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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-02-28 · 297 added, 442 removed, 549 unchanged (57% 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 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.

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 corporation incorporated under the laws of the Commonwealth of Pennsylvania, and its wholly owned subsidiaries.

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

FORWARD-LOOKING STATEMENTS

The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition, results of operations and business.

Do not unduly rely on forward-looking statements.

Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends," "projects," the negative of these terms and other comparable terminology.

These forward-looking statements may include projections of, or guidance on, the Corporation's future financial performance, expected levels of future expenses, including future credit losses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation's business or financial results.

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

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

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Corporation's control, and actual results and financial condition may differ materially from those indicated in the forward-looking statements.

Therefore, you should not unduly rely on any of these forward-looking statements.

Any forward-looking statement is based only on information currently available and speaks only as of the date when made.

The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Many factors could affect future financial results including, without limitation:

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

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

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

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

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

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

• the replacement of LIBOR as a benchmark reference rate;

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

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

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

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

• the potential for negative consequences resulting from regulatory violations, investigations and examinations, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions, the need to undertake remedial actions and possible damage to the Corporation's reputation;

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

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

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

• the effects of changes in U.S.

federal, state or local tax laws;

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

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

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

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

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

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

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

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

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

• the effects of changes in accounting policies, standards, and interpretations on the Corporation's reporting of its financial condition and results of operations;

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

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

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

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

• the Corporation's failure to identify and adequately and promptly address cybersecurity risks, including data breaches and cyber-attacks;

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

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

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

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

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

The 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.

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

Net income (in thousands) $ 275,497 $ 178,040

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

2022 2021 2020

(dollars in thousands, except per share)

Net income $ 286,981 $ 275,497 $ 178,040

Net income available to common shareholders $ 276,733 $ 265,220 $ 175,905

Diluted net income available to common shareholders per share $ 1.67 $ 1.62 $ 1.08

Return on average assets, annualized 1.05 % 0.73 %

Return on average equity 10.64 % 7.45 %

Diluted operating net income available to common shareholders per share (1)

$ 1.76 $ 1.62 $ 1.08

Return on average assets 1.10 % 1.05 % 0.73 %

Operating return on average assets (1)

1.16 % 1.05 % 0.73 %

Return on average common equity 11.69 % 10.64 % 9.94 %

Return on average common shareholders' equity (tangible) (1)

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Non-performing assets to total assets 0.66 % 0.60 % 0.58 %

Annualized net charge-offs to average loans 0.07 % 0.05 %

Net charge-offs (recoveries) to average loans 0.04 % 0.07 % 0.05 %

(1) Ratio represents a financial measure derived by methods other than GAAP.

See reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures," .

(2) Presented on an FTE basis, using a 21% Federal tax rate and statutory interest expense disallowances.

See reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure under the "Supplemental Reporting of Non-GAAP Based Financial Measures" section of Management's Discussion.

(2) Presented on a FTE basis using a 21% Federal tax rate and statutory interest expense disallowances.

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

Federal Funds Rate

After maintaining the target range for the Fed Funds Rate at 0.00% to 0.25% from March 16, 2020, as COVID-19 weighed on global economic activity, through March 16, 2022, the FOMC increased the target range eight times to address elevated levels of inflation, placing the target range for the Fed Funds Rate at 4.50% - 4.75% as of February 1, 2023.

Business Combinations

On July 1, 2022, the Corporation completed the acquisition of Prudential Bancorp.

Prudential Bancorp was merged with and into the Corporation, and Prudential Bancorp's wholly owned subsidiary, Prudential Bank, became a wholly owned subsidiary of the Corporation.

The Corporation merged Prudential Bank with and into Fulton Bank on November 5, 2022.

Results of the operations of the acquired entity are included in the Corporation's consolidated financial statements beginning on the acquisition date, July 1, 2022.

In accordance with the terms of the Merger Agreement, each share of Prudential Bancorp's common stock issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive the Merger

Consideration.

In the aggregate, approximately 80% of the Merger Consideration consisted of the Corporation's common stock with the remaining approximately 20% payable in cash.

The receipt of the Corporation’s common stock in the Merger is expected to qualify as a tax-free exchange for Prudential Bancorp shareholders.

The acquisition of Prudential Bancorp was accounted for as a business combination using the acquisition method of accounting, and accordingly, the assets acquired, the liabilities assumed, and consideration transferred were recorded at their estimated fair values as of the Merger.

The $16.3 million excess of the fair value of the Merger Consideration of $119.1 million over the fair value of assets acquired of $102.8 million was recorded as goodwill and is not amortizable or deductible for tax purposes.

COVID-19 Pandemic

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 met 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, 2022, the Corporation funded a total of approximately $2.7 billion of loans under the PPP.

Financial Highlights

Following is a summary of the financial highlights for the year ended December 31, 2022:

• Net Income Available to Common Shareholders and Net Income Per Share - Net income available to common shareholders was $276.7 million for the year ended December 31, 2022, a $11.5 million increase compared to $265.2 million for the same period in 2021.

Diluted operating net income available to common shareholders, per share was $1.76 for the year ended December 31, 2022, a $0.14 increase compared to the same period in 2021.

• Net Interest Income - Net interest income was $781.6 million for the year ended December 31, 2022, an increase of $117.9 million, or 17.8%, compared to the same period in 2021.

The increase was driven by higher interest rates and higher average loan balances.

◦ Net Interest Margin - For the year ended December 31, 2022, net interest margin increased to 3.27%, or 49 bps compared to 2021, driven by a 54 bps increase in yield on net loans and a 8 bps increase in yield on investment securities, partially offset by a 10 bps increase on cost of funds.

◦ Loan Growth - Average net loans grew by $0.5 billion, or 2.8%, in comparison to 2021.

Included in average net loans were PPP loans that had an average balance of $0.1 billion, a decrease of $1.0 billion from 2021.

The increase in average net loans was largely driven by increases in average residential mortgage loans, average commercial mortgage loans, average commercial and industrial loans, excluding PPP loans, average consumer loans, and average real estate construction loans of $760.5 million, $374.1 million, $194.6 million, $112.9 million, and $100.2 million, respectively, partially offset by a $1.0 billion decline in PPP loans due to the repayment of these loans upon forgiveness by the SBA.

◦ Deposit Decrease - Average deposits decreased $269.4 million, or 1.2%, in comparison to 2021.

The decrease was primarily due to decreases in average interest-bearing demand deposits and average time deposits of $385.5 million and $321.6 million, respectively, partially offset by increases in average noninterest-bearing demand deposits and average savings and money market deposits of $311.2 million and $151.2 million, respectively.

• Asset Quality - Non-performing assets increased $23.8 million, or 15.4%, as of December 31, 2022 compared to 2021, and were 0.66% and 0.60% of total assets as of the end of those periods, respectively.

For the years ended December 31, 2022 and 2021, net charge-offs to average loans outstanding were 0.04% and 0.07%, respectively.

The provision for credit losses was $28.0 million for the year ended December 31, 2022, compared to a negative provision of $14.6 million for the same period of 2021.

Included in the December 31, 2022 provision for credit losses was the CECL Day 1 Provision of $8.0 million for the acquired Prudential Bancorp loan portfolio.

• Non-Interest Income - Non-interest income, excluding investment securities gains, for the year ended December 31, 2022 decreased $13.1 million, or 5.4%, in comparison to 2021.

The decrease in non-interest income, excluding investment securities gains, was primarily due to decreases of $19.4 million in mortgage banking income and $5.8 million in other income, primarily due to a decline in income from equity method investments, partially offset by increases of $7.1 million in commercial banking income, $4.0 million in consumer banking fees and $1.0 million in wealth management revenues.

• Non-Interest Expense - Total non-interest expense, excluding merger-related expenses of $10.3 million, increased $5.6 million, or 0.9%, to $623.4 million in 2022 compared to 2021.

The increase was largely driven by increases in salaries and employee benefits expense of $27.7 million, data processing and software expense of $3.8 million, other outside services of $3.0 million, net occupancy expense of $2.4 million, and FDIC insurance expense of $1.9 million, partially offset by a decrease in debt extinguishment expense of $33.2 million.

• Income Taxes - Income tax expense for 2022 resulted in an ETR of 17.3%, in comparison to 17.6% for 2021.

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

Supplemental Reporting of Non-GAAP Based Financial Measures

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2022 2021 2020

(in thousands, except per share data and percentages)

(dollars in thousands, except per share data)

Operating net income available to common shareholders

Net income available to common shareholders $ 276,733 $ 265,220 $ 175,905

Core deposit intangible amortization 1,029 — —

Merger-related expenses 10,328 — —

CECL Day 1 Provision expense 7,954 — —

Tax impact of adjustments (4,055) — —

Operating net income available to common shareholders (numerator) $ 291,989 $ 265,220 $ 175,905

Weighted average shares (diluted) (denominator) 165,472 163,307 163,090

Operating net income available to common shareholders, per share (diluted) $ 1.76 $ 1.62 $ 1.08

Operating return on average assets

Net income $ 286,981 $ 275,497 $ 178,040

Core deposit intangible amortization 1,029 — —

Merger-related expenses 10,328 — —

CECL Day 1 Provision expense 7,954 — —

Tax impact of adjustments (4,055) — —

Operating net income (numerator) $ 302,237 $ 275,497 $ 178,040

Total average assets (denominator) $ 25,971,484 $ 26,170,333 $ 24,333,717

Operating return on average assets 1.16 % 1.05 % 0.73 %

Return on average common shareholders' equity (tangible)

Net income available to common shareholders $ 276,733 $ 265,220 $ 175,905

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

Intangible amortization 1,731 589 529

Merger-related expenses 10,328 — —

CECL Day 1 Provision expense 7,954 — —

Tax impact of adjustments (4,203) (127) (112)

Operating net income available to common shareholders (numerator) $ 292,543 $ 265,682 $ 176,322

Average shareholders' equity $ 2,560,323 $ 2,685,946 $ 2,391,649

Average goodwill and intangible assets (548,102) (536,621) (535,196)

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Return on average common shareholders' equity (tangible) 16.08 % 13.58 % 9.66 %

2022 2021 2020

(dollars in thousands)

Efficiency ratio

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Intangible amortization (1,731) (589) (529)

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

Merger-related expenses (10,328) — —

Debt extinguishment costs — (33,249) (2,878)

Numerator $ 618,886 $ 577,805 $ 569,907

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Total non-interest income 227,130 273,745 229,388

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

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

Investment securities losses (gains), net 27 (33,516) (3,053)

Total revenue (denominator) $ 1,023,786 $ 916,255 $ 867,844

Efficiency ratio 60.5 % 63.1 % 65.7 %

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 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 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.

government, including reductions in interest rates by the FOMC.

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 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.

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 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.

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

Adoption of CECL

On January 1, 2020, the Corporation adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326):

Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology, and is referred to as CECL.

The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities.

It also applies to OBS credit exposures, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, and net investments in leases recognized by a lessor in accordance with ASC Topic 842.

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

"Financial Statements and Supplementary Data" for additional information on the adoption of CECL.

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, 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 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 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.

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 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.

• Asset Quality - Non-performing assets increased $2.6 million, or 1.7%, as of December 31, 2021 compared to December 31, 2020.

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 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.

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 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 - 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.

The Corporation received net proceeds from the offering of $192.9 million, after deducting issuance costs.

CRITICAL ACCOUNTING POLICIES

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"Financial Statements and Supplementary Data."

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.

Allowance for Credit Losses - ACL is based on estimated losses over the remaining expected life of loans.

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.

10 unchanged sentences

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.

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.

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

Due to the high level of uncertainty regarding significant assumptions, the Corporation has evaluated a range of economic scenarios, including more and less severe economic deteriorations.

The ACL includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative models.

Qualitative adjustments include and consider changes in national, regional and local economic and business conditions, an assessment of the lending environment, including underwriting standards and other factors affecting credit quality.

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 ACL for loans was $269.4 million and $249.0 million on December 31, 2022 and December 31, 2021, respectively.

The increase of $20.4 million was primarily a result of increased loan growth and changes to the macroeconomic outlook.

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.

One scenario identified includes a slowdown in near-term economic growth.

This scenario resulted in a hypothetical increase to the ACL of approximately $18.7 million.

1 unchanged sentence

"Financial Statements and Supplementary Data."

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.

Income Taxes – Income tax expense 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.

4 unchanged sentences

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.

On a periodic basis, the Corporation evaluates its income tax expense 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.

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

Income tax expense was $60.0 million and $58.7 million for the years ended December 31, 2022 and December 31, 2021, respectively.

Recently Issued Accounting Standards

15 unchanged sentences

$ 19,152,740 $ 765,603 4.00 % $ 18,627,787 $ 644,387 3.46 % $ 18,270,390 $ 662,785 3.63 %

Taxable investment securities (2)

2,665,416 55,351 1.88 2,182,410 58,173 2.66 2,278,448 62,556 2.74

Tax-exempt investment securities (2)

Investment securities (2)

4,364,627 106,115 2.43 3,673,250 86,325 2.35 3,007,467 84,814 2.82

Total investment securities 3,673,250 86,325 2.35 3,007,467 84,814 2.82 2,778,846 80,554 2.89

Loans held for sale 14,974 866 5.78 39,211 1,302 3.32 60,015 2,077 3.46

15 unchanged sentences

Total interest-bearing deposits 13,932,270 43,829 0.31 14,512,793 30,005 0.21 13,686,243 70,046 0.51

Short-term borrowings 513,092 583 0.11 810,583 5,227 0.64 849,679 14,543 1.70

Long-term borrowings 784,871 29,094 3.71 1,254,300 38,398 3.06 942,600 30,599 3.25

Borrowings 1,358,357 39,375 2.89 1,297,963 29,677 2.29 2,064,883 43,625 2.11

Total interest-bearing liabilities 15,290,627 83,204 0.54 15,810,756 59,682 0.38 15,751,126 113,671 0.72

13 unchanged sentences

the related unrealized holding gains (losses) are included in other assets.

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

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

Comparison of 2022 to 2021

2 unchanged sentences

Volume Yield/Rate Net

(in thousands)

(dollars in thousands)

Interest income on:

1 unchanged sentence

$ 18,540 $ 102,676 $ 121,216

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

Tax-exempt investment securities 5,625 (1,292) 4,333

Investment securities 16,759 3,031 19,790

Loans held for sale (1,076) 640 (436)

3 unchanged sentences

Demand deposits $ (256) $ 4,813 $ 4,557

Savings deposits 1,689 (11,407) (9,718)

Savings and money market deposits 123 11,583 11,706

Brokered deposits (101) 3,102 3,001

Time deposits (3,115) (2,325) (5,440)

Short-term borrowings (1,426) (3,218) (4,644)

Long-term borrowings (16,337) 7,033 (9,304)

Borrowings 1,463 8,235 9,698

Total interest expense $ (1,886) $ 25,408 $ 23,522

1 unchanged sentence

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.

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.

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.

Compared to 2021, FTE total interest income for 2022 increased $144.1 million, or 19.6%, primarily due to an increase of $113.2 million attributable to changes in yield, of which $102.7 million related to net loans.

The yield on average interest-earning assets increased 59 bps in 2022 compared to 2021.

In 2022, interest expense increased $23.5 million compared to 2021, primarily driven by increases in rate on interest-bearing liabilities resulting in a $25.4 million increase in interest expense.

The increase in interest expense attributable to rate was primarily driven by the increases in savings and money market deposits, borrowings, demand deposits and brokered deposits.

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

10 unchanged sentences

Equipment lease financing 249,595 3.99 252,104 3.89 (2,509) (1.0)

(3,776) — (4,640) — 864 18.6

38,682 — (3,776) — 42,458 N/M

Total loans $ 19,152,740 4.00 % $ 18,627,787 3.46 % $ 524,953 2.8 %

1 unchanged sentence

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

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 loans increased $525.0 million, or 2.8%, compared to 2021.

The increase was largely driven by increases in average residential mortgage loans, average commercial mortgage loans, average consumer loans and average construction loans of

$760.5 million, $374.1 million, $112.9 million and $100.2 million, respectively, partially offset by decreases in average commercial and industrial loans of $822.7 million primarily due to the repayment of PPP loans upon forgiveness by the SBA.

Average investment securities increased $691.4 million, or 18.8%, in comparison to 2021, which contributed a $16.8 million increase in FTE interest income.

The yield on investment securities increased 8 bps in comparison to 2021, resulting in a $3.0 million increase in FTE interest income.

Yield on other interest-earning assets increased 71 bps in comparison to 2021, contributing $6.8 million to FTE interest income, partially offset by a decrease in the average balance of other interest-earning assets of $1.2 billion, contributing a $3.3 million decrease to FTE interest income.

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

4 unchanged sentences

Interest-bearing demand 5,593,942 0.15 5,979,479 0.06 (385,537) (6.4)

Savings 6,306,967 0.08 5,550,234 0.26 756,733 13.6

Total demand and savings 19,497,599 0.04 16,543,978 0.16 2,953,621 17.9

Savings and money market deposits 6,458,165 0.26 6,306,967 0.08 151,198 2.4

Total demand deposits and savings and money market deposits 19,574,411 0.13 19,497,599 0.04 76,812 0.4

Brokered deposits 262,359 1.56 286,901 0.38 (24,542) (8.6)

1 unchanged sentence

Total deposits $ 21,454,574 0.20 % $ 21,723,946 0.14 % $ (269,372) (1.2) %

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.

The cost of interest-bearing deposits increased 10 bps, to 0.31%, from 0.21% in 2021, due to an increase in rates.

The rate on total demand deposits and savings and money market deposits increased to 0.13%, compared to 0.04% for 2021.

Average interest-bearing demand deposits and average time deposits decreased $385.5 million and $321.6 million, respectively, during 2022.

Average noninterest-bearing demand deposits and average savings and money market deposits increased $311.2 million and $151.2 million, respectively, during 2022 compared to 2021.

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

2 unchanged sentences

(dollars in thousands)

Short-term borrowings:

Customer funding (1)

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

Federal funds purchased $ 91,125 3.21 % $ — — % $ 91,125 N/M

FHLB advances and other borrowings (2)

— — 192,632 1.61 (192,632) N/M

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

Long-term borrowings:

FHLB advances 126,677 1.80 557,596 1.86 (430,919) (77.3)

Other long-term borrowings 658,194 4.07 696,704 4.02 (38,510) (5.5)

Total long-term borrowings 784,871 3.71 1,254,300 3.06 (469,429) (37.4)

Federal Home Loan Bank advances 194,295 3.77 126,677 1.80 67,618 53.4 %

Senior debt and subordinated debt 564,337 3.94 657,386 4.07 (93,049) (14.2)

Other borrowings (1)

508,600 1.34 513,900 0.12 (5,300) (1.0)

Total borrowings $ 1,358,357 2.89 % $ 1,297,963 2.29 % $ 60,394 4.7 %

(1) Includes short-term promissory notes.

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

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.

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

Total average borrowings increased $60.4 million, or 4.7%, and the total borrowings rate increased 60 bps, to 2.89%, compared to 2021.

Borrowings increased primarily as a result of the decrease in deposits.

Short-term Federal funds purchased and Federal Home Loan Bank advances increased $91.1 million and $67.6 million, respectively.

Senior debt and subordinated debt decreased $93.0 million primarily due to the $65.0 million repayment of senior notes on March 16, 2022 and the redemption of $17.0 million of TruPS in September 2022.

See Note 10 "Borrowings" of the Notes to Consolidated Financial Statements for additional details.

Non-Interest Income and Expense

Non-Interest Income

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

Increase (Decrease)

2022 2021 $ %

(dollars in thousands)

Commercial banking:

Merchant and card $ 28,276 $ 26,121 $ 2,155 8.3 %

Cash management 23,729 20,865 2,864 13.7

Capital markets 12,256 9,381 2,875 30.6

Other commercial banking 11,518 12,322 (804) (6.5)

Total commercial banking 75,779 68,689 7,090 10.3

Consumer banking:

Card 24,472 23,505 967 4.1

Overdraft 15,480 12,844 2,636 20.5

Other consumer banking 9,544 9,195 349 3.8

Total consumer banking 49,496 45,544 3,952 8.7

Wealth management revenues 72,843 71,798 1,045 1.5

Mortgage banking:

Gains on sales of mortgage loans 8,820 24,380 (15,560) (63.8)

Mortgage servicing income 5,384 9,196 (3,812) (41.5)

Total mortgage banking 14,204 33,576 (19,372) (57.7)

Other 14,835 20,622 (5,787) (28.1)

Non-interest income before investment securities gains 227,157 240,229 (13,072) (5.4)

Investment securities gains (losses), net (27) 33,516 (33,543) (100.1)

Total Non-Interest Income $ 227,130 $ 273,745 $ (46,615) (17.0) %

Excluding net investment securities gains, non-interest income decreased $13.1 million, or 5.4%, in 2022, as compared to 2021.

The primary contributors to this net decrease were as follows:

• Mortgage banking income decreased $19.4 million, or 57.7%, compared to 2021, mainly due to reduced gains on sales of mortgage loans.

• Other non-interest income decreased $5.8 million, or 28.1%, compared to 2021, primarily due to a decline in income from equity method investments.

• Total commercial banking income increased $7.1 million, or 10.3%, compared to 2021, driven mainly by increases in commercial customer swap fees reflected in capital markets, cash management fees and merchant and card revenues.

• Total consumer banking income increased $4.0 million, or 8.7%, compared to 2021, driven primarily by increases in overdraft fees and card income.

• Investment securities gains decreased $33.5 million, primarily due to the sale of Visa Shares, as part of the balance sheet restructuring undertaken in 2021.

Non-Interest Expense

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

Increase (Decrease)

2022 2021 $ %

(dollars in thousands)

Salaries and employee benefits $ 356,884 $ 329,138 $ 27,746 8.4 %

Data processing and software 60,255 56,440 3,815 6.8

Net occupancy 56,195 53,799 2,396 4.5

Other outside services 37,152 34,194 2,958 8.7

State taxes 15,113 18,793 (3,680) (19.6)

Equipment 14,033 13,807 226 1.6

FDIC insurance 12,547 10,665 1,882 17.6

Professional fees 9,123 9,647 (524) (5.4)

Marketing 6,885 5,275 1,610 30.5

Intangible amortization 1,731 589 1,142 N/M

Debt extinguishment — 33,249 (33,249) N/M

Merger-related expenses 10,328 — 10,328 N/M

Other 53,482 52,234 1,248 2.4

Total Non-Interest Expense $ 633,728 $ 617,830 $ 15,898 2.6 %

Non-interest expense increased $15.9 million, or 2.6% compared to 2021.

Non-interest expense, excluding merger-related expenses of $10.3 million, was $623.4 million, an increase of $5.6 million, or 0.9% compared to non-interest expenses of $617.8 million in 2021.

Excluding merger-related expenses, the increase in non-interest expense compared to 2021 was primarily due to increases in salaries and benefits of $27.7 million, attributable to higher employee base salaries of $20.2 million and deferred loan origination expense of $14.3 million, partially offset by lower commissions expense of $8.8 million.

Increases in data processing and software expenses, other outside services and net occupancy expense in 2022 of $3.8 million, $3.0 million and $2.4 million, respectively, also contributed to the increase in non-interest expenses compared to 2021.

These increases were partially offset by a decrease of $33.2 million in debt extinguishment expense in 2021.

Income tax expense for 2022 was $60.0 million, a $1.3 million increase compared to 2021.

The ETR was 17.3% in 2022 compared to 17.6% in 2021.

The increase in income tax expense 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 2021 to 2020

2 unchanged sentences

Volume Yield/Rate Net

(in thousands)

(dollars in thousands)

Interest income on:

1 unchanged sentence

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

Taxable investment securities (3,323) (1,059) (4,382)

Tax-exempt investment securities 10,576 (1,933) 8,643

Investment securities 19,055 (17,544) 1,511

Loans held for sale (694) (81) (775)

3 unchanged sentences

Demand deposits $ 1,414 $ (9,142) $ (7,728)

Savings deposits 4,025 (31,194) (27,169)

Savings and money market deposits 1,689 (11,407) (9,718)

Brokered deposits (170) (1,121) (1,291)

Time deposits (8,545) (12,759) (21,304)

Short-term borrowings (641) (8,675) (9,316)

Long-term borrowings 9,627 (1,828) 7,799

Borrowings (17,763) 3,815 (13,948)

Total interest expense $ (23,375) $ (30,614) $ (53,989)

1 unchanged sentence

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.

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 $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.

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 to 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 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.

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.

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 the $23.4 million reduction in interest expense in 2021 compared to 2020.

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 increase was partially offset by a 7 bps decrease in 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 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 loans increased $357.4 million, or 2.0%, which contributed $12.9 million to the increase in FTE interest income.

The increase was driven largely by growth in residential mortgage loans and commercial mortgage loans, partially offset by a decrease in commercial and industrial loans, primarily due to a 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 yield on average investment securities, resulting in a $17.5 million decrease in FTE interest income.

Average 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 decrease 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:

4 unchanged sentences

Interest-bearing demand 5,979,479 0.06 5,278,941 0.22 700,538 13.3

Savings 5,550,234 0.26 5,018,381 0.83 531,853 10.6

Total demand and savings 16,543,978 0.16 13,651,734 0.44 2,892,244 21.2

Savings and money market deposits 6,306,967 0.08 5,550,234 0.26 756,733 13.6

Total demand and savings and money market deposits 19,497,599 0.04 16,543,978 0.16 2,953,621 17.9

Brokered deposits 286,901 0.38 310,763 0.77 (23,862) (7.7)

1 unchanged sentence

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

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.

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 cost of total deposits to 0.14% and 0.36% in 2021 and 2020, 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.

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

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

The average balance of interest-bearing deposits increased $826.6 million, or 6.0%, in comparison to 2020.

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

2 unchanged sentences

(dollars in thousands)

Short-term borrowings:

Customer funding (1)

$ 553,033 0.28 % $ 355,983 0.77 % $ 197,050 55.4 %

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

FHLB advances and other borrowings (2)

Federal funds purchased $ — — % $ 64,918 0.83 % $ (64,918) N/M

Federal Home Loan Bank advances 126,677 1.80 557,596 1.83 (430,919) (77.3)

Senior debt and subordinated debt 657,386 4.07 696,704 4.02 (39,318) (5.6)

Other borrowings (1)

513,900 0.12 745,665 0.36 (231,765) (31.1)

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

Long-term borrowings:

FHLB advances 557,596 1.86 555,229 2.38 2,367 0.4

Other long-term borrowings 696,704 4.02 387,371 4.48 309,333 79.85

Total long-term borrowings 1,254,300 3.06 942,600 3.25 311,700 33.1

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

(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 cost of borrowings decreased 40 bps, 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 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 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

Comparison of 2021 to 2020

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

Total average borrowings in 2021 decreased $766.9 million, or 37.1%, due to a balance sheet restructuring, while the total borrowings rate increased 18 bps to 2.29% compared to 2020.

Average Federal Home Loan Bank advances decreased $430.9 million, or 77.3%, and average other borrowings decreased $231.8 million or 31.1% compared to 2020.

Non-Interest Income

14 unchanged sentences

Total consumer banking 45,544 41,598 3,946 9.5

Wealth management fees 71,798 59,058 12,740 21.6

Wealth management revenues 71,798 59,058 12,740 21.6

Mortgage banking:

3 unchanged sentences

Other 20,622 13,084 7,538 57.6

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

Non-interest income before investment securities gains 240,229 226,335 13,894 6.1

Investment securities gains (losses), 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 $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.

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

Total commercial banking income in 2021 decreased $1.6 million, or 2.3%, compared to 2020, driven mainly by a decrease in commercial customer swap fees reflected in capital markets.

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

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

Non-Interest Expense

12 unchanged sentences

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

Amortization of TCI 6,187 6,126 61 1.0

Marketing 5,275 5,127 148 2.9

2 unchanged sentences

Total non-interest expense $ 617,830 $ 579,440 $ 38,390 6.6 %

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

Non-interest expense increased $38.4 million, or 6.6% in 2021.

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.

Also contributing to the increase in non-interest expense in 2021 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 tax expense for 2021 was $58.7 million, a $34.6 million increase compared to 2020.

2 unchanged sentences

Comparison of 2020 to 2019

Non-Interest Income

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

Increase (Decrease)

2020 2019 $ %

(dollars in thousands)

Commercial banking:

Merchant and card $ 23,139 $ 24,077 $ (938) (3.9) %

Cash management 18,725 18,392 333 1.8

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)

Consumer banking:

Card 19,777 20,515 (738) (3.6)

Overdraft 12,556 17,949 (5,393) (30.0)

Other consumer banking 9,265 11,039 (1,774) (16.1)

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

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 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 $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

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

Increase (Decrease)

2020 2019 $ %

(dollars in thousands)

Salaries and employee benefits $ 324,395 $ 311,934 $ 12,461 4.0 %

Net occupancy 53,013 52,826 187 0.4

Data processing and software 48,073 44,679 3,394 7.6

Other outside services 31,432 39,989 (8,557) (21.4)

Equipment 13,885 13,575 310 2.3

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

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

FDIC insurance 8,865 7,780 1,085 13.9

Amortization of TCI 6,126 6,021 105 1.7

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 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:

$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 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:

$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 $0.6 million 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 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

14 unchanged sentences

Deposits $ 20,649,538 $ 21,573,499 $ (923,961) (4.3) %

Short-term borrowings 416,764 630,066 (213,302) (33.9)

Long-term borrowings 621,345 1,296,263 (674,918) (52.1)

Borrowings 2,871,207 1,038,109 1,833,098 N/M

Other liabilities 831,200 472,110 359,090 76.1

4 unchanged sentences

The following table presents the carrying amount of investment securities as of December 31:

(in thousands)

(dollars in thousands)

Available for Sale

Government securities $ 218,485 $ 127,618

Government sponsored agency securities 1,008 —

State and municipal securities 1,105,712 1,188,670

4 unchanged sentences

Auction rate securities — 74,667

3,187,390 3,062,143

Total available for sale securities 2,646,767 3,187,390

Held to Maturity

1 unchanged sentence

Commercial mortgage-backed securities 863,931 575,426

980,384 278,281

Total held to maturity securities 1,321,256 980,384

Total investment securities $ 3,968,023 $ 4,167,774

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.

Total AFS securities decreased $540.6 million, or 17.0%, to $2,646.8 million at December 31, 2022, primarily due to decreases in commercial mortgage backed securities, state and municipal securities, collateralized mortgage obligations and auction rate

securities of $418.6 million, $83.0 million, $75.3 million and $74.7 million, respectively, partially offset by an increase in U.S.

Government securities of $90.9 million.

Total HTM securities increased $340.9 million, or 34.8%, due to increases in commercial mortgage-backed securities and residential mortgage-backed securities of $288.5 million and $52.4 million, respectively.

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 $ 20,279,547 $ 18,325,350 $ 18,900,820

(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.

(1) Includes PPP loans totaling $20.4 million, $301.3 million and $1,581.7 million as of December 31, 2022, 2021 and 2020, respectively.

Net loans increased $1,954.2 million, or 10.7%, as of December 31, 2022 compared to December 31, 2021, primarily due to increases in residential mortgage loans, commercial mortgage loans, commercial and industrial loans and consumer loans of $890.5 million, $414.8 million, $269.2 million and $234.5 million, respectively.

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

As of December 31, 2022, approximately $9.0 billion, or 44.1%, of the loan portfolio was comprised of commercial mortgage loans and construction loans.

The Corporation's policies limit the maximum total lending commitment to an individual borrower to $100.0 million as of December 31, 2022.

3 unchanged sentences

43.9 % 44.3 %

Manufacturing 6.8 5.1

Health care 6.5 6.7

Agriculture 5.4 6.1

Manufacturing 5.1 5.0

Other services (2)

Construction (2)

Other services (3)

Hospitality and food services 3.6 3.7

4 unchanged sentences

Professional, scientific and technical services 1.8 1.8

Transportation and warehousing 1.3 1.3

Public administration 1.2 1.5

Administrative and Support 1.1 0.6

Finance and Insurance 0.9 1.4

Transportation and warehousing 1.3 1.4

Other 7.1 7.8

Total 100.0 % 100.0 %

3 unchanged sentences

and appraising real estate.

(2) Excludes public administration.

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

(4) Includes energy sector.

(3) Excludes public administration.

The following table presents the changes in non-accrual loans for the years ended December 31:

3 unchanged sentences

Construction Real Estate -

Mortgage Real Estate -

Equity Consumer Equipment Lease Financing Total

(in thousands)

Mortgage Consumer and Real Estate -

Equity Equipment Lease Financing Total

(dollars in thousands)

Balance at December 31, 2020 $ 31,993 $ 51,470 $ 1,395 $ 26,107 $ 9,920 $ 16,313 $ 137,198

12 unchanged sentences

Non-accrual loans increased $0.8 million, or 0.5%, in 2022.

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.

Non-accrual loans as a percentage of net loans decreased to 0.71% at December 31, 2022, compared to 0.78% at December 31, 2021.

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

2022 2021 2020

(in thousands)

(dollars in thousands)

Non-accrual loans (1) (2) (3)

17 unchanged sentences

(dollars in thousands)

Commercial and industrial $ 30,629 $ 32,609 $ 49,491

Real estate – commercial mortgage $ 72,634 $ 54,044 $ 52,647

Commercial and industrial 28,288 30,629 32,609

Real estate – residential mortgage 46,509 39,399 30,794

7 unchanged sentences

2022 2021 2020

(in thousands)

(dollars in thousands)

Real estate – commercial mortgage $ 3,255 $ 3,464 $ 28,451

8 unchanged sentences

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

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.

The decrease in TDRs in 2022 compared to 2021 was primarily due to a decrease in non-accrual TDRs.

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

Total TDRs modified during 2022 and still outstanding as of December 31, 2022, were $1.6 million.

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.

Of these loans, $0.7 million, or 40.5%, had a payment default during 2022, which the Corporation defines as a single missed scheduled payment subsequent to modification.

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

1 unchanged sentence

The following table summarizes OREO, by property type, as of December 31:

(in thousands)

2022 2021 2020

(dollars in thousands)

Commercial properties $ 3,881 $ 943 $ 1,730

3 unchanged sentences

As noted under the heading "Critical Accounting Policies" within Management's Discussion, the Corporation's ability to identify potential problem loans in a timely manner is key to maintaining an adequate ACL.

For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality.

For commercial loans, commercial mortgage loans and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality.

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.

1 unchanged sentence

Total internally risk rated loans were $13.2 billion and $12.4 billion as of December 31, 2022 and 2021, respectively.

The following table presents criticized and classified loans, or those with internal risk ratings of special mention (1) or substandard or lower (2) for commercial mortgages, commercial and industrial loans and construction loans to commercial borrowers, by class segment, as of December 31:

The following table presents criticized and classified loans, or those with internal risk ratings of special mention (1) or substandard or lower (2) for commercial mortgage loans, commercial and industrial loans and construction loans to commercial borrowers, by class segment, as of December 31:

Special Mention (1)

6 unchanged sentences

Real estate - construction (3)

58,841 13,259 45,582 N/M 6,324 5,469 855 15.6 65,165 18,728

21,603 58,841 (37,238) (63.3) 10,601 6,324 4,277 67.6 32,204 65,165

Total $ 461,927 $ 588,489 $ (126,562) (21.5)% $ 290,161 $ 489,639 $ (199,478) (40.7)% $ 752,088 $ 1,078,128

3 unchanged sentences

(3) Excludes construction - other

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.

As of December 31, 2022, total loans with risk ratings of special mention decreased by $126.6 million, or 21.5%, and total loans with a risk rating of substandard or lower decreased by $199.5 million, or 40.7%, resulting in an overall decrease in total criticized loans of $326.0 million, or 30.2%, compared to 2021.

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

5 unchanged sentences

(dollars in thousands)

Real estate - home equity

$ 5,523 0.49 % $ 7,276 0.55 % $ 11,123 0.99 % $ 12,340 0.94 % $ 16,646 1.49 % $ 19,616 1.49 %

Consumer and real estate - home equity $ 16,141 0.90 % $ 9,960 0.63 % $ 9,800 0.54 % $ 11,706 0.74 % $ 25,941 1.44 % $ 21,666 1.37 %

Real estate - residential mortgage

2 unchanged sentences

3,520 0.28 1,318 0.11 — — 173 0.02 3,520 0.28 1,491 0.13

Consumer 4,437 0.95 3,537 0.76 583 0.13 750 0.16 5,020 1.08 4,287 0.93

Equipment lease financing

5 unchanged sentences

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

A summary of the Corporation’s activity in the ACL, including loans and OBS credit exposures:

A summary of the Corporation's activity in ACL - loans is shown below:

2022 2021 2020

3 unchanged sentences

Balance of ACL at beginning of period $ 249,001 $ 277,567 $ 163,620

CECL Day 1 provision expense 7,954 — —

Initial purchased credit deteriorated loans 1,135 — —

Impact of adopting CECL on January 1, 2020 — — 45,724

2 unchanged sentences

Real estate – commercial mortgage (12,473) (8,726) (4,225)

Real estate – home equity (676) (1,193) (1,291)

Consumer (2,633) (3,400) (3,403)

Equipment lease financing and other (2,251) (2,187) (2,560)

Consumer and real estate - home equity (4,412) (3,309) (4,593)

Real estate – residential mortgage (66) (1,290) (620)

Real estate – construction — (39) (17)

Equipment lease financing and other (2,131) (2,251) (2,187)

Total loans charged off (21,472) (30,952) (30,557)

1 unchanged sentence

Commercial and industrial 5,893 9,587 11,396

Real estate – construction 1,412 5,122 2,591

Real estate – home equity 248 504 688

Consumer 2,097 1,875 1,306

Real estate – commercial mortgage 3,860 2,474 1,027

Equipment lease financing and other 953 605 666

Consumer and real estate - home equity 2,581 2,345 2,379

Real estate – residential mortgage 425 375 491

Real estate – construction 574 1,412 5,122

Equipment lease financing and other 759 953 605

Total recoveries 14,092 17,146 21,020

2 unchanged sentences

Balance of ACL at end of period $ 269,366 $ 249,001 $ 277,567

Components of the ACL:

ACL - Loans $ 249,001 $ 277,567 $ 163,622

ACL - OBS credit exposures (1)

Provision for OBS credit exposures $ 1,411 $ 160 $ (840)

Reserve for OBS credit exposures (1)

$ 16,328 $ 14,533 $ 14,373

Balance of ACL at end of period $ 263,534 $ 291,940 $ 166,209

Selected Asset Quality Ratios %:

1 unchanged sentence

ACL - loans to total net loans 1.33 1.36 1.47

ACL to total Net Loans 1.44 1.54 0.99

Non-performing assets (2) to total assets

0.66 0.60 0.58

Non-performing assets (2) to total loans and OREO

0.83 0.83 0.88

Non-accrual loans to total net loans 0.71 0.78 0.72

ACL - loans to non-performing loans 157 164 189

163.69 188.66 117.75

Non-performing assets (2) to tangible common shareholders' equity and ACL - loans (3)

6.90 6.99 7.50

ACL - loans to non-accrual loans 186 173 202

(1) Reserve for OBS credit exposures is recorded within other liabilities on the consolidated balance sheets.

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

See "Note 5 - Loans and Allowance for Credit Losses" in the Notes to Consolidated Financial Statements in Item 8.

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

"Financial Statements and Supplementary Data." additional information.

(2) Includes accruing loans past due 90 days or more.

(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 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.

Excluding the CECL Day 1 Provision of $8.0 million for the acquired Prudential Bancorp loan portfolio, the provision for credit losses increased $33.4 million in comparison to 2021.

The increase in the provision for credit losses was primarily driven by loan growth and changes to the macroeconomic outlook.

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

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

"Financial Statements and Supplementary Data" for additional information.

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

2 unchanged sentences

ACL - loans %

Category (1) ACL - loans %

ACL - loans %

(dollars in thousands)

2 unchanged sentences

Real estate - residential mortgage 83,250 23.3 54,236 21.0 51,995 16.6

Consumer, home equity, equipment lease financing 26,798 10.2 31,770 10.3 25,196 12.5

Consumer, home equity, equipment lease financing and overdrafts 35,801 10.5 26,798 10.2 31,770 10.3

Real estate - construction 10,743 6.3 12,941 6.2 15,608 5.5

4 unchanged sentences

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

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.

Other assets increased $252.2 million, or 25.1%, to $1.3 billion as of December 31, 2022 compared to 2021, primarily due to increases in deferred Federal income taxes, cash surrender value of life insurance and equity method investments of $117.8 million, $92.2 million and $15.2 million, respectively.

Deposits and Borrowings

5 unchanged sentences

Interest-bearing demand 5,410,903 5,819,539 (408,636) (7.0)

Savings 6,403,995 5,929,792 474,203 8.0

Savings and money market deposits 6,434,621 6,403,995 30,626 0.5

Total demand and savings 18,851,912 19,594,497 (742,585) (3.8)

2 unchanged sentences

Total deposits $ 20,649,538 $ 21,573,499 $ (923,961) (4.3) %

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.

Compared to 2021, total deposits decreased by $924.0 million, or 4.3%, primarily due to decreases in interest-bearing demand deposits, noninterest-bearing demand deposits and time deposits of $408.6 million, $364.6 million and $138.3 million, respectively.

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

2 unchanged sentences

(dollars in thousands)

Short-term borrowings:

Customer funding (1)

Federal funds purchased $ 191,000 $ — $ 191,000 N/M

Federal Home Loan Bank advances 1,250,000 — 1,250,000 N/M

Senior debt and subordinated debt 539,634 620,406 (80,772) (13.0)

Other borrowings (1)

890,573 417,703 472,870 113.2

Long-term borrowings:

FHLB advances — 535,973 (535,973) (100.0)

Other long-term borrowings 621,345 760,290 (138,945) (18.3)

Total long-term borrowings 621,345 1,296,263 (674,918) (52.1)

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

Total borrowings $ 2,871,207 $ 1,038,109 $ 1,833,098 N/M

(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.

Total borrowings increased $1,833.1 million in 2022 compared to 2021, as a result of increases in FHLB advances of $1,250.0 million, customer repurchases of $472.9 million presented in other borrowings and Federal funds purchased of $191.0 million.

These increases were partially offset by a decrease in senior debt and subordinated debt of $80.8 million.

The increase in total borrowings during 2022 is reflective of the decrease in total deposit funding and the increase in net loans.

Other Liabilities

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.

Other liabilities increased $355.9 million, or 76.5%, to $821.0 million as of December 31, 2022, primarily as the result of a $360.8 million increase in derivative related liabilities.

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 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.

Total shareholders' equity decreased $132.9 million, or 4.9%, to $2,579.8 million, or 9.6% of total assets, as of December 31, 2022.

The decrease was due primarily to an increase in accumulated comprehensive loss of $412.9 million, partially offset by increases of $168.4 million from retained earnings and $87.9 million from treasury stock, primarily driven by the reissuance of treasury shares in connection with the Merger.

See "Note 15 - Shareholders' Equity" in the Notes to the Consolidated Financial Statements in Item 8.

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

"Financial Statements and Supplementary Data" for details of accumulated comprehensive loss.

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

8 unchanged sentences

Tier I Leverage Capital (to Average Assets) 9.5% 8.6% 4.0% 4.0%

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

In July 2013, the Federal Reserve Board 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.

15 unchanged sentences

Contractual purchase obligations to third parties that were fixed and determinable of $93 million and $96 million at December 31, 2022 and 2021, 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.

4 unchanged sentences

Commitments and standby and commercial letters of credit do not necessarily represent future cash needs, as they may expire without being drawn.

The following table presents the Corporation’s commitments to extend credit and letters of credit as of December 31, 2021 (in thousands):

The following table presents the Corporation's commitments to extend credit and letters of credit as of December 31, 2022 (dollars in thousands):

Commercial and industrial $ 4,832,858

6 unchanged sentences

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