Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management Discussion relates to the Corporation, a financial holding company registered under the BHCA and incorporated under the laws of the Commonwealth of Pennsylvania, and its wholly owned subsidiaries. Management’s Discussion should be read in conjunction with the consolidated financial statements and other financial information presented in this report.
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 and Fulton 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 the Federal Reserve Board and other government agencies, that impact money supply and market interest rates;
◦the effects of changes in U.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;
◦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 or Fulton 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;
◦potential adverse reactions or changes to business or employee relationships, including those resulting from the Merger;
◦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.
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 ended December 31, 2021, Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, and elsewhere in this report, including in Note 13 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements.
OVERVIEW
The Corporation is a financial holding company, which, through its wholly-owned banking subsidiary, provides a full range of retail and commercial financial services primarily in Pennsylvania, Delaware, Maryland, New Jersey and Virginia.
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the net interest margin, which is FTE net interest income as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments and properties. Offsetting these revenue sources are provisions for credit losses on loans and OBS credit risks, non-interest expenses and income taxes.
The following table presents a summary of the Corporation's earnings and selected performance ratios:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Six months ended June 30 |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Net income (in thousands) | $ | 69,989 | | $ | 64,964 | | $ | 134,277 | | $ | 138,027 |
Net income available to common shareholders (in thousands) | $ | 67,427 | | $ | 62,402 | | $ | 129,153 | | $ | 132,874 |
Diluted net income available to common shareholders per share | $ | 0.42 | | $ | 0.38 | | $ | 0.80 | | $ | 0.81 |
Return on average assets, annualized | 1.10 | % | | 1.00 | % | | 1.06 | % | | 1.07 | % |
Return on average assets, annualized, excluding merger-related expenses(1) | 1.11 | % | | 1.00 | % | | 1.07 | % | | 1.07 | % |
Return on average common shareholders' equity, annualized | 11.57 | % | | 10.11 | % | | 10.78 | % | | 10.10 | % |
Return on average common shareholders' equity (tangible), annualized(1) | 15.23 | % | | 12.93 | % | | 14.01 | % | | 13.95 | % |
Net interest margin(2) | 3.04 | % | | 2.73 | % | | 2.91 | % | | 2.76 | % |
Efficiency ratio(1) | 61.4 | % | | 63.8 | % | | 63.5 | % | | 63.4 | % |
Non-performing assets to total assets | 0.71 | % | | 0.60 | % | | 0.71 | % | | 0.60 | % |
Annualized net charge-offs to average loans | (0.08) | % | | 0.15 | % | | (0.05) | % | | 0.14 | % |
(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 FOMC raised the target range for the Fed Funds Rate by 25 bps to 0.25%-0.50% at its March 2022 meeting, by 50 bps to 0.75%-1.00% at its May 2022 meeting and by 75 bps to 1.50%-1.75% at its June 2022 meeting.
Business Combinations
On July 1, 2022, the Corporation completed the acquisition of Prudential. Prudential was merged with and into the Corporation, and Prudential's wholly owned subsidiary, Prudential Bank, became a wholly owned subsidiary of the Corporation. The Corporation plans to merge Prudential Bank with and into Fulton Bank during the fourth quarter of 2022. The consolidated financial statements contained in this report do not include the results of Prudential for the periods presented.
Prudential merger-related expenses included in non-interest expense for the three months and six months ended June 30, 2022, were $1.0 million and $1.4 million, respectively.
Financial Highlights
Following is a summary of the financial highlights for the three and six months ended June 30, 2022:
•Net Income Available to Common Shareholders and Net Income Per Share - Net income available to common shareholders was $67.4 million for the three months ended June 30, 2022, a $5.0 million increase compared to $62.4 million for the same period in 2021. Net income available to common shareholders was $129.2 million for the six months ended June 30, 2022, a $3.7 million decrease compared to $132.9 million for the same period in 2021. Diluted net income per share was $0.42 for the three months ended June 30, 2022, a $0.04 increase compared to the same
period in 2021, and $0.80 for the six months ended June 30, 2022, a $0.01 decrease compared to the same period in 2021.
•Net Interest Income - FTE net interest income increased $16.8 million, or 10.2%, for the three months ended June 30, 2022 compared to the same period in 2021. The increase was driven by higher interest rates, which resulted in a $9.2 million increase in interest income on average net loans, as well as the $807.2 million increase in average investment securities, which contributed $4.7 million to the increase in interest income. FTE net interest income increased $14.0 million, or 4.2%, for the six months ended June 30, 2022 compared to the same period in 2021. The increase in net interest income was primarily from an increase in interest income of $8.1 million from investments, a decrease of $6.2 million in interest expense from interest-bearing deposits and a decrease of $5.4 million in interest expense from long-term borrowings, partially offset by a decrease in interest income of $5.2 million on net loans, primarily due to a decline in PPP loans.
•Net Interest Margin - Overall, net interest margin increased 31 bps for the three months ended June 30, 2022 compared to the same period in 2021. Net interest margin increased 15 bps for the six months ended June 30, 2022 compared to the same period in 2021. The increases in net interest margin were driven by higher yields on average interest-earning assets, and funds moving to higher yielding investment securities from lower yielding other interest-earning assets.
•Loan Growth - Average net loans decreased by $269.4 million, or 1.4%, for the three months ended June 30, 2022 compared to the same period in 2021. The decrease was largely driven by a $1.4 billion decline in PPP loans due to the repayment of these loans upon forgiveness by the SBA, partially offset by increases in average residential mortgage loans, average commercial mortgage loans, average real estate construction loans and average commercial and industrial loans of $656.0 million, $162.8 million, $134.5 million and $119.8 million, respectively. Average net loans decreased $432.5 million, or 2.3%, for the six months ended June 30, 2022 compared to the same period in 2021. The decrease was primarily driven by a $1.4 billion decline in PPP loans, partially offset by increases in average residential mortgage loans, average commercial mortgage loans and average real estate construction loans of $680.2 million, $165.0 million and $110.2 million, respectively.
•Deposit Growth - Average deposits decreased $241.9 million, or 1.1%, for the three months ended June 30, 2022 compared to the same period in 2021. The decrease was largely due to decreases in average time deposits and average interest-bearing demand deposits of $395.3 million and $381.9 million, respectively, partially offset by growth in average non-interest bearing demand deposits and average savings and money market deposits of $443.9 million and $145.0 million, respectively. Average deposits increased $59.0 million, or 0.3%, for the six months ended June 30, 2022, compared to the same period in 2021. The increase was primarily due to increases in average noninterest-bearing demand deposits and average savings and money market deposits of $600.2 million and $221.8 million, respectively, partially offset by decreases in average time deposits and average interest-bearing demand deposits of $424.3 million and $275.1 million, respectively.
•Asset Quality - Non-performing assets increased $24.4 million, or 15.8%, as of June 30, 2022 compared to December 31, 2021, and were 0.71% and 0.60% of total assets as of those dates, respectively. For the six months ended June 30, 2022 and 2021, annualized net charge-offs to average loans outstanding were (0.05)% and 0.14%, respectively. The provision for credit losses was a negative $5.5 million for the six months ended June 30, 2022, compared to a negative provision of $9.0 million for the same period of 2021.
•Non-interest Income - For the three months ended June 30, 2022, non-interest income, excluding net investment securities gains, increased $6.5 million, or 12.6%, compared to the same period in 2021. The increase in non-interest income was primarily due to increases of $2.2 million in fee income from commercial customer interest rate swaps, $1.6 million in consumer banking fees, $0.9 million in mortgage banking income, $0.7 million in cash management fees, $0.6 million in wealth management revenues and $0.6 million in commercial banking merchant and card revenues. Non-interest income, excluding net investment securities gains, decreased $0.2 million, or 0.1% for the six months ended June 30, 2022 compared to the same period in 2021.
•Non-interest Expense - Non-interest expense, excluding merger-related expenses of $1.0 million, increased $7.9 million, or 5.6%, for the three months ended June 30, 2022 compared to the same period in 2021. This increase was primarily due to increases of $7.0 million in salaries and employee benefits, $1.1 million in net occupancy expense and $0.8 million in data processing and software, partially offset by a decrease of $0.8 million in state taxes. Non-interest expense, excluding merger-related expenses of $1.4 million, decreased $24.9 million, or 7.8%, for the six-months ended June 30, 2022, compared to the same period in 2021. The decrease was largely driven by debt extinguishment expenses in 2021 of $32.6 million, partially offset by an increase of $8.9 million in salaries and employee benefits.
•Income Taxes - Income tax expense for the three months ended June 30, 2022 was $16.0 million, a $4.0 million increase from $12.0 million from the same period in 2021. Income tax expense for the six months ended June 30, 2022 was $29.3 million, a $3.4 million increase from the same period in 2021. The Corporation's ETR was 18.6% for the three months ended June 30, 2022 compared to 15.6% for the same period in 2021. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs.
Supplemental Reporting of Non-GAAP Based 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.
Following are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Six months ended June 30 |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Return on average assets, excluding merger-related expenses |
Net income | $ | 69,989 | | $ | 64,964 | | $ | 134,277 | | $ | 138,027 |
Plus: Merger-related expenses, net of tax | 811 | | — | | 1,128 | | — |
Net income (numerator) | $ | 70,800 | | $ | 64,964 | | $ | 135,405 | | $ | 138,027 |
| | | | | | | |
Total average assets (denominator) | $ | 25,578,432 | | $ | 26,017,542 | | $ | 25,600,325 | | $ | 26,049,999 |
| | | | | | | |
Return on average assets, excluding merger-related expenses, annualized | 1.11 | % | | 1.00 | % | | 1.07 | % | | 1.07 | % |
| | | | | | | |
Return on average common shareholders' equity (tangible) |
Net income available to common shareholders | $ | 67,427 | | $ | 62,402 | | $ | 129,153 | | $ | 132,874 |
Plus: Merger-related expenses, net of tax | 811 | | — | | 1,128 | | — |
Plus: Intangible amortization, net of tax | 140 | | 140 | | 279 | | 230 |
Numerator | $ | 68,378 | | $ | 62,542 | | $ | 130,560 | | $ | 133,104 |
| | | | | | | |
Average shareholders' equity | $ | 2,531,346 | | $ | 2,669,413 | | $ | 2,609,655 | | $ | 2,653,345 |
| | | | | | | |
Less: Average goodwill and intangible assets | (537,786) | | (536,470) | | (537,881) | | (536,536) |
Less: Average preferred stock | (192,878) | | (192,878) | | (192,878) | | (192,878) |
Average tangible common shareholders' equity (denominator) | $ | 1,800,682 | | $ | 1,940,065 | | $ | 1,878,896 | | $ | 1,923,931 |
Return on average common shareholders' equity (tangible), annualized | 15.23 | % | | 12.93 | % | | 14.01 | % | | 13.95 | % |
| | | | | | | |
Efficiency ratio | | | | | | | |
Non-interest expense | $ | 149,730 | | $ | 140,831 | | $ | 295,708 | | $ | 319,215 |
Less: Amortization of tax credit investments | (696) | | (1,563) | | (1,391) | | (3,094) |
Less: Merger-related expenses | (1,027) | | — | | (1,428) | | — |
Less: Intangible amortization | (177) | | (178) | | (353) | | (293) |
Less: Debt extinguishment cost | — | | (412) | | — | | (32,575) |
Numerator | $ | 147,830 | | $ | 138,678 | | $ | 292,536 | | $ | 283,253 |
| | | | | | | |
Net interest income | $ | 178,831 | | $ | 162,399 | | $ | 340,141 | | $ | 326,847 |
Tax equivalent adjustment | 3,427 | | 3,018 | | 6,716 | | 5,998 |
Plus: Total non-interest income | 58,391 | | 51,890 | | 113,647 | | 147,287 |
Less: Investment securities gains, net | (8) | | (36) | | (27) | | (33,511) |
Denominator | $ | 240,641 | | $ | 217,271 | | $ | 460,477 | | $ | 446,621 |
Efficiency ratio | 61.4 | % | | 63.8 | % | | 63.5 | % | | 63.4 | % |
Presented on a FTE basis, using a 21% federal tax rate.
RESULTS OF OPERATIONS
Three months ended June 30, 2022 compared to the three months ended June 30, 2021
Net Interest Income
FTE net interest income increased $16.8 million to $182.3 million for the three months ended June 30, 2022, from $165.4 million for the same period in 2021. NIM increased 31 bps, to 3.04%, compared to 2.73% 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 June 30 |
| 2022 | | 2021 |
| Average Balance | | Interest | | Yield/ Rate | | Average Balance | | Interest | | Yield/ Rate |
ASSETS | (dollars in thousands) |
Interest-earning assets: | | | | | | | | | | | |
Net loans (1) | $ | 18,637,175 | | | $ | 165,682 | | | 3.56 | % | | $ | 18,906,556 | | | $ | 156,525 | | | 3.32 | % |
| | | | | | | | | | | |
Investment securities (2) | 4,398,424 | | | 26,061 | | | 2.37 | | | 3,591,231 | | | 21,392 | | | 2.38 | |
Loans held for sale | 13,260 | | | 260 | | | 7.84 | | | 31,948 | | | 199 | | | 2.49 | |
Other interest-earning assets | 938,244 | | | 1,723 | | | 0.74 | | | 1,752,549 | | | 1,575 | | | 0.36 | |
Total interest-earning assets | 23,987,103 | | | 193,726 | | | 3.24 | | | 24,282,284 | | | 179,691 | | | 2.97 | |
Noninterest-earning assets: | | | | | | | | | | | |
Cash and due from banks | 160,240 | | | | | | | 129,927 | | | | | |
Premises and equipment | 216,798 | | | | | | | 229,047 | | | | | |
Other assets | 1,463,332 | | | | | | | 1,643,410 | | | | | |
Less: ACL - loans (3) | (249,041) | | | | | | | (267,126) | | | | | |
Total Assets | $ | 25,578,432 | | | | | | | $ | 26,017,542 | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | $ | 5,597,975 | | | $ | 797 | | | 0.06 | % | | $ | 5,979,855 | | | $ | 932 | | | 0.06 | % |
Savings and money market deposits | 6,425,634 | | | 1,125 | | | 0.07 | | | 6,280,629 | | | 1,363 | | | 0.09 | |
Brokered deposits | 244,200 | | | 619 | | | 1.02 | | | 297,815 | | | 253 | | | 0.34 | |
Time deposits | 1,608,286 | | | 3,255 | | | 0.81 | | | 2,003,606 | | | 5,434 | | | 1.09 | |
Total interest-bearing deposits | 13,876,095 | | | 5,796 | | | 0.17 | | | 14,561,905 | | | 7,982 | | | 0.22 | |
Short-term borrowings | 446,838 | | | 190 | | | 0.17 | | | 514,025 | | | 137 | | | 0.11 | |
Long-term borrowings | 556,992 | | | 5,482 | | | 3.94 | | | 626,795 | | | 6,155 | | | 3.93 | |
Total interest-bearing liabilities | 14,879,925 | | | 11,468 | | | 0.31 | | | 15,702,725 | | | 14,274 | | | 0.36 | |
Noninterest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | 7,647,618 | | | | | | | 7,203,696 | | | | | |
Other liabilities | 519,543 | | | | | | | 441,708 | | | | | |
Total Liabilities | 23,047,086 | | | | | | | 23,348,129 | | | | | |
Total Deposits/Cost of deposits | 21,523,713 | | | | | 0.11 | | | 21,765,601 | | | | | 0.15 | |
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds | 22,527,543 | | | | | 0.20 | | | 22,906,421 | | | | | 0.25 | |
Shareholders’ equity | 2,531,346 | | | | | | | 2,669,413 | | | | | |
Total Liabilities and Shareholders’ Equity | $ | 25,578,432 | | | | | | | $ | 26,017,542 | | | | | |
Net interest income/FTE NIM | | | 182,258 | | | 3.04 | % | | | | 165,417 | | | 2.73 | % |
Tax equivalent adjustment | | | (3,427) | | | | | | | (3,018) | | | |
Net interest income | | | $ | 178,831 | | | | | | | $ | 162,399 | | | |
(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.
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 ended June 30, 2022 in comparison to the same period in 2021:
| | | | | | | | | | | | | | | | | |
| 2022 vs. 2021 Increase (Decrease) due to change in |
| Volume | | Yield/Rate | | Net |
| (in thousands) |
FTE Interest income on: | | | | | |
Net loans (1) | $ | (2,218) | | | $ | 11,375 | | | $ | 9,157 | |
Investment securities | 4,759 | | | (90) | | | 4,669 | |
| | | | | |
Loans held for sale | (169) | | | 230 | | | 61 | |
Other interest-earning assets | (970) | | | 1,118 | | | 148 | |
Total interest income | $ | 1,402 | | | $ | 12,633 | | | $ | 14,035 | |
Interest expense on: | | | | | |
Demand deposits | $ | (135) | | | $ | — | | | $ | (135) | |
Savings and money market deposits | 37 | | | (275) | | | (238) | |
Brokered deposits | (53) | | | 419 | | | 366 | |
Time deposits | (947) | | | (1,232) | | | (2,179) | |
Short-term borrowings | (19) | | | 72 | | | 53 | |
Long-term borrowings | (689) | | | 16 | | | (673) | |
Total interest expense | $ | (1,806) | | | $ | (1,000) | | | $ | (2,806) | |
(1)Average balance includes non-performing loans.
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.
Compared to the second quarter of 2021, FTE total interest income for the second quarter of 2022 increased $14.0 million, or 7.8%, primarily due to an increase of $12.6 million attributable to changes in yield of which $11.4 million related to net loans. The yield on average interest-earning assets increased 27 bps in the second quarter of 2022 compared to the same period in 2021.
In the second quarter of 2022, interest expense decreased $2.8 million compared to the second quarter of 2021, primarily driven by the decrease in average interest-bearing liabilities resulting in a $1.8 million decline in interest expense. The decrease in interest expense attributable to volume was primarily driven by the decreases in average time deposits and average long-term borrowings.
Average loans and average FTE yields, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) |
| 2022 | | 2021 | | in Balance |
| Balance | | Yield | | Balance | | Yield | | $ | | % |
| (dollars in thousands) |
Real estate – commercial mortgage | $ | 7,340,417 | | | 3.46 | % | | $ | 7,177,622 | | | 3.16 | % | | $ | 162,795 | | | 2.3 | % |
Commercial and industrial (1) | 4,155,436 | | | 3.57 | | | 5,445,160 | | | 2.58 | | | (1,289,724) | | | (23.7) | |
Real estate – residential mortgage | 4,052,666 | | | 3.31 | | | 3,396,690 | | | 3.39 | | | 655,976 | | | 19.3 | |
Real estate – home equity | 1,118,494 | | | 4.09 | | | 1,139,558 | | | 3.71 | | | (21,064) | | | (1.8) | |
Real estate – construction | 1,188,932 | | | 3.44 | | | 1,054,469 | | | 3.05 | | | 134,463 | | | 12.8 | |
Consumer | 485,095 | | | 5.30 | | | 451,486 | | | 3.89 | | | 33,609 | | | 7.4 | |
Equipment lease financing | 253,659 | | | 3.89 | | | 256,248 | | | 3.74 | | | (2,589) | | | (1.0) | |
Other (2) | 42,476 | | | — | | | (14,677) | | | — | | | 57,153 | | | N/M |
Total loans | $ | 18,637,175 | | | 3.56 | % | | $ | 18,906,556 | | | 3.32 | % | | $ | (269,381) | | | (1.4) | % |
(1) Includes average PPP loans of $0.1 billion and $1.5 billion for the three months ended June 30, 2022 and 2021, respectively.
(2) Consists of overdrafts and net origination fees and costs.
During the second quarter of 2022, average loans decreased $269.4 million, or 1.4%, compared to the same period in 2021. The decrease was largely driven by a $1.4 billion decline in average PPP loans due to the repayment of these loans upon forgiveness by the SBA, partially offset by increases in average residential mortgage loans, average commercial mortgage loans and average construction loans of $656.0 million, $162.8 million and $134.5 million, respectively. The increases in yields on commercial mortgage loans, commercial and industrial loans, home equity loans and construction loans were primarily due to rising interest rates.
Average deposits and average interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) in Balance |
| 2022 | | 2021 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 7,647,618 | | | — | % | | $ | 7,203,696 | | | — | % | | $ | 443,922 | | | 6.2 | % |
Interest-bearing demand | 5,597,975 | | | 0.06 | | | 5,979,855 | | | 0.06 | | | (381,880) | | | (6.4) | |
Savings and money market deposits | 6,425,634 | | | 0.07 | | | 6,280,629 | | | 0.09 | | | 145,005 | | | 2.3 | |
Total demand and savings | 19,671,227 | | | 0.04 | | | 19,464,180 | | | 0.05 | | | 207,047 | | | 1.1 | |
Brokered deposits | 244,200 | | | 1.02 | | | 297,815 | | | 0.34 | | | (53,615) | | | (18.0) | |
Time deposits | 1,608,286 | | | 0.81 | | | 2,003,606 | | | 1.09 | | | (395,320) | | | (19.7) | |
Total deposits | $ | 21,523,713 | | | 0.11 | % | | $ | 21,765,601 | | | 0.15 | % | | $ | (241,888) | | | (1.1) | % |
The cost of total deposits decreased 4 bps, to 0.11%, for the second quarter of 2022, compared to 0.15% for the same period in 2021, due to the change in mix of deposits and a decline in rates on time deposits of 28 bps and savings and money market deposits of 2 bps. Average noninterest-bearing demand deposits and average savings and money market deposits increased $443.9 million and $145.0 million, respectively, and time deposits and interest-bearing demand deposits decreased $395.3 million and $381.9 million, respectively, during the second quarter of 2022 compared to the same period in 2021.
Average borrowings and interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) |
| 2022 | | 2021 | | in Balance |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
Short-term borrowings: | (dollars in thousands) |
| | | | | | | | | | | |
| | | | | | | | | | | |
Customer funding(1) | $ | 443,970 | | | 0.18 | % | | $ | 514,025 | | | 0.11 | % | | $ | (70,055) | | | (13.6) | % |
Federal funds purchased | 2,857 | | | 1.48 | | | — | | | — | | | 2,857 | | | N/M |
FHLB advances and other borrowings (2) | 11 | | | — | | | — | | | — | | | 11 | | | N/M |
Total short-term borrowings | 446,838 | | | 0.17 | | | 514,025 | | | 0.11 | | | (67,187) | | | (13.1) | |
Long-term borrowings: | | | | | | | | | | | |
| | | | | | | | | | | |
Other long-term debt | 556,992 | | | 3.94 | | | 626,795 | | | 3.93 | | | (69,803) | | | (11.1) | |
| | | | | | | | | | | |
Total borrowings | $ | 1,003,830 | | | 2.26 | % | | $ | 1,140,820 | | | 2.21 | % | | $ | (136,990) | | | (12.0) | % |
(1) Includes repurchase agreements and short-term promissory notes.
(2) Consists of FHLB advances and other borrowings with original terms of less than one year.
Average total short-term borrowings decreased $67.2 million, or 13.1%, in the second quarter of 2022, compared to the same period in 2021.
Average total long-term borrowings decreased $69.8 million, or 11.1%, in the second quarter of 2022, compared to the same period in 2021, primarily as a result of the $65 million repayment of senior notes on March 16, 2022. See Note 14 "Long-Term Borrowings" of the Notes to Consolidated Financial Statements for additional details.
Provision for Credit Losses
The provision for credit losses was $1.5 million for the second quarter of 2022, an increase of $5.0 million from the same period in 2021. The provision for credit losses for the second quarter of 2022 was recorded to adjust the allowance for credit losses as a result of loan growth during the quarter as well as the economic outlook.
