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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-03-01 compared with 2022-02-28 · 38 added, 38 removed, 129 unchanged (37% of the section changed)

24 unchanged sentences

The following table summarizes the expected impact of abrupt interest rate changes, i.e.

a non-parallel instantaneous shock, on net interest income as of December 31, 2021 (due to the current level of interest rates, the downward shock scenarios are not shown):

a non-parallel instantaneous shock, on net interest income as of December 31, 2022 (due to the current level of interest rates, the 300 basis point downward shock scenario is not shown):

Rate Shock (1)

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+100 bps + $25.4 million + 2.6%

-100 bps - $37.3 million - 3.8%

-200 bps - $84.5 million - 8.6%

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

1 unchanged sentence

Discount rates are based upon market prices for like assets and liabilities.

Abrupt changes or "shocks" in interest rates, both upward and downward, are used to determine the comparative effect of such interest rate movements relative to the unchanged environment.

Abrupt changes or "shocks" in interest rates, both upward and downward, are used

to determine the comparative effect of such interest rate movements relative to the unchanged environment.

This measurement tool is used primarily to evaluate the longer-term repricing risks and options in the Corporation's balance sheet.

The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of

the base case economic value of equity for a 100 bps shock in interest rates, 20% for a 200 bps shock, 30% for a 300 bps shock and 40% for a 400 bps shock.

The Corporation's policy limits the economic value of equity that may be at risk, in a non-parallel instantaneous shock, to 10% of the base case economic value of equity for a 100 bps shock in interest rates, 20% for a 200 bps shock, 30% for a 300 bps shock and 40% for a 400 bps shock.

As of December 31, 2022, the Corporation was within economic value of equity policy limits for every 100 bps shock.

Interest Rate Swaps

The Corporation enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs.

The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms.

The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate.

These interest rate swaps are derivative financial instruments, and the gross fair values are recorded in other assets and liabilities on the consolidated balance sheets, with changes in fair value during the period recorded in other non-interest expense on the consolidated statements of income.

Interest Rate Derivatives

The Corporation enters into interest rate derivatives with certain qualifying commercial loan customers to meet their interest rate risk management needs.

The Corporation simultaneously enters into interest rate derivatives with dealer counterparties, with identical notional amounts and terms.

The net result of these interest rate derivatives is that the customer pays a fixed rate of interest and the Corporation receives a floating rate.

These interest rate derivatives are derivative financial instruments, and the gross fair values are recorded in other assets and liabilities on the consolidated balance sheets, with changes in fair value during the period recorded in other non-interest expense on the consolidated statements of income.

Cash Flow Hedges

The Corporation's objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements.

To accomplish this objective, the Corporation primarily uses interest rate swaps as part of its interest rate risk management strategy.

During 2021, the Corporation entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans.

To accomplish this objective, the Corporation primarily uses interest rate derivatives as part of its interest rate risk management strategy.

The Corporation enters into interest rate derivatives designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans.

These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Corporation making floating-rate payments over the life of the agreements without exchange of the underlying notional amount.

1 unchanged sentence

Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Corporation's variable-rate liabilities.

In January 2023, the Corporation terminated interest rate derivatives designated as cash flow hedges with a combined notional amount of $1.0 billion.

As the hedged transaction continues to be probable, the unrealized losses that have been recorded in AOCI will be recognized as reduction to interest income when the previously forecasted hedged item affects earnings in future periods.

The Corporation must maintain a sufficient level of liquid assets to meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability.

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Fulton Bank is a member of the FHLB and has access to FHLB overnight and term credit facilities.

As of December 31, 2021, the Corporation had no short- or long-term advances outstanding with the FHLB.

As of December 31, 2021, the Corporation has borrowing capacity of approximately $5.8 billion under these facilities.

As of December 31, 2022,

the Bank had total borrowing capacity of approximately $7.7 billion with $3.1 billion of advances and letters of credit outstanding, for a remaining available borrowing capacity of approximately $4.6 billion.

Advances from the FHLB, when utilized, are secured by qualifying commercial real estate and residential mortgage loans, investments and other assets.

As of December 31, 2021, the Corporation had aggregate availability under federal funds lines of $2.1 billion, with no outstanding borrowings against that amount.

A combination of commercial real estate loans, commercial loans and securities are pledged to the FRB of Philadelphia to provide access to FRB discount window borrowings.

As of December 31, 2021, the Corporation had $0.9 billion of collateralized borrowing availability at the discount window, and no outstanding borrowings.

The Corporation records a reserve for unfunded commitments, included in other liabilities on the consolidated balance sheets, which represents management’s estimate of losses inherent in commitments to extend credit and letters of credit.

As of December 31, 2021, the balance of these commitments was $352.5 million.

As of December 31, 2022, the Corporation had aggregate availability under federal funds lines of $2.3 billion, with $0.2 billion of outstanding borrowings against that amount.

A combination of commercial real estate loans, commercial loans, consumer loans and securities are pledged to the FRB of Philadelphia to provide access to FRB discount window borrowings.

December 31, 2022, the Corporation had $1.3 billion of collateralized borrowing availability at the discount window, and no outstanding borrowings.

The Corporation has commitments to extend credit and letters of credit.

As of December 31, 2022, the balance of commitments to extend credit was $8,695.6 million and total letters of credit were $310.1 million.

