fult-20201231
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________________________
FORM 10-K
For the fiscal year ended December 31, 2020, or
Commission File Number: 0-10587
_______________________________________________________
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
One Penn Square P. O. Box 4887 Lancaster, Pennsylvania 17602
(Address of principal executive offices) (Zip Code)
(717) 291-2411
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of exchange on which registered
Common Stock, $2.50 par value FULT The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx 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 ̈Nox
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. Yesx 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). Yesx 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.
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TABLE OF CONTENTS
Description Page
PART I
Item 1. Business 5
Item 1A. Risk Factors 21
Item 1B. Unresolved Staff Comments 35
Item 2. Properties 35
Item 3. Legal Proceedings 35
Item 4. Mine Safety Disclosures 35
PART II
Item 6. Selected Financial Data 39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 69
Item 8. Financial Statements and Supplementary Data:
Consolidated Balance Sheets 74
Consolidated Statements of Income 75
Consolidated Statements of Comprehensive Income 76
Consolidated Statements of Shareholders’ Equity 77
Consolidated Statements of Cash Flows 78
Notes to Consolidated Financial Statements 79
Management Report On Internal Control Over Financial Reporting 131
Report of Independent Registered Public Accounting Firm 132
Quarterly Consolidated Results of Operations (unaudited) 135
Item 9A. Controls and Procedures 136
Item 9B. Other Information 136
PART III
Item 10. Directors, Executive Officers and Corporate Governance 137
Item 11. Executive Compensation 137
Item 14. Principal Accounting Fees and Services 137
PART IV
Item 15. Exhibits, Financial Statement Schedules 138
Exhibit Index 143
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FULTON FINANCIAL CORPORATION
GLOSSARY OF DEFINED ACRONYMS AND TERMS
ACL Allowance for Credit Losses
AFS Available for Sale
ALCO Asset/Liability Management Committee
AML Anti-Money Laundering
AOCI Accumulated Other Comprehensive Income
ARC Auction Rate Security
ASC Accounting Standards Codification
ASU Accounting Standards Update
bp Basis Point(s)
BSA Bank Secrecy Act
CARES Act Coronavirus Aid, Relief, and Economic Security Act
CECL Current Expected Credit Losses
Corporation or Company Fulton Financial Corporation
COVID-19 Coronavirus
Directors' Plan Amended and Restated Directors’ Equity Participation Plan
DTAs Deferred Tax Assets
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
FTE Fully Taxable-Equivalent
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
N/M Not meaningful
OBS Off-Balance-Sheet
OCC Office of the Comptroller of the Currency
OREO Other Real Estate Owned
OTTI Other-Than-Temporary Impairment
PD Probability of Default
PPP Paycheck Protection Program
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PSU Performance-Based Restricted Stock Unit
ROU Right-of-Use
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
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PART I
Item 1. Business
General
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.
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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.
Non-Bank Subsidiaries
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:
Subsidiary Total Assets
(in thousands)
Columbia Bancorp Statutory Trust $ 6,186
Columbia Bancorp Statutory Trust II 4,124
Columbia Bancorp Statutory Trust III 6,186
Competition
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.
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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
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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
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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
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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
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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.
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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
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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
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•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
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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.
Privacy Protection and Cybersecurity - Fulton Bank is subject to regulations implementing the privacy protection provisions of the GLB Act. These regulations require Fulton Bank to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require Fulton Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not covered by an exception, Fulton Bank is required to provide its customers with the ability to "opt-out" of having Fulton Bank share their nonpublic personal information with unaffiliated third parties.
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."
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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-
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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.
Human Capital
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.
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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.
COVID-19 Response
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.
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Executive Officers
The executive officers of the Corporation are as follows:
Name Age (1) Office Held and Term of Office
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Name Age (1) Office Held and Term of Office
(1) As of December 31, 2020
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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
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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
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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."
MARKET RISKS.
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.
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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.
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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."
LIQUIDITY 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."
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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
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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
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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.
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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-
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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.
OPERATIONAL RISKS.
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.
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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.