Non-Interest Income
The following table presents the components of non-interest income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Commercial banking: | | | | | | | |
Merchant and card | $ | 7,355 | | | $ | 6,786 | | | $ | 569 | | | 8.4 | % |
Cash management | 6,062 | | | 5,341 | | | 721 | | | 13.5 | |
Capital markets | 3,893 | | | 1,536 | | | 2,357 | | | N/M |
Other commercial banking | 3,049 | | | 3,466 | | | (417) | | | (12.0) | |
Total commercial banking | 20,359 | | | 17,129 | | | 3,230 | | | 18.9 | |
Consumer banking: | | | | | | | |
Card | 6,067 | | | 5,733 | | | 334 | | | 5.8 | |
Overdraft | 3,881 | | | 2,750 | | | 1,131 | | | 41.1 | |
Other consumer banking | 2,524 | | | 2,377 | | | 147 | | | 6.2 | |
Total consumer banking | 12,472 | | | 10,860 | | | 1,612 | | | 14.8 | |
Wealth management revenues | 18,274 | | | 17,634 | | | 640 | | | 3.6 | |
Mortgage banking: | | | | | | | |
Gains on sales of mortgage loans | 2,542 | | | 5,438 | | | (2,896) | | | (53.3) | |
Mortgage servicing income | 1,226 | | | (2,600) | | | 3,826 | | | (147.2) | |
Total mortgage banking | 3,768 | | | 2,838 | | | 930 | | | 32.8 | |
Other | 3,510 | | | 3,393 | | | 117 | | | 3.4 | |
Non-interest income before investment securities gains | 58,383 | | | 51,854 | | | 6,529 | | | 12.6 | |
Investment securities gains, net | 8 | | | 36 | | | (28) | | | (77.8) | |
Total Non-Interest Income | $ | 58,391 | | | $ | 51,890 | | | $ | 6,501 | | | 12.5 | % |
Excluding net investment securities gains, non-interest income increased $6.5 million, or 12.6%, in the second quarter of 2022 compared to the same period in 2021.
Compared to the second quarter of 2021, commercial banking income in the second quarter of 2022 increased $3.2 million, or 18.9%, driven by a $2.2 million increase in fee income from commercial customer interest rate swaps reflected in capital markets income. Mortgage servicing income in the second quarter of 2022 compared to the same period in 2021 increased $3.8 million, partially offset by a decrease of $2.9 million in gains of sales of mortgage loans.
Non-Interest Expense
The following table presents the components of non-interest expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Increase (Decrease) |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Salaries and employee benefits | $ | 85,404 | | | $ | 78,367 | | | $ | 7,037 | | | 9.0 | % |
Data processing and software | 14,685 | | | 13,932 | | | 753 | | | 5.4 | |
Net occupancy | 13,587 | | | 12,494 | | | 1,093 | | | 8.7 | |
Other outside services | 8,764 | | | 8,178 | | | 586 | | | 7.2 | |
State taxes | 3,568 | | | 4,384 | | | (816) | | | (18.6) | |
Equipment | 3,422 | | | 3,424 | | | (2) | | | (0.1) | |
FDIC insurance | 2,961 | | | 2,282 | | | 679 | | | 29.8 | |
Professional fees | 2,013 | | | 2,651 | | | (638) | | | (24.1) | |
Marketing | 1,326 | | | 1,348 | | | (22) | | | (1.6) | |
Intangible amortization | 177 | | | 178 | | | (1) | | | (0.6) | |
Debt extinguishment | — | | | 412 | | | (412) | | | (100.0) | |
Merger-related expenses | 1,027 | | | — | | | 1,027 | | | N/M |
Other | 12,796 | | | 13,181 | | | (385) | | | (2.9) | |
Total non-interest expense | $ | 149,730 | | | $ | 140,831 | | | $ | 8,899 | | | 6.3 | % |
Compared to the second quarter of 2021, non-interest expense, excluding merger-related expenses of $1.0 million, in the second quarter of 2022 increased $7.9 million, or 5.6%, primarily due to increases of $7.0 million in salaries and employee benefits and $1.1 million in net occupancy expense, partially offset by a decrease in state taxes of $0.8 million.
Income Taxes
Income tax expense for the three months ended June 30, 2022 was $16.0 million, a $4.0 million increase from $12.0 million for the same period in 2021. The Corporation's ETR was 18.6% for the three months ended June 30, 2022, compared to 15.6% for the same period in 2021.
Six months ended June 30, 2022 compared to the six months ended June 30, 2021
Net Interest Income
FTE net interest income increased $14.0 million to $346.9 million for the six months ended June 30, 2022, from $332.8 million for the same period in 2021. NIM increased 15 bps, to 2.91%, compared to 2.76% 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 |
| 2022 | | 2021 |
| Average Balance | | Interest | | Yield/ Rate | | Average Balance | | Interest | | Yield/ Rate |
ASSETS | (dollars in thousands) |
Interest-earning assets: | | | | | | | | | | | |
Net loans(1) | $ | 18,510,845 | | | $ | 316,809 | | | 3.44 | % | | $ | 18,943,367 | | | $ | 321,987 | | | 3.42 | % |
| | | | | | | | | | | |
Investment securities (2) | 4,312,867 | | | 50,312 | | | 2.33 | | | 3,471,352 | | | 42,239 | | | 2.43 | |
Loans held for sale | 20,862 | | | 501 | | | 4.80 | | | 42,647 | | | 671 | | | 3.14 | |
Other interest-earning assets | 1,097,326 | | | 2,394 | | | 0.44 | | | 1,825,966 | | | 2,711 | | | 0.30 | |
Total interest-earning assets | 23,941,900 | | | 370,016 | | | 3.11 | | | 24,283,332 | | | 367,607 | | | 3.05 | |
Noninterest-earning assets: | | | | | | | | | | | |
Cash and due from banks | 161,274 | | | | | | | 125,081 | | | | | |
Premises and equipment | 218,357 | | | | | | | 229,843 | | | | | |
Other assets | 1,528,820 | | | | | | | 1,685,708 | | | | | |
Less: ACL - loans(3) | (250,026) | | | | | | | (273,965) | | | | | |
Total Assets | $ | 25,600,325 | | | | | | | $ | 26,049,999 | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | $ | 5,631,296 | | | $ | 1,525 | | | 0.06 | % | | $ | 5,906,423 | | | $ | 2,092 | | | 0.07 | % |
Savings and money market deposits | 6,431,060 | | | 2,146 | | | 0.07 | | | 6,209,253 | | | 2,890 | | | 0.09 | |
Brokered deposits | 247,258 | | | 835 | | | 0.68 | | | 311,016 | | | 647 | | | 0.42 | |
Time deposits | 1,652,430 | | | 6,895 | | | 0.84 | | | 2,076,681 | | | 11,955 | | | 1.16 | |
Total interest-bearing deposits | 13,962,044 | | | 11,401 | | | 0.16 | | | 14,503,373 | | | 17,584 | | | 0.24 | |
Short-term borrowings | 435,457 | | | 311 | | | 0.14 | | | 542,243 | | | 325 | | | 0.12 | |
Long-term borrowings | 583,283 | | | 11,447 | | | 3.92 | | | 947,203 | | | 16,853 | | | 3.56 | |
Total interest-bearing liabilities | 14,980,784 | | | 23,159 | | | 0.31 | | | 15,992,819 | | | 34,762 | | | 0.44 | |
Noninterest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | 7,540,025 | | | | | | | 6,939,731 | | | | | |
Other liabilities | 469,861 | | | | | | | 464,104 | | | | | |
Total Liabilities | 22,990,670 | | | | | | | 23,396,654 | | | | | |
Total Deposits/Cost of deposits | 21,502,069 | | | | | 0.11 | | | 21,443,104 | | | | | 0.17 | |
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds | 22,520,809 | | | | | 0.21 | | | 22,932,550 | | | | | 0.30 | |
Shareholders’ equity | 2,609,655 | | | | | | | 2,653,345 | | | | | |
Total Liabilities and Shareholders’ Equity | $ | 25,600,325 | | | | | | | $ | 26,049,999 | | | | | |
Net interest income/FTE NIM | | | 346,857 | | | 2.91 | % | | | | 332,845 | | | 2.76 | % |
Tax equivalent adjustment | | | (6,716) | | | | | | | (5,998) | | | |
Net interest income | | | $ | 340,141 | | | | | | | $ | 326,847 | | | |
(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.
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average
balances (volume) and changes in rates for the six months ended June 30, 2022 in comparison to the same period in 2021:
| | | | | | | | | | | | | | | | | |
| 2022 vs. 2021 Increase (Decrease) due to change in |
| Volume | | Yield/Rate | | Net |
| (in thousands) |
FTE interest income on: | | | | | |
Net loans (1) | $ | (7,114) | | | $ | 1,936 | | | $ | (5,178) | |
Investment securities | 9,845 | | | (1,772) | | | 8,073 | |
| | | | | |
Loans held for sale | (428) | | | 259 | | | (169) | |
Other interest-earning assets | (1,315) | | | 998 | | | (317) | |
Total interest income | $ | 988 | | | $ | 1,421 | | | $ | 2,409 | |
Interest expense on: | | | | | |
Demand deposits | $ | (139) | | | $ | (428) | | | $ | (567) | |
Savings and money market deposits | 68 | | | (812) | | | (744) | |
Brokered deposits | (153) | | | 341 | | | 188 | |
Time deposits | (2,153) | | | (2,907) | | | (5,060) | |
Short-term borrowings | (66) | | | 52 | | | (14) | |
Long-term borrowings | (6,957) | | | 1,551 | | | (5,406) | |
Total interest expense | $ | (9,400) | | | $ | (2,203) | | | $ | (11,603) | |
(1)Average balance includes non-performing loans.
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.
Compared to the same period in 2021, FTE total interest income for the six months ended June 30, 2022 increased $2.4 million, due to increases of $1.4 million attributable to changes in yield and $1.0 million attributable to changes in volume. The increase due to changes in rate was primarily driven by net loans and other interest-earning assets, partially offset by a decrease in yield on investment securities. The increase due to changes in volume was primarily due to an increase in average investment securities, partially offset by decreases in average net loans and average other interest-earning assets.
The yield on average interest-earning assets increased 6 bps in the six months ended June 30, 2022 compared to the same period in 2021.
For the six months ended June 30, 2022, interest expense decreased $11.6 million compared to the same period in 2021, primarily due to the decrease in average interest-bearing liabilities resulting in a $9.4 million decline in interest expense. The decrease in interest expense attributable to volume was primarily driven by the $7.0 million impact from the decrease in average long-term borrowings. In addition, interest expense on average time deposits decreased $5.1 million, of which $2.2 million was attributable to volume and $2.9 million was attributable to rate.
Average loans and average FTE yields, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) in Balance |
| 2022 | | 2021 | |
| Balance | | Yield | | Balance | | Yield | | $ | | % |
| (dollars in thousands) |
Real estate – commercial mortgage | $ | 7,318,422 | | | 3.30 | % | | $ | 7,153,444 | | | 3.16 | % | | $ | 164,978 | | | 2.3 | % |
Commercial and industrial (1) | 4,185,883 | | | 3.31 | | | 5,582,855 | | | 3.73 | | | (1,396,972) | | | (25.0) | |
Real estate – residential mortgage | 3,970,877 | | | 3.30 | | | 3,290,726 | | | 3.46 | | | 680,151 | | | 20.7 | |
Real estate – home equity | 1,125,257 | | | 3.85 | | | 1,157,289 | | | 3.73 | | | (32,032) | | | (2.8) | |
Real estate – construction | 1,164,785 | | | 3.23 | | | 1,054,593 | | | 3.07 | | | 110,192 | | | 10.4 | |
Consumer | 461,159 | | | 5.38 | | | 455,241 | | | 4.01 | | | 5,918 | | | 1.3 | |
Equipment lease financing | 245,071 | | | 3.84 | | | 261,300 | | | 3.93 | | | (16,229) | | | (6.2) | |
Other (2) | 39,391 | | | — | | | (12,081) | | | — | | | 51,472 | | | N/M |
Total loans | $ | 18,510,845 | | | 3.44 | % | | $ | 18,943,367 | | | 3.42 | % | | $ | (432,522) | | | (2.3) | % |
(1) Includes average PPP loans of $0.2 billion and $1.6 billion for the six months ended June 30, 2022 and 2021, respectively.
(2) Consists of overdrafts and net origination fees and costs.
During the six months ended June 30, 2022, average loans decreased $432.5 million, or 2.3%, compared to the same period in 2021. The decrease was largely driven by a decline in PPP loans due to the repayment of these loans upon forgiveness by the SBA, partially offset by increases in residential mortgage loans, commercial mortgage loans and construction loans of $680.2 million, $165.0 million and $110.2 million, respectively.
Average deposits and average interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) in Balance |
| 2022 | | 2021 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 7,540,025 | | | — | % | | $ | 6,939,731 | | | — | % | | $ | 600,294 | | | 8.7 | % |
Interest-bearing demand | 5,631,296 | | | 0.06 | | | 5,906,423 | | | 0.07 | | | (275,127) | | | (4.7) | |
Savings and money market deposits | 6,431,060 | | | 0.07 | | | 6,209,253 | | | 0.09 | | | 221,807 | | | 3.6 | |
Total demand and savings | 19,602,381 | | | 0.04 | | | 19,055,407 | | | 0.05 | | | 546,974 | | | 2.9 | |
Brokered deposits | 247,258 | | | 0.68 | | | 311,016 | | | 0.42 | | | (63,758) | | | (20.5) | |
Time deposits | 1,652,430 | | | 0.84 | | | 2,076,681 | | | 1.16 | | | (424,251) | | | (20.4) | |
Total deposits | $ | 21,502,069 | | | 0.11 | % | | $ | 21,443,104 | | | 0.17 | % | | $ | 58,965 | | | 0.3 | % |
The cost of total deposits decreased 6 bps to 0.11% for the first six months of 2022 compared to 0.17% for the same period of 2021, primarily due to the change in mix of deposits with increases in average noninterest-bearing demand deposits and average savings and money market deposits of $600.3 million and $221.8 million, respectively, and decreases of $424.3 million in average time deposits and $275.1 million in average interest-bearing demand deposits. Additionally, the decline in the rate on average time deposits resulted in a $2.9 million decrease in interest expense during the first six months of 2022 compared to the same period in 2021.
Average borrowings and interest rates, by type, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) in Balance |
| 2022 | | 2021 | |
| Balance | | Rate | | Balance | | Rate | | $ | | % |
Short-term borrowings: | (dollars in thousands) |
Customer funding(1) | $ | 434,015 | | | 0.15 | % | | $ | 542,243 | | | 0.12 | % | | $ | (108,228) | | | (20.0) | % |
Federal funds purchased | 1,436 | | | 1.48 | | | — | | | — | | | 1,436 | | | N/M |
FHLB advances and other borrowings(2) | 6 | | | — | | | — | | | — | | | 6 | | | N/M |
Total short-term borrowings | 435,457 | | | 0.14 | | | 542,243 | | | 0.12 | | | (106,786) | | | (19.7) | |
Long-term borrowings: | | | | | | | | | | | |
FHLB advances | — | | | — | | | 255,453 | | | 1.80 | | | (255,453) | | | (100.0) | |
Other long-term debt | 583,283 | | | 3.92 | | | 691,750 | | | 4.21 | | | (108,467) | | | (15.7) | |
Total long-term borrowings | 583,283 | | | 3.92 | | | 947,203 | | | 3.56 | | | (363,920) | | | (38.4) | |
Total borrowings | $ | 1,018,740 | | | 2.31 | % | | $ | 1,489,446 | | | 2.31 | % | | $ | (470,706) | | | (31.6) | % |
(1) Includes repurchase agreements and short-term promissory notes.
(2) Consists of FHLB borrowings with original term of less than one year.
Average total short-term borrowings decreased $106.8 million, or 19.7%, during the first six months of 2022, compared to the same period in 2021.
Average total long-term borrowings decreased $363.9 million, or 38.4%, in the first six months of 2022, compared to the same period of 2021 primarily as a result of the reduction of FHLB advances during 2021 and the $65 million repayment of senior notes on March 16, 2022. See Note 14 "Long-Term Borrowings" of the Notes to Consolidated Financial Statements for additional details.
Provision for Credit Losses
The provision for credit losses was a negative $5.5 million for the first six months of 2022, compared to a negative provision of $9.0 million for the same period of 2021.
Non-Interest Income
The following table presents the components of non-interest income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Commercial banking: | | | | | | | |
Merchant and card | $ | 13,452 | | | $ | 12,554 | | | $ | 898 | | | 7.2 | % |
Cash management | 11,490 | | | 10,262 | | | 1,228 | | | 12.0 | |
Capital markets | 5,569 | | | 4,336 | | | 1,233 | | | 28.4 | |
Other commercial banking | 5,856 | | | 6,319 | | | (463) | | | (7.3) | |
Total commercial banking | 36,367 | | | 33,471 | | | 2,896 | | | 8.7 | |
Consumer banking: | | | | | | | |
Card | 11,863 | | | 11,611 | | | 252 | | | 2.2 | |
Overdraft | 7,653 | | | 5,474 | | | 2,179 | | | 39.8 | |
Other consumer banking | 4,630 | | | 4,529 | | | 101 | | | 2.2 | |
Total consumer banking | 24,146 | | | 21,614 | | | 2,532 | | | 11.7 | |
Wealth management revenues | 37,702 | | | 34,981 | | | 2,721 | | | 7.8 | |
Mortgage banking: | | | | | | | |
Gains on sales of mortgage loans | 5,568 | | | 14,094 | | | (8,526) | | | (60.5) | |
Mortgage servicing income | 2,776 | | | 2,704 | | | 72 | | | 2.7 | |
Total mortgage banking | 8,344 | | | 16,798 | | | (8,454) | | | (50.3) | |
Other | 7,061 | | | 6,912 | | | 149 | | | 2.2 | |
Non-interest income before investment securities gains | 113,620 | | | 113,776 | | | (156) | | | (0.1) | |
Investment securities gains, net | 27 | | | 33,511 | | | (33,484) | | | N/M |
Total Non-Interest Income | $ | 113,647 | | | $ | 147,287 | | | $ | (33,640) | | | (22.8) | % |
Excluding net investment securities gains, non-interest income decreased $0.2 million, or 0.1%, during the six months ended June 30, 2022 as compared to the same period in 2021.
Investment securities gains recognized in the first six months of 2021 were the result of the sale of Visa Shares as part of the balance sheet restructuring completed during the first six months of 2021.
Non-Interest Expense
The following table presents the components of non-interest expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30 | | Increase (Decrease) |
| 2022 | | 2021 | | $ | | % |
| (dollars in thousands) |
Salaries and employee benefits | $ | 169,868 | | | $ | 160,953 | | | $ | 8,915 | | | 5.5 | % |
Data processing and software | 29,000 | | | 27,493 | | | 1,507 | | | 5.5 | |
Net occupancy | 28,109 | | | 26,476 | | | 1,633 | | | 6.2 | |
Other outside services | 16,931 | | | 16,668 | | | 263 | | | 1.6 | |
Equipment | 6,845 | | | 6,852 | | | (7) | | | (0.1) | |
State taxes | 6,605 | | | 8,889 | | | (2,284) | | | (25.7) | |
FDIC insurance | 6,170 | | | 4,906 | | | 1,264 | | | 25.8 | |
Professional fees | 3,805 | | | 5,430 | | | (1,625) | | | (29.9) | |
Marketing | 2,646 | | | 2,350 | | | 296 | | | 12.6 | |
Intangible amortization | 353 | | | 293 | | | 60 | | | 20.5 | |
Debt extinguishment | — | | | 32,575 | | | (32,575) | | | (100.0) | |
Merger-related expenses | 1,428 | | | — | | | 1,428 | | | N/M |
Other | 23,948 | | | 26,330 | | | (2,382) | | | (9.0) | |
Total non-interest expense | $ | 295,708 | | | $ | 319,215 | | | $ | (23,507) | | | (7.4) | % |
Compared to the first six months of 2021, non-interest expense in the first six months of 2022, excluding $1.4 million of merger-related expenses, decreased $24.9 million, or 7.8%, primarily as a result of debt extinguishment expenses related to the prepayment of FHLB advances, subordinated debt and senior notes in 2021, partially offset by an $8.9 million increase and salaries and employee benefits expenses.
Income Taxes
Income tax expense for the six months ended June 30, 2022 was $29.3 million, a $3.4 million increase from $25.9 million for the same period in 2021. The Corporation's ETR was 17.9% for the six months ended June 30, 2022, as compared to 15.8% in the same period of 2021.
FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | Increase (Decrease) |
| | | $ | | % |
Assets | (dollars in thousands) |
Cash and cash equivalents | $ | 449,674 | | | $ | 1,638,614 | | | $ | (1,188,940) | | | (72.6) | % |
FRB and FHLB Stock | 62,146 | | | 57,635 | | | 4,511 | | | 7.8 | |
Federal funds sold | 30,500 | | | — | | | 30,500 | | | N/M |
Loans held for sale | 17,528 | | | 35,768 | | | (18,240) | | | (51.0) | |
Investment securities | 4,117,801 | | | 4,167,774 | | | (49,973) | | | (1.2) | |
Net loans, less ACL - loans | 18,672,386 | | | 18,076,349 | | | 596,037 | | | 3.3 | |
Net premises and equipment | 211,639 | | | 220,357 | | | (8,718) | | | (4.0) | |
Goodwill and intangibles | 537,700 | | | 538,053 | | | (353) | | | (0.1) | |
Other assets | 1,153,312 | | | 1,061,848 | | | 91,464 | | | 8.6 | |
Total Assets | $ | 25,252,686 | | | $ | 25,796,398 | | | $ | (543,712) | | | (2.1) | % |
Liabilities and Shareholders' Equity | | | | | | | |
Deposits | $ | 21,143,866 | | | $ | 21,573,499 | | | $ | (429,633) | | | (2.0) | % |
Short-term borrowings | 456,185 | | | 416,764 | | | 39,421 | | | 9.5 | |
Long-term borrowings | 557,130 | | | 621,345 | | | (64,215) | | | (10.3) | |
Other liabilities | 624,412 | | | 472,110 | | | 152,302 | | | 32.3 | |
Total Liabilities | 22,781,593 | | | 23,083,718 | | | (302,125) | | | (1.3) | |
Total Shareholders' Equity | 2,471,093 | | | 2,712,680 | | | (241,587) | | | (8.9) | |
Total Liabilities and Shareholders' Equity | $ | 25,252,686 | | | $ | 25,796,398 | | | $ | (543,712) | | | (2.1) | % |
Cash and Cash Equivalents
Compared to December 31, 2021, cash and cash equivalents at June 30, 2022 decreased $1.2 billion, or 72.6%, primarily due to a $596.0 million increase in net loans, and a $429.6 million decrease in deposits.
Other Assets
Compared to December 31, 2021, other assets increased $91.5 million in the second quarter of 2022, primarily due to the increase in deferred federal income tax of $92.6 million.
Shareholders' Equity
Compared to December 31, 2021, shareholders' equity at June 30, 2022 decreased $241.6 million, primarily due to a $331.6 million loss in OCI primarily 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.
Investment Securities
The following table presents the carrying amount of investment securities:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | Increase (Decrease) |
| | | $ | | % |
Available for Sale | (dollars in thousands) |
U.S. Government securities | $ | 371,266 | | | $ | 127,618 | | | $ | 243,648 | | | N/M |
| | | | | | | |
State and municipal securities | 1,083,477 | | | 1,188,670 | | | (105,193) | | | (8.8) | % |
Corporate debt securities | 393,561 | | | 386,133 | | | 7,428 | | | 1.9 | |
Collateralized mortgage obligations | 148,103 | | | 209,359 | | | (61,256) | | | (29.3) | |
Residential mortgage-backed securities | 195,359 | | | 229,795 | | | (34,436) | | | (15.0) | |
Commercial mortgage-backed securities | 587,072 | | | 971,148 | | | (384,076) | | | (39.5) | |
Auction rate securities | — | | | 74,667 | | | (74,667) | | | (100.0) | |
| | | | | | | |
| | | | | | | |
Total available for sale securities | $ | 2,778,838 | | | $ | 3,187,390 | | | $ | (408,552) | | | (12.8) | % |
Held to Maturity | | | | | | | |
| | | | | | | |
Residential mortgage-backed securities | $ | 466,076 | | | $ | 404,958 | | | $ | 61,118 | | | 15.1 | % |
Commercial mortgage-backed securities | 872,887 | | | 575,426 | | | 297,461 | | | 51.7 | |
Total held to maturity securities | $ | 1,338,963 | | | $ | 980,384 | | | $ | 358,579 | | | 36.6 | % |
| | | | | | | |
Total Investment Securities | $ | 4,117,801 | | | $ | 4,167,774 | | | $ | (49,973) | | | (1.2) | % |
Compared to December 31, 2021, total AFS securities at June 30, 2022 decreased $408.6 million, or 12.8%, primarily due to decreases of $384.1 million in commercial mortgage-backed securities and $105.2 million in state and municipal securities, partially offset by an increase of $243.6 million in U.S government securities.
At June 30, 2022, total HTM securities increased $358.6 million compared to December 31, 2021, primarily driven by an increase of $297.5 million in commercial mortgage-backed securities.
Loans
The following table presents ending loans outstanding by type:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | 2022 vs. 2021 Increase (Decrease) |
| | | $ | | % |
| (dollars in thousands) |
Real estate – commercial mortgage | $ | 7,417,036 | | | $ | 7,279,080 | | | $ | 137,956 | | | 1.9 | % |
Commercial and industrial (1) | 4,173,114 | | | 4,208,327 | | | (35,213) | | | (0.8) | |
Real estate – residential mortgage | 4,203,827 | | | 3,846,750 | | | 357,077 | | | 9.3 | |
Real estate – home equity | 1,108,808 | | | 1,118,248 | | | (9,440) | | | (0.8) | |
Real estate – construction | 1,177,446 | | | 1,139,779 | | | 37,667 | | | 3.3 | |
Consumer | 538,747 | | | 464,657 | | | 74,090 | | | 15.9 | |
Equipment lease financing and other | 321,855 | | | 283,557 | | | 38,298 | | | 13.5 | |
Overdrafts | 2,346 | | | 1,988 | | | 358 | | | 18.0 | |
Gross loans | 18,943,179 | | | 18,342,386 | | | 600,793 | | | 3.3 | |
Unearned income | (22,229) | | | (17,036) | | | (5,193) | | | (30.5) | % |
Net loans | $ | 18,920,950 | | | $ | 18,325,350 | | | $ | 595,600 | | | 3.3 | % |
(1) Includes PPP loans totaling $0.1 billion and $0.3 billion as of June 30, 2022 and December 31, 2021, respectively.
During the six months ended June 30, 2022, net loans increased $595.6 million, or 3.3%, compared to the level at December 31, 2021, primarily due to increases in residential mortgage loans, commercial mortgages and consumer loans of $357.1 million, $138.0 million and $74.1 million, respectively.
The increase in residential mortgage loans was the result of continued growth in loan originations and the strategic decision by the Corporation to hold a greater proportion of the loan originations from adjustable rate mortgage products on its balance sheet.
The increase in commercial mortgages was due to increased loan origination volumes and the increase in consumer loans was primarily driven by growth in student loans and indirect auto loans.
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 of June 30, 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):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Real estate (1) | 44.9 | % | | 44.3 | % |
Health care | 6.5 | | | 6.7 | |
Agriculture | 5.8 | | | 6.1 | |
Manufacturing | 5.6 | | | 5.1 | |
Other services (2) | 4.8 | | | 5.0 | |
Construction (3) | 4.5 | | | 3.9 | |
Hospitality and food services | 3.5 | | | 3.7 | |
Wholesale trade | 3.2 | | | 2.8 | |
Retail | 2.9 | | | 3.0 | |
Educational services | 2.4 | | | 2.7 | |
Arts, entertainment and recreation | 2.2 | | | 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) | 8.3 | | | 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.
The following table presents the changes in non-accrual loans for the three and six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | Real Estate - Commercial Mortgage | | Real Estate - Construction | | Real Estate - Residential Mortgage | | Consumer and Real Estate - Home Equity | | Equipment Lease Financing | | Total |
| (in thousands) |
Three months ended June 30, 2022 | | | | | | | | | | | | |
Balance at March 31, 2022 | $ | 28,490 | | | $ | 50,400 | | | $ | 672 | | | $ | 33,920 | | | $ | 8,320 | | | $ | 14,997 | | | $ | 136,799 | |
Additions | 21,845 | | | 18,349 | | | 739 | | | 2,397 | | | 1,719 | | | — | | | 45,049 | |
Payments | (6,443) | | | (6,353) | | | (54) | | | (666) | | | (413) | | | (461) | | | (14,390) | |
Charge-offs | (201) | | | — | | | — | | | (66) | | | (877) | | | (474) | | | (1,618) | |
Transfers to accrual status | — | | | — | | | — | | | — | | | (429) | | | — | | | (429) | |
Transfers to OREO | — | | | (2,831) | | | — | | | — | | | (50) | | | — | | | (2,881) | |
Balance at June 30, 2022 | $ | 43,691 | | | $ | 59,565 | | | $ | 1,357 | | | $ | 35,585 | | | $ | 8,270 | | | $ | 14,062 | | | $ | 162,530 | |
| | | | | | | | | | | | | |
Six months ended June 30, 2022 | | | | | | | | | | | | |
Balance at December 31, 2021 | $ | 30,141 | | | $ | 52,815 | | | $ | 901 | | | $ | 35,269 | | | $ | 8,900 | | | $ | 15,640 | | | $ | 143,666 | |
Additions | 23,242 | | | 20,747 | | | 739 | | | 2,716 | | | 3,377 | | | — | | | 50,821 | |
Payments | (8,893) | | | (8,146) | | | (283) | | | (2,334) | | | (1,441) | | | (635) | | | (21,732) | |
Charge-offs | (428) | | | (152) | | | — | | | (66) | | | (1,929) | | | (943) | | | (3,518) | |
Transfers to accrual status | (349) | | | (2,238) | | | — | | | — | | | (429) | | | — | | | (3,016) | |
Transfers to OREO | (22) | | | (3,461) | | | — | | | — | | | (208) | | | — | | | (3,691) | |
Balance at June 30, 2022 | $ | 43,691 | | | $ | 59,565 | | | $ | 1,357 | | | $ | 35,585 | | | $ | 8,270 | | | $ | 14,062 | | | $ | 162,530 | |
During the second quarter of 2022, non-accrual loans increased approximately $25.7 million, or 18.8%, as a result of additions to non-accrual loans, partially offset by payments, and to a lesser extent, transfers to OREO and to accrual status, during the period.
The following table summarizes non-performing assets as of the indicated dates:
| | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | |
| (dollars in thousands) |
Non-accrual loans | $ | 162,530 | | | $ | 143,666 | | | |
Loans 90 days or more past due and still accruing | 11,016 | | | 8,453 | | | |
Total non-performing loans(1) | 173,546 | | | 152,119 | | | |
OREO (2) | 4,786 | | | 1,817 | | | |
Total non-performing assets | $ | 178,332 | | | $ | 153,936 | | | |
Non-accrual loans to total loans | 0.86 | % | | 0.78 | % | | |
Non-performing loans to total loans | 0.92 | % | | 0.83 | % | | |
Non-performing assets to total assets | 0.71 | % | | 0.60 | % | | |
| | | | | |
ACL - loans to non-performing loans | 143 | % | | 164 | % | | |
(1) Excludes PPP loans which are fully guaranteed by the federal government of $0.7 million as of June 30, 2022.
(2) Excludes $3.8 million and $6.4 million of residential mortgage properties for which formal foreclosure proceedings were in process as of June 30, 2022 and December 31, 2021, respectively.
Non-performing loans at June 30, 2022 increased $21.4 million, or 14.1%, compared to the level at December 31, 2021. Non-performing loans as a percentage of total loans were 0.92% at June 30, 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 TDRs as of the dates shown:
| | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | |
| (in thousands) |
Real estate - commercial mortgage | $ | 3,489 | | | $ | 3,464 | | | |
Commercial and industrial | 1,871 | | | 1,857 | | | |
Real estate - residential mortgage | 10,279 | | | 11,948 | | | |
Real estate - home equity | 11,764 | | | 12,218 | | | |
| | | | | |
Consumer | 2 | | | 5 | | | |
| | | | | |
Total accruing TDRs | 27,405 | | | 29,492 | | | |
Non-accrual TDRs(1) | 45,439 | | | 55,945 | | | |
Total TDRs | $ | 72,844 | | | $ | 85,437 | | | |
(1) Included with non-accrual loans in the preceding table.
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.
