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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-03-01 · 313 added, 329 removed, 678 unchanged (49% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Management’s Discussion") relates to Fulton Financial Corporation (the "Corporation"), a financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the Corporation, a financial holding company registered under the BHCA and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries.

Management’s Discussion should be read in conjunction with the consolidated financial statements and other financial information presented in this report.

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Forward-looking statements are neither historical facts, nor assurance of future performance.

Instead, they are based on current beliefs, expectations and assumptions regarding the future of the Corporation's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.

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.

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

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

• the 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, N.A.

• 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, or failure to comply with the BSA, the Patriot Act and related AML requirements, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions, the need to undertake remedial actions and possible damage to the Corporation’s reputation;

• the 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;

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• the potential effects of climate change on the Corporation's business and results of operations;

• the Corporation’s ability to implement from time to time measures intended to manage growth in non-interest expenses and improve the efficiency of its operations and realize the intended effects of those initiatives;

• 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, including the Corporation’s adoption of ASU 2016-13, Financial Instruments – Credit Losses (CECL);

• 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;

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

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

• the Corporation's 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;

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• 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’s or Fulton Bank’s credit ratings on their borrowing costs or access to capital markets.

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

In 2018, the Corporation had three banking subsidiaries.

During 2019, the Corporation consolidated two of its wholly owned banking subsidiaries into Fulton Bank ("Charter Consolidation").

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.

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Net income available to common shareholders (in thousands) $ 265,220 $ 175,905

Diluted net income per share $ 1.08 $ 1.35

Return on average assets 0.73 % 1.06 %

Diluted net income available to common shareholders per share $ 1.62 $ 1.08

Return on average assets, annualized 1.05 % 0.73 %

Return on average equity 10.64 % 7.45 %

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(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," in Item 6.

Selected Financial Data.

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 an FTE basis, using a 21% Federal tax rate and statutory interest expense disallowances.

See also the "Net Interest Income" section of Management’s Discussion.

Supplemental Reporting of Non-GAAP Based Financial Measures

This Annual Report on Form 10-K contains supplemental financial information, as detailed below, which has been derived by methods other than GAAP.

The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations and financial condition.

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.

Following are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure as of and for the year ended December 31:

2021 2020 2019

(in thousands, except per share data and percentages)

Return on average common shareholders' equity (tangible)

Net income available to common shareholders $ 265,220 $ 175,905 $ 226,339

Intangible amortization, net of tax 462 417 1,127

Numerator $ 265,682 $ 176,322 $ 227,466

Average common shareholders' equity $ 2,685,946 $ 2,391,649 $ 2,306,070

Average goodwill and intangible assets (536,621) (535,196) (534,120)

Average preferred stock (192,878) (32,084) —

Average tangible common shareholders' equity (denominator) $ 1,956,447 $ 1,824,369 $ 1,771,950

Return on average common shareholders' equity (tangible) 13.58 % 9.66 % 12.84 %

Efficiency ratio

Non-interest expense $ 617,830 $ 579,440 $ 567,736

Amortization of tax credit investments (6,187) (6,126) (6,021)

Intangible amortization (589) (529) (1,427)

Prepayment penalty on FHLB advances (33,249) (2,878) (4,326)

Numerator $ 577,805 $ 569,907 $ 555,962

Net interest income $ 663,730 $ 629,207 $ 648,389

Tax equivalent adjustment 12,296 12,303 12,967

Total non-interest income 273,745 229,388 216,159

Investment securities gains, net (33,516) (3,053) (4,733)

Denominator $ 916,255 $ 867,845 $ 872,782

Efficiency ratio 63.1 % 65.7 % 63.7 %

Non-performing assets to common shareholders' equity (tangible) and ACL - loans

Non-performing assets (numerator) $ 153,936 $ 151,305 $ 147,986

Shareholders' equity $ 2,712,680 $ 2,616,828 $ 2,342,176

Preferred Stock (192,878) (192,878) —

Goodwill and intangible assets (538,053) (536,659) (535,303)

Tangible common shareholders' equity 1,981,749 1,887,291 1,806,873

ACL - loans 249,001 277,567 166,209

Tangible common shareholders' equity and ACL - loans (denominator) $ 2,230,750 $ 2,164,858 $ 1,973,082

Non-performing assets to tangible common shareholders' equity and ACL - loans 6.90 % 6.99 % 7.50 %

(1) Presented on a fully taxable equivalent basis, using a 21% federal tax rate for 2019 through 2021.

COVID-19 Pandemic

The COVID-19 pandemic has caused substantial disruptions in economic and social activity, both globally and in the United States.

The spread of COVID-19, and related governmental actions to mandate or encourage temporary closures of businesses, quarantines, social distancing, "stay at home" orders and other restrictions on in-person operations and activities, have caused severe disruptions in the U.S.

economy, which has, in turn, disrupted, and will likely continue to disrupt, the business, activities, and operations of the Corporation’s customers, as well as the Corporation’s own business and operations.

The resulting impacts of the pandemic on consumers, including high levels of unemployment, have continued to cause changes in consumer and business spending, borrowing needs and saving habits, which have and will likely continue to affect the demand for loans and other products and services the Corporation offers, as well as the creditworthiness of its borrowers.

The significant decrease in commercial activity and disruptions in supply chains associated with the pandemic, both nationally and in the Corporation’s markets, may cause customers, vendors and counterparties to be unable to meet existing payment or other obligations to the Corporation.

While portions of the national economy have reopened, there is still significant uncertainty concerning the breadth and duration of business disruptions related to the COVID-19 pandemic, as well as their impact on the U.S.

The extent to which the pandemic impacts the Corporation’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the continuing severity of the COVID-19 pandemic, whether there are additional outbreaks of COVID-19, and the actions taken to contain it or treat its impact.

Moreover, although multiple COVID-19 vaccines have received regulatory approval and are currently being distributed to certain high-risk population groups, it is too early to know how quickly these vaccines can be distributed to the general population and how effective they will be in mitigating the adverse social and economic effects of the COVID-19 pandemic.

The spread of COVID-19, and related governmental actions to respond to the pandemic have caused severe disruptions in the U.S.

economy, which have, in turn, disrupted, and will likely continue to disrupt, the business, activities, and operations of the Corporation’s customers as well as the Corporation’s own business and operations.

In many locations throughout the U.S., the spread of COVID-19 decreased through much of 2021.

However, due in large part to the increased spread of a new, more transmissible coronavirus variant, the number of individuals diagnosed with COVID-19 in the U.S.

increased substantially

late in 2021 causing continued governmental responses.

The resulting impacts of the pandemic have continued to cause changes in consumer and business spending, borrowing needs and saving habits that have and will likely continue to affect the demand for loans and other products and services the Corporation offers, as well as the creditworthiness of its borrowers.

The significant impact on commercial activity and disruptions in supply chains associated with the pandemic, both nationally and in the Corporation’s markets, may cause customers, vendors and counterparties to be unable to meet existing payment or other obligations to the Corporation.

While employment and the national economy are showing signs of recovery, there is still significant uncertainty concerning the breadth and duration of the economic and social disruptions caused by the COVID-19 pandemic and their impact on the U.S.

The extent to which the pandemic continues to impact the Corporation’s operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the continuing progression of the COVID-19 pandemic, whether there are additional outbreaks of COVID-19 and its variants, including vaccine-resistant variants, and the actions taken to contain it or treat its impact.

Moreover, although multiple COVID-19 vaccines and booster vaccines have received regulatory approval and are currently being distributed throughout the U.S.

and the world, a significant portion of the population remains unvaccinated.

If the pandemic continues to cause significant negative impacts to economic conditions, the Corporation’s results of operations, financial condition and cash flows could be materially adversely impacted.

The Corporation’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions.

In an effort to mitigate the spread of COVID-19, the Corporation has adjusted service models at certain of its financial center locations, including limiting some locations to drive-up and ATM services only, offering lobby access by

appointment only, and encouraging the Corporation’s customers to use electronic banking platforms.

Approximately 25% of the Corporation’s locations are expected to provide lobby access by appointment only on a long-term basis.

A significant portion of the Corporation’s employees have transitioned to working remotely as a result of the COVID-19 pandemic, which, in addition to requiring added support from the Corporation’s information technology infrastructure, increases cybersecurity risks.

The continued spread of COVID-19 (or an outbreak of a similar highly contagious disease) could also negatively impact the business and operations of third-party service providers who perform critical services for the Corporation’s business.

In an effort to mitigate the spread of COVID-19, the Corporation adjusted service models at certain of its financial center locations, including limiting some locations to drive-up and ATM services only, offering lobby access by appointment only, and encouraging the Corporation’s customers to use electronic banking platforms.

A significant portion of the Corporation’s employees has transitioned to remote or hybrid onsite-remote working arrangements as a result of the COVID-19 pandemic, which, in addition to requiring added support from the Corporation’s information technology infrastructure, increases cybersecurity risks.

COVID-19 has significantly affected the financial markets and has resulted in a number of responses by the U.S.

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These reductions in interest rates, especially if prolonged, could adversely affect the Corporation’s net interest income and margins and the Corporation’s profitability.

The CARES Act was enacted in March 2020 and, among other provisions, authorized the SBA to guarantee loans under the PPP for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll.

During 2020, the Corporation funded approximately $2.0 billion loans under the PPP.

Stimulus payments to eligible consumers, enhanced unemployment benefits provided by the federal government and traditional, state-provided unemployment compensation, as well as other forms of relief provided to consumers and businesses, have helped to limit some of the adverse impacts of COVID-19.

The CARES Act was enacted in March 2020 and, among other provisions, authorized the SBA to guarantee loans under the PPP for small businesses that meet eligibility requirements in order to keep their workers on the payroll and fund specified operating expenses.

Subsequent legislation extended the authority of the SBA to guaranty loans under the PPP through August 8, 2020.

In December 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act reauthorized the SBA to guarantee loans under the PPP through March 31, 2021, and the PPP Extension Act of 2021 extended that authorization through June 30, 2021 for applications received by the SBA prior to June 1, 2021.

From the inception of the PPP through December 31, 2021, the Corporation funded a total of approximately $2.7 billion of loans under the PPP.

Through December 31, 2021, a total of $2.2 billion of those PPP loans have qualified for loan forgiveness and have been repaid by the SBA.

A series of stimulus payments to eligible consumers, enhanced unemployment benefits provided by the federal government and traditional, state-provided unemployment compensation, as well as other forms of relief provided to consumers and businesses, have helped to limit some of the adverse impacts of COVID-19 and, together with other factors, have contributed to significant growth in the Corporation’s customer deposit balances since the onset of the pandemic.

The reduction, expiration or discontinuation of these measures may adversely impact the recovery of economic activity and the ability of borrowers to meet their payment and other obligations to the Corporation, either of which could require the Corporation to increase the ACL through provisions for credit losses.

Further, if economic activity continues to recover, and consumer spending and business investment increase, customers may be less likely to maintain deposit balances with the Corporation at recent levels and may require the Corporation to increase its reliance on alternative or higher-cost sources of funding.

The impact of COVID-19 on the Corporation’s financial results is evolving and uncertain.

The Corporation has limited exposure to some of the industries that were initially most significantly impacted by COVID-19, such as hospitality and food services, energy and entertainment, and most of these loans are secured by real estate and other forms of collateral.

While many areas of the economy began to exhibit signs of recovery during the second half of 2020, the lingering effects of the pandemic, particularly in certain sectors of the economy, or a resurgence in COVID-19 infections that prompts the continuation or imposition of governmental restrictions on activities, may result in decreased demand for the Corporation’s loan products.

While many areas of the economy continue to show signs of recovery, the lingering effects of the pandemic, particularly in certain sectors of the economy, or a resurgence in COVID-19 infections that prompts the continuation or imposition of governmental restrictions on activities, may result in decreased demand for the Corporation’s loan products.

In addition, the decline in economic activity occurring due to COVID-19 and the actions by the FOMC with respect to interest rates are likely to affect the Corporation’s net interest income, non-interest income and credit-related losses for an uncertain period of time.

As a result, the Corporation took steps to maintain liquidity and conserve capital during this period of uncertainty.

The Corporation has been holding excess cash reserves since the end of the first quarter of 2020, has additional liquidity available through borrowing arrangements and other sources, and plans to maintain its excess cash and these arrangements until there is more clarity surrounding economic conditions.

See additional discussion in "Results of Operations" and "Financial Condition" of Management's Discussion.

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The Corporation adopted CECL using the modified retrospective method for all financial assets measured at amortized cost, and OBS credit exposures.

Results for 2020 are presented under CECL, while prior years' results are reported in accordance with the previously applicable incurred loss methodology.

Results for 2020 are presented under CECL, and prior years' results are reported in accordance with the previously applicable incurred loss methodology.

The Corporation recorded an increase of $58.3 million to the ACL on January 1, 2020, primarily as a result of the adoption of CECL.

Retained earnings decreased $43.8 million and deferred tax assets increased by $12.4 million on January 1, 2020, representing the cumulative effect of adoption.

Retained earnings decreased $43.8 million and DTAs increased by $12.4 million on January 1, 2020, representing the cumulative effect of adoption.

Financial Highlights

Following is a summary of the financial highlights for the year ended December 31, 2021:

• Net Income Per Share - Diluted net income per share decreased $0.27, or 20.0%, to $1.08 in 2020 compared to $1.35 in 2019.

The decline in net income per share was due to a $50.4 million, or 22.3%, decrease in net income available to common shareholders partially offset by a decrease in weighted average diluted shares outstanding.

• Net Interest Income - The $19.2 million, or 3.0%, decrease in net interest income resulted from lower yields on interest-earning assets, partially offset by balance sheet growth and the impact of lower funding costs.

◦ Net Interest Margin - For the year ended December 31, 2020, the net interest margin decreased to 2.86%, or 50 bp compared to 2019, driven by a 90 bp decrease in yields on interest-earning assets, partially offset by a 42 bp decrease in the cost of funds.

• Net Inco me Per Share - Diluted net income per share increased $0.54, or 50.0%, to $1.62 in 2021 compared to $1.08 in 2020.

The increase in net income per share was due to a $89.3 million, or 50.8%, increase in net income available to common shareholders.

• Net Interest Income - The $34.5 million, or 5.5%, increase in net interest income before provision for credit losses primarily resulted from $59.0 million in PPP loan fees.

◦ Net Interest Margin - For the year ended December 31, 2021, net interest margin decreased to 2.78%, or 8 bps compared to 2020, driven by a 34 bps decrease in the yield on interest-earning assets, partially offset by a 27 bps decrease on cost of funds.

◦ Loan Growth - Average Net Loans grew by $0.4 billion, or 2.0%, in comparison to 2020.

The increase was driven largely by the issuance of PPP loans, included in commercial and industrial loans, and growth in the real estate commercial and residential mortgage portfolios.

Included in average Net Loans were PPP loans that had an average balance of $1.1 billion, a decrease of $0.1 billion from 2020.

The increase in average Net Loans was mainly driven by a $0.6 billion increase in the residential mortgage loan portfolio.

◦ Deposit Growth - Average deposits increased $2.3 billion, or 12.0%, in comparison to 2020.

The increase was the result of growth in all deposit types except time deposits.

The increase was the result of growth in total demand and savings.

At December 31, 2021, the loan-to-deposit ratio was 84.9%, as compared to 90.7% at December 31, 2020.

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Net charge-offs to average loans outstanding were 0.07% for the year ended December 31, 2021 compared to 0.05% for the year ended December 31, 2020.

The provisions for credit losses increased $44.1 million, to $76.9 million, for the year ended December 31, 2020 compared to $32.8 million for the same period in 2019.

The provision for credit losses decreased $91.5 million, to $(14.6) million, for the year ended December 31, 2021 compared to $76.9 million for the same period in 2020.

The higher provision in 2020 was largely driven by the adoption of CECL, which, as a result of an overall downturn in economic forecasts due to COVID-19, resulted in increases in the ACL due to higher expected future credit losses under CECL.

The reduction of provision in 2021 is largely driven by improved economic conditions in comparison to 2020.

• Non-Interest Income - Non-interest income, excluding investment securities gains, increased $13.9 million, or 6.1%, in comparison to 2020.

Increases were experienced in mortgage banking and wealth management, partially offset by decreases in commercial and consumer banking.

• Investment Securities Gains/Balance Sheet Restructurings - During both 2020 and 2019, the Corporation completed limited balance sheet restructurings which included sales of investment securities and corresponding prepayment of FHLB advances.

As a result, investment securities gains totaled $3.1 million in 2020, as compared to $4.7 million in 2019, a $1.7 million, or 35.5%, decrease.

In addition, included in non-interest expense were prepayment penalties on FHLB advances of $2.9 million and $4.3 million incurred during 2020 and 2019, respectively.

• Non-Interest Expense - Non-interest expense increased $11.7 million, or 2.1%, in comparison to 2019, driven largely by higher salaries and employee benefits expense, state taxes and data processing and software expenses.

Partially offsetting these increases were reductions in other outside services and marketing.

In 2020, the Corporation completed a strategic operating expense review, which resulted in a number of cost-saving initiatives that are expected to result in annual expense savings of $25 million, which is not expected to be fully realized until mid-2021.

The Corporation expects to reinvest a portion of the cost savings to accelerate digital transformation initiatives.

In 2020, $16.2 million of expenses were recognized related to the cost-savings initiatives in the following categories:

$5.6 million of severance expense (included in salaries and employee benefits) and $4.8 million of write-offs of fixed assets and $5.8 million of lease termination charges (both included in other expense).

The increase was primarily due to increases of $12.7 million in wealth management, $7.1 million in income from equity method investments and $3.9 million in consumer banking income, offset by declines of $8.7 million in mortgage banking income, due to a $29.2 million decline in income from loan sales, partially offset by a net favorable pre-tax income change attributable to the mortgage servicing rights valuation allowance as compared to 2020 of $20.4 million.

Specifically, Fulton increased the mortgage servicing valuation allowance by $10.5 million in 2020.

The Corporation reduced the valuation allowance by $9.9 million in 2021.

As of December 31, 2021, the mortgage servicing rights valuation allowance remaining was $0.6 million.

• Investment Securities Gains/Balance Sheet Restructurings - During both 2021 and 2020 the Corporation completed limited balance sheet restructurings which included sales of investment securities, corresponding prepayments of

FHLB advances and in 2021, the cash tender offer for certain of its outstanding senior and subordinated notes.

As a result, investment securities gains totaled $33.5 million in 2021, as compared to $3.1 million in 2020, a $30.4 million increase.

In addition, included in non-interest expense were debt extinguishment costs on FHLB advances of $33.2 million and $2.9 million incurred during 2021 and 2020, respectively.

• Non-Interest Expense - Total non-interest expense increased $38.4 million, or 6.6%, to $617.8 million in 2021 in comparison to 2020.

Non-interest expense, excluding debt extinguishment costs of $33.2 million, was $584.6 million, an increase of $21.3 million, or 3.8%, compared to non-interest expenses of $563.2 million in 2020, which excludes expenses associated with cost savings initiatives of $16.2 million.

Excluding the net decrease in severance costs of $5.9 million, the increase in non-interest expense over 2020 was primarily due to increases in salaries and employee benefits of $10.6 million, attributable to a $12.7 million increase in incentive compensation and bonuses.

Also contributing to the increase in non-interest expense were $8.4 million in data processing and software and $2.8 million in other outside services expense, partially offset by a $3.2 million decrease in professional fees.

• Income Taxes - Income tax expense for 2021 resulted in an ETR of 17.6%, as compared to 12.0% for 2020.

The ETR was lower mainly due to lower income before income taxes.

The ETR was higher mainly due to higher income before income taxes.

The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and TCIs.

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

• Long-term Borrowings - During 2021, the Corporation prepaid FHLB advances reducing the long-term balance to zero from $536.0 million.

Also, in the first quarter of 2021, the Corporation completed a cash tender offer for $75.0 million of 4.50% subordinated debt due in 2024 and $60 million of 3.60% senior notes due in 2022.

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

• Preferred Stock - In October 2020, the Corporation issued 8.0 million depositary shares ("Depositary Shares"), each representing a 1/40th interest in a share of Fulton’s 5.125% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, with a liquidation preference of $1,000 per share (equivalent to $25.00 per Depositary Share), for an aggregate offering amount of $200.0 million.

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"Financial Statements and Supplementary Data."

Allowance for Credit Losses - The Corporation adopted new accounting guidance for estimating credit losses, known as CECL, in the first quarter of 2020.

Allowance for Credit Losses - The Corporation adopted CECL in the first quarter of 2020.

In accordance with CECL, the ACL, which includes both the ACL - loans and the ACL - OBS credit exposures, is based on estimated losses over the remaining expected life of loans and OBS exposures.

Management's determination of the appropriateness of the reserve is based on periodic evaluations of the loan portfolio, lending-related commitments, current and forecasted economic factors and other relevant factors.

In determining the ACL, the Corporation uses three inputs in to the model estimate.

In determining the ACL, the Corporation uses three inputs in the model estimate.

These inputs are PD, which estimates the likelihood that a borrower will be unable to meet its debt obligations;

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As economic variables revert to long-term averages through the forecast process, externally developed long-term economic forecasts are used to establish the impacts of the economic scenario, reversion, and long-term averages in the development of losses over the expected life of the assets being modeled.

The ACL reserve is highly sensitive to the economic forecasts used to develop the reserve.

reserve is highly sensitive to the economic forecasts used to develop the reserve.

Due to the high level of uncertainty regarding significant assumptions, such as the ultimate impact of COVID-19 and effectiveness of the related governmental responses, since the beginning of 2020, the Corporation has evaluated a range of economic scenarios, including more and less severe economic deteriorations, with varying speeds of recovery.

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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.

Qualitative adjustments have increased compared to those at the time of the adoption of CECL on January 1, 2020 primarily as a result of uncertainties related to the economic impact of COVID-19, including consideration for the future performance of loans that received deferrals or forbearances as a result of COVID-19 and the impact COVID-19 had on certain industries where the quantitative models was not fully capturing the appropriate level of risk.

Qualitative adjustments have increased compared to those at the time of the adoption of CECL on January 1, 2020 primarily as a result of uncertainties related to the economic impact of COVID-19, including consideration for the future performance of loans that received deferrals or forbearances as a result of COVID-19 and the impact COVID-19 had on certain industries where the quantitative models were not fully capturing the appropriate level of risk.

The impact from qualitative adjustments on the ACL decreased in 2021 with the improvement in economic conditions.

The ACL was $249.0 million and $277.6 million on December 31, 2021 and December 31, 2020, respectively.

The decrease of $28.6 million was primarily a result of improved economic conditions.

The Corporation performs loan loss sensitivity analysis on a quarterly basis to determine the impact of varying economic conditions based on Moody's model projections.

Our sensitivity analysis does not represent management's view of expected credit losses at the balance sheet date.

One scenario identified below the base case projection includes a slowdown in near-term economic growth.

This scenario resulted in a hypothetical increase to the ACL of approximately $13.8 million.

For further discussion of the methodology used in the determination of the ACL, refer to Note 1, "Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data."

Goodwill - Goodwill recorded in connection with acquisitions is not amortized to expense, but is tested at least annually for impairment.

A quantitative annual impairment test is not required if, based on a qualitative analysis, the Corporation determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired.

The Corporation completes its annual goodwill impairment test in October of each year.

Goodwill valuation is inherently subjective, with a number of factors based on assumptions and management judgments.

Among these are selection of comparable market transactions, discount rates and earnings capitalization rates.

Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance could result in different assessments of the fair values of reporting units and could result in impairment charges.

For additional details related to the annual goodwill impairment test, see "Note 1 - Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data."

Income Taxes – The provision for income taxes is based upon income before income taxes, adjusted for the effect of certain tax-exempt income, non-deductible expenses and credits.

In addition, certain items of income and expense are reported in

different periods for financial reporting and tax return purposes.

Income Taxes – The provision for income taxes is based upon income before taxes, adjusted for the effect of certain tax-exempt income, non-deductible expenses and credits.

In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes.

The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit.

1 unchanged sentence

The Corporation must also evaluate the likelihood that DTAs will be recovered through future taxable income.

If any such assets are determined to be more likely than not unrecoverable, a valuation allowance must be recognized.

The assessment of the carrying value of DTAs is based on certain assumptions, changes in which could have a material impact on the Corporation’s consolidated financial statements.

On a periodic basis, the Corporation evaluates its income tax positions based on tax laws, regulations and financial reporting considerations, and records adjustments as appropriate.

If any such assets are determined to be more likely than not unrecoverable, then a valuation allowance must be recognized.

The assessment of the carrying value of DTAs is based on certain assumptions, the changes of which could have a material impact on the Corporation's consolidated financial statements.

On a periodic basis, the Corporation evaluates its income tax provision based on tax laws, regulations and financial reporting considerations and records adjustments as appropriate.

Recognition and measurement of tax positions is based upon management's evaluations of current taxing authorities' examinations of the Corporation's tax returns, recent positions taken by the taxing authorities on similar transactions and the overall tax environment.

Fair Value Measurements – Assets and liabilities are categorized in a fair value hierarchy for the inputs to valuation techniques used to measure at fair value based on the following 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 included are 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.

The determination of fair value for assets categorized as Level 3 items involves significant subjectivity due to the use of unobservable inputs.

In addition, determining when a market is no longer active and placing little or no reliance on distressed market prices requires the use of management’s judgment.

The Corporation's Level 3 assets include AFS securities in the form of pooled trust preferred securities, certain single-issuer trust preferred securities issued by financial institutions and ARCs.

The Corporation also categorizes net loans individually evaluated for impairment, OREO and MSRs as Level 3 assets measured at fair value on a nonrecurring basis.

The Corporation engages third-party valuation experts to assist in valuing interest rate swap derivatives and most AFS investment securities, both measured at fair value on a recurring basis, and MSRs, which are measured at fair value on a non-recurring basis.

The pricing data and market quotes the Corporation obtains from outside sources are reviewed internally for reasonableness.

For additional details see "Note 19 - Fair Value Measurements," in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data."

The provision for income taxes was $58.7 million and $24.2 million on December 31, 2021 and December 31, 2020, respectively.

Recently Issued Accounting Standards

42 unchanged sentences

Demand deposits 7,211,153 5,714,803 4,249,294

Total deposits/Cost of deposits 19,401,046 0.36 16,766,561 0.79 15,832,606 0.55

Other liabilities 462,478 476,139 393,130

Total Liabilities 23,484,387 21,942,068 18,951,970

Total deposits/Cost of deposits 21,723,946 0.14 19,401,046 0.36 16,766,561 0.79

Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds 23,021,909 0.26 21,465,929 0.53 18,558,840 0.95

9 unchanged sentences

Comparison of 2021 to 2020

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volumes) and changes in rates:

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volumes) and changes in yields and rates:

2020 Increase (decrease) due to change in

Volume Rate Net

Volume Yield/Rate Net

(in thousands)

Interest income on:

Loans and leases $ 77,662 $ (161,996) $ (84,334)

Net loans (1)

$ 12,882 $ (31,280) $ (18,398)

Taxable investment securities 13,430 (16,252) (2,822)

13 unchanged sentences

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 the direct changes that are attributable to each component.

In March 2020, the FOMC decreased the Fed Funds Rate by a total of 150 bp in response to COVID-19.

These changes in the Fed Funds Rate resulted in corresponding decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and LIBOR as well as for certain interest-bearing liabilities.

FTE net interest income decreased $19.8 million, or 3.0%, to $641.5 million in 2020.

Net interest margin decreased 50 bp to 2.86% in 2020 from 3.36% in 2019.

As summarized above, FTE interest income decreased $176.2 million as the result of a 90 bp decrease in the yield on interest-earning assets, and increased $93.1 million as the result of a $2.8 billion, or 14.1%, increase in average interest-earning assets, primarily loans.

The average yield on the loan portfolio decreased 92 bp, to 3.63%, largely due to the aforementioned decreases in the Fed Funds Rate in 2020 and corresponding decreases to loan index rates.

All variable and certain adjustable rate loans repriced to lower rates as a result of these interest rate decreases, and yields on new loan originations were lower than the average yield on the loan portfolio.

Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease.

FTE net interest income increased $34.5 million, or 5.4%, to $676.0 million in 2021.

Net interest margin decreased 8 bps to 2.78% in 2021 from 2.86% in 2020.

As summarized above, FTE interest income decreased $53.6 million as the result of a 34 bps decrease in the yield on interest-earning assets, and increased $34.1 million as the result of a $1.9 billion, or 8.4%, increase in average interest-earning assets, primarily in investments and loans.

The yield on the loan portfolio decreased 17 bps, to 3.46%, largely due to decreases in the Fed Funds Rate in 2020 and corresponding decreases in loan index rates.

At that time, all variable and certain adjustable rate loans repriced to lower rates as a result of these interest rate decreases, and yields on new loan originations were lower than the average yield on the loan portfolio.

Adjustable rate loans reprice on dates specified in loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease.

Therefore, the benefit of increases or the reverse effect of decreases in index rates on adjustable rate loans may not be fully realized until future periods.

In addition, 2020 interest income included $6.5 million of unamortized origination fees and direct origination costs recognized as interest income at the time of PPP loan forgiveness, which is in addition to the normal amortization of those items of approximately $22.5 million recognized in 2020.

Interest expense decreased $63.2 million, with a 52 bp decrease in the rate on average interest-bearing liabilities contributing $76.7 million to this decrease, partially offset by a $13.4 million increase in expense as a result of a $1.4 billion, or 10.1%, increase in interest-bearing liabilities, primarily demand deposits and long-term borrowings.

The rates on average interest-bearing demand and savings accounts decreased 54 and 57 bp, respectively, which contributed $26.8 million and $31.2 million to the decrease in interest expense, respectively.

In addition, the 106 bp decrease in the cost of short-term borrowings contributed $8.7 million to the decrease in interest expense.

Interest expense decreased $54.0 million, with a 34 bps decrease in the rate on average interest-bearing liabilities contributing $30.6 million to this decrease.

In addition, a shift into lower-cost demand deposits and savings and money market deposits, which increased $1.5 billion collectively, combined with a decrease in higher-cost time deposits, short-term borrowings and long-term borrowings of $1.4 billion, were the primary drivers for $23.4 million of the reduction in interest expense.

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

12 unchanged sentences

Total loans $ 18,627,787 3.46 % $ 18,270,390 3.63 % $ 357,397 2.0 %

(1) Includes average PPP loans of $1.3 billion for the year ended December 31, 2020.

(1) Includes average PPP loans of $1.1 billion and $1.3 billion for the years ended December 31, 2021 and 2020, respectively.

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

Average loans increased $1.8 billion, or 11.2%, which contributed $77.7 million to the increase in FTE interest income.

The increase was driven largely by growth in the commercial and industrial portfolio as a result of loans originated under the PPP.

Excluding loans originated under the PPP, commercial and industrial loan balances declined $2.4 million.

Commercial and residential mortgage loan portfolios, as well as the construction, consumer and equipment lease financing portfolios, experienced growth, partially offset by decreases in the home equity loan portfolio.

Average investment securities increased $228.6 million, or 8.2%, in comparison to 2019, which contributed a $7.3 million increase in FTE interest income.

This was partially offset by a 7 bp decrease in average yields, resulting in a $3.0 million decrease in FTE interest income.

Other interest-earning assets increased $675.7 million, primarily the result of an increase in cash pledged with counterparties for interest rate swap contracts, contributing $6.9 million to FTE interest income.

The yield on other interest-earning assets decreased 159 bp in comparison to 2019, as a result of the Fed Funds Rate decreases during 2020, resulting in a $10.7 million decrease in FTE interest income.

Average loans increased $357.4 million, or 2.0%, which contributed $12.9 million to FTE interest income.

The increase was driven largely by growth in residential and commercial mortgage loans, partially offset by a decrease in commercial and industrial loans, primarily due to the decrease in PPP loans.

The yield on average loans decreased 17 bps resulting in a decrease in FTE interest income of $31.2 million.

Average investment securities increased $665.8 million, or 22.1%, in comparison to 2020, which contributed a $19.1 million increase in FTE interest income, offset by a decrease of 47 bps in investment yield, resulting in a $17.5 million decrease in FTE interest income.

Other interest-earning assets increased $894.2 million, contributing $2.9 million to FTE interest income.

The yield on other interest-earning assets decreased 31 bps in comparison to 2020, as a result of the Fed Funds Rate decreases during 2020, resulting in a $4.7 million decrease in FTE interest income.

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

9 unchanged sentences

Total deposits $ 21,723,946 0.14 % $ 19,401,046 0.36 % $ 2,322,900 12.0 %

The average cost of interest-bearing deposits decreased 54 bp to 0.51% from 1.05% in 2019 and contributed $66.2 million to the decrease in interest expense compared to 2019.

These rates do not include the impact of non-interest bearing deposits, which lower the cost of total deposits to 0.36% and 0.79% in 2020 and 2019, respectively.

The decrease in the cost is mainly as a result of reductions in deposit rates in response to the FOMC reductions to the Fed Funds Rate as well as deposit rate decreases implemented after the Fed Funds Rate cuts during the second half of 2019.

The majority of deposit rates are discretionary, with the exception of indexed municipal balances.

The average balance of interest-bearing deposits increased $1.2 billion, or 9.3%, partially offsetting the decrease in interest expense by $4.4 million in comparison to 2019.

The cost of interest-bearing deposits decreased 30 bps, to 0.21%, from 0.51% in 2020, resulting in a $34.4 million decrease in interest expense compared to 2020.

These rates do not include the impact of non-interest bearing deposits, which lowered the cost of total deposits to 0.14% and 0.36% in 2021 and 2020, respectively.

The decrease in deposit costs was primarily the result of reductions in deposit rates resulting from decreases in the Fed Funds Rate.

The majority of deposit rates are discretionary, with the exception of indexed municipal deposit balances.

The average balance of interest-bearing deposits increased $0.8 billion, or 6.0%, in comparison to 2020.

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

5 unchanged sentences

$ 513,092 0.11 % $ 553,033 0.28 % $ (39,941) (7.2) %

Federal funds purchased 64,918 0.82 132,578 2.20 (67,660) (51.0)

Federal funds purchased — — 64,918 0.82 (64,918) N/M

FHLB advances and other borrowings (2)

192,632 1.61 361,118 2.43 (168,486) (46.7)

— — 192,632 1.61 (192,632) N/M

Total short-term borrowings 513,092 0.11 810,583 0.64 (297,491) (36.7)

4 unchanged sentences

Total borrowings $ 1,297,963 2.29 % $ 2,064,883 2.11 % $ (766,920) (37.1) %

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

(1) Includes short-term promissory notes.

(2) Represents FHLB advances with an original maturity term of less than one year.

Total average borrowings increased $272.6 million, or 15.2%, while the total average cost of these funds decreased 40 bp, to 2.11% compared to 2019.

Total average short-term borrowings decreased $39.1 million, or 4.6%, due to a decrease in short-term FHLB advances and other borrowings and federal funds purchased, partially offset by increases in average customer funding.

The cost of average short-term borrowings decreased 106 bp to 0.64% in 2020, largely due to the net impact of changes in the Fed Funds Rate.

Average long-term borrowings increased $311.7 million, or 33.1%, and the average rate decreased 19 bp compared to 2019, as a result of the issuance of $375.0 million of subordinated notes in March of 2020.

Total average borrowings decreased $766.9 million, or 37.1%, while the total borrowings rate increased 18 bps, to 2.29% compared to 2020.

Total average short-term borrowings decreased $297.5 million, or 36.7%, due to the corporate restructuring.

The cost of average short-term borrowings decreased 53 bps to 0.11% in 2021, largely due to the restructuring and partial year 2020 net impact of changes in the Fed Funds Rate versus a full year in 2021.

Average long-term borrowings decreased $469.4 million, or 37.4%, and the long-term borrowings rate increased 65 bps compared to 2020, primarily due to a decrease in FHLB advances.

Comparison of 2020 to 2019

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volumes) and changes in rates:

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volumes) and changes in yields and rates:

2019 Increase (decrease) due to change in

Volume Rate Net

Volume Yield/Rate Net

(in thousands)

17 unchanged sentences

The FOMC increased the Fed Funds Rate by 25 bp in each of March, June, September and December of 2018.

During 2019, the FOMC decreased the Fed Funds Rate by 25 bp in each of August, September and October.

These changes in the Fed Funds Rate resulted in corresponding increases or decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and the LIBOR, as well as for certain interest-bearing liabilities.

FTE net interest income increased $18.8 million, or 2.9%, to $661.4 million in 2019.

Net interest margin decreased 4 bp to 3.36% in 2019 from 3.40% in 2018.

As summarized above, FTE interest income increased $35.4 million as the result of an 18 basis point increase in the yield on interest-earning assets, and increased $32.3 million as the result of a $796.4 million, or 4.2%, increase in average interest-earning assets, primarily loans.

The average yield on the loan portfolio increased 17 bp, to 4.55%, largely due to the aforementioned increases in the Fed Funds Rate in 2018 and corresponding increases to loan index rates.

All variable and certain adjustable rate loans repriced to higher rates as a result of these interest rate increases, and yields on new loan originations exceeded the average yield on the loan portfolio.

In March 2020, the FOMC decreased the Fed Funds Rate by a total of 150 bps in response to COVID-19.

These changes in the Fed Funds Rate resulted in corresponding decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and LIBOR, as well as for certain interest-bearing liabilities.

FTE net interest income decreased $19.8 million, or 3.0%, to $641.5 million in 2020.

Net interest margin decreased 50 bps to 2.86% in 2020 from 3.36% in 2019.

As summarized above, FTE interest income decreased $176.2 million as the result of a 90 basis point decrease in the yield on interest-earning assets, and increased $93.1 million as the result of a $2.8 billion, or 14.1%, increase in average interest-earning assets, primarily loans.

The yield on the loan portfolio decreased 92 bps, to 3.63%, largely due to the aforementioned decreases in the Fed Funds Rate in 2020 and corresponding decreases to loan index rates.

All variable and certain adjustable rate loans repriced to lower rates as a result of these interest rate decreases, and yields on new loan originations were lower than the yield on the loan portfolio.

Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease.

Therefore, the benefit of increases or the reverse effect of decreases in index rates on adjustable rate loans may not be fully realized until future periods.

Interest expense increased $48.9 million, with a 28 basis point increase in the rate on average interest-bearing liabilities contributing $39.7 million to this increase.

The rates on average interest-bearing time, savings accounts and demand deposits increased 45, 25 and 20 bp, respectively.

These rate increases contributed $12.9 million, $12.5 million and $8.6 million, respectively, to the increase in interest expense.

In addition, the 63 basis point increase in the rates on short-term borrowings contributed $5.3 million to the increase in interest expense.

In addition, 2020 interest income included $6.5 million of unamortized origination fees and direct origination costs recognized as interest income at the time of PPP loan forgiveness, which was in addition to the normal amortization of those items of approximately $22.5 million recognized in 2020.

Interest expense decreased $63.2 million, with a 52 bps decrease in the rate on average interest-bearing liabilities contributing $76.7 million to this decrease, partially offset by a $13.4 million increase in expense as a result of a $1.4 billion, or 10.1% increase in interest-bearing liabilities, primarily demand deposits and long-term borrowings.

The rates on average interest-bearing demand and savings accounts decreased 54 and 57 bps, respectively, which contributed $26.8 million and $31.2 million to the decrease in interest expense, respectively.

In addition, the 106 bps decrease in the cost of short-term borrowings contributed $8.7 million to the decrease in interest expense.

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

4 unchanged sentences

Commercial and industrial (1)

5,501,317 3.10 4,473,549 4.52 1,027,768 23.0

Real estate - residential mortgage 2,876,538 3.80 2,441,684 4.05 434,854 17.8

5 unchanged sentences

Total loans $ 18,270,390 3.63 % $ 16,430,347 4.55 % $ 1,840,043 11.2 %

(1) Includes average PPP loans of $1.3 billion for the year ended December 31, 2020..

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

Average loans increased $615.1 million, or 3.9%, which contributed $27.5 million to the increase in FTE interest income.

In addition, the average yield on the loan portfolio increased 17 bp, contributing $27.7 million to the increase in FTE interest income.

As mentioned above, the increase in average yields on loans was driven by the repricing of existing variable and adjustable rate loans as a result of increases in the prime rate and LIBOR during 2018 that were only partially offset by decreases in those same rates that occurred in the second half of 2019.

Average investment securities increased $116.0 million, or 4.4%, in comparison to 2018, which contributed $9.2 million to the increase in FTE interest income.

The average yield on investment securities increased 21 bp, contributing $5.7 million to the increase in FTE interest income.

Other interest-earning assets increased $62.4 million, or 16.3%, primarily the result of an increase in cash pledged with counterparties for interest rate swap contracts.

The yield on other interest-earning assets increased 46 bp in comparison to 2018, as a result of the Fed Funds Rate increases during 2018 that were only partially offset by the decreases during 2019, resulting in a $1.9 million increase in FTE interest income.

Average loans increased $1.8 billion, or 11.2%, which contributed $77.7 million to the increase in FTE interest income.

The increase was driven largely by growth in the commercial and industrial portfolio as a result of loans originated under the PPP.

Excluding loans originated under the PPP, commercial and industrial loan balances declined $2.4 million.

Average investment securities increased $228.6 million, or 8.2%, in comparison to 2019, which contributed a $7.3 million increase in FTE interest income.

This increase was partially offset by a 7 bps decrease in yields, resulting in a $3.0 million decrease in FTE interest income.

The yield on other interest-earning assets decreased 159 bps in comparison to 2019, as a result of the Fed Funds Rate decreases during 2020, resulting in a $10.7 million decrease in FTE interest income.

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

9 unchanged sentences

Total deposits $ 19,401,046 0.36 % $ 16,766,561 0.79 % $ 2,634,485 15.7 %

Average interest-bearing deposits contributed $44.1 million to the increase in interest expense, increasing $971.8 million, or 8.4%, in comparison to 2018.

The average cost of interest-bearing deposits increased 29 bp to 1.05% in 2019 from 0.76% in 2018, due to increases in the rates on all types of interest-bearing deposits as a result of the Fed Funds Rate increases and related market competition that occurred in 2018, and was only partially impacted by decreases to the Fed Funds Rate that occurred in 2019.

Average brokered deposits increased $123.6 million, to $245.5 million, as a result of continued growth of brokered deposit programs introduced in 2018.

The cost of interest-bearing deposits decreased 54 bps to 0.51% from 1.05% in 2019 and contributed $66.2 million to the decrease in interest expense compared to 2019.

These rates do not include the impact of non-interest bearing deposits, which lowered cost of total deposits to 0.36% and 0.79% in 2020 and 2019, respectively.

The decrease in the cost was mainly as a result of reductions in deposit rates in response to the FOMC reductions to the Fed Funds Rate as well as deposit rate decreases implemented after the Fed Funds Rate cuts during the second half of 2019.

The majority of deposit rates are discretionary, with the exception of indexed municipal balances.

The average balance of interest-bearing deposits increased $1.2 billion, or 9.3%, partially offsetting the decrease in interest expense by $4.4 million in comparison to 2019.

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

7 unchanged sentences

FHLB advances and other borrowings (2)

361,118 2.43 109,540 2.20 251,578 N/M

192,632 1.61 361,118 2.43 (168,486) (46.7)

Total short-term borrowings 810,583 0.64 849,679 1.70 (39,096) (4.6)

4 unchanged sentences

Total borrowings $ 2,064,883 2.11 % $ 1,792,279 2.51 % $ 272,604 15.2 %

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

(1) Includes short-term promissory notes.

(2) Represents FHLB advances with an original maturity term of less than one year.

Total average borrowings increased $28.8 million, or 1.6%, while the total average cost of these funds increased 22 bp, to 2.51%.

Total average short-term borrowings increased $63.8 million, or 8.1%, due to an increase in short-term FHLB advances and other borrowings, partially offset by decreases in average short-term customer funding and federal funds purchased.

The cost of average short-term borrowings increased 63 bp to 1.70% in 2019, largely due to the annual average impact of Fed Funds Rate increases.

Average long-term FHLB advances decreased $35.7 million, or 6.0%, and the average rate decreased 8 bp as higher rate advances were paid off or matured and replaced with advances at lower average rates.

Total average borrowings increased $272.6 million, or 15.2%, while the total cost of borrowings decreased 40 bps, to 2.11% compared to 2019.

The cost of short-term borrowings decreased 106 bps to 0.64% in 2020, largely due to the net impact of the changes in the Fed Funds Rate.

Average long-term borrowings increased $311.7 million, or 33.1%, and the rate decreased 19 bps compared to 2019, as a result of the issuance of $375.0 million of subordinated notes in March of 2020.

Provision for Credit Losses

The provision for credit losses increased $44.1 million, to $76.9 million, for the year ended December 31, 2020.

The increase was the result of several factors, most notably, the overall uncertainty in economic forecasts due to COVID-19.

See additional details under "Allowance for Credit Losses and Asset Quality" in the "Financial Condition" section below.

The provision for credit losses decreased $91.5 million, to $(14.6) million, for the year ended December 31, 2021.

The decrease was primarily the result of an improvement in economic conditions.

See additional details under "Loans and Allowance for Credit Losses" in the "Financial Condition" section below.

Non-Interest Income and Expense

18 unchanged sentences

Mortgage banking:

Gains on sales of mortgage loans 53,599 17,881 35,718 N/M

Gains on sales of mortgage loans 24,380 53,599 (29,219) (54.5)

Mortgage servicing income 9,196 (11,290) 20,486 N/M

1 unchanged sentence

Other 20,622 13,084 7,538 57.6

Non-interest income before investment securities gains, net 226,335 211,427 14,908 7.1

Investment securities gains, net 3,053 4,733 (1,680) (35.5)

Non-interest income before

investment securities gains 240,229 226,335 13,894 6.1

Investment securities gains, net 33,516 3,053 30,463 N/M

Total Non-Interest Income $ 273,745 $ 229,388 $ 44,357 19.3 %

Excluding net investment securities gains, non-interest income increased $13.9 million, or 6.1%, in 2021, as compared to 2020.

Total commercial banking income decreased $831,000, compared to 2019, driven mainly by a decrease in other commercial banking income (SBA lending income and other service charges as a result of COVID-19).

This decrease was somewhat offset by an increase in capital markets revenue.

Total consumer banking decreased $7.9 million, or 16.0%, compared to 2019, driven primarily by lower overdraft fees.

Other consumer banking income decreased largely due to lower ATM fees.

Wealth management revenues increased $3.4 million, or 6.1%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance.

Mortgage banking income increased $19.2 million, or 83.2%, mainly due to gains on sales of mortgage loans, partially offset by a decrease in mortgage servicing income.

Gains increased as a result of both higher volumes of loans sold and higher spreads on sales.

The decrease in mortgage servicing income was driven by $10.5 million of MSR impairment charges and higher MSR amortization due to higher prepayments as a result of the lower rate environment.

There were no MSR impairment charges in 2019.

Investment securities gains decreased $1.7 million, or 35.5%, mainly attributed to the difference in scope of the limited balance sheet restructures in 2020 and 2019.

See Note 3, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.

Total commercial banking income decreased $1.6 million, or 2.3% compared to 2020, driven mainly by a decrease in capital market revenues.

Total consumer banking increased $3.9 million, or 9.5%, compared to 2020, driven primarily by higher card income.

Wealth management revenues increased $12.7 million, or 21.6%, resulting primarily from an increase in client asset levels and improved overall market performance.

Mortgage banking income decreased $8.7 million, or 20.6%, mainly due to reduced gains on sales of mortgage loans, partially offset by an increase in mortgage servicing income.

Investment securities gains increased $30.5 million, primarily due to the sale of Visa Class B restricted shares, as part of the balance sheet restructuring undertaken in 2021.

Non-Interest Expense

4 unchanged sentences

Salaries and employee benefits $ 329,138 $ 324,395 $ 4,743 1.5 %

Net occupancy 53,013 52,826 187 0.4

Data processing and software 56,440 48,073 8,367 17.4

Net occupancy 53,799 53,013 786 1.5

Other outside services 34,194 31,432 2,762 8.8

Equipment 13,885 13,575 310 2.3

Professional fees 12,835 13,134 (299) (2.3)

Marketing 5,127 9,848 (4,721) (47.9)

Debt extinguishment 33,249 2,878 30,371 N/M

State taxes 18,793 12,613 6,180 49.0

Equipment 13,807 13,885 (78) (0.6)

FDIC insurance 10,665 8,865 1,800 20.3

Professional fees 9,647 12,835 (3,188) (24.8)

Amortization of TCI 6,187 6,126 61 1.0

Prepayment penalty on FHLB advances 2,878 4,326 (1,448) (33.5)

Marketing 5,275 5,127 148 2.9

Intangible amortization 589 529 60 11.3

1 unchanged sentence

Total Non-Interest Expense $ 617,830 $ 579,440 $ 38,390 6.6 %

In the third quarter of 2020, the Corporation announced cost-savings initiatives which will result in approximately $25 million in annual expense savings, not to be fully realized until mid-2021.

In 2020, $16.2 million of expenses were recognized related to the cost-savings initiatives in the following categories:

In 2019, the Corporation recognized $10.9 million of expenses related to the Charter Consolidation, primarily in the following categories:

$1.9 million of severance expense (included in salaries and employee benefits), $6.6 million of other outside services, $1.0 million of an intangible write-off (included in intangible amortization) and $600,000 in marketing expense.

The more significant fluctuations in expense levels, excluding the cost-savings initiatives in 2020 and the charter consolidation costs in 2019, by category are explained below:

• Salaries and employee benefits increased $9.0 million mainly due to increases in employee salaries (annual merit increases), overtime and incentive compensation (primarily COVID-19 related for front-line employees).

• Other outside services decreased $2.0 million, or 5.9%, primarily due to more in-house development and less reliance on third-party service providers.

• Data processing and software increased $3.4 million reflecting higher transaction volumes and costs related to growth and technology initiatives.

• Marketing decreased $4.1 million, or 44.3%, as a result of reduced marketing campaigns.

• State taxes increased $3.7 million, or 41.8%, as a result higher Pennsylvania Bank Shares tax due to the Bank's increased equity as well as higher sales taxes.

• Other expenses decreased $4.3 million compared to 2019, primarily driven by a decrease in travel and entertainment, influenced by the restrictions due to COVID-19.

Non-interest expense increased $38.4 million, or 6.6%.

Excluding the net decrease in severance costs of $5.9 million, the increase in non-interest expense over 2020 was primarily due to increases in salaries and benefits of $10.6 million, attributable to a $12.7 million increase in incentive compensation and bonuses.

Income tax expense for 2021 was $58.7 million, a $34.6 million increase compared to 2020.

The ETR was 17.6% in 2021, as compared to 12.0% in 2020.

The increase in income tax expense and the ETR resulted primarily from higher income before income taxes.

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

Comparison of 2020 to 2019

7 unchanged sentences

Cash management 18,725 18,392 333 1.8

Commercial loan interest rate swap 14,875 9,831 5,044 51.3

Other 13,773 13,090 683 5.2

Capital markets 18,288 14,875 3,413 22.9

Other commercial banking 10,134 13,773 (3,639) (26.4)

Total commercial banking 70,286 71,117 (831) (1.2)

4 unchanged sentences

Total consumer banking 41,598 49,503 (7,905) (16.0)

Wealth management 55,678 52,148 3,530 6.8

Mortgage banking income:

Gain on sales of mortgage loans 17,881 13,021 4,860 37.3

Mortgage servicing income 5,218 6,005 (787) (13.1)

Wealth management fees 59,058 55,678 3,380 6.1

Mortgage banking:

Gains on sales of mortgage loans 53,599 17,881 35,718 N/M

Mortgage servicing income (11,290) 5,218 (16,508) N/M

Total mortgage banking 42,309 23,099 19,210 83.2

Other 13,084 12,030 1,054 8.8

Non-interest income before investment securities gains, net 211,427 195,488 15,939 8.2

Investment securities gains, net 4,733 37 4,696 N/M

Non-interest income before

investment securities gains 226,335 211,427 14,908 7.1

Investment securities gains, net 3,053 4,733 (1,680) (35.5)

Total Non-Interest Income $ 229,388 $ 216,160 $ 13,228 6.1 %

Excluding net investment securities gains, non-interest income increased $15.9 million, or 8.2%, for the year ended December 31, 2019, as compared to the same period in 2018, with increases across all major categories

Wealth management fees increased $3.5 million, or 6.8%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance, as well as the acquisitions of two small wealth management firms in 2019.

Total commercial banking income increased $7.2 million, or 11.2%, compared to 2018, driven mainly by an increase in capital markets revenue along with increases in merchant and card income and cash management fees.

Total consumer banking increased $1.1 million, or 2.2%, compared to 2018, driven primarily by card income.

Mortgage banking income increased $4.1 million, or 21.4%, mainly due to gains on sales of mortgage loans.

The increase in gains resulted from both higher volumes of loans sold and higher spreads on sales.

Investment securities gains increased $4.7 million compared to 2018, mainly attributed to the sale of approximately $400 million of investment securities and a corresponding prepayment of FHLB advances.

This balance sheet restructuring occurred in the third quarter of 2019.

See Note 3, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.

Excluding net investment securities gains, non-interest income increased $14.9 million, or 7.1%, in 2020, as compared to 2019.

Total commercial banking income decreased $0.8 million, compared to 2019, driven mainly by a decrease in other commercial banking income (SBA lending income and other service charges as a result of COVID-19).

This decrease was somewhat offset by an increase in capital markets revenue.

Total consumer banking decreased $7.9 million, or 16.0%, compared to 2019, driven primarily by lower overdraft fees.

Other consumer banking income decreased largely due to lower ATM fees.

Wealth management revenues increased $3.4 million, or 6.1%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance.

Mortgage banking income increased $19.2 million, or 83.2%, mainly due to gains on sales of mortgage loans, partially offset by a decrease in mortgage servicing income.

Gains increased as a result of both higher volumes of loans sold and higher spreads on sales.

The decrease in mortgage servicing income was driven by $10.5 million of MSR impairment charges and higher MSR amortization due to higher prepayments as a result of the lower rate environment.

There were no MSR impairment charges in 2019.

Investment securities gains decreased $1.7 million, or 35.5%, mainly attributed to the difference in scope of the limited balance sheet restructures in 2020 and 2019.

Non-Interest Expense

9 unchanged sentences

Professional fees 12,835 13,134 (299) (2.3)

Marketing 9,848 8,854 994 11.2

State taxes 12,613 8,894 3,719 41.8

1 unchanged sentence

Amortization of TCI 6,126 6,021 105 1.7

Prepayment penalty on FHLB advances 4,326 — 4,326 N/M

Intangible amortization 1,427 — 1,427 N/M

Marketing 5,127 9,848 (4,721) (47.9)

Debt extinguishment 2,878 4,326 (1,448) (33.5)

Intangible amortization 529 1,427 (898) (62.9)

Other 59,669 53,303 6,366 11.9

Total non-interest expense $ 579,440 $ 567,736 $ 11,704 2.1 %

In 2019, $10.9 million of expenses were incurred related to Charter Consolidation, as compared to $3.6 million in 2018, a $7.3 million increase.

The 2019 expenses were primarily in salaries and benefits ($1.9 million of severance expense), other outside services ($6.6 million), intangible amortization ($1.0 million write-off) and marketing ($650,000).

The more significant fluctuations in expense levels, excluding charter consolidation costs, by category are explained below:

• Salaries and employee benefits increased $6.8 million mainly due to an increase in employee salaries (annual merit increases).

Healthcare and 401(k) plan matching expense also increased, but were partially offset by lower defined benefit pension expense driven by changes in the discount rate compared to 2018.

• Net occupancy expense increased $1.1 million, or 2.2%, due mainly to the addition of new properties.

• Data processing and software increased $3.4 million, or 8.2%, reflecting higher transaction volumes and costs related to growth and technology initiatives.

• Marketing increased $1.0 million, or 11.2%, due to additional promotions, primarily related to deposits.

• FDIC insurance expense decreased $3.2 million, or 29.2%, due to the recognition of assessment credits in 2019.

• Amortization of tax credit investments decreased $5.4 million as 2018 included amortization for one significant investment which generated a corresponding credit to income taxes.

• 2019 includes approximately $4.3 million of penalties related to the prepayment of certain FHLB advances in conjunction with the previously mentioned balance sheet restructuring.

• Other expenses increased $5.4 million due to losses on sale of fixed assets, telecommunications expense and operating risk losses.

Income tax expense for 2020 was $24.2 million, a $13.5 million, or 35.7%, decrease from $37.6 million in 2019.

The ETR was 12.0% in 2020, as compared to 14.3% in 2019.

The decrease in income tax expense and the ETR primarily resulted from lower income before income taxes.

In the third quarter of 2020, the Corporation announced cost-savings initiatives which resulted in annual expense savings, not to be fully realized until mid-2021.

In 2020, $16.2 million of expenses were recognized related to the cost-savings initiatives in the following categories:

The Corporation has been reinvesting a portion of the cost savings to accelerate digital transformation initiatives.

In 2019, the Corporation recognized $10.9 million of expenses related to the Charter Consolidation, primarily in the following categories:

The more significant fluctuations in expense levels, excluding the cost-savings initiatives in 2020 and the Charter Consolidation costs in 2019, by category are explained below:

• Other outside services decreased $2.0 million, or 5.9%, primarily due to more in-house development and less reliance on third-party service providers.

• Data processing and software increased $3.4 million, reflecting higher transaction volumes and costs related to growth and technology initiatives.

• Marketing decreased $4.1 million, or 44.3 %, as a result of reduced marketing campaigns.

• State taxes increased $3.7 million, or 41.8%, as a result of higher Pennsylvania Bank Shares tax due to the Bank's increased equity as well as higher sales taxes.

• Other expenses decreased $4.3 million compared to 2019, primarily driven by a decrease in travel and entertainment, influenced by the restrictions due to COVID-19.

FINANCIAL CONDITION

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(dollars in thousands)

Cash and cash equivalents $ 1,847,832 $ 517,791 $ 1,330,041 N/M

Cash and cash equivalents $ 1,638,614 $ 1,847,832 $ (209,218) (11.3) %

FRB and FHLB Stock 57,635 92,129 (34,494) (37.4) %

2 unchanged sentences

Loans, net 18,076,349 18,623,253 (546,904) (2.9)

Premises and equipment 231,480 240,046 (8,566) (3.6)

Net premises and equipment 220,357 231,480 (11,123) (4.8)

Goodwill and intangibles 538,053 536,659 1,394 0.3

9 unchanged sentences

Total Liabilities and Shareholders’ Equity $ 25,796,398 $ 25,906,733 $ (110,335) (0.4) %

Cash and Cash Equivalents

The $1.3 billion increase in cash and cash equivalents mainly resulted from additional cash maintained at the FRB due to deposit growth as well as additional collateral required to be posted with counterparties for derivative contracts.

Loans Held for Sale

Loans held for sale increased $46.1 million, or 121.8%, primarily as the result of an increase in the volume of residential mortgage originations due to higher refinancing activity.

Investment Securities

2 unchanged sentences

Available for Sale

Government securities $ 127,618 $ —

State and municipal securities 1,188,670 952,613

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Residential mortgage-backed securities 404,958 278,281

Commercial mortgage-backed securities 575,426 —

980,384 278,281

Total investment securities $ 4,167,774 $ 3,340,424

Total AFS securities increased $564.6 million, or 22.6%, to $3.1 billion at December 31, 2020 primarily due to the investment of a portion of the proceeds from the issuance of $375.0 million of subordinated notes and investment of excess funding, partially offset by the sale of investment securities, with an estimated fair value of $82.0 million, completed during the second quarter of 2020 as part of a limited balance sheet restructuring that included the redemption of FHLB advances.

See Note 9, "Short-term and Long-Term Borrowings," in the Notes to Consolidated Financial Statements for additional detail on the subordinated notes issuance.

Total HTM securities decreased $91.6 million, or 24.8%, primarily as a result of principal repayments and premium amortization.

There were no purchases of or transfers into HTM securities during 2020.

Total AFS securities increased $125.2 million, or 4.1%, to $3,187.4 million at December 31, 2021, primarily due to an increase in state and municipal securities and commercial mortgage backed securities, partially offset by a decrease in collateralized mortgage obligations.

Total HTM securities increased $702.1 million, primarily due to the addition of commercial mortgage-backed securities and an increase in residential mortgage-backed securities.

The following table presents ending loans outstanding, by type, as of the dates shown, and the changes in balances for the most recent year:

13 unchanged sentences

Net Loans $ 18,325,350 $ 18,900,820 $ 16,837,526

(1) Includes PPP loans totaling $1.6 billion as of December 31, 2020.

Net Loans increased $2.1 billion, or 12.3%, as of December 31, 2020 compared to December 31, 2019, primarily due to growth in commercial and industrial loans and commercial and residential mortgage loans, partially offset by decreases in home equity loans and equipment lease financing.

The increase in commercial and industrial loans was impacted by approximately $1.6 billion of PPP loans.

(1) Includes PPP loans totaling $0.3 billion and $1.6 billion as of December 31, 2021 and 2020, respectively.

Net Loans decreased $575.5 million, or 3.0%, as of December 31, 2021 compared to December 31, 2020, primarily due to a $1,462.5 million decrease in commercial and industrial loans due to the decrease in PPP loans, partially offset by a $704.8 million increase in residential mortgage loans.

The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographic location within its footprint.

As of December 31, 2020, approximately $8.2 billion, or 43.1%, of the loan portfolio was comprised of commercial mortgage and construction loans.

As of December 31, 2021, approximately $8,418.9 million, or 45.9%, of the loan portfolio was comprised of commercial mortgage and construction loans.

The Corporation's policies limit the maximum total lending commitment to an individual borrower to $55.0 million as of December 31, 2021.

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.

The following table summarizes the industry concentrations within the commercial mortgage and the commercial and industrial loan portfolios (including PPP loans) as of December 31:

The following table summarizes the industry concentrations within the commercial mortgage and the commercial and industrial loan portfolios (excluding PPP loans) as of December 31:

Real estate (1)

2 unchanged sentences

Agriculture 6.1 6.5

Construction (2)

Manufacturing 5.1 5.0

Other services (2)

Construction (3)

Hospitality and food services 3.7 4.0

Retail 3.0 3.5

Professional, scientific and technical services 3.6 2.9

Educational services 3.3 4.1

Wholesale trade 2.8 2.7

Educational services 2.7 3.0

Arts, entertainment and recreation 2.3 2.4

Professional, scientific and technical services 1.8 2.2

Public administration 1.5 1.7

Finance and Insurance 1.4 1.4

Transportation and warehousing 1.3 1.4

4 unchanged sentences

and appraising real estate.

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

(2) Excludes public administration.

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

(4) Includes energy sector.

7 unchanged sentences

(in thousands)

Balance of non-accrual loans at December 31, 2018 $ 50,149 $ 30,389 $ 7,390 $ 14,668 $ 6,707 $ — $ 19,269 $ 128,572

Balance at December 31, 2019 $ 48,106 $ 33,166 $ 3,618 $ 16,676 $ 7,004 $ — $ 16,528 $ 125,098

Additions 37,208 37,538 153 12,994 5,621 3,742 3,177 100,433

3 unchanged sentences

Transfers to accrual status (1) (901) (1) (858) — — — (1,761)

Balance of non-accrual loans at December 31, 2019 48,106 33,166 3,618 16,676 7,004 — 16,528 125,098

Balance at December 31, 2020 31,993 51,470 1,395 26,107 9,588 332 16,313 137,198

Additions 40,722 36,664 404 12,498 1,972 2,628 1,919 96,807

5 unchanged sentences

Non-accrual loans increased $6.5 million, or 4.7%, in 2021.

Non-accrual loans as a percentage of Net Loans decreased to 0.72% at December 31, 2020, as compared to 0.74% at December 31, 2019.

Non-accrual loans as a percentage of Net Loans increased to 0.78% at December 31, 2021, compared to 0.72% at December 31, 2020.

The following table presents non-performing assets as of the dates shown:

8 unchanged sentences

Total non-performing assets $ 153,936 $ 151,305 $ 147,986

(1) In 2020, the total interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms was $5.8 million.

The amount of interest income on non-accrual loans that was recognized in 2020 was approximately $290,000.

(1) The amount of interest income on non-accrual loans that was recognized in 2021 was approximately $1.3 million.

(2) Accrual of interest is generally discontinued when a loan becomes 90 days past due.

21 unchanged sentences

(in thousands)

Real estate – residential mortgage $ 18,602 $ 21,551 $ 24,102 $ 26,016 $ 27,617

Real estate – commercial mortgage $ 3,464 $ 28,451 $ 13,330

Real estate – home equity 14,391 15,068 16,665 15,558 8,594

Commercial and industrial 1,857 6,982 5,193

Real estate – residential mortgage 11,948 18,602 21,551

Real estate – home equity 12,218 14,391 15,068

Consumer 5 — 8

Real estate – construction — — — — 726

Total accruing TDRs 29,492 68,426 55,150

3 unchanged sentences

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

The increase in TDRs in 2020 compared to 2019 is primarily the result of one large borrower in the commercial mortgage portfolio.

The decrease in TDRs in 2021 compared to 2020 is primarily due to a decrease in commercial mortgage, residential mortgage and commercial and industrial loans, partially offset by an increase in non-accrual TDRs.

Total TDRs modified during 2021 and still outstanding as of December 31, 2021, were $33.5 million.

Of these loans, $15.5 million, or 34.3%, had a payment default during 2020, which the Corporation defines as a single missed scheduled payment, subsequent to modification.

Of these loans, $15.5 million, or 46.4%, had a payment default during 2021, which the Corporation defines as a single missed scheduled payment,

subsequent to modification.

TDRs modified during 2020 and still outstanding as of December 31, 2020, totaled $45.3 million.

9 unchanged sentences

For a complete description of the Corporation's risk ratings, refer to the "Allowance for Credit Losses" section within "Note 1 - Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data." The evaluation of credit risk for residential mortgages, home equity loans, construction

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

"Financial Statements and Supplementary Data." The evaluation of credit risk for residential mortgages, home equity loans, construction loans to individuals, consumer loans and equipment lease financing is based on aggregate payment history through the monitoring of delinquency levels and trends.

Total internally risk rated loans were $12.4 billion and $13.7 billion as of December 31, 2021 and 2020, respectively.

5 unchanged sentences

(dollars in thousands)

Real estate - commercial mortgage $ 478,165 $ 137,163 $ 341,002 N/M $ 181,970 $ 134,206 $ 47,764 35.6% $ 660,135 $ 271,369

Real estate - commercial mortgage $ 387,279 $ 478,165 $ (90,886) (19.0)% $ 331,096 $ 181,970 $ 149,126 82.0% $ 718,375 $ 660,135

Commercial and industrial 142,369 154,039 (11,670) (7.6) 152,219 128,175 24,044 18.8 294,588 282,214

6 unchanged sentences

(3) Excludes construction - other

As of December 31, 2020, total loans with risk ratings of special mention increased by $323.0 million, or 100.2%, and total loans with a risk rating of substandard or lower decreased by $24.5 million, or 7.2%, resulting in an overall increase in total criticized loans of $298.5 million, 45.0% higher than 2019.

The largest driver of the migration into these risk rating categories was within the hospitality industry, which is included in the real estate - commercial mortgage category.

The following table presents, by class segment, a summary of delinquency status and rates, as a percentage of total loans, for loans that do not have internal risk ratings as of December 31:

As of December 31, 2021, total loans with risk ratings of special mention decreased by $57.0 million, or 8.8%, and total loans with a risk rating of substandard or lower increased by $174.0 million, or 55.1%, resulting in an overall increase in total criticized loans of $117.1 million, 12.2% higher than 2020.

The largest drivers of the migration into these risk rating categories was within the arts, recreation and entertainment industry, education industry and hospitality industry, which is included in the real estate - commercial mortgage category.

The following table presents, by class segment, a summary of delinquency status and rates, as a percentage of total

loans that do not have internal risk ratings as of December 31:

Delinquent (1)

15 unchanged sentences

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

Allowance for Credit Losses and Asset Quality

Loans and Allowance for Credit Losses

The Corporation accounts for the credit risk associated with lending activities through the ACL and the provision for credit losses.

34 unchanged sentences

Net charge-offs to average loans 0.07 % 0.05 % 0.22 %

ACL - loans 1.47 0.97 0.99 1.08 1.15

ACL - loans to total Net Loans 1.36 1.47 0.97

ACL to total Net Loans 1.44 1.54 0.99

10 unchanged sentences

Prior to 2020, it was referred to as "reserve for unfunded lending commitments".

See "Note 4 - Allowance for Credit Losses and Asset Quality" in the Notes to Consolidated Financial Statements in Item 8.

See "Note 4 - Loans and Allowance for Credit Losses" in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data." for further details.

1 unchanged sentence

(3) 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," in Item 6.

"Selected Financial Data."

The provision for credit losses increased $44.1 million in comparison to 2019.

Prior periods did not incorporate "life of loan" losses under CECL and applied an incurred loss model, which would not have considered economic forecasts or forward-looking considerations over the remaining expected lives of loans.

The amounts recorded in 2020 were primarily driven by economic assumptions, which considered the impact of COVID-19.

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," in the Overview of Item 7.

"Management Discussion & Analysis of Financial Condition and Results of Operations."

The provision for credit losses decreased $91.5 million in comparison to 2020.

The amounts recorded in 2021 were primarily driven by economic assumptions.

Periods prior to 2020 did not incorporate "life of loan" losses under CECL and applied an incurred loss model, which would not have considered economic forecasts or forward-looking considerations over the remaining expected lives of loans.

See "Note 1 - Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Item 8.

5 unchanged sentences

Category (1) ACL - loans %

(dollars in thousands)

4 unchanged sentences

Real estate - construction 12,941 6.2 15,608 5.5 4,443 5.8

Unallocated — N/A — N/A — N/A — N/A 4,533 N/A

Total $ 249,001 100.0 % $ 277,567 100.0 % $ 163,622 100.0 %

N/A – Not applicable

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

Management believes that the $249.0 million ACL - loans as of December 31, 2021, was sufficient to cover expected losses in the loan portfolio.

See additional disclosures in "Note 1 - Summary of Significant Accounting Policies," and "Note 4 - Allowance for Credit Losses and Asset Quality," in the Notes to Consolidated Financial Statements in Item 8.

See additional disclosures in "Note 1 - Summary of Significant Accounting Policies," and "Note 4 - Loans and Allowance for Credit Losses," in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data;" and "Critical Accounting Policies" above.

Other assets increased $234.7 million, or 25.6%, to $1.2 billion as of December 31, 2020, primarily due to higher fair values of derivative contracts for interest rate swaps, earnings on bank-owned life insurance, and an increase in the net DTA mainly as the result of the adoption of CECL.

Other assets decreased $73.7 million, or 6.8%, to $1.0 billion as of December 31, 2021, primarily due to the decrease in fair values of derivatives related to the Bank's customer back-to-back interest rate swap program of $177.2 million, partially offset by an increase on bank-owned life insurance of $90.1 million driven by purchases of new policies of $75.0 million during 2021.

Deposits and Borrowings

10 unchanged sentences

Total deposits $ 21,573,499 $ 20,839,207 $ 734,292 3.5 %

Compared to 2021, total demand and savings deposits increased by $1.3 billion, or 7.2%, partially offset by a decrease in brokered deposits of $83.7 million and time deposits of $497.2 million.

This shift from higher-cost to lower-cost deposits favorably impacted the Corporation's net interest margin and profitability.

The following table presents ending borrowings, by type, as of December 31:

5 unchanged sentences

$ 416,764 $ 630,066 $ (213,302) (33.9) %

FHLB advances and other borrowings (2)

— 500,000 (500,000) (100.0)

Total short-term borrowings 630,066 883,241 (253,175) (28.7)

Long-term borrowings:

3 unchanged sentences

Total borrowings $ 1,038,109 $ 1,926,329 $ (888,220) (46.1) %

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

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

Total short-term borrowings decreased $253.2 million, or 28.7%, as a result of higher balances of deposits and the increase in long-term borrowings, reducing the need for short-term borrowings.

Long-term FHLB advances increased $44.9 million, or 9.2%, and other long-term debt increased $369.5 million as the result of the issuance of $375.0 million of subordinated notes in March 2020 as discussed in the "Overview" section of Management's Discussion.

(1) Includes short-term promissory notes.

Total short-term borrowings decreased $213.3 million, or 33.9%, compared to 2020, as a result of lower balances of customer short-term promissory notes.

Long-term borrowings decreased $674.9 million, or 52.1%, compared to 2020, primarily due to the prepayment of FHLB advances as part of the balance sheet restructuring.

Also, in the first quarter of 2021, the Corporation completed a cash tender offer for $75 million of 4.50% subordinated debt due in 2024 and $60 million of 3.60% senior notes due in 2022.

Other Liabilities

Other liabilities increased $139.4 million, or 36.2%, to $524.4 million as of December 31, 2020, primarily as the result of an increase in the fair values of derivative contracts related to interest rate swaps.

Other liabilities decreased $48.9 million, or 9.5%, to $465.1 million as of December 31, 2021, primarily as the result of a decrease in the fair values of derivatives related to the Bank's customer back-to-back interest rate swap program.

Shareholders’ Equity

Total shareholders’ equity increased $95.9 million, or 3.7%, to $2.7 billion, or 10.5% of total assets, as of December 31, 2021.

The increase was due primarily to the $192.9 million of net proceeds from the issuance of preferred stock, $178.0 million of net income, a $65.2 million net increase in AOCI, $7.5 million of stock-based compensation awards and $7.4 million of common stock issued, partially offset by $90.7 million of common stock cash dividends, a $43.8 million reduction to retained earnings as a result of the adoption of CECL on January 1, 2020, $39.7 million of common stock repurchases and $2.1 million of preferred stock dividends.

The increase was due primarily to an increase in retained earnings reflecting the net income available to common shareholders of $265.2 million for 2021, partially offset by a $41.7 million increase in treasury stock primarily driven by the Corporation's share repurchase program.

The Corporation repurchased 2.8 million shares of its common stock during 2021 at a cost of $43.9 million.

As of December 31, 2021, up to an additional $31.1 million of common stock may be purchased through March 31, 2022 under the $75 million share repurchase program originally announced in February 2021.

Shareholders' equity also decreased in 2021 due to a $37.7 million decrease in AOCI primarily from unrealized losses on and reclassification of securities.

See "Note 14 - Shareholders' Equity" in the Notes to the Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data." for details of the issuance of preferred stock and the Corporation's share repurchase programs and activities.

Under all repurchase programs, 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.

See "Note 4 - Allowance for Credit Losses and Asset Quality," in the Notes to the Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data." for details of the adoption of CECL.

"Financial Statements and Supplementary Data" for details of share repurchases.

The Corporation and its wholly owned subsidiary bank, Fulton Bank, are subject to regulatory capital requirements administered by the FRB and OCC.

Failure to meet minimum capital requirements can trigger certain actions by these regulators that could have a material effect on the Corporation’s financial statements.

The regulations require that banks and bank holding companies maintain minimum amounts and ratios of total, Tier I and Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined).

The regulations require that banks and bank holding companies maintain minimum amounts and ratios of total, Tier I and Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and Tier I capital to average assets (as defined in the regulations).

The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements at December 31:

1 unchanged sentence

Adequacy Fully Phased-in, with Capital Conservation Buffers

Total Capital (to Risk-Weighted Assets) 14.4% 11.8% 8.0% 10.5%

Tier I Capital (to Risk-Weighted Assets) 10.5% 9.7% 6.0% 8.5%

Total Risk-Based Capital (to Risk-Weighted Assets) 14.1% 14.4% 8.0% 10.5%

Tier I Risk-Based Capital (to Risk-Weighted Assets) 10.9% 10.5% 6.0% 8.5%

Common Equity Tier I (to Risk-Weighted Assets) 9.9% 9.5% 4.5% 7.0%

Tier I Leverage Capital (to Average Assets) 8.6% 8.2% 4.0% 4.0%

In July 2013, the FRB approved final rules (the "U.S.

Basel III Capital Rules") establishing a new comprehensive capital framework for U.S.

In July 2013, the FRB approved the Basel III Rules establishing a new comprehensive capital framework for U.S.

banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards.

Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions.

Basel III Capital Rules require the Corporation and its bank subsidiary to:

The Basel III Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions.

The Basel III Rules require the Corporation and Fulton Bank to:

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

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

As of January 1, 2019, the Corporation and its bank subsidiary were also required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments.

Basel III Capital Rules use a standardized approach for risk weightings that expand 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, resulting in higher risk weights for a variety of asset categories.

As of January 1, 2019, the Corporation and Fulton Bank were also required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments.

The Basel III Rules use a standardized approach for risk weightings that expand 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, resulting in higher risk weights for a variety of asset categories.

As of December 31, 2021, Fulton Bank was well capitalized under the regulatory framework for prompt corrective action based on its capital ratio calculations.

To be categorized as well capitalized, the bank must maintain minimum total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios as set forth in the table above.

There are no conditions or events since December 31, 2020 that management believes have changed the institution's categories.

To be categorized as well capitalized, Fulton 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 table above.

There are no conditions or events since December 31, 2021 that management believes have changed Fulton Bank's categories.

See "Note 11 - Regulatory Matters," in the Notes to Consolidated Financial Statements in Item 8.

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These obligations include payments for liabilities recorded on the Corporation’s consolidated balance sheets as well as contractual obligations for purchased services.

The following table summarizes the Corporation's significant contractual obligations to third parties, by type, that were fixed and determinable as of December 31, 2020:

Payments Due In

or Less One to

Three Years Three to

Five Years Over Five

(in thousands)

Deposits with no stated maturity (1)

$ 18,614,543 $ — $ — $ — $ 18,614,543

Time deposits (2)

1,417,396 682,245 70,006 55,017 2,224,664

Short-term borrowings (3)

630,066 — — — 630,066

Long-term debt (3)

— 393,098 513,865 389,300 1,296,263

Operating leases (4)

18,973 35,130 28,009 44,627 126,739

Purchase obligations (5)

23,011 47,087 4,863 — 74,961

Uncertain tax positions (6)

2,831 — — — 2,831

(1) Includes demand deposits, savings accounts and brokered deposits, which can be withdrawn at any time.

(2) See additional information regarding time deposits in "Note 8 - Deposits," in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data."

(3) See additional information regarding borrowings in "Note 9 - Short-Term and Long-Term Borrowings," in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data."

(4) See additional information regarding operating leases in "Note 17 - Leases," in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data."

(5) Includes information technology, telecommunication and data processing outsourcing contracts.

(6) Includes accrued interest.

See additional information related to uncertain tax positions in "Note 12 - Income Taxes," in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data."

In addition to the contractual obligations listed in the preceding table, the Corporation is a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of its customers.

Contractual purchase obligations to third parties that were fixed and determinable of $96 million and $75 million at December 31, 2021 and 2020, respectively, include information technology, telecommunication and data processing outsourcing contracts.

The increase is primarily driven by a contract extension with the Bank's core information system provider.

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

These financial instruments include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit and interest rate risk that are not recognized on the consolidated balance sheets.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis