FULTON FINANCIAL CORP - Quarter Report: 2020 September (Form 10-Q)

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 September 30, 2020, 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. 0-10587

FULTON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania

23-2195389

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

One Penn Square

Lancaster,

Pennsylvania

17602

(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
Common Stock, par value $2.50	FULT	The Nasdaq Stock Market, LLC
Depositary Shares, Each Representing 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A*	FULTP	The Nasdaq Stock Market, LLC

*Denotes class of security issued and outstanding on the date this report is filed, but not at September 30, 2020.

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.

Large accelerated filer

☒

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 –162,250,000 shares outstanding as of October 30, 2020.

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

INDEX


Description		Page



Glossary of Terms		3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

(a)	Consolidated Balance Sheets - September 30, 2020 and December 31, 2019	4

(b)	Consolidated Statements of Income - Three and nine months ended September 30, 2020 and 2019	5

(c)	Consolidated Statements of Comprehensive Income - Three and nine months ended September 30, 2020 and 2019	6

(d)	Consolidated Statements of Shareholders’ Equity - Three and nine months ended September 30, 2020 and 2019	7

(e)	Consolidated Statements of Cash Flows - Nine months ended September 30, 2020 and 2019	8

(f)	Notes to Consolidated Financial Statements	9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		44

Item 3. Quantitative and Qualitative Disclosures about Market Risk		73

Item 4. Controls and Procedures		76

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		76

Item 1A. Risk Factors		76

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		76

Item 3. Defaults Upon Senior Securities - (not applicable)

Item 4. Mine Safety Disclosures - (not applicable)

Item 5. Other Information - (none to be reported)

Item 6. Exhibits		78

Signatures		79


FULTON FINANCIAL CORPORATION
GLOSSARY OF DEFINED ACRONYMS AND TERMS

ACL						Allowance for Credit Losses
AFS						Available for Sale
ALCO						Asset/Liability Management Committee
AML						Anti-Money Laundering
ARC						Auction Rate Security
ASC						Accounting Standards Codification
ASU						Accounting Standards Update
bp						basis point(s)
BSA						Bank Secrecy Act
CARES Act						Coronavirus Aid, Relief, and Economic Security Act
CECL						Current Expected Credit Losses
Corporation or Company						Fulton Financial Corporation

COVID-19						Coronavirus
ETR						Effective Tax Rate
Exchange Act						Securities Exchange Act of 1934
EAD						Exposure at default
FASB						Financial Accounting Standards Board
FDIC						Federal Deposit Insurance Corporation
Fed Funds Rate						Target Federal Funds Rate
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
LGD						Loss given default
LIBOR						London Interbank Offered Rate
MSRs						Mortgage Servicing Rights
NIM						Net Interest Margin
Net Loans						Loans and lease receivables, (net of unearned income)
OBS						Off-Balance-Sheet
OREO						Other Real Estate Owned
OTTI						Other-than-temporary impairment
PD						Probability of default
PPP						Paycheck Protection Program
PSU						Performance-Based Restricted Stock Unit
RSU						Restricted Stock Unit
SBA						Small Business Administration
SEC						United States Securities and Exchange Commission
TCI						Tax Credit Investment
TDR						Troubled Debt Restructuring

TruPS						Trust Preferred Securities

Note: Some numbers contained in the document may not sum due to rounding

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)


	September 30, 2020		December 31, 2019
	(unaudited)
ASSETS
Cash and due from banks	$	139,304	$	132,283
Interest-bearing deposits with other banks	1,395,586		385,508
Cash and cash equivalents	1,534,890		517,791
FRB and FHLB stock	93,964		97,422
Loans held for sale	93,621		37,828
Investment securities:
AFS, at estimated fair value	2,793,480		2,497,537
HTM, at amortized cost	304,241		369,841
Loans	19,028,621		16,837,526
Less: ACL - loans	(266,825)		(163,622)
Net Loans	18,761,796		16,673,904
Premises and equipment	236,943		240,046
Accrued interest receivable	70,766		60,898
Goodwill and intangible assets	534,907		535,303
Other assets	1,118,673		855,470
Total Assets	$	25,543,281	$	21,886,040
LIABILITIES
Deposits:
Noninterest-bearing	$	6,378,077	$	4,453,324
Interest-bearing	14,351,974		12,940,589
Total Deposits	20,730,051		17,393,913



Short-term borrowings	611,727		883,241
Accrued interest payable	9,123		8,834
Long-term borrowings	1,296,012		881,769
Other liabilities	506,107		376,107
Total Liabilities	23,153,020		19,543,864
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 223.1 million shares issued in 2020 and 222.4 million issued in 2019	557,718		556,110
Additional paid-in capital	1,505,730		1,499,681
Retained earnings	1,099,684		1,079,391
Accumulated other comprehensive gain (loss)	56,954		(137)
Treasury stock, at cost, 61.0 million shares in 2020 and 58.3 million shares in 2019	(829,825)		(792,869)
Total Shareholders’ Equity	2,390,261		2,342,176
Total Liabilities and Shareholders’ Equity	$	25,543,281	$	21,886,040

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


(in thousands, except per-share data)	Three months ended September 30				Nine months ended September 30
	2020		2019		2020		2019
INTEREST INCOME
Loans, including fees	$	158,804	$	186,001	$	493,256	$	558,055
Investment securities:
Taxable	13,150		15,565		44,615		46,935
Tax-exempt	5,449		3,673		15,481		10,222

Loans held for sale	728		466		1,557		1,056
Other interest income	1,028		2,709		4,324		6,879
Total Interest Income	179,159		208,414		559,233		623,147
INTEREST EXPENSE
Deposits	14,631		35,737		58,189		97,974
Short-term borrowings	370		4,156		4,960		12,200
Long-term borrowings	10,042		7,260		28,468		23,854
Total Interest Expense	25,043		47,153		91,617		134,028
Net Interest Income	154,116		161,260		467,616		489,119
Provision for credit losses	7,080		2,170		70,680		12,295
Net Interest Income After Provision for Credit Losses	147,036		159,090		396,936		476,824
NON-INTEREST INCOME
Wealth management	14,943		13,867		43,405		41,259
Commercial banking	18,311		18,788		53,477		53,055
Consumer banking	10,423		13,333		30,800		37,077
Mortgage banking	16,801		6,658		32,998		18,023
Other	2,769		2,675		10,080		6,733
Non-Interest Income Before Investment Securities Gains	63,246		55,321		170,761		156,147
Investment securities gains, net	2		4,492		3,053		4,733
Total Non-Interest Income	63,248		59,813		173,814		160,879
NON-INTEREST EXPENSE
Salaries and employee benefits	79,227		78,211		240,467		234,959
Net occupancy	13,221		12,368		39,851		39,746
Data processing and software	12,285		11,590		36,123		33,211
Other outside services	7,617		12,163		23,098		31,774
Professional fees	2,879		3,331		10,412		10,261
Equipment	3,711		3,459		10,322		10,100
State taxes	2,692		2,523		8,583		7,005
FDIC insurance	1,578		239		6,519		5,603
Marketing	1,147		3,322		4,029		8,345
Amortization of TCI	1,694		1,533		4,594		4,516
Intangible amortization	132		1,071		397		1,285
Prepayment penalty on FHLB advances	—		4,326		2,878		4,326
Other	12,962		12,634		37,431		37,631
Total Non-Interest Expense	139,147		146,770		424,705		428,762
Income Before Income Taxes	71,137		72,133		146,045		208,941
Income taxes	9,529		10,025		18,832		30,391
Net Income	$	61,607	$	62,108	$	127,213	$	178,550
PER SHARE:
Net Income (Basic)	$	0.38	$	0.38	$	0.78	$	1.06
Net Income (Diluted)	0.38		0.37		0.78		1.06
Cash Dividends	0.13		0.13		0.39		0.39
See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)


	Three months ended September 30				Nine months ended September 30
	2020		2019		2020		2019

Net Income	$	61,607	$	62,108	$	127,213	$	178,550
Other Comprehensive Income, net of tax:
Unrealized gain on securities	4,333		18,029		56,186		63,244

Reclassification adjustment for securities gains included in net income	(1)		(3,498)		(2,377)		(3,686)
Amortization of net unrealized losses on AFS securities transferred to HTM	928		3,430		2,517		5,425

Non-credit related unrealized loss on other-than-temporarily impaired debt securities	—		—		—		(682)


Amortization of net unrecognized pension and postretirement income	255		277		765		843
Other Comprehensive Income	5,515		18,238		57,091		65,144
Total Comprehensive Income	$	67,122	$	80,346	$	184,304	$	243,694

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except per-share data)


	Common Stock					Retained Earnings				Treasury Stock		Total
	Shares Outstanding	Amount		Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)
Three months ended September 30, 2020
Balance at June 30, 2020	161,958	$	557,569	$	1,503,750	$	1,059,160	$	51,439	$	(831,417)	$	2,340,501
Net income						61,607						61,607
Other comprehensive income								5,515				5,515
Stock issued	176	149		105						1,592		1,846
Stock-based compensation awards				1,875								1,875


Common stock cash dividends - $0.13 per share						(21,083)						(21,083)
Balance at September 30, 2020	162,134	$	557,718	$	1,505,730	$	1,099,684	$	56,954	$	(829,825)	$	2,390,261

Three months ended September 30, 2019
Balance at June 30, 2019	166,903	$	555,690	$	1,493,628	$	1,018,736	$	(12,157)	$	(747,099)	$	2,308,798
Net income						62,108						62,108
Other comprehensive income								18,238				18,238
Stock issued	157	198		919						1,043		2,160
Stock-based compensation awards				2,110								2,110
Acquisition of treasury stock	(3,024)									(48,071)		(48,071)


Common stock cash dividends - $0.13 per share						(21,327)						(21,327)
Balance at September 30, 2019	164,036	$	555,888	$	1,496,657	$	1,059,517	$	6,081	$	(794,127)	$	2,324,016

Nine months ended September 30, 2020
Balance at December 31, 2019	164,218	$	556,110	$	1,499,681	$	1,079,391	$	(137)	$	(792,869)	$	2,342,176
Net income						127,213						127,213
Other comprehensive income								57,091				57,091
Stock issued	824	1,608		646						2,792		5,046
Stock-based compensation awards				5,403								5,403
Acquisition of treasury stock	(2,908)									(39,748)		(39,748)

Impact of adopting CECL (1)						(43,807)						(43,807)
Common stock cash dividends - $0.39 per share						(63,113)						(63,113)
Balance at September 30, 2020	162,134	$	557,718	$	1,505,730	$	1,099,684	$	56,954	$	(829,825)	$	2,390,261

Nine months ended September 30, 2019
Balance at December 31, 2018	170,184	$	554,377	$	1,489,703	$	946,032	$	(59,063)	$	(683,476)	$	2,247,573
Net income						178,550						178,550
Other comprehensive income								65,144				65,144
Stock issued	701	1,511		1,496						806		3,813
Stock-based compensation awards				5,458								5,458
Acquisition of treasury stock	(6,849)									(111,457)		(111,457)


Common stock cash dividends - $0.39 per share						(65,065)						(65,065)
Balance at September 30, 2019	164,036	$	555,888	$	1,496,657	$	1,059,517	$	6,081	$	(794,127)	$	2,324,016

See Notes to Consolidated Financial Statements

(1) The Corporation adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments on January 1, 2020. See Note 1, "Basis of Presentation" to the Consolidated Financial Statements for further details.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(in thousands)	Nine months ended September 30
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	127,213	$	178,550
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	70,680		12,295
Depreciation and amortization of premises and equipment	21,653		20,984
Amortization of TCI	22,883		24,608
Net amortization of investment securities premiums	8,722		6,861
Investment securities gains, net	(3,053)		(4,733)
Gain on sales of mortgage loans held for sale	(42,208)		(13,822)
Proceeds from sales of mortgage loans held for sale	1,113,671		672,314
Originations of mortgage loans held for sale	(1,127,256)		(665,338)
Intangible amortization	397		1,285
Amortization of issuance costs and discounts on long-term debt	836		632
Stock-based compensation	5,403		5,458


Other changes, net	(169,447)		(195,560)
Total adjustments	(97,719)		(135,016)
Net cash provided by operating activities	29,494		43,534
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of AFS securities	215,150		697,634
Proceeds from principal repayments and maturities of AFS securities	282,832		169,380
Proceeds from principal repayments and maturities of HTM securities	67,268		62,320
Purchase of AFS securities	(728,937)		(838,634)

Sale (purchase) of FRB and FHLB stock	3,458		(15,274)
Net increase in loans	(2,203,974)		(529,974)
Net purchases of premises and equipment	(18,550)		(23,799)
Net cash paid for acquisition	—		(3,907)
Net change in tax credit investments	(9,585)		(14,715)
Net cash used in investing activities	(2,392,338)		(496,969)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits	3,669,990		627,958
Net (decrease) increase in time deposits	(333,852)		338,600
Net (decrease) increase in short-term borrowings	(271,514)		78,083
Additions to long-term debt	495,898		305,000
Repayments of long-term debt	(82,491)		(571,197)
Net proceeds from issuance of common stock	5,046		3,813

Dividends paid	(63,387)		(64,439)
Acquisition of treasury stock	(39,748)		(111,457)
Net cash provided by financing activities	3,379,942		606,361
Net Increase in Cash and Cash Equivalents	1,017,099		152,926
Cash and Cash Equivalents at Beginning of Period	517,791		445,687
Cash and Cash Equivalents at End of Period	$	1,534,890	$	598,613
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	91,328	$	134,935
Income taxes	12,118		7,966
Supplemental schedule of certain noncash activities:

Transfer of HTM securities to AFS securities	$	—	$	158,898
See Notes to Consolidated Financial Statements

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, 2019. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the SEC.

CECL Adoption and Updated Significant Accounting Policy

On January 1, 2020, the Corporation adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology, and is referred to as CECL. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities. It also applies to OBS credit exposures, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, and net investments in leases recognized by a lessor in accordance with ASC Topic 842.

The Corporation adopted CECL using the modified retrospective method for all financial assets measured at amortized cost, net of investments in leases and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under CECL, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Corporation recorded an increase of $58.3 million to the ACL on January 1, 2020 as a result of the adoption of CECL. Retained earnings decreased $43.8 million and deferred tax assets increased by $12.4 million. Included in the $58.3 million increase to the ACL was $2.1 million for certain OBS credit exposures that was previously recognized in other liabilities before the adoption of CECL.

Loans: Loans are stated at their principal amount outstanding, except for mortgage loans held for sale, which are carried at fair value. Interest income on loans is accrued as earned. Unearned income on lease financing receivables is recognized on a basis which approximates the effective yield method.

In general, loans are placed on non-accrual status once they become 90 days delinquent as to principal or interest. In certain cases a loan may be placed on non-accrual status prior to being 90 days delinquent if there is an indication that the borrower is having difficulty making payments, or the Corporation believes it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan is considered secured and in the process of collection. The Corporation generally applies payments received on non-accruing loans to principal until such time as the principal is paid off, after which time any payments received are recognized as interest income. If the Corporation believes that all amounts outstanding on a non-accrual loan will ultimately be collected, payments received subsequent to its classification as a non-accrual loan are allocated between interest income and principal.

A loan that is 90 days delinquent may continue to accrue interest if the loan is both adequately secured and is in the process of collection. Past due status is determined based on contractual due dates for loan payments. An adequately secured loan is one that has collateral with a supported fair value that is sufficient to discharge the debt, and/or has an enforceable guarantee from a financially responsible party. A loan is considered to be in the process of collection if collection is proceeding through legal action or through other activities that are reasonably expected to result in repayment of the debt or restoration to current status in the near future.

Loans deemed to be a loss are written off through a charge against the ACL. Closed-end consumer loans are generally charged off when they become 120 days past due (180 days for open-end consumer loans) if they are not adequately secured by real

estate. All other loans are evaluated for possible charge-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral, if any. Principal recoveries of loans previously charged off are recorded as increases to the ACL.

Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are deferred and amortized over the life of the loan as an adjustment to interest income using the effective yield method. For mortgage loans sold, net loan origination fees and costs are included in the gain or loss on sale of the related loan, as components of mortgage banking.

Loan origination fees and the related direct origination costs for loans originated under the PPP loan program are amortized on a straight-line basis over the repayment period of the loan. To the extent that a PPP loan is forgiven, the unamortized fees and costs will be recorded at the time of forgiveness.

Troubled Debt Restructurings: Loans are accounted for and reported as TDRs when, for economic or legal reasons, the Corporation grants a concession to a borrower experiencing financial difficulty that it would not otherwise consider. Concessions, whether negotiated or imposed by bankruptcy, granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date or a reduction in the interest rate. Non-accrual TDRs can be restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.

On March 27, 2020 the CARES Act was signed into law. The CARES Act includes an option for financial institutions to suspend the requirements of GAAP for certain loan modifications that would otherwise be categorized as a TDR. Certain conditions must be met with respect to the loan modification including that the modification is related to COVID-19, the modified loan was not more than 30 days past due on December 31, 2019 and the modification was executed between March 1, 2020 and the earlier of (a) 60 days after the date of the COVID-19 national emergency comes to an end or (b) December 31, 2020. The Corporation is applying the option under the CARES act for all loan modifications that qualify.

On April 7, 2020, Troubled Debt Restructurings: Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by COVID-19 was issued by the federal banking regulatory agencies. Included in the Interagency Statement were provisions permitting banks that grant loan modifications to customers impacted by COVID-19 to exclude those modifications from loans categorized as TDRs. The Corporation is adopting the guidance in this Interagency Statement effective for COVID-19-related modifications occurring subsequent to March 13, 2020.

Allowance for Credit Losses: The discussion that follows describes the methodology for determining the ACL under the CECL model that was adopted January 1, 2020. The allowance methodology for prior periods is disclosed in the Corporation’s 2019 Annual Report on Form 10-K.

The Corporation has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income.

Loans: The ACL for loans is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for expected credit losses.

Loans Evaluated Collectively: Loans evaluated collectively for expected credit losses include loans on accrual status, excluding accruing TDRs, and loans initially evaluated individually, but determined not to have enhanced credit risk characteristics. This category includes loans on non-accrual status and TDRs where the total commitment amount is less than $1 million. The ACL is estimated by applying a probability of default (PD) and loss given default (LGD) to the exposure at default (EAD) at the loan or lease level. In order to determine the PD, LGD, and EAD inputs:

•Loans are aggregated into pools based on similar risk characteristics.

•The PD and LGD model components are determined based on loss estimates driven by historical credit loss experience for each pool of loans.

•The PD model components use econometric regression models that use the Corporation’s historical credit loss experience and economic variable inputs to estimate a PD for each loan pool. The LGD model component calculates a lifetime LGD estimate across each pool of loans utilizing a loss rate approach based on the Corporation’s historical charge-off and the balance at the time of loan default adjusted for the Corporation’s recovery experience.

•Reasonable and supportable economic variable forecasts are incorporated into the PD model components.

•Reasonable and supportable forecast periods are based on different economic forecasts and scenarios sourced from an external third party. A future loss forecast over the reasonable and supportable forecast period is based on the projected performance of specific economic variables that statistically correlate loss experience in the various loan pools.

•After the reasonable and supportable forecast period, economic variable forecasts naturally revert, at the input level,to a long-run average.

•To calculate the EAD model component, cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate. In addition, a constant prepayment rate is calculated for each loan pool.

Loans Evaluated Individually: Loans evaluated individually for expected credit losses include loans on non-accrual status and TDRs where the commitment amount equals or exceeds $1.0 million. The required ACL for such loans is determined using either the present value of expected future cash flows, observable market price or the fair value of collateral.

Loans evaluated individually may have specific allocations assigned if the measured value of the loan using one of the noted techniques is less than its current carrying value. For loans measured using the fair value of collateral, if the analysis determines that sufficient collateral value would be available for repayment of the debt, then no allocations would be assigned to those loans. Collateral could be in the form of real estate or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real estate.

For loans secured by real estate, estimated fair values are determined primarily through appraisals performed by third-party appraisers, discounted to arrive at expected net sale proceeds. For collateral dependent loans, estimated real estate fair values are also net of estimated selling costs. When a real estate secured loan is impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the Corporation’s experience and knowledge of the real estate market; the purpose of the loan; market factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Corporation generally obtains updated appraisals performed by third-party appraisers for impaired loans secured predominantly by real estate every 12 months.

When updated appraisals are not obtained for loans secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and there has not been a significant deterioration in the collateral value since the original appraisal was performed.

For loans with principal balances greater than or equal to $1.0 million secured by non-real estate collateral, such as accounts receivable or inventory, estimated fair values are determined based on borrower financial statements, inventory listings, accounts receivable agings or borrowing base certificates. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Liquidation or collection discounts are applied to these assets based upon existing loan evaluation policies.

Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. For commercial loans, commercial mortgages and construction loans to commercial borrowers, 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 rating categories is a significant component of the ACL methodology for these loans, which bases the PD on this migration. Assigning risk ratings involves judgment. Risk ratings may be changed based on ongoing monitoring procedures, or if specific loan review assessments identify a deterioration or an improvement in the loan.

The following is a summary of the Corporation's internal risk rating categories:

•Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.

•Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of Substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak.

•Substandard or Lower: These loans are inadequately protected by current sound worth and paying capacity of the borrower. There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.

