NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 – Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of the Corporation have been prepared in conformity with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2023. Operating results for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. The Corporation evaluates subsequent events through the date of filing of this Quarterly Report on Form 10-Q with the SEC for potential recognition or disclosure in the Consolidated Financial Statements.
Significant Accounting Policies
The significant accounting policies used in preparation of the Consolidated Financial Statements are disclosed in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2023. Those significant accounting policies are unchanged at June 30, 2024.
Recently Adopted Accounting Standards
In June 2022, FASB issued ASU 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions ("ASU 2022-03"). This update clarifies how the fair value of equity securities subject to contractual sale restrictions is determined and requires additional qualitative and quantitative disclosures for equity securities with contractual sale restrictions. The Corporation adopted ASU 2022-03 on January 1, 2024, and it did not have a material impact on its consolidated financial statements.
In March 2023, FASB issued ASU 2023-01 Leases (Topic 842): Common Control Arrangements ("ASU 2023-01"). This update clarifies guidance for leases between related parties under common control. The Corporation adopted ASU 2023-01 on January 1, 2024, and it did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Standards
In November 2023, FASB issued ASU 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). This update requires public entities with reportable segments to provide additional and more detailed disclosures. The Corporation will adopt ASU 2023-07 on December 15, 2024. The Corporation is not currently required to report segment information and, as such, does not expect the adoption of ASU 2023-07 to have an impact on its consolidated financial statements.
In December 2023, FASB issued ASU 2023-08 Intangibles - Goodwill and Other - Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets ("ASU 2023-08"). This update provides guidance for crypto assets to be carried at fair value and requires additional disclosures. The Corporation will adopt ASU 2023-08 on January 1, 2025. The Corporation does not expect the adoption of ASU 2023-08 to have an impact on its consolidated financial statements. The Corporation currently does not hold crypto assets.
In December 2023, FASB issued ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). This update requires companies to disclose specific categories in the income tax rate reconciliation and requires additional information for certain reconciling items. The Corporation will adopt ASU 2023-09 on January 1, 2025. The Corporation does not expect the adoption of ASU 2023-09 to have an impact on its consolidated financial statements.
In March 2024, FASB issued ASU 2024-01 Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards ("ASU 2024-01"). This update provides guidance for profits interest and similar awards. The Corporation will adopt ASU 2024-01 on January 1, 2025. The Corporation does not expect the adoption of ASU 2024-01 to have a material impact on its consolidated financial statements.
Reclassifications
Certain amounts in the 2023 consolidated financial statements and notes have been reclassified to conform to the 2024 presentation.
NOTE 2 – Business Combinations
On the Acquisition Date, Fulton Bank acquired substantially all of the assets and assumed substantially all of the deposits and certain liabilities of Republic First Bank from the FDIC, as receiver for Republic First Bank. As part of the Republic First Transaction, the Bank acquired approximately $4.8 billion of assets of Republic First Bank and received approximately $0.8 billion of cash from the FDIC. The Bank assumed approximately $5.6 billion of total liabilities of Republic First Bank. The Bank did not enter into a loss sharing arrangement with the FDIC in connection with the Republic First Transaction. Fulton Bank also has the option to purchase the Republic First Bank branches and office locations.
As a result of the Republic First Transaction, the Bank enhanced its presence in Philadelphia, Pennsylvania and New Jersey.
The Republic First Transaction constitutes a business combination as defined by FASB ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values based on preliminary valuations as of the Acquisition Date. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows and market conditions at the time of the Republic First Transaction.
The Bank and the FDIC are awaiting conclusion of the customary final settlement process to determine whether certain assets and liabilities of Republic First Bank will remain with the FDIC or be acquired by the Bank. Until management finalizes its fair value estimates for the acquired assets and assumed liabilities, the preliminary gain on acquisition can be updated for a period not to exceed one year following the Acquisition Date. The preliminary fair value estimates of assets acquired and liabilities assumed, provide a reasonable basis for determining the preliminary gain on acquisition.
The excess of the estimated fair value of net assets acquired and the cash consideration received from the FDIC over the estimated fair value of liabilities assumed was recorded as a preliminary gain on acquisition of $47.4 million, net of income taxes.
The following table summarizes the consideration transferred and the estimated fair values of identifiable assets acquired and liabilities assumed in connection with the Republic First Transaction on the Acquisition Date:
| | | | | | | | |
| | Estimated Fair Value |
| | |
| | |
| Cash payment received from FDIC | | $ | 809,920 | |
| | |
| Assets acquired: | | |
| Cash and due from banks | | 208,451 | |
| Investment securities | | 1,938,571 | |
| Loans | | 2,505,040 | |
| Premises and equipment | | 970 | |
| CDI | | 92,600 | |
| FHLB Stock | | 37,931 | |
| Accrued interest receivable | | 16,164 | |
| Other assets | | 11,782 | |
| Total assets | | 4,811,509 | |
| Liabilities assumed: | | |
| Deposits | | 4,112,325 | |
| Borrowings | | 1,435,976 | |
| Other liabilities | | 11,859 | |
| Total liabilities | | 5,560,160 | |
| Net assets acquired: | | (748,651) | |
| | |
| Gain on acquisition, before income taxes | | $ | 61,269 | |
| Gain on acquisition, net of income taxes | | $ | 47,392 | |
| | |
The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets
acquired and liabilities assumed.
Cash and due from banks: The fair values of cash and due from banks approximate their book values.
Investment securities: The investment portfolio acquired in the Republic First Transaction, with a fair value of $1.9 billion, was sold shortly after the Acquisition Date by the Corporation. The fair value of the investment portfolio was based on the proceeds from the sale.
Loans: The Corporation recorded $2.5 billion of acquired loans that were initially recorded at their estimated fair values as of the Acquisition Date. The estimated fair value for the loans was based on a discounted cash flow methodology that considered credit loss and prepayment expectations, market interest rates and other market factors from the perspective of a market participant. Loan cash flows were generated on an individual loan basis. The PD, LGD, exposure at default and prepayment assumptions are the key factors driving credit losses that are embedded in the estimated cash flows.
The following table presents information with respect to the estimated fair value and unpaid principal balance of acquired loans and leases at the Acquisition Date:
| | | | | | | | | | | | | | |
| | April 26, 2024 |
| | Unpaid Principal Balance | | Estimated Fair Value |
| | (dollars in thousands) |
| Real estate - commercial mortgage | | $ | 1,144,465 | | | $ | 1,024,004 | |
| Commercial and industrial | | 545,374 | | | 496,100 | |
| Real-estate - residential mortgage | | 947,135 | | | 752,328 | |
| Real-estate - home equity | | 72,730 | | | 66,237 | |
| Real-estate - construction | | 153,437 | | | 145,597 | |
| Consumer | | 20,789 | | | 20,774 | |
| | | | |
| Total acquired loans | | $ | 2,883,930 | | | $ | 2,505,040 | |
The following table summarizes PCD Loans:
| | | | | | | | |
| | April 26, 2024 |
| | (dollars in thousands) |
| Book balance of loans with deteriorated credit quality at acquisition | | $ | 1,023,940 | |
| Fair value of loans with deteriorated credit quality at acquisition | | 904,558 | |
| Fair value discount | | 119,382 | |
| PCD Loans credit discount | | (55,906) | |
| Non-credit discount | | $ | 63,476 | |
The Republic First Transaction resulted in the addition of $79.4 million to the ACL, including the $55.9 million identified in the table above for PCD Loans, and $23.4 million recorded through the provision for credit losses at the Acquisition Date for non-PCD Loans.
Intangible assets: The Corporation recorded $92.6 million of CDI reflected in other assets that is being amortized over seven years using the sum-of-the-years digits method. The estimated fair value of the CDI was determined using the cost savings approach. The cost savings approach is defined as the difference between the cost of funds of core deposits and an alternative cost of funds for those deposits. The CDI estimated fair value was determined by projecting discounted net cash flows that included assumptions related to customer attrition rates, discount rates, deposit interest rates, deposit account maintenance costs and alternative cost of funding rates.
FHLB stock: The Corporation acquired $37.9 million of FHLB stock. The estimated fair value of the FHLB stock approximated its book value.
Accrued interest receivable: The Corporation acquired $16.2 million of accrued interest receivable. The fair value of the accrued interest receivable approximated its book value.
Core deposits: Demand deposits, savings and money market deposits and time deposits (less than $250,000) were recorded at book value which approximated fair value. The Corporation recorded $92.6 million of CDI in other assets for these deposits.
Time deposits: Time deposits of $250,000 and greater were valued based on a comparison with the contractual cost of a portfolio of brokered deposits having a similar tenor. As the time deposit portfolio had a remaining average life of approximately three months, the estimated fair value of the time deposits approximated their book value and no adjustment was recorded.
Borrowings: The estimated fair values for borrowings approximated their book value given these were short-term advances. Assumed borrowings were subsequently repaid.
Acquisition-related expenses:
The Corporation developed a comprehensive integration plan under which it incurred direct costs that are expensed as incurred. For the second quarter of 2024, these direct costs included professional fees, a charitable donation, severance, and marketing expense. Costs related to the Republic First Transaction are included in acquisition-related expenses in the unaudited Consolidated Statements of Income.
The following table details the costs identified and classified as acquisition-related expenses:
| | | | | | | | | | |
| | Three months ended June 30, 2024 | | |
| | (dollars in thousands) |
| Salaries and employee benefits | | $ | 805 | | | |
| | | | |
| | | | |
| | | | |
| Professional fees | | 7,624 | | | |
| | | | |
| Charitable donation | Charitable donation | 5,000 | | | |
| Other | | 374 | | | |
| | $ | 13,803 | | | |
In connection with the Republic First Transaction, Fulton Bank made a $5.0 million donation to the Fulton Forward Foundation
to provide additional impact grants to nonprofit community organizations across the region that share Fulton Bank's vision of advancing economic empowerment, particularly in underserved communities.
Unaudited Pro Forma Information:
The amount of net interest income, non-interest income, non-interest expense and net income of $30.7 million, $50.2 million, $21.1 million and $38.8 million, respectively, attributable to the Republic First Transaction were included in the Corporation's unaudited Consolidated Statements of Income for the three months and six months ended June 30, 2024. Included in non-interest income above is $47.4 million related to the gain on acquisition, net of tax. Net interest income, non-interest income, non-interest expense and net income shown above reflect management's best estimates based on information available as of the date of the filing of this Quarterly Report on Form 10-Q.
Republic First Bank does not have historical financial information that the Corporation could base pro forma information. Additionally, the Bank did not acquire all of the assets or assume all of the liabilities of Republic First Bank. Therefore, it is impracticable to provide pro forma information on revenues and earnings for the Republic First Transaction in accordance with ASC 805-10-50-2.
NOTE 3 – Restrictions on Cash and Cash Equivalents
Cash collateral is posted by the Corporation with counterparties to secure derivatives and other contracts, which is included in "interest-bearing deposits with other banks" on the consolidated balance sheets. The amounts of such collateral as of June 30, 2024 and December 31, 2023 were $10.9 million and $17.4 million, respectively.
NOTE 4 – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value |
| Available for Sale | (dollars in thousands) |
| | | | | | | |
| | | | | | | |
| State and municipal securities | $ | 965,392 | | | $ | 50 | | | $ | (145,333) | | | $ | 820,109 | |
| Corporate debt securities | 368,901 | | | 510 | | | (32,013) | | | 337,398 | |
| Collateralized mortgage obligations | 724,602 | | | 1,533 | | | (12,366) | | | 713,769 | |
| Residential mortgage-backed securities | 589,267 | | | 14 | | | (32,090) | | | 557,191 | |
| Commercial mortgage-backed securities | 610,960 | | | — | | | (99,833) | | | 511,127 | |
| | | | | | | |
| Total | $ | 3,259,122 | | | $ | 2,107 | | | $ | (321,635) | | | $ | 2,939,594 | |
| | | | | | | |
| Held to Maturity | | | | | | | |
| Residential mortgage-backed securities | $ | 384,956 | | | $ | — | | | $ | (58,593) | | | $ | 326,363 | |
| Commercial mortgage-backed securities | 859,477 | | | — | | | (152,401) | | | 707,076 | |
| Total | $ | 1,244,433 | | | $ | — | | | $ | (210,994) | | | $ | 1,033,439 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value |
| Available for Sale | (dollars in thousands) |
| U.S. Government securities | $ | 42,475 | | | $ | — | | | $ | (314) | | | $ | 42,161 | |
| U.S. Government-sponsored agency securities | 1,038 | | | — | | | (28) | | | 1,010 | |
| State and municipal securities | 1,200,571 | | | 1,089 | | | (129,647) | | | 1,072,013 | |
| Corporate debt securities | 480,714 | | | 473 | | | (40,636) | | | 440,551 | |
| Collateralized mortgage obligations | 122,824 | | | — | | | (11,390) | | | 111,434 | |
| Residential mortgage-backed securities | 223,273 | | | 7 | | | (26,485) | | | 196,795 | |
| Commercial mortgage-backed securities | 627,364 | | | — | | | (92,976) | | | 534,388 | |
| | | | | | | |
| Total | $ | 2,698,259 | | | $ | 1,569 | | | $ | (301,476) | | | $ | 2,398,352 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Held to Maturity | | | | | | | |
| Residential mortgage-backed securities | $ | 407,075 | | | $ | — | | | $ | (51,805) | | | $ | 355,270 | |
| Commercial mortgage-backed securities | 860,847 | | | — | | | (143,910) | | | 716,937 | |
| Total | $ | 1,267,922 | | | $ | — | | | $ | (195,715) | | | $ | 1,072,207 | |
In May 2024, the Corporation sold $345.7 million AFS securities and recorded a pre-tax loss of $20.3 million. The proceeds from the sale were reinvested into higher-yielding securities of a similar type and similar duration.
Securities carried at $1.2 billion and $0.4 billion at June 30, 2024 and December 31, 2023, respectively, were pledged as collateral to secure public and trust deposits.
The amortized cost and estimated fair values of debt securities as of June 30, 2024, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay with or without call or prepayment penalties.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2024 |
| | Available for Sale | | Held to Maturity |
| | | Amortized
Cost | | Estimated
Fair Value | | Amortized
Cost | | Estimated
Fair Value |
| | (dollars in thousands) |
| Due in one year or less | | $ | 13,762 | | | $ | 13,533 | | | $ | — | | | $ | — | |
| Due from one year to five years | | 110,303 | | | 106,430 | | | — | | | — | |
| Due from five years to ten years | | 362,563 | | | 327,817 | | | — | | | — | |
| Due after ten years | | 847,665 | | | 709,727 | | | — | | | — | |
| | 1,334,293 | | | 1,157,507 | | | — | | | — | |
Residential mortgage-backed securities(1) | | 589,267 | | | 557,191 | | | 384,956 | | | 326,363 | |
Commercial mortgage-backed securities(1) | | 610,960 | | | 511,127 | | | 859,477 | | | 707,076 | |
Collateralized mortgage obligations(1) | | 724,602 | | | 713,769 | | | — | | | — | |
| Total | | $ | 3,259,122 | | | $ | 2,939,594 | | | $ | 1,244,433 | | | $ | 1,033,439 | |
(1) Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the
underlying loans.
The following table presents information related to gross realized gains and losses on the sales of securities:
| | | | | | | | | | | | | | | | | | | |
| Gross Realized Gains | | Gross Realized Losses | | | | Net Gains (Losses) |
| Three months ended | (dollars in thousands) |
| June 30, 2024 | $ | 91 | | | $ | (20,373) | | | | | $ | (20,282) | |
| June 30, 2023 | — | | | (4) | | | | | (4) | |
| | | | | | | |
| Six months ended | | | | | | | |
| June 30, 2024 | $ | 91 | | | $ | (20,373) | | | | | $ | (20,282) | |
| June 30, 2023 | 283 | | | (264) | | | | | 19 | |
The following tables present the gross unrealized losses and estimated fair values of investment securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 |
| | | Less than 12 months | | | | 12 months or longer | | Total |
| Number of Securities | | Estimated
Fair Value | | Unrealized
Losses | | Number of Securities | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses |
| | | | | | | | | | | | | | | |
| Available for Sale | (dollars in thousands) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| State and municipal securities | 19 | | | $ | 48,682 | | | $ | (1,552) | | | 276 | | | $ | 766,484 | | | $ | (143,781) | | | $ | 815,166 | | | $ | (145,333) | |
| Corporate debt securities | — | | | — | | | — | | | 52 | | | 286,277 | | | (32,013) | | | 286,277 | | | (32,013) | |
| Collateralized mortgage obligations | 9 | | | 195,411 | | | (601) | | | 82 | | | 93,219 | | | (11,765) | | | 288,630 | | | (12,366) | |
| Residential mortgage-backed securities | 32 | | | 369,024 | | | (1,115) | | | 75 | | | 183,416 | | | (30,975) | | | 552,440 | | | (32,090) | |
| Commercial mortgage-backed securities | — | | | — | | | — | | | 135 | | | 511,127 | | | (99,833) | | | 511,127 | | | (99,833) | |
| Total available for sale | 60 | | | $ | 613,117 | | | $ | (3,268) | | | 620 | | | $ | 1,840,523 | | | $ | (318,367) | | | $ | 2,453,640 | | | $ | (321,635) | |
| | | | | | | | | | | | | | | |
| Held to Maturity | | | | | | | | | | | | | | | |
| Residential mortgage-backed securities | — | | | $ | — | | | $ | — | | | 120 | | | $ | 326,363 | | | $ | (58,593) | | | $ | 326,363 | | | $ | (58,593) | |
| Commercial mortgage-backed securities | — | | | — | | | — | | | 60 | | | 707,076 | | | (152,401) | | | 707,076 | | | (152,401) | |
| Total held to maturity | — | | | $ | — | | | $ | — | | | 180 | | | $ | 1,033,439 | | | $ | (210,994) | | | $ | 1,033,439 | | | $ | (210,994) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Less than 12 months | | 12 months or longer | | Total |
| Number of Securities | | Estimated
Fair Value | | Unrealized
Losses | | Number of Securities | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses |
| Available for Sale | (dollars in thousands) |
| U.S. Government Securities | — | | | $ | — | | | $ | — | | | 1 | | | $ | 42,161 | | | $ | (314) | | | $ | 42,161 | | | $ | (314) | |
| U.S. Government-sponsored agency securities | — | | | — | | | — | | | 1 | | | 1,010 | | | (28) | | | 1,010 | | | (28) | |
| State and municipal securities | 40 | | | 76,155 | | | (858) | | | 314 | | | 917,274 | | | (128,789) | | | 993,429 | | | (129,647) | |
| Corporate debt securities | 8 | | | 42,945 | | | (1,326) | | | 60 | | | 370,523 | | | (39,310) | | | 413,468 | | | (40,636) | |
| Collateralized mortgage obligations | — | | | — | | | — | | | 93 | | | 111,434 | | | (11,390) | | | 111,434 | | | (11,390) | |
| Residential mortgage-backed securities | 6 | | | 409 | | | (3) | | | 69 | | | 195,453 | | | (26,482) | | | 195,862 | | | (26,485) | |
| Commercial mortgage-backed securities | 2 | | | 26,907 | | | (1,053) | | | 133 | | | 507,481 | | | (91,923) | | | 534,388 | | | (92,976) | |
| Total available for sale | 56 | | | $ | 146,416 | | | $ | (3,240) | | | 671 | | | $ | 2,145,336 | | | $ | (298,236) | | | $ | 2,291,752 | | | $ | (301,476) | |
| | | | | | | | | | | | | | | |
| Held to Maturity | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Residential mortgage-backed securities | — | | | $ | — | | | $ | — | | | 120 | | | $ | 355,270 | | | $ | (51,805) | | | $ | 355,270 | | | $ | (51,805) | |
| Commercial mortgage-backed securities | — | | | — | | | — | | | 60 | | | 716,937 | | | (143,910) | | | 716,937 | | | (143,910) | |
| Total held to maturity | — | | | $ | — | | | $ | — | | | 180 | | | $ | 1,072,207 | | | $ | (195,715) | | | $ | 1,072,207 | | | $ | (195,715) | |
The Corporation's collateralized mortgage obligations, residential mortgage-backed securities and commercial mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The change in fair value of these securities is attributable to changes in interest rates and not credit quality. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. Therefore, the Corporation did not record a loss on these investments as of June 30, 2024 and December 31, 2023.
As of June 30, 2024 and December 31, 2023, no ACL was required for the Corporation's state and municipal securities. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity. Therefore, the Corporation did not record a loss on these investments as of June 30, 2024 and December 31, 2023.
The majority of the corporate debt securities were rated at or above investment grade as of June 30, 2024 and December 31, 2023. Based on the payment status, rating and management's evaluation of these securities, no ACL was required for corporate debt securities as of June 30, 2024 and December 31, 2023. The Corporation does not have the intent to sell and does not
believe it will more likely than not to be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity. Therefore, the Corporation did not record a loss on these investments as of June 30, 2024 and December 31, 2023.
NOTE 5 - Loans and Allowance for Credit Losses
Loans and leases, net of unearned income
Loans and leases, net of unearned income, are summarized as follows:
| | | | | | | | | | | |
| June 30,
2024 | | December 31, 2023 |
| | (dollars in thousands) |
| Real estate - commercial mortgage | $ | 9,289,770 | | | $ | 8,127,728 | |
Commercial and industrial(1) | 4,967,796 | | | 4,545,552 | |
| Real-estate - residential mortgage | 6,248,856 | | | 5,325,923 | |
| Real-estate - home equity | 1,120,878 | | | 1,047,184 | |
| Real-estate - construction | 1,463,799 | | | 1,239,075 | |
| Consumer | 692,086 | | | 729,318 | |
Leases and other loans(2) | 323,112 | | | 336,314 | |
| Net loans | $ | 24,106,297 | | | $ | 21,351,094 | |
(1) Includes no unearned income at June 30, 2024 and $41.0 thousand at December 31, 2023.
(2) Includes unearned income of $36.6 million at June 30, 2024 and $38.0 million at December 31, 2023.
Allowance for Credit Losses
The ACL consists of reserves against loans that have been evaluated collectively and individually for expected credit losses. The ACL represents an estimate of expected credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to net loans. The ACL is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries. The reserve for OBS credit exposures includes estimated losses on unfunded loan commitments, letters of credit and other OBS credit exposures.
The following table summarizes the ACL - loans balance and the reserve for OBS credit exposures balance:
| | | | | | | | | | | |
| | | |
| June 30,
2024 | | December 31,
2023 |
| (dollars in thousands) |
| ACL - loans | $ | 375,941 | | | $ | 293,404 | |
| | | |
Reserve for OBS credit exposures(1) | $ | 14,540 | | | $ | 17,254 | |
(1) Included in other liabilities on the consolidated balance sheets.
The following table presents the activity in the ACL - loans balances:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | Six months ended June 30 |
| | 2024 | | 2023 | | 2024 | | 2023 |
| (dollars in thousands) |
| Balance at beginning of period | $ | 297,888 | | | $ | 278,695 | | | $ | 293,404 | | | 269,366 | |
CECL Day 1 Provision(1) | 23,444 | | | — | | | 23,444 | | | — | |
| Initial PCD allowance for credit losses | 55,906 | | | — | | | 55,906 | | | — | |
| Loans charged off | (14,007) | | | (4,787) | | | (24,959) | | | (21,690) | |
| Recoveries of loans previously charged off | 2,705 | | | 2,816 | | | 5,059 | | | 5,715 | |
| Net loans (charged off) recovered | (11,302) | | | (1,971) | | | (19,900) | | | (15,975) | |
Provision for credit losses(1) (2) | 10,005 | | | 10,718 | | | 23,087 | | | 34,051 | |
| Balance at end of period | $ | 375,941 | | | $ | 287,442 | | | $ | 375,941 | | | $ | 287,442 | |
Provision for OBS credit exposures(1) | $ | (1,393) | | | $ | (971) | | | $ | (3,550) | | | $ | 240 | |
| Reserve for OBS credit exposures | $ | 14,540 | | | $ | 16,568 | | | $ | 14,540 | | | $ | 16,568 | |
(1) The sum of these amounts are reflected in the provision for credit losses in the Consolidated Statements of Income.
(2) Provision only includes the portion related to net loans.
The following table presents the activity in the ACL by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate
Commercial
Mortgage | | Commercial and
Industrial | | Real Estate Residential
Mortgage | | Consumer and Home
Equity | | Real Estate
Construction | | Leases and other loans | | Total |
| | (dollars in thousands) |
| Three months ended June 30, 2024 | | | | | | | | | | | | | |
| March 31, 2024 | $ | 114,492 | | | $ | 76,883 | | | $ | 73,216 | | | $ | 16,688 | | | $ | 12,966 | | | $ | 3,643 | | | $ | 297,888 | |
CECL Day 1 Provision(1) | 6,108 | | | 1,484 | | | 14,922 | | | 444 | | | 486 | | | — | | | 23,444 | |
| Initial PCD allowance for credit losses | 32,157 | | | 20,869 | | | 565 | | | 357 | | | 1,958 | | | — | | | 55,906 | |
| Loans charged off | (7,853) | | | (2,955) | | | (35) | | | (1,766) | | | — | | | (1,398) | | | (14,007) | |
| Recoveries of loans previously charged off | 146 | | | 796 | | | 122 | | | 1,161 | | | 233 | | | 247 | | | 2,705 | |
| Net loans (charged off) recovered | (7,707) | | | (2,159) | | | 87 | | | (605) | | | 233 | | | (1,151) | | | (11,302) | |
Provision for loan losses(1) (2) | 11,115 | | | (2,454) | | | 924 | | | 649 | | | (1,033) | | | 804 | | | 10,005 | |
| Balance at June 30, 2024 | $ | 156,165 | | | $ | 94,623 | | | $ | 89,714 | | | $ | 17,533 | | | $ | 14,610 | | | $ | 3,296 | | | $ | 375,941 | |
| Three months ended June 30, 2023 | | | | | | | | | | | | | |
| March 31, 2023 | $ | 66,256 | | | $ | 77,126 | | | $ | 86,209 | | | $ | 27,303 | | | $ | 11,646 | | | $ | 10,155 | | | $ | 278,695 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Loans charged off | (230) | | | (2,017) | | | (62) | | | (1,313) | | | — | | | (1,165) | | | (4,787) | |
| Recoveries of loans previously charged off | 29 | | | 988 | | | 58 | | | 959 | | | 569 | | | 213 | | | 2,816 | |
| Net loans (charged off) recovered | (201) | | | (1,029) | | | (4) | | | (354) | | | 569 | | | (952) | | | (1,971) | |
Provision for loan and lease losses(1) (2) | 6,247 | | | (908) | | | 2,644 | | | 2,033 | | | (1,071) | | | 1,773 | | | 10,718 | |
| Balance at June 30, 2023 | $ | 72,302 | | | $ | 75,189 | | | $ | 88,849 | | | $ | 28,982 | | | $ | 11,144 | | | $ | 10,976 | | | $ | 287,442 | |
| Six months ended June 30, 2024 | | | | | | | | | | | | | |
| Balance at December 31, 2023 | $ | 112,565 | | | $ | 74,266 | | | $ | 73,286 | | | $ | 17,604 | | | $ | 12,295 | | | $ | 3,388 | | | $ | 293,404 | |
CECL Day 1 Provision(1) | 6,108 | | | 1,484 | | | 14,922 | | | 444 | | | 486 | | | — | | | 23,444 | |
| Initial PCD allowance for credit losses | 32,157 | | | 20,869 | | | 565 | | | 357 | | | 1,958 | | | — | | | 55,906 | |
| Loans charged off | (7,879) | | | (10,587) | | | (286) | | | (4,004) | | | — | | | (2,203) | | | (24,959) | |
| Recoveries of loans previously charged off | 298 | | | 2,044 | | | 238 | | | 1,837 | | | 233 | | | 409 | | | 5,059 | |
| Net loans (charged off) recovered | (7,581) | | | (8,543) | | | (48) | | | (2,167) | | | 233 | | | (1,794) | | | (19,900) | |
Provision for loan losses(1) (2) | 12,916 | | | 6,547 | | | 989 | | | 1,295 | | | (362) | | | 1,702 | | | 23,087 | |
| Balance at June 30, 2024 | $ | 156,165 | | | $ | 94,623 | | | $ | 89,714 | | | $ | 17,533 | | | $ | 14,610 | | | $ | 3,296 | | | $ | 375,941 | |
| Six months ended June 30, 2023 | | | | | | | | | | | | | |
| Balance at December 31, 2022 | $ | 69,456 | | | $ | 70,116 | | | $ | 83,250 | | | $ | 26,429 | | | $ | 10,743 | | | $ | 9,372 | | | $ | 269,366 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Loans charged off | (13,592) | | | (2,629) | | | (62) | | | (3,519) | | | — | | | (1,888) | | | (21,690) | |
| Recoveries of loans previously charged off | 815 | | | 2,074 | | | 106 | | | 1,620 | | | 771 | | | 329 | | | 5,715 | |
| Net loans (charged off) recovered | (12,777) | | | (555) | | | 44 | | | (1,899) | | | 771 | | | (1,559) | | | (15,975) | |
Provision for loan losses(1)(2) | 15,623 | | | 5,628 | | | 5,555 | | | 4,452 | | | (370) | | | 3,163 | | | 34,051 | |
| Balance at June 30, 2023 | $ | 72,302 | | | $ | 75,189 | | | $ | 88,849 | | | $ | 28,982 | | | $ | 11,144 | | | $ | 10,976 | | | $ | 287,442 | |
(1) These amounts are reflected in the provision for credit loss in the Consolidated Statements of Income.
(2) Provision included in the table only includes the portion related to net loans.
The ACL may include qualitative adjustments intended to capture the impact of uncertainties not reflected in the quantitative models. In determining qualitative adjustments, management considers changes in national, regional, and local economic and business conditions and their impact on the lending environment, including underwriting standards and other factors affecting credit losses over the remaining life of each loan.
The increase in the ACL - loans for the second quarter of 2024 and for the six months ended June 30, 2024, was primarily due to loans acquired in the Republic First Transaction.
Collateral-Dependent Loans
A loan or a lease is considered to be collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans and leases deemed collateral-dependent, the Corporation elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. Substantially all of the collateral supporting collateral-dependent loans or leases consists of various
types of real estate, including residential properties, commercial properties, such as retail centers, office buildings, and lodging, agricultural land, and vacant land. Commercial and industrial loans may also be secured by real estate.
All loans individually evaluated for impairment are measured for losses on a quarterly basis. As of June 30, 2024 and December 31, 2023, substantially all of the Corporation's individually evaluated loans with total commitments greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral, if any.
As of June 30, 2024 and December 31, 2023, approximately 76% and 78%, respectively, of loans evaluated individually for impairment with principal balances greater than or equal to $1.0 million, whose primary collateral consisted of real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated in the preceding 12 months.
Non-accrual Loans
The following table presents total non-accrual loans, by class segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| With a Related Allowance | | Without a Related Allowance | | Total | | With a Related Allowance | | Without a Related Allowance | | Total |
| (dollars in thousands) |
| Real estate - commercial mortgage | $ | 16,295 | | | $ | 29,897 | | | $ | 46,192 | | | $ | 23,338 | | | $ | 21,467 | | | $ | 44,805 | |
| Commercial and industrial | 28,693 | | | 28,581 | | | 57,274 | | | 12,410 | | | 27,542 | | | 39,952 | |
| Real estate - residential mortgage | 21,436 | | | 3,027 | | | 24,463 | | | 18,806 | | | 2,018 | | | 20,824 | |
| Real estate - home equity | 6,249 | | | 90 | | | 6,339 | | | 4,649 | | | 104 | | | 4,753 | |
| Real estate - construction | 340 | | | 886 | | | 1,226 | | | 341 | | | 1,000 | | | 1,341 | |
| Consumer | 183 | | | — | | | 183 | | | 52 | | | — | | | 52 | |
| Leases and other loans | 601 | | | 9,352 | | | 9,953 | | | 9,255 | | | 638 | | | 9,893 | |
| $ | 73,797 | | | $ | 71,833 | | | $ | 145,630 | | | $ | 68,851 | | | $ | 52,769 | | | $ | 121,620 | |
As of June 30, 2024 and December 31, 2023, there were $71.8 million and $52.8 million, respectively, of non-accrual loans that did not have a specific valuation allowance within the ACL. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.
Asset Quality
Maintaining an appropriate ACL is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, commercial and industrial, and commercial real estate, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk categories is a significant component of the ACL methodology for these loans, which bases the PD on this migration. Assigning risk ratings involves judgment. The Corporation's loan review officers provide a separate assessment of risk rating accuracy. Risk ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review assessments identify a deterioration or an improvement in a loan.
The following table summarizes designated internal risk rating categories by portfolio segment and loan class, by origination year, in the current period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2024 |
| | (dollars in thousands) |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | | Amortized | Amortized | |
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Cost Basis | Cost Basis | Total |
| Real estate - commercial mortgage | | | | | | | | |
| Pass | $ | 309,982 | | $ | 863,950 | | $ | 1,071,750 | | $ | 1,271,714 | | $ | 1,045,978 | | $ | 3,529,987 | | $ | 67,395 | | $ | — | | $ | 8,160,756 | |
| Special Mention | 1,226 | | 64,073 | | 156,132 | | 221,347 | | 78,390 | | 222,166 | | 10,166 | | 1,531 | | 755,031 | |
| Substandard or Lower | 216 | | 10,339 | | 60,790 | | 77,874 | | 63,740 | | 159,103 | | 1,921 | | — | | 373,983 | |
| Total real estate - commercial mortgage | 311,424 | | 938,362 | | 1,288,672 | | 1,570,935 | | 1,188,108 | | 3,911,256 | | 79,482 | | 1,531 | | 9,289,770 | |
| Real estate - commercial mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | (84) | | — | | — | | (7,769) | | — | | (26) | | (7,879) | |
| Commercial and industrial | | | | | | | | |
| Pass | 226,274 | | 549,429 | | 588,898 | | 324,519 | | 304,830 | | 812,912 | | 1,449,696 | | 16,778 | | 4,273,336 | |
| Special Mention | 9,518 | | 23,258 | | 46,588 | | 52,606 | | 25,066 | | 98,739 | | 137,793 | | 408 | | 393,976 | |
| Substandard or Lower | 8,828 | | 3,716 | | 32,980 | | 7,707 | | 8,213 | | 70,004 | | 167,668 | | 1,368 | | 300,484 | |
| Total commercial and industrial | 244,620 | | 576,403 | | 668,466 | | 384,832 | | 338,109 | | 981,655 | | 1,755,157 | | 18,554 | | 4,967,796 | |
| Commercial and industrial | | | | | | | | |
| Current period gross charge-offs | (370) | | (1,420) | | (29) | | (273) | | (57) | | (742) | | (4,061) | | (3,635) | | (10,587) | |
Real estate - construction(1) | | | | | | | | | |
| Pass | 53,160 | | 458,484 | | 321,727 | | 161,398 | | 6,181 | | 40,431 | | 26,297 | | — | | 1,067,678 | |
| Special Mention | — | | 14,371 | | 53,362 | | 48,683 | | 3,023 | | 3,226 | | 2,952 | | 1,280 | | 126,897 | |
| Substandard or Lower | — | | — | | 13,116 | | 11,929 | | — | | 26,195 | | 142 | | — | | 51,382 | |
| Total real estate - construction | 53,160 | | 472,855 | | 388,205 | | 222,010 | | 9,204 | | 69,852 | | 29,391 | | 1,280 | | 1,245,957 | |
Real estate - construction(1) | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | | | | | | | | |
| Pass | 589,416 | | 1,871,863 | | 1,982,375 | | 1,757,631 | | 1,356,989 | | 4,383,330 | | 1,543,388 | | 16,778 | | 13,501,770 | |
| Special Mention | 10,744 | | 101,702 | | 256,082 | | 322,636 | | 106,479 | | 324,131 | | 150,911 | | 3,219 | | 1,275,904 | |
| Substandard or Lower | 9,044 | | 14,055 | | 106,886 | | 97,510 | | 71,953 | | 255,302 | | 169,731 | | 1,368 | | 725,849 | |
| Total | $ | 609,204 | | $ | 1,987,620 | | $ | 2,345,343 | | $ | 2,177,777 | | $ | 1,535,421 | | $ | 4,962,763 | | $ | 1,864,030 | | $ | 21,365 | | $ | 15,503,523 | |
(1) Excludes real estate - construction - other.
The increase of $799.0 million in special mention loans as of June 30, 2024 was primarily due to loans acquired in the Republic First Transaction with a balance of $776.9 million as of June 30, 2024. The increase of $277.8 million in substandard or lower loans as of June 30, 2024 was primarily due to loans acquired in the Republic First Transaction with a balance of $166.5 million as of June 30, 2024.
