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Business Combinations
 6 Months Ended
Jun. 30, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]  
Business Combinations Business Combinations
Lakeland Bancorp, Inc. - Merger Agreement
On May 16, 2024, the Company completed its merger with Lakeland Bancorp, Inc. ("Lakeland"), which added $10.91 billion to total assets, $7.91 billion to total loans, $8.62 billion to total deposits and 68 full-service banking offices in New Jersey and New York. The Company expects to close 13 of the acquired Lakeland banking offices and nine legacy Bank branches in the third quarter of 2024 due to geographic overlap.
Under the merger agreement, each share of Lakeland common stock was converted into the right to receive 0.8319 shares of the Company's common stock, a total of 54,356,954 shares converted, plus cash in lieu of fractional shares. The total consideration paid for the acquisition of Lakeland was $876.8 million. In connection with the acquisition, Lakeland Bank, a wholly owned subsidiary of Lakeland, was merged with and into the Bank.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired totaled $190.9 million and was recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the merger date, net of cash consideration paid (in thousands):
As of May 16, 2024
Assets acquired:
Cash and cash equivalents, net$194,548 
Available for sale debt securities1,585,993 
Federal Home Loan Bank stock46,113 
Loans held for sale1,494 
Loans held for investment7,906,326 
Allowance for credit losses on PCD loans(17,188)
Loans, net7,889,138 
Bank-owned life insurance160,646 
Banking premises and equipment60,578 
Accrued interest receivable27,241 
Goodwill190,858 
Other intangibles assets209,915 
Other assets242,011 
Total assets acquired$10,608,535 
Liabilities assumed:
Deposits8,622,924 
Mortgage escrow deposits5,532 
Borrowed funds785,927 
Subordinated debentures180,198 
Other liabilities137,176 
Total liabilities assumed$9,731,757 
Net assets acquired$876,778 
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values and goodwill may be required.
Fair Value Measurement of Assets Assumed and Liabilities Assumed
The methods used to determine the fair value of the assets acquired and liabilities assumed in the Lakeland acquisition were as follows:
Securities Available for Sale
The estimated fair values of the available for sale debt securities, primarily comprised of U.S. government agency mortgage-backed securities and U.S. government agency and municipal bonds carried on Lakeland's balance sheet was confirmed using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities and a fair value adjustment was not recorded on the investments. A fair value discount of $249.7 million was recorded on the investments.
Loans
Loans acquired from Lakeland were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Lakeland were estimated using the discounted cash flow method based on the remaining maturity and repricing terms. Cash flows were adjusted for expected losses and prepayments. Projected cash flows were then discounted to present value based on: the relative risk of the cash flows, taking into account the loan type, liquidity risk, the maturity of the loans, servicing costs, and a required return on capital; and monthly principal and interest cash flows
were discounted to present value and summed to arrive at the calculated value of the loans. The fair value of the acquired loans receivable had a gross amortized cost basis of $7.91 billion.  
For loans acquired without evidence of more-than-insignificant deterioration in credit quality since origination, the Company recorded interest rate loan fair value and credit fair value adjustments. Loans were grouped into pools based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The loans were valued at the sub-pool level and were pooled at the summary level based on loan type. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these market rates was used as the fair value interest rate that a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $297.2 million. The Company used historical annual average charge-off percentages for banking institutions identified as peers of the Company and Lakeland combined as a market-participant proxy to develop the life-of-loan loss rates per loan type for the Non-PCD loans. The default and loss rates were then applied to the principal balance to arrive at the projected credit losses for each period, which resulted in a credit fair value discount of $82.4 million.
Loans acquired that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. The Company evaluated acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) modifications for borrowers experiencing financial difficulty; (3) risk ratings of watch, special mention, substandard or doubtful; and (4) loans greater than 59 days past due. At the acquisition date, an estimate of expected credit losses was made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics.
This estimate of credit losses was calculated using management's best estimate of projected losses over the remaining life of the loans. This represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective PCD loan pool, given the outlook and forecasts. The expected lifetime losses were calculated using historical losses observed at the Bank, Lakeland and peer banks. A $17.2 million allowance for credit losses was recorded on PCD loans. The interest rate fair value adjustment related to PCD loans will be substantially recognized as interest income on a level yield amortization or straight line method over the expected life of the loans.
The table below illustrates the fair value adjustments made to the amortized cost basis in order to present the fair value of the loans acquired (in thousands):
Gross amortized cost basis as of May 16, 2024$8,323,589 
Interest rate fair value adjustment on all loans(330,540)
Credit fair value adjustment on non-PCD loans(82,359)
Charge-offs on PCD Loans at acquisition(4,364)
Allowance for credit losses on PCD loans(17,188)
Fair value of acquired loans, net, as of May 16, 2024$7,889,138 
The table below is a summary of the PCD loans that were acquired from Lakeland as of the closing date (in thousands):
Gross amortized cost basis as of May 16, 2024$564,147 
Charge-offs on PCD Loans at acquisition(4,364)
Interest component of expected cash flows (accretable difference)(33,365)
Allowance for credit losses on PCD loans(17,188)
Net PCD loans$509,230 
Banking Premises and Equipment
The Company acquired 68 branches from Lakeland, 29 of which were owned premises. The Company expects to close 13 of the acquired banking offices in the third quarter of 2024. The fair value of Lakeland’s premises was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located.
Core Deposit Intangible
The fair value of the core deposit intangible was measured using a discounted cash flow approach by comparing the all-in cost of less rate sensitive deposits against an alternative funding source. The discounted cash flow approach is used because there is
no reliable market participant data to support a market approach nor is there an effective measure to utilize the cost approach. To calculate the value of core deposits, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources by using an average of Federal Home Loan Bank of New York ("FHLBNY") advance rates and brokered CD rates as disclosed by market sources. The projected cash flows were developed using projected deposit attrition rates. The discount rate was calculated using the Capital Assets Pricing Model.
The core deposit intangible totaled $209.2 million and is being amortized over its estimated life of approximately 10 years based on dollar weighted deposit runoff on an annualized basis. The core deposit intangible will be evaluated annually for impairment.
Bank Owned Life Insurance ("BOLI")
Lakeland's BOLI cash surrender value was $160.6 million with no fair value adjustment required.
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $1.2 million is being amortized into income on a level yield basis over the contractual life of the deposits.
Borrowings
The fair value of FHLBNY advances was determined based on a discounted cash flow analysis using a discount rate derived from FHLBNY rates as of May 16, 2024. The cash flows of the advances were projected based on the scheduled payments of each advance.
Subordinated Debentures
At the valuation date, Lakeland had three outstanding trust preferred issuances and a subordinated debt issuance with an aggregate balance of $180.2 million, all of which was assumed by the Company on May 16, 2024. The fair value of trust preferred and subordinated debt issuances was determined based on a discounted cash flow analysis using a discount rate commensurate with yields and terms of comparable issuances. The cash flows were projected through the remaining contractual term of the trust preferred issuance and based on the call date for the subordinated debt issuance.
Merger-Related Expenses
Merger-related expenses, which is a separate line in non-interest expense on the Consolidated Statements of Income, totaled $18.9 million and $21.1 million for the three and six months ended June 30, 2024, respectively, compared with $2.0 million and $3.1 million for the three and six months ended June 30, 2023.