The allocation of the ACL is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Corporation considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type.

Qualitative and Other Adjustments to ACL: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These qualitative factors include changes in lending policy, the nature and volume of the portfolio, overall business conditions in the economy, credit concentrations, specific industry risks, competition, model imprecision and legal and regulatory requirements. Qualitative adjustments are judgmental and are based on management’s knowledge of the portfolio and the markets in which the Corporation operates. Qualitative adjustments are evaluated and approved on a quarterly basis. Additionally, the ACL includes other allowance categories that are not directly incorporated in the quantitative results. These categories include but are not limited to loans-in-process, trade acceptances and overdrafts.

OBS Credit Exposures: The ACL for OBS credit exposures is recorded in other liabilities on the consolidated balance sheets. This portion of the ACL represents management’s estimate of expected losses in its unfunded loan commitments and other OBS credit exposures. The ACL specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The ACL for OBS credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses.

HTM Debt Securities: Expected credit losses on HTM debt securities would be recorded in the ACL on HTM debt securities. As of September 30, 2020, no HTM debt securities required an ACL as these investments consist solely of government guaranteed residential mortgage-backed securities.

AFS Debt Securities: The ACL approach for AFS debt securities differs from the CECL approach used for HTM debt securities as AFS debt securities are carried at fair value rather than amortized cost. Prior to the adoption of CECL, credit losses on AFS debt securities were determined using an OTTI approach. Under CECL, the concept of OTTI has been eliminated, but the general approach to determining credit losses is largely consistent with the OTTI method. Under CECL, credit losses on AFS debt securities are recognized through an ACL rather than through a direct write-down of the security. As of September 30, 2020, no AFS debt securities required an ACL.

Other Recently Adopted Accounting Standards

On January 1, 2020, the Corporation adopted ASC Update 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update changes the fair value measurement disclosure requirements of ASC Topic 820 "Fair Value Measurement." Among other things, the update modifies the disclosure objective paragraphs of ASC 820 to eliminate: (1) "at a minimum" from the phrase "an entity shall disclose at a minimum" and (2) other similar disclosure requirements to promote the appropriate exercise of discretion by entities.

The Corporation adopted this standards update effective with its March 31, 2020 quarterly report on Form 10-Q and it did not have a material impact on its consolidated financial statements.

On January 1, 2020, the Corporation adopted ASC Update 2018-15 - Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Subtopic 350-40 to determine which implementation costs to capitalize as assets.

The Corporation adopted this standards update effective with its March 31, 2020 quarterly report on Form 10-Q and it did not have a material impact on its consolidated financial statements

In March 2020, the Corporation adopted ASC Update 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standards update provided optional guidance for a limited time to ease the potential burden in accounting for reference rate reform, specific to those using LIBOR or another reference rate expected to be discontinued due to this reform.

The Corporation adopted this standards update effective with its March 31, 2020 quarterly report on Form 10-Q and it did not have a material impact on its consolidated financial statements.

Recently Issued Accounting Standards


Standard	Description	Date of Anticipated Adoption	Effect on Financial Statements
ASC Update 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans	This update amends ASC Topic 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. This update is effective for fiscal years ending after December 15, 2020. Early adoption is permitted.	Fiscal Year 2020	The Corporation intends to adopt this standards update effective with its December 31, 2020 annual report on Form 10-K. This standard will impact the Corporation's disclosure relating to employee benefit plans, but the Corporation does not expect the adoption of this update to have a material impact on the consolidated financial statements.
ASC Update 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	This update simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted.	First Quarter 2021	The Corporation intends to adopt this standards update effective with its March 31, 2021 quarterly report on Form 10-Q. This update is not expected to have a material impact on the consolidated financial statements.

Reclassifications

Certain amounts in the 2019 consolidated financial statements and notes have been reclassified to conform to the 2020 presentation.

NOTE 2 – Restrictions on Cash and Cash Equivalents

The Bank is required to maintain reserves against its deposit liabilities. Prior to March 2020, reserves were in the form of cash and balances with the FRB. The FRB suspended cash reserve requirements effective March 26, 2020. The amount of such reserves as of December 31, 2019 was $218.9 million. In addition, cash collateral is posted by the Corporation with counterparties to secure derivative and other contracts. The amounts of such cash collateral as of September 30, 2020 and December 31, 2019 were $460.3 million and $199.6 million, respectively.

NOTE 3 – Investment Securities

The following table presents the amortized cost and estimated fair values of investment securities for the periods presented:


	September 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale	(in thousands)


State and municipal securities	$	880,495	$	46,216	$	(157)	$	926,554
Corporate debt securities	327,143		16,724		(1,309)		342,558
Collateralized mortgage obligations	516,312		16,207		(46)		532,473
Residential mortgage-backed securities	318,343		3,409		(57)		321,695
Commercial mortgage-backed securities	548,076		24,136		(2)		572,210
Auction rate securities	101,510		—		(3,520)		97,990


Total	$	2,691,879	$	106,692	$	(5,091)	$	2,793,480

Held to Maturity

Residential mortgage-backed securities	$	304,241	$	20,699	$	—	$	324,940


	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale	(in thousands)


State and municipal securities	$	638,125	$	15,826	$	(1,024)	$	652,927
Corporate debt securities	370,401		8,490		(1,534)		377,357
Collateralized mortgage obligations	682,307		11,726		(315)		693,718
Residential mortgage-backed securities	177,183		1,078		(949)		177,312
Commercial mortgage-backed securities	489,603		6,471		(1,777)		494,297
Auction rate securities	107,410		—		(5,484)		101,926
Total	$	2,465,029	$	43,591	$	(11,083)	$	2,497,537



Held to Maturity

Residential mortgage-backed securities	$	369,841	$	13,864	$	—	$	383,705

On July 1, 2019, the Corporation transferred state and municipal securities from the held to maturity classification to the available for sale classification as permitted through the early adoption of ASU 2019-04. The amortized cost of the securities transferred was $158.9 million and the estimated fair value was $168.5 million.

Securities carried at $568.4 million at September 30, 2020 and $462.6 million at December 31, 2019 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

The amortized cost and estimated fair values of debt securities as of September 30, 2020, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities as certain investment securities are subject to call or prepayment with or without call or prepayment penalties.


		September 30, 2020
		Available for Sale				Held to Maturity
		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less		$	11,252	$	11,388	$	—	$	—
Due from one year to five years		32,118		33,397		—		—
Due from five years to ten years		315,094		330,233		—		—
Due after ten years		950,684		992,084		—		—
		1,309,148		1,367,102		—		—
Residential mortgage-backed securities(1)		318,343		321,695		304,241		324,940
Commercial mortgage-backed securities(1)		548,076		572,210		—		—
Collateralized mortgage obligations(1)		516,312		532,473		—		—
Total		$	2,691,879	$	2,793,480	$	304,241	$	324,940

(1) Mortgage-backed securities and collateralized mortgage obligations do not have stated maturities and are dependent upon the interest rate environment and prepayments on the underlying loans.

The following table presents information related to the gross realized gains and losses on the sales of investment securities for the periods presented:


	Gross Realized Gains		Gross Realized Losses		Net Gains
Three months ended	(in thousands)
September 30, 2020	$	94	$	(92)	$	2
September 30, 2019	7,938		(3,446)		4,492

Nine months ended
September 30, 2020	$	6,545	$	(3,492)	$	3,053
September 30, 2019	11,207		(6,474)		4,733

During the second quarter of 2020, the Corporation completed a limited balance sheet restructuring that included the sale of investment securities, with an amortized cost $79.0 million and an estimated fair value of $82.0 million, resulting in net investment securities gains of $3.0 million. Offsetting these gains were $2.9 million of prepayment penalties recorded in non-interest expense for the redemption of FHLB advances.

During the third quarter of 2019, the Corporation completed a balance sheet restructuring that included the sale of investment securities, with an amortized cost of $409.2 million and an estimated fair value of $413.7 million, resulting in net investment securities gains of $4.5 million. Offsetting these gains were $4.3 million of prepayment penalties recorded in non-interest expense for the redemption of FHLB advances.

The following tables present the gross unrealized losses and estimated fair values of investment securities, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position for the periods presented:


	September 30, 2020
	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		(in thousands)

State and municipal securities	6	$	25,372	$	(157)	—	$	—	$	—	$	25,372	$	(157)
Corporate debt securities	16	67,030		(965)		1	6,847		(344)		73,877		(1,309)
Collateralized mortgage obligations	1	25,489		(46)		—	—		—		25,489		(46)
Residential mortgage-backed securities	4	75,876		(57)		—	—		—		75,876		(57)
Commercial mortgage-backed securities	1	9,322		(2)		—	—		—		9,322		(2)
Auction rate securities	—	—		—		162	97,990		(3,520)		97,990		(3,520)
Total available for sale(1)	28	$	203,089	$	(1,227)	163	$	104,837	$	(3,864)	$	307,926	$	(5,091)


	December 31, 2019
	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	(in thousands)

State and municipal securities	44	$	136,344	$	(1,024)	—	$	—	$	—	$	136,344	$	(1,024)
Corporate debt securities	5	30,719		(346)		8	18,759		(1,188)		49,478		(1,534)
Collateralized mortgage obligations	5	33,865		(190)		1	5,330		(125)		39,195		(315)
Residential mortgage-backed securities	5	12,247		(40)		26	127,373		(909)		139,620		(949)
Commercial mortgage-backed securities	7	121,340		(1,777)		—	—		—		121,340		(1,777)
Auction rate securities	—	—		—		177	101,926		(5,484)		101,926		(5,484)
Total available for sale(1)	66	$	334,515	$	(3,377)	212	$	253,388	$	(7,706)	$	587,903	$	(11,083)

(1) No HTM securities were in an unrealized loss position as of September 30, 2020 or December 31, 2019.

The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The change in fair value of these securities is attributable to changes in interest rates and not credit quality. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. Therefore, the Corporation does not have an ACL for these investments as of September 30, 2020.

Based on management’s evaluations, no ACL was required for ARCs or corporate debt securities as of September 30, 2020. 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.

NOTE 4 - Allowance for Credit Losses and Asset Quality

Net Loans are summarized as follows:


	September 30, 2020		December 31, 2019
	(in thousands)
Real estate - commercial mortgage	$	7,046,330	$	6,700,776
Commercial and industrial	5,968,154		4,446,701
Real-estate - residential mortgage	3,061,835		2,641,465
Real-estate - home equity	1,222,709		1,314,944
Real-estate - construction	1,007,534		971,079
Consumer	469,551		463,164
Equipment lease financing and other	274,570		322,625
Overdrafts	1,694		3,582
Gross loans	19,052,377		16,864,336
Unearned income	(23,756)		(26,810)
Net Loans	$	19,028,621	$	16,837,526

The Corporation segments its loan portfolio by "portfolio segments," as presented in the table above. Certain portfolio segments are further disaggregated by "class segment" for the purpose of estimating credit losses. See "Allowance for Credit Losses" below for further discussion regarding portfolio and class segments and their impact on the determination of the ACL.

Allowance for Credit Losses, effective January 1, 2020

As discussed in Note 1, "Basis of Presentation," the Corporation adopted CECL effective January 1, 2020. CECL requires estimated credit losses on loans to be determined based on an expected life of loan model, as compared to an incurred loss model (in effect for periods prior to 2020). Accordingly, ACL disclosures subsequent to January 1, 2020 are not always comparable to prior periods. In addition, certain new disclosures required under CECL are not applicable to prior periods. As a result, the following tables present disclosures separately for each period, where appropriate. New disclosures required under CECL are only shown for the current period and are noted. See Note 1, "Basis of Presentation", for a summary of the impact of adopting CECL on January 1, 2020.

Under CECL, loans evaluated individually for impairment consist of non-accrual loans and TDRs. Under the incurred loss model in effect prior to the adoption of CECL, loans evaluated individually for impairment were referred to as impaired loans.

The ACL related to loans consists of loans evaluated collectively and individually for expected credit losses. The ACL related to loans 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 for OBS credit exposures includes estimated losses on unfunded loan commitments, letters of credit and other OBS credit exposures. The total ACL is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.

The following table presents the components of the ACL under CECL:



	September 30, 2020
	(in thousands)
ACL - loans	$	266,825
ACL - OBS credit exposure	15,533
Total ACL	$	282,358

The following table presents the activity in the ACL in 2020:





	Three months ended September 30, 2020		Nine months ended September 30, 2020
	(in thousands)
Balance at beginning of period	$	272,920	$	166,209
Impact of adopting CECL on January 1, 2020 (1)	—		58,348
Loans charged off	(5,489)		(27,539)
Recoveries of loans previously charged off	7,847		14,660
Net loans recovered (charged off)	2,358		(12,879)
Provision for credit losses (2)	7,080		70,680
Balance at end of period	$	282,358	$	282,358

(1) Includes $12.6 million of reserves for OBS credit exposures as of January 1, 2020.

(2) Includes $850,000 and $320,000 related to OBS credit exposures for the three and nine months ended September 30, 2020, respectively.

The following table presents the activity in the ACL - loans by portfolio segment, for the three and nine months ended September 30, 2020:


	Real Estate - Commercial Mortgage		Commercial and Industrial		Real Estate - Home Equity		Real Estate - Residential Mortgage		Real Estate - Construction		Consumer		Equipment lease financing, other and overdrafts		Total
	(in thousands)
Three months ended September 30, 2020
Balance at June 30, 2020	$	102,695	$	61,447	$	16,391	$	46,443	$	12,314	$	10,299	$	6,948	$	256,537

Loans charged off	(746)		(2,969)		(393)		(198)		—		(701)		(483)		(5,489)
Recoveries of loans previously charged off	100		2,103		44		95		4,873		447		185		7,847
Net loans recovered (charged off)	(646)		(866)		(349)		(103)		4,873		(254)		(298)		2,358
Provision for loan losses (1)	9,806		(1,743)		256		2,013		(2,177)		260		(484)		7,930
Balance at September 30, 2020	$	111,855	$	58,838	$	16,298	$	48,353	$	15,010	$	10,305	$	6,166	$	266,825







Nine months ended September 30, 2020
Balance at December 31, 2019	$	45,610	$	68,602	$	17,744	$	19,771	$	4,443	$	3,762	$	3,690	$	163,622
Impact of adopting CECL on January 1, 2020	29,361		(18,576)		(65)		21,235		4,015		5,969		3,784		45,723
Loans charged off	(3,925)		(17,348)		(1,138)		(620)		(17)		(2,788)		(1,704)		(27,539)
Recoveries of loans previously charged off	439		6,815		305		292		4,943		1,481		385		14,660
Net loans recovered (charged off)	(3,486)		(10,533)		(833)		(328)		4,926		(1,307)		(1,319)		(12,879)
Provision for loan losses (1)	40,370		19,345		(548)		7,675		1,626		1,881		11		70,359
Balance at September 30, 2020	$	111,855	$	58,838	$	16,298	$	48,353	$	15,010	$	10,305	$	6,166	$	266,825

(1) Provision included in the table only includes the portion related to Net Loans.

The higher provision during the first nine months of 2020 was largely driven by the overall downturn in economic forecasts due to COVID-19, resulting in higher expected future credit losses under CECL. The ACL includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative models. Qualitative adjustments include and consider changes in international, national, regional and local economic and business conditions, an assessment of the lending environment, including underwriting standards and other factors affecting credit quality. Qualitative adjustments used in determining the ACL increased compared to those at the time of adoption of CECL on January 1, 2020 primarily as a result of uncertainties related to forecasted economic variables due to the economic impact of COVID-19 and the future performance of loans that received deferrals or forbearances due to COVID-19.

Allowance for Credit Losses, prior to January 1, 2020

Prior to January 1, 2020, the ACL consisted of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represented management’s estimate of incurred losses in the loan portfolio as of the balance sheet date and is recorded as a reduction to Net Loans. The reserve for unfunded lending commitments represented management’s estimate of incurred losses in unfunded loan commitments and letters of credit, and was recorded in other liabilities on the consolidated balance sheets. The ACL was increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.

The following table presents the components of the ACL:


	December 31, 2019
	(in thousands)
Allowance for loan losses	$	163,622
Reserve for unfunded lending commitments	2,587
ACL	$	166,209

The following table presents the activity in the ACL for the periods indicated in 2019:


	Three months ended September 30, 2019		Nine months ended September 30, 2019
	(in thousands)
Balance at beginning of period	$	176,941	$	169,410
Loans charged off	(10,128)		(20,208)
Recoveries of loans previously charged off	3,814		11,300
Net loans charged off	(6,314)		(8,908)
Provision for credit losses(1)	2,170		12,295
Balance at end of period	$	172,797	$	172,797

(1) Includes ($46,000) and ($2.2 million) related to reserve for unfunded lending commitments for the three and nine months ended September 30, 2019, respectively.

The following table presents the activity in the allowance for loan losses, by portfolio segment, for the three and nine months ended September 30, 2019:


	Real Estate - Commercial Mortgage		Commercial & Industrial		Real Estate - Home Equity		Real Estate - Residential Mortgage		Real Estate - Construction		Consumer		Equipment lease financing, other and overdrafts		Total
	(in thousands)
Three months ended September 30, 2019
Balance at June 30, 2019	$	54,859	$	66,341	$	18,981	$	18,892	$	4,928	$	3,363	$	2,869	$	170,233
Loans charged off	(394)		(7,181)		(498)		(533)		(45)		(877)		(600)		(10,128)
Recoveries of loans previously charged off	444		2,311		132		440		164		216		107		3,814
Net loans recovered (charged off)	50		(4,870)		(366)		(93)		119		(661)		(493)		(6,314)
Provision for loan losses(1)	(5,529)		7,710		(662)		(109)		(664)		798		672		2,216
Balance at September 30, 2019	$	49,380	$	69,181	$	17,953	$	18,690	$	4,383	$	3,500	$	3,048	$	166,135
Nine months ended September 30, 2019
Balance at December 31, 2018	$	52,889	$	58,868	$	18,911	$	18,921	$	5,061	$	3,217	$	2,670	$	160,537
Loans charged off	(1,769)		(11,863)		(923)		(1,322)		(143)		(2,355)		(1,833)		(20,208)
Recoveries of loans previously charged off	749		6,234		552		783		1,493		1,005		484		11,300
Net loans recovered (charged off)	(1,020)		(5,629)		(371)		(539)		1,350		(1,350)		(1,349)		(8,908)
Provision for loan losses(1)	(2,489)		15,942		(587)		308		(2,028)		1,633		1,727		14,506
Balance at September 30, 2019	$	49,380	$	69,181	$	17,953	$	18,690	$	4,383	$	3,500	$	3,048	$	166,135

(1) The provision in the table only includes the portion related to Net Loans.

Non-accrual Loans

All loans individually evaluated for impairment are measured for losses on a quarterly basis. As of September 30, 2020 and December 31, 2019, substantially all of the Corporation’s individually evaluated loans with total commitments greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral, if any. Collateral could be in the form of real estate, in the case of commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real estate.

As of both September 30, 2020 and December 31, 2019, approximately 93% of loans evaluated individually for impairment with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated in the preceding 12 months.

The following table presents total non-accrual loans, by class segment:


	September 30, 2020						December 31, 2019
	Non-accrual Loans						Non-accrual Loans
	With a Related Allowance		Without a Related Allowance		Total		Total
	(in thousands)
Real estate - commercial mortgage	$	15,145	$	25,781	$	40,926	$	33,166
Commercial and industrial	14,326		20,948		35,274		48,106
Real estate - residential mortgage	23,637		1,256		24,893		16,676
Real estate - home equity	8,682		—		8,682		7,004
Real estate - construction	607		1,014		1,621		3,618
Consumer	235		—		235		—
Equipment lease financing and other	—		16,690		16,690		16,528
	$	62,632	$	65,689	$	128,321	$	125,098

As of September 30, 2020, there were $65.7 million of non-accrual loans that did not have a related allowance for credit losses. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

Asset Quality

Maintaining an appropriate ACL is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, residential construction, commercial and industrial, and commercial real estate, an internal risk rating process is used. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal risk categories is a significant component of the ACL methodology for these loans, under both the CECL and incurred loss models, which bases the probability of default on this migration. Assigning risk ratings involves judgment. The Corporation's loan review officers provide a separate assessment of risk rating accuracy. Risk ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review assessments identify a deterioration or an improvement in the loans.

The following table summarizes designated internal risk categories by portfolio segment and loan class, by origination year, in the current period :


		September 30, 2020
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans converted to Term Loans
		(dollars in thousands)												Amortized		Amortized
		2020		2019		2018		2017		2016		Prior		Cost Basis		Cost Basis		Total
Real estate - construction(1)
	Pass	$	94,758	$	243,614	$	196,393	$	138,308	$	44,315	$	114,228	$	47,594	$	—	$	879,210
	Special Mention	—		241		—		—		7,103		6,106		—		—		13,450
	Substandard or Lower	—		448		—		—		760		5,822		943		—		7,973
	Total real estate - construction	94,758		244,303		196,393		138,308		52,178		126,156		48,537		—		900,633
Real estate - construction(1)
	Current period gross charge-offs	—		—		—		—		—		(17)		—		—		(17)
	Current period recoveries	—		—		—		—		68		4,875		—		—		4,943
	Total net (charge-offs) recoveries	—		—		—		—		68		4,858		—		—		4,926
Commercial and industrial
	Pass	2,409,273		540,493		330,516		229,184		216,228		635,782		1,256,763		—		5,618,239
	Special Mention	52,203		13,653		7,618		10,886		13,693		29,919		50,673		—		178,645
	Substandard or Lower	38,983		1,125		15,819		11,797		13,422		25,081		64,089		954		171,270
	Total commercial and industrial	2,500,459		555,271		353,953		251,867		243,343		690,782		1,371,525		954		5,968,154
Commercial and industrial
	Current period gross charge-offs	—		(106)		(10)		(102)		(388)		(117)		(16,625)		—		(17,348)
	Current period recoveries			39		364		207		91		1,704		4,410		—		6,815
	Total net (charge-offs) recoveries	—		(67)		354		105		(297)		1,587		(12,215)		—		(10,533)
Real estate - commercial mortgage
	Pass	702,768		933,999		792,029		850,926		871,759		2,381,373		88,116		327		6,621,297
	Special Mention	13,247		13,505		19,298		33,245		46,354		139,832		3,502		—		268,983
	Substandard or Lower	1,119		2,409		13,665		39,467		9,375		88,671		1,344		—		156,050
	Total real estate - commercial mortgage	717,134		949,913		824,992		923,638		927,488		2,609,876		92,962		327		7,046,330
Real estate - commercial mortgage
	Current period gross charge-offs	—		(16)		(36)		(2,515)		(29)		(1,312)		(17)		—		(3,925)
	Current period recoveries	—		—		—		—		1		438		—		—		439
	Total net (charge-offs) recoveries	—		(16)		(36)		(2,515)		(28)		(874)		(17)		—		(3,486)
Total
	Pass	$	3,206,799	$	1,718,106	$	1,318,938	$	1,218,418	$	1,132,302	$	3,131,383	$	1,392,473	$	327	$	13,118,746
	Special Mention	65,450		27,399		26,916		44,131		67,150		175,857		54,175		—		461,078
	Substandard or Lower	40,102		3,982		29,484		51,264		23,557		119,574		66,376		954		335,293
	Total	$	3,312,351	$	1,749,487	$	1,375,338	$	1,313,813	$	1,223,009	$	3,426,814	$	1,513,024	$	1,281	$	13,915,117

(1) Excludes real estate - construction - other.

The information presented in the table above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, internal credit risk ratings for the indicated loan class segments:


	December 31, 2019
	Pass			Special Mention			Substandard or Lower			Total
	(dollars in thousands)
Real estate - commercial mortgage	$	6,429,407		$	137,163		$	134,206		$	6,700,776
Commercial and industrial - secured	3,830,847			171,442			195,884			4,198,173
Commercial and industrial - unsecured	234,987			9,665			3,876			248,528
Total commercial and industrial	4,065,834			181,107			199,760			4,446,701
Construction - commercial residential	100,808			2,897			3,461			107,166
Construction - commercial	765,562			1,322			2,676			769,560
Total construction (excluding construction - other)	866,370			4,219			6,137			876,726
	$	11,361,611		$	322,489		$	340,103		$	12,024,203
% of Total	94.5		%	2.7		%	2.8		%	100.0		%

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 equipment lease financing. For these loans, the most relevant credit quality indicator is delinquency status. The migration of loans through the various delinquency status categories is a significant component of the ACL methodology for those loans, under both the CECL and incurred loss models, which base the PD on this migration.

The Corporation considers the performance of the loan portfolio and its impact on the ACL. For certain loans classes, the Corporation evaluates credit quality based on the aging status of the loan. The following table presents the amortized cost of these loans based on payment activity, by origination year, for the current period:


		September 30, 2020
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans converted to Term Loans
		(dollars in thousands)												Amortized		Amortized
		2020		2019		2018		2017		2016		Prior		Cost Basis		Cost Basis		Total
Real estate - home equity
	Performing	$	21,247	$	8,297	$	14,573	$	12,064	$	13,006	$	140,145	$	995,811	$	5,485	$	1,210,628
	Nonperforming	—		—		153		256		225		2,354		8,764		329		12,081
	Total real estate - home equity	21,247		8,297		14,726		12,320		13,231		142,499		1,004,575		5,814		1,222,709
Real estate - home equity
	Current period gross charge-offs	—		—		—		—		—		—		(1,137)		—		(1,137)
	Current period recoveries	—		—		—		—		—		123		182		—		305
	Total net (charge-offs) recoveries	—		—		—		—		—		123		(955)		—		(832)
Real estate - residential mortgage
	Performing	953,063		649,475		268,809		383,345		294,005		484,717		—		—		3,033,414
	Nonperforming	—		832		2,437		2,611		723		21,818		—		—		28,421
	Total real estate - residential mortgage	953,063		650,307		271,246		385,956		294,728		506,535		—		—		3,061,835
Real estate - residential mortgage
	Current period gross charge-offs	—		(68)		(101)		(190)		(7)		(254)		—		—		(620)
	Current period recoveries	—		—		13		1		—		278		—		—		292
	Total net (charge-offs) recoveries	—		(68)		(88)		(189)		(7)		24		—		—		(328)
Consumer
	Performing	93,208		106,797		104,984		48,281		27,828		38,319		49,594		—		469,011
	Nonperforming	123		68		56		62		47		162		22		—		540
	Total consumer	93,331		106,865		105,040		48,343		27,875		38,481		49,616		—		469,551
Consumer
	Current period gross charge-offs	—		(500)		(425)		(346)		(433)		(642)		(442)		—		(2,788)
	Current period recoveries	—		48		148		116		177		891		101		—		1,481
	Total net (charge-offs) recoveries	—		(452)		(277)		(230)		(256)		249		(341)		—		(1,307)
Equipment lease financing and other
	Performing	69,512		71,629		53,733		39,888		18,481		6,219		—		—		259,462
	Nonperforming	—		—		190		16,054		272		286		—		—		16,802
	Total leasing and other	69,512		71,629		53,923		55,942		18,753		6,505		—		—		276,264
Equipment lease financing and other
	Current period gross charge-offs	(1,463)		(241)		—		—		—		—		—		—		(1,704)
	Current period recoveries	187		136		17		16		9		20		—		—		385
	Total net (charge-offs) recoveries	(1,276)		(105)		17		16		9		20		—		—		(1,319)
Construction - other
	Performing	45,386		36,764		6,614		—		16		—		17,940		—		106,720
	Nonperforming	—		—		—		181		—		—		—		—		181
	Total construction - other	45,386		36,764		6,614		181		16		—		17,940		—		106,901
Construction - other
	Current period gross charge-offs	—		—		—		—		—		—		—		—		—
	Current period recoveries	—		—		—		—		—		—		—		—		—
	Total net (charge-offs) recoveries	—		—		—		—		—		—		—		—		—
Total
	Performing	$	1,182,416	$	872,962	$	448,713	$	483,578	$	353,336	$	669,400	$	1,063,345	$	5,485	$	5,079,235
	Nonperforming	123		900		2,836		19,164		1,267		24,620		8,786		329		58,025
	Total	$	1,182,539	$	873,862	$	451,549	$	502,742	$	354,603	$	694,020	$	1,072,131	$	5,814	$	5,137,260

The information presented in the table above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, a summary of performing, delinquent and non-performing loans for the indicated class segments:


	December 31, 2019
	Performing			Delinquent (1)			Non-performing (2)			Total
	(dollars in thousands)
Real estate - home equity	$	1,292,035		$	12,341		$	10,568		$	1,314,944
Real estate - residential mortgage	2,584,763			34,291			22,411			2,641,465
Construction - other	92,649			895			809			94,353
Consumer - direct	63,582			465			190			64,237
Consumer - indirect	393,974			4,685			268			398,927
Total consumer	457,556			5,150			458			463,164
Equipment lease financing and other	278,743			4,012			16,642			299,397
	$	4,705,746		$	56,689		$	50,888		$	4,813,323
% of Total	97.8		%	1.2		%	1.0		%	100		%

(1)Includes all accruing loans 30 days to 89 days past due.

(2)Includes all accruing loans 90 days or more past due and all non-accrual loans.

The following table presents non-performing assets:


	September 30, 2020		December 31, 2019
	(in thousands)
Non-accrual loans	$	128,321	$	125,098
Loans 90 days or more past due and still accruing	13,761		16,057
Total non-performing loans	142,082		141,155
OREO (1)	4,565		6,831
Total non-performing assets	$	146,647	$	147,986

(1) Excludes $9.6 million of residential mortgage properties for which formal foreclosure proceedings were in process as of September 30, 2020.

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
	(in thousands)
September 30, 2020
Real estate – commercial mortgage	$	11,867	$	3,702	$	2,499	$	40,926	$	6,987,336	$	7,046,330
Commercial and industrial	5,326		1,228		1,950		35,274		5,924,376		5,968,154
Real estate – residential mortgage	10,686		1,180		3,394		24,893		3,021,682		3,061,835
Real estate – home equity	3,966		902		3,070		8,682		1,206,089		1,222,709
Real estate – construction	—		—		2,430		1,621		1,003,483		1,007,534
Consumer	1,648		436		306		235		466,926		469,551
Equipment lease financing and other	250		110		112		16,690		235,346		252,508
Total	$	33,743	$	7,558	$	13,761	$	128,321	$	18,845,238	$	19,028,621


	30-59 Days Past Due		60-89 Days Past Due		≥ 90 Days Past Due and Accruing		Non- accrual		Current		Total
	(in thousands)
December 31, 2019
Real estate – commercial mortgage	$	10,912	$	1,543	$	4,113	$	33,166	$	6,651,042	$	6,700,776
Commercial and industrial	2,302		2,630		1,385		48,106		4,392,278		4,446,701
Real estate – residential mortgage	26,982		7,309		5,735		16,676		2,584,763		2,641,465
Real estate – home equity	9,635		2,706		3,564		7,004		1,292,035		1,314,944
Real estate – construction	1,715		900		688		3,618		964,158		971,079
Consumer	4,228		922		458		—		457,556		463,164
Equipment lease financing and other	552		3,460		114		16,528		278,743		299,397
Total	$	56,326	$	19,470	$	16,057	$	125,098	$	16,620,575	$	16,837,526

Collateral-Dependent Loans

A financial asset 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 financial assets 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 loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral supporting collateral-dependent financial assets consists of various types of real estate including residential properties; commercial properties such as retail centers, office buildings, and lodging; agriculture land; and vacant land.

Troubled Debt Restructurings

The following table presents TDRs, by class segment:


	September 30, 2020		December 31, 2019
	(in thousands)
Real estate - residential mortgage	$	19,427	$	21,551
Real estate - commercial mortgage	28,558		13,330
Real estate - home equity	14,875		15,068
Commercial and industrial	7,328		5,193

Consumer	—		8

Total accruing TDRs	70,188		55,150
Non-accrual TDRs (1)	37,025		20,825
Total TDRs	$	107,213	$	75,975

(1)Included in non-accrual loans in the preceding table detailing non-performing assets.

The following table presents TDRs, by class segment, for loans that were modified during the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30						Nine months ended September 30
	2020			2019			2020			2019
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(dollars in thousands)
Real estate - residential mortgage	8	$	1,351	1	$	830	48	$	10,516	6	$	2,263
Real estate - commercial mortgage	5	8,394		1	81		12	24,868		1	81
Real estate - home equity	13	1,370		12	327		40	3,556		46	2,281
Commercial and industrial	4	3,021		3	97		18	4,399		13	4,928
Consumer	3	53		—	—		11	238		—	—
Total	33	$	14,189	17	$	1,335	129	$	43,577	66	$	9,553

Restructured loan modifications may include payment schedule modifications, interest rate concessions, bankruptcies, principal reduction or some combination of these concessions. The restructured loan modifications primarily included maturity date extensions, rate modifications and payment schedule modifications.

In accordance with regulatory guidance, payment schedule modifications granted after March 13, 2020 to borrowers impacted by the effects of the COVID-19 pandemic and who were not delinquent at the time of the payment schedule modifications have been excluded from TDRs. For the nine months ended September 30, 2020, payment schedule modifications having a recorded investment of $3.8 billion were excluded from TDRs based on this regulatory guidance.

NOTE 5 – Mortgage Servicing Rights

The following table summarizes the changes in MSRs, which are included in other assets on the consolidated balance sheets:


	Three months ended September 30				Nine months ended September 30
	2020		2019		2020		2019
	(in thousands)
Amortized cost:
Balance at beginning of period	$	38,692	$	38,826	$	39,267	$	38,573
Originations of MSRs	4,319		2,499		8,569		5,585
Amortization	(4,129)		(1,970)		(8,954)		(4,803)
Balance at end of period	$	38,882	$	39,355	$	38,882	$	39,355

Valuation allowance:
Balance at beginning of period	$	(7,700)	$	—	$	—	$	—
Additions to valuation allowance	(1,500)		—		(9,200)		—
Balance at end of period	$	(9,200)	$	—	$	(9,200)	$	—

Net MSRs at end of period	$	29,682	$	39,355	$	29,682	$	39,355
Estimated fair value of MSRs at end of period	$	29,682	$	43,968	$	29,682	$	43,968

MSRs represent the economic value of contractual rights to service mortgage loans that have been sold. The total portfolio of loans serviced by the Corporation for unrelated third parties was $4.8 billion and $4.9 billion as of September 30, 2020 and December 31, 2019, 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 $29.7 million and $45.2 million at September 30, 2020 and December 31, 2019, respectively. Based on its fair value analysis as of September 30, 2020, the Corporation determined that a $1.5 million increase to the valuation allowance was required for the three months ended September 30, 2020, resulting in a total valuation allowance of $9.2 million for the nine months ended September 30, 2020. The increases to the valuation allowance were recorded as reductions to mortgage banking income on the consolidated statements of income for the three and nine months ended September 30, 2020.

NOTE 6 – Derivative Financial Instruments

The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. None of the Corporation's outstanding derivative contracts are designated as hedges, and none are entered into for speculative purposes. Derivative instruments are carried at fair value, with changes in fair value recognized in earnings as components of non-interest income or non-interest expense on the consolidated statements of income.

Derivative contracts create counterparty credit risk with both the Corporation's customers and with institutional derivative counterparties. The Corporation manages counterparty credit risk through its credit approval processes, monitoring procedures and obtaining adequate collateral, when the Corporation determines it is appropriate to do so and in accordance with counterparty contracts.

For each of the derivatives, gross derivative assets and liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets. Related gains and losses on these derivative instruments are recorded in other changes, net on the consolidated statement of cash flows.

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured.

Interest Rate Swaps

The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. The Corporation is required to clear all eligible interest rate swap contracts with a clearing agent and is subject to the regulations of the Commodity Futures Trading Commission.

Foreign Exchange Contracts

The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a specific date at a contractual price. The Corporation limits its foreign exchange exposure with customers by entering into contracts with institutional counterparties to mitigate its foreign exchange risk. The Corporation also holds certain amounts of foreign currency with international correspondent banks ("Foreign Currency Nostro Accounts"). The Corporation limits the total overnight net foreign currency open positions, which is defined as an aggregate of all outstanding contracts and Foreign Currency Nostro Account balances, to $500,000.

The following table presents a summary of the notional amounts and fair values of derivative financial instruments:


	September 30, 2020				December 31, 2019
	Notional Amount		Asset (Liability) Fair Value		Notional Amount		Asset (Liability) Fair Value
	(in thousands)
Interest Rate Locks with Customers
Positive fair values	$	446,268	$	11,994	$	132,260	$	1,123
Negative fair values	4,611		(61)		9,783		(53)

Forward Commitments
Positive fair values	—		—		75,000		63
Negative fair values	414,110		(1,644)		180,000		(371)

Interest Rate Swaps with Customers
Positive fair values	3,777,684		375,567		2,903,489		143,484
Negative fair values	12,288		(2)		376,705		(695)

Interest Rate Swaps with Dealer Counterparties
Positive fair values	12,288		2		376,705		695
Negative fair values	3,777,684		(183,225)		2,903,489		(75,327)

Foreign Exchange Contracts with Customers
Positive fair values	2,947		32		3,373		38
Negative fair values	5,885		(280)		7,283		(154)

Foreign Exchange Contracts with Correspondent Banks
Positive fair values	7,325		340		9,028		192
Negative fair values	2,653		(19)		4,976		(45)

The following table presents a summary of the fair value gains (losses) on derivative financial instruments:


	Consolidated Statements of Income Classification	Three months ended September 30				Nine months ended September 30
		2020		2019		2020		2019
		(in thousands)
Mortgage banking derivatives (1)	Mortgage banking income	$	1,783	$	843	$	9,527	$	1,457

Interest rate swaps	Other expense	(12)		51		70		198

Foreign exchange contracts	Other income	25		10		42		44

Net fair value gains on derivative financial instruments		$	1,796	$	904	$	9,639	$	1,699

(1) Includes interest rate locks with customers and forward commitments.

Fair Value Option

The Corporation has elected to measure mortgage loans held for sale at fair value. The following table presents a summary of mortgage loans held for sale and the impact of the fair value election on the consolidated financial statements as of the periods shown:


	September 30, 2020		December 31, 2019
	(in thousands)
Amortized cost (1)	$	90,416	$	37,396
Fair value	93,621		37,828

(1) Cost basis of mortgage loans held for sale represents the unpaid principal balance.

Gains related to changes in fair values of mortgage loans held for sale were $658,000 and $2.8 million for the three and nine months ended September 30, 2020, respectively. During the three and nine months ended September 30, 2019, losses related to changes in fair values of mortgage loans held for sale were $499,000 and $174,000, respectively.

Balance Sheet Offsetting

Although certain financial assets and liabilities may be eligible for offset on the consolidated balance sheets because they are subject to master netting arrangements or similar agreements, the Corporation elects to not offset such qualifying assets and liabilities.

The Corporation is a party to interest rate swaps with dealer counterparties and customers. Under these agreements, the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. Cash collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the interest rate swap agreements in the event of default. A daily settlement occurs through a clearing agent for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared daily through a clearing agent. As a result, the total fair values of interest rate swap derivative assets and liabilities recognized on the consolidated balance sheet are not equal and offsetting.

The Corporation is also a party to foreign currency exchange contracts with financial institution counterparties, under which the Corporation has the right to net-settle multiple contracts with the same counterparty in the event of default on, or termination of, any one contract. As with interest rate swaps, collateral is posted by the party with a net liability position in accordance with contract thresholds and can be used to settle the fair value of the foreign currency exchange contracts in the event of default.

The Corporation also enters into agreements with customers in which it sells securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements. Under these agreements, the Corporation may transfer legal control over the assets but still maintain effective control through agreements that both entitle and obligate the Corporation to repurchase the assets. Therefore, repurchase agreements are reported as secured borrowings, classified in short-term borrowings on the consolidated balance sheets, while the securities underlying the repurchase agreements remain classified with investment securities on the consolidated balance sheets. The Corporation has no intent to set off these amounts, therefore, these repurchase agreements are not eligible for offset.

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
	(in thousands)
September 30, 2020
Interest rate swap derivative assets	$	375,569	$	(2)	$	—	$	375,567
Foreign exchange derivative assets with correspondent banks	340		(19)		—		321
Total	$	375,909	$	(21)	$	—	$	375,888

Interest rate swap derivative liabilities	$	183,230	$	(2)	$	(183,228)	$	—
Foreign exchange derivative liabilities with correspondent banks	19		(19)		—		—
Total	$	183,249	$	(21)	$	(183,228)	$	—

December 31, 2019
Interest rate swap derivative assets	$	144,179	$	(757)	$	—	$	143,422
Foreign exchange derivative assets with correspondent banks	192		(45)		—		147
Total	$	144,371	$	(802)	$	—	$	143,569

Interest rate swap derivative liabilities	$	76,022	$	(757)	$	(75,265)	$	—
Foreign exchange derivative liabilities with correspondent banks	45		(45)		—		—
Total	$	76,067	$	(802)	$	(75,265)	$	—

(1)For interest rate swap assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For interest rate swap 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 swap transactions and foreign exchange contracts with financial institution counterparties. Interest rate swaps with customers are collateralized by the same collateral securing the underlying loans to those borrowers. Cash and securities collateral amounts are included in the table only to the extent of the net derivative fair values.

NOTE 7 – Tax Credit Investments

TCIs are primarily for investments promoting qualified affordable housing projects and investments in community development entities. Investments in these projects generate a return primarily through the realization of federal income tax credits and deductions for operating losses over a specified time period.

The TCIs are included in other assets, with any unfunded equity commitments recorded in other liabilities on the consolidated balance sheets. Certain TCIs qualify for the proportional amortization method and are amortized over the period the Corporation expects to receive the tax credits, with the expense included within income taxes on the consolidated statements of income. Other TCIs are accounted for under the equity method of accounting, with amortization included within non-interest expense on the consolidated statements of income. This amortization includes equity in partnership losses and the systematic write-down of investments over the period in which income tax credits are earned. All of the TCIs are evaluated for impairment at the end of each reporting period.

The following table presents the balances of the Corporation's TCIs and related unfunded commitments:


		September 30,		December 31,
		2020		2019
Included in other assets:		(in thousands)
Affordable housing tax credit investment, net		$	145,415	$	153,351
Other tax credit investments, net		70,379		64,354
	Total TCIs, net	$	215,794	$	217,705
Included in other liabilities:
Unfunded affordable housing tax credit commitments		$	22,591	$	16,684
Other tax credit liabilities		60,585		55,105
	Total unfunded tax credit commitments and liabilities	$	83,176	$	71,789

The following table presents other information relating to the Corporation's TCIs:


		Three Months Ended				Nine Months Ended
		September 30				September 30
		2020		2019		2020		2019
Components of income taxes:		(in thousands)
Affordable housing tax credits and other tax benefits		$	(7,290)	$	(7,852)	$	(21,678)	$	(23,002)
Other tax credit investment credits and tax benefits		(1,240)		(1,136)		(3,122)		(3,407)
Amortization of affordable housing investments, net of tax benefit		5,024		5,649		15,071		16,638
Deferred tax expense		275		238		691		715
	Total net reduction in income tax expense	$	(3,231)	$	(3,101)	$	(9,038)	$	(9,056)
Amortization of TCIs:
Affordable housing tax credits investment		$	1,021	$	863	$	3,065	$	2,508
Other tax credit investment amortization		673		670		1,529		2,008
	Total amortization of TCIs	$	1,694	$	1,533	$	4,594	$	4,516

NOTE 8 – Accumulated Other Comprehensive Income

The following table presents changes in other comprehensive income:


	Before-Tax Amount		Tax Effect		Net of Tax Amount
Three months ended September 30, 2020	(in thousands)
Unrealized gain on securities	$	5,565	$	(1,232)	$	4,333

Reclassification adjustment for securities gains included in net income (1)	(2)		1		(1)

Amortization of net unrealized losses on AFS securities transferred to HTM (2)	1,192		(264)		928



Amortization of net unrecognized pension and postretirement items (3)	329		(73)		255
Total Other Comprehensive Income	$	7,083	$	(1,568)	$	5,515
Three months ended September 30, 2019
Unrealized gain on securities (4)	$	23,150	$	(5,121)	$	18,029

Reclassification adjustment for securities gains included in net income (1)	(4,492)		994		(3,498)
Amortization of net unrealized losses on AFS securities transferred to HTM (2)	4,405		(974)		3,430



Amortization of net unrecognized pension and postretirement items (3)	357		(80)		277
Total Other Comprehensive Income	$	23,419	$	(5,181)	$	18,238

Nine months ended September 30, 2020
Unrealized gain on securities	$	72,146	$	(15,960)	$	56,186

Reclassification adjustment for securities gains included in net income (1)	(3,053)		676		(2,377)

Amortization of net unrealized losses on AFS securities transferred to HTM (2)	3,232		(715)		2,517



Amortization of net unrecognized pension and postretirement items (3)	984		(219)		765
Total Other Comprehensive Income	$	73,309	$	(16,218)	$	57,091

Nine months ended September 30, 2019
Unrealized gain on securities (4)	$	81,207	$	(17,963)	$	63,244
Reclassification adjustment for securities gains included in net income (1)	(4,733)		1,047		(3,686)


Amortization of net unrealized losses on AFS securities transferred to HTM (2)	6,966		(1,541)		5,425
Non-credit related unrealized losses on other-than-temporarily impaired debt securities	(875)		193		(682)


Amortization of net unrecognized pension and postretirement items (3)	1,083		(240)		843
Total Other Comprehensive Income	$	83,648	$	(18,504)	$	65,144

(1) Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included in "Investment securities gains, net" on the Consolidated Statements of Income. See Note 3, "Investment Securities," for additional details.

(2) Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included as a reduction to "Interest Income" on the Consolidated Statements of Income.

(3) Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included in "Salaries and employee benefits" on the Consolidated Statements of Income. See Note 12, "Employee Benefit Plans," for additional details.

(4) Before-Tax amount includes a $3.7 million reclassification of unrealized loss related to the early adoption of ASU 2019-04.

The following table presents changes in each component of accumulated other comprehensive income (loss), net of tax:


	Unrealized Gains (Losses) on Investment Securities		Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities		Unrecognized Pension and Postretirement Plan Income (Costs)		Total
	(in thousands)
Three months ended September 30, 2020
Balance at June 30, 2020	$	65,930	$	—	$	(14,491)	$	51,439
Other comprehensive income before reclassifications	4,333		—		—		4,333
Amounts reclassified from accumulated other comprehensive income	(1)		—		255		254
Amortization of net unrealized losses on AFS securities transferred to HTM	928		—		—		928

Balance at September 30, 2020	$	71,190	$	—	$	(14,236)	$	56,954
Three months ended September 30, 2019
Balance at June 30, 2019	$	2,368	$	(2)	$	(14,523)	$	(12,157)
Other comprehensive income before reclassifications	18,029		—		—		18,029
Amounts reclassified from accumulated other comprehensive income (loss)	(3,498)		—		277		(3,221)
Amortization of net unrealized losses on AFS securities transferred to HTM	3,430		—		—		3,430

Balance at September 30, 2019	$	20,329	$	(2)	$	(14,246)	$	6,081

Nine months ended September 30, 2020
Balance at December 31, 2019	$	14,864	$	—	$	(15,001)	$	(137)
Other comprehensive income before reclassifications	56,186		—		—		56,186
Amounts reclassified from accumulated other comprehensive income (loss)	(2,377)		—		765		(1,612)
Amortization of net unrealized losses on AFS securities transferred to HTM	2,517		—		—		2,517

Balance at September 30, 2020	$	71,190	$	—	$	(14,236)	$	56,954
Nine months ended September 30, 2019
Balance at December 31, 2018	$	(44,654)	$	680	$	(15,089)	$	(59,063)
Other comprehensive income before reclassifications	63,244		(682)		—		62,562
Amounts reclassified from accumulated other comprehensive income (loss)	(3,686)		—		843		(2,843)
Amortization of net unrealized losses on AFS securities transferred to HTM	5,425		—		—		5,425

Balance at September 30, 2019	$	20,329	$	(2)	$	(14,246)	$	6,081

NOTE 9 – Fair Value Measurements

FASB ASC Topic 820 establishes a fair value hierarchy for the inputs to valuation techniques used to measure assets and liabilities at fair value using the following three categories (from highest to lowest priority):

•Level 1 – Inputs that represent quoted prices for identical instruments in active markets.

•Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.

•Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.

All assets and liabilities measured at fair value on both a recurring and nonrecurring basis, have been categorized into the above three levels. The following tables present assets and liabilities measured at fair value on a recurring basis and reported on the consolidated balance sheets:


	September 30, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	93,621	$	—	$	93,621
Available for sale investment securities:



State and municipal securities	—		926,554		—		926,554
Corporate debt securities	—		342,558		—		342,558
Collateralized mortgage obligations	—		532,473		—		532,473
Residential mortgage-backed securities	—		321,695		—		321,695
Commercial mortgage-backed securities	—		572,210		—		572,210
Auction rate securities	—		—		97,990		97,990
Total available for sale investment securities	—		2,695,490		97,990		2,793,480
Other assets:
Investments held in Rabbi Trust	21,828		—		—		21,828
Derivative assets	372		387,563		—		387,935
Total assets	$	22,200	$	3,176,674	$	97,990	$	3,296,864
Other liabilities:
Deferred compensation liabilities	$	21,828	$	—	$	—	$	21,828
Derivative liabilities	299		184,932		—		185,231
Total liabilities	$	22,127	$	184,932	$	—	$	207,059


	December 31, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	37,828	$	—	$	37,828
Available for sale investment securities:



State and municipal securities	—		652,927		—		652,927
Corporate debt securities	—		374,957		2,400		377,357
Collateralized mortgage obligations	—		693,718		—		693,718
Residential mortgage-backed securities	—		177,312		—		177,312
Commercial mortgage-backed securities	—		494,297		—		494,297
Auction rate securities	—		—		101,926		101,926
Total available for sale investment securities	—		2,393,211		104,326		2,497,537
Other assets:
Investments held in Rabbi Trust	22,213		—		—		22,213
Derivative assets	230		145,365		—		145,595
Total assets	$	22,443	$	2,576,404	$	104,326	$	2,703,173
Other liabilities:
Deferred compensation liabilities	$	22,213	$	—	$	—	$	22,213
Derivative liabilities	199		76,447		—		76,646
Total liabilities	$	22,412	$	76,447	$	—	$	98,859

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 September 30, 2020 and December 31, 2019 were based on the price that secondary market investors were offering for loans with similar characteristics. See "Note 6 - Derivative Financial Instruments" for details related to the Corporation’s election to measure assets and liabilities at fair value.

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.

•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 ($338.2 million at September 30, 2020 and $362.3 million at December 31, 2019), single-issuer trust preferred securities issued by financial institutions ($0 at September 30, 2020 and $11.2 million at December 31, 2019) and other corporate debt issued by non-financial institutions ($4.4 million at September 30, 2020 and $3.9 million at December 31, 2019). As noted in "Note 3 - Investment Securities", several corporate debt securities were sold in the second quarter of 2020. Refer to the specific note for further information.

Level 2 investment securities include the Corporation’s holdings of subordinated debt and senior debt, other corporate debt issued by non-financial institutions and $0 and $8.8 million of single-issuer TruPS held at September 30, 2020 and December 31, 2019, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.

Level 3 investment securities include the Corporation’s investments in certain single-issuer TruPS ($0 at September 30, 2020 and $2.4 million at December 31, 2019). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive markets for similar investments. Level 3 values are tested by management primarily through trend analysis, by comparing current values to those reported at the end of the preceding calendar quarter, and determining if they are reasonable based on price and spread movements for this asset class.

•Auction rate securities – Due to their illiquidity, ARCs are classified as Level 3 investment securities and are valued through the use of an expected cash flows model prepared by a third-party valuation expert. The assumptions used in preparing the expected cash flows model include estimates for coupon rates, time to maturity and market rates of return. The most significant unobservable input to the expected cash flows model is an assumed return to market liquidity sometime in the next five years. If the assumed return to market liquidity was lengthened beyond the next five years, this would result in a decrease in the fair value of these ARCs. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid. Level 3 fair values are tested by management through the performance of a trend analysis of the market price and discount rate. Changes in the price and discount rates are compared to changes in market data, including bond ratings, parity ratios, balances and delinquency levels.

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 classified as Level 1 assets ($372,000 at September 30, 2020 and $230,000 at December 31, 2019). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.

Level 2 assets, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($12.0 million at September 30, 2020 and $1.2 million at December 31, 2019) and the fair value of interest rate swaps ($375.6 million at September 30, 2020 and $144.2 million at December 31, 2019). The fair values of the Corporation’s interest rate locks, forward commitments and interest rate swaps 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 ($299,000 at September 30, 2020 and $199,000 at December 31, 2019).

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 ($1.7 million at September 30, 2020 and $424,000 at December 31, 2019) and the fair value of interest rate swaps ($183.2 million at September 30, 2020 and $76.0 million at December 31, 2019).

The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Derivative assets" above.

The following table presents the changes in the Corporation’s available for sale investment securities measured at fair value on a recurring basis using unobservable inputs (Level 3):


	Pooled Trust Preferred Securities		Single-issuer Trust Preferred Securities		ARCs
Three months ended September 30, 2020	(in thousands)
Balance at June 30, 2020	$	—	$	—	$	100,859
Sales	—		—		—

Unrealized adjustment to fair value (1)	—		—		(2,869)


Balance at September 30, 2020	$	—	$	—	$	97,990

Three months ended September 30, 2019
Balance at June 30, 2019	$	—	$	2,370	$	103,365


Unrealized adjustment to fair value (1)	—		(2)		(67)

Discount accretion	—		2		—
Balance at September 30, 2019	$	—	$	2,370	$	103,298

Nine months ended September 30, 2020
Balance at December 31, 2019	$	—	$	2,400	$	101,926
Sales	—		(2,160)		—

Unrealized adjustment to fair value (1)	—		(242)		(3,936)

Discount accretion	—		2		—
Balance at September 30, 2020	$	—	$	—	$	97,990

Nine months ended September 30, 2019
Balance at December 31, 2018	$	875	$	2,400	$	102,994
Sales	(770)		—		—

Unrealized adjustment to fair value (1)	(105)		(32)		304

Discount accretion	—		2		—
Balance at September 30, 2019	$	—	$	2,370	$	103,298

(1)Pooled trust preferred securities, single-issuer trust preferred securities and ARCs are classified as available for sale investment securities; as such, the unrealized adjustment to fair value was recorded as an unrealized holding gain (loss) and included as a component of "available for sale at estimated fair value" on the consolidated balance sheets.

Certain assets 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:


	September 30, 2020		December 31, 2019
	(in thousands)
Net Loans	$	113,073	$	144,807
OREO	4,565		6,831
MSRs (1)	29,682		45,193
Total assets	$	147,320	$	196,831

(1)Amounts shown are estimated fair value. MSRs are recorded on the Corporation's consolidated balance sheets at 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:

•Net Loans – This category consists of loans that were individually evaluated for impairment and have been classified as Level 3 assets. In 2020, the amount shown is the balance of nonaccrual loans, net of the related ACL. In 2019, the

amount shown is the balance of impaired loans, net of the related ACL. See "Note 4 - Allowance for Credit Losses and Asset Quality," for additional details.

•OREO – This category consists of OREO classified as Level 3 assets, for which the fair values were based on estimated selling prices less estimated selling costs for similar assets in active markets.

•MSRs - This category consists of MSRs, which were initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors, and subsequently carried at the lower of amortized cost or fair value. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified by product type and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the September 30, 2020 valuation were 17.7% 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.

In 2008, the Corporation received Class B restricted shares of Visa, Inc. ("Visa") as part of Visa’s initial public offering. These securities are considered equity securities without readily determinable fair values. As such, the approximately 133,000 Visa Class B shares owned as of September 30, 2020 were carried at a zero cost basis.

The following tables present the carrying amounts and estimated fair values of the Corporation’s financial instruments as of the periods shown. A general description of the methods and assumptions used to estimate such fair values follows:


	September 30, 2020
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	1,534,890	$	1,534,890	$	—	$	—	$	1,534,890
FRB and FHLB stock	93,964		—		93,964		—		93,964
Loans held for sale	93,621		—		93,621		—		93,621
AFS securities	2,793,480		—		2,695,490		97,990		2,793,480
HTM securities	304,241		—		324,940		—		324,940
Net Loans	18,761,796		—		—		18,514,547		18,514,547
Accrued interest receivable	70,766		70,766		—		—		70,766
Other assets	694,442		272,632		387,563		34,247		694,442
FINANCIAL LIABILITIES
Demand and savings deposits	$	17,997,443	$	17,997,443	$	—	$	—	$	17,997,443
Brokered deposits	317,588		275,719		41,869		—		317,588
Time deposits	2,415,020		—		2,442,422		—		2,442,422
Short-term borrowings	611,727		611,727		—		—		611,727
Accrued interest payable	9,123		9,123		—		—		9,123
FHLB advances and long-term debt	1,296,012		—		1,342,192		—		1,342,192
Other liabilities	352,740		152,272		184,935		15,533		352,740

	December 31, 2019
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	517,791	$	517,791	$	—	$	—	$	517,791
FRB and FHLB stock	97,422		—		97,422		—		97,422
Loans held for sale	37,828		—		37,828		—		37,828
AFS securities	2,497,537		—		2,393,211		104,326		2,497,537
HTM securities	369,841		—		383,705		—		383,705
Net Loans	16,673,904		—		—		16,485,122		16,485,122
Accrued interest receivable	60,898		60,898		—		—		60,898
Other assets	431,565		234,176		145,365		52,024		431,565
FINANCIAL LIABILITIES
Demand and savings deposits	$	14,327,453	$	14,327,453	$	—	$	—	$	14,327,453
Brokered deposits	264,531		223,982		40,549		—		264,531
Time deposits	2,801,930		—		2,828,988		—		2,828,988
Short-term borrowings	883,241		883,241		—		—		883,241
Accrued interest payable	8,834		8,834		—		—		8,834
FHLB advances and long-term debt	881,769		—		878,385		—		878,385
Other liabilities	221,542		142,508		76,447		2,587		221,542

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						Short-term borrowings
						Accrued interest payable

FRB and FHLB stock represent restricted investments and are carried at cost.

As of September 30, 2020, 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 consists of demand and saving deposits, which are classified as Level 1, and time deposits, which are classified as Level 2. The fair value of these deposits are determined in a manner consistent with the respective type of deposits discussed above.

NOTE 10 – Net Income Per Share

Basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. Diluted net income per share is calculated as net income 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, RSUs, and PSUs. PSUs are required to be included in weighted average 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 net income per share and diluted net income per share follows (in thousands, except per share data):


	Three months ended September 30				Nine months ended September 30
	2020		2019		2020		2019
Weighted average shares outstanding (basic)	162,061		165,324		162,416		167,834
Impact of common stock equivalents	518		802		667		888
Weighted average shares outstanding (diluted)	162,579		166,126		163,083		168,722
Per share:
Basic	$	0.38	$	0.38	$	0.78	$	1.06
Diluted	0.38		0.37		0.78		1.06

NOTE 11 – Stock-Based Compensation

The Corporation grants equity awards to employees in the form of stock options, restricted stock, RSUs or PSUs under its Amended and Restated Equity and Cash Incentive Compensation Plan ("Employee Equity Plan"). Recent grants of equity awards under the Employee Equity Plan have generally been limited to RSUs and PSUs. In addition, employees may purchase stock under the Corporation’s Employee Stock Purchase Plan. The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for

such awards. Compensation expense for PSUs is also recognized over the period during which employees are required to provide service in exchange for such awards, however, compensation expense may vary based on the expectations for actual performance relative to defined performance measures.

The Corporation also grants equity awards to non-employee members of its board of directors and subsidiary bank boards of directors under the 2011 Directors’ Equity Participation Plan, which was amended and approved by shareholders as the Amended and Restated Directors’ Equity Participation Plan in 2019 ("Directors’ Plan"). Under the Directors’ Plan, the Corporation can grant equity awards to non-employee holding company and subsidiary bank directors in the form of stock options, restricted stock, RSUs or common stock. Recent grants of equity awards under the Directors’ Plan have been limited to RSUs.

Equity awards under the Employee Equity Plan are generally granted annually and become fully vested over or after a three-year vesting period. The vesting period for non-performance-based awards represents the period during which employees are required to provide service in exchange for such awards. Equity awards under the Directors' Plan are generally granted annually and become fully vested after a one-year vesting period. Certain events, as defined in the Employee Equity Plan and the Directors' Plan, result in the acceleration of the vesting of equity awards.

Fair values for RSUs and a majority of PSUs are based on the trading price of the Corporation’s stock on the date of grant and earn dividend equivalents during the vesting period, which are forfeitable if the awards do not vest. The fair value of certain PSUs are estimated through the use of the Monte Carlo valuation methodology as of the date of grant.

As of September 30, 2020, the Employee Equity Plan had 9.3 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 180,000 shares reserved for future grants through 2029.

The following table presents compensation expense and the related tax benefits for equity awards recognized in the consolidated statements of income:


	Three months ended September 30				Nine months ended September 30
	2020		2019		2020		2019
	(in thousands)
Compensation expense	$	1,875	$	2,110	$	5,403	$	5,458
Tax benefit	(397)		(451)		(1,144)		(1,194)
Stock-based compensation expense, net of tax benefit	$	1,478	$	1,659	$	4,259	$	4,264

NOTE 12 – Employee Benefit Plans

The net periodic pension cost for the Corporation’s Defined Benefit Pension Plan ("Pension Plan") consisted of the following components:


	Three months ended September 30				Nine months ended September 30
	2020		2019		2020		2019
	(in thousands)

Interest cost	$	681	$	813	$	2,043	$	2,443
Expected return on plan assets	(982)		(688)		(2,946)		(2,066)
Net amortization and deferral	465		496		1,395		1,486
Net periodic pension cost	$	164	$	621	$	492	$	1,863

The components of the net benefit for the Corporation’s Postretirement Benefits Plan ("Postretirement Plan") consisted of the following components:


	Three months ended September 30				Nine months ended September 30
	2020		2019		2020		2019
	(in thousands)
Interest cost	$	11	$	15	$	33	$	45

Net accretion and deferral	(137)		(139)		(411)		(417)
Net periodic benefit	$	(126)	$	(124)	$	(378)	$	(372)

The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and recognizes the change in that funded status through other comprehensive income.

NOTE 13 – Commitments and Contingencies

Commitments

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.

Those financial instruments include commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on the Corporation’s consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the outstanding amount of those instruments.

The outstanding amounts of commitments to extend credit and letters of credit were as follows:


	September 30, 2020		December 31, 2019
	(in thousands)
Commitments to extend credit	$	8,325,169	$	6,689,519
Standby letters of credit	294,429		303,020
Commercial letters of credit	54,112		50,432

The Corporation records a reserve for unfunded lending commitments, included in ACL - OBS credit exposures, which represents management’s estimate of credit losses associated with unused commitments to extend credit and letters of credit. See "Note 4 - Allowance for Credit Losses and Asset Quality," for additional details.

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 September 30, 2020 and December 31, 2019, the total reserve for losses on residential mortgage loans sold was $1.1 million and $3.2 million, respectively, including reserves for both representation and warranty and credit loss exposures. With the adoption of CECL on January 1, 2020 the reserve for estimated losses on certain residential mortgage loans sold to investors was reclassified to ACL - OBS credit exposures. This reclassification resulted in a $2.1 million increase to ACL - OBS credit exposures and a corresponding decrease to the reserve for estimated losses related to loans sold to investors in the first quarter of 2020.

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, which 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.

SEC Investigation

As disclosed in the Corporation’s Current Report on Form 8-K filed with the SEC on September 28, 2020, on September 28, 2020, the SEC announced that it has accepted an Offer of Settlement submitted by the Corporation to resolve the previously disclosed investigation by the staff of the Division of Enforcement of the SEC regarding certain accounting determinations that could have impacted the Corporation’s reported earnings per share. Under the settlement, without admitting or denying the SEC’s findings in this matter, the Corporation consented to the entry of an administrative civil cease-and-desist order by the SEC with respect to certain violations of the federal securities laws in the fourth quarter of 2016 through the second quarter of 2017, and the payment of a civil monetary penalty of $1.5 million.

Kress v. Fulton Bank, N.A.

On October 15, 2019, a former Fulton Bank teller supervisor, D. Kress filed a putative collective and class action lawsuit on behalf of herself and other teller supervisors, tellers, and other similar non-exempt employees in the U.S. District Court for the District of New Jersey, D. Kress v. Fulton Bank, N.A., Case No. 1:19-cv-18985. Fulton Bank accepted summons without a formal service of process on January 20, 2020. The lawsuit alleges that Fulton Bank did not record or otherwise account for the amount of time D. Kress and putative collective and class members spent conducting branch opening security procedures. The allegation is that, as a result, Fulton Bank did not properly compensate those employees for their regular and overtime wages. The lawsuit alleges that by doing so, Fulton violated: (i) the federal Fair Labor Standards Act and seeks back overtime wages for a period of three years, liquidated damages and attorney fees and costs; (ii) the New Jersey State Wage and Hour Law and seeks back overtime wages for a period of six years, treble damages and attorney fees and costs; and (iii) the New Jersey Wage Payment Law and seeks back wages for a period of six years, treble damages and attorney fees and costs. The lawsuit also asserts New Jersey common law claims seeking compensatory damages and interest. Following the submission of a formal demand for damages by Counsel representing plaintiffs ("Plaintiffs’ Counsel"), the Corporation and Plaintiffs’ Counsel engaged in negotiations regarding the potential settlement of this lawsuit on a collective and class basis. While the negotiations are ongoing, the Corporation and Plaintiffs’ Counsel have reached a tentative agreement with respect to the financial terms of a potential settlement to resolve this lawsuit. If the parties are able to reach a formal settlement agreement, that settlement agreement would be subject to approval by the U.S. District Court for the District of New Jersey. The Corporation is not able to provide any assurance that a formal settlement agreement will be reached, or that the District Court will approve the settlement agreement. The financial terms of the potential settlement involve an amount that is not expected to be material to the Corporation. The Corporation established an accrued liability during the third quarter of 2020 for the amount of the potential settlement.

NOTE 14 – Long-Term Debt

In March 2020, the Corporation issued $200.0 million and $175.0 million of subordinated notes due in 2030 and 2035, respectively. The subordinated notes maturing in 2030 were issued with a fixed-to-floating rate of 3.25% and an effective rate of 3.35%, due to issuance costs, and the subordinated notes maturing in 2035 were issued with a fixed-to-floating rate of 3.75% and an effective rate of 3.85%, due to issuance costs.

NOTE 15 – Subsequent Event

On October 29, 2020 the Corporation issued 8,000,000 depositary shares ("Depositary Shares"), each representing a 1/40th interest in a share of Fulton’s 5.125% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, with a liquidation preference of $1,000 per share (equivalent to $25.00 per Depositary Share), for an aggregate offering amount of $200 million. The Corporation received net proceeds from the offering of $193.7 million, after deducting underwriting discounts and commissions and before deducting transaction expenses payable by the Corporation.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Management’s Discussion") relates to Fulton Financial Corporation, a financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. Management’s Discussion should be read in conjunction with the consolidated financial statements and other financial information presented in this report.

FORWARD-LOOKING STATEMENTS

The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition, results of operations and business. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends," "projects," the negative of these terms and other comparable terminology. These forward-looking statements may include projections of, or guidance on, the Corporation's future financial performance, expected levels of future expenses, including future credit losses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation's business or financial results.

Forward-looking statements are neither historical facts, nor assurance of future performance. Instead, they are based on current beliefs, expectations and assumptions regarding the future of the Corporation's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Corporation's control, and actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not unduly rely on any of these forward-looking statements. Any forward-looking statement is based only on information currently available and speaks only as of the date when made. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Many factors could affect future financial results including, without limitation:

•the impact of adverse conditions in the economy and financial markets on the performance of the Corporation’s loan and lease portfolio and demand for the Corporation’s products and services;

•the scope and duration of the COVID-19 pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impacts of the pandemic on the Corporation, its customers and third parties;

•increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge off loans and leases and incur elevated collection and carrying costs related to such non-performing assets;

•investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;

•the effects of market interest rates, and the relative balances of interest rate-sensitive assets to interest rate-sensitive liabilities, on net interest margin and net interest income;

•the planned phasing out of LIBOR as a benchmark reference rate;

•the effects of changes in interest rates on demand for the Corporation’s products and services;

•the effects of changes in interest rates or disruptions in liquidity markets on the Corporation’s sources of funding;

•the effects of the extensive level of regulation and supervision to which the Corporation and Fulton Bank, N.A. are subject;

•the effects of the significant amounts of time and expense associated with regulatory compliance and risk management;

•the potential for negative consequences resulting from regulatory violations, investigations and examinations, or failure to comply with the BSA, the Patriot Act and related AML requirements, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions, the need to undertake remedial actions and possible damage to the Corporation’s reputation;

•the continuing impact of the Dodd-Frank Act on the Corporation’s business and results of operations;

•the effects of, and uncertainty surrounding, new legislation, changes in regulation and government policy, which could result in significant changes in banking and financial services regulation;

•the effects of actions by the federal government, including those of the Federal Reserve Board and other government agencies, that impact money supply and market interest rates;

•the effects of changes in U.S. federal, state or local tax laws;

•the effects of negative publicity on the Corporation’s reputation;

•the effects of adverse outcomes in litigation and governmental or administrative proceedings;

•the potential to incur losses in connection with repurchase and indemnification payments related to sold loans;

•the Corporation’s ability to achieve its growth plans;

•completed and potential acquisitions may affect costs and the Corporation may not be able to successfully integrate the acquired business or realize the anticipated benefits from such acquisitions;

•the Corporation’s ability to achieve the expected cost savings, and the timing of such savings, associated with the Corporation’s recently announced plans to consolidate certain of its financial service offices and implement other cost-saving measures;

•the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;

•the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment;

•the effects of changes in accounting policies, standards, and interpretations on the Corporation’s reporting of its financial condition and results of operations, including the Corporation’s adoption of ASU 2016-13, Financial Instruments – Credit Losses (CECL);

•the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;

•the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements;

•the failure or circumvention of the Corporation’s system of internal controls;

•the loss of, or failure to safeguard, confidential or proprietary information;

•the Corporation’s failure to identify and to address cyber-security risks, including data breaches and cyber-attacks;

•the Corporation’s ability to keep pace with technological changes;

•the Corporation’s ability to attract and retain talented personnel;

•capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements, and the Corporation’s ability to generate capital internally or raise capital on favorable terms;

•the Corporation’s reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions; and

•the effects of any downgrade in the Corporation’s or Fulton Bank’s credit ratings on their borrowing costs or access to capital markets.

Additional information regarding these as well as other factors that could affect future financial results can be found in the sections entitled "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and elsewhere in this Report, including in Note 13 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements and in Item 1A. "Risk Factors".

RESULTS OF OPERATIONS

Overview

The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans, investments and other interest-earning assets, and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the net interest margin, which is FTE net interest income as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments, or properties. Offsetting these revenue sources are provisions for credit losses, non-interest expenses and income taxes.

The following table presents a summary of the Corporation’s earnings and selected performance ratios:


	Three months ended September 30		Nine months ended September 30
	2020	2019	2020	2019

Net income (in thousands)	$61,607	$62,108	$127,213	$178,550
Diluted net income per share	$0.38	$0.37	$0.78	$1.06
Return on average assets	0.97%	1.15%	0.71%	1.13%
Return on average shareholders' equity	10.32%	10.64%	7.26%	10.41%
Return on average tangible shareholders' equity (1)	13.50%	14.03%	9.44%	13.64%
Net interest margin (2)	2.70%	3.31%	2.90%	3.41%
Efficiency ratio (1)	62.3%	63.6%	64.4%	63.9%
Non-performing assets to total assets	0.57%	0.66%	0.57%	0.66%
Annualized net (recoveries) charge-offs to average loans	(0.05)%	0.15%	0.10%	0.07%

(1)Ratio represents a financial measure derived by methods other than GAAP. See reconciliation of this non-GAAP financial measure to the most comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures" at the end of this "Overview" section of Management’s Discussion.

(2)Presented on an FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion.

COVID-19 Pandemic

Beginning in the first quarter of 2020, the COVID-19 pandemic has caused substantial disruption in economic and social activity, both globally and in the United States. The spread of COVID-19, and the related government actions to mandate or encourage temporary closures of businesses, quarantines, social distancing, "stay at home" orders and other restrictions on in-person operations, activities, and operations, have caused severe disruptions in the U.S. economy, which has, in turn, disrupted, and will likely continue to disrupt the business of the Company's customers, as well as the Company's own business and operations. The resulting impacts of COVID-19 on consumers, including the sudden, significant increase in the unemployment rate, has caused changes in consumer and business spending, borrowing needs and saving habits, which will likely affect the demand for loans and other products and services the Company offers, as well as the creditworthiness of current and prospective borrowers. The significant decrease in commercial activity and disruptions in supply chains associated with the pandemic, both nationally and in the Company’s markets, may cause customers, vendors, and counterparties to be unable to meet existing payment or other obligations to the Company.

The Company expects COVID-19 to limit, at least for a period of time, customer demand for many banking products and services. Many companies and residents in the Company's market areas were subject to mandatory "non-essential business" shut-downs and stay at home orders, which reduced banking activity across its market areas. In response to these mandates, the Company temporarily limited most locations to drive-up and ATM services, with lobby access available by appointment only, reduced hours of operation at some locations, temporarily closed some locations and encouraged the Company’s customers to use electronic banking platforms. In addition, a significant portion of the Company’s employees have transitioned to working remotely as a result of COVID-19.

As the COVID-19 pandemic began to subside within the Company’s markets and governmental restrictions began to be lifted or eased, the Company adopted a phased approach to restoring regular lobby access at most of its locations and returning employees currently working remotely to the Company’s offices. The timing and scope of these processes are adaptable to respond to changes in the evolution of COVID-19 and governmental restrictions and recommendations, and include the addition of new physical and procedural safeguards designed to protect the health and safety of the Company’s employees and

customers and comply with governmental requirements and recommendations. Approximately 25% of the Company’s locations are expected to provide lobby access by appointment only on a long-term basis.

COVID-19 has significantly affected the financial markets and has resulted in a number of responses by the U.S. government, including reductions in interest rates by the FOMC. These reductions in interest rates, especially if prolonged, could continue to adversely affect the Company's net interest income and margins and profitability.

The CARES Act was enacted in March 2020 and, among other provisions, authorized the SBA to guarantee loans under the PPP for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. As of September 30, 2020, the Company funded approximately 10,000 loans totaling $2.0 billion under the PPP.

Stimulus payments to eligible consumers, enhanced unemployment benefits provided by the federal government and traditional, state-provided unemployment compensation, as well as other forms of relief provided to consumers and businesses, have helped to limit some of the adverse impacts of COVID-19. The reduction, expiration or discontinuation of these measures may adversely impact the recovery of economic activity and the ability of borrowers to meet their payment and other obligations to the Company, either of which could require the Company to increase the ACL through provisions for credit losses.

The impact of COVID-19 on the Company’s financial results is evolving and uncertain. The Company has limited exposure to some of the industries that were initially most significantly impacted by COVID-19, such as hospitality and food services, energy and entertainment, and most of these loans are secured by real estate and other forms of collateral. While many areas of the economy began to exhibit signs of recovery during the third quarter of 2020, the lingering effects of the pandemic, particularly in certain sectors of the economy, or a resurgence in COVID-19 infections that prompts the continuation or imposition of governmental restrictions on activities, may result in decreased demand for the Company’s loan products. In addition, the decline in economic activity occurring due to COVID-19 and the actions by the FOMC with respect to interest rates are likely to affect the Company’s net interest income, non-interest income and credit-related losses for an uncertain period of time. As a result, the Company has taken steps to maintain liquidity and conserve capital during this period of uncertainty. The Company has been holding excess cash reserves since the middle of March, has additional liquidity available through borrowing arrangements and other sources and has suspended its share repurchase program until there is more clarity surrounding the economic conditions. See additional discussion in "Results of Operations" and "Financial Condition" of Management's Discussion.

Adoption of CECL

The Corporation adopted CECL effective January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost, and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under CECL, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Corporation recorded an increase of $58.3 million to the ACL on January 1, 2020 primarily as a result of the adoption of CECL. Retained earnings decreased $43.8 million and deferred tax assets increased by $12.4 million on January 1, 2020, representing the cumulative effect of adoption.

Summary of Financial Results for the three and nine months ended September 30, 2020:

•Net Income and Net Income Per Share - Net income was $61.6 million and $127.2 million for the three and nine months ended September 30, 2020, respectively. For the three months ended September 30, 2020, net income decreased $500,000 compared to the same period in 2019. Diluted net income per share was $0.38, a $0.01, or 2.7%, increase compared to the same period in 2019. The increase in diluted net income per share was the result of lower weighted average diluted shares outstanding for the three months ended September 30, 2020 compared to the same period in 2019. Net income for the nine months ended September 30, 2020 decreased $51.3 million, or 28.8%, compared to the same period in 2019, and diluted net income per share was $0.78, a $0.28, or 26.4%, decrease compared to the same period in 2019. The decreases in net income for both periods were primarily a result of lower net interest income, and a higher provision for credit losses, as a result of the adoption of CECL and deteriorating economic assumptions resulting from COVID-19, partially offset by higher non-interest income and lower non-interest expense.

•Net Interest Income - Net interest income decreased $7.1 million, or 4.4%, and $21.5 million, or 4.4%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The decreases resulted from lower yields on interest-earning assets, partially offset by balance sheet growth and the impact of lower funding costs. Overall, the net interest margin decreased 61 bp and 51 bp for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

◦Net Interest Margin - For the three and nine months ended September 30, 2020, the decreases in the net interest margin reflect the net impact of a 112 bp and a 88 bp decrease in yields on interest-earning assets, respectively, partially offset by a 55 bp and 39 bp decrease in the cost of funds, respectively.

◦Loan Growth - Average Net Loans grew by $2.4 billion, or 14.9%, and $1.7 billion, or 10.5%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The increases were driven largely by the issuance of PPP loans and growth in the real estate commercial and residential mortgage portfolios.

◦Deposit Growth - Average deposits grew $3.4 billion, or 20.3%, and $2.4 billion, or 14.5%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The increases were driven by growth in all deposit categories except time deposits. The increases in average total demand and savings accounts were driven by the funding of various government stimulus programs, which largely remained in customer deposit accounts during the second and third quarters as well as seasonal increases in municipal accounts.

•Long-term Debt - In March 2020, the Corporation issued a total of $375.0 million of subordinated notes, with $200.0 million of subordinated notes due in 2030 having a fixed-to-floating rate of 3.25% and an effective rate of 3.35% and $175.0 million of subordinated notes due in 2035 having a fixed-to-floating rate of 3.75% and an effective rate of 3.85%.

•Asset Quality - Non-performing assets decreased $1.3 million as of September 30, 2020 compared to December 31, 2019. Annualized net recoveries to average loans outstanding were 0.05% for the three months ended September 30, 2020 and annualized net charge-offs were 0.10% for the nine months ended September 30, 2020, compared to net charge-offs of 0.15% and 0.07% for the same periods in 2019, respectively. The provisions for credit losses for the three and nine months ended September 30, 2020 were $7.1 million and $70.7 million, respectively, compared to $2.2 million and $12.3 million, respectively, for the same periods in 2019. The higher provision during the first nine months of 2020 was largely driven by the overall downturn in economic forecasts due to COVID-19, resulting in higher expected future credit losses under CECL. Qualitative adjustments used in determining the ACL increased compared to those at the time of adoption of CECL on January 1, 2020 primarily as a result of uncertainties related to forecasted economic variables due to the economic impact of COVID-19 and the future performance of loans that received deferrals or forbearances due to COVID-19.

•Non-interest Income - For the three and nine months ended September 30, 2020, non-interest income, excluding net investment securities gains, increased $7.9 million, or 14.3%, and $14.6 million, or 9.4%, respectively, as compared to the same periods in 2019. The increase during the three months ended September 30, 2020, was primarily the result of mortgage banking income which increased $10.1 million, driven by an increase in gains on sales of mortgage loans, partially offset by a $1.5 million increase to the valuation allowance for MSRs. In addition wealth management fees increased $1.0 million resulting from overall market performance. For the nine months ended September 30, 2020, mortgage banking increased $15.0 million, net of a $9.2 million increase to the valuation allowance for MSRs. Increases were also experienced in wealth management fees and commercial banking.

•Non-interest Expense - Non-interest expense decreased $7.6 million, or 5.2%, and $4.1 million, or 0.9%, for the three and nine months ended September 30, 2020, respectively, in comparison to the same periods in 2019. The decrease during the three months ended September 30, 2020 was primarily the result of lower outside services, marketing and professional fees, partially offset by higher FDIC insurance and salaries and employee benefits. During 2019 in connection with the consolidation of the Corporation's subsidiary banks into Fulton Bank ("Charter Consolidation"), expenses, primarily outside services, totaling $5.2 million and $11.7 million were incurred for the three and nine months ended September 30, 2019, respectively. In addition during the third quarter of 2019, the Corporation recorded $4.3 million of prepayment penalties on certain FHLB advances in conjunction with a balance sheet restructuring. The decrease during the nine months ended September 30, 2020 was primarily the result of decreases in outside services and marketing, and lower prepayment penalties on FHLB advances, partially offset by higher salaries and employee benefits, increases in data processing and software expenses and state taxes.

As a result of a recent strategic operating expense review announced in October of 2020, the Corporation is undertaking a number of cost-saving initiatives that are expected to result in annual expense savings of $25 million. The Corporation expects to reinvest a portion of the cost savings to accelerate digital transformation initiatives. It is expected that the cost savings will not be fully realized until mid-2021. In addition, it is expected that a pre-tax charge within the range of $17 to $19 million will be realized for this initiative for employee severance, fixed asset write-offs

and lease termination charges, among others. Of this charge, $800,000 for severance expense in connection with the closure and consolidation of 21 financial centers expected to be completed in early 2021 was incurred in the third quarter of 2020, $16 to $17 million is expected to be incurred in the fourth quarter of 2020, with the remaining charges of up to approximately $1 million being recognized in the first quarter of 2021.

•Income Taxes - Income taxes were $9.5 million and $18.8 million for the three and nine months ended September 30, 2020, respectively, resulting in ETRs of 13.4% and 12.9%, respectively, as compared to 13.9% and 14.5% for the same periods in 2019, respectively. The ETR was lower mainly due to lower income before income taxes. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs.

Supplemental Reporting of Non-GAAP Based Financial Measures

This Quarterly Report on Form 10-Q contains supplemental financial information, as detailed below, which has been derived by methods other than GAAP. The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of the Corporation and companies in the Corporation's industry. Management believes that these non-GAAP financial measures, in addition to GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-GAAP financial measures might not be comparable to similarly-titled measures at other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety. Following are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure:


	Three months ended September 30						Nine months ended September 30
	2020			2019			2020			2019
	(dollars in thousands)
Return on average tangible shareholders' equity
Net income	$	61,607		$	62,108		$	127,213		$	178,550
Plus: Intangible amortization, net of tax	103			846			312			1,016
Numerator	$	61,711		$	62,954		$	127,525		$	179,566

Average common shareholders' equity	$	2,374,091		$	2,315,585		$	2,340,204		$	2,294,165
Less: Average goodwill and intangible assets	(534,971)			(535,184)			(535,103)			(534,097)
Denominator	$	1,839,120		$	1,780,401		$	1,805,101		$	1,760,068

Return on average tangible shareholders' equity, annualized	13.50		%	14.03		%	9.44		%	13.64		%

Efficiency ratio
Non-interest expense	$	139,147		$	146,770		$	424,705		$	428,762
Less: Prepayment penalty on FHLB advances	—			(4,326)			(2,878)			(4,326)
Less: Amortization of tax credit investments	(1,694)			(1,533)			(4,594)			(4,516)
Less: Intangible amortization	(132)			(1,071)			(397)			(1,285)
Numerator	$	137,321		$	139,840		$	416,836		$	418,635

Net interest income (FTE) (1)	$	157,106		$	164,517		$	476,931		$	498,877
Plus: Total non-interest income	63,248			59,813			173,814			160,879
Less: Investment securities gains, net	(2)			(4,492)			(3,053)			(4,733)
Denominator	$	220,353		$	219,838		$	647,692		$	655,023

Efficiency ratio	62.3		%	63.6		%	64.4		%	63.9		%

(1) Presented on a FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. See also the “Net Interest Income” section of Management’s Discussion and Analysis.

CRITICAL ACCOUNTING POLICIES

The Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 includes a summary of critical accounting policies 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 following discussion addresses the critical accounting policies related to the application of CECL, which was adopted on January 1, 2020.

ALLOWANCE FOR CREDIT LOSSES

The Corporation adopted new accounting guidance for estimating credit losses, known as CECL, in the first quarter of 2020. In accordance with CECL, the ACL, which includes both the ACL - loans and the ACL - OBS credit exposures, is calculated with the objective of maintaining a reserve for CECL over the remaining expected life of the portfolio. Management's determination of the appropriateness of the reserve is based on periodic evaluations of the loan portfolio, lending-related commitments, current as well as forecasted economic factors and other relevant factors.

In determining the ACL, the Corporation uses three independent components. These components are PD, which measures the likelihood that a borrower will be unable to meet its debt obligations, LGD, which measures the share of an asset that is lost if a borrower defaults, and EAD which measures the gross exposure under a facility upon default. The PD models were developed based on historical default data. Both internal variables and external variables are evaluated in the process. The main internal variables are risk rating (commercial loans) or delinquency history (consumer loans) and the external variables are economic variables obtained from external forecasts. Management applies risk rating transition matrices to pools of loans and lending-related commitments with similar risk characteristics to determine default probabilities, calibrates using economic forecasts, applies modeled LGD results to associated EAD and incorporates modeled overlays and qualitative adjustments to estimate ACL. As such, the calculation of ACL is inherently subjective and requires management to exercise significant judgment.

The ACL is estimated over a reasonable and supportable forecast period based on the projected performance of specific economic variables that statistically correlate with PD rates. As economic variables revert to long-term averages through the forecast process, externally developed long-term economic forecasts are used to establish the impacts of the economic scenario, reversion, and long-term averages in the development of losses over the expected life of the assets being modeled. The CECL estimate is highly sensitive to the economic forecasts used to develop the estimate. Due to the high level of uncertainty regarding significant assumptions, such as the ultimate impact of COVID-19 and effectiveness of the related government response, since the beginning of 2020 the Corporation has evaluated a range of economic scenarios, including more and less severe economic deteriorations, with varying speeds of recovery.

The ACL includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative models. Qualitative adjustments include and consider changes in international, national, regional and local economic and business conditions, an assessment of the lending environment, including underwriting standards and other factors affecting credit quality. Qualitative adjustments have increased compared to those at the time of adoption of CECL on January 1, 2020 primarily as a result of uncertainties related to forecasted economic variables due to the economic impact of COVID-19 and the future performance of loans that received deferrals or forbearances due to COVID-19.

For further discussion of the methodology used in the determination of the ACL, refer to Note 1, "Basis of Presentation" to the Consolidated Financial Statements. To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods.

Three months ended September 30, 2020 compared to the three months ended September 30, 2019

Net Interest Income

FTE net interest income decreased $7.4 million, to $157.1 million, for the three months ended September 30, 2020, from $164.5 million in the same period in 2019. The NIM decreased 61 bp, or 18.4%, to 2.70%, compared to 3.31% for the same period in 2019. 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 FTE amounts.


	Three months ended September 30
	2020						2019
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
ASSETS	(dollars in thousands)
Interest-earning assets:
Net Loans (1)	$	18,880,519	$	160,344	3.38	%	$	16,436,507	$	188,280	4.55	%
Taxable investment securities (2)	2,011,893		13,150		2.61		2,282,292		15,565		2.73
Tax-exempt investment securities (2)	861,764		6,899		3.19		516,907		4,650		3.57

Total investment securities	2,873,657		20,049		2.79		2,799,199		20,215		2.88
Loans held for sale	79,999		728		3.64		31,898		466		5.83
Other interest-earning assets	1,387,327		1,028		0.30		509,579		2,709		2.12
Total interest-earning assets	23,221,502		182,149		3.13		19,777,183		211,670		4.25
Noninterest-earning assets:
Cash and due from banks	138,567						120,967
Premises and equipment	239,183						240,383
Other assets	1,835,190						1,491,115
Less: ACL - loans (3)	(264,934)						(171,848)
Total Assets	$	25,169,508					$	21,457,800
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	5,591,548	$	1,913	0.14	%	$	4,448,112	$	9,163	0.82	%
Savings deposits	5,716,050		2,347		0.16		5,026,316		11,059		0.87
Brokered deposits	314,721		440		0.56		253,426		1,536		2.40
Time deposits	2,495,445		9,931		1.58		2,974,993		13,979		1.86
Total interest-bearing deposits	14,117,764		14,631		0.41		12,702,847		35,737		1.12
Short-term borrowings	613,127		370		0.24		919,697		4,156		1.78
FHLB advances and long-term debt	1,295,515		10,042		3.10		842,706		7,260		3.44
Total interest-bearing liabilities	16,026,406		25,043		0.62		14,465,250		47,153		1.29
Noninterest-bearing liabilities:
Demand deposits	6,270,683						4,247,820
Total Deposits/Cost of deposits	20,388,447				0.29		16,950,667				0.84
Other liabilities	498,328						429,145
Total Liabilities	22,795,417						19,142,215
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds	22,297,089				0.45		18,713,070				1.00
Shareholders’ equity	2,374,091						2,315,585
Total Liabilities and Shareholders’ Equity	$	25,169,508					$	21,457,800
Net interest income/FTE NIM			157,106		2.70	%			164,517		3.31	%
Tax equivalent adjustment			(2,990)						(3,257)
Net interest income			$	154,116					$	161,260

(1)Average balance includes non-performing loans.

(2)Balances include amortized historical cost for AFS. The related unrealized holding gains (losses) are included in other assets.

(3)ACL - loans relates to the ACL specifically for Net Loans and does not include the ACL for OBS credit exposures, which is included in other liabilities.

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended September 30, 2020 in comparison to the same period in 2019:


	2020 vs. 2019 Increase (Decrease) due to change in
	Volume		Rate		Net
	(in thousands)
FTE Interest income on:
Net Loans (1)	$	24,784	$	(52,720)	$	(27,936)
Taxable investment securities	(1,961)		(454)		(2,415)
Tax-exempt investment securities	2,783		(534)		2,249

Loans held for sale	487		(225)		262
Other interest-earning assets	1,957		(3,638)		(1,681)
Total interest income	$	28,050	$	(57,571)	$	(29,521)
Interest expense on:
Demand deposits	$	1,569	$	(8,819)	$	(7,250)
Savings deposits	1,303		(10,014)		(8,711)
Brokered deposits	232		(1,328)		(1,096)
Time deposits	(2,094)		(1,955)		(4,049)
Short-term borrowings	(1,054)		(2,732)		(3,786)
Long-term borrowings	3,550		(768)		2,782
Total interest expense	$	3,507	$	(25,617)	$	(22,110)

(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.

The FOMC decreased the Fed Funds Rate by 25 bp in each of August, September and October of 2019. In March 2020, the FOMC decreased the Fed Funds Rate by a total of 150 bp in response to COVID-19. These changes in the Fed Funds Rate resulted in corresponding decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and LIBOR as well as for certain interest-bearing liabilities.

As summarized in the preceding table, the 112 bp decrease in the yield on average interest-earning assets drove a $57.6 million decrease in FTE interest income, but was partially offset by the impact of a $3.4 billion, or 17.4%, increase in average interest-earning assets, primarily PPP loans, which contributed $28.1 million to FTE interest income. The yield on the loan portfolio decreased 117 bp, or 25.7%, from the third quarter of 2019, as all variable and certain adjustable rate loans repriced to lower rates, and yields on new loan originations generally were lower than the average yield on the loan portfolio. Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease. As such, the impact of changes in index rates on adjustable rate loans may not be fully realized until future periods.

Interest expense decreased $22.1 million primarily due to the 67 bp decrease in the rate on average interest-bearing liabilities. The rates on average interest-bearing demand deposits and savings deposits decreased 68 bp and 71 bp, respectively, which contributed $8.8 million and $10.0 million to the decrease in interest expense, respectively. Brokered deposit rates decreased 184 bp, which contributed $1.3 million to the decrease in interest expense. In addition, the 154 bp decrease in the rates on short-term borrowings contributed $2.7 million to the decrease in interest expense. The $452.8 million increase in average long-term borrowings contributed $3.6 million of additional interest expense, partially offset by a $768,000 decrease in additional interest expense as a result of 34 bp decrease in the average rate.

Average loans and average FTE yields, by type, are summarized in the following table:


	Three months ended September 30								Increase (Decrease)
	2020				2019				in Balance
	Balance		Yield		Balance		Yield		$		%
	(dollars in thousands)
Real estate – commercial mortgage	$	6,986,528	3.27	%	$	6,489,456	4.57	%	$	497,072	7.7	%
Commercial and industrial (1)	5,983,872		2.53		4,414,406		4.57		1,569,466		35.6
Real estate – residential mortgage	2,975,516		3.73		2,512,899		4.06		462,617		18.4
Real estate – home equity	1,237,602		3.87		1,364,161		5.27		(126,559)		(9.3)
Real estate – construction	981,589		3.84		905,060		4.68		76,529		8.5
Consumer	464,851		4.07		457,524		4.36		7,327		1.6
Equipment lease financing	279,217		3.96		277,555		4.41		1,662		0.6
Other (2)	(28,656)		—		15,446		—		(44,102)		N/M
Total loans	$	18,880,519	3.38	%	$	16,436,507	4.55	%	$	2,444,012	14.9	%

(1) Includes average PPP loans of $2.0 billion for the three months ended September 30, 2020.

(2) Consists of overdrafts and net origination fees and costs.

N/M - Not meaningful

Average loans increased $2.4 billion, or 14.9%, compared to the same period of 2019. The increase was driven largely by growth in the commercial and industrial portfolio as a result of loans originated under the PPP. Excluding loans originated under the PPP, commercial and industrial loan balances declined. Commercial and residential mortgage loan portfolios, as well as the construction, consumer and equipment lease financing portfolios, experienced growth, partially offset by decreases in the home equity loan portfolio.

Average deposits and average interest rates, by type, are summarized in the following table:


	Three months ended September 30								Increase (Decrease) in Balance
	2020				2019
	Balance		Rate		Balance		Rate		$		%
	(dollars in thousands)
Noninterest-bearing demand	$	6,270,683	—	%	$	4,247,820	—	%	$	2,022,863	47.6	%
Interest-bearing demand	5,591,548		0.14		4,448,112		0.82		1,143,436		25.7
Savings	5,716,050		0.16		5,026,316		0.87		689,734		13.7
Total demand and savings	17,578,281		0.1		13,722,248		0.58		3,856,033		28.1
Brokered deposits	314,721		0.56		253,426		2.40		61,295		24.2
Time deposits	2,495,445		1.58		2,974,993		1.86		(479,548)		(16.1)
Total deposits	$	20,388,447	0.29	%	$	16,950,667	0.84	%	$	3,437,780	20.3	%

Average total demand and savings accounts increased $3.9 billion, or 28.1%, primarily driven by increases in noninterest-bearing demand deposits as well as interest-bearing demand and saving accounts. The increases in average total demand and savings accounts resulted from the funding of various government stimulus programs, which largely remained in customer deposit accounts during the quarter as well as seasonal increases in municipal accounts.

The average cost of total deposits decreased 55 bp, to 0.29%, for the third quarter of 2020, compared to 0.84% for the same period of 2019, mainly as a result of reductions in deposit rates in response to the FOMC reductions to the Fed Funds Rate and also as a result of deposit rate decreases implemented after the Fed Funds Rate cuts during the second half of 2019.

Average borrowings and interest rates, by type, are summarized in the following table:


	Three months ended September 30								Increase (Decrease)
	2020				2019				in Balance
	Balance		Rate		Balance		Rate		$		%
Short-term borrowings:	(dollars in thousands)


Customer funding(1)	$	613,127	0.24	%	$	332,893	0.80	%	$	280,234	84.2	%
Federal funds purchased	—		—		101,022		2.11		(101,022)		N/M
FHLB advances and other borrowings (2)	—		—		485,782		2.38		(485,782)		N/M
Total short-term borrowings	613,127		0.24		919,697		1.78		(306,570)		(33.3)
Long-term borrowings:
FHLB advances	535,992		1.81		455,264		2.55		80,728		17.7
Other long-term debt	759,523		4.00		387,442		4.48		372,081		96.0
Total long-term borrowings	1,295,515		3.10		842,706		3.44		452,809		53.7
Total borrowings	$	1,908,642	2.18	%	$	1,762,403	2.57	%	$	146,239	8.3	%

(1) Includes repurchase agreements and short-term promissory notes.

(2) Consists of FHLB borrowings with original term of less than one year.

Average total short-term borrowings decreased $306.6 million, or 33.3%, primarily as a result of a $485.8 million decrease in FHLB advances and other borrowings and a $101.0 million decrease in federal funds purchased, partially offset by a $280.2 million increase in customer funding. These decreases resulted from excess funding provided by higher deposits. The average cost of short-term borrowings decreased 154 bp, mainly due to the net impact of changes in the Fed Funds Rate.

Average total long-term borrowings increased $452.8 million, or 53.7%, during the third quarter of 2020, compared to the same period of 2019, primarily as a result of the issuance of $375.0 million of subordinated notes in March of 2020. The 74 bp decrease in the rate on FHLB advances reflects the impact of restructurings.

Provision for Credit Losses

The provision for credit losses was $7.1 million for the third quarter of 2020, an increase of $4.9 million from the same period of 2019. The increase was the result of several factors, most notably, the overall uncertainty in economic forecasts due to COVID-19.

Non-Interest Income

The following table presents the components of non-interest income:


	Three months ended September 30				Increase (Decrease)
	2020		2019		$		%
	(dollars in thousands)
Wealth management fees	$	14,943	$	13,867	$	1,076	7.8	%
Commercial banking:
Merchant and card	6,237		6,166		71		1.2
Cash management	4,742		4,696		46		1.0
Capital markets	4,696		4,448		248		5.6
Other commercial banking	2,636		3,478		(842)		(24.2)
Total commercial banking	18,311		18,788		(477)		(2.5)
Consumer banking:
Card	5,002		5,791		(789)		(13.6)
Overdraft	3,015		4,682		(1,667)		(35.6)
Other consumer banking	2,406		2,860		(454)		(15.9)
Total consumer banking	10,423		13,333		(2,910)		(21.8)
Mortgage banking:
Gains on sales of mortgage loans	19,480		5,520		13,960		N/M
Mortgage servicing income	(2,679)		1,138		(3,817)		N/M
Total mortgage banking	16,801		6,658		10,143		N/M
Other	2,769		2,675		94		3.5
Non-interest income before investment securities gains	63,246		55,321		7,925		14.3
Investment securities gains, net	2		4,492		(4,490)		N/M
Total Non-Interest Income	$	63,248	$	59,813	$	3,435	5.7	%

N/M - Not meaningful

Non-interest income, before net investment securities gains, increased $7.9 million, or 14.3%, in the third quarter of 2020 as compared to the same period in 2019. Wealth management revenues increased $1.1 million, or 7.8%, primarily resulting from growth in brokerage income due to an increase in client asset levels and improved overall market performance.

Total commercial banking income decreased $477,000, or 2.5%, compared to the same period in 2019, driven by decreases in other commercial banking income (primarily other services charges on deposits and Small Business Administration income) as a result of COVID-19.

Total consumer banking income decreased $2.9 million, or 21.8%, compared to the same period in 2019, primarily driven by lower overdraft fees.

Mortgage banking income increased $10.1 million, driven by an increase in gains on sales of mortgage loans, partially offset by a decrease in mortgage servicing income. The increase in gains on sales of mortgage loans reflected increases in both the volume of loans sold and higher spreads on sales. The decrease in mortgage servicing income was driven by a $1.5 million increase to the valuation allowance for MSRs in the third quarter of 2020, and higher MSR amortization due to higher prepayments.

Investment securities gains, net, were lower compared to the same period of 2019 as a result of a balance sheet restructuring involving the sale of approximately $400 million of investment securities and a corresponding prepayment of FHLB advances completed during the third quarter of 2019. As a result of these transactions, $4.5 million of investment securities gains were realized during the third quarter of 2019.

Non-Interest Expense

The following table presents the components of non-interest expense:


	Three months ended September 30				Increase (Decrease)
	2020		2019		$		%
	(dollars in thousands)
Salaries and employee benefits	$	79,227	$	78,211	$	1,016	1.3	%
Net occupancy	13,221		12,368		853		6.9
Data processing and software	12,285		11,590		695		6.0
Other outside services	7,617		12,163		(4,546)		(37.4)
Professional fees	2,879		3,331		(452)		(13.6)
Equipment	3,711		3,459		252		7.3
State taxes	2,692		2,523		169		6.7
FDIC insurance	1,578		239		1,339		N/M
Marketing	1,147		3,322		(2,175)		(65.5)
Amortization of TCI	1,694		1,533		161		10.5
Intangible amortization	132		1,071		(939)		(87.7)
Prepayment penalty on FHLB advances	—		4,326		(4,326)		N/M
Other	12,962		12,634		328		2.6
Total non-interest expense	$	139,147	$	146,770	$	(7,623)	(5.2)	%

N/M - Not meaningful

The $1.0 million, or 1.3%, increase in salaries and employee benefits reflected an $800,000 severance expense incurred in connection with the 21 financial center closures and consolidations expected to be completed in early 2021.

Other outside services decreased $4.5 million, or 37.4%, as 2019 included $2.6 million of expense associated with the Charter Consolidation.

Marketing expense declined $2.2 million, or 65.5%, as a result of reduced marketing campaigns during the quarter.

Professional fees decreased $452,000, or 13.6%, primarily due to a decrease in legal fees. The Corporation incurs fees related to various legal matters in the normal course of business. These fees can fluctuate based on timing and the extent of these matters.

FDIC insurance increased $1.3 million compared to the same period in 2019. FDIC insurance expense was reduced in the third quarter of 2019 as a result of the receipt of assessment credits.

The third quarter of 2019 included approximately $4.3 million of penalties related to the prepayment of certain FHLB advances in conjunction with the 2019 balance sheet restructuring mentioned above.

Income Taxes

Income tax expense for the three months ended September 30, 2020 was $9.5 million, a $500,000 decrease from $10.0 million for the same period in 2019. The Corporation’s ETR was 13.4% for the three months ended September 30, 2020, compared to 13.9% in the same period of 2019. The decrease in income tax expense primarily resulted from a decrease in income before taxes. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs.

Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019

Net Interest Income

FTE net interest income decreased $21.9 million, to $476.9 million for the nine months ended September 30, 2020, from $498.9 million for the same period in 2019. The NIM decreased 51 bp, or 15.0%, to 2.90% compared to 3.41% for the same period in 2019. 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 FTE amounts.


	Nine months ended September 30
	2020						2019
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
ASSETS	(dollars in thousands)
Interest-earning assets:
Net Loans(1)	$	18,027,253	$	498,455	3.69	%	$	16,316,540	$	565,095	4.63	%
Taxable investment securities (2)	2,165,180		44,615		2.75		2,305,472		46,935		2.71
Tax-exempt investment securities (2)	804,484		19,596		3.24		468,689		12,940		3.66

Total investment securities	2,969,664		64,211		2.88		2,774,161		59,875		2.87
Loans held for sale	54,355		1,557		3.82		24,357		1,056		5.78
Other interest-earning assets	936,819		4,325		0.62		428,982		6,879		2.14
Total interest-earning assets	21,988,091		568,548		3.45		19,544,040		632,905		4.33
Noninterest-earning assets:
Cash and due from banks	143,496						116,019
Premises and equipment	239,739						239,402
Other assets	1,729,351						1,337,482
Less: ACL - loans(3)	(242,300)						(165,733)
Total Assets	$	23,858,377					$	21,071,210
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	5,116,696	$	9,933	0.26	%	$	4,263,869	$	24,854	0.78	%
Savings and money market deposits	5,431,071		12,788		0.31		4,955,403		31,570		0.85
Brokered deposits	300,795		1,935		0.86		240,045		4,500		2.51
Time deposits	2,626,802		33,533		1.71		2,853,147		37,050		1.74
Total interest-bearing deposits	13,475,364		58,189		0.58		12,312,464		97,974		1.06
Short-term borrowings	873,694		4,960		0.76		894,116		12,200		1.81
FHLB advances and other long-term debt	1,240,253		28,468		3.06		965,111		23,854		3.30
Total interest-bearing liabilities	15,589,311		91,617		0.78		14,171,691		134,028		1.26
Noninterest-bearing liabilities:
Demand deposits	5,458,807						4,223,927
Total Deposits/Cost of deposits	18,934,171				0.41		16,536,391				0.79
Other liabilities	470,055						381,427
Total Liabilities	21,518,173						18,777,045
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds	21,048,118				0.58		18,395,618				0.97
Shareholders’ equity	2,340,204						2,294,165
Total Liabilities and Shareholders’ Equity	$	23,858,377					$	21,071,210
Net interest income/FTE NIM			476,931		2.90	%			498,877		3.41	%
Tax equivalent adjustment			(9,315)						(9,758)
Net interest income			$	467,616					$	489,119

(1)Average balance includes non-performing loans.

(2)Balances include amortized historical cost for AFS. The related unrealized holding gains (losses) are included in other assets.

(3)ACL - loans relates to the ACL specifically for Net Loans and does not include the ACL for OBS credit exposures, which is included in other liabilities.

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the nine months ended September 30, 2020 in comparison to the same period in 2019:


	2020 vs. 2019 Increase (Decrease) due to change in
	Volume		Rate		Net
FTE Interest income on:	(in thousands)
Net Loans (1)	$	3,192	$	(69,832)	$	(66,640)
Taxable investment securities	(2,213)		(108)		(2,320)
Tax-exempt investment securities	6,580		76		6,656

Loans held for sale	579		(78)		501
Other interest-earning assets	436		(2,990)		(2,554)
Total interest income	$	8,575	$	(72,932)	$	(64,357)
Interest expense on:
Demand deposits	$	(1,303)	$	(13,618)	$	(14,921)
Savings deposits	(732)		(18,050)		(18,782)
Brokered deposits	(228)		(2,336)		(2,565)
Time deposits	(1,161)		(2,355)		(3,517)
Short-term borrowings	(273)		(6,967)		(7,240)
Long-term borrowings	4,594		20		4,614
Total interest expense	$	896	$	(43,307)	$	(42,411)

(1)Average balance includes non-performing loans.

The 88 bp decrease in the yield on average interest-earning assets drove a $72.9 million decrease in FTE interest income, but was partially offset by the impact of a $2.4 billion, or 12.5%, increase in average interest-earning assets, primarily loans, which contributed $8.6 million to FTE interest income. The yield on the loan portfolio decreased 94 bp, or 20.2%, from the same period of 2019, as all variable and certain adjustable rate loans repriced to lower rates, and yields on new loan originations generally were lower than the average yield on the loan portfolio. Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease. As such, the impact of changes in index rates on adjustable rate loans may not be fully realized until future periods.

Interest expense decreased $42.4 million primarily due to the 48 bp decrease in the rate on average interest-bearing liabilities. The rates on average interest-bearing demand deposits and savings deposits decreased 52 bp and 54 bp, respectively, which contributed $13.6 million and $18.1 million to the decrease in interest expense, respectively. In addition, the 105 bp decrease in the rates on short-term borrowings contributed $7.0 million to the decrease in interest expense.

Average loans and average FTE yields, by type, are summarized in the following table:


	Nine months ended September 30								Increase (Decrease)
	2020				2019				in Balance
	Balance		Yield		Balance		Yield		$		%
	(dollars in thousands)
Real estate – commercial mortgage	$	6,870,148	3.64	%	$	6,431,012	4.64	%	$	439,136	6.8	%
Commercial and industrial (1)	5,382,459		3.10		4,438,894		4.65		943,565		21.3
Real estate – residential mortgage	2,805,694		3.86		2,386,264		4.07		419,430		17.6
Real estate – home equity	1,269,525		4.17		1,400,371		5.32		(130,846)		(9.3)
Real estate – construction	950,845		3.83		926,036		4.94		24,809		2.7
Consumer	465,661		4.19		442,678		4.41		22,983		5.2
Equipment lease financing	282,800		3.91		278,463		4.42		4,337		1.6
Other (2)	121		—		12,822		—		(12,701)		(99.1)
Total loans	$	18,027,253	3.69	%	$	16,316,540	4.63	%	$	1,710,713	10.5	%

(1) Includes average PPP loans of $1.1 billion for the nine months ended September 30, 2020.

(2) Consists of overdrafts and net origination fees and costs.

Average loans increased $1.7 billion, or 10.5%, compared to the same period of 2019. The increase was driven largely by growth in the commercial and industrial portfolio, which was primarily attributable to the origination of PPP loans in the second quarter of 2020. Excluding loans originated under the PPP, commercial and industrial loan balances declined as a result of the overall slowing of the economy. Commercial and residential mortgage loan portfolios, as well as the construction, consumer and equipment lease financing portfolios experienced growth, partially offset by decreases in the home equity loan portfolio.

Average deposits and average interest rates, by type, are summarized in the following table:


	Nine months ended September 30								Increase (Decrease) in Balance
	2020				2019
	Balance		Rate		Balance		Rate		$		%
	(dollars in thousands)
Noninterest-bearing demand	$	5,458,807	—	%	$	4,223,927	—	%	$	1,234,880	29.2	%
Interest-bearing demand	5,116,696		0.26		4,263,869		0.78		852,827		20.0
Savings	5,431,071		0.31		4,955,403		0.85		475,668		9.6
Total demand and savings	16,006,574		0.19		13,443,199		0.56		2,563,375		19.1
Brokered deposits	300,795		0.86		240,045		2.51		60,750		25.3
Time deposits	2,626,802		1.71		2,853,147		1.74		(226,345)		(7.9)
Total deposits	$	18,934,171	0.41	%	$	16,536,391	0.79	%	$	2,397,780	14.5	%

Average total demand and savings accounts increased $2.6 billion, or 19.1%, driven by increases in noninterest-bearing demand deposits, interest-bearing demand deposits and saving accounts. The primary reason for the increases in average total demand and savings accounts were the result of the funding of various government stimulus programs, which largely remained in customer deposit accounts during the period as well as seasonal increases in municipal accounts.

The average cost of total deposits decreased 38 bp, to 0.41%, for the first nine months of 2020, compared to 0.79% for the same period of 2019, mainly as a result of reductions in deposit rates in response to the FOMC reductions to the Fed Funds Rate as well as deposit rate decreases implemented after the Fed Funds Rate cuts during the second half of 2019. The majority of deposit rates are discretionary, with the exception of indexed municipal balances. The average cost of interest-bearing deposits decreased in all non-maturity deposit categories.

Average borrowings and interest rates, by type, are summarized in the following table:


	Nine months ended September 30								Increase (Decrease)
	2020				2019				in Balance
	Balance		Rate		Balance		Rate		$		%
Short-term borrowings:	(dollars in thousands)
Customer funding(1)	$	529,667	0.33	%	$	541,237	1.39	%	$	(11,570)	(2.1)	%
Federal funds purchased	86,715		0.82		146,432		2.35		(59,717)		(40.8)
FHLB advances and other borrowings(2)	257,312		1.61		206,447		2.55		50,865		24.6
Total short-term borrowings	873,694		0.76		894,116		1.81		(20,422)		(2.3)
Long-term borrowings:
FHLB advances	564,855		1.88		577,835		2.50		(12,980)		(2.2)
Other long-term debt	675,398		4.05		387,276		4.49		288,122		74.4
Total long-term borrowings	1,240,253		3.06		965,111		3.30		275,142		28.5
Total borrowings	$	2,113,947	2.11	%	$	1,859,227	2.58	%	$	254,720	13.7	%

(1) Includes repurchase agreements and short-term promissory notes.

(2) Consists of FHLB borrowings with original term of less than one year.

Average total short-term borrowings decreased $20.4 million, or 2.3%, primarily as a result of a $59.7 million, or 40.8%, decrease in federal funds purchased partially offset by a $50.9 million increase in short-term FHLB advances and other borrowings. The average cost of short-term borrowings decreased 105 bp, mainly due to the net impact of changes in the Fed Funds Rate.

Average total long-term borrowings increased $275.1 million, or 28.5%, during the first nine months of 2020, compared to the same period of 2019, as a result of the issuance of $375.0 million of subordinated notes in March of 2020, partially offset by a decrease in average FHLB advances.

Provision for Credit Losses

The provision for credit losses was $70.7 million for first nine months of 2020, an increase of $58.4 million from the same period of 2019. The increase was the result of several factors, most notably, the overall uncertainty in economic forecasts due to COVID-19.

Non-Interest Income

The following table presents the components of non-interest income:


	Nine months ended September 30				Increase (Decrease)
	2020		2019		$		%
	(dollars in thousands)
Wealth management fees	$	43,405	$	41,259	$	2,146	5.2	%
Commercial banking:
Merchant and card	17,187		18,236		(1,049)		(5.8)
Cash management	13,987		13,695		292		2.1
Capital markets	14,775		11,015		3,760		34.1
Other commercial banking	7,528		10,109		(2,581)		(25.5)
Total commercial banking	53,477		53,055		422		0.8
Consumer banking:
Card	14,653		15,524		(871)		(5.6)
Overdraft	9,180		13,199		(4,019)		(30.4)
Other consumer banking	6,967		8,354		(1,387)		(16.6)
Total consumer banking	30,800		37,077		(6,277)		(16.9)
Mortgage banking:
Gains on sales of mortgage loans	42,208		13,822		28,386		N/M
Mortgage servicing income	(9,210)		4,203		(13,413)		N/M
Total mortgage banking	32,998		18,023		14,975		83.1
Other	10,080		6,733		3,347		49.7
Non-interest income before investment securities gains	170,761		156,147		14,614		9.4
Investment securities gains, net	3,053		4,733		(1,680)		(35.5)
Total Non-Interest Income	$	173,814	$	160,879	$	12,935	8.0	%

N/M - Not meaningful

Wealth management revenues increased $2.1 million, or 5.2%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance.

Total commercial banking income increased $422,000, or 0.8%, compared to the same period in 2019, driven by increases in capital markets revenues, primarily commercial loan interest rate swap income, partially offset by decreases in other commercial banking income, primarily other services charges on deposits and Small Business Administration income, and merchant and card income as a result of COVID-19.

Total consumer banking income decreased $6.3 million, or 16.9%, compared to the same period in 2019, primarily driven by lower overdraft fees activity.

Mortgage banking income increased $15.0 million, or 83.1%, driven by an increase in gains on sales of mortgage loans, partially offset by a decrease in mortgage servicing income. The increase in gains on sales of mortgage loans reflected increases in both the volume of loans sold and higher spreads on sales. The decrease in mortgage servicing income was driven by a $9.2 million increase to the valuation allowance for MSRs.

Other income increased $3.3 million, or 49.7%, as a result of additional investments made in bank owned life insurance in 2019 and gains on sales of certain properties.

Investment securities gains, net were $3.0 million as the result of a limited balance sheet restructuring that included the sale of investment securities, with an amortized cost of $79.0 million and an estimated fair value of $82.0 million that the Corporation completed during the second quarter of 2020. Offsetting these gains were $2.9 million of prepayment penalties recorded in non-interest expense for the redemption of FHLB advances.

During the third quarter of 2019, the Corporation completed a balance sheet restructuring involving the sale of approximately $400 million of investment securities and a corresponding prepayment of FHLB advances. As a result of these transactions, $4.5 million of investment securities gains were realized during the third quarter of 2019. Offsetting these gains were $4.3 million of prepayment penalties recorded in non-interest expense for the redemption of FHLB advances.

Non-Interest Expense

The following table presents the components of non-interest expense:


	Nine months ended September 30				Increase (Decrease)
	2020		2019		$		%
	(dollars in thousands)
Salaries and employee benefits	$	240,467	$	234,959	$	5,508	2.3	%
Net occupancy	39,851		39,746		105		0.3
Data processing and software	36,123		33,211		2,912		8.8
Other outside services	23,098		31,774		(8,676)		(27.3)
Professional fees	10,412		10,261		151		1.5
Equipment	10,322		10,100		222		2.2
State taxes	8,583		7,005		1,578		22.5
FDIC insurance	6,519		5,603		916		16.3
Marketing	4,029		8,345		(4,316)		(51.7)
Amortization of tax credit investments	4,594		4,516		78		1.7
Intangible amortization	397		1,285		(888)		(69.1)
Prepayment penalty on FHLB advances	2,878		4,326		(1,448)		(33.5)
Other	37,431		37,631		(200)		(0.5)
Total non-interest expense	$	424,705	$	428,762	$	(4,057)	(0.9)	%

The $5.5 million, or 2.3%, increase in salaries and benefits reflects the net impact of changes in various items, including increases in salaries expense (due to normal merit increases) overtime expense, incentive compensation, health insurance expense and commissions (primarily mortgage banking). These increases were partially offset by higher deferrals of direct origination costs as a result of higher loan origination volumes and lower defined benefit plan expense.

Data processing and software increased $2.9 million, or 8.8%, reflecting higher transaction volumes and costs related to technology initiatives.

Other outside services decreased $8.7 million, or 27.3%, as the 2019 period included $6.6 million of expense associated with Charter Consolidation. Marketing expense also declined $4.3 million, or 51.7%, due to higher marketing expense associated with the Charter Consolidation in 2019.

State taxes increased $1.6 million, or 22.5%, primarily driven by an increase in Pennsylvania Bank Shares and Virginia franchise tax expenses, both due to growth in total assets and equity.

FDIC insurance increased $916,000, or 16.3%, compared to the same period in 2019, which included the recognition of assessment credits in the third quarter.

The Corporation redeemed certain long-term FHLB advances in the second quarter of 2020, which resulted in prepayment penalties of $2.9 million compared to 2019, which included approximately $4.3 million of penalties related to the prepayment of certain FHLB advances in conjunction with the balance sheet restructuring that was completed in the third quarter of 2019.

Income Taxes

Income tax expense for the nine months ended September 30, 2020 was $18.8 million, an $11.6 million decrease from $30.4 million for the same period in 2019. The Corporation’s ETR was 12.9% for the nine months ended September 30, 2020, as compared to 14.5% in the same period of 2019. The decrease in income tax expense and the ETR primarily resulted from a

decrease in income before taxes. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs.

FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.


	September 30, 2020		December 31, 2019		Increase (Decrease)
					$		%
Assets	(dollars in thousands)
Cash and cash equivalents	$	1,534,890	$	517,791	$	1,017,099	N/M
FRB and FHLB Stock	93,964		97,422		(3,458)		(3.5)
Loans held for sale	93,621		37,828		55,793		147.5
Investment securities	3,097,721		2,867,378		230,343		8.0
Net Loans	18,761,796		16,673,904		2,087,892		12.5
Premises and equipment	236,943		240,046		(3,103)		(1.3)
Goodwill and intangibles	534,907		535,303		(396)		(0.1)
Other assets	1,189,439		916,368		273,071		29.8
Total Assets	$	25,543,281	$	21,886,040	$	3,657,241	16.7	%
Liabilities and Shareholders’ Equity
Deposits	$	20,730,051	$	17,393,913	$	3,336,138	19.2	%
Short-term borrowings	611,727		883,241		(271,514)		(30.7)
Long-term borrowings	1,296,012		881,769		414,243		47.0
Other liabilities	515,230		384,941		130,289		33.8
Total Liabilities	23,153,020		19,543,864		3,609,156		18.5
Total Shareholders’ Equity	2,390,261		2,342,176		48,085		2.1
Total Liabilities and Shareholders’ Equity	$	25,543,281	$	21,886,040	$	3,657,241	16.7	%

N/M - Not meaningful

Cash and Cash Equivalents

The $1.0 billion increase in cash and cash equivalents mainly resulted from additional cash maintained at the FRB due to deposit growth as well as additional collateral required to be posted with counterparties for derivative contracts.

Loans held for sale

Loans held for sale increased $55.8 million, or 147.5%, primarily as the result of an increase in the volume of residential mortgage originations due to higher refinancing activity.

Investment Securities

The following table presents the carrying amount of investment securities:


	September 30, 2020		December 31, 2019		Increase (Decrease)
					$		%
Available for Sale	(dollars in thousands)


State and municipal securities	$	926,554	$	652,927	$	273,627	41.9	%
Corporate debt securities	342,558		377,357		(34,799)		(9.2)
Collateralized mortgage obligations	532,473		693,718		(161,245)		(23.2)
Residential mortgage-backed securities	321,695		177,312		144,383		81.4
Commercial mortgage-backed securities	572,210		494,297		77,913		15.8
Auction rate securities	97,990		101,926		(3,936)		(3.9)


Total available for sale securities	2,793,480		2,497,537		295,943		11.8
Held to Maturity

Residential mortgage-backed securities	304,241		369,841		(65,600)		(17.7)


Total Investment Securities	$	3,097,721	$	2,867,378	$	230,343	8.0	%

Total AFS securities increased $295.9 million, or 11.8%, primarily due to the investment of a portion of the proceeds from the issuance of $375.0 million of subordinated notes, partially offset by the sale of investment securities, with an estimated fair value of $82.0 million, completed during the second quarter of 2020 as part of a limited balance sheet restructuring that included the redemption of FHLB advances. See Note 14, "Long-Term Debt," in the Notes to Consolidated Financial Statements for additional detail on the subordinated notes issuance. Total HTM securities decreased $65.6 million, or 17.7%, primarily as a result of principal repayments and premium amortization. There were no purchases of or transfers into HTM securities during the periods presented.

Loans

The following table presents ending balances of Net Loans:


	September 30, 2020		December 31, 2019		Increase (Decrease)
					$		%
	(dollars in thousands)
Real estate – commercial mortgage	$	7,046,330	$	6,700,776	$	345,554	5.2	%
Commercial and industrial (1)	5,968,154		4,446,701		1,521,453		34.2
Real estate – residential mortgage	3,061,835		2,641,465		420,370		15.9
Real estate – home equity	1,222,709		1,314,944		(92,235)		(7.0)
Real estate – construction	1,007,534		971,079		36,455		3.8
Consumer	469,551		463,164		6,387		1.4
Equipment lease financing and other	274,570		322,625		(48,055)		(14.9)
Overdrafts	1,694		3,582		(1,888)		(52.7)
Gross loans	19,052,377		16,864,336		2,188,041		13.0
Unearned income	(23,756)		(26,810)		3,054		(11.4)
Net Loans	$	19,028,621	$	16,837,526	$	2,191,095	13.0	%

(1) Includes PPP loans totaling $2.0 billion for the nine months ended September 30, 2020

Net Loans increased $2.2 billion, or 13.0%, in comparison to December 31, 2019, primarily due to growth in commercial and industrial loans and commercial and residential mortgage loans, partially offset by decreases in home equity loans and equipment lease financing. The increase in commercial and industrial loans was impacted by approximately $2.0 billion of PPP loans.

Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which are loans to individuals secured by residential real estate. Approximately $8.1 billion, or 42.3%, of the loan portfolio was in commercial mortgage and construction loans as of

September 30, 2020. The Corporation's internal policy limited its maximum total lending commitment to an individual borrowing relationship to $55 million as of September 30, 2020. In addition, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrowing relationship at the time the lending commitment is approved.

The Corporation has limited exposure to some of the industries that were initially most significantly impacted by COVID-19, such as hospitality, energy and entertainment, and most of these loans are secured by real estate and other forms of collateral. The following table summarizes the industry concentrations within the commercial mortgage and the commercial and industrial loan portfolios:


	September 30, 2020		December 31, 2019
Real estate (1)	39.4	%	41.4	%
Health care	7.3		8.1
Agriculture	5.9		7.1
Construction (2)	4.4		6.2
Manufacturing	4.9		6.0
Other services (3)	4.5		4.7
Retail	3.3		4.2
Hospitality and food services	3.6		4.1
Wholesale trade	2.4		3.6
Educational services	2.8		4.1
Professional, scientific and technical services	2.0		2.9
Arts, entertainment and recreation	2.2		2.2
Public administration	1.6		2.0
Transportation and warehousing	1.3		1.2
Other (4)	14.4		2.2
Total	100.0	%	100.0	%

(1) Includes commercial loans to borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate.

(2) Includes commercial loans to borrowers engaged in the construction industry.

(3) Excludes public administration.

(4) Includes energy sector and $2.0 billion of PPP loans.

The following table presents the changes in non-accrual loans for the three and nine months ended September 30, 2020:


	Commercial and Industrial		Real Estate - Commercial Mortgage		Real Estate - Construction		Real Estate - Residential Mortgage		Real Estate - Home Equity		Consumer		Equipment Lease Financing		Total
	(in thousands)
Three months ended September 30, 2020
Balance at June 30, 2020	$	39,379	$	40,775	$	3,482	$	16,890	$	7,723	$	—	$	16,823	$	125,072
Additions	4,585		5,703		150		8,624		1,778		936		230		22,006
Payments	(5,721)		(4,775)		(2,010)		(186)		(276)		—		(133)		(13,101)
Charge-offs	(2,969)		(746)		—		(198)		(393)		(701)		(230)		(5,237)
Transfers to accrual status	—		(31)		—		(237)		(150)		—		—		(418)
Transfers to OREO	—		—		(1)		—		—		—		—		(1)
Balance at September 30, 2020	$	35,274	$	40,926	$	1,621	$	24,893	$	8,682	$	235	$	16,690	$	128,321

Nine months ended September 30, 2020
Balance at December 31, 2019	$	48,106	$	33,166	$	3,618	$	16,676	$	7,004	$	—	$	16,528	$	125,098
Additions	31,088		22,409		153		10,661		4,123		2,994		1,688		73,116
Payments	(26,572)		(10,677)		(2,132)		(729)		(1,051)		—		(828)		(41,989)
Charge-offs	(17,348)		(3,925)		(17)		(620)		(1,167)		(2,759)		(698)		(26,534)
Transfers to accrual status	—		(31)		—		(237)		(227)		—		—		(495)
Transfers to OREO	—		(16)		(1)		(858)		—		—		—		(875)
Balance at September 30, 2020	$	35,274	$	40,926	$	1,621	$	24,893	$	8,682	$	235	$	16,690	$	128,321

Non-accrual loans increased approximately $3.2 million, or 2.6%, in comparison to both June 30, 2020 and December 31, 2019 primarily as a result of additions to non-accrual loans during the respective periods, partially offset by payments and charge-offs.

The following table summarizes non-performing assets as of the indicated dates:


	September 30, 2020			December 31, 2019
	(dollars in thousands)
Non-accrual loans	$	128,321		$	125,098
Loans 90 days or more past due and still accruing	13,761			16,057
Total non-performing loans	142,082			141,155
OREO (1)	4,565			6,831
Total non-performing assets	$	146,647		$	147,986

Non-performing loans to total loans	0.75		%	0.84		%
Non-performing assets to total assets	0.57		%	0.68		%

ACL - loans to non-performing loans	188		%	116		%

(1) Excludes $9.6 million of residential mortgage properties for which formal foreclosure proceedings were in process as of September 30, 2020.

Non-performing loans increased $927,000, or 0.7%, in comparison to December 31, 2019. Non-performing loans as a percentage of total loans were 0.75% at September 30, 2020 in comparison to 0.84% at December 31, 2019. See Note 4, "Allowance for Credit Losses and Asset Quality," in the Notes to Consolidated Financial Statements for further details on non-performing loans.

The following table presents loans whose terms have been modified under TDRs, by type, as of the indicated dates:


	September 30, 2020		December 31, 2019
	(in thousands)
Real estate - residential mortgage	$	19,427	$	21,551
Real estate - home equity	14,875		15,068
Real estate - commercial mortgage	28,558		13,330
Commercial and industrial	7,328		5,193

Consumer	—		8
Total accruing TDRs	70,188		55,150
Non-accrual TDRs (1)	37,025		20,825
Total TDRs	$	107,213	$	75,975

(1) Included with non-accrual loans in the preceding table.

The Company has adopted a disaster relief and assistance program and has provided assistance through payment deferrals and forbearances to consumer, small business and commercial customers that have been impacted by COVID-19.

The ability to identify potential problem loans in a timely manner is important to maintaining an adequate ACL. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals and consumer loans is based on payment history, through the monitoring of delinquency levels and trends. For a description of the Corporation's risk ratings, see Note 4, "Allowance for Credit Losses and Asset Quality," in the Notes to Consolidated Financial Statements.

Total internally risk-rated loans were $13.9 billion, of which $796.4 million were criticized and classified, as of September 30, 2020, and $12.0 billion, of which $662.6 million were criticized and classified, as of December 31, 2019. The following table presents internal risk ratings for commercial and industrial loans, real estate - commercial mortgages and real estate - construction loans to commercial borrowers with internal risk ratings of Special Mention (1) or Substandard or lower (2):


	Special Mention (1)						Increase (Decrease)				Substandard or Lower (2)						Increase (Decrease)				Total Criticized and Classified Loans
	September 30, 2020			December 31, 2019			$		%		September 30, 2020			December 31, 2019			$		%		September 30, 2020			December 31, 2019
	(dollars in thousands)
Real estate - commercial mortgage	$	268,983		$	137,163		$	131,820	96.1	%	$	156,050		$	134,206		$	21,844	16.3	%	$	425,033		$	271,369
Commercial and industrial	178,645			181,107			(2,462)		(1.4)		171,270			199,760			(28,490)		(14.3)		349,915			380,867
Real estate - construction (3)	13,450			4,219			9,231		N/M		7,973			6,137			1,836		29.9		21,423			10,356
Total	$	461,078		$	322,489		$	138,589	43.0	%	$	335,293		$	340,103		$	(4,810)	(1.4)	%	$	796,371		$	662,592

% of total risk rated loans	3.3		%	2.7		%					2.4		%	2.8		%					5.7		%	5.5		%

(1) Considered "criticized" loans by banking regulators

(2) Considered "classified" loans by banking regulators

(3) Excludes construction - other

N/M - Not meaningful

Provision and Allowance for Credit Losses

The following table presents the components of the ACL:


	September 30, 2020			December 31, 2019
	(dollars in thousands)
ACL - loans	$	266,825		$	163,622
ACL - OBS credit exposure (1)	15,533			2,587
Total ACL	$	282,358		$	166,209

ACL - loans to net loans outstanding	1.40		%	0.97		%

(1) Included in "other liabilities" on the consolidated balance sheet.

The following table presents the activity in the ACL related to loans:


	Three months ended September 30						Nine months ended September 30
	2020			2019			2020			2019
	(dollars in thousands)
Average balance of net loans	$	18,880,519		$	16,436,507		$	18,027,253		$	16,316,540

Balance of ACL - loans at beginning of period	$	256,537		$	170,233		$	163,622		$	160,537
Impact of adopting CECL on January 1, 2020	—			—			45,723			—
Loans charged off:
Commercial and industrial	2,969			7,181			17,348			11,863
Consumer	701			877			2,788			2,355
Real estate – commercial mortgage	746			394			3,925			1,769
Real estate – home equity	393			498			1,138			923
Real estate – residential mortgage	198			533			620			1,322
Real estate – construction	—			45			17			143
Equipment lease financing and other	483			600			1,704			1,833
Total loans charged off	5,490			10,128			27,540			20,208
Recoveries of loans previously charged off:
Commercial and industrial	2,103			2,311			6,815			6,234
Real estate – commercial mortgage	100			444			439			749
Real estate – home equity	44			132			305			552
Real estate – residential mortgage	95			440			292			783
Real estate – construction	4,873			164			4,943			1,493
Consumer	447			216			1,481			1,005
Equipment lease financing and other	185			107			385			484
Total recoveries	7,847			3,814			14,660			11,300
Net loans (recovered) charged off	(2,357)			6,314			12,880			8,908
Provision for credit losses (1)	7,930			2,170			70,359			12,295
Balance of ACL - loans at end of period	$	266,825		$	166,135		$	266,825		$	166,135

Net (recoveries) charge-offs to average loans (annualized)	(0.05)		%	0.15		%	0.10		%	0.07		%

(1) Provision for credit losses included in the table only includes the portion related to loans.

The provision for credit losses, specific to loans, for the three and nine months ended September 30, 2020 was $7.9 million and $70.4 million, respectively. Prior periods did not incorporate "life of loan" losses under CECL and applied an incurred loss model, which would not have considered economic forecasts or forward-looking consideration over the remaining expected

lives of loans. The amounts recorded for the three and nine months ended September 30, 2020 were primarily driven by economic assumptions, which considered the impact of COVID-19.

In addition, net recoveries in the three months ended September 30, 2020 were an improvement of $8.7 million compared to the same period of 2019, primarily due to real estate construction recoveries of $4.9 million. However, net charge-offs in the nine months ended September 30, 2020 were $4.0 million higher compared to the same period of 2019. Annualized net (recoveries) charge-offs as a percentage of average loans for the three and nine months ended September 30, 2020 were (0.05)% and 0.10%, respectively, as compared to 0.15% and 0.07% during the same periods of 2019.

The following table summarizes the allocation of the ACL - loans:


	September 30, 2020				December 31, 2019
	ACL - loans		% In Each Loan Category (1)		ACL - loans		% In Each Loan Category (1)
	(dollars in thousands)
Real estate - commercial mortgage	$	111,855	37.0	%	$	45,610	39.7	%
Commercial and industrial	58,838		31.3		68,602		26.4
Real estate - residential mortgage	48,353		16.1		19,771		15.7
Real estate - home equity	16,298		6.4		17,744		7.8
Consumer	10,305		2.5		3,762		2.7
Real estate - construction	15,010		5.3		4,443		5.8
Equipment lease financing and other	6,166		1.4		3,690		1.9	%

Total ACL - loans	$	266,825	100.0	%	$	163,622	100.0	%

(1) Ending loan balances as a % of total loans for the periods presented.

Other Assets

Other assets increased $273.1 million, or 29.8%, primarily due to higher fair values of derivative contracts for commercial loan interest rate swaps, an increase in the net deferred tax asset as the result of the adoption of CECL and a reclassification from accrued federal income tax, partially offset by the increase to the valuation allowance for MSRs.

Deposits and Borrowings

The following table presents ending deposits, by type:


	September 30, 2020		December 31, 2019		Increase (Decrease)
					$		%
	(dollars in thousands)
Noninterest-bearing demand	$	6,378,077	$	4,453,324	$	1,924,753	43.2	%
Interest-bearing demand	5,813,935		4,720,188		1,093,747		23.2
Savings	5,805,431		5,153,941		651,490		12.6
Total demand and savings	17,997,443		14,327,453		3,669,990		25.6
Brokered deposits	317,588		264,531		53,057		20.1
Time deposits	2,415,020		2,801,929		(386,909)		(13.8)
Total deposits	$	20,730,051	$	17,393,913	$	3,336,138	19.2	%

Total demand and savings accounts increased $3.7 billion, or 25.6%, driven by increases in all categories primarily as the result of the funding of various government stimulus programs, which largely remained in customer deposit accounts during the second and third quarters, and seasonal increases in municipal accounts.

The following table presents ending borrowings, by type:


	September 30, 2020		December 31, 2019		Increase (Decrease)
					$		%
	(dollars in thousands)
Short-term borrowings:
Customer funding(1)	$	611,727	$	383,241	$	228,486	59.6	%

FHLB advances and other borrowings (2)	—		500,000		(500,000)		N/M
Total short-term borrowings	611,727		883,241		(271,514)		(30.7)
Long-term borrowings:
FHLB advances	535,986		491,024		44,962		9.2
Other long-term debt	760,026		390,745		369,281		94.5
Total long-term borrowings	1,296,012		881,769		414,243		47.0
Total borrowings	$	1,907,739	$	1,765,010	$	142,729	8.1	%

N/M - Not meaningful

(1) Includes repurchase agreements and short-term promissory notes.

(2) Consists of FHLB borrowings with an original maturity term of less than one year.

Total short-term borrowings decreased $271.5 million, or 30.7%, due to a $500.0 million decrease in short-term FHLB advances and other borrowings partially offset by an increase of $228.5 million, or 59.6%, in customer funding. The decrease in short-term borrowings was a result of higher balances of deposits and the increase in long-term borrowings, reducing the need for short-term borrowings. Long-term FHLB advances increased $45.0 million, or 9.2%, and other long-term debt increased $369.3 million as the result of the issuance of $375.0 million of subordinated notes in March 2020 as discussed in the "Overview" section of Management's Discussion.

Other Liabilities

Other liabilities increased $130.3 million, or 33.8%, primarily as the result of an increase in the fair values of derivative contracts related to commercial loan interest rate swaps.

Shareholders' Equity

Total shareholders’ equity increased $48.1 million during the first nine months of 2020. The increase was due primarily to $127.2 million of net income, and a $57.1 million increase in accumulated other comprehensive income, mainly due to improvements in fair values of AFS securities, partially offset by a $43.8 million reduction to retained earnings as a result of the adoption of CECL on January 1, 2020, $39.7 million of common stock repurchases and $63.1 million of common stock cash dividends.

In October 2019, the Corporation's board of directors approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $100.0 million of its outstanding shares of common stock, or approximately 3.9% of its outstanding shares, through December 31, 2020. During the first quarter of 2020, 2.9 million shares were repurchased at a total cost of $39.7 million, or $13.65 per share, under this program. Up to an additional $60.3 million of the Corporation's common stock may be repurchased under this program. Under the repurchase program, repurchased shares were added to treasury stock, at cost. As permitted by securities laws and other legal requirements, and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including, without limitation, through accelerated share repurchase transactions. The repurchase program may be discontinued at any time and was suspended in mid-March in order to preserve liquidity in response to potential unknown economic impacts of the COVID-19 pandemic.

Regulatory Capital

The Corporation and its subsidiary bank, Fulton Bank, are subject to regulatory capital requirements ("Capital Rules") administered by banking regulators. Failure to meet minimum capital requirements could result in certain actions by regulators that could have a material effect on the Corporation’s financial statements.

The Capital Rules require the Corporation and Fulton Bank to:

•Meet a minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a Tier 1 capital ratio of 6.00% of risk-weighted assets;

•Continue to require a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets; 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, have been phased out as a component of Tier 1 capital for institutions of the Corporation's size.

The Corporation and Fulton Bank are also required to 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.

The Capital Rules use a standardized approach for risk weightings that expands the risk-weightings for assets and off-balance sheet exposures from the previous 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and off-balance sheet exposures and resulting in higher risk weightings for a variety of asset categories.

As of September 30, 2020, the Corporation's capital levels met the fully phased-in minimum capital requirements, including the new capital conservation buffers, as prescribed in the Capital Rules.

In March 2020, the banking regulators amended the optional CECL Transition Rule to allow banks to add back to regulatory capital the decrease recorded to retained earnings at the CECL adoption date, or January 1, 2020 for the Corporation, plus 25% of additions to the ACL over the next two years. These amounts will then be phased in as reductions to regulatory capital over the following three years, or 2022 - 2024. Prior to this amendment, the regulatory capital impact of adopting CECL was to be phased in over a 3-year period beginning in 2020. The Corporation has elected to apply the amended rule to the regulatory capital treatment for the adoption of CECL.

As of September 30, 2020, Fulton Bank met the well capitalized requirements under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios as set forth in the regulation. In October 2020, the Corporation issued 8,000,000 depositary shares of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, and received net proceeds from the offering of $193.7 million, after deducting underwriting discounts and commissions and before deducting transaction expenses payable by the Corporation. See Note 15, "Subsequent Event," in the Notes to Consolidated Financial Statements for additional details. Preferred stock is included in both Tier 1 and Tier 2 regulatory capital, and would have the effect of increasing the Total Capital, Tier 1 Capital and Tier I Leverage Capital ratios by approximately 1.00%. There were no other conditions or events since September 30, 2020 that management believes have changed the Corporation's capital categories.

The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements:


	September 30, 2020		December 31, 2019		Regulatory Minimum for Capital Adequacy		Fully Phased-in, with Capital Conservation Buffers
Total Capital (to Risk-Weighted Assets)	13.8	%	11.8	%	8.0	%	10.5	%
Tier I Capital (to Risk-Weighted Assets)	9.6	%	9.7	%	6.0	%	8.5	%
Common Equity Tier I (to Risk-Weighted Assets)	9.6	%	9.7	%	4.5	%	7.0	%
Tier I Leverage Capital (to Average Assets)	7.5	%	8.4	%	4.0	%	4.0	%

The increase in the total capital ratio from December 31, 2019 to September 30, 2020 was mainly due to the issuance of $375.0 million of subordinated notes, which is a component of Tier 2 Capital, in March 2020, as discussed in the "Overview" of Management's Discussion, partially offset by common stock repurchases during the quarter. The decrease in the Tier 1 Leverage Capital ratio was mainly due to growth in average assets.

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. An 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 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 bp shock in interest rates, 15% for a 200 bp shock and 20% for a 300 bp 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.

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 September 30, 2020 (due to the current level of interest rates, the downward shock scenarios are not shown):


Rate Shock(1)	Annual change in net interest income	% change in net interest income
+400 bp	+ $116.3 million	18.7%
+300 bp	+ $87.5 million	14.1%
+200 bp	+ $58.0 million	9.3%
+100 bp	+ $27.3 million	4.4%

(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 bp shock in interest rates, 20% for a 200 bp shock and 30% for a 300 bp shock. As of September 30, 2020, the Corporation was within economic value of equity policy limits for every 100 bp shock.

Interest Rate Swaps

The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps 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.

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 deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.

The Corporation maintains liquidity sources in the form of demand and savings deposits, brokered deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing the rates of interest paid on those accounts and borrowings. The positive impact to liquidity resulting from paying higher interest rates could have a detrimental impact on the net interest margin 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 September 30, 2020, the Corporation had $539.0 million of borrowings outstanding from the FHLB with an additional borrowing capacity of approximately $3.8 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 September 30, 2020, the Corporation had aggregate federal funds lines of $1.8 billion, with no outstanding borrowings. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of September 30, 2020, the Corporation had $373 million of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.

Liquidity must also be managed at the Corporation parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from a subsidiary bank to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary bank's regulatory capital levels and its net income. Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain sufficiently capitalized and to meet its cash needs.

The Corporation’s sources and uses of funds were discussed in general terms in the "Net Interest Income" section of Management’s Discussion and Analysis. The consolidated statements of cash flows provide additional information. The Corporation’s operating activities during the first nine months of 2020 provided $29.5 million of cash, mainly due to net income of $127.2 million partially offset by the net impact of other operating activities. Cash used in investing activities was $2.4 billion, mainly due to net increases in loans and investments. Cash provided by financing activities was $3.4 billion due mainly to increases in demand and savings deposits.

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, U.S. government debt securities, auction rate 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 September 30, 2020, the Corporation owned securities issued by various states or municipalities with a total cost basis of $880.5 million and a fair value of $926.6 million. Downward pressure on local tax revenues of issuers could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing state or municipality and then, to a lesser extent, on any underlying credit enhancement. State or 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 September 30, 2020, approximately all of state and municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 64% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Corporate Debt Securities

The Corporation holds corporate debt securities in the form of subordinated debt and senior debt issued by financial institutions. As of September 30, 2020, these securities had an amortized cost of $327.1 million and an estimated fair value of $342.6 million. During the second quarter of 2020, the Corporation sold corporate debt securities with an amortized cost of $66.8 million and an estimated fair value of $66.9 million.

See "Note 9 - Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The information presented in the "Legal Proceedings" section of Note 13 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements is incorporated herein by reference.

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 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 Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, 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 U.S. Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting

During the first quarter of 2020, the Corporation implemented new CECL accounting policies, procedures, and controls as part of its adoption of ASU No. 2016-13 and subsequent ASUs issued to amend ASC Topic 326. There were no other changes made to the Corporation’s internal control over financial reporting that materially affected, or would be reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Item 1A. Risk Factors

Item 1A. Risk Factors of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2019 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 include 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 updates, and should be read in conjunction with, the risk factors and information disclosed in the Annual Report on Form 10-K and Quarterly Report on Form 10-Q.

The Corporation may not be able to achieve the reductions in non-interest expenses expected to result from the recently announced plans to consolidate certain of its financial center offices and other cost-saving initiatives in the amount, or within the timeframe, anticipated, and those initiatives may have an adverse impact on the Corporation’s competitive position and ability to achieve its growth plans.

It is possible that the Corporation will not be able to implement its previously announced plans to consolidate certain of its financial center offices and other cost-saving initiatives as planned, achieve the reductions in non-interest expenses expected to result from these initiatives in the amount, or within the timeframe, anticipated, or create the cost efficiencies intended through these initiatives. Moreover, these initiatives could adversely impact the retention of customers and deposit balances, harm the Corporation’s relationships with its customers, weaken the Corporation’s competitive position, or make it more difficult for the Corporation to achieve its growth plans. Any of these circumstances, should they arise, could have a material adverse effect on the Corporation’s business or results of operations.

There have been no other material changes to the risk factors previously disclosed in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) None.

(c) In October 2019, the Corporation's board of directors approved a share repurchase program pursuant to which the Corporation is authorized to repurchase up to $100.0 million of its outstanding shares of common stock, or approximately 3.9% of its outstanding shares, through December 31, 2020. During the first quarter of 2020, 2.9 million shares were repurchased at a total cost of $39.7 million, or $13.65 per share. Up to an additional $60.3 million of the Corporation's common stock may be repurchased under this program through December 31, 2020. Under the repurchase program, repurchased shares were added to treasury stock, at cost.

As permitted by securities laws and other legal requirements, and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including, without limitation, through accelerated share repurchase transactions. The repurchase program may be discontinued at any time and was suspended in mid-March of 2020 in order to preserve liquidity in response to potential unknown economic impacts due to the COVID-19 pandemic.

Item 6. Exhibits



3.1						Articles of Incorporation, as amended and restated, of Fulton Financial Corporation– Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K filed on June 24, 2011. (File No. 0-10587)

3.2						Statement with Respect to Shares of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A of Fulton Financial Corporation, dated October 23, 2020, filed with the Pennsylvania Department of State - Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K filed on October 29, 2020.

3.3						Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on a Form 8-K filed on May 21, 2020.

4.1						Statement with Respect to Shares of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A of Fulton Financial Corporation, dated October 23, 2020, filed with the Pennsylvania Department of State - Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on Form 8-K filed on October 29, 2020.

4.2						Deposit Agreement, dated October 29, 2020, among Fulton Financial Corporation, Equiniti Trust Company, as depositary, and the holders from time to time of the depositary receipts described therein - Incorporated by reference to Exhibit 4.1 of the Fulton Financial Corporation Current Report on Form 8-K filed on October 29, 2020.

4.3						Form of depositary receipt representing the Depositary Shares (included as Exhibit A to Exhibit 4.2 of this report).

31.1						Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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)

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:

November 6, 2020

/s/ E. Philip Wenger

E. Philip Wenger

Chairman and Chief Executive Officer

Date:

November 6, 2020

/s/ Mark R. McCollom

Mark R. McCollom

Senior Executive Vice President and Chief Financial Officer