NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business: The Corporation is a financial holding company that provides a full range of banking and financial services to businesses and consumers through its wholly owned banking subsidiary, Fulton Bank. In addition, the Parent Company owns the following non-bank subsidiaries: Fulton Financial Realty Company, Central Pennsylvania Financial Corp., FFC Penn Square, Inc., Fulton Community Partner, LLC, and Fulton Insurance Services Group, Inc. Collectively, the Parent Company and its subsidiaries are referred to as the Corporation.
The Corporation's primary sources of revenue are interest income on loans, investment securities and other interest-earning assets and fee income earned on its products and services. Its expenses consist of interest expense on deposits and borrowed funds, provision for credit losses, other operating expenses and income taxes. The Corporation's primary competition is other financial services providers operating in its region. Competitors also include financial services providers located outside the Corporation's geographic market as a result of the growth in electronic delivery channels. The Corporation is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by such regulatory agencies.
The Corporation offers, through its banking subsidiary, a full range of retail and commercial banking services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Industry diversity is the key to the economic well-being of these markets, and the Corporation is not dependent upon any single customer or industry.
Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with GAAP and include the accounts of the Parent Company and all wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amount of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Corporation evaluates subsequent events through the date of the filing of this report with the SEC.
Cash and Cash Equivalents and Restricted Cash: Cash and cash equivalents consists of cash and due from banks and interest bearing deposits with other banks, which includes restricted cash. Restricted cash comprises cash balances required to be maintained with the FRB, based on customer transaction deposit account levels, and cash balances provided as collateral on derivative contracts and other contracts. See Note 3, "Restrictions on Cash and Cash Equivalents" for additional information.
FRB and FHLB Stock: The Bank is a member of the FRB and FHLB and is required by federal law to hold stock in these institutions according to predetermined formulas. These restricted investments are carried at cost on the consolidated balance sheets and are periodically evaluated for impairment.
Investments: Debt securities are classified as HTM at the time of purchase when the Corporation has both the intent and ability to hold these investments until they mature. Such debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the effective yield method. The Corporation does not engage in trading activities; however, since the investment portfolio serves as a source of liquidity, most debt securities are classified as AFS. AFS securities are carried at estimated fair value with the related unrealized holding gains and losses reported in shareholders' equity as a component of OCI, net of tax. Realized securities gains and losses are computed using the specific identification method and are recorded on a trade date basis.
HTM Debt Securities: Expected credit losses on HTM debt securities would be recorded in the ACL on HTM debt securities. As of December 31, 2022, no HTM debt securities required an ACL as these investments consist solely of Agency guaranteed residential mortgage-backed and commercial mortgage-backed securities.
AFS Debt Securities: The Bank's AFS debt securities are investment grade. In evaluating credit losses on debt securities, management considers factors such as the credit quality of the investment counterparty, the credit rating of the security, and the delinquency history of the security. As of December 31, 2022, no AFS debt securities required an ACL.
Fair Value Option: The Corporation has elected to measure mortgage loans held for sale at fair value. Derivative financial instruments related to mortgage banking activities are also recorded at fair value, as detailed under the heading "Derivative Financial Instruments," below. The Corporation determines fair value for its mortgage loans held for sale based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Changes in fair values during the period are recorded as components of mortgage banking income on the
consolidated statements of income. Interest income earned on mortgage loans held for sale is classified in interest income on the consolidated statements of income.
Loans: Loans are stated at their principal amount outstanding, except for mortgage loans held for sale, which are carried at fair value. Interest income on loans is accrued as earned.
In general, loans are placed on non-accrual status once they become 90 days delinquent as to principal or interest. In certain cases a loan may be placed on non-accrual status prior to being 90 days delinquent if there is an indication that the borrower is having difficulty making payments, or the Corporation believes it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan is considered secured and in the process of collection. The Corporation generally applies payments received on non-accruing loans to principal until such time as the principal is paid off, after which time any payments received are recognized as interest income. If the Corporation believes that all amounts outstanding on a non-accrual loan will ultimately be collected, payments received subsequent to its classification as a non-accrual loan are allocated between interest income and principal.
A loan that is 90 days delinquent may continue to accrue interest if the loan is both adequately secured and is in the process of collection. Past due status is determined based on contractual due dates for loan payments. An adequately secured loan is one that has collateral with a supported fair value that is sufficient to discharge the debt, and/or has an enforceable guarantee from a financially responsible party. A loan is considered to be in the process of collection if collection is proceeding through legal action or through other activities that are reasonably expected to result in repayment of the debt or restoration to current status in the near future.
Loans deemed to be a loss are written off through a charge against the ACL. Closed-end consumer loans are generally charged- off when they become 120 days past due (180 days for open-end consumer loans) if they are not adequately secured by real
estate. All other loans are evaluated for possible charge-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral, if any. Principal recoveries of loans previously charged-off are recorded as increases to the ACL.
Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are deferred and amortized over the life of the loan as an adjustment to interest income using the effective yield method. For mortgage loans sold, net loan origination fees and costs are included in the gain or loss on sale of the related loan, as components of mortgage banking.
Troubled Debt Restructurings: Loans are accounted for and reported as TDRs when, for economic or legal reasons, the Corporation grants a concession to a borrower experiencing financial difficulty that it would not otherwise consider. Concessions, whether negotiated or imposed by bankruptcy, granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan's stated maturity date or a reduction in the interest rate. Non-accrual TDRs can be restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
On March 27, 2020 the CARES Act was signed into law. The CARES Act includes an option for financial institutions to suspend the requirements of GAAP for certain loan modifications that would otherwise be categorized as a TDR. Certain conditions were required to be met with respect to the loan modification including that the modification is related to COVID-19 and the modified loan was not more than 30 days past due on December 31, 2019. On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law and this Act extended the relief for TDR treatment until January 1, 2022, when it expired. The Corporation applied the option under the CARES act for all loan modifications that qualified.
Allowance for Credit Losses:
CECL
The Corporation follows ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities. It also applies to OBS credit exposures, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, and net investments in leases recognized by a lessor in accordance with ASC Topic 842.
The Corporation has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income.
Loans: The ACL is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for expected credit losses.
Loans Evaluated Collectively: Loans evaluated collectively for expected credit losses include loans on accrual status and loans initially evaluated individually, but determined not to have enhanced credit risk characteristics. This category includes loans on non-accrual status where the total commitment amount is less than $1 million. The ACL is estimated by applying a PD and LGD to the EAD at the loan level. In order to determine the PD, LGD, and EAD calculation inputs:
•Loans are aggregated into pools based on similar risk characteristics.
•The PD and LGD rates are determined by historical credit loss experience for each pool of loans.
•The loan segment PD rates are estimated using six econometric regression models that use the Corporation's historical credit loss experience and incorporate reasonable and supportable economic forecasts for various macroeconomic variables that are statistically correlated with expected loss behavior in the loan segment.
•The reasonable and supportable forecast for each macroeconomic variable is sourced from an external third party and is applied over the contractual term of the Corporation's loan portfolio. The Corporation's economic forecast considers the general health of the economy, the interest rate environment, real estate pricing and market risk.
•A single baseline forecast scenario is used for each macroeconomic variable.
•The loan segment lifetime LGD rates are estimated using a loss rate approach based on the Corporation's historical charge-off experience and the balance at the time of loan default.
•The LGD rates are adjusted for the Corporation's recovery experience.
•To calculate the EAD, the Corporation estimates contractual cash flows over the remaining life of each loan. Certain cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate. In addition, a prepayment rate is used in determining the EAD estimate.
Loans Evaluated Individually: Loans evaluated individually for expected credit losses include loans on non-accrual status where the commitment amount equals or exceeds $1.0 million. The required ACL for such loans is determined using either the present value of expected future cash flows, observable market price or the fair value of collateral.
Loans evaluated individually may have specific allocations of the ACL assigned if the measured value of the loan using one of the noted techniques is less than its current carrying value. For loans measured using the fair value of collateral, if the analysis determines that sufficient collateral value would be available for repayment of the debt, then no allocations would be assigned to those loans. Collateral could be in the form of real estate or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real estate.
For loans secured by real estate, estimated fair values are determined primarily through appraisals performed by third-party appraisers, discounted to arrive at expected net sale proceeds. For collateral dependent loans, estimated real estate fair values are also net of estimated selling costs. When a real estate secured loan is impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the Corporation's experience and knowledge of the real estate market; the purpose of the loan; market factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Corporation generally obtains updated appraisals performed by third-party appraisers for impaired loans secured predominantly by real estate every 12 months.
When updated appraisals are not obtained for loans secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and there has not been a significant deterioration in the collateral value since the original appraisal was performed.
For loans with principal balances greater than or equal to $1.0 million secured by non-real estate collateral, such as accounts receivable or inventory, estimated fair values are determined based on borrower financial statements, inventory listings, accounts receivable agings or borrowing base certificates. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Liquidation or collection discounts are applied to these assets based upon existing loan evaluation policies.
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk rating categories is a significant component of the ACL methodology for these loans, which bases the PD on this migration. Assigning risk ratings involves judgment. Risk ratings may be changed based on ongoing monitoring procedures, or if specific loan review assessments identify a deterioration or an improvement in the loan.
The following is a summary of the Corporation's internal risk rating categories:
•Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.
•Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of Substandard. Loans in this category are currently acceptable but, are nevertheless potentially weak.
•Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.
The allocation of the ACL is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Corporation considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type.
Qualitative and Other Adjustments to ACL: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These qualitative factors include changes in lending policy, the nature and volume of the portfolio, overall business conditions in the economy, credit concentrations, specific industry risks, model imprecision and legal and regulatory requirements. Qualitative adjustments are judgmental and are based on management's knowledge of the portfolio and the markets in which the Corporation operates. Qualitative adjustments are evaluated and approved on a quarterly basis. Additionally, the ACL includes other allowance categories that are not directly incorporated in the quantitative results. These categories include but are not limited to loans-in-process, trade acceptances and overdrafts.
OBS Credit Exposures: The reserve for OBS credit exposures is recorded in other liabilities on the consolidated balance sheets, and represents management's estimate of expected losses in its unfunded loan commitments and other OBS credit exposures. The reserve for OBS credit exposures specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The reserve for OBS credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is generally computed using the straight-line method over the estimated useful lives of the related assets, which are a maximum of 50 years for buildings and improvements, 8 years for furniture and 5 years for equipment. Leasehold improvements are amortized over the shorter of the useful life or the non-cancelable lease term.
Premises and equipment acquired in a business combination are initially recorded at fair value and subsequently carried at cost less depreciation and amortization. See Note 6, "Premises and Equipment" for additional information.
OREO: Assets acquired in settlement of mortgage loan indebtedness are recorded as OREO and are included in other assets on the consolidated balance sheets, initially at the lower of the estimated fair value of the asset, less estimated selling costs, or the carrying amount of the loan. Costs to maintain the assets and subsequent gains and losses on sales are included in other non-interest expense on the consolidated statements of income.
MSRs: The estimated fair value of MSRs related to residential mortgage loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. MSRs are amortized as a reduction to mortgage servicing income, included as a component of mortgage banking income on the consolidated statements of income, over the estimated lives of the underlying loans.
MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined through a discounted cash flows valuation completed by a third-party valuation expert. Significant inputs to the valuation include expected net servicing income, the discount rate and the expected lives of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. To the extent the amortized
cost of the MSRs exceeds their estimated fair value, a valuation allowance is established through a charge against servicing income. If subsequent valuations indicate that impairment no longer exists, the valuation allowance is reduced through an increase to servicing income. See Note 8, "Mortgage Servicing Rights" for additional information.
Derivative Financial Instruments: The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. Certain of the Corporation's outstanding derivative contracts are designated as hedges, and none are entered into for speculative purposes. The Corporation enters into derivative contracts that are intended to economically hedge certain of its risks, even if hedge accounting does not apply or the Corporation elects not to apply hedge accounting.
The Corporation records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Corporation has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The Corporation does not have any derivative instruments designated as fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For derivatives designated as cash flow hedges where hedge accounting is applied, changes in fair value are recognized in other comprehensive income. For derivatives where hedge accounting does not apply, changes in fair value are recognized in earnings as components of non-interest income or non-interest expense on the consolidated statements of income.
Derivative contracts create counterparty credit risk with both the Corporation's customers and with institutional derivative counterparties. The Corporation manages counterparty credit risk through its credit approval processes, monitoring procedures and obtaining adequate collateral, when the Corporation determines it is appropriate to do so and in accordance with counterparty contracts.
For each of the derivatives, gross derivative assets and liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets. Related gains and losses on these derivative instruments are recorded in other changes, net on the consolidated statement of cash flows.
Mortgage Banking Derivatives
In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured.
Interest Rate Derivatives - Non-Designated Hedges
The Corporation enters into interest rate derivatives with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate derivatives with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate derivatives is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. As the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
The Corporation's existing credit derivatives result from participation in interest rate derivatives provided by external lenders as part of loan participation arrangements and, therefore, are not used to manage interest rate risk in the Corporation's assets or liabilities.
The Corporation is required to clear all eligible interest rate derivative contracts with a clearing agent and is subject to the regulations of the Commodity Futures Trading Commission.
Cash Flow Hedges of Interest Rate Risk
The Corporation's objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Corporation primarily uses interest rate derivatives as part of its interest rate risk management strategy. The Corporation enters into interest rate derivatives designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Corporation's variable-rate loans.
Foreign Exchange Contracts
The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a specific date at a contractual price. The Corporation limits its foreign exchange exposure with customers by entering into contracts with institutional counterparties to mitigate its foreign exchange risk. The Corporation also holds certain amounts of Foreign Currency Nostro Accounts. The Corporation limits the total overnight net foreign currency open positions, which is defined as an aggregate of all outstanding contracts, to $500,000. See "Note 11 - Derivative Financial Instruments" for additional information.
Balance Sheet Offsetting: Certain financial assets and liabilities may be eligible for offset on the consolidated balance sheets because they are subject to master netting arrangements or similar agreements. The Corporation has elected to net its financial assets and liabilities designated as cash flow hedges when offsetting is permitted. The Corporation has elected not to offset the remaining assets and liabilities subject to such arrangements on the consolidated financial statements.
The Corporation is a party to interest rate derivatives with financial institution counterparties and customers. Under these agreements, the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. Cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate derivatives in the event of default. A daily settlement occurs through a clearing agent for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through a daily clearing agent. As a result, the total fair values of interest rate derivative assets and derivative liabilities recognized on the consolidated balance sheets are not equal and offsetting.
The Corporation is also a party to foreign exchange contracts with financial institution counterparties under which the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. As with interest rate derivatives, cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the foreign exchange contracts in the event of default.
For additional information on balance sheet offsetting, see "Note 11 - Derivative Financial Instruments."
Income Taxes: The Corporation utilizes the asset and liability method in accounting for income taxes. Under this method, DTAs and deferred tax liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, DTAs and deferred tax liabilities are adjusted through income tax expense. In assessing the realizability of DTAs, management considers whether it is more likely than not that some portion or all of the DTAs will not be realized. The ultimate realization of DTAs is dependent upon the generation of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the amount of taxes paid in available carryback years, projected future taxable income, and, if necessary, tax planning strategies in making this assessment. A valuation allowance is provided against DTAs unless it is more likely than not that such DTAs will be realized.
ASC Topic 740, "Income Taxes" creates a single model to address uncertainty in tax positions, and clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in an enterprise's financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The liability for unrecognized tax benefits is included in other liabilities within the consolidated balance sheets.
See Note 13, "Income Taxes" for additional information.
Stock-Based Compensation: The Corporation grants equity awards to employees, consisting of stock options, restricted stock, RSUs and PSUs under its Employee Equity Plan. In addition, employees may purchase stock under the Corporation's ESPP.
The Corporation also grants equity awards to non-employee members of its board of directors and subsidiary bank board of directors under the Directors' Plan. Under the Directors' Plan, the Corporation can grant equity awards to non-employee holding company and subsidiary bank directors in the form of stock options, restricted stock, RSUs or common stock. Recent grants of equity awards under the Directors' Plan have been limited to RSUs.
Equity awards issued under the Employee Equity Plan are generally granted annually and become fully vested over or after a three-year vesting period. The vesting period for non-performance-based awards represents the period during which employees are required to provide service in exchange for such awards. Equity awards under the Directors' Plan are generally granted annually and become fully vested after a one-year vesting period. Certain events, as defined in the Employee Equity Plan and the Directors' Plan, result in the acceleration of the vesting of equity awards. Restricted stock, RSUs and PSUs earn dividends during the vesting period, which are forfeitable if the awards do not vest.
The fair value of stock options, restricted stock and RSUs granted to employees or directors is recognized as compensation expense over the vesting period for such awards. Compensation expense for PSUs is also recognized over the vesting period, however, compensation expense for PSUs may vary based on the expectations for actual performance relative to defined performance measures.
The fair value of restricted stock, RSUs and a majority of PSUs are based on the trading price of the Corporation's stock on the date of grant. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant. See Note 16, "Stock-Based Compensation Plans" for additional information. The Corporation has not issued stock options since 2014 and accordingly, there is no compensation expense for this instrument.
Disclosures about Segments of an Enterprise and Related Information: The Corporation does not have any operating segments which require disclosure of additional information.
Financial Guarantees: Financial guarantees, which consist primarily of standby and commercial letters of credit, are accounted for by recognizing a liability equal to the fair value of the guarantees and crediting the liability to income over the term of the guarantee. Fair value is estimated based on the fees currently charged to enter into similar agreements with similar terms.
Goodwill and Intangible Assets: The Corporation accounts for its acquisitions using the purchase accounting method. Purchase accounting requires that all assets acquired and liabilities assumed, including certain intangible assets that must be recognized, be recorded at their estimated fair values as of the acquisition date. Any purchase price exceeding the fair value of net assets acquired is recorded as goodwill.
Goodwill is not amortized to expense, but is evaluated for impairment at least annually. Write-downs of the balance, if necessary as a result of the impairment test, are charged to expense in the period in which goodwill is determined to be impaired. The Corporation performs its annual assessment of goodwill impairment in the fourth quarter of each year. If certain events occur which indicate goodwill might be impaired between annual assessments, goodwill would be evaluated when such events occur.
Intangible assets are amortized over their estimated lives. Some intangible assets have indefinite lives and are, therefore, not amortized. All intangible assets must be evaluated for impairment if certain events occur. Any impairment write-downs are recognized as non-interest expense on the consolidated statements of income. See "Note 7 - Goodwill and Intangible Assets," for additional information.
VIEs: ASC Topic 810 provides guidance on when to consolidate certain VIEs in the financial statements of the Corporation. VIEs are entities in which equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance activities without additional financial support from other parties. VIEs are assessed for consolidation under ASC Topic 810 when the Corporation holds variable interests in these entities. The Corporation consolidates VIEs when it is deemed to be the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has the power to make decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.
The Corporation makes investments in certain community development projects, the majority of which generate tax credits under various federal programs, including TCIs. These investments are made throughout the Corporation's market area as a
means of supporting the communities it serves. The Corporation typically acts as a limited partner or member of a limited liability company in its TCIs and does not exert control over the operating or financial policies of the partnership or limited liability company. Tax credits earned are subject to recapture by federal taxing authorities based upon compliance requirements to be met at the project level.
Because the Corporation owns 100% of the equity interests in its NMTC, these investments were consolidated based on ASC Topic 810 as of December 31, 2022 and 2021. Investments in affordable housing projects were not consolidated based on management's assessment of the provisions of ASC Topic 810.
TCIs are tested for impairment when events or changes in circumstances indicate that it is more likely than not that the carrying amount of the investment will not be realized. An impairment loss is measured as the amount by which the current carrying value exceeds its aggregated remaining value of the tax benefits of the investment. There were no impairment losses recognized for the Corporation's TCIs in 2022, 2021 or 2020. For additional information, see "Note 13 - Income Taxes."
Fair Value Measurements: Assets and liabilities are categorized in a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):
•Level 1 - Inputs that represent quoted prices for identical instruments in active markets.
•Level 2 - Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also included are valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
•Level 3 - Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
The Corporation has categorized all assets and liabilities required to be measured at fair value on both a recurring and nonrecurring basis into the above three levels. See "Note 20 - Fair Value Measurements" for additional information.
Revenue Recognition: The sources of revenue for the Corporation are interest income from loans, leases and investments and non-interest income. Non-interest income is earned from various banking and financial services that the Corporation offers through its subsidiaries. Revenue is recognized as earned based on contractual terms, as transactions occur, or as services are provided. Following is further detail of the various types of revenue the Corporation earns and when it is recognized:
Interest income: Interest income is recognized on an accrual basis according to loan and lease agreements, investment securities contracts or other written contracts.
Wealth management services: Consists of income from trust commissions, brokerage, money market and insurance commissions. Trust commissions consists of advisory fees that are based on market values of clients' managed portfolios and transaction fees for fiduciary services performed, both of which are recognized when earned. Brokerage income includes advisory fees which are recognized when earned on a monthly basis and transaction fees that are recognized when transactions occur. Money market income is based on the balances held in trust accounts and is recognized monthly. Insurance commissions are earned and recognized when policies are originated. Currently, no investment management and trust service income is based on performance or investment results.
Commercial and consumer banking income: Consists of cash management, overdraft, non-sufficient fund fees and other service charges on deposit accounts as well as branch fees, ATM fees, debit and credit card income and merchant services fees. Also included are letter of credit fees, foreign exchange income and interest rate derivative fees. Revenue is primarily transactional and recognized when earned at the time the transactions occur.
Mortgage banking income: Consists of gains or losses on the sale of residential mortgage loans and mortgage loan servicing income.
Other Income: Includes gains on sales of SBA loans, cash surrender value of life insurance, and other miscellaneous income.
Leases: All leases with an initial term greater than 12 months recognize: (1) a ROU asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term; and (2) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, each measured on a discounted basis. The Corporation elected to not separate lease and non-lease components.
As a lessee, the majority of the operating lease portfolio consists of real estate leases for the Corporation's financial centers, land and office space. The operating leases have remaining lease terms of 1 year to 20 years, some of which include options to
extend the leases for 5 years or more. ROU assets and lease liabilities are not recognized for leases with an initial term of 12 months or less.
Certain real estate leases have lease payments that adjust based on annual changes in the CPI. The leases that are dependent upon CPI are initially measured using the CPI or rate at the commencement date and are included in the measurement of the lease liability.
Operating lease expense represents fixed lease payments for operating leases recognized on a straight-line basis over the applicable lease term. Variable lease expense represents expenses such as the payment of real estate taxes, insurance and common area maintenance based on the Corporation's pro-rata share.
Sublease income consists mostly of operating leases for space within the Corporation's offices and financial centers and is recorded as a reduction to net occupancy expense on the consolidated statements of income. See "Note 18 - Leases" for additional information.
Defined Benefit Plan: Net periodic pension costs are funded based on the requirements of federal laws and regulations. The determination of net periodic pension costs is based on assumptions about future events that will affect the amount and timing of required benefit payments under the plan. These assumptions include demographic assumptions such as retirement age and mortality, a discount rate used to determine the current benefit obligation, form of payment election and a long-term expected rate of return on plan assets. Net periodic pension expense includes interest cost, based on the assumed discount rate, an expected return on plan assets, amortization of prior service cost or credit and amortization of net actuarial gains or losses. The Corporation curtailed the Pension Plan in 2008, with no additional benefits accruing. In connection with the Merger, the Corporation assumed the obligations of Prudential Bancorp under a multiemployer defined benefit pension plan that had previously been closed to new Prudential Bancorp participants. Net periodic pension cost is recognized in salaries and employee benefits on the consolidated statements of income. For additional information, see "Note 17 - Employee Benefit Plans."
Business Combinations: Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, identifiable assets acquired and liabilities assumed are measured at fair value as of the acquisition date. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill. Results of the operations of the acquired entity are included in the consolidated statement of income from the acquisition date. Acquisition costs are expensed as incurred.
Other Recently Adopted Accounting Standards
On January 1, 2022, the Corporation adopted ASC Update 2021-06 Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update). The Corporation adopted this standards update effective with its March 31, 2022 quarterly report on Form 10-Q and it did not have a material impact on the consolidated financial statements.
Recently Issued Accounting Standards
In March 2022, FASB issued ASU 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method ("ASU 2022-01"). This update addresses questions regarding the last-of-layer method arising from the issuance of ASU 2017-12 and permits more flexibility in hedging interest rate risk for both variable-rate and fixed-rate financial instruments and introduces the ability to hedge risk components for non-financial hedges. The Corporation adopted ASU 2022-01 on January 1, 2023. The Corporation does not expect the adoption of ASU 2022-01 to have a material impact on its consolidated financial statements.
In March 2022, FASB issued ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This update reduces the complexity of accounting for TDRs by eliminating certain accounting guidance, enhancing disclosures and improving the consistency of vintage disclosures. The Corporation adopted ASU 2022-02 on January 1, 2023. The Corporation does not expect the adoption of ASU 2022-02 to have a material impact on its consolidated financial statements.
In June 2022, FASB issued ASU 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This update clarifies how the fair value of equity securities subject to contractual sale restrictions is determined and requires additional qualitative and quantitative disclosures for equity securities with contractual
sale restrictions. The Corporation will adopt ASU 2022-03 on January 1, 2024. The Corporation does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
In September 2022, FASB issued ASU 2022-04 Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations ("ASU 2022-04"). This update enhances transparency in the disclosure of supplier finance programs, which previously had no explicit requirements under GAAP. The Corporation adopted ASU 2022-04 on January 1, 2023. The Corporation does not expect the adoption of ASU 2022-04 to have a material impact on its consolidated financial statements.
In December 2022, FASB issued ASU 2022-06 Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of topic 848. This update extends the sunset provision date of "ASU 2020-04" to December 31, 2024. ASU 2022-06 became effective for the Corporation upon issuance of ASU 2022-06. The Corporation does not expect ASU 2022-06 to have a material impact on its consolidated financial statements.
In January 2023, FASB ratified the EITF consensus on EITF Issue No. 21-A, "Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method" reached at the December 1, 2022 meeting, but has not yet issued the standard. The standard will allow any tax credit program that meets certain criteria to use the proportional amortization method. The Corporation expects to early adopt the standard using the modified retrospective method effective upon issuance. The Corporation does not expect the adoption of the upcoming ASU to have a material impact on its consolidated financial statements.
Reclassifications
Certain amounts in the 2021 consolidated financial statements and notes have been reclassified to conform to the 2022 presentation.
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NOTE 2 - BUSINESS COMBINATIONS |
On July 1, 2022, the Corporation completed its acquisition of Prudential Bancorp, a Pennsylvania chartered bank holding company headquartered in Philadelphia, Pennsylvania that primarily served the Greater Philadelphia region. On that date, the Corporation acquired 100% of the outstanding common stock 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 in the fourth quarter of 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. As a result of this acquisition, the Corporation enhanced its presence in Philadelphia, expanded its customer base and leveraged operating costs through economies of scale.
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 Consideration. In the aggregate, approximately eighty percent (80%) of the Merger Consideration consisted of the Corporation's common stock with the remaining approximately twenty percent (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 Merger Consideration over the fair value of assets acquired was recorded as goodwill and is not amortizable or deductible for tax purposes.
The following table summarizes the consideration transferred and the fair values of identifiable assets acquired and liabilities assumed on July 1, 2022:
| | | | | | | | |
| | Fair Value |
(in thousands, except per share data) | | |
Consideration transferred: | | |
Common stock shares issued (6,208,516) | | $ | 89,713 | |
Cash paid to Prudential Bancorp shareholders | | 29,343 | |
Value of consideration | | 119,056 | |
Assets acquired: | | |
Cash and due from banks | | 7,532 | |
Investment securities | | 287,126 | |
Loans, net | | 554,288 | |
Premises and equipment | | 13,738 | |
Other assets | | 70,720 | |
Total assets | | 933,404 | |
Liabilities assumed: | | |
Deposits | | 532,180 | |
Borrowings(1) | | 284,000 | |
| | |
Other liabilities | | 14,441 | |
Total liabilities | | 830,621 | |
Net assets acquired: | | 102,783 | |
Goodwill resulting from acquisition of Prudential Bancorp | | $ | 16,273 | |
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(1) Includes a $30.5 million intercompany borrowing between Prudential Bank and Fulton Bank.
While the valuation of the acquired assets and liabilities is completed, fair value estimates related to the assets and liabilities from Prudential Bancorp are subject to adjustment for up to one year after the closing date of the Merger if additional information becomes available. Included in the above table are adjustments of $17 thousand that occurred during the fourth quarter of 2022, resulting in an increase to goodwill from the acquisition of Prudential Bancorp.
The amount of goodwill recorded reflects the increased market share and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired from Prudential Bancorp.
The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed.
Cash and due from banks: The estimated fair values of cash and due from banks approximate their stated value.
Investment securities: The acquired investment portfolio had a fair value of $287.1 million, primarily consisting of mortgage-backed securities, U.S. Government securities and municipal securities. The fair value of the investment portfolio was based on quoted market prices, dealer quotes and pricing obtained from independent pricing services.
Loans: The Company recorded $554.3 million of acquired loans, which were initially recorded at their fair values as of the Merger date. Fair value for the loans was based on a discounted cash flow methodology that considered credit loss and prepayment expectations, market interest rates and other market factors, such as liquidity, from the perspective of a market participant. Loan cash flows were generated on an individual loan basis. The PD, LGD, EAD and prepayment assumptions are the key factors driving credit losses that are embedded into the estimated cash flows.
The following table presents information with respect to the fair value and unpaid principal balance of acquired loans and leases at the Merger date:
| | | | | | | | | | | | | | |
| | July 1, 2022 |
| | Unpaid Principal Balance | | Fair Value |
| | (dollars in thousands) |
Real estate - commercial mortgage | | $ | 224,904 | | | $ | 216,613 | |
Commercial and industrial | | 63,560 | | | 62,050 | |
Real-estate - residential mortgage | | 177,327 | | | 169,098 | |
Real-estate - home equity | | 6,034 | | | 5,812 | |
Real-estate - construction | | 98,963 | | | 98,546 | |
Consumer | | 2,306 | | | 2,286 | |
| | | | |
Total acquired loans | | $ | 573,094 | | | $ | 554,405 | |
The following table presents the carrying amount of loans for which, at the date of the Merger, there was evidence of more than insignificant deterioration of credit quality since origination:
| | | | | | | | |
| | July 1, 2022 |
| | (dollars in thousands) |
Book balance of loans with deteriorated credit quality at acquisition | | $ | 27,057 | |
Allowance for credit losses at acquisition | | (1,135) | |
Non-credit related discount | | (130) | |
Total initial purchased credit deteriorated loans | | $ | 25,792 | |
The Merger resulted in the addition of $9.1 million in allowance for credit losses, including the $1.1 million identified in the table above for initial purchased credit deteriorated loans recorded through the provision for credit losses at the date of the Merger.
Premises and equipment: The fair value of land and buildings reflected in premises and equipment was determined by obtaining recent market sales for comparable properties. The difference between the fair market value and the net book value for these properties resulted in an increase of $7.1 million to the premises and equipment acquired from Prudential Bancorp.
Intangible assets: The Corporation recorded $8.2 million of CDI reflected in other assets that is being amortized over seven years using the sum-of-the-years digits method. The fair value of the CDI was determined using the cost savings approach. The cost savings approach is defined as the difference between the cost of funds of core deposits and an alternative cost of funds for those deposits. The CDI fair value was determined by projected discounted net cash flows, that included assumptions related to customer attrition rates, discount rates, deposit interest rates, deposit account maintenance costs and alternative cost of funding rates.
Time deposits: Time deposits were valued at the account level based on their remaining maturity dates and comparing the contractual cost of the portfolio to brokered deposit costs having a similar tenor. The valuation adjustment of $1.9 million will be accreted to interest expense over the remaining maturities of the individual customer deposits.
Borrowings: The estimated fair values for borrowings approximated their stated value given these were short-term advances.
The following table presents the change in goodwill during the period:
| | | | | |
| Twelve Months Ended December 31 |
| 2022 |
| (dollars in thousands) |
Goodwill at December 31, 2021 | $ | 534,266 | |
Goodwill from Prudential Bancorp acquisition | 16,273 | |
Goodwill at December 31, 2022 | $ | 550,539 | |
Merger-related expenses
The Company developed a comprehensive integration plan under which it has incurred direct costs, which are expensed as incurred. These direct costs include costs primarily related to terminated contracts, consolidated facilities (including lease termination expenses), severance, marketing and professional fees. Costs related to the acquisition and restructuring are included in Merger-related expenses on the unaudited Consolidated Statements of Income.
The following table details the costs identified and classified as Merger-related expenses:
| | | | | | | | | | |
| | | | Twelve Months Ended December 31 |
| | | | 2022 |
| | | (dollars in thousands) |
Salaries and employee benefits | | | | $ | 938 |
Data processing and software | | | | 1,412 |
Net occupancy | | | | 1,658 |
Other outside services | | | | 225 |
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Professional fees | | | | 3,053 |
Marketing | | | | 95 |
Charitable donation | | | | 2,000 |
Other | | | | 947 |
Total Merger-related expenses | | | | $ | 10,328 |
As part of the Merger, the Corporation made a $2.0 million contribution to the Fulton Forward Foundation in July 2022, designated to be used to provide impact gifts in support of nonprofit community organizations in Philadelphia that are focused on advancing economic empowerment, particularly in underserved communities.
Income Statement
During the fourth quarter of 2022, the Corporation merged Prudential Bank with and into Fulton Bank. Separate results from legacy Prudential Bancorp assets and liabilities can no longer be identified. The following table summarizes the results of operations contributed by Prudential Bancorp for the three-month period ended September 30, 2022, presented in the unaudited Consolidated Statements of Income:
| | | | | |
| Three Months Ended September 30, 2022 |
| (Unaudited) |
| (dollars in thousands) |
Total interest income | $ | 10,871 | |
Total interest expense | 2,733 |
Net interest income | 8,138 |
Provisions for credit losses | 7,571 |
Net Interest Income After Provision for Credit Losses | 567 |
Total noninterest income | 197 |
Total noninterest expense | 3,583 |
Income Before Income Taxes | (2,819) | |
Income taxes | (753) | |
Net Loss | $ | (2,066) | |
Pro Forma Income Statement (unaudited)
The below table presents the pro forma results of the operations of the combined institutions as if the Merger occurred on January 1, 2021. The pro forma income statement adjustments are limited to the effects of fair value mark amortization and accretion and intangible asset amortization and do not consider future cost savings the Corporation expects to achieve subsequent to the merger of Prudential Bank with and into the Bank.
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 |
| | | | | 2022 | | 2021 |
| | | | (dollars in thousands) |
Net interest income | | | | | $ | 801,907 | | | $ | 687,216 | |
Provision for credit losses | | | | | 34,041 | | | (14,400) | |
Net Interest Income After Provision for Credit Losses | | | | | 767,866 | | | 701,616 | |
Total noninterest income | | | | | 232,054 | | | 277,217 | |
Total noninterest expenses | | | | | 663,133 | | | 635,568 | |
Income Before Income Taxes | | | | | 336,787 | | | 343,265 | |
Income tax expense | | | | | 57,249 | | | 59,985 | |
Net Income | | | | | $ | 279,538 | | | $ | 283,280 | |
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NOTE 3 – RESTRICTIONS ON CASH AND CASH EQUIVALENTS |
Collateral is posted by the Corporation with counterparties to secure derivative and other contracts, which is included in "interest-bearing deposits with other banks." On the consolidated balance sheets, the amounts of such collateral as of December 31, 2022 and 2021 were $13.9 million and $202.8 million, respectively.
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NOTE 4 – INVESTMENT SECURITIES |
The following tables present the amortized cost and estimated fair values of investment securities, as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| (dollars in thousands) |
2022 | | | | | | | |
Available for Sale | | | | | | | |
U.S. Government securities | $ | 226,140 | | | $ | — | | | $ | (7,655) | | | $ | 218,485 | |
U.S. Government-sponsored agency securities | 1,050 | | | — | | | (42) | | | 1,008 | |
State and municipal securities | 1,284,245 | | | 283 | | | (178,816) | | | 1,105,712 | |
Corporate debt securities | 459,792 | | | — | | | (37,483) | | | 422,309 | |
Collateralized mortgage obligations | 147,155 | | | — | | | (13,122) | | | 134,033 | |
Residential mortgage-backed securities | 242,527 | | | 18 | | | (29,847) | | | 212,698 | |
Commercial mortgage-backed securities | 631,604 | | | — | | | (79,082) | | | 552,522 | |
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Total | $ | 2,992,513 | | | $ | 301 | | | $ | (346,047) | | | $ | 2,646,767 | |
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Held to Maturity | | | | | | | |
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Residential mortgage-backed securities | $ | 457,325 | | | $ | — | | | $ | (57,480) | | | $ | 399,845 | |
Commercial mortgage-backed securities | 863,931 | | | — | | | (138,727) | | | 725,204 | |
Total | $ | 1,321,256 | | | $ | — | | | $ | (196,207) | | | $ | 1,125,049 | |
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2021 | | | | | | | |
Available for Sale | | | | | | | |
U.S. Government securities | $ | 127,831 | | | $ | — | | | $ | (213) | | | $ | 127,618 | |
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State and municipal securities | 1,139,187 | | | 50,161 | | | (678) | | | 1,188,670 | |
Corporate debt securities | 373,482 | | | 13,009 | | | (358) | | | 386,133 | |
Collateralized mortgage obligations | 206,532 | | | 3,581 | | | (754) | | | 209,359 | |
Residential mortgage-backed securities | 231,607 | | | 1,224 | | | (3,036) | | | 229,795 | |
Commercial mortgage-backed securities | 974,541 | | | 6,141 | | | (9,534) | | | 971,148 | |
Auction rate securities | 76,350 | | | — | | | (1,683) | | | 74,667 | |
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Total | $ | 3,129,530 | | | $ | 74,116 | | | $ | (16,256) | | | $ | 3,187,390 | |
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Held to Maturity | | | | | | | |
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Residential mortgage-backed securities | $ | 404,958 | | | $ | 11,022 | | | $ | (7,067) | | | $ | 408,913 | |
Commercial mortgage-backed securities | 575,426 | | | — | | | (18,472) | | | 556,954 | |
Total | $ | 980,384 | | | $ | 11,022 | | | $ | (25,539) | | | $ | 965,867 | |
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During the first quarter of 2022, all ARC's were sold.
On May 1, 2022, the Corporation transferred certain residential mortgage-backed securities and commercial mortgage-backed securities from AFS to HTM classification as permitted by ASU 2019-04. The estimated fair value of the securities transferred was $415.2 million, and the amortized cost of the securities was $479.0 million.
Securities carried at $1.1 billion at December 31, 2022 and $2.5 billion at December 31, 2021, were pledged as collateral to secure public and trust deposits.
The amortized cost and estimated fair values of debt securities as of December 31, 2022, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
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| Available for Sale | | Held to Maturity |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (dollars in thousands) |
Due in one year or less | $ | 148,382 | | | $ | 143,463 | | | $ | — | | | $ | — | |
Due from one year to five years | 159,126 | | | 154,536 | | | — | | | — | |
Due from five years to ten years | 535,229 | | | 497,049 | | | — | | | — | |
Due after ten years | 1,128,490 | | | 952,466 | | | — | | | — | |
| 1,971,227 | | | 1,747,514 | | | — | | | — | |
Residential mortgage-backed securities(1) | 242,527 | | | 212,698 | | | 457,325 | | | 399,845 | |
Commercial mortgage-backed securities(1) | 631,604 | | | 552,522 | | | 863,931 | | | 725,204 | |
Collateralized mortgage obligations(1) | 147,155 | | | 134,033 | | | — | | | — | |
Total | $ | 2,992,513 | | | $ | 2,646,767 | | | $ | 1,321,256 | | | $ | 1,125,049 | |
(1) Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans.
The following table presents information related to gross gains and losses on the sales of securities:
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| Gross Realized Gains | | Gross Realized Losses | | Net Gains (Losses) |
| (dollars in thousands) |
2022 | $ | 1,587 | | | $ | (1,614) | | | $ | (27) | |
2021 | 35,593 | | | (2,077) | | | 33,516 | |
2020 | 6,545 | | | (3,492) | | | 3,053 | |
During 2021, the Corporation completed a balance sheet restructuring that included a $34.0 million gain on the sale of Visa Shares, offset by losses on other securities of $0.4 million, primarily in connection with the sale of $24.6 million of ARCs.
During 2020, the Corporation completed a balance sheet restructuring that included the sale of investment securities, with an amortized cost of $79.0 million and an estimated fair value of $82.0 million, resulting in net investment securities gains of $3.0 million. Offsetting these gains were $2.9 million of prepayment penalties recorded in non-interest expense for the redemption of FHLB advances.
The following tables present the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31:
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| Less Than 12 months | | 12 Months or Longer | | Total |
| Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
2022 | (dollars in thousands) |
Available for Sale | | | | | | | | | | | | | | | |
U.S. Government securities | 1 | | | $ | 96,906 | | | $ | (2,814) | | | 2 | | | $ | 121,579 | | | $ | (4,841) | | | $ | 218,485 | | | $ | (7,655) | |
U.S. Government sponsored agency securities | 1 | | | 1,008 | | | (42) | | | — | | | — | | | — | | | 1,008 | | | (42) | |
State and municipal securities | 360 | | | 995,122 | | | (157,397) | | | 29 | | | 61,089 | | | (21,419) | | | 1,056,211 | | | (178,816) | |
Corporate debt securities | 66 | | | 376,398 | | | (31,333) | | | 6 | | | 37,157 | | | (6,150) | | | 413,555 | | | (37,483) | |
Collateralized mortgage obligations | 96 | | | 113,191 | | | (7,650) | | | 1 | | | 20,842 | | | (5,472) | | | 134,033 | | | (13,122) | |
Residential mortgage-backed securities | 81 | | | 154,861 | | | (18,301) | | | 5 | | | 55,293 | | | (11,546) | | | 210,154 | | | (29,847) | |
Commercial mortgage-backed securities | 114 | | | 371,109 | | | (38,845) | | | 20 | | | 181,413 | | | (40,237) | | | 552,522 | | | (79,082) | |
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Total available for sale | 719 | | | $ | 2,108,595 | | | $ | (256,382) | | | 63 | | | $ | 477,373 | | | $ | (89,665) | | | $ | 2,585,968 | | | $ | (346,047) | |
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Held to Maturity | | | | | | | | | | | | | | | |
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Residential mortgage-backed securities | 106 | | $ | 246,667 | | | $ | (14,275) | | | 14 | | | $ | 153,178 | | | $ | (43,205) | | | $ | 399,845 | | | $ | (57,480) | |
Commercial mortgage-backed securities | 21 | | | 258,255 | | | (24,029) | | | 39 | | | 466,949 | | | (114,698) | | | 725,204 | | | (138,727) | |
Total | 127 | | | $ | 504,922 | | | $ | (38,304) | | | 53 | | | $ | 620,127 | | | $ | (157,903) | | | $ | 1,125,049 | | | $ | (196,207) | |
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| Less Than 12 months | | | | 12 Months or Longer | | Total |
| Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
2021 | |
Available for Sale | | | | | | | | | | | | | | | |
U.S Government Securities | 2 | | | $ | 127,618 | | | $ | (213) | | | — | | | $ | — | | | $ | — | | | $ | 127,618 | | | $ | (213) | |
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State and municipal securities | 29 | | | 82,731 | | | (678) | | | — | | | — | | | — | | | 82,731 | | | (678) | |
Corporate debt securities | 6 | | | 43,068 | | | (358) | | | — | | | — | | | — | | | 43,068 | | | (358) | |
Collateralized mortgage obligations | 4 | | | 28,517 | | | (754) | | | — | | | — | | | — | | | 28,517 | | | (754) | |
Residential mortgage-backed securities | 7 | | | 123,687 | | | (2,388) | | | 1 | | | 16,669 | | | (648) | | | 140,356 | | | (3,036) | |
Commercial mortgage-backed securities | 41 | | | 512,312 | | | (9,534) | | | — | | | — | | | — | | | 512,312 | | | (9,534) | |
Auction rate securities | — | | | — | | | — | | | 118 | | | 74,667 | | | (1,683) | | | 74,667 | | | (1,683) | |
Total available for sale | 89 | | | $ | 917,933 | | | $ | (13,925) | | | 119 | | | $ | 91,336 | | | $ | (2,331) | | | $ | 1,009,269 | | | $ | (16,256) | |
Held to maturity | | | | | | | | | | | | | | | |
Residential mortgage-backed securities | 14 | | | $ | 205,969 | | | $ | (7,067) | | | — | | | $ | — | | | $ | — | | | $ | 205,969 | | | $ | (7,067) | |
Commercial mortgage-backed securities | 36 | | | 556,954 | | | (18,472) | | | — | | | — | | | — | | | 556,954 | | | (18,472) | |
| | | | | | | | | | | | | | | |
Total | 50 | | | $ | 762,923 | | | $ | (25,539) | | | — | | | $ | — | | | $ | — | | | $ | 762,923 | | | $ | (25,539) | |
The Corporation's collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The change in fair value of these securities is attributable to changes in interest rates and not credit quality. The Corporation does not have the intent to sell, and does not believe it will more likely than not be required to sell, any of these securities prior to a recovery of their fair value to amortized cost. Therefore, the Corporation does not have an ACL for these investments as of December 31, 2022 and 2021.
As of December 31, 2022 and 2021, no ACL was required for state and municipal securities. The Corporation does not have the intent to sell and does not believe it will be more likely than not to be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
As of December 31, 2022 and 2021, all corporate debt securities were rated above investment grade. Based on the payment status, rating and management's evaluation of these securities, no ACL was required for corporate debt securities as of December 31, 2022 and 2021.
| | | | | | | | | | | | | | |
NOTE 5 – LOANS AND ALLOWANCE FOR CREDIT LOSSES |
Loans and leases, net of unearned income
Loans and leases, net of unearned income are summarized as follows as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Real estate - commercial mortgage | $ | 7,693,835 | | | $ | 7,279,080 | |
Commercial and industrial(1) | 4,477,537 | | | 4,208,327 | |
Real-estate - residential mortgage | 4,737,279 | | | 3,846,750 | |
Real-estate - home equity | 1,102,838 | | | 1,118,248 | |
Real-estate - construction | 1,269,925 | | | 1,139,779 | |
Consumer | 699,179 | | | 464,657 | |
Equipment lease financing and other | 324,928 | | | 283,557 | |
Overdrafts | 3,403 | | | 1,988 | |
Gross loans | 20,308,924 | | | 18,342,386 | |
Unearned income | (29,377) | | | (17,036) | |
Net loans | $ | 20,279,547 | | | $ | 18,325,350 | |
(1) Includes PPP loans totaling $20.4 million and $301.3 million as of December 31, 2022 and 2021 respectively.
The Corporation has extended credit to officers and directors of the Corporation and to their associates. These related-party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collection or present other unfavorable features. The aggregate dollar amount of these loans, including unadvanced commitments, was $126.3 million and $129.6 million as of December 31, 2022 and 2021, respectively. During 2022, additions totaled $4.2 million and repayments totaled $7.5 million for related-party loans.
Allowance for Credit Losses
The ACL consists of loans evaluated collectively and individually for expected credit losses. The ACL represents an estimate of expected credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to net loans. The ACL is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries. The reserve for OBS credit exposures includes estimated losses on unfunded loan commitments, letters of credit and other OBS credit exposures.
The following table summarizes the ACL - loans balance and the reserve for OBS credit exposures balance as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| | | |
| 2022 | | 2021 |
| (dollars in thousands) |
ACL - loans | $ | 269,366 | | | $ | 249,001 | |
| | | |
Reserve for OBS credit exposures(1) | $ | 16,328 | | | $ | 14,533 | |
| | | |
(1) Included in other liabilities on the Consolidated Balance Sheets.
The following table presents the activity in the ACL - loans balances for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
Balance at beginning of period | | $ | 249,001 | | | $ | 277,567 | | | $ | 163,620 | |
CECL Day 1 Provision expense | | 7,954 | | | — | | | — | |
Purchased credit deteriorated loans | | 1,135 | | | — | | | — | |
Impact of adopting CECL on January 1, 2020 | | — | | | — | | | 45,724 | |
Loans charged off | | (21,472) | | | (30,952) | | | (30,557) | |
Recoveries of loans previously charged off | | 14,092 | | | 17,146 | | | 21,020 | |
Net loans (charged-off) recovered | | (7,380) | | | (13,806) | | | (9,537) | |
Provision for credit losses | | 18,656 | | | (14,760) | | | 77,760 | |
Balance at the end of the period | | $ | 269,366 | | | $ | 249,001 | | | $ | 277,567 | |
Provision for OBS credit exposures | | $ | 1,411 | | | $ | 160 | | | $ | (840) | |
Reserve for OBS credit exposures | | $ | 16,328 | | | $ | 14,533 | | | $ | 14,373 | |
The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2022 and 2021, by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate - Commercial Mortgage | | Commercial and Industrial | | Consumer and Real Estate - Home Equity | | Real Estate - Residential Mortgage | | Real Estate - Construction | | Equipment Finance Leasing and Other | | Total |
| (dollars in thousands) |
Balance at December 31, 2020 | $ | 103,425 | | | $ | 74,771 | | | $ | 25,137 | | | $ | 51,995 | | | $ | 15,608 | | | $ | 6,631 | | | $ | 277,567 | |
| | | | | | | | | | | | | |
Loans charged off | (8,726) | | | (15,337) | | | (3,309) | | | (1,290) | | | (39) | | | (2,251) | | | (30,952) | |
Recoveries of loans previously charged off | 2,474 | | | 9,587 | | | 2,345 | | | 375 | | | 1,412 | | | 953 | | | 17,146 | |
Net loans (charged off) recovered | (6,252) | | | (5,750) | | | (964) | | | (915) | | | 1,373 | | | (1,298) | | | (13,806) | |
Provision for loan losses (1) | (9,203) | | | (1,965) | | | (4,424) | | | 3,156 | | | (4,040) | | | 1,716 | | | (14,760) | |
Balance at December 31, 2021 | 87,970 | | | 67,056 | | | 19,749 | | | 54,236 | | | 12,941 | | | 7,049 | | | 249,001 | |
CECL Day 1 Provision expense | 4,107 | | | — | | | 131 | | | 3,716 | | | — | | | — | | | 7,954 | |
Initial purchased credit deteriorated loans | 1,051 | | | — | | | 7 | | | 77 | | | — | | | — | | | 1,135 | |
Loans charged off | (12,473) | | | (2,390) | | | (4,412) | | | (66) | | | — | | | (2,131) | | | (21,472) | |
Recoveries of loans previously charged off | 3,860 | | | 5,893 | | | 2,581 | | | 425 | | | 574 | | | 759 | | | 14,092 | |
Net loans (charged off) recovered | (8,613) | | | 3,503 | | | (1,831) | | | 359 | | | 574 | | | (1,372) | | | (7,380) | |
Provision for loan losses(1) | (15,059) | | | (443) | | | 8,373 | | | 24,862 | | | (2,772) | | | 3,695 | | | 18,656 | |
Balance at December 31, 2022 | $ | 69,456 | | | $ | 70,116 | | | $ | 26,429 | | | $ | 83,250 | | | $ | 10,743 | | | $ | 9,372 | | | $ | 269,366 | |
(1) Provision included in the table only includes the portion related to net loans
The ACL - loans 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 increase in ACL - loans in 2022 was related to loan growth and changes to the macroeconomic outlook. The impact from qualitative adjustments related to COVID-19 on the ACL - loans decreased in 2021 with the improvement in economic conditions.
Non-accrual Loans
All loans individually evaluated for impairment are measured for losses on a quarterly basis. As of December 31, 2022 and 2021, substantially all of the Corporation's individually evaluated loans with total commitments greater than or equal to $1.0 million were measured based on the estimated fair value of each loan's collateral, if any. Collateral could be in the form of real estate, in the case of commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real estate.
As of December 31, 2022 and 2021, approximately 91% and 98%, respectively, of loans evaluated individually for impairment with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated in the preceding 12 months.
The following table presents total non-accrual loans, by class segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| With a Related Allowance | | Without a Related Allowance | | Total | | With a Related Allowance | | Without a Related Allowance | | Total |
| (dollars in thousands) |
Real estate - commercial mortgage | $ | 39,722 | | | $ | 30,439 | | | $ | 70,161 | | | $ | 20,564 | | | $ | 32,251 | | | $ | 52,815 | |
Commercial and industrial | 14,804 | | | 12,312 | | | 27,116 | | | 12,571 | | | 17,570 | | | 30,141 | |
Real estate - residential mortgage | 25,315 | | | 979 | | | 26,294 | | | 35,269 | | | — | | | 35,269 | |
Real estate - home equity | 5,975 | | | 130 | | | 6,105 | | | 8,671 | | | — | | | 8,671 | |
Real estate - construction | 866 | | | 502 | | | 1,368 | | | 173 | | | 728 | | | 901 | |
Consumer | 92 | | | — | | | 92 | | | 229 | | | — | | | 229 | |
Equipment lease financing and other | 4,052 | | | 9,255 | | | 13,307 | | | 6,247 | | | 9,393 | | | 15,640 | |
Total | $ | 90,826 | | | $ | 53,617 | | | $ | 144,443 | | | $ | 83,724 | | | $ | 59,942 | | | $ | 143,666 | |
| | | | | | | | | | | |
As of December 31, 2022, there were $53.6 million of non-accrual loans that did not have a related allowance for credit losses. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary. The amount of interest income on non-accrual loans that was recognized was approximately $2.2 million in 2022 and $1.3 million in 2021.
Asset Quality
Maintaining an appropriate ACL is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, residential construction, commercial and industrial, and commercial real estate, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk categories is a significant component of the ACL methodology for these loans, under both the CECL and incurred loss models, which bases the probability of default on this migration. Assigning risk ratings involves judgment. The Corporation's loan review officers provide a separate assessment of risk rating accuracy. Risk ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review assessments identify a deterioration or an improvement in the loans.
The following table summarizes designated internal risk categories by portfolio segment and loan class, by origination year, in the current period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Cost Basis | Cost Basis | Total |
Real estate - commercial mortgage | | | | | | | | |
| Pass | $ | 1,014,575 | | $ | 1,095,725 | | $ | 969,118 | | $ | 810,850 | | $ | 621,689 | | $ | 2,610,511 | | $ | 80,665 | | $ | 307 | | $ | 7,203,440 | |
| Special Mention | 95 | | 50,367 | | 23,296 | | 33,735 | | 16,205 | | 181,736 | | 947 | | — | | 306,381 | |
| Substandard or Lower | 1,032 | | 3,039 | | 31,042 | | 38,378 | | 23,112 | | 87,168 | | 243 | | — | | 184,014 | |
| Total real estate - commercial mortgage | 1,015,702 | | 1,149,131 | | 1,023,456 | | 882,963 | | 661,006 | | 2,879,415 | | 81,855 | | 307 | | 7,693,835 | |
Real estate - commercial mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | (53) | | — | | (12,420) | | (12,473) | |
| Current period recoveries | — | | — | | — | | — | | — | | 4 | | — | | 3,856 | | 3,860 | |
| Total net (charge-offs) recoveries | — | | — | | — | | — | | — | | (49) | | — | | (8,564) | | (8,613) | |
Commercial and industrial(2) | | | | | | | | |
| Pass | 907,390 | | 449,145 | | 397,881 | | 315,605 | | 185,096 | | 604,352 | | 1,387,961 | | 618 | | 4,248,048 | |
| Special Mention | 11,405 | | 24,479 | | 3,763 | | 8,147 | | 5,218 | | 24,633 | | 56,048 | | 250 | | 133,943 | |
| Substandard or Lower | 834 | | 418 | | 4,818 | | 13,044 | | 3,081 | | 22,025 | | 51,077 | | 249 | | 95,546 | |
| Total commercial and industrial | 919,629 | | 474,042 | | 406,462 | | 336,796 | | 193,395 | | 651,010 | | 1,495,086 | | 1,117 | | 4,477,537 | |
Commercial and industrial | | | | | | | | |
| Current period gross charge-offs | — | | — | | (36) | | — | | (21) | | (365) | | (1,192) | | (776) | | (2,390) | |
| Current period recoveries | — | | — | | 30 | | 95 | | 379 | | 1,740 | | 811 | | 2,838 | | 5,893 | |
| Total net (charge-offs) recoveries | — | | — | | (6) | | 95 | | 358 | | 1,375 | | (381) | | 2,062 | | 3,503 | |
Real estate - construction(1) | | | | | | | | | |
| Pass | 159,195 | | 390,993 | | 243,406 | | 28,539 | | 24,421 | | 93,511 | | 47,271 | | — | | 987,336 | |
| Special Mention | — | | — | | — | | — | | — | | 21,603 | | — | | — | | 21,603 | |
| Substandard or Lower | — | | — | | 3,852 | | 2,274 | | — | | 4,272 | | 203 | | — | | 10,601 | |
| Total real estate - construction | 159,195 | | 390,993 | | 247,258 | | 30,813 | | 24,421 | | 119,386 | | 47,474 | | — | | 1,019,540 | |
Real estate - construction(1) | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Current period recoveries | — | | — | | — | | — | | — | | 527 | | — | | 47 | | 574 | |
| Total net (charge-offs) recoveries | — | | — | | — | | — | | — | | 527 | | — | | 47 | | 574 | |
Total | | | | | | | | |
| Pass | $ | 2,081,160 | | $ | 1,935,863 | | $ | 1,610,405 | | $ | 1,154,994 | | $ | 831,206 | | $ | 3,308,374 | | $ | 1,515,897 | | $ | 925 | | $ | 12,438,824 | |
| Special Mention | 11,500 | | 74,846 | | 27,059 | | 41,882 | | 21,423 | | 227,972 | | 56,995 | | 250 | | 461,927 | |
| Substandard or Lower | 1,866 | | 3,457 | | 39,712 | | 53,696 | | 26,193 | | 113,465 | | 51,523 | | 249 | | 290,161 | |
| Total | $ | 2,094,526 | | $ | 2,014,166 | | $ | 1,677,176 | | $ | 1,250,572 | | $ | 878,822 | | $ | 3,649,811 | | $ | 1,624,415 | | $ | 1,424 | | $ | 13,190,912 | |
(1) Excludes real estate - construction - other.
(2) Loans originated in 2022 include $20.4 million of PPP loans that were assigned a rating of Pass based on the existence of a federal government guaranty through the SBA.
The following table summarizes designated internal risk rating categories by portfolio segment and loan class, by origination year, in the prior period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Cost Basis | Cost Basis | Total |
Real estate - commercial mortgage | | | | | | | | |
| Pass | $ | 1,086,113 | | $ | 899,172 | | $ | 826,866 | | $ | 624,653 | | $ | 712,223 | | $ | 2,356,308 | | $ | 55,370 | | $ | — | | $ | 6,560,705 | |
| Special Mention | 1,317 | | 60,732 | | 96,508 | | 25,280 | | 33,595 | | 169,732 | | 115 | | — | | 387,279 | |
| Substandard or Lower | 1,537 | | 8,516 | | 28,810 | | 68,818 | | 69,793 | | 151,450 | | 684 | | 1,488 | | 331,096 | |
| Total real estate - commercial mortgage | 1,088,967 | | 968,420 | | 952,184 | | 718,751 | | 815,611 | | 2,677,490 | | 56,169 | | 1,488 | | 7,279,080 | |
Real estate - commercial mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | (14) | | (25) | | (6,972) | | (1,517) | | (198) | | — | | (8,726) | |
| Current period recoveries | — | | — | | — | | — | | 983 | | 1,491 | | — | | — | | 2,474 | |
| Total net (charge-offs) recoveries | — | | — | | (14) | | (25) | | (5,989) | | (26) | | (198) | | — | | (6,252) | |
Commercial and industrial(2) | | | | | | | | |
| Pass | 855,924 | | 520,802 | | 396,575 | | 232,805 | | 147,675 | | 581,762 | | 1,177,857 | | 339 | | 3,913,739 | |
| Special Mention | 5,386 | | 8,538 | | 33,937 | | 8,301 | | 10,346 | | 23,380 | | 52,386 | | 95 | | 142,369 | |
| Substandard or Lower | 1,225 | | 9,775 | | 19,393 | | 24,327 | | 11,912 | | 34,825 | | 49,562 | | 1,200 | | 152,219 | |
| Total commercial and industrial | 862,535 | | 539,115 | | 449,905 | | 265,433 | | 169,933 | | 639,967 | | 1,279,805 | | 1,634 | | 4,208,327 | |
Commercial and industrial | | | | | | | | |
| Current period gross charge-offs | (2,977) | | (406) | | (4,966) | | (208) | | (286) | | (800) | | (5,694) | | — | | (15,337) | |
| Current period recoveries | 6 | | 39 | | 4,691 | | 841 | | 457 | | 2,342 | | 1,211 | | — | | 9,587 | |
| Total net (charge-offs) recoveries | (2,971) | | (367) | | (275) | | 633 | | 171 | | 1,542 | | (4,483) | | — | | (5,750) | |
Real estate - construction(1) | | | | | | | | |
| Pass | 190,030 | | 315,811 | | 113,245 | | 83,886 | | 17,545 | | 117,157 | | 46,409 | | — | | 884,083 | |
| Special Mention | 5,843 | | 775 | | 9,984 | | 20,200 | | 15,724 | | 6,315 | | — | | — | | 58,841 | |
| Substandard or Lower | — | | — | | — | | — | | 1,912 | | 4,185 | | 227 | | — | | 6,324 | |
| Total real estate - construction | 195,873 | | 316,586 | | 123,229 | | 104,086 | | 35,181 | | 127,657 | | 46,636 | | — | | 949,248 | |
Real estate - construction(1) | | | | | | | | |
| Current period gross charge-offs | — | | — | | (39) | | — | | — | | — | | — | | — | | (39) | |
| Current period recoveries | — | | — | | 39 | | — | | — | | 1,373 | | — | | — | | 1,412 | |
| Total net (charge-offs) recoveries | — | | — | | — | | — | | — | | 1,373 | | — | | — | | 1,373 | |
Total | | | | | | | | |
| Pass | $ | 2,132,067 | | $ | 1,735,785 | | $ | 1,336,686 | | $ | 941,344 | | $ | 877,443 | | $ | 3,055,227 | | $ | 1,279,636 | | $ | 339 | | $ | 11,358,527 | |
| Special Mention | 12,546 | | 70,045 | | 140,429 | | 53,781 | | 59,665 | | 199,427 | | 52,501 | | 95 | | 588,489 | |
| Substandard or Lower | 2,762 | | 18,291 | | 48,203 | | 93,145 | | 83,617 | | 190,460 | | 50,473 | | 2,688 | | 489,639 | |
| Total | $ | 2,147,375 | | $ | 1,824,121 | | $ | 1,525,318 | | $ | 1,088,270 | | $ | 1,020,725 | | $ | 3,445,114 | | $ | 1,382,610 | | $ | 3,122 | | $ | 12,436,655 | |
(1) Excludes real estate - construction - other.
(2) Loans originated in 2021 and 2020 include $301.3 million of PPP loans that were assigned a rating of Pass based on the existence of a federal government guaranty through the SBA.
The Corporation considers the performance of the loan portfolio and its impact on the ACL. The Corporation does not assign internal risk ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, construction loans to individuals secured by residential real estate, consumer and equipment lease financing. For these loans, the most relevant credit quality indicator is delinquency status, and the Corporation evaluates credit quality based on the aging status of the loan. The following table presents the amortized cost of these loans based on payment activity, by origination year, for the current period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Cost Basis | Cost Basis | Total |
Real estate - residential mortgage | | | | | | | | | |
| Performing | $ | 933,903 | | $ | 1,708,703 | | $ | 1,054,126 | | $ | 286,167 | | $ | 87,455 | | $ | 620,416 | | $ | — | | $ | — | | $ | 4,690,770 | |
| Non-performing | 1,199 | | 5,104 | | 6,597 | | 6,466 | | 4,587 | | 22,556 | | — | | — | | 46,509 | |
| Total real estate - residential mortgage | 935,102 | | 1,713,807 | | 1,060,723 | | 292,633 | | 92,042 | | 642,972 | | — | | — | | 4,737,279 | |
Real estate - residential mortgage | | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | (66) | | (66) | |
| Current period recoveries | — | | — | | 4 | | — | | 27 | | 261 | | — | | 133 | | 425 | |
| Total net (charge-offs) recoveries | — | | — | | 4 | | — | | 27 | | 261 | | — | | 67 | | 359 | |
Consumer and real estate - home equity | | | | | | | | |
| Performing | 416,631 | | 109,724 | | 80,422 | | 52,384 | | 45,642 | | 211,127 | | 842,226 | | 34,061 | | 1,792,217 | |
| Non-performing | 292 | | 298 | | 174 | | 36 | | 98 | | 6,512 | | 1,722 | | 668 | | 9,800 | |
| Total real estate - home equity | 416,923 | | 110,022 | | 80,596 | | 52,420 | | 45,740 | | 217,639 | | 843,948 | | 34,729 | | 1,802,017 | |
Consumer and real estate - home equity | | | | | | | | |
| Current period gross charge-offs | — | | (587) | | (70) | | (108) | | (16) | | (442) | | (178) | | (3,011) | | (4,412) | |
| Current period recoveries | — | | 44 | | 88 | | 29 | | 16 | | 595 | | 294 | | 1,515 | | 2,581 | |
| Total net (charge-offs) recoveries | — | | (543) | | 18 | | (79) | | — | | 153 | | 116 | | (1,496) | | (1,831) | |
Construction - other | | | | | | | | | |
| Performing | 164,924 | | 73,492 | | 10,892 | | — | | 1,077 | | — | | — | | — | | 250,385 | |
| Non-performing | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total construction - other | 164,924 | | 73,492 | | 10,892 | | — | | 1,077 | | — | | — | | — | | 250,385 | |
Construction - other | | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Current period recoveries | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total net (charge-offs) recoveries | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Equipment lease financing and other | | | | | | | | | |
| Performing | 146,198 | | 39,427 | | 40,024 | | 29,309 | | 15,019 | | 15,670 | | — | | — | | 285,647 | |
| Non-performing | — | | — | | — | | — | | — | | 13,307 | | — | | — | | 13,307 | |
| Total leasing and other | 146,198 | | 39,427 | | 40,024 | | 29,309 | | 15,019 | | 28,977 | | — | | — | | 298,954 | |
Equipment lease financing and other | | | | | | | | | |
| Current period gross charge-offs | (506) | | (167) | | (140) | | (80) | | (47) | | (1,191) | | — | | — | | (2,131) | |
| Current period recoveries | 63 | | 18 | | 82 | | 25 | | 10 | | 268 | | — | | 293 | | 759 | |
| Total net (charge-offs) recoveries | (443) | | (149) | | (58) | | (55) | | (37) | | (923) | | — | | 293 | | (1,372) | |
Total | | | | | | | | | |
| Performing | $ | 1,661,656 | | $ | 1,931,346 | | $ | 1,185,464 | | $ | 367,860 | | $ | 149,193 | | $ | 847,213 | | $ | 842,226 | | $ | 34,061 | | $ | 7,019,019 | |
| Non-performing | 1,491 | | 5,402 | | 6,771 | | 6,502 | | 4,685 | | 42,375 | | 1,722 | | 668 | | 69,616 | |
| Total | $ | 1,663,147 | | $ | 1,936,748 | | $ | 1,192,235 | | $ | 374,362 | | $ | 153,878 | | $ | 889,588 | | $ | 843,948 | | $ | 34,729 | | $ | 7,088,635 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Cost Basis | Cost Basis | Total |
Real estate - residential mortgage | | | | | | | | | |
| Performing | $ | 1,548,174 | | $ | 1,133,602 | | $ | 344,625 | | $ | 113,801 | | $ | 198,164 | | $ | 468,842 | | $ | — | | $ | — | | $ | 3,807,208 | |
| Non-performing | — | | 6,753 | | 2,189 | | 3,424 | | 2,844 | | 24,332 | | — | | — | | 39,542 | |
| Total real estate - residential mortgage | 1,548,174 | | 1,140,355 | | 346,814 | | 117,225 | | 201,008 | | 493,174 | | — | | — | | 3,846,750 | |
Real estate - residential mortgage | | | | | | | | | |
| Current period gross charge-offs | — | | (626) | | (148) | | (125) | | (4) | | (387) | | — | | — | | (1,290) | |
| Current period recoveries | — | | — | | 1 | | 18 | | — | | 264 | | 92 | | — | | 375 | |
| Total net (charge-offs) recoveries | — | | (626) | | (147) | | (107) | | (4) | | (123) | | 92 | | — | | (915) | |
Consumer and real estate - home equity | | | | | | | | |
| Performing | 162,441 | | 102,918 | | 73,769 | | 68,564 | | 33,254 | | 135,412 | | 990,842 | | 3,999 | | 1,571,199 | |
| Non-performing | 122 | | 101 | | 60 | | 51 | | 314 | | 2,348 | | 8,512 | | 198 | | 11,706 | |
| Total real estate - home equity | 162,563 | | 103,019 | | 73,829 | | 68,615 | | 33,568 | | 137,760 | | 999,354 | | 4,197 | | 1,582,905 | |
Consumer real estate - home equity | | | | | | | | | |
| Current period gross charge-offs | (175) | | (491) | | (496) | | (238) | | (224) | | (411) | | (1,274) | | — | | (3,309) | |
| Current period recoveries | — | | 223 | | 131 | | 131 | | 167 | | 1,048 | | 645 | | — | | 2,345 | |
| Total net (charge-offs) recoveries | (175) | | (268) | | (365) | | (107) | | (57) | | 637 | | (629) | | — | | (964) | |
Construction - other | | | | | | | | | |
| Performing | 144,652 | | 40,040 | | 638 | | 5,028 | | — | | — | | — | | — | | 190,358 | |
| Non-performing | — | | — | | — | | — | | 173 | | — | | — | | — | | 173 | |
| Total construction - other | 144,652 | | 40,040 | | 638 | | 5,028 | | 173 | | — | | — | | — | | 190,531 | |
Construction - other | | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Current period recoveries | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total net (charge-offs) recoveries | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Equipment lease financing and other | | | | | | | | | |
| Performing | 97,077 | | 65,316 | | 49,591 | | 34,107 | | 22,444 | | 1,369 | | — | | — | | 269,904 | |
| Non-performing | — | | — | | — | | — | | 15,503 | | 138 | | — | | — | | 15,641 | |
| Total leasing and other | 97,077 | | 65,316 | | 49,591 | | 34,107 | | 37,947 | | 1,507 | | — | | — | | 285,545 | |
Equipment lease financing and other | | | | | | | | | |
| Current period gross charge-offs | (975) | | (1,276) | | — | | — | | — | | — | | — | | — | | (2,251) | |
| Current period recoveries | 255 | | 539 | | 88 | | 10 | | 18 | | 43 | | — | | — | | 953 | |
| Total net (charge-offs) recoveries | (720) | | (737) | | 88 | | 10 | | 18 | | 43 | | — | | — | | (1,298) | |
Total | | | | | | | | | |
| Performing | $ | 1,952,344 | | $ | 1,341,876 | | $ | 468,623 | | $ | 221,500 | | $ | 253,862 | | $ | 605,623 | | $ | 990,842 | | $ | 3,999 | | $ | 5,838,669 | |
| Non-performing | 122 | | 6,854 | | 2,249 | | 3,475 | | 18,834 | | 26,818 | | 8,512 | | 198 | | 67,062 | |
| Total | $ | 1,952,466 | | $ | 1,348,730 | | $ | 470,872 | | $ | 224,975 | | $ | 272,696 | | $ | 632,441 | | $ | 999,354 | | $ | 4,197 | | $ | 5,905,731 | |
The following table presents non-performing assets:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (dollars in thousands) |
Non-accrual loans | $ | 144,443 | | | $ | 143,666 | |
Loans 90 days or more past due and still accruing(1) | 27,463 | | | 8,453 | |
Total non-performing loans | 171,906 | | | 152,119 | |
OREO(2) | 5,790 | | | 1,817 | |
Total non-performing assets | $ | 177,696 | | | $ | 153,936 | |
(1) Excludes PPP loans which are fully guaranteed by the federal government of $7.7 million as of December 31, 2022.
(2) Excludes $6.0 million of residential mortgage properties for which formal foreclosure proceedings were in process as of December 31, 2022.
The following tables present the aging of the amortized cost basis of loans, by class segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 | | 60-89 | | ≥ 90 Days | | | | | | |
| Days Past | | Days Past | | Past Due | | Non- | | | | |
| Due | | Due | | and Accruing | | Accrual | | Current | | Total |
| (dollars in thousands) |
December 31, 2022 | | | | | | | | | | | |
Real estate – commercial mortgage | $ | 10,753 | | | $ | 4,644 | | | $ | 2,473 | | | $ | 70,161 | | | $ | 7,605,804 | | | $ | 7,693,835 | |
Commercial and industrial(1) | 6,067 | | | 2,289 | | | 1,172 | | | 27,116 | | | 4,440,893 | | | 4,477,537 | |
Real estate – residential mortgage | 57,061 | | | 8,209 | | | 20,215 | | | 26,294 | | | 4,625,500 | | | 4,737,279 | |
Real estate – home equity | 5,666 | | | 2,444 | | | 2,704 | | | 6,105 | | | 1,085,919 | | | 1,102,838 | |
Real estate – construction | 1,762 | | | 1,758 | | | — | | | 1,368 | | | 1,265,037 | | | 1,269,925 | |
Consumer | 6,692 | | | 1,339 | | | 899 | | | 92 | | | 690,157 | | | 699,179 | |
Equipment lease financing and other | 348 | | | 122 | | | — | | | 13,307 | | | 285,177 | | | 298,954 | |
Total | $ | 88,349 | | | $ | 20,805 | | | $ | 27,463 | | | $ | 144,443 | | | $ | 19,998,487 | | | $ | 20,279,547 | |
(1) Excludes delinquent PPP loans 30-59 days past due, 60-89 days and 90 days or more past due of $0.1 million, $0.7 million and $7.7 million, respectively, which are fully guaranteed by the federal government.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | ≥ 90 Days Past Due and Accruing | | Non- accrual | | Current | | Total |
| (dollars in thousands) |
December 31, 2021 | | | | | | | | | | | |
Real estate – commercial mortgage | $ | 1,089 | | | $ | 1,750 | | | $ | 1,229 | | | $ | 52,815 | | | $ | 7,222,197 | | | $ | 7,279,080 | |
Commercial and industrial | 5,457 | | | 1,932 | | | 488 | | | 30,141 | | | 4,170,309 | | | 4,208,327 | |
Real estate – residential mortgage | 22,957 | | | 2,920 | | | 4,130 | | | 35,269 | | | 3,781,474 | | | 3,846,750 | |
Real estate – home equity | 4,369 | | | 1,154 | | | 2,253 | | | 8,671 | | | 1,101,801 | | | 1,118,248 | |
Real estate – construction | 1,318 | | | — | | | — | | | 901 | | | 1,137,560 | | | 1,139,779 | |
Consumer | 3,561 | | | 876 | | | 353 | | | 229 | | | 459,638 | | | 464,657 | |
Equipment lease financing and other | 226 | | | 27 | | | — | | | 15,640 | | | 252,616 | | | 268,509 | |
Total | $ | 38,977 | | | $ | 8,659 | | | $ | 8,453 | | | $ | 143,666 | | | $ | 18,125,595 | | | $ | 18,325,350 | |
| | | | | | | | | | | |
Collateral-Dependent Loans
A financial asset is considered to be collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of financial assets deemed collateral-dependent, the Corporation elected the practical expedient to estimate expected credit losses based on the collateral's fair value less cost to sell. In most cases, the Corporation records a partial charge-off to reduce the loan's carrying value to the collateral's fair value less cost to sell. Substantially all of the collateral supporting collateral-dependent financial assets consists
of various types of real estate including: residential properties; commercial properties such as retail centers, office buildings, and lodging; agriculture land; and vacant land.
Troubled Debt Restructurings
The following table presents TDRs, by class segment for the years ended December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Real estate - commercial mortgage | $ | 3,255 | | | $ | 3,464 | |
Commercial and industrial | 1,809 | | | 1,857 | |
Real estate - residential mortgage | 13,804 | | | 11,948 | |
Real estate - home equity | 10,717 | | | 12,218 | |
| | | |
Consumer | — | | | 5 | |
| | | |
Total accruing TDRs | 29,585 | | | 29,492 | |
Non-accrual TDRs(1) | 31,853 | | | 55,945 | |
Total TDRs | $ | 61,438 | | | $ | 85,437 | |
(1) Included within non-accrual loans in the preceding table.
The following table presents TDRs, by class segment, for loans that were modified during the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Number of Loans | | Post-Modification Recorded Investment | | Number of Loans | | Post-Modification Recorded Investment | | Number of Loans | | Post-Modification Recorded Investment |
| (dollars in thousands) |
Real estate - commercial mortgage | 1 | | | $ | 150 | | | 9 | | | $ | 16,020 | | | 12 | | | $ | 24,868 | |
Commercial and industrial | 1 | | | 82 | | | 10 | | | 2,823 | | | 20 | | | 5,218 | |
Real estate - residential mortgage | 5 | | | 293 | | | 46 | | | 13,256 | | | 48 | | | 10,493 | |
Real estate - home equity | 5 | | | 329 | | | 30 | | | 1,226 | | | 48 | | | 4,359 | |
Real estate - construction | — | | | — | | | 1 | | | 154 | | | — | | | — | |
Consumer | 13 | | | 792 | | | — | | | — | | | 14 | | | 345 | |
| | | | | | | | | | | |
Total | 25 | | | $ | 1,646 | | | 96 | | | $ | 33,479 | | | 142 | | | $ | 45,283 | |
Restructured loan modifications may include payment schedule modifications, interest rate concessions, bankruptcies, principal reduction or some combination of these concessions. The restructured loan modifications primarily included maturity date extensions, rate modifications and payment schedule modifications.
In accordance with regulatory guidance, payment schedule modifications granted after March 13, 2020 to borrowers impacted by the effects of COVID-19 and who are not delinquent at the time of the payment schedule modifications have been excluded from TDRs. As of December 31, 2022, $3.4 million in recorded investment remain in an active COVID-19 deferral program.
| | | | | | | | | | | | | | |
NOTE 6 – PREMISES AND EQUIPMENT |
The following is a summary of premises and equipment as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Land | $ | 39,752 | | | $ | 38,494 | |
Buildings and improvements | 357,698 | | | 346,098 | |
Furniture and equipment | 152,048 | | | 145,627 | |
Construction in progress | 8,711 | | | 8,644 | |
Total premises and equipment | 558,209 | | | 538,863 | |
Less: Accumulated depreciation and amortization | (333,068) | | | (318,506) | |
Net premises and equipment | $ | 225,141 | | | $ | 220,357 | |
| | | | | | | | | | | | | | |
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS |
Goodwill totaled $550.5 million and $534.3 million as of December 31, 2022 and 2021, respectively. The increase was the result of the Prudential Bancorp acquisition. See "Note 2 - Business Combinations" in the Notes to Consolidated Financial Statements for additional information. There were no goodwill impairment charges in 2022 based on the annual assessment.
The estimated fair values of the Corporation's reporting units are subject to uncertainty, including future changes in fair values of banks in general and future operating results of reporting units, which could differ significantly from the assumptions used in the current valuation of reporting units.
The follow table summarizes intangible assets, which are included in goodwill and intangible assets on the consolidated balance sheets:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Intangible assets |
Amortizing intangible assets | $ | 13,596 | | | $ | 5,368 | |
| | | |
Accumulated amortization | (3,311) | | | (1,580) | |
Net intangibles | $ | 10,285 | | | $ | 3,788 | |
Net intangibles of $10.3 million as of December 31, 2022, included $7.2 million of CDI that was recorded as part of the Merger and is being amortized over seven years using the sum-of-the-years digits method.
| | | | | | | | | | | | | | |
NOTE 8 – MORTGAGE SERVICING RIGHTS |
The following table summarizes the changes in MSRs, which are included in other assets on the consolidated balance sheets, with adjustments to the fair value included in mortgage banking income on the consolidated statements of income:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
Amortized cost: | | | | | |
Balance at beginning of period | $ | 35,993 | | | $ | 38,745 | | | $ | 39,267 | |
Originations of MSRs | 4,067 | | | 9,216 | | | 12,173 | |
Amortization | (5,843) | | | (11,968) | | | (12,695) | |
Balance at end of period | $ | 34,217 | | | $ | 35,993 | | | $ | 38,745 | |
| | | | | |
Valuation allowance: | | | | | |
Balance at beginning of period | $ | (600) | | | $ | (10,500) | | | $ | — | |
Reduction (addition) to valuation allowance | 600 | | | 9,900 | | | (10,500) | |
Balance at end of period | $ | — | | | $ | (600) | | | $ | (10,500) | |
| | | | | |
Net MSRs at end of period | $ | 34,217 | | | $ | 35,393 | | | $ | 28,245 | |
Estimated fair value of MSRs at end of period | $ | 50,044 | | | $ | 35,393 | | | $ | 28,245 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
MSRs represent the economic value of existing contractual rights to service mortgage loans that have been sold. The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $4.2 billion and $4.3 billion as of December 31, 2022 and 2021, respectively. Actual and expected prepayments of the underlying mortgage loans can impact the value of MSRs. The Corporation accounts for MSRs at the lower of amortized cost or fair value.
The fair value of MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The fair values of MSRs were $50.0 million and $35.4 million as of December 31, 2022 and 2021, respectively. Based on its fair value analysis as of December 31, 2022, the Corporation determined that no valuation allowance was required for the year ended December 31, 2022. The valuation allowance was $0.6 million and $10.5 million at December 31, 2021 and 2020, respectively.
Total servicing income, recognized as an increase to mortgage banking income in the consolidated statements of income, was $10.6 million, $11.2 million and $11.9 million as of December 31, 2022, 2021 and 2020, respectively.
Total MSR amortization expense, recognized as a reduction to mortgage banking income in the consolidated statements of income, was $5.8 million, $12.0 million and $12.7 million in 2022, 2021 and 2020, respectively. Estimated future MSR amortization expense, based on balances as of December 31, 2022, and the estimated remaining lives of the underlying loans, follows (dollars in thousands):
| | | | | |
Year | |
2023 | $ | 4,391 | |
2024 | 3,915 | |
2025 | 3,474 | |
2026 | 3,074 | |
2027 | 2,713 | |
Thereafter | 16,650 | |
Total estimated amortization expense | $ | 34,217 | |
Deposits consisted of the following as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 7,006,388 | | | $ | 7,370,963 | |
Interest-bearing demand | 5,410,903 | | | 5,819,539 | |
Savings and money market accounts | 6,434,621 | | | 6,403,995 | |
Total demand and savings | 18,851,912 | | | 19,594,497 | |
Brokered deposits | 208,416 | | | 251,526 | |
Time deposits | 1,589,210 | | | 1,727,476 | |
Total Deposits | $ | 20,649,538 | | | $ | 21,573,499 | |
The scheduled maturities of time deposits as of December 31, 2022 were as follows (dollars in thousands):
| | | | | |
Year | |
2023 | $ | 966,235 | |
2024 | 234,681 | |
2025 | 285,527 | |
2026 | 19,704 | |
2027 | 18,474 | |
Thereafter | 64,589 | |
| $ | 1,589,210 | |
Included in time deposits were certificates of deposit equal to or greater than $100,000 of $691.4 million and $745.5 million as of December 31, 2022 and 2021, respectively. Time deposits of $250,000 or more were $214.8 million and $219.0 million as of December 31, 2022 and 2021, respectively.
Borrowings as of December 31, 2022 and 2021 and the related maximum amounts outstanding at the end of any month in each of the two years then ended are presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31 | | Maximum Outstanding | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| (dollars in thousands) |
Federal funds purchased | $ | 191,000 | | | $ | — | | | $ | 292,000 | | | $ | — | | | | | |
Federal Home Loan Bank advances | 1,250,000 | | | — | | | 1,250,000 | | | 535,969 | | | | | |
Other borrowings: | | | | | | | | | | | |
Customer repurchase agreements | 574,394 | | | 416,764 | | | 574,394 | | | 552,547 | | | | | |
Other repurchase agreements | 315,000 | | | — | | | 315,000 | | | — | | | | | |
Other borrowings | 1,179 | | | 939 | | | N/A | | N/A | | | | |
Total other borrowings | $ | 890,573 | | | $ | 417,703 | | | | | | | | | |
In connection with the Merger, the Corporation assumed $253.5 million of Prudential Bancorp FHLB advances.
As of December 31, 2022, the Corporation had aggregate availability under federal funds lines of $2.3 billion, with $0.2 billion of outstanding borrowings against that amount. A combination of commercial real estate loans, commercial loans, consumer loans and investment securities were pledged to the FRB to provide access to the FRB discount window borrowings. As of December 31, 2022 and 2021, the Corporation had $1.3 billion and $0.9 billion, respectively, of collateralized borrowing availability at the FRB discount window and no outstanding borrowings.
As of December 31, 2022, the Corporation had additional borrowing capacity of approximately $4.6 billion with the FHLB. Advances from the FHLB, when utilized, are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.
The following is included in senior and subordinated debt as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Subordinated debt | $ | 543,601 | | | $ | 608,519 | |
| | | |
Junior subordinated deferrable interest debentures | — | | | 16,496 | |
Unamortized discounts and issuance costs | (3,967) | | | (4,609) | |
Total senior debt and subordinated debt | $ | 539,634 | | | $ | 620,406 | |
The following table summarizes the scheduled maturities with an original maturity of one year or more as of December 31, 2022 (dollars in thousands):
| | | | | |
Year | |
2023 | $ | — | |
2024 | 168,778 | |
2025 | — | |
2026 | — | |
2027 | — | |
Thereafter | 375,000 | |
Unamortized discounts and issuance costs | (4,144) | |
| $ | 539,634 | |
On March 16, 2022, $65.0 million of senior notes with a fixed rate of 3.60% were repaid upon their maturity.
On March 30, 2021, pursuant to a cash tender offer, the Corporation purchased $75.0 million and $60.0 million of its subordinated notes that are scheduled to mature on November 15, 2024 and its senior notes which matured on March 16, 2022, respectively. The Corporation incurred $11.3 million in debt extinguishment costs and expensed $0.8 million of unamortized discount costs. In addition, during the first quarter of 2021, the Corporation prepaid $536.0 million of FHLB advances and incurred $20.9 million in prepayment penalties.
In March 2020, the Corporation issued $200.0 million and $175.0 million of subordinated notes due in 2030 and 2035, respectively. The subordinated notes maturing in 2030 were issued with a fixed-to-floating rate of 3.25% and an effective rate of 3.35%, due to issuance costs, and the subordinated notes maturing in 2035 were issued with a fixed-to-floating rate of 3.75% and an effective rate of 3.85%, due to issuance costs.
In June 2015, the Corporation issued $150.0 million of subordinated notes, which mature on November 15, 2024 and carry a fixed rate of 4.50% and an effective rate of 4.69% as a result of discounts and issuance costs. Interest is paid semi-annually in May and November.
In November 2014, the Corporation issued $100.0 million of subordinated notes, which mature on November 15, 2024 and carry a fixed rate of 4.50% and an effective rate of 4.87% as a result of discounts and issuance costs. Interest is paid semi-annually in May and November.
The Corporation owned all of the common stock of the Columbia Bancorp Statutory Trust, Columbia Bancorp Statutory Trust II and Columbia Bancorp Statutory Trust III, each of which issued TruPS in conjunction with the Corporation issuing junior subordinated deferrable interest debentures to these trusts. In September 2022, the Corporation redeemed all of the outstanding junior subordinated deferrable interest debentures issued to these trusts, totaling approximately $17.2 million, and these trusts redeemed all of the outstanding TruPS in a like amount, after which the subsidiary trusts were canceled.
| | | | | | | | | | | | | | |
NOTE 11 – DERIVATIVE FINANCIAL INSTRUMENTS |
The following table presents the notional amounts and fair values of derivative financial instruments as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Notional Amount | | Asset (Liability) Fair Value | | Notional Amount | | Asset (Liability) Fair Value |
| (dollars in thousands) |
Interest Rate Locks with Customers | | | | | | | |
Positive fair values | $ | 70,836 | | | $ | 182 | | | $ | 261,428 | | | $ | 2,326 | |
Negative fair values | 4,939 | | | (51) | | | 2,549 | | | (23) | |
Forward Commitments | | | | | | | |
Positive fair values | — | | | — | | | 51,000 | | | 41 | |
Negative fair values | 10,000 | | | (147) | | | — | | | — | |
Interest Rate Derivatives with Customers | | | | | | | |
Positive fair values | 171,317 | | | 3,337 | | | 3,213,924 | | | 153,752 | |
Negative fair values | 3,802,480 | | | (280,401) | | | 752,462 | | | (4,766) | |
Interest Rate Derivatives with Dealer Counterparties | | | | | | | |
Positive fair values | 3,802,480 | | | 161,956 | | | 752,462 | | | 4,766 | |
Negative fair values | 171,317 | | | (3,703) | | | 3,213,924 | | | (79,889) | |
Interest Rate Derivatives used in Cash Flow Hedges | | | | | | | |
Positive fair values | 600,000 | | | 1,321 | | | 500,000 | | | 60 | |
Negative fair values | 1,000,000 | | | (12,163) | | | 500,000 | | | (1,432) | |
Foreign Exchange Contracts with Customers | | | | | | | |
Positive fair values | 11,123 | | | 571 | | | 7,629 | | | 229 | |
Negative fair values | 3,672 | | | (85) | | | 3,388 | | | (51) | |
Foreign Exchange Contracts with Correspondent Banks | | | | | | | |
Positive fair values | 4,887 | | | 101 | | | 3,656 | | | 69 | |
Negative fair values | 8,280 | | | (499) | | | 9,364 | | | (240) | |
The following table presents the effect of fair value and cash flow hedge accounting on AOCI for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in OCI on Derivative | | Amount of Gain (Loss) Recognized in OCI Included Component | | Amount of Gain (Loss) Recognized in OCI Excluded Component | | Location of Gain (Loss) Recognized from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income Included Component | | Amount of Gain (Loss) Reclassified from AOCI into Income Excluded Component |
| | | | | |
| |
| (in thousands) |
Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | | | | |
Year Ended December 31, 2022 | | | | | | | | | | | | |
Interest Rate Products | $ | (81,400) | | | $ | (81,400) | | | $ | — | | | Interest Income | | $ | (7,761) | | | $ | (7,761) | | | $ | — | |
Year Ended December 31, 2021 | | | | | | | | | | | | |
Interest Rate Products | (3,452) | | | (3,452) | | | — | | | Interest Income | | 2,776 | | | 2,776 | | | — | |
The following table presents the effect of fair value and cash flow hedge accounting on the income statement for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Income Classification |
| 2022 | | 2021 |
| Interest Income | | Interest Expense | | Interest Income | | Interest Expense |
| (in thousands) |
Total amounts of income line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (7,761) | | | $ | — | | | $ | 2,776 | | | $ | — | |
| | | | | | | |
| | | | | | | |
Interest contracts: | | | | | | | |
Amount of gain (loss) reclassified from AOCI into income | (7,761) | | | — | | | 2,776 | | | — | |
Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring | — | | | — | | | — | | | — | |
Amount of gain (loss) reclassified from AOCI into income - included component | (7,761) | | | — | | | 2,776 | | | — | |
Amount of gain (loss) reclassified from AOCI into income - excluded component | — | | | — | | | — | | | — | |
During the next twelve months, the Corporation estimates that an additional $38.5 million will be reclassified as a decrease to interest income.
The following table presents the fair value gains (losses) on derivative financial instruments for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Income Classification | | 2022 | | 2021 | | 2020 |
| | | (dollars in thousands) |
Mortgage banking derivatives(1) | Mortgage banking | | $ | (2,360) | | | $ | (3,392) | | | $ | 4,974 | |
Interest rate derivatives | Other expense | | — | | | 1,050 | | | 70 | |
Foreign exchange contracts | Other income | | 81 | | | (36) | | | 12 | |
Net fair value gains (losses) on derivative financial instruments | | | $ | (2,279) | | | $ | (2,378) | | | $ | 5,056 | |
(1) Includes interest rate locks with customers and forward commitments.
Fair Value Option
The Corporation has elected to measure mortgage loans held for sale at fair value. The following table presents a summary of mortgage loans held for sale and the impact of the fair value election on the consolidated financial statements as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Amortized cost(1) | $ | 7,180 | | | $ | 35,050 | |
Fair value | 7,264 | | | 35,768 | |
(1) Cost basis of mortgage loans held for sale represents the unpaid principal balance.
Losses related to changes in fair values of mortgage loans held for sale were $0.6 million for the year ended December 31, 2022. Losses related to changes in fair values of mortgage loans held for sale were $2.5 million for the year ended December 31, 2021, and gains related to changes in fair values of mortgage loans held for sale were $2.8 million for the year ended December 31, 2020. The gains and losses are recorded on the consolidated income statements as an adjustment to mortgage banking income.
Balance Sheet Offsetting
The fair values of interest rate derivative agreements and foreign exchange contracts the Corporation enters into with customers and dealer counterparties may be eligible for offset on the consolidated balance sheets if they are subject to master netting arrangements or similar agreements. The Corporation has elected to net its financial assets and liabilities designated as cash flow hedges when offsetting is permitted. The following table presents the financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amounts | | Gross Amounts Not Offset | | |
| Recognized | | on the Consolidated | | |
| on the | | Balance Sheets | | |
| Consolidated | | Financial | | Cash | | Net |
| Balance Sheets | | Instruments(1) | | Collateral(2) | | Amount |
| (in thousands) |
2022 | | | | | | | |
Interest rate derivative assets | $ | 166,614 | | | $ | (8,071) | | | $ | — | | | $ | 158,543 | |
Foreign exchange derivative assets with correspondent banks | 101 | | | (101) | | | — | | | — | |
Total | $ | 166,715 | | | $ | (8,172) | | | $ | — | | | $ | 158,543 | |
| | | | | | | |
Interest rate derivative liabilities | $ | 296,267 | | | $ | (2,771) | | | $ | (127,638) | | | $ | 165,858 | |
Foreign exchange derivative liabilities with correspondent banks | 499 | | | (101) | | | — | | | 398 | |
Total | $ | 296,766 | | | $ | (2,872) | | | $ | (127,638) | | | $ | 166,256 | |
| | | | | | | |
2021 | | | | | | | |
Interest rate derivative assets | $ | 158,578 | | | $ | (8,028) | | | $ | — | | | $ | 150,550 | |
Foreign exchange derivative assets with correspondent banks | 69 | | | (69) | | | — | | | — | |
Total | $ | 158,647 | | | $ | (8,097) | | | $ | — | | | $ | 150,550 | |
| | | | | | | |
Interest rate derivative liabilities | $ | 86,087 | | | $ | (6,656) | | | $ | (74,359) | | | $ | 5,072 | |
Foreign exchange derivative liabilities with correspondent banks | 240 | | | (69) | | | — | | | 171 | |
Total | $ | 86,327 | | | $ | (6,725) | | | $ | (74,359) | | | $ | 5,243 | |
(1) For interest rate derivative assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For interest rate derivative liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.
(2) Amounts represent cash collateral (pledged by the Corporation) or received from the counterparty on interest rate derivative transactions and foreign exchange contracts with financial institution counterparties. Interest rate derivatives with customers are collateralized by the same collateral securing the underlying loans to those borrowers. Cash collateral amounts are included in the table only to the extent of the net derivative fair values.
Cash Flow Hedge Terminations
In January 2023, the Corporation terminated interest rate derivatives designated as cash flow hedges with a combined notional amount of $1.0 billion. As the hedged transaction continues to be probable, the unrealized losses that have been recorded in AOCI will be recognized as reduction to interest income when the previously forecasted hedged item affects earnings in future periods.
| | | | | | | | | | | | | | |
NOTE 12 – REGULATORY MATTERS |
Regulatory Capital Requirements
The Corporation and the Bank are subject to regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can trigger certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Basel III Rules
In July 2013, the FRB approved 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 minimum regulatory capital requirements established by the Basel III Rules became effective on January 1, 2015, and became fully phased in on January 1, 2019. The Basel III Rules require the Corporation and the Bank to:
•Meet a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a minimum Tier 1 capital of 6.00% of risk-weighted assets;
•Meet a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets;
•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.
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.
The Corporation and the Bank are required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements. The rules provide that the failure to maintain the "capital conservation buffer" results in restrictions on capital distributions and discretionary cash bonus payments to executive officers. As a result, under the Basel III Rules, if the Bank fails to maintain the required minimum capital conservation buffer, the Corporation will be subject to limits, and possibly prohibitions, on its ability to obtain capital distributions from such subsidiaries. If the Corporation does not receive sufficient cash dividends from the Bank, it may not have sufficient funds to pay dividends on its common stock, service its debt obligations or repurchase its common stock.
As of December 31, 2022 and 2021, the Corporation's capital levels met the fully phased-in minimum capital requirements, including the new capital conservation buffers, as prescribed in the Basel III Rules.
As of December 31, 2022 and 2021, the Bank was well capitalized under the regulatory framework for prompt corrective action based on its capital ratio calculation. To be categorized as well capitalized, the bank was required to 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 below.
There are no conditions or events since December 31, 2022, that management believes have changed the institution's categories.
The following tables present the Total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage requirements under the Basel III Rules as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Actual | | For Capital Adequacy Purposes | | Well Capitalized |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| (dollars in thousands) |
Total Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 3,051,813 | | | 13.6 | % | | $ | 1,799,138 | | | 8.0 | % | | N/A | | N/A |
Fulton Bank, N.A. | 2,846,302 | | | 12.7 | | | 1,786,472 | | | 8.0 | | | $ | 2,233,090 | | | 10.0 | % |
Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 2,447,018 | | | 10.9 | % | | $ | 1,349,353 | | | 6.0 | % | | N/A | | N/A |
Fulton Bank, N.A | 2,612,363 | | | 11.7 | | | 1,339,854 | | | 6.0 | | | $ | 1,786,472 | | | 8.0 | % |
Common Equity Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 2,254,140 | | | 10.0% | | $ | 1,012,015 | | | 4.5 | % | | N/A | | N/A |
Fulton Bank, N.A | 2,568,363 | | | 11.5 | | | 1,004,890 | | | 4.5 | | | $ | 1,451,508 | | | 6.5 | % |
Tier I Leverage Capital (to Average Assets): | | | | | | | | | | | |
Corporation | $ | 2,447,018 | | | 9.5% | | $ | 1,032,543 | | | 4.0 | % | | N/A | | N/A |
Fulton Bank, N.A | 2,612,363 | | | 10.1 | | | 1,035,915 | | | 4.0 | | | $ | 1,294,893 | | | 5.0 | % |
N/A – Not applicable as "well capitalized" applies to banks only.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Actual | | For Capital Adequacy Purposes | | Well Capitalized |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| (dollars in thousands) |
Total Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 2,841,529 | | | 14.1 | % | | $ | 1,610,429 | | | 8.0 | % | | N/A | | N/A |
Fulton Bank, N.A. | 2,591,332 | | | 12.9 | | | 1,602,597 | | | 8.0 | | | $ | 2,003,246 | | | 10.0 | % |
Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 2,195,647 | | | 10.9 | % | | $ | 1,207,822 | | | 6.0 | % | | N/A | | N/A |
Fulton Bank, N.A | 2,395,890 | | | 12.0 | | | 1,201,948 | | | 6.0 | | | $ | 1,602,597 | | | 8.0 | % |
Common Equity Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | |
Corporation | $ | 2,002,769 | | | 9.9% | | $ | 905,866 | | | 4.5 | % | | N/A | | N/A |
Fulton Bank, N.A | 2,351,890 | | | 11.7 | | | 901,461 | | | 4.5 | | | $ | 1,302,110 | | | 6.5 | % |
Tier I Leverage Capital (to Average Assets): | | | | | | | | | | | |
Corporation | $ | 2,195,647 | | | 8.6 | % | | $ | 1,023,787 | | | 4.0 | % | | N/A | | N/A |
Fulton Bank, N.A | 2,395,890 | | | 9.4 | | | 1,017,083 | | | 4.0 | | | $ | 1,271,354 | | | 5.0 | % |
N/A – Not applicable as "well capitalized" applies to banks only.
Dividend and Loan Limitations
The dividends that may be paid by the Bank to the Parent Company are subject to certain legal and regulatory limitations. The total amount available for payment of dividends by the Bank to the Parent Company was approximately $151.6 million as of December 31, 2022, based on the Bank maintaining enough capital to be considered well capitalized under the Basel III Rules.
Under current regulations, the Bank is limited in the amount it may loan to its affiliates, including the Parent Company. Loans to a single affiliate may not exceed 10%, and the aggregate of loans to all affiliates may not exceed 20% of the Bank's regulatory capital.
The components of income taxes are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
Current tax expense: | | | | | |
Federal | $ | 44,478 | | | $ | 35,692 | | | $ | 38,397 | |
State | 6,906 | | | 10,646 | | | 7,389 | |
Total current tax expense | 51,384 | | | 46,338 | | | 45,786 | |
Deferred tax (benefit) expense: | | | | | |
Federal | 8,974 | | | 11,081 | | | (18,131) | |
State | (324) | | | 1,329 | | | (3,460) | |
Total deferred tax (benefit) expense | 8,650 | | | 12,410 | | | (21,591) | |
Total income tax expense | $ | 60,034 | | | $ | 58,748 | | | $ | 24,195 | |
The differences between the effective income tax rate and the federal statutory income tax rate are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Tax credit investments | (2.0) | | | (3.0) | | | (5.7) | |
Tax-exempt income | (3.5) | | | (3.0) | | | (4.9) | |
Bank owned life insurance | (0.7) | | | (0.5) | | | (0.7) | |
State income taxes, net of federal benefit | 1.2 | | | 2.6 | | | 1.1 | |
| | | | | |
| | | | | |
Executive compensation | 0.3 | | | 0.1 | | | — | |
| | | | | |
FDIC Premium | 0.3 | | | 0.3 | | | 0.3 | |
Penalties | — | | | — | | | 0.2 | |
Other, net | 0.7 | | | 0.1 | | | 0.7 | |
Effective income tax rate | 17.3 | % | | 17.6 | % | | 12.0 | % |
The net DTA recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Deferred tax assets: | | | |
Unrealized holding losses on securities | $ | 110,689 | | | $ | — | |
Allowance for credit losses | 65,481 | | | 62,465 | |
State loss carryforwards | 26,421 | | | 23,996 | |
Lease Liability | 21,264 | | | 21,034 | |
Tax credit investments | 11,186 | | | 11,203 | |
Other accrued expenses | 10,059 | | | 10,633 | |
Deferred compensation | 9,014 | | | 9,190 | |
Tax credit carryforwards | 5,146 | | | 27,192 | |
Stock-based compensation | 4,681 | | | 3,499 | |
| | | |
| | | |
Other | 8,158 | | | 7,348 | |
Total gross deferred tax assets | $ | 272,099 | | | $ | 176,560 | |
Deferred tax liabilities: | | | |
Equipment lease financing | $ | 26,560 | | | $ | 41,049 | |
Right-of-use-asset | 19,276 | | | 18,671 | |
MSRs | 7,750 | | | 8,016 | |
Premises and equipment | 5,775 | | | 9,151 | |
Acquisition premiums/discounts | 5,492 | | | 5,466 | |
Postretirement and defined benefit plans | 1,755 | | | 1,243 | |
Unrealized holding gains on AFS securities | — | | | 10,432 | |
Intangible assets | — | | | 1,272 | |
Other | 14,507 | | | 13,492 | |
Total gross deferred tax liabilities | 81,115 | | | 108,792 | |
Net deferred tax asset, before valuation allowance | 190,984 | | | 67,768 | |
Valuation allowance | (26,421) | | | (23,996) | |
Net deferred tax asset | $ | 164,563 | | | $ | 43,772 | |
In assessing the realizability of DTAs, management considers whether it is more likely than not that some or all of the DTAs will not be realized. The ultimate realization of DTAs is dependent upon the generation of future taxable income and/or capital gain income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, such as those that may be implemented to generate capital gains, in making this assessment.
The valuation allowance relates to state net operating loss carryforwards for which realizability is uncertain. As of December 31, 2022 and 2021, the Corporation had state net operating loss carryforwards of approximately $335.0 million and $306.9 million, respectively, which are available to offset future state taxable income, and expire at various dates through 2042.
As of December 31, 2022, based on the level of historical taxable income and projections for future taxable income over the periods in which the DTAs are deductible, management believes it is more likely than not that the Corporation will realize the benefits of its DTAs, net of the valuation allowance.
As of December 31, 2022, the Corporation had tax credit carryforwards related to TCIs of approximately $5.1 million. The Corporation recorded a DTA of $5.1 million, reflecting the benefit of these tax credit carryforwards. Such DTA will begin to expire in 2042 if not yet utilized.
Uncertain Tax Positions
The following table summarizes the changes in unrecognized tax benefits for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
Balance at beginning of year | $ | 1,673 | | | $ | 2,151 | | | $ | 2,517 | |
| | | | | |
Current period tax positions | 112 | | | 120 | | | 95 | |
| | | | | |
Lapse of statute of limitations | (557) | | | (598) | | | (461) | |
Balance at end of year | $ | 1,228 | | | $ | 1,673 | | | $ | 2,151 | |
Virtually all of the Corporation's unrecognized tax benefits are for positions that are taken on an annual basis on state tax returns. Increases to unrecognized tax benefits will occur as a result of accruing for the nonrecognition of the position for the current year.
Decreases will occur as a result of the lapsing of the statute of limitations for the oldest outstanding year which includes the position. These offsetting increases and decreases are likely to continue in the future, including over the next twelve months. While the net effect on total unrecognized tax benefits during this period cannot be reasonably estimated, approximately $0.3 million is expected to reverse in 2023 due to lapsing of the statute of limitations. Decreases can also occur throughout the settlement of positions with taxing authorities.
As of December 31, 2022, if recognized, all of the Corporation's unrecognized tax benefits would impact the effective tax rate. Not included in the table above is $0.2 million of federal income tax benefit on unrecognized state tax benefits which, if recognized, would also impact the effective tax rate. Interest accrued related to unrecognized tax benefits is recorded as a component of income tax expense. Penalties, if incurred, would also be recognized in income tax expense. The Corporation recognized approximately $121.0 thousand and $75.0 thousand of recoveries in 2022 and 2021, respectively, for interest and penalties in income tax expense related to unrecognized tax positions. As of December 31, 2022 and 2021, total accrued interest and penalties related to unrecognized tax positions were approximately $0.5 million and $0.6 million, respectively.
The Corporation files income tax returns in the federal and various state jurisdictions. In most cases, unrecognized tax benefits are related to tax years that remain subject to examination by the relevant taxing authorities. With few exceptions, the Corporation is no longer subject to federal, state and local examinations by tax authorities for years before 2019.
Tax Credit Investments
The TCIs are included in other assets, with any unfunded equity commitments recorded in other liabilities on the consolidated balance sheets. Certain TCIs qualify for the proportional amortization method and are amortized over the period the Corporation expects to receive the tax credits, with the expense included within income taxes on the consolidated statements of income. Other TCIs are accounted for under the equity method of accounting, with amortization included within non-interest expense on the consolidated statements of income. This amortization includes equity in partnership losses and the systematic write-down of investments over the period in which income tax credits are earned. All of the TCIs are evaluated for impairment at the end of each reporting period.
The following table presents the balances of the Corporation's TCIs and related unfunded commitments as of December 31:
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | 2022 | | 2021 |
Included in other assets: | | (dollars in thousands) |
Affordable housing tax credit investments, net | | $ | 161,103 | | | $ | 161,052 | |
Other tax credit investments, net | | 61,077 | | | 42,987 | |
| Total TCIs, net | | $ | 222,180 | | | $ | 204,039 | |
Included in other liabilities: | | | | |
Unfunded affordable housing tax credit commitments | | $ | 53,108 | | | $ | 49,364 | |
Other tax credit liabilities | | 46,814 | | | 33,941 | |
| Total unfunded tax credit commitments and liabilities | | $ | 99,922 | | | $ | 83,305 | |
The following table presents other information relating to the Corporation's TCIs for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | (dollars in thousands) |
Components of income taxes: | | | | | |
Tax credits and benefits | $ | (27,154) | | | $ | (28,141) | | | $ | (32,940) | |
Amortization of tax credits and benefits, net of tax benefits | 19,298 | | | 17,378 | | | 20,429 | |
Deferred tax expense | 766 | | | 639 | | | 921 | |
| Total reduction in income tax expense | $ | (7,090) | | | $ | (10,124) | | | $ | (11,590) | |
Amortization of TCIs: | | | | | |
| | | | | |
| | | | | |
| Total amortization of TCIs | $ | 2,783 | | | $ | 6,187 | | | $ | 6,126 | |
| | | | | | |
| | | | | | | | | | | | | | |
NOTE 14 – NET INCOME PER COMMON SHARE |
Basic net income per common share is calculated as net income available to common shareholders divided by the weighted average number of shares outstanding.
Diluted net income per common share is calculated as net income available to common shareholders divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation's common stock equivalents consist of outstanding stock options, restricted stock, RSUs and PSUs. PSUs are required to be included in weighted average diluted shares outstanding if performance measures, as defined in each PSU award agreement, are met as of the end of the period.
A reconciliation of weighted average common shares outstanding used to calculate basic and diluted net income per share follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (in thousands) |
Weighted average common shares outstanding (basic) | 164,119 | | | 162,233 | | | 162,372 | |
Impact of common stock equivalents | 1,353 | | | 1,074 | | | 718 | |
Weighted average common shares outstanding (diluted) | 165,472 | | | 163,307 | | | 163,090 | |
| | | | | | | | | | | | | | |
NOTE 15 – SHAREHOLDERS’ EQUITY |
Preferred Stock
On October 29, 2020, the Corporation issued 8.0 million depositary shares ("Depositary Shares"), each representing a 1/40th interest in a share of Fulton's 5.125% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, of which 200,000 are authorized and issued, with a liquidation preference of $1,000 per share (equivalent to $25.00 per Depositary Share), for an aggregate offering amount of $200 million. The preferred stock is redeemable, at the Corporation's option, in whole or in part, on and after January 15, 2026, and redeemable in whole, but not in part, prior to January 15, 2026 within 90 days following the occurrence of a regulatory capital treatment event. The Corporation received net proceeds from the offering of $192.9 million, after deducting underwriting discounts and commissions and before deducting transaction expenses payable by the Corporation.
Stock Reissuance
On July 1, 2022, the Corporation reissued 6,208,516 shares of common stock that had been held as Treasury stock in connection with the Merger.
Accumulated Other Comprehensive Income (Loss)
The following table presents the components of other comprehensive income (loss) for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| Before-Tax Amount | | Tax Effect | | Net of Tax Amount |
| (dollars in thousands) |
2022 | | | | | |
Unrealized gain (loss) on securities | $ | (403,606) | | | $ | 91,437 | | | $ | (312,169) | |
Reclassification adjustment for securities gains (losses) included in net income(1) | (27) | | | 7 | | | (20) | |
Amortization of net unrealized gains (losses) on AFS transferred to HTM(2) | (57,509) | | | 13,026 | | | (44,483) | |
| | | | | |
Net unrealized holding gains (loss) arising during the period on interest rate derivatives used in cash flow hedges | (81,400) | | | 18,437 | | | (62,963) | |
Reclassification adjustment for net loss (gain) realized in net income on interest rate derivatives used in cash flow hedges | 7,761 | | | (1,757) | | | 6,004 | |
Unrecognized pension and postretirement income (cost) | 825 | | | (181) | | | 644 | |
Amortization of net unrecognized pension and postretirement items(3) | 128 | | | (28) | | | 100 | |
Total Other Comprehensive Income (Loss) | $ | (533,828) | | | $ | 120,941 | | | $ | (412,887) | |
2021 | | | | | |
Unrealized gain (loss) on securities | $ | (23,222) | | | $ | 5,274 | | | $ | (17,948) | |
Reclassification adjustment for securities gains (losses) included in net income(1) | (33,516) | | | 7,611 | | | (25,905) | |
Amortization of net unrealized gains (losses) on AFS transferred to HTM(2) | 3,485 | | | (795) | | | 2,690 | |
Net unrealized holding gain (loss) arising during the period on interest rate derivatives used in cash flow hedges | (3,452) | | | 782 | | | (2,670) | |
Reclassification adjustment for net loss (gain) realized in net income on interest rate derivatives used in cash flow hedges | (2,776) | | | 629 | | | (2,147) | |
| | | | | |
Unrecognized pension and postretirement income (cost) | 9,147 | | | (2,003) | | | 7,144 | |
Amortization of net unrecognized pension and postretirement items(3) | 1,480 | | | (324) | | | 1,156 | |
Total Other Comprehensive Income (Loss) | $ | (48,854) | | | $ | 11,174 | | | $ | (37,680) | |
2020 | | | | | |
Unrealized gain (loss) on securities | $ | 85,188 | | | $ | (19,537) | | | $ | 65,651 | |
Reclassification adjustment for securities gains (losses) included in net income(1) | (3,053) | | | 694 | | | (2,359) | |
Amortization of net unrealized gains (losses) on AFS transferred to HTM(2)(4) | 4,360 | | | (912) | | | 3,448 | |
| | | | | |
Unrecognized pension and postretirement income (cost) | (3,242) | | | 710 | | | (2,532) | |
Amortization of net unrecognized pension and postretirement items(3) | 1,311 | | | (291) | | | 1,020 | |
Total Other Comprehensive Income (Loss) | $ | 84,564 | | | $ | (19,336) | | | $ | 65,228 | |
(1) Amounts reclassified out of AOCI/(loss). Before-tax amounts included in "Investment securities gains, net" on the consolidated statements of income. See "Note 4 - Investment Securities," for additional information.
(2) Amounts reclassified out of AOCI/(loss). Before-tax amounts included as a reduction to "Interest Income" on the consolidated statements of income. See "Note 4, - Investment Securities," for additional information.
(3) Amounts reclassified out of AOCI/(loss). Before-tax amounts included in "Salaries and employee benefits" on the consolidated statements of income. See "Note 17 - Employee Benefit Plans," for additional information.
(4) Before-Tax amount includes a $3.7 million reclassification of unrealized loss related to the early adoption of ASU 2019-04.
The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains (Losses) on Investment Securities | | Net Unrealized (Loss) Gain on Interest Rate Derivatives used in Cash Flow Hedges | | Unrecognized Pension and Postretirement Plan Income (Costs) | | Total |
| (dollars in thousands) |
Balance at December 31, 2019 | $ | 14,864 | | | $ | — | | | $ | (15,001) | | | $ | (137) | |
Other comprehensive income (loss) before reclassifications | 65,651 | | | — | | | (2,532) | | | 63,119 | |
Amounts reclassified from AOCI gain (loss) | (2,359) | | | — | | | 1,020 | | | (1,339) | |
Amortization of net unrealized gains (losses) on AFS securities transferred to HTM | 3,448 | | | — | | | — | | | 3,448 | |
| | | | | | | |
Balance at December 31, 2020 | 81,604 | | | — | | | (16,513) | | | 65,091 | |
OCI before reclassifications | (17,948) | | | — | | | 7,144 | | | (10,804) | |
Amounts reclassified from AOCI | (25,905) | | | (4,817) | | | 1,156 | | | (29,566) | |
Amortization of net unrealized gains (losses) on AFS securities transferred to HTM | 2,690 | | | — | | | — | | | 2,690 | |
Balance at December 31, 2021 | 40,441 | | | (4,817) | | | (8,213) | | | 27,411 | |
OCI before reclassifications | (312,169) | | | (62,963) | | | 644 | | | (374,488) | |
Amounts reclassified from AOCI | (20) | | | 6,004 | | | 100 | | | 6,084 | |
Amortization of net unrealized gains (losses) on AFS securities transferred to HTM | (44,483) | | | — | | | — | | | (44,483) | |
Balance at December 31, 2022 | $ | (316,231) | | | $ | (61,776) | | | $ | (7,469) | | | $ | (385,476) | |
Common Stock Repurchase Plans
On December 20, 2022, the Corporation announced that its board of directors approved the 2023 Repurchase Program. Under the 2023 Repurchase Program, the Corporation is authorized to repurchase up to $100.0 million of its common stock, or approximately 3.6% of its outstanding shares, through December 31, 2023. Under the 2023 Repurchase Program, repurchased shares are added to treasury stock at cost. As permitted by securities laws and other legal requirements, and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including, without limitation, through accelerated share repurchase transactions. The 2023 Repurchase Program may be discontinued at any time.
On March 21, 2022, the Corporation announced that its board of directors approved the repurchase of up to $75 million of shares of the Corporation's common stock, or approximately 2.7% of the Corporation's outstanding shares, based on the closing price of the Corporation's common stock and the number of shares outstanding on March 17, 2022. No shares of the Corporation's common stock were repurchased under this program during 2022.
In February 2021, the Corporation's board of directors approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $75.0 million of its outstanding shares of common stock, or approximately 3.2% of its outstanding shares, through December 31, 2021. In November 2021, the Corporation's board of directors approved the extension of this program through March 31, 2022. During 2021, 2.8 million shares were repurchased at a total cost of $43.9 million, or $15.65 per share, under this program.
In October 2019, the Corporation's board of directors approved a share repurchase program pursuant to which the Corporation was authorized to repurchase up to $100.0 million of its outstanding shares of common stock, or approximately 3.9% of its outstanding shares, through December 31, 2020. During the first quarter of 2020, 2.9 million shares were repurchased at a total cost of $39.7 million, or $13.65 per share, under this program. The repurchase program was suspended in mid-March of 2020 in order to preserve liquidity in response to potential unknown economic impacts of the COVID-19 pandemic at that time.
Under these repurchase programs, repurchased shares are added to treasury stock, at cost. As permitted by securities laws and other legal requirements, and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including, without limitation, through accelerated share repurchase transactions.
| | | | | | | | | | | | | | |
NOTE 16 – STOCK-BASED COMPENSATION PLANS |
The following table presents compensation expense and related tax benefits for all equity awards recognized in the consolidated statements of income for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
Compensation expense | $ | 15,081 | | | $ | 9,264 | | | $ | 8,381 | |
Tax benefit | (2,690) | | | (2,027) | | | (1,790) | |
Total stock-based compensation, net of tax | $ | 12,391 | | | $ | 7,237 | | | $ | 6,591 | |
The tax benefits as a percentage of compensation expense, as shown in the preceding table, were 17.8%, 21.9% and 21.4% in 2022, 2021 and 2020, respectively. These percentages differ from the Corporation's federal statutory tax rate of 21%. Tax benefits are only recognized over the vesting period for awards that ordinarily will generate a tax deduction when exercised, in the case of non-qualified stock options, or upon vesting, in the case of restricted stock, RSUs, and PSUs. Tax benefits in excess of the tax rate resulted from incentive stock option exercises that triggered a tax deduction when they were exercised and excess tax benefits realized on vesting RSUs and PSUs during the period.
The following table provides information about stock option activity for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (in millions) |
Outstanding and exercisable as of December 31, 2021 | 239,591 | | | $ | 11.57 | | | | | |
| | | | | | | |
Exercised | (130,503) | | | 11.12 | | | | | |
Forfeited | (624) | | | 12.10 | | | | | |
Expired | — | | | — | | | | | |
Outstanding and exercisable as of December 31, 2022 | 108,464 | | | $ | 12.11 | | | 1.0 year | | $ | 0.5 | |
| | | | | | | |
The following table presents information about stock options exercised for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
Number of options exercised | 130,503 | | | 148,670 | | | 89,725 | |
Total intrinsic value of options exercised | $ | 842 | | | $ | 801 | | | $ | 192 | |
Cash received from options exercised | $ | 1,402 | | | $ | 1,651 | | | $ | 880 | |
Tax benefit from options exercised | $ | 163 | | | $ | 155 | | | $ | 37 | |
Upon exercise, the Corporation issues shares from its authorized, but unissued, common stock to satisfy the options.
The following table provides information about nonvested restricted stock, RSUs and PSUs granted under the Employee Equity Plan and Directors' Plan for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | |
| | | Restricted Stock/RSUs/PSUs(1) |
| | | | | Shares | | Weighted Average Grant Date Fair Value |
Nonvested as of December 31, 2021 | | | | | 2,062,739 | | | $ | 14.26 | |
Granted | | | | | 884,633 | | | 15.34 | |
Vested | | | | | (343,527) | | | 16.36 | |
Forfeited | | | | | (79,649) | | | 15.22 | |
Nonvested as of December 31, 2022 | | | | | 2,524,196 | | | $ | 14.16 | |
(1) There were no nonvested stock options at December 31, 2022 or 2021.
As of December 31, 2022, there was $10.8 million of total unrecognized compensation cost (pre-tax) related to restricted stock, RSUs and PSUs that will be recognized as compensation expense over a weighted average period of 1.8 years. As of
December 31, 2022, the Employee Equity Plan had 5.0 million shares reserved for future grants through 2023, and the Directors' Plan had 46.1 thousand shares reserved for future grants through 2029.
The fair value of certain PSUs with market-based performance conditions granted under the Employee Equity Plan was estimated on the grant date using the Monte Carlo valuation methodology performed by a third-party valuation expert. This valuation is dependent upon certain assumptions, as summarized in the following table:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Risk-free interest rate | 2.84 | % | | 0.25 | % | | 0.25 | % |
Volatility of Corporation's stock | 43.46 | % | | 42.55 | % | | 33.10 | % |
Expected life of PSUs | 3 years | | 3 years | | 3 years |
The expected life of the PSUs with fair values measured using the Monte Carlo valuation methodology was based on the defined performance period of three years. Volatility of the Corporation's stock was based on historical volatility for the period commensurate with the expected life of the PSUs. The risk-free interest rate is the zero-coupon U.S. Treasury rate commensurate with the expected life of the PSUs on the date of the grant. Based on the assumptions above, the Corporation calculated an estimated fair value per PSU with market-based performance conditions granted in 2022, 2021 and 2020 of $14.93, $16.94 and $10.16, respectively.
Under the ESPP, eligible employees can purchase stock of the Corporation at 85% of the fair market value of the stock on the date of purchase. The ESPP is considered to be a compensatory plan and, as such, compensation expense is recognized for the 15% discount on shares purchased. The following table summarizes activity under the ESPP:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
ESPP shares purchased | 134,645 | | | 134,156 | | | 194,485 | |
Average purchase price per share (85% of market value) | $ | 14.06 | | | $ | 13.92 | | | $ | 10.02 | |
Compensation expense recognized (in thousands) | $ | 334 | | | $ | 329 | | | $ | 344 | |
| | | | | | | | | | | | | | |
NOTE 17 – EMPLOYEE BENEFIT PLANS |
The following summarizes retirement plan expense for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
401(k) Retirement Plan | $ | 10,988 | | | $ | 10,338 | | | $ | 9,853 | |
Pension Plan | (1,347) | | | 217 | | | 660 | |
Total | $ | 9,641 | | | $ | 10,555 | | | $ | 10,513 | |
The 401(k) Retirement Plan is a defined contribution plan under which eligible employees may defer a portion of their pre-tax covered compensation on an annual basis, with employer matches of up to 5% of employee compensation. Employee and employer contributions under these features are 100% vested.
Contributions to the Pension Plan are actuarially determined and funded annually, if necessary. The Corporation recognizes the funded status of its Pension Plan on the consolidated balance sheets and recognizes the changes in that funded status through OCI. The Pension Plan has been curtailed, with no additional benefits accruing to participants.
Pension Plan
The net periodic pension cost for the Pension Plan, as determined by consulting actuaries, consisted of the following components for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
| | | | | |
Interest cost | $ | 2,393 | | | $ | 2,244 | | | $ | 2,726 | |
Expected return on assets | (4,393) | | | (4,044) | | | (3,925) | |
Net amortization and deferral | 653 | | | 2,017 | | | 1,859 | |
Net periodic pension cost | $ | (1,347) | | | $ | 217 | | | $ | 660 | |
| | | | | |
The following table summarizes the changes in the projected benefit obligation and fair value of Pension Plan assets for the plan years ended December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Projected benefit obligation at beginning of year | $ | 87,530 | | | $ | 92,292 | |
| | | |
Interest cost | 2,393 | | | 2,244 | |
Benefit payments | (4,502) | | | (4,272) | |
Change in assumptions | (17,131) | | | (2,613) | |
Experience gain | 426 | | | (121) | |
Projected benefit obligation at end of year | $ | 68,716 | | | $ | 87,530 | |
| | | |
Fair value of plan assets at beginning of year | $ | 94,115 | | | $ | 87,177 | |
| | | |
Actual return on plan assets | (11,476) | | | 11,210 | |
Benefit payments | (4,502) | | | (4,272) | |
Fair value of plan assets at end of year | $ | 78,137 | | | $ | 94,115 | |
The following table presents the funded status of the Pension Plan, included in other assets and other liabilities on the consolidated balance sheets, as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Projected benefit obligation | $ | (68,716) | | | $ | (87,530) | |
Fair value of plan assets | 78,137 | | | 94,115 | |
Funded status | $ | 9,421 | | | $ | 6,585 | |
The following table summarizes the changes in the unrecognized net loss included as a component of accumulated other comprehensive income (loss):
| | | | | | | | | | | |
| Unrecognized Net Loss |
| Before tax | | Net of tax |
| (dollars in thousands) |
Balance as of December 31, 2020 | $ | 25,474 | | | $ | 19,843 | |
Recognized as a component of 2021 periodic pension cost | (2,017) | | | (1,574) | |
Unrecognized losses arising in 2021 | (9,899) | | | (7,724) | |
| | | |
Balance as of December 31, 2021 | 13,558 | | | 10,545 | |
Recognized as a component of 2022 periodic pension cost | (653) | | | (510) | |
Unrecognized losses arising in 2022 | (835) | | | (651) | |
Balance as of December 31, 2022 | $ | 12,070 | | | $ | 9,384 | |
The following rates were used to calculate the net periodic pension cost and the present value of benefit obligations as of December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Discount rate-projected benefit obligation | 4.93 | % | | 2.80 | % | | 2.50 | % |
Expected long-term rate of return on plan assets | 5.00 | % | | 5.00 | % | | 5.00 | % |
The discount rates used were determined using the FTSE Pension Discount Curve (formerly, the Citigroup Average Life discount rate table), as adjusted based on the Pension Plan's expected benefit payments.
The 5.00% long-term rate of return on plan assets used to calculate the net periodic pension cost was based on historical returns, adjusted for expectations of long-term asset returns based on the December 31, 2022 weighted average asset allocations. The expected long-term return is considered to be appropriate based on the asset mix and the historical returns realized.
The following table presents a summary of the fair values of the Pension Plan's assets as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Estimated Fair Value | | % of Total Assets | | Estimated Fair Value | | % of Total Assets |
| (dollars in thousands) |
Equity mutual funds | $ | 23,338 | | | | | $ | 35,752 | | | |
Equity common trust funds | 16,919 | | | | | 19,824 | | | |
Equity securities | 40,257 | | | 51.5 | % | | 55,576 | | | 59.1 | % |
Cash and money market funds | 9,102 | | | | | 8,447 | | | |
Fixed income mutual funds | 15,252 | | | | | 15,566 | | | |
Corporate debt securities | 2,324 | | | | | 2,733 | | | |
U.S. Government agency securities | 7,041 | | | | | 9,524 | | | |
Fixed income securities and cash | 33,719 | | | 43.2 | % | | 36,270 | | | 38.5 | % |
Other alternative investment funds | 4,161 | | | 5.3 | % | | 2,269 | | | 2.4 | % |
Total | $ | 78,137 | | | 100.0 | % | | $ | 94,115 | | | 100.0 | % |
Investment allocation decisions are made by a retirement plan committee. The goal of the investment allocation strategy is to match certain benefit obligations with maturities of fixed income securities. Alternative investments may include managed futures, commodities, real estate investment trusts, master limited partnerships, and long-short strategies with traditional stocks and bonds. All alternative investments are in the form of mutual funds, not individual contracts, to enable daily liquidity.
The fair values for assets held by the Pension Plan are based on quoted prices for identical instruments and would be categorized as Level 1 assets under the fair value hierarchy.
Estimated future benefit payments are as follows (in thousands):
| | | | | |
Year | |
2023 | $ | 4,676 | |
2024 | 4,730 | |
2025 | 4,791 | |
2026 | 4,904 | |
2027 | 4,959 | |
Thereafter | 24,632 | |
Total | $ | 48,692 | |
Multiemployer Defined Benefit Pension Plan
In connection with the Merger, the Corporation assumed the obligations of Prudential Bancorp under the Prudential Bancorp Pension Plan that had previously been closed to new Prudential Bancorp participants.
The Prudential Bancorp Pension Plan is structured as a multiple employer plan under Internal Revenue Code Section 413(c). It maintains a single trust and all assets are commingled and invested on a pooled basis. All amounts payable by the Prudential Bancorp Pension Plan are a general charge upon all its assets. This structure gives rise to the risk if a participating employer fails before funding up to cover the liabilities of its participants and orphans, contributions for all remaining employers will increase, as assets have to be re-allocated to cover such shortfall.
Information regarding the Prudential Bancorp Pension Plan as of December 31, 2022 is as follows:
| | | | | |
Legal Name of Plan | Pentegra Defined Benefit Plan for Financial Institutions |
| (dollars in thousands) |
Plan Employer Identification Number | 23-1928421 |
The Corporation's contribution for the year ended December 31, 2022(1) | $ | 320 | |
Are the Corporation's contributions more than 5% of total contributions? | No |
Funded Status | 84.33 | % |
(1) Includes 2023 prepayment of $125 thousand.
Postretirement Benefits
The Corporation provides medical benefits and life insurance benefits under the Postretirement Plan to certain retired full-time employees who were employees of the Corporation prior to January 1, 1998. Prior to February 1, 2014, certain full-time employees became eligible for these discretionary benefits if they reached retirement age while working for the Corporation. The Corporation recognizes the funded status of the Postretirement Plan on the consolidated balance sheets and recognizes the changes in that funded status through OCI.
The components of the net benefit for Postretirement Plan other than pensions are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
Interest cost | $ | 34 | | | $ | 32 | | | $ | 43 | |
| | | | | |
Net amortization and deferral | (525) | | | (536) | | | (548) | |
Net postretirement benefit | $ | (491) | | | $ | (504) | | | $ | (505) | |
This table summarizes the changes in the accumulated postretirement benefit obligation for the years ended December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Accumulated postretirement benefit obligation at beginning of year | $ | 1,244 | | | $ | 1,322 | |
| | | |
Interest cost | 34 | | | 32 | |
Benefit payments | (155) | | | (167) | |
Change in experience | 51 | | | 71 | |
Change in assumptions | (202) | | | (14) | |
| | | |
Accumulated postretirement benefit obligation at end of year | $ | 972 | | | $ | 1,244 | |
| | | |
| | | |
| | | |
| | | |
| | | |
The fair values of the Postretirement Plan assets were $0 as of both December 31, 2022 and 2021. The funded status of the Postretirement Plan, included in other liabilities on the consolidated balance sheets as of December 31, 2022 and 2021 was $1.0 million and $1.2 million, respectively.
The following table summarizes the changes in items recognized as a component of accumulated other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | |
| Before tax | | |
| Unrecognized Prior Service Cost | | Unrecognized Net Loss (Gain) | | Total | | Net of tax |
| (dollars in thousands) |
Balance as of December 31, 2020 | $ | (3,012) | | | $ | (858) | | | $ | (3,870) | | | $ | (3,018) | |
Recognized as a component of 2021 postretirement cost | 464 | | | 72 | | | 536 | | | 418 | |
Unrecognized gains arising in 2021 | — | | | 57 | | | 57 | | | 44 | |
Balance as of December 31, 2021 | (2,548) | | | (729) | | | (3,277) | | | (2,556) | |
Recognized as a component of 2022 postretirement cost | 464 | | | 61 | | | 525 | | | 410 | |
Unrecognized gains arising in 2022 | — | | | (150) | | | (150) | | | (118) | |
| | | | | | | |
Balance as of December 31, 2022 | $ | (2,084) | | | $ | (818) | | | $ | (2,902) | | | $ | (2,264) | |
The following rates were used to calculate net periodic postretirement benefit cost and the present value of benefit obligations as of December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Discount rate-projected benefit obligation | 4.93 | % | | 2.80 | % | | 2.50 | % |
Expected long-term rate of return on plan assets | 3.00 | % | | 3.00 | % | | 3.00 | % |
The discount rates used to calculate the accumulated postretirement benefit obligation were determined using the FTSE Pension Discount Curve (formerly, the Citigroup Average Life discount rate table), as adjusted based on the Postretirement Plan's expected benefit payments.
Estimated future benefit payments under the Postretirement Plan are as follows (dollars in thousands):
| | | | | |
Year | |
2023 | $ | 150 | |
2024 | 136 | |
2025 | 124 | |
2026 | 111 | |
2027 | 100 | |
Thereafter | 297 | |
Total | $ | 918 | |
The Corporation has operating leases for certain financial centers, corporate offices and land.
The following table presents the components of lease expense, which is included in net occupancy expense on the consolidated statements of income (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Operating lease expense | $ | 17,766 | | | $ | 16,345 | | | $ | 18,481 | |
Variable lease expense | 3,017 | | | 1,384 | | | 2,830 |
Sublease income | (964) | | | (860) | | | (749) | |
Total lease expense | $ | 19,819 | | | $ | 16,869 | | | $ | 20,562 | |
| | | | | | |
Supplemental consolidated balance sheet information related to leases was as follows as of December 31 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
Operating Leases | | Balance Sheet Classification | | 2022 | | 2021 |
ROU assets | | Other assets | | $ | 85,103 | | | $ | 82,431 | |
Lease liabilities | | Other liabilities | | $ | 93,883 | | | $ | 92,864 | |
Weighted average remaining lease term | | | | 6.75 years | | 7.0 years |
Weighted average discount rate | | | | 2.89 | % | | 2.73 | % |
The discount rate used in determining the lease liability for each individual lease is the FHLB fixed advance rate which corresponds with the remaining lease term.
Supplemental cash flow information related to operating leases was as follows (dollars in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities | $ | 19,405 | | | $ | 19,611 | |
ROU assets obtained in exchange for lease obligations | 18,715 | | | 12,588 | |
Lease payment obligations for each of the next five years and thereafter, with a reconciliation to the Corporation's lease liability were as follows (dollars in thousands):
| | | | | |
Year | Operating Leases |
2023 | $ | 19,222 | |
2024 | 17,821 | |
2025 | 15,310 | |
2026 | 13,584 | |
2027 | 11,112 | |
Thereafter | 26,681 | |
Total lease payments | 103,730 | |
Less: imputed interest | (9,847) | |
Present value of lease liabilities | $ | 93,883 | |
As of December 31, 2022, the Corporation had not entered into any significant leases that have not yet commenced.
| | | | | | | | | | | | | | |
NOTE 19 – COMMITMENTS AND CONTINGENCIES |
Commitments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower or obligor. Since a portion of the commitments is expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral, if any, obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, equipment and income-producing commercial properties.
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 and domestic trade transactions for customers. The credit risk involved in issuing letters of credit is similar to that involved in extending loan facilities. These obligations are underwritten consistently with commercial lending standards. The maximum exposure to loss for standby and commercial letters of credit is equal to the contractual (or notional) amount of the instruments.
The Corporation has commitments to extend credit and letters of credit.
The following table presents the Corporation's commitments to extend credit and letters of credit:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Commercial and industrial | $ | 4,832,858 | | | $ | 5,072,008 | |
Real estate - commercial mortgage and real estate - construction | 1,972,505 | | | 1,914,238 | |
Real estate - home equity | 1,890,258 | | | 1,744,922 | |
Total commitments to extend credit | $ | 8,695,621 | | | $ | 8,731,168 | |
| | | |
Standby letters of credit | $ | 260,829 | | | $ | 298,275 | |
Commercial letters of credit | 49,288 | | | 54,196 | |
Total letters of credit | $ | 310,117 | | | $ | 352,471 | |
Residential Lending
The Corporation originates and sells residential mortgages to secondary market investors. The Corporation provides customary representations and warranties to secondary market investors that specify, among other things, that the loans have been underwritten to the standards of the secondary market investor. The Corporation may be required to repurchase specific loans, or reimburse the investor for a credit loss incurred on a sold loan if it is determined that the representations and warranties have not been met. Under some agreements with secondary market investors, the Corporation may have additional credit exposure beyond customary representations and warranties, based on the specific terms of those agreements.
The Corporation maintains a reserve for estimated credit losses related to loans sold to investors. As of December 31, 2022 and 2021, the total reserve for losses on residential mortgage loans sold was $1.4 million and $1.1 million, for each period, including reserves for both representation and warranty and credit loss exposures. With the adoption of CECL on January 1, 2020, the reserve for estimated losses on certain residential mortgage loans sold to investors was reclassified to the reserve for OBS credit exposures. In addition, a component of the reserve for OBS credit exposures of $6.0 million and $3.8 million as of December 31, 2022 and December 31, 2021, respectively, related to additional credit exposure for potential loan repurchases.
Legal Proceedings
The Corporation is involved in various pending and threatened claims and other legal proceedings in the ordinary course of its business activities. The Corporation evaluates the possible impact of these matters, taking into consideration the most recent information available. A loss reserve is established for those matters for which the Corporation believes a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual losses with respect to any such matter may be more or less than the amount estimated by the Corporation. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated by the Corporation, no loss reserve is established.
In addition, from time to time, the Corporation is involved in investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other companies. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving the Corporation, and could result in fines, penalties, restitution, other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices. The Corporation's practice is to cooperate fully with regulatory and governmental inquiries and investigations.
As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, that may result from the final outcomes of pending legal proceedings, or regulatory or governmental inquiries or investigations, will not have a material adverse effect on the financial condition of the Corporation. However, legal proceedings, inquiries and investigations are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation's results of operations in any future period, depending, in part, upon the size of the loss or liability imposed and the operating results for the period, and could have a material adverse effect on the Corporation's business. In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause the Corporation to incur additional expenses, which could be significant, and possibly material, to the Corporation's results of operations in any future period.
Kress v. Fulton Bank, N.A.
