Note 3 - Accumulated Other Comprehensive (Loss) Income
Note 4 - Investment Securities
Note 5 - Loans and Allowance for Credit Losses
Note 6 - Mortgage Servicing Rights
Note 7 - Stock-Based Compensation
Note 8 - Employee Benefit Plans
Note 9 - Derivative Financial Instruments
Note 10 - Commitments and Contingencies
Note 11 - Fair Value Measurements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Exhibits
EX-31.1
fult93018-exhibit311.htm
EX-31.2
fult93018-exhibit312.htm
EX-32.1
fult93018-exhibit321.htm
EX-32.2
fult93018-exhibit322.htm
Fulton Financial Earnings 2018-09-30
FULT 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 fult930201810q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018, 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 Square, P.O. Box 4887, Lancaster, Pennsylvania
17604
(Address of principal executive offices)
(Zip Code)
(717) 291-2411
(Registrant’s telephone number, including area code)
Indicate by checkmark 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 ý No ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
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 –176,096,000 shares outstanding as of October 31, 2018.
1
FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018
Federal Reserve Bank and Federal Home Loan Bank stock
65,926
60,761
Loans held for sale
27,525
31,530
Investment securities:
Available for sale, at estimated fair value
2,008,816
2,547,956
Held to maturity, at amortized cost
626,597
—
Loans, net of unearned income
15,925,093
15,768,247
Less: Allowance for loan losses
(157,810
)
(169,910
)
Net Loans
15,767,283
15,598,337
Premises and equipment
231,236
222,802
Accrued interest receivable
58,584
52,910
Goodwill and intangible assets
531,556
531,556
Other assets
634,596
588,957
Total Assets
$
20,364,810
$
20,036,905
LIABILITIES
Deposits:
Noninterest-bearing
$
4,216,064
$
4,437,294
Interest-bearing
12,032,950
11,360,238
Total Deposits
16,249,014
15,797,532
Short-term borrowings:
Federal funds purchased
50,000
220,000
Other short-term borrowings
435,565
397,524
Total Short-Term Borrowings
485,565
617,524
Accrued interest payable
11,151
9,317
Other liabilities
343,951
344,329
Federal Home Loan Bank advances and other long-term debt
992,115
1,038,346
Total Liabilities
18,081,796
17,807,048
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 221.7 million shares issued in 2018 and 220.9 million shares issued in 2017
554,208
552,232
Additional paid-in capital
1,487,129
1,478,389
Retained earnings
915,687
821,619
Accumulated other comprehensive loss
(84,640
)
(32,974
)
Treasury stock, at cost, 45.7 million shares in 2018 and 2017
(589,370
)
(589,409
)
Total Shareholders’ Equity
2,283,014
2,229,857
Total Liabilities and Shareholders’ Equity
$
20,364,810
$
20,036,905
See Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)
Three months ended September 30
Nine months ended September 30
2018
2017
2018
2017
INTEREST INCOME
Loans, including fees
$
175,068
$
155,152
$
503,029
$
446,158
Investment securities:
Taxable
13,956
11,423
41,034
34,811
Tax-exempt
3,035
2,920
8,933
8,625
Dividends
—
105
5
343
Loans held for sale
388
243
888
631
Other interest income
1,601
1,667
4,016
3,311
Total Interest Income
194,048
171,510
557,905
493,879
INTEREST EXPENSE
Deposits
23,819
16,023
59,553
40,709
Short-term borrowings
2,002
578
7,079
2,407
Federal Home Loan Bank advances and other long-term debt
8,100
8,100
23,761
24,812
Total Interest Expense
33,921
24,701
90,393
67,928
Net Interest Income
160,127
146,809
467,512
425,951
Provision for credit losses
1,620
5,075
38,707
16,575
Net Interest Income After Provision for Credit Losses
158,507
141,734
428,805
409,376
NON-INTEREST INCOME
Other service charges and fees
15,433
12,251
40,517
39,030
Investment management and trust services
13,066
12,157
38,740
36,097
Service charges on deposit accounts
12,259
13,022
36,491
38,336
Mortgage banking income
4,896
4,805
14,252
15,542
Other
5,365
5,142
15,965
14,874
Non-interest income before investment securities gains
51,019
47,377
145,965
143,879
Investment securities gains, net
14
4,597
37
7,139
Total Non-Interest Income
51,033
51,974
146,002
151,018
NON-INTEREST EXPENSE
Salaries and employee benefits
76,770
72,894
227,457
216,626
Net occupancy expense
12,578
12,180
38,970
37,159
Data processing and software
10,157
10,301
31,083
28,334
Other outside services
9,122
6,582
24,814
19,836
Professional fees
3,427
3,388
10,615
9,056
Equipment expense
3,000
3,298
9,968
9,691
FDIC insurance expense
2,814
3,007
8,430
7,431
State Taxes
2,707
2,830
7,463
7,730
Marketing
2,692
2,089
7,277
6,309
Amortization of tax credit investments
1,637
3,503
4,911
7,652
Other
10,509
12,085
34,431
37,303
Total Non-Interest Expense
135,413
132,157
405,419
387,127
Income Before Income Taxes
74,127
61,551
169,388
173,267
Income taxes
8,494
12,646
19,078
35,515
Net Income
$
65,633
$
48,905
$
150,310
$
137,752
PER SHARE:
Net Income (Basic)
$
0.37
$
0.28
$
0.86
$
0.79
Net Income (Diluted)
0.37
0.28
0.85
0.78
Cash Dividends
0.12
0.11
0.36
0.33
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three months ended September 30
Nine months ended September 30
2018
2017
2018
2017
Net Income
$
65,633
$
48,905
$
150,310
$
137,752
Other Comprehensive (Loss) Income, net of tax:
Unrealized (loss) gain on securities
(12,531
)
3,320
(46,806
)
17,861
Reclassification adjustment for securities gains included in net income
(11
)
(2,988
)
(30
)
(4,639
)
Amortization of net unrealized losses on available for sale securities transferred to held to maturity
791
—
791
—
Non-credit related unrealized gain on other-than-temporarily impaired debt securities
—
—
232
—
Amortization of net unrecognized pension and postretirement items
369
340
1,248
1,024
Other Comprehensive (Loss) Income
(11,382
)
672
(44,565
)
14,246
Total Comprehensive Income
$
54,251
$
49,577
$
105,745
$
151,998
See Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(in thousands, except per-share data)
Common Stock
Retained
Earnings
Treasury
Stock
Total
Shares
Outstanding
Amount
Additional Paid-in
Capital
Accumulated Other Comprehensive
Income (Loss)
Balance at December 31, 2017
175,170
$
552,232
$
1,478,389
$
821,619
$
(32,974
)
$
(589,409
)
$
2,229,857
Net income
150,310
150,310
Other comprehensive loss
(44,565
)
(44,565
)
Stock issued
833
1,936
2,773
39
4,748
Stock-based compensation awards
16
40
5,967
6,007
Reclassification of stranded tax effects (1)
7,101
(7,101
)
—
Common stock cash dividends - $0.36 per share
(63,343
)
(63,343
)
Balance at September 30, 2018
176,019
$
554,208
$
1,487,129
$
915,687
$
(84,640
)
$
(589,370
)
$
2,283,014
Balance at December 31, 2016
174,040
$
549,707
$
1,467,602
$
732,099
$
(38,449
)
$
(589,844
)
$
2,121,115
Net income
137,752
137,752
Other comprehensive income
14,246
14,246
Stock issued
1,017
2,446
5,209
(618
)
7,037
Stock-based compensation awards
3,339
3,339
Common stock cash dividends - $0.33 per share
(57,703
)
(57,703
)
Balance at September 30, 2017
175,057
$
552,153
$
1,476,150
$
812,148
$
(24,203
)
$
(590,462
)
$
2,225,786
See Notes to Consolidated Financial Statements
(1) Result of adoption of ASU 2018-02. See Note 1 to Consolidated Financial Statements for further details.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine months ended September 30
2018
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
$
150,310
$
137,752
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
38,707
16,575
Depreciation and amortization of premises and equipment
21,423
21,013
Amortization of tax credit investments
25,093
28,117
Net amortization of investment securities premiums
6,153
7,412
Investment securities gains, net
(37
)
(7,139
)
Gain on sales of mortgage loans held for sale
(10,158
)
(10,122
)
Proceeds from sales of mortgage loans held for sale
608,561
470,927
Originations of mortgage loans held for sale
(594,398
)
(455,157
)
Amortization of issuance costs and discounts on long-term debt
606
618
Stock-based compensation
6,007
3,339
Increase in accrued interest receivable
(5,674
)
(3,788
)
(Increase) decrease in other assets
(11,893
)
9,991
Increase in accrued interest payable
1,834
936
Decrease in other liabilities
(3,843
)
(4,943
)
Total adjustments
82,381
77,779
Net cash provided by operating activities
232,691
215,531
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale
54,638
44,485
Proceeds from principal repayments and maturities of securities held to maturity
15,475
—
Proceeds from principal repayments and maturities of securities available for sale
237,624
321,088
Purchase of securities available for sale
(459,799
)
(344,569
)
Increase in other interest-earning assets
(49,225
)
(376,696
)
Net increase in loans
(200,526
)
(800,778
)
Net purchases of premises and equipment
(29,857
)
(24,758
)
Net change in tax credit investments
(47,096
)
(21,084
)
Net cash used in investing activities
(478,766
)
(1,202,312
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits
342,080
1,014,697
Net increase in time deposits
109,402
114,219
Decrease in short-term borrowings
(131,959
)
(242,566
)
Additions to long-term debt
50,000
223,251
Repayments of long-term debt
(100,122
)
(115,114
)
Net proceeds from issuance of common stock
4,748
7,037
Dividends paid
(61,539
)
(55,855
)
Net cash provided by financing activities
212,610
945,669
Net Decrease in Cash and Restricted Cash
(33,465
)
(41,112
)
Cash and Restricted Cash at Beginning of Period
246,726
236,887
Cash and Restricted Cash at End of Period
$
213,261
$
195,775
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
$
88,559
$
66,992
Income taxes
8,178
7,881
Supplemental schedule of certain noncash activities:
Transfer of student loans to loans held for sale
$
—
$
28,990
Transfer of available for sale securities to held to maturity securities
641,672
—
See Notes to Consolidated Financial Statements
Restricted cash is comprised of required reserve balances with the Federal Reserve Bank and cash collateral posted by the Corporation with counterparties to secure derivative financial instruments. These balances are included in "Interest-Bearing Deposits with Other Banks" on the consolidated balance sheets and totaled $122.9 million and $96.0 million at September 30, 2018 and 2017, respectively.
7
FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 – Basis of Presentation
The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the "Corporation") have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. 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 U.S. GAAP for complete financial statements. The preparation of financial statements in accordance with U.S. 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, 2017. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the U.S. Securities and Exchange Commission ("SEC").
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Update 2014-09, "Revenue from Contracts with Customers." This standards update established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle prescribed by this standards update is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard applies to all contracts with customers, except those that are within the scope of other topics in the FASB ASC. The Corporation adopted this standard, and all subsequent Accounting Standards Updates ("ASU") that modified the standard, on January 1, 2018 under the modified retrospective approach with no material impact on its consolidated financial statements. The Corporation evaluated the impact of the adoption of ASC Update 2014-09 on its consolidated financial statements and did not identify any significant changes in the timing of revenue recognition as a result of this amended guidance. The sources of revenue for the Corporation are interest income from loans and investments, net of interest expense on deposits and borrowings, and non-interest income. Non-interest income is earned from various banking and financial services that the Corporation offers through its subsidiary banks. Revenue is recognized as earned based on contractual terms, as transactions occur, or as services are provided. Following is further detail of the various types of revenue the Corporation earns and when it is recognized.
Interest income: Interest income is recognized on an accrual basis according to loan agreements, securities contracts or other such written contracts and is outside the scope of ASC Update 2014-09.
Investment management and trust services: Consists of trust commission income, brokerage income, money market income and insurance commission income. Trust commission income consists of advisory fees that are based on market values of clients' managed portfolios and transaction fees for fiduciary services performed, both of which are recognized as earned. Brokerage income includes advisory fees which are recognized as earned on a monthly basis and transaction fees that are recognized when transactions occur. Money market income is based on the balances held in trust accounts and is recognized monthly. Insurance commission income is earned and recognized when policies are originated. Currently, no investment management and trust service income is based on performance or investment results.
Service charges on deposit accounts: Consists of cash management, overdraft, non-sufficient fund fees and other service charges on deposit accounts. Revenue is primarily transactional and recognized when earned, at the time the transactions occur.
Other service charges and fees: Consists of branch fees, automated teller machine fees, debit card income and merchant services fees. These fees are primarily transactional, and revenue is recognized when transactions occur. Also included in other service charges and fees are letter of credit fees, foreign exchange income and commercial loan interest rate swap fees, which are outside the scope of ASC Update 2014-09.
Mortgage banking income: Consists of gains or losses on the sale of residential mortgage loans and mortgage loan servicing income. These revenues are outside the scope of ASC Update 2014-09.
8
Other Income: Includes credit card income, gains on sales of Small Business Association ("SBA") loans, cash surrender value of life insurance, and other miscellaneous income. These items are either outside the scope of ASC Update 2014-09 or are immaterial.
