FULTON FINANCIAL CORP - Quarter Report: 2022 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, 2022, or


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-39680

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

P. O. Box 4887

Lancaster,

Pennsylvania

17604

(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

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 –167,494,361 shares outstanding as of October 28, 2022.

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022

INDEX


Description		Page



Glossary of Terms		3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

(a)	Consolidated Balance Sheets - September 30, 2022 and December 31, 2021	5

(b)	Consolidated Statements of Income - Three and nine months ended September 30, 2022 and 2021	6

(c)	Consolidated Statements of Comprehensive Income - Three and nine months ended September 30, 2022 and 2021	7

(d)	Consolidated Statements of Shareholders’ Equity - Three and nine months ended September 30, 2022 and 2021	8

(e)	Consolidated Statements of Cash Flows - Nine months ended September 30, 2022 and 2021	9

(f)	Notes to Consolidated Financial Statements	10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		45

Item 3. Quantitative and Qualitative Disclosures about Market Risk		71

Item 4. Controls and Procedures		73

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		73

Item 1A. Risk Factors		73

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		74

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		75

Signatures		76

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


FULTON FINANCIAL CORPORATION
GLOSSARY OF DEFINED ACRONYMS AND TERMS

ACL						Allowance for credit losses
AFS						Available for sale
ALCO						Asset/Liability Management Committee
Annual Meeting						The annual meeting of the Corporation's shareholders held on May 17, 2022
AOCI						Accumulated other comprehensive (loss) income
ARC						Auction rate security
ASC						Accounting Standards Codification
ASU						Accounting Standards Update


BHCA						Bank Holding Company Act of 1956, as amended
bp or bps						Basis point(s)
CARES Act						Coronavirus Aid, Relief, and Economic Security Act
CDI						Core deposit intangible
CECL Day 1 Provision						Initial provision for credit losses required on non-purchased credit deteriorated loans acquired in the Merger
Corporation or Company						Fulton Financial Corporation
COVID-19						Coronavirus
Directors' Plan						Amended and Restated Directors’ Equity Participation Plan
Dodd-Frank Act						Dodd-Frank Wall Street Reform and Consumer Protection Act

Employee Equity Plan						2022 Amended and Restated Equity and Cash Incentive Compensation Plan
ESG						Environmental, social and governance
ETR						Effective tax rate
Exchange Act						Securities Exchange Act of 1934
FASB						Financial Accounting Standards Board
FDIC						Federal Deposit Insurance Corporation
Fed Funds Rate						Target federal funds rate
Federal Reserve Board						Board of Governors of the Federal Reserve System
FHLB						Federal Home Loan Bank
FOMC						Federal Open Market Committee
Foreign Currency Nostro Accounts						Foreign currency with international correspondent banks
FRB						Federal Reserve Bank
FTE						Fully taxable-equivalent
Fulton Bank or the Bank						Fulton Bank, N.A.
GAAP						U.S. generally accepted accounting principles
HTM						Held to maturity
LIBOR						London Interbank Offered Rate
Management Discussion						Management’s Discussion and Analysis of Financial Condition and Results of Operations
Merger						The acquisition by the Corporation of Prudential Bancorp that was completed effective as of July 1, 2022
Merger Agreement						Agreement and Plan of Merger, dated as of March 1, 2022, between the Corporation and Prudential Bancorp
Merger Consideration						For each share of Prudential Bancorp common stock, $3.65 in cash and 0.7974 of a share of the Corporation's common stock, with cash paid in lieu of each fractional share of the Corporation's common stock that would otherwise be issued, determined by multiplying such fractional share amount by $18.25
MSRs						Mortgage servicing rights
Net loans						Loans and lease receivables (net of unearned income)


NIM						Net interest margin
N/M						Not meaningful
OBS						Off-balance-sheet
OCI						Other comprehensive income
OREO						Other real estate owned
Pension Plan						Defined Benefit Pension Plan
Postretirement Plan						Postretirement Benefits Plan
PPP						Paycheck Protection Program
Prudential Bancorp						Prudential Bancorp, Inc.
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
Visa Shares						Visa, Inc. Class B restricted shares

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)


	September 30, 2022		December 31, 2021
	(unaudited)
ASSETS
Cash and due from banks	$	143,465	$	172,276
Interest-bearing deposits with other banks	385,250		1,466,338
Cash and cash equivalents	528,715		1,638,614
FRB and FHLB stock	81,914		57,635

Loans held for sale	14,411		35,768
Investment securities
AFS, at estimated fair value	2,597,384		3,187,390
HTM, at amortized cost	1,339,310		980,384
Net loans	19,695,199		18,325,350
Less: ACL - loans	(266,838)		(249,001)
Loans, net	19,428,361		18,076,349
Net premises and equipment	221,496		220,357
Accrued interest receivable	72,821		57,451
Goodwill and net intangible assets	561,495		538,053
Other assets	1,300,135		1,004,397
Total Assets	$	26,146,042	$	25,796,398
LIABILITIES
Deposits:
Noninterest-bearing	$	7,372,896	$	7,370,963
Interest-bearing	14,003,658		14,202,536
Total Deposits	21,376,554		21,573,499
Borrowings:
Federal funds purchased	136,000		—
Federal Home Loan Bank advances	265,500		—
Senior debt and subordinated debt	539,461		620,406
Other borrowings	483,720		417,703
Total borrowings	1,424,681		1,038,109
Accrued interest payable	5,739		7,000
Other liabilities	867,909		465,110
Total Liabilities	23,674,883		23,083,718
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 10.0 million shares authorized; Series A, 0.2 million shares authorized and issued as of September 30, 2022 and December 31, 2021, liquidation preference of $1,000 per share	192,878		192,878
Common stock, $2.50 par value, 600.0 million shares authorized, 224.5 million shares issued as of September 30, 2022 and 223.9 million issued as of December 31, 2021	561,272		559,766
Additional paid-in capital	1,536,584		1,519,873
Retained earnings	1,406,544		1,282,383
Accumulated other comprehensive (loss) income	(442,947)		27,411
Treasury stock, at cost, 57.1 million as of September 30, 2022 and 63.4 million shares as of December 31, 2021	(783,172)		(869,631)
Total Shareholders' Equity	2,471,159		2,712,680
Total Liabilities and Shareholders' Equity	$	26,146,042	$	25,796,398

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
	2022		2021		2022		2021
Interest Income
Loans, including fees	$	205,468	$	161,889	$	519,375	$	480,955
Investment securities	25,927		20,003		72,424		59,165



Loans held for sale	194		299		694		969
Other interest income	2,102		1,888		4,498		4,599
Total Interest Income	233,691		184,079		596,991		545,688
Interest Expense
Deposits	10,049		6,525		21,451		24,108
Federal funds purchased	550		—		540		—
Federal Home Loan Bank advances	1,404		—		1,404		2,286
Senior debt and subordinated debt	5,494		6144		16,921		20,704
Other borrowings	612		140		952		472
Total Interest Expense	18,109		12,809		41,268		47,570
Net Interest Income	215,582		171,270		555,723		498,118
Provision for credit losses	18,958		(600)		13,508		(9,600)
Net Interest Income After Provision for Credit Losses	196,624		171,870		542,215		507,718
Non-Interest Income
Commercial banking	20,808		16,738		57,175		50,209
Consumer banking	13,275		11,801		37,421		33,415
Wealth management	17,610		18,532		55,312		53,513
Mortgage banking	3,720		9,535		12,064		26,333
Other	3,802		5,971		10,863		12,883
Non-Interest Income Before Investment Securities Gains	59,215		62,577		172,835		176,353
Investment securities gains (losses), net	(53)		—		(26)		33,511
Total Non-Interest Income	59,162		62,577		172,809		209,864
Non-Interest Expense
Salaries and employee benefits	94,283		82,679		264,151		243,632
Data processing and software	15,807		14,335		44,807		41,828
Net occupancy	14,025		12,957		42,134		39,433
Other outside services	9,361		7,889		26,292		24,557
State taxes	3,583		4,994		10,188		13,883
Equipment	3,548		3,416		10,393		10,268
FDIC insurance	3,158		2,727		9,328		7,633
Professional fees	2,373		2,271		6,178		7,701
Marketing	1,859		1,448		4,505		3,798
Intangible amortization	690		150		1,043		443
Debt extinguishment	—		—		—		32,575
Merger-related expenses	7,006		—		8,434		—
Other	13,865		11,730		37,813		38,060
Total Non-Interest Expense	169,558		144,596		465,266		463,811
Income Before Income Taxes	86,228		89,851		249,758		253,771
Income taxes	15,357		14,268		44,610		40,160
Net Income	70,871		75,583		205,148		213,611
Preferred stock dividends	(2,562)		(2,562)		(7,686)		(7,715)
Net Income Available to Common Shareholders	$	68,309	$	73,021	$	197,462	$	205,896

PER SHARE:
Net income available to common shareholders (basic)	$	0.41	$	0.45	$	1.21	$	1.27
Net income available to common shareholders (diluted)	0.40		0.45		1.20		1.26
Cash dividends	0.15		0.14		0.45		0.42
See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)


	Three months ended September 30				Nine months ended September 30
	2022		2021		2022		2021

Net Income	$	70,871	$	75,583	$	205,148	$	213,611
Other Comprehensive (Loss)/Income, net of tax:
Unrealized gains (losses) on AFS investment securities
Unrealized (loss)/gain on securities	(120,385)		(21,622)		(362,596)		(16,073)
Reclassification adjustment for securities gains included in net income	(41)		—		(20)		(25,901)
Amortization of net unrealized losses on AFS securities transferred to HTM	1,653		637		(46,024)		2,154

Net unrealized gains (losses) on AFS investment securities	(118,773)		(20,985)		(408,640)		(39,820)
Unrealized (losses) gains on interest rate swaps used in cash flow hedges
Net unrealized holding (losses) gains arising during the period	(22,472)		(216)		(62,434)		938
Reclassification adjustment for net (losses) gains realized in net income	2,483		(675)		641		(1,462)
Net unrealized (losses) gains on interest rate swaps used in cash flow hedges	(19,989)		(891)		(61,793)		(524)
Defined benefit pension plan and postretirement benefits


Amortization of net unrecognized pension and postretirement items	25		290		75		868
Other Comprehensive (Loss)/Income	(138,737)		(21,586)		(470,358)		(39,476)
Total Comprehensive (Loss) Income	$	(67,866)	$	53,997	$	(265,210)	$	174,135

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except per-share data)


	Preferred Stock			Common Stock			Additional		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total
	Shares	Amount		Shares	Amount		Paid-in Capital
Three months ended September 30, 2022
Balance at June 30, 2022	200	$	192,878	161,057	$	561,181	$	1,527,756	$	1,363,344	$	(304,210)	$	(869,856)	$	2,471,093
Net income									70,871						70,871
Other comprehensive loss											(138,737)				(138,737)
Common stock issued				132	91		490						1,518		2,099
Reissuance of treasury stock pursuant to acquisition				6,209			4,547						85,166		89,713
Stock-based compensation awards							3,791								3,791

Preferred stock dividend									(2,562)						(2,562)
Common stock cash dividends - $0.15 per share									(25,109)						(25,109)
Balance at September 30, 2022	200	$	192,878	167,398	$	561,272	$	1,536,584	$	1,406,544	$	(442,947)	$	(783,172)	$	2,471,159

Three months ended September 30, 2021
Balance at June 30, 2021	200	$	192,878	162,988	$	559,485	$	1,513,645	$	1,208,086	$	47,201	$	(828,337)	$	2,692,958
Net income									75,583						75,583
Other comprehensive income											(21,586)				(21,586)

Common stock issued				132	137		781						1,049		1,967
Stock-based compensation awards							2,192								2,192
Acquisition of treasury stock				(1,691)									(26,126)		(26,126)
Preferred stock dividend									(2,562)						(2,562)
Common stock cash dividends - $0.14 per share									(22,608)						(22,608)
Balance at September 30, 2021	200	$	192,878	161,429	$	559,622	$	1,516,618	$	1,258,499	$	25,615	$	(853,414)	$	2,699,818

Nine months ended September 30, 2022
Balance at December 31, 2021	200	$	192,878	160,490	$	559,766	$	1,519,873	$	1,282,383	$	27,411	$	(869,631)	$	2,712,680
Net income									205,148						205,148
Other comprehensive loss											(470,358)				(470,358)
Common stock issued				699	1,506		1,998						1,293		4,797
Reissuance of treasury stock pursuant to acquisition				6,209			4,547						85,166		$	89,713
Stock-based compensation awards							10,166								10,166

Preferred stock dividend									(7,686)						(7,686)
Common stock cash dividends - $0.45 per share									(73,301)						(73,301)
Balance at September 30, 2022	200	$	192,878	167,398	$	561,272	$	1,536,584	$	1,406,544	$	(442,947)	$	(783,172)	$	2,471,159

Nine months ended September 30, 2021
Balance at December 31, 2020	200	$	192,878	162,350	$	557,917	$	1,508,117	$	1,120,781	$	65,091	$	(827,956)	$	2,616,828
Net income									213,611						213,611
Other comprehensive loss											(39,476)				(39,476)

Common stock issued				770	1,705		2,309						668		4,682
Stock-based compensation awards							6,192								6,192
Acquisition of treasury stock				(1,691)									(26,126)		(26,126)
Preferred stock dividend									(7,715)						(7,715)
Common stock cash dividends - $0.42 per share									(68,178)						(68,178)
Balance at September 30, 2021	200	$	192,878	161,429	$	559,622	$	1,516,618	$	1,258,499	$	25,615	$	(853,414)	$	2,699,818

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(in thousands)	Nine months ended September 30
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	205,148	$	213,611
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	13,508		(9,600)
Depreciation and amortization of premises and equipment	22,627		20,647
Net amortization of investment securities premiums	9,823		11,816

Investment securities (gains) losses, net	26		(33,511)
Gain on sales of mortgage loans held for sale	(7,974)		(20,038)
Proceeds from sales of mortgage loans held for sale	400,797		818,432
Originations of mortgage loans held for sale	(371,466)		(757,631)
Intangible amortization	1,043		443
Amortization of issuance costs and discounts on long-term borrowings	551		1,608
Debt extinguishment costs	—		32,575
Stock-based compensation	10,166		6,192
Change in deferred federal income tax	(148,952)		(11,079)

Change in life insurance cash surrender value	(90,234)		(12,802)
Other changes, net	474,156		61,509
Total adjustments	314,071		108,561
Net cash (used in) provided by operating activities	519,219		322,172
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of AFS securities	196,407		125,811
Proceeds from principal repayments and maturities of AFS securities	546,770		366,788
Proceeds from principal repayments and maturities of HTM securities	90,044		89,349
Purchase of AFS securities	(822,216)		(901,400)
Purchase of HTM securities	(30,959)		(310,699)
Sale of Visa Shares	—		33,962
(Increase) decrease of FRB and FHLB stock	(24,279)		30,836

Net (increase) decrease in loans	(819,164)		620,583
Net purchases of premises and equipment	(10,023)		(17,346)
Net cash paid for acquisition	(21,796)		292
Net change in tax credit investments	(33,178)		(12,439)
Net cash (used in) provided by investing activities	(928,394)		25,737
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand and savings deposits	(420,622)		1,743,512
Net (decrease) increase in time deposits	(308,503)		(508,678)

Net (decrease) increase from other borrowings	183,518		(160,479)

Repayments of senior debt and subordinated debt	(81,496)		(703,681)

Net proceeds from issuance of common stock	4,792		4,682

Dividends paid	(78,413)		(73,962)
Acquisition of treasury stock	—		(26,126)
Net cash (used in) provided by financing activities	(700,724)		275,268
Net (decrease) increase in Cash and Cash Equivalents	(1,109,899)		623,177
Cash and Cash Equivalents at Beginning of Period	1,638,614		1,847,832
Cash and Cash Equivalents at End of Period	$	528,715	$	2,471,009
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	42,529	$	52,733
Income taxes	22,416		8,329
Supplemental Schedule of Certain Noncash Activities:
Transfer of AFS securities to HTM securities	$	479,008	$	376,165

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, 2021. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the SEC.

Significant Accounting Policies:

The significant accounting policies used in preparation of the Consolidated Financial Statements are disclosed in the Corporation's 2021 Annual Report on Form 10-K. Those significant accounting policies are unchanged at September 30, 2022.

CARES Act and Consolidated Appropriations Act - 2021

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 and the modified loan was not more than 30 days past due on December 31, 2019. On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law and this Act extended the relief for TDR treatment that was set to expire on December 31, 2020 to the earlier of 60 days after the national emergency termination date or January 1, 2022. The Corporation applied the option under the CARES act for all loan modifications that qualified.

Recently Adopted Accounting Standards

On January 1, 2022, the Corporation adopted ASC Update 2021-06 Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update). The Corporation adopted this standards update effective with its March 31, 2022 quarterly report on Form 10-Q and it did not have a material impact on the consolidated financial statements.

Recently Issued Accounting Standards

In March 2022, FASB issued ASU 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method ("ASU 2022-01"). This update addresses questions regarding the last-of-layer method arising from the issuance of ASU 2017-12 and permits more flexibility in hedging interest rate risk for both variable-rate and fixed-rate financial instruments and introduces the ability to hedge risk components for non-financial hedges. The Corporation will adopt ASU 2022-01 on January 1, 2023. The Corporation does not expect the adoption of ASU 2022-01 to have a material impact on its consolidated financial statements.

In March 2022, FASB issued ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). This update reduces the complexity of accounting for TDRs by eliminating certain accounting guidance, enhancing disclosures and improving the consistency of vintage disclosures. The Corporation will adopt ASU 2022-02 on January 1, 2023. The Corporation does not expect the adoption of ASU 2022-02 to have a material impact on its consolidated financial statements.

In June 2022, FASB issued ASU 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions ("ASU 2022-03"). This update clarifies how the fair value of equity securities subject

to contractual sale restrictions is determined and requires additional qualitative and quantitative disclosures for equity securities with contractual sale restrictions. The Corporation will adopt ASU 2022-03 on January 1, 2024. The Corporation does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.

In September 2022, FASB issued ASU 2022-04 Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations ("ASU 2022-04"). This update enhances transparency in the disclosure of supplier finance programs, which previously had no explicit requirements under GAAP. The Corporation will adopt ASU 2022-04 in its entirety on January 1, 2023. The Corporation does not expect the adoption of ASU 2022-04 to have a material impact on its consolidated financial statements.

Reclassifications

Certain amounts in the 2021 consolidated financial statements and notes have been reclassified to conform to the 2022 presentation.

NOTE 2 – Business Combinations

On July 1, 2022, the Corporation completed its acquisition of Prudential Bancorp, a Pennsylvania chartered bank holding company headquartered in Philadelphia, Pennsylvania that primarily served the Greater Philadelphia region. On that date, the Corporation acquired 100% of the outstanding common stock of Prudential Bancorp and Prudential Bancorp was merged with and into the Corporation. Prudential Bancorp's wholly owned subsidiary, Prudential Bank, became a wholly owned subsidiary of the Corporation. The Corporation merged Prudential Bank with and into Fulton Bank on November 5, 2022. The Corporation expects to enhance its presence in Philadelphia, expand its customer base, leverage operating costs through economies of scale and positively affect the Corporation's operating results.

In accordance with the terms of the Merger Agreement, each share of Prudential Bancorp's common stock issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive the Merger Consideration. In the aggregate, approximately eighty percent (80%) of the Merger Consideration consisted of the Corporation's common stock with the remaining approximately twenty percent (20%) payable in cash. The receipt of the Corporation’s common stock in the Merger is expected to qualify as a tax-free exchange for Prudential Bancorp shareholders.

The acquisition of Prudential Bancorp was accounted for as a business combination using the acquisition method of accounting, and accordingly, the assets acquired, the liabilities assumed, and consideration transferred were recorded at their estimated fair values as of the Merger. The $16.3 million excess of the Merger Consideration over the fair value of assets acquired was recorded as goodwill and is not amortizable or deductible for tax purposes.

The following table summarizes the consideration transferred and the fair values of identifiable assets acquired and liabilities assumed:


	Fair Value
(in thousands, except per share data)
Consideration transferred:
Common stock shares issued (6,208,516)	$	89,713
Cash paid to Prudential Bancorp shareholders	29,343
Value of consideration	119,056
Assets acquired:
Cash and due from banks	7,532
Investment securities	287,126
Loans	554,288
Premises and equipment	13,743
Other assets	70,874
Total assets	933,563
Liabilities assumed:
Deposits	532,180
Borrowings(1)	284,000

Other liabilities	14,583
Total liabilities	830,763
Net assets acquired:	102,800
Goodwill resulting from acquisition of Prudential Bancorp	$	16,256

(1) Includes a $30.5 million intercompany borrowing between Prudential Bank and Fulton Bank.

While the valuation of the acquired assets and liabilities is substantially completed, fair value estimates related to the assets and liabilities from Prudential Bancorp are subject to adjustment for up to one year after the closing date of the Merger as additional information becomes available. Valuations subject to adjustment include, but are not limited to, investments, loans and deposits as management continues to review the estimated fair values and evaluate the assumed tax position. When the valuation is final, any changes to the preliminary valuation of acquired assets and liabilities could result in adjustments to goodwill.

The amount of goodwill recorded reflects the increased market share and related synergies that are expected to result from the Merger, and represents the excess purchase price over the estimated fair value of the net assets acquired from Prudential Bancorp.

The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed.

Cash and due from banks: The estimated fair values of cash and due from banks approximate their stated value.

Investment securities: The acquired investment portfolio had a fair value of $287.1 million, primarily consisting of mortgage-backed securities, U.S. Government securities and municipal securities. The fair value of the investment portfolio was based on quoted market prices, dealer quotes and pricing obtained from independent pricing services.

Loans: The Company recorded $554.3 million of acquired loans that were initially recorded at their fair values as of the date of the Merger. Fair value for the loans was based on a discounted cash flow methodology that considered credit loss and prepayment expectations, market interest rates and other market factors, such as liquidity, from the perspective of a market participant. Loan cash flows were generated on an individual loan basis. The PD, LGD, exposure at default and prepayment assumptions are the key factors driving credit losses that are embedded into the estimated cash flows.

The following table presents information with respect to the fair value and unpaid principal balance of acquired loans and leases at the date of the Merger:


	July 1, 2022
	Unpaid Principal Balance		Fair Value
	(in thousands)
Real estate - commercial mortgage	$	224,904	$	216,613
Commercial and industrial	63,560		62,050
Real-estate - residential mortgage	177,327		169,098
Real-estate - home equity	6,034		5,812
Real-estate - construction	98,963		98,546
Consumer	2,306		2,286

Total acquired loans	$	573,094	$	554,405

The following table presents the carrying amount of loans for which, at the date of Merger, there was evidence of more than insignificant deterioration of credit quality since origination:


	July 1, 2022
	(in thousands)
Book balance of loans with deteriorated credit quality at acquisition	$	27,057
Allowance for credit losses at acquisition	(1,135)
Non-credit related discount	(130)
Total purchased credit deteriorated loans	$	25,792

The Merger resulted in the addition of $9.1 million in allowance for credit losses, including the $1.1 million identified in the table above for purchased credit deteriorated loans recorded through the provision for credit losses at the date of Merger.

Premises and equipment: The fair value of land and buildings reflected in premises and equipment was determined by obtaining recent market sales for comparable properties. The difference between the fair market value and the net book value for these properties resulted in an increase of $7.1 million to the premises and equipment acquired from Prudential Bancorp.

Intangible assets: The Corporation recorded $8.2 million of CDI reflected in Other assets that is being amortized over seven years using the sum-of-the-years digits method. The fair value of the CDI was determined using the cost savings approach. The cost savings approach is defined as the difference between the cost of funds of core deposits and an alternative cost of funds for those deposits. The CDI fair value was determined by projected discounted net cash flows that included assumptions related to customer attrition rates, discount rates, deposit interest rates, deposit account maintenance costs and alternative cost of funding rates.

Time deposits: Time deposits were valued at the account level based on their remaining maturity dates and comparing the contractual cost of the portfolio to brokered deposit costs having a similar tenor. The valuation adjustment of $1.9 million will be accreted to interest expense over the remaining maturities of the individual customer deposits.

Borrowings: The estimated fair values for borrowings approximated their stated value given these were short-term advances.

The following table presents the change in goodwill during the period:


	Nine Months Ended September 30
	2022
	(in thousands)
Goodwill at December 31, 2021	$	534,266
Goodwill from Prudential Bancorp acquisition	16,256
Goodwill at September 30, 2022	$	550,522

Merger-related expenses

The Company developed a comprehensive integration plan under which it has incurred direct costs that are expensed as incurred. These direct costs include costs primarily related to terminated contracts, consolidated facilities (including lease termination expenses), severance, marketing and professional and legal fees. Costs related to the acquisition and restructuring are included in Merger-related expenses on the unaudited Consolidated Statements of Income.

The following table details the costs identified and classified as Merger-related expenses:


	Three Months Ended September 30		Nine Months Ended September 30
	2022		2022
	(in thousands)
Salaries and employee benefits	$	487	$	487
Data processing and software	1,113		1,114
Net occupancy	1,552		1,554
Other outside services	216		221

Professional fees	1,250		2,444
Marketing	88		88
Charitable donation	2,000		2,000
Other	300		526
Total Merger-related expenses	$	7,006	$	8,434

As part of the Merger, the Corporation made a $2.0 million contribution to the Fulton Forward Foundation in July 2022, designated to be used to provide impact gifts in support of nonprofit community organizations in Philadelphia that are focused on advancing economic empowerment, particularly in underserved communities.

Income Statement

The following table summarizes the results of operations contributed by Prudential Bancorp for the three-month period ended September 30, 2022 presented in the unaudited Consolidated Statements of Income:


	Three Months Ended September 30
	2022
	(in thousands)
Total interest income	$	10,871
Total interest expense	2,733
Net interest income	8,138
Provisions for credit losses	7,571
Net Interest Income After Provision for Credit Losses	567
Total noninterest income	197
Total noninterest expense	3,583
Income Before Income Taxes	(2,819)
Income taxes	(753)
Net Loss	$	(2,066)

Pro Forma Income Statement (unaudited)

The below table presents the pro forma results of the operations of the combined institutions (Prudential Bancorp and the Corporation) as if the Merger occurred on January 1, 2021. The pro forma income statement adjustments are limited to the effects of fair value mark amortization and accretion and intangible asset amortization and do not consider future cost savings the Corporation expects to achieve with the merging Prudential Bank with and into the Bank. No additional Merger-related expenses have been included in the pro forma results of operations.


	Three Months Ended September 30				Nine Months Ended September 30
	2022		2021		2022		2021
	(in thousands)
Net interest income	$	215,582	$	177,328	$	575,996	$	515,674
Provision for credit losses	18,958		(400)		19,528		(9,400)
Net Interest Income After Provision for Credit Losses	196,624		177,728		556,468		525,074
Total noninterest income	59,162		63,709		177,733		212,966
Total noninterest expenses	169,558		149,234		494,671		477,342
Income Before Income Taxes	86,228		92,203		239,530		260,698
Income tax expense	15,357		14,629		41,825		41,143
Net Income	$	70,871	$	77,574	$	197,705	$	219,555

NOTE 3 – Restrictions on Cash and Cash Equivalents

Cash collateral is posted by the Corporation with counterparties to secure derivatives and other contracts, which is included in "interest-bearing deposits with other banks" on the consolidated balance sheets. The amounts of such collateral as of September 30, 2022 and December 31, 2021 were $16.5 million and $202.8 million, respectively.

NOTE 4 – Investment Securities

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


	September 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale	(in thousands)
U.S. Government securities	$	226,439	$	—	$	(8,255)	$	218,184

U.S. Government-sponsored agency securities	1,053		—		(47)		1,006
State and municipal securities	1,287,140		12		(248,967)		1,038,185
Corporate debt securities	436,443		—		(36,828)		399,615
Collateralized mortgage obligations	155,010		—		(12,609)		142,401
Residential mortgage-backed securities	246,854		6		(32,608)		214,252
Commercial mortgage-backed securities	655,384		—		(71,643)		583,741


Total	$	3,008,323	$	18	$	(410,957)	$	2,597,384

Held to Maturity

Residential mortgage-backed securities	$	470,879	$	—	$	(60,881)	$	409,998
Commercial mortgage-backed securities	868,431		—		(136,719)		731,712
Total	$	1,339,310	$	—	$	(197,600)	$	1,141,710


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale	(in thousands)
U.S. Government securities	$	127,831	$	—	$	(213)	$	127,618

State and municipal securities	1,139,187		50,161		(678)		1,188,670
Corporate debt securities	373,482		13,009		(358)		386,133
Collateralized mortgage obligations	206,532		3,581		(754)		209,359
Residential mortgage-backed securities	231,607		1,224		(3,036)		229,795
Commercial mortgage-backed securities	974,541		6,141		(9,534)		971,148
Auction rate securities	76,350		—		(1,683)		74,667
Total	$	3,129,530	$	74,116	$	(16,256)	$	3,187,390



Held to Maturity

Residential mortgage-backed securities	$	404,958	$	11,022	$	(7,067)	$	408,913
Commercial mortgage-backed securities	575,426		—		(18,472)		556,954
Total	$	980,384	$	11,022	$	(25,539)	$	965,867

During the first quarter of 2022, all ARCs were sold.

On May 1, 2022, the Corporation transferred certain residential mortgage-backed securities and commercial mortgage-backed securities from AFS to HTM classification as permitted by ASU 2019-04. The estimated fair value of the securities transferred was $415.2 million, and the amortized cost of the securities was $479.0 million.

Securities carried at $1.3 billion at September 30, 2022 and $2.5 billion at December 31, 2021 were pledged as collateral to secure public and trust deposits.

The amortized cost and estimated fair values of debt securities as of September 30, 2022, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay with or without call or prepayment penalties.


		September 30, 2022
		Available for Sale				Held to Maturity
		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less		$	9,524	$	9,516	$	—	$	—
Due from one year to five years		287,824		277,609		—		—
Due from five years to ten years		506,946		463,474		—		—
Due after ten years		1,146,781		906,391		—		—
		1,951,075		1,656,990		—		—
Residential mortgage-backed securities(1)		246,854		214,252		470,879		409,998
Commercial mortgage-backed securities(1)		655,384		583,741		868,431		731,712
Collateralized mortgage obligations(1)		155,010		142,401		—		—
Total		$	3,008,323	$	2,597,384	$	1,339,310	$	1,141,710
(1) Maturities for mortgage-backed securities and collateralized mortgage obligations are dependent upon the interest rate environment and prepayments on the underlying loans.

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


	Gross Realized Gains		Gross Realized Losses		Net (Losses) Gains
Three months ended	(in thousands)
September 30, 2022	$	33	$	(86)	$	(53)
September 30, 2021	—		—		—

Nine months ended
September 30, 2022	$	1,587	$	(1,613)	$	(26)
September 30, 2021	34,481		(970)		33,511

During the first quarter of 2021, the Corporation completed a balance sheet restructuring that included a $34.0 million gain on the sale of Visa Shares, offset by losses on other securities of $0.4 million, primarily in connection with the sale of $24.6 million of ARCs.

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


	September 30, 2022
	Less than 12 months					12 months or longer					Total
	Number of Securities	Estimated Fair Value		Unrealized Losses		Number of Securities	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses

Available for Sale		(dollars in thousands)
U.S. Government securities	3	$	218,184	$	(8,255)	—	$	—	$	—	$	218,184	$	(8,255)

U.S. Government-sponsored agency securities	1	1,006		(47)		—	—		—		1,006		(47)
State and municipal securities	395	982,919		(228,508)		22	45,759		(20,459)		1,028,678		(248,967)
Corporate debt securities	68	386,141		(35,547)		2	10,718		(1,281)		396,859		(36,828)
Collateralized mortgage obligations	100	121,120		(7,182)		1	21,281		(5,427)		142,401		(12,609)
Residential mortgage-backed securities	101	157,808		(19,901)		4	55,110		(12,707)		212,918		(32,608)
Commercial mortgage-backed securities	122	462,988		(47,022)		12	120,753		(24,621)		583,741		(71,643)

Total available for sale	790	$	2,330,166	$	(346,462)	41	$	253,621	$	(64,495)	$	2,583,787	$	(410,957)

Held to Maturity

Residential mortgage-backed securities	108	$	270,986	$	(20,485)	12	$	139,012	$	(40,396)	$	409,998	$	(60,881)
Commercial mortgage-backed securities	33	376,207		(46,035)		27	355,505		(90,684)		731,712		(136,719)
Total	141	$	647,193	$	(66,520)	39	$	494,517	$	(131,080)	$	1,141,710	$	(197,600)


	December 31, 2021
	Less than 12 months					12 months or longer					Total
	Number of Securities	Estimated Fair Value		Unrealized Losses		Number of Securities	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Available for Sale	(dollars in thousands)
U.S Government Securities	2	$	127,618	$	(213)	—	$	—	$	—	$	127,618	$	(213)

State and municipal securities	29	82,731		(678)		—	—		—		82,731		(678)
Corporate debt securities	6	43,068		(358)		—	—		—		43,068		(358)
Collateralized mortgage obligations	4	28,517		(754)		—	—		—		28,517		(754)
Residential mortgage-backed securities	7	123,687		(2,388)		1	16,669		(648)		140,356		(3,036)
Commercial mortgage-backed securities	41	512,312		(9,534)		—	—		—		512,312		(9,534)
Auction rate securities	—	—		—		118	74,667		(1,683)		74,667		(1,683)
Total available for sale	89	$	917,933	$	(13,925)	119	$	91,336	$	(2,331)	$	1,009,269	$	(16,256)



Held to Maturity

Residential mortgage-backed securities	14	$	205,969	$	(7,067)	—	$	—	$	—	$	205,969	$	(7,067)
Commercial mortgage-backed securities	36	556,954		(18,472)		—	—		—		556,954		(18,472)
Total	50	$	762,923	$	(25,539)	—	$	—	$	—	$	762,923	$	(25,539)

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, 2022 and December 31, 2021.

Based on management’s evaluations, no ACL was required for state and municipal securities as of September 30, 2022 or December 31, 2021. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

As of September 30, 2022 and December 31, 2021, all corporate debt securities were rated above investment grade. Based on the payment status, rating and management's evaluation of these securities, no ACL was required for corporate debt securities as of September 30, 2022 or December 31, 2021.

As of December 31, 2021, all ARCs were rated above investment grade. All of the loans underlying the ARCs had principal payments that were guaranteed by the federal government. Based on the payment status, rating and management's evaluation of these securities, no ACL was required for ARCs as of December 31, 2021.

NOTE 5 - Loans and Allowance for Credit Losses

Loans and leases, net of unearned income

Loans and leases, net of unearned income are summarized as follows:


	September 30, 2022		December 31, 2021
	(in thousands)
Real estate - commercial mortgage	$	7,554,509	$	7,279,080
Commercial and industrial (1)	4,243,392		4,208,327
Real-estate - residential mortgage	4,574,228		3,846,750
Real-estate - home equity	1,110,103		1,118,248
Real-estate - construction	1,273,097		1,139,779
Consumer	633,666		464,657
Equipment lease financing and other	328,057		283,557
Overdrafts	2,162		1,988
Gross loans	19,719,214		18,342,386
Unearned income	(24,015)		(17,036)
Net loans	$	19,695,199	$	18,325,350

(1) Includes PPP loans totaling $32.1 million and $301.3 million as of September 30, 2022 and December 31, 2021, respectively.

The Corporation segments its loan portfolio by "portfolio segments," as presented in the table above. Certain portfolio segments are further disaggregated by "class segment" for the purpose of estimating credit losses.

Allowance for Credit Losses

The ACL 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 exposure includes estimated losses on unfunded loan commitments, letters of credit and other OBS credit exposures and is recorded in other liabilities. 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:



	September 30, 2022		December 31, 2021
	(in thousands)
ACL - loans	$	266,838	$	249,001
ACL - OBS credit exposure(1)	15,690		14,533
Total ACL	$	282,528	$	263,534

(1) Included in other liabilities on the Consolidated Balance Sheets.

The following table presents the activity in the ACL:


	Three months ended September 30				Nine months ended September 30
	2022		2021		2022		2021
	(in thousands)
Balance at beginning of period	$	262,887	$	269,805	$	263,534	$	291,940
CECL Day 1 Provision expense	7,954		—		7,954		—
Purchased credit deteriorated loans	1,135		—		1,135		—
Loans charged off	(3,724)		(2,234)		(7,242)		(19,958)
Recoveries of loans previously charged off	3,272		4,539		11,593		9,128
Net loans (charged-off) recovered	(452)		2,305		4,351		(10,830)
Provision for credit losses (1)	11,004		(600)		5,554		(9,600)
Balance at end of period	$	282,528	$	271,510	$	282,528	$	271,510

(1) Includes $1.4 million and $10 thousand for the three months ended September 30, 2022 and 2021, respectively, and includes $1.2 million and $0.4 million for the nine months ended September 30, 2022 and 2021, respectively, related to OBS credit exposure.

The following table presents the activity in the ACL by portfolio segment:


	Real Estate Commercial Mortgage		Commercial and Industrial		Consumer and Home Equity		Real Estate Residential Mortgage		Real Estate Construction		Equipment lease financing, other and overdrafts		Total
	(in thousands)
Three months ended September 30, 2022
Balance at June 30, 2022	$	72,605	$	72,119	$	23,080	$	61,635	$	10,628	$	8,497	$	248,564
CECL Day 1 Provision expense	4,107		—		131		3,716		—		—		7,954
Purchased credit deteriorated loans	1,051		—		7		77		—		—		1,135
Loans charged off	(86)		(1,783)		(1,172)		—		—		(683)		(3,724)
Recoveries of loans previously charged off	29		2,213		682		101		—		247		3,272
Net loans recovered (charged off)	(57)		430		(490)		101		—		(436)		(452)
Provision for loan losses (1)	11,144		(6,424)		1,812		1,880		1,045		180		9,637
Balance at September 30, 2022	$	88,850	$	66,125	$	24,540	$	67,409	$	11,673	$	8,241	$	266,838
Three months ended September 30, 2021
Balance at June 30, 2021	$	95,381	$	65,404	$	21,994	$	54,188	$	12,654	$	5,411	$	255,032
Loans charged off	(14)		(647)		(504)		(602)		—		(467)		(2,234)
Recoveries of loans previously charged off	564		2,330		504		86		697		358		4,539
Net loans recovered (charged off)	550		1,683		—		(516)		697		(109)		2,305
Provision for loan and lease losses (1)	234		(4,196)		(526)		2,557		(930)		2,251		(610)
Balance at September 30, 2021	$	96,165	$	62,891	$	21,468	$	56,229	$	12,421	$	7,553	$	256,727
Nine months ended September 30, 2022
Balance at December 31, 2021	$	87,970	$	67,056	$	19,749	$	54,236	$	12,941	$	7,049	$	249,001
CECL Day 1 Provision expense	4,107		—		131		3,716		—		—		7,954
Purchased credit deteriorated loans	1,051		—		7		77		—		—		1,135
Loans charged off	(238)		(2,211)		(3,101)		(66)		—		(1,626)		(7,242)
Recoveries of loans previously charged off	3,677		4,932		1,898		415		44		627		11,593
Net loans recovered (charged off)	3,439		2,721		(1,203)		349		44		(999)		4,351
Provision for loan losses (1)	(7,717)		(3,652)		5,856		9,031		(1,312)		2,191		4,397
Balance at September 30, 2022	$	88,850	$	66,125	$	24,540	$	67,409	$	11,673	$	8,241	$	266,838
Nine months ended September 30, 2021
Balance at December 31, 2020	$	103,425	$	74,771	$	25,137	$	51,995	$	15,608	$	6,631	$	277,567
Loans charged off	(8,357)		(5,920)		(2,481)		(1,290)		(39)		(1,871)		(19,958)
Recoveries of loans previously charged off	1,467		3,792		1,578		286		1,335		670		9,128
Net loans recovered (charged off)	(6,890)		(2,128)		(903)		(1,004)		1,296		(1,201)		(10,830)
Provision for loan losses (1)	(370)		(9,752)		(2,766)		5,238		(4,483)		2,123		(10,010)
Balance at September 30, 2021	$	96,165	$	62,891	$	21,468	$	56,229	$	12,421	$	7,553	$	256,727

(1) Provision included in the table only includes the portion related to net loans.

Included in the third quarter of 2022 provision for credit losses was a CECL Day 1 Provision of $8.0 million for the acquired Prudential Bancorp loan portfolio. The ACL also included $1.1 million for purchased credit deteriorated loans for the acquired Prudential Bancorp loan portfolio.

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 national, regional and local economic and business conditions, an assessment of the lending environment, including underwriting standards and other factors affecting credit quality.

The provision for credit losses for the third quarter of 2022 was recorded to increase the allowance for credit losses as a result of an increase in non-performing loans, as well as increases for the office building portfolio, reflected in the commercial real estate loan portfolio, and the consumer loan, real estate construction and residential mortgage loan portfolios.

Non-accrual Loans

All loans individually evaluated for impairment are measured for losses on a quarterly basis. As of September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021, approximately 89% and 98%, respectively, of loans evaluated individually for impairment with principal balances greater than or equal to $1.0 million, whose primary collateral consisted of real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated in the preceding 12 months.

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


	September 30, 2022						December 31, 2021
	With a Related Allowance		Without a Related Allowance		Total		With a Related Allowance		Without a Related Allowance		Total
	(in thousands)
Real estate - commercial mortgage	$	58,518	$	36,186	$	94,704	$	20,564	$	32,251	$	52,815
Commercial and industrial	11,171		18,633		29,804		12,571		17,570		30,141
Real estate - residential mortgage	31,464		—		31,464		35,269		—		35,269
Real estate - home equity	6,960		133		7,093		8,671		—		8,671
Real estate - construction	185		1,271		1,456		173		728		901
Consumer	101		—		101		229		—		229
Equipment lease financing and other	4,327		9,255		13,582		6,247		9,393		15,640
	$	112,726	$	65,478	$	178,204	$	83,724	$	59,942	$	143,666

As of September 30, 2022 and December 31, 2021, there were $65.5 million and $59.9 million, respectively, of non-accrual loans that did not have a related allowance for credit losses. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

Asset Quality

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

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


		September 30, 2022
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans converted to Term Loans
		(in thousands)												Amortized		Amortized
		2022		2021		2020		2019		2018		Prior		Cost Basis		Cost Basis		Total
Real estate - construction(1)
	Pass	$	102,525	$	355,433	$	299,312	$	48,953	$	49,473	$	113,662	$	37,564	$	—	$	1,006,922
	Special Mention	—		—		2,789		—		—		5,463		—		—		8,252
	Substandard or Lower	—		—		—		2,310		—		4,633		208		—		7,151
	Total real estate - construction	102,525		355,433		302,101		51,263		49,473		123,758		37,772		—		1,022,325
Real estate - construction(1)
	Current period gross charge-offs	—		—		—		—		—		—		—		—		—
	Current period recoveries	—		—		—		—		—		—		—		44		44
	Total net (charge-offs) recoveries	—		—		—		—		—		—		—		44		44
Commercial and industrial(2)
	Pass	635,272		497,464		419,171		337,009		191,715		641,262		1,306,921		962		4,029,776
	Special Mention	7,762		10,941		8,550		8,819		4,957		21,754		41,119		—		103,902
	Substandard or Lower	791		4,887		3,893		14,400		6,316		23,992		55,435		—		109,714
	Total commercial and industrial	643,825		513,292		431,614		360,228		202,988		687,008		1,403,475		962		4,243,392
Commercial and industrial
	Current period gross charge-offs	—		—		(36)		—		(21)		(365)		(1,192)		(597)		(2,211)
	Current period recoveries	—		—		30		95		379		1,618		747		2,063		4,932
	Total net (charge-offs) recoveries	—		—		(6)		95		358		1,253		(445)		1,466		2,721
Real estate - commercial mortgage
	Pass	730,581		1,147,950		955,537		808,474		613,888		2,680,340		65,607		—		7,002,377
	Special Mention	96		29,528		38,858		35,957		18,060		155,437		1,200		—		279,136
	Substandard or Lower	94		1,496		7,563		68,248		28,686		166,666		243		—		272,996
	Total real estate - commercial mortgage	730,771		1,178,974		1,001,958		912,679		660,634		3,002,443		67,050		—		7,554,509
Real estate - commercial mortgage
	Current period gross charge-offs	—		—		—		—		—		—		—		(238)		(238)
	Current period recoveries	—		—		—		—		—		4		—		3,673		3,677
	Total net (charge-offs) recoveries	—		—		—		—		—		4		—		3,435		3,439
Total
	Pass	$	1,468,378	$	2,000,847	$	1,674,020	$	1,194,436	$	855,076	$	3,435,264	$	1,410,092	$	962	$	12,039,075
	Special Mention	7,858		40,469		50,197		44,776		23,017		182,654		42,319		—		391,290
	Substandard or Lower	885		6,383		11,456		84,958		35,002		195,291		55,886		—		389,861
	Total	$	1,477,121	$	2,047,699	$	1,735,673	$	1,324,170	$	913,095	$	3,813,209	$	1,508,297	$	962	$	12,820,226

(1) Excludes real estate - construction - other.

(2) Loans originated in 2021 and 2020 include $32.1 million of PPP loans that were assigned a rating of Pass based on the existence of a federal government guaranty through the SBA.

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


		December 31, 2021
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans converted to Term Loans
		( in thousands)												Amortized		Amortized
		2021		2020		2019		2018		2017		Prior		Cost Basis		Cost Basis		Total
Real estate - construction(1)
	Pass	$	190,030	$	315,811	$	113,245	$	83,886	$	17,545	$	117,157	$	46,409	$	—	$	884,083
	Special Mention	5,843		775		9,984		20,200		15,724		6,315		—		—		58,841
	Substandard or Lower	—		—		—		—		1,912		4,185		227		—		6,324
	Total real estate - construction	195,873		316,586		123,229		104,086		35,181		127,657		46,636		—		949,248
Real estate - construction(1)
	Current period gross charge-offs	—		—		(39)		—		—		—		—		—		(39)
	Current period recoveries	—		—		39		—		—		1,373		—		—		1,412
	Total net (charge-offs) recoveries	—		—		—		—		—		1,373		—		—		1,373
Commercial and industrial(2)
	Pass	855,924		520,802		396,575		232,805		147,675		581,762		1,177,857		339		3,913,739
	Special Mention	5,386		8,538		33,937		8,301		10,346		23,380		52,386		95		142,369
	Substandard or Lower	1,225		9,775		19,393		24,327		11,912		34,825		49,562		1,200		152,219
	Total commercial and industrial	862,535		539,115		449,905		265,433		169,933		639,967		1,279,805		1,634		4,208,327
Commercial and industrial
	Current period gross charge-offs	(2,977)		(406)		(4,966)		(208)		(286)		(800)		(5,694)		—		(15,337)
	Current period recoveries	6		39		4,691		841		457		2,342		1,211		—		9,587
	Total net (charge-offs) recoveries	(2,971)		(367)		(275)		633		171		1,542		(4,483)		—		(5,750)
Real estate - commercial mortgage
	Pass	1,086,113		899,172		826,866		624,653		712,223		2,356,308		55,370		—		6,560,705
	Special Mention	1,317		60,732		96,508		25,280		33,595		169,732		115		—		387,279
	Substandard or Lower	1,537		8,516		28,810		68,818		69,793		151,450		684		1,488		331,096
	Total real estate - commercial mortgage	1,088,967		968,420		952,184		718,751		815,611		2,677,490		56,169		1,488		7,279,080
Real estate - commercial mortgage
	Current period gross charge-offs	—		—		(14)		(25)		(6,972)		(1,517)		(198)		—		(8,726)
	Current period recoveries	—		—		—		—		983		1,491		—		—		2,474
	Total net (charge-offs) recoveries	—		—		(14)		(25)		(5,989)		(26)		(198)		—		(6,252)
Total
	Pass	$	2,132,067	$	1,735,785	$	1,336,686	$	941,344	$	877,443	$	3,055,227	$	1,279,636	$	339	$	11,358,527
	Special Mention	12,546		70,045		140,429		53,781		59,665		199,427		52,501		95		588,489
	Substandard or Lower	2,762		18,291		48,203		93,145		83,617		190,460		50,473		2,688		489,639
	Total	$	2,147,375	$	1,824,121	$	1,525,318	$	1,088,270	$	1,020,725	$	3,445,114	$	1,382,610	$	3,122	$	12,436,655

(1) Excludes real estate - construction - other.

(2) Loans originated in 2021 and 2020 include $301.3 million of PPP loans that were assigned a rating of Pass based on the existence of a federal government guaranty through the SBA.

The Corporation considers the performance of the loan portfolio and its impact on the ACL. The Corporation does not assign internal risk ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, construction loans to individuals secured by residential real estate, consumer and equipment lease financing. For these loans, the most relevant credit quality indicator is delinquency status and the Corporation evaluates credit quality based on the aging status of the loan. The following tables present the amortized cost of these loans based on payment activity, by origination year, for the periods shown:


		September 30, 2022
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans converted to Term Loans
		(in thousands)												Amortized		Amortized
		2022		2021		2020		2019		2018		Prior		Cost Basis		Cost Basis		Total
Consumer and real estate - home equity
	Performing	$	323,238	$	121,500	$	89,432	$	59,199	$	51,895	$	98,043	$	847,612	$	142,704	$	1,733,623
	Nonperforming	152		209		32		167		112		2,071		1,739		5,664		10,146
	Total consumer and real estate - home equity	323,390		121,709		89,464		59,366		52,007		100,114		849,351		148,368		1,743,769
Consumer and real estate - home equity
	Current period gross charge-offs	—		(587)		(70)		(108)		(16)		(355)		(178)		(1,787)		(3,101)
	Current period recoveries	—		44		88		29		16		516		248		957		1,898
	Total net (charge-offs) recoveries	—		(543)		18		(79)		—		161		70		(830)		(1,203)
Real estate - residential mortgage
	Performing	763,300		1,672,528		1,077,559		296,437		87,861		634,295		—		—		4,531,980
	Nonperforming	—		2,610		5,222		4,696		3,983		25,737		—		—		42,248
	Total real estate - residential mortgage	763,300		1,675,138		1,082,781		301,133		91,844		660,032		—		—		4,574,228
Real estate - residential mortgage
	Current period gross charge-offs	—		—		—		—		—		—		—		(66)		(66)
	Current period recoveries	—		—		4		—		27		261		—		123		415
	Total net (charge-offs) recoveries	—		—		4		—		27		261		—		57		349
Equipment lease financing and other
	Performing	134,364		45,541		44,928		33,309		17,173		17,307		—		—		292,622
	Nonperforming	—		—		—		—		—		13,582		—		—		13,582
	Total leasing and other	134,364		45,541		44,928		33,309		17,173		30,889		—		—		306,204
Equipment lease financing and other
	Current period gross charge-offs	(304)		(108)		(72)		(50)		(21)		(1,071)		—		—		(1,626)
	Current period recoveries	33		12		74		20		6		253		—		229		627
	Total net (charge-offs) recoveries	(271)		(96)		2		(30)		(15)		(818)		—		229		(999)
Construction - other
	Performing	113,328		118,987		13,429		—		4,568		—		—		460		250,772
	Nonperforming	—		—		—		—		—		—		—		—		—
	Total construction - other	113,328		118,987		13,429		—		4,568		—		—		460		250,772
Construction - other
	Current period gross charge-offs	—		—		—		—		—		—		—		—		—
	Current period recoveries	—		—		—		—		—		—		—		—		—
	Total net (charge-offs) recoveries	—		—		—		—		—		—		—		—		—
Total
	Performing	$	1,334,230	$	1,958,556	$	1,225,348	$	388,945	$	161,497	$	749,645	$	847,612	$	143,164	$	6,808,997
	Nonperforming	152		2,819		5,254		4,863		4,095		41,390		1,739		5,664		65,976
	Total	$	1,334,382	$	1,961,375	$	1,230,602	$	393,808	$	165,592	$	791,035	$	849,351	$	148,828	$	6,874,973


		December 31, 2021
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans converted to Term Loans
		(in thousands)												Amortized		Amortized
		2021		2020		2019		2018		2017		Prior		Cost Basis		Cost Basis		Total
Consumer and Real estate - home equity
	Performing	$	162,441	$	102,918	$	73,769	$	68,564	$	33,254	$	135,412	$	990,842	$	3,999	$	1,571,199
	Nonperforming	122		101		60		51		314		2,348		8,512		198		11,706
	Total consumer and real estate - home equity	162,563		103,019		73,829		68,615		33,568		137,760		999,354		4,197		1,582,905
Consumer and Real estate - home equity
	Current period gross charge-offs	(175)		(491)		(496)		(238)		(224)		(411)		(1,274)		—		(3,309)
	Current period recoveries	—		223		131		131		167		1,048		645		—		2,345
	Total net (charge-offs) recoveries	(175)		(268)		(365)		(107)		(57)		637		(629)		—		(964)
Real estate - residential mortgage
	Performing	1,548,174		1,133,602		344,625		113,801		198,164		468,842		—		—		3,807,208
	Nonperforming	—		6,753		2,189		3,424		2,844		24,332		—		—		39,542
	Total real estate - residential mortgage	1,548,174		1,140,355		346,814		117,225		201,008		493,174		—		—		3,846,750
Real estate - residential mortgage
	Current period gross charge-offs	—		(626)		(148)		(125)		(4)		(387)		—		—		(1,290)
	Current period recoveries	—		—		1		18		—		264		92		—		375
	Total net (charge-offs) recoveries	—		(626)		(147)		(107)		(4)		(123)		92		—		(915)
Equipment lease financing and other
	Performing	97,077		65,316		49,591		34,107		22,444		1,369		—		—		269,904
	Nonperforming	—		—		—		—		15,503		138		—		—		15,641
	Total leasing and other	97,077		65,316		49,591		34,107		37,947		1,507		—		—		285,545
Equipment lease financing and other
	Current period gross charge-offs	(975)		(1,276)		—		—		—		—		—		—		(2,251)
	Current period recoveries	255		539		88		10		18		43		—		—		953
	Total net (charge-offs) recoveries	(720)		(737)		88		10		18		43		—		—		(1,298)
Construction - other
	Performing	144,652		40,040		638		5,028		—		—		—		—		190,358
	Nonperforming	—		—		—		—		173		—		—		—		173
	Total construction - other	144,652		40,040		638		5,028		173		—		—		—		190,531
Construction - other
	Current period gross charge-offs	—		—		—		—		—		—		—		—		—
	Current period recoveries	—		—		—		—		—		—		—		—		—
	Total net (charge-offs) recoveries	—		—		—		—		—		—		—		—		—
Total
	Performing	$	1,952,344	$	1,341,876	$	468,623	$	221,500	$	253,862	$	605,623	$	990,842	$	3,999	$	5,838,669
	Nonperforming	122		6,854		2,249		3,475		18,834		26,818		8,512		198		67,062
	Total	$	1,952,466	$	1,348,730	$	470,872	$	224,975	$	272,696	$	632,441	$	999,354	$	4,197	$	5,905,731

The following table presents non-performing assets:


	September 30, 2022		December 31, 2021
	(in thousands)
Non-accrual loans	$	178,204	$	143,666
Loans 90 days or more past due and still accruing(1)	14,559		8,453
Total non-performing loans	192,763		152,119
OREO (2)	5,877		1,817
Total non-performing assets	$	198,640	$	153,936

(1) Excludes PPP loans which are fully guaranteed by the federal government of $10.4 million as of September 30, 2022.

(2) Excludes $3.4 million and $6.4 million of residential mortgage properties for which formal foreclosure proceedings were in process as of September 30, 2022 and December 31, 2021, respectively.

The following tables present the aging of the amortized cost basis of loans, by class segment:


	30-59		60-89		≥ 90 Days
	Days Past		Days Past		Past Due		Non-
	Due		Due		and Accruing		Accrual		Current		Total
	(in thousands)
September 30, 2022
Real estate – commercial mortgage	$	9,428	$	1,884	$	1,577	$	94,704	$	7,446,916	$	7,554,509
Commercial and industrial(1)	4,705		228		27		29,804		4,208,628		4,243,392
Real estate – residential mortgage	45,625		9,825		10,133		31,464		4,477,181		4,574,228
Real estate – home equity	4,976		815		2,087		7,093		1,095,132		1,110,103
Real estate – construction	17,181		2,106		—		1,456		1,252,354		1,273,097
Consumer	6,308		1,384		735		101		625,138		633,666
Equipment lease financing and other	70		—		—		13,582		292,552		306,204
Total	$	88,293	$	16,242	$	14,559	$	178,204	$	19,397,901	$	19,695,199

(1) Delinquent PPP loans 30-59 days past due and 60-89 days past due of $2.2 million and $3.4 million, respectively, which are fully guaranteed by the federal government, are classified as current.


	30-59 Days Past Due		60-89 Days Past Due		≥ 90 Days Past Due and Accruing		Non- accrual		Current		Total
	(in thousands)
December 31, 2021
Real estate – commercial mortgage	$	1,089	$	1,750	$	1,229	$	52,815	$	7,222,197	$	7,279,080
Commercial and industrial	5,457		1,932		488		30,141		4,170,309		4,208,327
Real estate – residential mortgage	22,957		2,920		4,130		35,269		3,781,474		3,846,750
Real estate – home equity	4,369		1,154		2,253		8,671		1,101,801		1,118,248
Real estate – construction	1,318		—		—		901		1,137,560		1,139,779
Consumer	3,561		876		353		229		459,638		464,657
Equipment lease financing and other	226		27		—		15,640		252,616		268,509
Total	$	38,977	$	8,659	$	8,453	$	143,666	$	18,125,595	$	18,325,350

Collateral-Dependent Loans

A loan is considered to be collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans 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

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.

The following table presents TDRs, by class segment:


	September 30, 2022		December 31, 2021
	(in thousands)
Real estate - commercial mortgage	$	3,448	$	3,464
Commercial and industrial	1,837		1,857
Real estate - residential mortgage	12,101		11,948
Real estate - home equity	11,719		12,218

Consumer	2		5

Total accruing TDRs	29,107		29,492
Non-accrual TDRs (1)	40,401		55,945
Total TDRs	$	69,508	$	85,437

(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, 2022 and 2021:


	Three months ended September 30						Nine months ended September 30
	2022			2021			2022			2021
	Number of Loans	Post-Modification Recorded Investment		Number of Loans	Post-Modification Recorded Investment		Number of Loans	Post-Modification Recorded Investment		Number of Loans	Post-Modification Recorded Investment
	(dollars in thousands)
Commercial and industrial	—	$	—	5	$	852	1	$	82	9	$	2,745
Real estate - commercial mortgage	—	—		4	9,129		1	150		9	16,020
Real estate - residential mortgage	—	—		5	1,703		5	293		42	12,431

Real estate - home equity	—	—		6	123		5	329		22	870
Real estate - construction	—	—		—	—		—	—		1	154
Consumer	4	155		—	—		6	354		—	—
Total	4	$	155	20	$	11,807	18	$	1,208	83	$	32,220

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. As of September 30, 2022, $9.0 million in recorded investment remains in active COVID-19 deferral programs.

NOTE 6 – Mortgage Servicing Rights

The following table summarizes the changes in MSRs, which are included in other assets on the consolidated balance sheets, with adjustments to the carrying value included in mortgage banking income on the consolidated statements of income:


	Three months ended September 30				Nine months ended September 30
	2022		2021		2022		2021
	(in thousands)
Amortized cost:
Balance at beginning of period	$	35,249	$	36,062	$	35,993	$	38,745
Originations of MSRs	1,051		2,637		3,459		6,905
Amortization	(1,360)		(2,661)		(4,512)		(9,612)
Balance at end of period	$	34,940	$	36,038	$	34,940	$	36,038

Valuation allowance:
Balance at beginning of period	$	—	$	(6,600)	$	(600)	$	(10,500)
Reduction (addition) to valuation allowance	—		3,500		600		7,400
Balance at end of period	$	—	$	(3,100)	$	—	$	(3,100)

Net MSRs at end of period	$	34,940	$	32,938	$	34,940	$	32,938
Estimated fair value of MSRs at end of period	$	51,072	$	32,938	$	51,072	$	32,938

MSRs represent the economic value of contractual rights to service mortgage loans that have been sold. The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $4.2 billion and $4.3 billion as of September 30, 2022 and December 31, 2021, respectively. Actual and expected prepayments of the underlying mortgage loans can impact the fair values of the MSRs. The Corporation accounts for MSRs at the lower of amortized cost or fair value.

The fair value of MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The fair values of MSRs were $51.1 million and $35.4 million at September 30, 2022 and December 30, 2021, respectively. Based on its fair value analysis as of September 30, 2022, the Corporation determined that no valuation allowance was required as of September 30, 2022.

NOTE 7 – Derivative Financial Instruments

The Corporation manages its exposure to certain interest rate and foreign currency risks through the use of derivatives. Certain of the Corporation's outstanding derivative contracts are designated as hedges, and none are entered into for speculative purposes. The Corporation does enter into derivative contracts that are intended to economically hedge certain of its risks, even if hedge accounting does not apply or the Corporation elects not to apply hedge accounting.

Mortgage Banking Derivatives

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

Interest Rate Swaps - Non-Designated Hedges

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. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

The Corporation's existing credit derivatives result from participation in interest rate swaps provided by external lenders as part of loan participation arrangements and, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain lenders which participate in loans.

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.

Cash Flow Hedges of Interest Rate Risk

The Corporation's objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Corporation primarily uses interest rate swaps as part of its interest rate risk management strategy. During 2021, the Corporation entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Corporation making floating-rate payments over the life of the agreements without exchange of the underlying notional amount.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Corporation's variable-rate liabilities. During the next twelve months, the Corporation estimates that an additional $33.2 million will be reclassified as a decrease to interest income.

Foreign Exchange Contracts

The Corporation enters into foreign exchange contracts to accommodate the needs of its customers. Foreign exchange contracts are commitments to buy or sell foreign currency on a specific date at a contractual price. The Corporation limits its foreign exchange exposure with customers by entering into contracts with institutional counterparties to mitigate its foreign exchange risk. The Corporation also holds certain amounts of foreign currency in 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, 2022				December 31, 2021
	Notional Amount		Asset (Liability) Fair Value		Notional Amount		Asset (Liability) Fair Value
	(in thousands)
Interest Rate Locks with Customers
Positive fair values	$	73,375	$	127	$	261,428	$	2,326
Negative fair values	32,398		(736)		2,549		(23)

Forward Commitments
Positive fair values	75,000		2,646		51,000		41
Negative fair values	—		—		—		—

Interest Rate Swaps with Customers
Positive fair values	—		—		3,213,924		153,752
Negative fair values	3,980,850		(303,249)		752,462		(4,766)

Interest Rate Swaps with Dealer Counterparties
Positive fair values	3,980,850		176,276		752,462		4,766
Negative fair values	—		—		3,213,924		(79,889)

Interest Rate Swaps used in Cash Flow Hedges
Positive fair values	—		—		500,000		60
Negative fair values	1,000,000		(10,453)		500,000		(1,432)
Foreign Exchange Contracts with Customers
Positive fair values	12,965		941		7,629		229
Negative fair values	2,810		(75)		3,388		(51)

Foreign Exchange Contracts with Correspondent Banks
Positive fair values	3,212		86		3,656		69
Negative fair values	13,372		(931)		9,364		(240)

The following table presents the effect of fair value and cash flow hedge accounting on AOCI:


	Amount of Gain (Loss) Recognized in OCI on Derivative		Amount of Gain (Loss) Recognized in OCI Included Component		Amount of Gain (Loss) Recognized in OCI Excluded Component		Location of Gain (Loss) Recognized from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income		Amount of Gain (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain (Loss) Reclassified from AOCI into Income Excluded Component
	(in thousands)
Derivatives in Cash Flow Hedging Relationships:
Three months ended September 30, 2022
Interest Rate Products	$	(29,053)	$	(29,053)	$	—	Interest income	$	(3,210)	$	(3,210)	$	—
Three months ended September 30, 2021
Interest Rate Products	(280)		(280)		—		Interest income	873		873		—
Nine months ended September 30, 2022
Interest Rate Products	(80,716)		(80,716)		—		Interest income	(828)		(828)		—
Nine months ended September 30, 2021
Interest Rate Products	1,215		1,215		—		Interest Income	1,894		1,894		—

The following table presents the effect of fair value and cash flow hedge accounting on the income statement:




	Consolidated Statements of Income Classification
	Interest Income
	Three months ended September 30				Nine months ended September 30
	2022		2021		2022		2021
	(in thousands)
Total amounts of income line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded	$	(3,210)	$	873	$	(828)	$	1,894


Interest contracts:
Amount of gain reclassified from AOCI into income	(3,210)		873		(828)		1,894
Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring	—		—		—		—
Amount of Gain Reclassified from AOCI into Income - Included Component	(3,210)		873		(828)		1,894
Amount of Gain or (Loss) Reclassified from AOCI into Income - Excluded Component	—		—		—		—

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


	Consolidated Statements of Income Classification	Three months ended September 30				Nine months ended September 30
		2022		2021		2022		2021
		(in thousands)
Mortgage banking derivatives (1)	Mortgage banking income	$	1,403	$	228	$	(307)	$	(2,134)

Interest rate swaps	Other expense	—		1,069		—		861

Foreign exchange contracts	Other income	(27)		(17)		14		(21)

Net fair value gains/(losses) on derivative financial instruments		$	1,376	$	1,280	$	(293)	$	(1,294)

(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, 2022		December 31, 2021
	(in thousands)
Amortized cost (1)	$	14,813	$	35,050
Fair value	14,411		35,768

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

Losses related to changes in fair values of mortgage loans held for sale were $0.5 million for the three months ended September 30, 2022 compared to losses of $0.2 million for the three months ended September 30, 2021. Losses related to changes in fair values of mortgage loans held for sale were $1.1 million and $2.5 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Balance Sheet Offsetting

The fair values of interest rate swap agreements and foreign exchange contracts the Corporation enters into with customers and dealer counterparties may be eligible for offset on the consolidated balance sheets if they are subject to master netting arrangements or similar agreements. The Corporation has elected to net its financial assets and liabilities designated as cash

flow hedges when offsetting is permitted. The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the consolidated balance sheets:


	Gross Amounts		Gross Amounts Not Offset
	Recognized		on the Consolidated
	on the		Balance Sheets
	Consolidated		Financial		Cash		Net
	Balance Sheets		Instruments(1)		Collateral (2)		Amount
	(in thousands)
September 30, 2022
Interest rate swap derivative assets	$	176,276	$	(10,453)	$	—	$	165,823

Foreign exchange derivative assets with correspondent banks	86		(86)		—		—
Total	$	176,362	$	(10,539)	$	—	$	165,823

Interest rate swap derivative liabilities	$	313,702	$	—	$	(144,847)	$	168,855

Foreign exchange derivative liabilities with correspondent banks	931		(86)		—		845
Total	$	314,633	$	(86)	$	(144,847)	$	169,700

December 31, 2021
Interest rate swap derivative assets	$	158,578	$	(8,028)	$	—	$	150,550
Foreign exchange derivative assets with correspondent banks	69		(69)		—		—
Total	$	158,647	$	(8,097)	$	—	$	150,550

Interest rate swap derivative liabilities	$	86,087	$	(6,656)	$	(74,359)	$	5,072
Foreign exchange derivative liabilities with correspondent banks	240		(69)		—		171
Total	$	86,327	$	(6,725)	$	(74,359)	$	5,243

(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 8 – Accumulated Other Comprehensive (Loss) Income

The following table presents the components of other comprehensive (loss) income:


	Before-Tax Amount		Tax Effect		Net of Tax Amount
Three months ended September 30, 2022	(in thousands)
Unrealized loss on securities	$	(155,758)	$	35,373	$	(120,385)

Reclassification adjustment for securities gains included in net income (1)	(53)		12		(41)
Amortization of net unrealized losses on AFS securities transferred to HTM (2)	2,139		(486)		1,653
Net unrealized holding loss arising during the period on interest rate swaps used in cash flow hedges	(29,053)		6,581		(22,472)
Reclassification adjustment for net loss realized in net income on interest rate swaps used in cash flow hedges	3,210		(727)		2,483
Amortization of net unrecognized pension and postretirement items (3)	33		(8)		25
Total Other Comprehensive Loss	$	(179,482)	$	40,745	$	(138,737)
Three months ended September 30, 2021
Unrealized loss on securities	$	(27,975)	$	6,353	$	(21,622)


Amortization of net unrealized gains on AFS securities transferred to HTM (2)	824		(187)		637
Net unrealized holding gain arising during the period on interest rate swaps used in cash flow hedges	(280)		64		(216)

Reclassification adjustment for net loss realized in net income on interest rate swaps used in cash flow hedges	(873)		198		(675)
Amortization of net unrecognized pension and postretirement items (3)	370		(80)		290
Total Other Comprehensive Loss	$	(27,934)	$	6,348	$	(21,586)

Nine months ended September 30, 2022
Unrealized loss on securities	$	(469,137)	$	106,541	$	(362,596)

Reclassification adjustment for securities loss included in net income (1)	(26)		6		(20)
Amortization of net unrealized losses on AFS securities transferred to HTM (2)	(59,547)		13,523		(46,024)

Net unrealized loss on interest rate swaps used in cash flow hedges	(80,716)		18,282		(62,434)
Reclassification adjustment for net loss realized in net income on interest rate swaps used in cash flow hedges	828		(187)		641
Amortization of net unrecognized pension and postretirement items (3)	96		(21)		75
Total Other Comprehensive Loss	$	(608,502)	$	138,144	$	(470,358)

Nine months ended September 30, 2021
Unrealized loss on securities	$	(20,796)	$	4,723	$	(16,073)
Reclassification adjustment for securities gains included in net income (1)	(33,511)		7,610		(25,901)
Amortization of net unrealized losses on AFS securities transferred to HTM (2)	2,787		(633)		2,154

Net unrealized gain on interest rate swaps used in cash flow hedges	1,215		(277)		938
Reclassification adjustment for net loss realized in net income on interest rate swaps used in cash flow hedges	(1,894)		432		(1,462)

Amortization of net unrecognized pension and postretirement items (3)	1,111		(243)		868
Total Other Comprehensive Loss	$	(51,088)	$	11,612	$	(39,476)

(1) Amounts reclassified out of AOCI. Before-tax amounts included in "Investment securities gains, net" on the Consolidated Statements of Income. See Note 4, "Investment Securities," for additional details.

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

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

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


	Unrealized Gains (Losses) on Investment Securities		Net Unrealized (Loss) Gain on Interest Rate Swaps used in Cash Flow Hedges		Unrecognized Pension and Postretirement Plan Income (Costs)		Total
	(in thousands)
Three months ended September 30, 2022
Balance at June 30, 2022	$	(249,427)	$	(46,620)	$	(8,163)	$	(304,210)
OCI before reclassifications	(120,385)		—		—		(120,385)
Amounts reclassified from AOCI	(41)		(19,989)		25		(20,005)
Amortization of net unrealized losses on AFS securities transferred to HTM	1,653		—		—		1,653

Balance at September 30, 2022	$	(368,200)	$	(66,609)	$	(8,138)	$	(442,947)
Three months ended September 30, 2021
Balance at June 30, 2021	$	62,769	$	367	$	(15,935)	$	47,201
OCI before reclassifications	(21,622)		—		—		(21,622)
Amounts reclassified from AOCI	—		(891)		290		(601)
Amortization of net unrealized losses on AFS securities transferred to HTM	637		—		—		637

Balance at September 30, 2021	$	41,784	$	(524)	$	(15,645)	$	25,615

Nine months ended September 30, 2022
Balance at December 31, 2021	$	40,440	$	(4,816)	$	(8,213)	$	27,411
OCI before reclassifications	(362,596)		—		—		(362,596)
Amounts reclassified from AOCI	(20)		(61,793)		75		(61,738)
Amortization of net unrealized losses on AFS securities transferred to HTM	(46,024)		—		—		(46,024)

Balance at September 30, 2022	$	(368,200)	$	(66,609)	$	(8,138)	$	(442,947)
Nine months ended September 30, 2021
Balance at December 31, 2020	$	81,604	$	—	$	(16,513)	$	65,091
OCI before reclassifications	(16,073)		—		—		(16,073)
Amounts reclassified from AOCI	(25,901)		(524)		868		(25,557)
Amortization of net unrealized losses on AFS securities transferred to HTM	2,154		—		—		2,154

Balance at September 30, 2021	$	41,784	$	(524)	$	(15,645)	$	25,615

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, 2022
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	14,411	$	—	$	14,411
Available for sale investment securities:
Equity securities	—		—		—		—
U.S. Government securities	218,184		—		—		218,184
U.S. Government-sponsored agency securities	—		1,006		—		1,006
State and municipal securities	—		1,038,185		—		1,038,185
Corporate debt securities	—		399,615		—		399,615
Collateralized mortgage obligations	—		142,401		—		142,401
Residential mortgage-backed securities	—		214,252		—		214,252
Commercial mortgage-backed securities	—		583,741		—		583,741

Total available for sale investment securities	218,184		2,379,200		—		2,597,384
Other assets:
Investments held in Rabbi Trust	22,933		—		—		22,933
Derivative assets	1,027		179,049		—		180,076
Total assets	$	242,144	$	2,572,660	$	—	$	2,814,804
Other liabilities:
Deferred compensation liabilities	$	22,933	$	—	$	—	$	22,933
Derivative liabilities	1,006		314,438		—		315,444
Total liabilities	$	23,939	$	314,438	$	—	$	338,377


	December 31, 2021
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	35,768	$	—	$	35,768
Available for sale investment securities:

U.S. Government securities	127,618		—		—		127,618

State and municipal securities	—		1,188,670		—		1,188,670
Corporate debt securities	—		386,133		—		386,133
Collateralized mortgage obligations	—		209,359		—		209,359
Residential mortgage-backed securities	—		229,795		—		229,795
Commercial mortgage-backed securities	—		971,148		—		971,148
Auction rate securities	—		—		74,667		74,667
Total available for sale investment securities	127,618		2,985,105		74,667		3,187,390
Other assets:
Investments held in Rabbi Trust	28,619		—		—		28,619
Derivative assets	298		160,945		—		161,243
Total assets	$	156,535	$	3,181,818	$	74,667	$	3,413,020
Other liabilities:
Deferred compensation liabilities	$	28,619	$	—	$	—	$	28,619
Derivative liabilities	291		86,110		—		86,401
Total liabilities	$	28,910	$	86,110	$	—	$	115,020

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, 2022 and December 31, 2021 were based on the price that secondary market investors were offering for loans with similar characteristics.

Available for sale investment securities – Included in this asset category are debt securities. Level 2 investment securities are valued by a third-party pricing service. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings and matrix pricing.

Standard market inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, including market research publications. For certain security types, additional inputs may be used, or some of the standard market inputs may not be applicable.

•U.S. Government securities – These securities are classified as Level 1. Fair values are based on quoted prices with active markets.

•State and municipal securities/Collateralized mortgage obligations/Residential mortgage-backed securities/Commercial mortgage-backed securities – These debt securities are classified as Level 2. Fair values are determined by a third-party pricing service, as detailed above.

•Corporate debt securities – This category consists of subordinated debt and senior debt issued by financial institutions ($396.9 million at September 30, 2022 and $383.4 million at December 31, 2021) and other corporate debt issued by non-financial institutions ($2.8 million at September 30, 2022 and December 31, 2021).

•Level 2 investments include subordinated debt and senior debt, and other corporate debt issued by non-financial institutions at September 30, 2022 and December 31, 2021. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.

•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. In the first quarter of 2022, the Corporation sold all of its investment in ARCs.

Investments held in Rabbi Trust – This category consists of mutual funds that are held in trust for employee deferred compensation plans that the Corporation has elected to measure at fair value. Shares of mutual funds are valued based on net asset value, which represent quoted market prices for the underlying shares held in the mutual funds, and as such, are classified as Level 1.

Derivative assets – Fair value of foreign currency exchange contracts are classified as Level 1 assets ($1.0 million at September 30, 2022 and $0.3 million at December 31, 2021). 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 ($2.8 million at September 30, 2022 and $2.4 million at December 31, 2021) and the fair value of interest rate swaps ($176.3 million at September 30, 2022 and $158.6 million at December 31, 2021). The fair values of the 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 7 - Derivative Financial Instruments," for additional information.

Deferred compensation liabilities – Fair value of amounts due to employees under deferred compensation plans, classified as Level 1 liabilities and are included in other liabilities on the consolidated balance sheets. The fair values of these liabilities are determined in the same manner as the related assets, as described under the heading "Investments held in Rabbi Trust" above.

Derivative liabilities – Level 1 liabilities, representing the fair value of foreign currency exchange contracts ($1.0 million at September 30, 2022 and $0.3 million at December 31, 2021).

Level 2 liabilities, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($0.7 million at September 30, 2022 and $0.0 million at December 31, 2021) and the fair value of interest rate swaps ($313.7 million at September 30, 2022 and $86.1 million at December 31, 2021).

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):


		ARCs
Three months ended September 30, 2022	(in thousands)
Balance at June 30, 2022		$	—
Sales		—
Unrealized adjustment to fair value (1)		—

Balance at September 30, 2022		$	—

Three months ended September 30, 2021
Balance at June 30, 2021		$	74,834

Unrealized adjustment to fair value (1)		299

Balance at September 30, 2021		$	75,133

Nine months ended September 30, 2022
Balance at December 31, 2021		$	74,667
Sales		(74,823)
Unrealized adjustment to fair value (1)		156

Balance at September 30, 2022		$	—

Nine months ended September 30, 2021
Balance at December 31, 2020		$	98,206
Sales		(24,619)
Unrealized adjustment to fair value (1)		1,546

Balance at September 30, 2021		$	75,133

(1) 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 "AFS at estimated fair value" on the consolidated balance sheets.

Certain financial instruments are not measured at fair value on an ongoing basis, but are subject to fair value measurement in certain circumstances, such as upon their acquisition or when there is evidence of impairment. The following table presents Level 3 financial assets measured at fair value on a nonrecurring basis:


	September 30, 2022		December 31, 2021
	(in thousands)
Loans, net	$	140,763	$	118,458
OREO	5,877		1,817
MSRs (1)	51,072		35,393
Total assets	$	197,712	$	155,668

(1) Amounts shown are estimated fair value. MSRs are recorded on the Corporation's consolidated balance sheets at the lower of amortized cost or fair value. See "Note 6 - Mortgage Servicing Rights" for additional information.

The valuation techniques used to measure fair value for the items in the table above are as follows:

•Loans, net – This category consists of loans that were individually evaluated for impairment and have been classified as Level 3 assets. The amount shown is the balance of non-accrual loans, net of related ACL. See "Note 5 - Loans and Allowance for Credit Losses," for additional details.

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

•MSRs - This category consists of MSRs, which were initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors, and subsequently carried at the lower of amortized cost or fair value. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified by product type and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the September 30, 2022 valuation were 7.8% and 9.0%, respectively. Management reviews the reasonableness of the significant inputs to the third-party valuation in comparison to market data. See "Note 6 - Mortgage Servicing Rights," for additional information.

The following tables detail the book values and the estimated fair values of the Corporation's financial instruments as of September 30, 2022 and December 31, 2021.


	September 30, 2022
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	528,715	$	528,715	$	—	$	—	$	528,715
FRB and FHLB stock	81,914		—		81,914		—		81,914

Loans held for sale	14,411		—		14,411		—		14,411
AFS securities	2,597,384		218,184		2,379,200		—		2,597,384
HTM securities	1,339,310		—		1,141,710		—		1,141,710
Loans, net	19,428,361		—		—		18,817,452		18,817,452
Accrued interest receivable	72,821		72,821		—		—		72,821
Other assets	653,358		417,360		179,049		56,949		653,358
FINANCIAL LIABILITIES
Demand and savings deposits	$	19,612,499	$	19,612,499	$	—	$	—	$	19,612,499
Brokered deposits	226,883		206,883		26,216		—		233,099
Time deposits	1,537,172		—		1,521,484		—		1,521,484
Accrued interest payable	5,739		5,739		—		—		5,739
Federal funds purchased	136,000		136,000		—		—		136,000
Federal Home Loan Bank advances	265,500		265,500		—		—		265,500
Senior debt and subordinated debt	539,461		—		455,833		—		455,833
Other borrowings	483,720		482,449		1,263		—		483,712

Other liabilities	500,827		170,315		314,438		16,074		500,827


	December 31, 2021
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	1,638,614	$	1,638,614	$	—	$	—	$	1,638,614
FRB and FHLB stock	57,635		—		57,635		—		57,635
Loans held for sale	35,768		—		35,768		—		35,768
AFS securities	3,187,390		127,618		2,985,105		74,667		3,187,390
HTM securities	980,384		—		965,867		—		965,867
Loans, net	18,076,349		—		—		17,519,497		17,519,497
Accrued interest receivable	57,451		57,451		—		—		57,451
Other assets	565,491		367,336		160,945		37,210		565,491
FINANCIAL LIABILITIES
Demand and savings deposits	$	19,594,497	$	19,594,497	$	—	$	—	$	19,594,497
Brokered deposits	251,526		231,526		20,603		—		252,129
Time deposits	1,727,476		—		1,730,673		—		1,730,673
Accrued interest payable	7,000		7,000		—		—		7,000


Senior debt and subordinated debt	620,406		—		604,780		—		604,780
Other borrowings	417,703		416,764		939		—		417,703
Other liabilities	288,862		188,219		86,110		14,533		288,862

Fair values of financial instruments are significantly affected by the assumptions used, principally the timing of future cash flows and discount rates. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation.

For short-term financial instruments, defined as those with remaining maturities of 90 days or less, and excluding those recorded at fair value on the Corporation's consolidated balance sheets, book value was considered to be a reasonable estimate of fair value.

The following instruments are predominantly short-term:


Assets						Liabilities
Cash and cash equivalents						Demand and savings deposits
Accrued interest receivable						Other borrowings
						Accrued interest payable

FRB and FHLB stock represent restricted investments and are carried at cost on the consolidated balance sheets, which is a reasonable estimate of fair value.

As of September 30, 2022, fair values for loans and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans also include estimated credit losses that would be assumed in a market transaction, which represents estimated exit prices.

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

NOTE 10 – Net Income Per Share

Basic net income per share is calculated as net income available to common shareholders divided by the weighted average number of shares outstanding.

Diluted net income per share is calculated as net income available to common shareholders divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation's common stock equivalents consist of outstanding stock options, restricted stock, RSUs, and PSUs. PSUs are required to be included in weighted average diluted shares outstanding if performance measures, as defined in each PSU award agreement, are met as of the end of the period.

A reconciliation of weighted average shares outstanding used to calculate basic and diluted net income per share follows (in thousands, except per share data):


	Three months ended September 30				Nine months ended September 30
	2022		2021		2022		2021
Weighted average shares outstanding (basic)	167,353		162,506		162,979		162,577
Impact of common stock equivalents	1,428		950		1,275		1,057
Weighted average shares outstanding (diluted)	168,781		163,456		164,254		163,634
Per share:
Basic	$	0.41	$	0.45	$	1.21	$	1.27
Diluted	0.40		0.45		1.20		1.26

NOTE 11 – Stock-Based Compensation

The Corporation grants equity awards to employees in the form of stock options, restricted stock, RSUs or PSUs under its Employee Equity Plan. In addition, employees may purchase stock under the Corporation's Employee Stock Purchase Plan. The fair value of equity awards granted to employees is recognized as compensation expense over the period during which employees are required to provide service in exchange for such awards. Compensation expense for PSUs is also recognized over the period during which employees are required to provide service in exchange for such awards, however, compensation expense may vary based on the expectations for actual performance relative to defined performance measures.

The Corporation also grants equity awards to non-employee members of its board of directors and the subsidiary bank board of directors under the 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.

Upon approval at the Annual Meeting, the Employee Equity Plan was amended and restated. Subject to adjustments provided for in the Employee Equity Plan, the total number of equity awards that may be awarded under the Employee Equity Plan was reduced to 5,806,000 shares as of the date of the Annual Meeting.

As of September 30, 2022, the Employee Equity Plan had approximately 5.0 million shares reserved for future grants through 2032, and the Directors’ Plan had approximately 49,000 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
	2022		2021		2022		2021
	(in thousands)
Compensation expense	$	3,791	$	2,192	$	10,377	$	6,192
Tax benefit	(840)		(481)		(2,201)		(1,352)
Total stock-based compensation, net of tax	$	2,951	$	1,711	$	8,176	$	4,840

NOTE 12 – Employee Benefit Plans

The net periodic pension cost for the Corporation's Pension Plan consisted of the following components:


	Three months ended September 30				Nine months ended September 30
	2022		2021		2022		2021
	(in thousands)

Interest cost	$	599	$	561	$	1,795	$	1,683
Expected return on plan assets	(1,098)		(1,011)		(3,295)		(3,033)
Net amortization and deferral	163		504		490		1,513
Net periodic pension cost	$	(336)	$	54	$	(1,010)	$	163

The components of the net benefit for the Corporation's Postretirement Plan consisted of the following components:


	Three months ended September 30				Nine months ended September 30
	2022		2021		2022		2021
	(in thousands)
Interest cost	$	8	$	8	$	25	$	24

Net accretion and deferral	(132)		(134)		(394)		(402)
Net periodic benefit	$	(124)	$	(126)	$	(369)	$	(378)

In connection with the Merger, the Corporation assumed the obligations of Prudential Bancorp under a multiemployer defined benefit pension plan that had previously been closed to new Prudential Bancorp participants.

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

NOTE 13 – Commitments and Contingencies

Commitments

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer or obligor. Since some of the commitments are expected to expire without being drawn upon, the total commitments to extend credit do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral, if any, obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. Commercial letters of credit are conditional commitments issued to facilitate foreign and domestic trade transactions for customers. The credit risk involved in issuing letters of credit is similar to that involved in extending loan facilities. These obligations are underwritten consistent with commercial lending standards. The maximum exposure to loss for standby and commercial letters of credit is equal to the contractual (or notional) amount of the instruments.

The 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. As of September 30, 2022 and December 31, 2021, the ACL - OBS credit exposures for unfunded lending commitments was $11.0 million and $9.1 million, respectively. See "Note 5 - Loans and Allowance for Credit Losses," for additional details.

The following table presents the Corporation's commitments to extend credit and letters of credit:


	September 30, 2022		December 31, 2021
	(in thousands)
Commitments to extend credit	$	8,552,736	$	8,731,168
Standby letters of credit	267,247		298,275
Commercial letters of credit	51,852		54,196

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, 2022 and December 31, 2021, the total reserve for losses on residential mortgage loans sold was $1.3 million and $1.1 million, respectively, including reserves for both representation and warranty and credit loss exposures. In addition, a component of ACL - OBS credit exposures of $6.3 million and $3.8 million, as of September 30, 2022 and December 31, 2021, respectively, related to additional credit exposures for potential loan repurchases.

Legal Proceedings

The Corporation is involved in various pending and threatened claims and other legal proceedings in the ordinary course of its business activities. The Corporation evaluates the possible impact of these matters, taking into consideration the most recent information available. A loss reserve is established for those matters for which the Corporation believes a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual losses with respect to any such matter may be more or less than the amount estimated by the Corporation. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated by the Corporation, no loss reserve is established.

In addition, from time to time, the Corporation is involved in investigations or other forms of regulatory or governmental inquiry covering a range of possible issues and, in some cases, these may be part of similar reviews of the specified activities of other companies. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving the Corporation, and could result in fines, penalties, restitution, other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices. The Corporation's practice is to cooperate fully with regulatory and governmental inquiries and investigations.

As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, that may result from the final outcomes of pending legal proceedings, or regulatory or governmental inquiries or investigations, will not have a material adverse effect on the financial condition of the Corporation. However, legal proceedings, inquiries and investigations are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation's results of operations in any future period, depending, in part, upon the size of the loss or liability imposed and the

operating results for the period, and could have a material adverse effect on the Corporation's business. In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause the Corporation to incur additional expenses, which could be significant, and possibly material, to the Corporation's results of operations in any future period.

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. The Corporation and counsel representing plaintiffs ("Plaintiffs' Counsel") reached and executed a formal Settlement Agreement to resolve this lawsuit. Plaintiffs' Counsel filed a Motion for Preliminary Approval of Class and Collective Settlement and Provisional Certification of Settlement Class and Collective ("the Motion") with the U.S. District Court for the District of New Jersey ("the Court"). On June 30, 2022, the Court granted the Motion and scheduled a hearing for final approval of the Settlement Agreement and matters related thereto for November 2, 2022. On November 2, 2022, the Court granted final approval of the Settlement Agreement and matters related thereto and dismissed the lawsuit with prejudice. The financial terms of the Settlement Agreement are not material to the Corporation. The Corporation established an accrued liability during the third quarter of 2020 for the costs expected to be incurred in connection with the Settlement Agreement. The accrued liability is included in "other liabilities" on the consolidated balance sheets.

NOTE 14 – Borrowings

On March 16, 2022, $65.0 million of senior notes with a fixed rate of 3.60% were repaid upon their maturity.

On March 30, 2021, pursuant to a cash tender offer, the Corporation purchased $75.0 million and $60.0 million of its subordinated notes which are scheduled to mature on November 15, 2024 and its senior notes which matured on March 16, 2022, respectively. The Corporation incurred $11.3 million in debt extinguishment costs and expensed $0.8 million of unamortized discount costs. In addition, during the first quarter of 2021, the Corporation prepaid $536.0 million of FHLB advances and incurred $20.9 million in prepayment penalties.

In connection with the Merger, the Corporation assumed $253.5 million of Prudential Bancorp FHLB advances.

The Corporation owned all of the common securities of three unconsolidated subsidiary trusts that issued TruPS in conjunction with the Corporation issuing junior subordinated deferrable interest debentures to the trusts. In September 2022, the Corporation redeemed all of the outstanding junior subordinated deferrable interest debentures issued to the trusts, totaling approximately $17.0 million, and the trusts redeemed all of the outstanding TruPS in a like amount, after which the subsidiary trusts were terminated.

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

This Management Discussion relates to the Corporation, a financial holding company registered under the BHCA and incorporated under the laws of the Commonwealth of Pennsylvania, 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, the statements are based on current beliefs, expectations and assumptions regarding the future of the Corporation's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Corporation's control, and actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not unduly rely on any of these forward-looking statements. Any forward-looking statement is based only on information currently available and speaks only as of the date when made. 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 portfolio and demand for the Corporation's products and services;

◦the scope and duration of the COVID-19 pandemic and the direct and indirect impacts of the pandemic on the Corporation, its customers and third parties;

◦the determination of the ACL, which depends significantly upon assumptions and judgments with respect to a variety of factors, including the performance of the loan portfolio, the weighted-average remaining lives of different classifications of loans within the loan portfolio and current and forecasted economic conditions, among other factors;

◦increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge-off loans 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 replacement 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 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, 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 potential effects of climate change on the Corporation's business and results of operations;

◦the effects of concerns relating to the Corporation's ESG posture, including potential adverse impacts on the Corporation's reputation and the market value of its securities;

◦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;

◦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 adequately and promptly address cybersecurity 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;

◦the effects of any downgrade in the Corporation or Fulton Bank's credit ratings on each of their borrowing costs or access to capital markets;

◦the possibility that the anticipated benefits of the Merger, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or challenges arising from, the integration of Prudential Bancorp into the Corporation or as a result of the strength of the economy, competitive factors in the areas where the Corporation and Prudential Bancorp do business, or as a result of other unexpected factors or events;

◦potential adverse reactions or changes to business or employee relationships, including those resulting from the Merger;

◦unanticipated challenges or delays in the integration of Prudential Bancorp’s business into the Corporation's business and or the conversion of Prudential Bancorp’s operating systems and customer data onto the Corporation's may significantly increase the expense associated with the Merger; and

◦other factors that may affect future results of the Corporation.

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, 2021, Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, and elsewhere in this report, including in Note 13 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements.

OVERVIEW

The Corporation is a financial holding company, which, through its wholly-owned banking subsidiaries, provides a full range of retail and commercial financial services primarily in Pennsylvania, Delaware, Maryland, New Jersey and Virginia.

The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the 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 and properties. Offsetting these revenue sources are provisions for credit losses on loans and OBS credit risks, non-interest expenses and income taxes.

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


	Three months ended September 30						Nine months ended September 30
	2022			2021			2022			2021

	(dollars in thousands, except per share and percentages)
Net income (in thousands)	$	70,871		$	75,583		$	205,148		$	213,611
Net income available to common shareholders (in thousands)	$	68,309		$	73,021		$	197,462		$	205,896
Diluted net income available to common shareholders per share	$	0.40		$	0.45		$	1.20		$	1.26
Diluted operating net income available to common shareholders per share, annualized(1)	$	0.48		$	0.45		$	1.28		$	1.26
Return on average assets, annualized	1.07		%	1.13		%	1.06		%	1.09		%
Operating return on average assets, annualized(1)	1.25		%	1.13		%	1.13		%	1.09		%
Return on average common shareholders' equity, annualized	11.24		%	11.45		%	10.93		%	10.28		%

Return on average common shareholders' equity (tangible), annualized(1)	17.31		%	14.56		%	15.11		%	14.16		%
Net interest margin(2)	3.54		%	2.82		%	3.13		%	2.78		%
Efficiency ratio(1)	57.8		%	60.3		%	61.4		%	62.3		%
Non-performing assets to total assets	0.76		%	0.58		%	0.76		%	0.58		%
Net charge-offs (recoveries) to average loans, annualized	0.01		%	(0.05)		%	(0.05)		%	0.08		%

(1) Ratio represents a financial measure derived by methods other than GAAP. See reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures "

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

Federal Funds Rate

After maintaining the target range for the Fed Funds Rate at 0.00% to 0.25% from March 16, 2020, as the COVID-19 pandemic began to weigh on global economic activity, through March 16, 2022, the FOMC has increased the target range six times to address elevated levels of inflation, placing the target range for the Fed Funds Rate at 3.75% - 4.00% as of November 2, 2022.

Business Combinations

On July 1, 2022, the Corporation completed the acquisition of Prudential Bancorp. Prudential Bancorp was merged with and into the Corporation, and Prudential Bancorp's wholly owned subsidiary, Prudential Bank, became a wholly owned subsidiary of the Corporation. The Corporation merged Prudential Bank with and into Fulton Bank on November 5, 2022.

The total consideration paid of $119.1 million for the fair value of Prudential Bancorp's net assets acquired of $102.8 million resulted in $16.3 million of goodwill recognized as of July 1, 2022.

Merger-related expenses included in non-interest expense for the three months and nine months ended September 30, 2022, were $7.0 million and $8.4 million, respectively.

Financial Highlights

Following is a summary of the financial highlights for the three and nine months ended September 30, 2022:

•Net Income Available to Common Shareholders and Net Income Per Share - Net income available to common shareholders was $68.3 million for the three months ended September 30, 2022, a $4.7 million decrease compared to $73.0 million for the same period in 2021. Net income available to common shareholders was $197.5 million for the nine months ended September 30, 2022, a $8.4 million decrease compared to $205.9 million for the same period in 2021. Diluted net income available to common shareholders, per share was $0.40 for the three months ended September 30, 2022, a $0.05 decrease compared to the same period in 2021, and $1.20 for the nine months ended September 30, 2022, a $0.06 decrease compared to the same period in 2021.

•Net Interest Income - FTE net interest income increased $45.2 million, or 25.9%, for the three months ended September 30, 2022 compared to the same period in 2021. The increase was driven by higher interest rates, which resulted in a $44.0 million increase in interest income on average net loans, as well as a $678.9 million increase in average investment securities, which contributed $6.4 million to the increase in interest income. FTE net interest income increased $59.2 million, or 11.7%, for the nine months ended September 30, 2022 compared to the same period in 2021. The increase in net interest income was primarily from an increase in interest income of $38.8 million from average net loans and $14.4 from average investment securities.

•Net Interest Margin - Net interest margin increased 72 bps for the three months ended September 30, 2022 compared to the same period in 2021. Net interest margin increased 35 bps for the nine months ended September 30, 2022 compared to the same period in 2021. The increases in net interest margin were driven primarily by higher yields on average interest-earning assets, and funds moving to higher yielding interest-earning assets.

•Loan Growth - Average net loans increased by $1.1 billion, or 6.2%, for the three months ended September 30, 2022 compared to the same period in 2021. The increase was largely driven by increases in average residential mortgage loans, average commercial mortgage loans, average commercial and industrial loans, excluding PPP loans, average real estate construction loans and average consumer loans of $842.8 million, $432.1 million, $322.6 million, $182.7 million and $151.8 million, respectively, partially offset by a $801.4 million decline in PPP loans due to the repayment of these loans upon forgiveness by the SBA. Average net loans increased $100.6 million, or 0.5%, for the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily driven by increases in average residential mortgage loans, average commercial mortgage loans, average real estate construction loans, average commercial and industrial loans, excluding PPP loans, and average consumer loans of $734.5 million, $254.1 million, $132.8 million, $132.1 million and $78.0 million, respectively, partially offset by a $1.2 billion decline in PPP loans.

•Deposit Growth - Average deposits decreased $335.4 million, or 1.5%, for the three months ended September 30, 2022 compared to the same period in 2021. The decrease was largely due to decreases in average interest-bearing demand deposits and average time deposits of $460.8 million and $236.8 million, respectively, partially offset by growth in average savings and money market deposits and average noninterest-bearing demand deposits of $289.2 million and $96.1 million, respectively. Average deposits decreased $73.9 million, or 0.3%, for the nine months ended September 30, 2022 compared to the same period in 2021. The decrease was primarily due to decreases in average time deposits and average interest-bearing demand deposits of $368.0 million and $337.7 million, respectively, partially offset by increases in average noninterest-bearing demand deposits and average savings and money market deposits of $430.4 million and $244.5 million, respectively.

•Asset Quality - Non-performing assets increased $44.7 million, or 29.0%, as of September 30, 2022 compared to December 31, 2021, and were 0.76% and 0.60% of total assets as of those dates, respectively. For the nine months ended September 30, 2022 and 2021, annualized net charge-offs to average loans outstanding were (0.05)% and 0.08%, respectively. The provision for credit losses was $13.5 million for the nine months ended September 30, 2022, compared to a negative provision of $9.6 million for the same period of 2021. Included in the third quarter of 2022

provision for credit losses was a CECL Day 1 Provision of $8.0 million for the acquired Prudential Bancorp loan portfolio.

•Non-interest Income - For the three months ended September 30, 2022, non-interest income, excluding net investment securities gains, decreased $3.4 million, or 5.4%, compared to the same period in 2021. The decrease in non-interest income was primarily due to decreases of $5.8 million in mortgage banking income, $2.2 million in other income, primarily due to equity method investments, and $0.9 million in wealth management revenues, partially offset by increases of $4.1 million in commercial banking revenues and $1.5 million in consumer banking fees. Non-interest income, excluding net investment securities gains, decreased $3.5 million, or 2.0%, for the nine months ended September 30, 2022 compared to the same period in 2021. The decrease in non-interest income was driven by a decrease of $14.3 million in mortgage banking income, partially offset by increases of $7.0 million in commercial banking revenues and $4.0 million in consumer banking fees.

•Non-interest Expense - Non-interest expense, excluding Merger-related expenses of $7.0 million, increased $18.0 million, or 12.4%, for the three months ended September 30, 2022 compared to the same period in 2021. This increase was primarily due to increases of $11.6 million in salaries and employee benefits, $1.5 million in data processing and software expense, $1.5 million in other outside services and $1.1 million in net occupancy expense. Non-interest expense, excluding Merger-related expenses of $8.4 million, decreased $7.0 million, or 1.5%, for the nine-months ended September 30, 2022, compared to the same period in 2021. The decrease was largely driven by debt extinguishment expenses in 2021 of $32.6 million, partially offset by increases of $20.5 million in salaries and employee benefits expense, $3.0 million in data processing and software expense and $2.7 million in net occupancy expense.

•Income Taxes - Income tax expense for the three months ended September 30, 2022 was $15.4 million, a $1.1 million increase from $14.3 million from the same period in 2021. Income tax expense for the nine months ended September 30, 2022 was $44.6 million, a $4.5 million increase from the same period in 2021. The Corporation's ETR was 17.8% for the three months ended September 30, 2022 compared to 17.6% for the full-year of 2021. 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, that has been derived by methods other than GAAP. The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Corporation's industry. Management believes that these non-GAAP financial measures, in addition to GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-GAAP financial measures might not be comparable to similarly-titled measures of other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure follow:


	Three months ended September 30						Nine months ended September 30
	2022			2021			2022			2021
	(in thousands, except per share data)
Operating net income available to common shareholders
Net income available to common shareholders	$	68,309		$	73,021		$	197,462		$	205,896
Plus: Core deposit intangible amortization, net of tax	406			—			406			—
Plus: Merger-related expenses, net of tax	5,535			—			6,663			—
Plus: CECL Day 1 Provision expense, net of tax	6,283			—			6,283			—
Operating net income available to common shareholders (numerator)	$	80,533		$	73,021		$	210,814		$	205,896

Weighted average shares (diluted) (denominator)	168,781			163,456			164,254			163,634

Operating net income available to common shareholders, per share (diluted)	$	0.48		$	0.45		$	1.28		$	1.26

Operating return on average assets
Net income	$	70,871		$	75,583		$	205,148		$	213,611
Plus: Core deposit intangible amortization, net of tax	406			—			406			—
Plus: Merger-related expenses, net of tax	5,535			—			6,663			—
Plus: CECL Day 1 Provision expense, net of tax	6,283			—			6,283			—
Operating net income (numerator)	$	83,095		$	75,583		$	218,500		$	213,611

Total average assets (denominator)	$	26,357,095		$	26,440,876		$	25,855,097		$	26,181,723

Operating return on average assets, annualized	1.25		%	1.13		%	1.13		%	1.09		%














Return on average common shareholders' equity (tangible)
Net income available to common shareholders	$	68,309		$	73,021		$	197,462		$	205,896
Plus: Merger-related expenses, net of tax	5,535			—			6,663			—
Plus: CECL Day 1 Provision expense, net of tax	6,283			—			6,283			—
Plus: Intangible amortization, net of tax	545			118			824			350
Operating net income available to common shareholders (numerator)	$	80,672		$	73,139		$	211,232		$	206,246

Average shareholders' equity	$	2,604,057		$	2,722,833		$	2,607,514		$	2,676,762
Less: Average goodwill and intangible assets	(562,285)			(536,772)			(545,846)			(536,615)
Less: Average preferred stock	(192,878)			(192,878)			(192,878)			(192,878)
Average tangible common shareholders' equity (denominator)	$	1,848,894		$	1,993,183		$	1,868,790		$	1,947,269
Return on average common shareholders' equity (tangible), annualized	17.31		%	14.56		%	15.11		%	14.16		%


	Three months ended September 30						Nine months ended September 30
	2022			2021			2022			2021
	(in thousands)
Efficiency ratio
Non-interest expense	$	169,558		$	144,596		$	465,266		$	463,811
Less: Amortization of tax credit investments	(696)			(1,546)			(2,088)			(4,640)
Less: Merger-related expenses	(7,006)			—			(8,434)			—
Less: Intangible amortization	(690)			(150)			(1,043)			(443)
Less: Debt extinguishment costs	—			—			—			(32,575)
Non-interest expense (numerator)	$	161,166		$	142,900		$	453,701		$	426,153

Net interest income	$	215,582		$	171,270		$	555,723		$	498,118
Tax equivalent adjustment	3,970			3,114			10,685			9,111
Plus: Total non-interest income	59,162			62,577			172,809			209,864
Less: Investment securities (gains) losses, net	53			—			26			(33,511)
Total revenue (denominator)	$	278,767		$	236,961		$	739,243		$	683,582
Efficiency ratio	57.8		%	60.3		%	61.4		%	62.3		%

Presented on a FTE basis, using a 21% federal tax rate.

RESULTS OF OPERATIONS

Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Net Interest Income

FTE net interest income increased $45.2 million to $219.6 million for the three months ended September 30, 2022, from $174.4 million for the same period in 2021. NIM increased 72 bps, to 3.54%, compared to 2.82% for the same period in 2021. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate, and statutory interest expense disallowances. The discussion following this table is based on these taxable-equivalent amounts.


	Three months ended September 30
	2022						2021
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
ASSETS	(dollars in thousands)
Interest-earning assets:
Net loans (1)	$	19,563,825	$	207,343	4.21	%	$	18,414,153	$	163,343	3.53	%

Investment securities (2)	4,500,461		28,022		2.49		3,821,513		21,663		2.27
Loans held for sale	9,098		194		8.51		36,427		299		3.28
Other interest-earning assets	622,673		2,103		1.34		2,301,326		1,888		0.18
Total interest-earning assets	24,696,057		237,662		3.83		24,573,419		187,193		3.03
Noninterest-earning assets:
Cash and due from banks	152,349						200,315
Premises and equipment	223,880						228,861
Other assets	1,545,812						1,695,767
Less: ACL - loans (3)	(261,003)						(257,486)
Total Assets	$	26,357,095					$	26,440,876
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	5,708,059	$	1,886	0.13	%	$	6,168,908	$	814	0.05	%
Savings and money market deposits	6,681,713		3,414		0.20		6,392,537		1,054		0.07
Brokered deposits	247,105		1,346		2.16		270,168		229		0.34
Time deposits	1,615,384		3,404		0.84		1,852,223		4,428		0.95
Total interest-bearing deposits	14,252,261		10,050		0.28		14,683,836		6,525		0.18


Borrowings	1,359,348		8,060		2.35	%	1,122,111		6,284		2.22
Total interest-bearing liabilities	15,611,609		18,110		0.47		15,805,947		12,809		0.32
Noninterest-bearing liabilities:
Demand deposits	7,535,791						7,439,644
Other liabilities	605,638						472,452
Total Liabilities	23,753,038						23,718,043
Total Deposits/Cost of deposits	21,788,052				0.18		22,123,480				0.12
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds	23,147,400				0.31		23,245,591				0.22
Shareholders’ equity	2,604,057						2,722,833
Total Liabilities and Shareholders’ Equity	$	26,357,095					$	26,440,876
Net interest income/FTE NIM			219,552		3.54	%			174,384		2.82	%
Tax equivalent adjustment			(3,970)						(3,114)
Net interest income			$	215,582					$	171,270

(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 yields and rates for the three months ended September 30, 2022 in comparison to the same period in 2021:


	2022 vs. 2021 Increase (Decrease) due to change in
	Volume		Yield/Rate		Net
	(in thousands)
FTE Interest income on:
Net loans (1)	$	10,770	$	33,230	$	44,000
Investment securities	4,115		2,244		6,359

Loans held for sale	(338)		233		(105)
Other interest-earning assets	(1,332)		1,547		215
Total interest income	$	13,215	$	37,254	$	50,469
Interest expense on:
Demand deposits	$	(62)	$	1,134	$	1,072
Savings and money market deposits	56		2,304		2,360
Brokered deposits	(21)		1,138		1,117
Time deposits	(537)		(487)		(1,024)
Borrowings	1,284		492		1,776
Total interest expense	$	720	$	4,581	$	5,301

(1) Average balance includes non-performing loans.

Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of direct changes that are attributable to each component.

Compared to the third quarter of 2021, FTE total interest income for the third quarter of 2022 increased $50.5 million, or 27.0%, primarily due to an increase of $37.3 million attributable to changes in yield of which $33.2 million related to net loans. The yield on average interest-earning assets increased 80 bps in the third quarter of 2022 compared to the same period in 2021.

In the third quarter of 2022, interest expense increased $5.3 million compared to the third quarter of 2021, primarily driven by the increase in rate on interest-bearing liabilities resulting in a $4.6 million increase in interest expense. The increase in interest expense attributable to rate was primarily driven by the increases in savings and money market deposits, demand deposits and brokered deposits.

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


	Three months ended September 30								Increase (Decrease)
	2022				2021				in Balance
	Balance		Yield		Balance		Yield		$		%
	(dollars in thousands)
Real estate – commercial mortgage	$	7,566,259	4.21	%	$	7,134,177	3.11	%	$	432,082	6.1	%
Commercial and industrial (1)	4,250,573		4.58		4,729,385		2.79		(478,812)		(10.1)
Real estate – residential mortgage	4,485,649		3.59		3,642,822		3.39		842,827		23.1
Real estate – home equity	1,099,487		4.87		1,128,076		3.68		(28,589)		(2.5)
Real estate – construction	1,268,590		4.67		1,085,846		3.13		182,744		16.8
Consumer	604,634		5.14		452,844		4.00		151,790		33.5
Equipment lease financing	252,810		4.45		247,776		3.88		5,034		2.0
Other (2)	35,823		—		(6,773)		—		42,596		N/M
Total loans	$	19,563,825	4.21	%	$	18,414,153	3.53	%	$	1,149,672	6.2	%

(1) Includes average PPP loans of $49.2 million and $0.9 billion for the three months ended September 30, 2022 and 2021, respectively.

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

During the third quarter of 2022, average loans increased $1.1 billion, or 6.2%, compared to the same period in 2021. The increase was largely driven by increases in average residential mortgage loans, average commercial mortgage loans and average construction loans of $842.8 million, $432.1 million and $182.7 million, respectively, partially offset by decreases in average commercial and industrial loans of $478.8 million primarily due to the repayment of PPP loans upon forgiveness by the SBA.

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


	Three months ended September 30								Increase (Decrease) in Balance
	2022				2021
	Balance		Rate		Balance		Rate		$		%
	(dollars in thousands)
Noninterest-bearing demand	$	7,535,791	—	%	$	7,439,644	—	%	$	96,147	1.3	%
Interest-bearing demand	5,708,059		0.13		6,168,908		0.05		(460,849)		(7.5)
Savings and money market deposits	6,681,713		0.20		6,392,537		0.07		289,176		4.5
Total demand deposits and savings and money market deposits	19,925,563		0.11		20,001,089		0.04		(75,526)		(0.4)
Brokered deposits	247,105		2.16		270,168		0.34		(23,063)		(8.5)
Time deposits	1,615,384		0.84		1,852,223		0.95		(236,839)		(12.8)
Total deposits	$	21,788,052	0.18	%	$	22,123,480	0.12	%	$	(335,428)	(1.5)	%

The cost of total deposits increased 6 bps, to 0.18%, for the third quarter of 2022, compared to 0.12% for the same period in 2021, due to an increase in rates and the change in mix of deposits. The rate on total demand deposits and savings and money market deposits increased to 0.11% for the third quarter of 2022, compared to 0.04% for the same period in 2021. Average interest-bearing demand deposits and average time deposits decreased $460.8 million and $236.8 million, respectively, during the third quarter of 2022. Average savings and money market deposits and average noninterest-bearing demand deposits increased $289.2 million and $96.1 million, respectively, during the third quarter of 2022 compared to the same period in 2021.

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


	Three months ended September 30								Increase (Decrease)
	2022				2021				in Balance
	Balance		Rate		Balance		Rate		$		%
Borrowings:	(dollars in thousands)
Federal funds purchased	$	96,965	2.22	%	$	—	—	%	$	96,965	N/M
Federal Home Loan Bank advances	206,152		2.70		—		—		206,152		N/M
Senior debt and subordinated debt	554,735		3.97		626,278		3.92		(71,543)		(11.4)
Other borrowings(1)	501,496		0.48		495,833		0.11		5,663		1.1

Total borrowings	$	1,359,348	2.35	%	$	1,122,111	2.22	%	$	237,237	21.1	%

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

Average total borrowings increased $237.7 million, or 21.1%, in the third quarter of 2022, compared to the same period in 2021 primarily as a result of an increase of $206.2 million in average FHLB advances. See Note 14 "Borrowings" of the Notes to Consolidated Financial Statements for additional details.

Provision for Credit Losses

The provision for credit losses was $19.0 million for the third quarter of 2022, an increase of $19.6 million from the same period in 2021. Included in the third quarter of 2022 provision for credit losses was a CECL Day 1 Provision of $8.0 million for the acquired Prudential Bancorp loan portfolio. Excluding the CECL Day 1 Provision, the provision for credit losses was $11.0 million and was primarily due to an increase in non-performing loans, as well as increases for the office building portfolio, reflected in the commercial real estate loan portfolio, and the consumer loan, real estate construction and residential mortgage loan portfolios.

Non-Interest Income

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


	Three months ended September 30				Increase (Decrease)
	2022		2021		$		%
	(in thousands)
Commercial banking:
Merchant and card	$	7,601	$	6,979	$	622	8.9	%
Cash management	6,483		5,285		1,198		22.7
Capital markets	4,060		2,063		1,997		96.8
Other commercial banking	2,664		2,411		253		10.5
Total commercial banking	20,808		16,738		4,070		24.3
Consumer banking:
Card	6,278		5,941		337		5.7
Overdraft	4,463		3,474		989		28.5
Other consumer banking	2,534		2,386		148		6.2
Total consumer banking	13,275		11,801		1,474		12.5
Wealth management revenues	17,610		18,532		(922)		(5.0)
Mortgage banking:
Gains on sales of mortgage loans	2,410		5,944		(3,534)		(59.5)
Mortgage servicing income	1,310		3,591		(2,281)		(63.5)
Total mortgage banking	3,720		9,535		(5,815)		(61.0)
Other	3,802		5,971		(2,169)		(36.3)
Non-interest income before investment securities gains	59,215		62,577		(3,362)		(5.4)
Investment securities gains (losses), net	(53)		—		(53)		N/M
Total Non-Interest Income	$	59,162	$	62,577	$	(3,415)	(5.5)	%

Excluding net investment securities gains, non-interest income decreased $3.4 million, or 5.4%, in the third quarter of 2022 compared to the same period in 2021.

Compared to the third quarter of 2021, the decrease in non-interest income was primarily due to decreases of $5.8 million in mortgage banking income, $2.2 million in other income, primarily due to equity method investments, and $0.9 million in wealth management revenues, partially offset by increases of $4.1 million in commercial banking revenues and $1.5 million in consumer banking fees.

Non-Interest Expense

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


	Three months ended September 30				Increase (Decrease)
	2022		2021		$		%
	(in thousands)
Salaries and employee benefits	$	94,283	$	82,679	$	11,604	14.0	%
Data processing and software	15,807		14,335		1,472		10.3
Net occupancy	14,025		12,957		1,068		8.2
Other outside services	9,361		7,889		1,472		18.7
State taxes	3,583		4,994		(1,411)		(28.3)
Equipment	3,548		3,416		132		3.9
FDIC insurance	3,158		2,727		431		15.8
Professional fees	2,373		2,271		102		4.5
Marketing	1,859		1,448		411		28.4
Intangible amortization	690		150		540		N/M
Debt extinguishment	—		—		—		N/M
Merger-related expenses	7,006		—		7,006		N/M
Other	13,865		11,730		2,135		18.2
Total non-interest expense	$	169,558	$	144,596	$	24,962	17.3	%

Compared to the third quarter of 2021, non-interest expense, excluding Merger-related expenses of $7.0 million, increased $18.0 million in the third quarter of 2022, primarily due to increases of $11.6 million in salaries and employee benefits expense, $2.1 million in other non-interest expense, $1.5 million in data processing and software expense, $1.5 million in other outside services and $1.1 million in net occupancy expense, partially offset by a decrease in state taxes of $1.4 million.

Income Taxes

Income tax expense for the three months ended September 30, 2022 was $15.4 million, a $1.1 million increase from $14.3 million for the same period in 2021. The Corporation's ETR was 17.8% for the three months ended September 30, 2022, compared to 15.9% for the same period in 2021.

Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Net Interest Income

FTE net interest income increased $59.2 million to $566.4 million for the nine months ended September 30, 2022, from $507.2 million for the same period in 2021. NIM increased 35 bps, to 3.13%, compared to 2.78% for the same period in 2021. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate, and statutory interest expense disallowances. The discussion following this table is based on these taxable-equivalent amounts.


	Nine months ended September 30
	2022						2021
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
ASSETS	(dollars in thousands)
Interest-earning assets:
Net loans(1)	$	18,865,672	$	524,150	3.71	%	$	18,765,024	$	485,330	3.46	%

Investment securities (2)	4,376,084		78,334		2.39		3,589,357		63,902		2.37
Loans held for sale	16,898		694		5.48		40,551		969		3.19
Other interest-earning assets	937,369		4,498		0.64		1,986,161		4,599		0.18
Total interest-earning assets	24,196,023		607,676		3.35		24,381,093		554,799		3.04
Noninterest-earning assets:
Cash and due from banks	158,267						150,435
Premises and equipment	220,218						229,513
Other assets	1,534,314						1,689,094
Less: ACL - loans(3)	(253,725)						(268,412)
Total Assets	$	25,855,097					$	26,181,723
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	5,657,165	$	3,411	0.08	%	$	5,994,878	$	2,905	0.06	%
Savings and money market deposits	6,515,529		5,561		0.11		6,271,019		3,944		0.08
Brokered deposits	254,100		2,181		1.14		297,250		876		0.39
Time deposits	1,633,053		10,299		0.84		2,001,043		16,383		1.09
Total interest-bearing deposits	14,059,847		21,452		0.20		14,564,190		24,108		0.22


Borrowings	1,133,524		19,816		2.34		1,365,655		23,462		2.30
Total interest-bearing liabilities	15,193,371		41,268		0.36		15,929,845		47,570		0.40
Noninterest-bearing liabilities:
Demand deposits	7,538,597						7,108,199
Other liabilities	515,615						466,917
Total Liabilities	23,247,583						23,504,961
Total Deposits/Cost of deposits	21,598,444				0.13		21,672,389				0.15
Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds	22,731,968				0.24		23,038,044				0.28
Shareholders’ equity	2,607,514						2,676,762
Total Liabilities and Shareholders’ Equity	$	25,855,097					$	26,181,723
Net interest income/FTE NIM			566,408		3.13	%			507,229		2.78	%
Tax equivalent adjustment			(10,685)						(9,111)
Net interest income			$	555,723					$	498,118

(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, 2022 in comparison to the same period in 2021:


	2022 vs. 2021 Increase (Decrease) due to change in
	Volume		Yield/Rate		Net
	(in thousands)
FTE interest income on:
Net loans (1)	$	2,683	$	36,138	$	38,821
Investment securities	13,897		535		14,432

Loans held for sale	(746)		471		(275)
Other interest-earning assets	(2,358)		2,257		(101)
Total interest income	$	13,476	$	39,401	$	52,877
Interest expense on:
Demand deposits	$	(186)	$	692	$	506
Savings and money market deposits	152		1,465		1,617
Brokered deposits	(142)		1,447		1,305
Time deposits	(2,707)		(3,377)		(6,084)
Borrowings	(5,591)		1,945		(3,646)
Total interest expense	$	(8,474)	$	2,172	$	(6,302)

(1) Average balance includes non-performing loans.

Compared to the same period in 2021, FTE total interest income for the nine months ended September 30, 2022 increased $52.9 million due to increases of $39.4 million attributable to changes in yield and $13.5 million attributable to changes in volume. The increase due to changes in yield was primarily driven by net loans and other interest-earning assets. The increase due to changes in volume was primarily due to an increase in average investment securities and average net loans, partially offset by decreases in average other interest-earning assets.

The yield on average interest-earning assets increased 31 bps in the nine months ended September 30, 2022 compared to the same period in 2021.

For the nine months ended September 30, 2022, interest expense decreased $6.3 million compared to the same period in 2021, primarily due to the decrease in average interest-bearing liabilities resulting in a $8.5 million decline in interest expense. The decrease in interest expense attributable to volume was primarily driven by a $5.6 million impact from the decrease in average borrowings and a $2.7 million impact from the decrease in average time deposits.

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


	Nine months ended September 30								Increase (Decrease) in Balance
	2022				2021
	Balance		Yield		Balance		Yield		$		%
	(dollars in thousands)
Real estate – commercial mortgage	$	7,401,094	3.53	%	$	7,146,951	3.14	%	$	254,143	3.6	%
Commercial and industrial (1)	4,205,236		3.70		5,295,240		2.64		(1,090,004)		(20.6)
Real estate – residential mortgage	4,143,850		3.27		3,409,381		3.43		734,469		21.5
Real estate – home equity	1,099,310		4.25		1,147,444		3.71		(48,134)		(4.2)
Real estate – construction	1,197,947		3.53		1,065,125		3.09		132,822		12.5
Consumer	532,396		4.45		454,434		4.00		77,962		17.2
Equipment lease financing	247,674		3.81		256,741		3.92		(9,067)		(3.5)
Other (2)	38,165		—		(10,292)		—		48,457		N/M
Total loans	$	18,865,672	3.71	%	$	18,765,024	3.46	%	$	100,648	0.5	%

(1) Includes average PPP loans of $129.4 million and $1.4 billion for the nine months ended September 30, 2022 and 2021, respectively.

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

During the nine months ended September 30, 2022, average loans increased $100.6 million, or 0.5%, compared to the same period in 2021. The increase was largely driven by increases in average residential mortgage loans, average commercial mortgage loans and average construction loans of $734.5 million, $254.1 million and $132.8 million, respectively, partially offset by a $1.1 billion decline in commercial and industrial loans, due primarily to the decline in PPP loans as a result of the repayment of these loans upon forgiveness by the SBA.

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


	Nine months ended September 30								Increase (Decrease) in Balance
	2022				2021
	Balance		Rate		Balance		Rate		$		%
	(dollars in thousands)
Noninterest-bearing demand	$	7,538,597	—	%	$	7,108,199	—	%	$	430,398	6.1	%
Interest-bearing demand	5,657,165		0.08		5,994,878		0.06		(337,713)		(5.6)
Savings and money market deposits	6,515,529		0.11		6,271,019		0.08		244,510		3.9
Total demand deposits and savings and money market deposits	19,711,291		0.06		19,374,096		0.05		337,195		1.7
Brokered deposits	254,100		1.14		297,250		0.39		(43,150)		(14.5)
Time deposits	1,633,053		0.84		2,001,043		1.09		(367,990)		(18.4)
Total deposits	$	21,598,444	0.13	%	$	21,672,389	0.15	%	$	(73,945)	(0.3)	%

The cost of total deposits decreased 2 bps to 0.13% for the first nine months of 2022 compared to 0.15% for the same period of 2021, primarily due to the change in mix of deposits with increases in average noninterest-bearing demand deposits and average savings and money market deposits of $430.4 million and $244.5 million, respectively, and decreases of $368.0 million in average time deposits and $337.7 million in average interest-bearing demand deposits.

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


	Nine months ended September 30								Increase (Decrease) in Balance
	2022				2021
	Balance		Rate		Balance		Rate		$		%
	(dollars in thousands)
Federal funds purchased	$	33,629	2.12	%	$	—	—	%	$	33,629	N/M
Federal Home Loan Bank advances	69,473		2.70		169,366		1.80		(99,893)		(59.0)
Senior debt and subordinated debt	572,690		3.95		669,275		4.14		(96,585)		(14.4)
Other borrowings(1)	457,732		0.28		527,014		0.12		(69,282)		(13.1)
Total borrowings	$	1,133,524	2.34	%	$	1,365,655	2.30	%	$	(232,131)	(17.0)	%

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

Average total borrowings decreased $232.1 million, or 17%, during the first nine months of 2022, compared to the same period in 2021 primarily as a result of the reduction of FHLB advances, the $65 million repayment of senior notes on March 16, 2022 and the redemption of $17.0 million of TruPS in September 2022. See Note 14 "Borrowings" of the Notes to Consolidated Financial Statements for additional details.

Provision for Credit Losses

The provision for credit losses was $13.5 million for the first nine months of 2022, compared to a negative provision of $9.6 million for the same period of 2021. Included in the third quarter of 2022 provision for credit losses was a CECL Day 1 Provision of $8.0 million for the acquired Prudential Bancorp loan portfolio.

Non-Interest Income

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


	Nine months ended September 30				Increase (Decrease)
	2022		2021		$		%
	(in thousands)
Commercial banking:
Merchant and card	$	21,053	$	19,533	$	1,520	7.8	%
Cash management	17,973		15,547		2,426		15.6
Capital markets	9,629		6,399		3,230		50.5
Other commercial banking	8,520		8,730		(210)		(2.4)
Total commercial banking	57,175		50,209		6,966		13.9
Consumer banking:
Card	18,141		17,552		589		3.4
Overdraft	12,116		8,948		3,168		35.4
Other consumer banking	7,164		6,915		249		3.6
Total consumer banking	37,421		33,415		4,006		12.0
Wealth management revenues	55,312		53,513		1,799		3.4
Mortgage banking:
Gains on sales of mortgage loans	7,978		20,038		(12,060)		(60.2)
Mortgage servicing income	4,086		6,295		(2,209)		(35.1)
Total mortgage banking	12,064		26,333		(14,269)		(54.2)
Other	10,863		12,883		(2,020)		(15.7)
Non-interest income before investment securities gains	172,835		176,353		(3,518)		(2.0)
Investment securities gains (losses), net	(26)		33,511		(33,537)		N/M
Total Non-Interest Income	$	172,809	$	209,864	$	(37,055)	(17.7)	%

Excluding net investment securities gains, non-interest income decreased $3.5 million, or 2.0%, during the nine months ended September 30, 2022 as compared to the same period in 2021.

Compared to the first nine months of 2021, excluding net investment securities gains, the decrease in non-interest income was primarily due to a decrease of $14.3 million in mortgage banking income, partially offset by increases of $6.9 million in commercial banking revenues and $4.0 million in consumer banking fees.

Investment securities gains recognized in the first nine months of 2021 were the result of the sale of Visa Shares as part of the balance sheet restructuring completed during the first nine months of 2021.

Non-Interest Expense

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


	Nine months ended September 30				Increase (Decrease)
	2022		2021		$		%
	(in thousands)
Salaries and employee benefits	$	264,151	$	243,632	$	20,519	8.4	%
Data processing and software	44,807		41,828		2,979		7.1
Net occupancy	42,134		39,433		2,701		6.8
Other outside services	26,292		24,557		1,735		7.1
Equipment	10,393		10,268		125		1.2
State taxes	10,188		13,883		(3,695)		(26.6)
FDIC insurance	9,328		7,633		1,695		22.2
Professional fees	6,178		7,701		(1,523)		(19.8)
Marketing	4,505		3,798		707		18.6
Intangible amortization	1,043		443		600		135.4
Debt extinguishment	—		32,575		(32,575)		(100.0)
Merger-related expenses	8,434		—		8,434		N/M
Other	37,813		38,060		(247)		(0.6)
Total non-interest expense	$	465,266	$	463,811	$	1,455	0.3	%

Compared to the first nine months of 2021, non-interest expense in the first nine months of 2022, excluding $8.4 million of Merger-related expenses, decreased $7.0 million, or 1.5%, primarily as a result of debt extinguishment expenses of $32.6 million related to the prepayment of FHLB advances, subordinated debt and senior notes in 2021, partially offset by a $20.5 million increase in salaries and employee benefits expenses and a $3.0 million increase in data processing and software expenses.

Income Taxes

Income tax expense for the nine months ended September 30, 2022 was $44.6 million, a $4.4 million increase from $40.2 million for the same period in 2021. The Corporation's ETR was 17.9% for the nine months ended September 30, 2022, compared to 15.8% in the same period of 2021.

FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.


	September 30, 2022		December 31, 2021		Increase (Decrease)
					$		%
Assets	(in thousands)
Cash and cash equivalents	$	528,715	$	1,638,614	$	(1,109,899)	(67.7)	%
FRB and FHLB Stock	81,914		57,635		24,279		42.1

Loans held for sale	14,411		35,768		(21,357)		(59.7)
Investment securities	3,936,694		4,167,774		(231,080)		(5.5)
Net loans, less ACL - loans	19,428,361		18,076,349		1,352,012		7.5
Net premises and equipment	221,496		220,357		1,139		0.5
Goodwill and intangibles	561,495		538,053		23,442		4.4
Other assets	1,372,956		1,061,848		311,108		29.3
Total Assets	$	26,146,042	$	25,796,398	$	349,644	1.4	%
Liabilities and Shareholders' Equity
Deposits	$	21,376,554	$	21,573,499	$	(196,945)	(0.9)	%
Borrowings	1,424,681		1,038,109		386,572		37.2
Other liabilities	873,648		472,110		401,538		85.1
Total Liabilities	23,674,883		23,083,718		591,165		2.6
Total Shareholders' Equity	2,471,159		2,712,680		(241,521)		(8.9)
Total Liabilities and Shareholders' Equity	$	26,146,042	$	25,796,398	$	349,644	1.4	%

Cash and Cash Equivalents

Compared to December 31, 2021, cash and cash equivalents at September 30, 2022 decreased $1.1 billion, or 67.7%, primarily due to a $1.4 billion increase in net loans and a $196.9 million decrease in deposits.

Other Assets

Compared to December 31, 2021, other assets increased $311.1 million at September 30, 2022, primarily due to increases in deferred federal income tax of $149.0 million and the cash surrender value of life insurance policies of $90.2 million.

Other Liabilities

Compared to December 31, 2021, other liabilities increased $401.5 million at September 30, 2022, primarily due to increases in the value of interest rate swaps and interest rate swap collateral of $377.0 million.

Shareholders' Equity

Compared to December 31, 2021, shareholders' equity at September 30, 2022 decreased $241.5 million, primarily due to a $470.4 million increase in the loss for AOCI largely attributable to unrealized losses on investment securities and derivative instruments, partially offset by a $124.2 million increase in retained earnings and the $89.7 million issuance of treasury shares in connection with the Merger. See Note 8 "Accumulated Other Comprehensive (Loss) Income" of the Notes to Consolidated Financial Statements for additional details.

Investment Securities

The following table presents the carrying amount of investment securities:


	September 30, 2022		December 31, 2021		Increase (Decrease)
					$		%
Available for Sale	(in thousands)
U.S. Government securities	$	218,184	$	127,618	$	90,566	71.0
U.S. Government-sponsored agency securities	1,006		—		1,006		N/M
State and municipal securities	1,038,185		1,188,670		(150,485)		(12.7)	%
Corporate debt securities	399,615		386,133		13,482		3.5
Collateralized mortgage obligations	142,401		209,359		(66,958)		(32.0)
Residential mortgage-backed securities	214,252		229,795		(15,543)		(6.8)
Commercial mortgage-backed securities	583,741		971,148		(387,407)		(39.9)
Auction rate securities	—		74,667		(74,667)		(100.0)


Total available for sale securities	$	2,597,384	$	3,187,390	$	(590,006)	(18.5)	%
Held to Maturity

Residential mortgage-backed securities	$	470,879	$	404,958	$	65,921	16.3	%
Commercial mortgage-backed securities	868,431		575,426		293,005		50.9
Total held to maturity securities	$	1,339,310	$	980,384	$	358,926	36.6	%

Total Investment Securities	$	3,936,694	$	4,167,774	$	(231,080)	(5.5)	%

Compared to December 31, 2021, total AFS securities at September 30, 2022 decreased $590.0 million, or 18.5%, primarily due to decreases of $387.4 million in commercial mortgage-backed securities and $150.5 million in state and municipal securities, partially offset by an increase of $90.6 million in U.S government securities.

At September 30, 2022, total HTM securities increased $358.9 million compared to December 31, 2021, primarily driven by an increase of $293.0 million in commercial mortgage-backed securities.

Loans

The following table presents ending loans outstanding by type:


	September 30, 2022		December 31, 2021		2022 vs. 2021 Increase (Decrease)
					$		%
	(in thousands)
Real estate – commercial mortgage	$	7,554,509	$	7,279,080	$	275,429	3.8	%
Commercial and industrial (1)	4,243,392		4,208,327		35,065		0.8
Real estate – residential mortgage	4,574,228		3,846,750		727,478		18.9
Real estate – home equity	1,110,103		1,118,248		(8,145)		(0.7)
Real estate – construction	1,273,097		1,139,779		133,318		11.7
Consumer	633,666		464,657		169,009		36.4
Equipment lease financing and other	328,057		283,557		44,500		15.7
Overdrafts	2,162		1,988		174		8.8
Gross loans	19,719,214		18,342,386		1,376,828		7.5
Unearned income	(24,015)		(17,036)		(6,979)		(41.0)
Net loans	$	19,695,199	$	18,325,350	$	1,369,849	7.5	%

(1) Includes PPP loans totaling $32.1 million and $301.3 million as of September 30, 2022 and December 31, 2021, respectively.

During the nine months ended September 30, 2022, net loans increased $1.4 billion, or 7.5%, compared to the level at December 31, 2021, primarily due to increases in residential mortgage loans, commercial mortgage loans and consumer loans of $727.5 million, $275.4 million and $169.0 million, respectively. Net loans of $554.3 million were acquired in the Merger. Additionally, residential mortgage loans increased due to the strategic decision by the Corporation to hold a greater proportion of the loan originations from adjustable rate mortgage products on its balance sheet. The increase in consumer loans was primarily driven by growth in indirect auto loans and student loans.

The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographic location within its footprint. The Corporation's policies limit the maximum total lending commitment to an individual borrower to $100.0 million as of September 30, 2022. 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 borrower at the time the lending commitment is approved, geographic location of customer or collateral and asset class.

The following table summarizes the industry concentrations within the commercial mortgage and the commercial and industrial loan portfolios (excluding PPP loans):


	September 30, 2022		December 31, 2021
Real estate (1)	45.2	%	44.3	%
Manufacturing	7.0		5.1
Health care	6.7		6.7
Agriculture	5.6		6.1
Other services (2)	4.8		5.0
Construction (3)	4.8		3.9
Hospitality and food services	3.7		3.7
Retail	3.2		3.0
Wholesale trade	3.2		2.8
Educational services	2.9		2.7
Arts, entertainment and recreation	2.1		2.3
Professional, scientific and technical services	1.9		1.8
Public administration	1.3		1.5
Transportation and warehousing	1.3		1.3
Administrative and Support	1.1		0.6
Finance and Insurance	1.0		1.4
Other (4)	4.2		7.8
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) Excludes public administration.

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

(4) Includes the energy sector and at September 30, 2022, commercial loans acquired in the Merger.

The following table presents the changes in non-accrual loans for the three and nine months ended September 30, 2022:


	Commercial and Industrial		Real Estate - Commercial Mortgage		Real Estate - Construction		Real Estate - Residential Mortgage		Consumer and Real Estate - Home Equity		Equipment Lease Financing		Total
	(in thousands)
Three months ended September 30, 2022
Balance at June 30, 2022	$	43,691	$	59,565	$	1,357	$	35,585	$	8,270	$	14,062	$	162,530
Additions	2,271		41,350		185		2,265		1,714		683		48,468
Payments	(13,744)		(3,805)		(86)		(603)		(788)		(480)		(19,506)
Charge-offs	(1,783)		(86)		—		—		(1,172)		(683)		(3,724)
Transfers to accrual status	(631)		(2,320)		—		(5,783)		(830)		—		(9,564)

Balance at September 30, 2022	$	29,804	$	94,704	$	1,456	$	31,464	$	7,194	$	13,582	$	178,204

Nine months ended September 30, 2022
Balance at December 31, 2021	$	30,141	$	52,815	$	901	$	35,269	$	8,900	$	15,640	$	143,666
Additions	25,513		62,097		924		4,981		5,091		683		99,289
Payments	(22,637)		(11,951)		(369)		(2,937)		(2,229)		(1,115)		(41,238)
Charge-offs	(2,211)		(238)		—		(66)		(3,101)		(1,626)		(7,242)
Transfers to accrual status	(980)		(4,558)		—		(5,783)		(1,259)		—		(12,580)
Transfers to OREO	(22)		(3,461)		—		—		(208)		—		(3,691)
Balance at September 30, 2022	$	29,804	$	94,704	$	1,456	$	31,464	$	7,194	$	13,582	$	178,204

During the third quarter of 2022, non-accrual loans increased approximately $15.7 million, or 9.6%, as a result of additions to non-accrual loans, partially offset by payments, and to a lesser extent, transfers to accrual status, during the period.

The following table summarizes non-performing assets as of the periods shown below:


	September 30, 2022			December 31, 2021
	(dollars in thousands)
Non-accrual loans	$	178,204		$	143,666
Loans 90 days or more past due and still accruing	14,559			8,453
Total non-performing loans(1)	192,763			152,119
OREO (2)	5,877			1,817
Total non-performing assets	$	198,640		$	153,936
Non-accrual loans to total loans	0.90		%	0.78		%
Non-performing loans to total loans	0.98		%	0.83		%
Non-performing assets to total assets	0.76		%	0.60		%

ACL - loans to non-performing loans	138		%	164		%

(1) Excludes PPP loans which are fully guaranteed by the federal government of $10.4 million as of September 30, 2022.

(2) Excludes $3.4 million and $6.4 million of residential mortgage properties for which formal foreclosure proceedings were in process as of September 30, 2022 and December 31, 2021, respectively.

Non-performing loans at September 30, 2022 increased $40.6 million, or 26.7%, compared to $152.1 million as of December 31, 2021. Non-performing loans as a percentage of total loans were 0.98% at September 30, 2022 and 0.83% at December 31, 2021. See Note 5, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements for further details on non-performing loans.

The following table presents TDRs as of the periods shown below:


	September 30, 2022		December 31, 2021
	(in thousands)
Real estate - commercial mortgage	$	3,448	$	3,464
Commercial and industrial	1,837		1,857
Real estate - residential mortgage	12,101		11,948
Real estate - home equity	11,719		12,218

Consumer	2		5

Total accruing TDRs	29,107		29,492
Non-accrual TDRs(1)	40,401		55,945
Total TDRs	$	69,508	$	85,437

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

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, consumer loans and equipment lease financing is based on payment history, through the monitoring of delinquency levels and trends.

Total internally risk-rated loans were $12.8 billion, of which $0.8 billion were criticized and classified, as of September 30, 2022, and $12.4 billion, of which $1.1 billion were criticized and classified, as of December 31, 2021. For a description of the Corporation's risk ratings, see "Allowance for Credit Losses" in the Notes to Consolidated Financial Statements in Item 8 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2021. The following table presents criticized and classified loans, or those with internal risk ratings of special mention or substandard or lower for commercial mortgages, commercial and industrial loans and construction loans to commercial borrowers, by class segment:


	Special Mention (1)						Increase (Decrease)			Substandard or Lower (2)						Increase (Decrease)				Total Criticized and Classified Loans
	September 30, 2022			December 31, 2021			$		%	September 30, 2022			December 31, 2021			$		%		September 30, 2022			December 31, 2021
	(in thousands)
Real estate - commercial mortgage	$	279,136		$	387,279		$	(108,143)	(27.9)%	$	272,996		$	331,096		$	(58,100)	(17.5)	%	$	552,132		$	718,375
Commercial and industrial	103,902			142,369			(38,467)		(27.0)	109,714			152,219			(42,505)		(27.9)		213,616			294,588
Real estate - construction (3)	8,252			58,841			(50,589)		(86.0)	7,151			6,324			827		13.1		15,403			65,165
Total	$	391,290		$	588,489		$	(197,199)	(33.5)%	$	389,861		$	489,639		$	(99,778)	(20.4)%		$	781,151		$	1,078,128

% of total risk rated loans	3.1		%	4.7		%				3.0		%	3.9		%					6.1		%	8.6		%

(1) Considered "criticized" loans by banking regulators

(2) Considered "classified" loans by banking regulators

(3) Excludes construction - other

Provision and Allowance for Credit Losses

The following table presents the components of the ACL:


	September 30, 2022		December 31, 2021
	(in thousands)
ACL - loans	$	266,838	$	249,001
ACL - OBS credit exposure (1)	15,690		14,533
Total ACL	$	282,528	$	263,534

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

The following table presents the activity in the ACL:


	Three months ended September 30						Nine months ended September 30
	2022			2021			2022			2021
	(in thousands)
Average balance of Net loans	$	19,563,825		$	18,414,153		$	18,865,672		$	18,765,024

Balance of ACL at beginning of period	$	248,564		$	255,032		$	249,001		$	277,567

CECL Day 1 Provision expense	7,954			—			7,954			—
Purchased credit deteriorated loans	1,135			—			1,135			—

Loans charged off:
Commercial and industrial	(1,783)			(647)			(2,211)			(5,920)
Real estate – commercial mortgage	(86)			(14)			(238)			(8,357)
Consumer and home equity	(1,172)			(504)			(3,101)			(2,481)
Equipment lease financing and other	(683)			(467)			(1,626)			(1,871)
Real estate – residential mortgage	—			(602)			(66)			(1,290)
Real estate – construction	—			—			—			(39)
Total loans charged off	(3,724)			(2,234)			(7,242)			(19,958)
Recoveries of loans previously charged off:
Commercial and industrial	2,213			2,330			4,932			3,792
Real estate – commercial mortgage	29			564			3,677			1,467
Consumer and home equity	682			504			1,898			1,578
Equipment lease financing and other	247			358			627			670
Real estate – residential mortgage	101			86			415			286
Real estate – construction	—			697			44			1,335
Total recoveries	3,272			4,539			11,593			9,128
Net loans charged off/(recoveries)	(452)			2,305			4,351			(10,830)
Provision for credit losses (1)	9,637			(610)			4,397			(10,010)
Balance of ACL at end of period	$	266,838		$	256,727		$	266,838		$	256,727
Net charge-offs to average loans (annualized)	0.01		%	(0.05)		%	(0.05)		%	0.08		%

(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 months ended September 30, 2022 was $19.0 million, compared to a negative provision of $0.6 million recorded for the same period in 2021. Included in the third quarter of 2022 provision for credit losses was a CECL Day 1 Provision of $8.0 million for the acquired Prudential Bancorp loan portfolio. The ACL also included $1.1 million for purchased credit deteriorated loans for the acquired Prudential Bancorp loan portfolio. In addition, the ACL includes qualitative loan adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in

the quantitative models. See Note 5, "Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements for further details on the provision for credit losses.

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


	September 30, 2022				December 31, 2021
	ACL - loans		% In Each Loan Category (1)		ACL - loans		% In Each Loan Category (1)
	(in thousands)
Real estate - commercial mortgage	$	88,850	38.3	%	$	87,970	39.7	%
Commercial and industrial	66,125		21.5		67,056		22.9
Real estate - residential mortgage	67,409		23.2		54,236		21.0
Consumer, home equity, equipment lease financing	32,781		10.5		26,798		10.2
Real estate - construction	11,673		6.5		12,941		6.2

Total ACL - loans	$	266,838	100.0	%	$	249,001	100.0	%

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

Deposits and Borrowings

The following table presents ending deposits by type:


	September 30, 2022		December 31, 2021		Increase (Decrease)
					$		%
	(in thousands)
Noninterest-bearing demand	$	7,372,896	$	7,370,963	$	1,933	—	%
Interest-bearing demand	5,676,600		5,819,539		(142,939)		(2.5)
Savings and money market deposits	6,563,003		6,403,995		159,008		2.5
Total demand and savings	19,612,499		19,594,497		18,002		0.1
Brokered deposits	226,883		251,526		(24,643)		(9.8)
Time deposits	1,537,172		1,727,476		(190,304)		(11.0)
Total deposits	$	21,376,554	$	21,573,499	$	(196,945)	(0.9)	%

During the nine months ended September 30, 2022, total deposits decreased by $196.9 million, or 0.9%, primarily due to a $190.3 million decrease in time deposits and a $142.9 million decrease in interest-bearing demand deposits, partially offset by a $159.0 million increase in savings and money market deposits.

The following table presents ending borrowings by type:


	September 30, 2022		December 31, 2021		Increase (Decrease)
					$		%
	(in thousands)
Federal funds purchased	$	136,000	$	—	136,000		N/M

Federal Home Loan Bank advances	265,500		—		265,500		N/M
Senior debt and subordinated debt	539,461		620,406		(80,945)		(13.0)
Other borrowings(1)	483,720		417,703		66,017		15.8
Total borrowings	$	1,424,681	$	1,038,109	$	386,572	37.2	%

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

During the nine months ended September 30, 2022, borrowings increased $386.2 million, or 37.2%, primarily due to borrowings assumed in the Merger.

Shareholders' Equity

On March 21, 2022, the Corporation announced that its board of directors approved the repurchase of up to $75 million of shares of the Corporation's common stock, or approximately 2.7% of the Corporation's outstanding shares, based on the closing price of the Corporation's common stock and the number of shares outstanding on March 17, 2022. Under the repurchase program, repurchased shares are 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 will expire on December 31, 2022. No shares of the Corporation's common stock were repurchased under this program during the three and nine months ended September 30, 2022.

Regulatory Capital

The Corporation and its subsidiary banks, Fulton Bank and Prudential 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, Fulton Bank and Prudential Bank to:

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

•Meet a minimum Tier 1 Leverage capital ratio of 4.00% of average assets;

•Meet a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 capital ratio of 6.00% of risk-weighted assets;

•Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and

•Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, are excluded as a component of Tier 1 capital for institutions of the Corporation's size.

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, 2022, the Corporation's capital levels met the fully phased-in minimum capital requirements, including the capital conservation buffers, as prescribed in the Capital Rules.

As of September 30, 2022, Fulton Bank and Prudential Bank met the well capitalized requirements under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank must maintain minimum Total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios as set forth in the regulation. There were no other conditions or events since September 30, 2022 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, 2022		December 31, 2021		Regulatory Minimum for Capital Adequacy		Fully Phased-in, with Capital Conservation Buffers
Total Risk-Based Capital (to Risk-Weighted Assets)	13.6	%	14.1	%	8.0	%	10.5	%
Tier I Risk-Based Capital (to Risk-Weighted Assets)	10.9	%	10.9	%	6.0	%	8.5	%
Common Equity Tier I (to Risk-Weighted Assets)	10.0	%	9.9	%	4.5	%	7.0	%
Tier I Leverage Capital (to Average Assets)	9.2	%	8.6	%	4.0	%	4.0	%

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency price risk and commodity price risk. Due to the nature of its operations, foreign currency price risk and commodity price risk are not significant to the Corporation.

Interest Rate Risk, Asset/Liability Management and Liquidity

Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation's liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation's net interest income and changes in the economic value of its equity.

The Corporation employs various management techniques to minimize its exposure to interest rate risk. The Corporation's ALCO is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.

The Corporation uses two complementary methods to measure and manage interest rate risk. They are simulation of net interest income and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates.

Simulation of net interest income is performed for the next 12-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation's short-term earnings exposure to rate movements. The Corporation's policy limits the potential exposure of net interest income, in a non-parallel instantaneous shock, to 10% of the base case net interest income for a 100 bps shock in interest rates, 15% for a 200 bps shock, 20% for a 300 bps shock and 25% for a 400 bps shock. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet, nor does it take into account the potential effects of competition on the pricing of deposits and loans over the forward 12-month period.

Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options within the investment portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to timing, amount and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

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, 2022 :


Rate Shock(1)	Annual change in net interest income	% change in net interest income
+400 bp	+ $133.0 million	14.3%
+300 bp	+ $100.3 million	10.8%
+200 bp	+ $68.2 million	7.3%
+100 bp	+ $34.7 million	3.7%
–100 bp	– $60.4 million	– 6.5%
–200 bp	– $144.7 million	– 15.6%

(1) These results include the effect of implicit and explicit interest rate floors that limit further reduction in interest rates.

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.

Cash Flow Hedges

The Corporation's objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Corporation primarily uses interest rate swaps as part of its interest rate risk management strategy. The Corporation uses interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Corporation making floating-rate payments over the life of the agreements without exchange of the underlying notional amount.

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- and long-term needs.

The Corporation maintains liquidity sources in the form of interest-bearing deposits and customer funding (short-term promissory notes). The Corporation can access additional liquidity from these sources, if necessary, by increasing the rates of interest paid on those instruments. The positive impact to liquidity resulting from paying higher interest rates could have a detrimental impact on 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 and Prudential Bank are members of the FHLB and have access to FHLB overnight and term credit facilities. As of September 30, 2022, the Corporation had $265.5 million in advances outstanding with the FHLB. As of September 30, 2022, the Corporation has borrowing capacity of approximately $5.7 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, 2022, the Corporation had aggregate federal funds lines borrowing capacity of $2.2 billion. A combination of commercial real estate loans, commercial loans and securities are pledged to the FRB of Philadelphia to provide access to FRB discount window borrowings. As of September 30, 2022, the Corporation had $1.2 billion of collateralized borrowing capacity at the discount window.

Securities carried at $1.3 billion at September 30, 2022 and $2.5 billion at December 31, 2021 were pledged as collateral to secure public and trust deposits.

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

The consolidated statements of cash flows provide additional information. The Corporation's operating activities during the first nine months of 2022 provided $519.2 million of cash. Cash used by investing activities was $0.9 billion and was mainly due to the net increase in loans. Cash used by financing activities was $700.7 million, and was primarily due an decrease in deposits. Changes resulting from assets acquired and liabilities assumed in the Merger are not reflected in the Consolidated Statement of Cash Flows.

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, 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, 2022, the Corporation owned securities issued by various states and municipalities with a total fair value of $1.0 billion. Uncertainty with respect to the financial strength of state and municipal bond insurers places emphasis on the underlying strength of issuers. Pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the underlying creditworthiness of the issuing state or municipality and then, to a lesser extent, on any credit enhancement. State and municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the securities to be repaid by any means available to the issuing state or municipality. As of September 30, 2022, approximately 100% of state and municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 76% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

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 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 SEC's rules and forms.

Prudential Bancorp was acquired on July 1, 2022. The Corporation has extended oversight and monitoring processes that support internal control over financial reporting to include the acquired operations. Other than these processes, there have been no changes in the Corporation's internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.

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 1A. Risk Factors

There have been no 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, 2021 and Part II, Item 1A of the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.

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

(a) None.

(b) None.

(c) On March 21, 2022, the Corporation announced that its board of directors approved the repurchase of up to $75 million of shares of the Corporation's common stock, or approximately 2.7% of the Corporation's outstanding shares, through December 31, 2022. Under this repurchase program, repurchased shares are 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. This repurchase program may be discontinued at any time. During the three months ended September 30, 2022, no shares were repurchased under this program.

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 14, 2021.

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).

4.4						Stock Certificate - Incorporated by reference as Exhibit 4.1 of Fulton Financial Corporation Registration Statement on Form S-4 filed on April 21, 2022.

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 9, 2022

/s/ E. Philip Wenger

E. Philip Wenger

Chairman and Chief Executive Officer

Date:

November 9, 2022

/s/ Mark R. McCollom

Mark R. McCollom

Senior Executive Vice President and Chief Financial Officer