total interest-bearing deposits 13,486,870 17,118 0.51 12,174,646 32,550 1.07 Short-term borrowings 707,771 517 0.29 941,504 4,462 1.89 FHLB advances and long-term debt 1,361,421 10,307 3.03 1,051,919 8,480
3.23
Total interest-bearing liabilities 15,556,062 27,942 0.72 14,168,069 45,492
1.29
Noninterest-bearing liabilities: Demand deposits 5,789,788 4,200,810 Total Deposits/Cost of deposits 19,276,658 0.36 16,375,456 0.80 Other liabilities 484,133 386,893 Total Liabilities 21,829,983 18,755,772 Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds 21,345,850 0.53 18,368,879
0.93
Shareholders' equity 2,309,133 2,301,258 Total Liabilities and Shareholders' Equity$ 24,139,116 $ 21,057,030 Net interest income/FTE NIM 155,854 2.81 % 167,796 3.44 % Tax equivalent adjustment (3,100) (3,252) Net interest income$ 152,754 $ 164,544 (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. 52 -------------------------------------------------------------------------------- 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 endedJune 30, 2020 in comparison to the same period in 2019: 2020 vs. 2019 Increase (Decrease) due to change in Volume Rate Net (in thousands) FTE Interest income on: Net Loans$ 21,408 $ (51,489) $ (30,081) Taxable investment securities (1,131) 367 (764) Tax-exempt investment securities 3,170 (574) 2,596 Loans held for sale 319 (160) 159 Other interest-earning assets 1,173 (2,575) (1,402) Total interest income$ 24,939 $ (54,431) $ (29,492) Interest expense on: Demand deposits$ 1,275 $ (7,229) $ (5,954) Savings deposits 1,007 (8,225) (7,218) Brokered deposits 267 (1,427) (1,160) Time deposits (877) (223) (1,100) Short-term borrowings (896) (3,048) (3,945) Long-term borrowings 2,364 (537) 1,827 Total interest expense$ 3,139 $ (20,689) $ (17,550)
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.
TheFOMC decreased the Fed Funds Rate by 25 bp in each of August, September and October of 2019. InMarch 2020 , theFOMC 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. As summarized in the preceding table, the 105 bp decrease in the yield on average interest-earning assets drove a$54.4 million decrease in FTE interest income, but was partially offset by the impact of a$2.7 billion , or 13.8%, increase in interest-earning assets, primarily loans, which contributed$24.9 million to FTE interest income. The yield on the loan portfolio decreased 117 bp, or 24.9%, from the second quarter of 2019, 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, the impact of changes in index rates on adjustable rate loans may not be fully realized until future periods. Interest expense decreased$17.6 million primarily due to the 57 bp decrease in the rate on average interest-bearing liabilities. The rates on average interest-bearing demand deposits and savings deposits both decreased 61 bp, which contributed$7.2 million and$8.2 million to the decrease in interest expense, respectively. Brokered deposit rates decreased 204 bp, which contributed$1.4 million to the decrease in interest expense. In addition, the 160 bp decrease in the rates on short-term borrowings contributed$3.0 million to the decrease in interest expense. The$309.5 million increase in long-term borrowings contributed$2.4 million of additional interest expense, partially offset by a$537,000 decrease in additional interest expense as a result of 20 bp decrease in the average rate. 53
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Average loans and average FTE yields, by type, are summarized in the following table:
Three months ended June 30 Increase (Decrease)
2020 2019 in Balance
Balance Yield Balance Yield $ %
(dollars in thousands)
Real estate - commercial mortgage $ 6,875,872 3.47 % $ 6,424,213 4.67 % $ 451,659 7.0 %
Commercial and industrial 5,710,145 3.35 4,440,860 4.73 1,269,285 28.6
Real estate - residential mortgage 2,769,682 3.88 2,366,685 4.09 402,997 17.0
Real estate - home equity 1,271,190 3.91 1,404,141 5.35 (132,951) (9.5)
Real estate - construction 941,079 3.53 943,080 5.29 (2,001) (0.2)
Consumer 465,728 4.17 445,666 4.38 20,062 4.5
Equipment lease financing 284,658 3.44 279,619 4.45 5,039 1.8
Other 13,443 - 11,812 - 1,631 13.8
Total loans $ 18,331,797 3.52 % $ 16,316,076 4.69 % $ 2,015,721 12.4 %
Average loans increased $2.0 billion , or 12.4%, compared to the same period of
2019. The increase was driven largely by growth in the commercial and industrial
portfolio as a result of loans originated under the PPP. Excluding loans
originated under the PPP, commercial and industrial loan balances declined
primarily as a result of reduced utilization of lines of credit. Commercial and
residential mortgage loan portfolios, as well as the 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:
Three months ended June 30 Increase (Decrease)
2020 2019 in Balance
Balance Rate Balance Rate $ %
(dollars in thousands)Noninterest-bearing demand$ 5,789,788 - %$ 4,200,810 - %$ 1,588,978 37.8 % Interest-bearing demand 5,103,419 0.17 4,186,280 0.78 917,139 21.9 Savings 5,446,368 0.25 4,925,788 0.86 520,580 10.6 Total demand and savings 16,339,575 0.14 13,312,878 0.56 3,026,697 22.7 Brokered deposits 312,121 0.54 246,154 2.58 65,967 26.8 Time deposits 2,624,962 1.71 2,816,424 1.74 (191,462) (6.8) Total deposits$ 19,276,658 0.36 %$ 16,375,456 0.80 %$ 2,901,202 17.7 % Average total demand and savings accounts increased$3.0 billion , or 22.7%, primarily driven by increases in noninterest-bearing demand deposits as well as interest-bearing demand and saving accounts. The increases in average total demand and savings accounts resulted from the funding of PPP loans, which largely remained in customer deposit accounts during the quarter as well as reduced consumer spending and government stimulus payments, which also largely remained in customer deposit accounts during the second quarter. The average cost of total deposits decreased 44 bp, to 0.36%, for the second quarter of 2020, compared to 0.80% for the same period of 2019, mainly as a result of reductions in deposit rates in response to theFOMC reductions to the Fed Funds Rate and also as a result of deposit rate decreases implemented after the Fed Funds Rate cuts during the second half of 2019. 54