In January 2016, the FASB issued ASC Update 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." ASC Update 2016-01 provides guidance regarding the income statement impact of equity investments held by an entity and the recognition of changes in fair value of financial liabilities when the fair value option is elected. This standard requires equity investments to be measured at fair value, with changes recorded in net income. This ASU also requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASC Update 2016-01 was effective for interim and annual reporting periods beginning after December 15, 2017. The Corporation adopted this standards update effective with its March 31, 2018 quarterly report on Form 10-Q and the adoption of ASC Update 2016-01 did not have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASC Update 2016-18, "Statement of Cash Flows - Restricted Cash." This standards update provides guidance regarding the presentation of restricted cash in the statement of cash flows. The update requires companies to include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. It also requires an entity to disclose the nature of the restrictions on cash and cash equivalents. ASC Update 2016-18 was effective for interim and annual reporting periods beginning after December 15, 2017. The adoption of ASC Update 2016-18 did not have a material impact on its consolidated financial statements; however, in the second quarter of 2018 on the Consolidated Statements of Cash Flows, the Corporation corrected an error related to the adoption of this standards update to include restricted cash along with cash and cash equivalents in the reconciliation of beginning-of-period and end-of-period total amounts. The change had no impact on net income or retained earnings. In addition, the Corporation will revise the Consolidated Statements of Cash Flows for the three months ended March 31, 2018 when the amounts are next presented in the first quarter of 2019.
In February 2018, the FASB issued ASC Update 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU permits a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects resulting from the application of the Tax Cuts and Jobs Act of 2017 ("Tax Act"), which changed the federal corporate income tax rate from 35% to 21%. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Corporation adopted this standards update effective January 1, 2018 and elected to reclassify $7.1 million of stranded tax effects from AOCI to retained earnings at the beginning of the period of adoption. The Corporation's policy for releasing income tax effects from accumulated other comprehensive income is to release them as investments are sold or mature and as pension and post-retirement liabilities are extinguished.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASC Update 2016-02, "Leases." ASC Update 2016-02 requires a lessee to recognize for all leases with an initial term greater than twelve months: (1) a “right-of-use” asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term; and (2) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. ASC Update 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. In July 2018, the FASB also issued amendments to ASC Update 2016-02 (ASC Updates 2018-10 and 2018-11), which allow for an alternative transition method that eliminates the requirement to restate the earliest prior period presented in an entity’s financial statements. Entities that elect this transition method still adopt ASC Update 2016-02 using the modified retrospective transition method, but they recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Corporation expects to adopt ASC Update 2016-02 in the first quarter of 2019 using this alternative transition method. The Corporation expects to elect to apply the package of practical expedients permitted within the new standard, which, among other things, allows it to carryforward the historical lease classification, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.
Based on preliminary evaluation, the right-of-use asset and corresponding lease obligation liability, which represents substantially all of the Corporation’s operating lease commitments, is expected to be less than 1% of the Corporation's total assets at adoption. The Corporation does not believe the new lease standard will materially affect its consolidated net income. This estimate is based primarily on the present value of the unpaid future minimum lease payments. The final amount recognized may be impacted by assumptions relating to lease renewals and extensions before the effective date, and the interest rate used to discount those future lease obligations.
9
ASC Update 2016-02 requires lessors to classify leases as a sales-type, direct financing or operating lease. Substantially all of the Corporation's leasing activities as lessor are under direct financing leases and it does not expect the new standard to have a material effect on its financial statements related to these leases and does not expect a significant change in its leasing activities between now and time of adoption.
In June 2016, the FASB issued ASC Update 2016-13, "Financial Instruments - Credit Losses." The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and held to maturity investments). The recognition of credit losses would be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or "CECL"), as opposed to recognition of losses only when they are probable under current U.S. GAAP. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This adjustment will also be recognized in regulatory capital. ASC Update 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q. The Corporation is currently evaluating the impact of the adoption of ASC Update 2016-13 on its consolidated financial statements and disclosures. While the Corporation is currently unable to reasonably estimate the impact of adopting ASU 2016-13, it expects that the impact of adoption could be significantly influenced by the composition, characteristics and quality of its loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date. The Corporation’s steering committee and working group, which are comprised of individuals from various functional areas, are assessing processes, portfolio segmentation, systems requirements and solutions and resources to implement this new accounting standard. Current activities also include data gathering and building loss models. In addition, the Corporation has engaged a third-party consultant to assist with these implementation efforts.
In January 2017, the FASB issued ASC Update 2017-04, "Intangibles - Goodwill and Other." This standards update eliminates Step 2 of the goodwill impairment test which measures the impairment amount. Identifying and measuring impairment will take place in a single quantitative step. In addition, no separate qualitative assessment for reporting units with zero or negative carrying amounts is required. Entities must disclose the existence of these reporting units and the amount of goodwill allocated to them. This update should be applied on a prospective basis, and an entity is required to disclose the nature of and reason for the change in accounting principle upon transition. ASC Update 2017-04 is effective for annual or interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its 2020 goodwill impairment test and does not expect the adoption of ASC Update 2017-04 to have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASC Update 2017-08, "Premium Amortization on Purchased Callable Debt Securities." This standards update requires that a company amortize the premium on callable debt securities to the earliest call date versus current U.S. GAAP which requires amortization over the contractual life of the securities. The amortization period for callable debt securities purchased at a discount would not be impacted by the new accounting standards update. This amendment is to be adopted on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. ASC Update 2017-08 is effective for annual or interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2019 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2017-08 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASC Update 2018-13, "Fair Value Measurement - Disclosure Framework." This standards update changes the fair value measurement disclosure requirements of ASC 820 "Fair Value Measurement." Among other things, the ASU 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 “open ended” disclosure requirements to promote the appropriate exercise of discretion by entities. ASC Update 2018-13 is effective for annual or interim reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q. This standard will impact the Corporation's Fair Value Measurement disclosure but the Corporation does not expect the adoption of ASC Update 2018-13 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASC Update 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General." This standards update amends ASC 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. ASC Update 2018-14 is effective for annual reporting periods beginning after December 15, 2020. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2021 quarterly report on Form 10-Q. This standard will impact the Corporation's disclosure relating to employee benefit plans, but the Corporation does not expect the adoption of ASC Update 2018-14 to have a material impact on its consolidated financial statements.
10
In August 2018, the FASB issued ASC Update 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software." This standards update requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. ASC Update 2018-15 is effective for annual or interim reporting periods beginning after December 15, 2019. Early adoption is permitted. The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q and does not expect the adoption of ASC Update 2018-15 to have an impact on its consolidated financial statements.
Reclassifications
Certain amounts in the 2017 consolidated financial statements and notes have been reclassified to conform to the 2018 presentation. On the Consolidated Statements of Cash Flows, the net change in tax credit investments is presented as cash flows from investing activities. Prior to the quarter ended March 31, 2018, these cash flows were presented as cash flows from operating activities, included in the net increase (decrease) in other liabilities. The presentation of the cash flows for the nine months ended September 30, 2017 was changed to conform to this presentation, resulting in a $21.1 million decrease in net cash flows used in investing activities and a corresponding increase in net cash flows provided by operating activities. The change had no impact on net income or retained earnings. In addition, the Corporation will revise the Consolidated Statements of Cash Flows for each of the comparative 2017 periods in future filings.
NOTE 2 – 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, restricted stock units ("RSUs") and performance-based restricted stock units ("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:
Three months ended September 30
Nine months ended September 30
2018
2017
2018
2017
(in thousands)
Weighted average shares outstanding (basic)
175,942
174,991
175,672
174,582
Impact of common stock equivalents
1,186
1,225
1,176
1,194
Weighted average shares outstanding (diluted)
177,128
176,216
176,848
175,776
11
NOTE 3 – Accumulated Other Comprehensive (Loss) Income
The following table presents changes in other comprehensive (loss) income:
Before-Tax Amount
Tax Effect
Net of Tax Amount
(in thousands)
Three months ended September 30, 2018
Unrealized loss on securities
$
(15,865
)
$
3,334
$
(12,531
)
Reclassification adjustment for securities gains included in net income (1)
(14
)
3
(11
)
Amortization of net unrealized losses on AFS securities transferred to HTM (2)
1,000
(209
)
791
Amortization of net unrecognized pension and postretirement items (3)
466
(97
)
369
Total Other Comprehensive Loss
$
(14,413
)
$
3,031
$
(11,382
)
Three months ended September 30, 2017
Unrealized gain on securities
$
5,109
$
(1,789
)
$
3,320
Reclassification adjustment for securities gains included in net income (1)
(4,597
)
1,609
(2,988
)
Amortization of net unrecognized pension and postretirement items (3)
523
(183
)
340
Total Other Comprehensive Income
$
1,035
$
(363
)
$
672
Nine months ended September 30, 2018
Unrealized loss on securities
$
(59,250
)
$
12,444
$
(46,806
)
Reclassification adjustment for securities gains included in net income (1)
(37
)
7
(30
)
Amortization of net unrealized losses on AFS securities transferred to HTM (2)
1,000
(209
)
791
Non-credit related unrealized gains on other-than-temporarily impaired debt securities
294
(62
)
232
Amortization of net unrecognized pension and postretirement items (3)
1,580
(332
)
1,248
Total Other Comprehensive Loss
$
(56,413
)
$
11,848
$
(44,565
)
Nine months ended September 30, 2017
Unrealized gain on securities
$
27,482
$
(9,621
)
$
17,861
Reclassification adjustment for securities gains included in net income (1)
(7,139
)
2,500
(4,639
)
Amortization of net unrecognized pension and postretirement items (3)
1,575
(551
)
1,024
Total Other Comprehensive Income
$
21,918
$
(7,672
)
$
14,246
(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 4, "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. See Note 4, "Investment Securities," for additional details.
(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 8, "Employee Benefit Plans," for additional details.
