Fulton Financial - 10-Q quarterly report FY2019 Q3

Fulton Financial - 10-Q quarterly report FY2019 Q3

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false--12-31Q320190000700564P5Y168500000158900000390000024000002.52.56000000006000000002218000002224000000P3Y5160000058300000The Corporation adopted the Accounting Standards Codification ("ASC") Update 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" in the first quarter of 2018 which permitted a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017, which changed the federal corporate income tax rate from 35% to 21%. As a result, $7.1 million of stranded tax effects were reclassified from AOCI to retained earnings during the first quarter of 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2019, or



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

For the transition period from to

Commission File No. 0-10587

FULTON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



Pennsylvania				23-2195389
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

One Penn Square	P.O. Box 4887	Lancaster,	Pennsylvania	17604
(Address of principal executive offices)				(Zip Code)

(717) 291-2411

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $2.50	FULT	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $2.50 Par Value –164,122,000 shares outstanding as of October 31, 2019.

FULTON FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

INDEX



Description		Page



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

(a)	Consolidated Balance Sheets - September 30, 2019 and December 31, 2018	3

(b)	Consolidated Statements of Income - Three and nine months ended September 30, 2019 and 2018	4

(c)	Consolidated Statements of Comprehensive Income - Three and nine months ended September 30, 2019 and 2018	5

(d)	Consolidated Statements of Shareholders’ Equity - Three and nine months ended September 30, 2019 and 2018	6

(e)	Consolidated Statements of Cash Flows - Nine months ended September 30, 2019 and 2018	7

(f)	Notes to Consolidated Financial Statements	8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		40

Item 3. Quantitative and Qualitative Disclosures about Market Risk		66

Item 4. Controls and Procedures		69

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		70

Item 1A. Risk Factors		70

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		70

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

Item 4. Mine Safety Disclosures - (not applicable)

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

Item 6. Exhibits		71

Signatures		72

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share data)



	September 30, 2019			December 31, 2018
	(unaudited)
ASSETS
Cash and due from banks	$	120,671		$	103,436
Interest-bearing deposits with other banks	477,942			342,251
Cash and cash equivalents	598,613			445,687
Federal Reserve Bank and Federal Home Loan Bank stock	94,557			79,283
Loans held for sale	33,945			27,099
Investment securities:
Available for sale, at estimated fair value	2,315,541			2,080,294
Held to maturity, at amortized cost	390,069			606,679
Loans and leases, net of unearned income	16,686,866			16,165,800
Less: Allowance for loan and lease losses	(166,135		)	(160,537		)
Net loans and leases	16,520,731			16,005,263
Premises and equipment	237,344			234,529
Accrued interest receivable	60,447			58,879
Goodwill and intangible assets	534,178			531,556
Other assets	918,193			612,883
Total Assets	$	21,703,618		$	20,682,152
LIABILITIES
Deposits:
Noninterest-bearing	$	4,240,478		$	4,310,105
Interest-bearing	13,102,239			12,066,054
Total Deposits	17,342,717			16,376,159
Short-term borrowings	832,860			754,777
Accrued interest payable	9,622			10,529
Other liabilities	467,689			300,835
Federal Home Loan Bank advances and long-term debt	726,714			992,279
Total Liabilities	19,379,602			18,434,579
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 222.4 million shares issued in 2019 and 221.8 million issued in 2018	555,888			554,377
Additional paid-in capital	1,496,657			1,489,703
Retained earnings	1,059,517			946,032
Accumulated other comprehensive gain (loss)	6,081			(59,063		)
Treasury stock, at cost, 58.3 million shares in 2019 and 51.6 million shares in 2018	(794,127		)	(683,476		)
Total Shareholders’ Equity	2,324,016			2,247,573
Total Liabilities and Shareholders’ Equity	$	21,703,618		$	20,682,152

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



(in thousands, except per-share data)	Three months ended September 30				Nine months ended September 30
	2019		2018		2019		2018
INTEREST INCOME
Loans and leases, including fees	$	186,001	$	175,068	$	558,055	$	503,029
Investment securities:
Taxable	15,565		13,956		46,935		41,039
Tax-exempt	3,673		3,035		10,222		8,933
Loans held for sale	466		388		1,056		888
Other interest income	2,709		1,601		6,879		4,016
Total Interest Income	208,414		194,048		623,147		557,905
INTEREST EXPENSE
Deposits	35,737		23,819		97,974		59,553
Short-term borrowings	4,156		2,002		12,200		7,079
Federal Home Loan Bank advances and long-term debt	7,260		8,100		23,854		23,761
Total Interest Expense	47,153		33,921		134,028		90,393
Net Interest Income	161,260		160,127		489,119		467,512
Provision for credit losses	2,170		1,620		12,295		38,707
Net Interest Income After Provision for Credit Losses	159,090		158,507		476,824		428,805
NON-INTEREST INCOME
Wealth management	13,867		13,066		41,259		38,740
Commercial banking	18,284		17,540		51,489		47,928
Consumer banking	13,333		12,665		37,077		36,005
Mortgage banking	6,658		4,896		18,023		14,252
Other	3,179		2,852		8,298		9,040
Non-Interest Income Before Investment Securities Gains	55,321		51,019		156,146		145,965
Investment securities gains, net	4,492		14		4,733		37
Total Non-Interest Income	59,813		51,033		160,879		146,002
NON-INTEREST EXPENSE
Salaries and employee benefits	78,211		76,770		234,959		227,457
Net occupancy	12,368		12,578		39,746		38,970
Other outside services	12,163		9,122		31,774		24,814
Data processing and software	11,590		10,157		33,211		31,083
Prepayment penalty on FHLB advances	4,326		—		4,326		—
Equipment	3,459		3,000		10,100		9,968
Professional fees	3,331		3,427		10,261		10,615
Marketing	3,322		2,692		8,345		7,277
State Taxes	2,523		2,707		7,005		7,463
Amortization of tax credit investments	1,533		1,637		4,516		4,911
Intangible amortization	1,071		—		1,285		—
FDIC insurance	239		2,814		5,603		8,430
Other	12,634		10,509		37,631		34,431
Total Non-Interest Expense	146,770		135,413		428,762		405,419
Income Before Income Taxes	72,133		74,127		208,941		169,388
Income taxes	10,025		8,494		30,391		19,078
Net Income	$	62,108	$	65,633	$	178,550	$	150,310
PER SHARE:
Net Income (Basic)	$	0.38	$	0.37	$	1.06	$	0.86
Net Income (Diluted)	0.37		0.37		1.06		0.85
Cash Dividends	0.13		0.12		0.39		0.36
See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018

Net Income	$	62,108		$	65,633		$	178,550		$	150,310
Other Comprehensive Income (Loss), net of tax:
Unrealized gain (loss) on securities	18,029			(12,531		)	63,244			(46,806		)
Reclassification adjustment for securities gains included in net income	(3,498		)	(11		)	(3,686		)	(30		)
Amortization of net unrealized losses on available for sale securities transferred to held to maturity	3,430			791			5,425			791
Non-credit related unrealized (loss) gain on other-than-temporarily impaired debt securities	—			—			(682		)	232
Amortization of net unrecognized pension and postretirement income	277			369			843			1,248
Other Comprehensive Income (Loss)	18,238			(11,382		)	65,144			(44,565		)
Total Comprehensive Income	$	80,346		$	54,251		$	243,694		$	105,745

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except per-share data)



	Common Stock						Retained Earnings						Treasury Stock			Total
	Shares Outstanding		Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Three months ended September 30, 2019
Balance at June 30, 2019	166,903		$	555,690	$	1,493,628	$	1,018,736		$	(12,157	)	$	(747,099	)	$	2,308,798
Net income							62,108									62,108
Other comprehensive income										18,238						18,238
Stock issued	157		198		919								1,043			2,160
Stock-based compensation awards					2,110											2,110
Acquisition of treasury stock	(3,024	)											(48,071		)	(48,071		)
Common stock cash dividends - $0.13 per share							(21,327		)							(21,327		)
Balance at September 30, 2019	164,036		$	555,888	$	1,496,657	$	1,059,517		$	6,081		$	(794,127	)	$	2,324,016

Three months ended September 30, 2018
Balance at June 30, 2018	175,847		$	553,958	$	1,484,185	$	871,192		$	(73,258	)	$	(590,292	)	$	2,245,785
Net income							65,633									65,633
Other comprehensive loss										(11,382		)				(11,382		)
Stock issued	147		188		1,121								922			2,231
Stock-based compensation awards	25		62		1,823											1,885
Common stock cash dividends - $0.12 per share							(21,138		)							(21,138		)
Balance at September 30, 2018	176,019		$	554,208	$	1,487,129	$	915,687		$	(84,640	)	$	(589,370	)	$	2,283,014

Nine months ended September 30, 2019
Balance at December 31, 2018	170,184		$	554,377	$	1,489,703	$	946,032		$	(59,063	)	$	(683,476	)	$	2,247,573
Net income							178,550									178,550
Other comprehensive income										65,144						65,144
Stock issued	701		1,511		1,496								806			3,813
Stock-based compensation awards					5,458											5,458
Acquisition of treasury stock	(6,849	)											(111,457		)	(111,457		)
Common stock cash dividends - $0.39 per share							(65,065		)							(65,065		)
Balance at September 30, 2019	164,036		$	555,888	$	1,496,657	$	1,059,517		$	6,081		$	(794,127	)	$	2,324,016

Nine months ended September 30, 2018
Balance at December 31, 2017	175,170		$	552,232	$	1,478,389	$	821,619		$	(32,974	)	$	(589,409	)	$	2,229,857
Net income							150,310									150,310
Other comprehensive loss										(44,565		)				(44,565		)
Stock issued	833		1,936		2,773								39			4,748
Stock-based compensation awards	16		40		5,967											6,007
Reclassification of stranded tax effects ⁽¹⁾							7,101			(7,101		)				—
Common stock cash dividends - $0.36 per share							(63,343		)							(63,343		)
Balance at September 30, 2018	176,019		$	554,208	$	1,487,129	$	915,687		$	(84,640	)	$	(589,370	)	$	2,283,014

See Notes to Consolidated Financial Statements
(1) The Corporation adopted the Accounting Standards Codification ("ASC") Update 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" in the first quarter of 2018 which permitted a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017, which changed the federal corporate income tax rate from 35% to 21%. As a result, $7.1 million of stranded tax effects were reclassified from AOCI to retained earnings during the first quarter of 2018.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



(in thousands)	Nine months ended September 30
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	178,550		$	150,310
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	12,295			38,707
Depreciation and amortization of premises and equipment	20,984			21,423
Amortization of tax credit investments	24,608			25,093
Net amortization of investment securities premiums	6,861			6,153
Investment securities gains, net	(4,733		)	(37		)
Gain on sales of mortgage loans held for sale	(13,822		)	(10,158		)
Proceeds from sales of mortgage loans held for sale	672,314			608,561
Originations of mortgage loans held for sale	(665,338		)	(594,398		)
Intangible amortization	1,285			—
Amortization of issuance costs and discounts on long-term debt	632			606
Stock-based compensation	5,458			6,007
Other changes, net	(195,560		)	(19,576		)
Total adjustments	(135,016		)	82,381
Net cash provided by operating activities	43,534			232,691
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale	697,634			54,638
Proceeds from principal repayments and maturities of securities held to maturity	62,320			15,475
Proceeds from principal repayments and maturities of securities available for sale	169,380			237,624
Purchase of securities available for sale	(838,634		)	(459,799		)
Purchase of Federal Reserve Bank and Federal Home Loan Bank stock	(15,274		)	(5,165		)
Net increase in loans and leases	(529,974		)	(200,526		)
Net purchases of premises and equipment	(23,799		)	(29,857		)
Net cash paid for acquisition	(3,907		)	—
Net change in tax credit investments	(14,715		)	(47,096		)
Net cash used in by investing activities	(496,969		)	(434,706		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits	627,958			342,080
Net increase in time deposits	338,600			109,402
Increase (decrease) in short-term borrowings	78,083			(131,959		)
Additions to long-term debt	305,000			50,000
Repayments of long-term debt	(571,197		)	(100,122		)
Net proceeds from issuance of common stock	3,813			4,748
Dividends paid	(64,439		)	(61,539		)
Acquisition of treasury stock	(111,457		)	—
Net cash provided by financing activities	606,361			212,610
Net Increase in Cash and Cash Equivalents	152,926			10,595
Cash and Cash Equivalents at Beginning of Period	445,687			402,096
Cash and Cash Equivalents at End of Period	$	598,613		$	412,691
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	134,935		$	88,559
Income taxes	7,966			8,178
Supplemental schedule of certain noncash activities:
Transfer of available for sale securities to held to maturity securities	$	—		$	641,672
Transfer of held to maturity securities to available for sale securities	158,898			—
See Notes to Consolidated Financial Statements

FULTON FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Fulton Financial Corporation (the "Corporation") have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the U.S. Securities and Exchange Commission ("SEC").

Recently Adopted Accounting Standards

ASC Update 2016-02 - In February 2016, the Financial Accounting Standards Board ("FASB") issued ASC Update 2016-02, "Leases (Topic 842)." This standards update requires a lessee to recognize for all leases with an initial term greater than twelve months: (1) a "right-of-use" ("ROU") asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term; and (2) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, each measured on a discounted basis. This standards update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Corporation adopted ASC Update 2016-02 in the first quarter of 2019 using the alternative transition method, which eliminates the requirement to restate the earliest prior period presented in an entity’s financial statements. As such, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

This standards update provides for a number of practical expedients in transition. The Corporation elected to apply the package of practical expedients permitted within the new standard, which, among other things, allowed it to carryforward the prior conclusions on lease identification, lease classification and initial direct costs. In addition, the Corporation elected to not separate lease and non-lease components. The Corporation did not elect the practical expedient to apply hindsight in determining the lease term and in assessing impairment of the ROU assets. See "Note 6 - Leases" for additional information and expanded lessee disclosures.

This standards update also provides additional guidance on lessor accounting. The Corporation provides equipment lease financing to its customers, which are categorized as direct financing leases. The adoption of this standards update did not result in any changes to the accounting for this type of lease as the lessor.

ASC Update 2019-04 - In April 2019, the FASB issued ASC Update 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." The Corporation adopted this standard in the third quarter of 2019, which permitted the one-time reclassification of certain held to maturity investment securities to available for sale under Topic 815, specific to the transition guidance of ASU update 2017-12, which the Corporation adopted on January 1, 2019. See “Note 3 - Investment Securities” for additional information on this reclassification. The portion of this standards update related to codification improvements specific to Topic 326 will be implemented upon the Corporation’s adoption of ASU 2016-13 in the first quarter of 2020. Additional codification improvements to Topic 825, specifically ASU 2016-01, which the Corporation adopted as of January 1, 2018, did not have an impact on the Company’s Consolidated Financial Statements.

Recently Issued Accounting Standards



Standard	Description	Date of Anticipated Adoption	Effect on Financial Statements
ASC Update 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	The new impairment model prescribed by this standards update applies to all financial assets (i.e., loans and held to maturity investments) and certain off-balance sheet credit exposures. The recognition of credit losses will be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or "CECL"), as opposed to recognition of losses only when they are incurred under current GAAP. This update also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This adjustment will also be recognized in regulatory capital. This update is effective for interim and annual reporting periods beginning after December 15, 2019 (January 1, 2020 for the Corporation). Early adoption is permitted. In November 2018, the FASB issued ASC Update 2018-19, "Codifications Improvements to Topic 326, Financial Instruments - Credit Losses" which clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. ASC Update 2019-04 and 2019-05 were issued to provide certain clarifications and transition relief to adopting this standards update.	First Quarter of 2020	The Corporation intends to adopt these standards updates effective with its March 31, 2020 quarterly report on Form 10-Q. The allowance for credit losses ("ACL") will be based on the Corporation’s historical loss experience, borrower characteristics, forecasts of future economic conditions and other relevant factors. The Corporation will use models and other loss estimation techniques that are responsive to changes in forecasted economic conditions, to interpret borrower and economic factors in order to estimate the ACL. The Corporation will also apply qualitative factors to account for information that may not be reflected in quantitatively derived results, or other relevant factors to ensure the ACL reflects the best estimate of current expected credit losses. Preliminary expected loss estimates have been determined and continue to be validated and reviewed. The Corporation believes that the total allowance for credit losses will increase at the adoption date and that the magnitude of the increase will depend on the composition, characteristics and quality of its loan portfolio and its off-balance sheet credit exposures, as well as the prevailing economic conditions and forecasts as of the adoption date. The Corporation will continue to make refinements to its expected credit loss estimates throughout the remainder of 2019, including refinement of certain models, estimation techniques and the finalization of the operational and control structure supporting the end-to-end process. The Corporation will be adopting the option to phase in over a three-year period the day-one impact of this standards update on regulatory capital afforded to it in the Final Rule published in the Federal Register on February 14, 2019 by Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation.



Standard	Description	Date of Anticipated Adoption	Effect on Financial Statements
ASC Update 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment	The FASB issued this update to simplify the subsequent quantitative measurement of goodwill by eliminating Step 2 of the goodwill impairment test. Instead, identifying and measuring impairment will take place in a single quantitative step. In addition, no separate qualitative assessment for reporting units with zero or negative carrying amounts is required. Entities must disclose the existence of these reporting units and the amount of goodwill allocated to them. This update should be applied on a prospective basis, and an entity is required to disclose the nature of and reason for the change in accounting principle upon transition. This update is effective for annual or interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted.	Fourth Quarter of 2019, in connection with the annual impairment test	The Corporation does not expect the adoption of this update to have a material impact on its Consolidated Financial Statements. The Corporation has not needed to perform Step 2 since its impairment test completed in 2012.
ASC Update 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement	This update changes the fair value measurement disclosure requirements of ASC Topic 820 "Fair Value Measurement." Among other things, the update modifies the disclosure objective paragraphs of ASC 820 to eliminate: (1) "at a minimum" from the phrase "an entity shall disclose at a minimum;" and (2) other similar disclosure requirements to promote the appropriate exercise of discretion by entities.	First Quarter of 2020	The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q. This standard will impact the Corporation's Fair Value Measurement disclosure, but the Corporation does not expect the adoption of this update to have a material impact on its Consolidated Financial Statements.
ASC Update 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans	This update amends ASC Topic 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. This update is effective for annual reporting periods beginning after December 15, 2020. Early adoption is permitted.	First Quarter of 2021	The Corporation intends to adopt this standards update effective with its March 31, 2021 quarterly report on Form 10-Q. This standard will impact the Corporation's disclosure relating to employee benefit plans, but the Corporation does not expect the adoption of this update to have a material impact on its Consolidated Financial Statements.
ASC Update 2018-15 Intangibles - Goodwill and Other - Internal Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract	This update requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Subtopic 350-40 to determine which implementation costs to capitalize as assets. This update is effective for annual or interim reporting periods beginning after December 15, 2019. Early adoption is permitted.	First Quarter of 2020	The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q and does not expect the adoption of this update to have a material impact on its Consolidated Financial Statements.

Reclassifications

Certain amounts in the 2018 Consolidated Financial Statements and notes have been reclassified to conform to the 2019 presentation.

NOTE 2 – Restrictions on Cash and Cash Equivalents

The Corporation’s subsidiary bank, Fulton Bank, N.A. is required to maintain reserves against its deposit liabilities. These reserves are in the form of cash and balances with the Federal Reserve Bank ("FRB"), included in "interest-bearing deposits with other banks." The amounts of such reserves as of September 30, 2019 and December 31, 2018 were $134.0 million and $156.8 million, respectively.

In addition, collateral is posted by the Corporation with counterparties to secure derivative and other contracts, which is included in "interest-bearing deposits with other banks." The amounts of such collateral as of September 30, 2019 and December 31, 2018 were $243.3 million and $45.1 million, respectively.

NOTE 3 – Investment Securities

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



September 30, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Available for Sale
State and municipal securities	$	530,448	$	17,000	$	(104	)	$	547,344
Corporate debt securities	353,771		7,030		(2,395		)	358,406
Collateralized mortgage obligations	686,577		14,120		(98		)	700,599
Residential mortgage-backed securities	183,696		1,162		(1,073		)	183,785
Commercial mortgage-backed securities	413,011		9,145		(47		)	422,109
Auction rate securities	107,410		—		(4,112		)	103,298
Total	$	2,274,913	$	48,457	$	(7,829	)	$	2,315,541

Held to Maturity
Residential mortgage-backed securities	390,069		13,888		—			403,957
Total	$	390,069	$	13,888	$	—		$	403,957



December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Available for Sale
U.S. Government sponsored agency securities	$	31,586	$	185	$	(139	)	$	31,632
State and municipal securities	282,383		2,178		(5,466		)	279,095
Corporate debt securities	111,454		1,432		(3,353		)	109,533
Collateralized mortgage obligations	841,294		2,758		(11,972		)	832,080
Residential mortgage-backed securities	476,973		1,583		(15,212		)	463,344
Commercial mortgage-backed securities	264,165		524		(3,073		)	261,616
Auction rate securities	107,410		—		(4,416		)	102,994
Total	$	2,115,265	$	8,660	$	(43,631	)	$	2,080,294

Held to Maturity
State and municipal securities	$	156,134	$	1,166	$	(93	)	$	157,207
Residential mortgage-backed securities	450,545		3,667		—			454,212
Total	$	606,679	$	4,833	$	(93	)	$	611,419

On July 1, 2019, the Corporation transferred state and municipal securities from the held to maturity classification to the available for sale classification as permitted through the early adoption of ASU 2019-04, as disclosed in "Note 1 - Basis of Presentation."

The amortized cost of the securities transferred was $158.9 million and the estimated fair value was $168.5 million. The Corporation still has the positive intent and ability to hold the remainder of the held to maturity portfolio (residential mortgage-backed securities) to maturity.

Securities carried at $391.5 million at September 30, 2019 and $973.4 million at December 31, 2018, were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

The amortized cost and estimated fair values of debt securities as of September 30, 2019, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities as certain investment securities are subject to call or prepayment with or without call or prepayment penalties.



		Available for Sale				Held to Maturity
		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less		$	3,722	$	3,722	$	—	$	—
Due from one year to five years		38,518		39,747		—		—
Due from five years to ten years		332,514		337,519		—		—
Due after ten years		616,875		628,060		—		—
		991,629		1,009,048		—		—
Residential mortgage-backed securities⁽¹⁾		183,696		183,785		390,069		403,957
Commercial mortgage-backed securities⁽¹⁾		413,011		422,109		—		—
Collateralized mortgage obligations⁽¹⁾		686,577		700,599		—		—
Total		$	2,274,913	$	2,315,541	$	390,069	$	403,957

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

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



	Gross Realized Gains		Gross Realized Losses			Net Gains
Three months ended September 30, 2019	(in thousands)
Debt securities	$	7,938	$	(3,446	)	$	4,492
Total	$	7,938	$	(3,446	)	$	4,492
Three months ended September 30, 2018
Debt securities	$	116	$	(102	)	$	14
Total	$	116	$	(102	)	$	14

Nine months ended September 30, 2019
Debt securities	$	11,207	$	(6,474	)	$	4,733
Total	$	11,207	$	(6,474	)	$	4,733
Nine months ended September 30, 2018
Equity securities	$	9	$	—		$	9
Debt securities	1,656		(1,628		)	28
Total	$	1,665	$	(1,628	)	$	37

The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities held by the Corporation at September 30, 2019 and 2018:



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
	(in thousands)
Balance of cumulative credit losses on debt securities, beginning of period	$	(990	)	$	(11,510	)	$	(11,510	)	$	(11,510	)
Reductions for securities sold during the period	—			—			10,520			—
Balance of cumulative credit losses on debt securities, end of period	$	(990	)	$	(11,510	)	$	(990	)	$	(11,510	)

The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2019 and December 31, 2018:



September 30, 2019	Less than 12 months						12 months or longer						Total
	Number of Securities	Estimated Fair Value		Unrealized Losses			Number of Securities	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
Available for Sale		(in thousands)
State and municipal securities	5	$	17,058	$	(104	)	—	$	—	$	—		$	17,058	$	(104	)
Corporate debt securities	9	72,569		(313		)	13	25,729		(2,082		)	98,298		(2,395		)
Collateralized mortgage obligations	4	5,734		(2		)	5	5,886		(96		)	11,620		(98		)
Residential mortgage-backed securities	3	9,159		(29		)	28	135,616		(1,044		)	144,775		(1,073		)
Commercial mortgage-backed securities	1	11,843		(47		)	—	—		—			11,843		(47		)
Auction rate securities	—	—		—			177	103,298		(4,112		)	103,298		(4,112		)
Total⁽¹⁾	22	$	116,363	$	(495	)	223	$	270,529	$	(7,334	)	$	386,892	$	(7,829	)

(1) No Held to Maturity investments were in an unrealized loss position at September 30, 2019.



December 31, 2018	Less than 12 months						12 months or longer						Total
	Number of Securities	Estimated Fair Value		Unrealized Losses			Number of Securities	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
Available for Sale	(in thousands)
U.S. Government sponsored agency securities	1	$	4,961	$	(31	)	1	$	5,770	$	(108	)	$	10,731	$	(139	)
State and municipal securities	33	72,950		(1,292		)	38	83,770		(4,174		)	156,720		(5,466		)
Corporate debt securities	8	24,419		(227		)	14	25,642		(3,126		)	50,061		(3,353		)
Collateralized mortgage obligations	39	136,563		(1,050		)	89	388,173		(10,922		)	524,736		(11,972		)
Residential mortgage-backed securities	17	18,220		(222		)	110	402,779		(14,990		)	420,999		(15,212		)
Commercial mortgage-backed securities	1	9,778		(35		)	25	197,326		(3,038		)	207,104		(3,073		)
Auction rate securities	—	—		—			177	102,994		(4,416		)	102,994		(4,416		)
Total	99	$	266,891	$	(2,857	)	454	$	1,206,454	$	(40,774	)	$	1,473,345	$	(43,631	)
Held to Maturity
State and municipal securities	6	$	20,601	$	(93	)	—	$	—	$	—		$	20,601	$	(93	)
Total	6	$	20,601	$	(93	)	—	$	—	$	—		$	20,601	$	(93	)

The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The change in fair value of these securities is attributable to changes in interest rates and not credit quality, and the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. Therefore, the Corporation does not consider these investments to be other-than-temporarily impaired as of September 30, 2019.

As of September 30, 2019, all of the auction rate securities ("ARCs") were rated above investment grade. Based on management’s evaluations, none of the ARCs were subject to any other-than-temporary impairment charges for the three and nine months ended

September 30, 2019. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

Based on management’s evaluations, no corporate debt securities were subject to any other-than-temporary impairment charges for the three and nine months ended September 30, 2019. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

NOTE 4 – Loans and Leases and Allowance for Credit Losses

Loans and Leases, Net of Unearned Income

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



	September 30, 2019			December 31, 2018
	(in thousands)
Real-estate - commercial mortgage	$	6,604,634		$	6,434,285
Commercial - industrial, financial and agricultural	4,494,496			4,404,548
Real estate - residential mortgage	2,570,793			2,251,044
Real estate - home equity	1,346,115			1,452,137
Real estate - construction	913,644			916,599
Consumer	464,213			419,186
Equipment lease financing and other	316,880			311,866
Overdrafts	2,929			2,774
Loans and leases, gross of unearned income	16,713,704			16,192,439
Unearned income	(26,838		)	(26,639		)
Loans and leases, net of unearned income	$	16,686,866		$	16,165,800

The Corporation segments its loan and lease portfolio by general loan type, or "portfolio segments," as presented in the table under the heading, "Loans and Leases, Net of Unearned Income," above. Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on "class segments," which are largely based on the type of collateral underlying each loan. Commercial loans include both secured and unsecured loans. Construction loans include loans secured by commercial real estate, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Consumer loans include direct consumer installment loans and indirect vehicle loans.

Allowance for Credit Losses

The allowance for credit losses consists of the allowance for loan and lease losses and the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of incurred losses in the loan and lease portfolio as of the balance sheet date and is recorded as a reduction to loans and leases. The reserve for unfunded lending commitments represents management’s estimate of incurred losses in its unfunded loan commitments and other off balance sheet credit exposures, such as letters of credit, and is recorded in other liabilities on the Consolidated Balance Sheets. The allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.

The Corporation’s allowance for credit losses includes: (1) specific allowances allocated to loans and leases individually evaluated for impairment (FASB ASC Section 310-10-35); and (2) allowances calculated for pools of loans and leases collectively evaluated for impairment (FASB ASC Subtopic 450-20).

The following table presents the components of the allowance for credit losses:



	September 30, 2019		December 31, 2018
	(in thousands)
Allowance for loan and lease losses	$	166,135	$	160,537
Reserve for unfunded lending commitments	6,662		8,873
Allowance for credit losses	$	172,797	$	169,410

The following table presents the activity in the allowance for credit losses:



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
	(in thousands)
Balance at beginning of period	$	176,941		$	169,247		$	169,410		$	176,084
Loans and leases charged off	(10,128		)	(6,883		)	(20,208		)	(55,440		)
Recoveries of loans and leases previously charged off	3,814			3,842			11,300			8,475
Net loans and leases charged off	(6,314		)	(3,041		)	(8,908		)	(46,965		)
Provision for credit losses	2,170			1,620			12,295			38,707
Balance at end of period	$	172,797		$	167,826		$	172,797		$	167,826

The following table presents the activity in the allowance for loan and lease losses by portfolio segment:



	Real Estate - Commercial Mortgage			Commercial - Industrial, Financial and Agricultural			Real Estate - Home Equity			Real Estate - Residential Mortgage			Real Estate - Construction			Consumer			Equipment lease financing, other and overdrafts			Total
	(in thousands)
Three months ended September 30, 2019
Balance at June 30, 2019	$	54,859		$	66,341		$	18,981		$	18,892		$	4,928		$	3,363		$	2,869		$	170,233
Loans and leases charged off	(394		)	(7,181		)	(498		)	(533		)	(45		)	(877		)	(600		)	(10,128		)
Recoveries of loans and leases previously charged off	444			2,311			132			440			164			216			107			3,814
Net loans and leases recovered (charged off)	50			(4,870		)	(366		)	(93		)	119			(661		)	(493		)	(6,314		)
Provision for loan and lease losses ⁽¹⁾	(5,529		)	7,710			(662		)	(109		)	(664		)	798			672			2,216
Balance at September 30, 2019	$	49,380		$	69,181		$	17,953		$	18,690		$	4,383		$	3,500		$	3,048		$	166,135
Three months ended September 30, 2018
Balance at June 30, 2018	$	56,583		$	59,045		$	16,247		$	14,504		$	5,988		$	1,699		$	1,984		$	156,050
Loans and leases charged off	(650		)	(3,541		)	(743		)	(483		)	(212		)	(672		)	(582		)	(6,883		)
Recoveries of loans and leases previously charged off	928			731			217			317			664			390			595			3,842
Net loans and leases recovered (charged off)	278			(2,810		)	(526		)	(166		)	452			(282		)	13			(3,041		)
Provision for loan and lease losses ⁽¹⁾	(2,750		)	(301		)	2,890			3,774			(961		)	1,429			720			4,801
Balance at September 30, 2018	$	54,111		$	55,934		$	18,611		$	18,112		$	5,479		$	2,846		$	2,717		$	157,810
Nine months ended September 30, 2019
Balance at December 31, 2018	$	52,889		$	58,868		$	18,911		$	18,921		$	5,061		$	3,217		$	2,670		$	160,537
Loans and leases charged off	(1,769		)	(11,863		)	(923		)	(1,322		)	(143		)	(2,355		)	(1,833		)	(20,208		)
Recoveries of loans and leases previously charged off	749			6,234			552			783			1,493			1,005			484			11,300
Net loans and leases recovered (charged off)	(1,020		)	(5,629		)	(371		)	(539		)	1,350			(1,350		)	(1,349		)	(8,908		)
Provision for loan losses ⁽¹⁾	(2,489		)	15,942			(587		)	308			(2,028		)	1,633			1,727			14,506
Balance at September 30, 2019	$	49,380		$	69,181		$	17,953		$	18,690		$	4,383		$	3,500		$	3,048		$	166,135
Nine months ended September 30, 2018
Balance at December 31, 2017	$	58,793		$	66,280		$	18,127		$	16,088		$	6,620		$	2,045		$	1,957		$	169,910
Loans and leases charged off	(1,283		)	(46,178		)	(1,967		)	(1,128		)	(976		)	(2,276		)	(1,632		)	(55,440		)
Recoveries of loans and leases previously charged off	1,528			2,347			694			520			1,414			1,015			957			8,475
Net loans and leases recovered (charged off)	245			(43,831		)	(1,273		)	(608		)	438			(1,261		)	(675		)	(46,965		)
Provision for loan losses ⁽¹⁾	(4,927		)	33,485			1,757			2,632			(1,579		)	2,062			1,435			34,865
Balance at September 30, 2018	$	54,111		$	55,934		$	18,611		$	18,112		$	5,479		$	2,846		$	2,717		$	157,810


(1)	The provision for loan and lease losses excluded a $46,000 and a $2.2 million decrease in the reserve for unfunded lending commitments for the three and nine months ended September 30, 2019, respectively, and a $3.2 million decrease and a $3.8 million increase in the reserve for unfunded lending commitments for the three and nine months ended September 30, 2018, respectively.

The following table presents loans and leases, net of unearned income and their related allowance for loan and lease losses, by portfolio segment:



	Real Estate - Commercial Mortgage		Commercial - Industrial, Financial and Agricultural		Real Estate - Home Equity		Real Estate - Residential Mortgage		Real Estate - Construction		Consumer		Equipment lease financing, other and overdrafts		Total
	(in thousands)
Allowance for loan and lease losses at September 30, 2019:
Collectively evaluated for impairment	$	42,766	$	58,722	$	8,033	$	9,678	$	3,970	$	3,495	$	2,944	$	129,608
Individually evaluated for impairment	6,614		10,459		9,920		9,012		413		5		104		36,527
	$	49,380	$	69,181	$	17,953	$	18,690	$	4,383	$	3,500	$	3,048	$	166,135

Loans and leases, net of unearned income at September 30, 2019:
Collectively evaluated for impairment	$	6,543,781	$	4,453,062	$	1,323,950	$	2,533,295	$	909,811	$	464,206	$	275,552	$	16,503,657
Individually evaluated for impairment	60,853		41,434		22,165		37,498		3,833		7		17,419		183,209
	$	6,604,634	$	4,494,496	$	1,346,115	$	2,570,793	$	913,644	$	464,213	$	292,971	$	16,686,866

Allowance for loan and lease losses at September 30, 2018:
Collectively evaluated for impairment	$	46,812	$	47,028	$	7,856	$	8,369	$	4,718	$	2,841	$	2,717	$	120,341
Individually evaluated for impairment	7,299		8,906		10,755		9,743		761		5		—		37,469
	$	54,111	$	55,934	$	18,611	$	18,112	$	5,479	$	2,846	$	2,717	$	157,810

Loans and leases, net of unearned income at September 30, 2018:
Collectively evaluated for impairment	$	6,290,143	$	4,235,953	$	1,444,898	$	2,133,718	$	971,167	$	390,700	$	285,021	$	15,751,600
Individually evaluated for impairment	47,841		52,870		24,254		39,830		8,690		8		—		173,493
	$	6,337,984	$	4,288,823	$	1,469,152	$	2,173,548	$	979,857	$	390,708	$	285,021	$	15,925,093

Impaired Loans and Leases

A loan or lease is considered to be impaired if it is probable that all amounts will not be collected according to the contractual terms of the loan or lease agreement. Impaired loans and leases consist of all loans and leases on non-accrual status and accruing troubled debt restructurings ("TDRs"). An allowance for loan and lease losses is established for an impaired loan or lease if its carrying value exceeds its estimated fair value. Impaired loans and leases to borrowers with total commitments greater than or equal to $1.0 million are evaluated individually for impairment. Impaired loans and leases to borrowers with total commitments less than $1.0 million are pooled and measured for impairment collectively.

All loans and leases individually evaluated for impairment are measured for losses on a quarterly basis. As of September 30, 2019 and December 31, 2018, substantially all of the Corporation’s individually evaluated impaired loans and leases with total commitments greater than or equal to $1.0 million were measured based on the estimated fair value of each loan’s collateral. Collateral could be in the form of real estate, in the case of commercial mortgages and construction loans, or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans. Commercial and industrial loans may also be secured by real estate.

As of September 30, 2019 and December 31, 2018, approximately 73% and 89%, respectively, of impaired loans and leases with principal balances greater than or equal to $1.0 million, whose primary collateral is real estate, were measured at estimated fair value using appraisals performed by state certified third-party appraisers that had been updated in the preceding 12 months.

When updated appraisals are not obtained for loans and leases evaluated for impairment that are secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and there has not been a significant deterioration in the collateral value since the original appraisal was performed. Original appraisals are typically used only when the estimated collateral value, as adjusted for the age of the appraisal, results in a current loan-to-value ratio that is lower than the Corporation's loan-to-value requirements for new loans, generally less than 70%.

The following table presents total impaired loans and leases by class segment:



	September 30, 2019						December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
	(in thousands)
With no related allowance recorded:
Real estate - commercial mortgage	$	31,305	$	29,156	$	—	$	25,095	$	23,481	$	—
Commercial	27,060		21,617		—		33,493		26,585		—
Real estate - residential mortgage	4,531		4,368		—		3,149		3,149		—
Construction	6,449		2,598		—		8,980		5,083		—
Equipment lease financing	19,269		17,003		—		19,269		19,268		—
	88,614		74,742		—		89,986		77,566		—
With a related allowance recorded:
Real estate - commercial mortgage	38,393		31,697		6,614		29,005		22,592		7,255
Commercial	29,146		19,817		10,459		37,706		28,708		12,513
Real estate - residential mortgage	37,559		33,130		9,012		39,972		35,621		9,394
Real estate - home equity	25,317		22,165		9,920		26,599		23,373		10,370
Real estate - construction	4,724		1,235		413		5,984		2,307		793
Consumer	7		7		5		11		11		7
Equipment lease financing	416		416		104		—		—		—
	135,562		108,467		36,527		139,277		112,612		40,332
Total	$	224,176	$	183,209	$	36,527	$	229,263	$	190,178	$	40,332

As of September 30, 2019 and December 31, 2018, there were $74.7 million and $77.6 million, respectively, of impaired loans and leases that did not have a related allowance for loan and lease losses. The estimated fair values of the collateral securing these loans and leases exceeded their carrying amount, or the loans and leases were previously charged down to realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

The following table presents average impaired loans and leases by class segment:



	Three months ended September 30								Nine months ended September 30
	2019				2018				2019				2018
	Average Recorded Investment		Interest Income ⁽¹⁾		Average Recorded Investment		Interest Income ⁽¹⁾		Average Recorded Investment		Interest Income ⁽¹⁾		Average Recorded Investment		Interest Income ⁽¹⁾
	(in thousands)
With no related allowance recorded:
Real estate - commercial mortgage	$	29,865	$	94	$	26,051	$	94	$	27,028	$	291	$	25,702	$	274
Commercial	22,603		30		30,157		66		24,670		92		35,098		208
Real estate - residential mortgage	4,384		26		3,182		20		3,761		69		3,872		71
Real estate -construction	2,601		—		6,845		—		3,827		—		7,408		—
Equipment lease financing	17,381		—		—		—		18,136		—		—		—
	76,834		150		66,235		180		77,422		452		72,080		553
With a related allowance recorded:
Real estate - commercial mortgage	30,508		96		23,734		85		25,837		268		24,727		260
Commercial	23,906		32		23,687		51		26,373		101		23,934		149
Real estate - home equity	22,874		210		24,628		202		23,237		655		24,690		581
Real estate - residential mortgage	33,035		198		36,396		227		34,535		638		36,578		671
Real estate -construction	1,399		—		2,061		—		1,683		—		2,778		—
Consumer	8		—		10		—		10		—		18		—
Equipment lease financing	208		—		—		—		104		—		—		—
	111,938		536		110,516		565		111,779		1,662		112,725		1,661
Total	$	188,772	$	686	$	176,751	$	745	$	189,201	$	2,114	$	184,805	$	2,214


(1)	All impaired loans and leases were either TDRs or non-accrual loans and leases. Interest income recognized for the three and nine months ended September 30, 2019 and 2018 represented amounts earned on accruing TDRs.

Credit Quality Indicators and Non-performing Assets

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


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


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


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

The risk rating process allows management to identify credits that potentially carry more risk in a timely manner and to allocate resources to managing troubled accounts. The Corporation believes that internal risk ratings are the most relevant credit quality indicator for the class segments presented in the preceding tables. The migration of loans through the various internal risk rating categories is a significant component of the allowance for credit loss methodology, which bases the probability of default on this migration. Assigning risk ratings involves judgment. The Corporation's loan review officers provide an independent assessment of risk rating accuracy. Ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff, or if specific loan review activities identify a deterioration or an improvement in the loan.

The following table presents internal credit risk ratings for the indicated loan class segments:



	Pass						Special Mention						Substandard or Lower						Total
	September 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
	(dollars in thousands)
Real estate - commercial mortgage	$	6,290,567		$	6,129,463		$	142,136		$	170,827		$	171,931		$	133,995		$	6,604,634		$	6,434,285
Commercial - secured	3,926,856			3,902,484			198,592			193,470			184,584			129,026			4,310,032			4,224,980
Commercial - unsecured	175,761			171,589			5,082			4,016			3,621			3,963			184,464			179,568
Total commercial - industrial, financial and agricultural	4,102,617			4,074,073			203,674			197,486			188,205			132,989			4,494,496			4,404,548
Construction - commercial residential	112,163			104,079			2,871			6,912			3,627			6,881			118,661			117,872
Construction - commercial	707,290			723,030			719			1,163			2,704			2,533			710,713			726,726
Total construction (excluding Construction - other)	819,453			827,109			3,590			8,075			6,331			9,414			829,374			844,598
	$	11,212,637		$	11,030,645		$	349,400		$	376,388		$	366,467		$	276,398		$	11,928,504		$	11,683,431
% of Total	94.0		%	94.4		%	2.9		%	3.2		%	3.1		%	2.4		%	100.0		%	100.0		%

The Corporation does not assign internal risk ratings to smaller balance, homogeneous loans and leases, such as home equity, residential mortgage, construction loans to individuals secured by residential real estate, consumer and equipment lease financing. For these loans and leases, the most relevant credit quality indicator is delinquency status. The migration of loans and leases through the various delinquency status categories is a significant component of the allowance for credit losses methodology for those loans and leases, which bases the probability of default on this migration.

The following table presents a summary of performing, delinquent and non-performing loans and leases for the indicated class segments:



	Performing						Delinquent ⁽¹⁾						Non-performing ⁽²⁾						Total
	September 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
	(dollars in thousands)
Real estate - home equity	$	1,325,900		$	1,431,666		$	9,445		$	10,702		$	10,770		$	9,769		$	1,346,115		$	1,452,137
Real estate - residential mortgage	2,526,551			2,202,955			24,092			28,988			20,150			19,101			2,570,793			2,251,044
Construction - other	82,787			71,511			1,296			—			187			490			84,270			72,001
Consumer - direct	64,066			55,629			641			338			94			66			64,801			56,033
Consumer - indirect	395,919			359,405			3,345			3,405			148			343			399,412			363,153
Total consumer	459,985			415,034			3,986			3,743			242			409			464,213			419,186
Equipment lease financing, other and overdrafts	274,239			267,112			1,066			1,302			17,666			19,587			292,971			288,001
	$	4,669,462		$	4,388,278		$	39,885		$	44,735		$	49,015		$	49,356		$	4,758,362		$	4,482,369
% of Total	98.1		%	97.9		%	0.9		%	1.0		%	1.0		%	1.1		%	100.0		%	100.0		%


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


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

The following table presents non-performing assets:



	September 30, 2019		December 31, 2018
	(in thousands)
Non-accrual loans and leases	$	124,287	$	128,572
Loans and leases 90 days or more past due and still accruing	11,689		11,106
Total non-performing loans and leases	135,976		139,678
Other real estate owned (OREO)	7,706		10,518
Total non-performing assets	$	143,682	$	150,196

The following tables present past due status and non-accrual loans and leases by portfolio segment and class segment:



	September 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		≥ 90 Days Past Due and Accruing		Non- accrual		Total Past Due and Non-accrual		Current		Total
	(in thousands)
Real estate - commercial mortgage	$	25,100	$	4,292	$	1,301	$	44,409	$	75,102	$	6,529,532	$	6,604,634
Commercial - secured	3,234		1,961		731		35,664		41,590		4,268,442		4,310,032
Commercial - unsecured	91		85		153		578		907		183,557		184,464
Total commercial - industrial, financial and agricultural	3,325		2,046		884		36,242		42,497		4,451,999		4,494,496
Real estate - home equity	7,063		2,382		4,122		6,648		20,215		1,325,900		1,346,115
Real estate - residential mortgage	17,801		6,291		4,414		15,736		44,242		2,526,551		2,570,793
Construction - commercial residential	1,326		—		479		3,627		5,432		113,229		118,661
Construction - commercial	392		—		—		19		411		710,302		710,713
Construction - other	1,296		—		—		187		1,483		82,787		84,270
Total real estate - construction	3,014		—		479		3,833		7,326		906,318		913,644
Consumer - direct	521		120		94		—		735		64,066		64,801
Consumer - indirect	2,890		455		148		—		3,493		395,919		399,412
Total consumer	3,411		575		242		—		4,228		459,985		464,213
Equipment lease financing, other and overdrafts	923		143		247		17,419		18,732		274,239		292,971
Total	$	60,637	$	15,729	$	11,689	$	124,287	$	212,342	$	16,474,524	$	16,686,866



	December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		≥ 90 Days Past Due and Accruing		Non- accrual		Total Past Due and Non-accrual		Current		Total
	(in thousands)
Real estate - commercial mortgage	$	12,206	$	1,500	$	1,765	$	30,388	$	45,859	$	6,388,426	$	6,434,285
Commercial - secured	5,227		938		1,068		49,299		56,532		4,168,448		4,224,980
Commercial - unsecured	1,598		—		51		851		2,500		177,068		179,568
Total commercial - industrial, financial and agricultural	6,825		938		1,119		50,150		59,032		4,345,516		4,404,548
Real estate - home equity	7,144		3,558		3,061		6,708		20,471		1,431,666		1,452,137
Real estate - residential mortgage	20,796		8,192		4,433		14,668		48,089		2,202,955		2,251,044
Construction - commercial residential	2,489		—		—		6,881		9,370		108,502		117,872
Construction - commercial	—		—		—		19		19		726,707		726,726
Construction - other	—		—		—		490		490		71,511		72,001
Total real estate - construction	2,489		—		—		7,390		9,879		906,720		916,599
Consumer - direct	267		71		66		—		404		55,629		56,033
Consumer - indirect	2,908		497		343		—		3,748		359,405		363,153
Total consumer	3,175		568		409		—		4,152		415,034		419,186
Equipment lease financing, other and overdrafts	1,005		297		319		19,268		20,889		267,112		288,001
Total	$	53,640	$	15,053	$	11,106	$	128,572	$	208,371	$	15,957,429	$	16,165,800

The following table presents TDRs, by class segment:



	September 30, 2019		December 31, 2018
	(in thousands)
Real estate - residential mortgage	$	21,762	$	24,102
Real estate - commercial mortgage	16,444		15,685
Real estate - home equity	15,505		16,665
Commercial	5,192		5,143
Consumer	7		10
Total accruing TDRs	58,910		61,605
Non-accrual TDRs⁽¹⁾	23,553		28,659
Total TDRs	$	82,463	$	90,264


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

The following table presents TDRs, by class segment, for loans that were modified during the three and nine months ended September 30, 2019 and 2018:



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(dollars in thousands)
Real estate - residential mortgage	1	$	830	4	$	597	6	$	2,263	6	$	679
Real estate - commercial mortgage	1	81		—	—		1	81		—	—
Real estate - home equity	12	327		24	1,002		46	2,281		71	4,045
Commercial	3	97		2	913		13	4,928		13	10,325
Total	17	$	1,335	30	$	2,512	66	$	9,553	90	$	15,049

Restructured loan modifications may include payment schedule modifications, interest rate concessions, bankruptcies, principal reduction or some combination of these concessions. During the three and nine months ended September 30, 2019, restructured loan modifications of residential mortgages, home equity and commercial loans primarily included maturity date extensions, rate modifications and payment schedule modifications.

The following table presents TDRs, by class segment, as of September 30, 2019 and 2018 that were modified in the previous 12 months and had a post-modification payment default during the nine months ended September 30, 2019 and 2018. The Corporation defines a payment default as a single missed payment.



	2019			2018
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
	(dollars in thousands)
Real estate - residential mortgage	1	$	231	6	$	724
Real estate - commercial mortgage	—	—		2	452
Real estate - home equity	16	657		25	1,591
Commercial	4	190		4	5,042
Total	21	$	1,078	37	$	7,809

NOTE 5 – Mortgage Servicing Rights

The following table summarizes the changes in mortgage servicing rights ("MSRs"), which are included in other assets on the

Consolidated Balance Sheets:



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
	(in thousands)
Amortized cost:
Balance at beginning of period	$	38,826		$	37,894		$	38,573		$	37,663
Originations of mortgage servicing rights	2,499			2,018			5,585			5,247
Amortization	(1,970		)	(1,684		)	(4,803		)	(4,682		)
Balance at end of period	$	39,355		$	38,228		$	39,355		$	38,228

MSRs represent the economic value of contractual rights to service mortgage loans that have been sold. Accordingly, actual and expected prepayments of the underlying mortgage loans can impact the corresponding fair value of the MSRs. The Corporation accounts for MSRs at the lower of amortized cost or fair value.

The fair value of MSRs is estimated by discounting the estimated cash flows from servicing income, net of expense, over the expected life of the underlying loans at a discount rate commensurate with the risk associated with these assets. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The fair values of MSRs were $44.0 million and $50.2 million at September 30, 2019 and December 31, 2018, respectively.

NOTE 6 – Leases

Effective January 1, 2019, the Corporation adopted ASC Update 2016-02, "Leases (Topic 842)," using the modified retrospective method of applying the new standard at the adoption date. In addition, the Corporation elected the package of practical expedients permitted under the transition guidance within the new standard as the lessee. This permitted the carry forward of the conclusions on lease identification, lease classification and initial direct costs. The Corporation also elected not to separate lease and non-lease components. Financial results for reporting periods beginning on or after January 1, 2019 are presented under the Topic 842 requirements, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance (Topic 840).

As a lessee, the majority of the operating lease portfolio consists of real estate leases for the Corporation's branches, land and office space. The operating leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years or more. ROU assets and lease liabilities are not recognized for leases with an initial term of 12 months or less. The Corporation does not have any finance leases as lessee.

Certain real estate leases have lease payments that adjust based on annual changes in the Consumer Price Index ("CPI"). The leases that are dependent upon CPI are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability.

Operating lease expense represents fixed lease payments for operating leases recognized on a straight-line basis over the applicable lease term. Variable lease expense represents the payment of real estate taxes, insurance and common area maintenance based on the Corporation's pro-rata share.

Sublease income consists mostly of operating leases for space within the Corporation's offices and branches.

The following table presents the components of lease expense, which is included in net occupancy expense on the Consolidated Statements of Income (in thousands):



	Three months ended			Nine months ended
	September 30, 2019			September 30, 2019
Operating lease expense	$	4,654		$	14,140
Variable lease expense	786			2,156
Sublease income	(239		)	(610		)
Total lease expense	$	5,201		$	15,686

Supplemental balance sheet information related to leases was as follows (dollars in thousands):



Operating Leases	Balance Sheet Classification	September 30, 2019
ROU assets	Other assets	$	104,746
Lease liabilities	Other liabilities	$	111,617
Weighted average remaining lease term		8.3 years
Weighted average discount rate		3.05		%

The discount rate used in determining the lease liability for each individual lease was the Federal Home Loan Bank ("FHLB") fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement or modification date for leases subsequently entered into.

Supplemental cash flow information related to operating leases was as follows (in thousands):



	Nine months ended
	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities	$	13,913
ROU assets obtained in exchange for lease obligations	115,681

Lease payment obligations for each of the next five years and thereafter, with a reconciliation to the Corporation's lease liability were as follows (in thousands):



Year	Operating Leases
For the three months ending December 31, 2019	$	6,304
2020	18,761
2021	17,623
2022	16,349
2023	14,094
Thereafter	54,809
Total lease payments	127,940
Less: imputed interest	(16,323		)
Present value of lease liabilities	$	111,617

As of September 30, 2019, the Corporation had not entered into any material leases that have not yet commenced.

As previously disclosed in the Corporation's 2018 Annual Report on Form 10-K and under Topic 840, future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year as of December 31, 2018 were $18.0 million, $17.3 million, $15.7 million, $13.7 million, $11.4 million for years 2019 through 2023, respectively, and $43.3 million in the aggregate for all years thereafter.

NOTE 7 – Derivative Financial Instruments

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

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

For each of the derivatives, gross derivative assets and liabilities are recorded in other assets and other liabilities, respectively, on the Consolidated Balance Sheets. Related gains and losses on these derivative instruments are recorded in other changes, net on the Consolidated Statement of Cash Flows.

Mortgage Banking Derivatives

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

Interest Rate Swaps

The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. Fulton Bank, N.A. ("the Bank"), exceeds $10 billion in total assets and is required to clear all eligible interest rate swap contracts with a central counterparty. As a result, the Bank is subject to the regulations of the Commodity Futures Trading Commission ("CFTC").

Foreign Exchange Contracts

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

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



	September 30, 2019					December 31, 2018
	Notional Amount		Asset (Liability) Fair Value			Notional Amount		Asset (Liability) Fair Value
	(in thousands)
Interest Rate Locks with Customers
Positive fair values	$	179,038	$	1,722		$	101,700	$	1,148
Negative fair values	5,647		(33		)	1,646		(12		)
Forward Commitments
Positive fair values	39,874		95			1,540		3
Negative fair values	96,000		(254		)	83,562		(1,066		)
Interest Rate Swaps with Customers
Positive fair values	2,947,777		193,405			1,185,144		33,258
Negative fair values	75,840		(186		)	1,386,046		(30,769		)
Interest Rate Swaps with Dealer Counterparties
Positive fair values	75,840		186			1,386,046		28,143
Negative fair values	2,947,777		(104,544		)	1,185,144		(16,338		)
Foreign Exchange Contracts with Customers
Positive fair values	10,069		327			5,881		105
Negative fair values	1,691		(165		)	9,690		(251		)
Foreign Exchange Contracts with Correspondent Banks
Positive fair values	4,329		208			9,220		287
Negative fair values	11,953		(315		)	6,831		(130		)

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



	Consolidated Statements of Income Category of Gain/ (Loss) Recognized in Income	Three months ended September 30					Nine months ended September 30
		2019		2018			2019		2018
		(in thousands)
Mortgage Banking Derivatives	Mortgage banking income	$	843	$	441		$	1,457	$	486
Interest rate swaps	Other expense	51		18			198		17
Foreign exchange contracts	Other income	10		(59		)	44		(37		)
Net fair value gains on derivative financial instruments		$	904	$	400		$	1,699	$	466

Fair Value Option

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



	September 30, 2019		December 31, 2018
	(in thousands)
Amortized cost	$	33,427	$	26,407
Fair value	33,945		27,099

Losses related to changes in fair values of mortgage loans held for sale were $499,000 and $334,000 for the three months ended September 30, 2019 and 2018, respectively, and $174,000 and $207,000, for the nine months ended September 30, 2019 and 2018, respectively.

Balance Sheet Offsetting

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

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

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

The Corporation also enters into agreements with customers in which it sells securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements. Under these agreements, the Corporation may transfer legal control over the assets but still maintain effective control through agreements that both entitle and obligate the Corporation to repurchase the assets. Therefore, repurchase agreements are reported as secured borrowings, classified in short-term borrowings on the Consolidated Balance Sheets, while the securities underlying the repurchase agreements remain classified with available for sale ("AFS") investment securities on the Consolidated Balance Sheets. The Corporation does not enter into reverse repurchase agreements; therefore, there is no such offsetting to be done with the repurchase agreements.

The following table presents the Corporation's financial instruments that are eligible for offset, and the effects of offsetting, on the Consolidated Balance Sheets:



	Gross Amounts		Gross Amounts Not Offset
	Recognized		on the Consolidated
	on the		Balance Sheets
	Consolidated		Financial			Cash			Net
	Balance Sheets		Instruments⁽¹⁾			Collateral ⁽²⁾			Amount
	(in thousands)
September 30, 2019
Interest rate swap derivative assets	$	193,701	$	(207	)	$	—		$	193,494
Foreign exchange derivative assets with correspondent banks	196		(196		)	—			—
Total	$	193,897	$	(403	)	$	—		$	193,494

Interest rate swap derivative liabilities	$	104,730	$	(207	)	$	(104,523	)	$	—
Foreign exchange derivative liabilities with correspondent banks	314		(196		)	—			118
Total	$	105,044	$	(403	)	$	(104,523	)	$	118

December 31, 2018
Interest rate swap derivative assets	$	61,401	$	(12,955	)	$	(23,270	)	$	25,176
Foreign exchange derivative assets with correspondent banks	287		(130		)	—			157
Total	$	61,688	$	(13,085	)	$	(23,270	)	$	25,333

Interest rate swap derivative liabilities	$	47,107	$	(22,786	)	$	(22,786	)	$	1,535
Foreign exchange derivative liabilities with correspondent banks	130		(130		)	—			—
Total	$	47,237	$	(22,916	)	$	(22,786	)	$	1,535


(1)	For interest rate swap assets, amounts represent any derivative liability fair values that could be offset in the event of counterparty or customer default. For interest rate swap liabilities, amounts represent any derivative asset fair values that could be offset in the event of counterparty or customer default.

(2)

Amounts represent cash collateral received from the counterparty or posted by the Corporation on interest rate swap transactions and foreign exchange contracts with financial institution counterparties. Interest rate swaps with customers are collateralized by the same collateral securing the underlying loans to those borrowers. Cash and securities collateral amounts are included in the table only to the extent of the net derivative fair values.

NOTE 8 – Tax Credit Investments

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

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

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



		September 30,		December 31,
		2019		2018
Recorded in other assets on the Consolidated Balance Sheets:		(in thousands)
Affordable housing tax credit investment, net		$	159,502	$	170,401
Other tax credit investments, net		64,922		72,584
	Total TCIs, net	$	224,424	$	242,985
Recorded in other liabilities on the Consolidated Balance Sheets:
Unfunded affordable housing tax credit commitments		$	19,727	$	23,196
Other tax credit investment liabilities		54,623		59,823
	Total unfunded tax credit investment commitments and liabilities	$	74,350	$	83,019

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



		Three Months Ended						Nine Months Ended
		September 30						September 30
		2019			2018			2019			2018
Components of income taxes:		(in thousands)
Affordable housing tax credits and other tax benefits		$	(7,852	)	$	(8,555	)	$	(23,002	)	$	(23,642	)
Other tax credit investment credits and tax benefits		(1,136		)	(1,596		)	(3,407		)	(4,789		)
Amortization of affordable housing investments, net of tax benefit		5,649			5,459			16,638			16,376
Deferred tax expense		238			336			715			1,007
	Total reduction in income tax expense	$	(3,101	)	$	(4,356	)	$	(9,056	)	$	(11,048	)
Amortization of TCIs:
Affordable housing tax credits investment		$	863		$	839		$	2,508		$	2,517
Other tax credit investment amortization		670			798			2,008			2,394
	Total amortization of TCIs	$	1,533		$	1,637		$	4,516		$	4,911

NOTE 9 – Accumulated Other Comprehensive Income (Loss)

The following table presents changes in other comprehensive income (loss):



	Before-Tax Amount			Tax Effect			Net of Tax Amount
	(in thousands)
Three months ended September 30, 2019
Unrealized gain on securities ⁽³⁾	$	23,150		$	(5,121	)	$	18,029
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(4,492		)	994			(3,498		)
Amortization of net unrealized losses on AFS securities transferred to held to maturity ("HTM") ^{(2) (3)}	4,405			(974		)	3,430
Amortization of net unrecognized pension and postretirement items ⁽⁴⁾	357			(80		)	277
Total Other Comprehensive Income	$	23,419		$	(5,181	)	$	18,238
Three months ended September 30, 2018
Unrealized loss on securities	$	(15,865	)	$	3,334		$	(12,531	)
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(14		)	3			(11		)
Amortization of net unrealized losses on AFS securities transferred to HTM ⁽²⁾	1,000			(209		)	791
Amortization of net unrecognized pension and postretirement items ⁽⁴⁾	466			(97		)	369
Total Other Comprehensive Loss	$	(14,413	)	$	3,031		$	(11,382	)

Nine months ended September 30, 2019
Unrealized gain on securities ⁽³⁾	$	81,207		$	(17,963	)	$	63,244
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(4,733		)	1,047			(3,686		)
Amortization of net unrealized losses on AFS securities transferred to HTM^{(2) (3)}	6,966			(1,541		)	5,425
Non-credit related unrealized losses on other-than-temporarily impaired debt securities	(875		)	193			(682		)
Amortization of net unrecognized pension and postretirement items ⁽⁴⁾	1,083			(240		)	843
Total Other Comprehensive Income	$	83,648		$	(18,504	)	$	65,144

Nine months ended September 30, 2018
Unrealized loss on securities	$	(59,250	)	$	12,444		$	(46,806	)
Reclassification adjustment for securities gains included in net income ⁽¹⁾	(37		)	7			(30		)
Amortization of net unrealized losses on AFS securities transferred to HTM ⁽²⁾	1,000			(209		)	791
Non-credit related unrealized gains on other-than-temporarily impaired debt securities	294			(62		)	232
Amortization of net unrecognized pension and postretirement items⁽⁴⁾	1,580			(332		)	1,248
Total Other Comprehensive Loss	$	(56,413	)	$	11,848		$	(44,565	)


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


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


(3)	Before-Tax amount includes a $3.7 million reclassification of unrealized loss related to the early adoption of ASU 2019-04, as disclosed in "Note 1 - Basis of Presentation" from "Amortization of net unrealized losses on AFS securities transferred to HTM" to "Unrealized gain on securities."


(4)	Amounts reclassified out of accumulated other comprehensive income. Before-tax amounts included in "Salaries and employee benefits" on the Consolidated Statements of Income. See Note 13, "Employee Benefit Plans," for additional details.

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



	Unrealized Gains (Losses) on Investment Securities Not Other-Than-Temporarily Impaired				Unrealized Non-Credit Gains (Losses) on Other-Than-Temporarily Impaired Debt Securities			Unrecognized Pension and Postretirement Plan Income (Costs)			Total
	(in thousands)
Three months ended September 30, 2019
Balance at June 30, 2019	$	2,368			$	(2	)	$	(14,523	)	$	(12,157	)
Other comprehensive income before reclassifications	18,029				—			—			18,029
Amounts reclassified from accumulated other comprehensive income (loss)	(3,498		)		—			277			(3,221		)
Amortization of net unrealized losses on AFS securities transferred to HTM	3,430			—	—			—			3,430
Balance at September 30, 2019	$	20,329			$	(2	)	$	(14,246	)	$	6,081
Three months ended September 30, 2018
Balance at June 30, 2018	$	(56,690	)		$	690		$	(17,258	)	$	(73,258	)
Other comprehensive loss before reclassifications	(12,531		)		—			—			(12,531		)
Amounts reclassified from accumulated other comprehensive income (loss)	(11		)		—			369			358
Amortization of net unrealized losses on AFS securities transferred to HTM	791				—			—			791
Balance at September 30, 2018	$	(68,441	)		$	690		$	(16,889	)	$	(84,640	)

Nine months ended September 30, 2019
Balance at December 31, 2018	$	(44,654	)		$	680		$	(15,089	)	$	(59,063	)
Other comprehensive income before reclassifications	63,244				(682		)	—			62,562
Amounts reclassified from accumulated other comprehensive income (loss)	(3,686		)		—			843			(2,843		)
Amortization of net unrealized losses on AFS securities transferred to HTM	5,425				—			—			5,425
Balance at September 30, 2019	$	20,329			$	(2	)	$	(14,246	)	$	6,081
Nine months ended September 30, 2018
Balance at December 31, 2017	$	(18,509	)		$	458		$	(14,923	)	$	(32,974	)
Other comprehensive loss before reclassifications	(46,806		)		232			—			(46,574		)
Amounts reclassified from accumulated other comprehensive income (loss)	(30		)		—			1,248			1,218
Amortization of net unrealized losses on AFS securities transferred to HTM	791				—			—			791
Reclassification of stranded tax effects	(3,887		)		—			(3,214		)	(7,101		)
Balance at September 30, 2018	$	(68,441	)		$	690		$	(16,889	)	$	(84,640	)

NOTE 10 – Fair Value Measurements

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


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


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


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

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



	September 30, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	33,945	$	—	$	33,945
Available for sale investment securities:
State and municipal securities	—		547,344		—		547,344
Corporate debt securities	—		356,036		2,370		358,406
Collateralized mortgage obligations	—		700,599		—		700,599
Residential mortgage-backed securities	—		183,785		—		183,785
Commercial mortgage-backed securities	—		422,109		—		422,109
Auction rate securities	—		—		103,298		103,298
Total available for sale investment securities	—		2,209,873		105,668		2,315,541
Other assets:
Investments held in Rabbi Trust	20,853		—		—		20,853
Derivative assets	535		195,263		—		195,798
Total assets	$	21,388	$	2,439,081	$	105,668	$	2,566,137
Other liabilities:
Deferred compensation liabilities	20,853		—		—		20,853
Derivative liabilities	480		105,016		—		105,496
Total liabilities	$	21,333	$	105,016	$	—	$	126,349



	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Loans held for sale	$	—	$	27,099	$	—	$	27,099
Available for sale investment securities:
U.S. Government sponsored agency securities	—		31,632		—		31,632
State and municipal securities	—		279,095		—		279,095
Corporate debt securities	—		106,258		3,275		109,533
Collateralized mortgage obligations	—		832,080		—		832,080
Residential mortgage-backed securities	—		463,344		—		463,344
Commercial mortgage-backed securities	—		261,616		—		261,616
Auction rate securities	—		—		102,994		102,994
Total available for sale investment securities	—		1,974,025		106,269		2,080,294
Other assets:
Investments held in Rabbi Trust	18,415		—		—		18,415
Derivative assets	392		62,552		—		62,944
Total assets	$	18,807	$	2,063,676	$	106,269	$	2,188,752
Other liabilities:
Deferred compensation liabilities	$	18,415	$	—	$	—	$	18,415
Derivative liabilities	381		48,185		—		48,566
Total liabilities	$	18,796	$	48,185	$	—	$	66,981

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

•

Mortgage loans held for sale – This category includes mortgage loans held for sale that are measured at fair value. Fair values as of September 30, 2019 and December 31, 2018 were based on the price that secondary market investors were offering for loans with similar characteristics. See "Note 7 - Derivative Financial Instruments" for details related to the Corporation’s election to measure assets and liabilities at fair value.

•

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

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

Management tests the values provided by the pricing service by obtaining securities prices from an alternative third-party source and comparing the results. This test is performed for at least 95% of the securities valued by the pricing service. Generally, differences by security in excess of 5% are researched to reconcile the difference.


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

•

Corporate debt securities – This category consists of subordinated debt and senior debt issued by financial institutions ($336.0 million at September 30, 2019 and $86.1 million at December 31, 2018), single-issuer trust preferred securities issued by financial institutions ($18.5 million at September 30, 2019 and $18.6 million at December 31, 2018), pooled trust preferred securities issued by financial institutions ($0 at September 30, 2019 and $875,000 at December 31, 2018) and other corporate debt issued by non-financial institutions ($3.9 million at September 30, 2019 and December 31, 2018).

Level 2 investments include the Corporation’s holdings of subordinated debt and senior debt, other corporate debt issued by non-financial institutions and $16.1 million and $16.3 million of single-issuer trust preferred securities held at September 30, 2019 and December 31, 2018, respectively. The fair values for these corporate debt securities are determined by a third-party pricing service, as detailed above.

Level 3 investments include the Corporation’s investments in pooled trust preferred securities ($0 at September 30, 2019 and $875,000 at December 31, 2018) and certain single-issuer trust preferred securities ($2.4 million at September 30, 2019 and December 31, 2018). The fair values of these securities were determined based on quotes provided by third-party brokers who determined fair values based predominantly on internal valuation models which were not indicative prices or binding offers. The Corporation’s third-party pricing service cannot derive fair values for these securities primarily due to inactive markets for similar investments. Level 3 values are tested by management primarily through trend analysis, by comparing current values to those reported at the end of the preceding calendar quarter, and determining if they are reasonable based on price and spread movements for this asset class.

•

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


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


•	Derivative assets – Fair value of foreign currency exchange contracts classified as Level 1 assets ($535,000 at September 30, 2019 and $392,000 at December 31, 2018). The mutual funds and foreign exchange prices used to measure these items at fair value are based on quoted prices for identical instruments in active markets.

Level 2 assets, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($1.8 million at September 30, 2019 and $1.2 million at December 31, 2018) and the fair value of interest rate swaps ($193.6 million at September 30, 2019 and $61.4 million at December 31, 2018). The fair values of the Corporation’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. See "Note 7 - Derivative Financial Instruments," for additional information.


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


•	Derivative liabilities – Level 1 liabilities, representing the fair value of foreign currency exchange contracts ($480,000 at September 30, 2019 and $381,000 at December 31, 2018).

Level 2 liabilities, representing the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors ($287,000 at September 30, 2019 and $1.1 million December 31, 2018) and the fair value of interest rate swaps ($104.7 million at September 30, 2019 and $47.1 million at December 31, 2018).

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

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



	Pooled Trust Preferred Securities			Single-issuer Trust Preferred Securities			ARCs
Three months ended September 30, 2019	(in thousands)
Balance at June 30, 2019	$	—		$	2,370		$	103,365
Unrealized adjustment to fair value ⁽¹⁾	—			(2		)	(67		)
Discount accretion ⁽²⁾	—			2			—
Balance at September 30, 2019	$	—		$	2,370		$	103,298

Three months ended September 30, 2018
Balance at June 30, 2018	$	875		$	3,200		$	103,122
Realized adjustment to fair value	—			71			—
Unrealized adjustment to fair value ⁽¹⁾	—			153			11
Settlements - calls	—			(950		)	—
Discount accretion ⁽²⁾	—			1			—
Balance at September 30, 2018	$	875		$	2,475		$	103,133

Nine months ended September 30, 2019
Balance at December 31, 2018	$	875		$	2,400		$	102,994
Sales	(770		)	—			—
Unrealized adjustment to fair value ⁽¹⁾	(105		)	(32		)	304
Discount accretion ⁽²⁾	—			2			—
Balance at September 30, 2019	$	—		$	2,370		$	103,298

Nine months ended September 30, 2018
Balance at December 31, 2017	$	707		$	3,050		$	98,668
Realized adjustment to fair value	—			71			—
Unrealized adjustment to fair value ⁽¹⁾	168			297			4,465
Settlements - calls	—			(950		)	—
Discount accretion ⁽²⁾	—			7			—
Balance at September 30, 2018	$	875		$	2,475		$	103,133


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


(2)	Included as a component of "net interest income" on the Consolidated Statements of Income.

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



	September 30, 2019		December 31, 2018
	(in thousands)
Net loans and leases	$	146,682	$	149,846
OREO	7,706		10,518
MSRs ⁽¹⁾	43,968		50,200
Total assets	$	198,356	$	210,564


(1)	Amounts shown are estimated fair value. MSRs are recorded on the Corporation's Consolidated Balance Sheets at amortized cost. See "Note 5 - Mortgage Servicing Rights" for additional information.

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


•	Net loans and leases – This category consists of loans and leases that were individually evaluated for impairment and have been classified as Level 3 assets. The amount shown is the balance of impaired loans, net of the related allowance for loan losses. See "Note 4 - Loans and Allowance for Credit Losses," for additional details.


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

•

MSRs - This category consists of MSRs, which were initially recorded at fair value upon the sale of residential mortgage loans to secondary market investors, and subsequently carried at the lower of amortized cost or fair value. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are stratified and evaluated for impairment by comparing each stratum's carrying amount to its estimated fair value. Fair values are determined at the end of each quarter through a discounted cash flows valuation performed by a third-party valuation expert. Significant inputs to the valuation included expected net servicing income, the discount rate and the expected life of the underlying loans. Expected life is based on the contractual terms of the loans, as adjusted for prepayment projections. The weighted average annual constant prepayment rate and the weighted average discount rate used in the September 30, 2019 valuation were 10.7% and 10.0%, respectively. Management tests the reasonableness of the significant inputs to the third-party valuation in comparison to market data. See "Note 5 - Mortgage Servicing Rights," for additional information.

The following table presents the carrying amounts and estimated fair values of the Corporation’s financial instruments as of September 30, 2019 and December 31, 2018. A general description of the methods and assumptions used to estimate such fair values follows:



	September 30, 2019
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	598,613	$	598,613	$	—	$	—	$	598,613
FRB and FHLB stock	94,557		—		94,557		—		94,557
Loans held for sale	33,945		—		33,945		—		33,945
Available for sale investment securities	2,315,541		—		2,209,873		105,668		2,315,541
Held to maturity investment securities	390,069		—		403,957		—		403,957
Net loans and leases	16,520,731		—		—		16,427,675		16,427,675
Accrued interest receivable	60,447		60,447		—		—		60,447
Other assets	478,924		236,599		195,263		51,674		483,536
FINANCIAL LIABILITIES
Demand and savings deposits	$	14,105,974	$	14,105,974	$	—	$	—	$	14,105,974
Brokered deposits	256,870		216,870		40,550		—		257,420
Time deposits	2,979,873		—		3,002,796		—		3,002,796
Short-term borrowings	832,860		832,860		—		—		832,860
Accrued interest payable	9,622		9,622		—		—		9,622
FHLB advances and long-term debt	726,714		—		723,194		—		723,194
Other liabilities	288,477		176,799		105,016		6,662		288,477

	December 31, 2018
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	445,687	$	445,687	$	—	$	—	$	445,687
FRB and FHLB stock	79,283		—		79,283		—		79,283
Loans held for sale	27,099		—		27,099		—		27,099
Available for sale investment securities	2,080,294		—		1,974,025		106,269		2,080,294
Held to maturity investment securities	606,679		—		611,419		—		611,419
Net loans and leases	16,005,263		—		—		15,446,895		15,446,895
Accrued interest receivable	58,879		58,879		—		—		58,879
Other assets	235,782		124,138		62,552		49,092		235,782
FINANCIAL LIABILITIES
Demand and savings deposits	$	13,478,016	$	13,478,016	$	—	$	—	$	13,478,016
Brokered deposits	176,239		176,239		—		—		176,239
Time deposits	2,721,904		—		2,712,296		—		2,712,296
Short-term borrowings	754,777		754,777		—		—		754,777
Accrued interest payable	10,529		10,529		—		—		10,529
FHLB advances and long-term debt	992,279		—		970,985		—		970,985
Other liabilities	218,061		161,003		48,185		8,873		218,061

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

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

The following instruments are predominantly short-term:



Assets		Liabilities
Cash and cash equivalents		Demand and savings deposits
Accrued interest receivable		Short-term borrowings
		Accrued interest payable

FRB and FHLB stock represent restricted investments and are carried at cost on the Consolidated Balance Sheets.

As of September 30, 2019, fair values for loans and leases and time deposits were estimated by discounting future cash flows using the current rates, as adjusted for liquidity considerations, at which similar loans and leases would be made to borrowers and similar deposits would be issued to customers for the same remaining maturities. Fair values of loans and leases also include estimated credit losses that would be assumed in a market transaction, which represents estimated exit prices.

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

NOTE 11 – Net Income Per Share

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

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



	Three months ended September 30				Nine months ended September 30
	2019		2018		2019		2018
Weighted average shares outstanding (basic)	165,324		175,942		167,834		175,672
Impact of common stock equivalents	802		1,186		888		1,176
Weighted average shares outstanding (diluted)	166,126		177,128		168,722		176,848
Per share:
Basic	$	0.38	$	0.37	$	1.06	$	0.86
Diluted	0.37		0.37		1.06		0.85

NOTE 12 – Stock-Based Compensation

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

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

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

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

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

As of September 30, 2019, the Employee Equity Plan had 10.2 million shares reserved for future grants through 2023, and the Directors’ Plan had approximately 264,000 shares reserved for future grants through 2029.

The following table presents compensation expense and the related tax benefits for equity awards recognized in the Consolidated Statements of Income:



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
	(in thousands)
Compensation expense	$	2,110		$	1,823		$	5,458		$	6,007
Tax benefit	(451		)	(492		)	(1,194		)	(2,028		)
Stock-based compensation expense, net of tax benefit	$	1,659		$	1,331		$	4,264		$	3,979

NOTE 13 – Employee Benefit Plans

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



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
	(in thousands)
Interest cost	$	813		$	763		$	2,443		$	2,290
Expected return on plan assets	(688		)	(512		)	(2,066		)	(1,536		)
Net amortization and deferral	496			607			1,486			1,822
Net periodic pension cost	$	621		$	858		$	1,863		$	2,576

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



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
	(in thousands)
Interest cost	$	15		$	13		$	45		$	42
Net accretion and deferral	(139		)	(139		)	(417		)	(419		)
Net periodic benefit	$	(124	)	$	(126	)	$	(372	)	$	(377	)

The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the Consolidated Balance Sheets and recognizes the change in that funded status through other comprehensive income.

NOTE 14 – Commitments and Contingencies

Commitments

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

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

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



	September 30, 2019		December 31, 2018
	(in thousands)
Commitments to extend credit	$	6,872,248	$	6,306,583
Standby letters of credit	308,533		309,352
Commercial letters of credit	48,047		48,682

The Corporation records a reserve for unfunded lending commitments, which represents management’s estimate of incurred losses associated with unused commitments to extend credit and letters of credit. See "Note 4 - Loans and Leases Allowance for Credit Losses," for additional details.

Mortgage Repurchase Reserve

The Corporation originates and sells residential mortgages to secondary market investors. The Corporation provides customary representations and warranties to secondary market investors that specify, among other things, that the loans have been underwritten to the standards of the secondary market investor. The Corporation may be required to repurchase specific loans, or reimburse the investor for a credit loss incurred on a sold loan if it is determined that the representations and warranties have not been met. Under some agreements with secondary market investors, the Corporation may have additional credit exposure beyond customary representations and warranties, based on the specific terms of those agreements.

The Corporation maintains a reserve for estimated losses related to loans sold to investors. As of September 30, 2019 and December 31, 2018, the total reserve for losses on residential mortgage loans sold was $2.5 million and $2.1 million, respectively, including reserves for both representation and warranty and credit loss exposures.

Legal Proceedings

The Corporation is involved in various pending and threatened claims and other legal proceedings in the ordinary course of its business activities. The Corporation evaluates the possible impact of these matters, taking into consideration the most recent information available. A loss reserve is established for those matters for which the Corporation believes a loss is both probable and reasonably estimable. Once established, the reserve is adjusted as appropriate to reflect any subsequent developments. Actual

losses with respect to any such matter may be more or less than the amount estimated by the Corporation. For matters where a loss is not probable, or the amount of the loss cannot be reasonably estimated by the Corporation, no loss reserve is established.

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

As of the date of this report, the Corporation believes that any liabilities, individually or in the aggregate, which may result from the final outcomes of pending legal proceedings, or regulatory or governmental inquiries or investigations, will not have a material adverse effect on the financial condition of the Corporation. However, legal proceedings, inquiries and investigations are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Corporation’s results of operations in any future period, depending, in part, upon the size of the loss or liability imposed and the operating results for the period, and could have a material adverse effect on the Corporation’s business. In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause the Corporation to incur additional expenses, which could be significant, and possibly material, to the Corporation’s results of operations in any future period.

Fair Lending Investigation

During the second quarter of 2015, Fulton Bank, N.A., the Corporation’s largest bank subsidiary, received a letter from the U.S. Department of Justice (the "Department") indicating that the Department had initiated an investigation regarding potential violations of fair lending laws (specifically, the Equal Credit Opportunity Act and the Fair Housing Act) by Fulton Bank, N.A. in certain geographies. During the third quarter of 2016, the Department informed the Corporation, Fulton Bank, N.A., and three of the Corporation’s other bank subsidiaries, which have since merged with and into Fulton Bank, N.A., that the Department was expanding its investigation of potential lending discrimination on the basis of race and national origin to encompass additional geographies that were not included in the initial letter from the Department. In addition to requesting information concerning the lending activities of these bank subsidiaries, the Department also requested information concerning the Corporation and the residential mortgage lending activities conducted under the Fulton Mortgage Company brand, the trade name used by all of the Corporation’s bank subsidiaries for residential mortgage lending.

As previously disclosed in a Current Report on Form 8-K filed with the SEC on October 4, 2019, on October 3, 2019, the Corporation and Fulton Bank, N.A. received a letter from the Department, which indicated that the Department had completed its review and determined that the circumstances did not require enforcement action by the Department at this time.

SEC Investigation

The Corporation is responding to an investigation by the staff of the Division of Enforcement of the SEC regarding certain accounting determinations that could have impacted the Corporation’s reported earnings per share. The Corporation believes that its financial statements filed with the SEC in Forms 10-K and 10-Q present fairly, in all material respects, its financial condition, results of operations and cash flows as of or for the periods ending on their respective dates. The Corporation is cooperating fully with the SEC and at this time cannot predict when or how the investigation will be resolved.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Management’s Discussion") relates to Fulton Financial Corporation (the "Corporation"), a financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly owned subsidiaries. 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, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation's business or financial results.

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


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


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


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


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


•	the effects of the extensive level of regulation and supervision to which the Corporation and its bank subsidiary are subject;


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


•	the potential for negative consequences from regulatory violations, investigations and examinations, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions and the need to undertake remedial actions;


•	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, and changes in leadership at the federal banking agencies and in Congress, 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 intended reductions in the time, expense and resources associated with regulatory compliance from the consolidations of its bank subsidiaries, and the impact of the significant implementation costs the Corporation expects to incur in connection with those consolidations;


•	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 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 presentation of the Corporation's 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 to address cyber-security risks, including data breaches and cyber-attacks;


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


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


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


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


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

Additional information regarding these as well as other factors that could affect future financial results can be found in the sections entitled "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018, and elsewhere in this Report, including in Note 14 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS

Overview

The Corporation is a financial holding company which, through its wholly owned banking subsidiary, provides a full range of retail and commercial financial services through locations in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans, investments and other interest-earning assets, and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent, or "FTE") as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments, or properties. Offsetting these revenue sources are provisions for credit losses on loans and off-balance sheet credit exposures, non-interest expenses and income taxes.

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



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
Net income (in thousands)	$	62,108		$	65,633		$	178,550		$	150,310
Diluted net income per share	$	0.37		$	0.37		$	1.06		$	0.85
Return on average assets	1.15		%	1.28		%	1.13		%	1.00		%
Return on average equity	10.64		%	11.48		%	10.41		%	8.94		%
Return on average tangible equity ⁽¹⁾	14.03		%	14.99		%	13.64		%	11.71		%
Net interest margin ⁽²⁾	3.31		%	3.42		%	3.41		%	3.39		%
Efficiency ratio ⁽¹⁾	63.6		%	62.5		%	63.9		%	64.4		%
Non-performing assets to total assets	0.66		%	0.64		%	0.66		%	0.64		%
Annualized net (recoveries) charge-offs to average loans	0.15		%	0.08		%	0.07		%	0.40		%


(1)	Ratio represents a financial measure derived by methods other than U.S. Generally Accepted Accounting Principles ("GAAP"). See reconciliation of this non-GAAP financial measure to the most comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures" at the end of this "Overview" section.


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

The following is a summary of financial results for the three and nine months ended September 30, 2019:

•

Net Income and Net Income Per Share Growth - Net income was $62.1 million and $178.6 million for the three and nine months ended September 30, 2019, respectively. For the three months ended September 30, 2019, net income decreased $3.5 million, or 5.4%, compared to the same period in 2018. However, diluted net income per share of $0.37 for the three months ended September 30, 2019 was consistent the same period in 2018 as a result of repurchases of the Corporation's common stock. For the nine months ended September 30, 2019, net income increased $28.2 million, or 18.8%, compared to the same period in 2018. Diluted net income per share for the nine months ended September 30, 2019 increased $0.21, or 24.7%, to $1.06, as compared to $0.85 for the same period in 2018.

•

Net Interest Income Growth - Net interest income increased $1.1 million, or 0.7%, and $21.6 million, or 4.6%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increase for the three months ended September 30, 2019 resulted from balance sheet growth, partially offset by the impact of a larger increase in funding costs as compared to yields on interest-earning assets. Overall, the net interest margin decreased 11 basis points during the three months ended September 30, 2019 compared to the same period in 2018. For the nine months ended September 30, 2019, the net interest margin increased 2 basis point compared to the same period in 2018.


◦	Net Interest Margin - For the three and nine months ended September 30, 2019, the changes in the net interest margin reflect the net impact of 12 and 30 basis point increases, respectively, in yields on interest-earning assets, and 24 and 28 basis point increases, respectively, in the cost of funds.


◦	Loan Growth - Average loans grew by $574.4 million, or 3.6%, and $552.0 million, or 3.5%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The most notable increases were in the residential and commercial mortgage, commercial and consumer loan portfolios.


◦	Deposit Growth - Average deposits grew $983.4 million, or 6.2%, and $899.4 million, or 5.8%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases were driven by growth in total interest-bearing demand, savings accounts and time deposits.

•

Asset Quality - Annualized net charge-offs to average loans outstanding were 0.15% and 0.07% for the three and nine months ended September 30, 2019, respectively, compared to 0.08% and 0.40% for the same periods in 2018, respectively. The provision for credit losses for the three and nine months ended September 30, 2019 was $2.2 million and $12.3 million, respectively, compared to $1.6 million and $38.7 million, respectively, for the same periods in 2018. During the second quarter of 2018, the Corporation charged off $33.9 million and recorded a provision of $36.8 million for a credit loss related to a single, large commercial lending relationship ("Commercial Relationship") impacting the nine month period ended September 30, 2018.

•

Non-interest Income - For the three and nine months ended September 30, 2019, non-interest income, excluding investment securities gains, increased $4.3 million, or 8.4%, and $10.2 million, or 7.0%, respectively, as compared to the same periods in 2018. Increases were experienced during both periods in wealth management income, commercial banking income, mortgage banking income and consumer banking income.

•

Net Investment securities gains - For the three and nine months ended September 30, 2019, net gains on sales of investment securities increased $4.5 million and $4.7 million, respectively, compared to the same periods in 2018. During the third quarter of 2019, the Corporation completed a balance sheet restructuring, which included the sale of approximately $400 million of investment securities and a corresponding prepayment of Federal Home Loan Bank ("FHLB") advances. As a result of these transactions, $4.5 million of investment securities gains were realized during the quarter. See Note 3, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.

•

Non-interest Expense - Non-interest expense increased $11.4 million, or 8.4%, and $23.3 million, or 5.8%, for the three and nine months ended September 30, 2019, respectively, in comparison to the same periods in 2018. Increases in salaries and employee benefits, other outside services, data processing and software and other expense were partially offset by a decrease in FDIC insurance due to the recognition of $2.6 million in assessment credits during the third quarter of 2019. In addition, the Corporation recorded $4.3 million of prepayment penalties on certain FHLB advances in conjunction with the above-mentioned balance sheet restructuring for both the three and nine months ended September 30, 2019.

In connection with the consolidation of the Corporation's subsidiary banks into Fulton Bank, N.A. ("Charter Consolidation"), expenses totaling $5.2 million and $1.8 million were incurred for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, Charter Consolidation expenses were $11.7 million and $8.6 million, respectively.

•

Income Taxes - Income tax expense was $10.0 million and $30.4 million for the three and nine months ended September 30, 2019, respectively, resulting in effective tax rates ("ETR"), or income taxes as a percentage of income before income taxes, of 13.9% and 14.5%, respectively, as compared to 11.5% and 11.3% for the same periods in 2018, respectively. For the three and nine months ended September 30, 2018, the ETR was lower mainly due to the recording of a net tax benefit associated with legislative changes enacted in New Jersey during the third quarter of 2018. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs.

Supplemental Reporting of Non-GAAP Based Financial Measures

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



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
	(dollars in thousands)
Return on average tangible equity
Net income	$	62,108		$	65,633		$	178,550		$	150,310
Plus: Intangible amortization, net of tax	846			—			1,016			—
Numerator	$	62,954		$	65,633		$	179,566		$	150,310

Average common shareholders' equity	$	2,315,585		$	2,269,093		$	2,294,165		$	2,247,034
Less: Average goodwill and intangible assets	(535,184		)	(531,556		)	(534,097		)	(531,556		)
Denominator	$	1,780,401		$	1,737,537		$	1,760,068		$	1,715,478

Return on average tangible equity, annualized	14.03		%	14.99		%	13.64		%	11.71		%

Efficiency ratio
Non-interest expense	$	146,770		$	135,413		$	428,762		$	405,419
Less: Prepayment penalty on FHLB advances	(4,326		)	—			(4,326		)	—
Less: Amortization of tax credit investments	(1,533		)	(1,637		)	(4,516		)	(4,911		)
Less: Intangible amortization	(1,071		)	—			(1,285		)	—
Numerator	$	139,840		$	133,776		$	418,635		$	400,508

Net interest income (fully taxable equivalent) ⁽¹⁾	$	164,517		$	163,194		$	498,877		$	476,453
Plus: Total non-interest income	59,813			51,033			160,879			146,002
Less: Investment securities gains, net	(4,492		)	(14		)	(4,733		)	(37		)
Denominator	$	219,838		$	214,213		$	655,023		$	622,418

Efficiency ratio	63.6		%	62.5		%	63.9		%	64.4		%


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

Three months ended September 30, 2019 compared to the three months ended September 30, 2018

Net Interest Income

FTE net interest income increased $1.3 million, to $164.5 million, in the three months ended September 30, 2019, from $163.2 million in the same period in 2018. The net interest margin decreased 11 basis points, or 3.2%, to 3.31% compared to 3.42% for the same period in 2018. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.



	Three months ended September 30
	2019								2018
	Average Balance			Interest			Yield/ Rate		Average Balance			Interest			Yield/ Rate
ASSETS	(dollars in thousands)
Interest-earning assets:
Loans and leases, net of unearned income ⁽¹⁾	$	16,436,507		$	188,280		4.55	%	$	15,862,143		$	177,329		4.44	%
Taxable investment securities⁽²⁾	2,282,292			15,565			2.73		2,239,837			13,956			2.49
Tax-exempt investment securities⁽²⁾	516,907			4,650			3.57		415,908			3,841			3.67
Total investment securities	2,799,199			20,215			2.88		2,655,745			17,797			2.68
Loans held for sale	31,898			466			5.83		27,195			388			5.71
Other interest-earning assets	509,579			2,709			2.12		416,129			1,601			1.53
Total interest-earning assets	19,777,183			211,670			4.25		18,961,212			197,115			4.13
Noninterest-earning assets:
Cash and due from banks	120,967								100,568
Premises and equipment	240,383								231,280
Other assets	1,491,115								1,137,293
Less: Allowance for loan and lease losses	(171,848		)						(157,121		)
Total Assets	$	21,457,800							$	20,273,232
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	4,448,112		$	9,163		0.82	%	$	4,116,051		$	6,378		0.61	%
Savings and money market deposits	5,026,316			11,059			0.87		4,718,148			7,569			0.64
Brokered deposits	253,426			1,536			2.40		162,467			840			2.05
Time deposits	2,974,993			13,979			1.86		2,672,548			9,032			1.34
Total interest-bearing deposits	12,702,847			35,737			1.12		11,669,214			23,819			0.81
Short-term borrowings	919,697			4,156			1.78		724,132			2,002			1.09
FHLB advances and other long-term debt	842,706			7,260			3.44		988,748			8,100			3.26
Total interest-bearing liabilities	14,465,250			47,153			1.29		13,382,094			33,921			1.01
Noninterest-bearing liabilities:
Demand deposits	4,247,820								4,298,020
Other	429,145								324,025
Total Liabilities	19,142,215								18,004,139
Shareholders’ equity	2,315,585								2,269,093
Total Liabilities and Shareholders’ Equity	$	21,457,800							$	20,273,232
Net interest income/net interest margin (FTE)				164,517			3.31	%				163,194			3.42	%
Tax equivalent adjustment				(3,257		)						(3,067		)
Net interest income				$	161,260							$	160,127


(1)	Average balance includes non-performing loans.


(2)	Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.

Note: The weighted average interest rate on total average interest-bearing liabilities and average non-interest bearing demand deposits ("cost of funds") was 1.00% and 0.76% for the three months ended September 30, 2019 and 2018, respectively.

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the three months ended September 30, 2019 in comparison to the same period in 2018:



	2019 vs. 2018 Increase (Decrease) due to change in
	Volume			Rate			Net
	(in thousands)
Interest income on:
Loans and leases, net of unearned income	$	6,472		$	4,479		$	10,951
Taxable investment securities	269			1,340			1,609
Tax-exempt investment securities	910			(101		)	809
Loans held for sale	70			8			78
Other interest-earning assets	408			700			1,108
Total interest income	$	8,129		$	6,426		$	14,555
Interest expense on:
Demand deposits	$	529		$	2,256		$	2,785
Savings and money market deposits	531			2,959			3,490
Brokered deposits	533			163			696
Time deposits	1,117			3,830			4,947
Short-term borrowings	645			1,509			2,154
FHLB advances and other long-term debt	(1,249		)	409			(840		)
Total interest expense	$	2,106		$	11,126		$	13,232

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

The Federal Open Market Committee ("FOMC") increased the target federal funds rate ("Fed Funds Rate") by 25 basis points in each of March, June, September and December of 2018. During 2019 the FOMC decreased the Fed Funds Rate by 25 basis points in each of July and September. These changes in the Fed Funds Rate resulted in corresponding increases or decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and the London Interbank Offered Rate ("LIBOR") as well as for certain interest-bearing liabilities.

As summarized above, the $816.0 million, or 4.3%, increase in interest-earning assets, primarily loans and leases, contributed $8.1 million in FTE interest income, and the 12 basis point increase in the yield on average interest-earning assets resulted in a $6.4 million increase in FTE interest income. The yield on the loan and lease portfolio increased 11 basis points, or 2.5%, from the third quarter of 2018, as all variable and certain adjustable rate loans repriced to higher rates, and yields on new loan originations generally exceeded the average yield on the loan portfolio. Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease. As such, the impact of changes in index rates on adjustable rate loans may not be fully realized until future periods.

Interest expense increased $13.2 million primarily due to the 28 basis point increase in the rate on average interest-bearing liabilities. The 52 basis point increase in the rates on time deposits contributed $3.8 million to the increase in interest expense, while the rates on average interest-bearing demand deposits and savings and money market deposits increased 21 and 23 basis points, respectively, which contributed $2.3 million and $3.0 million to the increase in interest expense, respectively. In addition, the 69 basis point increase in the rates on short-term borrowings contributed $1.5 million to the increase in interest expense.

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



	Three months ended September 30								Increase (Decrease)
	2019				2018				in Balance
	Balance		Yield		Balance		Yield		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	6,489,456	4.57	%	$	6,309,663	4.46	%	$	179,793		2.8	%
Commercial – industrial, financial and agricultural	4,414,992		4.56		4,304,320		4.36		110,672			2.6
Real estate – residential mortgage	2,512,899		4.06		2,142,977		3.96		369,922			17.3
Real estate – home equity	1,364,161		5.27		1,474,011		4.99		(109,850		)	(7.5	)
Real estate – construction	905,060		4.68		969,575		4.58		(64,515		)	(6.7	)
Consumer	457,524		4.36		375,656		4.50		81,868			21.8
Equipment lease financing	277,555		4.41		276,456		4.66		1,099			0.4
Other	14,860		—		9,485		—		5,375			56.7
Total loans and leases	$	16,436,507	4.55	%	$	15,862,143	4.44	%	$	574,364		3.6	%

Average loans and leases increased $574.4 million, or 3.6%, compared to the same period of 2018. The increase was driven largely by growth in the residential and commercial mortgage loan portfolios, as well as the commercial and consumer portfolios.

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



	Three months ended September 30								Increase (Decrease) in Balance
	2019				2018				Increase (Decrease) in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,247,820	—	%	$	4,298,020	—	%	$	(50,200	)	(1.2	)%
Interest-bearing demand	4,448,112		0.82		4,116,051		0.61		332,061			8.1
Savings and money market accounts	5,026,316		0.87		4,718,148		0.64		308,168			6.5
Total demand and savings	13,722,248		0.58		13,132,219		0.42		590,029			4.5
Brokered deposits	253,426		2.40		162,467		2.05		90,959			56.0
Time deposits	2,974,993		1.86		2,672,548		1.34		302,445			11.3
Total deposits	$	16,950,667	0.84	%	$	15,967,234	0.59	%	$	983,433		6.2	%

Average total demand and savings accounts increased $590.0 million, or 4.5%, driven by increases in savings and money market deposits and interest-bearing demand deposits. The overall increase in total demand and savings deposits was primarily due to a $256.8 million, or 11.0%, increase in municipal account balances, a $213.8 million, or 4.9%, increase in business account balances and a $121.8 million, or 1.9%, increase in consumer account balances.

Average time deposits increased $302.4 million, or 11.3%, primarily driven by new customer accounts. Average brokered deposits increased $91.0 million, or 56.0%, which was the result of the continued growth of brokered deposit programs introduced in 2018.

The average cost of total deposits increased 25 basis points, to 0.84%, for the third quarter of 2019, compared to 0.59% for the same period of 2018, mainly as a result of the Fed Funds Rate increases during 2018. The Fed Funds Rate decreases during the third quarter of 2019 did not have a mitigating impact on the cost of deposits as the majority of deposits are not indexed to short-term interest rates and repricing is discretionary. The Corporation also experienced a seasonal increase of indexed municipal deposits, which impacted the overall cost of deposits for the quarter.

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



	Three months ended September 30								Increase (Decrease)
	2019				2018				in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Short-term borrowings:
Total short-term customer funding⁽¹⁾	$	332,893	0.80	%	$	447,556	0.48	%	$	(114,663	)	(25.6	)%
Federal funds purchased	101,022		2.11		145,793		1.97		(44,771		)	(30.7	)
Short-term FHLB advances and other borrowings ⁽²⁾	485,782		2.38		130,783		2.20		354,999			N/M
Total short-term borrowings	919,697		1.78		724,132		1.09		195,565			27.0
Long-term debt:
FHLB advances	455,264		2.55		602,029		2.48		(146,765		)	(24.4	)
Other long-term debt	387,442		4.48		386,719		4.48		723			0.2
Total long-term debt	842,706		3.44		988,748		3.26		(146,042		)	(14.8	)
Total borrowings	$	1,762,403	2.57	%	$	1,712,880	2.35	%	$	49,523		2.9	%

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

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

N/M - Not meaningful

Average total short-term borrowings increased $195.6 million, or 27.0%, primarily as a result of a $355.0 million increase in short-term FHLB advances and other borrowings, partially offset by decreases in total short-term customer funding and federal funds purchased during the third quarter of 2019. The average cost of short-term borrowings increased 69 basis points, mainly due to the net impact of changes in the Fed Funds Rate.

Average total long-term debt decreased $146.0 million, or 14.8%, during the third quarter of 2019, compared to the same period of 2018, as a result of a decrease in average FHLB advances related to the prepayment of outstanding advances as part of the previously mentioned balance sheet restructuring in during the third quarter of 2019.

Provision for Credit Losses

The provision for credit losses was $2.2 million for the third quarter of 2019, an increase of $550,000 from the same period of 2018.

The provision for credit losses is recognized as an expense in the Consolidated Statements of Income and is the amount necessary to adjust the allowance for credit losses to its appropriate balance, as determined through the Corporation's allowance methodology. The Corporation determines the appropriate level of the allowance for credit losses based on many quantitative and qualitative factors, including, but not limited to: the size and composition of the loan portfolio, changes in risk ratings, changes in collateral values, delinquency levels, historical losses and economic conditions. See the "Financial Condition" section of Management's Discussion under the heading "Provision and Allowance for Credit Losses" for details related to the Corporation's provision and allowance for credit losses.

Non-Interest Income

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



	Three months ended September 30				Increase (Decrease)
	2019		2018		$			%
	(dollars in thousands)
Wealth management	$	13,867	$	13,066	$	801		6.1	%
Commercial banking:
Merchant and card	6,166		6,307		(141		)	(2.2	)
Cash management	4,696		4,472		224			5.0
Commercial loan interest rate swap	3,944		3,607		337			9.3
Other commercial banking	3,478		3,154		324			10.3
Total commercial banking	18,284		17,540		744			4.2
Consumer banking:
Card	5,791		5,382		409			7.6
Overdraft	4,682		4,443		239			5.4
Other consumer banking	2,860		2,840		20			0.7
Total consumer	13,333		12,665		668			5.3
Mortgage banking:
Gains on sales of mortgage loans	5,520		3,659		1,861			50.9
Mortgage servicing	1,138		1,237		(99		)	(8.0	)
Total mortgage banking	6,658		4,896		1,762			36.0
Other	3,179		2,852		327			11.5
Total, excluding investment securities gains, net	55,321		51,019		4,302			8.4
Investment securities gains, net	4,492		14		4,478			N/M
Total non-interest income	$	59,813	$	51,033	$	8,780		17.2	%

N/M - Not meaningful

Excluding net investment securities gains, non-interest income increased $4.3 million, or 8.4%, in the third quarter of 2019 as compared to the same period in 2018. Wealth management fees increased $801,000, or 6.1%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance, as well as the acquisition of the assets of a small wealth management firm in the first quarter of 2019.

Total commercial banking income increased $744,000, or 4.2%, compared to the same period in 2018, driven by increases in commercial loan interest rate swap fees, cash management fees and other income, primarily Small Business Administration, partially offset by a decrease in merchant and card income.

Total consumer banking income increased $668,000, or 5.3%, compared to the same period in 2018, with increases in card income, consisting of both debit and credit cards, and overdraft fees.

Mortgage banking income increased $1.8 million, or 36.0%, mainly driven by an increase in gains on sales of mortgage loans. The increase in gains on sales of mortgage loans reflected increases in both the volume of loans sold and higher spreads on sales.

During the third quarter of 2019, the Corporation completed a balance sheet restructuring involving the sale of approximately $400 million of investment securities and a corresponding prepayment of FHLB advances. As a result of these transactions, $4.5 million of investment securities gains were realized during the quarter. See Note 3, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.

Non-Interest Expense

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



	Three months ended September 30				Increase (Decrease)
	2019		2018		$			%
	(dollars in thousands)
Salaries and employee benefits	$	78,211	$	76,770	$	1,441		1.9	%
Net occupancy	12,368		12,578		(210		)	(1.7	)
Other outside services	12,163		9,122		3,041			33.3
Data processing and software	11,590		10,157		1,433			14.1
Prepayment penalty on FHLB advances	4,326		—		4,326			100.0
Equipment	3,459		3,000		459			15.3
Professional fees	3,331		3,427		(96		)	(2.8	)
Marketing	3,322		2,692		630			23.4
State taxes	2,523		2,707		(184		)	(6.8	)
Amortization of tax credit investments	1,533		1,637		(104		)	(6.4	)
FDIC insurance	239		2,814		(2,575		)	(91.5	)
Intangible amortization	1,071		—		1,071			100.0
Other	12,634		10,509		2,125			20.2
Total non-interest expense	$	146,770	$	135,413	$	11,357		8.4	%

In the third quarter of 2019, $5.2 million of expenses were incurred related to Charter Consolidation, as compared to $1.8 million in the same period of 2018, a $3.4 million increase. The third quarter of 2019 expenses were primarily in other outside services ($2.6 million), intangible amortization ($1.0 million), advertising ($440,000) and salaries and benefits ($300,000).

The following provides explanations for the more significant fluctuations in expense levels, excluding Charter Consolidation costs, by category:

•

The $1.4 million, or 1.9%, increase in salaries and employee benefits reflected the net impact of a $1.9 million increase in employee salaries, due mainly to annual merit increases and incentive compensation expense, and a $465,000 decrease in benefits, primarily due to lower defined benefits expense driven by changes in the discount rate and healthcare expense due to favorable claims experience compared to 2018.


•	Data processing and software increased $1.4 million, or 14.1%, reflecting higher transaction volumes and costs related to technology initiatives.


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


•	FDIC insurance expense decreased $2.6 million, or 91.5%, due to the recognition of assessment credits in the third quarter of 2019.


•	Other expenses also included gains on sale of repossessed assets, telephone expense and operating risk loss.

Income Taxes

Income tax expense for the three months ended September 30, 2019 was $10.0 million, a $1.5 million increase from $8.5 million for the same period in 2018. The Corporation’s ETR was 13.9% for the three months ended September 30, 2019, as compared to 11.5% in the same period of 2018. The increase in income tax expense and the ETR primarily resulted from the third quarter of 2018 including a net tax benefit associated with legislative changes enacted in New Jersey. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs.

Nine months ended September 30, 2019 compared to the nine months ended September 30, 2018

Net Interest Income

FTE net interest income increased $22.4 million, to $498.9 million, in the nine months ended September 30, 2019, from $476.5 million in the same period in 2018. The increase was due to a 2 basis point increase in the net interest margin, to 3.41%, and a $764.1 million, or 4.1%, increase in average interest-earning assets. The following table provides a comparative average balance sheet and net interest income analysis for those periods. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these FTE amounts.



	Nine months ended September 30
	2019								2018
	Average Balance			Interest			Yield/ Rate		Average Balance			Interest			Yield/ Rate
ASSETS	(dollars in thousands)
Interest-earning assets:
Loans and leases, net of unearned income ⁽¹⁾	$	16,316,540		$	565,095		4.63	%	$	15,764,587		$	509,596		4.32	%
Taxable investment securities ⁽²⁾	2,305,472			46,935			2.71		2,233,972			41,034			2.45
Tax-exempt investment securities ⁽²⁾	468,689			12,940			3.66		412,663			11,312			3.64
Total investment securities	2,774,161			59,875			2.87		2,646,635			52,346			2.63
Loans held for sale	24,357			1,056			5.78		23,175			888			5.11
Other interest-earning assets	428,982			6,879			2.14		345,512			4,016			1.55
Total interest-earning assets	19,544,040			632,905			4.33		18,779,909			566,846			4.03
Noninterest-earning assets:
Cash and due from banks	116,019								102,352
Premises and equipment	239,402								231,195
Other assets	1,337,482								1,121,267
Less: Allowance for loan and lease losses	(165,733		)						(162,368		)
Total Assets	$	21,071,210							$	20,072,355
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	4,263,869		$	24,854		0.78	%	$	4,009,596		$	15,341		0.51	%
Savings and money market deposits	4,955,403			31,570			0.85		4,584,377			17,481			0.51
Brokered deposits	240,020			4,500			2.51		107,569			1,511			1.88
Time deposits	2,853,172			37,050			1.74		2,660,008			25,220			1.27
Total interest-bearing deposits	12,312,464			97,974			1.06		11,361,550			59,553			0.70
Short-term borrowings	894,116			12,200			1.81		880,745			7,079			1.07
FHLB advances and other long-term debt	965,111			23,854			3.30		973,751			23,761			3.26
Total interest-bearing liabilities	14,171,691			134,028			1.26		13,216,046			90,393			0.91
Noninterest-bearing liabilities:
Demand deposits	4,223,927								4,275,443
Other	381,427								333,832
Total Liabilities	18,777,045								17,825,321
Shareholders’ equity	2,294,165								2,247,034
Total Liabilities and Shareholders’ Equity	$	21,071,210							$	20,072,355
Net interest income/net interest margin (FTE)				498,877			3.41	%				476,453			3.39	%
Tax equivalent adjustment				(9,758		)						(8,941		)
Net interest income				$	489,119							$	467,512


(1)	Average balance includes non-performing loans.


(2)	Balances include amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets.

Note: The weighted average interest rate on total average interest-bearing liabilities and average non-interest bearing demand deposits ("cost of funds") was 0.97% and 0.69% for the nine months ended September 30, 2019 and 2018, respectively.

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volume) and changes in rates for the nine months ended September 30, 2019 in comparison to the same period in 2018:



	2019 vs. 2018 Increase (Decrease) due to change in
	Volume			Rate		Net
	(in thousands)
Interest income on:
Loans, net of unearned income	$	18,261		$	37,238	$	55,499
Taxable investment securities	1,355			4,546		5,901
Tax-exempt investment securities	1,579			49		1,628
Loans held for sale	47			121		168
Other interest-earning assets	1,113			1,750		2,863
Total interest income	$	22,355		$	43,704	$	66,059
Interest expense on:
Demand deposits	$	1,020		$	8,493	$	9,513
Savings and money market deposits	1,521			12,568		14,089
Brokered deposits	2,354			635		2,989
Time deposits	1,946			9,884		11,830
Short-term borrowings	110			5,011		5,121
FHLB advances and other long-term debt	(122		)	215		93
Total interest expense	$	6,829		$	36,806	$	43,635

Interest rate increases on both interest-earning assets and interest-bearing liabilities and the corresponding increases in FTE interest income and interest expense were largely the result of Fed Funds Rate increases during 2018. The increases in the Fed Funds Rate resulted in corresponding increases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and LIBOR. The Fed Funds Rate decreases in the third quarter of 2019 did not have a significant impact on results for the nine months ended September 30, 2019.

As summarized above, the 30 basis point increase in the yield on average interest-earning assets resulted in a $43.7 million increase in FTE interest income. The yield on the loan portfolio increased 31 basis points, or 7.2%, from the same period of 2018, resulting in a $37.2 million increase in interest income. All variable and certain adjustable rate loans repriced to higher rates, and yields on new loan originations generally exceeded the average yield on the loan portfolio. Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decreases.

Interest expense increased $43.6 million, primarily due to the 35 basis point increase in the rate on average interest-bearing liabilities driving a $36.8 million increase in interest expense. The rates on average interest-bearing demand deposits, savings and money market deposits and time deposits increased 27, 34 and 47 basis points, respectively. These rate increases contributed $8.5 million, $12.6 million and $9.9 million to the increase in interest expense, respectively. In addition, the 74 basis point increase in the rate on short-term borrowings resulted in a $5.0 million increase to interest expense.

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



	Nine months ended September 30								Increase (Decrease)
	2019				2018				in Balance
	Balance		Yield		Balance		Yield		$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	6,431,012	4.64	%	$	6,304,687	4.32	%	$	126,325		2.0	%
Commercial – industrial, financial and agricultural	4,439,314		4.64		4,309,408		4.26		129,906			3.0
Real estate – residential mortgage	2,386,264		5.32		2,043,223		4.82		343,041			16.8
Real estate – home equity	1,400,371		4.07		1,505,069		3.90		(104,698		)	(7.0	)
Real estate – construction	926,036		4.94		977,327		4.40		(51,291		)	(5.2	)
Consumer	442,678		4.41		345,937		4.53		96,741			28.0
Equipment lease financing	278,463		4.42		269,903		4.59		8,560			3.2
Other	12,402		—		9,033		—		3,369			37.3
Total loans and leases	$	16,316,540	4.63	%	$	15,764,587	4.32	%	$	551,953		3.5	%

Average loans and leases increased $552.0 million, or 3.5%, compared to the first nine months of 2018. The increase was driven largely by growth in the residential and commercial mortgage loan portfolios, as well as the commercial and consumer loan portfolios and equipment lease financing portfolios, partially offset by decreases in the home equity and construction loan portfolios.

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



	Nine months ended September 30								Increase (Decrease) in Balance
	2019				2018				Increase (Decrease) in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,223,927	—	%	$	4,275,443	—	%	$	(51,516	)	(1.2	)%
Interest-bearing demand	4,263,869		0.78		4,009,596		0.51		254,273			6.3
Savings and money market accounts	4,955,403		0.85		4,584,377		0.51		371,026			8.1
Total demand and savings	13,443,199		0.56		12,869,416		0.34		573,783			4.5
Brokered deposits	240,020		2.51		107,569		1.88		132,451			123.1
Time deposits	2,853,172		1.74		2,660,008		1.27		193,164			7.3
Total deposits	$	16,536,391	0.79	%	$	15,636,993	0.51	%	$	899,398		5.8	%

Average total demand and savings accounts increased $573.8 million, or 4.5%, driven by increases in savings and money market deposits and interest-bearing demand deposits. The overall increase in total demand and savings deposits was primarily due to a $223.3 million, or 10.2%, increase in municipal account balances, a $218.7 million, or 3.5%, increase in consumer account balances and a $135.0 million, or 3.1%, increase in business account balances.

Average brokered deposits increased $132.5 million, or 123.1%, which was the result of the introduction of new brokered deposit programs in 2018. Average time deposits increased $193.2 million, or 7.3%, primarily driven by promotional rate offerings.

The average cost of total deposits increased 28 basis points, to 0.79%, for the first nine months of 2019, compared to 0.51% for the same period in 2018, mainly as a result of the Fed Funds Rate increases during 2018, leading to discretionary increases to deposit rates. The decreases in the Fed Funds Rate during the third quarter of 2019 did not have a meaningful impact on the overall cost of deposits.

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



	Nine months ended September 30								Increase (Decrease)
	2019				2018				in Balance
	Balance		Rate		Balance		Rate		$			%
	(dollars in thousands)
Short-term borrowings:
Total short-term customer funding⁽¹⁾	$	541,237	1.39	%	$	470,199	0.43	%	$	71,038		15.1	%
Federal funds purchased	146,432		2.35		307,114		1.70		(160,682		)	(52.3	)
Short-term FHLB advances and other borrowings⁽²⁾	206,447		2.55		103,432		2.06		103,015			99.6
Total short-term borrowings	894,116		1.81		880,745		1.07		13,371			1.5
Long-term debt:
FHLB advances	577,835		2.50		587,226		2.46		(9,391		)	(1.6	)
Other long-term debt	387,276		4.49		386,525		4.47		751			0.2
Total long-term debt	965,111		3.30		973,751		3.26		(8,640		)	(0.9	)
Total borrowings	$	1,859,227	2.58	%	$	1,854,496	2.22	%	$	4,731		0.3	%

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

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

Average total short-term borrowings increased $13.4 million, or 1.5%, during the first nine months of 2019, primarily as a result of a $103.0 million, or 99.6%, increase in short-term FHLB advances and other borrowings and a $71.0 million, or 15.1%, increase in short-term customer funding, partially offset by a $160.7 million, or 52.3%, decrease in federal funds purchased. The average cost of short-term borrowings increased 74 basis points, mainly due to the net impact of changes in the Fed Funds Rate.

Provision for Credit Losses

The provision for credit losses was $12.3 million for the first nine months of 2019, a decrease of $26.4 million from the same period of 2018. During the second quarter of 2018, the Corporation charged off $33.9 million and recorded a provision of $36.8 million for a credit loss related to the Commercial Relationship, which impacted results for the nine months ended September 30, 2018.

Non-Interest Income

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



	Nine months ended September 30				Increase (Decrease)
	2019		2018		$			%
	(dollars in thousands)
Wealth management	$	41,259	$	38,740	$	2,519		6.5	%
Commercial banking:
Merchant and card	18,236		17,770		466			2.6
Cash management	13,695		13,242		453			3.4
Commercial loan interest rate swap	9,449		7,291		2,158			29.6
Other commercial banking	10,109		9,625		484			5.0
Total commercial banking	51,489		47,928		3,561			7.4
Consumer banking:
Card	15,524		14,531		993			6.8
Overdraft fees	13,199		12,952		247			1.9
Other consumer banking	8,354		8,522		(168		)	(2.0	)
Total consumer banking	37,077		36,005		1,072			3.0
Mortgage banking:
Gains on sales of mortgage loans	13,821		10,158		3,663			36.1
Mortgage servicing	4,202		4,094		108			2.6
Total mortgage banking	18,023		14,252		3,771			26.5
Other	8,298		9,040		(742		)	(8.2	)
Total, excluding investment securities gains, net	156,146		145,965		10,181			7.0
Investment securities gains, net	4,733		37		4,696			N/M
Total non-interest income	$	160,879	$	146,002	$	14,877		10.2	%

N/M - Not meaningful

Excluding net investment securities gains, non-interest income increased $10.2 million, or 7.0%, in the first nine months of 2019 as compared to the same period in 2018. Wealth management fees increased $2.5 million, or 6.5%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance, as well as the acquisition of the assets of a small wealth management firm in the first quarter of 2019.

Total commercial banking income increased $3.6 million, or 7.4%, compared to the same period in 2018, driven mainly by an increase in commercial loan interest rate swap fees.

Total consumer banking increased $1.1 million, or 3.0%, compared to the same period in 2018, driven by card income.

Mortgage banking income increased $3.8 million, or 26.5%, mainly due to gains on sales of mortgage loans. The increase in gains resulted from both higher volumes of loans sold and higher spreads on sales.

Non-Interest Expense

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



	Nine months ended September 30				Increase (Decrease)
	2019		2018		$			%
	(dollars in thousands)
Salaries and employee benefits	$	234,959	$	227,457	$	7,502		3.3	%
Net occupancy	39,746		38,970		776			2.0
Data processing and software	33,211		31,083		2,128			6.8
Other outside services	31,774		24,814		6,960			28.0
Professional fees	10,261		10,615		(354		)	(3.3	)
Equipment	10,100		9,968		132			1.3
Marketing	8,345		7,277		1,068			14.7
State taxes	7,005		7,463		(458		)	(6.1	)
FDIC insurance	5,603		8,430		(2,827		)	(33.5	)
Amortization of tax credit investments	4,516		4,911		(395		)	(8.0	)
Prepayment penalty on FHLB advances	4,326		—		4,326			100.0
Intangible amortization	1,285		—		1,285			100.0
Other	37,631		34,431		3,200			9.3
Total non-interest expense	$	428,762	$	405,419	$	23,343		5.8	%

N/M - Not meaningful

In the first nine months of 2019, $11.7 million of expenses were incurred related to Charter Consolidation, as compared to $8.6 million in the same period of 2018, a $3.2 million increase. The 2019 expenses were primarily in salaries and benefits ($1.9 million), other outside services ($6.6 million), intangible amortization ($1.0 million) and advertising ($650,000).

The following provides explanations for the more significant fluctuations in expense levels, excluding Charter Consolidation costs, by category:


•	The $7.5 million, or 3.3%, increase in salaries and employee benefits reflected the net impact of a $6.2 million increase in employee salaries, due mainly to annual merit increases and incentive compensation. Employee benefits included lower defined benefits expense driven by changes in discount rate and a decrease in healthcare expense due to favorable claims experience compared to 2018.


•	Net occupancy expense increased $776,000, or 2.0%, due mainly to the addition of new properties.


•	Data processing and software increased $2.1 million, or 6.8%, reflecting higher transaction volumes and costs related to technology initiatives.


•	Marketing included an increase in expense related to deposit promotions.


•	FDIC insurance expense decreased $2.9 million, or 33.5%, due to the recognition of assessment credits in the third quarter of 2019.


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


•	Other expenses increased due to losses on sale of fixed assets, telephone and operating risk loss.

Income Taxes

Income tax expense for the first nine months of 2019 was $30.4 million, an $11.3 million increase from $19.1 million for the same period in 2018. The Corporation’s ETR was 14.5% for the nine months ended September 30, 2019, as compared to 11.3% in the same period of 2018. The increase in income tax expense and the ETR primarily resulted from 2018 including a net tax benefit associated with legislative changes enacted in New Jersey. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and investments in community development projects that generate tax credits under various federal programs.

FINANCIAL CONDITION

The table below presents condensed consolidated ending balance sheets.



	September 30, 2019		December 31, 2018		Increase (Decrease)
	September 30, 2019		December 31, 2018		$			%
	(dollars in thousands)
Assets
Cash and cash equivalents	$	598,613	$	445,687	$	152,926		34.3	%
Federal Reserve Bank ("FRB") and FHLB stock	94,557		79,283		15,274			19.3
Loans held for sale	33,945		27,099		6,846			25.3
Investment securities	2,705,610		2,686,973		18,637			0.7
Loans and leases, net of allowance	16,520,731		16,005,263		515,468			3.2
Premises and equipment	237,344		234,529		2,815			1.2
Goodwill and intangible assets	534,178		531,556		2,622			0.5
Other assets	978,640		671,762		306,878			45.7
Total Assets	$	21,703,618	$	20,682,152	$	1,021,466		4.9	%
Liabilities and Shareholders’ Equity
Deposits	$	17,342,717	$	16,376,159	$	966,558		5.9	%
Short-term borrowings	832,860		754,777		78,083			10.3
FHLB advances and other long-term debt	726,714		992,279		(265,565		)	(26.8	)
Other liabilities	477,311		311,364		165,947			53.3
Total Liabilities	19,379,602		18,434,579		945,023			5.1
Total Shareholders’ Equity	2,324,016		2,247,573		76,443			3.4
Total Liabilities and Shareholders’ Equity	$	21,703,618	$	20,682,152	$	1,021,466		4.9	%

Cash and Cash Equivalents

The $152.9 million, or 34.3%, increase in cash and cash equivalents mainly resulted from additional collateral required to be posted with counterparties for commercial loan interest rate swap contracts.

FRB and FHLB Stock

FRB and FHLB stock increased $15.3 million, or 19.3%, due to a $19.6 million increase in FRB stock partially offset by a $7.3 million decrease in FHLB stock. Additional FRB stock was required to be purchased as a result of the recent Charter Consolidation.

Investment Securities

The following table presents the carrying amount of investment securities:



	September 30, 2019		December 31, 2018		Increase (Decrease)
	September 30, 2019		December 31, 2018		$			%
	(dollars in thousands)
Available for Sale
U.S. Government sponsored agency securities	$	—	$	31,632	$	(31,632	)	N/M
State and municipal securities	547,344		279,095		268,249			96.1	%
Corporate debt securities	358,406		109,533		248,873			N/M
Collateralized mortgage obligations	700,599		832,080		(131,481		)	(15.8	)
Residential mortgage-backed securities	183,785		463,344		(279,559		)	(60.3	)
Commercial mortgage-backed securities	422,109		261,616		160,493			61.3
Auction rate securities	103,298		102,994		304			0.3
Total available for sale securities	$	2,315,541	$	2,080,294	$	235,247		11.3	%

Held to Maturity
State and municipal securities	$	—	$	156,134	$	(156,134	)	N/M
Residential mortgage-backed securities	390,069		450,545		(60,476		)	(13.4	)
Total held to maturity securities	$	390,069	$	606,679	$	(216,610	)	(35.7	)%

Total Investment Securities	$	2,705,610	$	2,686,973	$	18,637		0.7	%

N/M - Not meaningful

Total available for sale investment securities increased $235.2 million, or 11.3%. Cash flows from maturities, sales and repayments of residential mortgage-backed securities, U.S. Government sponsored agency securities and securities with shorter expected durations were reinvested in other investment categories in order to diversify the portfolio into securities with longer expected durations to better manage the Corporation's asset-sensitive interest rate risk profile. Total held to maturity securities decreased $216.6 million, or 35.7%, primarily as a result of the transfer of state and municipal securities from the held to maturity classification to the available for sale classification as permitted through the early adoption of ASU 2019-04, as disclosed in "Note 1 - Basis of Presentation" and "Note 3 -Investment Securities" in the Notes to Consolidated Financial Statements. The $60.5 million, or 13.4%, decrease in residential mortgage-backed securities was the result of principal repayments and premium amortization. There were no purchases of held to maturity securities during the nine months ended September 30, 2019.

Loans and Leases

The following table presents ending balances of loans and leases outstanding, net of unearned income:



	September 30, 2019			December 31, 2018			Increase (Decrease)
	September 30, 2019			December 31, 2018			$			%
	(dollars in thousands)
Real estate – commercial mortgage	$	6,604,634		$	6,434,285		$	170,349		2.6	%
Commercial – industrial, financial and agricultural	4,494,496			4,404,548			89,948			2.0
Real estate – residential mortgage	2,570,793			2,251,044			319,749			14.2
Real estate – home equity	1,346,115			1,452,137			(106,022		)	(7.3	)
Real estate – construction	913,644			916,599			(2,955		)	(0.3	)
Consumer	464,213			419,186			45,027			10.7
Equipment lease financing and other	316,880			311,866			5,014			1.6
Overdrafts	2,929			2,774			155			5.6
Loans and leases	16,713,704			16,192,439			521,265			3.2
Unearned income	(26,838		)	(26,639		)	(199		)	0.7
Loans and leases, net of unearned income	$	16,686,866		$	16,165,800		$	521,066		3.2	%

Loans and leases, net of unearned income, increased $521.1 million, or 3.2%, in comparison to December 31, 2018, primarily due to growth in residential and commercial mortgage loans and commercial loans.

Construction loans include loans to commercial borrowers secured by commercial real estate, loans to commercial borrowers secured by residential real estate, and other construction loans, which are loans to individuals secured by residential real estate. The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographic location. Approximately $7.5 billion, or 45.0%, of the loan portfolio was in commercial mortgage and construction loans as of September 30, 2019. The Corporation's internal policy limits its maximum total lending commitment to an individual borrowing relationship to $55 million as of September 30, 2019. In addition, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrowing relationship at the time the lending commitment is approved.

Commercial loans also include shared national credits, which are participations in loans or loan commitments of at least $100 million that are shared by three or more banks. As of September 30, 2019, shared national credits increased $2.5 million, or 3.7%, to $70.0 million, compared to $67.5 million as of December 31, 2018. The Corporation's shared national credits are to borrowers located in its geographic markets, and are granted subject to the Corporation's standard underwriting policies. None of the shared national credits were past due as of September 30, 2019 or December 31, 2018.

Provision and Allowance for Credit Losses

The following table presents the components of the allowance for credit losses:



	September 30, 2019			December 31, 2018
	(dollars in thousands)
Allowance for loan and lease losses	$	166,135		$	160,537
Reserve for unfunded lending commitments	6,662			8,873
Allowance for credit losses	$	172,797		$	169,410

Allowance for loan and lease losses to loans and leases outstanding	1.00		%	0.99		%
Allowance for credit losses to loans and leases outstanding	1.04		%	1.05		%

The following table presents the activity in the allowance for credit losses:



	Three months ended September 30						Nine months ended September 30
	2019			2018			2019			2018
	(dollars in thousands)
Average balance of loans and leases, net of unearned income	$	16,436,507		$	15,862,143		$	16,316,540		$	15,764,587

Balance of allowance for credit losses at beginning of period	$	176,941		$	169,247		$	169,410		$	176,084
Loans and leases charged off:
Commercial – industrial, financial and agricultural	7,181			3,541			11,863			46,178
Consumer	877			672			2,355			2,276
Real estate – commercial mortgage	394			650			1,769			1,283
Real estate – home equity	498			743			923			1,967
Real estate – residential mortgage	533			483			1,322			1,128
Real estate – construction	45			212			143			976
Equipment lease financing and other	600			582			1,833			1,632
Total loans and leases charged off	10,128			6,883			20,208			55,440
Recoveries of loans and leases previously charged off:
Commercial – industrial, financial and agricultural	2,311			731			6,234			2,347
Consumer	216			390			1,005			1,015
Real estate – commercial mortgage	444			928			749			1,528
Real estate – home equity	132			217			552			694
Real estate – residential mortgage	440			317			783			520
Real estate – construction	164			664			1,493			1,414
Equipment lease financing and other	107			595			484			957
Total recoveries	3,814			3,842			11,300			8,475
Net loans and leases charged off	6,314			3,041			8,908			46,965
Provision for credit losses	2,170			1,620			12,295			38,707
Balance of allowance for credit losses at end of period	$	172,797		$	167,826		$	172,797		$	167,826

Net charge-offs to average loans and leases (annualized)	0.15		%	0.08		%	0.07		%	0.40		%

The provision for credit losses for the three months ended September 30, 2019 was $2.2 million, an increase of $550,000 in comparison to the same period in 2018. For the nine months ended September 30, 2019, the provision for credit losses was $12.3 million, a $26.4 million decrease compared to the same period in 2018, primarily as a result of the $36.8 million provision for credit losses related to the Commercial Relationship recognized in 2018.

Net charge-offs increased $3.3 million and decreased $38.1 million for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. Annualized net charge-offs as a percentage of average loans and leases for the third quarter of 2019 were 0.15%, as compared to 0.08% during the same period of 2018. For the nine months ended September 30, 2019, annualized net charge-offs as a percentage of average loans and leases were 0.07%, compared to 0.40% for the same period of 2018. The decrease in net charge-offs and the lower annualized net charge-offs as a percentage of average loans and leases for the nine months ended September 30, 2019 compared to the same period of 2018 was primarily due to the $33.9 million charge-off related to the Commercial Relationship recorded during the second quarter of 2018.

The following table presents the changes in non-accrual loans and leases for the three and nine months ended September 30, 2019:



	Commercial - Industrial, Financial and Agricultural			Real Estate - Commercial Mortgage			Real Estate - Construction			Real Estate - Residential Mortgage			Real Estate - Home Equity			Consumer			Equipment Lease Financing			Total
	(in thousands)
Three months ended September 30, 2019
Balance of non-accrual loans and leases at June 30, 2019	$	45,837		$	43,213		$	4,167		$	14,950		$	7,193		$	—		$	17,758		$	133,118
Additions	4,628			8,063			—			2,879			993			877			578			18,018
Payments	(7,038		)	(6,473		)	(289		)	(367		)	(800		)	—			(755		)	(15,722		)
Charge-offs	(7,181		)	(394		)	(45		)	(533		)	(498		)	(877		)	(162		)	(9,690		)
Transfers to other real estate owned ("OREO")	(4		)	—			—			(1,193		)	(240		)	—			—			(1,437		)
Balance of non-accrual loans and leases at September 30, 2019	$	36,242		$	44,409		$	3,833		$	15,736		$	6,648		$	—		$	17,419		$	124,287

Nine months ended September 30, 2019
Balance of non-accrual loans and leases at December 31, 2018	$	50,149		$	30,389		$	7,390		$	14,668		$	6,707		$	—		$	19,269		$	128,572
Additions	13,233			28,884			100			6,794			3,269			2,355			1,010			55,645
Payments	(14,700		)	(12,252		)	(3,373		)	(2,166		)	(1,553		)	—			(2,266		)	(36,310		)
Charge-offs	(11,863		)	(1,769		)	(143		)	(1,322		)	(923		)	(2,355		)	(594		)	(18,969		)
Transfers to accrual status	(573		)	(163		)	(17		)	(57		)	(334		)	—			—			(1,144		)
Transfers to OREO	(4		)	(680		)	(124		)	(2,181		)	(518		)	—			—			(3,507		)
Balance of non-accrual loans and leases at September 30, 2019	$	36,242		$	44,409		$	3,833		$	15,736		$	6,648		$	—		$	17,419		$	124,287

Non-accrual loans and leases decreased $4.3 million, or 3.3%, in comparison to December 31, 2018, primarily as a result of payments and charge-offs, partially offset by additions to non-accrual loans and leases.

The following table summarizes non-performing loans and leases, by type, as of the indicated dates:



	September 30, 2019		December 31, 2018
	(in thousands)
Commercial – industrial, financial and agricultural	$	37,126	$	51,269
Real estate – commercial mortgage	45,710		32,153
Real estate – residential mortgage	20,150		19,101
Real estate – home equity	10,770		9,769
Real estate – construction	4,312		7,390
Consumer	242		409
Equipment lease financing	17,666		19,587
Total non-performing loans and leases	$	135,976	$	139,678

Non-performing loans and leases decreased $3.7 million, or 2.7%, in comparison to December 31, 2018. Non-performing loans and leases as a percentage of total loans and leases were 0.81% at September 30, 2019 in comparison to 0.86% at December 31, 2018.

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



	September 30, 2019			December 31, 2018
	(dollars in thousands)
Non-accrual loans and leases	$	124,287		$	128,572
Loans and leases 90 days or more past due and still accruing	11,689			11,106
Total non-performing loans and leases	135,976			139,678
OREO	7,706			10,518
Total non-performing assets	$	143,682		$	150,196
Non-performing loans and leases to total loans and leases	0.81		%	0.80		%
Non-performing assets to total assets	0.66		%	0.73		%
Allowance for loan and lease losses to non-performing loans and leases	122		%	115		%
Allowance for credit losses to non-performing loans and leases	127		%	121		%

The following table presents loans whose terms have been modified under troubled debt restructurings ("TDRs"), by type, as of the indicated dates:



	September 30, 2019		December 31, 2018
	(in thousands)
Real estate - residential mortgage	$	21,762	$	24,102
Real estate - commercial mortgage	16,444		15,685
Real estate - home equity	15,505		16,665
Commercial	5,192		5,143
Consumer	7		10
Total accruing TDRs	58,910		61,605
Non-accrual TDRs ⁽¹⁾	23,553		28,659
Total TDRs	$	82,463	$	90,264

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

During the first nine months of 2019, $1.1 million of TDRs that were modified in the previous 12 months had a payment default, which is defined as a single missed scheduled payment subsequent to modification.

The following table summarizes the Corporation’s OREO, by property type, as of the indicated dates:



	September 30, 2019		December 31, 2018
	(in thousands)
Residential properties	$	2,729	$	3,665
Commercial properties	2,973		4,127
Undeveloped land	2,004		2,726
Total OREO	$	7,706	$	10,518

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

Total internally risk-rated loans were $11.9 billion as of September 30, 2019 and $11.7 billion as of December 31, 2018. The following table presents internal risk ratings for commercial loans, commercial mortgages and construction loans to commercial borrowers with internal risk ratings of Special Mention (considered "criticized" loans by banking regulators) or Substandard or lower (considered "classified" loans by banking regulators), by class segment.



	Special Mention						Increase (Decrease)					Substandard or lower						Increase (Decrease)					Total Criticized and Classified Loans
	September 30, 2019			December 31, 2018			$			%		September 30, 2019			December 31, 2018			$			%		September 30, 2019			December 31, 2018
	(dollars in thousands)
Real estate - commercial mortgage	$	142,136		$	170,827		$	(28,691	)	(16.8	)%	$	171,931		$	133,995		$	37,936		28.3	%	$	314,067		$	304,822
Commercial - secured	198,592			193,470			5,122			2.6		184,584			129,026			55,558			43.1		383,176			322,496
Commercial - unsecured	5,082			4,016			1,066			26.5		3,621			3,963			(342		)	(8.6	)	8,703			7,979
Total Commercial - industrial, financial and agricultural	203,674			197,486			6,188			3.1		188,205			132,989			55,216			41.5		391,879			330,475
Construction - commercial residential	2,871			6,912			(4,041		)	(58.5	)	3,627			6,881			(3,254		)	(47.3	)	6,498			13,793
Construction - commercial	719			1,163			(444		)	(38.2	)	2,704			2,533			171			6.8		3,423			3,696
Total real estate - construction⁽¹⁾	3,590			8,075			(4,485		)	(55.5	)	6,331			9,414			(3,083		)	(32.7	)	9,921			17,489
Total	$	349,400		$	376,388		$	(26,988	)	(7.2	)%	$	366,467		$	276,398		$	90,069		32.6	%	$	715,867		$	652,786

% of total risk-rated loans	2.9		%	3.2		%						3.1		%	2.4		%						6.0		%	5.6		%

(1) excludes construction - other

The decrease in real estate commercial mortgage loans categorized as special mention compared to December 31, 2018 was primarily the result of a shift to the substandard or lower category. The increases in both categories for commercial loans is due to changes in risk ratings within the portfolio. The decreases that occurred in special mention and substandard or lower for real estate construction loans primarily resulted from an upgrade of a large relationship and the payoff of another large relationship, respectively.

Goodwill and Intangible Assets

Goodwill and intangible assets, net of amortization increased $2.6 million, or 0.5%, as a result of the acquisition of the assets of a wealth management business with approximately $250 million in assets under management or administration, which was completed in January 2019, partially offset by trade name intangible write-off due to the consolidation of a bank subsidiary in the third quarter of 2019.

Other Assets

Other assets increased $306.9 million, or 45.7%, due to higher fair values of commercial loan interest rate swap derivatives ($132.0 million), right-of-use assets recorded as a result of the adoption of Topic 842 ($104.7 million) and additional investments in bank- owned life insurance ($100.0 million).

Deposits and Borrowings

The following table presents ending deposits, by type, as of the dates indicated:



	September 30, 2019		December 31, 2018		Increase (Decrease)
	September 30, 2019		December 31, 2018		$			%
	(dollars in thousands)
Noninterest-bearing demand	$	4,240,478	$	4,310,105	$	(69,627	)	(1.6	)%
Interest-bearing demand	4,771,109		4,240,974		530,135			12.5
Savings and money market accounts	5,094,387		4,926,937		167,450			3.4
Total demand and savings	14,105,974		13,478,016		627,958			4.7
Brokered deposits	256,870		176,239		80,631			45.8
Time deposits	2,979,873		2,721,904		257,969			9.5
Total deposits	$	17,342,717	$	16,376,159	$	966,558		5.9	%

Total demand and savings accounts increased $628.0 million, or 4.7%, due to a $562.3 million, or 23.9%, seasonal increase in municipal accounts, and a $228.4 million, or 5.2%, increase in business accounts, partially offset by a $165.0 million, or 2.5%, decrease in consumer accounts.

Brokered deposits increased $80.6 million, or 45.8%, the result of the introduction of new brokered deposit programs which began in 2018. Time deposits increased $258.0 million, or 9.5%, primarily due to promotional rate offerings.

The following table presents ending borrowings, by type, as of the dates indicated:



	September 30, 2019		December 31, 2018		Increase (Decrease)
	September 30, 2019		December 31, 2018		$			%
	(dollars in thousands)
Short-term borrowings:
Total short-term customer funding⁽¹⁾	$	337,860	$	369,777	$	(31,917	)	(8.6	)%
Federal funds purchased	20,000		—		20,000			N/M
Short-term FHLB advances and other borrowings ⁽²⁾	475,000		385,000		90,000			23.4
Total short-term borrowings	832,860		754,777		78,083			10.3
FHLB advances and other long-term debt:
FHLB advances	336,036		601,978		(265,942		)	(44.2	)
Other long-term debt	390,678		390,301		377			0.1
Total FHLB advances and other long-term debt	726,714		992,279		(265,565		)	(26.8	)
Total borrowings	$	1,559,574	$	1,747,056	$	(187,482	)	(10.7	)%

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

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

N/M - Not meaningful

Total short-term borrowings increased $78.1 million, or 10.3%, due to a $90.0 million, or 23.4%, increase in short-term FHLB advances and other borrowings, partially offset by a $31.9 million, or 8.6% decrease in short-term customer funding. Long-term FHLB advances decreased $265.9 million, or 44.2%, as a result of balance sheet restructuring and maturities. The decrease in total borrowings was funded with deposit growth in excess of loan growth.

Other Liabilities

Other liabilities increased $165.9 million, or 53.3%, primarily as a result of the recognition of a lease liability of $111.6 million as a result of the adoption of Topic 842 and increases in the fair values of commercial loan interest rate swap derivatives. See Note 1, "Basis of Presentation," and Note 6, "Leases," in the Notes to Consolidated Financial Statements for additional disclosures regarding Topic 842 lease liabilities.

Shareholders' Equity

Total shareholders’ equity increased $76.4 million during the first nine months of 2019. The increase was due primarily to $178.5 million of net income, a $65.1 million increase in accumulated other comprehensive income, mainly due to improvements in fair values of available for sale securities, $5.5 million of stock-based compensation awards and $3.8 million of stock issued, partially offset by $111.5 million of common stock repurchases and $65.1 million of common stock cash dividends.

During nine months ended September 30, 2019, 6.8 million shares were repurchased at a total cost of $111.3 million, or $16.25 per share, under existing repurchase programs previously approved by the Corporation's board of directors.

In October 2019, the Corporation's board of directors approved an additional share repurchase program pursuant to which the Corporation is authorized to repurchase up to $100.0 million of its outstanding shares of common stock, or approximately 3.9% of its outstanding shares, through December 31, 2020.

Under the repurchase programs, repurchased shares were added to treasury stock, at cost. As permitted by securities laws and other legal requirements, and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including, without limitation, through accelerated share repurchase transactions. The repurchase program may be discontinued at any time.

Regulatory Capital

The Corporation and its subsidiary bank, Fulton Bank, N.A., are subject to regulatory capital requirements administered by various banking regulators. Failure to meet minimum capital requirements could result in certain actions by regulators that could have a material effect on the Corporation’s financial statements. In July 2013, the Federal Reserve Board approved final rules (the "U.S. Basel III Capital 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. The U.S. Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions.

The minimum regulatory capital requirements established by the U.S. Basel III Capital Rules became effective for the Corporation on January 1, 2015, and were fully phased in on January 1, 2019.

The U.S. Basel III Capital Rules require the Corporation and its bank subsidiary to:


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


•	Continue to require a minimum Total capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 leverage capital ratio of 4.00% of average assets; and


•	Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities ("TruPS"), have been phased out as a component of Tier 1 capital for institutions of the Corporation's size.

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

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

As of September 30, 2019, the Corporation's capital levels met the fully phased-in minimum capital requirements, including the new capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.

As of September 30, 2019, the Corporation’s subsidiary bank, Fulton Bank, N.A., was well capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculations. To be categorized as well capitalized, Fulton Bank, N.A. must maintain minimum total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios

as set forth in the regulation. There are no conditions or events since September 30, 2019 that management believes have changed the institutions’ capital categories.

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



	September 30, 2019		December 31, 2018		Regulatory Minimum for Capital Adequacy		Fully Phased-in, with Capital Conservation Buffers
Total Capital (to Risk-Weighted Assets)	12.0	%	12.8	%	8.0	%	10.5	%
Tier I Capital (to Risk-Weighted Assets)	9.6	%	10.2	%	6.0	%	8.5	%
Common Equity Tier I (to Risk-Weighted Assets)	9.6	%	10.2	%	4.5	%	7.0	%
Tier I Capital (to Average Assets)	8.5	%	9.0	%	4.0	%	4.0	%

The decreases in regulatory capital ratios from December 31, 2018 to September 30, 2019 were mainly due to common stock repurchases.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk, Asset/Liability Management and Liquidity

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

The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee ("ALCO") is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.

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

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

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

The following table summarizes the expected impact of abrupt interest rate changes, i.e. a non-parallel instantaneous shock, on net interest income as of September 30, 2019 (due to the current level of interest rates, the 300 basis point downward shock scenario is not shown):



Rate Shock⁽¹⁾	Annual change in net interest income	% change in net interest income
+300 bp	+ $59.1 million	9.0%
+200 bp	+ $40.7 million	6.2%
+100 bp	+ $20.9 million	3.2%
–100 bp	– $34.0 million	– 5.2%
–200 bp	– $76.7 million	– 11.7%


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

Economic value of equity estimates the discounted present value of asset and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Abrupt changes or "shocks" in interest rates, both upward and downward, are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation’s balance sheet. The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of the base case economic value of equity for a 100 basis point shock in interest rates, 20% for a 200 basis point shock and 30% for a 300 basis point shock. As of September 30, 2019, the Corporation was within economic value of equity policy limits for every 100 basis point shock.

Interest Rate Swaps

The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments and the gross fair values are recorded in other assets and liabilities on the Consolidated Balance Sheets, with changes in fair value during the period recorded in other non-interest expense on the Consolidated Statements of Income.

Liquidity

The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on investments and outstanding loans and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short-term and long-term needs.

The Corporation maintains liquidity sources in the form of demand and savings deposits, brokered deposits, time deposits, repurchase agreements and short-term promissory notes. The Corporation can access additional liquidity from these sources, if necessary, by increasing the rates of interest paid on those accounts and borrowings. The positive impact to liquidity resulting from paying higher interest rates could have a detrimental impact on the net interest margin and net interest income if rates on interest-earning assets do not experience a proportionate increase. Borrowing availability with the FHLB and the FRB, along with federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.

The Corporation's subsidiary bank, Fulton Bank, N.A., is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of September 30, 2019, the Corporation had $811.0 million of borrowings outstanding from the FHLB with an additional borrowing capacity of approximately $2.7 billion under these facilities. Advances from the FHLB are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of September 30, 2019, the Corporation had aggregate federal funds lines of $1.6 billion, with $20.0 million borrowed against that amount. A combination of commercial real estate loans, commercial loans and securities are pledged to the Federal Reserve Bank of Philadelphia to provide access to Federal Reserve Bank Discount Window borrowings. As of September 30, 2019, the Corporation had $332 million of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.

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

The Corporation’s sources and uses of funds were discussed in general terms in the "Net Interest Income" section of Management’s Discussion and Analysis. The Consolidated Statements of Cash Flows provide additional information. The Corporation’s operating activities during the first nine months of 2019 generated $43.5 million of cash, mainly due to net income of $178.6 million, partially offset by the net impact of other operating activities Other changes, net resulted in a cash decrease of $195.6 million as a result of increases in bank-owned life insurance and net changes in the fair values of derivative assets and liabilities. Cash used in investing activities was $497.0 million, mainly due to net increases in investments and loans. Cash provided by financing activities was $606.4 million due mainly to increases in deposits exceeding the net decrease in long-term debt and the acquisition of treasury stock.

Debt Security Market Price Risk

Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, U.S. government debt securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.

State and Municipal Securities

As of September 30, 2019, the Corporation owned securities issued by various states or municipalities with a total cost basis of $530.4 million and a fair value of $547.3 million. Downward pressure on local tax revenues of issuers could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the creditworthiness of the issuing state or municipality and then, to a lesser extent, on any underlying credit enhancement. State or municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the securities to be repaid by any means available to the issuing state or municipality. As of September 30, 2019, approximately 99% of state and municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 59% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.

Auction Rate Securities

As of September 30, 2019, the Corporation’s investments in auction rate certificates ("ARCs"), a type of auction rate security, had a cost basis of $107.4 million and a fair value of $103.3 million.

As of September 30, 2019, the fair values of the ARCs currently in the portfolio were derived using significant unobservable inputs based on an expected cash flows model which produced fair values that may not represent those that could be expected from settlement of these investments in the current market. The expected cash flows model produced fair values which assumed a return to market liquidity sometime within the next five years. The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.

The credit quality of the underlying debt associated with the ARCs is also a factor in the determination of their estimated fair value. As of September 30, 2019, all of the ARCs were rated above investment grade. All of the loans underlying the ARCs have principal payments that are guaranteed by the federal government. At September 30, 2019, all ARCs were current and making scheduled interest payments.

Corporate Debt Securities

The Corporation holds corporate debt securities in the form of single-issuer trust preferred securities, subordinated debt and senior debt issued by financial institutions. As of September 30, 2019, these securities had an amortized cost of $353.8 million and an estimated fair value of $358.4 million.

See "Note 3 - Investment Securities," in the Notes to Consolidated Financial Statements for further discussion related to the Corporation’s other-than-temporary impairment evaluations for debt securities, and see "Note 10 - Fair Value Measurements," in the Notes to Consolidated Financial Statements for further discussion related to the fair values of debt securities.

Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-15, promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

There have been no changes in the Corporation’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The information presented in the "Legal Proceedings" section of Note 14 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.

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

(a) None.

(b) None.



(c) Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

July 1, 2019 to July 31, 2019	710,042	$	16.31	710,042	$	36,432,800
August 1, 2019 to August 31, 2019	1,918,289	15.76		1,918,289	6,202,292
September 1, 2019 to September 30, 2019	395,512	15.68		395,512	—

During nine months ended September 30, 2019, 6.8 million shares were repurchased at a total cost of $111.3 million or $16.25 per share, under existing repurchase programs previously approved by the Corporation's board of directors.

Item 6. Exhibits




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

3.2			Bylaws of Fulton Financial Corporation as amended – Incorporated by reference to Exhibit 3.1 of the Fulton Financial Corporation Current Report on an Amended Form 8-K dated September 23, 2014.

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

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

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

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

101.Def			Definition Linkbase Document

101.Pre			Presentation Linkbase Document

101.Lab			Labels Linkbase Document

101.Cal			Calculation Linkbase Document

101.Sch			Schema Document

101.Ins			Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

FULTON FINANCIAL CORPORATION AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



FULTON FINANCIAL CORPORATION

Date:	November 8, 2019	/s/ E. Philip Wenger
		E. Philip Wenger
		Chairman and Chief Executive Officer

Date:	November 8, 2019	/s/ Mark R. McCollom
		Mark R. McCollom
		Senior Executive Vice President and Chief Financial Officer

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.