--------------------------------------------------------------------------------
Average borrowings and interest rates, by type, are summarized in the following table:
Three months ended June 30 Increase (Decrease)
2020 2019 in Balance
Balance Rate Balance Rate $ %
(dollars in thousands)
Short-term borrowings:
Total short-term customer funding(1) $ 546,716 0.23 % $ 344,867 0.77 % $ 201,849 58.5 %
Federal funds purchased 74,231 0.06 181,769 2.41 (107,538) (59.2)
Short-term FHLB advances and other
borrowings (2) 86,824 0.90 414,868 2.58 (328,044) (79.1)
Total short-term borrowings 707,771 0.29 941,504 1.89 (233,733) (24.8)
Long-term borrowings:
FHLB advances 601,938 1.88 664,656 2.49 (62,718) (9.4)
Other long-term debt 759,483 3.94 387,263 4.49 372,220 96.1
Total long-term borrowings 1,361,421 3.03 1,051,919 3.23 309,502 29.4
Total borrowings $ 2,069,192 2.10 % $ 1,993,423 2.59 % $ 75,769 3.8 %
(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$233.7 million , or 24.8%, primarily as a result of a$328.0 million decrease in short-term FHLB advances and other borrowings, partially offset by a$201.8 million increase in short-term customer funding. The average cost of short-term borrowings decreased 160 bp, mainly due to the net impact of changes in the Fed Funds Rate. Average total long-term borrowings increased$309.5 million , or 29.4%, during the second quarter 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
55--------------------------------------------------------------------------------
Non-Interest Income
The following table presents the components of non-interest income:
Three months ended June 30 Increase (Decrease)
2020 2019 $ %
(dollars in thousands)
Wealth management fees $ 13,407 $ 14,153 $ (746) (5.3) %
Commercial banking:
Merchant and card 5,326 6,512 (1,186) (18.2)
Cash management 4,503 4,638 (135) (2.9)
Capital markets 5,004 4,053 951 23.5
Other commercial banking 1,914 3,815 (1,901) (49.8)
Total commercial banking 16,748 19,018 (2,270) (11.9)
Consumer banking:
Card 4,966 5,047 (81) (1.6)
Overdraft 2,107 4,413 (2,306) (52.3)
Other consumer banking 2,065 2,907 (842) (29.0)
Total consumer banking 9,138 12,367 (3,229) (26.1)
Mortgage banking:
Gains on sales of mortgage loans 16,547 5,180 11,367 N/M
Mortgage servicing income (6,584) 1,413 (7,997) N/M
Total mortgage banking 9,964 6,593 3,371 51.1
Other 3,660 2,008 1,652 82.3
Non-interest income before investment securities gains 52,917
54,139 (1,222) (2.3)
Investment securities gains, net 3,005 176 2,829 N/M
Total Non-Interest Income $ 55,922 $ 54,315 $ 1,607 3.0 %
N/M - Not meaningful
Excluding investment securities gains, net, non-interest income decreased $1.2
million , or 2.3%, in the second quarter of 2020 as compared to the same period
in 2019. Wealth management revenues decreased $746,000 , or 5.3%, resulting from
a decline in overall market performance from the impact of COVID-19.
Total commercial banking income decreased $2.3 million , or 11.9%, 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) and transaction-based revenue such as merchant and card income, as a
result of COVID-19. Partially offsetting these decreases, were increases in
capital markets revenues, which consists primarily of commercial loan interest
rate swap income.
Mortgage banking income increased $3.4 million , or 51.1%, 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 resulted from a $6.6 million increase to
the valuation allowance for MSRs.
Other income increased
During the second 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. 56 --------------------------------------------------------------------------------
Non-Interest Expense
The following table presents the components of non-interest expense:
Three months ended June 30 Increase (Decrease)
2020 2019 $ %
(dollars in thousands)
Salaries and employee benefits $ 81,012 $ 78,991 $ 2,021 2.6 %
Net occupancy 13,144 14,469 (1,325) (9.2)
Data processing and software 12,193 11,268 925 8.2
Other outside services 7,600 11,259 (3,659) (32.5)
Professional fees 3,331 2,970 361 12.2
Equipment 3,193 3,299 (106) (3.2)
State taxes 3,088 2,480 608 24.5
FDIC insurance 2,133 2,755 (622) (22.6)
Marketing 1,303 2,863 (1,560) (54.5)
Amortization of TCI 1,450 1,492 (42) (2.8)
Intangible amortization 132 107 25 23.4
Prepayment penalty on FHLB advances 2,878 - 2,878 N/M
Other 11,549 12,215 (666) (5.5)
Total non-interest expense $ 143,006 $ 144,168 $ (1,162) (0.8) %
N/M - Not meaningful
The $2.0 million , or 2.6%, increase in salaries and employee benefits reflected
the net impact of an increase in employee salaries, due to annual merit
increases and commissions, and an increase in benefits, primarily due to higher
health insurance and 401(k) matching expense, partially offset by lower defined
benefits expense compared to 2019. Staffing levels decreased modestly from prior
period.
Data processing and software increased
Other outside services decreased
Professional fees increased$361,000 , or 12.2%, primarily due to an increase 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.
State taxes increased
In the second quarter of 2020, the Corporation redeemed long-term FHLB advances,
which resulted in prepayment penalities of
Income Taxes
Income tax expense for the three months endedJune 30, 2020 was$6.5 million , a$3.3 million decrease from$9.9 million for the same period in 2019. The Corporation's ETR was 14.2% for the three months endedJune 30, 2020 , unchanged from the same period of 2019. The decrease in income tax expense 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. 57
--------------------------------------------------------------------------------
Six months ended
Net Interest Income
FTE net interest income decreased$14.5 million , to$319.8 million for the six months endedJune 30, 2020 , from$334.4 million for the same period in 2019. The NIM decreased 45 bp, or 13.1%, to 3.01% compared to 3.46% for the same period in 2019. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts. Six months ended June 30 2020 2019 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ASSETS (dollars in thousands) Interest-earning assets: Net Loans(1)$ 17,595,932 $ 338,110 3.86 %$ 16,255,562 $ 376,816 4.67 % Taxable investment securities (2) 2,242,663 31,465 2.81 2,317,257 31,370
2.71
Tax-exempt investment securities (2) 775,530 12,698 3.26 444,180 8,291
3.71
Total investment securities 3,018,193 44,163 2.92 2,761,437 39,661 2.87 Loans held for sale 41,393 829 4.00 20,523 590 5.76 Other interest-earning assets 709,091 3,297 4.31 388,016 4,170
2.16
Total interest-earning assets 21,364,609 386,399 3.63 19,425,538 421,237
4.36
Noninterest-earning assets: Cash and due from banks 145,988 113,504 Premises and equipment 240,019 238,905 Other assets 1,675,849 1,259,388 Less: ACL - loans(3) (230,858) (162,624) Total Assets$ 23,195,607 $ 20,874,711 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand deposits$ 4,876,662 $ 8,020 0.33 %$ 4,170,221 $ 15,692 0.76 % Savings and money market deposits 5,287,015 10,441 0.40 4,919,357 20,512 0.84 Brokered deposits 293,756 1,495 1.02 233,244 2,964 2.56 Time deposits 2,693,202 23,602 1.76 2,791,216 23,071 1.67 Total interest-bearing deposits 13,150,635 43,558 0.67 12,114,038 62,239 1.04 Short-term borrowings 1,005,409 4,590 0.91 881,115 8,044 1.83 FHLB advances and other long-term debt 1,212,318 18,426 3.04 1,027,328 16,594
3.24
Total interest-bearing liabilities 15,368,362 66,574 0.87 14,022,481 86,877
1.25
Noninterest-bearing liabilities: Demand deposits 5,048,408 4,211,782 Total Deposits/Cost of deposits 18,199,043 0.48 % 16,325,820 0.77 % Other liabilities 455,763 357,170 Total Liabilities 20,872,533 18,591,433
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds
20,416,770 0.65 % 18,234,263 0.96 %
Shareholders' equity 2,323,074 2,283,278
Total Liabilities and Shareholders' Equity $ 23,195,607 $ 20,874,711
Net interest income/FTE NIM 319,825 3.01 % 334,360 3.46 %
Tax equivalent adjustment (6,325) (6,501)
Net interest income $ 313,500 $ 327,859
(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.
58
--------------------------------------------------------------------------------
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, 2020 in comparison to the same period in 2019:
2020 vs. 2019
Increase (Decrease) due
to change in
Volume Rate Net
(in thousands)
FTE Interest income on:
Net Loans $ 8,601 $ (47,307) $ (38,706)
Taxable investment securities 83 13 96
Tax-exempt investment securities 4,643 (237) 4,407
Loans held for sale 322 (83) 239
Other interest-earning assets 882 (1,755) (873)
Total interest income $ 14,531 $ (49,369) $ (34,838)
Interest expense on:
Demand deposits $ 61 $ (7,734) $ (7,673)
Savings deposits 97 (10,168) (10,071)
Brokered deposits 32 (1,501) (1,469)
Time deposits 351 180 531
Short-term borrowings 122 (3,576) (3,454)
Long-term borrowings 2,125 (292) 1,833
Total interest expense $ 2,788 $ (23,091) $ (20,303)
The FOMC decreased the Fed Funds Rate by 25 bp in each of August, September 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.
The 73 bp decrease in the yield on average interest-earning assets drove a $49.4
million decrease in FTE interest income, but was partially offset by the impact
of a $1.9 billion , or 10.0%, increase in interest-earning assets, primarily
loans, which contributed $8.6 million to FTE interest income. The yield on the
loan portfolio decreased 81 bp, or 17.3%, from the same period of 2019, 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, the impact of changes in index rates
on adjustable rate loans may not be fully realized until future periods.
Interest expense decreased $20.3 million primarily due to the 38 bp decrease in
the rate on average interest-bearing liabilities. The rates on average
interest-bearing demand deposits and savings deposits decreased 43 bp and 44 bp,
respectively, which contributed $7.7 million and $10.2 million to the decrease
in interest expense, respectively. In addition, the 92 bp decrease in the rates
on short-term borrowings contributed $3.6 million to the decrease in interest
expense.
59--------------------------------------------------------------------------------
Average loans and average FTE yields, by type, are summarized in the following table:
Six months ended June 30 Increase (Decrease)
2020 2019 in Balance
Balance Yield Balance Yield $ %
(dollars in thousands)
Real estate - commercial mortgage $ 6,811,318 3.83 % $ 6,401,305 4.68 % $ 410,013 6.4 %
Commercial and industrial 5,078,448 3.73 4,451,677 4.68 626,771 14.1
Real estate - residential mortgage 2,719,851 3.93 2,321,897 5.34 397,954 17.1
Real estate - home equity 1,285,661 4.32 1,418,776 4.07 (133,115) (9.4)
Real estate - construction 935,304 3.83 936,699 5.06 (1,395) (0.1)
Consumer 466,071 4.25 435,131 4.43 30,940 7.1
Equipment lease financing 284,612 3.88 278,290 4.42 6,322 2.3
Other 14,667 - 11,787 - 2,880 24.4
Total loans $ 17,595,932 3.86 % $ 16,255,562 4.67 % $ 1,340,370 8.2 %
Average loans increased $1.3 billion , or 8.2%, compared to the same period of
2019. The increase was driven largely by growth in the commercial and industrial
portfolio which was impacted by PPP loans. Excluding loans originated under the
PPP, commercial and industrial loan balances declined primarily as a result of
reduced utilization of lines of credit. Commercial and residential mortgage loan
portfolios, as well as the 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:
Six months ended June 30 Increase (Decrease)
2020 2019 in Balance
Balance Rate Balance Rate $ %
(dollars in thousands)Noninterest-bearing demand$ 5,048,408 - %$ 4,211,782 - %$ 836,626 19.9 % Interest-bearing demand 4,876,662 0.33 4,170,221 0.76 706,441 16.9 Savings 5,287,015 0.40 4,919,357 0.84 367,658 7.5 Total demand and savings 15,212,085 0.24 13,301,360 0.55 1,910,725 14.4 Brokered deposits 293,756 1.02 233,206 2.56 60,550 26.0 Time deposits 2,693,202 1.76 2,791,254 1.67 (98,052) (3.5) Total deposits$ 18,199,043 0.48 %$ 16,325,820 0.77 %$ 1,873,223 11.5 % Average total demand and savings accounts increased$1.9 billion , or 14.4%, 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 PPP loans, which largely remained in customer deposit accounts during the quarter as well as reduced consumer spending and government stimulus payments, which also largely remained in customer deposit accounts during the quarter. The average cost of total deposits decreased 29 bp, to 0.48%, for the first six months of 2020, compared to 0.77% for the same period of 2019, mainly as a result of reductions in deposit rates in response to theFOMC 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. 60
--------------------------------------------------------------------------------
Average borrowings and interest rates, by type, are summarized in the following table:
Six months ended June 30 Increase (Decrease)
2020 2019 in Balance
Balance Rate Balance Rate $ %
(dollars in thousands)
Short-term borrowings:
Total short-term customer funding(1) $ 487,478 0.38 % $ 492,209 1.26 % $ (4,731) (1.0) %
Federal funds purchased 130,549 0.82 169,514 2.42 (38,965) (23.0)
Short-term FHLB advances and other
borrowings(2) 387,382 1.61 219,392 2.64 167,990 76.6
Total short-term borrowings 1,005,409 0.91 881,115 1.83 124,294 14.1
Long-term borrowings:
FHLB advances 579,445 1.91 640,136 2.49 (60,691) (9.5)
Other long-term debt 632,873 4.09 387,192 4.49 245,681 63.5
Total long-term borrowings 1,212,318 3.04 1,027,328 3.24 184,990 18.0
Total borrowings $ 2,217,727 2.08 % $ 1,908,443 2.59 % $ 309,284 16.2 %
(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 increased$124.3 million , or 14.1%, primarily as a result of a$168.0 million increase in short-term FHLB advances and other borrowings. Total short-term customer funding and federal funds purchased decreased during the first six months of 2020. The average cost of short-term borrowings decreased 92 bp, mainly due to the net impact of changes in the Fed Funds Rate. Average total long-term borrowings increased$185.0 million , or 18.0%, during the first six 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$63.6 million for first six months of 2020, an increase of$53.5 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. 61
--------------------------------------------------------------------------------
Non-Interest Income
The following table presents the components of non-interest income:
Six months ended June 30 Increase (Decrease)
2020 2019 $ %
(dollars in thousands)
Wealth management fees $ 28,462 $ 27,392 $ 1,070 3.9 %
Commercial banking:
Merchant and card 10,950 12,070 (1,120) (9.3)
Cash management 9,245 8,999 246 2.7
Capital markets 10,079 6,568 3,511 53.5
Other commercial banking 4,892 6,631 (1,739) (26.2)
Total commercial banking 35,167 34,268 899 2.6
Consumer banking:
Card 9,651 9,733 (82) (0.8)
Overdraft 6,165 8,517 (2,352) (27.6)
Other consumer banking 4,561 5,494 (933) (17.0)
Total consumer banking 20,377 23,744 (3,367) (14.2)
Mortgage banking:
Gains on sales of mortgage
loans 22,728 8,302 14,426 173.8
Mortgage servicing income (6,530) 3,063 (9,593) (313.2)
Total mortgage banking 16,198 11,365 4,833 42.5
Other 7,311 4,056 3,255 80.3
Non-interest income before
investment securities gains 107,515 100,825 6,690 6.6
Investment securities gains,
net 3,051 241 2,810 N/M
Total Non-Interest Income $ 110,566 $ 101,066 $ 9,500 9.4 %
N/M - Not meaningful
Excluding net investment securities gains, non-interest income increased $6.7
million , or 6.6%, in the six months ended June 30, 2020 as compared to the same
period in 2019. Wealth management revenues increased $1.1 million , or 3.9%,
resulting primarily from growth in brokerage income due to an increase in client
asset levels and improved overall market performance prior to the impact of
COVID-19, which began impacting market performance late in the first quarter of
2020.
Total commercial banking income increased $899,000 , or 2.6%, compared to the
same period in 2019, driven by increases in capital markets revenues, primarily
commercial loan interest rate swap income and cash management fees.
Mortgage banking income increased $4.8 million , or 42.5%, 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 resulted from a $7.7 million increase to
the valuation allowance for MSRs.
Other income increased
During the second 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. 62 --------------------------------------------------------------------------------
Non-Interest Expense
The following table presents the components of non-interest expense:
Six months ended June 30 Increase (Decrease)
2020 2019 $ %
(dollars in thousands)
Salaries and employee benefits $ 161,240 $ 156,748 $ 4,492 2.9 %
Net occupancy 26,630 27,378 (748) (2.7)
Data processing and software 23,838 21,621 2,217 10.3
Other outside services 15,481 19,611 (4,130) (21.1)
Professional fees 7,533 6,930 603 8.7
Equipment 6,611 6,641 (30) (0.5)
State taxes 5,891 4,482 1,409 31.4
FDIC insurance 4,941 5,364 (423) (7.9)
Marketing 2,882 5,023 (2,141) (42.6)
Amortization of tax credit investments 2,900 2,983 (83) (2.8)
Intangible amortization 264 214 50 23.4
Prepayment penalty on FHLB advances 2,878 - 2,878 N/M
Other 24,469 24,997 (528) (2.1)
Total non-interest expense $ 285,558 $ 281,992 $ 3,566 1.3 %
N/M - Not meaningful
The $4.5 million , or 2.9%, increase in salaries and employee benefits reflected
the net impact of an increase in employee salaries, due mainly to annual merit
increases and commissions, and an increase in benefits, primarily due to higher
health insurance and 401(k) matching expense, partially offset by lower defined
benefits expense compared to 2019. Staffing levels decreased modestly from prior
period.
Data processing and software increased
Other outside services decreased
Professional fees increased$603,000 , or 8.7%, primarily due to an increase 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.
State taxes increased
In the second quarter of 2020, the Corporation redeemed certain long-term FHLB
advances, which resulted in prepayment penalties of
Income Taxes
Income tax expense for the six months endedJune 30, 2020 was$9.3 million , a$11.1 million decrease from$20.4 million for the same period in 2019. The Corporation's ETR was 12.4% for the six months endedJune 30, 2020 , as compared to 14.9% 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. 63 --------------------------------------------------------------------------------
FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets.
Increase (Decrease)
June 30, 2020 December 31, 2019 $ %
(dollars in thousands)
Assets
Cash and cash equivalents $ 1,058,599 $ 517,791 $ 540,808 104.4 %
FRB and FHLB Stock 91,042 97,422 (6,380) (6.5)
Loans held for sale 77,415 37,828 39,587 104.6
Investment securities 2,974,813 2,867,378 107,435 3.7
Net Loans 18,448,185 16,673,904 1,774,281 10.6
Premises and equipment 239,596 240,046 (450) (0.2)
Goodwill and intangibles 535,039 535,303 (264) -
Other assets 1,193,174 916,368 276,806 30.2
Total Assets $ 24,617,863 $ 21,886,040 $ 2,731,823 12.5 %
Liabilities and Shareholders' Equity
Deposits $ 19,884,208 $ 17,393,913 $ 2,490,295 14.3 %
Short-term borrowings 572,551 883,241 (310,690) (35.2)
Long-term borrowings 1,295,196 881,769 413,427 46.9
Other liabilities 525,407 384,941 140,466 36.5
Total Liabilities 22,277,362 19,543,864 2,733,498 14.0
Total Shareholders' Equity 2,340,501 2,342,176 (1,675) (0.1)
Total Liabilities and Shareholders' Equity $ 24,617,863 $ 21,886,040 $ 2,731,823 12.5 %
Cash and Cash Equivalents
The $540.8 million , or 104.4%, increase in cash and cash equivalents mainly
resulted from additional collateral required to be posted with counterparties
for derivative contracts as well as additional cash maintained at the FRB for
liquidity purposes due to the uncertainty surrounding COVID-19.
Loans held for sale
Loans held for sale increased$39.6 million , or 104.6%, primarily as the result of an increase in the volume of residential mortgage originations due to higher refinancing activity. 64
--------------------------------------------------------------------------------
The following table presents the carrying amount of investment securities:
June 30, December 31, Increase (Decrease)
2020 2019 $ %
(dollars in thousands)
Available for Sale
State and municipal securities $ 893,682 $ 652,927 $ 240,755 36.9 %
Corporate debt securities 325,353 377,357 (52,004) (13.8)
Collateralized mortgage obligations 578,394 693,718 (115,324) (16.6)
Residential mortgage-backed securities 160,868 177,312 (16,444) (9.3)
Commercial mortgage-backed securities 585,143 494,297 90,846 18.4
Auction rate securities 100,859 101,926 (1,067) (1.0)
Total available for sale securities $ 2,644,299 $ 2,497,537 $ 146,762 5.9 %
Held to Maturity
Residential mortgage-backed securities$ 330,514 $ 369,841 $ (39,327) (10.6) % Total Investment Securities$ 2,974,813 $ 2,867,378 $ 107,435 3.7 % Total AFS securities increased$146.8 million , or 5.9%, primarily due to the investment of a portion of the proceeds from the issuance of$375.0 million of subordinated notes, partially offset by the sale of investment securities, with an estimated fair value of$82.0 million , completed during the second 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. Total HTM securities decreased$39.3 million , or 10.6%, primarily as a result of principal repayments and premium amortization. There were no purchases of or transfers into HTM securities during the periods presented.
Loans
The following table presents ending balances of Net Loans:
June 30, Increase (Decrease)
2020 December 31, 2019 $ %
(dollars in thousands)
Real estate - commercial mortgage $ 6,934,936 $ 6,700,776 $ 234,160 3.5 %
Commercial and industrial 5,971,201 4,446,701 1,524,500 34.3
Real estate - residential mortgage 2,862,226 2,641,465 220,761 8.4
Real estate - home equity 1,251,455 1,314,944 (63,489) (4.8)
Real estate - construction 972,909 971,079 1,830 0.2
Consumer 465,610 463,164 2,446 0.5
Equipment lease financing and other 266,521 322,625 (56,104) (17.4)
Overdrafts 3,622 3,582 40 1.1
Gross loans 18,728,480 16,864,336 1,864,144 11.1
Unearned income (23,758) (26,810) 3,052 (11.4)
Net Loans $ 18,704,722 $ 16,837,526 $ 1,867,196 11.1 %
Net Loans increased $1.9 billion , or 11.1%, in comparison to December 31, 2019 ,
primarily due to growth in commercial and industrial loans and commercial and
residential mortgage loans, partially offset by decreases in home equity loans
and equipment lease financing. The increase in commercial and industrial loans
was impacted by approximately $1.9 billion of PPP loans, partially offset by
reduced utilization of lines of credit as a result of customers receiving the
PPP loans.
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.
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Approximately $7.9 billion , or 42.2%, of the loan portfolio was in commercial
mortgage and construction loans as of June 30, 2020 . The Corporation's internal
policy limited its maximum total lending commitment to an individual borrowing
relationship to $55 million as of June 30, 2020 . 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 accommodation and
food services, 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:
June 30, 2020 December 31, 2019
Real estate (1) 38.2 % 41.4 %
Health care 7.2 8.1
Agriculture 5.8 7.1
Construction (2) 4.5 6.2
Manufacturing 4.6 6.0
Other services 4.3 4.7
Retail 3.3 4.2
Accommodation and food services 3.7 4.1
Wholesale trade 2.5 3.6
Educational services 2.7 4.1
Professional, scientific and technical services 2.0 2.9
Arts, entertainment and recreation 2.2
2.2
Public administration 1.7
2.0
Transportation and warehousing 1.3 1.2 Other (4) 16.0 2.2 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 energy sector and$1.9 billion of PPP loans. 66
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The following table presents the changes in non-accrual loans for the three and
six months ended
Commercial Real Estate - Real Estate - Real Estate -
and Commercial Real Estate - Residential Home Equipment Lease
Industrial Mortgage Construction Mortgage Equity Consumer Financing Total
(in thousands)
Three months ended June 30, 2020
Balance at March 31, 2020 $ 41,075 $ 35,657 $ 3,560 $ 16,393 $ 7,261 $ - $ 16,399 $ 120,345
Additions 9,844 9,091 3 1,150 1,171 845 932 23,036
Payments (8,060) (1,649) (64) (380) (251) - (135) (10,539)
Charge-offs (3,480) (2,324) (17) (235) (458) (845) (373) (7,732)
Transfers to OREO - - - (38) - - - (38)
Balance at
3,482
$ 16,823 $ 125,072 Six months endedJune 30, 2020 Balance at December 31, 2019$ 48,106 $ 33,166 $ 3,618 $ 16,676 $ 7,004 $ -$ 16,528 $ 125,098 Additions 26,503 16,706 3 2,037 2,345 2,058 1,458 51,110 Payments (20,851) (5,902) (122) (543) (775) - (695) (28,888) Charge-offs (14,379) (3,179) (17) (422) (774) (2,058) (468) (21,297) Transfers to accrual status - - - - - - - - Transfers to OREO - (16) - (858) (77) - - (951)
Balance at