On October 15, 2019, a former Fulton Bank teller supervisor, D. Kress, filed a putative collective and class action lawsuit on behalf of herself and other teller supervisors, tellers, and other similar non-exempt employees in the U.S. District Court for the District of New Jersey (the "Court"), D. Kress v. Fulton Bank, N.A., Case No. 1:19-cv-18985. The lawsuit alleged that Fulton Bank did not record or otherwise account for the amount of time D. Kress and putative collective and class members spent conducting branch opening security procedures. The lawsuit alleged that by doing so, Fulton Bank violated: (i) the federal Fair Labor Standards Act and sought back overtime wages for a period of three years, liquidated damages and attorney fees and costs; (ii) the New Jersey State Wage and Hour Law and sought back overtime wages for a period of six years, treble damages and attorney fees and costs; and (iii) the New Jersey Wage Payment Law and sought back wages for a period of six years, treble damages and attorney fees and costs. The lawsuit also asserted New Jersey common law claims seeking compensatory damages and interest. Fulton Bank and counsel representing plaintiffs ("Plaintiffs' Counsel") reached and executed a formal settlement agreement to resolve this lawsuit. On June 30, 2022, the Court granted Plaintiffs' Counsel's Motion for Preliminary Approval of Class and Collective Settlement and Provisional Certification of Settlement Class and Collective and scheduled a hearing for final approval of the settlement agreement and matters related thereto for November 2, 2022. On November 2, 2022, the Court granted final approval of the settlement agreement and matters related thereto and dismissed the lawsuit with prejudice. The financial terms of the settlement agreement are not material to the Corporation. The Corporation established an accrued liability during the third quarter of 2020 for the costs expected to be incurred in connection with the settlement agreement.
| | | | | | | | | | | | | | |
NOTE 20 – FAIR VALUE MEASUREMENTS |
The following tables present assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) |
Loans held for sale | $ | — | | | $ | 7,264 | | | $ | — | | | $ | 7,264 | |
Available for sale investment securities: | | | | | | | |
| | | | | | | |
U.S. Government securities | 218,485 | | | — | | | — | | | 218,485 | |
U.S. Government sponsored agency securities | — | | | 1,008 | | | — | | | 1,008 | |
State and municipal securities | — | | | 1,105,712 | | | — | | | 1,105,712 | |
Corporate debt securities | — | | | 422,309 | | | — | | | 422,309 | |
Collateralized mortgage obligations | — | | | 134,033 | | | — | | | 134,033 | |
Residential mortgage-backed securities | — | | | 212,698 | | | — | | | 212,698 | |
Commercial mortgage-backed securities | — | | | 552,522 | | | — | | | 552,522 | |
| | | | | | | |
Total available for sale investment securities | 218,485 | | | 2,428,282 | | | — | | | 2,646,767 | |
Other assets: | | | | | | | |
Investments held in Rabbi Trust | 23,435 | | | — | | | — | | | 23,435 | |
Derivative assets | 672 | | | 166,796 | | | — | | | 167,468 | |
Total assets | $ | 242,592 | | | $ | 2,602,342 | | | $ | — | | | $ | 2,844,934 | |
Other liabilities: | | | | | | | |
Deferred compensation liabilities | $ | 23,435 | | | $ | — | | | $ | — | | | $ | 23,435 | |
Derivative liabilities | 584 | | | 296,465 | | | — | | | 297,049 | |
Total liabilities | $ | 24,019 | | | $ | 296,465 | | | $ | — | | | $ | 320,484 | |
| | | | | | | |
| 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) |
Loans held for sale | $ | — | | | $ | 35,768 | | | $ | — | | | $ | 35,768 | |
Available for sale investment securities: | | | | | | | |
| | | | | | | |
U.S. Government securities | 127,618 | | | — | | | — | | | 127,618 | |
| | | | | | | |
State and municipal securities | — | | | 1,188,670 | | | — | | | 1,188,670 | |
Corporate debt securities | — | | | 386,133 | | | — | | | 386,133 | |
Collateralized mortgage obligations | — | | | 209,359 | | | — | | | 209,359 | |
Residential mortgage-backed securities | — | | | 229,795 | | | — | | | 229,795 | |
Commercial mortgage-backed securities | — | | | 971,148 | | | — | | | 971,148 | |
Auction rate securities | — | | | — | | | 74,667 | | | 74,667 | |
Total available for sale investment securities | 127,618 | | | 2,985,105 | | | 74,667 | | | 3,187,390 | |
Other assets: | | | | | | | |
Investments held in Rabbi Trust | 28,619 | | | — | | | — | | | 28,619 | |
Derivative assets | 298 | | | 160,945 | | | — | | | 161,243 | |
Total assets | $ | 156,535 | | | $ | 3,181,818 | | | $ | 74,667 | | | $ | 3,413,020 | |
Other liabilities: | | | | | | | |
Deferred compensation liabilities | $ | 28,619 | | | $ | — | | | $ | — | | | $ | 28,619 | |
Derivative liabilities | 291 | | | 86,110 | | | — | | | 86,401 | |
Total liabilities | $ | 28,910 | | | $ | 86,110 | | | $ | — | | | $ | 115,020 | |
The valuation techniques used to measure fair value for the items in the preceding tables are as follows:
Loans held for sale – This category includes mortgage loans held for sale that are measured at fair value. Fair values as of December 31, 2022 and 2021, were measured as the price that secondary market investors were offering for loans with similar characteristics. See "Note 1 - Summary of Significant Accounting Policies" for details related to the Corporation's election to measure assets and liabilities at fair value.
Available for sale investment securities – Included in this asset category are debt securities. Level 2 investment securities are valued by a third-party pricing service. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings and matrix pricing.
Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.
•U.S. Government securities – These securities are classified as Level 1. Fair values are based on quoted prices with active markets.
•U.S. Government sponsored agency securities – These debt securities are classified as Level 2. Fair values are determined by a third-party pricing service, as detailed above.
•State and municipal securities/Collateralized mortgage obligations/Residential mortgage-backed securities/Commercial mortgage-backed securities – These debt securities are classified as Level 2. Fair values are determined by a third-party pricing service, as detailed above.
•Corporate debt securities – This category consists of subordinated and senior debt issued by financial institutions ($415.4 million at December 31, 2022 and $383.4 million at December 31, 2021), single-issuer trust preferred securities issued by financial institutions (none at December 31, 2022 and at 2021), and other corporate debt issued by non-financial institutions ($6.9 million at December 31, 2022 and $2.8 million at December 31, 2021). As noted in "Note 4 - Investment Securities," several corporate debt securities were sold during 2020. Refer to the specific note for further information.
Level 2 investments include subordinated debt and senior debt, and other corporate debt issued by non-financial institutions at December 31, 2022 and 2021. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.
Level 3 investments include ARCs. Due to their illiquidity, ARCs are classified as Level 3 investments and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime within the next 5 years. Level 3 values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels. In the first quarter of 2022, the Corporation sold all of its investment in ARCs.
Investments held in Rabbi Trust - This category consists of mutual funds that are held in trust for employee deferred compensation plans that the Corporation has elected to measure at fair value. Shares of mutual funds are valued based on net asset value, which represents quoted market prices for the underlying shares held in the mutual funds, and as such, are classified as Level 1.
Derivative assets - Fair value of foreign currency exchange contracts classified as Level 1 assets ($0.7 million at December 31, 2022 and $0.3 million at December 31, 2021). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.
Level 2 assets, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($0.2 million at December 31, 2022 and $2.4 million at December 31, 2021) and the fair value of interest rate derivatives ($166.6 million at December 31, 2022 and $158.6 million at December 31, 2021). The fair values of the interest rate locks, forward commitments and interest rate derivatives represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See "Note 11 - Derivative Financial Instruments," for additional information.
Deferred compensation liabilities – Fair value of amounts due to employees under deferred compensation plans, classified as Level 1 liabilities and are included in other liabilities on the consolidated balance sheets. The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Investments held in Rabbi Trust" above.
Derivative liabilities - Level 1 liabilities, representing the fair value of foreign currency exchange contracts ($0.6 million and $0.3 million at December 31, 2022 and 2021, respectively).
Level 2 liabilities, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($0.2 million at December 31, 2022 and none at December 31, 2021) and the fair value of interest rate derivatives ($296.3 million at December 31, 2022 and $86.1 million at December 31, 2021).
The fair values of these liabilities are determined in the same manner as the related assets, which are described under the heading "Derivative assets" above.
The following table presents the changes in AFS investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the years ended December 31:
| | | | | | | | | | | |
| | | | | ARCs |
| | (dollars in thousands) |
Balance at December 31, 2020 | | | | | $ | 98,206 | |
Sales | | | | | (24,619) | |
| | | | | |
Unrealized adjustment to fair value(1) | | | | | 1,080 | |
| | | | | |
| | | | | |
Balance at December 31, 2021 | | | | | $ | 74,667 | |
Sales | | | | | (74,823) | |
| | | | | |
Unrealized adjustment to fair value(1) | | | | | 156 | |
| | | | | |
| | | | | |
Balance at December 31, 2022 | | | | | $ | — | |
(1) ARCs are classified as AFS investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of "AFS at estimated fair value" on the consolidated balance sheets.
Certain financial instruments are not measured at fair value on an ongoing basis but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents Level 3 financial instruments measured at fair value on a nonrecurring basis:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (dollars in thousands) |
Loans, net | $ | 121,115 | | | $ | 118,458 | |
OREO | 5,790 | | | 1,817 | |
MSRs(1) | 50,044 | | | 35,393 | |
Total assets | $ | 176,949 | | | $ | 155,668 | |
(1) Amounts shown are estimated fair value. MSRs are recorded on the Corporation's consolidated balance sheets at lower of amortized cost or fair value. See "Note 8 - Mortgage Servicing Rights" for additional information.
The valuation techniques used to measure fair value for the items in the table above are as follows:
•Loans, net – This category consists of loans that were individually evaluated for impairment and have been classified as Level 3 assets. The amount shown is the balance of nonaccrual loans, net of the related ACL. See "Note 5 - Loans and Allowance for Credit Losses," for additional information.
•OREO – This category consists of OREO classified as Level 3 assets, for which the fair values were based on estimated selling prices less estimated selling costs for similar assets in active markets.
•MSRs - This category consists of MSRs, which were initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors, and subsequently carried at the lower of amortized cost or fair value. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified by product type and evaluated for impairment by comparing each stratum's carrying amount to its estimated
fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the December 31, 2022 valuation were 8.0% and 9.0%, respectively. Management reviews the reasonableness of the significant inputs to the third-party valuation in comparison to market data. See "Note 8 - Mortgage Servicing Rights," for additional information. Changes in any of those inputs, in isolation, could result in a significantly different fair value measurement, as depicted in the table below:
| | | | | | | | | | | | | | |
Significant Input | | Scenario Shock | | % Change in Valuation |
Prepayment Rate | | + 15% | | (5)% |
Prepayment Rate | | - 15% | | 5% |
Discount Rate | | - 200 bps | | 10% |
Discount Rate | | + 200 bps | | (8)% |
The following table details the book values and the estimated fair values of the Corporation's financial instruments as of December 31, 2022 and 2021. A general description of the methods and assumptions used to estimate such fair values is also provided.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| | | Estimated Fair Value |
| Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total |
FINANCIAL ASSETS | (dollars in thousands) |
Cash and cash equivalents | $ | 681,921 | | | $ | 681,921 | | | $ | — | | | $ | — | | | $ | 681,921 | |
FRB and FHLB stock | 130,186 | | | — | | | 130,186 | | | — | | | 130,186 | |
Loans held for sale | 7,264 | | | — | | | 7,264 | | | — | | | 7,264 | |
HTM securities | 1,321,256 | | | — | | | 1,125,049 | | | — | | | 1,125,049 | |
AFS securities | 2,646,767 | | | 218,485 | | | 2,428,282 | | | — | | | 2,646,767 | |
Loans, net | 20,010,181 | | | — | | | — | | | 18,862,701 | | | 18,862,701 | |
Accrued interest receivable | 91,579 | | | 91,579 | | | — | | | — | | | 91,579 | |
Other assets | 642,049 | | | 419,419 | | | 166,796 | | | 55,834 | | | 642,049 | |
FINANCIAL LIABILITIES | | | | | | | | | |
Demand and savings deposits | $ | 18,851,912 | | | $ | 18,851,912 | | | $ | — | | | $ | — | | | $ | 18,851,912 | |
Brokered deposits | 208,416 | | | 188,416 | | | 25,085 | | | — | | | 213,501 | |
Time deposits | 1,589,210 | | | — | | | 1,574,747 | | | — | | | 1,574,747 | |
Accrued interest payable | 10,185 | | | 10,185 | | | — | | | — | | | 10,185 | |
Federal funds purchased | 191,000 | | | 190,998 | | | — | | | — | | | 190,998 | |
Federal Home Loan Bank advances | 1,250,000 | | | 1,249,629 | | | — | | | — | | | 1,249,629 | |
Senior debt and subordinated debt | 539,634 | | | — | | | 456,867 | | | — | | | 456,867 | |
Other borrowings | 890,573 | | | 889,393 | | | 1,180 | | | — | | | 890,573 | |
Other liabilities | 467,705 | | | 154,912 | | | 296,465 | | | 16,328 | | | 467,705 | |
| | | | | | | | | |
| 2021 |
| | | Estimated Fair Value |
| Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total |
FINANCIAL ASSETS | (dollars in thousands) |
Cash and cash equivalents | $ | 1,638,614 | | | $ | 1,638,614 | | | $ | — | | | $ | — | | | $ | 1,638,614 | |
FRB and FHLB stock | 57,635 | | | — | | | 57,635 | | | — | | | 57,635 | |
Loans held for sale | 35,768 | | | — | | | 35,768 | | | — | | | 35,768 | |
HTM securities | 980,384 | | | — | | | 965,867 | | | — | | | 965,867 | |
AFS securities | 3,187,390 | | | 127,618 | | | 2,985,105 | | | 74,667 | | | 3,187,390 | |
Loans, net | 18,076,349 | | | — | | | — | | | 17,519,497 | | | 17,519,497 | |
Accrued interest receivable | 57,451 | | | 57,451 | | | — | | | — | | | 57,451 | |
Other assets | 565,491 | | | 367,336 | | | 160,945 | | | 37,210 | | | 565,491 | |
FINANCIAL LIABILITIES | | | | | | | | | |
Demand and savings deposits | $ | 19,594,497 | | | $ | 19,594,497 | | | $ | — | | | $ | — | | | $ | 19,594,497 | |
Brokered deposits | 251,526 | | | 231,526 | | | 20,603 | | | — | | | 252,129 | |
Time deposits | 1,727,476 | | | — | | | 1,730,673 | | | — | | | 1,730,673 | |
Accrued interest payable | 7,000 | | | 7,000 | | | — | | | — | | | 7,000 | |
| | | | | | | | | |
| | | | | | | | | |
Senior debt and subordinated debt | 620,406 | | | — | | | 604,780 | | | — | | | 604,780 | |
Other borrowings | 417,703 | | | 416,764 | | | 939 | | | — | | | 417,703 | |
Other liabilities | 288,862 | | | 188,219 | | | 86,110 | | | 14,533 | | | 288,862 | |
Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management's estimate of the underlying value of the Corporation.
For short-term financial instruments, defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation's consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.
The following instruments are predominantly short-term:
| | | | | | | | |
Assets | | Liabilities |
Cash and cash equivalents | | Demand and savings deposits |
Accrued interest receivable | | Short-term borrowings |
| | Accrued interest payable |
FRB and FHLB stock represent restricted investments and are carried at cost on the consolidated balance sheets, which is a reasonable estimate of fair value.
As of December 31, 2022, fair values for loans and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans also include estimated credit losses that would be assumed in a market transaction, which represents estimated exit prices.
Brokered deposits consists of demand and saving deposits, which are classified as Level 1, and time deposits, which are classified as Level 2. The fair value of these deposits are determined in a manner consistent with the respective type of deposits discussed above.
| | | | | | | | | | | | | | |
NOTE 21 – CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY |
CONDENSED BALANCE SHEETS
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (dollars in thousands) |
ASSETS | | | |
Cash and cash equivalents | $ | 169,208 | | | $ | 352,715 | |
Other assets | 58,497 | | | 25,888 | |
Receivable from subsidiaries | 194,869 | | | 50,822 | |
Investments in: | | | |
Bank subsidiary | 2,708,663 | | | 2,872,274 | |
Non-bank subsidiaries | 38,348 | | | 188,171 | |
Total Assets | $ | 3,169,585 | | | $ | 3,489,870 | |
LIABILITIES AND EQUITY | | | |
Senior and subordinated debt | $ | 539,634 | | | $ | 620,406 | |
Payable to non-bank subsidiaries | — | | | 78,793 | |
Other liabilities | 50,194 | | | 77,991 | |
Total Liabilities | 589,828 | | | 777,190 | |
Shareholders' equity | 2,579,757 | | | 2,712,680 | |
Total Liabilities and Shareholders' Equity | $ | 3,169,585 | | | $ | 3,489,870 | |
CONDENSED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
Income: | | | | | |
Dividends from subsidiaries | $ | 207,000 | | | $ | 469,339 | | | $ | 161,000 | |
Other | 725 | | | 258 | | | 100 | |
| 207,725 | | | 469,597 | | | 161,100 | |
Expenses | 51,887 | | | 58,527 | | | 48,634 | |
Income before income taxes and equity in undistributed net income of subsidiaries | 155,838 | | | 411,070 | | | 112,466 | |
Income tax benefit | (12,331) | | | (12,516) | | | (9,679) | |
| 168,169 | | | 423,586 | | | 122,145 | |
Equity in undistributed net income (loss) of: | | | | | |
Bank subsidiary | 121,388 | | | (133,157) | | | 162,037 | |
Non-bank subsidiaries | (2,576) | | | (14,932) | | | (106,142) | |
Net Income | 286,981 | | | 275,497 | | | 178,040 | |
Preferred stock dividends | (10,248) | | | (10,277) | | | (2,135) | |
Net Income Available to Common Shareholders | $ | 276,733 | | | $ | 265,220 | | | $ | 175,905 | |
CONDENSED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (dollars in thousands) |
Cash Flows From Operating Activities: | | | | | |
Net income | $ | 286,981 | | | $ | 275,497 | | | $ | 178,040 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Amortization of issuance costs and discount of long-term debt | 724 | | | 1,846 | | | 1,128 | |
Stock-based compensation | 14,000 | | | 8,402 | | | 7,529 | |
| | | | | |
Decrease (increase) in other assets | 44,790 | | | 119,822 | | | (307,976) | |
Equity in undistributed net (income) loss of subsidiaries | (120,213) | | | 148,091 | | | (55,895) | |
Write-off of unamortized costs on trust preferred securities | — | | | 12,390 | | | — | |
Increase (decrease) in other liabilities and payable to non-bank subsidiaries | (198,349) | | | 78,716 | | | (244,598) | |
Total adjustments | (259,048) | | | 369,267 | | | (599,812) | |
Net cash provided by (used in) operating activities | 27,933 | | | 644,764 | | | (421,772) | |
Cash Flows From Investing Activities | | | | | |
| | | | | |
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Net cash paid for acquisition | (21,811) | | | — | | | — | |
Net cash provided by (used in) investing activities | (21,811) | | | — | | | — | |
Cash Flows From Financing Activities: | | | | | |
Repayments of long-term borrowings | (81,496) | | | (153,612) | | | (19,453) | |
Additions to long-term borrowings | — | | | — | | | 370,898 | |
Net proceeds from issuance of preferred stock | — | | | — | | | 192,878 | |
Net proceeds from issuance of common stock | 7,876 | | | 7,437 | | | 7,375 | |
Dividends paid | (116,009) | | | (112,028) | | | (90,956) | |
Acquisition of treasury stock | — | | | (43,909) | | | (39,748) | |
Net cash provided by (used in) financing activities | (189,629) | | | (302,112) | | | 420,994 | |
Net increase (decrease) in Cash and Cash Equivalents | (183,507) | | | 342,652 | | | (778) | |
Cash and Cash Equivalents at Beginning of Year | 352,715 | | | 10,063 | | | 10,841 | |
Cash and Cash Equivalents at End of Year | $ | 169,208 | | | $ | 352,715 | | | $ | 10,063 | |
Management Report on Internal Control Over Financial Reporting
The management of Fulton Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Fulton Financial Corporation's internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that, as of December 31, 2022, the Corporation's internal control over financial reporting is effective based on those criteria.
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/s/ CURTIS J. MYERS |
Curtis J. Myers Chairman and Chief Executive Officer |
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/s/ MARK R. MCCOLLOM |
Mark R. McCollom Senior Executive Vice President and Chief Financial Officer |