12
The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax:
Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired
Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities
Unrecognized Pension and Postretirement Plan Income (Costs)
Total
(in thousands)
Three months ended September 30, 2018
Balance at June 30, 2018
$
(56,690
)
$
690
$
(17,258
)
$
(73,258
)
Other comprehensive loss before reclassifications
(12,531
)
—
—
(12,531
)
Amounts reclassified from accumulated other comprehensive income (loss)
(11
)
—
369
358
Amortization of net unrealized losses on AFS securities transferred to HTM
791
—
—
791
Balance at September 30, 2018
$
(68,441
)
$
690
$
(16,889
)
$
(84,640
)
Three months ended September 30, 2017
Balance at June 30, 2017
$
(10,157
)
$
273
$
(14,991
)
$
(24,875
)
Other comprehensive income before reclassifications
3,320
—
—
3,320
Amounts reclassified from accumulated other comprehensive income (loss)
(2,988
)
—
340
(2,648
)
Balance at September 30, 2017
$
(9,825
)
$
273
$
(14,651
)
$
(24,203
)
Nine months ended September 30, 2018
Balance at December 31, 2017
$
(18,509
)
$
458
$
(14,923
)
$
(32,974
)
Other comprehensive income before reclassifications
(46,806
)
232
—
(46,574
)
Amounts reclassified from accumulated other comprehensive income (loss)
(30
)
—
1,248
1,218
Amortization of net unrealized losses on AFS securities transferred to HTM
791
—
—
791
Reclassification of stranded tax effects
(3,887
)
—
(3,214
)
(7,101
)
Balance at September 30, 2018
$
(68,441
)
$
690
$
(16,889
)
$
(84,640
)
Nine months ended September 30, 2017
Balance at December 31, 2016
$
(23,047
)
$
273
$
(15,675
)
$
(38,449
)
Other comprehensive income before reclassifications
17,861
—
—
17,861
Amounts reclassified from accumulated other comprehensive income (loss)
(4,639
)
—
1,024
(3,615
)
Balance at September 30, 2017
$
(9,825
)
$
273
$
(14,651
)
$
(24,203
)
13
NOTE 4 – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
(in thousands)
September 30, 2018 Available for Sale
U.S. Government sponsored agency securities
$
31,527
$
1
$
(437
)
$
31,091
State and municipal securities
269,582
1,281
(9,723
)
261,140
Corporate debt securities
93,482
950
(2,142
)
92,290
Collateralized mortgage obligations
820,150
100
(23,016
)
797,234
Residential mortgage-backed securities
497,614
1,873
(21,310
)
478,177
Commercial mortgage-backed securities
251,969
—
(6,218
)
245,751
Auction rate securities
107,410
—
(4,277
)
103,133
Total
$
2,071,734
$
4,205
$
(67,123
)
$
2,008,816
September 30, 2018 Held to Maturity
State and municipal securities
$
156,267
$
—
$
(2,006
)
$
154,261
Residential mortgage-backed securities
470,330
2
(1,741
)
468,591
Total
$
626,597
$
2
$
(3,747
)
$
622,852
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
(in thousands)
December 31, 2017 Available for Sale
U.S. Government sponsored agency securities
$
5,962
$
2
$
(26
)
$
5,938
State and municipal securities
405,860
5,638
(2,549
)
408,949
Corporate debt securities
96,353
2,832
(1,876
)
97,309
Collateralized mortgage obligations
611,927
491
(9,795
)
602,623
Residential mortgage-backed securities
1,132,080
3,957
(15,241
)
1,120,796
Commercial mortgage-backed securities
215,351
—
(2,596
)
212,755
Auction rate securities
107,410
—
(8,742
)
98,668
Total debt securities
2,574,943
12,920
(40,825
)
2,547,038
Equity securities
776
142
—
918
Total
$
2,575,719
$
13,062
$
(40,825
)
$
2,547,956
On August 1, 2018, the Corporation transferred debt securities with an amortized cost of $665.5 million and an estimated fair value of $641.7 million from the available for sale classification to the held to maturity classification. These securities consisted of residential mortgage-backed securities ($505.5 million amortized cost and $485.3 million estimated fair value) and state and municipal securities ($160.0 million amortized cost and $156.4 million estimated fair value) and were transferred as the Corporation has the positive intent and ability to hold these securities to maturity. The transfer of debt securities into the held to maturity category from the available for sale category was recorded at fair value on the date of transfer. The net unrealized gains or losses at the transfer date are included in AOCI and are being amortized over the remaining lives of the securities. This amortization is expected to offset the amortization of the related premium or discount created by the investment securities transfer into the held to maturity classification, with no expected impact on future net income.