3,482$ 16,890 $ 7,723 $ -$ 16,823 $ 125,072 Non-accrual loans increased$4.7 million , or 3.9%, in comparison toMarch 31, 2020 primarily as a result of additions to non-accrual loans during the quarter, partially offset by payments and charge-offs. In comparison toDecember 31, 2019 , non-accrual loans were relatively unchanged. The following table summarizes non-performing assets as of the indicated dates: December 31, June 30, 2020 2019 (dollars in thousands) Non-accrual loans$ 125,037 $ 125,098 Loans 90 days or more past due and still accruing 14,767 16,057 Total non-performing loans 139,804 141,155 OREO (1) 5,418 6,831 Total non-performing assets $
145,222
Non-performing loans to total loans 0.75 % 0.84 % Non-performing assets to total assets 0.59 % 0.68 % ACL - loans to non-performing loans 183 % 116 %
(1) Excludes
Non-performing loans decreased$1.4 million , or 1.0%, in comparison toDecember 31, 2019 . Non-performing loans as a percentage of total loans were 0.75% atJune 30, 2020 in comparison to 0.84% atDecember 31, 2019 . See Note 4, "Allowance for Credit Losses and Asset Quality," in the Notes to Consolidated Financial Statements for further details on non-performing loans. 67
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The following table presents loans whose terms have been modified under TDRs, by type, as of the indicated dates:
June 30, 2020 December 31 ,
2019
(in thousands)
Real estate - residential mortgage
15,548 15,068
Real estate - commercial mortgage 20,407 13,330
Commercial and industrial 4,398 5,193
Consumer - 8
Total accruing TDRs 68,383 55,150
Non-accrual TDRs (1) 31,575 20,825
Total TDRs $ 99,958 $ 75,975
(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 for Credit Losses and Asset Quality," in the Notes to Consolidated Financial Statements. Total internally risk-rated loans were$13.8 billion , of which$665.4 million were criticized and classified, as ofJune 30, 2020 and$12.0 billion , of which$662.6 million were criticized and classified, as ofDecember 31, 2019 . 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 (considered "criticized" loans by banking regulators) or Substandard or lower (considered "classified" loans by banking regulators), by class segment. Special Mention Increase (Decrease) Substandard or Lower Increase (Decrease) Total Criticized and Classified LoansDecember 31 ,December 31 ,December 31 ,June 30, 2020 2019 $ %June 30, 2020 2019 $ %June 30, 2020 2019 (dollars in thousands) Real estate - commercial mortgage$ 174,730 $ 137,163 $ 37,567 27.4 %$ 119,232 $ 134,206 $ (14,974) (11.2) %$ 293,962 $ 271,369 Commercial and industrial 194,277 181,107 13,170 7.3 165,583 199,760 (34,177) (17.1) 359,860 380,867 Real estate - construction(1) 4,288 4,219 69 1.6 7,295 6,137 1,158 18.9 11,583 10,356 Total$ 373,295 $ 322,489 $ 50,806 15.8 %$ 292,110 $ 340,103 $ (47,993) (14.1) %$ 665,405 $ 662,592
% of total risk rated loans 2.7 % 2.7 % 2.1 % 2.8 % 4.8 % 5.5 %
(1) Excludes construction - other
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Provision and Allowance for Credit Losses
The following table presents the components of the ACL:
June 30, December 31,
2020 2019
(dollars in thousands)
ACL - loans $ 256,537 $ 163,622
ACL - OBS credit exposure (1) 16,383 2,587
Total ACL $ 272,920 $ 166,209
ACL - loans to net loans outstanding 1.37 % 0.97 %
(1) Included in "other liabilities" on the consolidated balance sheet.
The following table presents the activity in the ACL related to loans:
Six months ended June
Three months ended June 30 30
2020 2019 2020 2019
(dollars in thousands)
Average balance of net loans $ 18,331,797 $
16,316,076
Balance of ACL - loans at beginning of period$ 238,508 $ 162,109 $ 163,622 $ 160,537 Impact of adopting CECL - - 45,723 - Loans charged off: Commercial and industrial 3,480 1,895 14,379 4,682 Consumer 845 795 2,087 1,478 Real estate - commercial mortgage 2,324 230 3,179 1,375 Real estate - home equity 458 206 745 425 Real estate - residential mortgage 235 134 422 789 Real estate - construction 17 3 17 98 Equipment lease financing and other 688 448 1,221 1,233 Total loans charged off 8,047 3,711 22,050 10,080 Recoveries of loans previously charged off: Commercial and industrial 2,978 2,680 4,712 3,923 Real estate - commercial mortgage 95 169 339 305 Real estate - home equity 44 223 261 420 Real estate - residential mortgage 112 211 197 343 Real estate - construction - 1,245 70 1,329 Consumer 605 579 1,034 789 Equipment lease financing and other 92 148 200 377 Total recoveries 3,926 5,255 6,813 7,486 Net loans charged off 4,121 (1,544) 15,237 2,594 Provision for credit losses (1) 22,150 5,025 62,429 10,125
Balance of ACL - loans at end of period
Net charge-offs (recoveries) to average loans (annualized) 0.09 % (0.04) % 0.17 % 0.03 %
(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 six months endedJune 30, 2020 was$22.2 million and$62.4 million , respectively. Prior periods did not incorporate "life of loan" losses under CECL and applied an incurred loss model, which would not have considered economic forecasts or forward-looking consideration over the remaining expected lives of 69 -------------------------------------------------------------------------------- loans. The amounts recorded for the three and six months endedJune 30, 2020 were primarily driven by economic assumptions, which considered the impact of COVID-19. In addition, net charge-offs were approximately$5.7 million and$12.6 million higher in the three and six months endedJune 30, 2020 , respectively, compared to the same periods of 2019. Annualized net charge-offs as a percentage of average loans for the three and six months endedJune 30, 2020 were 0.09% and 0.17%, respectively, as compared to (0.04)% and 0.03% during the same periods of 2019.
The following table summarizes the allocation of the ACL - loans:
June 30, 2020 December 31, 2019
% In Each Loan % In Each Loan
ACL - loans Category (1) ACL - loans Category (1)
(dollars in thousands)
Real estate - commercial mortgage $ 102,695 37.0 % $ 45,610 39.7 %
Commercial and industrial 61,447 31.9 68,602 26.4
Real estate - residential mortgage 46,443 15.3 19,771 7.8
Real estate - home equity 16,391 6.7 17,744 15.7
Consumer 10,299 2.5 3,762 5.8
Real estate - construction 12,314 5.2 4,443 2.7
Equipment lease financing and other 6,948 1.4 3,690 1.9 %
Total ACL - loans $ 256,537 100.0 % $ 163,622 100.0 %
(1) Ending loan balances as of a % of total loans for the periods presented. N/A - Not applicable
Other Assets Other assets increased$276.8 million , or 30.2%, 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 a$7.7 million increase to the valuation allowance for MSRs.
Deposits and Borrowings
The following table presents ending deposits, by type, as of the dates
indicated:
Increase (Decrease)
June 30, 2020 December 31, 2019 $ %
(dollars in thousands)
Noninterest-bearing demand
1,785,731 40.1 %
Interest-bearing demand 5,099,405 4,720,188 379,217 8.0
Savings 5,667,893 5,153,941 513,952 10.0
Total demand and savings 17,006,353 14,327,453 2,678,900 18.7
Brokered deposits 310,689 264,531 46,158 17.4
Time deposits 2,567,166 2,801,929 (234,763) (8.4)
Total deposits $ 19,884,208 $ 17,393,913 $ 2,490,295 14.3 %
Total demand and savings accounts increased $2.7 billion , or 18.7%, driven by
increases in all categories primarily, as the result of the funding of PPP
loans, which largely remained in customer deposit accounts during the second
quarter, reduced consumer spending and government stimulus payments, which also
largely remained in customer deposit accounts during the second quarter.
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The following table presents ending borrowings, by type, as of the dates
indicated:
Increase (Decrease)
June 30, 2020 December 31, 2019 $ %
(dollars in thousands)
Short-term borrowings:
Total short-term customer funding(1) $ 572,551 $ 383,241 $ 189,310 49.4 %
Short-term FHLB advances and other borrowings (2) - 500,000 (500,000) (100.0)
Total short-term borrowings 572,551 883,241 (310,690) (35.2)
Long-term borrowings:
FHLB advances 535,999 491,024 44,975 9.2
Other long-term debt 759,197 390,745 368,452 94.3
Total long-term borrowings 1,295,196 881,769 413,427 46.9
Total borrowings $ 1,867,747 $ 1,765,010 $ 102,737 5.8 %
(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$310.7 million , or 35.2%, due to a$500.0 million decrease in short-term FHLB advances and other borrowings partially offset by an increase of$189.3 million , or 49.4%, in short-term customer funding. 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 other long-term debt increased$368.5 million as the result of the issuance of$375.0 million of subordinated notes inMarch 2020 as discussed in the "Overview" section of Management's Discussion.
Other Liabilities
Other liabilities increased$140.5 million , or 36.5%, primarily as the result of an increase in the fair values of derivative contracts related to commercial loan interest rate swaps. Shareholders' Equity Total shareholders' equity decreased$1.7 million during the first six months of 2020. The decrease was due primarily to the$43.8 million reduction to retained earnings as a result of the adoption of CECL onJanuary 1, 2020 , the$39.7 million of common stock repurchases and$42.0 million of common stock cash dividends, partially offset by$65.6 million of net income, and a$51.6 million increase in accumulated other comprehensive income, mainly due to improvements in fair values of AFS securities. InOctober 2019 , the Corporation's board of directors approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to$100.0 million of its outstanding shares of common stock, or approximately 3.9% of its outstanding shares, throughDecember 31, 2020 . 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 were 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 impacts of the COVID-19 pandemic.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. 71
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The Capital Rules require the Corporation and
•Meet a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;
•Continue to require a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets; and •Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, have been phased out as a component of Tier 1 capital for institutions of the Corporation's size.
The Corporation and
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 ofJune 30, 2020 , 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. InMarch 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 January1, 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 ofJune 30, 2020 ,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. There are no conditions or events sinceJune 30, 2020 that management believes have changed the institutions' capital categories.
The following table summarizes the Corporation's capital ratios in comparison to regulatory requirements:
Regulatory
Minimum Fully Phased-in, with
for Capital Capital Conservation
June 30, 2020 December 31, 2019 Adequacy Buffers
Total Capital (to Risk-Weighted Assets) 14.0 % 11.8 % 8.0 % 10.5 %
Tier I Capital (to Risk-Weighted Assets) 9.5 % 9.7 % 6.0 % 8.5 %
Common Equity Tier I (to Risk-Weighted
Assets) 9.5 % 9.7 % 4.5 % 7.0 %
Tier I Capital (to Average Assets) 7.4 % 8.4 % 4.0 % 4.0 %
The increase in the total capital ratio from December 31, 2019 to June 30, 2020
was mainly due to the issuance of $375.0 million of subordinated notes in March
2020 , as discussed in the "Overview" of Management's Discussion, partially
offset by common stock repurchases during the quarter.
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