Item 7. Management’s Discussion and Analysis
Item 7. 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 relates to the Corporation, a financial holding company registered under the BHCA and corporation incorporated under the laws of the Commonwealth of Pennsylvania, 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.
OVERVIEW
The Corporation is a financial holding company, which, through its wholly owned banking subsidiary, provides a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia.
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments 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 and properties. Offsetting these revenue sources are provisions for credit losses on loans and OBS credit risks, non-interest expenses and income taxes.
The following table presents a summary of the Corporation's earnings and selected performance ratios:
2022 2021 2020
(dollars in thousands, except per share)
Net income $ 286,981 $ 275,497 $ 178,040
Net income available to common shareholders $ 276,733 $ 265,220 $ 175,905
Diluted net income available to common shareholders per share $ 1.67 $ 1.62 $ 1.08
Diluted operating net income available to common shareholders per share (1)
$ 1.76 $ 1.62 $ 1.08
Return on average assets 1.10 % 1.05 % 0.73 %
Operating return on average assets (1)
1.16 % 1.05 % 0.73 %
Return on average common equity 11.69 % 10.64 % 9.94 %
Return on average common shareholders' equity (tangible) (1)
16.08 % 13.58 % 9.66 %
Net interest margin (2)
3.27 % 2.78 % 2.86 %
Efficiency ratio (1)
60.5 % 63.1 % 65.7 %
Non-performing assets to total assets 0.66 % 0.60 % 0.58 %
Net charge-offs (recoveries) to average loans 0.04 % 0.07 % 0.05 %
(1) Ratio represents a financial measure derived by methods other than GAAP. See reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure under the "Supplemental Reporting of Non-GAAP Based Financial Measures" section of Management's Discussion.
(2) 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.
Federal Funds Rate
After maintaining the target range for the Fed Funds Rate at 0.00% to 0.25% from March 16, 2020, as COVID-19 weighed on global economic activity, through March 16, 2022, the FOMC increased the target range eight times to address elevated levels of inflation, placing the target range for the Fed Funds Rate at 4.50% - 4.75% as of February 1, 2023.
Business Combinations
On July 1, 2022, the Corporation completed the acquisition of Prudential Bancorp. Prudential Bancorp was merged with and into the Corporation, and Prudential Bancorp's wholly owned subsidiary, Prudential Bank, became a wholly owned subsidiary of the Corporation. The Corporation merged Prudential Bank with and into Fulton Bank on November 5, 2022. Results of the operations of the acquired entity are included in the Corporation's consolidated financial statements beginning on the acquisition date, July 1, 2022.
In accordance with the terms of the Merger Agreement, each share of Prudential Bancorp's common stock issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive the Merger
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Consideration. In the aggregate, approximately 80% of the Merger Consideration consisted of the Corporation's common stock with the remaining approximately 20% payable in cash. The receipt of the Corporation’s common stock in the Merger is expected to qualify as a tax-free exchange for Prudential Bancorp shareholders. The acquisition of Prudential Bancorp was accounted for as a business combination using the acquisition method of accounting, and accordingly, the assets acquired, the liabilities assumed, and consideration transferred were recorded at their estimated fair values as of the Merger. The $16.3 million excess of the fair value of the Merger Consideration of $119.1 million over the fair value of assets acquired of $102.8 million was recorded as goodwill and is not amortizable or deductible for tax purposes.
COVID-19 Pandemic
The CARES Act was enacted in March 2020 and, among other provisions, authorized the SBA to guarantee loans under the PPP for small businesses that met eligibility requirements in order to keep their workers on the payroll and fund specified operating expenses. Subsequent legislation extended the authority of the SBA to guaranty loans under the PPP through August 8, 2020. In December 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act reauthorized the SBA to guarantee loans under the PPP through March 31, 2021, and the PPP Extension Act of 2021 extended that authorization through June 30, 2021 for applications received by the SBA prior to June 1, 2021. From the inception of the PPP through December 31, 2022, the Corporation funded a total of approximately $2.7 billion of loans under the PPP.
Financial Highlights
Following is a summary of the financial highlights for the year ended December 31, 2022:
• Net Income Available to Common Shareholders and Net Income Per Share - Net income available to common shareholders was $276.7 million for the year ended December 31, 2022, a $11.5 million increase compared to $265.2 million for the same period in 2021.
Diluted operating net income available to common shareholders, per share was $1.76 for the year ended December 31, 2022, a $0.14 increase compared to the same period in 2021.
• Net Interest Income - Net interest income was $781.6 million for the year ended December 31, 2022, an increase of $117.9 million, or 17.8%, compared to the same period in 2021. The increase was driven by higher interest rates and higher average loan balances.
◦ Net Interest Margin - For the year ended December 31, 2022, net interest margin increased to 3.27%, or 49 bps compared to 2021, driven by a 54 bps increase in yield on net loans and a 8 bps increase in yield on investment securities, partially offset by a 10 bps increase on cost of funds.
◦ Loan Growth - Average net loans grew by $0.5 billion, or 2.8%, in comparison to 2021. Included in average net loans were PPP loans that had an average balance of $0.1 billion, a decrease of $1.0 billion from 2021. The increase in average net loans was largely driven by increases in average residential mortgage loans, average commercial mortgage loans, average commercial and industrial loans, excluding PPP loans, average consumer loans, and average real estate construction loans of $760.5 million, $374.1 million, $194.6 million, $112.9 million, and $100.2 million, respectively, partially offset by a $1.0 billion decline in PPP loans due to the repayment of these loans upon forgiveness by the SBA.
◦ Deposit Decrease - Average deposits decreased $269.4 million, or 1.2%, in comparison to 2021. The decrease was primarily due to decreases in average interest-bearing demand deposits and average time deposits of $385.5 million and $321.6 million, respectively, partially offset by increases in average noninterest-bearing demand deposits and average savings and money market deposits of $311.2 million and $151.2 million, respectively.
• Asset Quality - Non-performing assets increased $23.8 million, or 15.4%, as of December 31, 2022 compared to 2021, and were 0.66% and 0.60% of total assets as of the end of those periods, respectively. For the years ended December 31, 2022 and 2021, net charge-offs to average loans outstanding were 0.04% and 0.07%, respectively. The provision for credit losses was $28.0 million for the year ended December 31, 2022, compared to a negative provision of $14.6 million for the same period of 2021. Included in the December 31, 2022 provision for credit losses was the CECL Day 1 Provision of $8.0 million for the acquired Prudential Bancorp loan portfolio.
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• Non-Interest Income - Non-interest income, excluding investment securities gains, for the year ended December 31, 2022 decreased $13.1 million, or 5.4%, in comparison to 2021. The decrease in non-interest income, excluding investment securities gains, was primarily due to decreases of $19.4 million in mortgage banking income and $5.8 million in other income, primarily due to a decline in income from equity method investments, partially offset by increases of $7.1 million in commercial banking income, $4.0 million in consumer banking fees and $1.0 million in wealth management revenues.
• Non-Interest Expense - Total non-interest expense, excluding merger-related expenses of $10.3 million, increased $5.6 million, or 0.9%, to $623.4 million in 2022 compared to 2021. The increase was largely driven by increases in salaries and employee benefits expense of $27.7 million, data processing and software expense of $3.8 million, other outside services of $3.0 million, net occupancy expense of $2.4 million, and FDIC insurance expense of $1.9 million, partially offset by a decrease in debt extinguishment expense of $33.2 million.
• Income Taxes - Income tax expense for 2022 resulted in an ETR of 17.3%, in comparison to 17.6% for 2021. 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 TCIs.
Supplemental Reporting of Non-GAAP Based Financial Measures
This Annual Report on Form 10-K 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 and financial condition. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of 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 of 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.
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Following are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure as of and for the year ended December 31:
2022 2021 2020
(dollars in thousands, except per share data)
Operating net income available to common shareholders
Net income available to common shareholders $ 276,733 $ 265,220 $ 175,905
Plus: Core deposit intangible amortization 1,029 — —
Plus: Merger-related expenses 10,328 — —
Plus: CECL Day 1 Provision expense 7,954 — —
Less: Tax impact of adjustments (4,055) — —
Operating net income available to common shareholders (numerator) $ 291,989 $ 265,220 $ 175,905
Weighted average shares (diluted) (denominator) 165,472 163,307 163,090
Operating net income available to common shareholders, per share (diluted) $ 1.76 $ 1.62 $ 1.08
Operating return on average assets
Net income $ 286,981 $ 275,497 $ 178,040
Plus: Core deposit intangible amortization 1,029 — —
Plus: Merger-related expenses 10,328 — —
Plus: CECL Day 1 Provision expense 7,954 — —
Less: Tax impact of adjustments (4,055) — —
Operating net income (numerator) $ 302,237 $ 275,497 $ 178,040
Total average assets (denominator) $ 25,971,484 $ 26,170,333 $ 24,333,717
Operating return on average assets 1.16 % 1.05 % 0.73 %
Return on average common shareholders' equity (tangible)
Net income available to common shareholders $ 276,733 $ 265,220 $ 175,905
Plus: Intangible amortization 1,731 589 529
Plus: Merger-related expenses 10,328 — —
Plus: CECL Day 1 Provision expense 7,954 — —
Less: Tax impact of adjustments (4,203) (127) (112)
Operating net income available to common shareholders (numerator) $ 292,543 $ 265,682 $ 176,322
Average shareholders' equity $ 2,560,323 $ 2,685,946 $ 2,391,649
Less: Average goodwill and intangible assets (548,102) (536,621) (535,196)
Less: Average preferred stock (192,878) (192,878) (32,084)
Average tangible common shareholders' equity (denominator) $ 1,819,343 $ 1,956,447 $ 1,824,369
Return on average common shareholders' equity (tangible) 16.08 % 13.58 % 9.66 %
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2022 2021 2020
(dollars in thousands)
Efficiency ratio
Non-interest expense $ 633,728 $ 617,830 $ 579,440
Less: Amortization of tax credit investments (2,783) (6,187) (6,126)
Less: Intangible amortization (1,731) (589) (529)
Less: Merger-related expenses (10,328) — —
Less: Debt extinguishment costs — (33,249) (2,878)
Numerator $ 618,886 $ 577,805 $ 569,907
Net interest income $ 781,634 $ 663,730 $ 629,207
Tax equivalent adjustment 14,995 12,296 12,302
Plus: Total non-interest income 227,130 273,745 229,388
Less: Investment securities losses (gains), net 27 (33,516) (3,053)
Total revenue (denominator) $ 1,023,786 $ 916,255 $ 867,844
Efficiency ratio 60.5 % 63.1 % 65.7 %
CRITICAL ACCOUNTING POLICIES
The following is a summary of those 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. See additional information regarding these critical accounting policies in "Note 1 - Summary of Significant Accounting Policies," in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Allowance for Credit Losses - ACL is based on estimated losses over the remaining expected life of loans. Management's determination of the appropriateness of the reserve is based on periodic evaluations of the loan portfolio, lending-related commitments, current and forecasted economic factors and other relevant factors.
In determining the ACL, the Corporation uses three inputs in the model estimate. These inputs are PD, which estimates the likelihood that a borrower will be unable to meet its debt obligations; LGD, which estimates the share of an asset that is lost if a borrower defaults; and EAD, which estimates the gross exposure under a facility upon default. The PD models were developed based on historical default data. Both internal and external variables are evaluated in the process. The main internal variables are risk rating or delinquency history, and the external variables are economic variables obtained from third-party provided forecasts. Management applies risk-rating transition matrices to pools of loans and lending-related commitments with similar risk characteristics to determine default probabilities, utilizes economic forecasts, applies modeled LGD results to associated EAD and incorporates modeled overlays and qualitative adjustments to estimate ACL. As such, the calculation of the 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 ACL is highly sensitive to the economic forecasts used to develop the reserve. Due to the high level of uncertainty regarding significant assumptions, the Corporation has evaluated a range of economic scenarios, including more and less severe economic deteriorations.
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 national, regional and local economic and business conditions, an assessment of the lending environment, including underwriting standards and other factors affecting credit quality.
The ACL for loans was $269.4 million and $249.0 million on December 31, 2022 and December 31, 2021, respectively. The increase of $20.4 million was primarily a result of increased loan growth and changes to the macroeconomic outlook.
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The Corporation performs loan loss sensitivity analysis on a quarterly basis to determine the impact of varying economic conditions based on Moody's model projections. Our sensitivity analysis does not represent management's view of expected credit losses at the balance sheet date. One scenario identified includes a slowdown in near-term economic growth. This scenario resulted in a hypothetical increase to the ACL of approximately $18.7 million.
For further discussion of the methodology used in the determination of the ACL, refer to Note 1, "Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Income Taxes – Income tax expense is based upon income before taxes, adjusted for the effect of certain tax-exempt income, non-deductible expenses and credits. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. DTAs or deferred tax liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The Corporation must also evaluate the likelihood that DTAs will be recovered through future taxable income. If any such assets are determined to be more likely than not unrecoverable, then a valuation allowance must be recognized. The assessment of the carrying value of DTAs is based on certain assumptions, the changes of which could have a material impact on the Corporation's consolidated financial statements.
On a periodic basis, the Corporation evaluates its income tax expense based on tax laws, regulations and financial reporting considerations and records adjustments as appropriate. Recognition and measurement of tax positions is based upon management's evaluations of current taxing authorities' examinations of the Corporation's tax returns, recent positions taken by the taxing authorities on similar transactions and the overall tax environment.
Income tax expense was $60.0 million and $58.7 million for the years ended December 31, 2022 and December 31, 2021, respectively.
Recently Issued Accounting Standards
For a description of accounting standards recently issued, but not yet adopted by the Corporation, see "Recently Issued Accounting Standards," in "Note 1 - Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
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RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporation's net income. The Corporation manages the risk associated with changes in interest rates through the techniques described within Item 7A, "Quantitative and Qualitative Disclosures About Market Risk." The following table provides a comparative average balance sheet and net interest income analysis for 2022 compared to 2021 and 2020. Interest income and yields are presented on an FTE basis using a 21% federal tax rate as well as statutory interest expense disallowances. The discussion following this table is based on these tax-equivalent amounts.
2022 2021 2020
Average
Balance Interest Yield/
Rate Average
Balance Interest Yield/
Rate Average
Balance Interest Yield/
Rate
(dollars in thousands)
ASSETS
Interest-earning assets:
Net loans (1)
$ 19,152,740 $ 765,603 4.00 % $ 18,627,787 $ 644,387 3.46 % $ 18,270,390 $ 662,785 3.63 %
Investment securities (2)
4,364,627 106,115 2.43 3,673,250 86,325 2.35 3,007,467 84,814 2.82
Loans held for sale 14,974 866 5.78 39,211 1,302 3.32 60,015 2,077 3.46
Other interest-earning assets 814,731 7,249 0.89 2,014,954 3,694 0.18 1,120,727 5,504 0.49
Total interest-earning assets 24,347,072 879,833 3.61 24,355,202 735,708 3.02 22,458,599 755,180 3.36
Noninterest-earning assets:
Cash and due from banks 156,050 165,942 139,146
Premises and equipment 220,982 228,708 238,864
Other assets 1,505,277 1,686,053 1,746,956
Less: ACL - loans (3)
(257,897) (265,572) (249,848)
Total Assets $ 25,971,484 $ 26,170,333 $ 24,333,717
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Demand deposits $ 5,593,942 $ 8,219 0.15 % $ 5,979,479 $ 3,662 0.06 % $ 5,278,941 $ 11,390 0.22 %
Savings and money market deposits 6,458,165 16,642 0.26 6,306,967 4,936 0.08 5,550,234 14,654 0.26
Brokered deposits 262,359 4,097 1.56 286,901 1,096 0.38 310,763 2,387 0.77
Time deposits 1,617,804 14,871 0.92 1,939,446 20,311 1.05 2,546,305 41,615 1.63
Total interest-bearing deposits 13,932,270 43,829 0.31 14,512,793 30,005 0.21 13,686,243 70,046 0.51
Borrowings 1,358,357 39,375 2.89 1,297,963 29,677 2.29 2,064,883 43,625 2.11
Total interest-bearing liabilities 15,290,627 83,204 0.54 15,810,756 59,682 0.38 15,751,126 113,671 0.72
Noninterest-bearing liabilities:
Demand deposits 7,522,304 7,211,153 5,714,803
Other liabilities 598,230 462,478 476,139
Total Liabilities 23,411,161 23,484,387 21,942,068
Total deposits/Cost of deposits 21,454,574 0.20% 21,723,946 0.14% 19,401,046 0.36%
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds 22,812,931 0.36% 23,021,909 0.26% 21,465,929 0.53%
Shareholders' equity 2,560,323 2,685,946 2,391,649
Total Liabilities and Shareholders' Equity $ 25,971,484 $ 26,170,333 $ 24,333,717
Net interest income/net interest margin (FTE) 796,629 3.27 % 676,026 2.78 % 641,509 2.86 %
Tax equivalent adjustment (14,995) (12,296) (12,302)
Net interest income $ 781,634 $ 663,730 $ 629,207
(1) Average balances include non-performing loans.
(2) Average balances include amortized historical cost for AFS securities; 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 reserve for OBS credit exposures, which is included in other liabilities.
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Comparison of 2022 to 2021
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volumes) and changes in yields and rates:
2022 vs. 2021
Increase (decrease) due to change in
Volume Yield/Rate Net
(dollars in thousands)
Interest income on:
Net loans (1)
$ 18,540 $ 102,676 $ 121,216
Investment securities 16,759 3,031 19,790
Loans held for sale (1,076) 640 (436)
Other interest-earning assets (3,288) 6,843 3,555
Total interest income $ 30,935 $ 113,190 $ 144,125
Interest expense on:
Demand deposits $ (256) $ 4,813 $ 4,557
Savings and money market deposits 123 11,583 11,706
Brokered deposits (101) 3,102 3,001
Time deposits (3,115) (2,325) (5,440)
Borrowings 1,463 8,235 9,698
Total interest expense $ (1,886) $ 25,408 $ 23,522
(1) Average balance includes non-performing loans.
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of the direct changes that are attributable to each component.
Compared to 2021, FTE total interest income for 2022 increased $144.1 million, or 19.6%, primarily due to an increase of $113.2 million attributable to changes in yield, of which $102.7 million related to net loans. The yield on average interest-earning assets increased 59 bps in 2022 compared to 2021.
In 2022, interest expense increased $23.5 million compared to 2021, primarily driven by increases in rate on interest-bearing liabilities resulting in a $25.4 million increase in interest expense. The increase in interest expense attributable to rate was primarily driven by the increases in savings and money market deposits, borrowings, demand deposits and brokered deposits.
Average loans and average FTE yields, by type, are summarized in the following table:
Increase (Decrease) in Balance
2022 2021
Balance Yield Balance Yield $ %
(dollars in thousands)
Real estate – commercial mortgage $ 7,523,806 4.00 % $ 7,149,712 3.14 % $ 374,094 5.2 %
Commercial and industrial (1)
4,230,133 4.13 5,052,856 2.64 (822,723) (16.3)
Real estate – residential mortgage 4,261,527 3.38 3,501,072 3.40 760,455 21.7
Real estate – home equity 1,101,142 4.60 1,141,042 3.85 (39,900) (3.5)
Real estate – construction 1,178,550 4.14 1,078,350 3.08 100,200 9.3
Consumer 569,305 5.11 456,427 3.99 112,878 24.7
Equipment lease financing 249,595 3.99 252,104 3.89 (2,509) (1.0)
Other (2)
38,682 — (3,776) — 42,458 N/M
Total loans $ 19,152,740 4.00 % $ 18,627,787 3.46 % $ 524,953 2.8 %
(1) Includes average PPP loans of $0.1 billion and $1.1 billion for the years ended December 31, 2022 and 2021, respectively.
(2) Consists of overdrafts and net origination fees and costs.
Average loans increased $525.0 million, or 2.8%, compared to 2021. The increase was largely driven by increases in average residential mortgage loans, average commercial mortgage loans, average consumer loans and average construction loans of
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$760.5 million, $374.1 million, $112.9 million and $100.2 million, respectively, partially offset by decreases in average commercial and industrial loans of $822.7 million primarily due to the repayment of PPP loans upon forgiveness by the SBA.
Average investment securities increased $691.4 million, or 18.8%, in comparison to 2021, which contributed a $16.8 million increase in FTE interest income. The yield on investment securities increased 8 bps in comparison to 2021, resulting in a $3.0 million increase in FTE interest income.
Yield on other interest-earning assets increased 71 bps in comparison to 2021, contributing $6.8 million to FTE interest income, partially offset by a decrease in the average balance of other interest-earning assets of $1.2 billion, contributing a $3.3 million decrease to FTE interest income.
Average deposits and interest rates, by type, are summarized in the following table:
Increase (Decrease) in
Balance
2022 2021
Balance Rate Balance Rate $ %
(dollars in thousands)
Noninterest-bearing demand $ 7,522,304 — % $ 7,211,153 — % $ 311,151 4.3 %
Interest-bearing demand 5,593,942 0.15 5,979,479 0.06 (385,537) (6.4)
Savings and money market deposits 6,458,165 0.26 6,306,967 0.08 151,198 2.4
Total demand deposits and savings and money market deposits 19,574,411 0.13 19,497,599 0.04 76,812 0.4
Brokered deposits 262,359 1.56 286,901 0.38 (24,542) (8.6)
Time deposits 1,617,804 0.92 1,939,446 1.05 (321,642) (16.6)
Total deposits $ 21,454,574 0.20 % $ 21,723,946 0.14 % $ (269,372) (1.2) %
The cost of interest-bearing deposits increased 10 bps, to 0.31%, from 0.21% in 2021, due to an increase in rates. The rate on total demand deposits and savings and money market deposits increased to 0.13%, compared to 0.04% for 2021. Average interest-bearing demand deposits and average time deposits decreased $385.5 million and $321.6 million, respectively, during 2022. Average noninterest-bearing demand deposits and average savings and money market deposits increased $311.2 million and $151.2 million, respectively, during 2022 compared to 2021.
Average borrowings and interest rates, by type, are summarized in the following table:
Increase (Decrease) in
Balance
2022 2021
Balance Rate Balance Rate $ %
(dollars in thousands)
Borrowings:
Federal funds purchased $ 91,125 3.21 % $ — — % $ 91,125 N/M
Federal Home Loan Bank advances 194,295 3.77 126,677 1.80 67,618 53.4 %
Senior debt and subordinated debt 564,337 3.94 657,386 4.07 (93,049) (14.2)
Other borrowings (1)
508,600 1.34 513,900 0.12 (5,300) (1.0)
Total borrowings $ 1,358,357 2.89 % $ 1,297,963 2.29 % $ 60,394 4.7 %
(1) Includes repurchase agreements, short-term promissory notes and capital leases.
Total average borrowings increased $60.4 million, or 4.7%, and the total borrowings rate increased 60 bps, to 2.89%, compared to 2021. Borrowings increased primarily as a result of the decrease in deposits. Short-term Federal funds purchased and Federal Home Loan Bank advances increased $91.1 million and $67.6 million, respectively. Senior debt and subordinated debt decreased $93.0 million primarily due to the $65.0 million repayment of senior notes on March 16, 2022 and the redemption of $17.0 million of TruPS in September 2022. See Note 10 "Borrowings" of the Notes to Consolidated Financial Statements for additional details.
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Non-Interest Income and Expense
Non-Interest Income
The following table presents the components of non-interest income:
Increase (Decrease)
2022 2021 $ %
(dollars in thousands)
Commercial banking:
Merchant and card $ 28,276 $ 26,121 $ 2,155 8.3 %
Cash management 23,729 20,865 2,864 13.7
Capital markets 12,256 9,381 2,875 30.6
Other commercial banking 11,518 12,322 (804) (6.5)
Total commercial banking 75,779 68,689 7,090 10.3
Consumer banking:
Card 24,472 23,505 967 4.1
Overdraft 15,480 12,844 2,636 20.5
Other consumer banking 9,544 9,195 349 3.8
Total consumer banking 49,496 45,544 3,952 8.7
Wealth management revenues 72,843 71,798 1,045 1.5
Mortgage banking:
Gains on sales of mortgage loans 8,820 24,380 (15,560) (63.8)
Mortgage servicing income 5,384 9,196 (3,812) (41.5)
Total mortgage banking 14,204 33,576 (19,372) (57.7)
Other 14,835 20,622 (5,787) (28.1)
Non-interest income before investment securities gains 227,157 240,229 (13,072) (5.4)
Investment securities gains (losses), net (27) 33,516 (33,543) (100.1)
Total Non-Interest Income $ 227,130 $ 273,745 $ (46,615) (17.0) %
Excluding net investment securities gains, non-interest income decreased $13.1 million, or 5.4%, in 2022, as compared to 2021. The primary contributors to this net decrease were as follows:
• Mortgage banking income decreased $19.4 million, or 57.7%, compared to 2021, mainly due to reduced gains on sales of mortgage loans.
• Other non-interest income decreased $5.8 million, or 28.1%, compared to 2021, primarily due to a decline in income from equity method investments.
• Total commercial banking income increased $7.1 million, or 10.3%, compared to 2021, driven mainly by increases in commercial customer swap fees reflected in capital markets, cash management fees and merchant and card revenues.
• Total consumer banking income increased $4.0 million, or 8.7%, compared to 2021, driven primarily by increases in overdraft fees and card income.
• Investment securities gains decreased $33.5 million, primarily due to the sale of Visa Shares, as part of the balance sheet restructuring undertaken in 2021.
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Non-Interest Expense
The following table presents the components of non-interest expense:
Increase (Decrease)
2022 2021 $ %
(dollars in thousands)
Salaries and employee benefits $ 356,884 $ 329,138 $ 27,746 8.4 %
Data processing and software 60,255 56,440 3,815 6.8
Net occupancy 56,195 53,799 2,396 4.5
Other outside services 37,152 34,194 2,958 8.7
State taxes 15,113 18,793 (3,680) (19.6)
Equipment 14,033 13,807 226 1.6
FDIC insurance 12,547 10,665 1,882 17.6
Professional fees 9,123 9,647 (524) (5.4)
Marketing 6,885 5,275 1,610 30.5
Intangible amortization 1,731 589 1,142 N/M
Debt extinguishment — 33,249 (33,249) N/M
Merger-related expenses 10,328 — 10,328 N/M
Other 53,482 52,234 1,248 2.4
Total Non-Interest Expense $ 633,728 $ 617,830 $ 15,898 2.6 %
Non-interest expense increased $15.9 million, or 2.6% compared to 2021. Non-interest expense, excluding merger-related expenses of $10.3 million, was $623.4 million, an increase of $5.6 million, or 0.9% compared to non-interest expenses of $617.8 million in 2021. Excluding merger-related expenses, the increase in non-interest expense compared to 2021 was primarily due to increases in salaries and benefits of $27.7 million, attributable to higher employee base salaries of $20.2 million and deferred loan origination expense of $14.3 million, partially offset by lower commissions expense of $8.8 million. Increases in data processing and software expenses, other outside services and net occupancy expense in 2022 of $3.8 million, $3.0 million and $2.4 million, respectively, also contributed to the increase in non-interest expenses compared to 2021. These increases were partially offset by a decrease of $33.2 million in debt extinguishment expense in 2021.
Income Taxes
Income tax expense for 2022 was $60.0 million, a $1.3 million increase compared to 2021. The ETR was 17.3% in 2022 compared to 17.6% in 2021. The increase in income tax expense resulted primarily from higher 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 TCIs that generate tax credits under various federal programs.
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Comparison of 2021 to 2020
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volumes) and changes in yields and rates:
2021 vs. 2020 Increase (decrease) due to change in
Volume Yield/Rate Net
(dollars in thousands)
Interest income on:
Net loans (1)
$ 12,882 $ (31,280) $ (18,398)
Investment securities 19,055 (17,544) 1,511
Loans held for sale (694) (81) (775)
Other interest-earning assets 2,866 (4,676) (1,810)
Total interest income $ 34,109 $ (53,581) $ (19,472)
Interest expense on:
Demand deposits $ 1,414 $ (9,142) $ (7,728)
Savings and money market deposits 1,689 (11,407) (9,718)
Brokered deposits (170) (1,121) (1,291)
Time deposits (8,545) (12,759) (21,304)
Borrowings (17,763) 3,815 (13,948)
Total interest expense $ (23,375) $ (30,614) $ (53,989)
(1) Average balance includes non-performing loans.
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of the direct changes that are attributable to each component.
FTE net interest income increased $34.5 million, or 5.4%, to $676.0 million in 2021. Net interest margin decreased 8 bps to 2.78% in 2021 from 2.86% in 2020. As summarized above, FTE interest income decreased $53.6 million as the result of a 34 bps decrease in the yield on interest-earning assets, and increased $34.1 million as the result of a $1.9 billion, or 8.4%, increase in average interest-earning assets, primarily in investments and loans. The yield on the loan portfolio decreased 17 bps, to 3.46%, largely due to decreases in the Fed Funds Rate in 2020 and corresponding decreases to loan index rates. At that time all variable and certain adjustable rate loans repriced to lower rates as a result of these interest rate decreases, and yields on new loan originations were lower than the 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. Therefore, the benefit of increases or the reverse effect of decreases in index rates on adjustable rate loans may not be fully realized until future periods.
Interest expense decreased $54.0 million, with a 34 bps decrease in the rate on average interest-bearing liabilities contributing $30.6 million to this decrease. In addition, a shift into lower-cost demand deposits and savings and money market deposits, which increased $1.5 billion collectively, combined with a decrease in higher-cost time deposits, short-term borrowings and long-term borrowings of $1.4 billion, were the primary drivers for the $23.4 million reduction in interest expense in 2021 compared to 2020.
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Average loans and average FTE yields, by type, are summarized in the following table:
Increase (Decrease) in Balance
2021 2020
Balance Yield Balance Yield $ %
(dollars in thousands)
Real estate - commercial mortgage $ 7,149,712 3.14 % $ 6,928,269 3.53 % $ 221,443 3.2 %
Commercial and industrial (1)
5,052,856 2.64 5,501,317 3.10 (448,461) (8.2)
Real estate - residential mortgage 3,501,072 3.40 2,876,538 3.80 624,534 21.7
Real estate - home equity 1,141,042 3.85 1,255,094 4.11 (114,052) (9.1)
Real estate - construction 1,078,350 3.08 965,534 3.64 112,816 11.7
Consumer 456,427 3.99 466,419 4.16 (9,992) (2.1)
Equipment lease financing 252,104 3.89 281,859 3.93 (29,755) (10.6)
Other (2)
(3,776) — (4,640) — 864 (18.6)
Total loans $ 18,627,787 3.46 % $ 18,270,390 3.63 % $ 357,397 2.0%
(1) Includes average PPP loans of $1.1 billion and $1.3 billion for the years ended December 31, 2021 and 2020, respectively.
(2) Consists of overdrafts and net origination fees and costs.
Average loans increased $357.4 million, or 2.0%, which contributed $12.9 million to the increase in FTE interest income. The increase was driven largely by growth in residential mortgage loans and commercial mortgage loans, partially offset by a decrease in commercial and industrial loans, primarily due to a decrease in PPP loans. The yield on average loans decreased 17 bps resulting in a decrease in FTE interest income of $31.2 million.
Average investment securities increased $665.8 million, or 22.1%, in comparison to 2020, which contributed a $19.1 million increase in FTE interest income, offset by a decrease of 47 bps in yield on average investment securities, resulting in a $17.5 million decrease in FTE interest income. Average other interest-earning assets increased $894.2 million, contributing $2.9 million to FTE interest income. The yield on other interest-earning assets decreased 31 bps in comparison to 2020, as a result of the Fed Funds Rate decrease during 2020, resulting in a $4.7 million decrease in FTE interest income.
Average deposits and interest rates, by type, are summarized in the following table:
Increase (Decrease) in Balance
2021 2020
Balance Rate Balance Rate $ %
(dollars in thousands)
Noninterest-bearing demand $ 7,211,153 — % $ 5,714,803 — % $ 1,496,350 26.2 %
Interest-bearing demand 5,979,479 0.06 5,278,941 0.22 700,538 13.3
Savings and money market deposits 6,306,967 0.08 5,550,234 0.26 756,733 13.6
Total demand and savings and money market deposits 19,497,599 0.04 16,543,978 0.16 2,953,621 17.9
Brokered deposits 286,901 0.38 310,763 0.77 (23,862) (7.7)
Time deposits 1,939,446 1.05 2,546,305 1.63 (606,859) (23.8)
Total deposits $ 21,723,946 0.14 % $ 19,401,046 0.36 % $ 2,322,900 12.0 %
The cost of interest-bearing deposits decreased 30 bps to 0.21% from 0.51% in 2020, resulting in a $34.4 million decrease in interest expense compared to 2020. These rates do not include the impact of non-interest bearing deposits, which lowered cost of total deposits to 0.14% and 0.36% in 2021 and 2020, respectively. The decrease in deposit cost was primarily the result of reductions in deposit rates resulting from decreases in the Fed Funds Rate. The majority of the deposit rates are discretionary, with the exception of indexed municipal deposit balances. The average balance of interest-bearing deposits increased $826.6 million, or 6.0%, in comparison to 2020.
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Average borrowings and interest rates, by type, are summarized in the following table:
2021 2020 Increase (Decrease) in
Balance
Balance Rate Balance Rate $ %
(dollars in thousands)
Borrowings:
Federal funds purchased $ — — % $ 64,918 0.83 % $ (64,918) N/M
Federal Home Loan Bank advances 126,677 1.80 557,596 1.83 (430,919) (77.3)
Senior debt and subordinated debt 657,386 4.07 696,704 4.02 (39,318) (5.6)
Other borrowings (1)
513,900 0.12 745,665 0.36 (231,765) (31.1)
Total borrowings $ 1,297,963 2.29 % $ 2,064,883 2.11 % $ (766,920) (37.1) %
(1) Includes repurchase agreements, short-term promissory notes and capital leases.
Total average borrowings in 2021 decreased $766.9 million, or 37.1%, due to a balance sheet restructuring, while the total borrowings rate increased 18 bps to 2.29% compared to 2020. Average Federal Home Loan Bank advances decreased $430.9 million, or 77.3%, and average other borrowings decreased $231.8 million or 31.1% compared to 2020.
Non-Interest Income
The following table presents the components of non-interest income:
Increase (Decrease)
2021 2020 $ %
(dollars in thousands)
Commercial banking:
Merchant and card $ 26,121 $ 23,139 $ 2,982 12.9 %
Cash management 20,865 18,725 2,140 11.4
Capital markets 9,381 18,288 (8,907) (48.7)
Other commercial banking 12,322 10,134 2,188 21.6
Total commercial banking 68,689 70,286 (1,597) (2.3)
Consumer banking:
Card 23,505 19,777 3,728 18.9
Overdraft 12,844 12,556 288 2.3
Other consumer banking 9,195 9,265 (70) (0.8)
Total consumer banking 45,544 41,598 3,946 9.5
Wealth management revenues 71,798 59,058 12,740 21.6
Mortgage banking:
Gains on sales of mortgage loans 24,380 53,599 (29,219) (54.5)
Mortgage servicing income 9,196 (11,290) 20,486 N/M
Total mortgage banking 33,576 42,309 (8,733) (20.6)
Other 20,622 13,084 7,538 57.6
Non-interest income before investment securities gains 240,229 226,335 13,894 6.1
Investment securities gains (losses), net 33,516 3,053 30,463 N/M
Total Non-Interest Income $ 273,745 $ 229,388 $ 44,357 19.3 %
Excluding net investment securities gains, non-interest income increased $13.9 million, or 6.1%, in 2021 compared to 2020.
Total commercial banking income in 2021 decreased $1.6 million, or 2.3%, compared to 2020, driven mainly by a decrease in commercial customer swap fees reflected in capital markets.
Total consumer banking increased $3.9 million, or 9.5%, compared to 2020, driven primarily by higher card fee income.
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Wealth management revenues increased $12.7 million, or 21.6%, resulting primarily from an increase in client asset levels and improved overall market performance.
Mortgage banking income decreased $8.7 million, or 20.6%, mainly due to reduced gains on sales of mortgage loans, partially offset by an increase in mortgage servicing income.
Investment securities gains increased $30.5 million, primarily due to the sale of Visa Shares as part of the balance sheet restructuring undertaken in 2021.
Non-Interest Expense
The following table presents the components of non-interest expense:
Increase (Decrease)
2021 2020 $ %
(dollars in thousands)
Salaries and employee benefits $ 329,138 $ 324,395 $ 4,743 1.5 %
Data processing and software 56,440 48,073 8,367 17.4
Net occupancy 53,799 53,013 786 1.5
Other outside services 34,194 31,432 2,762 8.8
Debt extinguishment 33,249 2,878 30,371 N/M
State taxes 18,793 12,613 6,180 49.0
Equipment 13,807 13,885 (78) (0.6)
FDIC insurance 10,665 8,865 1,800 20.3
Professional fees 9,647 12,835 (3,188) (24.8)
Marketing 5,275 5,127 148 2.9
Intangible amortization 589 529 60 11.3
Other 52,234 65,795 (13,561) (20.6)
Total non-interest expense $ 617,830 $ 579,440 $ 38,390 6.6 %
Non-interest expense increased $38.4 million, or 6.6% in 2021. Non-interest expense, excluding debt extinguishment costs of $33.2 million, was $584.6 million, an increase of $21.3 million, or 3.8%, compared to non-interest expenses of $563.2 million in 2020, which excludes expenses associated with cost savings initiatives of $16.2 million. Excluding the net decrease in severance costs of $5.9 million, the increase in non-interest expense over 2020 was primarily due to increases in salaries and benefits of $10.6 million, attributable to a $12.7 million increase in incentive compensation and bonuses. Also contributing to the increase in non-interest expense in 2021 were $8.4 million in data processing and software and $2.8 million in other outside services expense, partially offset by a $3.2 million decrease in professional fees.
Income Taxes
Income tax expense for 2021 was $58.7 million, a $34.6 million increase compared to 2020. The ETR was 17.6% in 2021, as compared to 12.0% in 2020. The increase in income tax expense and the ETR resulted primarily from higher 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 TCIs that generate tax credits under various federal programs.
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FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets.
December 31 Increase (Decrease)
2022 2021 $ %
(dollars in thousands)
Assets
Cash and cash equivalents $ 681,921 $ 1,638,614 $ (956,693) (58.4) %
FRB and FHLB Stock 130,186 57,635 72,551 125.9
Loans held for sale 7,264 35,768 (28,504) (79.7)
Investment securities 3,968,023 4,167,774 (199,751) (4.8)
Loans, net 20,010,181 18,076,349 1,933,832 10.7
Net premises and equipment 225,141 220,357 4,784 2.2
Goodwill and intangibles 560,824 538,053 22,771 4.2
Other assets 1,348,162 1,061,848 286,314 27.0
Total Assets $ 26,931,702 $ 25,796,398 $ 1,135,304 4.4 %
Liabilities and Shareholders' Equity
Deposits $ 20,649,538 $ 21,573,499 $ (923,961) (4.3) %
Borrowings 2,871,207 1,038,109 1,833,098 N/M
Other liabilities 831,200 472,110 359,090 76.1
Total Liabilities 24,351,945 23,083,718 1,268,227 5.5
Total Shareholders' Equity 2,579,757 2,712,680 (132,923) (4.9)
Total Liabilities and Shareholders' Equity $ 26,931,702 $ 25,796,398 $ 1,135,304 4.4 %
Investment Securities
The following table presents the carrying amount of investment securities as of December 31:
2022 2021
(dollars in thousands)
Available for Sale
U.S. Government securities $ 218,485 $ 127,618
U.S. Government sponsored agency securities 1,008 —
State and municipal securities 1,105,712 1,188,670
Corporate debt securities 422,309 386,133
Collateralized mortgage obligations 134,033 209,359
Residential mortgage-backed securities 212,698 229,795
Commercial mortgage-backed securities 552,522 971,148
Auction rate securities — 74,667
Total available for sale securities 2,646,767 3,187,390
Held to Maturity
Residential mortgage-backed securities 457,325 404,958
Commercial mortgage-backed securities 863,931 575,426
Total held to maturity securities 1,321,256 980,384
Total investment securities $ 3,968,023 $ 4,167,774
Total AFS securities decreased $540.6 million, or 17.0%, to $2,646.8 million at December 31, 2022, primarily due to decreases in commercial mortgage backed securities, state and municipal securities, collateralized mortgage obligations and auction rate
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securities of $418.6 million, $83.0 million, $75.3 million and $74.7 million, respectively, partially offset by an increase in U.S. Government securities of $90.9 million.
Total HTM securities increased $340.9 million, or 34.8%, due to increases in commercial mortgage-backed securities and residential mortgage-backed securities of $288.5 million and $52.4 million, respectively.
Loans
The following table presents ending loans outstanding, by type, as of the dates shown, and the changes in balances for the most recent year:
December 31
2022 2021 2020
(dollars in thousands)
Real estate – commercial mortgage $ 7,693,835 $ 7,279,080 $ 7,105,092
Commercial and industrial (1)
4,477,537 4,208,327 5,670,828
Real estate – residential mortgage 4,737,279 3,846,750 3,141,915
Real estate – home equity 1,102,838 1,118,248 1,202,913
Real estate – construction 1,269,925 1,139,779 1,047,218
Consumer 699,179 464,657 466,772
Equipment lease financing and other 324,928 283,557 284,377
Overdrafts 3,403 1,988 4,806
Gross loans 20,308,924 18,342,386 18,923,921
Unearned income (29,377) (17,036) (23,101)
Net loans $ 20,279,547 $ 18,325,350 $ 18,900,820
(1) Includes PPP loans totaling $20.4 million, $301.3 million and $1,581.7 million as of December 31, 2022, 2021 and 2020, respectively.
Net loans increased $1,954.2 million, or 10.7%, as of December 31, 2022 compared to December 31, 2021, primarily due to increases in residential mortgage loans, commercial mortgage loans, commercial and industrial loans and consumer loans of $890.5 million, $414.8 million, $269.2 million and $234.5 million, respectively.
The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographic location within its footprint. As of December 31, 2022, approximately $9.0 billion, or 44.1%, of the loan portfolio was comprised of commercial mortgage loans and construction loans. The Corporation's policies limit the maximum total lending commitment to an individual borrower to $100.0 million as of December 31, 2022. 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 borrower at the time the lending commitment is approved.
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The following table summarizes the industry concentrations within the commercial mortgage and the commercial and industrial loan portfolios (excluding PPP loans) as of December 31:
2022 2021
Real estate (1)
43.9 % 44.3 %
Manufacturing 6.8 5.1
Health care 6.5 6.7
Agriculture 5.4 6.1
Construction (2)
4.7 3.9
Other services (3)
4.7 5.0
Hospitality and food services 3.6 3.7
Retail 3.1 3.0
Wholesale trade 3.1 2.8
Educational services 2.8 2.7
Arts, entertainment and recreation 2.0 2.3
Professional, scientific and technical services 1.8 1.8
Transportation and warehousing 1.3 1.3
Public administration 1.2 1.5
Administrative and Support 1.1 0.6
Finance and Insurance 0.9 1.4
Other 7.1 7.8
Total 100.0 % 100.0 %
(1) Includes commercial loans to borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate.
(2) Includes commercial loans to borrowers engaged in the construction industry.
(3) Excludes public administration.
The following table presents the changes in non-accrual loans for the years ended December 31:
Commercial and
Industrial Real Estate -
Commercial
Mortgage Real Estate -
Construction Real Estate -
Residential
Mortgage Consumer and Real Estate -
Home
Equity Equipment Lease Financing Total
(dollars in thousands)
Balance at December 31, 2020 $ 31,993 $ 51,470 $ 1,395 $ 26,107 $ 9,920 $ 16,313 $ 137,198
Additions 40,722 36,664 404 12,498 4,600 1,919 96,807
Payments (27,175) (25,668) (859) (1,823) (1,883) (341) (57,749)
Charge-offs (15,337) (8,726) (39) (1,290) (3,309) (2,251) (30,952)
Transfers to OREO — — — — (274) — (274)
Transfers to accrual status (62) (925) — (223) (154) — (1,364)
Balance at December 31, 2021 30,141 52,815 901 35,269 8,900 15,640 143,666
Additions 27,627 66,212 1,104 6,151 6,363 1,188 108,645
Payments (27,260) (27,394) (637) (5,440) (2,941) (1,390) (65,062)
Charge-offs (2,390) (12,473) — (66) (4,412) (2,131) (21,472)
Transfers to OREO (22) (3,461) — — (297) — (3,780)
Transfers to accrual status (980) (5,538) — (9,620) (1,416) — (17,554)
Balance of non-accrual loans at December 31, 2022 $ 27,116 $ 70,161 $ 1,368 $ 26,294 $ 6,197 $ 13,307 $ 144,443
Non-accrual loans increased $0.8 million, or 0.5%, in 2022. Non-accrual loans as a percentage of net loans decreased to 0.71% at December 31, 2022, compared to 0.78% at December 31, 2021.
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The following table presents non-performing assets as of the dates shown:
December 31,
2022 2021 2020
(dollars in thousands)
Non-accrual loans (1) (2) (3)
$ 144,443 $ 143,666 $ 137,198
Loans 90 days or more past due and still accruing (2)
27,463 8,453 9,929
Total non-performing loans and leases 171,906 152,119 147,127
OREO (4)
5,790 1,817 4,178
Total non-performing assets $ 177,696 $ 153,936 $ 151,305
(1) The amount of interest income on non-accrual loans that was recognized in 2022 was approximately $2.2 million.
(2) Accrual of interest is generally discontinued when a loan becomes 90 days past due. 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 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 to be adequately secured and in the process of collection. Certain loans, primarily adequately collateralized residential mortgage loans, may continue to accrue interest after reaching 90 days past due.
(3) Excluded from non-performing assets as of December 31, 2022, were $29.6 million of loans modified under TDRs. These loans continue to accrue interest and are, therefore, not included in non-accrual loans.
(4) Excludes $6.0 million of residential mortgage properties for which formal foreclosure proceedings were in process as of December 31, 2022.
The following table presents non-performing loans, by type, as of the dates shown:
December 31,
2022 2021 2020
(dollars in thousands)
Real estate – commercial mortgage $ 72,634 $ 54,044 $ 52,647
Commercial and industrial 28,288 30,629 32,609
Real estate – residential mortgage 46,509 39,399 30,794
Real estate – home equity 8,809 10,924 1,550
Real estate – construction 1,368 901 12,341
Consumer 991 582 749
Equipment lease financing 13,307 15,640 16,437
Total non-performing loans $ 171,906 $ 152,119 $ 147,127
Non-performing loans to total loans 0.85 % 0.83 % 0.78 %
The following table presents TDRs as of the dates shown:
December 31,
2022 2021 2020
(dollars in thousands)
Real estate – commercial mortgage $ 3,255 $ 3,464 $ 28,451
Commercial and industrial 1,809 1,857 6,982
Real estate – residential mortgage 13,804 11,948 18,602
Real estate – home equity 10,717 12,218 14,391
Consumer — 5 —
Total accruing TDRs 29,585 29,492 68,426
Non-accrual TDRs (1)
31,853 55,945 35,755
Total TDRs $ 61,438 $ 85,437 $ 104,181
(1) Included within non-accrual loans in the preceding table.
The decrease in TDRs in 2022 compared to 2021 was primarily due to a decrease in non-accrual TDRs.
The decrease in TDRs in 2021 compared to 2020 was primarily due to a decrease in commercial mortgage loans, residential mortgage loans, and commercial and industrial loans, partially offset by an increase in non-accrual TDRs.
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Total TDRs modified during 2022 and still outstanding as of December 31, 2022, were $1.6 million. Of these loans, $0.7 million, or 40.5%, had a payment default during 2022, which the Corporation defines as a single missed scheduled payment subsequent to modification. TDRs modified during 2021 and still outstanding as of December 31, 2021 totaled $33.5 million. Of these loans, $15.5 million, or 46.4%, had a payment default during 2021, which the Corporation defines as a single missed scheduled payment, subsequent to modification.
The following table summarizes OREO, by property type, as of December 31:
2022 2021 2020
(dollars in thousands)
Commercial properties $ 3,881 $ 943 $ 1,730
Residential properties 482 669 1,496
Undeveloped land 1,427 205 952
Total OREO $ 5,790 $ 1,817 $ 4,178
As noted under the heading "Critical Accounting Policies" within Management's Discussion, the Corporation's ability to identify potential problem loans in a timely manner is key to maintaining an adequate ACL. For commercial loans, commercial mortgage loans and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. For a complete description of the Corporation's risk ratings, refer to the "Allowance for Credit Losses" section within "Note 1 - Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and equipment lease financing is based on aggregate payment history through the monitoring of delinquency levels and trends.
Total internally risk rated loans were $13.2 billion and $12.4 billion as of December 31, 2022 and 2021, respectively. The following table presents criticized and classified loans, or those with internal risk ratings of special mention (1) or substandard or lower (2) for commercial mortgage loans, commercial and industrial loans and construction loans to commercial borrowers, by class segment, as of December 31:
Special Mention (1)
Increase (Decrease) Substandard or Lower (2)
Increase (Decrease) Total Criticized and Classified Loans
2022 2021 $ % 2022 2021 $ % 2022 2021
(dollars in thousands)
Real estate - commercial mortgage $ 306,381 $ 387,279 $ (80,898) (20.9)% $ 184,014 $ 331,096 $ (147,082) (44.4)% $ 490,395 $ 718,375
Commercial and industrial 133,943 142,369 (8,426) (5.9) 95,546 152,219 (56,673) (37.2) 229,489 294,588
Real estate - construction (3)
21,603 58,841 (37,238) (63.3) 10,601 6,324 4,277 67.6 32,204 65,165
Total $ 461,927 $ 588,489 $ (126,562) (21.5)% $ 290,161 $ 489,639 $ (199,478) (40.7)% $ 752,088 $ 1,078,128
% of total risk rated loans 3.5% 4.7% 2.2% 3.9% 5.7% 8.6%
(1) Considered "criticized" loans by banking regulators
(2) Considered "classified" loans by banking regulators
(3) Excludes construction - other
As of December 31, 2022, total loans with risk ratings of special mention decreased by $126.6 million, or 21.5%, and total loans with a risk rating of substandard or lower decreased by $199.5 million, or 40.7%, resulting in an overall decrease in total criticized loans of $326.0 million, or 30.2%, compared to 2021.
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The following table presents, by class segment, a summary of delinquency status and rates, as a percentage of total
loans that do not have internal risk ratings as of December 31:
Delinquent (1)
Non-performing (2)
Total
2022 2021 2022 2021 2022 2021
$ % $ % $ % $ % $ % $ %
(dollars in thousands)
Consumer and real estate - home equity $ 16,141 0.90 % $ 9,960 0.63 % $ 9,800 0.54 % $ 11,706 0.74 % $ 25,941 1.44 % $ 21,666 1.37 %
Real estate - residential mortgage
65,270 1.38 25,877 0.67 46,509 0.98 39,542 1.03 111,779 2.36 65,419 1.70
Real estate - construction - other
3,520 0.28 1,318 0.11 — — 173 0.02 3,520 0.28 1,491 0.13
Equipment lease financing
470 0.16 253 0.09 13,307 4.45 15,641 5.83 13,777 4.61 15,894 5.92
Total $ 85,401 1.05 % $ 37,408 0.56 % $ 69,616 0.86 % $ 67,062 0.98 % $ 155,017 1.92 % $ 104,470 1.54 %
(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 and leases.
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Loans and Allowance for Credit Losses
The Corporation accounts for the credit risk associated with lending activities through the ACL and the provision for credit losses.
A summary of the Corporation's activity in ACL - loans is shown below:
2022 2021 2020
(dollars in thousands)
Net loans $ 20,279,547 $ 18,325,350 $ 18,900,820
Average balance of net loans $ 19,152,740 $ 18,627,787 $ 18,270,390
Balance of ACL at beginning of period $ 249,001 $ 277,567 $ 163,620
CECL Day 1 provision expense 7,954 — —
Initial purchased credit deteriorated loans 1,135 — —
Impact of adopting CECL on January 1, 2020 — — 45,724
Loans charged off:
Commercial and industrial (2,390) (15,337) (18,915)
Real estate – commercial mortgage (12,473) (8,726) (4,225)
Consumer and real estate - home equity (4,412) (3,309) (4,593)
Real estate – residential mortgage (66) (1,290) (620)
Real estate – construction — (39) (17)
Equipment lease financing and other (2,131) (2,251) (2,187)
Total loans charged off (21,472) (30,952) (30,557)
Recoveries of loans previously charged off:
Commercial and industrial 5,893 9,587 11,396
Real estate – commercial mortgage 3,860 2,474 1,027
Consumer and real estate - home equity 2,581 2,345 2,379
Real estate – residential mortgage 425 375 491
Real estate – construction 574 1,412 5,122
Equipment lease financing and other 759 953 605
Total recoveries 14,092 17,146 21,020
Net loans charged off (7,380) (13,806) (9,537)
Provision for credit losses 18,656 (14,760) 77,760
Balance of ACL at end of period $ 269,366 $ 249,001 $ 277,567
Provision for OBS credit exposures $ 1,411 $ 160 $ (840)
Reserve for OBS credit exposures (1)
$ 16,328 $ 14,533 $ 14,373
Selected Asset Quality Ratios %:
Net charge-offs to average loans 0.04 % 0.07 % 0.05 %
ACL - loans to total net loans 1.33 1.36 1.47
Non-performing assets (2) to total assets
0.66 0.60 0.58
Non-accrual loans to total net loans 0.71 0.78 0.72
ACL - loans to non-performing loans 157 164 189
ACL - loans to non-accrual loans 186 173 202
(1) Reserve for OBS credit exposures is recorded within other liabilities on the consolidated balance sheets. See "Note 5 - Loans and Allowance for Credit Losses" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." additional information.
(2) Includes accruing loans past due 90 days or more.
Excluding the CECL Day 1 Provision of $8.0 million for the acquired Prudential Bancorp loan portfolio, the provision for credit losses increased $33.4 million in comparison to 2021. The increase in the provision for credit losses was primarily driven by loan growth and changes to the macroeconomic outlook. See "Note 1 - Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional information.
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The following table summarizes the allocation of the ACL - loans :
2022 2021 2020
ACL - loans %
In Each Loan
Category (1)
ACL - loans %
In Each Loan
Category (1)
ACL - loans %
In Each Loan
Category (1)
(dollars in thousands)
Real estate - commercial mortgage $ 69,456 37.9 % $ 87,970 39.7 % $ 103,425 37.6 %
Commercial and industrial 70,116 22.0 67,056 22.9 74,771 30.0
Real estate - residential mortgage 83,250 23.3 54,236 21.0 51,995 16.6
Consumer, home equity, equipment lease financing and overdrafts 35,801 10.5 26,798 10.2 31,770 10.3
Real estate - construction 10,743 6.3 12,941 6.2 15,608 5.5
Total $ 269,366 100.0 % $ 249,001 100.0 % $ 277,569 100.0 %
(1) Ending loan balances as a % of total loans for the years presented.
Management believes that the $269.4 million ACL - loans as of December 31, 2022, was sufficient to cover expected losses in the loan portfolio. See additional disclosures in "Note 1 - Summary of Significant Accounting Policies," and "Note 5 - Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data;" and "Critical Accounting Policies" above.
Other Assets
Other assets increased $252.2 million, or 25.1%, to $1.3 billion as of December 31, 2022 compared to 2021, primarily due to increases in deferred Federal income taxes, cash surrender value of life insurance and equity method investments of $117.8 million, $92.2 million and $15.2 million, respectively.
Deposits and Borrowings
The following table presents ending deposits, by type, as of December 31:
Increase (Decrease)
2022 2021 $ %
(dollars in thousands)
Noninterest-bearing demand $ 7,006,388 $ 7,370,963 $ (364,575) (4.9) %
Interest-bearing demand 5,410,903 5,819,539 (408,636) (7.0)
Savings and money market deposits 6,434,621 6,403,995 30,626 0.5
Total demand and savings 18,851,912 19,594,497 (742,585) (3.8)
Brokered deposits 208,416 251,526 (43,110) (17.1)
Time deposits 1,589,210 1,727,476 (138,266) (8.0)
Total deposits $ 20,649,538 $ 21,573,499 $ (923,961) (4.3) %
Compared to 2021, total deposits decreased by $924.0 million, or 4.3%, primarily due to decreases in interest-bearing demand deposits, noninterest-bearing demand deposits and time deposits of $408.6 million, $364.6 million and $138.3 million, respectively.
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The following table presents ending borrowings, by type, as of December 31:
Increase (Decrease)
2022 2021 $ %
(dollars in thousands)
Federal funds purchased $ 191,000 $ — $ 191,000 N/M
Federal Home Loan Bank advances 1,250,000 — 1,250,000 N/M
Senior debt and subordinated debt 539,634 620,406 (80,772) (13.0)
Other borrowings (1)
890,573 417,703 472,870 113.2
Total borrowings $ 2,871,207 $ 1,038,109 $ 1,833,098 N/M
(1) Includes short-term promissory notes.
Total borrowings increased $1,833.1 million in 2022 compared to 2021, as a result of increases in FHLB advances of $1,250.0 million, customer repurchases of $472.9 million presented in other borrowings and Federal funds purchased of $191.0 million. These increases were partially offset by a decrease in senior debt and subordinated debt of $80.8 million.
The increase in total borrowings during 2022 is reflective of the decrease in total deposit funding and the increase in net loans.
Other Liabilities
Other liabilities increased $355.9 million, or 76.5%, to $821.0 million as of December 31, 2022, primarily as the result of a $360.8 million increase in derivative related liabilities.
Shareholders' Equity
Total shareholders' equity decreased $132.9 million, or 4.9%, to $2,579.8 million, or 9.6% of total assets, as of December 31, 2022. The decrease was due primarily to an increase in accumulated comprehensive loss of $412.9 million, partially offset by increases of $168.4 million from retained earnings and $87.9 million from treasury stock, primarily driven by the reissuance of treasury shares in connection with the Merger. See "Note 15 - Shareholders' Equity" in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for details of accumulated comprehensive loss.
The Corporation and its wholly owned subsidiary bank, Fulton Bank, are subject to regulatory capital requirements administered by the FRB and OCC. Failure to meet minimum capital requirements can trigger certain actions by these regulators that could have a material effect on the Corporation's financial statements. The regulations require that banks and bank holding companies maintain minimum amounts and ratios of total, Tier I and Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and Tier I capital to average assets (as defined in the regulations).
The following table summarizes the Corporation's capital ratios in comparison to regulatory requirements at December 31:
2022 2021 Regulatory
Minimum
for Capital
Adequacy Fully Phased-in, with Capital Conservation Buffers
Total Risk-Based Capital (to Risk-Weighted Assets) 13.6% 14.1% 8.0% 10.5%
Tier I Risk-Based Capital (to Risk-Weighted Assets) 10.9% 10.9% 6.0% 8.5%
Common Equity Tier I (to Risk-Weighted Assets) 10.0% 9.9% 4.5% 7.0%
Tier I Leverage Capital (to Average Assets) 9.5% 8.6% 4.0% 4.0%
In July 2013, the Federal Reserve Board approved the Basel III Rules establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards. The Basel III Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions.
The Basel III 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 Tier 1 leverage capital ratio of 4.00% of average assets; and
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• Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses as a result of which certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size.
As of January 1, 2019, the Corporation and Fulton Bank were 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 Basel III Rules use a standardized approach for risk weightings that expand 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, resulting in higher risk weights for a variety of asset categories.
As of December 31, 2022, Fulton Bank was well capitalized under the regulatory framework for prompt corrective action based on its capital ratio calculations. To be categorized as well capitalized, Fulton 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 table above. There are no conditions or events since December 31, 2022 that management believes have changed Fulton Bank's categories. See "Note 12 - Regulatory Matters," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Contractual Obligations and Off-Balance Sheet Arrangements
The Corporation has various financial obligations that require future cash payments. These obligations include payments for liabilities recorded on the Corporation's consolidated balance sheets as well as contractual obligations for purchased services.
Contractual purchase obligations to third parties that were fixed and determinable of $93 million and $96 million at December 31, 2022 and 2021, respectively, include information technology, telecommunication and data processing outsourcing contracts.
The Corporation is a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit and interest rate risk that are not recognized on the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. Commercial letters of credit are conditional commitments issued to facilitate foreign or domestic trade transactions for customers. Commitments and standby and commercial letters of credit do not necessarily represent future cash needs, as they may expire without being drawn.
The following table presents the Corporation's commitments to extend credit and letters of credit as of December 31, 2022 (dollars in thousands):
Commercial and industrial $ 4,832,858
Real estate - commercial mortgage and real estate - construction 1,972,505
Real estate - home equity 1,890,258
Total commitments to extend credit $ 8,695,621
Standby letters of credit $ 260,829
Commercial letters of credit 49,288
Total letters of credit $ 310,117
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