Securities carried at $1.6 billion at September 30, 2018 and $1.8 billion at December 31, 2017, were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
14
The amortized cost and estimated fair values of debt securities as of September 30, 2018, 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 Sale
Held to Maturity
Amortized Cost
Estimated Fair Value
Amortized Cost
Estimated Fair Value
(in thousands)
Due in one year or less
$
5,946
$
5,949
$
—
$
—
Due from one year to five years
52,613
52,541
—
—
Due from five years to ten years
105,838
104,579
—
—
Due after ten years
337,604
324,585
156,267
154,261
502,001
487,654
156,267
154,261
Residential mortgage-backed securities(1)
497,614
478,177
470,330
468,591
Commercial mortgage-backed securities(1)
251,969
245,751
—
—
Collateralized mortgage obligations(1)
820,150
797,234
—
—
Total
$
2,071,734
$
2,008,816
$
626,597
$
622,852
(1) Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans.
The following table presents information related to the gross realized gains and losses on the sales of equity and debt securities:
Gross Realized Gains
Gross Realized Losses
Net Gains (Losses)
Three months ended September 30, 2018
(in thousands)
Equity securities
$
—
$
—
$
—
Debt securities
116
(102
)
14
Total
$
116
$
(102
)
$
14
Three months ended September 30, 2017
Equity securities
$
4,817
$
—
$
4,817
Debt securities
12
(232
)
(220
)
Total
$
4,829
$
(232
)
$
4,597
Nine months ended September 30, 2018
Equity securities
$
9
$
—
$
9
Debt securities
1,656
(1,628
)
28
Total
$
1,665
$
(1,628
)
$
37
Nine months ended September 30, 2017
Equity securities
$
7,167
$
—
$
7,167
Debt securities
218
(246
)
(28
)
Total
$
7,385
$
(246
)
$
7,139
The cumulative balance of credit-related other-than-temporary impairment charges, previously recognized as components of earnings, for debt securities held by the Corporation at September 30, 2018 and September 30, 2017 was $11.5 million. There were no other-than-temporary impairment charges recognized for the three and nine months ended September 30, 2018 and September 30, 2017.
15
The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2018 and December 31, 2017:
Less than 12 months
12 months or longer
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
September 30, 2018 Available for Sale
(in thousands)
U.S. Government sponsored agency securities
$
30,992
$
(437
)
$
—
$
—
$
30,992
$
(437
)
State and municipal securities
112,366
(3,550
)
73,856
(6,173
)
186,222
(9,723
)
Corporate debt securities
56,159
(694
)
22,700
(1,448
)
78,859
(2,142
)
Collateralized mortgage obligations
620,047
(12,833
)
168,560
(10,183
)
788,607
(23,016
)
Residential mortgage-backed securities
105,850
(3,447
)
329,007
(17,863
)
434,857
(21,310
)
Commercial mortgage-backed securities
164,993
(3,591
)
77,302
(2,627
)
242,295
(6,218
)
Auction rate securities
—
—
103,133
(4,277
)
103,133
(4,277
)
Total
$
1,090,407
$
(24,552
)
$
774,558
$
(42,571
)
$
1,864,965
$
(67,123
)
September 30, 2018 Held to Maturity
State and municipal securities
154,261
(2,006
)
—
—
154,261
(2,006
)
Residential mortgage-backed securities
454,544
(1,741
)
—
—
454,544
(1,741
)
Total
$
608,805
$
(3,747
)
$
—
$
—
$
608,805
$
(3,747
)
Less than 12 months
12 months or longer
Total
Estimated Fair Value
Unrealized Losses
Estimated Fair Value
Unrealized Losses
Estimated Fair Value
Unrealized Losses
December 31, 2017 Available for Sale
(in thousands)
U.S. Government sponsored agency securities
$
5,830
$
(26
)
$
—
$
—
$
5,830
$
(26
)
State and municipal securities
11,650
(50
)
118,297
(2,499
)
129,947
(2,549
)
Corporate debt securities
4,544
(48
)
32,163
(1,828
)
36,707
(1,876
)
Collateralized mortgage obligations
303,932
(2,408
)
187,690
(7,387
)
491,622
(9,795
)
Residential mortgage-backed securities
511,378
(4,348
)
500,375
(10,893
)
1,011,753
(15,241
)
Commercial mortgage-backed securities
190,985
(2,118
)
21,770
(478
)
212,755
(2,596
)
Auction rate securities
—
—
98,668
(8,742
)
98,668
(8,742
)
Total
$
1,028,319
$
(8,998
)
$
958,963
$
(31,827
)
$
1,987,282
$
(40,825
)
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 consider these investments to be other-than-temporarily impaired as of September 30, 2018.
As of September 30, 2018, all of the auction rate securities (auction rate certificates, or "ARCs"), were rated above investment grade. Based on management’s evaluations, none of the ARCs were subject to any other-than-temporary impairment charges for the three and nine months ended September 30, 2018. 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.
16
The majority of the Corporation's available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair values of corporate debt securities:
September 30, 2018
December 31, 2017
Amortized
cost
Estimated
fair value
Amortized
cost
Estimated
fair value
(in thousands)
Single-issuer trust preferred securities
$
20,860
$
19,596
$
31,335
$
30,703
Subordinated debt
56,641
55,774
49,013
49,533
Senior debt
12,025
12,089
12,031
12,392
Pooled trust preferred securities
—
875
—
707
Corporate debt securities issued by financial institutions
89,526
88,334
92,379
93,335
Other corporate debt securities
3,956
3,956
3,974
3,974
Available for sale corporate debt securities
$
93,482
$
92,290
$
96,353
$
97,309
Single-issuer trust preferred securities had an unrealized loss of $1.3 million at September 30, 2018. Two of the 11 single-issuer trust preferred securities, with an amortized cost of $2.0 million and an estimated fair value of $1.9 million at September 30, 2018, were rated below investment grade by at least one ratings agency. The single-issuer trust preferred securities were rated "Baa2" or "BB+". One single-issuer trust preferred security with an amortized cost of $2.8 million and an estimated fair value of $2.5 million at September 30, 2018 was not rated by any ratings agency.
Based on management’s evaluations, no corporate debt securities were subject to any other-than-temporary impairment charges for the three and nine months ended September 30, 2018. 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 5 – Loans and Allowance for Credit Losses
Loans, Net of Unearned Income
Loans, net of unearned income are summarized as follows:
September 30, 2018
December 31, 2017
(in thousands)
Real-estate - commercial mortgage
$
6,337,984
$
6,364,804
Commercial - industrial, financial and agricultural
4,288,823
4,300,297
Real-estate - residential mortgage
2,173,548
1,954,711
Real-estate - home equity
1,469,152
1,559,719
Real-estate - construction
979,857
1,006,935
Consumer
390,708
313,783
Leasing and other
312,207
291,556
Overdrafts
2,047
4,113
Loans, gross of unearned income
15,954,326
15,795,918
Unearned income
(29,233
)
(27,671
)
Loans, net of unearned income
$
15,925,093
$
15,768,247
The Corporation segments its loan portfolio by general loan type, or "portfolio segments," as presented in the table under the heading, "Loans, Net of Unearned Income," above. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on "class segments," which are largely based on the type of collateral underlying each loan. Commercial loans include both secured and unsecured loans. Construction loan class segments include loans secured by commercial real estate, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Consumer loan class segments include direct consumer installment loans and indirect vehicle loans.
17
Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of incurred losses in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of incurred losses in its unfunded loan commitments and letters of credit and is recorded in other liabilities on the consolidated balance sheets. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The Corporation’s allowance for credit losses includes: (1) specific allowances allocated to loans individually evaluated for impairment (FASB ASC Section 310-10-35); and (2) allowances calculated for pools of loans collectively evaluated for impairment (FASB ASC Subtopic 450-20).
The following table presents the components of the allowance for credit losses:
September 30, 2018
December 31, 2017
(in thousands)
Allowance for loan losses
$
157,810
$
169,910
Reserve for unfunded lending commitments
10,016
6,174
Allowance for credit losses
$
167,826
$
176,084
The following table presents the activity in the allowance for credit losses:
Three months ended September 30
Nine months ended September 30
2018
2017
2018
2017
(in thousands)
Balance at beginning of period
$
169,247
$
174,998
$
176,084
$
171,325
Loans charged off
(6,883
)
(7,795
)
(55,440
)
(25,917
)
Recoveries of loans previously charged off
3,842
2,471
8,475
12,766
Net loans charged off
(3,041
)
(5,324
)
(46,965
)
(13,151
)
Provision for credit losses
1,620
5,075
38,707
16,575
Balance at end of period
$
167,826
$
174,749
$
167,826
$
174,749
Included in the provision for credit losses for the nine months ended September 30, 2018 was a $36.8 million provision related to a single, large commercial lending relationship ("Commercial Relationship"). In addition, loans charged off for the same period included a $33.9 million charge-off related to the Commercial Relationship.
The Corporation had historically maintained an unallocated allowance for credit losses for factors and conditions that existed at the balance sheet date, but were not specifically identifiable, and to recognize the inherent imprecision in estimating and measuring loss exposure. In the second quarter of 2017, enhancements were made to allow for the impact of these factors and conditions to be quantified in the allowance allocation process. Accordingly, an unallocated allowance for credit losses is no longer necessary.
18
The following table presents the activity in the allowance for loan losses by portfolio segment: