FULTON FINANCIAL CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
This MD&A relates to the Company, a financial holding company registered under the BHCA and incorporated under the laws of
FORWARD-LOOKING STATEMENTS The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition, results of operations and business. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends," "projects," the negative of these terms and other comparable terminology. These forward-looking statements may include projections of, or guidance on, the Corporation's future financial performance, expected levels of future expenses, including future credit losses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation's business or financial results. Forward-looking statements are neither historical facts, nor assurance of future performance. Instead, the statements are based on current beliefs, expectations and assumptions regarding the future of the Corporation's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Corporation's control, and actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not unduly rely on any of these forward-looking statements. Any forward-looking statement is based only on information currently available and speaks only as of the date when made. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Many factors could affect future financial results including, without limitation: •the impact of adverse conditions in the economy and financial markets on the performance of the Corporation's loan portfolio and demand for the Corporation's products and services; •the scope and duration of the COVID-19 pandemic, actions taken by governmental authorities in response to the pandemic, the Corporation's participation in the PPP and other COVID-19 relief programs, and the direct and indirect impacts of the pandemic on the Corporation, its customers and third parties; •the determination of the ACL, which depends significantly upon assumptions and judgments with respect to a variety of factors, including the performance of the loan portfolio, the weighted-average remaining lives of different classifications of loans within the loan portfolio and current and forecasted economic conditions, among other factors; •increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets; •investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings; •the effects of market interest rates, and the relative balances of interest rate-sensitive assets to interest rate-sensitive liabilities, on net interest margin and net interest income; •the replacement of LIBOR as a benchmark reference rate; •the effects of changes in interest rates on demand for the Corporation's products and services; •the effects of changes in interest rates or disruptions in liquidity markets on the Corporation's sources of funding; •the effects of the extensive level of regulation and supervision to which the Corporation andFulton Bank are subject; •the effects of the significant amounts of time and expense associated with regulatory compliance and risk management; •the potential for negative consequences resulting from regulatory violations, investigations and examinations, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions, the need to undertake remedial actions and possible damage to the Corporation's reputation; •the continuing impact of the Dodd-Frank Act on the Corporation's business and results of operations; •the effects of, and uncertainty surrounding, new legislation, changes in regulation and government policy, which could result in significant changes in banking and financial services regulation; •the effects of actions by the federal government, including those of theFederal Reserve Board and other government agencies, that impact money supply and market interest rates; •the effects of changes inU.S. federal, state or local tax laws; •the effects of negative publicity on the Corporation's reputation; •the effects of adverse outcomes in litigation and governmental or administrative proceedings; 39 -------------------------------------------------------------------------------- •the potential to incur losses in connection with repurchase and indemnification payments related to sold loans; •the Corporation's ability to achieve its growth plans; •completed and potential acquisitions may affect costs and the Corporation may not be able to successfully integrate the acquired business or realize the anticipated benefits from such acquisitions; •the potential effects of climate change on the Corporation's business and results of operations; •the effects of concerns relating to the Corporation's ESG posture, including potential adverse impacts on the Corporation's reputation and the market value of its securities; •the effects of competition on deposit rates and growth, loan rates and growth and net interest margin; •the Corporation's ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment; •the effects of changes in accounting policies, standards, and interpretations on the Corporation's reporting of its financial condition and results of operations; •the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework; •the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements; •the failure or circumvention of the Corporation's system of internal controls; •the loss of, or failure to safeguard, confidential or proprietary information; •the Corporation's failure to identify and adequately and promptly address cybersecurity risks, including data breaches and cyber-attacks; •the Corporation's ability to keep pace with technological changes; •the Corporation's ability to attract and retain talented personnel; •capital and liquidity strategies, including the Corporation's ability to comply with applicable capital and liquidity requirements, and the Corporation's ability to generate capital internally or raise capital on favorable terms; •the Corporation's reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions; •the effects of any downgrade in the Corporation orFulton Bank's credit ratings on each of their borrowing costs or access to capital markets; •the possibility that the anticipated benefits of the Merger, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or challenges arising from, the integration of Prudential into the Corporation or as a result of the strength of the economy, competitive factors in the areas where the Corporation and Prudential do business, or as a result of other unexpected factors or events; •the timing and completion of the Merger is dependent on the satisfaction of customary closing conditions, including approval by Prudential shareholders, which cannot be assured, and various other factors that cannot be predicted with precision at this point; •the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Merger Agreement; •completion of the Merger is subject to bank regulatory approvals and such approvals may not be obtained in a timely manner or at all or may be subject to conditions which may cause additional significant expense or delay the consummation of the Merger; •potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the Merger; •the outcome of any legal proceedings related to the Merger which may be instituted against the Corporation or Prudential; •unanticipated challenges or delays in the integration of Prudential's business into the Corporation's business and or the conversion of Prudential's operating systems and customer data onto the Corporation's may significantly increase the expense associated with the Merger; and •other factors that may affect future results of the Corporation and Prudential. Additional information regarding these as well as other factors that could affect future financial results can be found in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2021 and elsewhere in this report, including in Note 13 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements and in Item 1A. "Risk Factors". 40 --------------------------------------------------------------------------------
PREVIEW
The Corporation is a financial holding company, which, through its wholly-owned banking subsidiary, provides a full range of retail and commercial financial services primarily inPennsylvania ,Delaware ,Maryland ,New Jersey andVirginia . The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the net interest margin, which is FTE net interest income as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments and properties. Offsetting these revenue sources are provisions for credit losses on loans and OBS credit risks, non-interest expenses and income taxes.
The following table provides a summary of the Corporation’s selected results and performance ratios:
Three months ended March 31
2022 2021
Net income (in thousands) $ 64,288 $ 73,063
Net income available to common shareholders (in thousands) $ 61,726 $ 70,472
Diluted net income available to common shareholders per share $ 0.38 $ 0.43
Return on average assets, annualized 1.02 % 1.14 %
Return on average common shareholders' equity, annualized 10.03 % 11.73 %
Return on average common shareholders' equity (tangible), annualized (1) 12.88 % 15.00 %
Net interest margin (2) 2.78 % 2.79 %
Efficiency ratio (1) 65.8 % 63.0 %
Non-performing assets to total assets 0.64 % 0.60 %
Annualized net charge-offs to average loans (0.02) % 0.13 %
(1)Ratio represents a financial measure derived by methods other than GAAP. See
reconciliation of this non-GAAP financial measure to the most directly
comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP
Based Financial Measures "
(2)Presented on a FTE basis, using a 21% federal tax rate and statutory interest
expense disallowances. See also the "Net Interest Income" section of the
Management's Discussion.
Federal funds rate
the
Business combinations
OnMarch 2, 2022 , the Corporation announced that it had entered into the Merger Agreement with Prudential. Under the terms of the Merger Agreement, Prudential will merge with and into the Corporation. The parties anticipate the Merger will close in the third quarter of 2022, subject to regulatory approvals, Prudential shareholder approval and the satisfaction of other customary conditions.
Non-interest expense for the first quarter of 2022 included
for Merger-related expenses.
COVID-19 The COVID-19 pandemic has caused substantial disruptions in economic and social activity, both globally and inthe United States . The spread of COVID-19, and related governmental actions to respond to the pandemic have caused severe disruptions in theU.S. economy, which have, in turn, disrupted the business, activities, and operations of the Corporation's customers as well as the Corporation's own business and operations. The resulting impacts of the pandemic have continued to cause changes in consumer and business spending, borrowing needs and saving habits that have and will likely continue to affect the demand for loans and other products and services the Corporation offers, as well as the creditworthiness of its borrowers. The significant impact on commercial activity and disruptions in supply chains associated with the pandemic, both nationally and in the Corporation's markets, may cause customers, vendors and counterparties to be unable to meet existing payment or other obligations to the Corporation. 41 -------------------------------------------------------------------------------- While the impacts from the COVID-19 pandemic have diminished, there remains significant uncertainty concerning the breadth and duration of the economic and social disruptions caused by the COVID-19 pandemic and their impact on theU.S. economy. The extent to which the pandemic continues to impact the Corporation's operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the continuing progression of the COVID-19 pandemic, whether there are additional outbreaks of COVID-19 and its variants, including vaccine-resistant variants, and the actions taken to contain it or treat its impact. If the pandemic continues to cause significant negative impacts to economic conditions, the Corporation's results of operations, financial condition and cash flows could be materially adversely impacted.
See additional discussion in “Results of Operations” and “Financial Condition” of the MD&A.
Financial Highlights
Here is a summary of financial highlights for the three months ended
•Net Income Available to Common Shareholders and Net Income Per Share - Net income available to common shareholders was$61.7 million for the three months endedMarch 31, 2022 , an$8.7 million decrease compared to$70.5 million for the same period in 2021. Diluted net income per share was$0.38 , a$0.05 decrease compared to the same period in 2021. •Net Interest Income - Net interest income decreased$3.1 million , or 1.9%, for the three months endedMarch 31, 2022 compared to the same period in 2021. The decrease was driven by a decline of$15.0 million in PPP loan fees, partially offset by a decline in interest expense on interest-bearing deposits and long-term borrowings of$4.0 million and$4.7 million , respectively. Overall, net interest margin decreased 1 bp for the three months endedMarch 31, 2022 compared to the same period in 2021.
• Net interest margin – For the three months ended
•Loan Growth - Average Net loans decreased by$597.5 million , or 3.1%, for the three months endedMarch 31, 2022 compared to the same period in 2021. The decrease was largely driven by a$1.5 billion decline in PPP loans due to the repayment of these loans upon forgiveness by the SBA, partially offset by increases in residential mortgage loans and commercial mortgage loans of$703.8 million and$165.9 million , respectively. •Deposit Growth - Average deposits grew$363.2 million , or 1.7%, for the three months endedMarch 31, 2022 compared to the same period in 2021, driven by growth in non-interest bearing demand deposits and savings and money market deposits of$758.4 million and$299.5 million , respectively, partially offset by a decline in time deposits of$0.5 million . AtMarch 31, 2022 , the loan-to-deposit ratio was 85.8% as compared to 84.9% atDecember 31, 2021 . •Asset Quality - Non-performing assets increased$9.1 million , or 5.9%, as ofMarch 31, 2022 compared toDecember 31, 2021 , and were 0.64% and 0.60% of total assets as of those dates, respectively. For the three months endedMarch 31, 2022 and 2021, annualized net charge-offs to average loans outstanding were (0.02)% and 0.13%, respectively. The provision for credit losses was a negative$7.0 million for the three months endedMarch 31, 2022 , a decrease of$1.5 million from the same period of 2021. The negative provision for credit losses for the first quarter of 2022 was recorded to adjust the ACL as a result of improved economic conditions. •Non-interest Income - For the three months endedMarch 31, 2022 , non-interest income, excluding net investment securities gains, decreased$6.7 million , or 10.8%, compared to the same period in 2021. The decrease was primarily the result of a decrease in mortgage banking income of$9.4 million , partially offset by an increase of$2.1 million in wealth management revenues. •Non-interest Expense - Non-interest expense decreased$32.4 million , or 18.2%, for the three months endedMarch 31, 2022 compared to the same period in 2021. The decrease during the quarter was largely driven by debt extinguishment expenses in 2021 of$32.2 million . •Income Taxes - Income tax expense for the three months endedMarch 31, 2022 was$13.3 million , a$0.6 million decrease from$13.9 million for the same period in 2021. The Corporation's ETR was 17.1% for the three months endedMarch 31, 2022 compared to 16.0% in the same period in 2021. The ETR is generally lower than the federal 42 --------------------------------------------------------------------------------
statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities, and investments in community development projects that generate tax credits under various federal programs.
Supplementary Report on Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains supplemental financial information, as detailed below, which has been derived by methods other than GAAP. The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations and financial condition. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of the Corporation and companies in the Corporation's industry. Management believes that these non-GAAP financial measures, in addition to GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-GAAP financial measures might not be comparable to similarly-titled measures at other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety.
Below are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure:
Three months endedMarch 31 2022 2021
(in thousands of dollars) Return on average common shareholders’ equity (tangible) Net earnings available to common shareholders
$ 61,726 $ 70,472 Plus: Merger-related expenses, net of tax 317 - Plus: Intangible amortization, net of tax 138 90 Numerator $
62,181
Average common shareholders' equity $
2,688,834
Less: Average goodwill and intangible assets (537,976) (536,601) Less: Average preferred stock (192,878) (192,878) Average tangible common shareholders' equity (denominator)$ 1,957,980 $ 1,907,619 Return on average common shareholders' equity (tangible), annualized 12.88 % 15.00 % Efficiency ratio Non-interest expense$ 145,978 $ 178,384 Less: Amortization of tax credit investments (696) (1,531) Less: Merger-related expenses (401) - Less: Intangible amortization (176) (115) Less: Debt extinguishment cost - (32,163) Numerator$ 144,705 $ 144,575 Net interest income$ 161,310 $ 164,449 Tax equivalent adjustment 3,288 2,979 Plus: Total non-interest income 55,256 95,397 Less: Investment securities gains, net (19) (33,475) Denominator$ 219,835 $ 229,350 Efficiency ratio 65.8 % 63.0 %
Reported on an FTE basis, using a federal tax rate of 21%.
43 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Three months completed
Net Interest Income FTE net interest income decreased$2.8 million to$164.6 million for the three months endedMarch 31, 2022 , from$167.4 million in the same period in 2021. The NIM decreased 1 bp, to 2.78%, compared to 2.79% for the same period in 2021. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate, and statutory interest expense disallowances. The discussion following this table is based on these taxable-equivalent amounts. Three months ended March 31 2022 2021 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ASSETS (dollars in thousands) Interest-earning assets: Net loans (1)$ 18,383,118 $ 151,127 3.32 %$ 18,980,586 $ 165,462 3.53 % Taxable investment securities (2) 3,073,643 15,213 1.71 2,438,496 13,691
2.08
Tax-exempt investment securities (2) 1,152,709 9,038 3.13 911,648 7,156 3.13 Total investment securities 4,226,352 24,251 2.29 3,350,144 20,847 2.49 Loans held for sale 28,549 241 3.37 53,465 471 3.53 Other interest-earning assets 1,258,174 671 0.22 1,900,199 1,136
0.24
Total interest-earning assets 23,896,193 176,290 2.98 24,284,394 187,916 3.13 Noninterest-earning assets: Cash and due from banks 162,320 120,181 Premises and equipment 219,932 230,649 Other assets 1,595,039 1,728,473 Less: ACL - loans (3) (251,022) (280,881) Total Assets$ 25,622,462 $ 26,082,816 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand deposits$ 5,664,987 $ 728 0.05 %$ 5,832,174 $ 1,160 0.08 % Savings and money market deposits 6,436,548 1,021 0.06 6,137,084 1,526 0.10 Brokered deposits 250,350 216 0.35 324,364 395 0.49 Time deposits 1,697,063 3,640 0.87 2,150,570 6,521 1.23 Total interest-bearing deposits 14,048,948 5,605 0.16 14,444,192 9,602 0.27 Short-term borrowings 423,949 121 0.12 570,775 188 0.13 Long-term borrowings 609,866 5,966 3.91 1,271,170 10,698 3.38 Total interest-bearing liabilities 15,082,763 11,692 0.31 16,286,137 20,488
0.51
Noninterest-bearing liabilities: Demand deposits 7,431,235 6,672,832 Other liabilities 419,630 486,749 Total Liabilities 22,933,628 23,445,718 Total Deposits/Cost of deposits 21,480,183 0.11 21,117,024
0.18
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds 22,513,998 0.21 22,958,969
0.36
Shareholders' equity 2,688,834 2,637,098 Total Liabilities and Shareholders' Equity$ 25,622,462 $ 26,082,816 Net interest income/FTE NIM 164,598 2.78 % 167,428 2.79 % Tax equivalent adjustment (3,288) (2,979) Net interest income$ 161,310 $ 164,449 (1)Average balance includes non-performing loans. (2)Balances include amortized historical cost for AFS. The related unrealized holding gains (losses) are included in other assets. (3)ACL - loans relates to the ACL specifically for Net loans and does not include the ACL for OBS credit exposures, which is included in other liabilities. 44 -------------------------------------------------------------------------------- The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in yields and rates for the three months endedMarch 31, 2022 in comparison to the same period in 2021: 2022 vs. 2021 Increase (Decrease) due to change in Volume Rate Net (in thousands) FTE Interest income on: Net loans (1)$ (4,960) $ (9,375) $ (14,335)
Taxable investment securities 3,548 (2,026) 1,522 Exempt investment securities 1,882
- 1,882 Loans held for sale (210) (20) (230) Other interest-earning assets (373) (92) (465) Total interest income$ (113) $ (11,513) $ (11,626) Interest expense on: Demand deposits$ (31) $ (401) $ (432) Savings and money market deposits 77 (582) (505) Brokered deposits (79) (100) (179) Time deposits (1,206) (1,675) (2,881) Short-term borrowings (52) (15) (67) Long-term borrowings (6,189) 1,457 (4,732) Total interest expense$ (7,480) $ (1,316) $ (8,796)
(1) The average balance includes bad debts.
Note: Changes partially attributable to volume and price are attributed to the volume and price components shown above based on the percentage of direct changes attributable to each component.
Compared to the first quarter of 2021, FTE total interest income in the first quarter of 2022 decreased$11.6 million , or 6.2%, primarily due to a decrease of$11.5 million attributable to changes in rate of which$9.4 million related to Net loans. The yield on average interest-earning assets declined 15 basis points in the first quarter of 2022 compared to the same period in 2021. In the first quarter of 2022, interest expense decreased$8.8 million compared to the first quarter of 2021, primarily due to the decrease in the volume of interest-bearing liabilities of$7.5 million . The decrease attributable to volume was primarily driven by the$661.3 million decrease in average long-term borrowings that resulted in a$6.2 million decrease in interest expense, partially offset by a$1.5 million increase in interest expense attributable to changes in the rate on long-term borrowings, which increased 53 bps. The Corporation completed a balance sheet restructuring in March of 2021, which included the prepayment of$536.0 million of FHLB advances and the cash tender for$75.0 million and$60.0 million of subordinated debt and senior notes, respectively. 45
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Average loans and average FTE yields, by type, are summarized in the following
table:
Three months ended March 31 Increase (Decrease)
2022 2021 in Balance
Balance Yield Balance Yield $ %
(dollars in thousands)
Real estate - commercial mortgage $ 7,294,914 3.19 % $ 7,128,997 3.15 % $ 165,917 2.3 %
Commercial and industrial (1) 4,213,014 3.06 5,722,080 2.57 (1,509,066) (26.4)
Real estate - residential mortgage 3,887,428 3.30 3,183,585 3.52 703,843 22.1
Real estate - home equity 1,106,319 3.74 1,175,218 3.75 (68,899) (5.9)
Real estate - construction 1,137,649 3.05 1,054,718 3.09 82,931 7.9
Consumer 471,129 5.15 459,038 4.13 12,091 2.6
Equipment lease financing 236,388 3.79 266,405 4.11 (30,017) (11.3)
Other (2) 36,277 - (9,455) - 45,732 N/M
Total loans $ 18,383,118 3.32 % $ 18,980,586 3.53 % $ (597,468) (3.1) %
(1) Includes average PPP loans of
During the first quarter of 2022, average loans decreased$597.5 million , or 3.1%, compared to the same period in 2021. The decrease was largely driven by a$1.5 billion decline in PPP loans due to the repayment of these loans upon forgiveness by the SBA, partially offset by increases in residential mortgage loans and commercial mortgage loans of$703.8 million and$165.9 million , respectively. Average deposits and average interest rates, by type, are summarized in the following table: Three months ended March 31 Increase (Decrease) 2022 2021 in Balance Balance Rate Balance Rate $ % (dollars in thousands)
Noninterest-bearing demand$ 7,431,235 - %$ 6,672,832 - %$ 758,403 11.4 % Interest-bearing demand 5,664,987 0.05 5,832,174 0.08 (167,187) (2.9) Savings and money market deposits 6,436,548 0.06 6,137,084 0.10 299,464 4.9 Total demand and savings 19,532,770 0.04 18,642,090 0.06 890,680 4.8 Brokered deposits 250,350 0.35 324,364 0.49 (74,014) (22.8) Time deposits 1,697,063 0.87 2,150,570 1.23 (453,507) (21.1) Total deposits$ 21,480,183 0.11 %$ 21,117,024 0.18 %$ 363,159 1.7 % The cost of total deposits decreased 7 bps, to 0.11%, for the first quarter of 2022, compared to 0.18% for the same period in 2021, primarily due to the change in mix of deposits with increases in noninterest-bearing demand deposits and savings and money market deposits of$758.4 million and$299.5 million , respectively, and a$453.5 million decrease in time deposits. 46
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Average borrowings and interest rates, by type, are summarized in the following
table:
Three months ended March 31 Increase (Decrease)
2022 2021 in Balance
Balance Rate Balance Rate $ %
Short-term borrowings: (dollars in thousands)
Customer funding(1) $ 423,949 0.12 % $ 570,775 0.13 % $ (146,826) (25.7) %
Long-term borrowings:
FHLB advances - - 513,744 1.80 (513,744) N/M
Other long-term debt 609,866 3.91 757,426 4.44 (147,560) (19.5)
Total long-term borrowings 609,866 3.91 1,271,170 3.38 (661,304) (52.0)
Total borrowings $ 1,033,815 2.36 % $ 1,841,945 2.37 % $ (808,130) (43.9) %
(1) Includes repurchase agreements and short-term promissory notes.
Average total short-term borrowing decreased
Average total long-term borrowings decreased$661.3 million , or 52.0%, in the first quarter of 2022, compared to the same period in 2021, primarily as a result of the balance sheet restructuring completed in 2021, which included the prepayment of$536.0 million of long-term FHLB advances and the cash tender for$75.0 million and$60.0 million of the Corporation's outstanding subordinated and senior notes, respectively. This reduction in average long-term borrowings resulted in a$6.2 million reduction of interest expense, partially offset by a 53 bps increase in the rate on average long-term borrowings during the first quarter of 2022 compared to the same period in 2021.
Provision for credit losses
The provision for credit losses was a negative$7.0 million for the first quarter of 2022, a decrease of$1.5 million from the same period in 2021. The negative provision for credit losses for the first quarter of 2022 was recorded to adjust the ACL as a result of improved economic conditions. 47
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Non-interest income
The following table presents the components of non-interest income:
Three months ended March 31 Increase (Decrease)
2022 2021 $ %
(dollars in thousands)
Commercial banking:
Merchant and card $ 6,097 $ 5,768 $ 329 5.7 %
Cash management 5,428 4,921 507 10.3
Capital markets 1,676 2,800 (1,124) (40.1)
Other commercial banking 2,807 2,853 (46) (1.6)
Total commercial banking 16,008 16,342 (334) (2.0)
Consumer banking:
Card 5,796 5,878 (82) (1.4)
Overdraft 3,772 2,724 1,048 38.5
Other consumer banking 2,106 2,152 (46) (2.1)
Total consumer banking 11,674 10,754 920 8.6
Wealth management revenues 19,428 17,347 2,081 12.0
Mortgage banking:
Gains on sales of mortgage loans 3,026 8,656 (5,630) (65.0)
Mortgage servicing income 1,550 5,304 (3,754) (70.8)
Total mortgage banking 4,576 13,960 (9,384) (67.2)
Other 3,551 3,519 32 0.9
Non-interest income before investment securities
gains 55,237 61,922 (6,685) (10.8)
Investment securities gains, net 19 33,475 (33,456) (99.9)
Total Non-Interest Income $ 55,256 $ 95,397 $ (40,141) (42.1) %
Excluding net investment securities gains, non-interest income decreased $6.7
million , or 10.8%, in the first quarter of 2022 compared to the same period in
2021.
Compared to the first quarter of 2021, mortgage banking income in the first
quarter of 2022 decreased $9.4 million , or 67.2%, as a result of decreased gains
on sales of mortgage loans, driven by lower mortgage sales and lower
gain-on-sale spreads on loans sold, and a decrease in mortgage servicing income.
The decrease in mortgage servicing income was primarily due to a $0.6 million
reduction in the MSR valuation allowance in the first quarter of 2022, compared
to a $6.1 million reduction to the MSR valuation allowance in the same period in
2021.
In the first quarter of 2022, wealth management revenues increased $2.1 million ,
or 12.0%, from the first quarter of 2021. The increase in wealth management
revenues primarily resulted from growth in brokerage income due to an increase
in the number of customer accounts.
Investment securities gains recognized in the first quarter of 2021 resulted from the sale of Visa shares as part of the balance sheet restructuring completed in the first quarter of 2021.
48
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Non-interest charges
The following table presents the components of non-interest expenses:
Three months ended March 31 Increase (Decrease)
2022 2021 $ %
(dollars in thousands)
Salaries and employee benefits $ 84,464 $ 82,586 $ 1,878 2.3 %
Net occupancy 14,522 13,982 540 3.9
Data processing and software 14,315 13,561 754 5.6
Other outside services 8,167 8,490 (323) (3.8)
Equipment 3,423 3,428 (5) (0.1)
FDIC insurance 3,209 2,624 585 22.3
State taxes 3,037 4,505 (1,468) (32.6)
Professional fees 1,792 2,779 (987) (35.5)
Marketing 1,320 1,002 318 31.7
Intangible amortization 176 115 61 53.0
Debt extinguishment - 32,163 (32,163) (100.0)
Merger-related expenses 401 - 401 N/M
Other 11,152 13,149 (1,997) (15.2)
Total non-interest expense $ 145,978 $ 178,384 $ (32,406) (18.2) %
Compared to the first quarter of 2021, non-interest expense in the first quarter
of 2022 decreased $32.4 million , or 18.2%, primarily as a result of debt
extinguishment expenses related to the prepayment of FHLB advances, subordinated
debt and senior notes in 2021.
Non-interest expense for the first quarter of 2022 included
for merger-related expenses associated with the acquisition of Prudential.
Income taxes
Income tax expense for the three months endedMarch 31, 2022 was$13.3 million , a$0.6 million decrease from$13.9 million for the same period in 2021. The Corporation's ETR was 17.1% for the three months endedMarch 31, 2022 , compared to 16.0% for the same period in 2021. 49
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FINANCIAL CONDITION
The table below presents the condensed consolidated closing balance sheets.
Increase (Decrease)
March 31, 2022 December 31, 2021 $ %
Assets (dollars in thousands)
Cash and cash equivalents $ 1,157,965 $
1,638,614$ (480,649) (29.3) % FRB and FHLB Stock 57,729 57,635 94 0.2 Loans held for sale 27,675 35,768 (8,093) (22.6) Investment securities 4,288,674 4,167,774 120,900 2.9 Net loans, less ACL - loans 18,232,414 18,076,349 156,065 0.9 Net premises and equipment 218,257 220,357 (2,100) (1.0) Goodwill and intangibles 537,877 538,053 (176) - Other assets 1,077,719 1,061,848 15,871 1.5 Total Assets$ 25,598,310 $ 25,796,398 $ (198,088) (0.8) % Liabilities and Shareholders' Equity Deposits$ 21,541,174 $ 21,573,499 $ (32,325) (0.1) % Short-term borrowings 452,440 416,764 35,676 8.6 Long-term borrowings 556,494 621,345 (64,851) (10.4) Other liabilities 478,667 472,110 6,557 1.4 Total Liabilities 23,028,775 23,083,718 (54,943) (0.2) Total Shareholders' Equity 2,569,535 2,712,680 (143,145) (5.3)
Total Liabilities and Equity
25,796,398$ (198,088) (0.8) %
Cash and cash equivalents
Compared toDecember 31, 2021 , cash and cash equivalents in the first quarter of 2022 decreased$480.6 million , or 29.3%, primarily due to a$156.1 million increase in Net loans, a$120.9 million increase in investment securities and a$97.2 million decrease in deposits and long-term borrowings.
Equity
Compared toDecember 31, 2021 , shareholders' equity in the first quarter of 2022 decreased$143.1 million , primarily due to a$186.3 million loss in comprehensive income for the quarter, attributable to unrealized losses on investment securities and derivative instruments. See Note 8 "Accumulated Other Comprehensive (Loss) Income" of the Notes to Consolidated Financial Statements for additional details. 50
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The following table shows the book value of marketable securities:
March 31, December 31, Increase (Decrease)
2022 2021 $ %
Available for Sale (dollars in thousands)
U.S. Government securities $ 373,717 $ 127,618 $ 246,099 N/M
State and municipal securities 1,144,646 1,188,670 (44,024) (3.7) %
Corporate debt securities 395,597 386,133 9,464 2.5
Collateralized mortgage obligations 171,264 209,359 (38,095) (18.2)
Residential mortgage-backed securities 275,602 229,795 45,807 19.9
Commercial mortgage-backed securities 963,507 971,148 (7,641) (0.8)
Auction rate securities - 74,667 (74,667) (100.0)
Total available for sale securities $ 3,324,333 $ 3,187,390 $ 136,943 4.3 %
Held to maturity
Residential mortgage-backed securities$ 384,675 $ 404,958 $ (20,283) (5.0) % Commercial mortgage-backed securities 579,666 575,426 4,240 0.7 Total held to maturity securities$ 964,341 $ 980,384 $ (16,043) (1.6) % Total Investment Securities$ 4,288,674 $ 4,167,774 $ 120,900 2.9 %
Compared to
In the first quarter of 2022, the total of HTM titles decreased
compared to
in residential mortgage-backed securities.
Loans
The following table presents the outstandings by nature:
March 31, 2022 vs. 2021 Increase (Decrease)
2022 December 31, 2021 $ %
(in thousands of dollars) Real estate – commercial mortgage
0.1 % Commercial and industrial (1) 4,156,981 4,208,327 (51,346) (1.2) Real estate - residential mortgage 3,946,741 3,846,750 99,991 2.6 Real estate - home equity 1,098,171 1,118,248 (20,077) (1.8) Real estate - construction 1,210,340 1,139,779 70,561 6.2 Consumer 481,551 464,657 16,894 3.6 Equipment lease financing and other 310,884 283,557 27,327 9.6 Overdrafts 1,928 1,988 (60) (3.0) Gross loans 18,495,972 18,342,386 153,586 0.8 Unearned income (19,853) (17,036) (2,817) (16.5) % Net loans$ 18,476,119 $ 18,325,350 $ 150,769 0.8 %
(1) Includes PPP loans totaling
During the first three months of 2022, net loans increased$150.8 million , or 0.8%, compared to the level atDecember 31, 2021 , primarily due to increases in residential mortgage loans, commercial and industrial loans, excluding PPP loans, and construction loans of$100.0 million ,$85.5 million and$70.6 million , respectively, offset by a$137.0 million decrease in PPP loans reflected in commercial and industrial loans. 51 --------------------------------------------------------------------------------
The increase in residential mortgages is due to continued growth in loan originations and the Company’s strategic decision to hold a larger proportion of loan originations on its balance sheet.
The increase in commercial and industrial loans, excluding PPP loans, was due to solid loan origination volumes along with an increase in existing credit line utilization. Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which are loans to individuals secured by residential real estate. Approximately$8.5 billion , or 46.0%, of the loan portfolio was in commercial mortgage and construction loans as ofMarch 31, 2022 . The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographic location within its footprint. The Corporation's policies limit the maximum total lending commitment to an individual borrower to$70.0 million as ofMarch 31, 2022 . In addition, the Corporation has established lower total lending limits for certain types of lending commitments and lower total lending limits based on the Corporation's internal risk rating of an individual borrower at the time the lending commitment is approved, geographic location of customer or collateral and asset class. The following table summarized the industry concentrations within the commercial mortgage and the commercial and industrial loan portfolios (excluding PPP loans): March 31, 2022 December 31, 2021 Real estate (1) 45.4 % 44.3 % Health care 6.5 6.7 Agriculture 6.1 6.1 Manufacturing 5.5 5.1 Other services (2) 4.9 5.0 Construction (3) 4.3 3.9 Hospitality and food services 3.7 3.7 Wholesale trade 3.3 2.8 Retail 2.9 3.0 Educational services 2.6 2.7 Arts, entertainment and recreation 2.3
2.3
Professional, scientific and technical services 1.8
1.8
Public administration 1.3
1.5
Transportation and warehousing 1.2 1.3
Finance and Insurance 1.1 1.4
Other (4) 7.1 8.4
Total 100.0 % 100.0 %
(1) Includes commercial loans to borrowers engaged in the business of:
renting, leasing or managing real estate for others; selling and/or buying real
estate for others; and appraising real estate.
(2) Excludes public administration.
(3) Includes commercial loans to borrowers engaged in the construction
industry.
(4) Includes the energy sector.
52
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The following table shows the changes in outstanding loans for the three months ended
Consumer and
Commercial Real Estate - Real Estate - Real Estate - Equipment
and Commercial Real Estate - Residential Home Lease
Industrial Mortgage Construction Mortgage Equity Financing Total
(in thousands)
Three months ended March 31, 2022
Balance at December 31,
2021 $ 30,141 $ 52,815 $ 901 $ 35,269 $ 8,900 $ 15,640 $ 143,666
Additions 1,397 2,398 - 319 1,658 - 5,772
Payments (2,450) (1,793) (229) (1,668) (1,028) (174) (7,342)
Charge-offs (227) (152) - - (1,052) (469) (1,900)
Transfers to accrual
status (349) (2,238) - - - - (2,587)
Transfers to OREO (22) (630) - - (158) - (810)
Balance at March 31,
2022 $ 28,490 $ 50,400 $ 672 $ 33,920 $ 8,320 $ 14,997 $ 136,799
In the first three months of 2022, outstanding loans decreased by approximately
The following table summarizes non-performing assets as of the indicated dates:
March 31, 2022 December 31, 2021
(dollars in thousands)
Non-accrual loans $ 136,799 $ 143,666
Loans 90 days or more past due and still accruing 24,182 8,453
Total non-performing loans 160,981 152,119
OREO (1) 2,014 1,817
Total non-performing assets $ 162,995 $ 153,936
Non-accrual loans to total loans 0.74 % 0.78 %
Non-performing loans to total loans 0.87 % 0.83 %
Non-performing assets to total assets 0.64 % 0.60 %
ACL - loans to non-performing loans 151 % 164 %
(1) Excludes $4.7 million and $6.4 million of residential mortgage properties
for which formal foreclosure proceedings were in process as of March 31, 2022
and December 31, 2021 , respectively
Non-performing loans increased $8.9 million , or 5.8%, compared to the level at
December 31, 2021 . Non-performing loans as a percentage of total loans were
0.87% at March 31, 2022 and 0.83% at December 31, 2021 . See Note 4, "Loans and
Allowance for Credit Losses," in the Notes to Consolidated Financial Statements
for further details on non-performing loans.
The following table presents the ToRs on the dates indicated:
March 31, 2022 December 31 ,
2021
(in thousands) Real estate - commercial mortgage $ 3,563 $
3,464
Commercial and industrial 1,903
1,857
Real estate - residential mortgage 11,700 11,948 Real estate - home equity 12,028 12,218 Consumer 2 5 Total accruing TDRs 29,196 29,492 Non-accrual TDRs(1) 52,125 55,945 Total TDRs$ 81,321 $ 85,437
(1) Included with unaccrued loans in the previous table.
53 -------------------------------------------------------------------------------- The ability to identify potential problem loans in a timely manner is important to maintaining an adequate ACL. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and equipment lease financing is based on payment history, through the monitoring of delinquency levels and trends. For a description of the Corporation's risk ratings, see Note 4, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements. Total internally risk-rated loans were$12.5 billion , of which$1.1 billion were criticized and classified, as ofMarch 31, 2022 , and$12.4 billion , of which$1.1 billion were criticized and classified, as ofDecember 31, 2021 . The following table presents criticized and classified loans, or those with internal risk ratings of special mention or substandard or lower for commercial mortgages, commercial and industrial loans and construction loans to commercial borrowers, by class segment: Special Mention (1) Increase (Decrease) Substandard or Lower (2) Increase (Decrease) Total Criticized and Classified LoansMarch 31, 2022 December 31, 2021 $ %March 31, 2022 December 31, 2021 $ %March 31, 2022 December 31, 2021 (dollars in thousands) Real estate - commercial mortgage$ 364,463 $ 387,279$ (22,816) (5.9)%$ 321,298 $ 331,096$ (9,798) (3.0)%$ 685,761 $ 718,375 Commercial and industrial 149,008 142,369 6,639 4.7 176,970 152,219 24,751 16.3 325,978 294,588 Real estate - construction (3) 35,807 58,841 (23,034) (39.1) 4,769 6,324 (1,555) (24.6) 40,576 65,165 Total$ 549,278 $ 588,489$ (39,211) (6.7)%$ 503,037 $ 489,639$ 13,398 2.7%$ 1,052,315 $ 1,078,128 % of total risk rated loans 4.4 % 4.7 % 4.0 % 3.9 % 8.4 % 8.6 %
(1) Loans considered “criticized” by banking regulators (2) Loans considered “classified” by banking regulators (3) Excluding construction – other
The decrease in total loans challenged and classified that occurred during the three months ended
Allowance and Provision for Credit Losses
The following table presents the components of the ACL:
March 31, 2022 December 31, 2021
(dollars in thousands)
ACL - loans $ 243,705 $ 249,001
ACL - OBS credit exposure (1) 13,933 14,533
Total ACL $ 257,638 $ 263,534
(1) Included in “other liabilities” in the consolidated balance sheet.
54
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The following table shows the activity in the ACL:
Three months ended March 31
2022 2021
(dollars in thousands)
Average balance of Net loans $ 18,383,118 $
18,980,586
Balance of ACL at beginning of period$ 249,001 $ 277,567 Loans charged off: Commercial and industrial (227) (4,319) Real estate - commercial mortgage (152)
(1,837)
Consumer and real estate - home equity (1,052)
(847)
Equipment lease financing and other (469)
(968)
Real estate - residential mortgage - (192) Real estate - construction - (39) Total loans charged off (1,900) (8,202) Recoveries of loans previously charged off: Commercial and industrial 1,980
769
Real estate - commercial mortgage 112
174
Consumer and real estate - home equity 454
440
Equipment lease financing and other 154
159
Real estate - residential mortgage 222 95 Real estate - construction 32 384 Total recoveries 2,954 2,021 Net loans charged off/(recoveries) 1,054
(6,181)
Provision for credit losses (1) (6,350)
(5,400)
Balance of ACL at end of period$ 243,705 $
265,986
Net charge-offs to average loans (annualized) (0.02) %
0.13%
(1) The allowance for credit losses included in the table only includes the portion related to loans.
The provision for credit losses, specific to loans, for the three months endedMarch 31, 2022 was negative$6.4 million , compared to a negative provision of$5.4 million recorded for the same period in 2021. Several factors during the first three months of 2022 in comparison to the same period in 2021, including improved economic conditions, reduced the level of the ACL determined to be necessary. The ACL includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative models. See Note 4, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements for further details on the provision for credit losses.
The following table summarizes the assignment of the ACL – ready:
March 31, 2022 December 31, 2021
% In Each Loan % In Each Loan
ACL - loans Category (1) ACL - loans Category (1)
(dollars in thousands)
Real estate - commercial mortgage $ 79,853 39.5 % $ 87,970 39.7 %
Commercial and industrial 66,511 22.5 67,056 22.9
Real estate - residential mortgage 55,892 21.3 54,236 21.0
Consumer, home equity, equipment lease
financing 28,146 10.2 26,798 10.2
Real estate - construction 13,303 6.5 12,941 6.2
Total ACL - loans $ 243,705 100.0 % $ 249,001 100.0 %
(1) Ending loan balances as a % of total loans for the periods presented.
55 --------------------------------------------------------------------------------
Deposits and borrowings
The following table presents closing filings by type:
Increase (Decrease)
March 31, 2022 December 31, 2021 $ %
(dollars in thousands)
Noninterest-bearing demand $ 7,528,391 $ 7,370,963 $ 157,428 2.1 %
Interest-bearing demand 5,625,286 5,819,539 (194,253) (3.3)
Savings and money market deposits 6,479,196 6,403,995 75,201 1.2
Total demand and savings 19,632,873 19,594,497 38,376 0.2
Brokered deposits 248,833 251,526 (2,693) (1.1)
Time deposits 1,659,468 1,727,476 (68,008) (3.9)
Total deposits $ 21,541,174 $ 21,573,499 $ (32,325) (0.1) %
During the first three months of 2022, total deposits decreased by $32.3
million , or 0.1%, primarily related to a $194.3 million decrease in
interest-bearing demand deposits and a $68.0 million decrease in time deposits,
partially offset by increases of $157.4 million in noninterest-bearing demand
deposits and $75.2 million in savings and money market deposits.
The following table presents term loans by type:
Increase (Decrease)
March 31, 2022 December 31, 2021 $ %
(dollars in thousands)
Short-term borrowings:
Customer funding (1) $ 452,440 $ 416,764 $ 35,676 8.6 %
Long-term borrowings:
Other long-term borrowings 556,494 621,345 (64,851) (10.4)
Total borrowings $ 1,008,934 $ 1,038,109 $ (29,175) (2.8) %
(1) Includes repurchase agreements and short-term promissory notes.
In the first three months of 2022, customer financing increased
Equity
Total shareholders' equity decreased$143.1 million during the first three months of 2022. The decrease was due primarily to a$186.3 million decrease in AOCI, mainly due to unrealized losses in investment securities and derivatives. The decrease in AOCI was partially offset by net income of$64.3 million reflected in retained earnings. OnMarch 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 onMarch 17, 2022 . Under the 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 repurchase program may be discontinued at any time and will expire onDecember 31, 2022 .
The Corporation and its subsidiary bank,Fulton Bank , are subject to regulatory capital requirements ("Capital Rules") administered by banking regulators. Failure to meet minimum capital requirements could result in certain actions by regulators that could have a material effect on the Corporation's financial statements. 56 --------------------------------------------------------------------------------
Capital rules require that the company and
•Achieving a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets;
•Achieving a minimum Tier 1 Leverage capital ratio of 4.00% of average assets;
• Achieve a minimum total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 capital ratio of 6.00% of risk-weighted assets;
•Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and •Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, are excluded as a component of Tier 1 capital for institutions of the Corporation's size. The Capital Rules use a standardized approach for risk weightings that expands 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 and resulting in higher risk weightings for a variety of asset categories. As ofMarch 31, 2022 , the Corporation's capital levels met the fully phased-in minimum capital requirements, including the capital conservation buffers, as prescribed in the Capital Rules. As ofMarch 31, 2022 ,Fulton Bank met the well capitalized requirements under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios as set forth in the regulation. There were no other conditions or events sinceMarch 31, 2022 that management believes have changed the Corporation's capital categories.
The following table summarizes the Company’s capital ratios against regulatory requirements:
Regulatory
Minimum Fully Phased-in, with
for Capital Capital Conservation
March 31, 2022 December 31, 2021 Adequacy Buffers
Total Risk-Based Capital (to Risk-Weighted
Assets) 13.8 % 14.1 % 8.0 % 10.5 %
Tier I Risk-Based Capital (to Risk-Weighted
Assets) 10.9 % 10.9 % 6.0 % 8.5 %
Common Equity Tier I (to Risk-Weighted
Assets) 10.0 % 9.9 % 4.5 % 7.0 %
Tier I Leverage Capital (to Average Assets) 8.9 % 8.6 % 4.0 % 4.0 %
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