UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2024 , or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File No. 001-39680
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
(717 ) 291-2411
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | |||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value – 181,760,745 shares outstanding as of May 3, 2024.
1
FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2024
INDEX
| Description | Page | |||||||
| Glossary of Terms | ||||||||
| PART I. FINANCIAL INFORMATION | ||||||||
| (a) | ||||||||
| (b) | ||||||||
| (c) | ||||||||
| (d) | ||||||||
| (e) | ||||||||
| (f) | ||||||||
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||
Item 3. Defaults Upon Senior Securities - (not applicable) | ||||||||
| Item 4. Mine Safety Disclosures - (not applicable) | ||||||||
Item 5. Other Information | ||||||||
Note: Some numbers contained in the document may not sum due to rounding
2
| GLOSSARY OF DEFINED ACRONYMS AND TERMS | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 Repurchase Program | The authorization, commencing on January 1, 2024 and expiring on December 31, 2024, to repurchase up to $125 million of the Corporation's common stock; under this authorization, up to $25 million of the $125 million authorization may be used to repurchase the Corporation's preferred stock and outstanding subordinated notes | ||||||||||||||||||||||||||||||||||||||||||||||
| ACL | Allowance for credit losses | ||||||||||||||||||||||||||||||||||||||||||||||
| AFS | Available for sale | ||||||||||||||||||||||||||||||||||||||||||||||
| ALCO | Asset/Liability Management Committee | ||||||||||||||||||||||||||||||||||||||||||||||
| AOCI | Accumulated other comprehensive (loss) income | ||||||||||||||||||||||||||||||||||||||||||||||
| ASC | Accounting Standards Codification | ||||||||||||||||||||||||||||||||||||||||||||||
| ASU | Accounting Standards Update | ||||||||||||||||||||||||||||||||||||||||||||||
| BHCA | Bank Holding Company Act of 1956, as amended | ||||||||||||||||||||||||||||||||||||||||||||||
| bp or bps | Basis point(s) | ||||||||||||||||||||||||||||||||||||||||||||||
| Capital Rules | Regulatory capital requirements applicable to the Corporation and Fulton Bank | ||||||||||||||||||||||||||||||||||||||||||||||
| Corporation, Company, we, our or us | Fulton Financial Corporation | ||||||||||||||||||||||||||||||||||||||||||||||
| Directors' Plan | Amended and Restated 2023 Director Equity Plan | ||||||||||||||||||||||||||||||||||||||||||||||
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | ||||||||||||||||||||||||||||||||||||||||||||||
| Employee Equity Plan | 2022 Amended and Restated Equity and Cash Incentive Compensation Plan | ||||||||||||||||||||||||||||||||||||||||||||||
| ETR | Effective tax rate | ||||||||||||||||||||||||||||||||||||||||||||||
| Exchange Act | Securities Exchange Act of 1934, as amended | ||||||||||||||||||||||||||||||||||||||||||||||
| FASB | Financial Accounting Standards Board | ||||||||||||||||||||||||||||||||||||||||||||||
| FDIC | Federal Deposit Insurance Corporation | ||||||||||||||||||||||||||||||||||||||||||||||
| Federal Reserve Board | Board of Governors of the Federal Reserve System | ||||||||||||||||||||||||||||||||||||||||||||||
| FHLB | Federal Home Loan Bank | ||||||||||||||||||||||||||||||||||||||||||||||
| FOMC | Federal Open Market Committee | ||||||||||||||||||||||||||||||||||||||||||||||
| FRB | Federal Reserve Bank | ||||||||||||||||||||||||||||||||||||||||||||||
| FTE | Fully taxable-equivalent | ||||||||||||||||||||||||||||||||||||||||||||||
| Fulton Bank or the Bank | Fulton Bank, N.A. | ||||||||||||||||||||||||||||||||||||||||||||||
| GAAP | U.S. generally accepted accounting principles | ||||||||||||||||||||||||||||||||||||||||||||||
| HTM | Held to maturity | ||||||||||||||||||||||||||||||||||||||||||||||
| LIBOR | London Interbank Offered Rate | ||||||||||||||||||||||||||||||||||||||||||||||
| Management's Discussion | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||||||||||||||||||||||||||||||||||||||||
| Merger | The acquisition by the Corporation of Prudential Bancorp that was completed effective as of July 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| MSRs | Mortgage servicing rights | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loans | Loan and lease receivables (net of unearned income) | ||||||||||||||||||||||||||||||||||||||||||||||
| NIM | Net interest margin | ||||||||||||||||||||||||||||||||||||||||||||||
| N/M | Not meaningful | ||||||||||||||||||||||||||||||||||||||||||||||
| OBS | Off-balance-sheet | ||||||||||||||||||||||||||||||||||||||||||||||
| OCI | Other comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||
| OREO | Other real estate owned | ||||||||||||||||||||||||||||||||||||||||||||||
| Pension Plan | Defined Benefit Pension Plan | ||||||||||||||||||||||||||||||||||||||||||||||
| Postretirement Plan | Postretirement Benefits Plan | ||||||||||||||||||||||||||||||||||||||||||||||
| Prudential Bancorp | Prudential Bancorp, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||
| PSU | Performance-based restricted stock unit | ||||||||||||||||||||||||||||||||||||||||||||||
| Republic First Bank | Republic First Bank, doing business as Republic Bank | ||||||||||||||||||||||||||||||||||||||||||||||
3
| Republic First Assets and Liabilities | The assets acquired and liabilities assumed of Republic First Bank by Fulton Bank in connection with the Republic First Transaction. | ||||||||||||||||||||||||||||||||||||||||||||||
| Republic First Transaction | The acquisition of substantially all of the assets and assumption of substantially all of the deposits and certain liabilities of Republic First Bank by Fulton Bank from the FDIC, as receiver for Republic First Bank, as described further in “Note 13—Subsequent Events—Acquisition of all of the Assets and Assumption of all of the Deposits and Certain Liabilities of Republic First Bank from the FDIC." | ||||||||||||||||||||||||||||||||||||||||||||||
| RSU | Restricted stock unit | ||||||||||||||||||||||||||||||||||||||||||||||
| SBA | Small Business Administration | ||||||||||||||||||||||||||||||||||||||||||||||
| SEC | United States Securities and Exchange Commission | ||||||||||||||||||||||||||||||||||||||||||||||
| SOFR | Secured Overnight Financing Rate | ||||||||||||||||||||||||||||||||||||||||||||||
| TruPS | Trust Preferred Securities | ||||||||||||||||||||||||||||||||||||||||||||||
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition, results of operations and business. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends," "projects," the negative of these terms and other comparable terminology. These forward-looking statements may include projections of, or guidance on, the Corporation's future financial performance, expected levels of future expenses, including future credit losses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation's business or financial results.
Forward-looking statements are neither historical facts, nor assurance of future performance. Instead, the statements are based on current beliefs, expectations and assumptions regarding the future of the Corporation's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Corporation's control, and actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not unduly rely on any of these forward-looking statements. Any forward-looking statement is based only on information currently available and speaks only as of the date when made. In particular, statements about the fair value of the Republic First Assets and Liabilities are based on information provided to the Corporation by the FDIC, some of which has not been independently verified, and which is subject to change as the Corporation acquires additional information about the characteristics of the acquired assets and assumed liabilities. See “Item 1A. Risk Factors—Our assumptions regarding the fair value of Republic First Assets and Liabilities could be inaccurate which could materially and adversely affect our business, financial condition, results of operations, and future prospects.” Statements about the Corporation’s beliefs regarding the impact of the Republic First Transaction, including statements about the value of the assets acquired and the deposits and other liabilities assumed are subject to a number of factors, including the accuracy of the data provided by the FDIC with respect to the acquired assets and assumed liabilities in the Republic First Transaction, the accuracy of the Corporation’s projections with respect to factors, including with respect to future interest rates and allowances for credit losses, that may impact the value of the acquired assets and assumed liabilities, the ability of the Corporation to integrate the acquired assets, assumed liabilities, customers, systems and management personnel following the completion of the Republic First Transaction and the ability of the Corporation to manage costs (including in connection with potential future legal or regulatory costs incurred in connection with the Republic First Transaction) and achieve its projected synergies following the completion of the Republic First Transaction. See “Item 1A. Risk Factors—We may fail to realize the anticipated benefits of the Republic First Transaction” and “—We may incur unforeseen liabilities or losses in connection with the Republic First Transaction.” The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Many factors could affect future financial results including, without limitation:
•the impact of adverse conditions in the economy and financial markets, including increasing or elevated interest rates and elevated levels of inflation, on the performance of the Corporation's loan portfolio and demand for the Corporation's products and services;
•the potential impacts of recent events affecting the financial services industry on the Corporation, including increased competition for, and costs of, deposits and other funding sources, more stringent regulatory requirements relating to liquidity and interest rate risk management and capital adequacy and increased FDIC insurance expenses;
•the effects of actions by the federal government, including those of the Federal Reserve Board and other government agencies, that impact the money supply and market interest rates;
4
•the effects of market interest rates, and the relative balances of interest rate-sensitive assets to interest rate-sensitive liabilities, on NIM and net interest income;
•the composition of the Corporation's loan portfolio, including commercial mortgage loans, commercial and industrial loans and construction loans, which collectively represent a majority of the loan portfolio, may expose the Corporation to increased credit risk;
•the effects of changes in interest rates on demand for the Corporation's products and services;
•investment securities gains and losses, including declines in the fair value of securities which may result in changes to earnings or shareholders' equity;
•the effects of changes in interest rates or disruptions in liquidity markets on the Corporation's sources of funding;
•capital and liquidity strategies, including the Corporation's ability to comply with applicable capital and liquidity requirements, and the Corporation's ability to generate capital internally or raise capital on favorable terms;
•the effects of competition on deposit rates and growth, loan rates and growth and NIM;
•possible goodwill impairment charges;
•the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;
•the loss of, or failure to safeguard, confidential or proprietary information;
•the Corporation's failure to identify and adequately and promptly address cybersecurity risks, including data breaches and cyberattacks;
•the impact of failures from third-party vendors upon which the Corporation relies to perform in accordance with contractual arrangements and the effects of concerns about other financial institutions on the Corporation;
•the potential to incur losses in connection with repurchase and indemnification payments related to sold loans;
•the potential effects of climate change on the Corporation's business and results of operations;
•the potential effects of increases in non-performing assets, which may require the Corporation to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;
•the determination of the ACL, which depends significantly upon assumptions and judgments with respect to a variety of factors, including the performance of the loan portfolio, the weighted-average remaining lives of different classifications of loans within the loan portfolio and current and forecasted economic conditions, among other factors;
•the effects of the extensive level of regulation and supervision to which the Corporation and Fulton Bank are subject;
•changes in regulation and government policy, which could result in significant changes in banking and financial services regulation;
•the continuing impact of the Dodd-Frank Act on the Corporation's business and results of operations;
•the potential for negative consequences resulting from regulatory violations, investigations and examinations, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions, the need to undertake remedial actions and possible damage to the Corporation's reputation;
•the effects of adverse outcomes in litigation and governmental or administrative proceedings;
•the effects of changes in U.S. federal, state or local tax laws;
•the effects of the significant amounts of time and expense associated with regulatory compliance and risk management;
•completed and potential acquisitions, including but not limited to the Republic First Transaction, may affect costs and the Corporation may not be able to successfully integrate the acquired business or realize the anticipated benefits from such acquisitions;
•the possibility that the anticipated benefits of the Republic First Transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or challenges arising from, the integration of the acquired assets and assumed liabilities into the Corporation, potential adverse reactions or changes to business or employee relationships, or as a result of other unexpected factors or events;
•the Corporation's ability to successfully integrate into the Corporation's operations any assumed assets, liabilities, customers, systems, and management personnel the Corporation may acquire in connection with the Republic First Transaction, which may result in a disruption to the Corporation’s business;
•changes in the estimated fair value of the Republic First Assets and Liabilities in connection with the Republic First Transaction;
•the possibility of increased scrutiny by, and/or additional regulatory requirements of, governmental authorities as a result of the Republic First Transaction;
•potential exposure to unknown or contingent risks and liabilities the Corporation has acquired, or may acquire, or target for acquisition, including in connection with the purchase and assumption of certain assets and liabilities in connection with the Republic First Transaction;
•geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, including the war between Russia and Ukraine and
5
escalating conflict in the Middle East, which could impact business and economic conditions in the United States and abroad;
•public health crises and pandemics and their effects on the economic and business environments in which the Corporation operates, including on the Corporation's credit quality and business operations, as well as the impact on general economic and financial market conditions;
•the Corporation's ability to achieve its growth plans;
•the Corporation's ability to attract and retain talented personnel;
•the effects of competition from financial service companies and other companies offering bank services;
•the Corporation's ability to keep pace with technological changes;
•the Corporation's reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions;
•the effects of negative publicity on the Corporation's reputation; and
•other factors that may affect future results of the Corporation.
6
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per-share data)
| March 31, 2024 | December 31, 2023 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Interest-bearing deposits with other banks | |||||||||||
| Cash and cash equivalents | |||||||||||
| FRB and FHLB stock | |||||||||||
| Loans held for sale | |||||||||||
| Investment securities | |||||||||||
| AFS, at estimated fair value | |||||||||||
| HTM, at amortized cost | |||||||||||
| Net loans | |||||||||||
| Less: ACL - loans | ( | ( | |||||||||
| Loans, net | |||||||||||
| Net premises and equipment | |||||||||||
| Accrued interest receivable | |||||||||||
| Goodwill and net intangible assets | |||||||||||
| Other assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Deposits: | |||||||||||
| Noninterest-bearing | $ | $ | |||||||||
| Interest-bearing | |||||||||||
| Total Deposits | |||||||||||
| Borrowings: | |||||||||||
| Federal funds purchased | |||||||||||
| Federal Home Loan Bank advances | |||||||||||
| Senior debt and subordinated debt | |||||||||||
| Other borrowings | |||||||||||
| Total Borrowings | |||||||||||
| Accrued interest payable | |||||||||||
| Other liabilities | |||||||||||
| Total Liabilities | $ | $ | |||||||||
| SHAREHOLDERS' EQUITY | |||||||||||
Preferred stock, no par value, | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, at cost, | ( | ( | |||||||||
| Total Shareholders' Equity | |||||||||||
| Total Liabilities and Shareholders' Equity | $ | $ | |||||||||
| See Notes to Consolidated Financial Statements | |||||||||||
7
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| (dollars in thousands, except per-share data) | Three months ended March 31 | ||||||||||
| 2024 | 2023 | ||||||||||
| Interest Income | |||||||||||
| Loans, including fees | $ | $ | |||||||||
| Investment securities | |||||||||||
| Other interest income | |||||||||||
| Total Interest Income | |||||||||||
| Interest Expense | |||||||||||
| Deposits | |||||||||||
| Federal funds purchased | |||||||||||
| Federal Home Loan Bank advances | |||||||||||
| Senior debt and subordinated debt | |||||||||||
| Other borrowings and interest-bearing liabilities | |||||||||||
| Total Interest Expense | |||||||||||
| Net Interest Income | |||||||||||
| Provision for credit losses | |||||||||||
| Net Interest Income After Provision for Credit Losses | |||||||||||
| Non-Interest Income | |||||||||||
| Wealth management | |||||||||||
| Commercial banking | |||||||||||
| Consumer banking | |||||||||||
| Mortgage banking | |||||||||||
| Other | |||||||||||
| Non-Interest Income Before Investment Securities (Losses) Gains, Net | |||||||||||
| Investment securities gains, net | |||||||||||
| Total Non-Interest Income | |||||||||||
| Non-Interest Expense | |||||||||||
| Salaries and employee benefits | |||||||||||
| Data processing and software | |||||||||||
| Net occupancy | |||||||||||
| Other outside services | |||||||||||
| FDIC insurance | |||||||||||
| Equipment | |||||||||||
| Professional fees | |||||||||||
| Marketing | |||||||||||
| Intangible amortization | |||||||||||
| Other | |||||||||||
| Total Non-Interest Expense | |||||||||||
| Income Before Income Taxes | |||||||||||
| Income taxes | |||||||||||
| Net Income | |||||||||||
| Preferred stock dividends | ( | ( | |||||||||
| Net Income Available to Common Shareholders | $ | $ | |||||||||
| PER SHARE: | |||||||||||
| Net income available to common shareholders (basic) | $ | $ | |||||||||
| Net income available to common shareholders (diluted) | |||||||||||
| Cash dividends | |||||||||||
| See Notes to Consolidated Financial Statements | |||||||||||
8
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
| Three months ended March 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| Net Income | $ | $ | |||||||||
| Other Comprehensive Income/(Loss), net of tax: | |||||||||||
| Unrealized (losses) gains on AFS investment securities | |||||||||||
| Net unrealized holding (losses) gains | ( | ||||||||||
| Reclassification adjustment for securities net change realized in net income | |||||||||||
| Amortization of net unrealized gains on AFS securities transferred to HTM | |||||||||||
| Net unrealized (losses) gains on AFS investment securities | ( | ||||||||||
| Unrealized gains (losses) on interest rate derivatives used in cash flow hedges | |||||||||||
| Net unrealized holding gains (losses) | ( | ||||||||||
| Reclassification adjustment for net change realized in net income | |||||||||||
| Net unrealized gains on interest rate derivatives used in cash flow hedges | |||||||||||
| Defined benefit pension plan and postretirement benefits | |||||||||||
| Amortization of net unrecognized pension and postretirement items | ( | ||||||||||
| Other Comprehensive (Loss) Income | ( | ||||||||||
| Total Comprehensive Income | $ | $ | |||||||||
| See Notes to Consolidated Financial Statements | |||||||||||
9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except per-share data)
| Preferred Stock | Common Stock | Additional | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares Outstanding | Amount | Shares Outstanding | Amount | Paid-in Capital | |||||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended March 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued(1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend reinvestment activity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation awards (repurchases) | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of treasury stock | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividend | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends - $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Three months ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued(1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend reinvestment activity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation awards (repurchases) | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of treasury stock | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividend | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends - $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||
| See Notes to Consolidated Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Issuance of common stock includes issuance in connection with the Corporation’s Employee Stock Purchase Plan and exercised stock options.
