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 March 31, 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 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $2.50	FULT	The Nasdaq Stock Market, LLC

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 –161,794,000 shares outstanding as of May 1, 2020.

1

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2020

INDEX

Description		Page
Glossary of Terms		3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
(a)	Consolidated Balance Sheets - March 31, 2020 and December 31, 2019	4
(b)	Consolidated Statements of Income - Three months ended March 31, 2020 and 2019	5
(c)	Consolidated Statements of Comprehensive Income - Three months ended March 31, 2020 and 2019	6
(d)	Consolidated Statements of Shareholders’ Equity - Three months ended March 31, 2020 and 2019	7
(e)	Consolidated Statements of Cash Flows - Three months ended March 31, 2020 and 2019	8
(f)	Notes to Consolidated Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		41
Item 3. Quantitative and Qualitative Disclosures about Market Risk		62
Item 4. Controls and Procedures		65
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		66
Item 1A. Risk Factors		66
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		68
Item 3. Defaults Upon Senior Securities - (not applicable)
Item 4. Mine Safety Disclosures - (not applicable)
Item 5. Other Information - (none to be reported)
Item 6. Exhibits		69
Signatures		70

2

FULTON FINANCIAL CORPORATION
GLOSSARY OF DEFINED ACRONYMS AND TERMS
ACL	Allowance for Credit Losses
AFS	Available for Sale
ALCO	Asset/Liability Management Committee
AML	Anti-Money Laundering
ARC	Auction Rate Security
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
bp	basis point(s)
BSA	Bank Secrecy Act
CARES Act	Coronavirus Aid, Relief, and Economic Security Act
CECL	Current Expected Credit Losses
Corporation or Company	Fulton Financial Corporation
COVID-19	Coronavirus
ETR	Effective Tax Rate
Exchange Act	Securities Exchange Act of 1934
EAD	Exposure at default
FASB	Financial Accounting Standards Board
FDIC	Federal Deposit Insurance Corporation
Fed Funds Rate	Target Federal Funds Rate
FHLB	Federal Home Loan Bank
FOMC	Federal Open Market Committee
FRB	Federal Reserve Bank
FTE	Fully Taxable-Equivalent
Fulton Bank or the Bank	Fulton Bank, N.A.
GAAP	U.S. Generally Accepted Accounting Principles
HTM	Held to Maturity
LGD	Loss given default
LIBOR	London Interbank Offered Rate
MSRs	Mortgage Servicing Rights
NIM	Net Interest Margin
Net Loans	Loans and lease receivables, (net of unearned income)
OBS	Off-Balance-Sheet
OREO	Other Real Estate Owned
OTTI	Other-than-temporary impairment
PD	Probability of default
PPP	Paycheck Protection Program
PSU	Performance-Based Restricted Stock Unit
RSU	Restricted Stock Unit
SBA	Small Business Administration
SEC	United States Securities and Exchange Commission
TCI	Tax Credit Investment
TDR	Troubled Debt Restructuring
TruPS	Trust Preferred Securities

3

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS 

(in thousands, except per-share data)

