FULT Fulton Financial
Filed: 1 Mar 21, 4:21pm
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2020, or
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Commission File Number: 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of Incorporation or organization)||(I.R.S. Employer Identification No.)|
|One Penn Square||P. O. Box 4887||Lancaster,||Pennsylvania||17602|
|(Address of principal executive offices)||(Zip Code)|
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol||Name of exchange on which registered|
|Common Stock, $2.50 par value||FULT||The Nasdaq Stock Market, LLC|
|Depositary Shares, Each Representing 1/40th Interest in a Share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A||FULTP||The Nasdaq Stock Market, LLC|
|Securities registered pursuant to Section 12(g) of the Act:|
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically if any, 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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. (Check One):
|Large accelerated filer||x||Accelerated filer||¨||Emerging growth company||☐|
|Non-accelerated filer||¨||Smaller reporting company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
The aggregate market value of the voting Common Stock held by non-affiliates of the registrant, based on the average bid and asked prices on June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1.6 billion. The number of shares of the registrant’s Common Stock outstanding on February 18, 2021 was 162,460,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 25, 2021 are incorporated by reference in Part III.
TABLE OF CONTENTS
|FULTON FINANCIAL CORPORATION|
|GLOSSARY OF DEFINED ACRONYMS AND TERMS|
|ACL||Allowance for Credit Losses|
|AFS||Available for Sale|
|ALCO||Asset/Liability Management Committee|
|AOCI||Accumulated Other Comprehensive Income|
|ARC||Auction Rate Security|
|ASC||Accounting Standards Codification|
|ASU||Accounting Standards Update|
|BSA||Bank Secrecy Act|
|CARES Act||Coronavirus Aid, Relief, and Economic Security Act|
|CECL||Current Expected Credit Losses|
|Corporation or Company||Fulton Financial Corporation|
|Directors' Plan||Amended and Restated Directors’ Equity Participation Plan|
|DTAs||Deferred Tax Assets|
|Employee Equity Plan||Amended and Restated Equity and Cash Incentive Compensation Plan|
|ESPP||Employee Stock Purchase Plan|
|ETR||Effective Tax Rate|
|Exchange Act||Securities Exchange Act of 1934|
|EAD||Exposure at Default|
|FASB||Financial Accounting Standards Board|
|FDIC||Federal Deposit Insurance Corporation|
|Fed Funds Rate||Target Federal Funds Rate|
|FHLB||Federal Home Loan Bank|
|FOMC||Federal Open Market Committee|
|FRB||Federal Reserve Bank|
|Fulton Bank or the Bank||Fulton Bank, N.A.|
|GAAP||U.S. Generally Accepted Accounting Principles|
|GLB Act||Gramm-Leach-Bliley Act|
|HTM||Held to Maturity|
|LGD||Loss Given Default|
|LIBOR||London Interbank Offered Rate|
|MSRs||Mortgage Servicing Rights|
|Net Loans||Loans and Lease Receivables, (net of unearned income)|
|NIM||Net Interest Margin|
|OCC||Office of the Comptroller of the Currency|
|OREO||Other Real Estate Owned|
|PD||Probability of Default|
|PPP||Paycheck Protection Program|
|PSU||Performance-Based Restricted Stock Unit|
|RSU||Restricted Stock Unit|
|SBA||Small Business Administration|
|SEC||United States Securities and Exchange Commission|
|TCI||Tax Credit Investment|
|TDR||Troubled Debt Restructuring|
|TruPS||Trust Preferred Securities|
Note: Some numbers contained in the document may not sum due to rounding
Item 1. Business
Fulton Financial Corporation was incorporated under the laws of Pennsylvania on February 8, 1982 and became a bank holding company through the acquisition of all of the outstanding stock of Fulton Bank on June 30, 1982. In this Report, "the Corporation" refers to Fulton Financial Corporation and its subsidiaries that are consolidated for financial reporting purposes, except that when referring to Fulton Financial Corporation as a public company, as a bank holding company or as a financial holding company, or to the common stock or other securities issued by Fulton Financial Corporation, references to "the Corporation" refer solely to Fulton Financial Corporation. References to "the Parent Company" refer solely to Fulton Financial Corporation. In 2000, the Corporation became a financial holding company as defined in the GLB Act, which gave the Corporation the ability to expand its financial services activities under its holding company structure. See "Competition" and "Supervision and Regulation." The Corporation directly owns 100% of the common stock of Fulton Bank and eight non-bank entities.
The Corporation's Internet address is www.fult.com. Electronic copies of the Corporation's 2020 Annual Report on Form 10-K are available free of charge by visiting "Investor Relations" at www.fult.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this Internet address. These reports, as well as any amendments thereto, are posted on the Corporation's website as soon as reasonably practicable after they are electronically filed with the SEC.
Banking and Financial Services Subsidiary
The Corporation, through its banking subsidiary, Fulton Bank, delivers financial services within its five-state market area (Pennsylvania, Delaware, Maryland, New Jersey and Virginia) in a personalized, community-oriented style that emphasizes relationship banking. As recently as 2018, the Corporation had six banking subsidiaries. During 2018, the Corporation began the process of consolidating its banking subsidiaries into Fulton Bank; the consolidation was completed in September 2019. The consolidation process resulted in the Corporation conducting its core banking business through a single bank subsidiary, Fulton Bank, which reduced the number of government agencies that regulate the Corporation's banking operations.
The Corporation operates in areas that are home to a wide range of manufacturing, distribution, health care and other service companies. The Corporation is not dependent upon one or a few customers or any one industry, and the loss of any single customer or a few customers would not have a material adverse impact on the Corporation. However, a large portion of the Corporation's loan portfolio is comprised of commercial loans, commercial mortgage loans and construction loans. See Item 1A. "Risk Factors - Economic and Credit Risks - The composition of the Corporation's loan portfolio and competition for loans subject the Corporation to credit risk."
The Corporation offers a full range of consumer and commercial banking products and services in its market area. Consumer banking services include various checking account and savings deposit products, certificates of deposit and individual retirement accounts. The Corporation offers a variety of consumer lending products to customers in its market areas. Secured consumer loan products include home equity loans and lines of credit, which are underwritten based on loan-to-value limits specified in the Corporation's lending policy. The Corporation also offers a variety of fixed, variable and adjustable rate products, including construction loans and jumbo residential mortgage loans. Residential mortgages are offered through Fulton Mortgage Company, which operates as a division of Fulton Bank. Consumer loan products also include automobile loans, personal lines of credit and checking account overdraft protection.
Commercial banking services are provided primarily to small and medium sized businesses (generally with sales of less than $150 million) in the Corporation's market area. The Corporation's policies limit the maximum total lending commitment to a single borrower to $55.0 million as of December 31, 2020, which is significantly below the Corporation's regulatory lending limit. In addition, the Corporation has established lower total lending limits based on the Corporation's internal risk rating of the borrower and for certain types of lending commitments. Commercial lending products include commercial, financial, agricultural and real estate loans. Variable, adjustable and fixed rate loans are provided, with variable and adjustable rate loans generally tied to an index, such as the Prime Rate or LIBOR, as well as interest rate swaps. See Item 1A. "Risk Factors - Market Risks - The planned phasing out of LIBOR as a financial benchmark presents risks to the financial instruments originated or held by the Corporation." The Corporation's commercial lending policy encourages relationship banking and provides strict guidelines related to customer creditworthiness and collateral requirements for secured loans. In addition, equipment lease financing, letters of credit, cash management services and traditional deposit products are offered to commercial customers.
Wealth management services, which include investment management, trust, brokerage, insurance and investment advisory services, are offered to consumer and commercial customers in the Corporation's market area by Fulton Financial Advisors, a division of Fulton Bank.
The Corporation delivers products and services through traditional financial center banking, with a network of full service financial center offices. Electronic delivery channels include a network of automated teller machines and telephone, mobile and online banking. The variety of available delivery channels allows customers to access their account information and perform certain transactions, such as depositing checks, transferring funds and paying bills, at virtually any time of the day. As of December 31, 2020, Fulton Bank had 223 financial centers, not including remote service facilities (mainly stand-alone automated teller machines), and its main office is located in Lancaster, Pennsylvania. On October 1, 2020, the Corporation announced that Fulton Bank had approved a plan to close 21 financial center offices and consolidate the operations of those offices into nearby financial centers operated by the Fulton Bank. The closure and consolidation of those financial center offices was completed on January 8, 2021.
The Corporation owns 100% of the common stock of five non-bank subsidiaries, which are consolidated for financial reporting purposes: (i) Fulton Financial Realty Company, which holds title to or leases certain properties where Corporation financial centers and other facilities are located; (ii) Central Pennsylvania Financial Corp., which owns limited partnership interests in partnerships invested primarily in low- and moderate-income housing projects; (iii) FFC Management, Inc., which owns certain passive investments; (iv) FFC Penn Square, Inc., which owns TruPS issued by a subsidiary of Fulton Bank; and (v) Fulton Insurance Services Group, Inc., which engages in the sale of various life insurance products.
The Corporation also owns 100% of the common stock of three non-bank subsidiaries, which are not consolidated for financial reporting purposes. The following table provides information for these non-bank subsidiaries, incorporated in the state of Delaware, whose sole assets consist of junior subordinated deferrable interest debentures issued by the Corporation, as of December 31, 2020:
|Columbia Bancorp Statutory Trust||$||6,186|
|Columbia Bancorp Statutory Trust II||4,124|
|Columbia Bancorp Statutory Trust III||6,186|
The banking and financial services industries are highly competitive. Within its geographic region, the Corporation faces direct competition from other commercial banks, varying in size from local community banks to regional and national banks, credit unions and non-bank entities. As a result of the wide availability of electronic delivery channels, the Corporation also faces competition from financial institutions that do not have a physical presence in the Corporation's geographic markets.
The industry is also highly competitive due to the various types of entities that now compete aggressively for customers that were traditionally served only by the banking industry. Under the current financial services regulatory framework, banks, insurance companies and securities firms may affiliate under a financial holding company structure, allowing their expansion into non-banking financial services activities that had previously been restricted. These activities include a full range of banking, securities and insurance activities, including securities and insurance underwriting, issuing and selling annuities and merchant banking activities. Moreover, the Corporation faces increased competition from certain non-bank entities, such as financial technology companies and marketplace lenders, which in many cases are not subject to the same regulatory compliance obligations as the Corporation. While the Corporation does not currently engage in many of the activities described above, further entry into these businesses may enhance the ability of the Corporation to compete in the future.
Supervision and Regulation
The Corporation operates in an industry that is subject to laws and regulations that are enforced by a number of federal and state agencies. Changes in these laws and regulations, including interpretation and enforcement activities, could impact the cost of operating in the financial services industry, limit or expand permissible activities or affect competition among banks and other financial institutions.
The Corporation is a registered bank holding company, and has elected to be treated as a financial holding company, under the Bank Holding Company Act of 1956, as amended ("BHCA"). The Corporation is regulated, supervised and examined by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). Fulton Bank is a national banking association chartered under the laws of the United States and is primarily regulated by the OCC. In addition, the Consumer Financial Protection Bureau ("CFPB") examines Fulton Bank for compliance with most federal consumer financial protection laws, including the laws relating to fair lending and prohibiting unfair, deceptive or abusive acts or practices in connection with the offer, sale or provision of consumer financial products or services, and for enforcing such laws with respect to Fulton Bank and its affiliates.
Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the BHCA, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), the Federal Reserve Act, the National Bank Act and the Federal Deposit Insurance Act, among others. In general, these statutes, regulations promulgated thereunder, and related interpretations establish the eligible business activities of the Corporation, certain acquisition and merger restrictions, limitations on intercompany transactions (such as loans and dividends), cash reserve requirements, lending limitations, compliance with unfair, deceptive and abusive acts and practices prohibitions, limitations on investments, and capital adequacy requirements, among other things. Such laws and regulations are intended primarily for the protection of depositors, customers and the Federal Deposit Insurance Fund ("DIF"), as well as to minimize risk to the banking system as a whole, and not for the protection of the Corporation's shareholders or non-depository creditors.
The following discussion is general in nature and seeks to highlight some of the more significant regulatory requirements to which the Corporation is subject, but does not purport to be complete or to describe all applicable laws and regulations.
Governmental and Regulatory Actions to Mitigate the Impact of the COVID-19 Pandemic - There have been several regulatory and legislative actions intended to help mitigate the adverse economic impact of COVID-19 on individuals, including several mandates from the federal bank regulatory agencies, requiring financial institutions to work constructively with borrowers affected by COVID-19 and mandatory loan forbearances. In addition, although the bans on foreclosures in Pennsylvania and Delaware have expired, bans remain in many of the other states in which the Corporation does business. In New Jersey, Governor Philip Murphy has, barring rare circumstances, suspended evictions and foreclosures throughout the state until at least April 19, 2021. Both Virginia and Maryland have enacted provisions allowing for pauses on foreclosures and forbearances for residential homeowners affected by the COVID-19 pandemic until at least the state of emergency ends in the respective states. There continues to be mounting pressure on governors and localities to take further relief action.
On March 27, 2020, the CARES Act was signed into law. The CARES Act is a $2.2 trillion economic stimulus bill that was intended to provide relief in the wake of the COVID-19 pandemic. Several provisions within the CARES Act led to action from the bank regulatory agencies and there were also separate provisions within the legislation that directly impact financial institutions. Section 4022 of the CARES Act allows, until the earlier of December 31, 2020, or the date the national emergency declared by the President terminates, borrowers with federally-backed one-to-four family mortgage loans experiencing a financial hardship due to COVID-19 to request a forbearance, regardless of delinquency status, for up to 360 days. Section 4022 also prohibited servicers of federally-backed mortgage loans from initiating foreclosures during the 60-day period beginning March 18, 2020. Further, on December 21, 2020, the Federal Housing Finance Agency ("FHFA") announced that Fannie Mae and Freddie Mac (the "Enterprises") would extend their single-family moratorium on foreclosures and evictions through February 28, 2021. The FHFA also extended, through February 28, 2021, the deadline for single family borrowers with Federal Housing Administration ("FHA") insured mortgages to request an initial COVID-19 forbearance from their mortgage servicer to defer or reduce their mortgage payments for up to six months, which can be extended for an additional six months. In addition, under Section 4023 of the CARES Act, until the earlier of December 31, 2020 and the date the national emergency declared by the President terminates, borrowers with federally-backed multifamily mortgage loans whose payments were current as of February 1, 2020, but who have since experienced financial hardship due to COVID-19, may request a forbearance for up to 90 days. Borrowers receiving such forbearance may not evict or charge late fees to tenants for its duration. On December 23, 2020, the FHFA announced an extension of forbearance programs for qualifying multifamily properties through March 31, 2021.
The bank regulatory agencies have ensured that adequate flexibility will be given to financial institutions who work with borrowers affected by COVID-19, and have indicated that they will not criticize institutions who do so in a safe and sound manner. Further, the federal bank regulatory agencies have encouraged financial institutions to report accurate information to credit bureaus regarding relief provided to borrowers and have urged financial institutions to continue to assist those borrowers impacted by COVID-19. Also, on April 2, 2020, the bank regulatory agencies issued a joint policy statement to facilitate mortgage servicers’ ability to place consumers in short-term payment forbearance programs. This policy statement was followed by a final rule, on June 23, 2020, that makes it easier for consumers to transition out of financial hardship caused by COVID-19. The rule makes it clear that servicers do not violate Regulation X (which places restrictions and requirements upon lenders, mortgage brokers, or servicers of home loans related to consumers when they apply for and receive mortgage loans) by offering certain COVID-19-related loss mitigation options based on an evaluation of limited application information collected
from the borrower. Also, in an attempt to allow individuals and businesses to more quickly access real estate equity, on September 29, 2020, the bank regulatory agencies issued a rule that deferred appraisal and evaluation requirements after the closing of certain residential and commercial real estate transactions through December 31, 2020.
Moreover, on January 20, 2021 the Biden Administration issued an Executive Order extending the federal eviction moratorium, originally issued through the Centers for Disease Control and Prevention, through March 31, 2021. On January 21, 2021, the United States Department of Housing and Urban Development ("HUD") issued an extension of the foreclosure moratorium for all FHA-insured mortgages through March 31, 2021. Also, on February 9, 2021, the FHFA announced that the Enterprises would extend their single-family moratorium on foreclosures and evictions through March 31, 2021. Further, on February 16, 2021, the Biden Administration, HUD, and the Departments of Veterans Affairs and Agriculture announced actions to (i) extend the foreclosure moratorium for relevant borrowers through June 30, 2021; (ii) extend the mortgage payment forbearance enrollment window until June 30, 2021 for relevant borrowers who wish to request forbearance; and (iii) provide up to six months of additional mortgage payment forbearance, in three-month increments, for relevant borrowers who entered forbearance on or before June 30, 2020. Further, on December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriation Act of 2021 was signed into law, which also contains provisions that could directly impact financial institutions. The Act directs financial regulators to support community development financial institutions and minority depository institutions and directs Congress to re-appropriate approximately $429 billion in unobligated CARES Act funds. These regulatory and legislative actions may be expanded, extended and amended as the pandemic and its economic impact continue.
The PPP, originally established under the CARES Act and extended under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, authorizes financial institutions to make federally-guaranteed loans to qualifying small businesses and non-profit organizations. These loans carry an interest rate of 1% per annum and a maturity of 2 years for loans originated prior to June 5, 2020 and 5 years for loans originated on or after June 5th. The PPP provides that such loans may be forgiven if the borrowers meet certain requirements with respect to maintaining employee headcount and payroll and the use of the loan proceeds after the loan is originated. The initial phase of the PPP, after being extended multiple times by Congress, expired on August 8, 2020. However, on January 11, 2021, the SBA reopened the PPP for First Draw PPP loans to small business and non-profit organizations that did not receive a loan through the initial PPP phase. Further, on January 13, 2021, the SBA reopened the PPP for Second Draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. At least $25 billion has been set aside for Second Draw PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods. Generally speaking, businesses with more than 300 employees and/or less than a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020 are not eligible for Second Draw loans. Further, maximum loan amounts have been increased for accommodation and food service businesses.
Also, the Federal Reserve, in cooperation with the Department of the Treasury, has established many financing and liquidity programs. The Main Street Lending Program ("MSLP"), which terminated on January 8, 2021, was intended to keep credit flowing to small and mid-sized businesses that were in sound financial condition before the coronavirus pandemic but needed financing to maintain operations. The Paycheck Protection Liquidity Facility ("PPPLF") supplies liquidity to PPP participating financial institutions through term financing backed by PPP loans and the Money Market Mutual Fund Liquidity Facility ("MMLF") is intended to assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy.
Further, the federal bank regulatory agencies issued several interim final rules throughout the course of 2020 to neutralize the regulatory capital and liquidity effects for banks that participated in the Federal Reserve liquidity facilities and/or government relief programs. The interim final rule issued on April 9, 2020, clarifies that a zero percent risk weight applies to loans covered by the PPP for capital purposes and the interim final rule issued on May 15, 2020, permits depository institutions to choose to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the supplementary leverage ratio. These interim final rules were finalized on September 29, 2020.
BHCA - The Corporation is subject to regulation and examination by the Federal Reserve Board, and is required to file periodic reports and to provide additional information that the Federal Reserve Board may require. The BHCA regulates activities of bank holding companies, including requirements and limitations relating to capital, transactions with officers, directors and affiliates, securities issuances, dividend payments and extensions of credit, among others. The BHCA permits the Federal Reserve Board, in certain circumstances, to issue cease and desist orders and other enforcement actions against bank holding companies (and their non-banking affiliates) to correct or curtail unsafe or unsound banking practices. In addition, the Federal Reserve Board must approve certain proposed changes in organizational structure or other business activities before they occur. The BHCA imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of, or direct or indirect ownership or control of, any bank for which it is not already the majority owner.
Source of Strength - Federal banking law requires bank holding companies such as the Corporation to act as a source of financial strength and to commit capital and other financial resources to each of their banking subsidiaries. This support may be
required at times when the Corporation may not be able to provide such support without adversely affecting its ability to meet other obligations, or when, absent such requirements, the Corporation might not otherwise choose to provide such support. If the Corporation is unable to provide such support, the Federal Reserve Board could instead require the divestiture of the Corporation's subsidiaries and impose operating restrictions pending the divestiture. If a bank holding company commits to a federal bank regulator that it will maintain the capital of its bank subsidiary, whether in response to the Federal Reserve Board's invoking its source of strength authority or in response to other regulatory measures, that commitment will be assumed by the bankruptcy trustee and the bank will be entitled to priority payment in respect of that commitment.
The Economic Growth, Regulatory Relief, and Consumer Protection Act - In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act ("Economic Growth Act") became law. Among other things, the Economic Growth Act amended certain provisions of the Dodd-Frank Act to raise the total asset threshold for mandatory applicability of enhanced prudential standards for bank holding companies to $250 billion and to allow the Federal Reserve Board to apply enhanced prudential standards to bank holding companies with between $100 billion and $250 billion in total assets to address financial stability risks or safety and soundness concerns. The Economic Growth Act's increased threshold took effect immediately for bank holding companies with total assets of less than $100 billion, including the Corporation.
The Economic Growth Act also enacted other important changes, for which the banking agencies issued certain corresponding proposed and interim final rules, including:
•Raising the total asset threshold for Dodd-Frank Act company-run stress tests from $10 billion to $250 billion;
•Prohibiting federal banking agencies from imposing higher capital requirements for High Volatility Commercial Real Estate ("HVCRE") exposures unless such exposures meet the statutory definition for high volatility acquisition, development or construction ("ADC") loans in the Economic Growth Act;
•Exempting from appraisal requirements certain transactions involving real property in rural areas and valued at less than $400,000;
•Providing that reciprocal deposits are not treated as brokered deposits in the case of a "well capitalized" institution that received an "outstanding" or "good" rating on its most recent examination to the extent the amount of such deposits does not exceed the lesser of $5 billion or 20% of the bank's total liabilities;
•Directing the CFPB to provide guidance on the applicability of the TILA-RESPA Integrated Disclosure rule to mortgage assumption transactions and construction-to-permanent home loans, as well the extent to which lenders can rely on model disclosures that do not reflect recent regulatory changes.
Given Fulton Bank's size, a number of additional benefits afforded to community banks under applicable asset thresholds are not available to Fulton Bank.
Consumer Financial Protection Laws and Enforcement - The CFPB and the federal banking agencies continue to focus attention on consumer protection laws and regulations. The CFPB is responsible for promoting fairness and transparency for mortgages, credit cards, deposit accounts and other consumer financial products and services and for interpreting and enforcing the federal consumer financial laws that govern the provision of such products and services. Federal consumer financial laws enforced by the CFPB include, but are not limited to, the Equal Credit Opportunity Act ("ECOA"), Truth in Lending Act ("TILA"), the Truth in Savings Act, Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act ("RESPA"), the Fair Debt Collection Practices Act, and the Fair Credit Reporting Act. The CFPB is also authorized to prevent any institution under its authority from engaging in an unfair, deceptive, or abusive act or practice in connection with consumer financial products and services. As a residential mortgage lender, the Corporation is subject to multiple federal consumer protection statutes and regulations, including, but not limited to, those referenced above.
In particular, fair lending laws prohibit discrimination in the provision of banking services. Fair lending laws include ECOA and the Fair Housing Act, which outlaw discrimination in credit and residential real estate transactions on the basis of prohibited factors including, among others, race, color, national origin, gender, and religion. A lender may be liable for policies that result in a disparate treatment of, or have a disparate impact on, a protected class of applicants or borrowers. If a pattern or practice of lending discrimination is alleged by a regulator, then that agency may refer the matter to the U.S. Department of Justice ("DOJ") for investigation. Failure to comply with these and similar statutes and regulations can result in the Corporation becoming subject to formal or informal enforcement actions, the imposition of civil money penalties and consumer litigation.
The CFPB has exclusive examination and primary enforcement authority with respect to compliance with federal consumer financial protection laws and regulations by institutions under its supervision and is authorized, individually or jointly with the federal banking agencies, to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations. The CFPB may bring an administrative enforcement proceeding or civil action in federal district court. In addition, in accordance with a memorandum of understanding entered into between the CFPB and the DOJ, the two agencies have agreed to coordinate efforts related to enforcing the fair lending laws, which includes information sharing and conducting joint investigations; however, the extent to which such coordination may actually occur is unpredictable and may change over
time as the result of a number of factors, including changes in leadership at the DOJ and CFPB, as well as changes in the enforcement policies and priorities of each agency. As an independent bureau funded by the Federal Reserve Board, the CFPB may impose requirements that are more stringent than those of the other bank regulatory agencies.
As an insured depository institution with total assets of more than $10 billion, Fulton Bank is subject to the CFPB's supervisory and enforcement authorities. The Dodd-Frank Act also permits states to adopt stricter consumer protection laws and state attorneys general to enforce consumer protection rules issued by the CFPB. As a result, Fulton Bank operates in a stringent consumer compliance environment.
Ability-to-pay rules and qualified mortgages - Under CFPB rules that implement TILA, mortgage lenders are required to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a residential mortgage loan has a reasonable ability to repay the loan according to its terms. These rules prohibit creditors, such as Fulton Bank, from extending residential mortgage loans without regard for the consumer's ability to repay and add restrictions and requirements to residential mortgage origination and servicing practices. In addition, these rules restrict the imposition of prepayment penalties and compensation practices relating to residential mortgage loan origination. Mortgage lenders are required to determine consumers' ability to repay in one of two ways. The first alternative requires the mortgage lender to consider eight underwriting factors when making the credit decision. The mortgage lender may also originate "qualified mortgages," which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a qualified mortgage ("QM") is a residential mortgage loan that does not have certain high-risk features, such as negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years. In addition, to be a QM loan, the points and fees paid by a consumer cannot exceed 3% of the total loan amount, and the borrower's total debt-to-income ratio must be no higher than 43% (subject to certain limited exceptions for loans eligible for purchase, guarantee or insurance by a government sponsored enterprise or a federal agency).
However, on December 10, 2020, the CFPB issued two final rules related to QM loans. The first rule replaces the strict debt-to-income (DTI) threshold for QM loans and provides that, in addition to existing requirements, a loan receives a conclusive presumption that the consumer had the ability to repay if the annual percentage rate ("APR") does not exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set. Further, a loan receives a rebuttable presumption that the consumer had the ability to repay if the APR exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points. The second rule creates a new category of "seasoned" QM loans for those that meet certain performance requirements. Specifically, the rule allows a non-QM loan or a "rebuttable presumption" QM loan to receive a safe harbor from APR liability at the end of a "seasoning" period of at least 36 months as a "seasoned QM" if it satisfies certain product restrictions, points-and-fees limits, and underwriting requirements, and the loan meets the designated performance and portfolio requirements during the "seasoning period." The first final rule has a mandatory compliance date of July 1, 2021, and the second final rule will apply to covered transactions for which institutions receive an application after the effective date.
Integrated disclosures under the Real Estate Settlement Procedures Act and the Truth in Lending Act - Under CFPB rules, mortgage lenders are required to provide a loan estimate, not later than the third business day after submission of a loan application, and a closing disclosure at least three days prior to the loan closing. The loan estimate must detail the terms of the loan, including, among other things, expenses, projected monthly mortgage payments and estimated closing costs. The closing disclosure must include, among other things, closing costs and a comparison of costs reported on the loan estimate to actual charges to be applied at closing.