The following table summarizes designated internal risk rating categories by portfolio segment and loan class, by origination year, in the prior period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | (dollars in thousands) |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | | Amortized | Amortized | |
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | Cost Basis | Total |
| Real estate - commercial mortgage | | | | | | | | |
| Pass | $ | 783,673 | | $ | 993,017 | | $ | 1,203,852 | | $ | 984,958 | | $ | 721,857 | | $ | 2,822,155 | | $ | 59,253 | | $ | 31,636 | | $ | 7,600,401 | |
| Special Mention | 2,767 | | 43,904 | | 105,185 | | 7,862 | | 35,289 | | 105,786 | | 1,760 | | — | | 302,553 | |
| Substandard or Lower | 366 | | 20,958 | | 31,304 | | 49,142 | | 26,579 | | 95,621 | | 804 | | — | | 224,774 | |
| Total real estate - commercial mortgage | 786,806 | | 1,057,879 | | 1,340,341 | | 1,041,962 | | 783,725 | | 3,023,562 | | 61,817 | | 31,636 | | 8,127,728 | |
| Real estate - commercial mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | (424) | | — | | (17,575) | | (17,999) | |
| Commercial and industrial | | | | | | | | |
| Pass | 626,386 | | 590,132 | | 330,576 | | 341,218 | | 272,126 | | 598,838 | | 1,443,203 | | 10,736 | | 4,213,215 | |
| Special Mention | 7,936 | | 9,548 | | 16,499 | | 3,577 | | 6,817 | | 18,487 | | 72,775 | | 198 | | 135,837 | |
| Substandard or Lower | 247 | | 25,184 | | 4,611 | | 3,843 | | 18,988 | | 31,663 | | 105,230 | | 6,734 | | 196,500 | |
| Total commercial and industrial | 634,569 | | 624,864 | | 351,686 | | 348,638 | | 297,931 | | 648,988 | | 1,621,208 | | 17,668 | | 4,545,552 | |
| Commercial and industrial | | | | | | | | |
| Current period gross charge-offs | — | | (299) | | — | | — | | — | | (249) | | (682) | | (8,016) | | (9,246) | |
Real estate - construction(1) | | | | | | | | |
| Pass | 322,922 | | 258,080 | | 261,583 | | 37,426 | | 9,510 | | 34,097 | | 13,677 | | — | | 937,295 | |
| Special Mention | — | | 12,622 | | 25,898 | | — | | — | | — | | — | | — | | 38,520 | |
| Substandard or Lower | — | | 521 | | 2,229 | | — | | 340 | | 21,284 | | 168 | | 2,229 | | 26,771 | |
| Total real estate - construction | 322,922 | | 271,223 | | 289,710 | | 37,426 | | 9,850 | | 55,381 | | 13,845 | | 2,229 | | 1,002,586 | |
Real estate - construction(1) | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | | | | | | | | |
| Pass | 1,732,981 | | 1,841,229 | | 1,796,011 | | 1,363,602 | | 1,003,493 | | 3,455,090 | | 1,516,133 | | 42,372 | | 12,750,911 | |
| Special Mention | 10,703 | | 66,074 | | 147,582 | | 11,439 | | 42,106 | | 124,273 | | 74,535 | | 198 | | 476,910 | |
| Substandard or Lower | 613 | | 46,663 | | 38,144 | | 52,985 | | 45,907 | | 148,568 | | 106,202 | | 8,963 | | 448,045 | |
| Total | $ | 1,744,297 | | $ | 1,953,966 | | $ | 1,981,737 | | $ | 1,428,026 | | $ | 1,091,506 | | $ | 3,727,931 | | $ | 1,696,870 | | $ | 51,533 | | $ | 13,675,866 | |
(1) Excludes real estate - construction - other.
The Corporation considers the performance of the loan portfolio and its impact on the ACL. The Corporation does not assign internal risk ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, construction loans to individuals secured by residential real estate, consumer and other loans. For these loans, the most relevant credit quality indicator is delinquency status and the Corporation evaluates credit quality based on the aging status of the loan. The following tables present the amortized cost of these loans based on payment activity, by origination year, for the periods shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2024 |
| | (dollars in thousands) |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | | Amortized | Amortized | |
| | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Cost Basis | Cost Basis | Total |
| Real estate - residential mortgage | | | | | | | | |
| Performing | $ | 223,893 | | $ | 693,496 | | $ | 1,541,848 | | $ | 1,779,390 | | $ | 1,063,559 | | $ | 905,637 | | $ | — | | $ | — | | $ | 6,207,823 | |
| Nonperforming | — | | 1,265 | | 2,259 | | 3,831 | | 4,809 | | 28,869 | | — | | — | | 41,033 | |
| Total real estate - residential mortgage | 223,893 | | 694,761 | | 1,544,107 | | 1,783,221 | | 1,068,368 | | 934,506 | | — | | — | | 6,248,856 | |
| Real estate - residential mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | (35) | | — | | (251) | | (286) | |
| Consumer and real estate - home equity | | | | | | | | |
| Performing | 160,101 | | 136,412 | | 250,006 | | 77,901 | | 56,063 | | 235,923 | | 872,989 | | 11,614 | | 1,801,009 | |
| Nonperforming | 3 | | 178 | | 1,116 | | 596 | | 283 | | 7,170 | | 1,708 | | 901 | | 11,955 | |
| Total consumer and real estate - home equity | 160,104 | | 136,590 | | 251,122 | | 78,497 | | 56,346 | | 243,093 | | 874,697 | | 12,515 | | 1,812,964 | |
| Consumer and real estate - home equity | | | | | | | | |
| Current period gross charge-offs | (1) | | (326) | | (477) | | (125) | | (142) | | (1,096) | | — | | (1,837) | | (4,004) | |
| Leases and other loans | | | | | | | | |
| Performing | 77,600 | | 107,668 | | 71,018 | | 22,699 | | 16,005 | | 18,130 | | — | | — | | 313,120 | |
| Nonperforming | — | | — | | 568 | | 72 | | 41 | | 9,311 | | — | | — | | 9,992 | |
| Leases and other loans | 77,600 | | 107,668 | | 71,586 | | 22,771 | | 16,046 | | 27,441 | | — | | — | | 323,112 | |
| Leases and other loans | | | | | | | | |
| Current period gross charge-offs | (585) | | (559) | | (159) | | (193) | | (63) | | (343) | | (125) | | (176) | | (2,203) | |
| Construction - other | | | | | | | | | |
| Performing | 32,808 | | 135,217 | | 42,100 | | 6,311 | | — | | — | | — | | — | | 216,436 | |
| Nonperforming | — | | — | | 1,406 | | — | | — | | — | | — | | — | | 1,406 | |
| Total construction - other | 32,808 | | 135,217 | | 43,506 | | 6,311 | | — | | — | | — | | — | | 217,842 | |
| Construction - other | | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | | | | | | | | | |
| Performing | 494,402 | | 1,072,793 | | 1,904,972 | | 1,886,301 | | 1,135,627 | | 1,159,690 | | 872,989 | | 11,614 | | 8,538,388 | |
| Nonperforming | 3 | | 1,443 | | 5,349 | | 4,499 | | 5,133 | | 45,350 | | 1,708 | | 901 | | 64,386 | |
| Total | $ | 494,405 | | $ | 1,074,236 | | $ | 1,910,321 | | $ | 1,890,800 | | $ | 1,140,760 | | $ | 1,205,040 | | $ | 874,697 | | $ | 12,515 | | $ | 8,602,774 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | (dollars in thousands) |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | | Amortized | Amortized | |
| | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | Cost Basis | Total |
| Real estate - residential mortgage | | | | | | | | |
| Performing | $ | 623,247 | | $ | 1,126,656 | | $ | 1,682,759 | | $ | 984,050 | | $ | 260,049 | | $ | 607,133 | | $ | — | | $ | — | | $ | 5,283,894 | |
| Nonperforming | — | | 1,720 | | 4,888 | | 4,701 | | 6,233 | | 24,487 | | — | | — | | 42,029 | |
| Total real estate - residential mortgage | 623,247 | | 1,128,376 | | 1,687,647 | | 988,751 | | 266,282 | | 631,620 | | — | | — | | 5,325,923 | |
| Real estate - residential mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | (62) | | (62) | |
| Consumer and Real estate - home equity | | | | | | | | |
| Performing | 272,571 | | 276,373 | | 85,985 | | 62,426 | | 37,667 | | 204,913 | | 805,645 | | 20,044 | | 1,765,624 | |
| Nonperforming | 295 | | 455 | | 866 | | 282 | | 354 | | 5,526 | | 1,439 | | 1,661 | | 10,878 | |
| Total consumer and real estate - home equity | 272,866 | | 276,828 | | 86,851 | | 62,708 | | 38,021 | | 210,439 | | 807,084 | | 21,705 | | 1,776,502 | |
| Consumer and Real estate - home equity | | | | | | | | |
| Current period gross charge-offs | (119) | | — | | — | | — | | — | | (525) | | (283) | | (6,587) | | (7,514) | |
| Leases and other loans | | | | | | | | |
| Performing | 166,490 | | 83,641 | | 27,755 | | 22,304 | | 16,246 | | 9,867 | | — | | — | | 326,303 | |
| Nonperforming | — | | 118 | | — | | — | | — | | 9,893 | | — | | — | | 10,011 | |
| Leases and other loans | 166,490 | | 83,759 | | 27,755 | | 22,304 | | 16,246 | | 19,760 | | — | | — | | 336,314 | |
| Leases and other loans | | | | | | | | |
| Current period gross charge-offs | (471) | | (521) | | (246) | | (128) | | (82) | | (656) | | (765) | | (1,511) | | (4,380) | |
| Construction - other | | | | | | | | | |
| Performing | 127,382 | | 93,319 | | 13,698 | | 555 | | — | | — | | — | | — | | 234,954 | |
| Nonperforming | — | | 1,535 | | — | | — | | — | | — | | — | | — | | 1,535 | |
| Total construction - other | 127,382 | | 94,854 | | 13,698 | | 555 | | — | | — | | — | | — | | 236,489 | |
| Construction - other | | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | | | | | | | | | |
| Performing | 1,189,690 | | 1,579,989 | | 1,810,197 | | 1,069,335 | | 313,962 | | 821,913 | | 805,645 | | 20,044 | | 7,610,775 | |
| Nonperforming | 295 | | 3,828 | | 5,754 | | 4,983 | | 6,587 | | 39,906 | | 1,439 | | 1,661 | | 64,453 | |
| Total | $ | 1,189,985 | | $ | 1,583,817 | | $ | 1,815,951 | | $ | 1,074,318 | | $ | 320,549 | | $ | 861,819 | | $ | 807,084 | | $ | 21,705 | | $ | 7,675,228 | |
The following table presents non-performing assets:
| | | | | | | | | | | |
| June 30,
2024 | | December 31,
2023 |
| | (dollars in thousands) |
| Non-accrual loans | $ | 145,630 | | | $ | 121,620 | |
| Loans 90 days or more past due and still accruing | 26,962 | | | 31,721 | |
| Total non-performing loans | 172,592 | | | 153,341 | |
OREO(1) | 1,444 | | | 896 | |
| Total non-performing assets | $ | 174,036 | | | $ | 154,237 | |
(1) Excludes $24.2 million and $10.9 million of residential mortgage properties for which formal foreclosure proceedings were in process as of June 30,
2024 and December 31, 2023, respectively.
The following tables present the aging of the amortized cost basis of loans, by class segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 | | 60-89 | | ≥ 90 Days | | | | | | | | |
| Days Past | | Days Past | | Past Due | | | | Non- | | | | |
| Due | | Due | | and Accruing | | | | Accrual | | Current | | Total |
| (dollars in thousands) |
| June 30, 2024 | | | | | | | | | | | | | |
| Real estate - commercial mortgage | $ | 14,262 | | | $ | 1,126 | | | $ | 2,422 | | | | | $ | 46,193 | | | $ | 9,225,767 | | | $ | 9,289,770 | |
Commercial and industrial(1) | 12,191 | | | 14,984 | | | 1,159 | | | | | 57,274 | | | 4,882,188 | | | 4,967,796 | |
| Real estate - residential mortgage | 58,454 | | | 13,895 | | | 16,571 | | | | | 24,462 | | | 6,135,474 | | | 6,248,856 | |
| Real estate - home equity | 7,403 | | | 1,776 | | | 4,880 | | | | | 6,338 | | | 1,100,482 | | | 1,120,878 | |
| Real estate - construction | 10,951 | | | 749 | | | 1,406 | | | | | 1,226 | | | 1,449,467 | | | 1,463,799 | |
| Consumer | 7,274 | | | 1,767 | | | 485 | | | | | 183 | | | 682,377 | | | 692,086 | |
Leases and other loans(1) | 397 | | | 80 | | | 39 | | | | | 9,954 | | | 312,642 | | | 323,112 | |
| Total | $ | 110,932 | | | $ | 34,377 | | | $ | 26,962 | | | | | $ | 145,630 | | | $ | 23,788,397 | | | $ | 24,106,297 | |
(1) Includes unearned income.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days Past
Due | | 60-89
Days Past
Due | | ≥ 90 Days
Past Due
and
Accruing | | Non-
accrual | | Current | | Total |
| (dollars in thousands) |
| December 31, 2023 | | | | | | | | | | | |
| Real estate - commercial mortgage | $ | 4,408 | | | $ | 1,341 | | | $ | 1,722 | | | $ | 44,805 | | | $ | 8,075,452 | | | $ | 8,127,728 | |
Commercial and industrial(1) | 5,620 | | | 1,656 | | | 1,068 | | | 39,952 | | | 4,497,256 | | | 4,545,552 | |
| Real estate - residential mortgage | 49,145 | | | 10,838 | | | 21,205 | | | 20,824 | | | 5,223,911 | | | 5,325,923 | |
| Real estate - home equity | 8,142 | | | 2,075 | | | 5,326 | | | 4,753 | | | 1,026,888 | | | 1,047,184 | |
| Real estate - construction | 4,185 | | | 451 | | | 1,535 | | | 1,341 | | | 1,231,563 | | | 1,239,075 | |
| Consumer | 8,361 | | | 1,767 | | | 747 | | | 52 | | | 718,391 | | | 729,318 | |
Leases and other loans(1) | 146 | | | 722 | | | 118 | | | 9,893 | | | 325,435 | | | 336,314 | |
| Total | $ | 80,007 | | | $ | 18,850 | | | $ | 31,721 | | | $ | 121,620 | | | $ | 21,098,896 | | | $ | 21,351,094 | |
(1) Includes unearned income.
Loan Modifications to Borrowers Experiencing Financial Difficulty
The Corporation modifies loans by providing a concession when deemed appropriate. Depending on the circumstances, a term extension, interest rate reduction or principal forgiveness may be granted. In certain instances a combination of concessions may be provided to a borrower.
When principal forgiveness is provided, the amount of principal forgiven is deemed to be uncollectible and the amortized cost basis of the loan is reduced by the amount of the forgiven portion, with a corresponding reduction to the ACL.
The following table presents the amortized cost basis of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:
| | | | | | | | | | | | | | | | | | | | |
| Term Extension |
| 2024 | 2023 |
| Amortization Cost Basis | | % of Class of Financing Receivable | Amortization Cost Basis | | % of Class of Financing Receivable |
| (dollars in thousands) |
| Three months ended June 30 | | | | | | |
| Real estate - commercial mortgage | $ | 20,603 | | | 0.22 | % | $ | 276 | | | — | % |
| Commercial and industrial | — | | | — | | — | | | — | |
| Real estate - residential mortgage | 2,966 | | | 0.05 | | 2,045 | | | 0.04 | |
| Real estate - home equity | 129 | | | 0.01 | | — | | | — | |
| | | | | | |
| | | | | | |
| Total | $ | 23,698 | | | | $ | 2,321 | | | |
| | | | | | |
| Six months ended June 30 | | | | | | |
| Real estate - commercial mortgage | $ | 20,603 | | | 0.22 | % | $ | 1,478 | | | 0.02 | % |
| Commercial and industrial | — | | | — | | 75 | | | — | |
| Real estate - residential mortgage | 5,651 | | | 0.09 | | 3,423 | | | 0.07 | |
| Real estate - home equity | 129 | | | 0.01 | | — | | | — | |
| Real estate - construction | 541 | | | 0.04 | | — | | | — | |
| | | | | | |
| Total | $ | 26,924 | | | | $ | 4,976 | | | |
| | | | | | | | | | | | | | | | | | | | |
| Interest Rate Reduction and Term Extension |
| 2024 | 2023 |
| Amortized Cost Basis | | % of Class of Financing Receivable | Amortized Cost Basis | | % of Class of Financing Receivable |
| (dollars in thousands) |
| Three months ended June 30 | | | | | | |
| | | | | | |
| | | | | | |
| Real estate - residential mortgage | $ | 884 | | | 0.01 | % | $ | — | | | — | % |
| | | | | | |
| | | | | | |
| | | | | | |
| Total | $ | 884 | | | | $ | — | | | |
| | | | | | |
| Six months ended June 30 | | | | | | |
| | | | | | |
| | | | | | |
| Real estate - residential mortgage | $ | 1,348 | | | 0.02 | % | $ | — | | | — | % |
| | | | | | |
| | | | | | |
| | | | | | |
| Total | $ | 1,348 | | | | $ | — | | | |
| | | | | | |
The following table presents the financial effect of the modifications made to borrowers experiencing financial difficulty:
| | | | | | | | | | | | | | | | | | | | | | | |
| Term Extension | | | | | | |
| Financial Effect | | | | | | |
| Three months ended June 30, 2024 | | | | | | | |
| Real estate - commercial mortgage | Added a weighted-average 2.00 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| | | | | | | |
| Real estate - residential mortgage | Added a weighted-average 8.51 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| Real estate - home equity | Added a weighted-average 17.92 years to the life of loans, which reduced monthly payment amounts for borrowers. | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Three months ended June 30, 2023 | | | | | | | |
| Real estate - commercial mortgage | Added a weighted-average 1.25 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| | | | | | | |
| Real estate - residential mortgage | Added a weighted-average 5.29 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Six months ended June 30, 2024 | | | | | | | |
| Real estate - commercial mortgage | Added a weighted-average 2.00 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| | | | | | | |
| Real estate - residential mortgage | Added a weighted-average 7.44 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| Real estate - home equity | Added a weighted-average 17.92 years to the life of loans, which reduced monthly payment amounts for borrowers. | | | | | | |
| Real estate - construction | Added a weighted-average 0.67 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Six months ended June 30, 2023 | | | | | | | |
| Real estate - commercial mortgage | Added a weighted-average 2.05 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| Commercial and industrial | Added a weighted-average 2.88 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| Real estate - residential mortgage | Added a weighted-average 4.64 years to the life of loans, which reduced monthly payment amounts for the borrowers. | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | |
| Interest Rate Reduction(1) |
| Financial Effect |
| Three months ended June 30, 2024 | |
| Real estate - residential mortgage | Reduced weighted-average interest rate from 3.00% to 1.00% |
| |
| |
| |
| Six months ended June 30, 2024 | |
| Real estate - residential mortgage | Reduced weighted-average interest rate from 2.36% to 1.37% |
| |
| |
(1) There were no loan modifications with interest rate reductions for the three months and six months ended June 30, 2023.
During the three months and six months ended June 30, 2024 and 2023, there were no loans modified due to financial difficulty where there was a principal balance forgiveness.
The following table presents the performance of loans that have been modified due to financial difficulty in the previous 12 months:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 30-89 | | 90+ | | Total |
| | | Days Past | | Past Due | | Past |
| Current | | Due | | and Accruing | | Due |
| June 30, 2024 | (dollars in thousands) |
| Real estate - commercial mortgage | $ | 20,603 | | | $ | — | | | $ | — | | | $ | — | |
| Commercial and industrial | 9,859 | | | — | | | — | | | — | |
| Real estate - residential mortgage | 8,776 | | | 1,977 | | | 1,353 | | | 3,330 | |
| Real estate - home equity | 122 | | | 7 | | | — | | | 7 | |
| Real estate - construction | 541 | | | — | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Total | $ | 39,901 | | | $ | 1,984 | | | $ | 1,353 | | | $ | 3,337 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
There were no commitments to lend additional funds to borrowers with loan modifications as a result of financial difficulty as of June 30, 2024.
NOTE 6 – Mortgage Servicing Rights
The following table summarizes the changes in MSRs, which are included in other assets on the consolidated balance sheets, with adjustments to the carrying value included in mortgage banking income on the consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Six months ended June 30 |
| | 2024 | | 2023 | | 2024 | | 2023 |
| | (dollars in thousands) |
| Amortized cost: | | | | | | | |
| Balance at beginning of period | $ | 31,057 | | | $ | 33,082 | | | $ | 31,602 | | | $ | 34,217 | |
| Originations of MSRs | 883 | | | 688 | | | 1,465 | | | 884 | |
| Amortization | (1,294) | | | (1,312) | | | (2,421) | | | (2,643) | |
| Balance at end of period | $ | 30,646 | | | $ | 32,458 | | | $ | 30,646 | | | $ | 32,458 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Estimated fair value of MSRs at end of period | $ | 51,724 | | | $ | 49,444 | | | $ | 51,724 | | | $ | 49,444 | |
MSRs represent the economic value of contractual rights to service mortgage loans that have been sold. The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $4.0 billion and $4.1 billion as of June 30, 2024 and December 31, 2023, respectively. Actual and expected prepayments of the underlying mortgage loans can impact the fair values of the MSRs. The Corporation accounts for MSRs at the lower of amortized cost or fair value.
The fair value of MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The fair values of MSRs were $51.7 million and $49.7 million as of June 30, 2024 and December 31, 2023, respectively. Based on its fair value analysis as of June 30, 2024, the Corporation determined that no valuation allowance was required as of June 30, 2024.
NOTE 7 – Derivative Financial Instruments
The Corporation uses derivatives to manage its exposure to certain market risks, including interest rate and foreign currency risks, and to assist customers with their risk management objectives. Certain of the Corporation's outstanding derivative contracts are designated as hedges, and none are entered into for speculative purposes. The Corporation enters into derivative contracts that are intended to economically hedge certain of its risks, even if hedge accounting does not apply or the Corporation elects not to apply hedge accounting.
In January 2023, the Corporation terminated interest rate derivatives designated as cash flow hedges with a combined notional amount of $1.0 billion. As the hedged transaction continues to be probable, the original unrealized loss of $70.6 million included in AOCI will be recognized as a reduction to interest income when the previously forecasted hedged item affects earnings in future periods. During the six months ended June 30, 2024, $14.1 million of these unrealized losses have been reclassified as a reduction of interest income on loans, including fees, on the Corporation's consolidated statements of income.
In the third quarter of 2023, the Corporation transitioned certain of the Corporation's legacy commercial customer back-to-back interest rate swap transactions from LIBOR to SOFR. For the six months ended June 30, 2024, the increase to other non-interest income to reflect market valuation movements from the transition from LIBOR to SOFR was $0.3 million. For the year ended December 31, 2023, the full-year reduction to other non-interest income related to the transition from LIBOR to SOFR was $1.9 million.
For additional information on our derivative accounting policies see Note 1 "Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2023.
The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
| | Notional
Amount | | Asset
(Liability)
Fair Value | | Notional
Amount | | Asset
(Liability)
Fair Value |
| | (dollars in thousands) |
| Interest Rate Locks with Customers | | | | | | | |
| Positive fair values | $ | 197,685 | | | $ | 965 | | | $ | 119,558 | | | $ | 460 | |
| Negative fair values | 2,109 | | | (3) | | | 1,015 | | | (2) | |
| | | | | | | |
| Forward Commitments | | | | | | | |
| Positive fair values | — | | | — | | | — | | | — | |
| Negative fair values | 58,500 | | | (236) | | | 42,000 | | | (854) | |
| | | | | | | |
| Interest Rate Derivatives with Customers | | | | | | | |
| Positive fair values | 546,330 | | | 8,091 | | | 824,659 | | | 22,656 | |
| Negative fair values | 4,132,103 | | | (271,356) | | | 3,784,236 | | | (222,530) | |
| | | | | | | |
Interest Rate Derivatives with Dealer Counterparties(1) | | | | | | | |
| Positive fair values | 4,132,103 | | | 166,461 | | | 3,784,236 | | | 128,235 | |
| Negative fair values | 546,330 | | | (8,457) | | | 824,659 | | | (23,023) | |
| | | | | | | |
| Interest Rate Derivatives used in Cash Flow Hedges | | | | | | | |
| Positive fair values | 2,300,000 | | | 245 | | | 2,500,000 | | | 6,189 | |
| Negative fair values | 950,000 | | | (78) | | | 750,000 | | | — | |
| Foreign Exchange Contracts with Customers | | | | | | | |
| Positive fair values | 25,730 | | | 639 | | | 4,159 | | | 40 | |
| Negative fair values | 4,081 | | | (81) | | | 13,353 | | | (446) | |
| | | | | | | |
| Foreign Exchange Contracts with Correspondent Banks | | | | | | | |
| Positive fair values | 4,798 | | | 127 | | | 15,969 | | | 532 | |
| Negative fair values | 25,139 | | | (467) | | | 6,112 | | | (31) | |
| | | | | | | |
| | | | | | | |
(1) Fair Values are net of a valuation allowance of $366.3 thousand as of June 30, 2024 and December 31, 2023.
The following table presents the effect of cash flow hedge accounting on AOCI:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in OCI on Derivative | | Amount of Gain (Loss) Recognized in OCI Included Component | | Amount of Gain (Loss) Recognized in OCI Excluded Component | | Location of Gain (Loss) Recognized from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income Included Component | | Amount of Gain (Loss) Reclassified from AOCI into Income Excluded Component |
| (dollars in thousands) |
| | | | | | | | | | |
| Three months ended June 30, 2024 | | | | | | | | | | |
| Interest Rate Products | $ | (381) | | | $ | (381) | | | $ | — | | | Interest Income | | $ | (7,032) | | | $ | (7,032) | | | $ | — | |
| Interest Rate Products | 3,297 | | | 3,297 | | | — | | | Interest Expense | | 2,030 | | | 2,030 | | | — | |
| Total | $ | 2,916 | | | $ | 2,916 | | | $ | — | | | | | $ | (5,002) | | | $ | (5,002) | | | $ | — | |
| | | | | | | | | | | | | |
| Three months ended June 30, 2023 | | | | | | | | | | |
| Interest Rate Products | $ | (7,251) | | | $ | (7,251) | | | — | | | Interest Income | | $ | (7,032) | | | $ | (7,032) | | | — | |
| Total | $ | (7,251) | | | $ | (7,251) | | | — | | | | | $ | (7,032) | | | $ | (7,032) | | | — | |
| Six months ended June 30, 2024 | | | | | | | | | | |
| Interest Rate Products | (6,040) | | | (6,040) | | | — | | | Interest Income | | (14,064) | | | (14,064) | | | — | |
| Interest Rate Products | 14,512 | | | 14,512 | | | — | | | Interest Expense | | 4,050 | | | 4,050 | | | — | |
| Total | 8,472 | | | 8,472 | | | — | | | | | (10,014) | | | (10,014) | | | — | |
| Six months ended June 30, 2023 | | | | | | | | | | |
| Interest Rate Products | 5,284 | | | 5,284 | | | — | | | Interest Income | | (14,189) | | | (14,189) | | | — | |
During the next twelve months, the Corporation estimates that an additional $15.9 million of unrecognized losses will be reclassified as a decrease to net interest income.
The following table presents the effect of fair value and cash flow hedge accounting on the income statement:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | | |
| Consolidated Statements of Income Classification |
| 2024 | | 2023 |
| Interest Income | | Interest Expense | | Interest Income | | Interest Expense |
| (dollars in thousands) |
| Three months ended June 30 | | | | | | | |
| Total amounts of income line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (7,032) | | | $ | 2,030 | | | $ | (7,032) | | | $ | — | |
| | | | | | | |
| | | | | | | |
| Interest contracts: | | | | | | | |
| Amount of gain (loss) reclassified from AOCI into income | (7,032) | | | 2,030 | | | (7,032) | | | — | |
| Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring | — | | | — | | | — | | | — | |
| Amount of gain (loss) reclassified from AOCI into income - included component | (7,032) | | | 2,030 | | | (7,032) | | | — | |
| Amount of gain (loss) reclassified from AOCI into income - excluded component | — | | | — | | | — | | | — | |
| | | | | | | |
| Six months ended June 30 | | | | | | | |
| Total amounts of income line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (14,064) | | | $ | 4,050 | | | $ | (14,189) | | | $ | — | |
| Interest contracts: | | | | | | | |
| Amount of gain (loss) reclassified from AOCI into income | (14,064) | | | 4,050 | | | (14,189) | | | — | |
| Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring | — | | | — | | | — | | | — | |
| Amount of gain (loss) reclassified from AOCI into income - included component | (14,064) | | | 4,050 | | | (14,189) | | | — | |
| Amount of gain (loss) reclassified from AOCI into income - excluded component | — | | | — | | | — | | | — | |
The following table presents a summary of the net fair value gains (losses) on derivative financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Income Classification | | Three months ended June 30 | | Six months ended June 30 |
| | | | 2024 | | 2023 | | 2024 | | 2023 |
| | | (dollars in thousands) |
Mortgage banking derivatives(1) | Mortgage banking income | | $ | (45) | | | $ | 475 | | | $ | 1,122 | | | $ | 869 | |
| | | | | | | | | |
| Interest rate derivatives | Other income | | 137 | | | — | | | 288 | | | — | |
| | | | | | | | | |
| Foreign exchange contracts | Other income | | 84 | | | 93 | | | 123 | | | 184 | |
| | | | | | | | | |
| Net fair value gains (losses) on derivative financial instruments | | $ | 176 | | | $ | 568 | | | $ | 1,533 | | | $ | 1,053 | |
(1) Includes interest rate locks with customers and forward commitments.
The following table presents a summary of mortgage loans held for sale and the impact of the fair value election on the consolidated financial statements:
| | | | | | | | | | | |
| June 30,
2024 | | December 31,
2023 |
| | (dollars in thousands) |
Amortized cost(1) | $ | 26,335 | | | $ | 14,792 | |
| Fair value | 26,822 | | | 15,158 | |
(1) Cost basis of mortgage loans held for sale represents the unpaid principal balance.
Gains related to changes in fair values of mortgage loans held for sale were $0.3 million for the three months ended June 30, 2024 compared to a nominal amount for the three months ended June 30, 2023. Losses related to changes in fair values of mortgage loans held for sale were $0.1 million for the six months ended June 30, 2024 compared to gains of $0.1 million for the six months ended June 30, 2023.
Balance Sheet Offsetting
The fair values of interest rate derivative agreements and foreign exchange contracts the Corporation enters into with customers and dealer counterparties may be eligible for offset on the consolidated balance sheets if they are subject to master netting arrangements or similar agreements. The Corporation has elected to net its financial assets and liabilities designated as interest rate derivatives when offsetting is permitted. The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amounts | | Gross Amounts Not Offset | | |
| Recognized | | on the Consolidated | | |
| on the | | Balance Sheets | | |
| Consolidated | | Financial | | Cash | | Net |
| Balance Sheets | | Instruments(1) | | Collateral(2) | | Amount |
| (dollars in thousands) |
| June 30, 2024 | | | | | | | |
| Interest rate derivative assets | $ | 174,797 | | | $ | (9,480) | | | $ | — | | | $ | 165,317 | |
| | | | | | | |
| Foreign exchange derivative assets with correspondent banks | 127 | | | (127) | | | — | | | — | |
| Total | $ | 174,924 | | | $ | (9,607) | | | $ | — | | | $ | 165,317 | |
| | | | | | | |
| Interest rate derivative liabilities | $ | 279,891 | | | $ | (9,647) | | | $ | (107,649) | | | $ | 162,595 | |
| | | | | | | |
| Foreign exchange derivative liabilities with correspondent banks | 467 | | | (127) | | | — | | | 340 | |
| Total | $ | 280,358 | | | $ | (9,774) | | | $ | (107,649) | | | $ | 162,935 | |
| | | | | | | |
| December 31, 2023 | | | | | | | |
| Interest rate derivative assets | $ | 157,080 | | | $ | (15,154) | | | $ | — | | | $ | 141,926 | |
| Foreign exchange derivative assets with correspondent banks | 532 | | | (532) | | | — | | | — | |
| Total | $ | 157,612 | | | $ | (15,686) | | | $ | — | | | $ | 141,926 | |
| | | | | | | |
| Interest rate derivative liabilities | $ | 245,553 | | | $ | (21,343) | | | $ | (93,841) | | | $ | 130,369 | |
| Foreign exchange derivative liabilities with correspondent banks | 31 | | | (532) | | | — | | | (501) | |
| Total | $ | 245,584 | | | $ | (21,875) | | | $ | (93,841) | | | $ | 129,868 | |
(1) For interest rate derivative assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default.
For interest rate derivative liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.
(2) Amounts represent cash collateral received from the counterparty or posted by the Corporation on interest rate derivative transactions and foreign exchange
contracts with financial institution counterparties. Interest rate derivatives with customers are collateralized by the same collateral securing the underlying
loans to those borrowers. Cash and securities collateral amounts are included in the table only to the extent of the net derivative fair values.
NOTE 8 – Accumulated Other Comprehensive (Loss) Income
The following table presents the components of other comprehensive income (loss):
| | | | | | | | | | | | | | | | | |
| Before-Tax Amount | | Tax Effect | | Net of Tax Amount |
| (dollars in thousands) |
| Three months ended June 30, 2024 | | | | | |
| Net unrealized gain on securities | $ | (18,356) | | | $ | 4,157 | | | $ | (14,199) | |
Reclassification adjustment for securities net change included in net income(1) | 20,282 | | | (4,594) | | | 15,688 | |
Amortization of net unrealized gains on AFS securities transferred to HTM(1) | 1,815 | | | (412) | | | 1,403 | |
| Net unrealized holding gains arising during the period on interest rate derivatives used in cash flow hedges | 2,916 | | | (660) | | | 2,256 | |
| Reclassification adjustment for net change realized in net income on interest rate derivatives used in cash flow hedges | 5,002 | | | (1,111) | | | 3,891 | |
Amortization of net unrecognized pension and postretirement items(2) | (136) | | | 31 | | | (105) | |
| Total Other Comprehensive Income | $ | 11,523 | | | $ | (2,589) | | | $ | 8,934 | |
| | | | | |
| Three months ended June 30, 2023 | | | | | |
| Net unrealized losses on securities | $ | (40,361) | | | $ | 9,142 | | | $ | (31,219) | |
Reclassification adjustment for securities net change included in net income(3) | (4) | | | 1 | | | (3) | |
Amortization of net unrealized gains on AFS securities transferred to HTM(1) | 1,941 | | | (440) | | | 1,501 | |
| Net unrealized holding losses arising during the period on interest rate derivatives used in cash flow hedges | (7,251) | | | 1,665 | | | (5,586) | |
| Reclassification adjustment for net change realized in net income on interest rate derivatives used in cash flow hedges | 7,032 | | | (22) | | | 7,010 | |
Amortization of net unrecognized pension and postretirement items(2) | 4 | | | (1) | | | 3 | |
| Total Other Comprehensive Loss | $ | (38,639) | | | $ | 10,345 | | | $ | (28,294) | |
| | | | | |
| Six months ended June 30, 2024 | | | | | |
| Unrealized gain on securities | $ | (39,902) | | | $ | 9,038 | | | $ | (30,864) | |
Reclassification adjustment for securities net change included in net income(3) | 20,282 | | | (4,594) | | | 15,688 | |
Amortization of net unrealized gains on AFS securities transferred to HTM(1) | 3,608 | | | (818) | | | 2,790 | |
| Net unrealized holding gains arising during the period on interest rate derivatives used in cash flow hedges | 8,472 | | (1,919) | | | 6,553 | |
| Reclassification adjustment for net change realized in net income on interest rate swaps used in cash flow hedges | 10,014 | | | (2,224) | | | 7,790 | |
Amortization of net unrecognized pension and postretirement item(2) | (271) | | | 60 | | | (211) | |
| Total Other Comprehensive Income | $ | 2,203 | | | $ | (457) | | | $ | 1,746 | |
| | | | | |
| Six months ended June 30, 2023 | | | | | |
| Unrealized gain on securities | $ | 1,838 | | | $ | (416) | | | $ | 1,422 | |
Reclassification adjustment for securities net change included in net income(3) | 18 | | | (4) | | | 14 | |
Amortization of net unrealized gains on AFS securities transferred to HTM(1) | 3,851 | | | (872) | | | 2,979 | |
| Net unrealized holding losses arising during the period on interest rate derivatives used in cash flow hedges | 5,284 | | | (17,690) | | | (12,406) | |
| Reclassification adjustment for change realized in net income on interest rate swaps used in cash flow hedges | 14,189 | | | (36) | | | 14,153 | |
Amortization of net unrecognized pension and postretirement items(2) | 36 | | | (8) | | | 28 | |
| Total Other Comprehensive Income | $ | 25,216 | | | $ | (19,026) | | | $ | 6,190 | |
(1) Amounts reclassified out of AOCI. Before-tax amounts included as a reduction to "Interest Income" on the Consolidated Statements of Income.
(2) Amounts reclassified out of AOCI. Before-tax amounts included in "Salaries and employee benefits" on the Consolidated Statements of Income. See "Note
12 - Employee Benefit Plans," for additional details.
(3) Amounts reclassified out of AOCI. Before-tax amounts included in "Investment securities gains, net" on the Consolidated Statements of Income. See "Note 4
- Investment Securities," for additional details.
The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains (Losses) on Investment Securities | | Net Unrealized Gain (Loss) on Interest Rate Derivatives used in Cash Flow Hedges | | | | Unrecognized Pension and Postretirement Plan Income (Costs) | | Total |
| (dollars in thousands) |
| Three months ended June 30, 2024 | | | | | | | | | |
| Balance at March 31, 2024 | $ | (290,140) | | | $ | (26,587) | | | | | $ | (2,741) | | | $ | (319,468) | |
| OCI before reclassifications | (14,199) | | | 2,256 | | | | | — | | | (11,943) | |
| Amounts reclassified from AOCI | 15,688 | | | 3,891 | | | | | (105) | | | 19,474 | |
| Amortization of net unrealized gains on AFS securities transferred to HTM | 1,403 | | | — | | | | | — | | | 1,403 | |
| | | | | | | | | |
| Balance at June 30, 2024 | $ | (287,248) | | | $ | (20,440) | | | | | $ | (2,846) | | | $ | (310,534) | |
| | | | | | | | | |
| Three months ended June 30, 2023 | | | | | | | | | |
| Balance at March 31, 2023 | $ | (282,095) | | | $ | (61,453) | | | | | $ | (7,444) | | | $ | (350,992) | |
| OCI before reclassifications | (31,219) | | | (5,586) | | | | | — | | | (36,805) | |
| Amounts reclassified from AOCI | (3) | | | 7,010 | | | | | 3 | | | 7,010 | |
| Amortization of net unrealized losses on AFS securities transferred to HTM | 1,501 | | | — | | | | | — | | | 1,501 | |
| | | | | | | | | |
| Balance at June 30, 2023 | $ | (311,816) | | | $ | (60,029) | | | | | $ | (7,441) | | | $ | (379,286) | |
| | | | | | | | | |
| Six months ended June 30, 2024 | | | | | | | | | |
| Balance at December 31, 2023 | $ | (274,862) | | | $ | (34,783) | | | | | $ | (2,635) | | | $ | (312,280) | |
| OCI before reclassifications | (30,864) | | | 6,553 | | | | | — | | | (24,311) | |
| Amounts reclassified from AOCI | 15,688 | | | 7,790 | | | | | (211) | | | 23,267 | |
| Amortization of net unrealized gains on AFS securities transferred to HTM | 2,790 | | | — | | | | | — | | | 2,790 | |
| | | | | | | | | |
| Balance at June 30, 2024 | $ | (287,248) | | | $ | (20,440) | | | | | $ | (2,846) | | | $ | (310,534) | |
| | | | | | | | | |
| Six months ended June 30, 2023 | | | | | | | | | |
| Balance at December 31, 2022 | $ | (316,231) | | | $ | (61,776) | | | | | $ | (7,469) | | | $ | (385,476) | |
| OCI before reclassifications | 1,422 | | | (12,406) | | | | | — | | | (10,984) | |
| Amounts reclassified from AOCI | 14 | | | 14,153 | | | | | 28 | | | 14,195 | |
| Amortization of net unrealized losses on AFS securities transferred to HTM | 2,979 | | | — | | | | | — | | | 2,979 | |
| | | | | | | | | |
| Balance at June 30, 2023 | $ | (311,816) | | | $ | (60,029) | | | | | $ | (7,441) | | | $ | (379,286) | |
NOTE 9 – Fair Value Measurements
FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):
•Level 1 – Inputs that represent quoted prices for identical instruments in active markets.
•Level 2 – Inputs that represent quoted prices for similar instruments in active markets or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
•Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
All assets and liabilities measured at fair value on both a recurring and nonrecurring basis have been categorized into the above three levels. The following tables present assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2024 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (dollars in thousands) |
| Loans held for sale | $ | — | | | $ | 26,822 | | | $ | — | | | $ | 26,822 | |
| Available for sale investment securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| State and municipal securities | — | | | 820,109 | | | — | | | 820,109 | |
| Corporate debt securities | — | | | 337,398 | | | — | | | 337,398 | |
| Collateralized mortgage obligations | — | | | 713,769 | | | — | | | 713,769 | |
| Residential mortgage-backed securities | — | | | 557,191 | | | — | | | 557,191 | |
| Commercial mortgage-backed securities | — | | | 511,127 | | | — | | | 511,127 | |
| Total available for sale investment securities | — | | | 2,939,594 | | | — | | | 2,939,594 | |
| Other assets: | | | | | | | |
| Investments held in Rabbi Trust | 34,339 | | | — | | | — | | | 34,339 | |
| Derivative assets | 766 | | | 175,762 | | | — | | | 176,528 | |
| Total assets | $ | 35,105 | | | $ | 3,142,178 | | | $ | — | | | $ | 3,177,283 | |
| Other liabilities: | | | | | | | |
| Deferred compensation liabilities | $ | 34,339 | | | $ | — | | | $ | — | | | $ | 34,339 | |
| Derivative liabilities | 548 | | | 280,130 | | | — | | | 280,678 | |
| Total liabilities | $ | 34,887 | | | $ | 280,130 | | | $ | — | | | $ | 315,017 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (dollars in thousands) |
| Loans held for sale | $ | — | | | $ | 15,158 | | | $ | — | | | $ | 15,158 | |
| Available for sale investment securities: | | | | | | | |
| | | | | | | |
| U.S. Government securities | 42,161 | | | — | | | — | | | 42,161 | |
| U.S. Government sponsored agency securities | — | | | 1,010 | | | — | | | 1,010 | |
| State and municipal securities | — | | | 1,072,013 | | | — | | | 1,072,013 | |
| Corporate debt securities | — | | | 440,551 | | | — | | | 440,551 | |
| Collateralized mortgage obligations | — | | | 111,434 | | | — | | | 111,434 | |
| Residential mortgage-backed securities | — | | | 196,795 | | | — | | | 196,795 | |
| Commercial mortgage-backed securities | — | | | 534,388 | | | — | | | 534,388 | |
| | | | | | | |
| Total available for sale investment securities | 42,161 | | | 2,356,191 | | | — | | | 2,398,352 | |
| Other assets: | | | | | | | |
| Investments held in Rabbi Trust | 29,819 | | | — | | | — | | | 29,819 | |
| Derivative assets | 572 | | | 157,540 | | | — | | | 158,112 | |
| Total assets | $ | 72,552 | | | $ | 2,528,889 | | | $ | — | | | $ | 2,601,441 | |
| Other liabilities: | | | | | | | |
| Deferred compensation liabilities | $ | 29,819 | | | $ | — | | | $ | — | | | $ | 29,819 | |
| Derivative liabilities | 477 | | | 246,157 | | | — | | | 246,634 | |
| Total liabilities | $ | 30,296 | | | $ | 246,157 | | | $ | — | | | $ | 276,453 | |
The valuation techniques used to measure fair value for the items in the preceding tables are as follows:
Loans held for sale – This category includes mortgage loans held for sale that are measured at fair value. Fair values as of June 30, 2024 and December 31, 2023 were measured at the price that secondary market investors were offering for loans with similar characteristics.
Available for sale investment securities – Included in this asset category are debt securities. Level 2 investment securities are valued by a third-party pricing service. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings and matrix pricing.
Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used or some of the standard market inputs may not be applicable.
•U.S. Government securities – These securities are classified as Level 1. Fair values are based on quoted prices with active markets.
•U.S. Government-sponsored agency securities, State and municipal securities/Collateralized mortgage obligations/Residential mortgage-backed securities/Commercial mortgage-backed securities – These debt securities are classified as Level 2. Fair values are determined by a third-party pricing service, as detailed above.
•Corporate debt securities – These securities are classified as Level 2. This category consists of subordinated debt and senior debt issued by financial institutions ($330.4 million at June 30, 2024 and $433.4 million at December 31, 2023) and other corporate debt issued by non-financial institutions ($6.9 million and $7.2 million at June 30, 2024 and December 31, 2023, respectively). The fair values for these corporate debt securities are determined by a third-party pricing service as detailed above.
Investments held in Rabbi Trust – This category consists of mutual funds that are held in trust for employee deferred compensation plans that the Corporation has elected to measure at fair value. Shares of mutual funds are valued based on net asset value, which represent quoted market prices for the underlying shares held in the mutual funds, and as such, are classified as Level 1.
Derivative assets – Fair value of foreign currency exchange contracts are classified as Level 1 assets ($0.8 million and $0.6 million at June 30, 2024 and December 31, 2023, respectively). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.
Level 2 assets, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($1.0 million at June 30, 2024 and $0.5 million at December 31, 2023) and the fair value of interest rate derivatives ($174.8 million at June 30, 2024 and $157.1 million at December 31, 2023). The fair values of the interest rate locks, forward commitments and interest rate derivatives represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See "Note 7 - Derivative Financial Instruments," for additional information.
Deferred compensation liabilities – Fair value of amounts due to employees under deferred compensation plans, classified as Level 1 liabilities and are included in other liabilities on the consolidated balance sheets. The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Investments held in Rabbi Trust" above.
Derivative liabilities – Level 1 liabilities, representing the fair value of foreign currency exchange contracts ($0.5 million at June 30, 2024 and December 31, 2023).
Level 2 liabilities, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($0.2 million at June 30, 2024 and $0.9 million at December 31, 2023) and the fair value of interest rate derivatives ($279.9 million at June 30, 2024 and $245.6 million at December 31, 2023).
The fair values of these liabilities are determined in the same manner as the related assets as described under the heading "Derivative assets" above.
Certain financial instruments are not measured at fair value on an ongoing basis but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents Level 3 financial assets measured at fair value on a nonrecurring basis:
| | | | | | | | | | | |
| | June 30,
2024 | | December 31,
2023 |
| | (dollars in thousands) |
| Loans, net | $ | 121,942 | | | $ | 102,135 | |
| OREO | 1,444 | | | 896 | |
MSRs(1) | 51,724 | | | 49,696 | |
| Total assets | $ | 175,110 | | | $ | 152,727 | |
(1) Amounts shown are estimated fair value. MSRs are recorded on the Corporation's consolidated balance sheets at the lower of amortized cost or fair value.
See "Note 6 - Mortgage Servicing Rights" for additional information.
The valuation techniques used to measure fair value for the items in the table above are as follows:
•Loans, net – This category consists of loans that were individually evaluated for impairment and have been classified as Level 3 assets. The amount shown is the balance of non-accrual loans, net of related ACL. See "Note 5 - Loans and Allowance for Credit Losses," for additional details.
•OREO – This category consists of OREO classified as Level 3 assets, for which the fair values were based on estimated selling prices less estimated selling costs for similar assets in active markets.
•MSRs – This category consists of MSRs, which were initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors, and subsequently carried at the lower of amortized cost or fair value. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified by product type and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the June 30, 2024 valuation were 7.3% and 9.5%, respectively. Management reviews the reasonableness of the significant inputs to the third-party valuation in comparison to market data. See "Note 6 - Mortgage Servicing Rights," for additional information.
The following tables detail the book values and the estimated fair values of the Corporation's financial instruments:
| | | | | | | | | | | | | | | | | |
| | June 30, 2024 |
| | Estimated Fair Value |
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total |
| (dollars in thousands) |
| FINANCIAL ASSETS | | | | | |
| Cash and cash equivalents | $ | 1,396,282 | | $ | 1,396,282 | | $ | — | | $ | — | | $ | 1,396,282 | |
| FRB and FHLB stock | 125,297 | | — | | 125,297 | | — | | 125,297 | |
| | | | | |
| Loans held for sale | 26,822 | | — | | 26,822 | | — | | 26,822 | |
| AFS securities | 2,939,594 | | — | | 2,939,594 | | — | | 2,939,594 | |
| HTM securities | 1,244,433 | | — | | 1,033,439 | | — | | 1,033,439 | |
| Loans, net | 23,730,356 | | — | | — | | 22,391,497 | | 22,391,497 | |
| Accrued interest receivable | 120,752 | | 120,752 | | — | | — | | 120,752 | |
| Other assets | 731,849 | | 524,312 | | 175,762 | | 53,168 | | 753,242 | |
| FINANCIAL LIABILITIES | | | | | |
| Demand and savings deposits | $ | 20,650,955 | | $ | 20,650,955 | | $ | — | | $ | — | | $ | 20,650,955 | |
| Brokered deposits | 995,975 | | 139,166 | | 856,809 | | — | | 995,975 | |
| Time deposits | 3,912,724 | | — | | 3,912,608 | | — | | 3,912,608 | |
| Accrued interest payable | 48,757 | | 48,757 | | — | | — | | 48,757 | |
| | | | | |
| Federal Home Loan Bank advances | 750,000 | | 754,414 | | — | | — | | 754,414 | |
| Senior debt and subordinated debt | 535,741 | | — | | 419,072 | | — | | 419,072 | |
| Other borrowings | 892,856 | | 891,851 | | 1,119 | | — | | 892,970 | |
| Other liabilities | 467,810 | | 173,140 | | 280,130 | | 14,540 | | 467,810 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| | Estimated Fair Value |
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total |
| (dollars in thousands) |
| FINANCIAL ASSETS | | | | | |
| Cash and cash equivalents | $ | 549,710 | | $ | 549,710 | | $ | — | | $ | — | | $ | 549,710 | |
| FRB and FHLB stock | 124,405 | | — | | 124,405 | | — | | 124,405 | |
| Loans held for sale | 15,158 | | — | | 15,158 | | — | | 15,158 | |
| AFS securities | 2,398,352 | | 42,161 | | 2,356,191 | | — | | 2,398,352 | |
| HTM securities | 1,267,922 | | — | | 1,072,207 | | — | | 1,072,207 | |
| Loans, net | 21,057,690 | | — | | — | | 19,930,560 | | 19,930,560 | |
| Accrued interest receivable | 107,972 | | 107,972 | | — | | — | | 107,972 | |
| Other assets | 661,067 | | 452,935 | | 157,540 | | 50,592 | | 661,067 | |
| FINANCIAL LIABILITIES | | | | | |
| Demand and savings deposits | $ | 17,653,690 | | $ | 17,653,690 | | $ | — | | $ | — | | $ | 17,653,690 | |
| Brokered deposits | 1,144,692 | | 145,987 | | 999,392 | | — | | 1,145,379 | |
| Time deposits | 2,739,241 | | — | | 2,714,709 | | — | | 2,714,709 | |
| Accrued interest payable | 35,083 | | 35,083 | | — | | — | | 35,083 | |
| Federal funds purchased | 240,000 | | 240,000 | | — | | — | | 240,000 | |
| Federal Home Loan Bank advances | 1,100,000 | | 1,094,013 | | — | | — | | 1,094,013 | |
| Senior debt and subordinated debt | 535,384 | | — | | 463,270 | | — | | 463,270 | |
| Other borrowings | 612,142 | | 611,269 | | 837 | | — | | 612,106 | |
| Other liabilities | 429,046 | | 165,635 | | 246,157 | | 17,254 | | 429,046 | |
Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be
substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.
For short-term financial instruments, defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation's consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.
The following instruments are predominantly short-term:
| | | | | | | | |
| Assets | | Liabilities |
| Cash and cash equivalents | | Demand and savings deposits |
| Accrued interest receivable | | Other borrowings |
| | Accrued interest payable |
FRB and FHLB stock represent restricted investments and are carried at cost on the consolidated balance sheets, which is a reasonable estimate of fair value.
As of June 30, 2024, fair values for loans and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans also include estimated credit losses that would be assumed in a market transaction, which represents estimated exit prices.
Brokered deposits consist of demand and saving deposits, which are classified as Level 1, and time deposits, which are classified as Level 2. The fair value of these deposits is determined in a manner consistent with the respective type of deposits discussed above.
NOTE 10 – Net Income Per Share
Basic net income per share is calculated as net income available to common shareholders divided by the weighted average number of shares outstanding.
Diluted net income per share is calculated as net income available to common shareholders divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation's common stock equivalents consist of outstanding stock options, restricted stock, RSUs, and PSUs. PSUs are required to be included in weighted average diluted shares outstanding if performance measures, as defined in each PSU award agreement, are met as of the end of the period.
A reconciliation of weighted average shares outstanding used to calculate basic and diluted net income per share follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Six months ended June 30 |
| | 2024 | | 2023 | | 2024 | | 2023 |
| Weighted average shares outstanding (basic) | 175,305 | | | 165,854 | | | 169,006 | | | 166,227 | |
| Impact of common stock equivalents | 1,629 | | | 1,337 | | | 1,763 | | | 1,582 | |
| Weighted average shares outstanding (diluted) | 176,934 | | | 167,191 | | | 170,769 | | | 167,809 | |
| Per share: | | | | | | | |
| Basic | $ | 0.53 | | | $ | 0.46 | | | $ | 0.90 | | | $ | 0.86 | |
| Diluted | 0.52 | | | 0.46 | | | 0.89 | | | 0.85 | |
NOTE 11 – Stock-Based Compensation
The Corporation grants equity awards to employees in the form of restricted stock, RSUs or PSUs under its Employee Equity Plan. In addition, employees may purchase stock under the Corporation's Employee Stock Purchase Plan. The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards.
The Corporation also grants equity awards to non-employee members of its Board of Directors and the Bank's Board of Directors under the Directors’ Plan. Under the Directors’ Plan, the Corporation can grant equity awards to non-employee Corporation and Bank directors in the form of restricted stock, RSUs or common stock. Recent grants of equity awards under the Directors’ Plan have been limited to RSUs.
As of June 30, 2024, the Employee Equity Plan had approximately 3.9 million shares reserved for future grants through 2032, and the Directors’ Plan had approximately 330,000 shares reserved for future grants through 2033.
The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Six months ended June 30 |
| | 2024 | | 2023 | | 2024 | | 2023 |
| | (dollars in thousands) |
| Compensation expense | $ | 2,758 | | | $ | 2,571 | | | $ | 3,425 | | | $ | 4,240 | |
| Tax benefit | (620) | | | (565) | | | (764) | | | (927) | |
| Total stock-based compensation, net of tax | $ | 2,138 | | | $ | 2,006 | | | $ | 2,661 | | | $ | 3,313 | |
NOTE 12 – Employee Benefit Plans
The net periodic pension cost for the Pension Plan consisted of the following components:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Six months ended June 30 |
| | 2024 | | 2023 | | 2024 | | 2023 |
| | (dollars in thousands) |
| | | | | | | |
| Interest cost | $ | 789 | | | $ | 855 | | | $ | 1,579 | | | $ | 1,711 | |
| Expected return on plan assets | (975) | | | (877) | | | (1,951) | | | (1,754) | |
| Net amortization and deferral | — | | | 80 | | | — | | | 161 | |
| Net periodic pension cost | $ | (186) | | | $ | 58 | | | $ | (372) | | | $ | 118 | |
| | | | | | | |
| | | | | | | |
The components of the net benefit for the Postretirement Plan consisted of the following components:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | | Six months ended June 30 |
| | 2024 | | 2023 | | 2024 | | 2023 |
| | (dollars in thousands) |
| Interest cost | $ | 9 | | | $ | 13 | | | $ | 19 | | | $ | 26 | |
| | | | | | | |
| Net accretion and deferral | (136) | | | (136) | | | (271) | | | (272) | |
| Net periodic benefit | $ | (127) | | | $ | (123) | | | $ | (252) | | | $ | (246) | |
In connection with the Merger, the Corporation assumed the obligations of Prudential Bancorp under a multiemployer defined benefit pension plan that had previously been closed to new Prudential Bancorp participants.
The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the change in that funded status through OCI.
NOTE 13 – LEASES
The Corporation has operating leases for certain financial centers, corporate offices and land.
On May 10, 2024, the Bank and Fulton Financial Realty Company, a wholly owned subsidiary of the Corporation, entered into a sale-leaseback agreement for 40 financial center office locations for an aggregate cash purchase price of $55.4 million. The Bank entered into a lease for each of the locations sold in the Sale-Leaseback Transaction for an initial term of 15 years, with the option to extend the term of each for up to three successive terms of up to five years each. During the initial 12 months of the lease terms, the aggregate base rental amount for the properties will be approximately $4.4 million. During the initial lease terms, the base rental amount will increase annually at a rate of 2.25%. The Corporation recorded a pre-tax gain, after deduction of transaction-related expenses, of approximately $20.3 million in connection with the Sale-Leaseback Transaction. The properties are located in Pennsylvania, New Jersey, Delaware and Maryland.
The following table presents the components of lease expense, which is included in net occupancy expense on the consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30 | Six months ended June 30 |
| | 2024 | | 2023 | 2024 | | 2023 |
| | (dollars in thousands) |
| Operating lease expense | $ | 7,633 | | | $ | 4,751 | | $ | 12,697 | | | $ | 9,592 | |
| Variable lease expense | 716 | | | 773 | | 1,480 | | | 1,557 | |
| Sublease income | (300) | | | (292) | | (583) | | | (540) | |
| Total lease expense | $ | 8,049 | | | $ | 5,232 | | $ | 13,594 | | | $ | 10,609 | |
| | | | | | | |
Supplemental consolidated balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| Operating Leases | | Balance Sheet Classification | | June 30, 2024 | | December 31, 2023 |
| | | | (dollars in thousands) |
| ROU assets | | Other assets | | $ | 131,796 | | | $ | 88,188 | |
| Lease liabilities | | Other liabilities | | $ | 138,389 | | | $ | 95,230 | |
| Weighted average remaining lease term | | | | 9.23 years | | 6.48 years |
| Weighted average discount rate | | | | 5.14 | % | | 3.34 | % |
The discount rate used in determining the lease liability for each individual lease is the Bank's incremental borrowing rate which corresponds with the remaining lease term.
Supplemental cash flow information related to operating leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30 | Six months ended June 30 |
| 2024 | | 2023 | 2024 | | 2023 |
| (dollars in thousands) |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 5,662 | | | $ | 4,844 | | $ | 11,272 | | | $ | 9,770 | |
| ROU assets obtained in exchange for lease obligations | 47,446 | | | — | | 52,993 | | | 9,018 | |
Lease payment obligations for each of the next five years and thereafter, with a reconciliation to the Corporation's lease liabilities were as follows as of June 30, 2024 (dollars in thousands):
| | | | | |
| Year | Operating Leases |
| Remaining in 2024 | $ | 12,616 | |
| 2025 | 23,741 | |
| 2026 | 22,122 | |
| 2027 | 19,830 | |
| 2028 | 16,622 | |
| Thereafter | 79,672 | |
| Total lease payments | 174,603 | |
| Less: imputed interest | (36,214) | |
| Present value of lease liabilities | $ | 138,389 | |
As of June 30, 2024, the Corporation had not entered into any significant leases that have not yet commenced.
NOTE 14 – Commitments and Contingencies
Commitments
The Corporation is a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of its borrowers or obligors.
Commitments to extend credit are agreements to lend to a borrower or obligor as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower or obligor. Since a portion of the commitments is expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each borrower's or obligor's creditworthiness on a case-by-case basis. The amount of collateral, if any, obtained upon an extension of credit is based on management's credit evaluation of the borrower or obligor. Collateral held varies but may include accounts receivable, inventory, property, equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a borrower or obligor to a third party. Commercial letters of credit are conditional commitments issued to facilitate foreign and domestic trade transactions for borrowers or obligors. The credit risk involved in issuing letters of credit is similar to that involved in extending loan facilities. These obligations are underwritten consistent with commercial lending standards. The maximum exposure to loss for standby and commercial letters of credit is equal to the contractual (or notional) amount of the instruments.
The following table presents the Corporation's commitments to extend credit and letters of credit:
| | | | | | | | | | | |
| June 30,
2024 | | December 31, 2023 |
| | (dollars in thousands) |
| Commitments to extend credit | $ | 9,100,013 | | | $ | 8,790,511 | |
| Standby letters of credit | 254,067 | | | 264,440 | |
| Commercial letters of credit | 64,605 | | | 67,396 | |
Residential Lending
The Corporation originates and sells residential mortgages to secondary market investors. The Corporation provides customary representations and warranties to secondary market investors that specify, among other things, that the loans have been underwritten to the standards of the secondary market investor. The Corporation may be required to repurchase specific loans or reimburse the investor for a credit loss incurred on a sold loan if it is determined that the representations and warranties have not been met. Under some agreements with secondary market investors, the Corporation may have additional credit exposure beyond customary representations and warranties, based on the specific terms of those agreements.
The Corporation maintains a reserve for estimated losses related to loans sold to investors. As of June 30, 2024 and December 31, 2023, the total reserve for losses on residential mortgage loans sold was $2.5 million and $1.8 million, respectively, including reserves for both representation and warranty and credit loss exposures. In addition, a component of ACL - OBS credit exposures of $1.3 million and $2.7 million, as of June 30, 2024 and December 31, 2023, respectively, related to additional credit exposures for potential loan repurchases.
Legal Proceedings
The Corporation is involved in various pending and threatened claims and other legal proceedings in the ordinary course of its business activities. The Corporation evaluates the possible impact of these matters, taking into consideration the most recent information available. A loss reserve is established for those matters for which the Corporation believes a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual losses with respect to any such matter may be more or less than the amount estimated by the Corporation. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated by the Corporation, no loss reserve is established.
In addition, from time to time, the Corporation is involved in investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other companies. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving the Corporation, and could result in fines, penalties, restitution, other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices. The Corporation's practice is to cooperate fully with regulatory and governmental inquiries and investigations.
As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, that may result from the final outcomes of pending legal proceedings, or regulatory or governmental inquiries or investigations, will not have a material adverse effect on the financial condition of the Corporation. However, legal proceedings, inquiries and investigations are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation's results of operations in any future period, depending, in part, upon the size of the loss or liability imposed and the operating results for the period, and could have a material adverse effect on the Corporation's business. In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause the Corporation to incur additional expenses, which could be significant, and possibly material, to the Corporation's results of operations in any future period.
NOTE 15 – Subsequent Events
On July 16, 2024, the Board of Directors of the Bank, approved a plan to close 13 of the Bank's financial center offices and consolidate the operations of those offices into nearby financial center offices operated by the Bank. The Board of Directors of the Bank adopted the plan as part of the Bank's integration of the assets acquired and the deposits and certain other liabilities assumed in the Republic First Transaction and the ongoing FultonFirst strategic initiative. The financial center offices to be closed are located in Pennsylvania and New Jersey. The financial centers are expected to close on or about November 22, 2024.
In connection with the planned financial center office closures, the Corporation expects to incur pre-tax costs of approximately $10 million, consisting of approximately $6 million of write-offs of premises and equipment and related expenses, approximately $3 million of lease termination charges, and approximately $1 million of future cash expenditures in connection with employee severance. The Corporation expects that, in the aggregate, these financial center office closures will reduce annual pre-tax operating expense by approximately $8 million, beginning in the first quarter of 2025.