Total internally risk-rated loans were $12.5 billion, of which $1.0 billion were criticized and classified, as of June 30, 2022, and $12.4 billion, of which $1.1 billion were criticized and classified, as of December 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 Loans |
| June 30, 2022 | | December 31, 2021 | | $ | | % | | June 30, 2022 | | December 31, 2021 | | $ | | % | | June 30, 2022 | | December 31, 2021 |
| (dollars in thousands) |
Real estate - commercial mortgage | $ | 374,483 | | $ | 387,279 | | $ | (12,796) | | | (3.3)% | | $ | 328,308 | | $ | 331,096 | | $ | (2,788) | | | (0.8) | % | | $ | 702,791 | | $ | 718,375 |
Commercial and industrial | 132,860 | | 142,369 | | (9,509) | | | (6.7) | | 158,742 | | 152,219 | | 6,523 | | | 4.3 | | 291,602 | | 294,588 |
Real estate - construction (3) | 32,674 | | 58,841 | | (26,167) | | | (44.5) | | 4,665 | | 6,324 | | (1,659) | | | (26.2) | | 37,339 | | 65,165 |
Total | $ | 540,017 | | $ | 588,489 | | $ | (48,472) | | (8.2)% | | $ | 491,715 | | $ | 489,639 | | $ | 2,076 | | 0.4% | | $ | 1,031,732 | | $ | 1,078,128 |
| | | | | | | | | | | | | | | | | | | |
% of total risk rated loans | 4.3 | % | | 4.7 | % | | | | | | 3.9 | % | | 3.9 | % | | | | | | 8.2 | % | | 8.6 | % |
(1) Considered "criticized" loans by banking regulators
(2) Considered "classified" loans by banking regulators
(3) Excludes construction - other
Provision and Allowance for Credit Losses
The following table presents the components of the ACL:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (dollars in thousands) |
ACL - loans | $ | 248,564 | | | $ | 249,001 | |
ACL - OBS credit exposure (1) | 14,323 | | | 14,533 | |
Total ACL | $ | 262,887 | | | $ | 263,534 | |
| | | |
| | | |
| | | |
(1) Included in "other liabilities" on the consolidated balance sheet.
The following table presents the activity in the ACL:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Six months ended June 30 |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) |
Average balance of Net loans | $ | 18,637,175 | | | $ | 18,906,556 | | | $ | 18,510,845 | | | $ | 18,943,367 | |
| | | | | | | |
Balance of ACL at beginning of period | $ | 243,705 | | | $ | 265,986 | | | $ | 249,001 | | | $ | 277,567 | |
Loans charged off: | | | | | | | |
Commercial and industrial | (201) | | | (954) | | | (428) | | | (5,273) | |
Real estate – commercial mortgage | — | | | (6,506) | | | (152) | | | (8,343) | |
Consumer and real estate – home equity | (877) | | | (1,130) | | | (1,929) | | | (1,977) | |
Equipment lease financing and other | (474) | | | (436) | | | (943) | | | (1,404) | |
Real estate – residential mortgage | (66) | | | (496) | | | (66) | | | (688) | |
Real estate – construction | — | | | — | | | — | | | (39) | |
Total loans charged off | (1,618) | | | (9,522) | | | (3,518) | | | (17,724) | |
Recoveries of loans previously charged off: | | | | | | | |
Commercial and industrial | 739 | | | 693 | | | 2,719 | | | 1,462 | |
Real estate – commercial mortgage | 3,536 | | | 729 | | | 3,648 | | | 903 | |
Consumer and real estate – home equity | 762 | | | 634 | | | 1,216 | | | 1,074 | |
Equipment lease financing and other | 226 | | | 153 | | | 380 | | | 312 | |
Real estate – residential mortgage | 92 | | | 105 | | | 314 | | | 200 | |
Real estate – construction | 12 | | | 254 | | | 44 | | | 638 | |
Total recoveries | 5,367 | | | 2,568 | | | 8,321 | | | 4,589 | |
Net loans charged off/(recoveries) | 3,749 | | | (6,954) | | | 4,803 | | | (13,135) | |
Provision for credit losses (1) | 1,110 | | | (4,000) | | | (5,240) | | | (9,400) | |
Balance of ACL at end of period | $ | 248,564 | | | $ | 255,032 | | | $ | 248,564 | | | $ | 255,032 | |
Net charge-offs to average loans (annualized) | (0.08) | % | | 0.15 | % | | (0.05) | % | | 0.14 | % |
(1) Provision 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 ended June 30, 2022 was $1.1 million, compared to a negative provision of $4.0 million recorded for the same period in 2021. 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 allocation of the ACL - loans:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | |
| ACL - loans | | % In Each Loan Category (1) | | ACL - loans | | % In Each Loan Category (1) | | |
| (dollars in thousands) |
Real estate - commercial mortgage | $ | 72,605 | | | 39.2 | % | | $ | 87,970 | | | 39.7 | % | | |
Commercial and industrial | 72,119 | | | 22.0 | | | 67,056 | | | 22.9 | | | |
Real estate - residential mortgage | 61,635 | | | 22.2 | | | 54,236 | | | 21.0 | | | |
Consumer, home equity, equipment lease financing | 31,577 | | | 10.4 | | | 26,798 | | | 10.2 | | | |
Real estate - construction | 10,628 | | | 6.2 | | | 12,941 | | | 6.2 | | | |
| | | | | | | | | |
Total ACL - loans | $ | 248,564 | | | 100.0 | % | | $ | 249,001 | | | 100.0 | % | | |
(1) Ending loan balances as a % of total loans for the periods presented.
Deposits and Borrowings
The following table presents ending deposits by type:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | Increase (Decrease) |
| | | $ | | % |
| (dollars in thousands) |
Noninterest-bearing demand | $ | 7,530,777 | | | $ | 7,370,963 | | | $ | 159,814 | | | 2.2 | % |
Interest-bearing demand | 5,403,805 | | | 5,819,539 | | | (415,734) | | | (7.1) | |
Savings and money market deposits | 6,406,051 | | | 6,403,995 | | | 2,056 | | | — | |
Total demand and savings | 19,340,633 | | | 19,594,497 | | | (253,864) | | | (1.3) | |
Brokered deposits | 243,172 | | | 251,526 | | | (8,354) | | | (3.3) | |
Time deposits | 1,560,061 | | | 1,727,476 | | | (167,415) | | | (9.7) | |
Total deposits | $ | 21,143,866 | | | $ | 21,573,499 | | | $ | (429,633) | | | (2.0) | % |
During the six months ended June 30, 2022, total deposits decreased by $429.6 million, or 2.0%, primarily due to a $415.7 million decrease in interest-bearing demand deposits.
The following table presents ending borrowings by type:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | Increase (Decrease) |
| | | $ | | % |
| (dollars in thousands) |
Short-term borrowings: | | | | | | | |
Customer funding (1) | $ | 436,185 | | | $ | 416,764 | | | $ | 19,421 | | | 4.7 | % |
Federal funds purchased | 20,000 | | | — | | | 20,000 | | | N/M |
| | | | | | | |
Total short-term borrowings | 456,185 | | | 416,764 | | | 39,421 | | | 9.5 | |
Long-term borrowings: | | | | | | | |
| | | | | | | |
Other long-term borrowings | 557,130 | | | 621,345 | | | (64,215) | | | (10.3) | |
| | | | | | | |
Total borrowings | $ | 1,013,315 | | | $ | 1,038,109 | | | $ | (24,794) | | | (2.4) | % |
| | | | | | | |
(1) Includes repurchase agreements and short-term promissory notes.
During the six months ended June 30, 2022, short-term borrowings increased $39.4 million, or 9.5%. In addition, as compared to December 31, 2021, total long-term borrowings decreased $64.2 million due to the maturity of $65.0 million of senior notes with a fixed rate of 3.60%.
Shareholders' Equity
Total shareholders’ equity decreased $241.6 million during the six months ended June 30, 2022. The decrease was due primarily to a $331.6 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 $134.3 million reflected in retained earnings.
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. 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 on December 31, 2022. No shares of the Corporation's common stock were repurchased under this program during the three and six months ended June 30, 2022.
Regulatory Capital
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.
The Capital Rules require the Corporation and Fulton Bank to:
•Meet a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets;
•Meet a minimum Tier 1 Leverage capital ratio of 4.00% of average assets;
•Meet a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 capital ratio of 6.00% of risk-weighted assets;
•Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and
•Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, are excluded as a component of Tier 1 capital for institutions of the Corporation's size.
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 of June 30, 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 of June 30, 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 since June 30, 2022 that management believes have changed the Corporation's capital categories.
The following table summarizes the Corporation's capital ratios in comparison to regulatory requirements:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | Regulatory Minimum for Capital Adequacy | | Fully Phased-in, with Capital Conservation Buffers |
Total Risk-Based Capital (to Risk-Weighted Assets) | 13.7 | % | | 14.1 | % | | 8.0 | % | | 10.5 | % |
Tier I Risk-Based Capital (to Risk-Weighted Assets) | 10.8 | % | | 10.9 | % | | 6.0 | % | | 8.5 | % |
Common Equity Tier I (to Risk-Weighted Assets) | 9.9 | % | | 9.9 | % | | 4.5 | % | | 7.0 | % |
Tier I Leverage Capital (to Average Assets) | 9.1 | % | | 8.6 | % | | 4.0 | % | | 4.0 | % |