Liquidity must also be managed at the Corporation's parent company level.

1 unchanged sentence

Generally, these limitations are based on the subsidiary banks' regulatory capital levels and their net income.

"Note 11 - Regulatory Matters - Dividend and Loan Limitations" in the Notes to Consolidated Financial Statements in Item 8.

See "Note 12 - Regulatory Matters - Dividend and Loan Limitations" in the Notes to Consolidated Financial Statements in Item 8.

"Financial Statements and Supplementary Data" for additional information concerning limitations on the dividends that may be paid to the Corporation, and loans that may be granted to the Corporation.

2 unchanged sentences

The consolidated statements of cash flows provide additional information.

The Corporation’s operating activities during 2021 generated $342.3 million of cash, mainly due to net income of $275.5 million.

Cash used in investing activities was $214.0 million, primarily due to net cash flows from purchases of AFS and HTM securities, offset by an increase in cash flows from loans, primarily related to the decrease in PPP loans.

Net cash used in financing activities was $337.5 million, due primarily to the repayment of long-term borrowings, decreases in time deposits and short-term borrowings, and dividends paid, offset by cash flows provided by an increase in demand and savings deposits.

The following table presents the expected maturities of AFS investment securities, at estimated fair value, as of December 31, 2021 and the weighted average yields on such securities (calculated based on historical cost):

The Corporation's operating activities during 2022 generated $598.3 million of cash, mainly due to net income of $287.0 million and an increase in other liabilities presented in other changes, net.

Cash used in investing activities was $1,539.1 million, primarily due to $1,407.3 million net increase in loans.

Net cash used in financing activities was $15.9 million, due primarily to the decreases in deposits and dividend payments, partially offset by an increase in borrowings.

The following table presents the expected maturities of government and corporate AFS investment securities, at estimated fair value, as of December 31, 2022 and the weighted average yields on such securities (calculated based on historical cost):

Within One Year After One But

4 unchanged sentences

Government securities $ 121,579 0.65 % $ 96,906 2.40 % $ — — % $ — — %

Government sponsored agency securities

— — 1,008 — — — — —

State and municipal (1)

1 unchanged sentence

Corporate debt securities 15,240 5.28 39,954 4.08 367,115 4.01 — —

Auction rate securities (2)

— — — — — — 74,667 1.60

Total $ 143,463 1.29 % $ 154,536 3.01 % $ 497,049 4.02 % $ 952,466 3.86 %

(1) Weighted average yields on tax-exempt securities have been computed on a fully taxable-equivalent basis assuming a federal tax rate of 21% and statutory interest expense disallowances.

(2) Maturities of ARCs are based on contractual maturities.

(1) Weighted average yields on tax-exempt securities have been computed on a FTE basis assuming a federal tax rate of 21% and statutory interest expense disallowances.

The Corporation's investment portfolio consists mainly of state and municipal securities, mortgage-backed securities and collateralized mortgage obligations.

16 unchanged sentences

Five Years Total

(in thousands)

(dollars in thousands)

Commercial and industrial:

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(1) Includes commercial and residential mortgages and home equity loans.

Contractual maturities of time deposits as of December 31, 2021 were as follows (in thousands):

Contractual maturities of time deposits as of December 31, 2022 were as follows (dollars in thousands):

2023 $ 966,235

1 unchanged sentence

Total $ 1,589,210

Contractual maturities of time deposits of $100,000 or more outstanding, included in the table above, as of December 31, 2021 were as follows (in thousands):

Contractual maturities of outstanding uninsured time deposits included in the table above, as of December 31, 2022, were as follows (dollars in thousands):

Three months or less $ 54,013

3 unchanged sentences

Total $ 214,781

Total uninsured deposits were estimated to be $7.0 billion at December 31, 2022 compared with $7.8 billion at December 31, 2021.

Debt Security Market Price Risk

1 unchanged sentence

The Corporation's debt security investments consist primarily of U.S.

government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities, auction rate securities and corporate debt securities.

government sponsored agency issued mortgage-backed securities and collateralized mortgage obligations, state and municipal securities and corporate debt securities.

All of the Corporation's investments in mortgage-backed securities and collateralized mortgage obligations have principal payments that are guaranteed by U.S.

9 unchanged sentences

Auction Rate Securities

As of December 31, 2021, the Corporation’s investments in ARCs had a cost basis of $76.4 million and an estimated fair value of $74.7 million.

The fair values of the ARCs currently in the portfolio were derived using significant unobservable inputs based on an expected cash flows model which produced fair values that may not represent those that could be expected from settlement of these investments in the current market.

During 2022, the Corporation sold its investments in ARCs.

The fair values of the ARCs in 2021 were derived using significant unobservable inputs based on an expected cash flows model.

The expected cash flows model produced fair values which assumed a return to market liquidity sometime within the next five years.

The Corporation believes that the trusts underlying the ARCs will self-liquidate as student loans are repaid.

The credit quality of the underlying debt associated with the ARCs is also a factor in the determination of their estimated fair value.

As of December 31, 2021, all of the ARCs were rated above investment grade.

All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government.

At December 31, 2021, all of the Corporation's ARCs were current and making scheduled interest payments.

All of the loans underlying the ARCs had principal payments which were guaranteed by the federal government.

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

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk