Companies: 10,793     total market cap: $139.081 T
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Fulton Financial
FULT
#3457
Rank
$4.14 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$21.54
Share price
-1.28%
Change (1 day)
38.88%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Fulton Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q2

Fulton Financial - 10-Q quarterly report FY2020 Q2


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549 

FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020, or
☐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) 
Pennsylvania 23-2195389
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
Identification No.)
One Penn SquareP.O. Box 4887Lancaster,Pennsylvania 17604
(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:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $2.50FULTThe Nasdaq Stock Market, LLC
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.
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 –162,073,000 shares outstanding as of July 31, 2020.
1

FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020
INDEX
 
DescriptionPage
Glossary of Terms
3
PART I. FINANCIAL INFORMATION
(a)
4
(b)
5
(c)
6
(d)
7
(e)
8
(f)
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
45
72
75
76
76
76
Item 3. Defaults Upon Senior Securities - (not applicable)
Item 4. Mine Safety Disclosures - (not applicable)
Item 5. Other Information - (none to be reported)
77
78

2

FULTON FINANCIAL CORPORATION
GLOSSARY OF DEFINED ACRONYMS AND TERMS
ACLAllowance for Credit Losses
AFSAvailable for Sale
ALCOAsset/Liability Management Committee
AMLAnti-Money Laundering
ARCAuction Rate Security
ASCAccounting Standards Codification
ASUAccounting Standards Update
bpbasis point(s)
BSABank Secrecy Act
CARES ActCoronavirus Aid, Relief, and Economic Security Act
CECLCurrent Expected Credit Losses
Corporation or CompanyFulton Financial Corporation
COVID-19Coronavirus
ETREffective Tax Rate
Exchange ActSecurities Exchange Act of 1934
EADExposure at default
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
Fed Funds RateTarget Federal Funds Rate
FHLBFederal Home Loan Bank
FOMCFederal Open Market Committee
FRBFederal Reserve Bank
FTEFully Taxable-Equivalent
Fulton Bank or the BankFulton Bank, N.A.
GAAPU.S. Generally Accepted Accounting Principles
HTMHeld to Maturity
LGDLoss given default
LIBORLondon Interbank Offered Rate
MSRsMortgage Servicing Rights
NIMNet Interest Margin
Net LoansLoans and lease receivables, (net of unearned income)
OBSOff-Balance-Sheet
OREOOther Real Estate Owned
OTTIOther-than-temporary impairment
PDProbability of default
PPPPaycheck Protection Program
PSUPerformance-Based Restricted Stock Unit
RSURestricted Stock Unit
SBASmall Business Administration
SECUnited States Securities and Exchange Commission
TCITax Credit Investment
TDRTroubled Debt Restructuring
TruPSTrust Preferred Securities

3


Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS 
(in thousands, except per-share data)
June 30,
2020		December 31,
2019
(unaudited)
ASSETS
Cash and due from banks$141,702  $132,283  
Interest-bearing deposits with other banks916,897  385,508  
        Cash and cash equivalents 1,058,599  517,791  
FRB and FHLB stock91,042  97,422  
Loans held for sale77,415  37,828  
Investment securities:
AFS, at estimated fair value2,644,299  2,497,537  
HTM, at amortized cost330,514  369,841  
Loans18,704,722  16,837,526  
Less: ACL - loans(256,537) (163,622) 
Net Loans18,448,185  16,673,904  
Premises and equipment239,596  240,046  
Accrued interest receivable73,720  60,898  
Goodwill and intangible assets535,039  535,303  
Other assets1,119,454  855,470  
Total Assets$24,617,863  $21,886,040  
LIABILITIES
Deposits:
Noninterest-bearing$6,239,055  $4,453,324  
Interest-bearing13,645,153  12,940,589  
Total Deposits19,884,208  17,393,913  
Short-term borrowings572,551  883,241  
Accrued interest payable11,571  8,834  
Long-term borrowings1,295,196  881,769  
Other liabilities513,836  376,107  
Total Liabilities22,277,362  19,543,864  
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 223.0 million shares issued in 2020 and 222.4 million issued in 2019557,569  556,110  
Additional paid-in capital1,503,750  1,499,681  
Retained earnings1,059,160  1,079,391  
Accumulated other comprehensive gain (loss)51,439  (137) 
Treasury stock, at cost, 61.1 million shares in 2020 and 58.2 million shares in 2019(831,417) (792,869) 
Total Shareholders’ Equity2,340,501  2,342,176  
Total Liabilities and Shareholders’ Equity$24,617,863  $21,886,040  
See Notes to Consolidated Financial Statements
 
4

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)Three months ended June 30Six months ended June 30
 2020201920202019
INTEREST INCOME
Loans, including fees$158,928  $188,310  $334,452  $372,054  
Investment securities:
Taxable15,171  15,935  31,465  31,370  
Tax-exempt5,323  3,271  10,031  6,550  
Loans held for sale509  350  829  590  
Other interest income766  2,168  3,297  4,170  
Total Interest Income
180,697  210,034  380,074  414,734  
INTEREST EXPENSE
Deposits17,118  32,548  43,558  62,237  
Short-term borrowings517  4,462  4,590  8,044  
Long-term borrowings10,307  8,480  18,426  16,594  
Total Interest Expense
27,942  45,490  66,574  86,875  
Net Interest Income
152,754  164,544  313,500  327,859  
Provision for credit losses19,570  5,025  63,600  10,125  
Net Interest Income After Provision for Credit Losses
133,184  159,519  249,900  317,734  
NON-INTEREST INCOME
Wealth management13,407  14,153  28,462  27,392  
Commercial banking16,748  19,018  35,167  34,268  
Consumer banking9,138  12,367  20,377  23,744  
Mortgage banking 9,964  6,593  16,198  11,365  
Other3,660  2,008  7,311  4,056  
Non-Interest Income Before Investment Securities Gains52,917  54,139  107,515  100,825  
Investment securities gains, net3,005  176  3,051  241  
Total Non-Interest Income55,922  54,315  110,566  101,066  
NON-INTEREST EXPENSE
Salaries and employee benefits81,012  78,991  161,240  156,748  
Net occupancy13,144  14,469  26,630  27,378  
Data processing and software12,193  11,268  23,838  21,621  
Other outside services7,600  11,259  15,481  19,611  
Professional fees3,331  2,970  7,533  6,930  
Equipment 3,193  3,299  6,611  6,641  
State Taxes3,088  2,480  5,891  4,482  
FDIC insurance2,133  2,755  4,941  5,364  
Marketing1,303  2,863  2,882  5,023  
Amortization of TCI1,450  1,492  2,900  2,983  
Intangible amortization132  107  264  214  
Prepayment penalty on FHLB advances2,878  —  2,878  —  
Other11,549  12,215  24,469  24,997  
Total Non-Interest Income143,006  144,168  285,558  281,992  
Income Before Income Taxes46,100  69,666  74,909  136,808  
Income taxes6,542  9,887  9,303  20,366  
Net Income$39,559  $59,779  $65,606  $116,442  
PER SHARE:
Net Income (Basic)$0.24  $0.36  $0.40  $0.69  
Net Income (Diluted)0.24  0.35  0.40  0.68  
Cash Dividends0.13  0.13  0.26  0.26  
See Notes to Consolidated Financial Statements
Note: numbers may not sum due to rounding
5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 Three months ended June 30Six months ended June 30
 2020201920202019
 
Net Income$39,559  $59,779  $65,606  $116,442  
Other Comprehensive Income, net of tax:
Unrealized gain on securities34,424  24,917  51,853  45,215  
Reclassification adjustment for securities gains included in net income(2,341) (137) (2,376) (188) 
Amortization of net unrealized losses on AFS securities transferred to HTM793  1,021  1,589  1,995  
Non-credit related unrealized loss on other-than-temporarily impaired debt securities—  (600) —  (682) 
Amortization of net unrecognized pension and postretirement income255  275  510  566  
Other Comprehensive Income33,131  25,476  51,576  46,906  
Total Comprehensive Income$72,690  $85,255  $117,182  $163,348  
See Notes to Consolidated Financial Statements

6

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except per-share data)
 Common StockRetained
Earnings		Treasury
Stock		Total
 Shares
Outstanding		AmountAdditional Paid-in
Capital		Accumulated
Other Comprehensive
Income (Loss)
Three months ended June 30, 2020
Balance at March 31, 2020161,435  $556,243  $1,502,189  $1,040,646  $18,308  $(831,638) $2,285,748  
Net income39,559  39,559  
Other comprehensive income33,131  33,131  
Stock issued523  1,326  (350) 221  1,197  
Stock-based compensation awards1,911  1,911  
Common stock cash dividends - $0.13 per share(21,045) (21,045) 
Balance at June 30, 2020161,958  $557,569  $1,503,750  $1,059,160  $51,439  $(831,417) $2,340,501  
Three months ended June 30, 2019
Balance at March 31, 2019169,923  $554,485  $1,491,870  $980,708  $(37,633) $(688,411) $2,301,019  
Net income59,779  59,779  
Other comprehensive income25,476  25,476  
Stock issued429  1,205  (30) (1,179) (4) 
Stock-based compensation awards1,788  1,788  
Acquisition of treasury stock(3,449) (57,509) (57,509) 
Common stock cash dividends - $0.13 per share(21,751) (21,751) 
Balance at June 30, 2019166,903  $555,690  $1,493,628  $1,018,736  $(12,157) $(747,099) $2,308,798  
Six months ended June 30, 2020
Balance at December 31, 2019164,218  $556,110  $1,499,681  $1,079,391  $(137) $(792,869) $2,342,176  
Net income65,606  65,606  
Other comprehensive income51,576  51,576  
Stock issued648  1,459  540  1,200  3,198  
Stock-based compensation awards3,530  3,530  
Acquisition of treasury stock(2,908) (39,748) (39,748) 
Impact of adopting CECL (1)
(43,807) (43,807) 
Common stock cash dividends - $0.26 per share(42,030) (42,030) 
Balance at June 30, 2020161,958  $557,569  $1,503,750  $1,059,160  $51,439  $(831,417) $2,340,501  
Six months ended June 30, 2019
Balance at December 31, 2018170,184  $554,377  $1,489,703  $946,032  $(59,063) $(683,476) $2,247,573  
Net income116,442  116,442  
Other comprehensive loss46,906  46,906  
Stock issued544  1,313  577  (237) 1,653  
Stock-based compensation awards3,348  3,348  
Acquisition of treasury stock(3,825) (63,386) (63,386) 
Common stock cash dividends - $0.26 per share(43,738) (43,738) 
Balance at June 30, 2019166,903  $555,690  $1,493,628  $1,018,736  $(12,157) $(747,099) $2,308,798  
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.
7

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)Six months ended June 30
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income$65,606  $116,442  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for credit losses63,600  10,125  
Depreciation and amortization of premises and equipment14,331  13,924  
Amortization of TCI15,237  16,311  
Net amortization of investment securities premiums5,599  4,359  
Investment securities gains, net(3,051) (241) 
Gain on sales of mortgage loans held for sale(22,728) (8,302) 
Proceeds from sales of mortgage loans held for sale584,924  375,306  
Originations of mortgage loans held for sale(601,783) (385,659) 
Intangible amortization264  214  
Amortization of issuance costs and discounts on long-term debt543  421  
Stock-based compensation3,530  3,348  
Other changes, net(161,412) (67,400) 
Total adjustments(100,946) (37,594) 
Net cash (used in) provided by operating activities(35,340) 78,848  
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities AFS187,819  283,952  
Proceeds from principal repayments and maturities of AFS securities147,551  113,154  
Proceeds from principal repayments and maturities of HTM securities 40,374  40,058  
Purchase of securities AFS(418,395) (538,629) 
Sale (purchase) of FRB and FHLB stock 6,380  (17,965) 
Net increase in loans(1,882,433) (205,404) 
Net purchases of premises and equipment(13,881) (22,695) 
Net cash paid for acquisition—  (3,907) 
Net change in tax credit investments(4,873) (11,092) 
Net cash used in investing activities(1,937,458) (362,528) 
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits 2,678,900  (228,999) 
Net (decrease) increase in time deposits(188,604) 241,735  
(Decrease) increase in short-term borrowings(310,690) 433,613  
Additions to long-term debt495,898  105,000  
Repayments of long-term debt(83,015) (110,132) 
Net proceeds from issuance of common stock3,198  1,653  
Dividends paid(42,333) (42,680) 
Acquisition of treasury stock(39,748) (63,386) 
Net cash provided by financing activities2,513,606  336,804  
Net Increase in Cash and Cash Equivalents 540,808  53,124  
Cash and Cash Equivalents at Beginning of Period517,791  445,687  
Cash and Cash Equivalents at End of Period$1,058,599  $498,811  
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest$63,837  $88,186  
Income taxes11,051  4,932  
See Notes to Consolidated Financial Statements
 
8

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. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 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 (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 principal 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
9

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 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.

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, the modified loan was not more than 30 days past due on December 31, 2019 and the modification was executed between March 1, 2020 and the earlier of (a) 60 days after the date of the COVID-19 national emergency comes to an end or (b) December 31, 2020. 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. The ACL also includes certain qualitative adjustments to the CECL model.

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. In order to determine the ACL:

•Loans are aggregated into pools based on similar risk characteristics.
•The PD and LGD CECL model components are determined based on loss estimates driven by historical experience at the input level.
•The PD model component uses "through the economic cycle transition" matrices based on the Corporation's historical loan and transaction data across each pool of loans.
•The LGD model component calculates a lifetime LGD estimate across each pool of loans utilizing a non parametric loss curve modeling approach.
•Reasonable and supportable forecasts are incorporated into the PD model component.
•Reasonable and supportable forecast periods are based on different economic forecasts and scenarios sourced from an external party. A future loss forecast over the reasonable and supportable forecast period is based on the projected
10

performance of specific economic variables that statistically correlate with the PD and LGD pools. After the reasonable and supportable forecast period, loss estimates naturally revert to input-level reversion.
•Cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate.
•A constant prepayment rate is calculated for each loan pool in the CECL model.

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.

11

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 include changes in lending policy, the nature and volume of the portfolio, overall business conditions in the economy, credit concentrations, 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, such as letters of credit and credit recourse on sold residential mortgage loans. 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 June 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 June 30, 2020, no AFS debt securities required an ACL.

Other Recently Adopted Accounting Standards

On January 1, 2020, the Corporation adopted ASC Update 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update changes the fair value measurement disclosure requirements of ASC Topic 820 "Fair Value Measurement." Among other things, the update modifies the disclosure objective paragraphs of ASC 820 to eliminate: (1) "at a minimum" from the phrase "an entity shall disclose at a minimum;" and (2) other similar disclosure requirements to promote the appropriate exercise of discretion by entities.

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.

On January 1, 2020, the Corporation adopted ASC Update 2018-15 - Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Subtopic 350-40 to determine which implementation costs to capitalize as assets.

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

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.






12





Recently Issued Accounting Standards
StandardDescriptionDate of Anticipated AdoptionEffect 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 PlansThis 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 2020The 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 its consolidated financial statements.
ASC Update 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income TaxesThis 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 2021The 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 2019 consolidated financial statements and notes have been reclassified to conform to the 2020 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 June 30, 2020 and December 31, 2019 were $473.2 million and $199.6 million, respectively.

13

NOTE 3 – Investment Securities

The following table presents the amortized cost and estimated fair values of investment securities as of June 30, 2020:
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
(in thousands)
Available for Sale    
State and municipal securities$852,617  $41,292  $(227) $893,682  
Corporate debt securities312,507  15,168  (2,322) 325,353  
Collateralized mortgage obligations559,281  19,113  —  578,394  
Residential mortgage-backed securities156,152  4,716  —  160,868  
Commercial mortgage-backed securities560,294  24,849  —  585,143  
Auction rate securities107,410  —  (6,551) 100,859  
   Total $2,548,261  $105,138  $(9,100) $2,644,299  
Held to Maturity
Residential mortgage-backed securities$330,514  $23,595  $—  $354,109  

The following table presents the amortized cost and estimated fair values of investment securities as of December 31, 2019:
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
(in thousands)
Available for Sale
State and municipal securities$638,125  $15,826  $(1,024) $652,927  
Corporate debt securities370,401  8,490  (1,534) 377,357  
Collateralized mortgage obligations682,307  11,726  (315) 693,718  
Residential mortgage-backed securities177,183  1,078  (949) 177,312  
Commercial mortgage-backed securities489,603  6,471  (1,777) 494,297  
Auction rate securities107,410  —  (5,484) 101,926  
   Total $2,465,029  $43,591  $(11,083) $2,497,537  
Held to Maturity
Residential mortgage-backed securities$369,841  $13,864  $—  $383,705  

Securities carried at $468.8 million at June 30, 2020 and $462.6 million at December 31, 2019 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

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.









14

The amortized cost and estimated fair values of debt securities as of June 30, 2020, 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.
Available for SaleHeld to Maturity
 Amortized
Cost		Estimated
Fair Value		Amortized
Cost		Estimated
Fair Value
 (in thousands)
Due in one year or less$12,731  $12,731  $—  $—  
Due from one year to five years31,144  32,687  —  —  
Due from five years to ten years301,186  313,583  —  —  
Due after ten years927,473  960,893  —  —  
1,272,534  1,319,894  —  —  
Residential mortgage-backed securities(1)
156,152  160,868  330,514  354,109  
Commercial mortgage-backed securities(1)
560,294  585,143  —  —  
Collateralized mortgage obligations(1)
559,281  578,394  —  —  
  Total$2,548,261  $2,644,299  $330,514  $354,109  
(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 GainsGross Realized LossesNet Gains
(in thousands)
Three months ended
June 30, 2020$6,334  $(3,329) $3,005  
June 30, 20193,012  (2,836) 176  
Six months ended
June 30, 2020$6,451  $(3,400) $3,051  
June 30, 20193,269  (3,028) 241  

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 as of June 30, 2020:
Less than 12 months12 months or longerTotal
Number of SecuritiesEstimated
Fair Value		Unrealized
Losses		Number of SecuritiesEstimated
Fair Value		Unrealized
Losses		Estimated
Fair Value		Unrealized
Losses
Available for Sale(in thousands)
State and municipal securities9  $30,378  $(227) —  $—  $—  $30,378  $(227) 
Corporate debt securities15  85,486  (2,322) —  —  —  85,486  (2,322) 
Auction rate securities—  —  —  177  100,859  (6,551) 100,859  (6,551) 
Total available for sale(1)
24  $115,864  $(2,549) 177  $100,859  $(6,551) $216,723  $(9,100) 
(1) No HTM securities were in an unrealized loss position as of June 30, 2020.


15

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 as of December 31, 2019:
Less than 12 months12 months or longerTotal
Number of SecuritiesEstimated
Fair Value		Unrealized
Losses		Number of SecuritiesEstimated
Fair Value		Unrealized
Losses		Estimated
Fair Value		Unrealized
Losses
Available for Sale(in thousands)
State and municipal securities44  $136,344  $(1,024) —  $—  $—  $136,344  $(1,024) 
Corporate debt securities5  30,719  (346) 8  18,759  (1,188) 49,478  (1,534) 
Collateralized mortgage obligations5  33,865  (190) 1  5,330  (125) 39,195  (315) 
Residential mortgage-backed securities5  12,247  (40) 26  127,373  (909) 139,620  (949) 
Commercial mortgage-backed securities7  121,340  (1,777) —  —  —  121,340  (1,777) 
Auction rate securities—  —  —  177  101,926  (5,484) 101,926  (5,484) 
Total available for sale(1)
66  $334,515  $(3,377) 212  $253,388  $(7,706) $587,903  $(11,083) 
(1) No HTM securities were in an unrealized loss position as of December 31, 2019.

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, and 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 June 30, 2020.

Based on management’s evaluations, no ACL was required for ARCs or corporate debt securities as of June 30, 2020. 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 - Allowance for Credit Losses and Asset Quality

Net Loans are summarized as follows:
June 30,
2020		December 31, 2019
 (in thousands)
Real estate - commercial mortgage$6,934,936  $6,700,776  
Commercial and industrial5,971,201  4,446,701  
Real-estate - residential mortgage2,862,226  2,641,465  
Real-estate - home equity1,251,455  1,314,944  
Real-estate - construction972,909  971,079  
Consumer465,610  463,164  
Equipment lease financing and other266,521  322,625  
Overdrafts3,622  3,582  
Gross loans18,728,480  16,864,336  
Unearned income(23,758) (26,810) 
Net Loans$18,704,722  $16,837,526  

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.





16

Allowance for Credit Losses, effective January 1, 2020

As discussed in Note 1, "Basis of Presentation," the Corporation adopted CECL effective January 1, 2020. CECL requires estimated credit losses 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.

Under CECL, loans evaluated individually for impairment consist of non-accrual loans and TDRs. Under the incurred loss model in effect prior to the adoption of CECL, loans evaluated individually for impairment were referred to as impaired loans.

The ACL related to loans consists of loans evaluated collectively and individually for expected credit losses. The ACL related to loans represents an estimate of expected credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to Net Loans. The ACL for OBS credit exposures includes estimated losses on unfunded loan commitments, letters of credit and other OBS credit exposures. The total ACL is 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 under CECL:
June 30, 2020
(in thousands)
ACL - loans $256,537  
ACL - OBS credit exposure16,383  
        Total ACL$272,920  


The following table presents the activity in the ACL in 2020:
Three months ended June 30, 2020Six months ended June 30, 2020
(in thousands)
Balance at beginning of period$257,471  $166,209  
Impact of adopting CECL (1)
—  58,348  
Loans charged off(8,047) (22,050) 
Recoveries of loans previously charged off3,926  6,813  
Net loans charged off(4,121) (15,237) 
Provision for credit losses (2)
19,570  63,600  
Balance at end of period$272,920  $272,920  
(1) Includes $12.6 million of reserves for OBS credit exposures as of January 1, 2020.
(2) Includes $(2.6) million and $1.2 million related to OBS credit exposures for the three and six months ended June 30, 2020, respectively.












17

The following table presents the activity in the ACL - loans by portfolio segment, for the three and six months ended June 30, 2020:
Real Estate -
Commercial
Mortgage		Commercial and
Industrial		Real Estate -
Home
Equity		Real Estate -
Residential
Mortgage		Real Estate -
Construction		ConsumerEquipment lease financing, other
and overdrafts		Total
 (in thousands)
Three months ended June 30, 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(2,324) (3,480) (458) (235) (17) (845) (688) (8,047) 
Recoveries of loans previously charged off95  2,978  44  112  —  605  92  3,926  
Net loans recovered (charged off) (2,229) (502) (414) (123) (17) (240) (596) (4,121) 
Provision for loan losses (1)14,605  (1,657) 1,552  4,139  3,933  674  (1,096) 22,150  
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, 2020
Balance at December 31, 2019$45,610  $68,602  $17,744  $19,771  $4,443  $3,762  $3,690  $163,622  
Impact of CECL29,361  (18,576) (65) 21,235  4,015  5,969  3,784  45,723  
Loans charged off(3,179) (14,379) (745) (422) (17) (2,087) (1,221) (22,050) 
Recoveries of loans previously charged off339  4,712  261  197  70  1,034  200  6,813  
Net loans recovered (charged off)(2,840) (9,667) (484) (225) 53  (1,053) (1,021) (15,237) 
Provision for loan losses (1)30,564  21,088  (804) 5,662  3,803  1,621  495  62,429  
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.


The following table presents the ACL - loans and amortized cost basis of Net Loans under CECL methodology as of June 30, 2020:
ACL - LoansNet Loans
Collectively Evaluated for ImpairmentIndividually Evaluated for ImpairmentTotal ACL - LoansCollectively Evaluated for ImpairmentIndividually Evaluated for ImpairmentTotal Net Loans
(in thousands)
June 30, 2020
Real Estate - Commercial Mortgage$94,654  $8,041  $102,695  $6,873,754  $61,182  $6,934,936  
Commercial and Industrial54,413  7,034  61,447  5,927,424  43,777  5,971,201  
Real Estate - Home Equity8,510  7,881  16,391  1,228,411  23,044  1,251,455  
Real Estate - Residential Mortgage39,984  6,459  46,443  2,817,173  45,053  2,862,226  
Real Estate - Construction12,060  254  12,314  969,427  3,482  972,909  
Consumer10,182  117  10,299  465,418  192  465,610  
Equipment Lease Financing and Other6,948  —  6,948  229,562  16,823  246,385  
Total$226,751  $29,786  $256,537  $18,511,169  $193,553  $18,704,722  





18

Allowance for Credit Losses, prior to January 1, 2020

Prior to January 1, 2020, the ACL consisted of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represented management’s estimate of incurred losses in the loan portfolio 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, and was recorded in other liabilities on 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 commitments2,587  
ACL$166,209  

The following table presents the activity in the ACL for the periods indicated in 2019:
Three months ended June 30, 2019Six months ended June 30, 2019
(in thousands)
Balance at beginning of period$170,372  $169,410  
Loans charged off(3,711) (10,080) 
Recoveries of loans previously charged off5,255  7,486  
Net loans charged off1,544  (2,594) 
Provision for credit losses(1)5,025  10,125  
Balance at end of period$176,941  $176,941  
(1) Includes ($1.6 million) and ($2.2 million) related to reserve for unfunded lending commitments for the three and six months ended June 30, 2019, respectively.

















19

The following table presents the activity in the allowance for loan losses, by portfolio segment, for the three and six months ended June 30, 2019:
Real Estate -
Commercial
Mortgage		Commercial &
Industrial		Real Estate -
Home
Equity		Real Estate -
Residential
Mortgage		Real Estate -
Construction		ConsumerEquipment lease financing, other
and overdrafts		Total
(in thousands)
Three months ended June 30, 2019
Balance at March 31, 2019$51,946  $60,501  $19,215  $19,146  $4,941  $3,319  $3,041  $162,109  
Loans charged off(230) (1,895) (206) (134) (3) (795) (448) (3,711) 
Recoveries of loans previously charged off169  2,680  223  211  1,245  579  148  5,255  
Net loans recovered (charged off)(61) 785  17  77  1,242  (216) (300) 1,544  
Provision for loan losses2,974  5,055  (251) (331) (1,255) 260  128  6,580  
Balance at June 30, 2019$54,859  $66,341  $18,981  $18,892  $4,928  $3,363  $2,869  $170,233  
Six months ended June 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(1,375) (4,682) (425) (789) (98) (1,478) (1,233) (10,080) 
Recoveries of loans previously charged off305  3,923  420  343  1,329  789  377  7,486  
Net loans recovered (charged off)(1,070) (759) (5) (446) 1,231  (689) (856) (2,594) 
Provision for loan losses3,040  8,232  75  417  (1,364) 835  1,055  12,290  
Balance at June 30, 2019$54,859  $66,341  $18,981  $18,892  $4,928  $3,363  $2,869  $170,233  
(1) The provision in the table only includes the portion related to Net Loans.


The following table presents Net Loans and their related allowance for loan losses, by portfolio segment as of June 30, 2019:
Real Estate -
Commercial
Mortgage		Commercial and
Industrial		Real Estate -
Home
Equity		Real Estate -
Residential
Mortgage		Real Estate -
Construction		ConsumerEquipment lease financing, other and
overdrafts		Total
 (in thousands)
Allowance for loan losses:
Collectively evaluated for impairment$45,367  $53,985  $8,463  $9,913  $4,399  $3,356  $2,869  $128,352  
Individually evaluated for impairment9,492  12,356  10,518  8,979  529  7  —  41,881  
Total$54,859  $66,341  $18,981  $18,892  $4,928  $3,363  $2,869  $170,233  
Net Loans:
Collectively evaluated for impairment$6,438,080  $4,313,666  $1,363,392  $2,414,627  $918,380  $452,865  $273,118  $16,174,128  
Individually evaluated for impairment59,893  51,582  23,582  37,339  4,167  9  17,758  194,330  
Total$6,497,973  $4,365,248  $1,386,974  $2,451,966  $922,547  $452,874  $290,876  $16,368,458  

Non-accrual Loans

All loans individually evaluated for impairment are measured for losses on a quarterly basis. As of June 30, 2020 and December 31, 2019, 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.

20

As of June 30, 2020 and December 31, 2019, approximately 97% and 93%, respectively, of loans evaluated individually for impairment with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated in the preceding 12 months.

The following table presents total non-accrual loans, by class segment, as of the following periods:
June 30, 2020December 31, 2019
Non-accrual LoansNon-accrual Loans
With a Related AllowanceWithout a Related AllowanceTotalTotal
(in thousands)
Real estate - commercial mortgage$24,638  $16,137  $40,775  $33,166  
Commercial and industrial18,222  21,157  39,379  48,106  
Real estate - residential mortgage15,634  1,256  16,890  16,676  
Real estate - home equity7,688  —  7,688  7,004  
Real estate - construction2,412  1,070  3,482  3,618  
Equipment lease financing and other—  16,823  16,823  16,528  
$68,594  $56,443  $125,037  $125,098  

As of June 30, 2020, there were $56.4 million 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 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.

21

The following table summarizes designated internal risk categories by portfolio segment and loan class, by origination year, as of June 30, 2020:
Term Loans Amortized Cost Basis by Origination YearRevolving LoansRevolving Loans converted to Term Loans
(dollars in thousands)AmortizedAmortized
20202019201820172016PriorCost BasisCost BasisTotal
 Real estate - construction
Pass$57,915  $229,899  $204,748  $140,877  $50,094  $126,187  $48,947  $—  $858,667  
Special Mention—  534  —  —  783  2,635  336  —  4,288  
Substandard or Lower—  156  —  —  778  5,601  760  —  7,295  
   Total real estate - construction57,915  230,589  204,748  140,877  51,655  134,423  50,043  —  870,250  
Real estate - construction
Current period gross charge-offs—  —  —  —  —  (17) —  —  (17) 
Current period recoveries—  —  —  —  —  70  —  —  70  
   Current period net charge-offs—  —  —  —  —  53  —  —  53  
Commercial and industrial
Pass2,286,984  559,728  362,758  257,780  230,120  625,302  1,285,256  3,412  5,611,340  
Special Mention51,958  9,918  10,905  8,782  14,898  37,112  59,836  868  194,277  
Substandard or Lower30,171  1,193  13,353  14,186  12,712  25,173  68,283  512  165,583  
   Total commercial and industrial2,369,113  570,839  387,016  280,748  257,730  687,587  1,413,375  4,792  5,971,200  
Commercial and industrial loans
Current period gross charge-offs—  (107) (9) (55) (334) (210) (13,664) —  (14,379) 
Current period recoveries39  242  63  43  1,673  2,652  —  4,712  
   Current period net charge-offs—  (68) 233  8  (291) 1,463  (11,012) —  (9,667) 
Real estate - commercial mortgage
Pass459,245  935,899  791,164  894,358  918,394  2,554,653  81,448  5,812  6,640,973  
Special Mention755  4,819  18,187  30,164  16,142  101,456  3,207  —  174,730  
Substandard or Lower15  469  8,393  28,954  9,470  70,781  1,150  —  119,232  
Total real estate - commercial460,015  941,187  817,744  953,476  944,006  2,726,890  85,805  5,812  6,934,935  
Real estate - commercial mortgage
Current period gross charge-offs—  (10) (16) (1,993) (11) (1,132) (17) —  (3,179) 
Current period recoveries—  —  —  —  1  338  —  —  339  
   Current period net charge-offs—  (10) (16) (1,993) (10) (794) (17) —  (2,840) 
Total
Pass$2,804,144  $1,725,526  $1,358,670  $1,293,015  $1,198,608  $3,306,142  $1,415,651  $9,224  $13,110,980  
Special Mention52,713  15,271  29,092  38,946  31,823  141,203  63,379  868  373,295  
Substandard or Lower30,186  1,818  21,746  43,140  22,960  101,555  70,193  512  292,110  
Total$2,887,043  $1,742,615  $1,409,508  $1,375,101  $1,253,391  $3,548,900  $1,549,223  $10,604  $13,776,385  
22

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 as of December 31, 2019:
PassSpecial MentionSubstandard or LowerTotal
(dollars in thousands)
Real estate - commercial mortgage$6,429,407  $137,163  $134,206  $6,700,776  
Commercial and industrial - secured3,830,847  171,442  195,884  4,198,173  
Commercial and industrial - unsecured234,987  9,665  3,876  248,528  
Total commercial and industrial
4,065,834  181,107  199,760  4,446,701  
Construction - commercial residential100,808  2,897  3,461  107,166  
Construction - commercial765,562  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 Total94.5 %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 base the PD on this migration.

23

The Corporation considers the performance of the loan portfolio and its impact on the ACL. For certain loans classes, the Corporation evaluates credit quality based on the aging status of the loan. The following table presents the amortized cost of these loans based on payment activity, by origination year, as of June 30, 2020:
Term Loans Amortized Cost Basis by Origination YearRevolving LoansRevolving Loans converted to Term Loans
(dollars in thousands)AmortizedAmortized
20202019201820172016PriorCost BasisCost BasisTotal
Real estate - home equity
Performing$13,718  $9,591  $15,464  $13,681  $15,006  $145,384  $1,018,865  $7,755  $1,239,464  
Nonperforming—  —  153  256  228  2,674  8,265  415  11,991  
   Total real estate - home equity13,718  9,591  15,617  13,937  15,234  148,058  1,027,130  8,170  1,251,455  
Real estate - home equity
Current period gross charge-offs—  —  —  (117) (23) (231) (374) —  (745) 
Current period recoveries—  —  —  —  —  219  42  —  261  
   Current period net charge-offs—  —  —  (117) (23) (12) (332) —  (484) 
Real estate - residential mortgage
Performing554,061  660,974  311,804  438,785  320,134  553,448  —  —  2,839,206  
Nonperforming—  635  2,647  2,465  398  16,876  —  —  23,021  
   Total real estate - residential mortgage554,061  661,609  314,451  441,250  320,532  570,324  —  —  2,862,227  
Real estate - residential mortgage
Current period gross charge-offs—  (15) (100) (104) (6) (197) —  —  (422) 
Current period recoveries—  —  10  1  1  185  —  —  197  
   Current period net charge-offs—  (15) (90) (103) (5) (12) —  —  (225) 
Consumer
Performing58,202  115,866  115,707  54,108  31,027  43,344  47,021  —  465,275  
Nonperforming—  —  73  42  31  42  147  —  335  
   Total consumer credit - other consumer loans58,202  115,866  115,780  54,150  31,058  43,386  47,168  —  465,610  
Consumer
Current period gross charge-offs—  (532) (335) (326) (303) (591) —  —  (2,087) 
Current period recoveries83  89  143  51  43  625  —  —  1,034  
   Current period net charge-offs83  (443) (192) (275) (260) 34  —  —  (1,053) 
Equipment Lease Financing and Other
Performing63,153  76,157  54,353  39,435  16,132  2,537  —  —  251,767  
Nonperforming1,526  —  207  16,048  299  296  —  —  18,376  
   Total leasing and other64,679  76,157  54,560  55,483  16,431  2,833  —  —  270,143  
Equipment Lease Financing and other
Current period gross charge-offs(228) (460) —  (95) —  (438) —  —  (1,221) 
Current period recoveries61  39  —  66  2  32  —  —  200  
   Current period net charge-offs(167) (421) —  (29) 2  (406) —  —  (1,021) 
Construction - other
Performing22,051  63,737  6,491  —  16  —  9,508  673  102,476  
Nonperforming—  —  —  182  —  —  —  —  182  
   Total leasing and other22,051  63,737  6,491  182  16  —  9,508  673  102,658  
Construction - other
Current period gross charge-offs—  —  —  —  —  —  —  —  —  
Current period recoveries—  —  —  —  —  —  —  —  —  
   Current period net charge-offs—  —  —  —  —  —  —  —  —  
Total
Performing$711,185  $926,325  $503,819  $546,009  $382,315  $744,713  $1,075,394  $8,428  $4,898,188  
Nonperforming1,526  635  3,080  18,993  956  19,888  8,412  415  53,905  
Total$712,711  $926,960  $506,899  $565,002  $383,271  $764,601  $1,083,806  $8,843  $4,952,093  
24

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, 2019
Performing
Delinquent (1)
Non-performing (2)
Total
(dollars in thousands)
Real estate - home equity$1,292,035  $12,341  $10,568  $1,314,944  
Real estate - residential mortgage2,584,763  34,291  22,411  2,641,465  
Construction - other92,649  895  809  94,353  
Consumer - direct63,582  465  190  64,237  
Consumer - indirect393,974  4,685  268  398,927  
   Total consumer457,556  5,150  458  463,164  
Equipment lease financing and other278,743  4,012  16,642  299,397  
$4,705,746  $56,689  $50,888  $4,813,323  
% of Total97.8 %1.2 %1.0 %100 %
(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:
June 30,
2020		December 31,
2019
 (in thousands)
Non-accrual loans$125,037  $125,098  
Loans 90 days or more past due and still accruing14,767  16,057  
Total non-performing loans139,804  141,155  
OREO (1)
5,418  6,831  
Total non-performing assets$145,222  $147,986  
(1) Excludes $10.6 million of residential mortgage properties for which formal foreclosure proceedings were in process as of June 30, 2020.

The following tables present the aging of the amortized cost basis of loans, by class segment:
30-5960-89≥ 90 Days
Days PastDays PastPast Due Non-
DueDueand AccruingAccrualCurrentTotal
(in thousands)
June 30, 2020
Real estate – commercial mortgage$16,431  $1,190  $1,599  $40,775  $6,874,941  $6,934,936  
Commercial and industrial2,970  1,215  351  39,379  5,927,286  5,971,201  
Real estate – residential mortgage11,401  5,761  5,997  16,890  2,822,177  2,862,226  
Real estate – home equity3,431  1,593  3,889  7,688  1,234,854  1,251,455  
Real estate – construction2,606  414  1,043  3,482  965,364  972,909  
Consumer1,851  471  334  —  462,954  465,610  
Equipment lease financing and other795  216  1,554  16,823  226,997  246,385  
Total$39,485  $10,860  $14,767  $125,037  $18,514,573  $18,704,722  
25

30-59 Days Past
Due		60-89
Days Past
Due		≥ 90 Days
Past Due
and
Accruing		Non-
accrual		CurrentTotal
(in thousands)
December 31, 2019
Real estate – commercial mortgage$10,912  $1,543  $4,113  $33,166  $6,651,042  $6,700,776  
Commercial and industrial2,302  2,630  1,385  48,106  4,392,278  4,446,701  
Real estate – residential mortgage26,982  7,309  5,735  16,676  2,584,763  2,641,465  
Real estate – home equity9,635  2,706  3,564  7,004  1,292,035  1,314,944  
Real estate – construction1,715  900  688  3,618  964,158  971,079  
Consumer4,228  922  458  —  457,556  463,164  
Equipment lease financing and other552  3,460  114  16,528  278,743  299,397  
Total$56,326  $19,470  $16,057  $125,098  $16,620,575  $16,837,526  

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; commercial properties such as retail centers, office buildings, and lodging; agriculture land; and vacant land.

Troubled Debt Restructurings

The following table presents TDRs, by class segment:
June 30,
2020		December 31,
2019
 (in thousands)
Real estate - residential mortgage$28,030  $21,551  
Real estate - commercial mortgage20,407  13,330  
Real estate - home equity15,548  15,068  
Commercial and industrial4,398  5,193  
Consumer—  8  
Total accruing TDRs68,383  55,150  
Non-accrual TDRs (1)
31,575  20,825  
Total TDRs$99,958  $75,975  
 
(1)Included in non-accrual loans in the preceding table detailing non-performing assets.












26

The following table presents TDRs, by class segment, for loans that were modified during the three and six months ended June 30, 2020 and 2019:
Three months ended June 30Six months ended June 30
2020201920202019
Number of LoansRecorded InvestmentNumber of LoansRecorded InvestmentNumber of LoansRecorded InvestmentNumber of LoansRecorded Investment
(dollars in thousands)
Real estate - residential mortgage33  $8,505  1  $516  40  $9,165  5  $1,433  
Real estate - commercial mortgage6  16,082  2  1,785  7  16,474  2  1,785  
Real estate - home equity19  1,609  22  1,125  27  2,186  34  1,954  
Commercial and industrial13  1,304  4  586  14  1,378  8  3,046  
Consumer8  185  —  —  8  185  —  —  
Total
79  $27,685  29  $4,012  96  $29,388  49  $8,218  

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 six months ended June 30, 2020, payment schedule modifications having a recorded investment of $3.9 billion were excluded from TDRs based on this regulatory guidance.

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 June 30Six months ended June 30
 2020201920202019
 (in thousands)
Amortized cost:
Balance at beginning of period$38,854  $38,504  $39,267  $38,573  
Originations of MSRs2,772  1,861  4,250  3,086  
Amortization(2,934) (1,539) (4,825) (2,833) 
Balance at end of period$38,692  $38,826  $38,692  $38,826  
Valuation allowance:
Balance at beginning of period$(1,100) $—  $—  $—  
Additions to valuation allowance(6,600) —  (7,700) —  
Balance at end of period$(7,700) $—  $(7,700) $—  
Net MSRs at end of period$30,992  $38,826  $30,992  $38,826  
Estimated fair value of MSRs at end of period$30,992  $44,916  $30,992  $44,916  

MSRs represent the economic value of contractual rights to service mortgage loans that have been sold. The total portfolio of loans serviced by the Corporation for unrelated third parties was $4.8 billion and $4.9 billion as of June 30, 2020 and December 31, 2019, 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.

27

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 $31.0 million and $45.2 million at June 30, 2020 and December 31, 2019, respectively. Based on its fair value analysis as of June 30, 2020, the Corporation determined that a $6.6 million increase to the valuation allowance was required for the three months ended June 30, 2020, resulting in a total valuation allowance of $7.7 million for the six months ended June 30, 2020. The $6.6 million and $7.7 million increases to the valuation allowance were recorded as reductions to mortgage banking income on the consolidated statements of income for the three and six months ended June 30, 2020, respectively.

NOTE 6 – Derivative Financial Instruments

The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. None of the Corporation's outstanding derivative contracts are designated as hedges, and none are entered into for speculative purposes. Derivative instruments are carried at fair value, with changes in fair value recognized in earnings as components of non-interest income or non-interest expense on the consolidated statements of income.

Derivative contracts create counterparty credit risk with both the Corporation's customers and with institutional derivative counterparties. The Corporation manages counterparty credit risk through its credit approval processes, monitoring procedures and obtaining adequate collateral, when the Corporation determines it is appropriate to do so and in accordance with counterparty contracts.

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

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. The Corporation is required to clear all eligible interest rate swap contracts with a central counterparty and is subject to the regulations of the Commodity Futures Trading Commission.

Foreign Exchange Contracts

The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a specific date at a contractual price. The Corporation 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.








28

The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
 June 30, 2020December 31, 2019
 Notional
Amount		Asset
(Liability)
Fair Value		Notional
Amount		Asset
(Liability)
Fair Value
 (in thousands)
Interest Rate Locks with Customers
Positive fair values$463,202  $10,614  $132,260  $1,123  
Negative fair values6,003  (51) 9,783  (53) 
Forward Commitments
Positive fair values—  —  75,000  63  
Negative fair values395,515  (2,057) 180,000  (371) 
Interest Rate Swaps with Customers
Positive fair values3,587,221  390,701  2,903,489  143,484  
Negative fair values12,288  (4) 376,705  (695) 
Interest Rate Swaps with Dealer Counterparties
Positive fair values 12,288  4  376,705  695  
Negative fair values3,587,221  (188,515) 2,903,489  (75,327) 
Foreign Exchange Contracts with Customers
Positive fair values7,174  79  3,373  38  
Negative fair values5,248  (92) 7,283  (154) 
Foreign Exchange Contracts with Correspondent Banks
Positive fair values10,090  137  9,028  192  
Negative fair values5,774  (76) 4,976  (45) 

The following table presents a summary of the fair value gains (losses) on derivative financial instruments:
Consolidated Statements of Income ClassificationThree months ended June 30Six months ended June 30
 2020201920202019
        (in thousands)
Mortgage banking derivatives (1)
Mortgage banking income$6,704  $(48) $7,744  $614  
Interest rate swapsOther expense10  296  82  147  
Foreign exchange contractsOther income(102) (14) 17  34  
Net fair value gains on derivative financial instruments$6,612  $234  $7,843  $795  
(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:
June 30,
2020		December 31,
2019
 (in thousands)
Amortized cost (1)
$74,868  $37,396  
Fair value77,415  37,828  
(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 $1.4 million and $304,000 for the three months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020 and 2019, gains related to changes in fair values of mortgage loans held for sale were $2.1 million and $325,000, respectively

29

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 financial institution counterparties and customers. Under these agreements, the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. Cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default. A daily settlement occurs through a clearing agent for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared daily through a clearing agent. As a result, the total fair values of interest rate swap derivative assets and derivative 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 investment securities on the consolidated balance sheets. The Corporation has no intent to set off these amounts, therefore, these repurchase agreements are not eligible for offset.
































30

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 AmountsGross Amounts Not Offset
Recognized on the Consolidated
on the Balance Sheets
ConsolidatedFinancialCashNet
Balance Sheets
Instruments(1)
Collateral (2)

Amount
(in thousands)
June 30, 2020
Interest rate swap derivative assets$390,706  $(4) $—  $390,702  
Foreign exchange derivative assets with correspondent banks137  (76) —  61  
Total $390,843  $(80) $—  $390,763  
Interest rate swap derivative liabilities$188,519  $(4) $(188,515) $—  
Foreign exchange derivative liabilities with correspondent banks76  (76) —  —  
Total$188,595  $(80) $(188,515) $—  
December 31, 2019
Interest rate swap derivative assets$144,179  $(757) $—  $143,422  
Foreign exchange derivative assets with correspondent banks192  (45) —  147  
Total $144,371  $(802) $—  $143,569  
Interest rate swap derivative liabilities$76,022  $(757) $(75,265) $—  
Foreign exchange derivative liabilities with correspondent banks45  (45) —  —  
Total$76,067  $(802) $(75,265) $—  

(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.
31

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:
June 30,December 31,
20202019
Included in other assets:(in thousands)
Affordable housing tax credit investment, net$139,956  $153,351  
Other tax credit investments, net62,932  64,354  
Total TCIs, net$202,888  $217,705  
Included in other liabilities:
Unfunded affordable housing tax credit commitments$12,513  $16,684  
Other tax credit liabilities54,823  55,105  
Total unfunded tax credit commitments and liabilities$67,336  $71,789  

The following table presents other information relating to the Corporation's TCIs:
Three Months EndedSix Months Ended
June 30June 30
2020201920202019
Components of income taxes:(in thousands)
Affordable housing tax credits and other tax benefits$(7,194) $(7,575) $(14,388) $(15,150) 
Other tax credit investment credits and tax benefits(941) (1,135) (1,882) (2,271) 
Amortization of affordable housing investments, net of tax benefit5,023  5,494  10,047  10,989  
Deferred tax expense208  239  416  477  
Total net reduction in income tax expense$(2,904) $(2,977) $(5,807) $(5,955) 
Amortization of TCIs:
Affordable housing tax credits investment$1,022  $823  $2,044  $1,645  
Other tax credit investment amortization428  669  856  1,338  
Total amortization of TCIs$1,450  $1,492  $2,900  $2,983  

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NOTE 8 – Accumulated Other Comprehensive Income

The following table presents changes in other comprehensive income:
Before-Tax AmountTax EffectNet of Tax Amount
Three months ended June 30, 2020(in thousands)
Unrealized gain on securities$44,199  $(9,775) $34,424  
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)
1,019  (226) 793  
Amortization of net unrecognized pension and postretirement items (3)
328  (73) 255  
Total Other Comprehensive Income$42,541  $(9,410) $33,131  
Three months ended June 30, 2019
Unrealized gain on securities$31,994  $(7,077) $24,917  
Reclassification adjustment for securities gains included in net income (1)
(176) 39  (137) 
Amortization of net unrealized losses on AFS securities transferred to HTM (2)
1,311  (290) 1,021  
Non-credit related unrealized losses on other-than-temporarily impaired debt securities(770) 170  (600) 
Amortization of net unrecognized pension and postretirement items (3)
353  (78) 275  
Total Other Comprehensive Income$32,712  $(7,236) $25,476  
Six months ended June 30, 2020
Unrealized gain on securities (3)
$66,581  $(14,728) $51,853  
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) (3)
2,040  (451) 1,589  
Amortization of net unrecognized pension and postretirement items (4)
656  (146) 510  
Total Other Comprehensive Income$66,226  $(14,650) $51,576  
Six months ended June 30, 2019
Unrealized gain on securities$58,056  $(12,841) $45,215  
Reclassification adjustment for securities gains included in net income (1)
(241) 53  (188) 
Amortization of net unrealized losses on AFS securities transferred to HTM (2)
2,563  (568) 1,995  
Non-credit related unrealized losses on other-than-temporarily impaired debt securities(875) 193  (682) 
Amortization of net unrecognized pension and postretirement items (3)
727  (161) 566  
Total Other Comprehensive Income$60,230  $(13,324) $46,906  

(1) Amounts reclassified out of accumulated other comprehensive income. 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. 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. Before-tax amounts included in "Salaries and employee benefits" on the Consolidated Statements of Income. See Note 12, "Employee Benefit Plans," for additional details.







33

The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax:
Unrealized Gains (Losses) on Investment SecuritiesUnrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt SecuritiesUnrecognized Pension and Postretirement Plan Income (Costs)Total
(in thousands)
Three months ended June 30, 2020
Balance at March 31, 2020$33,054  $—  $(14,746) $18,308  
Other comprehensive income before reclassifications34,424  —  —  34,424  
Amounts reclassified from accumulated other comprehensive income(2,341) —  255  (2,086) 
Amortization of net unrealized losses on AFS securities transferred to HTM
793  —  —  793  
Balance at June 30, 2020$65,930  $—  $(14,491) $51,439  
Three months ended June 30, 2019
Balance at March 31, 2019$(23,433) $598  $(14,798) $(37,633) 
Other comprehensive income before reclassifications24,917  (600) —  24,317  
Amounts reclassified from accumulated other comprehensive income(137) —  275  138  
Amortization of net unrealized losses on AFS securities transferred to HTM1,021  —  —  1,021  
Balance at June 30, 2019$2,368  $(2) $(14,523) $(12,157) 
Six months ended June 30, 2020
Balance at December 31, 2019$14,864  $—  $(15,001) $(137) 
Other comprehensive income before reclassifications51,853  —  —  51,853  
Amounts reclassified from accumulated other comprehensive income(2,376) —  510  (1,866) 
Amortization of net unrealized losses on AFS securities transferred to HTM
1,589  —  —  1,589  
Balance at June 30, 2020$65,930  $—  $(14,491) $51,439  
Six months ended June 30, 2019
Balance at December 31, 2018$(44,654) $680  $(15,089) $(59,063) 
Other comprehensive income before reclassifications45,215  (682) —  44,533  
Amounts reclassified from accumulated other comprehensive income(188) —  566  378  
Amortization of net unrealized losses on AFS securities transferred to HTM1,995  —  —  1,995  
Balance at June 30, 2019$2,368  $(2) $(14,523) $(12,157) 

34

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:
 June 30, 2020
 Level 1Level 2Level 3Total
 (in thousands)
Loans held for sale$—  $77,415  $—  $77,415  
Available for sale investment securities:
State and municipal securities—  893,682  —  893,682  
Corporate debt securities—  325,353  —  325,353  
Collateralized mortgage obligations—  578,394  —  578,394  
Residential mortgage-backed securities—  160,868  —  160,868  
Commercial mortgage-backed securities—  585,143  —  585,143  
Auction rate securities—  —  100,859  100,859  
Total available for sale investment securities—  2,543,440  100,859  2,644,299  
Other assets:
Investments held in Rabbi Trust20,555  —  —  20,555  
Derivative assets216  401,319  —  401,535  
Total assets$20,771  $3,022,174  $100,859  $3,143,804  
Other liabilities:
Deferred compensation liabilities$20,555  $—  $—  $20,555  
Derivative liabilities168  190,627  —  190,795  
Total liabilities$20,723  $190,627  $—  $211,350  
35

 December 31, 2019
 Level 1Level 2Level 3Total
 (in thousands)
Loans held for sale$—  $37,828  $—  $37,828  
Available for sale investment securities:
State and municipal securities—  652,927  —  652,927  
Corporate debt securities—  374,957  2,400  377,357  
Collateralized mortgage obligations—  693,718  —  693,718  
Residential mortgage-backed securities—  177,312  —  177,312  
Commercial mortgage-backed securities—  494,297  —  494,297  
Auction rate securities—  —  101,926  101,926  
Total available for sale investment securities—  2,393,211  104,326  2,497,537  
Other assets:
Investments held in Rabbi Trust22,213  —  —  22,213  
Derivative assets230  145,365  —  145,595  
Total assets$22,443  $2,576,404  $104,326  $2,703,173  
Other liabilities:
Deferred compensation liabilities$22,213  $—  $—  $22,213  
Derivative liabilities199  76,447  —  76,646  
Total liabilities$22,412  $76,447  $—  $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 June 30, 2020 and December 31, 2019 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 commonly used in the banking industry. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings and matrix pricing.
Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.
Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is performed for at least 95% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.
•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 ($321.0 million at June 30, 2020 and $362.3 million at December 31, 2019), single-issuer trust preferred securities issued by financial institutions ($0 at June 30, 2020 and $11.2 million at December 31, 2019) and other corporate debt issued by non-financial institutions ($4.4 million at June 30, 2020 and $3.9 million December 31, 2019). 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.

36

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 June 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 June 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. 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 ($216,000 at June 30, 2020 and $230,000 at December 31, 2019). 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 ($10.6 million at June 30, 2020 and $1.2 million at December 31, 2019) and the fair value of interest rate swaps ($390.7 million at June 30, 2020 and $144.2 million at December 31, 2019). 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 ($168,000 at June 30, 2020 and $199,000 at December 31, 2019).

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 ($2.1 million at June 30, 2020 and $424,000 at December 31, 2019) and the fair value of interest rate swaps ($188.5 million at June 30, 2020 and $76.0 million at December 31, 2019).

The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Derivative assets" above.


37

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
Three months ended June 30, 2020(in thousands)
Balance at March 31, 2020$—  $2,160  $93,666  
Sales —  (2,160) —  
Unrealized adjustment to fair value (1)
—  —  7,193  
Balance at June 30, 2020$—  $—  $100,859  
Three months ended June 30, 2019
Balance at March 31, 2019$770  $2,430  $102,810  
Sales(770) —  —  
Unrealized adjustment to fair value (1)
—  (60) 555  
Balance at June 30, 2019$—  $2,370  $103,365  
Six months ended June 30, 2020
Balance at December 31, 2019$—  $2,400  $101,926  
Sales—  (2,160) —  
Unrealized adjustment to fair value (1)
—  (242) (1,067) 
Discount accretion—  2  —  
Balance at June 30, 2020$—  $—  $100,859  
Six months ended June 30, 2019
Balance at December 31, 2018$875  $2,400  $102,994  
Sales(770) —  —  
Unrealized adjustment to fair value (1)
(105) (30) 371  
Balance at June 30, 2019$—  $2,370  $103,365  
(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:
 June 30, 2020December 31, 2019
 (in thousands)
Net Loans$108,746  $144,807  
OREO5,418  6,831  
MSRs (1)
30,992  45,193  
Total assets$145,156  $196,831  
(1)Amounts shown are estimated fair value. MSRs are recorded on the Corporation's consolidated balance sheets at 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
38

amount shown is the balance of impaired loans, net of the related ACL. See "Note 4 - 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 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 June 30, 2020 valuation were 17.5% and 9.5%, respectively. Management tests 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, the Corporation received Class B restricted shares of Visa, Inc. ("Visa") as part of Visa’s initial public offering. These securities are considered equity securities without readily determinable fair values. As such, the approximately 133,000 Visa Class B shares owned as of June 30, 2020 were carried at a zero cost basis.






















39

The following tables present the carrying amounts and estimated fair values of the Corporation’s financial instruments as of the periods shown. A general description of the methods and assumptions used to estimate such fair values follows:
 June 30, 2020
Estimated Fair Value
Carrying AmountLevel 1Level 2Level 3Total
(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents$1,058,599  $1,058,599  $—  $—  $1,058,599  
FRB and FHLB stock91,042  —  91,042  —  91,042  
Loans held for sale 77,415  —  77,415  —  77,415  
AFS securities 2,644,299  —  2,543,440  100,859  2,644,299  
HTM securities330,514  —  354,109  —  354,109  
Net Loans 18,448,185  —  —  18,173,117  18,173,117  
Accrued interest receivable73,720  73,720  —  —  73,720  
Other assets 706,518  268,789  401,319  36,410  706,518  
FINANCIAL LIABILITIES  
Demand and savings deposits$17,006,353  $17,006,353  $—  $—  $17,006,353  
Brokered deposits310,689  268,618  42,071  —  310,689  
Time deposits2,567,166  —  2,599,932  —  2,599,932  
Short-term borrowings572,551  572,551  —  —  572,551  
Accrued interest payable11,571  11,571  —  —  11,571  
FHLB advances and long-term debt1,295,196  —  1,342,497  —  1,342,497  
Other liabilities 369,624  162,614  190,627  16,383  369,624  
December 31, 2019
Estimated Fair Value
Carrying AmountLevel 1Level 2Level 3Total
(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents$517,791  $517,791  $—  $—  $517,791  
FRB and FHLB stock97,422  —  97,422  —  97,422  
Loans held for sale 37,828  —  37,828  —  37,828  
AFS securities 2,497,537  —  2,393,211  104,326  2,497,537  
HTM securities369,841  —  383,705  —  383,705  
Net Loans16,673,904  —  —  16,485,122  16,485,122  
Accrued interest receivable60,898  60,898  —  —  60,898  
Other assets 431,565  234,176  145,365  52,024  431,565  
FINANCIAL LIABILITIES  
Demand and savings deposits$14,327,453  $14,327,453  $—  $—  $14,327,453  
Brokered deposits264,531  223,982  40,549  —  264,531  
Time deposits2,801,930  —  2,828,988  —  2,828,988  
Short-term borrowings883,241  883,241  —  —  883,241  
Accrued interest payable8,834  8,834  —  —  8,834  
FHLB advances and long-term debt881,769  —  878,385  —  878,385  
Other liabilities 221,542  142,508  76,447  2,587  221,542  
 
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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.

As of June 30, 2020, 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 divided by the weighted average number of shares outstanding. Diluted net income per share is calculated as net income divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist of outstanding stock options, RSUs and PSUs. PSUs are required to be included in weighted average 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 June 30Six months ended June 30
 2020201920202019
Weighted average shares outstanding (basic)161,715  168,343  162,582  169,109  
Impact of common stock equivalents552  825  744  933  
Weighted average shares outstanding (diluted)162,267  169,168  163,326  170,042  
Per share:
Basic$0.24  $0.36  $0.40  $0.69  
Diluted0.24  0.35  0.40  0.68  

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
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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 June 30, 2020, the Employee Equity Plan had 9.3 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 181,000 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 June 30Six months ended June 30
 2020201920202019
         (in thousands)
Compensation expense$1,911  $1,788  $3,530  $3,348  
Tax benefit(403) (412) (747) (743) 
Stock-based compensation expense, net of tax benefit$1,508  $1,376  $2,783  $2,605  

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 June 30Six months ended June 30
 2020201920202019
         (in thousands)
Interest cost$681  $815  $1,362  $1,630  
Expected return on plan assets(982) (689) (1,964) (1,378) 
Net amortization and deferral465  495  930  990  
Net periodic pension cost$164  $621  $328  $1,242  









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The components of the net benefit for the Corporation’s Postretirement Benefits Plan ("Postretirement Plan") consisted of the following components:
Three months ended June 30Six months ended June 30
 2020201920202019
         (in thousands)
Interest cost$11  $15  $22  $30  
Net accretion and deferral(137) (139) (274) (278) 
Net periodic benefit$(126) $(124) $(252) $(248) 

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:
June 30,
2020		December 31, 2019
 (in thousands)
Commitments to extend credit$8,140,293  $6,689,519  
Standby letters of credit294,647  303,020  
Commercial letters of credit52,100  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. See "Note 4 - Allowance for Credit Losses and Asset Quality," for additional details.

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. As of June 30, 2020 and December 31, 2019, the total reserve for losses on residential mortgage loans sold was $1.1 million and $3.2 million, respectively, including reserves for both representation and warranty and credit loss exposures. With the adoption 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 and a corresponding decrease to the reserve for estimated losses related to loans sold to investors in the first quarter of 2020.



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Legal Proceedings
        
The Corporation is involved in various pending and threatened claims and other legal proceedings in the ordinary course of its business activities. The Corporation evaluates the possible impact of these matters, taking into consideration the most recent information available. A loss reserve is established for those matters for which the Corporation believes a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual losses with respect to any such matter may be more or less than the amount estimated by the Corporation. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated by the Corporation, no loss reserve is established.

In addition, from time to time, the Corporation is involved in investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other companies. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving the Corporation, and could result in fines, penalties, restitution, other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices. The Corporation’s practice is to cooperate fully with regulatory and governmental inquiries and investigations.

As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending legal proceedings, or regulatory or governmental inquiries or investigations, will not have a material adverse effect on the financial condition of the Corporation. However, legal proceedings, inquiries and investigations are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of operations in any future period, depending, in part, upon the size of the loss or liability imposed and the operating results for the period, and could have a material adverse effect on the Corporation’s business. In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause the Corporation to incur additional expenses, which could be significant, and possibly material, to the Corporation’s results of operations in any future period.

SEC Investigation

The Corporation is responding to an investigation by the staff of the Division of Enforcement of the SEC regarding certain accounting determinations that could have impacted the Corporation’s reported earnings per share. The Corporation believes that its financial statements filed with the SEC in Forms 10-K and 10-Q present fairly, in all material respects, its financial condition, results of operations and cash flows as of or for the periods ending on their respective dates. The Corporation is cooperating fully with the SEC and at this time cannot predict when or how the investigation will be resolved.

Kress v. Fulton Bank, N.A.

On October 15, 2019, a former Fulton Bank teller supervisor, D. Kress filed a putative class action lawsuit on behalf of herself and other similarly situated non-exempt, hourly employees in the U.S. District Court for the District of New Jersey, D. Kress v. Fulton Bank, N.A., Case No. 1:19-cv-18985. Fulton Bank accepted service of process on January 20, 2020. The lawsuit alleges that Fulton Bank did not record or otherwise account for the amount of time which non-exempt employees who are paid based on their time worked, spent conducting branch opening security procedures. The allegation is that, as a result, Fulton Bank did not properly compensate those employees for their regular and overtime wages. The lawsuit alleges that by doing so, Fulton violated: (i) the federal Fair Labor Standards Act and seeks back overtime wages for a period of three years, liquidated damages and attorney fees and costs; (ii) the New Jersey State Wage and Hour Law and seeks back overtime wages for a period of six years, treble damages and attorney fees and costs; and (iii) the New Jersey Wage Payment Law and seeks back wages for a period of six years, treble damages and attorney fees and costs. The lawsuit also asserts New Jersey common law claims seeking compensatory damages and interest.

NOTE 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.

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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, 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 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 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 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;
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•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 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, Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and elsewhere in this Report, including in Note 13 "Commitments and Contingencies."
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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 30Six months ended June 30
 2020201920202019
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 assets0.66%1.14%0.57%1.12%
Return on average shareholders' equity6.89%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 assets0.59%0.73%0.59%0.73%
Annualized net charge-offs (recoveries) to average loans0.09%(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
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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 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.

Summary of Financial Results for the three and six months ended June 30, 2020:

•Net Income and Net Income Per Share - Net income was $39.6 million and $65.6 million for the three and six months ended June 30, 2020, respectively. For the three months ended June 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 ended June 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 ended June 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 ended June 30, 2020, respectively, compared to the same periods in 2019.

◦Net Interest Margin - For the three and six months ended June 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.

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◦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 ended June 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 ended June 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 - In March 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 of June 30, 2020 compared to December 31, 2019. Annualized net charge-offs to average loans outstanding were 0.09% and 0.17% for the three and six months ended June 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 ended June 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 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.

•Non-interest Income - For the three and six months ended June 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 ended June 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 ended June 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 ended June 30, 2020, respectively, in comparison to the same periods in 2019. The decrease during the three months ended June 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 ended June 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 ended June 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 ended June 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:
Three months ended June 30Six months ended June 30
2020201920202019
(dollars in thousands)
Return on average tangible shareholders' equity
Net income$39,559  $59,779  $65,606  $116,442  
Plus: Intangible amortization, net of tax104  85  208  170  
Numerator$39,663  $59,864  $65,814  $116,612  
Average common shareholders' equity$2,309,133  $2,301,258  $2,323,074  $2,283,278  
Less: Average goodwill and intangible assets(535,103) (535,301) (535,169) (533,544) 
Average tangible shareholders' equity (denominator)$1,774,030  $1,765,957  $1,787,905  $1,749,734  
Return on average tangible shareholders' equity, annualized
8.99 %13.60 %7.40 %13.44 %
Efficiency ratio
Non-interest expense$143,006  $144,168  $285,558  $281,992  
Less: Prepayment penalty on FHLB advances(2,878) —  (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  $319,825  $334,360  
Plus: Total non-interest income55,922  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 ratio66.4 %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 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 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 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.
51

Three months ended June 30, 2020 compared to the three months ended June 30, 2019

Net Interest Income

FTE net interest income decreased $11.9 million, to $155.9 million, for the three months ended June 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
 20202019
Average
Balance		InterestYield/
Rate		Average
Balance		InterestYield/
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 securities3,031,706  21,908  2.89  2,792,670  20,076  2.87  
Loans held for sale55,608  509  3.66  24,568  350  5.71  
Other interest-earning assets815,910  766  0.38  409,617  2,168  2.12  
Total interest-earning assets22,235,021  183,796  3.32  19,542,931  213,288  4.37  
Noninterest-earning assets:
Cash and due from banks153,728  116,285  
Premises and equipment240,417  240,666  
Other assets1,761,038  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 deposits5,446,368  3,331  0.25  4,925,788  10,550  0.86  
Brokered deposits312,121  422  0.54  246,154  1,582  2.58  
Time deposits2,624,962  11,145  1.71  2,816,424  12,245  1.74  
Total interest-bearing deposits13,486,870  17,118  0.51  12,174,646  32,550  1.07  
Short-term borrowings707,771  517  0.29  941,504  4,462  1.89  
 FHLB advances and long-term debt1,361,421  10,307  3.03  1,051,919  8,480  3.23  
Total interest-bearing liabilities15,556,062  27,942  0.72  14,168,069  45,492  1.29  
Noninterest-bearing liabilities:
Demand deposits5,789,788  4,200,810  
Total Deposits/Cost of deposits19,276,658  0.36  16,375,456  0.80  
Other liabilities484,133  386,893  
Total Liabilities21,829,983  18,755,772  
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds21,345,850  0.53  18,368,879  0.93  
Shareholders’ equity2,309,133  2,301,258  
Total Liabilities and Shareholders’ Equity$24,139,116  $21,057,030  
Net interest income/FTE NIM155,854  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 ended June 30, 2020 in comparison to the same period in 2019:
 2020 vs. 2019
Increase (Decrease) due
to change in
 VolumeRateNet
 (in thousands)
FTE Interest income on:
Net Loans$21,408  $(51,489) $(30,081) 
Taxable investment securities(1,131) 367  (764) 
Tax-exempt investment securities3,170  (574) 2,596  
Loans held for sale319  (160) 159  
Other interest-earning assets1,173  (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 deposits1,007  (8,225) (7,218) 
Brokered deposits267  (1,427) (1,160) 
Time deposits(877) (223) (1,100) 
Short-term borrowings(896) (3,048) (3,945) 
Long-term borrowings2,364  (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.

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.

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

Average loans and average FTE yields, by type, are summarized in the following table:
Three months ended June 30Increase (Decrease)
 20202019 in Balance
 BalanceYieldBalanceYield$%
 (dollars in thousands)
Real estate – commercial mortgage$6,875,872  3.47 %$6,424,213  4.67 %$451,659  7.0 %
Commercial and industrial5,710,145  3.35  4,440,860  4.73  1,269,285  28.6  
Real estate – residential mortgage2,769,682  3.88  2,366,685  4.09  402,997  17.0  
Real estate – home equity1,271,190  3.91  1,404,141  5.35  (132,951) (9.5) 
Real estate – construction941,079  3.53  943,080  5.29  (2,001) (0.2) 
Consumer465,728  4.17  445,666  4.38  20,062  4.5  
Equipment lease financing284,658  3.44  279,619  4.45  5,039  1.8  
Other13,443  —  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 30Increase (Decrease)
in Balance
 20202019
 BalanceRateBalanceRate$%
 (dollars in thousands)
Noninterest-bearing demand$5,789,788  — %$4,200,810  — %$1,588,978  37.8 %
Interest-bearing demand5,103,419  0.17  4,186,280  0.78  917,139  21.9  
Savings5,446,368  0.25  4,925,788  0.86  520,580  10.6  
Total demand and savings16,339,575  0.14  13,312,878  0.56  3,026,697  22.7  
Brokered deposits312,121  0.54  246,154  2.58  65,967  26.8  
Time deposits2,624,962  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 the FOMC 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 30Increase (Decrease)
 20202019in Balance
 BalanceRateBalanceRate$%
 (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 purchased74,231  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 borrowings707,771  0.29  941,504  1.89  (233,733) (24.8) 
Long-term borrowings:
FHLB advances601,938  1.88  664,656  2.49  (62,718) (9.4) 
Other long-term debt759,483  3.94  387,263  4.49  372,220  96.1  
Total long-term borrowings1,361,421  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 $19.6 million for the second quarter of 2020, an increase of $14.5 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.
























55

Non-Interest Income

The following table presents the components of non-interest income:
 Three months ended June 30Increase (Decrease)
 20202019$%
 (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 markets5,004  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:
  Card4,966  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 banking9,138  12,367  (3,229) (26.1) 
Mortgage banking:
Gains on sales of mortgage loans16,547  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  
Other3,660  2,008  1,652  82.3  
     Non-interest income before investment securities gains 52,917  54,139  (1,222) (2.3) 
Investment securities gains, net3,005  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 $1.7 million, as a result of additional investments made in bank owned life insurance in 2019 and gains on sales of certain properties.

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 30Increase (Decrease)
 20202019$%
 (dollars in thousands)
Salaries and employee benefits$81,012  $78,991  $2,021  2.6 %
Net occupancy13,144  14,469  (1,325) (9.2) 
Data processing and software12,193  11,268  925  8.2  
Other outside services7,600  11,259  (3,659) (32.5) 
Professional fees3,331  2,970  361  12.2  
Equipment 3,193  3,299  (106) (3.2) 
State taxes3,088  2,480  608  24.5  
FDIC insurance2,133  2,755  (622) (22.6) 
Marketing1,303  2,863  (1,560) (54.5) 
Amortization of TCI1,450  1,492  (42) (2.8) 
Intangible amortization132  107  25  23.4  
Prepayment penalty on FHLB advances2,878  —  2,878  N/M
Other11,549  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 $925,000, or 8.2%, reflecting higher transaction volumes and costs related to technology initiatives.

Other outside services decreased $3.7 million, or 32.5%, as the prior year period included costs associated with the consolidation of the Corporation's banking subsidiaries into Fulton Bank. Marketing expense also declined $1.6 million, or 54.5%, due to the consolidation efforts in 2019.

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 $608,000, or 24.5%, primarily driven by an increase in PA Bank Shares and VA franchise tax expense.

In the second quarter of 2020, the Corporation redeemed long-term FHLB advances, which resulted in prepayment penalities of $2.9 million.

Income Taxes

Income tax expense for the three months ended June 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 ended June 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 June 30, 2020 compared to the six months ended June 30, 2019

Net Interest Income

FTE net interest income decreased $14.5 million, to $319.8 million for the six months ended June 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
 20202019
Average
Balance		Interest Yield/
Rate		Average
Balance		Interest Yield/
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 securities3,018,193  44,163  2.92  2,761,437  39,661  2.87  
Loans held for sale41,393  829  4.00  20,523  590  5.76  
Other interest-earning assets709,091  3,297  4.31  388,016  4,170  2.16  
Total interest-earning assets21,364,609  386,399  3.63  19,425,538  421,237  4.36  
Noninterest-earning assets:
Cash and due from banks145,988  113,504  
Premises and equipment240,019  238,905  
Other assets1,675,849  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 deposits5,287,015  10,441  0.40  4,919,357  20,512  0.84  
Brokered deposits293,756  1,495  1.02  233,244  2,964  2.56  
Time deposits2,693,202  23,602  1.76  2,791,216  23,071  1.67  
Total interest-bearing deposits13,150,635  43,558  0.67  12,114,038  62,239  1.04  
Short-term borrowings1,005,409  4,590  0.91  881,115  8,044  1.83  
FHLB advances and other long-term debt1,212,318  18,426  3.04  1,027,328  16,594  3.24  
Total interest-bearing liabilities15,368,362  66,574  0.87  14,022,481  86,877  1.25  
Noninterest-bearing liabilities:
Demand deposits5,048,408  4,211,782  
Total Deposits/Cost of deposits18,199,043  0.48 %16,325,820  0.77 %
Other liabilities455,763  357,170  
Total Liabilities20,872,533  18,591,433  
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds20,416,770  0.65 %18,234,263  0.96 %
Shareholders’ equity2,323,074  2,283,278  
Total Liabilities and Shareholders’ Equity$23,195,607  $20,874,711  
Net interest income/FTE NIM319,825  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
 VolumeRateNet
 (in thousands)
FTE Interest income on:
Net Loans$8,601  $(47,307) $(38,706) 
Taxable investment securities83  13  96  
Tax-exempt investment securities4,643  (237) 4,407  
Loans held for sale322  (83) 239  
Other interest-earning assets882  (1,755) (873) 
Total interest income$14,531  $(49,369) $(34,838) 
Interest expense on:
Demand deposits$61  $(7,734) $(7,673) 
Savings deposits97  (10,168) (10,071) 
Brokered deposits32  (1,501) (1,469) 
Time deposits351  180  531  
Short-term borrowings122  (3,576) (3,454) 
Long-term borrowings2,125  (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 30Increase (Decrease)
 20202019in Balance
 BalanceYieldBalanceYield$%
 (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 mortgage2,719,851  3.93  2,321,897  5.34  397,954  17.1  
Real estate – home equity1,285,661  4.32  1,418,776  4.07  (133,115) (9.4) 
Real estate – construction935,304  3.83  936,699  5.06  (1,395) (0.1) 
Consumer466,071  4.25  435,131  4.43  30,940  7.1  
Equipment lease financing284,612  3.88  278,290  4.42  6,322  2.3  
Other14,667  —  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 30Increase (Decrease)
in Balance
 20202019
 BalanceRateBalanceRate$%
 (dollars in thousands)
Noninterest-bearing demand$5,048,408  — %$4,211,782  — %$836,626  19.9 %
Interest-bearing demand4,876,662  0.33  4,170,221  0.76  706,441  16.9  
Savings5,287,015  0.40  4,919,357  0.84  367,658  7.5  
Total demand and savings15,212,085  0.24  13,301,360  0.55  1,910,725  14.4  
Brokered deposits293,756  1.02  233,206  2.56  60,550  26.0  
Time deposits2,693,202  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 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.








60

Average borrowings and interest rates, by type, are summarized in the following table:
Six months ended June 30Increase (Decrease)
 20202019in Balance
 BalanceRateBalanceRate$%
 (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 purchased130,549  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 borrowings1,005,409  0.91  881,115  1.83  124,294  14.1  
Long-term borrowings:
FHLB advances579,445  1.91  640,136  2.49  (60,691) (9.5) 
Other long-term debt632,873  4.09  387,192  4.49  245,681  63.5  
Total long-term borrowings1,212,318  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 30Increase (Decrease)
 20202019$%
 (dollars in thousands)
Wealth management fees$28,462  $27,392  $1,070  3.9 %
Commercial banking:
Merchant and card10,950  12,070  (1,120) (9.3) 
Cash management9,245  8,999  246  2.7  
Capital markets10,079  6,568  3,511  53.5  
Other commercial banking4,892  6,631  (1,739) (26.2) 
Total commercial banking35,167  34,268  899  2.6  
Consumer banking:
Card9,651  9,733  (82) (0.8) 
Overdraft6,165  8,517  (2,352) (27.6) 
Other consumer banking4,561  5,494  (933) (17.0) 
Total consumer banking20,377  23,744  (3,367) (14.2) 
Mortgage banking:
Gains on sales of mortgage loans22,728  8,302  14,426  173.8  
Mortgage servicing income(6,530) 3,063  (9,593) (313.2) 
Total mortgage banking16,198  11,365  4,833  42.5  
Other7,311  4,056  3,255  80.3  
Non-interest income before investment securities gains107,515  100,825  6,690  6.6  
Investment securities gains, net3,051  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 $3.3 million, as a result of additional investments made in bank owned life insurance in 2019 and gains on sales of certain properties.

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 30Increase (Decrease)
 20202019$%
 (dollars in thousands)
Salaries and employee benefits$161,240  $156,748  $4,492  2.9 %
Net occupancy26,630  27,378  (748) (2.7) 
Data processing and software23,838  21,621  2,217  10.3  
Other outside services15,481  19,611  (4,130) (21.1) 
Professional fees7,533  6,930  603  8.7  
Equipment6,611  6,641  (30) (0.5) 
State taxes5,891  4,482  1,409  31.4  
FDIC insurance4,941  5,364  (423) (7.9) 
Marketing2,882  5,023  (2,141) (42.6) 
Amortization of tax credit investments2,900  2,983  (83) (2.8) 
Intangible amortization264  214  50  23.4  
Prepayment penalty on FHLB advances2,878  —  2,878  N/M
Other24,469  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 $2.2 million, or 10.3%, reflecting higher transaction volumes and costs related to technology initiatives.

Other outside services decreased $4.1 million, or 21.1%, as the prior year period included costs associated with the consolidation of the Corporation's banking subsidiaries into Fulton Bank. Marketing expense also declined $2.1 million, or 42.6%, due to the consolidation efforts in 2019.

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 $1.4 million, or 31.4%, primarily driven by an increase in PA Bank Shares and VA franchise tax expenses.

In the second quarter of 2020, the Corporation redeemed certain long-term FHLB advances, which resulted in prepayment penalties of $2.9 million.

Income Taxes

Income tax expense for the six months ended June 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 ended June 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.
June 30, 2020December 31, 2019Increase (Decrease)
 $%
 (dollars in thousands)
Assets
Cash and cash equivalents$1,058,599  $517,791  $540,808  104.4 %
FRB and FHLB Stock91,042  97,422  (6,380) (6.5) 
Loans held for sale77,415  37,828  39,587  104.6  
Investment securities2,974,813  2,867,378  107,435  3.7  
Net Loans18,448,185  16,673,904  1,774,281  10.6  
Premises and equipment239,596  240,046  (450) (0.2) 
Goodwill and intangibles535,039  535,303  (264) —  
Other assets1,193,174  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 borrowings572,551  883,241  (310,690) (35.2) 
Long-term borrowings1,295,196  881,769  413,427  46.9  
Other liabilities525,407  384,941  140,466  36.5  
Total Liabilities22,277,362  19,543,864  2,733,498  14.0  
Total Shareholders’ Equity2,340,501  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

Investment Securities

The following table presents the carrying amount of investment securities:
June 30,
2020		December 31,
2019		Increase (Decrease)
 $%
(dollars in thousands)
Available for Sale
State and municipal securities
$893,682  $652,927  $240,755  36.9 %
Corporate debt securities325,353  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 securities100,859  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,
2020		December 31, 2019Increase (Decrease)
$%
(dollars in thousands)
Real estate – commercial mortgage$6,934,936  $6,700,776  $234,160  3.5 %
Commercial and industrial5,971,201  4,446,701  1,524,500  34.3  
Real estate – residential mortgage2,862,226  2,641,465  220,761  8.4  
Real estate – home equity1,251,455  1,314,944  (63,489) (4.8) 
Real estate – construction972,909  971,079  1,830  0.2  
Consumer465,610  463,164  2,446  0.5  
Equipment lease financing and other266,521  322,625  (56,104) (17.4) 
Overdrafts3,622  3,582  40  1.1  
Gross loans18,728,480  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.
65

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, 2020December 31, 2019
Real estate (1)
38.2 %41.4 %
Health care7.2  8.1  
Agriculture5.8  7.1  
Construction (2)
4.5  6.2  
Manufacturing4.6  6.0  
Other services4.3  4.7  
Retail3.3  4.2  
Accommodation and food services3.7  4.1  
Wholesale trade2.5  3.6  
Educational services2.7  4.1  
Professional, scientific and technical services2.0  2.9  
Arts, entertainment and recreation2.2  2.2  
Public administration1.7  2.0  
Transportation and warehousing1.3  1.2  
Other (4)
16.0  2.2  
Total100.0 %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

The following table presents the changes in non-accrual loans for the three and six months ended June 30, 2020:
Commercial 
and
Industrial		Real Estate -
Commercial
Mortgage		Real Estate -
Construction		Real Estate -
Residential
Mortgage		Real Estate -
Home
Equity		ConsumerEquipment Lease FinancingTotal
(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  
Additions9,844  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 June 30, 2020$39,379  $40,775  $3,482  $16,890  $7,723  $—  $16,823  $125,072  
Six months ended June 30, 2020
Balance at December 31, 2019$48,106  $33,166  $3,618  $16,676  $7,004  $—  $16,528  $125,098  
Additions26,503  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 June 30, 2020$39,379  $40,775  $3,482  $16,890  $7,723  $—  $16,823  $125,072  

Non-accrual loans increased $4.7 million, or 3.9%, in comparison to March 31, 2020 primarily as a result of additions to non-accrual loans during the quarter, partially offset by payments and charge-offs. In comparison to December 31, 2019, non-accrual loans were relatively unchanged.
The following table summarizes non-performing assets as of the indicated dates:
June 30, 2020December 31, 2019
 (dollars in thousands)
Non-accrual loans$125,037  $125,098  
Loans 90 days or more past due and still accruing14,767  16,057  
Total non-performing loans139,804  141,155  
OREO (1)
5,418  6,831  
Total non-performing assets$145,222  $147,986  
Non-performing loans to total loans0.75 %0.84 %
Non-performing assets to total assets0.59 %0.68 %
ACL - loans to non-performing loans183 %116 %
(1) Excludes $10.6 million of residential mortgage properties for which formal foreclosure proceedings were in process as of June 30, 2020.

Non-performing loans decreased $1.4 million, or 1.0%, in comparison to December 31, 2019. Non-performing loans as a percentage of total loans were 0.75% at June 30, 2020 in comparison to 0.84% at December 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

The following table presents loans whose terms have been modified under TDRs, by type, as of the indicated dates:
June 30, 2020December 31, 2019
(in thousands)
Real estate - residential mortgage$28,030  $21,551  
Real estate - home equity15,548  15,068  
Real estate - commercial mortgage20,407  13,330  
Commercial and industrial4,398  5,193  
Consumer—  8  
Total accruing TDRs68,383  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 of June 30, 2020 and $12.0 billion, of which $662.6 million were criticized and classified, as of December 31, 2019. The following table presents internal risk ratings for commercial and industrial loans, real estate - commercial mortgages and real estate - construction loans to commercial borrowers with internal risk ratings of Special Mention (considered "criticized" loans by banking regulators) or Substandard or lower (considered "classified" loans by banking regulators), by class segment.
Special MentionIncrease (Decrease)Substandard or LowerIncrease (Decrease)Total Criticized and Classified Loans
June 30, 2020December 31, 2019$%June 30, 2020December 31, 2019$%June 30, 2020December 31, 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 industrial194,277  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 loans2.7 %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,
2020		December 31,
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 outstanding1.37 %0.97 %

(1) Included in "other liabilities" on the consolidated balance sheet.

The following table presents the activity in the ACL related to loans:
 Three months ended June 30Six months ended June 30
 2020201920202019
 (dollars in thousands)
Average balance of net loans$18,331,797  $16,316,076  $17,595,932  $16,255,562  
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 industrial3,480  1,895  14,379  4,682  
Consumer845  795  2,087  1,478  
Real estate – commercial mortgage2,324  230  3,179  1,375  
Real estate – home equity458  206  745  425  
Real estate – residential mortgage235  134  422  789  
Real estate – construction17  3  17  98  
Equipment lease financing and other688  448  1,221  1,233  
Total loans charged off8,047  3,711  22,050  10,080  
Recoveries of loans previously charged off:
Commercial and industrial2,978  2,680  4,712  3,923  
Real estate – commercial mortgage95  169  339  305  
Real estate – home equity44  223  261  420  
Real estate – residential mortgage112  211  197  343  
Real estate – construction—  1,245  70  1,329  
Consumer605  579  1,034  789  
Equipment lease financing and other92  148  200  377  
Total recoveries3,926  5,255  6,813  7,486  
Net loans charged off4,121  (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$256,537  $170,233  $256,537  $170,233  
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 ended June 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
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loans. The amounts recorded for the three and six months ended June 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 ended June 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 ended June 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, 2020December 31, 2019
ACL - loans
% In Each Loan
Category (1)
ACL - loans
% In Each Loan Category (1)
(dollars in thousands)
Real estate - commercial mortgage$102,695  37.0 %$45,610  39.7 %
Commercial and industrial61,447  31.9  68,602  26.4  
Real estate - residential mortgage46,443  15.3  19,771  7.8  
Real estate - home equity16,391  6.7  17,744  15.7  
Consumer10,299  2.5  3,762  5.8  
Real estate - construction12,314  5.2  4,443  2.7  
Equipment lease financing and other6,948  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:
June 30, 2020December 31, 2019Increase (Decrease)
$%
(dollars in thousands)
Noninterest-bearing demand$6,239,055  $4,453,324  $1,785,731  40.1 %
Interest-bearing demand5,099,405  4,720,188  379,217  8.0  
Savings5,667,893  5,153,941  513,952  10.0  
Total demand and savings17,006,353  14,327,453  2,678,900  18.7  
Brokered deposits310,689  264,531  46,158  17.4  
Time deposits2,567,166  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:
 June 30, 2020December 31, 2019Increase (Decrease)
 $%
 (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 borrowings572,551  883,241  (310,690) (35.2) 
Long-term borrowings:
FHLB advances535,999  491,024  44,975  9.2  
Other long-term debt759,197  390,745  368,452  94.3  
Total long-term borrowings1,295,196  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 in March 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 on January 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.

In October 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, through December 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.





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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 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 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 June 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.

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 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 of June 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 since June 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:
June 30, 2020December 31, 2019Regulatory
Minimum
for Capital
Adequacy		Fully Phased-in, with Capital Conservation 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.

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.

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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. 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 June 30, 2020 (due to the current level of interest rates, the downward shock scenarios are not shown):
Rate Shock(1)
Annual change
in net interest income		% change in net interest income
+400 bp+ $114.3million18.5%
+300 bp+ $85.8 million13.9%
+200 bp+ $56.2 million9.1%
+100 bp+ $26.9 million4.4%

(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 June 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
73

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.

Liquidity

The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on investments and outstanding loans and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.

The Corporation maintains liquidity sources in the form of demand and savings deposits, brokered deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing the rates of interest paid on those accounts and borrowings. The positive impact to liquidity resulting from paying higher interest rates could have a detrimental impact on the net interest margin and net interest income if rates on interest-earning assets do not 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 June 30, 2020, the Corporation had $539.0 million of borrowings outstanding from the FHLB with an additional borrowing capacity of approximately $4.2 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of June 30, 2020, the Corporation had aggregate federal funds lines of $1.8 billion, with no outstanding borrowings. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of June 30, 2020, the Corporation had $383 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 six months of 2020 used $35.3 million of cash, mainly due to net increases in other operating activities of $161.4 million, partially offset by net income of $65.6 million, and the net impact of provision for credit losses of $63.6 million. Cash used in investing activities was $1.9 billion, mainly due to net increases in loans and investments. Cash provided by financing activities was $2.5 billion due mainly to increases in demand and savings deposits.

Debt Security Market Price Risk

Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government debt securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.

State and Municipal Securities

As of June 30, 2020, the Corporation owned securities issued by various states or municipalities with a total cost basis of $852.6 million and a fair value of $893.7 million. Downward pressure on local tax revenues of issuers could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing state or municipality and then, to a lesser extent, on any underlying credit enhancement. State or municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the
74

securities to be repaid by any means available to the issuing state or municipality. As of June 30, 2020, approximately all of state and municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 60% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Corporate Debt Securities

The Corporation holds corporate debt securities in the form of subordinated debt and senior debt issued by financial institutions. As of June 30, 2020, these securities had an amortized cost of $312.5 million and an estimated fair value of $325.4 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 the fair values of debt securities.

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.



75

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 1A. Risk Factors

There have been no 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, 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, through December 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. 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 programs, 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 of 2020 in order to preserve liquidity in response to potential unknown economic impacts due to the COVID-19 pandemic.

76

Item 6. Exhibits
3.1  
Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K filed on June 24, 2011. (File No. 0-10587)

3.2    
31.1    
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1    
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2    
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101Interactive 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.
104  Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101)

77



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.
 
FULTON FINANCIAL CORPORATION
Date: August 7, 2020/s/ E. Philip Wenger
 E. Philip Wenger
 Chairman and Chief Executive Officer
Date:August 7, 2020/s/ Mark R. McCollom
Mark R. McCollom
Senior Executive Vice President and Chief Financial Officer

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