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 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 Annual Report on Form 10-K.
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 NIM, 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:
2023 2022 2021
(dollars in thousands, except per share)
Net income $ 284,280 $ 286,981 $ 275,497
Net income available to common shareholders $ 274,032 $ 276,733 $ 265,220
Net income available to common shareholders per share (diluted) $ 1.64 $ 1.67 $ 1.62
Operating net income available to common shareholders per share (1)
$ 1.71 $ 1.76 $ 1.62
Return on average assets 1.04 % 1.10 % 1.05 %
Operating return on average assets (1)
1.08 % 1.16 % 1.05 %
Return on average common shareholders' equity 11.24 % 11.69 % 10.64 %
Return on average common shareholders' equity (tangible) (1)
15.21 % 16.08 % 13.58 %
Net interest margin (2)
3.42 % 3.27 % 2.78 %
Efficiency ratio (1)
60.5 % 60.5 % 63.1 %
Non-performing assets to total assets 0.56 % 0.66 % 0.60 %
Net charge-offs (recoveries) to average loans 0.14 % 0.04 % 0.07 %
(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.
Fed Funds Rate
Since March 15, 2022, the FOMC increased the target rate for the Fed Funds Rate eleven times to address elevated levels of inflation, placing the target range at 5.25% - 5.50% as of February 29, 2024.
LIBOR Transition
U.S. dollar LIBOR ceased as of June 30, 2023. The Corporation has transitioned all of its products away from LIBOR. For most financial products, the most common alternative reference rates have been SOFR-based benchmarks. This is true for both new originations and legacy LIBOR contracts that were subject to amendment or a transition by their terms.
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Financial Highlights
Following is a summary of the financial highlights for the year ended December 31, 2023:
• Net Income Available to Common Shareholders and Net Income Per Share - Net income available to common shareholders was $274.0 million for the year ended December 31, 2023, a $2.7 million decrease compared to $276.7 million for the same period in 2022.
• Net Interest Income - Net interest income was $854.3 million for the year ended December 31, 2023, an increase of $72.7 million, or 9.3%, compared to the same period in 2022. The increase was driven by higher interest rates and higher average loan balances.
◦ Net Interest Margin - For the year ended December 31, 2023, NIM increased to 3.42%, or 15 bps compared to the same period in 2022, driven by a 157 bps increase in the yield on net loans, a 16 bps increase in the yield on investment securities and a 298 bps increase in the yield on other interest-earning assets, partially offset by a 139 bps increase in the cost of total interest-bearing liabilities and noninterest-bearing deposits.
◦ Net Loans - Average net loans increased $1.8 billion, or 9.3%, for the year ended December 31, 2023 compared to the same period in 2022. The increase in average net loans was largely driven by increases in average residential mortgage loans, average commercial and industrial loans, average commercial mortgage loans, average consumer loans, and average real estate construction loans of $818.2 million, $366.6 million, $352.3 million, $178.8 million, and $68.8 million, respectively.
◦ Deposits - Average deposits decreased $297.7 million, or 1.4%, for the year ended December 31, 2023 compared to the same period in 2022. The decrease in average deposits was largely due to a decrease in average noninterest-bearing demand deposits of $1.6 billion, partially offset by increases in average brokered deposits, average time deposits and average savings and money market deposits of $585.4 million, $552.4 million and $157.9 million, respectively.
◦ Borrowings and Other Interest-Bearing Liabilities - Average borrowings and other interest-bearing liabilities increased $1.4 billion for the year ended December 31, 2023 compared to the same period in 2022. The increase in borrowings and other interest-bearing liabilities was primarily due to increases in average FHLB advances and Federal funds purchased of $727.9 million and $475.3 million, respectively.
• Asset Quality - Non-performing assets decreased $23.5 million, or 13.2%, as of December 31, 2023 compared to December 31, 2022, and were 0.56% and 0.66% of total assets as of those dates, respectively. Net charge-offs to average loans outstanding was 0.14% for the year ended December 31, 2023, compared to net charge-offs to average loans outstanding of 0.04% for the same period in 2022. Net charge-offs of $29.1 million for the year ended December 31, 2023 included a charge-off of $13.3 million during the first quarter of 2023 for a commercial office loan. The provision for credit losses was $54.0 million for the year ended December 31, 2023, compared to $28.0 million for the same period of 2022. 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.
• Non-Interest Income - Non-interest income, excluding investment securities losses, for the year ended December 31, 2023 increased $1.3 million, or 0.6%, compared to the same period in 2022. The increase in non-interest income, excluding investment securities losses, was primarily due to an increase in commercial banking revenues of $5.4 million, driven by an increase in commercial customer interest rate swap fee income reflected in capital markets and an increase in wealth management of $2.7 million, partially offset by decreases in mortgage banking income of $3.8 million and in consumer banking fees of $2.3 million, largely due to a decline in overdraft fees.
• Non-Interest Expense - Non-interest expense for the year ended December 31, 2023 increased $45.5 million, or 7.2%, compared to the same period in 2022. Excluding merger-related expenses of $10.3 million for the year ended December 31, 2022, non-interest expense increased $55.8 million, or 9.0%, for the year ended December 31, 2023 compared to the same period in 2022. The increase in non-interest expense, excluding merger-related expenses, was largely driven by increases of $20.5 million in salaries and employee benefits expense, $13.0 million in FDIC insurance expense, primarily due to the adoption of a final rule to increase base deposit insurance assessment rates effective January 1, 2023 and the special assessment of $6.5 million charged to recover the loss to the DIF in
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connection with the closures of certain banks in 2023, $10.6 million in other outside services expense, $6.2 million in data processing and software expense and $2.1 million in marketing expense. The $20.5 million increase in salaries and employee benefits expense was primarily driven by annual merit increases, an increase in the number of employees, higher healthcare claims expenses and higher pension expense.
• Income Taxes - The Corporation's ETR was 18.5% for the year ended 2023, compared to 17.3% for the same period in 2022. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various programs.
Supplemental Reporting of Non-GAAP Based Financial Measures
This Annual Report on Form 10-K contains supplemental financial information, as detailed below, that has been derived by methods other than GAAP. The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of 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.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure follow:
2023 2022 2021
(dollars in thousands, except per share data)
Operating net income available to common shareholders
Net income available to common shareholders $ 274,032 $ 276,733 $ 265,220
Plus: Core deposit intangible amortization 2,308 1,029 —
Plus: Merger-related expenses — 10,328 —
Plus: CECL Day 1 Provision expense — 7,954 —
Plus: Interest rate derivative transition valuation (1)
1,855 — —
Plus: FDIC special assessment 6,494 — —
Plus: FultonFirst initiative expenses 3,197 — —
Less: Tax impact of adjustments (2,909) (4,055) —
Operating net income available to common shareholders (numerator) $ 284,977 $ 291,989 $ 265,220
Weighted average shares (diluted) (denominator) 166,769 165,472 163,307
Operating net income available to common shareholders, per share (diluted) $ 1.71 $ 1.76 $ 1.62
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2023 2022 2021
(dollars in thousands)
Operating return on average assets
Net income $ 284,280 $ 286,981 $ 275,497
Plus: Core deposit intangible amortization 2,308 1,029 —
Plus: Merger-related expenses — 10,328 —
Plus: CECL Day 1 Provision expense — 7,954 —
Plus: Interest rate derivative transition valuation (1)
1,855 — —
Plus: FDIC special assessment 6,494 — —
Plus: FultonFirst initiative expenses 3,197 — —
Less: Tax impact of adjustments (2,909) (4,055) —
Operating net income (numerator) $ 295,225 $ 302,237 $ 275,497
Total average assets $ 27,229,704 $ 25,971,484 $ 26,170,333
Less: Average net core deposit intangible (5,996) (3,915) —
Total average operating assets (denominator) $ 27,223,708 $ 25,967,569 $ 26,170,333
Operating return on average assets 1.08 % 1.16 % 1.05 %
Return on average common shareholders' equity (tangible)
Net income available to common shareholders $ 274,032 $ 276,733 $ 265,220
Plus: Intangible amortization 2,944 1,731 589
Plus: Merger-related expenses — 10,328 —
Plus: CECL Day 1 Provision expense — 7,954 —
Plus: Interest rate derivative transition valuation (1)
1,855 — —
Plus: FDIC special assessment 6,494 — —
Plus: FultonFirst initiative expenses 3,197 — —
Less: Tax impact of adjustments (3,043) (4,203) (127)
Adjusted net income available to common shareholders (numerator) $ 285,479 $ 292,543 $ 265,682
Average shareholders' equity $ 2,631,249 $ 2,560,323 $ 2,685,946
Less: Average goodwill and intangible assets (561,858) (548,102) (536,621)
Less: Average preferred stock (192,878) (192,878) (192,878)
Average tangible common shareholders' equity (denominator) $ 1,876,513 $ 1,819,343 $ 1,956,447
Return on average common shareholders' equity (tangible) 15.21 % 16.08 % 13.58 %
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2023 2022 2021
(dollars in thousands)
Efficiency ratio
Non-interest expense $ 679,207 $ 633,728 $ 617,830
Less: Amortization of tax credit investments — (2,783) (6,187)
Less: Intangible amortization (2,944) (1,731) (589)
Less: Merger-related expenses — (10,328) —
Less: Debt extinguishment gain (cost) 720 — (33,249)
Less: FDIC special assessment (6,494) — —
Less: FultonFirst initiative expenses (3,197) — —
Non-interest expense (numerator) $ 667,292 $ 618,886 $ 577,805
Net interest income $ 854,286 $ 781,634 $ 663,730
Tax equivalent adjustment 17,811 14,995 12,296
Plus: Total non-interest income 227,678 227,130 273,745
Plus: Interest rate derivative transition valuation (1)
1,855 — —
Less: Investment securities losses (gains), net 733 27 (33,516)
Total revenue (denominator) $ 1,102,363 $ 1,023,786 $ 916,255
Efficiency ratio 60.5 % 60.5 % 63.1 %
(1) Resulting from the reference rate transition from LIBOR to SOFR in the Corporation's commercial customer interest rate swap program.
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 - The 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.
Loans Evaluated Collectively : Loans evaluated collectively for expected credit losses include all accruing loans and non-accrual loans where the total commitment amount is less than $1 million. In determining the ACL, the Corporation uses three inputs to model the estimate. These inputs are the PD rate which estimates the likelihood that a borrower will be unable to meet its debt obligations, the LGD rate which estimates the percentage of an asset that is lost if a borrower defaults, and the EAD balance 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 indicators of default. The external variables are economic variables obtained from third-party forecasts.
The PD models are transition matrix models that utilize historical credit observations and incorporate economic forecasts to project future default rates using a linear regression methodology for each loan segment. The LGD model uses a vintage loss approach that estimates LGD rates based on the bank’s historical loss experience for each loan segment. The EAD incorporates a prepayment rate and applies the PD rates to estimate the projected exposure at default across the life of each loan. The ACL is calculated by applying the LGD to the EAD at each period across the life of each loan.
The ACL incorporates the Corporation’s historical credit observations, current conditions, and reasonable and supportable forecasts that are based on the projected performance of specific economic variables that are statistically correlated with historical PD rates. The reasonable and supportable forecast extends to 24 months and reverts back to an average PD rate using a straight-line reversion methodology over a 12 month period.
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The ACL is highly sensitive to the economic forecasts used to develop the reserve. As such, the calculation of the ACL is inherently subjective and requires management to exercise judgment.
The ACL may include qualitative adjustments intended to capture the impact of uncertainties not reflected in the quantitative models. In determining qualitative adjustments, management considers changes in national, regional, and local economic and business conditions and their impact on the lending environment, including underwriting standards and other factors affecting credit losses over the remaining life of each loan.
The ACL for loans was $293.4 million and $269.4 million on December 31, 2023 and December 31, 2022, respectively. The increase of $24.0 million was primarily a result of increased loan growth, changes to the macroeconomic outlook and risk migration.
The Corporation performs loan loss sensitivity analysis on a quarterly basis to determine the impact of varying economic conditions based on third-party forecasts. 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 o f approximately $21.6 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 $64.4 million and $60.0 million for the years ended December 31, 2023 and December 31, 2022, 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 2023 compared to 2022 and 2021. 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.
2023 2022 2021
Average
Balance Interest (1)
Yield/
Rate Average
Balance Interest (1)
Yield/
Rate Average
Balance Interest (1)
Yield/
Rate
(dollars in thousands)
ASSETS
Interest-earning assets:
Net loans (2)
$ 20,929,302 $ 1,166,376 5.57 % $ 19,152,740 $ 765,603 4.00 % $ 18,627,787 $ 644,387 3.46 %
Investment securities (3)
4,210,010 109,325 2.59 4,364,627 106,115 2.43 3,673,250 86,325 2.35
Other interest-earning assets 387,360 15,346 3.96 829,705 8,115 0.98 2,054,165 4,996 0.24
Total interest-earning assets 25,526,672 1,291,047 5.06 24,347,072 879,833 3.61 24,355,202 735,708 3.02
Noninterest-earning assets:
Cash and due from banks 215,649 156,050 165,942
Premises and equipment 219,315 220,982 228,708
Other assets 1,553,284 1,505,277 1,686,053
Less: ACL - loans (4)
(285,216) (257,897) (265,572)
Total Assets $ 27,229,704 $ 25,971,484 $ 26,170,333
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits $ 5,582,930 $ 62,494 1.12 % $ 5,593,942 $ 8,219 0.15 % $ 5,979,479 $ 3,662 0.06 %
Savings and money market deposits 6,616,087 122,340 1.85 6,458,165 16,642 0.26 6,306,967 4,936 0.08
Brokered deposits 847,795 43,635 5.15 262,359 4,097 1.56 286,901 1,096 0.38
Time deposits 2,170,245 63,735 2.94 1,617,804 14,871 0.92 1,939,446 20,311 1.05
Total interest-bearing deposits 15,217,057 292,204 1.92 13,932,270 43,829 0.31 14,512,793 30,005 0.21
Borrowings and other interest-bearing liabilities 2,771,330 126,746 4.54 1,358,357 39,375 2.89 1,297,963 29,677 2.29
Total interest-bearing liabilities 17,988,387 418,950 2.32 15,290,627 83,204 0.54 15,810,756 59,682 0.38
Noninterest-bearing liabilities:
Demand deposits 5,939,799 7,522,304 7,211,153
Other liabilities 670,269 598,230 462,478
Total Liabilities 24,598,455 23,411,161 23,484,387
Total deposits 21,156,856 1.38% 21,454,574 0.20% 21,723,946 0.14%
Total interest-bearing liabilities and noninterest-bearing deposits 23,928,186 1.75% 22,812,931 0.36% 23,021,909 0.26%
Shareholders' equity 2,631,249 2,560,323 2,685,946
Total Liabilities and Shareholders' Equity $ 27,229,704 $ 25,971,484 $ 26,170,333
Net interest income/net interest margin (FTE) 872,097 3.42 % 796,629 3.27 % 676,026 2.78 %
Tax equivalent adjustment (17,811) (14,995) (12,296)
Net interest income $ 854,286 $ 781,634 $ 663,730
(1) Presented on a fully taxable-equivalent basis using a 21% federal tax rate and statutory interest expense disallowances.
(2) Average balances include non-performing loans.
(3) Average balances include amortized historical cost for AFS securities; the related unrealized holding gains (losses) are included in other assets.
(4) ACL - loans relates to the ACL for net loans and does not include the ACL for OBS credit exposures, which is included in other liabilities.
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Comparison of 2023 to 2022
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:
2023 vs. 2022
Increase (decrease) due to change in
Volume Yield/Rate Net
(dollars in thousands)
Interest income on:
Net loans (1)
$ 76,608 $ 324,165 $ 400,773
Investment securities (3,763) 6,973 3,210
Other interest-earning assets (6,298) 13,529 7,231
Total interest income $ 66,547 $ 344,667 $ 411,214
Interest expense on:
Demand deposits $ (17) $ 54,292 $ 54,275
Savings and money market deposits 421 105,277 105,698
Brokered deposits 19,464 20,074 39,538
Time deposits 6,577 42,287 48,864
Borrowings and other interest-bearing liabilities 56,410 30,961 87,371
Total interest expense $ 82,855 $ 252,891 $ 335,746
(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 2022, FTE total interest income for 2023 increased $411.2 million due to increases of $344.7 million attributable to changes in yield and $66.5 million attributable to changes in volume. The increase due to changes in yield was largely due to an increase in net loans. The increase due to changes in volume was due to an increase in average net loans, partially offset by decreases in average other interest-earning assets and investment securities.
The yield on average interest-earning assets increased 145 bps in 2023 compared to 2022.
In 2023, interest expense increased $335.7 million compared to 2022, primarily driven by an increase in rate on interest-bearing liabilities resulting in a $252.9 million increase in interest expense. The increase in interest expense attributable to rate was driven by the increases in savings and money market deposits, interest-bearing demand deposits, time deposits, borrowings and other interest-bearing liabilities and brokered deposits. The increase in interest expense attributable to volume was $82.9 million primarily driven by increases in borrowings and other interest-bearing liabilities and brokered deposits.
The rate on average interest-bearing liabilities increased 178 bps in 2023 compared to 2022.
Average loans and average FTE yields, by type, are summarized in the following table:
2023 2022 Increase (Decrease)
Balance Yield Balance Yield $ %
(dollars in thousands)
Real estate - commercial mortgage $ 7,876,076 5.97 % $ 7,523,806 4.00 % $ 352,270 4.7 %
Commercial and industrial 4,596,742 6.27 4,230,133 4.13 366,609 8.7
Real estate - residential mortgage 5,079,739 3.76 4,261,527 3.38 818,212 19.2
Real estate - home equity 1,060,396 6.95 1,101,142 4.60 (40,746) (3.7)
Real estate - construction 1,247,336 6.81 1,178,550 4.14 68,786 5.8
Consumer 748,089 5.94 569,305 5.11 178,784 31.4
Leases and other loans (1)
320,924 4.37 288,277 6.04 32,647 11.3
Total loans $ 20,929,302 5.57 % $ 19,152,740 4.00 % $ 1,776,562 9.3 %
(1) Consists of equipment lease financing, overdrafts and net origination fees and costs.
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During 2023, average loans increased $1.8 billion, or 9.3%, compared to 2022. The increase was largely driven by increases in average residential mortgage loans, average commercial and industrial loans, average commercial mortgage loans, average consumer loans and average construction loans of $818.2 million, $366.6 million, $352.3 million, $178.8 million and $68.8 million, respectively. The yield on total loans increased 157 bps to 5.57% in 2023 compared to 4.00% in 2022.
Average deposits and interest rates, by type, are summarized in the following table:
2023 2022 Increase (Decrease)
Balance Rate Balance Rate $ %
(dollars in thousands)
Noninterest-bearing demand $ 5,939,799 — % $ 7,522,304 — % $ (1,582,505) (21.0) %
Interest-bearing demand 5,582,930 1.12 5,593,942 0.15 (11,012) (0.2)
Savings and money market deposits 6,616,087 1.85 6,458,165 0.26 157,922 2.4
Total demand deposits and savings and money market deposits 18,138,816 1.02 19,574,411 0.13 (1,435,595) (7.3)
Brokered deposits 847,795 5.15 262,359 1.56 585,436 N/M
Time deposits 2,170,245 2.94 1,617,804 0.92 552,441 34.1
Total deposits $ 21,156,856 1.38 % $ 21,454,574 0.20 % $ (297,718) (1.4) %
The cost of total deposits increased 118 bps to 1.38% in 2023 compared to 0.20% in 2022, primarily due to rising interest rates and a change in mix of deposits. Average deposits decreased $297.7 million driven by a $1.6 billion decrease in average noninterest-bearing demand deposits, partially offset by increases in average brokered deposits, average time deposits and average savings and money market deposits of $585.4 million, $552.4 million and $157.9 million, respectively.
Average borrowings and interest rates, by type, are summarized in the following table:
2023 2022 Increase (Decrease)
Balance Rate Balance Rate $ %
(dollars in thousands)
Federal funds purchased $ 566,379 5.30 % $ 91,125 3.21 % $ 475,254 N/M
Federal Home Loan Bank advances 922,164 5.05 194,295 3.77 727,869 N/M
Senior debt and subordinated debt 539,726 3.96 564,337 3.94 (24,611) (4.4)
Other borrowings and other interest-bearing liabilities (1)
743,061 3.77 508,600 1.34 234,461 46.1
Total borrowings and other interest-bearing liabilities $ 2,771,330 4.54 % $ 1,358,357 2.89 % $ 1,412,973 104.0 %
(1) Includes repurchase agreements, short-term promissory notes, capital leases and interest-bearing collateral.
Average borrowings and other interest-bearing liabilities increased $1.4 billion during 2023 compared to 2022, primarily as a result of an increase in average net loans and a decrease in average total deposits. Average FHLB advances, average Federal funds purchased and average other borrowings and other interest-bearing liabilities increased $727.9 million, $475.3 million and $234.5 million, respectively. See "Note 10 - Borrowings" of the Notes to Consolidated Financial Statements for additional details.
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Non-Interest Income
The following table presents the components of non-interest income:
Increase (Decrease)
2023 2022 $ %
(dollars in thousands)
Commercial banking:
Merchant and card $ 29,205 $ 28,276 $ 929 3.3 %
Cash management 23,340 23,729 (389) (1.6)
Capital markets 15,654 12,256 3,398 27.7
Other commercial banking 12,961 11,518 1,443 12.5
Total commercial banking 81,160 75,779 5,381 7.1
Wealth management 75,541 72,843 2,698 3.7
Consumer banking:
Card 26,343 24,472 1,871 7.6
Overdraft 11,416 15,480 (4,064) (26.3)
Other consumer banking 9,438 9,544 (106) (1.1)
Total consumer banking 47,197 49,496 (2,299) (4.6)
Mortgage banking 10,388 14,204 (3,816) (26.9)
Other 14,125 14,835 (710) (4.8)
Non-interest income before investment securities gains (losses) 228,411 227,157 1,254 0.6
Investment securities gains (losses), net (733) (27) (706) N/M
Total Non-Interest Income $ 227,678 $ 227,130 $ 548 0.2 %
Non-interest income before investment securities gains (losses) increased $1.3 million, or 0.6%, during 2023 compared to 2022. The increase in non-interest income was primarily due to increases in commercial banking revenues of $5.4 million, largely driven by an increase in commercial customer interest rate swap fee income reflected in capital markets, an increase in wealth management of $2.7 million, due to an increase in assets under management, and an increase in the cash surrender value of bank owned life insurance agreements of $1.7 million, reflected in other non-interest income, partially offset by decreases in mortgage banking income of $3.8 million, mainly due to lower sales volumes and lower gains on sales margins, consumer banking income of $2.3 million, driven largely by decreases in overdraft fees, and an $1.8 million reduction in other non-interest income to reflect market valuation movement in certain of the Corporation's legacy commercial customer back-to-back interest rate swap transactions resulting from the transition from LIBOR to SOFR.
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Non-Interest Expense
The following table presents the components of non-interest expense:
Increase (Decrease)
2023 2022 $ %
(dollars in thousands)
Salaries and employee benefits $ 377,417 $ 356,884 $ 20,533 5.8 %
Data processing and software 66,471 60,255 6,216 10.3
Net occupancy 58,019 56,195 1,824 3.2
Other outside services 47,724 37,152 10,572 28.5
FDIC insurance 25,565 12,547 13,018 103.8
Equipment 14,390 14,033 357 2.5
Marketing 9,004 6,885 2,119 30.8
Professional fees 8,392 9,123 (731) (8.0)
Intangible amortization 2,944 1,731 1,213 70.1
Merger-related expenses — 10,328 (10,328) N/M
Other 69,281 68,595 686 1.0
Total Non-Interest Expense $ 679,207 $ 633,728 $ 45,479 7.2 %
Non-interest expense in 2023 increased $45.5 million, or 7.2%, compared to 2022. Excluding merger-related expenses of $10.3 million in 2022, non-interest expense increased $55.8 million, or 9.0%, in 2023 compared to 2022. The increase in non-interest expense, excluding merger-related expenses, was primarily due to increases of $20.5 million in salaries and employee benefits expense, $13.0 million in FDIC insurance expense, primarily due to the adoption of a final rule to increase base deposit insurance assessment rates effective January 1, 2023, and the special assessment of $6.5 million charged to recover the loss to the DIF in connection with the closures of certain banks in 2023, $10.6 million in other outside services expense largely due to a number of corporate initiatives, $6.2 million in data processing and software expense due to ongoing investment in technology and customer growth and $2.1 million in marketing expense primarily due to a targeted customer deposit acquisition program and brand marketing campaigns. The $20.5 million increase in salaries and employee benefits expense was largely due to annual merit increases, an increase in the number of employees, higher healthcare claims expense and higher pension expense.
Income Taxes
Income tax expense for 2023 was $64.4 million, a $4.4 million increase compared to 2022. The ETR was 18.5% in 2023 compared to 17.3% in 2022. The increase in income tax expense in 2023 resulted primarily from the higher ETR. 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 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
Other interest-earning assets (4,364) 7,483 3,119
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, interest-bearing demand deposits and brokered deposits.
Average loans and average FTE yields, by type, are summarized in the following table:
2022 2021 Increase (Decrease)
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
4,230,133 4.13 5,052,856 2.73 (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 finance leasing 249,595 3.99 252,104 3.89 (2,509) (1.0)
Other (1)
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) 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 $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 Paycheck Protection Program loans upon forgiveness by the SBA.
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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 74 bps in comparison to 2021, contributing $7.5 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 $4.4 million decrease to FTE interest income.
Average deposits and interest rates, by type, are summarized in the following table:
2022 2021 Increase (Decrease)
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 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:
2022 2021 Increase (Decrease)
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 and other interest-bearing liabilities (1)
508,600 1.34 513,900 0.12 (5,300) (1.0)
Total borrowings and other interest-bearing liabilities $ 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 and other interest-bearing liabilities increased $60.4 million, or 4.7%, and the rate on total average borrowings and other interest-bearing liabilities 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 FHLB 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
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
Wealth management 72,843 71,798 1,045 1.5
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
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 (losses) 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) %
Non-interest income before investment securities gains (losses) 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 interest rate 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 gain on 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
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 68,595 71,027 (2,432) (3.4)
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 expense 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 employee 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 expense 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 Corporation's ETR was 17.3% for the year ended 2022, compared to 17.6% for the same period in 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 investments in community development projects that generate tax credits under various programs.
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FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets.
December 31, Increase (Decrease)
2023 2022 $ %
(dollars in thousands)
Assets
Cash and cash equivalents $ 549,710 $ 681,921 $ (132,211) (19.4) %
FRB and FHLB Stock 124,405 130,186 (5,781) (4.4)
Loans held for sale 15,158 7,264 7,894 108.7
Investment securities 3,666,274 3,968,023 (301,749) (7.6)
Net loans, less ACL - loans 21,057,690 20,010,181 1,047,509 5.2
Net premises and equipment 222,881 225,141 (2,260) (1.0)
Goodwill and intangibles 560,687 560,824 (137) —
Other assets 1,375,110 1,348,162 26,948 2.0
Total Assets $ 27,571,915 $ 26,931,702 $ 640,213 2.4 %
Liabilities and Shareholders' Equity
Deposits $ 21,537,623 $ 20,649,538 $ 888,085 4.3 %
Borrowings 2,487,526 2,871,207 (383,681) (13.4)
Other liabilities 786,627 831,200 (44,573) (5.4)
Total Liabilities 24,811,776 24,351,945 459,831 1.9
Total Shareholders' Equity 2,760,139 2,579,757 180,382 7.0
Total Liabilities and Shareholders' Equity $ 27,571,915 $ 26,931,702 $ 640,213 2.4 %
Investment Securities
The table below presents the carrying amount of investment securities:
December 31, Increase (Decrease)
2023 2022 $ %
(dollars in thousands)
Available for Sale
U.S. Government securities $ 42,161 $ 218,485 $ (176,324) (80.7) %
U.S. Government-sponsored agency securities 1,010 1,008 2 0.2
State and municipal securities 1,072,013 1,105,712 (33,699) (3.0)
Corporate debt securities 440,551 422,309 18,242 4.3
Collateralized mortgage obligations 111,434 134,033 (22,599) (16.9)
Residential mortgage-backed securities 196,795 212,698 (15,903) (7.5)
Commercial mortgage-backed securities 534,388 552,522 (18,134) (3.3)
Total available for sale securities $ 2,398,352 $ 2,646,767 $ (248,415) (9.4) %
Held to Maturity
Residential mortgage-backed securities $ 407,075 $ 457,325 $ (50,250) (11.0) %
Commercial mortgage-backed securities 860,847 863,931 (3,084) (0.4)
Total held to maturity securities $ 1,267,922 $ 1,321,256 $ (53,334) (4.0) %
Total investment securities $ 3,666,274 $ 3,968,023 $ (301,749) (7.6) %
Compared to December 31, 2022, total AFS securities at December 31, 2023 decreased $248.4 million, or 9.4%, primarily due to decreases in U.S. Government securities, state and municipal securities, collateralized mortgage obligations, commercial
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mortgage-backed securities and residential mortgage-backed securities of $176.3 million $33.7 million, $22.6 million, $18.1 million and $15.9 million, respectively.
At December 31, 2023, total HTM securities decreased $53.3 million, or 4.0%, primarily driven by a decrease in residential mortgage-backed securities of $50.3 million due to payments.
Loans
The following table presents ending loans outstanding, by type:
December 31, Increase (Decrease)
2023 2022 $ %
(dollars in thousands)
Real estate - commercial mortgage $ 8,127,728 $ 7,693,835 $ 433,893 5.6 %
Commercial and industrial (1)
4,545,552 4,473,004 72,548 1.6
Real estate - residential mortgage 5,325,923 4,737,279 588,644 12.4
Real estate - home equity 1,047,184 1,102,838 (55,654) (5.0)
Real estate - construction 1,239,075 1,269,925 (30,850) (2.4)
Consumer 729,318 699,179 30,139 4.3
Leases and other loans (2)
336,314 303,487 32,827 10.8
Net loans $ 21,351,094 $ 20,279,547 $ 1,071,547 5.3 %
(1) Includes unearned income of $41.0 thousand and $4.5 million as of December 31, 2023 and 2022, respectively.
(2) Includes unearned income of $38.0 million and $24.8 million as of December 31, 2023 and 2022, respectively.
During 2023, net loans increased $1.1 billion, or 5.3%, compared to December 31, 2022, primarily due to increases in residential mortgage loans, commercial mortgage loans and commercial and industrial loans of $588.6 million, $433.9 million and $72.5 million, respectively, partially offset by decreases in home equity loans and construction loans of $55.7 million and $30.9 million, respectively.
The Corporation does not have a significant concentration of credit risk with any single borrower. As of December 31, 2023, approximately $9.4 billion, or 43.9%, of the loan portfolio was comprised of commercial mortgage loans and construction loans. 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:
December 31,
2023 2022
Real estate (1)
46.6 % 43.9 %
Health care 6.6 6.5
Manufacturing 6.1 6.8
Agriculture 5.6 5.4
Other services 4.5 4.7
Construction (2)
4.1 4.7
Hospitality and food services 3.6 3.6
Retail 3.3 3.1
Wholesale trade 3.2 3.1
Educational services 2.9 2.8
Professional, scientific and technical services 2.2 1.8
Arts, entertainment and recreation 1.9 2.0
Transportation and warehousing 1.7 1.3
Finance and Insurance 1.3 0.9
Administrative and Support 1.1 1.1
Public administration 1.0 1.2
Other 4.3 7.1
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. Real estate commercial office represents 3% of total loans.
(2) Includes commercial loans to borrowers engaged in the construction industry.
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, 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 at December 31, 2022 27,116 70,161 1,368 26,294 6,197 13,307 144,443
Additions 46,358 31,004 438 792 8,416 1,520 88,528
Payments (24,276) (38,296) (465) (1,881) (2,245) (554) (67,717)
Charge-offs (9,246) (17,999) — (62) (7,514) (4,380) (39,201)
Transfers to OREO — — — (1,793) — — (1,793)
Transfers to accrual status — (65) — (2,526) (49) — (2,640)
Balance at December 31, 2023 $ 39,952 $ 44,805 $ 1,341 $ 20,824 $ 4,805 $ 9,893 $ 121,620
During 2023, non-accrual loans decreased $22.8 million, or 15.8%, largely due to payments and charge-offs, partially offset by additions to non-accrual loans. During 2023, non-accrual loans as a percentage of net loans decreased to 0.57%, compared to 0.71% as of December 31, 2022.
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The following table presents non-performing assets:
December 31,
2023 2022 2021
(dollars in thousands)
Non-accrual loans (1)(2)
$ 121,620 $ 144,443 $ 143,666
Loans 90 days or more past due and still accruing (2)
31,721 27,463 8,453
Total non-performing loans and leases 153,341 171,906 152,119
OREO (3)
896 5,790 1,817
Total non-performing assets $ 154,237 $ 177,696 $ 153,936
Non-accrual loans to total loans 0.57 % 0.71 % 0.78 %
Non-performing loans to total loans 0.72 % 0.85 % 0.83 %
Non-performing assets to total assets 0.56 % 0.66 % 0.60 %
ACL to non-performing loans 191 % 157 % 164 %
(1) The amount of interest income on non-accrual loans that was recognized in 2023, 2022 and 2021was approximately $1.5 million, $2.2 million and $1.3
million, respectively.
(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) Excludes $10.9 million, $6.0 million and $6.4 million of residential mortgage properties for which formal foreclosure proceedings were in process as of
December 31, 2023, 2022 and 2021, respectively.
The following table presents non-performing loans:
December 31,
2023 2022 2021
(dollars in thousands)
Real estate - commercial mortgage $ 46,527 $ 72,634 $ 54,044
Commercial and industrial 41,020 28,288 30,629
Real estate - residential mortgage 42,029 46,509 39,399
Real estate - home equity 10,079 8,809 10,924
Real estate - construction 2,876 1,368 901
Consumer 799 991 582
Leases and other loans 10,011 13,307 15,640
Total non-performing loans $ 153,341 $ 171,906 $ 152,119
Non-performing loans to total loans 0.72 % 0.85 % 0.83 %
The following table presents the amortized cost basis of loans modified to borrowers experiencing financial difficulty:
December 31,
2023
(dollars in thousands)
Real estate - commercial mortgage $ 2,944
Commercial and industrial 11,970
Real estate - residential mortgage 9,092
Total $ 24,006
There were no loans modified due to borrowers experiencing financial difficulty that defaulted during 2023.
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The following table summarizes OREO, by property type:
December 31,
2023 2022 2021
(dollars in thousands)
Commercial properties $ 165 $ 3,881 $ 943
Residential properties 229 482 669
Undeveloped land 502 1,427 205
Total OREO $ 896 $ 5,790 $ 1,817
The Corporation's ability to identify potential problem loans in a timely manner is important to maintaining an adequate ACL. For commercial and industrial loans, commercial mortgage loans and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and leases and other loans is based on payment history through the monitoring of delinquency levels and trends.
Total internally risk-rated loans were $13.7 billion and $13.2 billion as of December 31, 2023 and 2022, respectively, of which $0.9 million and $0.8 million were criticized and classified loans, 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 mortgages, commercial and industrial loans and construction loans to commercial borrowers, by class segment:
Special Mention (1)
Increase (Decrease) Substandard or Lower (2)
Increase (Decrease) Total Criticized and Classified Loans
December 31, December 31, December 31,
2023 2022 $ % 2023 2022 $ % 2023 2022
(dollars in thousands)
Real estate - commercial mortgage $ 302,553 $ 306,381 $ (3,828) (1.2)% $ 224,774 $ 184,014 $ 40,760 22.2% $ 527,327 $ 490,395
Commercial and industrial 135,837 133,943 1,894 1.4 196,500 95,546 100,954 105.7 332,337 229,489
Real estate - construction (3)
38,520 21,603 16,917 78.3 26,771 10,601 16,170 152.5 65,291 32,204
Total $ 476,910 $ 461,927 $ 14,983 3.2% $ 448,045 $ 290,161 $ 157,884 54.4% $ 924,955 $ 752,088
% of total risk-rated loans 3.5% 3.5% 3.3% 2.2% 6.8% 5.7%
(1) Considered "criticized" loans by banking regulators.
(2) Considered "classified" loans by banking regulators.
(3) Excludes construction - other.
Total loans risk-rated special mention increased by $15.0 million, or 3.2%, compared to December 31, 2022. Total loans risk- rated substandard or lower increased by $157.9 million, or 54.4%, compared to December 31, 2022, primarily due to borrower performance in both commercial and industrial loans and commercial real estate loans. Total criticized and classified loans increased $172.9 million, or 23.0%, compared to December 31, 2022.
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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:
Delinquent (1)
Non-performing (2)
Total
December 31, December 31, December 31, December 31, December 31, December 31,
2023 2022 2023 2022 2023 2022
$ % $ % $ % $ % $ % $ %
(dollars in thousands)
Consumer and real estate - home equity $ 20,345 1.15 % $ 16,141 0.90 % $ 10,878 0.61 % $ 9,800 0.54 % $ 31,223 1.76 % $ 25,941 1.44 %
Real estate - residential mortgage 59,983 1.13 65,270 1.38 42,029 0.79 46,509 0.98 102,012 1.92 111,779 2.36
Real estate - construction 4,636 0.37 3,520 0.28 1,535 0.12 — — 6,171 0.50 3,520 0.28
Leases and other loans 868 0.26 470 0.16 10,011 2.98 13,307 4.45 10,879 3.23 13,777 4.61
Total $ 85,832 0.99 % $ 85,401 1.05 % $ 64,453 0.74 % $ 69,616 0.86 % $ 150,285 1.74 % $ 155,017 1.92 %
(1) Includes accruing loans 30 days to 89 days past due.
(2) Includes accruing loans 90 days or more past due and 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.
The following table presents the activity in the ACL:
December 31, December 31, December 31,
2023 2022 2021
(dollars in thousands)
Net loans $ 21,351,094 $ 20,279,547 $ 18,325,350
Average balance of net loans $ 20,929,302 $ 19,152,740 $ 18,627,787
Balance of ACL at beginning of period $ 269,366 $ 249,001 $ 277,567
CECL Day 1 provision expense — 7,954 —
Initial purchased credit deteriorated loans — 1,135 —
Loans charged off:
Commercial and industrial (9,246) (2,390) (15,337)
Real estate - commercial mortgage (17,999) (12,473) (8,726)
Consumer and real estate - home equity (7,514) (4,412) (3,309)
Real estate - residential mortgage (62) (66) (1,290)
Real estate - construction — — (39)
Leases and other loans (4,380) (2,131) (2,251)
Total loans charged off (39,201) (21,472) (30,952)
Recoveries of loans previously charged off:
Commercial and industrial 3,473 5,893 9,587
Real estate - commercial mortgage 1,076 3,860 2,474
Consumer and real estate - home equity 3,198 2,581 2,345
Real estate - residential mortgage 421 425 375
Real estate - construction 858 574 1,412
Leases and other loans 1,103 759 953
Total recoveries 10,129 14,092 17,146
Net loans charged off (recoveries) (29,072) (7,380) (13,806)
Provision for credit losses (1)
53,110 18,656 (14,760)
Balance of ACL at end of period $ 293,404 $ 269,366 $ 249,001
Provision for OBS credit exposures $ 926 $ 1,411 $ 160
Reserve for OBS credit exposures (2)
$ 17,254 $ 16,328 $ 14,533
Selected Asset Quality Ratios %:
Net charge-offs to average loans 0.14 % 0.04 % 0.07 %
ACL - loans to total net loans 1.37 1.33 1.36
Non-performing assets (3) to total assets
0.56 0.66 0.60
Non-accrual loans to total net loans 0.57 0.71 0.78
ACL - loans to non-performing loans 191 157 164
ACL - loans to non-accrual loans 241 186 173
(1) Provision for credit losses includes only the portion related to net loans.
(2) Reserve for OBS credit exposures is recorded within other liabilities on the consolidated balance sheets.
(3) Includes accruing loans past due 90 days or more.
The provision for credit losses, specific to loans, for 2023 was $53.1 million, compared to a provision for credit losses, specific to loans, of $26.6 million, which included an $8.0 million CECL Day 1 Provision recorded in 2022. The increase in the provision for credit losses for net loans was primarily driven by loan growth, changes to the macroeconomic outlook, higher net loan charge-offs and migration of internally risk-rated loans into special mention and substandard or lower categories.
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The following table summarizes the allocation of the ACL - loans :
December 31, 2023 December 31, 2022 December 31, 2021
ACL - loans % to Total ACL - loans (1)
% to Total Net Loans (2)
ACL - loans % to Total ACL - loans (1)
% to Total Net Loans (2)
ACL - loans % to Total ACL - loans (1)
% to Total Net Loans (2)
(dollars in thousands)
Real estate - commercial mortgage $ 112,565 38.4 % 38.1 % $ 69,456 25.8 % 37.9 % $ 87,970 35.3 % 39.7 %
Commercial and industrial 74,266 25.3 21.3 70,116 26.0 22.1 67,056 26.9 23.0
Real estate - residential mortgage 73,286 25.0 24.9 83,250 30.9 23.4 54,236 21.8 21.0
Consumer, home equity and leases and other loans 20,992 7.1 9.9 35,801 13.3 10.3 26,798 10.8 10.1
Real estate - construction 12,295 4.2 5.8 10,743 4.0 6.3 12,941 5.2 6.2
Total $ 293,404 100.0 % 100 % $ 269,366 100.0 % 100 % $ 249,001 100.0 % 100.0 %
(1) Ending ACL - loan portfolio segment balance as a % of total ACL - loans.
(2) Ending loan portfolio segment balances as a % of total net loans for the periods presented.
Management believes that the $293.4 million ACL - loans as of December 31, 2023 is sufficient to cover expected credit losses in the loan portfolio.
Deposits and Borrowings
The following table presents ending deposits, by type:
December 31, Increase (Decrease)
2023 2022 $ %
(dollars in thousands)
Noninterest-bearing demand $ 5,314,094 $ 7,006,388 $ (1,692,294) (24.2) %
Interest-bearing demand 5,722,695 5,410,903 311,792 5.8
Savings and money market deposits 6,616,901 6,434,621 182,280 2.8
Total demand and savings 17,653,690 18,851,912 (1,198,222) (6.4)
Brokered deposits 1,144,692 208,416 936,276 N/M
Time deposits 2,739,241 1,589,210 1,150,031 72.4
Total deposits $ 21,537,623 $ 20,649,538 $ 888,085 4.3 %
During 2023, total deposits increased by $888.1 million, or 4.3%, compared to December 31, 2022. The increase in total deposits was primarily due to increases in time deposits, brokered deposits, interest-bearing demand deposits and savings and money market deposits of $1.2 billion, $936.3 million, $311.8 million and $182.3 million, respectively, partially offset by a decrease in noninterest-bearing demand deposits $1.7 billion. The shift from noninterest-bearing demand deposits to interest-bearing deposits was mainly due to rising interest rates.
Total uninsured deposits (excluding intra-Company deposits) were estimated to be $7.2 billion and $7.8 billion at December 31, 2023 and December 31, 2022, respectively.
The following table presents ending borrowings, by type:
December 31, Increase (Decrease)
2023 2022 $ %
(dollars in thousands)
Federal funds purchased $ 240,000 $ 191,000 $ 49,000 25.7
Federal Home Loan Bank advances 1,100,000 1,250,000 (150,000) (12.0)
Senior debt and subordinated debt 535,384 539,634 (4,250) (0.8)
Other borrowings (1)
612,142 890,573 (278,431) (31.3)
Total borrowings $ 2,487,526 $ 2,871,207 $ (383,681) (13.4) %
(1) Includes repurchase agreements, short-term promissory notes and capital leases.
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During 2023, total borrowings decreased $383.7 million, or 13.4%, compared to December 31, 2022. The decrease in total borrowings was due to decreases in other borrowings of $278.4 million, FHLB advances of $150.0 million and senior and subordinated debt of $4.3 million, partially offset by an increase in Federal funds purchased of $49.0 million.
Other Liabilities
During 2023, other liabilities decreased $69.5 million, or 8.5%, compared to December 31, 2022, primarily due to a decrease in derivative related liabilities.
Shareholders' Equity
During 2023, total shareholders' equity increased $180.4 million, or 7.0%, to $2.8 billion, or 10.0% of total assets, as of December 31, 2023. The increase was due primarily to an increase of $168.5 million in retained earnings and a reduction of $73.2 million in accumulated other comprehensive loss, partially offset by a $75.3 million increase in treasury stock largely due to common stock repurchases. 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.
Regulatory Capital
The Corporation and its wholly-owned subsidiary bank, Fulton Bank, are subject to the Capital Rules administered by banking regulators. Failure to meet minimum capital requirements can trigger certain actions by regulators that could have a material effect on the Corporation's financial statements.
The Capital Rules require the Corporation and Fulton Bank to:
• Meet a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets;
• Meet a minimum Tier 1 Leverage capital ratio of 4.00% of average assets;
• Meet a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 capital ratio of 6.00% of risk-weighted assets;
• 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; and
• Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, are excluded as a component of Tier 1 capital for institutions of the Corporation's size.
As of December 31, 2023, the Corporation's capital levels met the minimum capital requirements, including the capital conservation buffers, as prescribed in the Capital Rules.
As of December 31, 2023, Fulton Bank met the well-capitalized requirements under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, a 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 Capital Rules. There were no other conditions or events since December 31, 2023 that management believes have changed the Corporation's capital categories.
The following table summarizes the Corporation's capital ratios in comparison to regulatory requirements:
December 31,
2023 December 31,
2022 Regulatory
Minimum
for Capital
Adequacy Fully Phased-in, with Capital Conservation Buffers
Total Risk-Based Capital (to Risk-Weighted Assets) 14.0% 13.6% 8.0% 10.5%
Tier I Risk-Based Capital (to Risk-Weighted Assets) 11.2% 10.9% 6.0% 8.5%
Common Equity Tier I (to Risk-Weighted Assets) 10.3% 10.0% 4.5% 7.0%
Tier I Leverage Capital (to Average Assets) 9.5% 9.5% 4.0% 4.0%
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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 approximately $125 million and $93 million at December 31, 2023 and 2022, respectively, include information technology, telecommunication and data processing outsourcing contracts. The increase is primarily due to the renewals of large multi-year 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, 2023 (dollars in thousands):
Commercial and industrial $ 4,929,981
Real estate - commercial mortgage and real estate - construction 1,867,830
Real estate - home equity 1,992,700
Total commitments to extend credit $ 8,790,511
Standby letters of credit $ 264,440
Commercial letters of credit 67,396
Total letters of credit $ 331,836
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