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, 2022. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the SEC.
Significant Accounting Policies:
The significant accounting policies used in preparation of the Consolidated Financial Statements are disclosed in the Corporation's 2022 Annual Report on Form 10-K. Those significant accounting policies are unchanged at March 31, 2023.
Recently Adopted Accounting Standards
In March 2022, FASB issued ASU 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method ("ASU 2022-01"). This update addresses questions regarding the last-of-layer method arising from the issuance of ASU 2017-12 and permits more flexibility in hedging interest rate risk for both variable-rate and fixed-rate financial instruments and introduces the ability to hedge risk components for non-financial hedges. The Corporation adopted ASU 2022-01 on January 1, 2023 and it did not have a material impact on its consolidated financial statements.
In March 2022, FASB issued ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). This update reduces the complexity of accounting for TDRs by eliminating certain accounting guidance, enhancing disclosures and improving the consistency of vintage disclosures. The Corporation adopted ASU 2022-02 on January 1, 2023 and it did not have a material impact on its consolidated financial statements.
In September 2022, FASB issued ASU 2022-04 Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations ("ASU 2022-04"). This update enhances transparency in the disclosure of supplier finance programs, which previously had no explicit requirements under GAAP. The Corporation adopted ASU 2022-04 on January 1, 2023 and it did not have a material impact on its consolidated financial statements.
In December 2022, FASB issued ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This update extends the sunset provision date of ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04") to December 31, 2024. The Corporation will adopt ASU 2020-04 on January 1, 2025. The Corporation does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
In March 2023, FASB issued ASU 2023-02 Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method ("ASU 2023-02"). This update allows any tax credit program that meets certain criteria to use the proportional amortization method. The Corporation early adopted ASU 2023-02 using the modified retrospective method effective upon issuance, and it did not have a material impact on its consolidated financial statements.
Recently Issued 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 will adopt ASU 2022-03 on January 1, 2024. The Corporation does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
In 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 will adopt ASU 2023-01 on January 1, 2024. The Corporation does not expect the adoption of ASU 2023-01 to have a material impact on its consolidated financial statements.
Reclassifications
Certain amounts in the 2022 consolidated financial statements and notes have been reclassified to conform to the 2023 presentation.
NOTE 2 – Business Combinations
On July 1, 2022, the Corporation completed its acquisition of Prudential Bancorp, a Pennsylvania chartered bank holding company headquartered in Philadelphia, Pennsylvania that primarily served the Greater Philadelphia region. On that date, the Corporation acquired 100% of the outstanding common stock of Prudential Bancorp, Prudential Bancorp was merged with and into the Corporation, and Prudential Bancorp's wholly-owned subsidiary, Prudential Bank, became a wholly owned subsidiary of the Corporation. The Corporation merged Prudential Bank with and into Fulton Bank in the fourth quarter of 2022. Results of the operations of the acquired entity were included in the Corporation's consolidated financial statements beginning on July 1, 2022. As a result of the Merger, the Corporation enhanced its presence in Philadelphia, Pennsylvania, expanded its customer base and leveraged operating costs through economies of scale.
In accordance with the terms of the definitive merger agreement, each share of Prudential Bancorp's common stock issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive the Merger Consideration. In the aggregate, approximately eighty percent (80%) of the Merger Consideration consisted of the Corporation's common stock with the remaining approximately twenty percent (20%) paid in cash. The receipt of the Corporation’s common stock in the Merger qualified as a tax-free exchange for Prudential Bancorp shareholders.
The acquisition of Prudential Bancorp was accounted for as a business combination using the acquisition method of accounting, and accordingly, the assets acquired, the liabilities assumed, and consideration transferred were recorded at their estimated fair values as of the Merger. The $19.6 million excess of the Merger Consideration over the fair value of assets acquired was recorded as goodwill and is not amortizable or deductible for tax purposes.
The following table summarizes the consideration transferred and the fair values of identifiable assets acquired and liabilities assumed on July 1, 2022:
| | | | | | | | |
| | Fair Value |
| (dollars in thousands, except per share data) | | |
| Consideration transferred: | | |
Common stock shares issued (6,208,516) | | $ | 89,713 | |
| Cash paid to Prudential Bancorp shareholders | | 29,343 | |
| Value of consideration | | 119,056 | |
| Assets acquired: | | |
| Cash and due from banks | | 7,533 | |
| Investment securities | | 287,126 | |
| Loans | | 554,091 | |
| Premises and equipment | | 9,538 | |
| Other assets | | 71,795 | |
| Total assets | | 930,083 | |
| Liabilities assumed: | | |
| Deposits | | 532,170 | |
Borrowings(1) | | 284,000 | |
| | |
| Other liabilities | | 14,482 | |
| Total liabilities | | 830,652 | |
| Net assets acquired: | | 99,431 | |
| Goodwill resulting from the Merger | | $ | 19,625 | |
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(1) Included a $30.5 million intercompany borrowing between Prudential Bank and Fulton Bank.
While the valuation of the acquired assets and liabilities is completed, fair value estimates related to the assets and liabilities from Prudential Bancorp are subject to adjustment for up to one year after the closing date of the Merger as additional information becomes available. Included in the above table are adjustments of $3.4 million that occurred during the first quarter of 2023, resulting in an increase to goodwill resulting from the Merger.
The amount of goodwill recorded reflects the increased market share and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired from Prudential Bancorp.
The following table presents information with respect to the fair value and unpaid principal balance of acquired loans and leases at the date of the Merger:
| | | | | | | | | | | | | | |
| | July 1, 2022 |
| | Unpaid Principal Balance | | Fair Value |
| | (dollars in thousands) |
| Real estate - commercial mortgage | | $ | 224,904 | | | $ | 216,593 | |
| Commercial and industrial | | 63,560 | | | 61,873 | |
| Real-estate - residential mortgage | | 177,327 | | | 169,098 | |
| Real-estate - home equity | | 6,034 | | | 5,812 | |
| Real-estate - construction | | 98,963 | | | 98,546 | |
| Consumer | | 2,306 | | | 2,286 | |
| | | | |
| Total acquired loans | | $ | 573,094 | | | $ | 554,208 | |
The following table presents the carrying amount of loans for which, at the date of Merger, there was evidence of more than insignificant deterioration of credit quality since origination:
| | | | | | | | |
| | July 1, 2022 |
| | (dollars in thousands) |
| Book balance of loans with deteriorated credit quality at acquisition | | $ | 27,057 | |
| Allowance for credit losses at acquisition | | (1,135) | |
| Non-credit related discount | | (130) | |
| Total purchased credit deteriorated loans | | $ | 25,792 | |
The following table presents the change in goodwill during the period:
| | | | | |
| March 31 |
| 2023 |
| (dollars in thousands) |
| Goodwill at December 31, 2022 | $ | 550,539 | |
| Adjustments to goodwill from the Merger | 3,352 | |
| |
| Goodwill at March 31, 2023 | $ | 553,891 | |
Pro Forma Income Statement (unaudited)
The table below presents the pro forma results of the operations of the combined institutions as if the Merger occurred on January 1, 2022. The pro forma income statement adjustments are limited to the effects of fair value mark amortization and accretion and intangible asset amortization and do not consider future cost savings the Corporation expects to achieve subsequent to the merger of Prudential Bank with and into the Bank.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | |
| 2023 | | 2022 | | | | |
| (dollars in thousands) |
| Net interest income | $ | 215,587 | | | $ | 166,998 | | | | | |
| Provision for credit losses | 24,544 | | | (4,050) | | | | | |
| Net Interest Income After Provision for Credit Losses | 191,043 | | | 171,048 | | | | | |
| Total noninterest income | 51,753 | | | 55,543 | | | | | |
| Total noninterest expenses | 159,616 | | | 157,434 | | | | | |
| Income Before Income Taxes | 83,180 | | | 69,157 | | | | | |
| Income tax expense | 14,866 | | | 11,384 | | | | | |
| Net Income | $ | 68,314 | | | $ | 57,773 | | | | | |
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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 March 31, 2023 and December 31, 2022 were $11.5 million and $13.9 million, respectively.
NOTE 4 – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value |
| Available for Sale | (dollars in thousands) |
| U.S. Government securities | $ | 225,844 | | | $ | — | | | $ | (5,791) | | | $ | 220,053 | |
| U.S. Government-sponsored agency securities | 1,047 | | | — | | | (30) | | | 1,017 | |
| State and municipal securities | 1,211,841 | | | 967 | | | (145,210) | | | 1,067,598 | |
| Corporate debt securities | 475,052 | | | — | | | (36,018) | | | 439,034 | |
| Collateralized mortgage obligations | 141,587 | | | — | | | (11,137) | | | 130,450 | |
| Residential mortgage-backed securities | 238,775 | | | 33 | | | (26,234) | | | 212,574 | |
| Commercial mortgage-backed securities | 651,767 | | | — | | | (80,104) | | | 571,663 | |
| | | | | | | |
| Total | $ | 2,945,913 | | | $ | 1,000 | | | $ | (304,524) | | | $ | 2,642,389 | |
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| Held to Maturity | | | | | | | |
| | | | | | | |
| Residential mortgage-backed securities | $ | 444,431 | | | $ | — | | | $ | (52,078) | | | $ | 392,353 | |
| Commercial mortgage-backed securities | 863,281 | | | — | | | (130,607) | | | 732,674 | |
| Total | $ | 1,307,712 | | | $ | — | | | $ | (182,685) | | | $ | 1,125,027 | |
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| December 31, 2022 |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value |
| Available for Sale | (dollars in thousands) |
| U.S. Government securities | $ | 226,140 | | | $ | — | | | $ | (7,655) | | | $ | 218,485 | |
| U.S. Government sponsored agency securities | 1,050 | | | — | | | (42) | | | 1,008 | |
| State and municipal securities | 1,284,245 | | | 283 | | | (178,816) | | | 1,105,712 | |
| Corporate debt securities | 459,792 | | | — | | | (37,483) | | | 422,309 | |
| Collateralized mortgage obligations | 147,155 | | | — | | | (13,122) | | | 134,033 | |
| Residential mortgage-backed securities | 242,527 | | | 18 | | | (29,847) | | | 212,698 | |
| Commercial mortgage-backed securities | 631,604 | | | — | | | (79,082) | | | 552,522 | |
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| Total | $ | 2,992,513 | | | $ | 301 | | | $ | (346,047) | | | $ | 2,646,767 | |
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| Held to Maturity | | | | | | | |
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| Residential mortgage-backed securities | $ | 457,325 | | | $ | — | | | $ | (57,480) | | | $ | 399,845 | |
| Commercial mortgage-backed securities | 863,931 | | | — | | | (138,727) | | | 725,204 | |
| Total | $ | 1,321,256 | | | $ | — | | | $ | (196,207) | | | $ | 1,125,049 | |
On May 1, 2022, the Corporation transferred certain residential mortgage-backed securities and commercial mortgage-backed securities from AFS to HTM classification as permitted by ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The estimated fair value of the securities transferred was $415.2 million, and the amortized cost of the securities was $479.0 million.
Securities carried at $1.1 billion at March 31, 2023 and December 31, 2022 were pledged as collateral to secure public and trust deposits.
The amortized cost and estimated fair values of debt securities as of March 31, 2023, 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.
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| | March 31, 2023 |
| | 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 | | $ | 237,505 | | | $ | 231,571 | | | $ | — | | | $ | — | |
| Due from one year to five years | | 75,121 | | | 72,835 | | | — | | | — | |
| Due from five years to ten years | | 544,101 | | | 509,791 | | | — | | | — | |
| Due after ten years | | 1,057,057 | | | 913,505 | | | — | | | — | |
| | 1,913,784 | | | 1,727,702 | | | — | | | — | |
Residential mortgage-backed securities(1) | | 238,775 | | | 212,574 | | | 444,431 | | | 392,353 | |
Commercial mortgage-backed securities(1) | | 651,767 | | | 571,663 | | | 863,281 | | | 732,674 | |
Collateralized mortgage obligations(1) | | 141,587 | | | 130,450 | | | — | | | — | |
| Total | | $ | 2,945,913 | | | $ | 2,642,389 | | | $ | 1,307,712 | | | $ | 1,125,027 | |
(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 for the periods presented:
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| Gross Realized Gains | | Gross Realized Losses | | | | Net Gains (Losses) |
| Three months ended | (dollars in thousands) |
| March 31, 2023 | $ | 283 | | | $ | (260) | | | | | $ | 23 | |
| March 31, 2022 | 1,546 | | | (1,527) | | | | | 19 | |
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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 for the periods presented:
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| March 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 | | $ | 97,566 | | | $ | (2,210) | | | 2 | | | $ | 122,487 | | | $ | (3,581) | | | $ | 220,053 | | | $ | (5,791) | |
| U.S. Government-sponsored agency securities | 1 | | 1,017 | | | (30) | | | | | — | | | — | | | 1,017 | | | (30) | |
| State and municipal securities | 86 | | | 238,922 | | | (6,326) | | | 258 | | | 735,187 | | | (138,884) | | | 974,109 | | | (145,210) | |
| Corporate debt securities | 45 | | | 239,873 | | | (13,138) | | | 27 | | | 196,406 | | | (22,880) | | | 436,279 | | | (36,018) | |
| Collateralized mortgage obligations | 37 | | | 29,944 | | | (1,499) | | | 59 | | | 100,506 | | | (9,638) | | | 130,450 | | | (11,137) | |
| Residential mortgage-backed securities | 50 | | | 80,524 | | | (4,743) | | | 25 | | | 129,035 | | | (21,491) | | | 209,559 | | | (26,234) | |
| Commercial mortgage-backed securities | 75 | | | 138,365 | | | (4,501) | | | 61 | | | 433,298 | | | (75,603) | | | 571,663 | | | (80,104) | |
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| Total available for sale | 295 | | | $ | 826,211 | | | $ | (32,447) | | | 432 | | | $ | 1,716,919 | | | $ | (272,077) | | | $ | 2,543,130 | | | $ | (304,524) | |
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| Held to Maturity | | | | | | | | | | | | | | | |
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| Residential mortgage-backed securities | 106 | | | $ | 238,862 | | | $ | (11,981) | | | 14 | | | $ | 153,491 | | | $ | (40,097) | | | $ | 392,353 | | | $ | (52,078) | |
| Commercial mortgage-backed securities | 20 | | | 257,006 | | | (17,272) | | | 40 | | | 475,668 | | | (113,335) | | | 732,674 | | | (130,607) | |
| Total held to maturity | 126 | | | $ | 495,868 | | | $ | (29,253) | | | 54 | | | $ | 629,159 | | | $ | (153,432) | | | $ | 1,125,027 | | | $ | (182,685) | |
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| December 31, 2022 |
| 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 | | | $ | 96,906 | | | $ | (2,814) | | | 2 | | | $ | 121,579 | | | $ | (4,841) | | | $ | 218,485 | | | $ | (7,655) | |
| U.S. Government sponsored agency securities | 1 | | | 1,008 | | | (42) | | | — | | | — | | | — | | | 1,008 | | | (42) | |
| State and municipal securities | 360 | | | 995,122 | | | (157,397) | | | 29 | | | 61,089 | | | (21,419) | | | 1,056,211 | | | (178,816) | |
| Corporate debt securities | 66 | | | 376,398 | | | (31,333) | | | 6 | | | 37,157 | | | (6,150) | | | 413,555 | | | (37,483) | |
| Collateralized mortgage obligations | 96 | | | 113,191 | | | (7,650) | | | 1 | | | 20,842 | | | (5,472) | | | 134,033 | | | (13,122) | |
| Residential mortgage-backed securities | 81 | | | 154,861 | | | (18,301) | | | 5 | | | 55,293 | | | (11,546) | | | 210,154 | | | (29,847) | |
| Commercial mortgage-backed securities | 114 | | | 371,109 | | | (38,845) | | | 20 | | | 181,413 | | | (40,237) | | | 552,522 | | | (79,082) | |
| Total available for sale | 719 | | | $ | 2,108,595 | | | $ | (256,382) | | | 63 | | | $ | 477,373 | | | $ | (89,665) | | | $ | 2,585,968 | | | $ | (346,047) | |
| | | | | | | | | | | | | | | |
| Held to Maturity | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Residential mortgage-backed securities | 106 | | | $ | 246,667 | | | $ | (14,275) | | | 14 | | | $ | 153,178 | | | $ | (43,205) | | | $ | 399,845 | | | $ | (57,480) | |
| Commercial mortgage-backed securities | 21 | | | 258,255 | | | (24,029) | | | 39 | | | 466,949 | | | (114,698) | | | 725,204 | | | (138,727) | |
| Total held to maturity | 127 | | | $ | 504,922 | | | $ | (38,304) | | | 53 | | | $ | 620,127 | | | $ | (157,903) | | | $ | 1,125,049 | | | $ | (196,207) | |
The Corporation's collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The change in fair value of these securities is attributable to changes in interest rates and not credit quality. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. Therefore, the Corporation does not have an ACL for these investments as of March 31, 2023 and December 31, 2022.
As of March 31, 2023 and December 31, 2022, 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.
As of March 31, 2023 and December 31, 2022, all of the Corporation's corporate debt securities were rated above investment grade. Based on the payment status, rating and management's evaluation of these securities, no ACL was required for corporate debt securities as of March 31, 2023 or December 31, 2022.
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:
| | | | | | | | | | | |
| March 31,
2023 | | December 31, 2022 |
| | (dollars in thousands) |
| Real estate - commercial mortgage | $ | 7,746,920 | | | $ | 7,693,835 | |
| Commercial and industrial | 4,600,696 | | | 4,477,537 | |
| Real-estate - residential mortgage | 4,880,919 | | | 4,737,279 | |
| Real-estate - home equity | 1,074,712 | | | 1,102,838 | |
| Real-estate - construction | 1,326,754 | | | 1,269,925 | |
| Consumer | 730,775 | | | 699,179 | |
| Leases and other loans | 340,595 | | | 328,331 | |
| Gross loans | 20,701,371 | | | 20,308,924 | |
| Unearned income | (31,183) | | | (29,377) | |
| Net loans | $ | 20,670,188 | | | $ | 20,279,547 | |
The Corporation segments its loan portfolio by "portfolio segments," as presented in the table above. Certain portfolio segments are further disaggregated by "class segment" for the purpose of estimating credit losses.
Allowance for Credit Losses
The ACL consists of loans evaluated collectively and individually for expected credit losses. The ACL represents an estimate of expected credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to net loans. The ACL is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries. The reserve for OBS credit exposures includes estimated losses on unfunded loan commitments, letters of credit and other OBS credit exposures.
The following table summarizes the ACL - loans balance and the reserve for OBS credit exposures balance as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| | | |
| March 31, 2023 | | December 31, 2022 |
| (dollars in thousands) |
| ACL - loans | $ | 278,695 | | | $ | 269,366 | |
| | | |
Reserve for OBS credit exposures(1) | $ | 17,539 | | | $ | 16,328 | |
(1) Included in other liabilities on the consolidated balance sheets.
The following table presents the activity in the ACL - loans balances:
| | | | | | | | | | | | | | | |
| Three months ended March 31 | |
| | 2023 | | 2022 | | | | |
| (dollars in thousands) | | | | |
| Balance at beginning of period | $ | 269,366 | | | $ | 249,001 | | | | | |
| | | | | | | |
| | | | | | | |
| Loans charged off | (16,903) | | | (1,900) | | | | | |
| Recoveries of loans previously charged off | 2,899 | | | 2,954 | | | | | |
| Net loans (charged-off) recovered | (14,004) | | | 1,054 | | | | | |
| Provision for credit losses | 23,333 | | | (6,350) | | | | | |
| Balance at end of period | $ | 278,695 | | | $ | 243,705 | | | | | |
| Provision for OBS credit exposures | $ | 1,211 | | | $ | (600) | | | | | |
| Reserve for OBS credit exposures | $ | 17,539 | | | $ | 13,933 | | | | | |
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 March 31, 2023 | | | | | | | | | | | | | |
| Balance at December 31, 2022 | $ | 69,456 | | | $ | 70,116 | | | $ | 83,250 | | | $ | 26,429 | | | $ | 10,743 | | | $ | 9,372 | | | $ | 269,366 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Loans charged off | (13,362) | | | (612) | | | — | | | (2,206) | | | — | | | (723) | | | (16,903) | |
| Recoveries of loans previously charged off | 786 | | | 1,086 | | | 48 | | | 661 | | | 202 | | | 116 | | | 2,899 | |
| Net loans (charged off) recovered | (12,576) | | | 474 | | | 48 | | | (1,545) | | | 202 | | | (607) | | | (14,004) | |
Provision for loan losses(1) | 9,376 | | | 6,536 | | | 2,911 | | | 2,419 | | | 701 | | | 1,390 | | | 23,333 | |
| Balance at March 31, 2023 | $ | 66,256 | | | $ | 77,126 | | | $ | 86,209 | | | $ | 27,303 | | | $ | 11,646 | | | $ | 10,155 | | | $ | 278,695 | |
| Three months ended March 31, 2022 | | | | | | | | | | | | | |
| Balance at December 31, 2021 | $ | 87,970 | | | $ | 67,056 | | | $ | 54,236 | | | $ | 19,749 | | | $ | 12,941 | | | $ | 7,049 | | | $ | 249,001 | |
| Loans charged off | (152) | | | (227) | | | — | | | (1,052) | | | — | | | (469) | | | (1,900) | |
| Recoveries of loans previously charged off | 112 | | | 1,980 | | | 222 | | | 454 | | | 32 | | | 154 | | | 2,954 | |
| Net loans (charged off) recovered | (40) | | | 1,753 | | | 222 | | | (598) | | | 32 | | | (315) | | | 1,054 | |
Provision for loan and lease losses(1) | (8,077) | | | (2,298) | | | 1,434 | | | 1,062 | | | 330 | | | 1,199 | | | (6,350) | |
| Balance at March 31, 2022 | $ | 79,853 | | | $ | 66,511 | | | $ | 55,892 | | | $ | 20,213 | | | $ | 13,303 | | | $ | 7,933 | | | $ | 243,705 | |
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(1) Provision included in the table only includes the portion related to net loans.
The ACL - loans includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative models. Qualitative adjustments include and consider changes in national, regional and local economic and business conditions, an assessment of the lending environment, including underwriting standards and other factors affecting credit quality.
The provision for credit losses for the first quarter of 2023 was recorded to increase the allowance for credit losses as a result of loan growth and changes to the macroeconomic outlook.
Non-accrual Loans
All loans individually evaluated for impairment are measured for losses on a quarterly basis. As of March 31, 2023 and December 31, 2022, substantially all of the Corporation's individually evaluated loans with total commitments greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral, if any. Collateral could be in the form of real estate, in the case of commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real estate.
As of March 31, 2023 and December 31, 2022, approximately 85% and 91%, 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.
The following table presents total non-accrual loans, by class segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| 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 | $ | 18,878 | | | $ | 39,531 | | | $ | 58,409 | | | $ | 39,722 | | | $ | 30,439 | | | $ | 70,161 | |
| Commercial and industrial | 16,090 | | | 15,789 | | | 31,879 | | | 14,804 | | | 12,312 | | | 27,116 | |
| Real estate - residential mortgage | 23,450 | | | 977 | | | 24,427 | | | 25,315 | | | 979 | | | 26,294 | |
| Real estate - home equity | 5,912 | | | 122 | | | 6,034 | | | 5,975 | | | 130 | | | 6,105 | |
| Real estate - construction | 831 | | | 447 | | | 1,278 | | | 866 | | | 502 | | | 1,368 | |
| Consumer | 25 | | | — | | | 25 | | | 92 | | | — | | | 92 | |
| Leases and other loans | 2,995 | | | 9,256 | | | 12,251 | | | 4,052 | | | 9,255 | | | 13,307 | |
| $ | 68,181 | | | $ | 66,122 | | | $ | 134,303 | | | $ | 90,826 | | | $ | 53,617 | | | $ | 144,443 | |
As of March 31, 2023 and December 31, 2022, there were $66.1 million and $53.6 million, respectively, of non-accrual loans that did not have a related allowance for credit losses. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.
Asset Quality
Maintaining an appropriate ACL is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, residential construction, commercial and industrial, and commercial real estate, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk categories is a significant component of the ACL methodology for these loans, under both the CECL and incurred loss models, which bases the probability of default on this migration. Assigning risk ratings involves judgment. The Corporation's loan review officers provide a separate assessment of risk rating accuracy. Risk ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review assessments identify a deterioration or an improvement in a loan.
The following table summarizes designated internal risk rating categories by portfolio segment and loan class, by origination year, in the current period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (in thousands) | Amortized | Amortized | |
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | Cost Basis | Total |
| Real estate - commercial mortgage | | | | | | | | |
| Pass | $ | 173,387 | | $ | 1,015,881 | | $ | 1,077,823 | | $ | 943,188 | | $ | 799,374 | | $ | 3,170,784 | | $ | 73,033 | | $ | 305 | | $ | 7,253,775 | |
| Special Mention | — | | 14,438 | | 65,362 | | 19,804 | | 34,352 | | 169,568 | | 2,728 | | — | | 306,252 | |
| Substandard or Lower | — | | 2,668 | | 19,190 | | 48,655 | | 24,531 | | 91,606 | | 243 | | — | | 186,893 | |
| Total real estate - commercial mortgage | 173,387 | | 1,032,987 | | 1,162,375 | | 1,011,647 | | 858,257 | | 3,431,958 | | 76,004 | | 305 | | 7,746,920 | |
| Real estate - commercial mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | (30) | | — | | (13,332) | | (13,362) | |
Commercial and industrial(1) | | | | | | | | |
| Pass | 379,383 | | 689,276 | | 444,738 | | 379,630 | | 301,392 | | 748,118 | | 1,394,101 | | 6,517 | | 4,343,155 | |
| Special Mention | 150 | | 17,426 | | 16,457 | | 4,958 | | 9,500 | | 31,125 | | 65,596 | | 243 | | 145,455 | |
| Substandard or Lower | 206 | | 1,259 | | 754 | | 4,001 | | 13,042 | | 22,863 | | 69,675 | | 286 | | 112,086 | |
| Total commercial and industrial | 379,739 | | 707,961 | | 461,949 | | 388,589 | | 323,934 | | 802,106 | | 1,529,372 | | 7,046 | | 4,600,696 | |
Commercial and industrial(1) | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | (53) | | (559) | | (612) | |
Real estate - construction(2) | | | | | | | | | |
| Pass | 49,829 | | 165,351 | | 425,549 | | 218,594 | | 23,387 | | 103,958 | | 39,917 | | — | | 1,026,585 | |
| Special Mention | — | | 1,218 | | — | | — | | — | | 29,283 | | — | | — | | 30,501 | |
| Substandard or Lower | — | | 305 | | 2,079 | | — | | 2,238 | | 4,148 | | 2,284 | | — | | 11,054 | |
| Total real estate - construction | 49,829 | | 166,874 | | 427,628 | | 218,594 | | 25,625 | | 137,389 | | 42,201 | | — | | 1,068,140 | |
Real estate - construction(2) | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | | | | | | | | |
| Pass | $ | 602,599 | | $ | 1,870,508 | | $ | 1,948,110 | | $ | 1,541,412 | | $ | 1,124,153 | | $ | 4,022,860 | | $ | 1,507,051 | | $ | 6,822 | | $ | 12,623,515 | |
| Special Mention | 150 | | 33,082 | | 81,819 | | 24,762 | | 43,852 | | 229,976 | | 68,324 | | 243 | | 482,208 | |
| Substandard or Lower | 206 | | 4,232 | | 22,023 | | 52,656 | | 39,811 | | 118,617 | | 72,202 | | 286 | | 310,033 | |
| Total | $ | 602,955 | | $ | 1,907,822 | | $ | 2,051,952 | | $ | 1,618,830 | | $ | 1,207,816 | | $ | 4,371,453 | | $ | 1,647,577 | | $ | 7,351 | | $ | 13,415,756 | |
(1) Loans originated in 2021 and 2020 include $9.8 million of PPP loans that were assigned a rating of Pass based on the existence of a federal government guaranty through the SBA.
(2) Excludes real estate - construction - other.
The following table summarizes designated internal risk rating categories by portfolio segment and loan class, by origination year, in the prior period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Cost Basis | Cost Basis | Total |
| Real estate - commercial mortgage | | | | | | | | |
| Pass | $ | 1,014,575 | | $ | 1,095,725 | | $ | 969,118 | | $ | 810,850 | | $ | 621,689 | | $ | 2,610,511 | | $ | 80,665 | | $ | 307 | | $ | 7,203,440 | |
| Special Mention | 95 | | 50,367 | | 23,296 | | 33,735 | | 16,205 | | 181,736 | | 947 | | — | | 306,381 | |
| Substandard or Lower | 1,032 | | 3,039 | | 31,042 | | 38,378 | | 23,112 | | 87,168 | | 243 | | — | | 184,014 | |
| Total real estate - commercial mortgage | 1,015,702 | | 1,149,131 | | 1,023,456 | | 882,963 | | 661,006 | | 2,879,415 | | 81,855 | | 307 | | 7,693,835 | |
| Real estate - commercial mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | (53) | | — | | (12,420) | | (12,473) | |
Commercial and industrial(1) | | | | | | | | |
| Pass | 907,390 | | 449,145 | | 397,881 | | 315,605 | | 185,096 | | 604,352 | | 1,387,961 | | 618 | | 4,248,048 | |
| Special Mention | 11,405 | | 24,479 | | 3,763 | | 8,147 | | 5,218 | | 24,633 | | 56,048 | | 250 | | 133,943 | |
| Substandard or Lower | 834 | | 418 | | 4,818 | | 13,044 | | 3,081 | | 22,025 | | 51,077 | | 249 | | 95,546 | |
| Total commercial and industrial | 919,629 | | 474,042 | | 406,462 | | 336,796 | | 193,395 | | 651,010 | | 1,495,086 | | 1,117 | | 4,477,537 | |
Commercial and industrial(1) | | | | | | | | |
| Current period gross charge-offs | — | | — | | (36) | | — | | (21) | | (365) | | (1,192) | | (776) | | (2,390) | |
Real estate - construction(2) | | | | | | | | |
| Pass | 159,195 | | 390,993 | | 243,406 | | 28,539 | | 24,421 | | 93,511 | | 47,271 | | — | | 987,336 | |
| Special Mention | — | | — | | — | | — | | — | | 21,603 | | — | | — | | 21,603 | |
| Substandard or Lower | — | | — | | 3,852 | | 2,274 | | — | | 4,272 | | 203 | | — | | 10,601 | |
| Total real estate - construction | 159,195 | | 390,993 | | 247,258 | | 30,813 | | 24,421 | | 119,386 | | 47,474 | | — | | 1,019,540 | |
Real estate - construction(2) | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | | | | | | | | |
| Pass | $ | 2,081,160 | | $ | 1,935,863 | | $ | 1,610,405 | | $ | 1,154,994 | | $ | 831,206 | | $ | 3,308,374 | | $ | 1,515,897 | | $ | 925 | | $ | 12,438,824 | |
| Special Mention | 11,500 | | 74,846 | | 27,059 | | 41,882 | | 21,423 | | 227,972 | | 56,995 | | 250 | | 461,927 | |
| Substandard or Lower | 1,866 | | 3,457 | | 39,712 | | 53,696 | | 26,193 | | 113,465 | | 51,523 | | 249 | | 290,161 | |
| Total | $ | 2,094,526 | | $ | 2,014,166 | | $ | 1,677,176 | | $ | 1,250,572 | | $ | 878,822 | | $ | 3,649,811 | | $ | 1,624,415 | | $ | 1,424 | | $ | 13,190,912 | |
(1) Loans originated in 2021 and 2020 include $20.4 million of PPP loans that were assigned a rating of Pass based on the existence of a federal government guaranty through the SBA.
(2) 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 leases 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | Cost Basis | Total |
| Real estate - residential mortgage | | | | | | | | |
| Performing | $ | 139,551 | | $ | 961,137 | | $ | 1,732,158 | | $ | 1,041,054 | | $ | 282,030 | | $ | 678,413 | | $ | — | | $ | — | | $ | 4,834,343 | |
| Nonperforming | — | | 706 | | 6,089 | | 7,630 | | 5,335 | | 26,816 | | — | | — | | 46,576 | |
| Total real estate - residential mortgage | 139,551 | | 961,843 | | 1,738,247 | | 1,048,684 | | 287,365 | | 705,229 | | — | | — | | 4,880,919 | |
| Real estate - residential mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Consumer and real estate - home equity | | | | | | | | |
| Performing | 148,247 | | 309,812 | | 95,136 | | 66,377 | | 49,877 | | 162,289 | | 947,347 | | 17,419 | | 1,796,504 | |
| Nonperforming | — | | 204 | | 155 | | 67 | | 31 | | 2,013 | | 6,460 | | 53 | | 8,983 | |
| Total consumer and real estate - home equity | 148,247 | | 310,016 | | 95,291 | | 66,444 | | 49,908 | | 164,302 | | 953,807 | | 17,472 | | 1,805,487 | |
| Consumer and real estate - home equity | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | (325) | | — | | (1,881) | | (2,206) | |
| Leases and other loans | | | | | | | | |
| Performing | 75,403 | | 99,125 | | 36,559 | | 32,785 | | 25,955 | | 26,891 | | — | | — | | 296,718 | |
| Nonperforming | — | | 443 | | — | | — | | — | | 12,251 | | — | | — | | 12,694 | |
| Leases and other loans | 75,403 | | 99,568 | | 36,559 | | 32,785 | | 25,955 | | 39,142 | | — | | — | | 309,412 | |
| Leases and other loans | | | | | | | | |
| Current period gross charge-offs | (59) | | (251) | | (60) | | (45) | | (21) | | (287) | | — | | — | | (723) | |
| Construction - other | | | | | | | | | |
| Performing | 8,997 | | 202,286 | | 38,473 | | 8,858 | | — | | — | | — | | — | | 258,614 | |
| Nonperforming | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total construction - other | 8,997 | | 202,286 | | 38,473 | | 8,858 | | — | | — | | — | | — | | 258,614 | |
| Construction - other | | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | | | | | | | | | |
| Performing | $ | 372,198 | | $ | 1,572,360 | | $ | 1,902,326 | | $ | 1,149,074 | | $ | 357,862 | | $ | 867,593 | | $ | 947,347 | | $ | 17,419 | | $ | 7,186,179 | |
| Nonperforming | — | | 1,353 | | 6,244 | | 7,697 | | 5,366 | | 41,080 | | 6,460 | | 53 | | 68,253 | |
| Total | $ | 372,198 | | $ | 1,573,713 | | $ | 1,908,570 | | $ | 1,156,771 | | $ | 363,228 | | $ | 908,673 | | $ | 953,807 | | $ | 17,472 | | $ | 7,254,432 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | |
| | (dollars in thousands) | Amortized | Amortized | |
| | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Cost Basis | Cost Basis | Total |
| Real estate - residential mortgage | | | | | | | | |
| Performing | $ | 933,903 | | $ | 1,708,703 | | $ | 1,054,126 | | $ | 286,167 | | $ | 87,455 | | $ | 620,416 | | $ | — | | $ | — | | $ | 4,690,770 | |
| Nonperforming | 1,199 | | 5,104 | | 6,597 | | 6,466 | | 4,587 | | 22,556 | | — | | — | | 46,509 | |
| Total real estate - residential mortgage | 935,102 | | 1,713,807 | | 1,060,723 | | 292,633 | | 92,042 | | 642,972 | | — | | — | | 4,737,279 | |
| Real estate - residential mortgage | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | (66) | | (66) | |
| Consumer and Real estate - home equity | | | | | | | | |
| Performing | 416,631 | | 109,724 | | 80,422 | | 52,384 | | 45,642 | | 211,127 | | 842,226 | | 34,061 | | 1,792,217 | |
| Nonperforming | 292 | | 298 | | 174 | | 36 | | 98 | | 6,512 | | 1,722 | | 668 | | 9,800 | |
| Total consumer and real estate - home equity | 416,923 | | 110,022 | | 80,596 | | 52,420 | | 45,740 | | 217,639 | | 843,948 | | 34,729 | | 1,802,017 | |
| Consumer and Real estate - home equity | | | | | | | | |
| Current period gross charge-offs | — | | (587) | | (70) | | (108) | | (16) | | (442) | | (178) | | (3,011) | | (4,412) | |
| Construction - other | | | | | | | | | |
| Performing | 164,924 | | 73,492 | | 10,892 | | — | | 1,077 | | — | | — | | — | | 250,385 | |
| Nonperforming | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total construction - other | 164,924 | | 73,492 | | 10,892 | | — | | 1,077 | | — | | — | | — | | 250,385 | |
| Construction - other | | | | | | | | | |
| Current period gross charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Leases and other loans | | | | | | | | |
| Performing | 146,198 | | 39,427 | | 40,024 | | 29,309 | | 15,019 | | 15,670 | | — | | — | | 285,647 | |
| Nonperforming | — | | — | | — | | — | | — | | 13,307 | | — | | — | | 13,307 | |
| Leases and other loans | 146,198 | | 39,427 | | 40,024 | | 29,309 | | 15,019 | | 28,977 | | — | | — | | 298,954 | |
| Leases and other loans | | | | | | | | |
| Current period gross charge-offs | (506) | | (167) | | (140) | | (80) | | (47) | | (1,191) | | — | | — | | (2,131) | |
| Total | | | | | | | | | |
| Performing | $ | 1,661,656 | | $ | 1,931,346 | | $ | 1,185,464 | | $ | 367,860 | | $ | 149,193 | | $ | 847,213 | | $ | 842,226 | | $ | 34,061 | | $ | 7,019,019 | |
| Nonperforming | 1,491 | | 5,402 | | 6,771 | | 6,502 | | 4,685 | | 42,375 | | 1,722 | | 668 | | 69,616 | |
| Total | $ | 1,663,147 | | $ | 1,936,748 | | $ | 1,192,235 | | $ | 374,362 | | $ | 153,878 | | $ | 889,588 | | $ | 843,948 | | $ | 34,729 | | $ | 7,088,635 | |
The following table presents non-performing assets:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| | (dollars in thousands) |
| Non-accrual loans | $ | 134,303 | | | $ | 144,443 | |
Loans 90 days or more past due and still accruing(1) | 30,336 | | | 27,463 | |
| Total non-performing loans | 164,639 | | | 171,906 | |
OREO(2) | 3,304 | | | 5,790 | |
| Total non-performing assets | $ | 167,943 | | | $ | 177,696 | |
(1) Excludes PPP loans which are fully guaranteed by the federal government of $1.6 million and $7.7 million as of March 31, 2023 and December 31, 2022, respectively.
(2) Excludes $9.6 million and $6.0 million of residential mortgage properties for which formal foreclosure proceedings were in process as of March 31, 2023 and December 31, 2022, 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) |
| March 31, 2023 | | | | | | | | | | | | | |
| Real estate – commercial mortgage | $ | 19,251 | | | $ | 1,887 | | | $ | 2,913 | | | | | $ | 58,409 | | | $ | 7,664,460 | | | $ | 7,746,920 | |
Commercial and industrial(1) | 6,428 | | | 1,279 | | | 1,676 | | | | | 31,879 | | | 4,559,434 | | | 4,600,696 | |
| Real estate – residential mortgage | 34,483 | | | 5,779 | | | 22,149 | | | | | 24,427 | | | 4,794,081 | | | 4,880,919 | |
| Real estate – home equity | 6,442 | | | 2,441 | | | 2,316 | | | | | 6,034 | | | 1,057,479 | | | 1,074,712 | |
| Real estate – construction | 13,074 | | | 751 | | | 231 | | | | | 1,278 | | | 1,311,420 | | | 1,326,754 | |
| Consumer | 5,840 | | | 1,400 | | | 608 | | | | | 25 | | | 722,902 | | | 730,775 | |
Leases and other loans(2) | 871 | | | 64 | | | 443 | | | | | 12,251 | | | 295,783 | | | 309,412 | |
| Total | $ | 86,389 | | | $ | 13,601 | | | $ | 30,336 | | | | | $ | 134,303 | | | $ | 20,405,559 | | | $ | 20,670,188 | |
(1) Excludes delinquent PPP loans 30-59 days past due, 60-89 days past due and 90 days or more past due of $1.2 million, $0.1 million and $1.6 million, respectively, which are fully guaranteed by the federal government and are classified as current.
(2) 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, 2022 | | | | | | | | | | | |
| Real estate – commercial mortgage | $ | 10,753 | | | $ | 4,644 | | | $ | 2,473 | | | $ | 70,161 | | | $ | 7,605,804 | | | $ | 7,693,835 | |
Commercial and industrial(1) | 6,067 | | | 2,289 | | | 1,172 | | | 27,116 | | | 4,440,893 | | | 4,477,537 | |
| Real estate – residential mortgage | 57,061 | | | 8,209 | | | 20,215 | | | 26,294 | | | 4,625,500 | | | 4,737,279 | |
| Real estate – home equity | 5,666 | | | 2,444 | | | 2,704 | | | 6,105 | | | 1,085,919 | | | 1,102,838 | |
| Real estate – construction | 1,762 | | | 1,758 | | | — | | | 1,368 | | | 1,265,037 | | | 1,269,925 | |
| Consumer | 6,692 | | | 1,339 | | | 899 | | | 92 | | | 690,157 | | | 699,179 | |
Leases and other loans(2) | 348 | | | 122 | | | — | | | 13,307 | | | 285,177 | | | 298,954 | |
| Total | $ | 88,349 | | | $ | 20,805 | | | $ | 27,463 | | | $ | 144,443 | | | $ | 19,998,487 | | | $ | 20,279,547 | |
(1) Excludes delinquent PPP loans 30-59 days past due, 60-89 days past due and 90 days or more past due of $0.1 million, $0.7 million and $7.7 million, respectively, which are fully guaranteed by the federal government and are classified as current.
(2) Includes unearned income.
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. In most cases, the Corporation records a partial charge-off to reduce the collateral-dependent loan's or lease's carrying value to 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, agriculture land, and vacant land.
Loan Modifications
On January 1, 2023, the Corporation adopted ASU 2022-02. Loan modifications reported below do not include modifications with insignificant payment delays. ASU 2022-02 lists the following factors when considering if the loan modification has insignificant payment delays: (1) the amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due, and (2) the delay in timing of the restructured payment period is insignificant relative to the frequency of payments due under the debt, the debt’s original contractual maturity or the debt’s original expected duration.
The ACL incorporates an estimate of lifetime expected credit losses and is recorded upon asset origination or acquisition. The starting point for the estimate of the ACL is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Corporation uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
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 maybe be provided to a customer.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the ACL, a change to the ACL is generally not recorded upon modification. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the ACL. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the ACL.
The following table presents the amortized cost basis during the three months ended March 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:
| | | | | | | | | | | | | | | | | | | | | | | |
| Term Extension |
| Three months ended March 31, 2023 | | | | | | |
| Amortization Cost Basis | | % of Class of Financing Receivable | | | | | | | | | | | | |
| (dollars in thousands) |
| Real estate - commercial mortgage | $ | 1,426 | | | 0.02 | % | | | | | | | | | | | | |
| Commercial and industrial | 6,227 | | | 0.14 | | | | | | | | | | | | | |
| Real estate - residential mortgage | 1,182 | | | 0.02 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total | $ | 8,835 | | | | | | | | | | | | | | | |
The following table presents the financial effect of the modifications made to borrowers experiencing financial difficulty as of March 31, 2023.
| | | | | |
| Term Extension |
| Financial Effect |
| Real estate - commercial mortgage | Added a weighted-average 1.91 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
| Commercial and industrial | Added a weighted-average 0.77 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
| Real estate - residential mortgage | Added a weighted-average 3.51 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
| |
| |
| |
| |
During the first quarter of 2023, there were no loans modified due to financial difficulty where there was an interest rate reduction or principal balance forgiveness.
During the first quarter of 2023, there were no loans modified due to financial difficulty that defaulted in the three months subsequent to modification.
The following table presents the performance of loans that have been modified in the last three months as of March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 30-89 | | 90+ | | Total |
| | | Days Past | | Past Due | | Past |
| Current | | Due | | and Accruing | | Due |
| (dollars in thousands) |
| Real estate - commercial mortgage | $ | 1,426 | | | $ | — | | | $ | — | | | $ | — | |
| Commercial and industrial | 6,227 | | | — | | | — | | | — | |
| Real estate - residential mortgage | 1,182 | | | — | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | $ | 8,835 | | | $ | — | | | $ | — | | | $ | — | |
There were no commitments to lend additional funds to borrowers with loan modifications as a result of financial difficulty as of March 31, 2023.
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 March 31 | | |
| | 2023 | | 2022 | | | | |
| | (dollars in thousands) |
| Amortized cost: | | | | | | | |
| Balance at beginning of period | $ | 34,217 | | | $ | 35,993 | | | | | |
| Originations of MSRs | 196 | | | 1,355 | | | | | |
| Amortization | (1,331) | | | (1,724) | | | | | |
| Balance at end of period | $ | 33,082 | | | $ | 35,624 | | | | | |
| | | | | | | |
| Valuation allowance: | | | | | | | |
| Balance at beginning of period | $ | — | | | $ | (600) | | | | | |
| Reduction (addition) to valuation allowance | — | | | 600 | | | | | |
| Balance at end of period | $ | — | | | $ | — | | | | | |
| | | | | | | |
| Net MSRs at end of period | $ | 33,082 | | | $ | 35,624 | | | | | |
| Estimated fair value of MSRs at end of period | $ | 47,223 | | | $ | 47,609 | | | | | |
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 $4.1 billion and $4.2 billion as of March 31, 2023 and December 31, 2022, 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 $47.2 million and $50.0 million at March 31, 2023 and December 31, 2022 respectively. Based on its fair value analysis as of March 31, 2023, the Corporation determined that no valuation allowance was required as of March 31, 2023.
NOTE 7 – Derivative Financial Instruments
The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. Certain of the Corporation's outstanding derivative contracts are designated as hedges, and none are entered into for speculative purposes. The Corporation enters into derivative contracts that are intended to economically hedge certain of its risks, even if hedge accounting does not apply or the Corporation elects not to apply hedge accounting.
Mortgage Banking Derivatives
In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured.
Interest Rate Derivatives - Non-Designated Hedges
The Corporation enters into interest rate derivatives with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate derivatives with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate derivatives is that the customer pays a fixed rate
of interest and the Corporation receives a floating rate. As the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
The Corporation's existing credit derivatives result from participation in interest rate derivatives provided by external lenders as part of loan participation arrangements and, therefore, are not used to manage interest rate risk in the Corporation's assets or liabilities.
The Corporation is required to clear all eligible interest rate derivative contracts with a clearing agent and is subject to the regulations of the Commodity Futures Trading Commission.
Cash Flow Hedges of Interest Rate Risk
The Corporation's objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Corporation primarily uses interest rate derivatives as part of its interest rate risk management strategy. The Corporation enters into interest rate derivatives designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivatives is recorded in AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Corporation's variable-rate loans. During the next twelve months, the Corporation estimates that an additional $28.3 million of unrealized losses will be reclassified as a decrease to interest income.
In January 2023, the Corporation terminated interest rate derivatives designated as cash flow hedges with a combined notional amount of $1.0 billion. As the hedged transaction continues to be probable, the unrealized 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 first quarter of 2023, $5.5 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.
Foreign Exchange Contracts
The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a specific date at a contractual price. The Corporation limits its foreign exchange exposure with customers by entering into contracts with institutional counterparties to mitigate its foreign exchange risk. The Corporation also holds certain amounts of Foreign Currency Nostro Accounts. The Corporation limits the total overnight net foreign currency open positions, which is defined as an aggregate of all outstanding contracts, to $0.5 million.
The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Notional
Amount | | Asset
(Liability)
Fair Value | | Notional
Amount | | Asset
(Liability)
Fair Value |
| | (dollars in thousands) |
| Interest Rate Locks with Customers | | | | | | | |
| Positive fair values | $ | 95,469 | | | $ | 420 | | | $ | 70,836 | | | $ | 182 | |
| Negative fair values | 1,622 | | | (11) | | | 4,939 | | | (51) | |
| | | | | | | |
| Forward Commitments | | | | | | | |
| Positive fair values | — | | | — | | | — | | | — | |
| Negative fair values | 8,500 | | | (31) | | | 10,000 | | | (147) | |
| | | | | | | |
| Interest Rate Derivatives with Customers | | | | | | | |
| Positive fair values | 422,891 | | | 10,324 | | | 171,317 | | | 3,337 | |
| Negative fair values | 3,628,451 | | | (220,342) | | | 3,802,480 | | | (280,401) | |
| | | | | | | |
| Interest Rate Derivatives with Dealer Counterparties | | | | | | | |
| Positive fair values | 3,628,451 | | | 125,932 | | | 3,802,480 | | | 161,956 | |
| Negative fair values | 422,891 | | | (10,690) | | | 171,317 | | | (3,703) | |
| | | | | | | |
| Interest Rate Derivatives used in Cash Flow Hedges | | | | | | | |
| Positive fair values | 1,500,000 | | | 5,646 | | | 600,000 | | | 1,321 | |
| Negative fair values | — | | | — | | | 1,000,000 | | | (12,163) | |
| Foreign Exchange Contracts with Customers | | | | | | | |
| Positive fair values | 19,026 | | | 180 | | | 11,123 | | | 571 | |
| Negative fair values | 10,290 | | | (380) | | | 3,672 | | | (85) | |
| | | | | | | |
| Foreign Exchange Contracts with Correspondent Banks | | | | | | | |
| Positive fair values | 12,725 | | | 435 | | | 4,887 | | | 101 | |
| Negative fair values | 7,836 | | | (56) | | | 8,280 | | | (499) | |
| | | | | | | |
| | | | | | | |
The following table presents the effect of fair value and 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) |
| Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | |
| Three months ended March 31, 2023 | | | | | | | | | | |
| Interest Rate Products | $ | 12,535 | | | $ | 12,535 | | | $ | — | | | Interest Income | | $ | (7,157) | | | $ | (7,157) | | | $ | — | |
| Three months ended March 31, 2022 | | | | | | | | | | |
| Interest Rate Products | (40,563) | | | (40,563) | | | — | | | Interest Income | | 1,948 | | | 1,948 | | | — | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
The following table presents the effect of fair value and cash flow hedge accounting on the income statement:
| | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | |
| Consolidated Statements of Income Classification |
| Interest Income | | |
| Three months ended March 31 | | | |
| 2023 | | 2022 | | | | | | | |
| (dollars in thousands) |
| Total amounts of income line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded | $ | (7,157) | | | $ | 1,948 | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Interest contracts: | | | | | | | | | | |
| Amount of gain (loss) reclassified from AOCI into income | (7,157) | | | 1,948 | | | | | | | | |
| 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 | (7,157) | | | 1,948 | | | | | | | | |
| 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 March 31 | | |
| | | | 2023 | | 2022 | | | | |
| | | (dollars in thousands) |
Mortgage banking derivatives (1) | Mortgage banking income | | $ | 394 | | | $ | 385 | | | | | |
| | | | | | | | | |
| Interest rate derivatives | Other expense | | — | | | — | | | | | |
| | | | | | | | | |
| Foreign exchange contracts | Other income | | 91 | | | 47 | | | | | |
| | | | | | | | | |
| Net fair value gains/(losses) on derivative financial instruments | | $ | 485 | | | $ | 432 | | | | | |
(1) Includes interest rate locks with customers and forward commitments.
Fair Value Option
The Corporation has elected to measure mortgage loans held for sale at fair value. The following table presents a summary of mortgage loans held for sale and the impact of the fair value election on the consolidated financial statements as of the periods shown:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| | (dollars in thousands) |
Amortized cost (1) | $ | 6,362 | | | $ | 7,180 | |
| Fair value | 6,507 | | | 7,264 | |
(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 $0.1 million for the three months ended March 31, 2023 compared to losses of $1.1 million for the three months ended March 31, 2022.
Balance Sheet Offsetting
The fair values of interest rate derivative agreements and foreign exchange contracts the Corporation enters into with customers and dealer counterparties may be eligible for offset on the consolidated balance sheets if they are subject to master netting arrangements or similar agreements. The Corporation has elected to net its financial assets and liabilities designated as cash flow hedges when offsetting is permitted. The following table presents the 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) |
| March 31, 2023 | | | | | | | |
| Interest rate derivative assets | $ | 141,902 | | | $ | — | | | $ | — | | | $ | 141,902 | |
| | | | | | | |
| Foreign exchange derivative assets with correspondent banks | 435 | | | (435) | | | — | | | — | |
| Total | $ | 142,337 | | | $ | (435) | | | $ | — | | | $ | 141,902 | |
| | | | | | | |
| Interest rate derivative liabilities | $ | 231,032 | | | $ | (5,641) | | | $ | (96,102) | | | $ | 129,289 | |
| | | | | | | |
| Foreign exchange derivative liabilities with correspondent banks | 56 | | | (435) | | | — | | | (379) | |
| Total | $ | 231,088 | | | $ | (6,076) | | | $ | (96,102) | | | $ | 128,910 | |
| | | | | | | |
| December 31, 2022 | | | | | | | |
| Interest rate derivative assets | $ | 166,614 | | | $ | (8,071) | | | $ | — | | | $ | 158,543 | |
| Foreign exchange derivative assets with correspondent banks | 101 | | | (101) | | | — | | | — | |
| Total | $ | 166,715 | | | $ | (8,172) | | | $ | — | | | $ | 158,543 | |
| | | | | | | |
| Interest rate derivative liabilities | $ | 296,267 | | | $ | (2,771) | | | $ | (127,638) | | | $ | 165,858 | |
| Foreign exchange derivative liabilities with correspondent banks | 499 | | | (101) | | | — | | | 398 | |
| Total | $ | 296,766 | | | $ | (2,872) | | | $ | (127,638) | | | $ | 166,256 | |
(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 |
| Three months ended March 31, 2023 | (dollars in thousands) |
| Net unrealized income on securities | $ | 42,199 | | | $ | (9,558) | | | $ | 32,641 | |
| | | | | |
Reclassification adjustment for securities net change included in net income (1) | 23 | | | (5) | | | 18 | |
Amortization of net unrealized gains on AFS securities transferred to HTM (2) | 1,910 | | | (433) | | | 1,477 | |
Net unrealized holding losses arising during the period on interest rate derivatives used in cash flow hedges(3) | 12,535 | | | (17,748) | | | (5,213) | |
Reclassification adjustment for net change realized in net income on interest rate derivatives used in cash flow hedges(3) | 7,157 | | | (1,621) | | | 5,536 | |
Amortization of net unrecognized pension and postretirement items (4) | 32 | | | (7) | | | 25 | |
| Total Other Comprehensive Income | $ | 63,856 | | | $ | (29,372) | | | $ | 34,484 | |
| Three months ended March 31, 2022 | | | | | |
| Net unrealized losses on securities | $ | (199,068) | | | $ | 45,208 | | | $ | (153,860) | |
| | | | | |
Reclassification adjustment for securities net change included in net income (1) | 19 | | | (4) | | | 15 | |
Amortization of net unrealized gains on AFS securities transferred to HTM (2) | 564 | | | (128) | | | 436 | |
| Net unrealized holding losses arising during the period on interest rate derivatives used in cash flow hedges | (40,563) | | | 9,187 | | | (31,376) | |
| | | | | |
| Reclassification adjustment for net change realized in net income on interest rate derivatives used in cash flow hedges | (1,948) | | | 442 | | | (1,506) | |
Amortization of net unrecognized pension and postretirement items (4) | 32 | | | (7) | | | 25 | |
| Total Other Comprehensive Loss | $ | (240,964) | | | $ | 54,698 | | | $ | (186,266) | |
| | | | | |
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(1) 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.
(2) Amounts reclassified out of AOCI. Before-tax amounts included as a reduction to "Interest Income" on the Consolidated Statements of Income.
(3) Tax effect includes reversal of swap deferred tax benefit upon termination.
(4) 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.
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 March 31, 2023 | | | | | | | | | |
| Balance at December 31, 2022 | $ | (316,231) | | | $ | (61,776) | | | | | $ | (7,469) | | | $ | (385,476) | |
| OCI before reclassifications | 32,641 | | | — | | | | | — | | | 32,641 | |
| Amounts reclassified from AOCI | 18 | | | 323 | | | | | 25 | | | 366 | |
| Amortization of net unrealized losses on AFS securities transferred to HTM | 1,477 | | | — | | | | | — | | | 1,477 | |
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| Balance at March 31, 2023 | $ | (282,095) | | | $ | (61,453) | | | | | $ | (7,444) | | | $ | (350,992) | |
| Three months ended March 31, 2022 | | | | | | | | | |
| Balance at December 31, 2021 | $ | 40,441 | | | $ | (4,817) | | | | | $ | (8,213) | | | $ | 27,411 | |
| OCI before reclassifications | (153,860) | | | — | | | | | — | | | (153,860) | |
| Amounts reclassified from AOCI | 15 | | | (32,882) | | | | | 25 | | | (32,842) | |
| Amortization of net unrealized losses on AFS securities transferred to HTM | 436 | | | — | | | | | — | | | 436 | |
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| Balance at March 31, 2022 | $ | (112,968) | | | $ | (37,699) | | | | | $ | (8,188) | | | $ | (158,855) | |
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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:
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (dollars in thousands) |
| Loans held for sale | $ | — | | | $ | 6,507 | | | $ | — | | | $ | 6,507 | |
| Available for sale investment securities: | | | | | | | |
| | | | | | | |
| U.S. Government securities | 220,053 | | | — | | | — | | | 220,053 | |
| U.S. Government-sponsored agency securities | — | | | 1,017 | | | — | | | 1,017 | |
| State and municipal securities | — | | | 1,067,598 | | | — | | | 1,067,598 | |
| Corporate debt securities | — | | | 439,034 | | | — | | | 439,034 | |
| Collateralized mortgage obligations | — | | | 130,450 | | | — | | | 130,450 | |
| Residential mortgage-backed securities | — | | | 212,574 | | | — | | | 212,574 | |
| Commercial mortgage-backed securities | — | | | 571,663 | | | — | | | 571,663 | |
| | | | | | | |
| Total available for sale investment securities | 220,053 | | | 2,422,336 | | | — | | | 2,642,389 | |
| Other assets: | | | | | | | |
| Investments held in Rabbi Trust | 26,211 | | | — | | | — | | | 26,211 | |
| Derivative assets | 615 | | | 142,322 | | | — | | | 142,937 | |
| Total assets | $ | 246,879 | | | $ | 2,571,165 | | | $ | — | | | $ | 2,818,044 | |
| Other liabilities: | | | | | | | |
| Deferred compensation liabilities | $ | 26,211 | | | $ | — | | | $ | — | | | $ | 26,211 | |
| Derivative liabilities | 436 | | | 231,074 | | | — | | | 231,510 | |
| Total liabilities | $ | 26,647 | | | $ | 231,074 | | | $ | — | | | $ | 257,721 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (dollars in thousands) |
| Loans held for sale | $ | — | | | $ | 7,264 | | | $ | — | | | $ | 7,264 | |
| Available for sale investment securities: | | | | | | | |
| | | | | | | |
| U.S. Government securities | 218,485 | | | — | | | — | | | 218,485 | |
| U.S. Government sponsored agency securities | — | | | 1,008 | | | — | | | 1,008 | |
| State and municipal securities | — | | | 1,105,712 | | | — | | | 1,105,712 | |
| Corporate debt securities | — | | | 422,309 | | | — | | | 422,309 | |
| Collateralized mortgage obligations | — | | | 134,033 | | | — | | | 134,033 | |
| Residential mortgage-backed securities | — | | | 212,698 | | | — | | | 212,698 | |
| Commercial mortgage-backed securities | — | | | 552,522 | | | — | | | 552,522 | |
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| Total available for sale investment securities | 218,485 | | | 2,428,282 | | | — | | | 2,646,767 | |
| Other assets: | | | | | | | |
| Investments held in Rabbi Trust | 23,435 | | | — | | | — | | | 23,435 | |
| Derivative assets | 672 | | | 166,796 | | | — | | | 167,468 | |
| Total assets | $ | 242,592 | | | $ | 2,602,342 | | | $ | — | | | $ | 2,844,934 | |
| Other liabilities: | | | | | | | |
| Deferred compensation liabilities | $ | 23,435 | | | $ | — | | | $ | — | | | $ | 23,435 | |
| Derivative liabilities | 584 | | | 296,465 | | | — | | | 297,049 | |
| Total liabilities | $ | 24,019 | | | $ | 296,465 | | | $ | — | | | $ | 320,484 | |
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 March 31, 2023 and December 31, 2022 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.
•State and municipal securities/Collateralized mortgage obligations/Residential mortgage-backed securities/Commercial mortgage-backed securities – These debt securities are classified as Level 2. Fair values are determined by a third-party pricing service, as detailed above.
•Corporate debt securities – This category consists of subordinated debt and senior debt issued by financial institutions ($432.0 million at March 31, 2023 and $415.4 million at December 31, 2022) and other corporate debt issued by non-financial institutions ($7.0 million at March 31, 2023 and $6.9 million December 31, 2022).
Level 2 investments include subordinated debt and senior debt, and other corporate debt issued by non-financial institutions at March 31, 2023 and December 31, 2022. 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 ($0.6 million at March 31, 2023 and $0.7 million at December 31, 2022). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.
Level 2 assets, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($0.4 million at March 31, 2023 and $0.2 million at December 31, 2022) and the fair value of interest rate derivatives ($141.9 million at March 31, 2023 and $166.6 million at December 31, 2022). 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 ($0.4 million at March 31, 2023 and $0.6 million at December 31, 2022).
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 (nominal at March 31, 2023 and $0.2 million at December 31, 2022) and the fair value of interest rate derivatives ($231.0 million at March 31, 2023 and $296.3 million at December 31, 2022).
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:
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | (dollars in thousands) |
| Loans, net | $ | 113,799 | | | $ | 121,115 | |
| OREO | 3,304 | | | 5,790 | |
MSRs(1) | 47,223 | | | 50,044 | |
| Total assets | $ | 164,326 | | | $ | 176,949 | |
(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 March 31, 2023 valuation were 8.2% and 9.0%, 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 as of March 31, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Estimated Fair Value |
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total |
| (dollars in thousands) |
| FINANCIAL ASSETS | | | | | |
| Cash and cash equivalents | $ | 566,753 | | $ | 566,753 | | $ | — | | $ | — | | $ | 566,753 | |
| FRB and FHLB stock | 107,605 | | — | | 107,605 | | — | | 107,605 | |
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| Loans held for sale | 6,507 | | — | | 6,507 | | — | | 6,507 | |
| AFS securities | 2,642,389 | | 220,053 | | 2,422,336 | | — | | 2,642,389 | |
| HTM securities | 1,307,712 | | — | | 1,125,027 | | — | | 1,125,027 | |
| Loans, net | 20,391,493 | | — | | — | | 19,132,951 | | 19,132,951 | |
| Accrued interest receivable | 90,267 | | 90,267 | | — | | — | | 90,267 | |
| Other assets | 619,022 | | 426,173 | | 142,322 | | 50,527 | | 619,022 | |
| FINANCIAL LIABILITIES | | | | | |
| Demand and savings deposits | $ | 18,461,527 | | $ | 18,461,527 | | $ | — | | $ | — | | $ | 18,461,527 | |
| Brokered deposits | 960,919 | | 161,395 | | 798,376 | | — | | 959,771 | |
| Time deposits | 1,894,138 | | — | | 1,858,982 | | — | | 1,858,982 | |
| Accrued interest payable | 11,892 | | 11,892 | | — | | — | | 11,892 | |
| Federal funds purchased | 525,000 | | 525,000 | | — | | — | | 525,000 | |
| Federal Home Loan Bank advances | 747,000 | | 747,000 | | — | | — | | 747,000 | |
| Senior debt and subordinated debt | 539,814 | | — | | 468,896 | | — | | 468,896 | |
| Other borrowings | 634,956 | | 633,815 | | 1,095 | | — | | 634,910 | |
| Other liabilities | 409,353 | | 160,740 | | 231,074 | | 17,539 | | 409,353 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| | Estimated Fair Value |
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total |
| (dollars in thousands) |
| FINANCIAL ASSETS | | | | | |
| Cash and cash equivalents | $ | 681,921 | | $ | 681,921 | | $ | — | | $ | — | | $ | 681,921 | |
| FRB and FHLB stock | 130,186 | | — | | 130,186 | | — | | 130,186 | |
| Loans held for sale | 7,264 | | — | | 7,264 | | — | | 7,264 | |
| AFS securities | 2,646,767 | | 218,485 | | 2,428,282 | | — | | 2,646,767 | |
| HTM securities | 1,321,256 | | — | | 1,125,049 | | — | | 1,125,049 | |
| Loans, net | 20,010,181 | | — | | — | | 18,862,701 | | 18,862,701 | |
| Accrued interest receivable | 91,579 | | 91,579 | | — | | — | | 91,579 | |
| Other assets | 642,049 | | 419,419 | | 166,796 | | 55,834 | | 642,049 | |
| FINANCIAL LIABILITIES | | | | | |
| Demand and savings deposits | $ | 18,851,912 | | $ | 18,851,912 | | $ | — | | $ | — | | $ | 18,851,912 | |
| Brokered deposits | 208,416 | | 188,416 | | 25,085 | | — | | 213,501 | |
| Time deposits | 1,589,210 | | — | | 1,574,747 | | — | | 1,574,747 | |
| Accrued interest payable | 10,185 | | 10,185 | | — | | — | | 10,185 | |
| Federal funds purchased | 191,000 | | 190,998 | | — | | — | | 190,998 | |
| Federal Home Loan Bank advances | 1,250,000 | | 1,249,629 | | — | | — | | 1,249,629 | |
| Senior debt and subordinated debt | 539,634 | | — | | 456,867 | | — | | 456,867 | |
| Other borrowings | 890,573 | | 889,393 | | 1,180 | | — | | 890,573 | |
| Other liabilities | 467,705 | | 154,912 | | 296,465 | | 16,328 | | 467,705 | |
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:
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| 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 March 31, 2023, 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 are 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 March 31 | | |
| | 2023 | | 2022 | | | | |
| Weighted average shares outstanding (basic) | 166,605 | | | 160,588 | | | | | |
| Impact of common stock equivalents | 1,796 | | | 1,323 | | | | | |
| Weighted average shares outstanding (diluted) | 168,401 | | | 161,911 | | | | | |
| Per share: | | | | | | | |
| Basic | $ | 0.39 | | | $ | 0.38 | | | | | |
| Diluted | 0.39 | | | 0.38 | | | | | |
NOTE 11 – Stock-Based Compensation
The Corporation grants equity awards to employees in the form of stock options, 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. Compensation expense for PSUs is also recognized over the period during which employees are required to provide service in exchange for such awards, however, compensation expense may vary based on the expectations for actual performance relative to defined performance measures.
The Corporation also grants equity awards to non-employee members of its board of directors and the Bank 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 stock options, restricted stock, RSUs or common stock. Recent grants of equity awards under the Directors’ Plan have been limited to RSUs.
Equity awards under the Employee Equity Plan are generally granted annually and become fully vested over or after a three-year vesting period. The vesting period for non-performance-based awards represents the period during which employees are required to provide service in exchange for such awards. Equity awards under the Directors' Plan are generally granted annually and become fully vested after a one-year vesting period. Certain events, as defined in the Employee Equity Plan and the Directors' Plan, result in the acceleration of the vesting of equity awards.
Fair values for RSUs and a majority of PSUs are based on the trading price of the Corporation's stock on the date of grant and earn dividend equivalents during the vesting period, which are forfeitable if the awards do not vest. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant.
As of March 31, 2023, the Employee Equity Plan had approximately 5.0 million shares reserved for future grants through 2032, and the Directors’ Plan had approximately 44,000 shares reserved for future grants through 2029.
The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
| | | | | | | | | | | | | | | |
| Three months ended March 31 | | |
| | 2023 | | 2022 | | | | |
| | (dollars in thousands) |
| Compensation expense | $ | 1,668 | | | $ | 2,955 | | | | | |
| Tax benefit | (362) | | | (603) | | | | | |
| Total stock-based compensation, net of tax | $ | 1,306 | | | $ | 2,352 | | | | | |
NOTE 12 – Employee Benefit Plans
The net periodic pension cost for the Pension Plan consisted of the following components:
| | | | | | | | | | | | | | | |
| Three months ended March 31 | | |
| | 2023 | | 2022 | | | | |
| | (dollars in thousands) |
| | | | | | | |
| Interest cost | $ | 856 | | | $ | 598 | | | | | |
| Expected return on plan assets | (877) | | | (1,098) | | | | | |
| Net amortization and deferral | 80 | | | 163 | | | | | |
| Net periodic pension cost | $ | 59 | | | $ | (337) | | | | | |
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The components of the net benefit for the Postretirement Plan consisted of the following components:
| | | | | | | | | | | | | | | |
| Three months ended March 31 | | |
| | 2023 | | 2022 | | | | |
| | (dollars in thousands) |
| Interest cost | $ | 13 | | | $ | 8 | | | | | |
| | | | | | | |
| Net accretion and deferral | (136) | | | (131) | | | | | |
| Net periodic benefit | $ | (123) | | | $ | (123) | | | | | |
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 other comprehensive income.
NOTE 13 – Commitments and Contingencies
Commitments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its 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:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| | (dollars in thousands) |
| Commitments to extend credit | $ | 8,902,212 | | | $ | 8,695,621 | |
| Standby letters of credit | 258,922 | | | 260,829 | |
| Commercial letters of credit | 57,912 | | | 49,288 | |
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 March 31, 2023 and December 31, 2022, the total reserve for losses on residential mortgage loans sold was $1.4 million and $1.4 million, respectively, including reserves for both representation and warranty and credit loss exposures. In addition, a component of ACL - OBS credit exposures of $6.0 million and $6.0 million, as of March 31, 2023 and December 31, 2022, 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 14 – Borrowings
On March 16, 2022, $65.0 million of senior notes with a fixed rate of 3.60% were repaid upon their maturity.
The Corporation owned all of the common stock of the Columbia Bancorp Statutory Trust, Columbia Bancorp Statutory Trust II and Columbia Bancorp Statutory Trust III, each of which issued TruPS in conjunction with the Corporation issuing junior subordinated deferrable interest debentures to these trusts. In September 2022, the Corporation redeemed all of the outstanding junior subordinated deferrable interest debentures issued to these trusts, totaling approximately $17.2 million, and these trusts redeemed all of the outstanding TruPS in a like amount, after which the subsidiary trusts were canceled.