10
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| (dollars in thousands) | Three months ended March 31 | ||||||||||
| 2024 | 2023 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Provision for credit losses | |||||||||||
| Depreciation and amortization of premises and equipment | |||||||||||
| Net amortization of investment securities premiums | |||||||||||
| Investment securities gains, net | ( | ||||||||||
| Gain on sales of mortgage loans held for sale | ( | ( | |||||||||
| Proceeds from sales of mortgage loans held for sale | |||||||||||
| Originations of mortgage loans held for sale | ( | ( | |||||||||
| Intangible amortization | |||||||||||
| Amortization of issuance costs and discounts on long-term borrowings | |||||||||||
| Loss on disposal of premises and equipment | |||||||||||
| Stock-based compensation | |||||||||||
| Net change in deferred federal income tax | ( | ||||||||||
| Net change in accrued salaries and benefits | ( | ( | |||||||||
| Net change in life insurance cash surrender value | ( | ( | |||||||||
| Other changes, net | ( | ||||||||||
| Total adjustments | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Proceeds from sales of AFS securities | |||||||||||
| Proceeds from principal repayments and maturities of AFS securities | |||||||||||
| Proceeds from principal repayments and maturities of HTM securities | |||||||||||
| Purchase of AFS securities | ( | ( | |||||||||
| Net change in FRB and FHLB stock | |||||||||||
| Net change in loans | ( | ( | |||||||||
| Net purchases of premises and equipment | ( | ( | |||||||||
| Settlement of bank-owned life insurance | |||||||||||
| Net change in tax credit investments | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Net change in demand and savings deposits | ( | ( | |||||||||
| Net change in time deposits and brokered deposits | |||||||||||
| Net change in other borrowings | ( | ( | |||||||||
| Net proceeds from issuance of common stock | |||||||||||
| Dividends paid | ( | ( | |||||||||
| Acquisition of treasury stock | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Net decrease in Cash and Cash Equivalents | ( | ( | |||||||||
| Cash and Cash Equivalents at Beginning of Period | |||||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | |||||||||
| Supplemental Disclosures of Cash Flow Information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes | |||||||||||
| Supplemental Schedule of Certain Noncash Activities: | |||||||||||
| Unsettled maturities of AFS securities | $ | $ | |||||||||
| See Notes to Consolidated Financial Statements | |||||||||||
11
FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 – Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of the Corporation have been prepared in conformity with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2023. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. The Corporation evaluates subsequent events through the date of filing of this Quarterly Report on Form 10-Q with the SEC for potential recognition or disclosure in the Consolidated Financial Statements.
Significant Accounting Policies
The significant accounting policies used in preparation of the Consolidated Financial Statements are disclosed in the Corporation's 2023 Annual Report on Form 10-K. Those significant accounting policies are unchanged at March 31, 2024.
Recently Adopted Accounting Standards
In June 2022, FASB issued ASU 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions ("ASU 2022-03"). This update clarifies how the fair value of equity securities subject to contractual sale restrictions is determined and requires additional qualitative and quantitative disclosures for equity securities with contractual sale restrictions. The Corporation adopted ASU 2022-03 on January 1, 2024, and it did not have a material impact on its consolidated financial statements.
In March 2023, FASB issued ASU 2023-01 Leases (Topic 842): Common Control Arrangements ("ASU 2023-01"). This update clarifies guidance for leases between related parties under common control. The Corporation adopted ASU 2023-01 on January 1, 2024, and it did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Standards
In November 2023, FASB issued ASU 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-04"). This update requires public entities with reportable segments to provide additional and more detailed disclosures. The Corporation will adopt ASU 2023-07 on December 15, 2024. The Corporation is not currently required to report segment information and, as such, does not expect the adoption of ASU 2023-07 to have an impact on its consolidated financial statements.
In December 2023, FASB issued ASU 2023-08 Intangibles - Goodwill and Other - Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets ("ASU 2023-08"). This update provides guidance for crypto assets to be carried at fair value and requires additional disclosures. The Corporation will adopt ASU 2023-08 on January 1, 2025. The Corporation does not expect the adoption of ASU 2023-08 to have an impact on its consolidated financial statements. The Corporation currently does not hold crypto assets.
In December 2023, FASB issued ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). This update requires companies to disclose specific categories in the income tax rate reconciliation and requires additional information for certain reconciling items. The Corporation will adopt ASU 2023-09 on January 1, 2025. The Corporation does not expect the adoption of ASU 2023-09 to have an impact on its consolidated financial statements.
In March 2024, FASB issued ASU 2024-01 Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards ("ASU 2024-01"). This update provides guidance for profits interest and similar awards. The Corporation will adopt ASU 2024-01 on January 1, 2025. The Corporation does not expect the adoption of ASU 2024-01 to have a material impact on its consolidated financial statements.
12
In March 2024, FASB issued ASU 2024-02 Codification Improvements - Amendments to Remove References to the Concepts Statements ("ASU 2024-02"). This update contains amendments that remove references to various Concepts Statements. The Corporation will adopt ASU 2024-02 on January 1, 2025. The Corporation does not expect the adoption of ASU 2024-02 to have an impact on its consolidated financial statements.
Reclassifications
NOTE 2 – 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, 2024 and December 31, 2023 were $11.0 million and $17.4 million, respectively.
NOTE 3 – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities:
| March 31, 2024 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| Available for Sale | (dollars in thousands) | ||||||||||||||||||||||
| U.S. Government-sponsored agency securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| State and municipal securities | ( | ||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| Collateralized mortgage obligations | ( | ||||||||||||||||||||||
| Residential mortgage-backed securities | ( | ||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| Held to Maturity | |||||||||||||||||||||||
| Residential mortgage-backed securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial mortgage-backed securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
13
| December 31, 2023 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||
| Available for Sale | (dollars in thousands) | ||||||||||||||||||||||
| U.S. Government securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| U.S. Government-sponsored agency securities | ( | ||||||||||||||||||||||
| State and municipal securities | ( | ||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| Collateralized mortgage obligations | ( | ||||||||||||||||||||||
| Residential mortgage-backed securities | ( | ||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| Held to Maturity | |||||||||||||||||||||||
| Residential mortgage-backed securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial mortgage-backed securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
Securities carried at $0.6 billion and $0.4 billion at March 31, 2024 and December 31, 2023, respectively, were pledged as collateral to secure public and trust deposits.
The amortized cost and estimated fair values of debt securities as of March 31, 2024, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay with or without call or prepayment penalties.
| March 31, 2024 | ||||||||||||||||||||||||||
| Available for Sale | Held to Maturity | |||||||||||||||||||||||||
| Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||
| Due in one year or less | $ | $ | $ | $ | ||||||||||||||||||||||
| Due from one year to five years | ||||||||||||||||||||||||||
| Due from five years to ten years | ||||||||||||||||||||||||||
| Due after ten years | ||||||||||||||||||||||||||
Residential mortgage-backed securities(1) | ||||||||||||||||||||||||||
Commercial mortgage-backed securities(1) | ||||||||||||||||||||||||||
Collateralized mortgage obligations(1) | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
(1) Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the
underlying loans.
The following table presents information related to gross realized gains and losses on the sales of securities:
| Gross Realized Gains | Gross Realized Losses | Net Gains (Losses) | |||||||||||||||
| Three months ended | (dollars in thousands) | ||||||||||||||||
| March 31, 2024 | $ | $ | $ | ||||||||||||||
| March 31, 2023 | ( | ||||||||||||||||
14
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:
| March 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Number of Securities | Estimated Fair Value | Unrealized Losses | Number of Securities | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||
| Available for Sale | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government-sponsored agency securities | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||
| State and municipal securities | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Total available for sale | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
| Held to Maturity | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Total held to maturity | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Number of Securities | Estimated Fair Value | Unrealized Losses | Number of Securities | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||
| Available for Sale | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government Securities | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||
| U.S. Government-sponsored agency securities | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| State and municipal securities | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Total available for sale | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
| Held to Maturity | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Total held to maturity | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||
The Corporation's collateralized mortgage obligations, residential mortgage-backed securities and commercial mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The change in fair value of these securities is attributable to changes in interest rates and not credit quality. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. Therefore, the Corporation does not have an ACL for these investments as of March 31, 2024 and December 31, 2023.
As of March 31, 2024 and December 31, 2023, no ACL was required for the Corporation's state and municipal securities. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
15
NOTE 4 - 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, 2024 | December 31, 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Real estate - commercial mortgage | $ | $ | |||||||||
Commercial and industrial(1) | |||||||||||
| Real-estate - residential mortgage | |||||||||||
| Real-estate - home equity | |||||||||||
| Real-estate - construction | |||||||||||
| Consumer | |||||||||||
Leases and other loans(2) | |||||||||||
| Net loans | $ | $ | |||||||||
(1) Includes no unearned income for March 31, 2024 and $41.0 thousand at December 31, 2023.
(2) Includes unearned income of $38.0
Allowance for Credit Losses
The ACL consists of reserves against loans that have been evaluated collectively and individually for expected credit losses. The ACL represents an estimate of expected credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to net loans. The ACL is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries. The reserve for OBS credit exposures includes estimated losses on unfunded loan commitments, letters of credit and other OBS credit exposures.
The following table summarizes the ACL - loans balance and the reserve for OBS credit exposures balance:
| March 31, 2024 | December 31, 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| ACL - loans | $ | $ | |||||||||
Reserve for OBS credit exposures(1) | $ | $ | |||||||||
(1) Included in other liabilities on the consolidated balance sheets.
16
The following table presents the activity in the ACL - loans balances:
| Three months ended March 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Loans charged off | ( | ( | |||||||||
| Recoveries of loans previously charged off | |||||||||||
| Net loans (charged off) recovered | ( | ( | |||||||||
Provision for credit losses(1) | |||||||||||
| Balance at end of period | |||||||||||
| Provision for OBS credit exposures | ( | ||||||||||
| Reserve for OBS credit exposures | $ | $ | |||||||||
(1) Provision only includes the portion related to net loans.
The following table presents the activity in the ACL by portfolio segment:
| Real Estate Commercial Mortgage | Commercial and Industrial | Real Estate Residential Mortgage | Consumer and Home Equity | Real Estate Construction | Leases and other loans | Total | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Three months ended March 31, 2024 | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Loans charged off | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Recoveries of loans previously charged off | |||||||||||||||||||||||||||||||||||||||||
| Net loans (charged off) recovered | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||
Provision for loan losses(1) | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Three months ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Loans charged off | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||
| Recoveries of loans previously charged off | |||||||||||||||||||||||||||||||||||||||||
| Net loans (charged off) recovered | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
Provision for loan and lease losses(1) | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
The ACL may include qualitative adjustments intended to capture the impact of uncertainties not reflected in the quantitative models. In determining qualitative adjustments, management considers changes in national, regional, and local economic and business conditions and their impact on the lending environment, including underwriting standards and other factors affecting credit losses over the remaining life of each loan.
The increases in ACL - loans for the first quarter of 2024 were related to loan growth and risk migration.
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 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, agricultural land, and vacant land.
17
All loans individually evaluated for impairment are measured for losses on a quarterly basis. As of March 31, 2024 and December 31, 2023, substantially all of the Corporation's individually evaluated loans with total commitments greater than or equal to $1.0
As of March 31, 2024 and December 31, 2023, approximately 84 % and 78 %, respectively, of loans evaluated individually for impairment with principal balances greater than or equal to $1.0 million, whose primary collateral consisted of real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated in the preceding 12 months.
Non-accrual Loans
The following table presents total non-accrual loans, by class segment:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| With a Related Allowance | Without a Related Allowance | Total | With a Related Allowance | Without a Related Allowance | Total | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Real estate - commercial mortgage | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commercial and industrial | |||||||||||||||||||||||||||||||||||
| Real estate - residential mortgage | |||||||||||||||||||||||||||||||||||
| Real estate - home equity | |||||||||||||||||||||||||||||||||||
| Real estate - construction | |||||||||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
| Leases and other loans | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
As of March 31, 2024 and December 31, 2023, there were $52.7 million and $52.8 million, respectively, of non-accrual loans that did not have a specific valuation allowance within the ACL. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.
Asset Quality
Maintaining an appropriate ACL is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, commercial and industrial, and commercial real estate, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk categories is a significant component of the ACL methodology for these loans, which bases the 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.
18
The following table summarizes designated internal risk rating categories by portfolio segment and loan class, by origination year, in the current period:
| March 31, 2024 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | ||||||||||||||||||||||||||||||
| Amortized | Amortized | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Cost Basis | Cost Basis | Total | ||||||||||||||||||||||||
| Real estate - commercial mortgage | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||
| Total real estate - commercial mortgage | ||||||||||||||||||||||||||||||||
| Real estate - commercial mortgage | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||
| Total commercial and industrial | ||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ( | |||||||||||||||||||||||||||||
Real estate - construction(1) | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||
| Total real estate - construction | ||||||||||||||||||||||||||||||||
Real estate - construction(1) | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
(1) Excludes real estate - construction - other.
19
The following table summarizes designated internal risk rating categories by portfolio segment and loan class, by origination year, in the prior period:
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | ||||||||||||||||||||||||||||||
| Amortized | Amortized | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | Cost Basis | Total | ||||||||||||||||||||||||
| Real estate - commercial mortgage | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||
| Total real estate - commercial mortgage | ||||||||||||||||||||||||||||||||
| Real estate - commercial mortgage | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ( | |||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||
| Total commercial and industrial | ||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||
Real estate - construction(1) | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||
| Total real estate - construction | ||||||||||||||||||||||||||||||||
Real estate - construction(1) | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
(1) Excludes real estate - construction - other.
20
The Corporation considers the performance of the loan portfolio and its impact on the ACL. The Corporation does not assign internal risk ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, construction loans to individuals secured by residential real estate, consumer and other loans. For these loans, the most relevant credit quality indicator is delinquency status and the Corporation evaluates credit quality based on the aging status of the loan. The following tables present the amortized cost of these loans based on payment activity, by origination year, for the periods shown:
| March 31, 2024 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | ||||||||||||||||||||||||||||||
| Amortized | Amortized | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Cost Basis | Cost Basis | Total | ||||||||||||||||||||||||
| Real estate - residential mortgage | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total real estate - residential mortgage | ||||||||||||||||||||||||||||||||
| Real estate - residential mortgage | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ||||||||||||||||||||||||||||||
| Consumer and real estate - home equity | ||||||||||||||||||||||||||||||||
| Performing | ||||||||||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total consumer and real estate - home equity | ||||||||||||||||||||||||||||||||
| Consumer and real estate - home equity | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ( | |||||||||||||||||||||||||||||
| Leases and other loans | ||||||||||||||||||||||||||||||||
| Performing | ||||||||||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Leases and other loans | ||||||||||||||||||||||||||||||||
| Leases and other loans | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
| Construction - other | ||||||||||||||||||||||||||||||||
| Performing | ||||||||||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total construction - other | ||||||||||||||||||||||||||||||||
| Construction - other | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
21
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans converted to Term Loans | ||||||||||||||||||||||||||||||
| Amortized | Amortized | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | Cost Basis | Total | ||||||||||||||||||||||||
| Real estate - residential mortgage | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total real estate - residential mortgage | ||||||||||||||||||||||||||||||||
| Real estate - residential mortgage | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ||||||||||||||||||||||||||||||
| Consumer and Real estate - home equity | ||||||||||||||||||||||||||||||||
| Performing | ||||||||||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total consumer and real estate - home equity | ||||||||||||||||||||||||||||||||
| Consumer and Real estate - home equity | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||
| Leases and other loans | ||||||||||||||||||||||||||||||||
| Performing | ||||||||||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Leases and other loans | ||||||||||||||||||||||||||||||||
| Leases and other loans | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ( | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||
| Construction - other | ||||||||||||||||||||||||||||||||
| Performing | ||||||||||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total construction - other | ||||||||||||||||||||||||||||||||
| Construction - other | ||||||||||||||||||||||||||||||||
| Current period gross charge-offs | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
22
The following table presents non-performing assets:
| March 31, 2024 | December 31, 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Non-accrual loans | $ | $ | |||||||||
| Loans 90 days or more past due and still accruing | |||||||||||
| Total non-performing loans | |||||||||||
OREO(1) | |||||||||||
| Total non-performing assets | $ | $ | |||||||||
(1) Excludes $19.0 million and $10.9 million of residential mortgage properties for which formal foreclosure proceedings were in process as of March 31,
2024 and December 31, 2023, respectively.
The following tables present the aging of the amortized cost basis of loans, by class segment:
| 30-59 | 60-89 | ≥ 90 Days | |||||||||||||||||||||||||||||||||
| Days Past | Days Past | Past Due | Non- | ||||||||||||||||||||||||||||||||
| Due | Due | and Accruing | Accrual | Current | Total | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| March 31, 2024 | |||||||||||||||||||||||||||||||||||
| Real estate - commercial mortgage | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Commercial and industrial(1) | |||||||||||||||||||||||||||||||||||
| Real estate - residential mortgage | |||||||||||||||||||||||||||||||||||
| Real estate - home equity | |||||||||||||||||||||||||||||||||||
| Real estate - construction | |||||||||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
Leases and other loans(1) | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(1) Includes unearned income.
| 30-59 Days Past Due | 60-89 Days Past Due | ≥ 90 Days Past Due and Accruing | Non- accrual | Current | Total | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Real estate - commercial mortgage | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Commercial and industrial(1) | |||||||||||||||||||||||||||||||||||
| Real estate - residential mortgage | |||||||||||||||||||||||||||||||||||
| Real estate - home equity | |||||||||||||||||||||||||||||||||||
| Real estate - construction | |||||||||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
Leases and other loans(1) | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(1) Includes unearned income.
Loan Modifications to Borrowers Experiencing Financial Difficulty
The Corporation modifies loans by providing a concession when deemed appropriate. Depending on the circumstances, a term extension, interest rate reduction or principal forgiveness may be granted. In certain instances a combination of concessions may be provided to a borrower.
23
When principal forgiveness is provided, the amount of principal forgiven is deemed to be uncollectible and the amortized cost basis of the loan is reduced by the amount of the forgiven portion, with a corresponding reduction to the ACL.
The following table presents the amortized cost basis of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:
| Term Extension | ||||||||||||||||||||
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||||||||||||||
| Amortization Cost Basis | % of Class of Financing Receivable | Amortization Cost Basis | % of Class of Financing Receivable | |||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Real estate - commercial mortgage | $ | % | $ | % | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Real estate - residential mortgage | ||||||||||||||||||||
| Real estate - construction | ||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||
| Interest Rate Reduction and Term Extension | ||||||||||||||||||||
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||||||||||||||
| Amortized Cost Basis | % of Class of Financing Receivable | Amortized Cost Basis | % of Class of Financing Receivable | |||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Real estate - residential mortgage | $ | % | $ | % | ||||||||||||||||
| Total | $ | $ | ||||||||||||||||||
The following table presents the financial effect of the modifications made to borrowers experiencing financial difficulty:
| Term Extension | |||||||||||||||||||||||
| Financial Effect | |||||||||||||||||||||||
| Three months ended March 31, 2024 | |||||||||||||||||||||||
| Real estate - residential mortgage | Added a weighted-average | ||||||||||||||||||||||
| Real estate - construction | Added a weighted-average | ||||||||||||||||||||||
| Three months ended March 31, 2023 | |||||||||||||||||||||||
| Real estate - commercial mortgage | Added a weighted-average | ||||||||||||||||||||||
| Commercial and industrial | Added a weighted-average | ||||||||||||||||||||||
| Real estate - residential mortgage | Added a weighted-average | ||||||||||||||||||||||
Interest Rate Reduction1 | |||||
| Financial Effect | |||||
| Three months ended March 31, 2024 | |||||
| Real estate - residential mortgage | Reduced weighted-average interest rate from | ||||
1 There were no loan modifications with interest rate reductions for the three months ended March 31, 2023.
24
During the three months ended March 31, 2024 and 2023, there were no loans modified due to financial difficulty where there was a principal balance forgiveness.
The following table presents the performance of loans that have been modified due to financial difficulty in the previous 12 months:
| 30-89 | 90+ | Total | |||||||||||||||||||||
| Days Past | Past Due | Past | |||||||||||||||||||||
| Current | Due | and Accruing | Due | ||||||||||||||||||||
| March 31, 2024 | (dollars in thousands) | ||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | |||||||||||||||||||
| Real estate - residential mortgage | |||||||||||||||||||||||
| Real estate - construction | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
NOTE 5 – 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 | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Amortized cost: | |||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Originations of MSRs | |||||||||||
| Amortization | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
| Valuation allowance: | |||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Reduction (addition) to valuation allowance | |||||||||||
| Balance at end of period | $ | $ | |||||||||
| Net MSRs at end of period | $ | $ | |||||||||
| Estimated fair value of MSRs at end of period | $ | $ | |||||||||
MSRs represent the economic value of contractual rights to service mortgage loans that have been sold. The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $4.0 billion and $4.1 billion as of March 31, 2024 and December 31, 2023, respectively. Actual and expected prepayments of the underlying mortgage loans can impact the fair values of the MSRs. The Corporation accounts for MSRs at the lower of amortized cost or fair value.
The fair value of MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The fair values of MSRs were $51.2 49.7 million as of March 31, 2024 and December 31, 2023, respectively. Based on its fair value analysis as of March 31, 2024, the Corporation determined that no valuation allowance was required as of March 31, 2024.
25
NOTE 6 – Derivative Financial Instruments
The Corporation uses derivatives to manage its exposure to certain market risk, including interest rate and foreign currency risks, and to assist customers with their risk management objectives. Certain of the Corporation's outstanding derivative contracts are designated as hedges, and none are entered into for speculative purposes. The Corporation enters into derivative contracts that are intended to economically hedge certain of its risks, even if hedge accounting does not apply or the Corporation elects not to apply hedge accounting.
In January 2023, the Corporation terminated interest rate derivatives designated as cash flow hedges with a combined notional amount of $1.0 billion. As the hedged transaction continues to be probable, the original unrealized loss of $70.6 million included in AOCI will be recognized as a reduction to interest income when the previously forecasted hedged item affects earnings in future periods. During the three months ended March 31, 2024, $7.0 million of these unrealized losses have been reclassified as a reduction of interest income on loans, including fees, on the Corporation's consolidated statements of income.
In the third quarter of 2023, the Corporation transitioned certain of the Corporation's legacy commercial customer back-to-back interest rate swap transactions from LIBOR to SOFR. For the three months ended March 31, 2024, the increase to other non-interest income to reflect market valuation movements from the transition from LIBOR to SOFR was $0.2 million. For the year ended December 31, 2023, the full-year reduction to other non-interest income related to the transition from LIBOR to SOFR was $1.9 million.
For additional information on our derivative accounting policies see Note 1 "Summary of Significant Accounting Policies" in our 2023 Annual Report on Form 10-K.
26
The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Notional Amount | Asset (Liability) Fair Value | Notional Amount | Asset (Liability) Fair Value | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest Rate Locks with Customers | |||||||||||||||||||||||
| Positive fair values | $ | $ | $ | $ | |||||||||||||||||||
| Negative fair values | ( | ( | |||||||||||||||||||||
| Forward Commitments | |||||||||||||||||||||||
| Positive fair values | |||||||||||||||||||||||
| Negative fair values | ( | ||||||||||||||||||||||
| Interest Rate Derivatives with Customers | |||||||||||||||||||||||
| Positive fair values | |||||||||||||||||||||||
| Negative fair values | ( | ( | |||||||||||||||||||||
Interest Rate Derivatives with Dealer Counterparties(1) | |||||||||||||||||||||||
| Positive fair values | |||||||||||||||||||||||
| Negative fair values | ( | ( | |||||||||||||||||||||
| Interest Rate Derivatives used in Cash Flow Hedges | |||||||||||||||||||||||
| Positive fair values | |||||||||||||||||||||||
| Negative fair values | ( | ||||||||||||||||||||||
| Foreign Exchange Contracts with Customers | |||||||||||||||||||||||
| Positive fair values | |||||||||||||||||||||||
| Negative fair values | ( | ( | |||||||||||||||||||||
| Foreign Exchange Contracts with Correspondent Banks | |||||||||||||||||||||||
| Positive fair values | |||||||||||||||||||||||
| Negative fair values | ( | ( | |||||||||||||||||||||
(1) Fair Values are net of a valuation allowance of $366.3 thousand as of March 31, 2024 and December 31, 2023.
The following table presents the effect of cash flow hedge accounting on AOCI:
| Amount of Gain (Loss) Recognized in OCI on Derivative | Amount of Gain (Loss) Recognized in OCI Included Component | Amount of Gain (Loss) Recognized in OCI Excluded Component | Location of Gain (Loss) Recognized from AOCI into Income | Amount of Gain (Loss) Reclassified from AOCI into Income | Amount of Gain (Loss) Reclassified from AOCI into Income Included Component | Amount of Gain (Loss) Reclassified from AOCI into Income Excluded Component | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Three months ended March 31, 2024 | |||||||||||||||||||||||||||||||||||||||||
| Interest Rate Products | $ | ( | $ | ( | $ | Interest Income | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Interest Rate Products | Interest Expense | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Three months ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Interest Rate Products | $ | $ | Interest Income | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
27
During the next twelve months, the Corporation estimates that an additional $19.7 million of unrealized losses will be reclassified as a decrease to net interest income.
The following table presents the effect of fair value and cash flow hedge accounting on the income statement:
| Consolidated Statements of Income Classification | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Interest Income | Interest Expense | Interest Income | Interest Expense | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Three months ended March 31 | |||||||||||||||||||||||
| 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 | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Interest contracts: | |||||||||||||||||||||||
| Amount of gain (loss) reclassified from AOCI into income | ( | ( | |||||||||||||||||||||
| 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 | ( | ( | |||||||||||||||||||||
| 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 | ||||||||||||||||
| 2024 | 2023 | ||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
Mortgage banking derivatives(1) | Mortgage banking income | $ | $ | ||||||||||||||
| Interest rate derivatives | Other income | ||||||||||||||||
| Foreign exchange contracts | Other income | ||||||||||||||||
| Net fair value gains/(losses) on derivative financial instruments | $ | $ | |||||||||||||||
(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:
| March 31, 2024 | December 31, 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
Amortized cost(1) | $ | $ | |||||||||
| Fair value | |||||||||||
(1) Cost basis of mortgage loans held for sale represents the unpaid principal balance.
Losses related to changes in fair values of mortgage loans held for sale were $0.2 million for the three months ended March 31, 2024 compared to gain of $0.1 million for the three months ended March 31, 2023. The gains and losses are recorded on the consolidated income statements as adjustments to mortgage banking income.
28
Balance Sheet Offsetting
The fair values of interest rate derivative agreements and foreign exchange contracts the Corporation enters into with customers and dealer counterparties may be eligible for offset on the consolidated balance sheets if they are subject to master netting arrangements or similar agreements. The Corporation has elected to net its financial assets and liabilities designated as interest rate derivatives when offsetting is permitted. The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:
| Gross Amounts | Gross Amounts Not Offset | ||||||||||||||||||||||
| Recognized | on the Consolidated | ||||||||||||||||||||||
| on the | Balance Sheets | ||||||||||||||||||||||
| Consolidated | Financial | Cash | Net | ||||||||||||||||||||
| Balance Sheets | Instruments(1) | Collateral(2) | Amount | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| March 31, 2024 | |||||||||||||||||||||||
| Interest rate derivative assets | $ | $ | ( | $ | $ | ||||||||||||||||||
| Foreign exchange derivative assets with correspondent banks | ( | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ||||||||||||||||||
| Interest rate derivative liabilities | $ | $ | ( | $ | ( | $ | |||||||||||||||||
| Foreign exchange derivative liabilities with correspondent banks | ( | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | ( | $ | |||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Interest rate derivative assets | $ | $ | ( | $ | $ | ||||||||||||||||||
| Foreign exchange derivative assets with correspondent banks | ( | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ||||||||||||||||||
| Interest rate derivative liabilities | $ | $ | ( | $ | ( | $ | |||||||||||||||||
| Foreign exchange derivative liabilities with correspondent banks | ( | ( | |||||||||||||||||||||
| Total | $ | $ | ( | $ | ( | $ | |||||||||||||||||
(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.
29
NOTE 7 – Accumulated Other Comprehensive (Loss) Income
The following table presents the components of other comprehensive income (loss):
| Before-Tax Amount | Tax Effect | Net of Tax Amount | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Three months ended March 31, 2024 | |||||||||||||||||
| Net unrealized losses on securities | $ | ( | $ | $ | ( | ||||||||||||
Amortization of net unrealized gains on AFS securities transferred to HTM(1) | ( | ||||||||||||||||
| Net unrealized holding gains arising during the period on interest rate derivatives used in cash flow hedges | ( | ||||||||||||||||
| Reclassification adjustment for net change realized in net income on interest rate derivatives used in cash flow hedges | ( | ||||||||||||||||
Amortization of net unrecognized pension and postretirement items(2) | ( | ( | |||||||||||||||
| Total Other Comprehensive Loss | $ | ( | $ | $ | ( | ||||||||||||
| Three months ended March 31, 2023 | |||||||||||||||||
| Net unrealized gains on securities | $ | $ | ( | $ | |||||||||||||
Reclassification adjustment for securities net change included in net income(3) | ( | ||||||||||||||||
Amortization of net unrealized gains on AFS securities transferred to HTM(1) | ( | ||||||||||||||||
| Net unrealized holding gains arising during the period on interest rate derivatives used in cash flow hedges | ( | ( | |||||||||||||||
| Reclassification adjustment for net change realized in net income on interest rate derivatives used in cash flow hedges | ( | ||||||||||||||||
Amortization of net unrecognized pension and postretirement items(2) | ( | ||||||||||||||||
| Total Other Comprehensive Loss | $ | $ | ( | $ | |||||||||||||
(1) Amounts reclassified out of AOCI. Before-tax amounts included as a reduction to "Interest Income" on the Consolidated Statements of Income.
(2) Amounts reclassified out of AOCI. Before-tax amounts included in "Salaries and employee benefits" on the Consolidated Statements of Income. See "Note
11 - Employee Benefit Plans," for additional details.
(3) Amounts reclassified out of AOCI. Before-tax amounts included in "Investment securities gains, net" on the Consolidated Statements of Income. See "Note 3
- Investment Securities," for additional details.
The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax:
| Unrealized Gains (Losses) on Investment Securities | Net Unrealized Gain (Loss) on Interest Rate Derivatives used in Cash Flow Hedges | Unrecognized Pension and Postretirement Plan Income (Costs) | Total | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Three months ended March 31, 2024 | |||||||||||||||||||||||
| Balance at December 31, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| OCI before reclassifications | ( | ( | |||||||||||||||||||||
| Amounts reclassified from AOCI | ( | ||||||||||||||||||||||
| Amortization of net unrealized gains on AFS securities transferred to HTM | |||||||||||||||||||||||
| Balance at March 31, 2024 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Three months ended March 31, 2023 | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| OCI before reclassifications | |||||||||||||||||||||||
| Amounts reclassified from AOCI | |||||||||||||||||||||||
| Amortization of net unrealized losses on AFS securities transferred to HTM | |||||||||||||||||||||||
| Balance at March 31, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
30
NOTE 8 – 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, 2024 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Loans held for sale | $ | $ | $ | $ | |||||||||||||||||||
| Available for sale investment securities: | |||||||||||||||||||||||
| U.S. Government-sponsored agency securities | |||||||||||||||||||||||
| State and municipal securities | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Collateralized mortgage obligations | |||||||||||||||||||||||
| Residential mortgage-backed securities | |||||||||||||||||||||||
| Commercial mortgage-backed securities | |||||||||||||||||||||||
| Total available for sale investment securities | |||||||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Investments held in Rabbi Trust | |||||||||||||||||||||||
| Derivative assets | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Other liabilities: | |||||||||||||||||||||||
| Deferred compensation liabilities | $ | $ | $ | $ | |||||||||||||||||||
| Derivative liabilities | |||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
31
| December 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Loans held for sale | $ | $ | $ | $ | |||||||||||||||||||
| Available for sale investment securities: | |||||||||||||||||||||||
| U.S. Government securities | |||||||||||||||||||||||
| U.S. Government sponsored agency securities | |||||||||||||||||||||||
| State and municipal securities | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Collateralized mortgage obligations | |||||||||||||||||||||||
| Residential mortgage-backed securities | |||||||||||||||||||||||
| Commercial mortgage-backed securities | |||||||||||||||||||||||
| Total available for sale investment securities | |||||||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Investments held in Rabbi Trust | |||||||||||||||||||||||
| Derivative assets | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Other liabilities: | |||||||||||||||||||||||
| Deferred compensation liabilities | $ | $ | $ | $ | |||||||||||||||||||
| Derivative liabilities | |||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
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, 2024 and December 31, 2023, were measured at the price that secondary market investors were offering for loans with similar characteristics.
Available for sale investment securities – Included in this asset category are debt securities. Level 2 investment securities are valued by a third-party pricing service. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings and matrix pricing.
Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.
•U.S. Government securities – These securities are classified as Level 1. Fair values are based on quoted prices with active markets.
•U.S. Government-sponsored agency securities, State and municipal securities/Collateralized mortgage obligations/Residential mortgage-backed securities/Commercial mortgage-backed securities – These debt securities are classified as Level 2. Fair values are determined by a third-party pricing service, as detailed above.
•Corporate debt securities – This category consists of subordinated debt and senior debt issued by financial institutions ($437.1 million at March 31, 2024 and $433.4 million at December 31, 2023) and other corporate debt issued by non-financial institutions ($7.2
Level 2 investments include subordinated debt and senior debt, and other corporate debt issued by non-financial institutions at March 31, 2024 and December 31, 2023. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.
32
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
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 ($0.8 million at March 31, 2024 and $0.5 million at December 31, 2023) and the fair value of interest rate derivatives ($174.1 million at March 31, 2024 and $157.1 million at December 31, 2023). The fair values of the interest rate locks, forward commitments and interest rate derivatives represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See "Note 6 - Derivative Financial Instruments," for additional information.
Deferred compensation liabilities – Fair value of amounts due to employees under deferred compensation plans, classified as Level 1 liabilities and are included in other liabilities on the consolidated balance sheets. The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Investments held in Rabbi Trust" above.
Derivative liabilities – Level 1 liabilities, representing the fair value of foreign currency exchange contracts ($0.5
Level 2 liabilities, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($0 at March 31, 2024 and $0.9 million at December 31, 2023) and the fair value of interest rate derivatives ($281.6 million at March 31, 2024 and $245.6 million at December 31, 2023).
The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Derivative assets" above.
Certain financial instruments are not measured at fair value on an ongoing basis but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents Level 3 financial assets measured at fair value on a nonrecurring basis:
| March 31, 2024 | December 31, 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Loans, net | $ | $ | |||||||||
| OREO | |||||||||||
MSRs(1) | |||||||||||
| Total assets | $ | $ | |||||||||
(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 5 - 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 4 - 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.
33
•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, 2024 valuation were 7.3 % and 9.5 %, respectively. Management reviews the reasonableness of the significant inputs to the third-party valuation in comparison to market data. See "Note 5 - Mortgage Servicing Rights," for additional information.
The following tables detail the book values and the estimated fair values of the Corporation's financial instruments:
| March 31, 2024 | |||||||||||||||||
| Estimated Fair Value | |||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (dollars in thousands) | |||||||||||||||||
| FINANCIAL ASSETS | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||
| FRB and FHLB stock | |||||||||||||||||
| Loans held for sale | |||||||||||||||||
| AFS securities | |||||||||||||||||
| HTM securities | |||||||||||||||||
| Loans, net | |||||||||||||||||
| Accrued interest receivable | |||||||||||||||||
| Other assets | |||||||||||||||||
| FINANCIAL LIABILITIES | |||||||||||||||||
| Demand and savings deposits | $ | $ | $ | $ | $ | ||||||||||||
| Brokered deposits | |||||||||||||||||
| Time deposits | |||||||||||||||||
| Accrued interest payable | |||||||||||||||||
| Federal Home Loan Bank advances | |||||||||||||||||
| Senior debt and subordinated debt | |||||||||||||||||
| Other borrowings | |||||||||||||||||
| Other liabilities | |||||||||||||||||
34
| December 31, 2023 | |||||||||||||||||
| Estimated Fair Value | |||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (dollars in thousands) | |||||||||||||||||
| FINANCIAL ASSETS | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||
| FRB and FHLB stock | |||||||||||||||||
| Loans held for sale | |||||||||||||||||
| AFS securities | |||||||||||||||||
| HTM securities | |||||||||||||||||
| Loans, net | |||||||||||||||||
| Accrued interest receivable | |||||||||||||||||
| Other assets | |||||||||||||||||
| FINANCIAL LIABILITIES | |||||||||||||||||
| Demand and savings deposits | $ | $ | $ | $ | $ | ||||||||||||
| Brokered deposits | |||||||||||||||||
| Time deposits | |||||||||||||||||
| Accrued interest payable | |||||||||||||||||
| Federal funds purchased | |||||||||||||||||
| Federal Home Loan Bank advances | |||||||||||||||||
| Senior debt and subordinated debt | |||||||||||||||||
| Other borrowings | |||||||||||||||||
| Other liabilities | |||||||||||||||||
Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.
For short-term financial instruments, defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation's consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.
The following instruments are predominantly short-term:
| Assets | Liabilities | |||||||
| Cash and cash equivalents | Demand and savings deposits | |||||||
| Accrued interest receivable | Other borrowings | |||||||
| Accrued interest payable | ||||||||
FRB and FHLB stock represent restricted investments and are carried at cost on the consolidated balance sheets, which is a reasonable estimate of fair value.
As of March 31, 2024, fair values for loans and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans also include estimated credit losses that would be assumed in a market transaction, which represents estimated exit prices.
Brokered deposits consist of demand and saving deposits, which are classified as Level 1, and time deposits, which are classified as Level 2. The fair value of these deposits is determined in a manner consistent with the respective type of deposits discussed above.
35
NOTE 9 – 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 | |||||||||||
| 2024 | 2023 | ||||||||||
| Weighted average shares outstanding (basic) | |||||||||||
| Impact of common stock equivalents | |||||||||||
| Weighted average shares outstanding (diluted) | |||||||||||
| Per share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | |||||||||||
NOTE 10 – 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.
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 restricted stock, RSUs or common stock. Recent grants of equity awards under the Directors’ Plan have been limited to RSUs.
As of March 31, 2024, the Employee Equity Plan had approximately 4.5 million shares reserved for future grants through 2032, and the Directors’ Plan had approximately 395,000 shares reserved for future grants through 2033.
The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:
| Three months ended March 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Compensation expense | $ | $ | |||||||||
| Tax benefit | ( | ( | |||||||||
| Total stock-based compensation, net of tax | $ | $ | |||||||||
36
NOTE 11 – Employee Benefit Plans
The net periodic pension cost for the Pension Plan consisted of the following components:
| Three months ended March 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Interest cost | $ | $ | |||||||||
| Expected return on plan assets | ( | ( | |||||||||
| Net amortization and deferral | |||||||||||
| Net periodic pension cost | $ | ( | $ | ||||||||
The components of the net benefit for the Postretirement Plan consisted of the following components:
| Three months ended March 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Interest cost | $ | $ | |||||||||
| Net accretion and deferral | ( | ( | |||||||||
| Net periodic benefit | $ | ( | $ | ( | |||||||
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.
NOTE 12 – Commitments and Contingencies
Commitments
The Corporation is a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of its borrowers or obligors.
Commitments to extend credit are agreements to lend to a borrower or obligor as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower or obligor. Since a portion of the commitments is expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each borrower's or obligor's creditworthiness on a case-by-case basis. The amount of collateral, if any, obtained upon an extension of credit is based on management's credit evaluation of the borrower or obligor. Collateral held varies but may include accounts receivable, inventory, property, equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a borrower or obligor to a third party. Commercial letters of credit are conditional commitments issued to facilitate foreign and domestic trade transactions for borrowers or obligors. The credit risk involved in issuing letters of credit is similar to that involved in extending loan facilities. These obligations are underwritten consistent with commercial lending standards. The maximum exposure to loss for standby and commercial letters of credit is equal to the contractual (or notional) amount of the instruments.
37
The following table presents the Corporation's commitments to extend credit and letters of credit:
| March 31, 2024 | December 31, 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Commitments to extend credit | $ | $ | |||||||||
| Standby letters of credit | |||||||||||
| Commercial letters of credit | |||||||||||
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, 2024 and December 31, 2023, the total reserve for losses on residential mortgage loans sold was $2.0 million and $1.8 million, respectively, including reserves for both representation and warranty and credit loss exposures. In addition, a component of ACL - OBS credit exposures of $1.9 million and $2.7 million, as of March 31, 2024 and December 31, 2023, respectively, related to additional credit exposures for potential loan repurchases.
Legal Proceedings
The Corporation is involved in various pending and threatened claims and other legal proceedings in the ordinary course of its business activities. The Corporation evaluates the possible impact of these matters, taking into consideration the most recent information available. A loss reserve is established for those matters for which the Corporation believes a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual losses with respect to any such matter may be more or less than the amount estimated by the Corporation. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated by the Corporation, no loss reserve is established.
In addition, from time to time, the Corporation is involved in investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other companies. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving the Corporation, and could result in fines, penalties, restitution, other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices. The Corporation's practice is to cooperate fully with regulatory and governmental inquiries and investigations.
As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, that may result from the final outcomes of pending legal proceedings, or regulatory or governmental inquiries or investigations, will not have a material adverse effect on the financial condition of the Corporation. However, legal proceedings, inquiries and investigations are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation's results of operations in any future period, depending, in part, upon the size of the loss or liability imposed and the operating results for the period, and could have a material adverse effect on the Corporation's business. In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause the Corporation to incur additional expenses, which could be significant, and possibly material, to the Corporation's results of operations in any future period.
38
NOTE 13 – Subsequent Events
Acquisition of Substantially all of the Assets and Assumption of Substantially all of the Deposits and Certain Liabilities of Republic First Bank from the FDIC
On April 26, 2024, Fulton Bank acquired substantially all of the assets and assumed substantially all of the deposits and certain liabilities of Republic First Bank from the FDIC, as receiver for Republic First Bank. As part of the transaction, the Corporation acquired approximately $5.2 billion of assets of Republic First Bank, consisting of approximately $0.2 billion of cash, approximately $2.0 billion of investments (purchased at fair value), approximately $2.9 billion of loans, and approximately $0.1 billion of other assets. The Corporation also received approximately $0.8 billion of cash from the FDIC in connection with the Republic First Transaction. The Corporation assumed approximately $5.6 billion of total liabilities of Republic First Bank, including approximately $4.2 billion of deposits, approximately $1.3 billion of borrowings, and approximately $0.1 billion of other liabilities. The Corporation did not enter into a loss sharing arrangement with the FDIC in connection with the Republic First Transaction. Fulton Bank also has the option to purchase the Republic First Bank branches and office locations. Following the closing of the Republic First Transaction, the Corporation sold all of the acquired investment securities, and used $1.4 billion of the cash received from the sale of the investment securities to repay the assumed borrowings in their entirety and $250.0 million of the Corporation's wholesale funding sources.
The description of the Republic First Transaction and the value of the acquired assets and assumed liabilities are preliminary estimates based on information currently available to the Corporation and are subject to change. Information related to the assets and liabilities of Republic First Bank is based on information for Republic First Bank provided by the FDIC.
As a result of the Republic First Transaction, the Corporation enhanced its presence in Philadelphia, Pennsylvania and New Jersey.
In connection with the Republic First Transaction, Fulton Bank made a $5.0 million donation to the Fulton Forward Foundation to provide additional impact grants to nonprofit community organizations across the region that share Fulton’s vision of advancing economic empowerment, particularly in underserved communities.
Common Stock Offering
On May 1, 2024, the Corporation completed its previously announced underwritten public offering of 19,166,667 shares of its common stock at a price to the public of $15.00 per share, before underwriting discounts, which included 2,500,000 shares of common stock upon the exercise in full by the underwriters of their over-allotment option to purchase additional shares of common stock. The net proceeds to the Corporation from the offering before deducting transaction expenses were approximately $273.5 million.
39
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion relates to the Corporation, a financial holding company registered under the BHCA and corporation incorporated under the laws of the Commonwealth of Pennsylvania, and its wholly owned subsidiaries. This Management's Discussion should be read in conjunction with the consolidated financial statements and other financial information presented in this report.
OVERVIEW
The Corporation is a financial holding company, which, through its wholly-owned banking subsidiary, provides a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia.
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the NIM, which is FTE net interest income as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments and properties. Offsetting these revenue sources are provisions for credit losses on loans and OBS credit risks, non-interest expenses and income taxes.
The following table presents a summary of the Corporation's earnings and selected performance ratios:
| Three months ended March 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands, except per share data) | |||||||||||
| Net income | $ | 61,941 | $ | 68,314 | |||||||
| Net income available to common shareholders | 59,379 | 65,752 | |||||||||
| Net income available to common shareholders (diluted) | 0.36 | 0.39 | |||||||||
Operating net income available to common shareholders per share(1) | 0.40 | 0.39 | |||||||||
| Return on average assets, annualized | 0.91 | % | 1.03 | % | |||||||
Operating return on average assets, annualized(1) | 1.00 | % | 1.04 | % | |||||||
| Return on average common shareholders' equity, annualized | 9.28 | % | 11.02 | % | |||||||
Operating return on average common shareholders' equity (tangible), annualized(1) | 13.08 | % | 14.46 | % | |||||||
Net interest margin(2) | 3.32 | % | 3.53 | % | |||||||
Efficiency ratio(1) | 63.2 | % | 58.5 | % | |||||||
| Non-performing assets to total assets | 0.57 | % | 0.62 | % | |||||||
| Net charge-offs (recoveries) to average loans | 0.16 | % | 0.27 | % | |||||||
(1) Ratio represents a financial measure derived by methods other than GAAP. See reconciliation of this non-GAAP financial measure to the most directly
comparable GAAP measure under the "Supplemental Reporting of Non-GAAP Based Financial Measures" section of Management's Discussion.
(2) Presented on a FTE basis, using a 21% federal tax rate and statutory interest expense disallowances.
Acquisition of Substantially all of the Assets and Assumption of Substantially all of the Deposits and Certain Liabilities of Republic First Bank from the FDIC
On April 26, 2024, Fulton Bank acquired substantially all of the assets and assumed substantially all of the deposits and certain liabilities of Republic First Bank from the FDIC, as receiver for Republic First Bank. As part of the transaction, the Corporation acquired approximately $5.2 billion of assets of Republic First Bank and assumed approximately $5.6 billion of liabilities of Republic First Bank, The Corporation received approximately $0.8 billion of cash from the FDIC in connection with the Republic First Transaction.
The description of the Republic First Transaction and the value of the acquired assets and assumed liabilities are preliminary estimates based on information currently available to the Corporation and are subject to change. Information related to the assets and liabilities of Republic First Bank is based on information for Republic First Bank provided by the FDIC.
40
The consolidated financial statements contained in this report do not include the impact of the Republic First Transaction for the periods presented.
See "Note 13 - Subsequent Events" in the Notes to Consolidated Financial Statements in "Item 1. Financial Statements."
Common Stock Offering
On May 1, 2024, the Corporation completed its previously announced underwritten public offering of 19,166,667 shares of its common stock at a price to the public of $15.00 per share, before underwriting discounts, which included 2,500,000 shares of common stock upon the exercise in full by the underwriters of their over-allotment option to purchase additional shares of common stock. The net proceeds to the Corporation from the offering before deducting transaction expenses were approximately $273.5 million.
The Corporation intends to use the net proceeds of the offering for general corporate purposes, including to support new opportunities in connection with the Republic First Transaction.
Financial Highlights
Following is a summary of the financial highlights for the three months ended March 31, 2024:
•Net Income Available to Common Shareholders and Net Income Per Share - Net income available to common shareholders was $59.4 million for the three months ended March 31, 2024, a $6.4 million decrease compared to $65.8 million for the same period in 2023. Diluted net income available to common shareholders per share was $0.36 for the three months ended March 31, 2024, a $0.03 decrease compared to the same period in 2023.
•Net Interest Income - Net interest income was $206.9 million for the three months ended March 31, 2024, a decrease of $8.7 million, or 4.0%, compared to the same period in 2023. The decrease was primarily driven by rising interest rates resulting in an increase in interest expense from interest-bearing deposits, partially offset by an increase in interest income on loans.
•Net Interest Margin - For the three months ended March 31, 2024, NIM decreased to 3.32%, or 21 bps, compared to the same period in 2023, driven by a 95 bps increase in the cost of interest-bearing liabilities and noninterest-bearing deposits, partially offset by a 69 bps increase in the yield on net loans, a 11 bps increase in the yield on investment securities and a 236 bps increase in the yield on other interest-earning assets.
•Net Loans - Average net loans increased $906.9 million, or 4.4%, for the three months ended March 31, 2024 compared to the same period in 2023. The increase in average net loans was largely driven by increases in average residential mortgage loans and average commercial mortgage loans of $563.0 million and $445.0 million, respectively.
•Deposits - Average deposits increased $804.4 million, or 3.9%, for the three months ended March 31, 2024 compared to the same period in 2023. The increase in average deposits was largely due to increases in average time deposits of $1.3 billion, average brokered deposits of $643.7 million, average interest-bearing demand deposits of $270.2 million and average savings and money market deposits of $199.8 million, partially offset by a decrease in average noninterest-bearing demand deposits of $1.6 billion.
•Borrowings and Other Interest-Bearing Liabilities - Average borrowings and other interest-bearing liabilities decreased $450.3 million, or 14.7%, for the three months ended March 31, 2024 compared to the same period in 2023. The decrease in borrowings and other interest-bearing liabilities was primarily due to decreases in average FHLB advances and Federal funds purchased of $358.7 million and $331.5 million, respectively.
•Asset Quality - Non-performing assets increased $2.2 million, or 1.4%, as of March 31, 2024 compared to December 31, 2023, and were 0.57% and 0.56% of total assets as of those dates, respectively. Annualized net charge-offs to average loans outstanding was 0.16% for the three months ended March 31, 2024, compared to annualized net charge-offs to average loans outstanding of 0.27% for the same period in 2023. The provision for credit losses was $10.9 million for the three months ended March 31, 2024, compared to $24.5 million in the same period in 2023. Net charge-offs of $14.0 million for the three months ended March 31, 2023 included a charge-off of $13.3 million for a commercial office loan.
41
•Non-interest Income - Compared to the three months ended March 31, 2023, non-interest income before investment securities gains (losses) increased $5.4 million, or 10.5%, from $51.7 million. The increase in non-interest income was primarily due to increases of $2.1 million in wealth management revenues due to an increase in assets under management, $1.3 million in commercial banking income, $1.1 million in mortgage banking income and $0.5 million in consumer banking income. The increase in commercial banking income was primarily due to increases of $0.8 million in cash management fee income and $0.3 million in gains on sale from SBA loans, reflected in other commercial banking income. The increase in mortgage banking income was driven by higher loan sale volumes and higher spreads.
•Non-interest Expense - Non-interest expense increased $18.0 million, or 11.3%, for the three months ended March 31, 2024 compared to the same period in 2023. Excluding FultonFirst implementation costs and loss on asset disposals of $6.3 million, non-interest expense increased $11.7 million, or 7.3%, compared to the same period in 2023. The increase was primarily due to increases of $6.0 million in salaries and employee benefits expense, $1.9 million in data processing and software expense primarily due to technology investments made in 2023, $1.7 million in net occupancy expense driven by snow removal costs, $1.3 million in FDIC insurance expense, which includes a $1.0 million special assessment charge to recover the loss to the Deposit Insurance Fund in connection with certain bank closures in 2023, and $0.7 million in other outside services expense. The $6.0 million increase in salaries and benefits expense was primarily due to merit increases and healthcare costs.
•Income Taxes - The Corporation's ETR was 18.0% for the three months ended March 31, 2024 compared to 18.5% for the full-year of 2023. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various programs.
Critical Accounting Policies
The Corporation's accounting policies are fundamental to understanding Management’s Discussion. Critical policies are those that the Corporation considers to be most important to the presentation of its financial condition and results of operations, because they require management's most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.
The Corporation's critical accounting policies are described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023.
Supplemental Reporting of Non-GAAP Based Financial Measures
This Quarterly Report on Form 10-Q contains supplemental financial information, as detailed below, that has been derived by methods other than GAAP. The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Corporation's industry. Management believes that these non-GAAP financial measures, in addition to GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-GAAP financial measures might not be comparable to similarly titled measures of other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety.
42
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure follow:
| Three months ended March 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands, except per share data and share data) | |||||||||||
| Operating net income available to common shareholders | |||||||||||
| Net income available to common shareholders | $ | 59,379 | $ | 65,752 | |||||||
| Plus: Core deposit intangible amortization | 441 | 514 | |||||||||
Plus: Interest rate derivative transition valuation(1) | (151) | — | |||||||||
| Plus: FDIC special assessment | 956 | — | |||||||||
| Plus: FultonFirst implementation and asset disposals | 6,329 | — | |||||||||
| Less: Tax impact of adjustments | (1,591) | (108) | |||||||||
| Operating net income available to common shareholders (numerator) | $ | 65,363 | $ | 66,158 | |||||||
| Weighted average shares (diluted) (denominator) | 164,520 | 168,401 | |||||||||
| Operating net income available to common shareholders, per share (diluted) | $ | 0.40 | $ | 0.39 | |||||||
| Operating return on average assets, annualized | |||||||||||
| Net income | $ | 61,941 | $ | 68,314 | |||||||
| Plus: Core deposit intangible amortization | 441 | 514 | |||||||||
Plus: Interest rate derivative transition valuation(1) | (151) | — | |||||||||
| Plus: FDIC special assessment | 956 | — | |||||||||
| Plus: FultonFirst implementation and asset disposals | 6,329 | — | |||||||||
| Less: Tax impact of adjustments | (1,591) | (108) | |||||||||
| Operating net income (numerator) | $ | 67,925 | $ | 68,720 | |||||||
| Total average assets | 27,427,626 | 26,900,653 | |||||||||
| Less: Average net core deposit intangible | (4,666) | (6,937) | |||||||||
| Total operating average assets | $ | 27,422,960 | $ | 26,893,716 | |||||||
| Operating return on average assets | 1.00 | % | 1.04 | % | |||||||
43
| Three months ended March 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands, except per share data and share data) | |||||||||||
| Operating return on average common shareholders' equity (tangible), annualized | |||||||||||
| Net income available to common shareholders | $ | 59,379 | $ | 65,752 | |||||||
| Plus: Intangible amortization | 573 | 674 | |||||||||
Plus: Interest rate derivative transition valuation(1) | (151) | — | |||||||||
| Plus: FDIC special assessment | 956 | — | |||||||||
| Plus: FultonFirst implementation and asset disposals | 6,329 | — | |||||||||
| Less: Tax impact of adjustments | (1,618) | (142) | |||||||||
| Adjusted net income available to common shareholders (numerator) | $ | 65,468 | $ | 66,284 | |||||||
| Average shareholders' equity | 2,766,945 | $ | 2,613,316 | ||||||||
| Less: Average preferred stock | (192,878) | (192,878) | |||||||||
| Less: Average goodwill and intangible assets | (560,393) | (561,744) | |||||||||
| Average tangible common shareholders' equity (denominator) | $ | 2,013,674 | $ | 1,858,694 | |||||||
| Operating return on average common shareholders' equity (tangible) | 13.08 | % | 14.46 | % | |||||||
| Efficiency ratio | |||||||||||
| Non-interest expense | $ | 177,600 | $ | 159,616 | |||||||
| Less: Intangible amortization | (573) | (674) | |||||||||
| Less: FDIC special assessment | (956) | — | |||||||||
| Less: FultonFirst implementation and asset disposals | (6,329) | — | |||||||||
| Non-interest expense (numerator) | $ | 169,742 | $ | 158,942 | |||||||
| Net interest income | $ | 206,937 | $ | 215,587 | |||||||
| Tax equivalent adjustment | 4,592 | 4,414 | |||||||||
| Plus: Total non-interest income | 57,140 | 51,753 | |||||||||
Plus: Interest rate derivative transition valuation(1) | (151) | — | |||||||||
| Less: Investment securities (gains) losses, net | — | (23) | |||||||||
| Total revenue (denominator) | $ | 268,518 | $ | 271,731 | |||||||
| Efficiency ratio | 63.2 | % | 58.5 | % | |||||||
(1) Resulting from the reference rate transition from LIBOR to SOFR in the Corporation's commercial customer interest rate swap program. | |||||||||||
44
RESULTS OF OPERATIONS
Three months ended March 31, 2024 compared to the three months ended March 31, 2023
Net Interest Income
FTE net interest income was $211.5 million for the three months ended March 31, 2024, a decrease of $8.5 million, compared to $220.0 million for the same period in 2023. For the three months ended March 31, 2024, NIM decreased to 3.32%, or 21 bps, compared to the same period in 2023. The Corporation manages the risk associated with changes in interest rates through the techniques described within Item 3, "Quantitative and Qualitative Disclosures About Market Risk" in this Quarterly Report on Form 10-Q. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate, and statutory interest expense disallowances. The discussion following this table is based on these taxable-equivalent amounts.
| Three months ended March 31 | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||
| Average Balance | Interest (1) | Yield/ Rate | Average Balance | Interest (1) | Yield/ Rate | ||||||||||||||||||||||||||||||
| ASSETS | (dollars in thousands) | ||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
Net loans(2) | $ | 21,370,033 | $ | 313,882 | 5.90 | % | $ | 20,463,096 | $ | 263,065 | 5.21 | % | |||||||||||||||||||||||
Investment securities(3) | 3,983,753 | 27,048 | 2.71 | 4,289,643 | 27,522 | 2.60 | |||||||||||||||||||||||||||||
| Other interest-earning assets | 249,079 | 3,328 | 5.36 | 493,130 | 3,648 | 3.00 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 25,602,865 | 344,258 | 5.40 | 25,245,869 | 294,235 | 4.73 | |||||||||||||||||||||||||||||
| Noninterest-earning assets: | |||||||||||||||||||||||||||||||||||
| Cash and due from banks | 282,895 | 141,254 | |||||||||||||||||||||||||||||||||
| Premises and equipment | 223,375 | 223,025 | |||||||||||||||||||||||||||||||||
| Other assets | 1,614,746 | 1,563,806 | |||||||||||||||||||||||||||||||||
Less: ACL - loans(4) | (296,255) | (273,301) | |||||||||||||||||||||||||||||||||
| Total Assets | $ | 27,427,626 | $ | 26,900,653 | |||||||||||||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Demand deposits | $ | 5,596,725 | $ | 20,500 | 1.47 | % | $ | 5,326,566 | $ | 8,455 | 0.64 | % | |||||||||||||||||||||||
| Savings and money market deposits | 6,669,228 | 38,797 | 2.34 | 6,469,468 | 20,535 | 1.29 | |||||||||||||||||||||||||||||
| Brokered deposits | 1,083,382 | 14,655 | 5.44 | 439,670 | 5,173 | 4.77 | |||||||||||||||||||||||||||||
| Time deposits | 2,968,344 | 29,622 | 4.01 | 1,696,878 | 7,458 | 1.78 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 16,317,679 | 103,574 | 2.55 | 13,932,582 | 41,621 | 1.21 | |||||||||||||||||||||||||||||
| Borrowings and other interest-bearing liabilities | 2,608,376 | 29,155 | 4.46 | 3,058,684 | 32,613 | 4.32 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 18,926,055 | 132,729 | 2.82 | 16,991,266 | 74,234 | 1.78 | |||||||||||||||||||||||||||||
| Noninterest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Demand deposits | 5,061,075 | 6,641,741 | |||||||||||||||||||||||||||||||||
| Other noninterest-bearing liabilities | 673,551 | 654,330 | |||||||||||||||||||||||||||||||||
| Total Liabilities | 24,660,681 | 24,287,337 | |||||||||||||||||||||||||||||||||
| Total Deposits | 21,378,754 | 1.95 | % | 20,574,323 | 0.82 | % | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities and non-interest bearing deposits | 23,987,130 | 2.22 | % | 23,633,007 | 1.27 | % | |||||||||||||||||||||||||||||
| Shareholders’ equity | 2,766,945 | 2,613,316 | |||||||||||||||||||||||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 27,427,626 | $ | 26,900,653 | |||||||||||||||||||||||||||||||
| Net interest income/FTE NIM | 211,529 | 3.32 | % | 220,001 | 3.53 | % | |||||||||||||||||||||||||||||
| Tax equivalent adjustment | (4,592) | (4,414) | |||||||||||||||||||||||||||||||||
| Net interest income | $ | 206,937 | $ | 215,587 | |||||||||||||||||||||||||||||||
(1) Presented on a fully taxable-equivalent basis using a 21% federal tax rate and statutory interest expense disallowances.
(2) Average balance includes non-performing loans.
(3) Balances include amortized historical cost for AFS. The related unrealized holding gains (losses) are included in other assets.
(4) ACL - loans relates to the ACL specifically for net loans and does not include the ACL for OBS credit exposures, which is included in other liabilities.
45
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in yields and rates for the three months ended March 31, 2024 in comparison to the same period in 2023:
| 2024 vs. 2023 Increase (Decrease) due to change in | |||||||||||||||||
| Volume | Yield/Rate | Net | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| FTE Interest income on: | |||||||||||||||||
Net loans(1) | $ | 12,700 | $ | 38,117 | $ | 50,817 | |||||||||||
| Investment securities | (1,757) | 1,283 | (474) | ||||||||||||||
| Other interest-earning assets | (2,358) | 2,038 | (320) | ||||||||||||||
| Total interest income | $ | 8,585 | $ | 41,438 | $ | 50,023 | |||||||||||
| Interest expense on: | |||||||||||||||||
| Demand deposits | $ | 453 | $ | 11,592 | $ | 12,045 | |||||||||||
| Savings and money market deposits | 668 | 17,594 | 18,262 | ||||||||||||||
| Brokered deposits | 8,652 | 830 | 9,482 | ||||||||||||||
| Time deposits | 8,295 | 13,869 | 22,164 | ||||||||||||||
| Borrowings and other interest-bearing liabilities | (4,579) | 1,121 | (3,458) | ||||||||||||||
| Total interest expense | $ | 13,489 | $ | 45,006 | $ | 58,495 | |||||||||||
(1) Average balance includes non-performing loans.
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.
Compared to the first quarter of 2023, FTE total interest income for the first quarter of 2024 increased $50.0 million, or 17.0%, primarily due to an increase of $41.4 million attributable to changes in yield, of which $38.1 million related to net loans. The yield on average interest-earning assets increased 67 bps in the first quarter of 2024 compared to the same period in 2023. The increase due to changes in volume was due to an increase in average net loans, partially offset by decreases in average other interest-earning assets and average investment securities.
In the first quarter of 2024, interest expense increased $58.5 million compared to the first quarter of 2023, primarily driven by an increase in the rate on interest-bearing liabilities resulting in a $45.0 million increase in interest expense. The increase in interest expense attributable to rate was driven by increases in the rates on savings and money market deposits, time deposits and demand deposits. The increase in interest expense attributable to volume was primarily due to increases in average brokered deposits and average time deposits, partially offset by a decrease in average borrowings and other interest-bearing liabilities.
Average loans and average FTE yields, by type, are summarized in the following table:
| Three months ended March 31 | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Increase (Decrease) | |||||||||||||||||||||||||||||||||
| Balance | Yield | Balance | Yield | $ | % | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Real estate – commercial mortgage | $ | 8,166,018 | 6.34 | % | $ | 7,720,975 | 5.55 | % | $ | 445,043 | 5.8 | % | |||||||||||||||||||||||
| Commercial and industrial | 4,517,179 | 6.67 | 4,565,923 | 5.75 | (48,744) | (1.1) | |||||||||||||||||||||||||||||
| Real estate – residential mortgage | 5,353,905 | 3.96 | 4,790,868 | 3.58 | 563,037 | 11.8 | |||||||||||||||||||||||||||||
| Real estate – home equity | 1,039,321 | 7.34 | 1,086,032 | 6.37 | (46,711) | (4.3) | |||||||||||||||||||||||||||||
| Real estate – construction | 1,240,640 | 7.44 | 1,276,145 | 6.29 | (35,505) | (2.8) | |||||||||||||||||||||||||||||
| Consumer | 721,523 | 6.45 | 721,248 | 5.38 | 275 | — | |||||||||||||||||||||||||||||
Leases and other loans(1) | 331,447 | 4.69 | 301,905 | 4.09 | 29,542 | 9.8 | |||||||||||||||||||||||||||||
| Total loans | $ | 21,370,033 | 5.90 | % | $ | 20,463,096 | 5.21 | % | $ | 906,937 | 4.4 | % | |||||||||||||||||||||||
(1) Consists of equipment lease financing, overdrafts and net origination fees and costs.
During the first quarter of 2024, average loans increased $906.9 million, or 4.4%, compared to the same period in 2023. The increase in average loans was largely driven by increases in average residential mortgage loans and average commercial
46
mortgage loans of $563.0 million and $445.0 million, respectively. The yield on total loans increased 69 bps to 5.90% for the first quarter of 2024, compared to 5.21% for the same period in 2023, primarily due to rising interest rates.
Average deposits and average interest rates, by type, are summarized in the following table:
| Three months ended March 31 | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Increase (Decrease) | |||||||||||||||||||||||||||||||||
| Balance | Rate | Balance | Rate | $ | % | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Noninterest-bearing demand | $ | 5,061,075 | — | % | $ | 6,641,741 | — | % | $ | (1,580,666) | (23.8) | % | |||||||||||||||||||||||
| Interest-bearing demand | 5,596,725 | 1.47 | 5,326,566 | 0.64 | 270,159 | 5.1 | |||||||||||||||||||||||||||||
| Savings and money market deposits | 6,669,228 | 2.34 | 6,469,468 | 1.29 | 199,760 | 3.1 | |||||||||||||||||||||||||||||
| Total demand deposits and savings and money market deposits | 17,327,028 | 1.38 | 18,437,775 | 0.64 | (1,110,747) | (6.0) | |||||||||||||||||||||||||||||
| Brokered deposits | 1,083,382 | 5.44 | 439,670 | 4.77 | 643,712 | 1.5 | |||||||||||||||||||||||||||||
| Time deposits | 2,968,344 | 4.01 | 1,696,878 | 1.78 | 1,271,466 | 74.9 | |||||||||||||||||||||||||||||
| Total deposits | $ | 21,378,754 | 1.95 | % | $ | 20,574,323 | 0.82 | % | $ | 804,431 | 3.9 | % | |||||||||||||||||||||||
The cost of deposits increased 113 bps, to 1.95%, for the first quarter of 2024 compared to 0.82% for the same period in 2023, primarily due to an increase in rates and a change in the mix of deposits. Average deposits increased $804.4 million during the first quarter of 2024 compared to the same period in 2023, primarily due to increases in average time deposits and average brokered deposits of $1.3 billion and $643.7 million, respectively, partially offset by a decrease in average noninterest-bearing demand deposits of $1.6 billion.
Average borrowings and interest rates, by type, are summarized in the following table:
| Three months ended March 31 | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Increase (Decrease) | |||||||||||||||||||||||||||||||||
| Balance | Rate | Balance | Rate | $ | % | ||||||||||||||||||||||||||||||
| Borrowings and other interest-bearing liabilities: | (dollars in thousands) | ||||||||||||||||||||||||||||||||||
| Federal funds purchased | $ | 173,659 | 5.44 | % | $ | 505,142 | 4.85 | % | $ | (331,483) | (65.6) | % | |||||||||||||||||||||||
| Federal Home Loan Bank advances | 902,890 | 4.80 | 1,261,589 | 4.97 | (358,699) | (28.4) | |||||||||||||||||||||||||||||
| Senior debt and subordinated debt | 535,479 | 3.96 | 539,726 | 4.02 | (4,247) | (0.8) | |||||||||||||||||||||||||||||
Other borrowings and other interest-bearing liabilities(1) | 996,348 | 4.10 | 752,227 | 3.11 | 244,121 | 32.5 | |||||||||||||||||||||||||||||
| Total borrowings and other interest-bearing liabilities | $ | 2,608,376 | 4.46 | % | $ | 3,058,684 | 4.32 | % | $ | (450,308) | (14.7) | % | |||||||||||||||||||||||
(1) Includes repurchase agreements, short-term promissory notes, capital leases and collateral liabilities.
Average borrowings and other interest-bearing liabilities decreased $450.3 million in the first quarter of 2024 compared to the same period in 2023, primarily as a result of an increase in average total deposits. The decrease in average borrowings and other interest-bearing liabilities in the first quarter of 2024 compared to the first quarter of 2023 was primarily due to decreases in average FHLB advances and average Federal funds purchased of $358.7 million and $331.5 million, respectively, partially offset by an increase in average other borrowings and other interest-bearing liabilities of $244.1 million.
Provision for Credit Losses
The provision for credit losses was $10.9 million for the first quarter of 2024 compared to a provision of $24.5 million for the same period in 2023. The provision for credit losses of $10.9 million recorded in the first quarter of 2024 was primarily due to net charge-offs of $8.6 million and loan growth.
47
Non-Interest Income
The following table presents the components of non-interest income:
| Three months ended March 31 | Increase (Decrease) | ||||||||||||||||||||||
| 2024 | 2023 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Wealth management | $ | 20,155 | $ | 18,062 | $ | 2,093 | 11.6 | % | |||||||||||||||
| Commercial banking: | |||||||||||||||||||||||
| Merchant and card | 6,808 | 6,834 | (26) | N/M | |||||||||||||||||||
| Cash management | 6,305 | 5,515 | 790 | 14.3 | |||||||||||||||||||
| Capital markets | 2,341 | 2,344 | (3) | N/M | |||||||||||||||||||
| Other commercial banking | 3,375 | 2,820 | 555 | 19.7 | |||||||||||||||||||
| Total commercial banking | 18,829 | 17,513 | 1,316 | 7.5 | |||||||||||||||||||
| Consumer banking: | |||||||||||||||||||||||
| Card | 6,628 | 6,243 | 385 | 6.2 | |||||||||||||||||||
| Overdraft | 2,786 | 2,733 | 53 | 1.9 | |||||||||||||||||||
| Other consumer banking | 2,254 | 2,241 | 13 | 0.6 | |||||||||||||||||||
| Total consumer banking | 11,668 | 11,217 | 451 | 4.0 | |||||||||||||||||||
| Mortgage banking | 3,090 | 1,970 | 1,120 | 56.9 | |||||||||||||||||||
| Other | 3,398 | 2,968 | 430 | 14.5 | |||||||||||||||||||
| Non-interest income before investment securities gains | 57,140 | 51,730 | 5,410 | 10.5 | |||||||||||||||||||
| Investment securities gains (losses), net | — | 23 | (23) | (100.0) | |||||||||||||||||||
| Total Non-Interest Income | $ | 57,140 | $ | 51,753 | $ | 5,387 | 10.4 | % | |||||||||||||||
Compared to the three months ended March 31, 2023, non-interest income before investment securities gains (losses) increased $5.4 million, or 10.5%, from $51.7 million. The increase in non-interest income was primarily due to increases of $2.1 million in wealth management revenues due to an increase in assets under management, $1.3 million in commercial banking income, $1.1 million in mortgage banking income and $0.5 million in consumer banking income. The increase in commercial banking income was primarily due to increases of $0.8 million in cash management fee income and $0.3 million in gains on sale from SBA loans, reflected in other commercial banking income. The increase in mortgage banking income was driven by higher loan sale volumes and higher spreads.
48
Non-Interest Expense
The following table presents the components of non-interest expense:
| Three months ended March 31 | Increase (Decrease) | ||||||||||||||||||||||
| 2024 | 2023 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 95,240 | $ | 89,283 | $ | 5,957 | 6.7 | % | |||||||||||||||
| Data processing and software | 17,661 | 15,796 | 1,865 | 11.8 | |||||||||||||||||||
| Net occupancy | 16,149 | 14,438 | 1,711 | 11.9 | |||||||||||||||||||
| Other outside services | 10,809 | 10,126 | 683 | 6.7 | |||||||||||||||||||
| FDIC insurance | 6,104 | 4,795 | 1,309 | 27.3 | |||||||||||||||||||
| Equipment | 4,040 | 3,389 | 651 | 19.2 | |||||||||||||||||||
| Professional fees | 2,088 | 2,392 | (304) | (12.7) | |||||||||||||||||||
| Marketing | 1,912 | 1,886 | 26 | 1.4 | |||||||||||||||||||
| Intangible amortization | 573 | 674 | (101) | (15.0) | |||||||||||||||||||
| Other | 16,695 | 16,837 | (142) | (0.8) | |||||||||||||||||||
| Subtotal | 171,271 | 159,616 | 11,655 | 7.3 | |||||||||||||||||||
| FultonFirst implementation and asset disposals | 6,329 | — | 6,329 | N/M | |||||||||||||||||||
| Total non-interest expense | $ | 177,600 | $ | 159,616 | $ | 17,984 | 11.3 | % | |||||||||||||||
Non-interest expense increased $18.0 million, or 11.3%, for the three months ended March 31, 2024 compared to the same period in 2023. Excluding FultonFirst implementation costs and loss on asset disposals of $6.3 million, non-interest expense increased $11.7 million, or 7.3%, compared to the same period in 2023. The increase was primarily due to increases of $6.0 million in salaries and employee benefits expense, $1.9 million in data processing and software expense primarily due to technology investments made in 2023, $1.7 million in net occupancy expense driven by snow removal costs, $1.3 million in FDIC insurance expense, which includes a $1.0 million special assessment charge to recover the loss to the Deposit Insurance Fund in connection with certain bank closures in 2023, and $0.7 million in other outside services expense. The $6.0 million increase in salaries and benefits expense was primarily due to merit increases and healthcare costs.
FultonFirst initiative expenses of $6.3 million for the three months ended March 31, 2024 included $0.2 million in severance expense (reflected in salaries and employee benefits on the Consolidated Statement of Income), $2.5 million in consulting services expense (reflected in other outside services on the Consolidated Statement of Income) and loss on disposals of assets of $3.6 million (reflected in other non-interest expense on the Consolidated Statement of Income).
Income Taxes
Income tax expense for the three months ended March 31, 2024 was $13.6 million, a $1.3 million decrease from $14.9 million for the same period in 2023. The Corporation's ETR was 18.0% for the three months ended March 31, 2024 compared to 18.5% for the full year in 2023.
49
FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets:
| March 31, 2024 | December 31, 2023 | Increase (Decrease) | |||||||||||||||||||||
| $ | % | ||||||||||||||||||||||
| Assets | (dollars in thousands) | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 357,333 | $ | 549,710 | $ | (192,377) | (35.0) | % | |||||||||||||||
| FRB and FHLB Stock | 121,637 | 124,405 | (2,768) | (2.2) | |||||||||||||||||||
| Loans held for sale | 10,624 | 15,158 | (4,534) | (29.9) | |||||||||||||||||||
| Investment securities | 3,783,392 | 3,666,274 | 117,118 | 3.2 | |||||||||||||||||||
| Net loans, less ACL - loans | 21,146,595 | 21,057,690 | 88,905 | 0.4 | |||||||||||||||||||
| Net premises and equipment | 213,541 | 222,881 | (9,340) | (4.2) | |||||||||||||||||||
| Goodwill and intangibles | 560,114 | 560,687 | (573) | (0.1) | |||||||||||||||||||
| Other assets | 1,449,721 | 1,375,110 | 74,611 | 5.4 | |||||||||||||||||||
| Total Assets | $ | 27,642,957 | $ | 27,571,915 | $ | 71,042 | 0.3 | % | |||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||
| Deposits | $ | 21,741,950 | $ | 21,537,623 | $ | 204,327 | 0.9 | % | |||||||||||||||
| Borrowings | 2,296,040 | 2,487,526 | (191,486) | (7.7) | |||||||||||||||||||
| Other liabilities | 847,288 | 786,627 | 60,661 | 7.7 | |||||||||||||||||||
| Total Liabilities | 24,885,278 | 24,811,776 | 73,502 | 0.3 | |||||||||||||||||||
| Total Shareholders' Equity | 2,757,679 | 2,760,139 | (2,460) | (0.1) | |||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 27,642,957 | $ | 27,571,915 | $ | 71,042 | 0.3 | % | |||||||||||||||
Investment Securities
The following table presents the carrying amount of investment securities:
| March 31, 2024 | December 31, 2023 | Increase (Decrease) | |||||||||||||||||||||
| $ | % | ||||||||||||||||||||||
| Available for Sale | (dollars in thousands) | ||||||||||||||||||||||
| U.S. Government securities | $ | — | $ | 42,161 | $ | (42,161) | N/M | ||||||||||||||||
| U.S. Government-sponsored agency securities | 998 | 1,010 | (12) | (1.2) | |||||||||||||||||||
| State and municipal securities | 1,052,259 | 1,072,013 | (19,754) | (1.8) | |||||||||||||||||||
| Corporate debt securities | 444,267 | 440,551 | 3,716 | 0.8 | |||||||||||||||||||
| Collateralized mortgage obligations | 187,428 | 111,434 | 75,994 | 68.2 | |||||||||||||||||||
| Residential mortgage-backed securities | 316,832 | 196,795 | 120,037 | 61.0 | |||||||||||||||||||
| Commercial mortgage-backed securities | 525,185 | 534,388 | (9,203) | (1.7) | |||||||||||||||||||
| Total available for sale securities | $ | 2,526,969 | $ | 2,398,352 | $ | 128,617 | 5.4 | % | |||||||||||||||
| Held to Maturity | |||||||||||||||||||||||
| Residential mortgage-backed securities | $ | 396,308 | $ | 407,075 | $ | (10,767) | (2.6) | % | |||||||||||||||
| Commercial mortgage-backed securities | 860,115 | 860,847 | (732) | (0.1) | |||||||||||||||||||
| Total held to maturity securities | $ | 1,256,423 | $ | 1,267,922 | $ | (11,499) | (0.9) | % | |||||||||||||||
| Total Investment Securities | $ | 3,783,392 | $ | 3,666,274 | $ | 117,118 | 3.2 | % | |||||||||||||||
Compared to December 31, 2023, total AFS securities at March 31, 2024 increased $128.6 million, or 5.4%, primarily due to increases in residential mortgage-backed securities and collateralized mortgage obligations of $120.0 million and $76.0 million,
50
respectively, partially offset by decreases in U.S. Government securities and state and municipal securities of $42.2 million and $19.8 million, respectively. The increases in residential mortgage-backed securities and collateralized mortgage obligations were driven by purchases of these securities.
At March 31, 2024, total HTM securities decreased $11.5 million compared to December 31, 2023, primarily driven by a decrease of $10.8 million in residential mortgage-backed securities due to payments.
Loans
The following table presents ending net loans outstanding by type:
| March 31, 2024 | December 31, 2023 | Increase (Decrease) | |||||||||||||||||||||
| $ | % | ||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Real estate - commercial mortgage | $ | 8,252,117 | $ | 8,127,728 | $ | 124,389 | 1.5% | ||||||||||||||||
Commercial and industrial(1) | 4,467,589 | 4,545,552 | (77,963) | (1.7)% | |||||||||||||||||||
| Real estate - residential mortgage | 5,395,720 | 5,325,923 | 69,797 | 1.3% | |||||||||||||||||||
| Real estate - home equity | 1,040,335 | 1,047,184 | (6,849) | (0.7)% | |||||||||||||||||||
| Real estate - construction | 1,249,199 | 1,239,075 | 10,124 | 0.8% | |||||||||||||||||||
| Consumer | 698,421 | 729,318 | (30,897) | (4.2)% | |||||||||||||||||||
Leases and other loans(2) | 341,102 | 336,314 | 4,788 | 1.4% | |||||||||||||||||||
| Net loans | $ | 21,444,483 | $ | 21,351,094 | $ | 93,389 | 0.4% | ||||||||||||||||
(1) Includes no unearned income for March 31, 2024 and $41.0 thousand for December 31, 2023.
(2) Includes unearned income of $38.0 million for March 31, 2024 and December 31, 2023.
During the three months ended March 31, 2024, net loans increased $93.4 million, or 0.4%, compared to December 31, 2023, primarily due to increases in commercial mortgage loans and residential mortgage loans of $124.4 million and $69.8 million, respectively, partially offset by decreases in commercial and industrial loans and consumer loans of $78.0 million and $30.9 million, respectively.
The Corporation does not have a significant concentration of credit risk with any single borrower. As of March 31, 2024, approximately $9.5 billion, or 44.3%, of the loan portfolio was comprised of commercial mortgage loans and construction loans. The Corporation has established lower total lending limits for certain types of lending commitments and lower total lending limits based on the Corporation's internal risk rating of an individual borrower at the time the lending commitment is approved.
51
The following table summarizes the industry concentrations within the commercial mortgage and the commercial and industrial loan portfolios:
| March 31, 2024 | December 31, 2023 | ||||||||||
Real estate(1) | 48.7 | % | 46.6 | % | |||||||
| Health care | 7.0 | 6.6 | |||||||||
| Manufacturing | 6.2 | 6.1 | |||||||||
| Agriculture | 5.5 | 5.6 | |||||||||
| Other services | 4.5 | 4.5 | |||||||||
Construction(2) | 4.4 | 4.1 | |||||||||
| Hospitality and food services | 3.5 | 3.6 | |||||||||
| Retail | 3.3 | 3.3 | |||||||||
| Wholesale trade | 3.1 | 3.2 | |||||||||
| Educational services | 2.9 | 2.9 | |||||||||
| Professional, scientific and technical services | 2.4 | 2.2 | |||||||||
| Arts, entertainment and recreation | 1.9 | 1.9 | |||||||||
| Transportation and warehousing | 1.7 | 1.7 | |||||||||
| Finance and Insurance | 1.3 | 1.3 | |||||||||
| Administrative and Support | 1.1 | 1.1 | |||||||||
| Public administration | 1.0 | 1.0 | |||||||||
| Other | 1.5 | 4.3 | |||||||||
| Total | 100.0 | % | 100.0 | % | |||||||
(1) Includes commercial loans to borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for
others; and appraising real estate. Real estate commercial office represents 3% of total loans.
(2) Includes commercial loans to borrowers engaged in the construction industry.
The following table presents the changes in non-accrual loans for the three months ended March 31, 2024:
| Commercial and Industrial | Real Estate - Commercial Mortgage | Real Estate - Construction | Real Estate - Residential Mortgage | Consumer and Real Estate - Home Equity | Leases and other loans | Total | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | 39,952 | $ | 44,805 | $ | 1,341 | $ | 20,824 | $ | 4,805 | $ | 9,893 | $ | 121,620 | |||||||||||||||||||||||||||
| Additions | 30,942 | 11,238 | — | 2,702 | 3,153 | 1,248 | 49,283 | ||||||||||||||||||||||||||||||||||
| Payments | (12,064) | (9,876) | (55) | (394) | (272) | (245) | (22,906) | ||||||||||||||||||||||||||||||||||
| Charge-offs | (7,632) | (26) | — | (251) | (2,238) | (805) | (10,952) | ||||||||||||||||||||||||||||||||||
| Transfers to accrual status | (7,463) | (180) | — | (142) | (138) | — | (7,923) | ||||||||||||||||||||||||||||||||||
| Transfers to OREO | — | — | — | 506 | — | — | 506 | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | 43,735 | $ | 45,961 | $ | 1,286 | $ | 23,245 | $ | 5,310 | $ | 10,091 | $ | 129,628 | |||||||||||||||||||||||||||
During the first quarter of 2024, non-accrual loans increased approximately $8.0 million, or 6.6%, largely due to additions to non-accrual loans, partially offset by payments and charge-offs. During the three months ended March 31, 2024, non-accrual loans as a percentage of total loans increased to 0.60%, compared to 0.57% as of December 31, 2023.
52
The following table summarizes non-performing assets as of the periods shown below:
| March 31, 2024 | December 31, 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Non-accrual loans | $ | 129,628 | $ | 121,620 | |||||||
| Loans 90 days or more past due and still accruing | 26,521 | 31,721 | |||||||||
| Total non-performing loans | 156,149 | 153,341 | |||||||||
OREO(1) | 277 | 896 | |||||||||
| Total non-performing assets | $ | 156,426 | $ | 154,237 | |||||||
| Non-accrual loans to total loans | 0.60 | % | 0.57 | % | |||||||
| Non-performing loans to total loans | 0.73 | % | 0.72 | % | |||||||
| Non-performing assets to total assets | 0.57 | % | 0.56 | % | |||||||
| ACL - loans to non-performing loans | 191 | % | 191 | % | |||||||
(1) Excludes $19.0 million and $10.9 million of residential mortgage properties for which formal foreclosure proceedings were in process as of March 31, 2024
and December 31, 2023, respectively.
Non-performing loans at March 31, 2024 increased $2.8 million, or 1.8%, compared to $153.3 million as of December 31, 2023. Non-performing loans as a percentage of total loans were 0.73% at March 31, 2024 and 0.72% at December 31, 2023. See "Note 4 - Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements for further details on non-performing loans.
The ability to identify potential problem loans in a timely manner is important to maintaining an adequate ACL. For commercial and industrial loans, commercial mortgages and commercial construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and leases and other loans is based on payment history, through the monitoring of delinquency levels and trends.
Total internally risk-rated loans were $13.7 billion as of March 31, 2024 and December 31, 2023, respectively, of which $1.0 billion and $0.9 billion were criticized and classified, respectively. For a description of the Corporation's risk ratings, see "Note 1 - Summary of Significant Accounting Policies - Allowance for Credit Losses" in the Notes to Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2023.
The following table presents criticized and classified loans, or those with internal risk ratings of special mention or substandard or lower for commercial mortgages, commercial and industrial loans and construction loans to commercial borrowers, by class segment:
Special Mention(1) | Increase (Decrease) | Substandard or Lower(2) | Increase (Decrease) | Total Criticized and Classified Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2024 | December 31, 2023 | $ | % | March 31, 2024 | December 31, 2023 | $ | % | March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate - commercial mortgage | $ | 340,848 | $ | 302,553 | $ | 38,295 | 12.7% | $ | 248,325 | $ | 224,774 | $ | 23,551 | 10.5 | % | $ | 589,173 | $ | 527,327 | ||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 122,170 | 135,837 | (13,667) | (10.1) | 243,219 | 196,500 | 46,719 | 23.8 | 365,389 | 332,337 | |||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - construction (3) | 22,273 | 38,520 | (16,247) | (42.2) | 24,404 | 26,771 | (2,367) | (8.8) | 46,677 | 65,291 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 485,291 | $ | 476,910 | $ | 8,381 | 1.8% | $ | 515,948 | $ | 448,045 | $ | 67,903 | 15.2% | $ | 1,001,239 | $ | 924,955 | |||||||||||||||||||||||||||||||||||||||||
| % of total risk rated loans | 3.5 | % | 3.5 | % | 3.8 | % | 3.3 | % | 7.3 | % | 6.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||
(1) Considered "criticized" loans by banking regulators.
(2) Considered "classified" loans by banking regulators.
(3) Excludes construction - other.
53
The Corporation accounts for the credit risk associated with lending activities through the ACL and the provision for credit losses.
The following table presents the activity in the ACL:
| Three months ended March 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Average balance of net loans | $ | 21,370,033 | $ | 20,463,096 | |||||||
| Balance of ACL at beginning of period | $ | 293,404 | $ | 269,366 | |||||||
| Loans charged off: | |||||||||||
| Real estate - commercial mortgage | (26) | (13,362) | |||||||||
| Commercial and industrial | (7,632) | (612) | |||||||||
| Real estate - residential mortgage | (251) | — | |||||||||
| Consumer and real estate - home equity | (2,238) | (2,206) | |||||||||
| Real estate - construction | — | — | |||||||||
| Leases and other loans | (805) | (723) | |||||||||
| Total loans charged off | (10,952) | (16,903) | |||||||||
| Recoveries of loans previously charged off: | |||||||||||
| Real estate - commercial mortgage | 152 | 786 | |||||||||
| Commercial and industrial | 1,248 | 1,086 | |||||||||
| Real estate - residential mortgage | 116 | 48 | |||||||||
| Consumer and real estate - home equity | 676 | 661 | |||||||||
| Real estate - construction | — | 202 | |||||||||
| Leases and other loans | 162 | 116 | |||||||||
| Total recoveries | 2,354 | 2,899 | |||||||||
| Net loans charged off (recoveries) | (8,598) | (14,004) | |||||||||
Provision for credit losses(1) | 13,082 | 23,333 | |||||||||
| Balance of ACL at end of period | $ | 297,888 | $ | 278,695 | |||||||
| Provision for OBS credit exposures | $ | (2,157) | $ | 1,211 | |||||||
Reserve for OBS credit exposures(2) | $ | 15,097 | $ | 17,539 | |||||||
| Net charge-offs to average loans (annualized) | 0.16 | % | 0.27 | % | |||||||
(1) Provision included in the table only includes the portion related to net loans.
(2) Reserve for OBS credit exposures is recorded with other liabilities on the consolidated balance sheets.
The provision for credit losses, specific to loans, for the three months ended March 31, 2024 was $13.1 million, compared to a provision of $23.3 million recorded for the same period in 2023. The ACL includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative models. See "Note 4 - Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements for further details on the provision for credit losses.
54
The following table summarizes the allocation of the ACL - loans:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| ACL - loans | % to Total ACL - loans(1) | % to Total Net Loans(2) | ACL - loans | % to Total ACL - loans(1) | % to Total Net Loans(2) | ||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Real estate - commercial mortgage | $ | 114,492 | 38.4 | % | 38.5 | % | $ | 112,565 | 38.4 | % | 38.1 | % | |||||||||||||||||||||||
| Commercial and industrial | 76,883 | 25.8 | 20.8 | 74,266 | 25.3 | 21.3 | |||||||||||||||||||||||||||||
| Real estate - residential mortgage | 73,216 | 24.6 | 25.2 | 73,286 | 25.0 | 24.9 | |||||||||||||||||||||||||||||
| Consumer, home equity and leases and other loans | 20,331 | 6.8 | 9.7 | 20,992 | 7.1 | 9.9 | |||||||||||||||||||||||||||||
| Real estate - construction | 12,966 | 4.4 | 5.8 | 12,295 | 4.2 | 5.8 | |||||||||||||||||||||||||||||
| Total ACL - loans | $ | 297,888 | 100.0 | % | 100.0 | % | $ | 293,404 | 100.0 | % | 100.0 | % | |||||||||||||||||||||||
(1) Ending ACL - loan portfolio segment balance as a % of total ACL - loans.
(2) Ending loan portfolio segment balances as a % of total net loans for the periods presented.
Deposits and Borrowings
The following table presents ending deposits by type:
| March 31, 2024 | December 31, 2023 | Increase (Decrease) | |||||||||||||||||||||
| $ | % | ||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Noninterest-bearing demand | $ | 5,086,514 | $ | 5,314,094 | $ | (227,580) | (4.3) | % | |||||||||||||||
| Interest-bearing demand | 5,521,017 | 5,722,695 | (201,678) | (3.5) | |||||||||||||||||||
| Savings and money market deposits | 6,846,038 | 6,616,901 | 229,137 | 3.5 | |||||||||||||||||||
| Total demand and savings | 17,453,569 | 17,653,690 | (200,121) | (1.1) | |||||||||||||||||||
| Brokered deposits | 1,152,427 | 1,144,692 | 7,735 | 0.7 | |||||||||||||||||||
| Time deposits | 3,135,954 | 2,739,241 | 396,713 | 14.5 | |||||||||||||||||||
| Total deposits | $ | 21,741,950 | $ | 21,537,623 | $ | 204,327 | 0.9 | % | |||||||||||||||
During the three months ended March 31, 2024, total deposits increased by $204.3 million, or 0.9%, compared to December 31, 2023. The increase in total deposits was primarily due to increases in time deposits and savings and money market deposits of $396.7 million and $229.1 million, respectively, partially offset by decreases in noninterest-bearing demand deposits and interest-bearing demand deposits of $227.6 million and $201.7 million, respectively.
Total uninsured deposits were estimated to be $7.1 billion and $7.2 billion at March 31, 2024 and December 31, 2023, respectively.
Time deposits of $250 thousand or more were $698.2 million and $551.2 million at March 31, 2024 and December 31, 2023, respectively.
55
The following table presents ending borrowings by type:
| March 31, 2024 | December 31, 2023 | Increase (Decrease) | |||||||||||||||||||||
| $ | % | ||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Federal funds purchased | $ | — | $ | 240,000 | $ | (240,000) | N/M | ||||||||||||||||
| Federal Home Loan Bank advances | 900,000 | 1,100,000 | (200,000) | (18.2) | |||||||||||||||||||
| Senior debt and subordinated debt | 535,566 | 535,384 | 182 | — | |||||||||||||||||||
Other borrowings(1) | 860,474 | 612,142 | 248,332 | 40.6 | |||||||||||||||||||
| Total borrowings | $ | 2,296,040 | $ | 2,487,526 | $ | (191,486) | (7.7) | % | |||||||||||||||
(1) Includes repurchase agreements, short-term promissory notes and capital leases.
During the three months ended March 31, 2024, total borrowings decreased $191.5 million, or 7.7%, compared to December 31, 2023. The decrease in total borrowings was due to decreases in Federal funds purchased and FHLB advances of $240.0 million and $200.0 million, respectively, partially offset by an increase in other borrowings of $248.3 million.
Shareholders' Equity
On December 19, 2023, the Corporation announced that its Board of Directors approved the 2024 Repurchase Program. The 2024 Repurchase Program will expire on December 31, 2024. Under the 2024 Repurchase Program, the Corporation is authorized to repurchase up to $125.0 million of shares of its common stock through December 31, 2024. Under this authorization, up to $25.0 million of the $125 million authorization may be used to repurchase shares of the Corporation's preferred stock and outstanding subordinated notes.
During the three months ended March 31, 2024, 1,934,297 shares were repurchased under the 2024 Repurchase Program at a total cost of $30.3 million, or $15.69 per share.
Regulatory Capital
The Corporation and its wholly owned subsidiary bank, Fulton Bank, are subject to the Capital Rules administered by banking regulators. Failure to meet minimum capital requirements can trigger certain actions by regulators that could have a material effect on the Corporation's financial statements.
The Capital Rules require the Corporation and Fulton Bank to:
•Meet a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets;
•Meet a minimum Tier 1 Leverage capital ratio of 4.00% of average assets;
•Meet a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 capital ratio of 6.00% of risk-weighted assets;
•Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and
•Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, are excluded as a component of Tier 1 capital for institutions of the Corporation's size.
As of March 31, 2024, the Corporation's capital levels met the minimum capital requirements, including the capital conservation buffers, as prescribed in the Capital Rules.
As of March 31, 2024, Fulton Bank met the well-capitalized requirements under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, a bank must maintain minimum Total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios as set forth in the Capital Rules. There were no other conditions or events since March 31, 2024 that management believes have changed the Corporation's capital categories.
56
The following table summarizes the Corporation's capital ratios in comparison to regulatory requirements:
| March 31, 2024 | December 31, 2023 | Regulatory Minimum for Capital Adequacy | Fully Phased-in, with Capital Conservation Buffers | ||||||||||||||||||||
| Total Risk-Based Capital (to Risk-Weighted Assets) | 14.0 | % | 14.0 | % | 8.0 | % | 10.5 | % | |||||||||||||||
| Tier I Risk-Based Capital (to Risk-Weighted Assets) | 11.1 | % | 11.2 | % | 6.0 | % | 8.5 | % | |||||||||||||||
| Common Equity Tier I (to Risk-Weighted Assets) | 10.3 | % | 10.3 | % | 4.5 | % | 7.0 | % | |||||||||||||||
| Tier I Leverage Capital (to Average Assets) | 9.3 | % | 9.5 | % | 4.0 | % | 4.0 | % | |||||||||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency price risk and commodity price risk. Due to the nature of its operations, foreign currency price risk and commodity price risk are not significant to the Corporation.
Interest Rate Risk, Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation's liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation's net interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. The Corporation's ALCO is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.
The Corporation uses two complementary methods to measure and manage interest rate risk. They are a simulation of net interest income and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates.
Simulation of net interest income is performed for the next 12-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation's short-term earnings exposure to rate movements. The Corporation's policy limits the potential exposure of net interest income, in a non-parallel instantaneous shock, to 10% of the base case net interest income for a 100 bps shock in interest rates, 15% for a 200 bps shock, 20% for a 300 bps shock and 25% for a 400 bps shock. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet, nor does it take into account the potential effects of competition on the pricing of deposits and loans over the forward 12-month period.
Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options within the investment portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to timing, amount and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
57
The following table summarizes the expected impact of abrupt interest rate changes, that is, a non-parallel instantaneous shock, on net interest income as of March 31, 2024:
Rate Shock(1) | Annual change in net interest income | % change in net interest income | |||||||||
| +400 bp | + $52.6 million | +5.8% | |||||||||
| +300 bp | + $40.6 million | +4.5% | |||||||||
| +200 bp | + $28.8 million | +3.2% | |||||||||
| +100 bp | + $17.7 million | +2.0% | |||||||||
| –100 bp | - $39.4 million | -4.4% | |||||||||
| –200 bp | - $79.5 million | -8.8% | |||||||||
| –300 bp | - $111.1 million | -12.3% | |||||||||
| –400 bp | - $131.9 million | -14.6% | |||||||||
(1) These results include the effect of implicit and explicit interest rate floors that limit further reduction in interest rates.
Economic value of equity estimates the discounted present value of asset and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Abrupt changes or "shocks" in interest rates, both upward and downward, are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation's balance sheet. The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of the base case economic value of equity for a 100 bps shock in interest rates, 20% for a 200 bps shock, 30% for a 300 bps shock and 40% for a 400 bps shock. As of March 31, 2024, the Corporation was within economic value of equity policy limits for every 100 bps shock.
Interest Rate Derivatives
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. These interest rate derivatives are derivative financial instruments, and the gross fair values are recorded in other assets and liabilities on the consolidated balance sheets, with changes in fair value during the period recorded in other non-interest expense on the consolidated statements of income.
Cash Flow Hedges
The Corporation's objectives in using interest rate derivatives are to reduce volatility in interest income and interest expense 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 and borrowings.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income or interest expense 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 liabilities.
In January 2023, the Corporation terminated interest rate derivatives designated as cash flow hedges with a combined notional amount of $1.0 billion. As the hedged transaction continues to be probable, the unrealized losses that have been recorded in AOCI will be recognized as a reduction to interest income when the previously forecasted hedged item affects earnings in future periods. During the three months ended March 31, 2024, $7.0 million of these unrealized losses have been reclassified as a reduction of interest income on loans, including fees, on the consolidated statements of income.
Liquidity
The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on investments and outstanding loans and through the availability of
58
deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short- and long-term needs.
The Corporation maintains liquidity sources in the form of interest-bearing deposits and customer funding (short-term promissory notes). The Corporation can access additional liquidity from these sources, if necessary, by increasing the rates of interest paid on those instruments. The positive impact to liquidity resulting from paying higher interest rates could have a detrimental impact on NIM and net interest income if rates on interest-earning assets do not experience a proportionate increase. Borrowing availability with the FHLB and the FRB, along with federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.
Fulton Bank is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of March 31, 2024, the Bank had total borrowing capacity of approximately $9.4 billion with $3.3 billion of advances and letters of credit outstanding, for a remaining available borrowing capacity of approximately $6.1 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.
As of March 31, 2024, the Corporation had aggregate federal funds lines borrowing capacity of $2.6 billion with $0 outstanding against that amount. As of March 31, 2024, the Corporation had $1.2 billion of collateralized borrowing capacity at the FRB discount window.
A combination of commercial real estate loans, commercial loans, consumer loans and securities are pledged to the FRB of Philadelphia to provide access to FRB discount window borrowings. Securities carried at $0.6 billion at March 31, 2024 and $0.4 billion at December 31, 2023 were pledged as collateral to secure public and trust deposits.
Liquidity must also be managed at the Corporation's parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. Management continues to monitor the liquidity and capital needs of the parent company including monitoring the granularity of the deposit portfolio and level of uninsured deposits. Management will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.
The consolidated statements of cash flows provide additional information. The Corporation's operating activities during the three months ended March 31, 2024 provided $152.9 million of cash. Cash used by investing activities was $299.9 million and was mainly due to the purchase of AFS securities and a net increase in loans. Cash used by financing activities was $45.4 million, and was primarily due to acquisition of treasury stock and dividends paid, partially offset by a net $12.7 million increase in deposits and other borrowings.
Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation's debt security investments consist primarily of U.S. government-sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government-sponsored agencies.
State and Municipal Securities
As of March 31, 2024, the Corporation owned securities issued by various states and municipalities with a total fair value of $1.1 billion. Uncertainty with respect to the financial strength of state and municipal bond insurers places emphasis on the underlying strength of issuers. Pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the underlying creditworthiness of the issuing state or municipality and then, to a lesser extent, on any credit enhancement. State and municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the securities to be repaid by any means available to the issuing state or municipality. As of March 31, 2024, approximately 100% of state and municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 74% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.
59
Item 4. Controls and Procedures
The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Rule 13a-15, promulgated under the Exchange Act. Based upon that evaluation, the Corporation's Chief Executive Officer and Interim Chief Financial Officer concluded that, as of March 31, 2024, the Corporation's disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The information presented in the "Legal Proceedings" section of Note 12 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements is incorporated herein by reference.
Item 1A. Risk Factors
Item 1A. Risk Factors of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2023 includes a discussion of the material risks and uncertainties that could adversely affect the Corporation's business, results of operations and financial condition.
The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2023.
We may fail to realize the anticipated benefits of the Republic First Transaction.
The success of the Republic First Transaction will depend on, among other things, our ability to integrate the Republic First Assets and Liabilities into our business in a manner that facilitates growth opportunities and achieves the anticipated benefits of the Republic First Transaction. Although the Republic First Transaction was an FDIC-assisted transaction, we are still subject to some of the same risks we would face in acquiring another bank in a negotiated transaction. In addition, because of the expedited nature of the FDIC-assisted transaction, which did not allow bidders the time and access to information customarily associated with preparing for and evaluating a negotiated transaction, we may face additional risks. Such risks include risks associated with maintaining customer relationships and failure to realize the anticipated acquisition benefits in the amounts and within the time frames we expect. Further, we did not enter into a loss sharing arrangement with the FDIC in connection with the Republic First Transaction. If we are not able to successfully achieve our objectives and manage the corresponding risks, the anticipated benefits of the Republic First Transaction may not be realized fully or at all or may take longer to realize than expected.
There is a significant degree of difficulty and management distraction inherent in the process of integrating an acquisition, including challenges consolidating certain operations and functions (including regulatory functions), integrating technologies, organizations, procedures, policies and operations, addressing differences in the business cultures of the Corporation and retaining key personnel. In addition, the success of the Republic First Transaction will depend on a number of factors, including, but not limited to our ability to limit the outflow of deposits held by our new customers and to successfully retain and manage interest-earning assets (i.e., loans) acquired in the Republic First Transaction, our ability to attract new deposits and to generate new interest-earning assets in the areas previously served by the former Republic First Bank branches, our ability to control the incremental non-interest expense from the former Republic First Bank branches and other units in a manner that enables us to maintain a favorable overall efficiency ratio, the accuracy of our assumptions regarding the value of the Republic First Assets and Liabilities, our ability to effectively manage the ongoing relationship with the FDIC related to the Republic First Transaction, our ability to collect on the loans acquired, our assumptions regarding the risk profile of the loans acquired, and our ability to earn acceptable levels of interest and non-interest income. The integration may be complex and time consuming and involve delays or additional and unforeseen expenses. The integration process and other disruptions resulting from the Republic First Transaction may also disrupt our ongoing business, which may cause the Corporation to lose clients and customers, or cause clients and customers to move their business to competing financial institutions. It is possible that the integration process could result in inconsistencies in standards, controls, procedures and policies that could adversely affect the Corporation's ability to maintain relationships with clients, customers, depositors and employees. In addition, the loss of key employees in connection with the Republic First Transaction could adversely affect the Corporation's ability to successfully conduct its business. Any failure to successfully or cost-effectively integrate the Republic First Assets and Liabilities in connection with the Republic First Transaction could have a material adverse effect on our business, operations and financial
60
position, including as a result of reputational harm or other legal or regulatory costs associated with the Republic First Transaction.
We may incur unforeseen liabilities or losses in connection with the Republic First Transaction.
In connection with the Republic First Transaction, we have agreed to assume certain liabilities of Republic First Bank. The expedited nature of the Republic First Transaction did not allow bidders the time and access to information customarily associated with preparing for and evaluating a negotiated transaction. As such, there may be liabilities that we failed or were unable to discover in the course of performing due diligence investigations into the Republic First Assets and Liabilities, or we may not have correctly assessed the significance of certain liabilities identified in the course of our due diligence. Any such liabilities, individually or in the aggregate, could lead to unforeseen losses, which may be significant, and which could have a material adverse effect on our business, financial condition and results of operations.
Our assumptions regarding the fair value of Republic First Assets and Liabilities could be inaccurate which could materially and adversely affect our business, financial condition, results of operations, and future prospects.
Our acquisition of certain assets of Republic First Bank in connection with the Republic First Transaction followed the FDIC's competitive bidding process. The expedited nature of the transaction did not allow bidders the time and access to information customarily associated with preparing for and evaluating a negotiated transaction. The determination of both the aggregate amount and the fair value of the Republic First Assets and Liabilities is based on estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Our estimates of the fair value of the Republic First Assets and Liabilities are based on information provided to us by the FDIC, much of which has not been independently verified given the nature of the FDIC's expedited competitive bidding process. Further, we have not entered into a loss sharing arrangement with the FDIC in connection with the Republic First Transaction. As a result, fair value assumptions we have made in connection with Republic First Assets and Liabilities in the Republic First Transaction may be inaccurate and subject to change as the acquired assets and customers are integrated into Fulton Bank and we acquire additional information and details about the Republic First Assets and Liabilities. If our assumptions and projections regarding the fair value of the Republic First Assets and Liabilities are wrong, it could adversely impact our business, financial condition and results of operations.
We are in the process of validating the fair value of the Republic First Assets and Liabilities based on ongoing internal assessments and continuing discussions with the FDIC regarding the fair value of the assets acquired in the Republic First Transaction, which may impact our assumptions and estimates regarding the fair value of the Republic First Assets and Liabilities. In addition, we may obtain additional information and evidence that could result in changes to our assumptions regarding the fair value of the Republic First Assets and Liabilities in connection with the Republic First Transaction, including potential decreases in the fair value of the Republic First Assets and Liabilities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
| (c) Period | Total Number of Shares Purchased | Average Price Paid per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| January 1, 2024 to January 31, 2024 | 514,004 | $ | 16.08 | 514,004 | $ | 116,733,523 | ||||||||||||||||||||
| February 1, 2024 to February 29, 2024 | 1,420,293 | 15.55 | 1,420,293 | 94,651,692 | ||||||||||||||||||||||
| March 1, 2024 to March 31, 2024 | — | — | — | 94,651,692 | ||||||||||||||||||||||
(1) Includes 1% excise tax
On December 19, 2023, the Corporation announced that its Board of Directors approved the 2024 Repurchase Program. The 2024 Repurchase Program will expire on December 31, 2024. Under the 2024 Repurchase Program, the Corporation is authorized to repurchase up to $125.0 million of shares of its common stock through December 31, 2024. Under this authorization, up to $25.0 million of the $125 million authorization may be used to repurchase shares of the Corporation's preferred stock and outstanding subordinated notes.
As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time under the 2024 Repurchase Program in open market or privately negotiated transactions, including
61
without limitation, through accelerated share repurchase transactions. The 2024 Repurchase Program may be discontinued at any time.
During the three months ended March 31, 2024, 1,934,297 shares were repurchased under the 2024 Repurchase Program at a total cost of $30.3 million, or $15.69 per share.
62
Item 5. Other Information
(c) None of the Corporation's directors or "officers" (as defined in Rule 16a-1(f) (17 C.F.R. § 240.16a-1(f))) adopted terminated
63
Item 6. Exhibits
| 1.1 | |||||||||||
| 2.1 | |||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 3.3 | |||||||||||
| 4.1 | |||||||||||
| 4.2 | |||||||||||
| 4.3 | |||||||||||
| 4.4 | |||||||||||
| 10.1 | |||||||||||
| 10.2 | |||||||||||
| 10.3 | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32.1 | |||||||||||
| 32.2 | |||||||||||
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. | ||||||||||
| 104 | Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101) | ||||||||||
64
FULTON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FULTON FINANCIAL CORPORATION | ||||||||||||||
| Date: | May 9, 2024 | /s/ Curtis J. Myers | ||||||||||||
| Curtis J. Myers | ||||||||||||||
| Chairman and Chief Executive Officer | ||||||||||||||
| Date: | May 9, 2024 | /s/ Beth Ann L. Chivinski | ||||||||||||
| Beth Ann L. Chivinski | ||||||||||||||
| Senior Executive Vice President and Interim Chief Financial Officer | ||||||||||||||
65