	March 31, 2020			December 31, 2019
	(unaudited)
ASSETS
Cash and due from banks	$	181,777		$	132,283
Interest-bearing deposits with other banks	674,583			385,508
Cash and cash equivalents	856,360			517,791
FRB and FHLB stock	118,989			97,422
Loans held for sale	40,645			37,828
Investment securities:
AFS, at estimated fair value	2,790,834			2,497,537
HTM, at amortized cost	350,606			369,841
Loans	17,077,403			16,837,526
Less: ACL - loans	(238,508		)	(163,622		)
Net loans	16,838,895			16,673,904
Premises and equipment	236,908			240,046
Accrued interest receivable	59,365			60,898
Goodwill and intangible assets	535,171			535,303
Other assets	1,102,086			855,470
Total Assets	$	22,929,859		$	21,886,040
LIABILITIES
Deposits:
Noninterest-bearing	$	4,531,872		$	4,453,324
Interest-bearing	12,833,154			12,940,589
Total Deposits	17,365,026			17,393,913
Short-term borrowings	1,386,808			883,241
Accrued interest payable	10,890			8,834
Long-term borrowings	1,378,466			881,769
Other liabilities	502,921			376,107
Total Liabilities	20,644,111			19,543,864
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 222.5 million shares issued in 2020 and 222.4 million issued in 2019	556,243			556,110
Additional paid-in capital	1,502,189			1,499,681
Retained earnings	1,040,646			1,079,391
Accumulated other comprehensive gain (loss)	18,308			(137		)
Treasury stock, at cost, 61.1 million shares in 2020 and 58.2 million shares in 2019	(831,638		)	(792,869		)
Total Shareholders’ Equity	2,285,748			2,342,176
Total Liabilities and Shareholders’ Equity	$	22,929,859		$	21,886,040
See Notes to Consolidated Financial Statements

4

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per-share data)	Three months ended March 31
	2020		2019
INTEREST INCOME
Loans, including fees	$	175,523	$	183,744
Investment securities:
Taxable	16,294		15,435
Tax-exempt	4,709		3,279
Loans held for sale	320		240
Other interest income	2,532		2,002
Total Interest Income	199,378		204,700
INTEREST EXPENSE
Deposits	26,440		29,689
Short-term borrowings	4,073		3,582
Long-term borrowings	8,119		8,114
Total Interest Expense	38,632		41,385
Net Interest Income	160,746		163,315
Provision for credit losses	44,030		5,100
Net Interest Income After Provision for Credit Losses	116,716		158,215
NON-INTEREST INCOME
Wealth management	15,055		13,239
Commercial banking	18,419		15,250
Consumer banking	11,239		11,377
Mortgage banking	6,234		4,772
Other	3,651		2,048
Non-Interest Income Before Investment Securities Gains	54,598		46,686
Investment securities gains, net	46		65
Total Non-Interest Income	54,644		46,751
NON-INTEREST EXPENSE
Salaries and employee benefits	80,228		77,757
Net occupancy	13,486		12,909
Data processing and software	11,645		10,353
Other outside services	7,881		8,352
Professional fees	4,202		3,960
Equipment	3,418		3,342
State Taxes	2,804		2,002
FDIC insurance	2,808		2,609
Marketing	1,579		2,160
Amortization of TCI	1,450		1,491
Intangible amortization	132		107
Other	12,919		12,782
Total Non-Interest Expense	142,552		137,824
Income Before Income Taxes	28,808		67,142
Income taxes	2,761		10,479
Net Income	$	26,047	$	56,663
PER SHARE:
Net Income (Basic)	$	0.16	$	0.33
Net Income (Diluted)	0.16		0.33
Cash Dividends	0.13		0.13
See Notes to Consolidated Financial Statements

5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

	Three months ended March 31
	2020			2019
Net Income	$	26,047		$	56,663
Other Comprehensive Income, net of tax:
Unrealized gain on securities	17,431			20,298
Reclassification adjustment for securities gains included in net income	(36		)	(51		)
Amortization of net unrealized losses on AFS securities transferred to HTM	795			974
Non-credit related unrealized (loss) on other-than-temporarily impaired debt securities	—			(82		)
Amortization of net unrecognized pension and postretirement income	255			291
Other Comprehensive Income	18,445			21,430
Total Comprehensive Income	$	44,492		$	78,093
See Notes to Consolidated Financial Statements

6

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(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)
Three months ended March 31, 2020
Balance at December 31, 2019	164,218		$	556,110	$	1,499,681	$	1,079,391		$	(137	)	$	(792,869	)	$	2,342,176
Net income							26,047									26,047
Other comprehensive income										18,445						18,445
Stock issued	125		133		889								979			2,001
Stock-based compensation awards					1,619											1,619
Acquisition of treasury stock	(2,908	)											(39,748		)	(39,748		)
Impact of adopting CECL (1)							(43,807		)							(43,807		)
Common stock cash dividends - $0.13 per share							(20,985		)							(20,985		)
Balance at March 31, 2020	161,435		$	556,243	$	1,502,189	$	1,040,646		$	18,308		$	(831,638	)	$	2,285,748
Three months ended March 31, 2019
Balance at December 31, 2018	170,184		$	554,377	$	1,489,703	$	946,032		$	(59,063	)	$	(683,476	)	$	2,247,573
Net income							56,663									56,663
Other comprehensive income										21,430						21,430
Stock issued	115		108		607								942			1,657
Stock-based compensation awards					1,560											1,560
Acquisition of treasury stock	(376	)											(5,877		)	(5,877		)
Common stock cash dividends - $0.13 per share							(21,987		)							(21,987		)
Balance at March 31, 2019	169,923		$	554,485	$	1,491,870	$	980,708		$	(37,633	)	$	(688,411	)	$	2,301,019
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 effective January 1, 2020. See Note 1, "Basis of Presentation" to the Consolidated Financial Statements for further details.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)	Three months ended March 31
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	26,047		$	56,663
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for credit losses	44,030			5,100
Depreciation and amortization of premises and equipment	7,161			6,888
Amortization of TCI	7,619			8,155
Net amortization of investment securities premiums	2,707			2,075
Investment securities gains, net	(46		)	(65		)
Gain on sales of mortgage loans held for sale	(6,181		)	(3,122		)
Proceeds from sales of mortgage loans held for sale	195,649			142,739
Originations of mortgage loans held for sale	(192,285		)	(140,286		)
Intangible amortization	132			107
Amortization of issuance costs and discounts on long-term debt	250			211
Stock-based compensation	1,619			1,560
Other changes, net	(133,579		)	(41,754		)
Total adjustments	(72,924		)	(18,392		)
Net cash (used in) provided by operating activities	(46,877		)	38,271
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities AFS	59,894			37,660
Proceeds from principal repayments and maturities of AFS securities	61,408			51,097
Proceeds from principal repayments and maturities of HTM securities	19,758			18,687
Purchase of securities AFS	(390,936		)	(143,588		)
Purchase of FRB and FHLB stock	(21,567		)	(6,250		)
Net increase in loans	(250,993		)	(101,123		)
Net purchases of premises and equipment	(4,023		)	(11,363		)
Net cash paid for acquisition	—			(3,907		)
Net change in tax credit investments	(128		)	(8,003		)
Net cash used in investing activities	(526,587		)	(166,790		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand and savings deposits	(34,866		)	(108,185		)
Net increase in time deposits	5,979			110,004
Net increase in short-term borrowings	503,567			74,239
Additions to long-term debt	496,461			75,000
Repayments of long-term debt	(13		)	(2,026		)
Net proceeds from issuance of common stock	2,001			1,657
Dividends paid	(21,348		)	(20,592		)
Acquisition of treasury stock	(39,748		)	(5,877		)
Net cash provided by financing activities	912,033			124,220
Net Increase (Decrease) in Cash and Cash Equivalents	338,569			(4,299		)
Cash and Cash Equivalents at Beginning of Period	517,791			445,687
Cash and Cash Equivalents at End of Period	$	856,360		$	441,388
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	36,576		$	40,695
Income taxes	1,072			1,485
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 Fulton Financial 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 months ended March 31, 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 overall 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 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

9

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.

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 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 effective 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 to 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 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 nonparametric 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 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 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.

10

For loans secured by real estate, estimated fair values are determined primarily through appraisals performed by third-party appraisers, discounted to arrive at expected net sale proceeds. For collateral dependent loans, estimated real estate fair values are also net of estimated selling costs. When a real estate secured loan is impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the Corporation’s experience and knowledge of the real estate market; the purpose of the loan; market factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Corporation generally obtains updated appraisals performed by third-party appraisers for impaired loans secured predominantly by real estate every 12 months.

When updated appraisals are not obtained for loans secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and there has not been a significant deterioration in the collateral value since the original appraisal was performed.

For loans with principal balances greater than or equal to $1.0 million secured by non-real estate collateral, such as accounts receivable or inventory, estimated fair values are determined based on borrower financial statements, inventory listings, accounts receivable agings or borrowing base certificates. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Liquidation or collection discounts are applied to these assets based upon existing loan evaluation policies.

Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk rating categories is a significant component of the ACL methodology for these loans, which bases the PD on this migration. Assigning risk ratings involves judgment. Risk ratings may be changed based on ongoing monitoring procedures, or if specific loan review assessments identify a deterioration or an improvement in the loan.

The following is a summary of the Corporation's internal risk rating categories:

• Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.

• Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of Substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak.

• Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.

The allocation of the ACL is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Corporation considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type.

Qualitative and Other Adjustments to ACL: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These 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 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 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.

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HTM debt securities: Expected credit losses on HTM debt securities would be recorded in the ACL on HTM debt securities. As of March 31, 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 March 31, 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.

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Recently Issued Accounting Standards

Standard	Description	Date of Anticipated Adoption	Effect on Financial Statements
ASC Update 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans	This update amends ASC Topic 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. This update is effective for fiscal years ending after December 15, 2020. Early adoption is permitted.	Fiscal Year 2020	The Corporation intends to adopt this standards update effective with its December 31, 2020 annual report on Form 10-K. This standard will impact the Corporation's disclosure relating to employee benefit plans, but the Corporation does not expect the adoption of this update to have a material impact on its consolidated financial statements.
ASC Update 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	This update simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted.	First Quarter 2021	The Corporation intends to adopt this standards update effective with its March 31, 2021 quarterly report on Form 10-Q. This update is not expected to have a material impact on the consolidated financial statements.

Reclassifications

Certain amounts in the 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, included in "interest-bearing deposits with other banks." 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, collateral is posted by the Corporation with counterparties to secure derivative and other contracts, which is included in "interest-bearing deposits with other banks" on the consolidated balance sheets. The amounts of such collateral as of March 31, 2020 and December 31, 2019 were $452.9 million and $199.6 million, respectively.

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NOTE 3 – 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
March 31, 2020	(in thousands)
Available for Sale
State and municipal securities	$	825,863	$	23,790	$	(1,569	)	$	848,084
Corporate debt securities	375,141		5,378		(7,041		)	373,478
Collateralized mortgage obligations	638,458		29,194		—			667,652
Residential mortgage-backed securities	214,259		6,370		—			220,629
Commercial mortgage-backed securities	574,860		12,681		(216		)	587,325
Auction rate securities	107,410		—		(13,744		)	93,666
Total	$	2,735,991	$	77,413	$	(22,570	)	$	2,790,834
Held to Maturity
Residential mortgage-backed securities	$	350,606	$	21,667	$	—		$	372,273

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2019	(in thousands)
Available for Sale
State and municipal securities	$	638,125	$	15,826	$	(1,024	)	$	652,927
Corporate debt securities	370,401		8,490		(1,534		)	377,357
Collateralized mortgage obligations	682,307		11,726		(315		)	693,718
Residential mortgage-backed securities	177,183		1,078		(949		)	177,312
Commercial mortgage-backed securities	489,603		6,471		(1,777		)	494,297
Auction rate securities	107,410		—		(5,484		)	101,926
Total	$	2,465,029	$	43,591	$	(11,083	)	$	2,497,537
Held to Maturity
Residential mortgage-backed securities	$	369,841	$	13,864	$	—		$	383,705

Securities carried at $497.8 million at March 31, 2020 and $462.6 million at December 31, 2019, were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

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The amortized cost and estimated fair values of debt securities as of March 31, 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 Sale				Held to Maturity
		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less		$	1,175	$	1,175	$	—	$	—
Due from one year to five years		34,996		35,936		—		—
Due from five years to ten years		355,584		355,472		—		—
Due after ten years		916,659		922,645		—