Volcker Rule - Provisions of the Dodd-Frank Act, commonly known as the "Volcker Rule," prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds and other private funds that are, among other things, offered within specified exemptions to the Investment Company Act, known as "covered funds," subject to certain exemptions. In October 2019, the federal banking agencies, the Commodity Futures Trading Commission and the SEC (the "Volcker Rule Regulators") finalized amendments, effective on January 1, 2020, but with a required compliance date of January 1, 2021, to their regulations implementing the Volcker Rule, tailoring compliance requirements based on the size and scope of a banking entity's trading activities and clarifying and amending certain definitions, requirements and exemptions. On June 25, 2020, the five U.S. federal financial regulators issued a final rule that modifies the rule’s prohibition on banking entities investing in or sponsoring "covered funds." The new rule (1) streamlines the covered funds portion of the rule; (2) addresses the extraterritorial treatment of certain foreign funds; and (3) permits banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was intended to address. The Corporation's investing and trading activities have and will continue to depend on, among other things, further rulemaking and guidance from the Volcker Rule Regulators and the development of market practices and standards.
Capital Requirements - The Corporation and Fulton Bank are subject to risk-based requirements and rules issued by the federal banking agencies (the "Basel III Rules") that are based upon the final framework of the Basel Committee for strengthening
capital and liquidity regulation. Under the Basel III Rules, the Corporation and Fulton Bank apply the standardized approach in measuring their risk-weighted assets ("RWA") and regulatory capital.
Under the Basel III Rules, the Corporation and Fulton Bank are subject to the following minimum capital ratios:
•A minimum Common Equity Tier 1 ("CET1") capital ratio of 4.50% of RWA;
•A minimum Tier 1 capital ratio of 6.00% of RWA; and
•A minimum Total capital ratio of 8.00% of RWA.
The Basel III Rules also include a "capital conservation buffer" of 2.5%, composed entirely of CET1 capital, in addition to the minimum capital to RWA ratios outlined above, resulting in effective minimum CET1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a capital ratio above the minimum, but below the conservation buffer, will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall and the institution's "eligible retained income" (that is, four quarter trailing net income, net of distributions and tax effects not reflected in net income). If Fulton Bank fails to maintain the required minimum capital conservation buffer, the Corporation will be subject to limits, and possibly prohibitions, on its ability to obtain capital distributions from Fulton Bank. If the Corporation does not receive sufficient cash dividends from Fulton Bank, it may not have sufficient funds to pay dividends on its capital stock, service its debt obligations or repurchase its common stock. In addition, the restrictions on payments of discretionary cash bonuses to executive officers may make it more difficult for the Corporation to retain key personnel. As of December 31, 2020, the Corporation and Fulton Bank met the minimum capital requirements, including the capital conservation buffer, as prescribed in the Basel III Rules.
The Corporation and Fulton Bank are also required to maintain a minimum Tier 1 leverage ratio (Tier 1 capital to a quarterly average of non-risk weighted total assets) of 4%. The Corporation and Fulton Bank are not subject to the Basel III Rules' countercyclical buffer or the supplementary leverage ratio.
The Basel III Rules provide for a number of deductions from and adjustments to CET1. These include, for example, goodwill, other intangible assets, and DTAs that arise from net operating loss and tax credit carryforwards net of any related valuation allowance. MSRs, DTAs arising from temporary differences that could not be realized through net operating loss carrybacks and investments in non-consolidated financial institutions must also be deducted from CET1 to the extent that they exceed certain thresholds. In July 2019, the federal banking agencies adopted final rules intended to simplify the capital treatment for certain DTAs, MSRs, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Corporation and Fulton Bank, that are not subject to the advanced approaches framework (the "Capital Simplification Rules"). The Capital Simplification Rules were effective for the Corporation as of January 1, 2020.
The Corporation and Fulton Bank, as non-advanced approaches banking organizations, made a one-time, permanent election under the Basel III Rules to exclude the effects of certain components of AOCI included in shareholders' equity under U.S. GAAP in determining regulatory capital ratios.
Under the Basel III Rules, certain off-balance sheet commitments and obligations are converted into RWA, that together with on-balance sheet assets, are the base against which regulatory capital is measured. The Basel III Rule defined the risk-weighting categories for bank holding companies and banks that follow the standardized approach, such as the Corporation and Fulton Bank, based on a risk-sensitive analysis, depending on the nature of the exposure.
The Capital Simplifications Rules adopted in July 2019 eliminated the standalone prior approval requirement in the Basel III Capital Rules for any repurchase of common stock. In certain circumstances, the Corporation's repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations or policies of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.
In December 2017, the Basel Committee published the last version of the Basel III accord, generally referred to as "Basel IV." Among other things, these standards revise the Basel Committee's standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain "unconditionally cancellable commitments," such as unused credit card and home equity lines of credit) and provides a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Corporation or Fulton Bank. The impact of Basel IV on the Corporation and Fulton Bank will depend on the manner in which it is implemented by the federal banking agencies.
As noted above, the federal banking agencies have implemented the provisions of the Economic Growth Act that provide certain capital relief pursuant a new and narrower definition of HVCRE exposures that are subject to a heightened risk weight.
Stress Testing and Capital Planning - As a result of the Economic Growth Act and implementing regulations adopted by the Federal Reserve Board and OCC, the Corporation and Fulton Bank are no longer subject to company-run stress testing requirements under the Dodd-Frank Act. The Federal Reserve Board continues to supervise the Corporation's capital planning and risk management practices through the regular supervisory process.
Current Expected Credit Losses Transitional Provisions - In June 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standard update, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the existing "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the Current Expected Credit Loss ("CECL") model. Under the CECL model, the Corporation is required to present certain financial assets carried at amortized cost, such as loans held for investment and HTM debt securities, at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In December 2018, the federal banking agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of the CECL model. The final rule also revises the agencies' other rules to reflect the update to the accounting standards. The new CECL standard became effective for the Corporation on January 1, 2020. On August 26, 2020, the federal bank regulatory agencies issued a rule that allows institutions that adopted the CECL accounting standard in 2020 the option to mitigate the estimated capital effects of CECL for two years, followed by a three-year transition period. Taken together, these measures offer institutions a transition period of up to five years. The Corporation has elected to avail itself of the 2020 Capital Transition Relief as permitted under applicable regulations. On May 8, 2020, four federal banking agencies issued an interagency policy statement on the new CECL methodology. The policy statement harmonizes the agencies' policies on ACL with the FASB's new accounting standards. Specifically, the statement (1) updates concepts and practices from prior policy statements issued in December 2006 and July 2001 and specifies which prior guidance documents are no longer relevant; (2) describes the appropriate CECL methodology, in light of Topic 326, for determining ACLs on financial assets measured at amortized cost, net investments in leases, and certain OBS credit exposures; and (3) describes how to estimate an ACL for an impaired AFS debt security in line with Topic 326. The proposed policy statement is effective at the time that each institution adopts the new standards required by the FASB. See "Note 1 - Summary of Significant Accounting Policies - Recently Issued Accounting Standards" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional information on CECL and its impact on the Corporation's ACL and regulatory capital.
Prompt Corrective Action - The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") established a system of prompt corrective action to attempt to resolve the problems of undercapitalized institutions. The FDICIA, among other things, establishes five capital categories for FDIC-insured banks: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." An insured depository institution is treated as well capitalized if its total risk-based capital ratio is 10.00% or greater, its Tier 1 risk-based capital ratio is 8.00% or greater, its CET1 risk-based capital ratio is 6.50% or greater and its Tier 1 leverage capital ratio is 5.00% or greater, and it is not subject to any order or directive to meet a specific capital level. As of December 31, 2020, Fulton Bank's capital ratios were above the minimum levels required to be considered "well capitalized" by the OCC.
Under this system, the federal banking agencies are required to take certain, and authorized to take other, prompt corrective actions against undercapitalized institutions, the severity of which increase as the capital category of an institution declines, including restrictions on growth of assets and other forms of expansion. Generally, a capital restoration plan must be filed with the institution's primary federal regulator within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Although prompt corrective action regulations apply only to depository institutions and not to bank holding companies, the holding company must guarantee any such capital restoration plan in certain circumstances. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank's assets at the time it became "undercapitalized" or the amount needed to comply. The parent holding company might also be liable for civil money damages for failure to fulfill that guarantee. In the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors.
In addition, regulators consider both risk-based capital ratios and other factors that can affect a bank's financial condition, including (i) concentrations of credit risk, (ii) interest rate risk, and (iii) risks from non-traditional activities, along with an institution's ability to manage those risks, when determining capital adequacy. This evaluation is made during the institution's safety and soundness examination. An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
Brokered Deposits - The FDICIA and FDIC regulations limit the ability of an insured depository institution, such as Fulton Bank, to accept, renew or roll over brokered deposits unless the institution is well-capitalized under the prompt corrective action framework described above, or unless it is adequately capitalized and obtains a waiver from the FDIC. In addition, less than well-capitalized banks are subject to restrictions on the interest rates they may pay on deposits. On December 15, 2020, the
FDIC issued a final rule that aims to bring brokered deposits regulations in line with modern deposit taking methods and that may reduce the amount of deposits that would be classified as brokered. Specifically, the rule (1) establishes bright-line standards for determining whether an entity meets the statutory definition of "deposit broker"; (2) identifies a number of business relationships ("designated exceptions") to which the "primary purpose" exception (which exempts an agent or nominee whose "primary purpose" is not the placement of funds with insured depository institutions ("IDI"s)) is automatically applicable; (3) establishes a "transparent" application process for entities that seek a "primary purpose" exception, but do not qualify as a "designated exception"; and (4) clarifies that third parties that have an exclusive deposit-placement arrangement with one IDI is not considered a "deposit broker."
Loans and Dividends from Bank Subsidiary - There are various restrictions on the extent to which Fulton Bank can make loans and other extensions of credit (including credit exposure arising from repurchase and reverse repurchase agreements, securities borrowing and derivative transactions) to, or enter into certain transactions with, its affiliates, which include the Corporation and its non-bank subsidiaries. In general, these restrictions require that such transactions: are limited, as to any one of the Corporation or its non-bank subsidiaries, to 10% of Fulton Bank's regulatory capital (20% in the aggregate to all such entities); satisfy certain qualitative limitations, including that any covered transaction be made on an arm's length basis; and, in the case of extensions of credit, be secured by designated amounts of specified collateral.
For safety and soundness reasons, banking regulations also limit the amount of cash that can be transferred from Fulton Bank to the Parent Company in the form of dividends. Generally, dividends are limited to the lesser of the amounts calculated under an earnings retention test and an undivided profits test. Under the earnings retention test, without the prior approval of the OCC, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year's net income combined with the retained net income of the two preceding years. Under the undivided profits test, a dividend may not be paid in excess of a bank's undivided profits. In addition, banks are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. See "Note 11 - Regulatory Matters," in the Notes to Consolidated Financial Statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding regulatory capital and dividend and loan limitations.
Federal Deposit Insurance - The deposits of Fulton Bank are insured up to the applicable limits by the DIF, generally up to $250,000 per insured depositor. Fulton Bank pays deposit insurance premiums based on assessment rates established by the FDIC. The FDIC has established a risk-based assessment system under which institutions are classified and pay premiums according to their perceived risk to the DIF. In addition, the FDIC possesses backup enforcement authority over a depository institution holding company, such as the Corporation, if the conduct or threatened conduct of such holding company poses a risk to the DIF, although such authority may not be used if the holding company is generally in sound condition and does not pose a foreseeable and material risk to the DIF.
FDIC assessment rates for large institutions that have more than $10 billion in assets, such as Fulton Bank, are calculated based on a "scorecard" methodology that seeks to capture both the probability that an individual large institution will fail and the magnitude of the impact on the DIF if such a failure occurs, based primarily on the difference between the institution's average of total assets and average tangible equity. The FDIC has the ability to make discretionary adjustments to the total score, up or down, based upon significant risk factors that are not adequately captured in the scorecard. For large institutions, including Fulton Bank, after accounting for potential base-rate adjustments, the total assessment rate could range from 1.5 to 40 basis points on an annualized basis. An institution's assessment is determined by multiplying its assessment rate by its assessment base, which is asset based.
The Tax Cuts and Jobs Act of 2017 (the "Tax Act"), which was signed into law on December 22, 2017, disallows the deduction of FDIC deposit insurance premium payments for banking organizations with total consolidated assets of $50 billion or more. For banks with less than $50 billion in total consolidated assets, such as Fulton Bank, the premium deduction is phased out based on the proportion of the bank's assets exceeding $10 billion.
Anti-Money Laundering Requirements and the USA Patriot Act - The USA PATRIOT Act of 2001 ("Patriot Act"), which amended the Bank Secrecy Act of 1970 ("BSA"), and other anti-money laundering ("AML") laws and regulations impose affirmative obligations on a wide range of financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.
Among other requirements, the Patriot Act and related regulations impose the following requirements on financial institutions:
•Establishment of AML programs;
•Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time;
•Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering; and
•Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks.
Failure to comply with the requirements of the Patriot Act and other AML laws and regulations could have serious legal, financial, regulatory and reputational consequences. In addition, bank regulators will consider a holding company's effectiveness in combating money laundering when ruling on BHCA and Bank Merger Act applications. In addition, financial institutions are subject to customer due diligence requirements, issued by the Financial Crimes Enforcement Network, to identify and verify the identity of natural persons, known as beneficial owners, who own, control, and profit from legal entity customers when those customers open accounts. The Corporation has adopted policies, procedures and controls to address compliance with the Patriot Act and other AML laws and regulations, and will continue to revise and update its policies, procedures and controls to reflect required changes. See Item 1A. "Risk Factors - Legal, Compliance and Reputational Risks - Failure to comply with the BSA, the Patriot Act and related AML requirements, or with sanctions laws, could subject the Corporation to enforcement actions, fines, penalties, sanctions and other remedial actions."
On January 1, 2021, the National Defense Authorization Act ("NDAA") was signed into law, which enacted the most significant overhaul of the BSA and other AML-related laws since the Patriot Act. Notable aspects of the NDAA include: (1) significant changes to the collection of beneficial ownership and the establishment of a beneficial ownership registry, which requires corporate entities (generally, any corporation, LLC, or other similar entity with 20 or fewer employees and annual gross income of $5 million or less) to report beneficial ownership information to FinCEN (which will be maintained by FinCEN and made available upon request to financial institutions); (2) enhanced whistleblower provisions, which provide that one or more whistleblowers who voluntarily provide original information leading to the successful enforcement of violations of the BSA or other AML-related laws in any judicial or administrative action brought by the Secretary of the Treasury or the Attorney General resulting in monetary sanctions exceeding $1 million (including disgorgement and interest but excluding forfeiture, restitution, or compensation to victims) will receive not more than 30 percent of the monetary sanctions collected and will receive increased protections; (3) increased penalties for violations of the BSA; (4) improvements to existing information sharing provisions that permit financial institutions to share information relating to SARs with foreign branches, subsidiaries, and affiliates (except those located in China, Russia, or certain other jurisdictions) for the purpose of combating illicit finance risks; and (5) expanded duties and powers of FinCEN. Many of the new provisions, including those with respect to beneficial ownership, require the Department of Treasury and FinCEN to promulgate rules.
Commercial Real Estate Guidance - Under guidance issued by the federal banking agencies, the agencies have expressed concerns with institutions that ease commercial real estate underwriting standards, and have directed financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks. The agencies have also issued guidance that requires a financial institution to employ enhanced risk management practices if the institution is exposed to significant concentration risk. Under that guidance, an institution is potentially exposed to significant concentration risk if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development, and other land loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital, and the outstanding balance of the institution's commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.
Community Reinvestment - Under the Community Reinvestment Act of 1977 ("CRA"), Fulton Bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to ascertain and meet the credit needs of its entire community, including low- and moderate-income areas. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires an institution's primary federal regulator, in connection with its examination of the institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The assessment focuses on three tests: (1) a lending test, to evaluate the institution's record of making loans, including community development loans, in its designated assessment areas; (2) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and areas and small businesses; and (3) a service test, to evaluate the institution's delivery of banking services throughout its CRA assessment area, including low- and moderate-income areas. The CRA also requires all institutions to make public disclosure of their CRA ratings. As of December 31, 2020, Fulton Bank was rated as "satisfactory." Regulations require that Fulton Bank publicly disclose certain agreements that are in fulfillment of CRA. Fulton Bank is not a party to any such agreements at this time.
On June 5, 2020, the OCC issued a final rule in an attempt to modernize the agency’s regulations under the CRA. The rule (i) clarifies which activities qualify for CRA credit and (2) requires banks to identify an additional assessment area based on where they receive a significant portion of their domestic retail products, thus creating two assessments areas: a deposit-based assessment area and a facility-based assessment area. Also, on November 24, 2020, the OCC issued a proposed rule to establish
the agency’s approach to determine the CRA evaluation measure benchmarks, retail lending distribution test thresholds, and community development minimums under the general performance standards set forth in the June 2020 final rule.
Standards for Safety and Soundness - Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994 ("Riegle-Neal Act"), the federal bank regulatory agencies adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. In addition, the agencies have adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If the institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the regulator must issue an order directing corrective actions and may issue an order directing other actions of the types to which a significantly undercapitalized institution is subject under the "prompt corrective action" provisions of FDICIA. If the institution fails to comply with such an order, the regulator may seek to enforce such order in judicial proceedings and to impose civil money penalties.
The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. The federal banking agencies have issued guidance that provides that, to be consistent with safety and soundness principles, a banking organization's incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance, including active and effective oversight by the banking organization's board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.
During the second quarter of 2016, as required by the Dodd-Frank Act, the federal bank regulatory agencies and the SEC proposed revised rules on incentive-based compensation arrangements at specified regulated entities having at least $1 billion in total assets (including the Corporation and Fulton Bank), but these proposed rules have not been finalized.
Fulton Bank is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the GLB Act. The guidelines describe the federal bank regulatory agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services.
Certain states have enacted laws establishing consumer privacy protections and data security requirements in their respective states. For example, the California Consumer Privacy Act ("CCPA") gives California residents new rights to receive certain disclosures regarding the collection, use, and sharing of "Personal Information," as well as rights to access, delete, and restrict the sale of certain personal information collected about them. The CCPA went into effect on January 1, 2020, and Fulton Bank is required to comply with the CCPA in serving the small number of its customers that are residents of California. Privacy and data security legislation remained a priority issue in 2020. Attempts by state and local governments to regulate consumer privacy have the potential to create a patchwork of differing and/or conflicting state regulations. In addition, Congress and federal regulatory agencies are considering similar laws or regulations, which could create new individual privacy rights and impose increased obligations on companies handling personal data. For example, on December 18, 2020, the federal financial regulatory agencies announced a proposal that would require supervised banking organizations to promptly notify their primary federal regulator in the event of a computer security incident. If adopted without substantial change, the proposed rule would require banking organizations to notify their primary federal regulator promptly (not later than 36 hours after the discovery of such incidents) of such incidents, termed "computer-security incidents" that are "notification incidents."
Federal Reserve System - Federal Reserve Board regulations require depository institutions to maintain cash reserves against specified deposit liabilities. The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to an institution's reservable liabilities (primarily net transaction accounts such as NOW and demand deposit accounts). A reserve of 3% must be maintained against aggregate transaction account balances of between $16.9 million and $127.5 million (subject to adjustment by the Federal Reserve Board) plus a reserve of 10% (subject to adjustment by the Federal Reserve Board within a range of between 8% and 14%) against that portion of total transaction account balances in excess of $127.5 million. The first $16.9 million of otherwise reservable balances (subject to adjustment by the Federal Reserve Board) are exempt from the reserve requirements. Fulton Bank is in compliance with the foregoing requirements.
Required reserves must be maintained in the form of either vault cash, an account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board. Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal Reserve Banks pay interest on depository institutions' required and excess reserve balances. The interest rate paid on required reserve balances is currently the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest target federal funds rate in effect during the reserve maintenance period.
However, on December 22, 2020, the Federal Reserve Board issued a final rule that amends Regulation D by lowering the reserve requirement ratios on transaction accounts maintained at depository institutions to 0%. It is currently unclear whether the reduction of the reserve requirements on transaction accounts is permanent and any potential impact of such on the Bank’s lending activities is also unclear.
Acquisitions - The BHCA requires a bank holding company to obtain the prior approval of the Federal Reserve Board before:
•the company may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition the bank holding company will directly or indirectly own or control more than five percent of any class of voting securities of the institution;
•the company may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition the bank holding company will directly or indirectly own or control more than five percent of any class of voting securities of the institution;
•the company may merge or consolidate with any other bank or financial holding company.
Prior regulatory approval is also generally required for mergers, acquisitions and consolidations involving other insured depository institutions. In reviewing acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect of the transaction, financial and managerial issues, including the capital position of the combined organization, convenience and needs factors, including the applicant's CRA record, the effectiveness of the subject organizations in combating money laundering activities, and the transaction's effect on the stability of the U.S. banking or financial system.
The Change in Bank Control Act prohibits a person, entity or group of persons or entities acting in concert, from acquiring "control" of a bank holding company or bank unless the Federal Reserve Board has been given prior notice and has not objected to the transaction. Under Federal Reserve Board regulations, the acquisition of 10% or more (but less than 25%) of the voting stock of a corporation would, under the circumstances set forth in the regulations, create a rebuttable presumption of acquisition of control of the corporation.
On January 30, 2020, the Federal Reserve finalized a rule that simplifies and increases the transparency of its rules for determining when one company controls another company for purposes of the BHC Act. The rule’s original effective date, April 1, 2020, was delayed on March 31, 2020, and became effective September 30, 2020. The rule has and will likely continue to have a meaningful impact on control determinations related to investments in banks and bank holding companies and investments by bank holding companies in nonbank companies.
Permissible Activities - As a bank holding company, the Corporation may engage in the business of banking, managing or controlling banks, performing servicing activities for subsidiaries, and engaging in activities that the Federal Reserve Board has determined, by order or regulation, are so closely related to banking as to be a proper incident thereto. As a financial holding company, the Corporation may also may engage in or acquire and retain the shares of a company engaged in activities that are financial in nature or incidental or complementary to activities that are financial in nature as long as the Corporation continues to meet the eligibility requirements for financial holding companies, including that the Corporation and each of its U.S. depository institution subsidiaries remain "well-capitalized" and "well-managed."
A depository institution is considered "well-capitalized" if it satisfies the requirements of the Prompt Corrective Action framework described above. A depository institution is considered "well-managed" if it received a composite rating and management rating of at least "satisfactory" in its most recent examination. If a financial holding company ceases to be well-
capitalized and well-managed, the financial holding company must enter into a non-public confidential agreement with the Federal Reserve Board to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the Federal Reserve Board may impose limitations or conditions on the conduct of its activities, and the company may not commence any new non-banking financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve Board. If the company does not timely return to compliance, the Federal Reserve Board may require divestiture of the financial holding company's banking subsidiaries. Bank holding companies and banks must also be well-capitalized and well-managed in order to acquire banks located outside their home state. A financial holding company will also be limited in its ability to commence non-banking financial activities or acquire a company engaged in such financial activities if any of its insured depository institution subsidiaries fails to maintain a "satisfactory" rating under the CRA.
Activities that are "financial in nature" include securities underwriting, dealing and market making, advising mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature or incidental to such financial activity.
"Complementary activities" are activities that the Federal Reserve Board determines upon application to be complementary to a financial activity and that do not pose a safety and soundness issue.
Enforcement Powers of Federal Banking Regulators - The Federal Reserve Board and other U.S. banking agencies have broad enforcement powers with respect to an insured depository institution and its holding company, including the power to (i) impose cease and desist orders, substantial fines and other civil penalties, (ii) terminate deposit insurance, and (iii) appoint a conservator or receiver. Failure to comply with applicable laws or regulations could subject the Corporation or Fulton Bank, as well as their officers and directors, to administrative sanctions and potentially substantial civil and criminal penalties.
In addition, under the BHCA, the Federal Reserve Board has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company.
Federal Securities Laws - The Corporation is subject to the periodic reporting, proxy solicitation, tender offer, insider trading, corporate governance and other requirements under the Securities Exchange Act of 1934. Among other things, the federal securities laws require management to issue a report on the effectiveness of its internal controls over financial reporting. In addition, the Corporation's independent registered public accountants are required to issue an opinion on the effectiveness of the Corporation's internal control over financial reporting. These reports can be found in Part II, Item 8, "Financial Statements and Supplementary Data." Certifications of the Chief Executive Officer and the Chief Financial Officer as required by the Sarbanes-Oxley Act of 2002 and the resulting SEC rules can be found in the "Signatures" and "Exhibits" sections.
The Corporation’s workforce at December 31, 2020 consisted of approximately 3,300 full-time equivalent employees, compared to approximately 3,500 full-time equivalent employees at December 31, 2019. While workforce numbers can be fluid over time and employee attrition is a function of many variables, a significant portion of the workforce decline at December 31, 2020 compared to December 31, 2019 was attributable to a publicly announced (see the Corporation’s Current Report on Form 8-K filed on October 20, 2020), company-wide strategic operating expense review, which was prompted by the prolonged and continuing effects of COVID-19 and the expectation that interest rates could remain very low for the next several years, as well as recognition of the need for the Corporation to accelerate the timetable for certain technology and digital investments that were in progress. The announced optimization of Fulton Bank’s network of financial centers and closing of 21 financial center offices was also part of that strategic expense review.
Employee Engagement and Retention
The Corporation places a premium on having a highly engaged workforce because engaged employees tend to perform at a higher level, support the Corporation’s success, and are more likely to remain with the organization. The Corporation conducts an annual survey of its workforce to measure employee engagement, assess employee morale and help to identify areas of the employee experience that could be improved. The Corporation then tasks its leaders to develop and implement communication and action plans aimed at engaging with their respective teams to gain a better understanding of the results of the assessment, and to foster enhanced future engagement.
Leaders at the Corporation are held accountable for employee engagement scores for the teams they lead, as each leader’s engagement score is included in their annual performance review. Additionally, aggregated employee engagement assessment results are reported to the Corporation’s Board of Directors, as a key indicator to the health and well-being of the workforce.
Culture, Diversity and Inclusion
The Corporation believes that building relationships matters. This belief includes relationships with clients and customers and relationships among employees. In recent years, the Corporation has placed significant emphasis on developing its corporate culture, and now considers its culture to be one of the components of its continuing success. The Corporation’s culture-shaping program, The Fulton Experience, is a highly engaging program that is intended to spark new ways of thinking about employees’ individual roles, how employees collaborate, and how employees and the Corporation grow together as an organization. The Corporation believes that it succeeds as a company because it values the teamwork of its employees and fosters a culture around that belief. More recently, the Corporation has been applying that same emphasis to the development of a diverse and inclusive workforce. The Corporation recognizes that having a diverse and inclusive culture and workforce, that encourages employees to share their opinions and different perspectives, and fosters a culture of respect, are also crucial elements of a successful organization. In 2020, the Corporation launched a significant effort to enhance and accelerate diversity and inclusion in its workforce by implementing a number of initiatives aimed at improving its ability to attract and retain diverse candidates so that, over time, the Corporation can increase the diversity of its workforce to reflect the makeup of the communities it serves.
Compensation and Rewards
The Corporation invests in its workforce by offering competitive salaries, incentives and benefits that are part of the Corporation’s pay for performance culture. This is implemented through a number of incentive programs that are tailored to drive performance in the business units, as well as at the corporate level.
Workforce Recruitment and Development
The Corporation recruits its workforce, filling both vacant and new positions, largely through the posting for such positions on its own website, on social media platforms and through talent recruiting efforts by internal recruiters. The Corporation provides for professional development of new and existing employees largely through the efforts of its Center for Learning and Talent Development, which develops and administers a wide variety of training programs for employee professional development. The Corporation also provides for a number of off-site, third-party offerings in which employees can further enhance their skills, knowledge and leadership potential. One such example, afforded to employees with future leadership potential, is through the Corporation’s participation in the Stonier School of Banking sponsored by the American Bankers Association.
During 2020, the Corporation also needed to navigate the ever-changing COVID-19 environment. From the start of the COVID-19 pandemic, the Corporation has been committed to supporting its customers and communities. In response to the COVID-19 pandemic, and related governmental guidance, the Corporation implemented changes to its operations necessary to continue to serve the communities in which it operates, while also striving to provide the necessary protections for its employees. These changes included having the majority of the Corporation’s employees work from home for a continuing and indefinite period of time, while implementing additional safety measures and protocols for employees continuing critical on-site work.
The safety, health and wellness of the Corporation’s employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining workforce safety while continuing successful operations, particularly at financial center locations where employees routinely interact with the public.
The executive officers of the Corporation are as follows:
|Office Held and Term of Office|
E. Philip Wenger
|63||Director of the Corporation since 2009 and Director of Fulton Bank, N.A since 2019. Chairman of the Board and Chief Executive Officer of the Corporation since January 2013. Mr. Wenger previously served as President of the Corporation from 2008 to 2017, Chief Operating Officer of the Corporation from 2008 to 2012, a Director of Fulton Bank, N.A. from 2003 to 2009, Chairman of Fulton Bank, N.A. from 2006 to 2009 and has been employed by the Corporation in a number of positions since 1979.|
Mark R. McCollom
Senior Executive Vice President and Chief Financial Officer of the Corporation since March of 2018. Mr. McCollom joined the Corporation in November 2017 as Senior Executive Vice President and Chief Financial Officer Designee. Before joining the corporation he was a Senior Managing Director, Chief Administrative Officer and COO of Griffin Financial Group, LLC. Prior to his role at Griffin Financial Group, Mr. McCollom was the Chief Financial Officer of Sovereign Bancorp, Inc. He has over 30 years of experience in the financial services industry.
Curtis J. Myers
|52||Director of the Corporation since 2019 and Director of Fulton Bank, N.A. since 2009. President and Chief Operating Officer of the Corporation since January 1, 2018. Chairman and Chief Executive Officer of Fulton Bank, N.A. since May 2018. Mr. Myers served as Senior Executive Vice President of the Corporation from July 2013 to December 2017. President and Chief Operating Officer of Fulton Bank, N.A. since February 2009. He served as Executive Vice President of the Corporation since August 2011. Mr. Myers has been employed by Fulton Bank, N.A. in a number of positions since 1990.|
David M. Campbell
|59||Senior Executive Vice President, and Director of Strategic Initiatives and Operations since December 2014. Mr. Campbell joined the Corporation as Chief Administrative Officer of Fulton Financial Advisors, a division of Fulton Bank, N.A. in 2009, and was promoted to President of Fulton Financial Advisors in 2010. He has more than 30 years of experience in financial services.|
Beth Ann L. Chivinski
Senior Executive Vice President and Chief Risk Officer of the Corporation effective June 1, 2016. Previously, she served as the Corporation’s Chief Audit Executive April 2013 to June 2016 and was promoted to Senior Executive Vice President of the Corporation in 2014. Prior to that, she served as the Corporation’s Executive Vice President, Controller and Chief Accounting Officer from June 2004 to March 31, 2013. Ms. Chivinski has worked in various positions with the Corporation since 1994.
|Office Held and Term of Office|
Meg R. Mueller
Senior Executive Vice President and Head of Commercial Business since January 1, 2018. Ms. Mueller served as Chief Credit Officer of the Corporation from 2010 - 2017 and was promoted to Senior Executive Vice President of the Corporation in 2013. Ms. Mueller has been employed by the Corporation in a number of positions since 1996.
Angela M. Sargent
|53||Senior Executive Vice President and Chief Information Officer of the Corporation since July 2013. Ms. Sargent served as Executive Vice President and Chief Information Officer from 2002 to 2013 and has been employed by the Corporation in a number of positions since 1992.|
Angela M. Snyder
|56||Senior Executive Vice President and Head of Consumer Banking since January 1, 2018. She heads the Corporation's Consumer Banking line of business. Ms. Snyder joined the Corporation in 2002 as President of Woodstown National Bank she then served as Chairwoman, President and CEO of Fulton Bank of New Jersey until 2019, when the Corporation consolidated that bank into Fulton Bank, N.A. She has more than 30 years of experience in the financial services industry.|
Daniel R. Stolzer
|64||Senior Executive Vice President, Chief Legal Officer and Corporate Secretary since January 1, 2018. Mr. Stolzer joined the Corporation in 2013 as Executive Vice President, General Counsel and Corporate Secretary. Prior to joining the Corporation, Mr. Stolzer served as Chief Counsel - Special Projects at PNC Financial Services Group in Pittsburgh, PA and Deputy General Counsel at KeyCorp in Cleveland, OH. He has more than 30 years of experience working in financial services law beginning with work at several law firms, including Cadwalader, Wickersham & Taft in New York City where he was a member of the Corporate Securities and Capital Markets practice groups.|
Bernadette M. Taylor
|59||Senior Executive Vice President, and Chief Human Resource Officer since May 2015. In 2001, she was promoted to Senior Vice President of employee services. She served as Executive Vice President of employee services, employment, and director of human resources before her promotion in 2015 to Chief Human Resources Officer. Dr. Taylor joined the Corporation in 1994 as Corporate Training Director at Fulton Financial Corporation.|
(1) As of December 31, 2020
Item 1A. Risk Factors
An investment in the Corporation's securities involves certain risks, including, among others, the risks described below. In addition to the other information contained in this report, you should carefully consider the following risk factors.
ECONOMIC AND CREDIT RISKS.
Difficult conditions in the economy and the financial markets may materially adversely affect the Corporation's business, results of operations and financial condition.
The Corporation's results of operations and financial condition are affected by conditions in the economy and the financial markets generally. The Corporation's financial performance is highly dependent upon the business environment in the markets where the Corporation operates and in the United States as a whole. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, business activity or investor or business confidence; limitations on the availability, or increases in the cost, of credit and capital; changes in the rate of inflation or in interest rates; high unemployment; governmental fiscal and monetary policies; the level of, or changes in, prices of raw materials, goods or commodities; global economic conditions; trade policies and tariffs affecting other countries as well as retaliatory policies and tariffs by such countries; geopolitical events; natural disasters; public health crises, such as epidemics and pandemics; acts of war or terrorism; or a combination of these or other factors.
Specifically, the business environment impacts the ability of borrowers to pay interest on, and repay principal of, outstanding loans and the value of collateral, if any, securing those loans, as well as demand for loans and other products and services the Corporation offers. There continues to be significant ongoing financial risk facing the U.S. economy, which could negatively impact the quality of the Corporation's loan portfolio. As a result, the Corporation may have to increase its provision for credit losses, which would negatively impact its results of operations, and could result in charge-offs of a higher percentage of its loans. Unlike large, national institutions, the Corporation is not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies and geographic locations. If the communities in which the Corporation operates do not grow, or if prevailing economic conditions locally or nationally are unfavorable, its business could be adversely affected. In addition, increased market competition in a lower demand environment could adversely affect the profit potential of the Corporation.
The COVID-19 pandemic has adversely affected, and will likely continue to adversely affect, the Corporation’s business, results of operations and financial condition for an indefinite period.
Beginning in the first quarter of 2020, the COVID-19 pandemic has caused substantial disruptions in economic and social activity, both globally and in the United States. The spread of COVID-19, and related governmental actions to mandate or encourage temporary closures of businesses, quarantines, social distancing, "stay at home" orders and other restrictions on in-person operations and activities, have caused severe disruptions in the U.S. economy, which has, in turn, disrupted, and will likely continue to disrupt, the business, activities, and operations of the Corporation’s customers, as well as the Corporation’s own business and operations. The resulting impacts of the pandemic on consumers, including high levels of unemployment, have continued to cause changes in consumer and business spending, borrowing needs and saving habits, which have and will likely continue to affect the demand for loans and other products and services the Corporation offers, as well as the creditworthiness of its borrowers and guarantors. The significant decrease in commercial activity and disruptions in supply chains associated with the pandemic, both nationally and in the Corporation’s markets, may cause customers, vendors and counterparties to be unable to meet existing payment or other obligations to the Corporation. While portions of the national economy have reopened, there is still significant uncertainty concerning the breadth and duration of business disruptions related to the COVID-19 pandemic, as well as their impact on the U.S. economy. The extent to which the pandemic impacts the Corporation’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the continuing severity of the COVID-19 pandemic, whether there are additional outbreaks of COVID-19, and the actions taken to contain it or treat its impact. Moreover, although multiple COVID-19 vaccines have received regulatory approval and are currently being distributed to certain high-risk population groups, it is too early to know how quickly these vaccines can be distributed to the general population and how effective they will be in mitigating the adverse social and economic effects of the COVID-19 pandemic. If the pandemic continues to cause significant negative impacts to economic conditions, the Corporation’s results of operations, financial condition and cash flows could be materially adversely impacted.
The Corporation’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. In an effort to mitigate the spread of COVID-19, the Corporation has adjusted service models at certain of its financial center locations, including limiting some locations to drive-up and ATM services only, offering lobby access by appointment only, and encouraging the Corporation’s customers to use electronic banking platforms. The Corporation expects some of these measures may remain in place permanently. The increased use of electronic banking platforms by the
Corporation’s customers may expose the Corporation to increased operational risks, including fraud and cybersecurity risks. In addition, the use of quarantines and social distancing methods to curtail the spread of COVID-19 – whether mandated by governmental authorities or recommended as a public health practice – may adversely affect the Corporation’s operations as key personnel, employees and customers avoid physical interaction. A significant portion of the Corporation’s employees has transitioned to working remotely as a result of the COVID-19 pandemic, which, in addition to requiring added support from the Corporation’s information technology infrastructure, increases cybersecurity risks. The continued spread of COVID-19 (or an outbreak of a similar highly contagious disease) could also negatively impact the business and operations of third-party service providers who perform critical services for the Corporation’s business. It is not yet known what impact these operational changes may have on the Corporation’s financial performance.
There continues to be broad concerns related to the potential effects of the COVID-19 pandemic. The aftereffects of the pandemic may continue to have an adverse effect on, among other things, (i) the Corporation’s ability to attract customer deposits, (ii) the ability of the Corporation’s borrowers to satisfy their obligations, (iii) the demand for the Corporation’s loans or the Corporation’s other products and services and/or (iv) unemployment rates, financial markets, real estate markets or economic growth. Further, the timing and ability of the Corporation’s customers’ businesses to re-open and ramp up to prior levels of activity will vary, depending upon geography, industry and other factors.
The outbreak of COVID-19 has significantly affected the financial markets and has resulted in a number of responses by the U.S. government, including reductions in interest rates by the FOMC. These reductions in interest rates, especially if prolonged, could adversely affect the Corporation’s net interest income and margins and the Corporation’s profitability for an uncertain period of time.
The COVID-19 pandemic and its impact on the economy heightens the risk associated with many of the risk factors described in this Annual Report on Form 10-K, including those related to economic conditions in the Corporation’s market areas, interest rates, loan losses, operational risks, the Corporation’s reliance on its executives and third party service providers and impairments of goodwill and intangible assets.
Governmental and regulatory actions to mitigate the impact of COVID-19 could increase regulatory compliance risks and result in a material decline in the Corporation’s earnings.
There have been several regulatory and legislative actions intended to help mitigate the adverse economic impact of COVID-19 on individuals, including mandates requiring financial institutions to work constructively with borrowers affected by COVID-19 and mandatory loan forbearances. Due to the unforeseen nature of the pandemic, future regulatory action is highly uncertain and cannot be predicted. Although the state-wide eviction and foreclosure moratoriums have expired in some of the states we do business, there are federal prohibitions. Further, there have been several other bank regulatory actions and legislative changes intended to help mitigate the adverse impact of COVID-19. There continues to be mounting pressure on federal and state officials to take further action. In addition, the Corporation’s administration of COVID-19 relief programs is likely to be subject to greater regulatory scrutiny. For example, the newly appointed Acting Director of the CFPB recently expressed concerns regarding some regulated companies’ administration of COVID-19 relief programs and communicated the CFPB’s intent to take aggressive action and expedite enforcement actions to ensure that regulated companies follow the law and meet their obligations to assist consumers during the COVID-19 pandemic.
The Corporation has offered, and may continue to offer, payment deferrals, forbearances, fee waivers, and other forms of assistance to commercial, small business and consumer customers that have been impacted by the COVID-19 pandemic. If these customers are unable to repay their loans in a timely manner when payment deferrals, forbearances or other forms of assistance end, delinquency levels may increase, the Corporation may be required to reverse the accrual of interest during the deferral or forbearance period, and the Corporation may need to increase its ACL through provisions for credit losses. In addition, the existence of deferrals, forbearances and other forms of assistance provided to borrowers impacted by the COVID-19 pandemic may not be considered TDRs or be required to be reflected as delinquent during the applicable deferral or forbearance period, and may make it more challenging to identify deterioration in individual borrower performance and in the loan portfolio generally. See Item 1. "Business-Supervision and Regulation-Governmental and Regulatory Actions to Mitigate the Impact of the COVID-19 Pandemic."
The Corporation originated a significant number of loans under the SBA’s Paycheck Protection Program, which may expose the Corporation to potential risks and may result in a large number of such loans remaining on the Corporation’s consolidated balance sheets.
The Corporation is a participating lender under the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operating costs during the COVID-19 pandemic. There are areas of ambiguity in the laws, regulations and guidance relating to the operation of the PPP, which exposes the Corporation to potential risks relating to non-compliance with the requirements of the PPP. For example, other lenders have been named in
litigation related to their processes and procedures for accepting and processing applications for PPP loans and other matters related to PPP loans. In addition, the Corporation may be exposed to credit risk in connection with PPP loans if a determination is made by the SBA that a deficiency exists in the manner in which the PPP loan was originated, funded or serviced. If a deficiency is identified, the SBA may deny or limit its liability under its guaranty, or seek to recover from the Corporation amounts paid pursuant to its guaranty. Moreover, loan programs adopted by the federal government, such as the PPP and the Main Street Lending Program, while intended to lessen the impact of the pandemic on businesses, may result in a decreased demand for the Corporation’s loan products. See Item 1. "Business-Supervision and Regulation-Governmental and Regulatory Actions to Mitigate the Impact of the COVID-19 Pandemic."
The Corporation is subject to certain risks in connection with the establishment and level of its allowance for credit losses.
The ACL consists of the ACL - Loans, which is recorded as a reduction to loans on the consolidated balance sheets, and the ACL for OBS credit exposures, which is included in other liabilities on the consolidated balance sheets. While the Corporation believes that its ACL as of December 31, 2020 was sufficient to cover expected future credit losses in its financial instruments, principally the loan portfolio and OBS credit exposures, as of that date, the Corporation may need to increase its provision for credit losses in future periods due to changes in the risk characteristics of the loan portfolio or OBS credit exposures, forecasted economic conditions and growth in the loan portfolio or OBS credit exposures, among other factors, thereby negatively impacting its results of operations. The determination of the ACL depends significantly upon the Corporation's assumptions and judgments with respect to a variety of factors, including the performance of the loan portfolio, the weighted-average remaining lives of different classifications of loans within the loan portfolio and current and forecasted economic conditions, as well as changes in lending policy, the nature and volume of the portfolio, credit concentrations, specific industry risks, competition, model imprecision and legal and regulatory requirements, among other factors. If the Corporation's assumptions and judgments regarding such matters prove to be inaccurate, its ACL might not be sufficient, and additional provisions for credit losses might need to be made. Depending on the amount of such provisions for credit losses, the adverse impact on the Corporation's earnings could be material.
Furthermore, banking regulators may require the Corporation to make additional provisions for credit losses, or otherwise recognize further loan charge-offs or impairments following their periodic reviews of the Corporation's loan portfolio, underwriting procedures and the ACL. Any increase in the ACL or loan charge-offs as required by such regulatory agencies could have a material adverse effect on the Corporation's financial condition and results of operations. See "Note 1 - Summary of Significant Accounting Policies – Allowance for Credit Losses" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-Allowance for Credit Losses and Asset Quality."
The composition of the Corporation's loan portfolio and competition for loans subject the Corporation to credit risk.
Approximately 73% of the Corporation's loan portfolio was in commercial loans, commercial mortgage loans, and construction loans at December 31, 2020. Commercial loans, commercial mortgage loans and construction loans generally involve a greater degree of credit risk than residential mortgage loans and consumer loans because they typically have larger balances and are likely to be more sensitive to broader economic factors and conditions. Because payments on these loans often depend on the successful operation and management of businesses and properties, repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate markets, adverse economic conditions or changes in governmental regulation.
Furthermore, intense competition among both bank and non-bank lenders could increase pressure on the Corporation to relax its credit standards and/or underwriting criteria in order to achieve the Corporation's loan growth targets. This could result in greater challenges in the repayment or collection of loans should economic conditions, or individual borrower performance, deteriorate. Additionally, competitive pressures could drive the Corporation to consider loans and customer relationships that are outside of the Corporation's established risk appetite or target customer base, posing similar repayment and collection risk. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-Loans."
The Corporation is subject to interest rate risk.
The Corporation cannot predict or control changes in interest rates. The Corporation is affected by fiscal and monetary policies of the federal government, including those of the Federal Reserve Board, which regulates the national money supply and engages in other lending and investment activities in order to manage recessionary and inflationary pressures, many of which affect interest rates charged on loans and paid on deposits.
Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is the most significant component of the Corporation's net income, accounting for approximately 74% of total revenues in 2020. Changes in market interest rates, in the shape of the yield curve or in spreads between different market interest rates can have a material effect on the Corporation's net interest margin, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. The rates on some interest-earning assets, such as loans and investments, and interest-bearing liabilities, such as deposits and borrowings, adjust concurrently with, or within a brief period after, changes in market interest rates, while others adjust only periodically or not at all during their terms. Thus, changes in market interest rates might, for example, result in a decrease in the interest earned on interest-earning assets that is not accompanied by a corresponding decrease in the interest paid on interest-bearing liabilities, or the decrease in interest paid might be at a slower pace, or in a smaller amount, than the decrease in interest earned, reducing the Corporation's net interest income and/or net interest margin. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Net Interest Income."
Changes in interest rates may also affect the average life of loans and certain investment securities, most notably mortgage-backed securities. Decreases in interest rates can result in increased prepayments of loans and certain investment securities, as borrowers or issuers refinance to reduce their borrowing costs. Under those circumstances, the Corporation would be subject to reinvestment risk to the extent that it is not able to reinvest the cash received from such prepayments at rates that are comparable to the rates on the loans and investment securities which are prepaid. Conversely, increases in interest rates may extend the average life of fixed rate assets, which could restrict the Corporation's ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates.
Changes in interest rates also affect the fair value of interest-earning investment securities. Generally, the value of interest-earning investment securities moves inversely with changes in interest rates. In the event that the fair value of an investment security declines below its amortized cost, the Corporation is required to determine whether the decline constitutes an OTTI. The determination of whether a decline in fair value is other-than-temporary depends on a number of factors, including whether the Corporation has the intent and ability to retain the investment security for a period of time sufficient to allow for any anticipated recovery in fair value. If a determination is made that a decline is other-than-temporary, an OTTI charge is recorded.
The planned phasing out of LIBOR as a financial benchmark presents risks to the financial instruments originated or held by the Corporation.
LIBOR is the reference rate used for many of the Corporation's transactions, including variable and adjustable rate loans, derivative contracts, borrowings and other financial instruments. However, a reduced volume of interbank unsecured term borrowing, coupled with legal and regulatory proceedings related to rate manipulation by certain financial institutions, has led to international reconsideration of LIBOR as a financial benchmark. The United Kingdom Financial Conduct Authority ("FCA"), which regulates the process for establishing LIBOR, announced in July 2017 that the FCA intends to stop persuading, or compelling, banks to submit rates for the calculation of LIBOR after 2021. Until such time, however, FCA panel banks have agreed to continue to support LIBOR.
Regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate and the American Interbank Offered Rate (“Ameribor”) as the recommended alternative to U.S. Dollar LIBOR), and proposed implementation of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments. The uncertainty surrounding potential reforms, including the use of alternative reference rates and changes to the methods and processes used to calculate rates, may have an adverse effect on the trading market for LIBOR-based securities, loan yields, and the amounts received and paid on derivative contracts and other financial instruments. In addition, the implementation of LIBOR reform proposals may result in increased compliance and operational costs.
Changes in interest rates can affect demand for the Corporation's products and services.
Movements in interest rates can cause demand for some of the Corporation's products and services to be cyclical. For example, demand for residential mortgage loans has historically tended to increase during periods when interest rates were declining and to decrease during periods when interest rates were rising. As a result, the Corporation may need to periodically increase or decrease the size of certain of its businesses, including its personnel, to match increases and decreases in demand and volume. The need to change the scale of these businesses is challenging, and there is often a lag between changes in the businesses and the Corporation's reaction to these changes.
Price fluctuations in securities markets, as well as other market events, such as a disruption in credit and other markets and the abnormal functioning of markets for securities, could have an impact on the Corporation's results of operations.
The market value of the Corporation's securities investments, which include mortgage-backed securities, state and municipal securities, auction rate securities, and corporate debt securities, as well as the revenues the Corporation earns from its trust and investment management services business, are particularly sensitive to price fluctuations and market events. Declines in the values of the Corporation's securities holdings, combined with adverse changes in the expected cash flows from these investments, could result in OTTI charges.
The Corporation's investment management and trust services revenue, which is partially based on the value of the underlying investment portfolios, can also be impacted by fluctuations in the securities markets. If the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation's revenue could be negatively impacted. In addition, the Corporation's ability to sell its brokerage services is dependent, in part, upon consumers' level of confidence in securities markets. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk."
Changes in interest rates or disruption in liquidity markets may adversely affect the Corporation's sources of funding.
The Corporation must maintain sufficient sources of liquidity to meet the demands of its depositors and borrowers, support its operations and meet regulatory expectations. The Corporation's liquidity management policies and practices emphasize core deposits and repayments and maturities of loans and investments as its primary sources of liquidity. These primary sources of liquidity can be supplemented by FHLB advances, borrowings from the Federal Reserve Bank, proceeds from the sales of loans and use of liquidity resources of the Corporation, including capital markets funding. Lower-cost, core deposits may be adversely affected by changes in interest rates, and secondary sources of liquidity can be more costly to the Corporation than funding provided by deposit account balances having similar maturities. In addition, adverse changes in the Corporation's results of operations or financial condition, downgrades in the Corporation's credit ratings, regulatory actions involving the Corporation, or changes in regulatory, industry or market conditions could lead to increases in the cost of these secondary sources of liquidity, the inability to refinance or replace these secondary funding sources as they mature, or the withdrawal of unused borrowing capacity under these secondary funding sources.
The Corporation relies on customer deposits as its primary source of funding. A substantial majority of the Corporation's deposits are in non-maturing accounts, which deposit customers can withdraw on demand or upon several days' notice. Factors, many of which are outside the Corporation's control, can cause fluctuations in both the level and cost of customer deposits. These factors include competition for customer deposits from other financial institutions and non-bank competitors, changes in interest rates, the rates of return available from alternative investments or asset classes, changes in customer confidence in the Corporation or in financial institutions generally, and the liquidity needs of the Corporation's deposit customers. Further, deposits from state and municipal entities, primarily in non-maturing, interest-bearing accounts, are a significant source of deposit funding for the Corporation, representing approximately 11% of total deposits at December 31, 2020. State and municipal customers frequently maintain large deposit account balances substantially in excess of the per-depositor limit of FDIC insurance, and may be more sensitive than other depositors to changes in interest rates and the other factors discussed above. Advances in technology, such as online banking, mobile banking, digital payment platforms and the acceleration of financial technology innovation, have also made it easier to move money, potentially causing customers to switch financial institutions or switch to non-bank competitors. Movement of customer deposits into higher-yielding deposit accounts offered by the Corporation, the need to offer higher interest rates on deposit accounts to retain customer deposits, or the movement of customer deposits into alternative investments or deposits of other banks or non-bank providers could increase the Corporation's funding costs, reduce its net interest margin and/or create liquidity challenges.
Market conditions have been negatively impacted by disruptions in the liquidity markets in the past, and such disruptions or an adverse change in the Corporation's results of operations or financial condition could, in the future, have a negative impact on secondary sources of liquidity. If the Corporation is not able to continue to rely primarily on customer deposits to meet its liquidity and funding needs, continue to access secondary, non-deposit funding sources on favorable terms or otherwise fails to manage its liquidity effectively, the Corporation's ability to continue to grow may be constrained, and the Corporation's liquidity, operating margins, results of operations and financial condition may be materially adversely affected. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk, Asset/Liability Management and Liquidity."
LEGAL, COMPLIANCE AND REPUTATIONAL RISKS.
The Corporation and Fulton Bank are subject to extensive regulation and supervision and may be adversely affected by changes in laws and regulations or any failure to comply with laws and regulations.
Virtually every aspect of the Corporation's and Fulton Bank's operations is subject to extensive regulation and supervision by federal and state regulatory agencies, including the Federal Reserve Board, OCC, FDIC, CFPB, DOJ, UST, SEC, HUD, state attorneys general and state banking, financial services, securities and insurance regulators. Under this regulatory framework, regulatory agencies have broad authority in carrying out their supervisory, examination and enforcement responsibilities to address compliance with applicable laws and regulations, including laws and regulations relating to capital adequacy, asset quality, liquidity, risk management and financial accounting and reporting, as well as laws and regulations governing consumer protection, fair lending, privacy, information security and cybersecurity risk management, third-party vendor risk management, and AML and anti-terrorism laws, among other aspects of the Corporation's business. Failure to comply with these regulatory requirements, including inadvertent or unintentional violations, may result in the assessment of fines and penalties, or the commencement of informal or formal regulatory enforcement actions against the Corporation or Fulton Bank. Other negative consequences can also result from such failures, including regulatory restrictions on the Corporation's activities, including restrictions on the Corporation's ability to grow through acquisition, reputational damage, restrictions on the ability of institutional investment managers to invest in the Corporation's securities and increases in the Corporation's costs of doing business.
The U.S. Congress and state legislatures and federal and state regulatory agencies continually review banking and other laws, regulations and policies for possible changes. Changes in applicable federal or state laws, regulations or governmental policies may affect the Corporation and its business. The effects of such changes are difficult to predict and may produce unintended consequences. New laws, regulations or changes in the regulatory environment could limit the types of financial services and products the Corporation may offer, alter demand for existing products and services, increase the ability of non-banks to offer competing financial services and products, increase compliance burdens, or otherwise adversely affect the Corporation's business, results of operations or financial condition. Further, unified Democratic control of the White House and both chambers of Congress will allow Democratic control of the legislative and executive agendas. The Corporation expects that Democratic-led Congressional committees will pursue greater oversight and will also pay increased attention to the banking sector’s role in providing COVID-19-related assistance. The prospects for the enactment of major banking reform legislation under the new Congress are unclear at this time.
Further, the turnover of the presidential administration has produced, and likely will continue to produce, various changes in the leadership and senior staffs of the federal regulatory agencies. The heads of many of these agencies will change in 2021 pending Senate confirmation. Also, the Board of Governors of the Federal Reserve and the FDIC Board of Directors may experience significant turnover within the next several years. Future regulatory agendas and the impact of such on the Corporation and the financial services sector generally cannot be predicted at this time.
Compliance with banking and financial services statutes and regulations is also important to the Corporation's ability to engage in new activities or to expand existing activities. Regulators continue to scrutinize banks through longer and more intensive examinations. Federal and state banking agencies possess broad powers to take supervisory actions, as they deem appropriate. These supervisory actions may result in higher capital requirements, higher deposit insurance premiums and limitations on the Corporation's operations and expansion activities that could have a material adverse effect on its business and profitability. The Corporation has dedicated significant time, effort, and expense over time to comply with regulatory and supervisory standards and requirements imposed by the Corporation's regulators, and the Corporation expects that it will continue to do so. If the Corporation fails to develop at a reasonable cost the systems and processes necessary to comply with the standards and requirements imposed by these rules, it could have a material adverse effect on the Corporation's business, financial condition, or results of operations.
Failure to comply with the BSA, the Patriot Act and related AML requirements, or with sanctions laws, could subject the Corporation to enforcement actions, fines, penalties, sanctions and other remedial actions.
Regulators have broad authority to enforce AML and sanctions laws. Failure to comply with AML and sanctions laws or to maintain an adequate compliance program can lead to significant monetary penalties and reputational damage, and federal regulators evaluate the effectiveness of an applicant in combating money laundering when considering approval of applications to acquire, merge, or consolidate with another banking institution, or to engage in other expansionary activities. There have been a number of significant enforcement actions by regulators, as well as state attorneys general and the DOJ, against banks, broker-dealers and non-bank financial institutions with respect to AML and sanctions laws and some have resulted in substantial penalties, including criminal pleas. Enforcement actions have included the Federal Reserve Board's Consent Order against the Corporation in 2014 (the "Consent Order"), which was terminated in May 2019, in connection with alleged deficiencies in the Corporation's BSA/AML compliance program. Any violation of law or regulation, possibly even inadvertent
or unintentional violations, could result in the fines, sanctions or other penalties described above, including one or more additional consent orders against Fulton Bank or the Corporation, which could have significant reputational or other consequences and could have a material adverse effect on the Corporation’s business, financial condition and results of operations.
Additional expenses and investments have been incurred in recent years as the Corporation expanded its hiring of personnel and use of outside professionals, such as consulting and legal services, and made capital investments in operating systems to strengthen and support the Corporation's BSA/AML compliance program, as well as the Corporation's broader compliance and risk management infrastructures. The expense and capital investment associated with all of these efforts, including those undertaken in connection with the Consent Order, have had an adverse effect on the Corporation's results of operations in recent periods and could have a material adverse effect on the Corporation's results of operations in one or more future periods.
The Dodd-Frank Act continues to have a significant impact on the Corporation's business and results of operations.
The Dodd-Frank Act has had a substantial impact on many aspects of the financial services industry. The Corporation has been impacted, and will likely continue to be impacted in the future, by the so-called Durbin Amendment to the Dodd-Frank Act, which reduced debit card interchange revenue of banks, and revised FDIC deposit insurance assessments. The Corporation has also been impacted by the Dodd-Frank Act in the areas of corporate governance, capital requirements, risk management and regulation under federal consumer protection laws.
The CFPB, which was established pursuant to the Dodd-Frank Act, has imposed enforcement actions against a variety of bank and non-bank market participants with respect to a number of consumer financial products and services. These actions have resulted in those participants expending significant time, money and resources to adjust to the initiatives being pursued by the CFPB. These enforcement actions may serve as precedent for how the CFPB interprets and enforces consumer protection laws, including practices or acts that are deemed to be unfair, deceptive or abusive, with respect to all supervised institutions, which may result in the imposition of higher standards of compliance with such laws. Other federal financial regulatory agencies, including the OCC, as well as state attorneys general and state banking agencies and other state financial regulators, also have been active in this area with respect to institutions over which they have jurisdiction. Federal financial regulatory agencies may be even more active in this area under the Biden Administration. See Item 1. "Business-Supervision and Regulation."
Changes in U.S. federal, state or local tax laws may negatively impact the Corporation's financial performance.
The Corporation is subject to changes in tax law that could increase the Corporation's effective tax rates. These law changes may be retroactive to previous periods and, as a result, could negatively affect the Corporation's current and future financial performance. In December 2017, the Tax Act was signed into law, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended (the "Code"). The Tax Act reduced the Corporation's Federal corporate income tax rate to 21% beginning in 2018. However, the Tax Act also imposed limitations on the Corporation's ability to take certain deductions, such as the deduction for FDIC deposit insurance premiums, which partially offset the increase in net income from the lower tax rate.
In addition, a number of the changes to the Code are set to expire in future years. There is substantial uncertainty concerning whether those expiring provisions will be extended, or whether future legislation will further revise the Code.
From time to time the Corporation may be the subject of litigation and governmental or administrative proceedings. Adverse outcomes of any such litigation or proceedings may have a material adverse impact on the Corporation's business and results of operations as well as its reputation.
Many aspects of the Corporation's business involve substantial risk of legal liability. From time to time, the Corporation has been named or threatened to be named as defendant in various lawsuits arising from its business activities (and in some cases from the activities of companies that were acquired). In addition, the Corporation is periodically the subject of governmental investigations and other forms of regulatory or governmental inquiry. For example, as previously disclosed, the Corporation recently consented to the entry of an administrative civil cease-and-desist order and paid a civil monetary penalty of $1.5 million to resolve 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. Like other large financial institutions, the Corporation is also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. These lawsuits, investigations, inquiries and other matters could lead to administrative, civil or criminal proceedings, or result in adverse judgments, settlements, fines, penalties, restitution, injunctions or other types of sanctions, or the need for the Corporation to undertake remedial actions, or to alter its business, financial or accounting practices. Substantial legal liability or significant regulatory actions against the Corporation could materially adversely affect the Corporation's business, financial condition or results of operations and/or cause significant reputational harm. The Corporation establishes reserves for legal claims when payments associated with the claims become probable and the
costs can be reasonably estimated. 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. However, the Corporation may still incur potentially significant legal costs for a matter, even if a reserve has not been established.
The Corporation can provide no assurance as to the outcome or resolution of legal or administrative actions or investigations, and such actions and investigations may result in judgments against the Corporation for significant damages or the imposition of regulatory restrictions on the Corporation's operations. Resolution of these types of matters can be prolonged and costly, and the ultimate results or judgments are uncertain due to the inherent uncertainty in the outcomes of litigation and other proceedings.
STRATEGIC AND EXTERNAL RISKS.
The Corporation may not be able to achieve its growth plans.
The Corporation's business plan includes the pursuit of profitable growth. Under current economic, competitive and regulatory conditions, profitable growth may be difficult to achieve due to one or more of the following factors:
•In the current interest rate environment, it may become more difficult for the Corporation to further increase its net interest margin or its net interest margin may come under further downward pressure. As a result, income growth will likely need to come from growth in the volume of earning assets, particularly loans, and an increase in non-interest income. However, customer demand and competition could make such income growth difficult to achieve; and
•The Corporation may seek to supplement organic growth through acquisitions, but may not be able to identify suitable acquisition opportunities, obtain the required regulatory approvals or successfully integrate acquired businesses.
To achieve profitable growth, the Corporation may pursue new lines of business or offer new products or services, all of which can involve significant costs, uncertainties and risks. Any new activity the Corporation pursues may require a significant investment of time and resources, and may not generate the anticipated return on that investment. Sustainable growth requires that the Corporation manage risks by balancing loan and deposit growth at acceptable levels of risk, maintaining adequate liquidity and capital, hiring and retaining qualified employees, successfully managing the costs and implementation risks with respect to strategic projects and initiatives, and integrating acquisition targets while managing costs. In addition, the Corporation may not be able to effectively implement and manage any new activities. External factors, such as the need to comply with additional regulations, the availability, or introduction, of competitive alternatives in the market, and changes in customer preferences may also impact the successful implementation of any new activity. Any new activity could have a significant impact on the effectiveness of the Corporation's system of internal controls. If the Corporation is not able to adequately identify and manage the risks associated with new activities, the Corporation's business, results of operations and financial condition could be materially and adversely impacted.
The Corporation faces a variety of risks in connection with potential acquisitions.
The Corporation may seek to supplement organic growth through acquisitions of banks or branches, or other financial businesses or assets. Acquiring other banks, branches, financial businesses or assets involves a variety of risks commonly associated with acquisitions, including, among other things:
•The possible loss of key employees and customers of the acquired business;
•Potential disruption of the acquired business and the Corporation's business;
•Exposure to potential asset quality issues of the acquired business;
•Potential exposure to unknown or contingent liabilities of the acquired business including, without limitation, liabilities for regulatory and compliance issues;
•Potential changes in banking or tax laws or regulations that may affect the acquired business; and
•Potential difficulties in integrating the acquired business, resulting in the diversion of resources from the operation of the Corporation's existing businesses.
Acquisitions typically involve the payment of a premium over book and market values, and therefore, some dilution of the Corporation's tangible book value and net income per common share may occur in connection with any future transaction. Failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on the Corporation's business, financial condition and results of operations. In addition, the Corporation faces significant competition from other financial services institutions, some of which may have greater financial resources than the Corporation, when considering acquisition opportunities. Accordingly, attractive opportunities may not be available and there can be no assurance that the Corporation will be successful in identifying, completing or integrating future acquisitions.
The competition the Corporation faces is significant and may reduce the Corporation's customer base and negatively impact the Corporation's results of operations.
There is significant competition among commercial banks in the market areas served by the Corporation. In addition, the Corporation also competes with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulation than the Corporation and have different cost structures. Some of the Corporation's competitors have greater resources, higher lending limits, lower cost of funds and may offer other services not offered by the Corporation. The Corporation also experiences competition from a variety of institutions outside its market areas. Some of these institutions conduct business primarily over the Internet and, as a result, may be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as funds transfers, payment services, residential mortgage loans, consumer loans and wealth and investment management services. Competition with non-banks, including technology companies, to provide financial products and services is intensifying. In particular, the activity of financial technology companies ("Fintechs") has grown significantly over recent years and is expected to continue to grow. Fintechs have and may continue to offer bank or bank-like products. In July 2018, the OCC announced that it will begin accepting applications from Fintechs to become special purpose national banks. Although the OCC’s authority to issue special purpose bank charters to non-bank Fintechs continues to be subject to ongoing litigation, similar developments are likely to result in even greater competition within all areas of the Corporation’s operations.
Competition may adversely affect the rates the Corporation pays on deposits and charges on loans, and could result in the loss of fee income, as well as the loss of customer deposits and the income generated from those deposits, thereby potentially adversely affecting the Corporation's profitability and its ability to continue to grow. The Corporation's profitability and continued growth depends upon its continued ability to successfully compete in the market areas it serves. See Item 1. "Business-Competition."
Climate change may materially adversely affect the Corporation's business and results of operations.
The Corporation operates in areas where its business and the activities of its customers could be impacted by the effects of climate change. The effects of climate change may include increased frequency or severity of weather-related events, such as severe storms, hurricanes, flooding and droughts, and rising sea levels. These effects can disrupt business operations, damage property, devalue assets and change consumer and business preferences, which may adversely affect borrowers, increase credit risk and reduce demand for the Corporation’s products and services. In addition, increasing concerns over the long-term impacts of climate change have led and will likely continue to lead to legislative and regulatory initiatives to combat climate change and may result in increased supervisory expectations with respect to banks’ risk management practices related to climate change. Climate change, its effects and the resulting, unknown impacts could have a material adverse effect on the Corporation’s financial condition and results of operations.
If the goodwill that the Corporation has recorded or records in the future in connection with its acquisitions becomes impaired, it could have a negative impact on the Corporation's results of operations.
In the past, the Corporation supplemented its internal growth with strategic acquisitions of banks, branches and other financial services companies. In the future, the Corporation may seek to supplement organic growth through additional acquisitions. If the purchase price of an acquired company exceeds the fair value of the company's net assets, the excess is carried on the acquirer's balance sheet as goodwill. As of December 31, 2020, the Corporation had $533.4 million of goodwill recorded on its balance sheet. The Corporation is required to evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to earnings in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in impairment charges.
Changes in accounting policies, standards, and interpretations could materially affect how the Corporation reports its financial condition and results of operations.
The preparation of the Corporation's financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as revenues and expenses during the period. A summary of the accounting policies that the Corporation considers to be most important to the presentation of its financial condition and results of operations, because they require management's most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain, including those related to the ACL, goodwill, income taxes, and fair value measurements, is set forth in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" and within "Note 1-
Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
A variety of factors could affect the ultimate values of assets, liabilities, income and expenses recognized and reported in the Corporation's financial statements, and these ultimate values may differ materially from those determined based on management's estimates and assumptions. In addition, the FASB, regulatory agencies, and other bodies that establish accounting standards from time to time change the financial accounting and reporting standards governing the preparation of the Corporation's financial statements. Further, those bodies that establish and interpret the accounting standards (such as the FASB, the Securities and Exchange Commission, and banking regulators) may change prior interpretations or positions regarding how these standards should be applied. These changes can be difficult to predict and can materially affect how the Corporation records and reports its financial condition and results of operations.
The Corporation has from time to time undertaken initiatives to reduce or manage growth in its non-interest expenses and increase the efficiency of its operations. The Corporation may not achieve the intended effect on its non-interest expenses or its operating efficiency, and those initiatives may have an adverse impact on the Corporation’s competitive position and ability to achieve its growth plans.
It is possible that initiatives from time to time undertaken by the Corporation to reduce or manage growth in its non-interest expenses and increase its operating efficiency will not achieve the effects on its non-interest expenses or create the cost efficiencies intended through those initiatives. Moreover, those initiatives could adversely impact the retention of customers and deposit balances, harm the Corporation’s relationships with its customers, weaken the Corporation’s competitive position, or make it more difficult for the Corporation to achieve its growth plans. Any of these circumstances, should they arise, could have a material adverse effect on the Corporation’s business or results of operations.
The Corporation is exposed to many types of operational and other risks, and the Corporation's framework for managing risks may not be effective in mitigating risk.
The Corporation is exposed to many types of operational risk, including the risk of human error or fraud by employees and other third parties, intentional and inadvertent misrepresentation by loan applicants, borrowers or guarantors, unsatisfactory performance by employees and vendors, clerical and record-keeping errors, computer and telecommunications systems malfunctions or failures and reliance on data that may be faulty or incomplete. In an environment characterized by continual, rapid technological change, as discussed below, when the Corporation introduces new products and services, or makes changes to its information technology systems and processes, these operational risks are increased. Any of these operational risks could result in the Corporation's diminished ability to operate one or more of its businesses, financial loss, potential liability to customers, inability to secure insurance, reputational damage and regulatory intervention, which could materially adversely affect the Corporation.
The Corporation's risk management framework is subject to inherent limitations, and risks may exist, or develop in the future, that the Corporation has not anticipated or identified. If the Corporation's risk management framework proves to be ineffective, the Corporation could suffer unexpected losses and could be materially adversely affected.
The Corporation's operational risks include risks associated with third-party vendors and other financial institutions.
The Corporation relies upon certain third-party vendors to provide products and services necessary to maintain its day-to-day operations, including, notably, responsibility for the core processing system that services Fulton Bank. Accordingly, the Corporation's operations are exposed to the risk that these vendors might not perform in accordance with applicable contractual arrangements or service level agreements. The failure of an external vendor to perform in accordance with applicable contractual arrangements or service level agreements could be disruptive to the Corporation's operations, which could have a material adverse effect on the Corporation's financial condition or results of operations, and damage its reputation. Further, third-party vendor risk management has become a point of regulatory emphasis recently. A failure of the Corporation to follow applicable regulatory guidance in this area could expose the Corporation to regulatory sanctions.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, execution of transactions or other relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This risk is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Corporation interacts on a daily basis, and therefore could adversely affect the Corporation.
Any of these operational or other risks could result in the Corporation's diminished ability to operate one or more of its businesses, financial loss, potential liability to customers, inability to secure insurance, reputational damage and regulatory intervention, which could materially adversely affect the Corporation.
Loss of, or failure to adequately safeguard, confidential or proprietary information may adversely affect the Corporation's operations, net income or reputation.
The Corporation's business is highly dependent on information systems and technology and the ability to collect, process, transmit and store significant amounts of confidential information regarding customers, employees and others on a daily basis. While the Corporation performs some of the functions required to operate its business directly, it also relies on third parties for significant business functions, such as processing customer transactions, providing cloud-based infrastructure, software and data storage services, maintaining customer-facing websites, including its online and mobile banking functions, and developing software for new products and services, among others. These relationships require the Corporation to allow third parties to access, store, process and transmit customer information. As a result, the Corporation may be subject to cyber security risks directly, as well as indirectly, through the vendors to whom it outsources business functions and the downstream service providers of those vendors. The increased use of smartphones, tablets and other mobile devices, as well as cloud computing, may also heighten these and other operational risks. Cyber threats could result in unauthorized access, loss or destruction of confidential information or customer data, unavailability, degradation or denial of service, introduction of computer viruses or ransomware and other adverse events, causing the Corporation to incur additional costs (such as repairing systems or adding new personnel or protection technologies). Cyber threats may also subject the Corporation to regulatory investigations, litigation or enforcement actions require the payment of regulatory fines or penalties or undertaking costly remediation efforts with respect to third parties affected by a cyber security incident, all or any of which could adversely affect the Corporation's business, financial condition or results of operations and damage its reputation.
Like other financial institutions, the Corporation experiences malicious cyber activity on an ongoing basis directed at its websites, computer systems, software, networks and its users. This malicious activity includes attempts at unauthorized access, implantation of computer viruses or malware, and denial-of-service attacks. The Corporation also experiences large volumes of phishing and other forms of social engineering attempted for the purpose of perpetrating fraud against the Corporation, its employees or its customers. While, to date, malicious cyber activity, cyber attacks and other information security breaches have not had a material adverse impact on the Corporation, there can be no assurance that such events will not have a material adverse impact on the Corporation’s business, results of operations, financial condition or reputation in the future.
The Corporation uses monitoring and preventive controls to detect and respond to data breaches and cyber threats involving its own systems before they become significant. The Corporation regularly evaluates its systems and controls and implements upgrades as necessary. The Corporation also attempts to reduce its exposure to its vendors' data privacy and cyber incidents by performing initial vendor due diligence that is updated periodically for critical vendors, negotiating service level standards with vendors, negotiating for indemnification from vendors for confidentiality and data breaches, and limiting third-party access to the least privileged level necessary to perform outsourced functions, among other things. The additional cost to the Corporation of data and cyber security monitoring and protection systems and controls includes the cost of hardware and software, third party technology providers, consulting and forensic testing firms, insurance premium costs and legal fees, in addition to the incremental cost of personnel who focus a substantial portion of their responsibilities on data and cyber security.
There can be no assurance that the measures employed by the Corporation to detect and combat direct or indirect cyber threats will be effective. In addition, because the methods of cyber attacks change frequently or, in some cases, are not recognized until launched, the Corporation may be unable to implement effective preventive control measures to proactively address these methods. The Corporation's or a vendor's failure to promptly identify and counter a cyber attack may result in increased costs and other negative consequences, such as the loss of, or inability to access, data, degradation or denial of service and introduction of computer viruses. Although the Corporation maintains insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be inapplicable or otherwise insufficient to cover any or all losses. Further, a successful cyber attack that results in a significant loss of customer data or compromises the Corporation's ability to function would have a material adverse effect on the Corporation's business, reputation, financial condition and results of operation.
Account data compromise, malware and ransomware events affecting a broad spectrum of commercial businesses and governmental entities in recent years have resulted in heightened legislative and regulatory focus on privacy, data protection and information security. New or revised laws and regulations may significantly impact the Corporation's current and planned privacy, data protection and information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities. Compliance with current or future privacy, data protection and information security laws to which the Corporation is subject could result in higher compliance and technology costs and could restrict the Corporation's ability to provide certain products and services, which could materially and adversely affect the Corporation's profitability. The Corporation's failure to comply with privacy, data protection and information security
laws could result in potentially significant regulatory and governmental investigations and/or actions, litigation, fines, sanctions and damage to the Corporation's reputation and its brand.
The Corporation is subject to a variety of risks in connection with origination and sale of loans.
The Corporation originates residential mortgage loans and other loans, such as loans guaranteed, in part, by the SBA, all or portions of which are later sold in the secondary market to government sponsored enterprises or agencies, such as the Federal National Mortgage Association (Fannie Mae), and other non-government sponsored investors. In connection with such sales, the Corporation makes certain representations and warranties with respect to matters such as the underwriting, origination, documentation or other characteristics of the loans sold. The Corporation may be required to repurchase a loan, or to reimburse the purchaser of a loan for any related losses, if it is determined that the loan sold was in violation of representations or warranties made at the time of the sale, and, in some cases, if there is evidence of borrower fraud, in the event of early payment default by the borrower on the loan, or for other reasons. The Corporation maintains reserves for potential losses on certain loans sold, however, it is possible that losses incurred in connection with loan repurchases and reimbursement payments may be in excess of any applicable reserves, and the Corporation may be required to increase reserves and may sustain additional losses associated with such loan repurchases and reimbursement payments in the future, which could have a material adverse effect on the Corporation's financial condition or results of operations.
In addition, the sale of residential mortgage loans and other loans in the secondary market serves as a source of non-interest income and liquidity for the Corporation, and can reduce its exposure to risks arising from changes in interest rates. Efforts to reform government sponsored enterprises and agencies, changes in the types of, or standards for, loans purchased by government sponsored enterprises or agencies and other investors, or the Corporation's failure to maintain its status as an eligible seller of such loans may limit the Corporation's ability to sell these loans. The inability of the Corporation to continue to sell these loans could reduce the Corporation's non-interest income, limit the Corporation's ability to originate and fund these loans in the future, and make managing interest rate risk more challenging, any of which could have a material adverse effect on the Corporation's results of operations and financial condition.
The Corporation continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Corporation's future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation's operations. The costs of new technology, including personnel, can be high, in both absolute and relative terms. Many of the Corporation's financial institution competitors have substantially greater resources to invest in technological improvements. In addition, new payment, credit and investment and wealth management services developed and offered by non-bank or non-traditional competitors pose an increasing threat to the products and services traditionally provided by financial institutions like the Corporation. The Corporation may not be able to effectively implement new technology-driven products and services, be successful in marketing these products and services to its customers, or effectively deploy new technologies to improve the efficiency of its operations. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Corporation's business, financial condition and results of operations.
There can be no assurance, given the past pace of change and innovation, that the Corporation's technology, either purchased or developed internally, will meet or continue to meet the needs of the Corporation and the needs of its customers.
In addition, advances in technology, as well as changing customer preferences favoring access to the Corporation's products and services through digital channels, could decrease the value of the Corporation's branch network and other assets. If customers increasingly choose to access the Corporation's products and services through digital channels, the Corporation may find it necessary to consolidate, close or sell branch locations or restructure its branch network. These actions could lead to losses on assets, expenses to reconfigure branches and the loss of customers in affected markets. As a result, the Corporation's business, financial condition or results of operations may be adversely affected.
RISKS RELATED TO AN INVESTMENT IN THE CORPORATION'S SECURITIES.
Capital requirements have been adopted by U.S. banking regulators that may limit the Corporation's ability to return earnings to shareholders or operate or invest in its business.
The Corporation and Fulton Bank are subject to capital requirements under the Basel III Rules. Failure to meet the established capital requirements could result in the federal banking regulators placing limitations or conditions on the activities of the Corporation or Fulton Bank or restricting the commencement of new activities, and such failure could subject the Corporation
or Fulton Bank to a variety of enforcement remedies, including limiting the ability of the Corporation or Fulton Bank to pay dividends, issuing a directive to increase capital and terminating FDIC deposit insurance. In addition, the failure to comply with the capital conservation buffer will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers. As of December 31, 2020, the Corporation's current capital levels met the minimum capital requirements, including the capital conservation buffer, as set forth in the Basel III Rules. See Item 1. "Business-Supervision and Regulation-Capital Requirements."
In addition, the implementation of certain regulations with regard to regulatory capital could disproportionately affect the Corporation's regulatory capital position relative to that of its competitors, including those who may not be subject to the same regulatory requirements.
The Corporation is a holding company and relies on dividends and other payments from its subsidiaries for substantially all of its revenue and its ability to make dividend payments, distributions and other payments.
Fulton Financial Corporation is a separate and distinct legal entity from its bank and non-bank subsidiaries, and depends on the payment of dividends and other payments and distributions from its subsidiaries, principally Fulton Bank, for substantially all of its revenues. As a result, the Corporation's ability to make dividend payments on its common stock depends primarily on compliance with applicable federal regulatory requirements and the receipt of dividends and other distributions from its subsidiaries. There are various regulatory and prudential supervisory restrictions, which may change from time to time, that impact the ability of Fulton Bank to pay dividends or make other payments to the Corporation. There can be no assurance that Fulton Bank will be able to pay dividends at past levels, or at all, in the future. If the Corporation does not receive sufficient cash dividends or is unable to borrow from Fulton Bank, then the Corporation may not have sufficient funds to pay dividends to its shareholders, repurchase its common stock or service its debt obligations. See Item 1. "Business-Supervision and Regulation-Loans and Dividends from Bank Subsidiary."
In addition, the Corporation has pursued a strategy of capital management under which it has sought to deploy its capital, through stock repurchases, increased regular dividends and special dividends, in a manner that is beneficial to the Corporation's shareholders. This capital management strategy is subject to regulatory supervision. In July 2019, the Federal Reserve Board eliminated the standalone prior approval requirement in the capital rules for repurchase or redemption of common stock. In certain circumstances, however, the Corporation's repurchases of its common stock may be subject to a prior approval or notice requirement under the regulations or policies of the Federal Reserve Board. As a result, the Corporation may not be able to enter the market for stock repurchases on a timely basis when the Corporation's board of directors and management believe such repurchases to be most opportune, or at all.
Anti-takeover provisions could negatively impact the Corporation's shareholders.
Provisions of banking laws, Pennsylvania corporate law and of the Corporation's Amended and Restated Articles of Incorporation and Bylaws could make it more difficult for a third party to acquire control of the Corporation or have the effect of discouraging a third party from attempting to acquire control of the Corporation. To the extent that these provisions discourage such a transaction, holders of the Corporation's common stock may not have an opportunity to dispose of part or all of their stock at a higher price than that prevailing in the market. These provisions may also adversely affect the market price of the Corporation's stock. In addition, some of these provisions make it more difficult to remove, and thereby may serve to entrench, the Corporation's incumbent directors and officers, even if their removal would be regarded by some shareholders as desirable.
Certain provisions of Pennsylvania corporate law applicable to the Corporation and the Corporation's Amended and Restated Articles of Incorporation and Bylaws include provisions which may be considered to be "anti-takeover" in nature because they may have the effect of discouraging or making more difficult the acquisition of control of the Corporation by means of a hostile tender offer, exchange offer, proxy contest or similar transaction. These provisions are intended to protect the Corporation's shareholders by providing a measure of assurance that the Corporation's shareholders will be treated fairly in the event of an unsolicited takeover bid and by preventing a successful takeover bidder from exercising its voting control to the detriment of the other shareholders. However, these provisions, taken as a whole, may also discourage a hostile tender offer, exchange offer, proxy solicitation or similar transaction relating to the Corporation's common stock, even if the accomplishment of a given transaction may be favorable to the interests of shareholders.
The ability of a third party to acquire the Corporation is also limited under applicable banking regulations. The BHCA requires any "bank holding company" (as defined in that Act) to obtain the approval of the Federal Reserve Board prior to acquiring more than 5% of the Corporation's outstanding common stock. Any person other than a bank holding company is required to obtain prior approval of the Federal Reserve Board to acquire 10% or more of the Corporation's outstanding common stock under the Change in Bank Control Act of 1978 and, under certain circumstances, such approvals are required at an even lower ownership percentage. Any holder of 25% or more of the Corporation's outstanding common stock, other than an individual, is
subject to regulation as a bank holding company under the BHCA. In addition, the delays associated with obtaining necessary regulatory approvals for acquisitions of interests in bank holding companies also tend to make more difficult certain methods of effecting acquisitions. While these provisions do not prohibit an acquisition, they would likely act as deterrents to an unsolicited takeover attempt.
GENERAL RISK FACTORS.
Negative publicity could damage the Corporation's reputation and business.
Reputation risk, or the risk to the Corporation's earnings and capital from negative public opinion, is inherent in the Corporation's business. Negative public opinion could result from the Corporation's actual, alleged or perceived conduct in any number of activities, including lending practices, litigation, regulatory compliance, mergers and acquisitions, disclosure, sharing or inadequate protection of customer information, environmental, social and governance practices and disclosures, and from actions taken by government agencies and community organizations in response to that conduct. In addition, unfavorable public opinion regarding the broader financial services industry, or arising from the actions of individual financial institutions, can have an adverse effect on the Corporation's reputation. Because the Corporation conducts its businesses under the "Fulton" brand, negative public opinion about one line of business could affect the Corporation's other lines of businesses. Further, the increased use of social media platforms facilitates the rapid and widespread dissemination of information, including inaccurate, misleading, or false information, which could magnify the potential harm to the Corporation's reputation. Any of these or other events that impair the Corporation's reputation can affect the Corporation's ability to attract and retain customers and employees, and access sources of funding and capital, any of which could have materially adverse effect on the Corporation's results of operations and financial condition.
The Corporation's internal controls may be ineffective.
One critical component of the Corporation's risk management framework is its system of internal controls. Management regularly reviews and updates the Corporation's internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide reasonable, but not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of the Corporation's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation's business, results of operations, financial condition and reputation. See Item 9A. "Controls and Procedures."
The Corporation may not be able to attract and retain skilled people.
The Corporation's success depends, in large part, on its ability to attract and retain skilled people. Competition for talented personnel in most activities engaged in by the Corporation can be intense, and the Corporation may not be able to hire sufficiently skilled people or to retain them. The unexpected loss of services of one or more of the Corporation's key personnel could have a material adverse impact on the Corporation's business because of their skills, knowledge of the Corporation's markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
A downgrade in the credit ratings of the Corporation or Fulton Bank could have a material adverse impact on the Corporation.
Moody's Investors Service, Inc. and DBRS, Inc. continuously evaluate the Corporation and Fulton Bank, and their ratings of the Corporation's and Fulton Bank's long-term and short-term debt and preferred stock are based on a number of factors, including financial strength, as well as factors not entirely within the Corporation's and Fulton Bank's control, such as conditions affecting the financial services industry generally. In light of these reviews and the continued focus on the financial services industry generally, the Corporation and Fulton Bank may not be able to maintain their current respective ratings. Ratings downgrades by any of these credit rating agencies could have a significant and immediate impact on the Corporation's funding and liquidity through cash obligations, reduced funding capacity and collateral triggers. A reduction in the Corporation's or Fulton Bank's credit ratings could also increase the Corporation's and Fulton Bank's borrowing costs and limit their access to the capital markets.
Downgrades in the credit or financial strength ratings assigned to the counterparties with whom the Corporation transacts could create the perception that the Corporation's financial condition will be adversely impacted as a result of potential future defaults by such counterparties. Additionally, the Corporation could be adversely affected by a general, negative perception of financial institutions caused by the downgrade of other financial institutions. Accordingly, ratings downgrades for other financial institutions could affect the market price of the Corporation's stock and could limit the Corporation's access to or increase its cost of capital.
The Corporation's future growth may require the Corporation to raise additional capital in the future, but that capital may not be available when it is needed or may be available only at an excessive cost.
The Corporation is required by regulatory agencies to maintain adequate levels of capital to support its operations. The Corporation anticipates that current capital levels will satisfy regulatory requirements for the foreseeable future. The Corporation, however, may at some point choose to raise additional capital to support future growth. The Corporation's ability to raise additional capital will depend, in part, on conditions in the financial markets at that time, which are outside of the Corporation's control. Accordingly, the Corporation may be unable to raise additional capital, if and when needed, on terms acceptable to the Corporation, or at all.
If the Corporation cannot raise additional capital when needed, its ability to expand operations through internal growth and acquisitions could be materially impacted. In the event of a material decrease in the Corporation's stock price, future issuances of equity securities could result in dilution of existing shareholder interests.
Item 1B. Unresolved Staff Comments
Item 2. Properties
The Corporation's financial center properties as of December 31, 2020 totaled 223 financial centers. Of those financial centers, 89 were owned and 134 were leased. On January 8, 2021, the Corporation closed 21 financial centers (5 were owned and 16 were leased) and consolidated operations of those financial centers into other nearby financial centers operated by the Corporation. Remote service facilities (mainly stand-alone ATMs) are excluded from these totals. The Corporate headquarters is located in Lancaster, Pennsylvania. The Corporation owns two dedicated operations centers, located in East Petersburg, Pennsylvania and Mantua, New Jersey.
Item 3. Legal Proceedings
The information presented in the "Legal Proceedings" section of "Note 18 - Commitments and Contingencies" in the Notes to Consolidated Financial Statements is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of December 31, 2020, the Corporation had 162.3 million shares of $2.50 par value common stock outstanding held by approximately 30,500 holders of record. The closing price per share of the Corporation’s common stock on February 18, 2021 was $14.88. The common stock of the Corporation is traded on the Global Select Market of The Nasdaq Stock Market under the symbol FULT.
The following table presents the quarterly high and low prices of the Corporation’s stock and per share cash dividends declared for each of the quarterly periods in 2020 and 2019:
Restrictions on the Payments of Dividends
The Corporation is a separate and distinct legal entity from its banking and nonbanking subsidiaries, and depends on the payment of dividends from its subsidiaries, principally its banking subsidiary, for substantially all of its revenues. As a result, the Corporation's ability to make dividend payments on its common stock depends primarily on compliance with applicable federal regulatory requirements and the receipt of dividends and other distributions from its subsidiaries. There are various regulatory and prudential supervisory restrictions, which may change from time to time, that impact the ability of its banking subsidiaries to pay dividends or make other payments to the Corporation. In addition, dividends on the Corporation’s common stock may not be declared, paid or set aside for payment, unless the full dividends for the immediately preceding dividend payment period for the Corporation’s Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A have been declared and paid or declared and a sum sufficient for the payment thereof has been set aside. For additional information regarding the regulatory restrictions applicable to the Corporation and its subsidiaries, see "Supervision and Regulation," in Item 1. "Business;" Item 1A. "Risk Factors - The Corporation is a holding company and relies on dividends and other payments from its subsidiaries for substantially all of its revenue and its ability to make dividend payments, distributions and other payments," under "Risks Related to an Investment in the Corporation’s Securities;" and "Note 11 - Regulatory Matters," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about options outstanding under the Corporation’s Employee Equity Plan and the number of securities remaining available for future issuance under the Employee Equity Plan, Directors' Plan and the ESPP as of December 31, 2020:
Number of securities to be
issued upon exercise of
warrants and rights (1)
Weighted-average exercise price of outstanding options, warrants and rights (2)
Number of securities
remaining available for
future issuance under
equity compensation plans
reflected in first column) (3)
|Equity compensation plans approved by security holders||2,295,687||$||11.39||10,917,000|
|Equity compensation plans not approved by security holders||—||—||—|
(1) The number of securities to be issued upon exercise of outstanding options, warrants and rights includes 1,101,418 PSUs, which is the target number of PSUs that are payable under the Employee Equity Plan, though no shares will be issued until achievement of applicable performance goals, and includes 683,264 time-vested RSUs granted under the Employee Equity Plan and 112,698 time-vested RSUs granted under the Directors' Plan.
(2) The weighted-average exercise price of outstanding options, warrants and rights does not take into account outstanding PSUs and RSUs granted under the Employee Equity and the Directors' Plan.
(3) Consists of 9,307,000 shares that may be awarded under the Employee Equity Plan, 180,000 shares that may be awarded under the Directors' Plan and 1,430,000 shares that may be purchased under the ESPP. Excludes accrued purchase rights under the ESPP as of December 31, 2020 as the number of shares to be purchased is indeterminable until the shares are issued.
The following graph shows cumulative total shareholder return (i.e., price change, plus reinvestment of dividends) on the common stock of Fulton Financial Corporation during the five-year period ended December 31, 2020, compared with (1) the Nasdaq Bank Index and (2) the Standard and Poor's 500 index ("S&P 500"). The graph is not indicative of future price performance.
The graph below is furnished under this Part II, Item 5 of this Form 10-K and shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
|Year Ending December 31|
|Fulton Financial Corporation||$||100.00||$||148.52||$||145.05||$||129.41||$||150.76||$||115.75|
|Nasdaq Bank Index||$||100.00||$||135.03||$||141.28||$||114.74||$||139.10||$||124.31|
Item 6. Selected Financial Data
5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data)
|SUMMARY OF INCOME|
|Net interest income||629,207||648,389||630,456||575,364||520,772|
Provision for credit losses (1)
|Investment securities gains, net||3,053||4,733||37||9,071||2,550|
|Non-interest income, excluding net investment securities gains||226,335||211,427||195,488||198,903||187,628|
|Prepayment penalty on FHLB advances||2,878||4,326||—||—||—|
Non-interest expense (2)
|Income before income taxes||202,235||263,988||232,970||234,454||208,249|
|Preferred stock dividends||(2,135)||—||—||—||—|
|Net income available to common shareholders||$||175,905||$||226,339||$||208,393||$||171,753||$||161,625|
|Net income (basic)||$||1.08||$||1.36||$||1.19||$||0.98||$||0.93|
|Net income (diluted)||1.08||1.35||1.18||0.98||0.93|
|Return on average assets||0.73||%||1.06||%||1.03||%||0.88||%||0.88||%|
|Return on average equity||7.44||9.81||9.24||7.83||7.69|
Return on average tangible equity (3)
|Net interest margin||2.86||3.36||3.40||3.28||3.18|
Efficiency ratio (3)
|Dividend payout ratio||51.9||41.5||44.1||48.0||44.1|
|Average equity to assets ratio||9.83||10.85||11.18||11.20||11.43|
(1)Beginning January 1, 2020, provision is determined under CECL methodology. Prior to January 1, 2020, provision was determined based on incurred loss methodology.
(2)Excluding prepayment penalty on FHLB advances.
(3)Ratio represents a financial measure derived by methods other than GAAP. See reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure under the following heading, "Supplemental Reporting of Non-GAAP Based Financial Measures" below.
Supplemental Reporting of Non-GAAP Based Financial Measures
This Annual Report on Form 10-K contains supplemental financial information, as detailed below, which has been derived by methods other than GAAP. The Corporation has presented these non-GAAP financial measures because it believes that these measures provide useful and comparative information to assess trends in the Corporation's results of operations and financial condition. Presentation of these non-GAAP financial measures is consistent with how the Corporation evaluates its performance internally, and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Corporation's industry. Management believes that these non-GAAP financial measures, in addition to GAAP measures, are also useful to investors to evaluate the Corporation's results. Investors should recognize that the Corporation's presentation of these non-GAAP financial measures might not be comparable to similarly-titled measures of other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures, and the Corporation strongly encourages a review of its consolidated financial statements in their entirety. Following are reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure as of and for the year ended December 31:
|(in thousands, except per share data and percentages)|
|Return on average common shareholders' equity (tangible)|
|Net income available to common shareholders||$||175,905||$||226,339||$||208,393||$||171,753||$||161,625|
|Plus: Intangible amortization, net of tax||417||1,127||—||—||—|
|Average common shareholders' equity||$||2,391,649||$||2,306,070||$||2,255,764||$||2,193,863||$||2,100,634|
|Less: Average goodwill and intangible assets||(535,196)||(534,120)||(531,556)||(531,556)||(531,556)|
|Less: Average preferred stock||(32,084)||—||—||—||—|
|Average tangible common shareholders' equity (denominator)||$||1,824,369||$||1,771,950||$||1,724,208||$||1,662,307||$||1,569,078|
|Return on average common shareholders' equity (tangible)||9.66||%||12.84||%||12.09||%||10.33||%||10.30||%|
|Less: Amortization of tax credit investments||(6,126)||(6,021)||(11,449)||(11,028)||—|
|Less: Intangible amortization||(529)||(1,427)||—||—||—|
|Less: Prepayment penalty on FHLB advances||(2,878)||(4,326)||—||—||—|
Net interest income FTE (1)
|Plus: Total non-interest income||229,388||216,159||195,525||207,974||190,178|
|Less: Investment securities gains, net||(3,053)||(4,733)||(37)||(9,071)||(2,550)|
|Non-performing assets to common shareholders' equity (tangible) and ACL - loans|
|Non-performing assets (numerator)||$||151,305||$||147,986||$||150,196||$||144,582||$||144,453|
|Tangible common shareholders' equity||$||1,887,291||$||1,806,873||$||1,716,017||$||1,698,301||$||1,589,559|
|Plus: ACL - loans||277,567||166,209||169,410||176,084||171,325|
|Tangible common shareholders' equity and ACL - loans (denominator)||$||2,164,858||$||1,973,082||$||1,885,427||$||1,874,385||$||1,760,884|
|Non-performing assets to tangible common shareholders' equity and ACL - loans||6.99||%||7.50||%||7.97||%||7.71||%||8.20||%|
(1) Presented on a fully taxable equivalent basis, using a 21% federal tax rate for 2018 through 2020 and 35% for 2016 and 2017.
Item 7. 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.
The Corporation has made, and may continue to make, certain forward-looking statements with respect to its financial condition, results of operations and business. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends," "projects," the negative of these terms and other comparable terminology. These forward-looking statements may include projections of, or guidance on, the Corporation's future financial performance, expected levels of future expenses, including future credit losses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Corporation's business or financial results.
Forward-looking statements are neither historical facts, nor assurance of future performance. Instead, they are based on current beliefs, expectations and assumptions regarding the future of the Corporation's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Corporation's control, and actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not unduly rely on any of these forward-looking statements. Any forward-looking statement is based only on information currently available and speaks only as of the date when made. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Many factors could affect future financial results including, without limitation:
•the impact of adverse conditions in the economy and financial markets on the performance of the Corporation’s loan portfolio and demand for the Corporation’s products and services;
•the scope and duration of the COVID-19 pandemic, actions taken by governmental authorities in response to the pandemic, the Corporation’s participation in the PPP and other COVID-19 relief programs, and the direct and indirect impacts of the pandemic on the Corporation, its customers and third parties;
•the determination of the ACL, which depends significantly upon assumptions and judgments with respect to a variety of factors, including the performance of the loan portfolio, the weighted-average remaining lives of different classifications of loans within the loan portfolio and current and forecasted economic conditions, among other factors;
•increases in non-performing assets, which may require the Corporation to increase the allowance for credit losses, charge off loans and incur elevated collection and carrying costs related to such non-performing assets;
•investment securities gains and losses, including other-than-temporary declines in the value of securities which may result in charges to earnings;
•the effects of market interest rates, and the relative balances of interest rate-sensitive assets to interest rate-sensitive liabilities, on net interest margin and net interest income;
•the planned phasing out of LIBOR as a benchmark reference rate;
•the effects of changes in interest rates on demand for the Corporation’s products and services;
•the effects of changes in interest rates or disruptions in liquidity markets on the Corporation’s sources of funding;
•the effects of the extensive level of regulation and supervision to which the Corporation and Fulton Bank, N.A. are subject;
•the effects of the significant amounts of time and expense associated with regulatory compliance and risk management;
•the potential for negative consequences resulting from regulatory violations, investigations and examinations, or failure to comply with the BSA, the Patriot Act and related AML requirements, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions, the need to undertake remedial actions and possible damage to the Corporation’s reputation;
•the continuing impact of the Dodd-Frank Act on the Corporation’s business and results of operations;
•the effects of, and uncertainty surrounding, new legislation, changes in regulation and government policy, which could result in significant changes in banking and financial services regulation;
•the effects of actions by the federal government, including those of the Federal Reserve Board and other government agencies, that impact money supply and market interest rates;
•the effects of changes in U.S. federal, state or local tax laws;
•the effects of negative publicity on the Corporation’s reputation;
•the effects of adverse outcomes in litigation and governmental or administrative proceedings;
•the potential to incur losses in connection with repurchase and indemnification payments related to sold loans;
•the Corporation’s ability to achieve its growth plans;
•completed and potential acquisitions may affect costs and the Corporation may not be able to successfully integrate the acquired business or realize the anticipated benefits from such acquisitions;
•the potential effects of climate change on the Corporation’s business and results of operations;
•the Corporation’s ability to implement from time to time measures intended to manage growth in non-interest expenses and improve the efficiency of its operations and realize the intended effects of those initiatives;
•the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;
•the Corporation’s ability to manage the level of non-interest expenses, including salaries and employee benefits expenses, operating risk losses and goodwill impairment;
•the effects of changes in accounting policies, standards, and interpretations on the Corporation’s reporting of its financial condition and results of operations, including the Corporation’s adoption of ASU 2016-13, Financial Instruments – Credit Losses (CECL);
•the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;
•the impact of failures of third parties upon which the Corporation relies to perform in accordance with contractual arrangements;
•the failure or circumvention of the Corporation’s system of internal controls;
•the loss of, or failure to safeguard, confidential or proprietary information;
•the Corporation’s failure to identify and to address cyber-security risks, including data breaches and cyber-attacks;
•the Corporation’s ability to keep pace with technological changes;
•the Corporation’s ability to attract and retain talented personnel;
•capital and liquidity strategies, including the Corporation’s ability to comply with applicable capital and liquidity requirements, and the Corporation’s ability to generate capital internally or raise capital on favorable terms;
•the Corporation’s reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions; and
•the effects of any downgrade in the Corporation’s or Fulton Bank’s credit ratings on their borrowing costs or access to capital markets.
The Corporation is a financial holding company, which, through its wholly owned banking subsidiary, provides a full range of retail and commercial financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. In 2018, the Corporation had three banking subsidiaries. During 2019, the Corporation consolidated two of its wholly owned banking subsidiaries into Fulton Bank ("Charter Consolidation").
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the net interest margin, which is FTE net interest income as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments and properties. Offsetting these revenue sources are provisions for credit losses on loans and OBS credit risks, non-interest expenses and income taxes.
The following table presents a summary of the Corporation’s earnings and selected performance ratios:
|Net income (in thousands)||$||178,040||$||226,339|
|Net income available to common shareholders (in thousands)||$||175,905||$||226,339|
|Diluted net income per share||$||1.08||$||1.35|
|Return on average assets||0.73||%||1.06||%|
|Return on average equity||7.44||%||9.81||%|
Return on average common shareholders' equity (tangible) (1)
Net interest margin (2)
Efficiency ratio (1)
|Non-performing assets to total assets||0.58||%||0.68||%|
|Annualized net charge-offs to average loans||0.05||%||0.22||%|
(1)Ratio represents a financial measure derived by methods other than GAAP. See reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures," in Item 6. Selected Financial Data.
(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 COVID-19 pandemic has caused substantial disruptions in economic and social activity, both globally and in the United States. The spread of COVID-19, and related governmental actions to mandate or encourage temporary closures of businesses, quarantines, social distancing, "stay at home" orders and other restrictions on in-person operations and activities, have caused severe disruptions in the U.S. economy, which has, in turn, disrupted, and will likely continue to disrupt, the business, activities, and operations of the Corporation’s customers, as well as the Corporation’s own business and operations. The resulting impacts of the pandemic on consumers, including high levels of unemployment, have continued to cause changes in consumer and business spending, borrowing needs and saving habits, which have and will likely continue to affect the demand for loans and other products and services the Corporation offers, as well as the creditworthiness of its borrowers. The significant decrease in commercial activity and disruptions in supply chains associated with the pandemic, both nationally and in the Corporation’s markets, may cause customers, vendors and counterparties to be unable to meet existing payment or other obligations to the Corporation.
While portions of the national economy have reopened, there is still significant uncertainty concerning the breadth and duration of business disruptions related to the COVID-19 pandemic, as well as their impact on the U.S. economy. The extent to which the pandemic impacts the Corporation’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the continuing severity of the COVID-19 pandemic, whether there are additional outbreaks of COVID-19, and the actions taken to contain it or treat its impact. Moreover, although multiple COVID-19 vaccines have received regulatory approval and are currently being distributed to certain high-risk population groups, it is too early to know how quickly these vaccines can be distributed to the general population and how effective they will be in mitigating the adverse social and economic effects of the COVID-19 pandemic.
The Corporation’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. In an effort to mitigate the spread of COVID-19, the Corporation has adjusted service models at certain of its financial center locations, including limiting some locations to drive-up and ATM services only, offering lobby access by
appointment only, and encouraging the Corporation’s customers to use electronic banking platforms. Approximately 25% of the Corporation’s locations are expected to provide lobby access by appointment only on a long-term basis.
A significant portion of the Corporation’s employees have transitioned to working remotely as a result of the COVID-19 pandemic, which, in addition to requiring added support from the Corporation’s information technology infrastructure, increases cybersecurity risks. The continued spread of COVID-19 (or an outbreak of a similar highly contagious disease) could also negatively impact the business and operations of third-party service providers who perform critical services for the Corporation’s business.
COVID-19 has significantly affected the financial markets and has resulted in a number of responses by the U.S. government, including reductions in interest rates by the FOMC. These reductions in interest rates, especially if prolonged, could adversely affect the Corporation’s net interest income and margins and the Corporation’s profitability.
The CARES Act was enacted in March 2020 and, among other provisions, authorized the SBA to guarantee loans under the PPP for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. During 2020, the Corporation funded approximately $2.0 billion loans under the PPP.
Stimulus payments to eligible consumers, enhanced unemployment benefits provided by the federal government and traditional, state-provided unemployment compensation, as well as other forms of relief provided to consumers and businesses, have helped to limit some of the adverse impacts of COVID-19. The reduction, expiration or discontinuation of these measures may adversely impact the recovery of economic activity and the ability of borrowers to meet their payment and other obligations to the Corporation, either of which could require the Corporation to increase the ACL through provisions for credit losses.
The impact of COVID-19 on the Corporation’s financial results is evolving and uncertain. The Corporation has limited exposure to some of the industries that were initially most significantly impacted by COVID-19, such as hospitality and food services, energy and entertainment, and most of these loans are secured by real estate and other forms of collateral. While many areas of the economy began to exhibit signs of recovery during the second half of 2020, the lingering effects of the pandemic, particularly in certain sectors of the economy, or a resurgence in COVID-19 infections that prompts the continuation or imposition of governmental restrictions on activities, may result in decreased demand for the Corporation’s loan products. In addition, the decline in economic activity occurring due to COVID-19 and the actions by the FOMC with respect to interest rates are likely to affect the Corporation’s net interest income, non-interest income and credit-related losses for an uncertain period of time. As a result, the Corporation took steps to maintain liquidity and conserve capital during this period of uncertainty. The Corporation has been holding excess cash reserves since the end of the first quarter of 2020, has additional liquidity available through borrowing arrangements and other sources, and plans to maintain its excess cash and these arrangements until there is more clarity surrounding economic conditions. See additional discussion in "Results of Operations" and "Financial Condition" of Management's Discussion.
Adoption of CECL
On January 1, 2020, the Corporation adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology, and is referred to as CECL. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities. It also applies to OBS credit exposures, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, and net investments in leases recognized by a lessor in accordance with ASC Topic 842. Refer to "Note 1 - Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional information on the adoption of CECL.
The Corporation adopted CECL using the modified retrospective method for all financial assets measured at amortized cost, and OBS credit exposures. Results for 2020 are presented under CECL, while prior years' results are reported in accordance with the previously applicable incurred loss methodology. The Corporation recorded an increase of $58.3 million to the ACL on January 1, 2020, primarily as a result of the adoption of CECL. Retained earnings decreased $43.8 million and deferred tax assets increased by $12.4 million on January 1, 2020, representing the cumulative effect of adoption.
Following is a summary of the financial highlights for the year ended December 31, 2020:
•Net Income Per Share - Diluted net income per share decreased $0.27, or 20.0%, to $1.08 in 2020 compared to $1.35 in 2019. The decline in net income per share was due to a $50.4 million, or 22.3%, decrease in net income available to common shareholders partially offset by a decrease in weighted average diluted shares outstanding.
•Net Interest Income - The $19.2 million, or 3.0%, decrease in net interest income resulted from lower yields on interest-earning assets, partially offset by balance sheet growth and the impact of lower funding costs.
◦Net Interest Margin - For the year ended December 31, 2020, the net interest margin decreased to 2.86%, or 50 bp compared to 2019, driven by a 90 bp decrease in yields on interest-earning assets, partially offset by a 42 bp decrease in the cost of funds.
◦Loan Growth - Average Net Loans grew by $1.8 billion, or 11.2%, in comparison to 2019. The increase was driven largely by the issuance of PPP loans, included in commercial and industrial loans, and growth in the real estate commercial and residential mortgage portfolios.
◦Deposit Growth - Average deposits increased $2.6 billion, or 15.7%, in comparison to 2019. The increase was the result of growth in all deposit types except time deposits. At December 31, 2020, the loan-to-deposit ratio was 94.2%, as compared to 98.0% at December 31, 2019.
•Asset Quality - Non-performing assets increased $3.3 million, or 2.2%, as of December 31, 2020 compared to December 31, 2019. Net charge-offs to average loans outstanding were 0.05% for the year ended December 31, 2020 compared to 0.22% for the year ended December 31, 2019. The provisions for credit losses increased $44.1 million, to $76.9 million, for the year ended December 31, 2020 compared to $32.8 million for the same period in 2019. The higher provision in 2020 was largely driven by the adoption of CECL, which, as a result of an overall downturn in economic forecasts due to COVID-19, resulted in increases in the ACL due to higher expected future credit losses under CECL.
•Non-Interest Income - Non-interest income, excluding investment securities gains, increased $14.9 million, or 7.1%, in comparison to 2019. Increases were experienced in mortgage banking and wealth management, partially offset by decreases in commercial and consumer banking.
•Investment Securities Gains/Balance Sheet Restructurings - During both 2020 and 2019, the Corporation completed limited balance sheet restructurings which included sales of investment securities and corresponding prepayment of FHLB advances. As a result, investment securities gains totaled $3.1 million in 2020, as compared to $4.7 million in 2019, a $1.7 million, or 35.5%, decrease. In addition, included in non-interest expense were prepayment penalties on FHLB advances of $2.9 million and $4.3 million incurred during 2020 and 2019, respectively.
•Non-Interest Expense - Non-interest expense increased $11.7 million, or 2.1%, in comparison to 2019, driven largely by higher salaries and employee benefits expense, state taxes and data processing and software expenses. Partially offsetting these increases were reductions in other outside services and marketing.
In 2020, the Corporation completed a strategic operating expense review, which resulted in a number of cost-saving initiatives that are expected to result in annual expense savings of $25 million, which is not expected to be fully realized until mid-2021. The Corporation expects to reinvest a portion of the cost savings to accelerate digital transformation initiatives. In 2020, $16.2 million of expenses were recognized related to the cost-savings initiatives in the following categories: $5.6 million of severance expense (included in salaries and employee benefits) and $4.8 million of write-offs of fixed assets and $5.8 million of lease termination charges (both included in other expense).
•Income Taxes - Income tax expense for 2020 resulted in an ETR of 12.0%, as compared to 14.3% for 2019. The ETR was lower mainly due to lower income before income taxes. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and TCIs.
•Long-term Borrowings - In March 2020, the Corporation issued a total of $375.0 million of subordinated notes, with $200.0 million of subordinated notes due in 2030 having a fixed-to-floating rate of 3.25% and an effective rate of 3.35% and $175.0 million of subordinated notes due in 2035 having a fixed-to-floating rate of 3.75% and an effective rate of 3.85%.
•Preferred Stock - In October 2020, the Corporation issued 8.0 million depositary shares ("Depositary Shares"), each representing a 1/40th interest in a share of Fulton’s 5.125% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, with a liquidation preference of $1,000 per share (equivalent to $25.00 per Depositary Share), for an aggregate offering amount of $200.0 million. The Corporation received net proceeds from the offering of $192.9 million, after deducting issuance costs.
CRITICAL ACCOUNTING POLICIES
The following is a summary of those accounting policies that the Corporation considers to be most important to the presentation of its financial condition and results of operations, because they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain. See additional information regarding these critical accounting policies in "Note 1 - Summary of Significant Accounting Policies," in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Allowance for Credit Losses - The Corporation adopted new accounting guidance for estimating credit losses, known as CECL, in the first quarter of 2020. In accordance with CECL, the ACL, which includes both the ACL - loans and the ACL - OBS credit exposures, is based on estimated losses over the remaining expected life of loans and OBS exposures. Management's determination of the appropriateness of the reserve is based on periodic evaluations of the loan portfolio, lending-related commitments, current and forecasted economic factors and other relevant factors.
In determining the ACL, the Corporation uses three inputs in to the model estimate. These inputs are PD, which estimates the likelihood that a borrower will be unable to meet its debt obligations; LGD, which estimates the share of an asset that is lost if a borrower defaults; and EAD which estimates the gross exposure under a facility upon default. The PD models were developed based on historical default data. Both internal and external variables are evaluated in the process. The main internal variables are risk rating or delinquency history and the external variables are economic variables obtained from third-party provided forecasts. Management applies risk rating transition matrices to pools of loans and lending-related commitments with similar risk characteristics to determine default probabilities, utilizes economic forecasts, applies modeled LGD results to associated EAD and incorporates modeled overlays and qualitative adjustments to estimate ACL. As such, the calculation of the ACL is inherently subjective and requires management to exercise significant judgment.
The ACL is estimated over a reasonable and supportable forecast period based on the projected performance of specific economic variables that statistically correlate with PD rates. As economic variables revert to long-term averages through the forecast process, externally developed long-term economic forecasts are used to establish the impacts of the economic scenario, reversion, and long-term averages in the development of losses over the expected life of the assets being modeled. The ACL reserve is highly sensitive to the economic forecasts used to develop the reserve. Due to the high level of uncertainty regarding significant assumptions, such as the ultimate impact of COVID-19 and effectiveness of the related governmental responses, since the beginning of 2020, the Corporation has evaluated a range of economic scenarios, including more and less severe economic deteriorations, with varying speeds of recovery.
The ACL includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative models. Qualitative adjustments include and consider changes in national, regional and local economic and business conditions, an assessment of the lending environment, including underwriting standards and other factors affecting credit quality. Qualitative adjustments have increased compared to those at the time of the adoption of CECL on January 1, 2020 primarily as a result of uncertainties related to the economic impact of COVID-19, including consideration for the future performance of loans that received deferrals or forbearances as a result of COVID-19 and the impact COVID-19 had on certain industries where the quantitative models was not fully capturing the appropriate level of risk.
For further discussion of the methodology used in the determination of the ACL, refer to Note 1, "Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Goodwill - Goodwill recorded in connection with acquisitions is not amortized to expense, but is tested at least annually for impairment. A quantitative annual impairment test is not required if, based on a qualitative analysis, the Corporation determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. The Corporation completes its annual goodwill impairment test in October of each year.
Goodwill valuation is inherently subjective, with a number of factors based on assumptions and management judgments. Among these are selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance could result in different assessments of the fair values of reporting units and could result in impairment charges.
For additional details related to the annual goodwill impairment test, see "Note 1 - Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Income Taxes – The provision for income taxes is based upon income before income taxes, adjusted for the effect of certain tax-exempt income, non-deductible expenses and credits. In addition, certain items of income and expense are reported in
different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. DTAs or deferred tax liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The Corporation must also evaluate the likelihood that DTAs will be recovered through future taxable income. If any such assets are determined to be more likely than not unrecoverable, a valuation allowance must be recognized. The assessment of the carrying value of DTAs is based on certain assumptions, changes in which could have a material impact on the Corporation’s consolidated financial statements.
On a periodic basis, the Corporation evaluates its income tax positions based on tax laws, regulations and financial reporting considerations, and records adjustments as appropriate. Recognition and measurement of tax positions is based upon management’s evaluations of current taxing authorities’ examinations of the Corporation’s tax returns, recent positions taken by the taxing authorities on similar transactions and the overall tax environment.
Fair Value Measurements – Assets and liabilities are categorized in a fair value hierarchy for the inputs to valuation techniques used to measure at fair value based on the following categories (from highest to lowest priority):
•Level 1 – Inputs that represent quoted prices for identical instruments in active markets.
•Level 2 – Inputs that represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Also included are valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means.
•Level 3 – Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
The determination of fair value for assets categorized as Level 3 items involves significant subjectivity due to the use of unobservable inputs. In addition, determining when a market is no longer active and placing little or no reliance on distressed market prices requires the use of management’s judgment. The Corporation's Level 3 assets include AFS securities in the form of pooled trust preferred securities, certain single-issuer trust preferred securities issued by financial institutions and ARCs. The Corporation also categorizes net loans individually evaluated for impairment, OREO and MSRs as Level 3 assets measured at fair value on a nonrecurring basis.
The Corporation engages third-party valuation experts to assist in valuing interest rate swap derivatives and most AFS investment securities, both measured at fair value on a recurring basis, and MSRs, which are measured at fair value on a non-recurring basis. The pricing data and market quotes the Corporation obtains from outside sources are reviewed internally for reasonableness.
For additional details see "Note 19 - Fair Value Measurements," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Recently Issued Accounting Standards
For a description of accounting standards recently issued, but not yet adopted by the Corporation, see "Recently Issued Accounting Standards," in "Note 1 - Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporation’s net income. The Corporation manages the risk associated with changes in interest rates through the techniques described within Item 7A, "Quantitative and Qualitative Disclosures About Market Risk." The following table provides a comparative average balance sheet and net interest income analysis for 2020 compared to 2019 and 2018. Interest income and yields are presented on an FTE basis, using a 21% federal tax rate, as well as statutory interest expense disallowances. The discussion following this table is based on these tax-equivalent amounts.
|(dollars in thousands)|
Net Loans (1)
Taxable investment securities (2)
Tax-exempt investment securities (2)
|Total investment securities||3,007,467||84,814||2.82||2,778,846||80,554||2.89||2,662,800||71,329||2.68|
|Loans held for sale||60,015||2,077||3.46||25,795||1,351||5.24||22,970||1,159||5.05|
|Other interest-earning assets||1,120,727||5,504||0.49||445,008||9,249||2.08||382,569||6,193||1.62|
|Total interest-earning assets||22,458,599||755,181||3.36||19,679,996||838,273||4.26||18,883,602||770,635||4.08|
|Cash and due from banks||139,146||119,144||104,595|
|Premises and equipment||238,864||239,376||231,762|
Less: ACL - loans (3)
|LIABILITIES AND EQUITY|
|Savings and money market deposits||5,550,234||14,654||0.26||5,018,381||41,823||0.83||4,684,023||27,226||0.58|
|Total interest-bearing deposits||13,686,243||70,045||0.51||12,517,267||131,775||1.05||11,545,485||87,712||0.76|
|Total interest-bearing liabilities||15,751,126||113,671||0.72||14,309,546||176,917||1.24||13,308,981||128,058||0.96|
|Total deposits/Cost of deposits||19,401,046||0.36||16,766,561||0.79||15,832,606||0.55|
|Total Interest-bearing liabilities and non-interest bearing deposits/Cost of funds||21,465,929||0.53||18,558,840||0.95||17,596,102||0.73|
|Total Liabilities and Shareholders’ Equity||$||24,333,717||$||21,258,040||$||20,183,202|
|Net interest income/net interest margin (FTE)||641,510||2.86||%||661,356||3.36||%||642,577||3.40||%|
|Tax equivalent adjustment||(12,303)||(12,967)||(12,121)|
|Net interest income||$||629,207||$||648,389||$||630,456|
(1)Average balances include non-performing loans.
(2) Average balances include amortized historical cost for AFS securities; the related unrealized holding gains (losses) are included in other assets.
(3) ACL - loans relates to the ACL specifically for Net Loans and does not include the ACL for OBS credit exposures, which is included in other
Comparison of 2020 to 2019
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volumes) and changes in rates:
|2020 vs. 2019 Increase (decrease) due to change in|
|Interest income on:|
|Loans and leases||$||77,662||$||(161,996)||$||(84,334)|
|Taxable investment securities||(3,323)||(1,059)||(4,382)|
|Tax-exempt investment securities||10,576||(1,933)||8,643|
|Loans held for sale||1,308||(582)||726|
|Other interest-earning assets||6,909||(10,654)||(3,745)|
|Total interest income||$||93,132||$||(176,224)||$||(83,092)|
|Interest expense on:|
|Total interest expense||$||13,424||$||(76,670)||$||(63,246)|
(1) Average balance includes non-performing loans.
|Note:||Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of the direct changes that are attributable to each component.|
In March 2020, the FOMC decreased the Fed Funds Rate by a total of 150 bp in response to COVID-19. These changes in the Fed Funds Rate resulted in corresponding decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and LIBOR as well as for certain interest-bearing liabilities.
FTE net interest income decreased $19.8 million, or 3.0%, to $641.5 million in 2020. Net interest margin decreased 50 bp to 2.86% in 2020 from 3.36% in 2019. As summarized above, FTE interest income decreased $176.2 million as the result of a 90 bp decrease in the yield on interest-earning assets, and increased $93.1 million as the result of a $2.8 billion, or 14.1%, increase in average interest-earning assets, primarily loans. The average yield on the loan portfolio decreased 92 bp, to 3.63%, largely due to the aforementioned decreases in the Fed Funds Rate in 2020 and corresponding decreases to loan index rates. All variable and certain adjustable rate loans repriced to lower rates as a result of these interest rate decreases, and yields on new loan originations were lower than the average yield on the loan portfolio. Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease. Therefore, the benefit of increases or the reverse effect of decreases in index rates on adjustable rate loans may not be fully realized until future periods. In addition, 2020 interest income included $6.5 million of unamortized origination fees and direct origination costs recognized as interest income at the time of PPP loan forgiveness, which is in addition to the normal amortization of those items of approximately $22.5 million recognized in 2020.
Interest expense decreased $63.2 million, with a 52 bp decrease in the rate on average interest-bearing liabilities contributing $76.7 million to this decrease, partially offset by a $13.4 million increase in expense as a result of a $1.4 billion, or 10.1%, increase in interest-bearing liabilities, primarily demand deposits and long-term borrowings. The rates on average interest-bearing demand and savings accounts decreased 54 and 57 bp, respectively, which contributed $26.8 million and $31.2 million to the decrease in interest expense, respectively. In addition, the 106 bp decrease in the cost of short-term borrowings contributed $8.7 million to the decrease in interest expense.
Average loans and average FTE yields, by type, are summarized in the following table:
|Increase (Decrease) in Balance|
|(dollars in thousands)|
|Real estate – commercial mortgage||$||6,928,269||3.53||%||$||6,463,783||4.56||%||$||464,486||7.2||%|
Commercial and industrial (1)
|Real estate – residential mortgage||2,876,538||3.80||2,441,684||4.05||434,854||17.8|
|Real estate – home equity||1,255,094||4.11||1,382,908||5.23||(127,814)||(9.2)|
|Real estate – construction||965,534||3.64||928,183||4.79||37,351||4.0|
|Equipment lease financing||281,859||3.93||279,489||4.40||2,370||0.8|
(1) Includes average PPP loans of $1.3 billion for the year ended December 31, 2020.
(2) Consists of overdrafts and net origination fees and costs.
Average loans increased $1.8 billion, or 11.2%, which contributed $77.7 million to the increase in FTE interest income. The increase was driven largely by growth in the commercial and industrial portfolio as a result of loans originated under the PPP. Excluding loans originated under the PPP, commercial and industrial loan balances declined $2.4 million. Commercial and residential mortgage loan portfolios, as well as the construction, consumer and equipment lease financing portfolios, experienced growth, partially offset by decreases in the home equity loan portfolio.
Average investment securities increased $228.6 million, or 8.2%, in comparison to 2019, which contributed a $7.3 million increase in FTE interest income. This was partially offset by a 7 bp decrease in average yields, resulting in a $3.0 million decrease in FTE interest income. Other interest-earning assets increased $675.7 million, primarily the result of an increase in cash pledged with counterparties for interest rate swap contracts, contributing $6.9 million to FTE interest income. The yield on other interest-earning assets decreased 159 bp in comparison to 2019, as a result of the Fed Funds Rate decreases during 2020, resulting in a $10.7 million decrease in FTE interest income.
Average deposits and interest rates, by type, are summarized in the following table:
|Increase (Decrease) in|
|(dollars in thousands)|
|Total demand and savings||16,543,978||0.16||13,651,734||0.44||2,892,244||21.2|
The average cost of interest-bearing deposits decreased 54 bp to 0.51% from 1.05% in 2019 and contributed $66.2 million to the decrease in interest expense compared to 2019. These rates do not include the impact of non-interest bearing deposits, which lower the cost of total deposits to 0.36% and 0.79% in 2020 and 2019, respectively. The decrease in the cost is mainly as a result of reductions in deposit rates in response to the FOMC reductions to the Fed Funds Rate as well as deposit rate decreases implemented after the Fed Funds Rate cuts during the second half of 2019. The majority of deposit rates are discretionary, with the exception of indexed municipal balances. The average balance of interest-bearing deposits increased $1.2 billion, or 9.3%, partially offsetting the decrease in interest expense by $4.4 million in comparison to 2019.
Average borrowings and interest rates, by type, are summarized in the following table:
|Increase (Decrease) in|
|(dollars in thousands)|
Customer funding (1)
|Federal funds purchased||64,918||0.82||132,578||2.20||(67,660)||(51.0)|
FHLB advances and other borrowings (2)
|Total short-term borrowings||810,583||0.64||849,679||1.70||(39,096)||(4.6)|
|Other long-term borrowings||696,704||4.02||387,371||4.48||309,333||79.9|
|Total long-term borrowings||1,254,300||3.06||942,600||3.25||311,700||33.1|
(1) Includes repurchase agreements and short-term promissory notes.
(2) Represents FHLB advances with an original maturity term of less than one year.
Total average borrowings increased $272.6 million, or 15.2%, while the total average cost of these funds decreased 40 bp, to 2.11% compared to 2019. Total average short-term borrowings decreased $39.1 million, or 4.6%, due to a decrease in short-term FHLB advances and other borrowings and federal funds purchased, partially offset by increases in average customer funding. The cost of average short-term borrowings decreased 106 bp to 0.64% in 2020, largely due to the net impact of changes in the Fed Funds Rate.
Average long-term borrowings increased $311.7 million, or 33.1%, and the average rate decreased 19 bp compared to 2019, as a result of the issuance of $375.0 million of subordinated notes in March of 2020.
Comparison of 2019 to 2018
The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances (volumes) and changes in rates:
|2019 vs. 2018 Increase (decrease) due to change in|
|Interest income on:|
Net Loans (1)
|Taxable investment securities||792||5,720||6,512|
|Tax-exempt investment securities||2,744||(31)||2,713|
|Loans held for sale||148||44||192|
|Other interest-earning assets||1,117||1,939||3,056|
|Total interest income||$||32,266||$||35,374||$||67,640|
|Interest expense on:|
|Total interest expense||$||9,186||$||39,673||$||48,859|
(1) Average balance includes non-performing loans.
Note: Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of the direct changes that are attributable to each component.
The FOMC increased the Fed Funds Rate by 25 bp in each of March, June, September and December of 2018. During 2019, the FOMC decreased the Fed Funds Rate by 25 bp in each of August, September and October. These changes in the Fed Funds Rate resulted in corresponding increases or decreases to the index rates for the Corporation's variable and adjustable rate loans, primarily the prime rate and the LIBOR, as well as for certain interest-bearing liabilities.
FTE net interest income increased $18.8 million, or 2.9%, to $661.4 million in 2019. Net interest margin decreased 4 bp to 3.36% in 2019 from 3.40% in 2018. As summarized above, FTE interest income increased $35.4 million as the result of an 18 basis point increase in the yield on interest-earning assets, and increased $32.3 million as the result of a $796.4 million, or 4.2%, increase in average interest-earning assets, primarily loans. The average yield on the loan portfolio increased 17 bp, to 4.55%, largely due to the aforementioned increases in the Fed Funds Rate in 2018 and corresponding increases to loan index rates. All variable and certain adjustable rate loans repriced to higher rates as a result of these interest rate increases, and yields on new loan originations exceeded the average yield on the loan portfolio. Adjustable rate loans reprice on dates specified in the loan agreements, which may be later than the date the Fed Funds Rate and related loan index rates increase or decrease. Therefore, the benefit of increases or the reverse effect of decreases in index rates on adjustable rate loans may not be fully realized until future periods.
Interest expense increased $48.9 million, with a 28 basis point increase in the rate on average interest-bearing liabilities contributing $39.7 million to this increase. The rates on average interest-bearing time, savings accounts and demand deposits increased 45, 25 and 20 bp, respectively. These rate increases contributed $12.9 million, $12.5 million and $8.6 million, respectively, to the increase in interest expense. In addition, the 63 basis point increase in the rates on short-term borrowings contributed $5.3 million to the increase in interest expense.
Average loans and average FTE yields, by type, are summarized in the following table:
|Increase (Decrease) in Balance|
|(dollars in thousands)|
|Real estate - commercial mortgage||$||6,463,783||4.56||%||$||6,314,349||4.38||%||$||149,434||2.4||%|
|Commercial and industrial||4,473,549||4.52||4,314,584||4.32||158,965||3.7|
|Real estate - residential mortgage||2,441,684||4.05||2,085,258||3.93||356,426||17.1|
|Real estate - home equity||1,382,908||5.23||1,493,620||4.91||(110,712)||(7.4)|
|Real estate - construction||928,183||4.79||965,835||4.45||(37,652)||(3.9)|
|Equipment lease financing||279,489||4.40||270,967||4.60||8,522||3.1|
(1) Consists of overdrafts and net origination fees and costs.
Average loans increased $615.1 million, or 3.9%, which contributed $27.5 million to the increase in FTE interest income. In addition, the average yield on the loan portfolio increased 17 bp, contributing $27.7 million to the increase in FTE interest income. As mentioned above, the increase in average yields on loans was driven by the repricing of existing variable and adjustable rate loans as a result of increases in the prime rate and LIBOR during 2018 that were only partially offset by decreases in those same rates that occurred in the second half of 2019.
Average investment securities increased $116.0 million, or 4.4%, in comparison to 2018, which contributed $9.2 million to the increase in FTE interest income. The average yield on investment securities increased 21 bp, contributing $5.7 million to the increase in FTE interest income. Other interest-earning assets increased $62.4 million, or 16.3%, primarily the result of an increase in cash pledged with counterparties for interest rate swap contracts. The yield on other interest-earning assets increased 46 bp in comparison to 2018, as a result of the Fed Funds Rate increases during 2018 that were only partially offset by the decreases during 2019, resulting in a $1.9 million increase in FTE interest income.
Average deposits and interest rates, by type, are summarized in the following table:
|Increase (Decrease) in Balance|
|(dollars in thousands)|
|Total demand and savings||13,651,734||0.44||13,035,073||0.38||616,661||4.7|
Average interest-bearing deposits contributed $44.1 million to the increase in interest expense, increasing $971.8 million, or 8.4%, in comparison to 2018. The average cost of interest-bearing deposits increased 29 bp to 1.05% in 2019 from 0.76% in 2018, due to increases in the rates on all types of interest-bearing deposits as a result of the Fed Funds Rate increases and related market competition that occurred in 2018, and was only partially impacted by decreases to the Fed Funds Rate that occurred in 2019.
Average brokered deposits increased $123.6 million, to $245.5 million, as a result of continued growth of brokered deposit programs introduced in 2018.
Average borrowings and interest rates, by type, are summarized in the following table:
|2019||2018||Increase (Decrease) in|
|(dollars in thousands)|
Customer funding (1)
|Federal funds purchased||132,578||2.20||229,715||1.70||(97,137)||(42.3)|
FHLB advances and other borrowings (2)
|Total short-term borrowings||849,679||1.70||785,923||1.07||63,756||8.1|
|Other long-term borrowings||387,371||4.48||386,625||4.47||746||0.19|
|Total long-term borrowings||942,600||3.25||977,573||3.26||(34,973)||(3.6)|
(1) Includes repurchase agreements and short-term promissory notes.
(2) Represents FHLB advances with an original maturity term of less than one year.
Total average borrowings increased $28.8 million, or 1.6%, while the total average cost of these funds increased 22 bp, to 2.51%. Total average short-term borrowings increased $63.8 million, or 8.1%, due to an increase in short-term FHLB advances and other borrowings, partially offset by decreases in average short-term customer funding and federal funds purchased. The cost of average short-term borrowings increased 63 bp to 1.70% in 2019, largely due to the annual average impact of Fed Funds Rate increases.
Average long-term FHLB advances decreased $35.7 million, or 6.0%, and the average rate decreased 8 bp as higher rate advances were paid off or matured and replaced with advances at lower average rates.
Provision for Credit Losses
The provision for credit losses increased $44.1 million, to $76.9 million, for the year ended December 31, 2020. The increase was the result of several factors, most notably, the overall uncertainty in economic forecasts due to COVID-19. See additional details under "Allowance for Credit Losses and Asset Quality" in the "Financial Condition" section below.
Non-Interest Income and Expense
Comparison of 2020 to 2019
The following table presents the components of non-interest income:
|(dollars in thousands)|
|Merchant and card||$||23,139||$||24,077||$||(938)||(3.9)||%|
|Other commercial banking||10,134||13,773||(3,639)||(26.4)|
|Total commercial banking||70,286||71,117||(831)||(1.2)|
|Other consumer banking||9,266||11,039||(1,773)||(16.1)|
|Total consumer banking||41,598||49,503||(7,905)||(16.0)|
|Wealth management fees||59,058||55,678||3,380||6.1|
|Gains on sales of mortgage loans||53,599||17,881||35,718||N/M|
|Mortgage servicing income||(11,290)||5,218||(16,508)||N/M|
|Total mortgage banking||42,309||23,099||19,210||83.2|
|Non-interest income before investment securities gains, net||226,335||211,427||14,908||7.1|
|Investment securities gains, net||3,053||4,733||(1,680)||(35.5)|
|Total Non-Interest Income||$||229,388||$||216,160||$||13,227||6.1||%|
Excluding net investment securities gains, non-interest income increased $14.9 million, or 7.1%, in 2020, as compared to 2019.
Total commercial banking income decreased $831,000, compared to 2019, driven mainly by a decrease in other commercial banking income (SBA lending income and other service charges as a result of COVID-19). This decrease was somewhat offset by an increase in capital markets revenue.
Total consumer banking decreased $7.9 million, or 16.0%, compared to 2019, driven primarily by lower overdraft fees. Other consumer banking income decreased largely due to lower ATM fees.
Wealth management revenues increased $3.4 million, or 6.1%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance.
Mortgage banking income increased $19.2 million, or 83.2%, mainly due to gains on sales of mortgage loans, partially offset by a decrease in mortgage servicing income. Gains increased as a result of both higher volumes of loans sold and higher spreads on sales. The decrease in mortgage servicing income was driven by $10.5 million of MSR impairment charges and higher MSR amortization due to higher prepayments as a result of the lower rate environment. There were no MSR impairment charges in 2019.
Investment securities gains decreased $1.7 million, or 35.5%, mainly attributed to the difference in scope of the limited balance sheet restructures in 2020 and 2019. See Note 3, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.
The following table presents the components of non-interest expense:
|(dollars in thousands)|
|Salaries and employee benefits||$||324,395||$||311,934||$||12,461||4.0||%|
|Data processing and software||48,073||44,679||3,394||7.6|
|Other outside services||31,432||39,989||(8,557)||(21.4)|
|Amortization of TCI||6,126||6,021||105||1.7|
|Prepayment penalty on FHLB advances||2,878||4,326||(1,448)||(33.5)|
|Total Non-Interest Expense||$||579,440||$||567,736||$||11,704||2.1||%|
In the third quarter of 2020, the Corporation announced cost-savings initiatives which will result in approximately $25 million in annual expense savings, not to be fully realized until mid-2021. In 2020, $16.2 million of expenses were recognized related to the cost-savings initiatives in the following categories: $5.6 million of severance expense (included in salaries and employee benefits) and $4.8 million of write-offs of fixed assets and $5.8 million of lease termination charges (both included in other expense).
In 2019, the Corporation recognized $10.9 million of expenses related to the Charter Consolidation, primarily in the following categories: $1.9 million of severance expense (included in salaries and employee benefits), $6.6 million of other outside services, $1.0 million of an intangible write-off (included in intangible amortization) and $600,000 in marketing expense.
The more significant fluctuations in expense levels, excluding the cost-savings initiatives in 2020 and the charter consolidation costs in 2019, by category are explained below:
•Salaries and employee benefits increased $9.0 million mainly due to increases in employee salaries (annual merit increases), overtime and incentive compensation (primarily COVID-19 related for front-line employees).
•Other outside services decreased $2.0 million, or 5.9%, primarily due to more in-house development and less reliance on third-party service providers.
•Data processing and software increased $3.4 million reflecting higher transaction volumes and costs related to growth and technology initiatives.
•Marketing decreased $4.1 million, or 44.3%, as a result of reduced marketing campaigns.
•State taxes increased $3.7 million, or 41.8%, as a result higher Pennsylvania Bank Shares tax due to the Bank's increased equity as well as higher sales taxes.
•Other expenses decreased $4.3 million compared to 2019, primarily driven by a decrease in travel and entertainment, influenced by the restrictions due to COVID-19.
Comparison of 2019 to 2018
The following table presents the components of non-interest income:
|(dollars in thousands)|
|Merchant and card||$||24,077||$||23,427||$||650||2.8||%|
|Commercial loan interest rate swap||14,875||9,831||5,044||51.3|
|Total commercial banking||71,117||63,929||7,188||11.2|
|Other consumer banking||11,039||11,319||(280)||(2.5)|
|Total consumer banking||49,503||48,422||1,081||2.2|
|Mortgage banking income:|
|Gain on sales of mortgage loans||17,881||13,021||4,860||37.3|
|Mortgage servicing income||5,218||6,005||(787)||(13.1)|
|Total mortgage banking||23,099||19,026||4,073||21.4|
|Non-interest income before investment securities gains, net||211,427||195,488||15,939||8.2|
|Investment securities gains, net||4,733||37||4,696||N/M|
|Total Non-Interest Income||$||216,160||$||195,525||$||20,635||10.6||%|
Excluding net investment securities gains, non-interest income increased $15.9 million, or 8.2%, for the year ended December 31, 2019, as compared to the same period in 2018, with increases across all major categories
Wealth management fees increased $3.5 million, or 6.8%, resulting primarily from growth in brokerage income due to an increase in client asset levels and improved overall market performance, as well as the acquisitions of two small wealth management firms in 2019.
Total commercial banking income increased $7.2 million, or 11.2%, compared to 2018, driven mainly by an increase in capital markets revenue along with increases in merchant and card income and cash management fees.
Total consumer banking increased $1.1 million, or 2.2%, compared to 2018, driven primarily by card income.
Mortgage banking income increased $4.1 million, or 21.4%, mainly due to gains on sales of mortgage loans. The increase in gains resulted from both higher volumes of loans sold and higher spreads on sales.
Investment securities gains increased $4.7 million compared to 2018, mainly attributed to the sale of approximately $400 million of investment securities and a corresponding prepayment of FHLB advances. This balance sheet restructuring occurred in the third quarter of 2019. See Note 3, "Investment Securities," in the Notes to Consolidated Financial Statements for additional details.
The following table presents the components of non-interest expense:
|(dollars in thousands)|
|Salaries and employee benefits||$||311,934||$||303,202||$||8,732||2.9||%|
|Data processing and software||44,679��||41,286||3,393||8.2|
|Other outside services||39,989||33,758||6,231||18.5|
|Amortization of TCI||6,021||11,449||(5,428)||(47.4)|
|Prepayment penalty on FHLB advances||4,326||—||4,326||N/M|
|Total Non-Interest Expense||$||567,736||$||546,104||$||21,632||4.0||%|
In 2019, $10.9 million of expenses were incurred related to Charter Consolidation, as compared to $3.6 million in 2018, a $7.3 million increase. The 2019 expenses were primarily in salaries and benefits ($1.9 million of severance expense), other outside services ($6.6 million), intangible amortization ($1.0 million write-off) and marketing ($650,000).
The more significant fluctuations in expense levels, excluding charter consolidation costs, by category are explained below:
•Salaries and employee benefits increased $6.8 million mainly due to an increase in employee salaries (annual merit increases). Healthcare and 401(k) plan matching expense also increased, but were partially offset by lower defined benefit pension expense driven by changes in the discount rate compared to 2018.
•Net occupancy expense increased $1.1 million, or 2.2%, due mainly to the addition of new properties.
•Data processing and software increased $3.4 million, or 8.2%, reflecting higher transaction volumes and costs related to growth and technology initiatives.
•Marketing increased $1.0 million, or 11.2%, due to additional promotions, primarily related to deposits.
•FDIC insurance expense decreased $3.2 million, or 29.2%, due to the recognition of assessment credits in 2019.
•Amortization of tax credit investments decreased $5.4 million as 2018 included amortization for one significant investment which generated a corresponding credit to income taxes.
•2019 includes approximately $4.3 million of penalties related to the prepayment of certain FHLB advances in conjunction with the previously mentioned balance sheet restructuring.
•Other expenses increased $5.4 million due to losses on sale of fixed assets, telecommunications expense and operating risk losses.
Income tax expense for 2020 was $24.2 million, a $13.5 million, or 35.7%, decrease from $37.6 million in 2019. The ETR was 12.0% in 2020, as compared to 14.3% in 2019. The decrease in income tax expense and the ETR primarily resulted from lower income before income taxes. The ETR is generally lower than the federal statutory rate of 21% due to tax-exempt interest income earned on loans, investments in tax-free municipal securities and TCIs that generate tax credits under various federal programs.
The table below presents condensed consolidated ending balance sheets.
|December 31||Increase (Decrease)|
|(dollars in thousands)|
|Cash and cash equivalents||$||1,847,832||$||517,791||$||1,330,041||N/M|
|FRB and FHLB Stock||92,129||97,422||(5,293)||(5.4)||%|
|Loans held for sale||83,886||37,828||46,058||121.8|
|Premises and equipment||231,480||240,046||(8,566)||(3.6)|
|Goodwill and intangibles||536,659||535,303||1,356||0.3|
|Liabilities and Shareholders’ Equity|
|Total Shareholders’ Equity||2,616,828||2,342,176||274,652||11.7|
|Total Liabilities and Shareholders’ Equity||$||25,906,733||$||21,886,040||$||4,020,693||18.4||%|
Cash and Cash Equivalents
The $1.3 billion increase in cash and cash equivalents mainly resulted from additional cash maintained at the FRB due to deposit growth as well as additional collateral required to be posted with counterparties for derivative contracts.
Loans Held for Sale
Loans held for sale increased $46.1 million, or 121.8%, primarily as the result of an increase in the volume of residential mortgage originations due to higher refinancing activity.
The following table presents the carrying amount of investment securities as of December 31:
|Available for Sale|
|State and municipal securities||$||952,613||$||652,927|
|Corporate debt securities||367,145||377,357|
|Collateralized mortgage obligations||503,766||693,718|
|Residential Mortgage-backed securities||377,998||177,312|
|Commercial mortgage backed securities||762,415||494,297|
|Auction rate securities||98,206||101,926|
|Held to Maturity|
|Residential mortgage-backed securities||278,281||369,841|
|Total investment securities||$||3,340,424||$||2,867,378|
Total AFS securities increased $564.6 million, or 22.6%, to $3.1 billion at December 31, 2020 primarily due to the investment of a portion of the proceeds from the issuance of $375.0 million of subordinated notes and investment of excess funding, partially offset by the sale of investment securities, with an estimated fair value of $82.0 million, completed during the second quarter of 2020 as part of a limited balance sheet restructuring that included the redemption of FHLB advances. See Note 9, "Short-term and Long-Term Borrowings," in the Notes to Consolidated Financial Statements for additional detail on the subordinated notes issuance. Total HTM securities decreased $91.6 million, or 24.8%, primarily as a result of principal repayments and premium amortization. There were no purchases of or transfers into HTM securities during 2020.
The following table presents ending loans outstanding, by type, as of the dates shown, and the changes in balances for the most recent year:
|(dollars in thousands)|
|Real estate – commercial mortgage||$||7,105,092||$||6,700,776||$||6,434,285||$||6,364,804||$||6,018,582|
Commercial and industrial (1)
|Real estate – residential mortgage||3,141,915||2,641,465||2,251,044||1,954,711||1,601,994|
|Real estate – home equity||1,202,913||1,314,944||1,452,137||1,559,719||1,625,115|
|Real estate – construction||1,047,218||971,079||916,599||1,006,935||843,649|
|Equipment lease financing and other||284,377||322,625||311,866||291,556||246,704|
(1) Includes PPP loans totaling $1.6 billion as of December 31, 2020.
Net Loans increased $2.1 billion, or 12.3%, as of December 31, 2020 compared to December 31, 2019, primarily due to growth in commercial and industrial loans and commercial and residential mortgage loans, partially offset by decreases in home equity loans and equipment lease financing. The increase in commercial and industrial loans was impacted by approximately $1.6 billion of PPP loans.
The Corporation does not have a significant concentration of credit risk with any single borrower, industry or geographic location within its footprint. As of December 31, 2020, approximately $8.2 billion, or 43.1%, of the loan portfolio was comprised of commercial mortgage and construction loans. The Corporation's policies limit the maximum total lending commitment to an individual borrower to $55.0 million as of December 31, 2020. In addition, the Corporation has established lower total lending limits for certain types of lending commitments, and lower total lending limits based on the Corporation's internal risk rating of an individual borrower at the time the lending commitment is approved.
The following table summarizes the industry concentrations within the commercial mortgage and the commercial and industrial loan portfolios (including PPP loans) as of December 31:
Real estate (1)
Other services (3)
|Hospitality and food services||4.2||4.1|
|Professional, scientific and technical services||3.6||2.9|
|Arts, entertainment and recreation||2.4||2.2|
|Transportation and warehousing||1.7||1.2|
(1) Includes commercial loans to borrowers engaged in the business of: renting, leasing or managing real estate for others; selling and/or buying real estate for others; and appraising real estate.
(2) Includes commercial loans to borrowers engaged in the construction industry.
(3) Excludes public administration.
(4) Includes energy sector.
The following table presents the changes in non-accrual loans for the years ended December 31:
|Real Estate -|
|Real Estate -|
|Real Estate -|
|Real Estate -|
|Consumer||Equipment Lease Financing||Total|
|Balance of non-accrual loans at December 31, 2018||$||50,149||$||30,389||$||7,390||$||14,668||$||6,707||$||—||$||19,269||$||128,572|
|Transfers to OREO||(144)||(680)||(124)||(2,433)||(582)||—||—||(3,963)|
|Transfers to accrual status||(572)||(1,305)||(17)||(57)||(405)||—||—||(2,356)|
|Balance of non-accrual loans at December 31, 2019||48,106||33,166||3,618||16,676||7,004||—||16,528||125,098|
|Transfers to OREO||—||(31)||—||(237)||(227)||—||—||(495)|
|Transfers to accrual status||(1)||(901)||(1)||(858)||—||—||—||(1,761)|
|Balance of non-accrual loans at December 31, 2020||$||31,993||$||51,470||$||1,395||$||26,107||$||9,588||$||332||$||16,313||$||137,198|
Non-accrual loans increased $12.1 million, or 9.7%, in 2020. Non-accrual loans as a percentage of Net Loans decreased to 0.72% at December 31, 2020, as compared to 0.74% at December 31, 2019.
The following table presents non-performing assets as of the dates shown:
Non-accrual loans (1) (2) (3)
Loans 90 days or more past due and still accruing (2)
|Total non-performing loans and leases||147,127||141,155||139,678||134,759||131,638|
|Total non-performing assets||$||151,305||$||147,986||$||150,196||$||144,582||$||144,453|
(1)In 2020, the total interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms was $5.8 million. The amount of interest income on non-accrual loans that was recognized in 2020 was approximately $290,000.
(2)Accrual of interest is generally discontinued when a loan becomes 90 days past due. In certain cases a loan may be placed on non-accrual status prior to being 90 days delinquent if there is an indication that the borrower is having difficulty making payments, or the Corporation believes it is probable that all amounts will not be collected according to the contractual terms of the agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan is considered to be adequately secured and in the process of collection. Certain loans, primarily adequately collateralized residential mortgage loans, may continue to accrue interest after reaching 90 days past due.
(3)Excluded from non-performing assets as of December 31, 2020, were $68.4 million of loans modified under TDRs. These loans continue to accrue interest and are, therefore, not included in non-accrual loans.
(4) Excludes $8.1 million of residential mortgage properties for which formal foreclosure proceedings were in process as of December 31, 2020.
The following table presents non-performing loans, by type, as of the dates shown:
|(dollars in thousands)|
|Commercial and industrial||$||32,609||$||49,491||$||51,269||$||54,309||$||43,460|
|Real estate – commercial mortgage||52,647||37,279||32,153||35,447||39,319|
|Real estate – residential mortgage||30,794||22,411||19,101||20,971||23,655|
|Real estate – home equity||1,550||10,568||9,769||11,507||13,154|
|Real estate – construction||12,341||4,306||7,390||12,197||9,842|
|Equipment lease financing||16,437||16,642||19,587||32||317|
|Total non-performing loans||$||147,127||$||141,155||$||139,678||$||134,759||$||131,638|
|Non-performing loans to total loans||0.78||%||0.84||%||0.86||%||0.85||%||0.90||%|
The following table presents TDRs as of the dates shown:
|Real estate – residential mortgage||$||18,602||$||21,551||$||24,102||$||26,016||$||27,617|
|Real estate – commercial mortgage||28,451||13,330||15,685||13,959||15,957|
|Real estate – home equity||14,391||15,068||16,665||15,558||8,594|
|Commercial and industrial||6,982||5,193||5,143||10,820||6,627|
|Real estate – construction||—||—||—||—||726|
|Total accruing TDRs||68,426||55,150||61,605||66,379||59,560|
Non-accrual TDRs (1)
(1) Included within non-accrual loans in the preceding table.
The increase in TDRs in 2020 compared to 2019 is primarily the result of one large borrower in the commercial mortgage portfolio.
Total TDRs modified during 2020 and still outstanding as of December 31, 2020, were $45.3 million. Of these loans, $15.5 million, or 34.3%, had a payment default during 2020, which the Corporation defines as a single missed scheduled payment, subsequent to modification. TDRs modified during 2019 and still outstanding as of December 31, 2019, totaled $10.6 million. Of these loans, $2.0 million, or 18.5%, had a payment default during 2019, which the Corporation defines as a single missed scheduled payment, subsequent to modification.
The following table summarizes OREO, by property type, as of December 31:
As noted under the heading "Critical Accounting Policies" within Management's Discussion, the Corporation's ability to identify potential problem loans in a timely manner is key to maintaining an adequate ACL. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal risk rating process is used to monitor credit quality. For a complete description of the Corporation's risk ratings, refer to the "Allowance for Credit Losses" section within "Note 1 - Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." The evaluation of credit risk for residential mortgages, home equity loans, construction
loans to individuals, consumer loans and equipment lease financing is based on aggregate payment history, through the monitoring of delinquency levels and trends.
Total internally risk rated loans were $13.7 billion and $12.0 billion as of December 31, 2020 and 2019, respectively. The following table presents criticized and classified loans, or those with internal risk ratings of Special Mention (1) or Substandard or Lower (2) for commercial mortgages, commercial and industrial loans and construction loans to commercial borrowers, by class segment, as of December 31:
Special Mention (1)
Substandard or Lower (2)
|Increase (Decrease)||Total Criticized and Classified Loans|
|(dollars in thousands)|
|Real estate - commercial mortgage||$||478,165||$||137,163||$||341,002||N/M||$||181,970||$||134,206||$||47,764||35.6%||$||660,135||$||271,369|
|Commercial and industrial||154,039||181,107||(27,068)||(14.9)||128,175||199,760||(71,585)||(35.8)||282,214||380,867|
Real estate - construction (3)
|% of total risk rated loans||4.7%||2.7%||2.3%||2.8%||7.0%||5.5%|
(1) Considered "criticized" loans by banking regulators
(2) Considered "classified" loans by banking regulators
(3) Excludes construction - other
As of December 31, 2020, total loans with risk ratings of special mention increased by $323.0 million, or 100.2%, and total loans with a risk rating of substandard or lower decreased by $24.5 million, or 7.2%, resulting in an overall increase in total criticized loans of $298.5 million, 45.0% higher than 2019. The largest driver of the migration into these risk rating categories was within the hospitality industry, which is included in the real estate - commercial mortgage category.
The following table presents, by class segment, a summary of delinquency status and rates, as a percentage of total loans, for loans that do not have internal risk ratings as of December 31:
|(dollars in thousands)|
|Real estate - home equity||$||7,276||0.55||%||$||12,341||0.94||%||$||12,340||0.94||%||$||10,568||0.80||%||$||19,616||1.49||%||$||22,909||1.74||%|
|Real estate - residential mortgage||29,956||0.95||34,291||1.30||30,665||0.98||22,411||0.85||60,621||1.93||56,702||2.15|
|Real estate - construction - other||1,938||0.20||895||0.95||178||0.02||809||0.86||2,116||0.22||1,704||1.81|
|Equipment lease financing||988||0.33||4,012||1.34||16,437||5.49||16,642||5.56||17,425||5.82||20,654||6.90|
(1) Includes all accruing loans 30 days to 89 days past due.
(2) Includes all accruing loans 90 days or more past due and all non-accrual loans and leases.
Allowance for Credit Losses and Asset Quality
The Corporation accounts for the credit risk associated with lending activities through the ACL and the provision for credit losses.
A summary of the Corporation’s activity in the ACL, including loans and OBS credit exposures:
|(dollars in thousands)|
|Average balance of Net Loans||$||18,270,390||$||16,430,347||$||15,815,263||$||15,236,612||$||14,128,064|
|Balance of ACL at beginning of period||$||166,209||$||169,410||$||176,084||$||171,325||$||171,412|
|Impact of adopting CECL on January 1, 2020||58,348||—||—||—||—|
|Loans charged off:|
|Commercial and industrial||18,915||42,410||52,441||19,067||15,276|
|Real estate – commercial mortgage||4,225||1,837||2,045||2,169||3,580|
|Real estate – home equity||1,193||1,291||6,127||4,567||7,712|
|Equipment lease financing and other||2,187||2,560||2,521||3,035||3,815|
|Real estate – residential mortgage||620||1,545||1,574||687||2,326|
|Real estate – construction||17||143||1,368||3,765||1,218|
|Total loans charged off||30,557||53,189||66,076||33,290||33,927|
|Recoveries of loans previously charged off:|
|Commercial and industrial||11,396||8,721||4,994||7,771||8,981|
|Real estate – construction||5,122||2,591||1,829||1,582||3,924|
|Real estate – home equity||504||688||2,393||1,969||2,466|
|Real estate – commercial mortgage||1,027||2,202||1,622||1,668||3,373|
|Equipment lease financing and other||605||666||1,037||968||842|
|Real estate – residential mortgage||491||989||620||786||1,072|
|Net loans charged off||9,537||36,026||53,581||18,546||13,269|
|Provision for credit losses||76,920||32,825||46,907||23,305||13,182|
|Balance of ACL at end of period||$||291,940||$||166,209||$||169,410||$||176,084||$||171,325|
|Components of the ACL:|
|ACL - Loans||$||277,567||$||163,622||$||160,537||$||169,910||$||168,679|
ACL - OBS credit exposures (1)
|Balance of ACL at end of period||$||291,940||$||166,209||$||169,410||$||176,084||$||171,325|
|Selected Asset Quality Ratios:|
|Net charge-offs to average loans||0.05||%||0.22||%||0.34||%||0.12||%||0.09||%|
|ACL - loans||1.47||0.97||0.99||1.08||1.15|
|ACL to total Net Loans||1.54||0.99||1.05||1.12||1.17|
Non-performing assets (2) to total assets
Non-performing assets (2) to total loans and OREO
|Non-accrual loans to total Net Loans||0.72||0.74||0.80||0.79||0.82|
ACL - loans(3) to non-performing loans
Non-performing assets (2) to tangible common shareholders' equity and ACL - loans (3)
(1) Reserve for OBS credit exposures is recorded within other liabilities on the consolidated balance sheets. Prior to 2020, it was referred to as "reserve for unfunded lending commitments". See "Note 4 - Allowance for Credit Losses and Asset Quality" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." for further details.
(2) Includes accruing loans past due 90 days or more.
(3) Ratio represents a financial measure derived by methods other than GAAP. See reconciliation of this non-GAAP financial measure to the most directly
comparable GAAP measure under the heading, "Supplemental Reporting of Non-GAAP Based Financial Measures," in Item 6. "Selected Financial Data."
The provision for credit losses increased $44.1 million in comparison to 2019. Prior periods did not incorporate "life of loan" losses under CECL and applied an incurred loss model, which would not have considered economic forecasts or forward-looking considerations over the remaining expected lives of loans. The amounts recorded in 2020 were primarily driven by economic assumptions, which considered the impact of COVID-19. See "Note 1 - Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." for further details.
The following table summarizes the allocation of the ACL - loans:
|ACL - loans|
In Each Loan
|ACL - loans||%|
In Each Loan
|ACL - loans||%|
In Each Loan
|ACL - loans||%|
In Each Loan
|ACL - loans||%|
In Each Loan
|(dollars in thousands)|
|Real estate - commercial mortgage||$||103,425||37.6||%||$||45,610||39.6||%||$||52,889||39.7||%||$||58,793||40.3||%||$||46,842||40.9||%|
|Commercial and industrial||74,771||30.0||68,602||26.4||58,868||27.2||66,280||27.2||54,353||27.8|
|Real estate - residential mortgage||51,995||16.6||19,771||15.7||18,921||13.9||16,088||12.4||22,929||10.9|
|Consumer, home equity, equipment lease financing||31,770||10.3||25,196||12.5||24,798||13.5||22,129||13.7||33,567||14.7|
|Real estate - construction||15,608||5.5||4,443||5.8||5,061||5.7||6,620||6.4||6,455||5.7|
N/A – Not applicable
(1) Ending loan balances as a % of total loans for the years presented.
Management believes that the $277.6 million ACL - loans as of December 31, 2020, was sufficient to cover expected losses in the loan portfolio. See additional disclosures in "Note 1 - Summary of Significant Accounting Policies," and "Note 4 - Allowance for Credit Losses and Asset Quality," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data;" and "Critical Accounting Policies" above.
Other assets increased $234.7 million, or 25.6%, to $1.2 billion as of December 31, 2020, primarily due to higher fair values of derivative contracts for interest rate swaps, earnings on bank-owned life insurance, and an increase in the net DTA mainly as the result of the adoption of CECL.
Deposits and Borrowings
The following table presents ending deposits, by type, as of December 31:
|(dollars in thousands)|
|Total demand and savings||18,279,358||14,327,453||3,951,905||27.6|
The following table presents ending borrowings, by type as of December 31:
|(dollars in thousands)|
Customer funding (1)
FHLB advances and other borrowings (2)
|Total short-term borrowings||630,066||883,241||(253,175)||(28.7)|
|Other long-term borrowings||760,290||390,745||369,545||94.6|
|Total long-term borrowings||1,296,263||881,769||414,494||47.0|
(1) Includes repurchase agreements and short-term promissory notes.
(2) Consists of FHLB advances with an original maturity term of less than one year.
Total short-term borrowings decreased $253.2 million, or 28.7%, as a result of higher balances of deposits and the increase in long-term borrowings, reducing the need for short-term borrowings. Long-term FHLB advances increased $44.9 million, or 9.2%, and other long-term debt increased $369.5 million as the result of the issuance of $375.0 million of subordinated notes in March 2020 as discussed in the "Overview" section of Management's Discussion.
Other liabilities increased $139.4 million, or 36.2%, to $524.4 million as of December 31, 2020, primarily as the result of an increase in the fair values of derivative contracts related to interest rate swaps.
Total shareholders’ equity increased $274.7 million, or 11.7%, to $2.6 billion, or 10.1% of total assets, as of December 31, 2020. The increase was due primarily to the $192.9 million of net proceeds from the issuance of preferred stock, $178.0 million of net income, a $65.2 million net increase in AOCI, $7.5 million of stock-based compensation awards and $7.4 million of common stock issued, partially offset by $90.7 million of common stock cash dividends, a $43.8 million reduction to retained earnings as a result of the adoption of CECL on January 1, 2020, $39.7 million of common stock repurchases and $2.1 million of preferred stock dividends.
See "Note 14 - Shareholders' Equity" in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." for details of the issuance of preferred stock and the Corporation's share repurchase programs and activities. Under all repurchase programs, repurchased shares are added to treasury stock, at cost. As permitted by securities laws and other legal requirements, and subject to market conditions and other factors, purchases may be made from time to time in open market or privately negotiated transactions, including, without limitation, through accelerated share repurchase transactions. See "Note 4 - Allowance for Credit Losses and Asset Quality," in the Notes to the Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data." for details of the adoption of CECL.
The Corporation and its wholly owned subsidiary bank, Fulton Bank, are subject to regulatory capital requirements administered by the FRB and OCC. Failure to meet minimum capital requirements can trigger certain actions by these regulators that could have a material effect on the Corporation’s financial statements. The regulations require that banks and bank holding companies maintain minimum amounts and ratios of total, Tier I and Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined).
The following table summarizes the Corporation’s capital ratios in comparison to regulatory requirements at December 31:
|Fully Phased-in, with Capital Conservation Buffers|
|Total Capital (to Risk-Weighted Assets)||14.4%||11.8%||8.0%||10.5%|
|Tier I Capital (to Risk-Weighted Assets)||10.5%||9.7%||6.0%||8.5%|
|Common Equity Tier I (to Risk-Weighted Assets)||9.5%||9.7%||4.5%||7.0%|
|Tier I Leverage Capital (to Average Assets)||8.2%||8.4%||4.0%||4.0%|
In July 2013, the FRB approved final rules (the "U.S. Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. 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 revise the risk-based capital requirements applicable to bank holding companies and depository institutions.
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 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 as a result of which certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size.
As of January 1, 2019, the Corporation and its bank subsidiary were also required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments.
The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expand the risk-weightings for assets and off-balance sheet exposures from the previous 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and off-balance sheet exposures, resulting in higher risk weights for a variety of asset categories.
As of December 31, 2020, Fulton Bank was well capitalized under the regulatory framework for prompt corrective action based on its capital ratio calculations. To be categorized as well capitalized, the bank must maintain minimum total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage ratios as set forth in the table above. There are no conditions or events since December 31, 2020 that management believes have changed the institution's categories. See "Note 11 - Regulatory Matters," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
Contractual Obligations and Off-Balance Sheet Arrangements
The Corporation has various financial obligations that require future cash payments. These obligations include payments for liabilities recorded on the Corporation’s consolidated balance sheets as well as contractual obligations for purchased services.
The following table summarizes the Corporation's significant contractual obligations to third parties, by type, that were fixed and determinable as of December 31, 2020:
|Payments Due In|
Deposits with no stated maturity (1)
Time deposits (2)
Short-term borrowings (3)
Long-term debt (3)
Operating leases (4)
Purchase obligations (5)
Uncertain tax positions (6)
(1)Includes demand deposits, savings accounts and brokered deposits, which can be withdrawn at any time.
(2)See additional information regarding time deposits in "Note 8 - Deposits," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
(3)See additional information regarding borrowings in "Note 9 - Short-Term and Long-Term Borrowings," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
(4)See additional information regarding operating leases in "Note 17 - Leases," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
(5)Includes information technology, telecommunication and data processing outsourcing contracts.
(6)Includes accrued interest. See additional information related to uncertain tax positions in "Note 12 - Income Taxes," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data."
In addition to the contractual obligations listed in the preceding table, the Corporation is a party to financial instruments with OBS risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit and interest rate risk that are not recognized on the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. Commercial letters of credit are conditional commitments issued to facilitate foreign or domestic trade transactions for customers. Commitments and standby and commercial letters of credit do not necessarily represent future cash needs, as they may expire without being drawn.
The following table presents the Corporation’s commitments to extend credit and letters of credit as of December 31, 2020 (in thousands):
|Commercial and industrial||$||5,245,041|
|Real estate - commercial mortgage and real estate - construction||1,787,963|
|Real estate - home equity||1,618,051|
|Total commitments to extend credit||$||8,651,055|
|Standby letters of credit||$||298,750|
|Commercial letters of credit||56,229|
|Total letters of credit||$||354,979|
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, debt security market price risk, foreign currency price risk and commodity price risk. Due to the nature of its operations, foreign currency price risk and commodity price risk are not significant to the Corporation.
Interest Rate Risk, Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An ALCO is responsible for reviewing the interest rate sensitivity and liquidity positions of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions.
The Corporation uses two complementary methods to measure and manage interest rate risk. They are simulation of net interest income and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of the Corporation's interest rate risk, level of risk as time evolves, and exposure to changes in interest rates.
Simulation of net interest income is performed for the next 12-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of net interest income is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income, in a non-parallel instantaneous shock, to 10% of the base case net interest income for a 100 bp shock in interest rates, 15% for a 200 bp shock, 20% for a 300 bp shock and 25% for a 400 bp shock. A "shock" is an immediate upward or downward movement of interest rates. The shocks do not take into account changes in customer behavior that could result in changes to mix and/or volumes in the balance sheet, nor does it take into account the potential effects of competition on the pricing of deposits and loans over the forward 12-month period.
Contractual maturities and repricing opportunities of loans are incorporated in the simulation model as are prepayment assumptions, maturity data and call options within the investment portfolio. Assumptions based on past experience are incorporated into the model for non-maturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to timing, amount and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
The following table summarizes the expected impact of abrupt interest rate changes, i.e. a non-parallel instantaneous shock, on net interest income as of December 31, 2020 (due to the current level of interest rates, the downward shock scenarios are not shown):
Rate Shock (1)
in net interest income
|% Change in net interest income|
|+400 bp||+ $131.7 million||+ 19.8%|
|+300 bp||+ $98.9 million||+ 14.9%|
|+200 bp||+ $65.5 million||+ 9.9%|
|+100 bp||+ $31.4 million||+ 4.7%|
(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 bp shock in interest rates, 20% for a 200 bp shock, 30% for a 300 bp shock
and 40% for a 400 bp shock. As of December 31, 2020, the Corporation was within economic value of equity policy limits for every 100 bp shock.
Interest Rate Swaps
The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These interest rate swaps are derivative financial instruments and the gross fair values are recorded in other assets and liabilities on the consolidated balance sheets, with changes in fair value during the period recorded in other non-interest expense on the consolidated statements of income.
The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity is provided on a continuous basis through scheduled and unscheduled principal and interest payments on investments and outstanding loans and through the availability of deposits and borrowings. The Corporation also maintains secondary sources that provide liquidity on a secured and unsecured basis to meet short- and long-term needs.
The Corporation maintains liquidity sources in the form of interest-bearing deposits and customer funding (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 instruments. The positive impact to liquidity resulting from paying higher interest rates could have a detrimental impact on the net interest margin and net interest income if rates on interest-earning assets do not experience a proportionate increase. Borrowing availability with the FHLB and the FRB, along with federal funds lines at various correspondent banks, provides the Corporation with additional liquidity.
Fulton Bank is a member of the FHLB and has access to FHLB overnight and term credit facilities. As of December 31, 2020, the Corporation had $536.0 million of short- and long-term advances outstanding from the FHLB with an additional borrowing capacity of approximately $3.9 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 December 31, 2020, the Corporation had aggregate availability under federal funds lines of $1.8 billion, with no outstanding borrowings against that amount. A combination of commercial real estate loans, commercial loans and securities are pledged to the FRB of Philadelphia to provide access to FRB Discount Window borrowings. As of December 31, 2020, the Corporation had $324.3 million of collateralized borrowing availability at the Discount Window, and no outstanding borrowings.
Liquidity must also be managed at the Corporation's parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the parent company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. See "Note 11 - Regulatory Matters - Dividend and Loan Limitations" in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for additional information concerning limitations on the dividends that may be paid to the Corporation, and loans that may be granted to the Corporation. Management continues to monitor the liquidity and capital needs of the parent company and will implement appropriate strategies, as necessary, to remain adequately capitalized and to meet its cash needs.
The 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 2020 generated $154.5 million of cash, mainly due to net income of $178.0 million, partially offset by the net impact of other operating activities. Cash used in investing activities was $2.5 billion, primarily due to the net increase in loans, primarily related to loans originated under the PPP. Net cash provided by financing activities was $3.7 billion due mainly to increases in deposits and the issuance of long-term borrowings, which included the addition of subordinated debt, and preferred stock.
The following table presents the expected maturities of AFS investment securities, at estimated fair value, as of December 31, 2020 and the weighted average yields on such securities (calculated based on historical cost):
|Within One Year||After One But|
Within Five Years
|After Five But|
Within Ten Years
|After Ten Years|
|Available for sale||(dollars in thousands)|
State and municipal (1)
|Corporate debt securities||5,106||3.39||23,880||3.72||336,551||3.93||1,608||6.05|
Auction rate securities (2)
(1)Weighted average yields on tax-exempt securities have been computed on a fully taxable-equivalent basis assuming a federal tax rate of 21% and statutory interest expense disallowances.
(2)Maturities of ARCs are based on contractual maturities.
The Corporation’s investment portfolio consists mainly of mortgage-backed securities and collateralized mortgage obligations which have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase.
The following table presents AFS investment securities, at estimated fair value, and HTM investment securities, at amortized cost, as of December 31, 2020, without stated maturities, including the weighted average yields and estimated weighted average lives based on prepayment speeds on such securities:
|(dollars in thousands)||(in years)|
|Available for sale|
|Collateralized mortgage obligations||$||503,766||2.39||%||1.4|
|Residential mortgage-backed securities||377,998||1.66||%||8.8|
|Commercial mortgage-backed securities||762,415||2.20||%||4.8|
|Held to maturity|
|Residential mortgage-backed securities||$||278,281||1.90||%||2.5|
The following table presents the contractual maturities of fixed rate loans and loan types subject to changes in interest rates as of December 31, 2020:
|Commercial and industrial:|
|Adjustable and floating rate||$||818,696||$||1,728,808||$||484,398||$||3,031,902|
|Total commercial and industrial||$||1,426,114||$||3,662,719||$||581,995||$||5,670,828|
Real estate – mortgage (1):
|Adjustable and floating rate||$||1,563,128||$||4,953,856||$||2,360,628||$||8,877,612|
Total real estate - mortgage (1)
|Real estate – construction:|
|Adjustable and floating rate||$||327,515||$||388,505||$||168,311||$||884,331|
|Total real estate – construction||$||464,589||$||402,599||$||180,030||$||1,047,218|
(1) Includes commercial and residential mortgages and home equity loans.
Contractual maturities of time deposits as of December 31, 2020 were as follows (in thousands):
Contractual maturities of time deposits of $100,000 or more outstanding, included in the table above, as of December 31, 2020 were as follows (in thousands):
|Three months or less||$||244,764|
|Over three through six months||163,430|
|Over six through twelve months||269,749|
|Over twelve months||358,788|
Debt Security Market Price Risk
Debt security market price risk is the risk that changes in the values of debt securities, unrelated to interest rate changes, could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s debt security investments consist primarily of U.S. government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, auction rate securities and corporate debt securities. All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S. government sponsored agencies.
State and Municipal Securities
As of December 31, 2020, the Corporation owned securities issued by various states and municipalities with a total fair value of $952.6 million. Uncertainty with respect to the financial strength of state and municipal bond insurers places emphasis on the underlying strength of issuers. Pressure on local tax revenues of issuers due to adverse economic conditions could have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily based on the underlying creditworthiness of the issuing state or municipality and then, to a lesser extent, on any credit enhancement. State and municipal securities can be supported by the general obligation of the issuing state or municipality, allowing the securities to be repaid by any means available to the issuing state or municipality. As of December 31, 2020, approximately 99% of state and municipal securities were supported by the general obligation of corresponding states or municipalities. Approximately 64% of these securities were school district issuances, which are also supported by the states of the issuing municipalities.
Auction Rate Securities
As of December 31, 2020, the Corporation’s investments in ARCs had a cost basis of $101.5 million and an estimated fair value of $98.2 million. 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 December 31, 2020, all of the ARCs were rated above investment grade. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government. At December 31, 2020, all of the Corporation's ARCs were current and making scheduled interest payments.
Corporate Debt Securities
The Corporation holds corporate debt securities in the form of single-issuer TruPs and subordinated debt and senior debt issued by financial institutions. As of December 31, 2020, these securities had an amortized cost of $348.4 million and an estimated fair value of $367.1 million.
See "Note 3 - Investment Securities," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for further discussion related to the Corporation’s other-than-temporary impairment evaluations for debt securities, and see "Note 19 - Fair Value Measurements," in the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary Data" for further discussion related to the fair values of debt securities.
Item 8. Financial Statements and Supplementary Data
|CONSOLIDATED BALANCE SHEETS|
|(dollars in thousands, except per-share data)|
|Cash and due from banks||$||120,462||$||132,283|
|Interest-bearing deposits with other banks||1,727,370||385,508|
|Cash and cash equivalents||1,847,832||517,791|
|FRB and FHLB stock||92,129||97,422|
|Loans held for sale||83,886||37,828|
|AFS, at estimated fair value||3,062,143||2,497,537|
|HTM, at amortized cost||278,281||369,841|
|Less: ACL - loans||(277,567)||(163,622)|
|Net premises and equipment||231,480||240,046|
|Accrued interest receivable||72,942||60,898|
|Goodwill and intangible assets||536,659||535,303|
|Accrued interest payable||10,365||8,834|
|Preferred stock, no par value; 10,000,000 shares authorized Series A, 200,000 shares authorized and issued in 2020; liquidation preference of $1,000 per share||192,878||0|
|Common stock, $2.50 par value, 600.0 million shares authorized, 223.2 million shares issued in 2020 and 222.4 million issued in 2019||557,917||556,110|
|Additional paid-in capital||1,508,117||1,499,681|
|Accumulated other comprehensive gain (loss)||65,091||(137)|
|Treasury stock, at cost, 60.8 million shares in 2020 and 58.2 million shares in 2019||(827,956)||(792,869)|
|Total Shareholders’ Equity||2,616,828||2,342,176|
|Total Liabilities and Shareholders’ Equity||$||25,906,733||$||21,886,040|
|See Notes to Consolidated Financial Statements|
|CONSOLIDATED STATEMENTS OF INCOME|
|(dollars in thousands, except per-share data)|
|Loans, including fees||$||656,077||$||737,932||$||683,042|
|Loans held for sale||2,077||1,351||1,159|
|Other interest income||5,504||9,249||6,193|
|Total Interest Income||742,878||825,306||758,514|
|Total Interest Expense||113,671||176,917||128,058|
|Net Interest Income||629,207||648,389||630,456|
|Provision for credit losses||76,920||32,825||46,907|
|Net Interest Income After Provision for Credit Losses||552,287||615,564||583,549|
|Non-interest income before investment securities gains, net||226,335||211,427||195,488|
|Investment securities gains, net||3,053||4,733||37|
|Total Non-Interest Income||229,388||216,160||195,525|
|Salaries and employee benefits||324,395||311,934||303,202|
|Data processing and software||48,073||44,679||41,286|
|Other outside services||31,432||39,989||33,758|
|Amortization of TCI||6,126||6,021||11,449|
|Prepayment penalty on FHLB advances||2,878||4,326||0|
|Total Non-Interest Expense||579,440||567,736||546,104|
|Income Before Income Taxes||202,235||263,988||232,970|
|Preferred stock dividends||(2,135)||0||0|
|Net Income Available to Common Shareholders||$||175,905||$||226,339||$||208,393|
|Net Income (Basic)||$||1.08||$||1.36||$||1.19|
|Net Income (Diluted)||1.08||1.35||1.18|
|See Notes to Consolidated Financial Statements|
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME|
|Other Comprehensive Income (Loss), net of tax:|
|Unrealized gains (losses) on AFS investment securities:|
|Unrealized gain (loss) on securities||65,651||56,919||(24,326)|
|Reclassification adjustment for securities gains included in net income||(2,359)||(3,686)||(30)|
|Amortization of net unrealized losses on AFS securities transferred to HTM||3,448||6,285||2,098|
|Non-credit related unrealized (loss) gain on other-than-temporarily impaired debt securities||0||(680)||222|
|Net unrealized gains (losses) on AFS investment securities||66,740||58,838||(22,036)|
|Defined benefit pension plan and postretirement benefits:|
|Unrecognized pension and postretirement (cost) income||(2,532)||(937)||1,400|
|Amortization of net unrecognized pension and postretirement income||1,020||1,025||1,648|
|Net unrealized (losses) gains on defined benefit pension and postretirement plans||(1,512)||88||3,048|
|Other Comprehensive Income (Loss)||65,228||58,926||(18,988)|
|Total Comprehensive Income||$||243,268||$||285,265||$||189,405|
|See Notes to Consolidated Financial Statements|
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY|
|(in thousands, except per share data)|
|Preferred Stock||Common Stock||Additional|
|Balance at December 31, 2017||0||$||0||175,170||$||552,232||$||1,478,389||$||821,619||$||(32,974)||$||(589,409)||$||2,229,857|
|Other comprehensive income||(18,988)||(18,988)|
|Common stock issued||977||2,062||3,432||1,241||6,735|
|Stock-based compensation awards||33||83||7,882||7,965|
|Acquisition of treasury stock||(5,996)||(95,308)||(95,308)|
Reclassification of stranded tax effects (1)
|Common stock cash dividends - $0.52 per share||(91,081)||(91,081)|
|Balance at December 31, 2018||0||$||0||170,184||$||554,377||$||1,489,703||$||946,032||$||(59,063)||$||(683,476)||$||2,247,573|
|Other comprehensive income||58,926||58,926|
|Common stock issued||883||1,733||2,565||2,064||6,362|
|Stock-based compensation awards||7,413||7,413|
|Acquisition of treasury stock||(6,849)||(111,457)||(111,457)|
|Common stock cash dividends - $0.56 per share||(92,980)||(92,980)|
|Balance at December 31, 2019||0||$||0||164,218||$||556,110||$||1,499,681||$||1,079,391||$||(137)||$||(792,869)||$||2,342,176|
|Other comprehensive income||65,228||65,228|
|Preferred stock issued||200||192,878||192,878|
|Common stock issued||1,040||1,807||907||4,661||7,375|
|Stock-based compensation awards||7,529||7,529|
|Acquisition of treasury stock||(2,908)||(39,748)||(39,748)|
Adjustment for CECL (2)
|Preferred stock dividend||(2,135)||(2,135)|
|Common stock cash dividends - $0.56 per share||(90,708)||(90,708)|
|Balance at December 31, 2020||200||$||192,878||162,350||$||557,917||$||1,508,117||$||1,120,781||$||65,091||$||(827,956)||$||2,616,828|
|See Notes to Consolidated Financial Statements|
(1) Result of adoption of ASU 2018-02. See Note 1 to Consolidated Financial Statements for further details.
(2) The Corporation adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments on January 1, 2020. See Note 1 to the Consolidated Financial Statements for further details.
|CONSOLIDATED STATEMENTS OF CASH FLOWS|
|CASH FLOWS FROM OPERATING ACTIVITIES:|
|Adjustments to reconcile net income to net cash provided by operating activities:|
|Provision for credit losses||76,920||32,825||46,907|
|Depreciation and amortization of premises and equipment||28,803||28,200||28,156|
|Amortization of TCI||30,800||32,810||38,606|
|Net amortization of investment securities premiums||12,222||9,387||9,297|
|Deferred income tax benefit||(21,591)||(165)||(15,749)|
|Re-measurement of net DTA||0||0||(809)|
|Investment securities gains, net||(3,053)||(4,733)||(37)|
|Gain on sales of mortgage loans held for sale||(53,599)||(17,882)||(13,021)|
|Proceeds from sales of mortgage loans held for sale||1,536,174||916,725||795,756|
|Originations of mortgage loans held for sale||(1,528,633)||(909,572)||(778,304)|
|Amortization of issuance costs and discounts on long-term borrowings||1,128||842||813|
|Other changes, net||(110,781)||(195,903)||(31,153)|
|Net cash provided by operating activities||154,488||127,713||296,820|
|CASH FLOWS FROM INVESTING ACTIVITIES:|
|Proceeds from sales of AFS securities||215,150||710,739||54,638|
|Proceeds from principal repayments and maturities of AFS securities||430,845||234,702||290,681|
|Proceeds from principal repayments and maturities of HTM securities||93,823||83,121||35,900|
|Purchase of AFS securities||(1,134,380)||(1,138,070)||(558,949)|
|Sale (purchase) of FRB and FHLB stock||5,293||(18,139)||(18,522)|
|Net increase in loans||(2,072,831)||(708,048)||(447,849)|
|Net purchases of premises and equipment||(20,237)||(33,717)||(39,883)|
|Net cash paid for acquisition||(1,884)||(5,174)||0|
|Net change in tax credit investments||(15,259)||(18,760)||(56,733)|
|Net cash used in investing activities||(2,499,480)||(893,346)||(740,717)|
|CASH FLOWS FROM FINANCING ACTIVITIES:|
|Net increase in demand and savings deposits||3,951,905||849,437||435,872|
|Net (decrease) increase in time deposits||(506,611)||168,317||142,755|
|Net (decrease) increase in short-term borrowings||(253,175)||128,464||137,253|
|Proceeds from long-term borrowings||495,898||485,000||50,000|
|Repayments of long-term borrowings||(82,533)||(596,056)||(100,165)|
|Net proceeds from issuance of preferred stock||192,878||0||0|
|Net proceeds from issuance of common stock||7,375||6,362||6,735|
|Acquisition of treasury stock||(39,748)||(111,457)||(95,308)|
|Net cash provided by financing activities||3,675,033||837,737||487,488|
|Net Increase in Cash and Cash Equivalents||1,330,041||72,104||43,591|
|Cash and Cash Equivalents at Beginning of Year||517,791||445,687||402,096|
|Cash and Cash Equivalents at End of Year||$||1,847,832||$||517,791||$||445,687|
|Supplemental Disclosures of Cash Flow Information:|
|Cash paid during the period for:|
|Supplemental schedule of certain noncash activities:|
|Transfer of AFS securities to HTM securities||$||0||$||0||$||641,672|
|Transfer of HTM securities to AFS securities||0||158,898||0|
|See Notes to Consolidated Financial Statements|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES|
Business: Fulton Financial Corporation (the Parent Company) is a financial holding company which provides a full range of banking and financial services to businesses and consumers through its wholly owned banking subsidiary, Fulton Bank, N.A. In addition, the Parent Company owns the following non-bank subsidiaries: Fulton Financial Realty Company, Central Pennsylvania Financial Corp., FFC Management, Inc., FFC Penn Square, Inc. and Fulton Insurance Services Group, Inc. Collectively, the Parent Company and its subsidiaries are referred to as the Corporation.
The Corporation’s primary sources of revenue are interest income on loans, investment securities and other interest-earning assets and fee income earned on its products and services. Its expenses consist of interest expense on deposits and borrowed funds, provision for credit losses, other operating expenses and income taxes. The Corporation’s primary competition is other financial services providers operating in its region. Competitors also include financial services providers located outside the Corporation’s geographic market as a result of the growth in electronic delivery channels. The Corporation is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by such regulatory agencies.
The Corporation offers, through its banking subsidiary, a full range of retail and commercial banking services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Industry diversity is the key to the economic well-being of these markets, and the Corporation is not dependent upon any single customer or industry. In 2018, the Corporation had 3 banking subsidiaries. During 2019, the Corporation consolidated two wholly owned banking subsidiaries into its lead bank, Fulton Bank.
Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with GAAP and include the accounts of the Parent Company and all wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amount of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Corporation evaluates subsequent events through the date of the filing of this report with the SEC.
Cash and Cash Equivalents and Restricted Cash: Cash and cash equivalents consists of cash and due from banks and interest bearing deposits with other banks, which includes restricted cash. Restricted cash comprises cash balances required to be maintained with the FRB, based on customer transaction deposit account levels, and cash balances provided as collateral on derivative contracts and other contracts. See Note 2, "Restrictions on Cash and Cash Equivalents" for additional information.
FRB and FHLB Stock: The Bank is a member of the FRB and FHLB and is required by federal law to hold stock in these institutions according to predetermined formulas. These restricted investments are carried at cost on the consolidated balance sheets and are periodically evaluated for impairment.
Investments: Debt securities are classified as HTM at the time of purchase when the Corporation has both the intent and ability to hold these investments until they mature. Such debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the effective yield method. The Corporation does not engage in trading activities; however, since the investment portfolio serves as a source of liquidity, most debt securities are classified as AFS. AFS securities are carried at estimated fair value with the related unrealized holding gains and losses reported in shareholders’ equity as a component of other comprehensive income, net of tax. Realized securities gains and losses are computed using the specific identification method and are recorded on a trade date basis.
The Corporation early adopted ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivative and Hedging, and Topic 825, Financial Instruments," in the third quarter of 2019, which permitted the one-time reclassification of certain HTM securities to AFS 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 was implemented with 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 Corporation's consolidated financial statements.
HTM Debt Securities: Expected credit losses on HTM debt securities would be recorded in the ACL on HTM debt securities. As of December 31, 2020, no HTM debt securities required an ACL as these investments consist solely of government guaranteed residential mortgage-backed securities.
AFS Debt Securities: The ACL approach for AFS debt securities differs from the approach used for HTM debt securities as AFS debt securities are carried at fair value rather than amortized cost. Under CECL, the concept of OTTI has been eliminated, and credit losses on AFS debt securities are recognized through an ACL rather than through a direct write-down of the security. In evaluating credit losses on AFS debt securities, management considers factors such as delinquency, guarantees and whether the securities are rated higher than investment grade. As of December 31, 2020, no AFS debt securities required an ACL.
Fair Value Option: The Corporation has elected to measure mortgage loans held for sale at fair value. Derivative financial instruments related to mortgage banking activities are also recorded at fair value, as detailed under the heading "Derivative Financial Instruments," below. The Corporation determines fair value for its mortgage loans held for sale 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. Changes in fair values during the period are recorded as components of mortgage banking income on the consolidated statements of income. Interest income earned on mortgage loans held for sale is classified in interest income on the consolidated statements of income.
Loans: Loans are stated at their principal amount outstanding, except for mortgage loans held for sale, which are carried at fair value. Interest income on loans is accrued as earned. Unearned income on lease financing receivables is recognized on a basis which approximates the effective yield method.
In general, loans are placed on non-accrual status once they become 90 days delinquent as to principal or interest. In certain cases a loan may be placed on non-accrual status prior to being 90 days delinquent if there is an indication that the borrower is having difficulty making payments, or the Corporation believes it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. When interest accruals are discontinued, unpaid interest previously credited to income is reversed. Non-accrual loans may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan is considered secured and in the process of collection. The Corporation generally applies payments received on non-accruing loans to principal until such time as the principal is paid off, after which time any payments received are recognized as interest income. If the Corporation believes that all amounts outstanding on a non-accrual loan will ultimately be collected, payments received subsequent to its classification as a non-accrual loan are allocated between interest income and principal.
A loan that is 90 days delinquent may continue to accrue interest if the loan is both adequately secured and is in the process of collection. Past due status is determined based on contractual due dates for loan payments. An adequately secured loan is one that has collateral with a supported fair value that is sufficient to discharge the debt, and/or has an enforceable guarantee from a financially responsible party. A loan is considered to be in the process of collection if collection is proceeding through legal action or through other activities that are reasonably expected to result in repayment of the debt or restoration to current status in the near future.
Loans deemed to be a loss are written off through a charge against the ACL. Closed-end consumer loans are generally charged off when they become 120 days past due (180 days for open-end consumer loans) if they are not adequately secured by real
estate. All other loans are evaluated for possible charge-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral, if any. Principal recoveries of loans previously charged off are recorded as increases to the ACL.
Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are deferred and amortized over the life of the loan as an adjustment to interest income using the effective yield method. For mortgage loans sold, net loan origination fees and costs are included in the gain or loss on sale of the related loan, as components of mortgage banking.
Loan origination fees and the related direct origination costs for loans originated under the PPP loan program are amortized on a straight-line basis over the repayment period of the loan. To the extent that a PPP loan is forgiven, the unamortized fees and costs will be recognized as interest income at the time of forgiveness.
Troubled Debt Restructurings: Loans are accounted for and reported as TDRs when, for economic or legal reasons, the Corporation grants a concession to a borrower experiencing financial difficulty that it would not otherwise consider. Concessions, whether negotiated or imposed by bankruptcy, granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date or a reduction in the interest rate. Non-accrual TDRs can be restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
On March 27, 2020, the CARES Act was signed into law. The CARES Act includes an option for financial institutions to suspend the requirements of GAAP for certain loan modifications that would otherwise be categorized as a TDR. Certain conditions must be met with respect to the loan modification including that the modification is related to COVID-19, the modified loan was not more than 30 days past due on December 31, 2019 and the modification was executed between March 1, 2020 and the earlier of (a) 60 days after the date of the COVID-19 national emergency comes to an end or (b) December 31, 2020. The Corporation is applying the option under the CARES act for all loan modifications that qualify.
On April 7, 2020, Troubled Debt Restructurings: Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by COVID-19 was issued by the federal banking regulatory agencies. Included in the Interagency Statement were provisions permitting banks that grant loan modifications to customers impacted by COVID-19 to exclude those modifications from loans categorized as TDRs. The Corporation is adopting the guidance in this Interagency Statement effective for COVID-19-related modifications occurring subsequent to March 13, 2020.
Allowance for Credit Losses:
On January 1, 2020, the Corporation adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology, and is referred to as CECL. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities. It also applies to OBS credit exposures, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, and net investments in leases recognized by a lessor in accordance with ASC Topic 842.
The Corporation adopted CECL using the modified retrospective method for all financial assets measured at amortized cost, net investments in leases and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under CECL, while prior period results are reported in accordance with the previously applicable incurred loss methodology, ASC 310-10 and ASC 450-20. The Corporation recorded an increase of $58.3 million to the ACL on January 1, 2020 as a result of the adoption of CECL. Retained earnings decreased $43.8 million and DTAs increased by $12.4 million. Included in the $58.3 million increase to the ACL was $2.1 million for certain OBS credit exposures that was previously recognized in other liabilities before the adoption of CECL.
The Corporation has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income.
Loans: The ACL for loans is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for expected credit losses.
Loans Evaluated Collectively: Loans evaluated collectively for expected credit losses include loans on accrual status, excluding accruing TDRs, and loans initially evaluated individually, but determined not to have enhanced credit risk characteristics. This category includes loans on non-accrual status and TDRs where the total commitment amount is less than $1 million. The ACL is estimated by applying a probability of default (PD) and loss given default (LGD) to the exposure at default (EAD) at the loan level. In order to determine the PD, LGD, and EAD calculation inputs:
•Loans are aggregated into pools based on similar risk characteristics.
•The PD and LGD rates are determined by historical credit loss experience for each pool of loans.
•The loan segment PD rates are estimated using six econometric regression models that use the Corporation’s historical credit loss experience and incorporate reasonable and supportable economic forecasts for various macroeconomic variables that are statistically correlated with expected loss behavior in the loan segment.
•The reasonable and supportable forecast for each macroeconomic variable is sourced from an external third party and is applied over the contractual term of the Corporation’s loan portfolio. The Corporation’s economic forecast considers the general health of the economy, the interest rate environment, real estate pricing and market risk.
•A single baseline forecast scenario is used for each macroeconomic variable.
•The loan segment lifetime LGD rates are estimated using a loss rate approach based on the Corporation’s historical charge-off experience and the balance at the time of loan default.
•The LGD rates are adjusted for the Corporation’s recovery experience.
•To calculate the EAD, the corporation estimates contractual cash flows over the remaining life of each loan. Certain cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate. In addition, a prepayment rate is used in determining the EAD estimate.