Fulton Financial Corporation — Q3 2020 Form 10-Q
Business context and reporting period. Fulton Financial Corporation is a bank holding company. This unaudited filing covers the three and nine months ended September 30, 2020; balance-sheet comparisons are against December 31, 2019. Dollar amounts below are in millions unless noted.
Financial performance and condition
- Q3 earnings: Net income was $61.6, versus $62.1 a year earlier; diluted EPS was $0.38 versus $0.37. Return on average assets was 0.97%, and return on average equity was 10.32%.
- First nine months: Net income was $127.2, down 28.8% from $178.6; diluted EPS was $0.78 versus $1.06. Return on average assets was 0.71%, compared with 1.13%.
- Net interest: Q3 net interest income was $154.1, down 4.4%; fully taxable-equivalent net interest income was $157.1. Net interest margin declined 61 basis points to 2.70%. For nine months, net interest income was $467.6, down 4.4%, and fully taxable-equivalent margin fell 51 basis points to 2.90%. Lower asset yields outweighed loan and deposit growth, despite lower funding costs.
- Noninterest income and expense: Q3 noninterest income was $63.2, including $16.8 of mortgage banking income; income excluding securities gains rose 14.3% year over year. Noninterest expense declined 5.2% to $139.1. For nine months, noninterest income was $173.8 and expense was $424.7, down 0.9%.
- Credit costs: Provision for credit losses was $7.1 in Q3 versus $2.2; nine-month provision was $70.7 versus $12.3. The company attributed the increase principally to COVID-19-related economic forecasts and uncertainty over borrowers receiving payment relief. Total allowance for credit losses was $282.4 at quarter-end, including $266.8 for loans.
- Credit quality: Nonperforming assets were $146.6, or 0.57% of assets, versus $148.0 at year-end. Nonperforming loans were 0.75% of loans. Criticized and classified internally risk-rated loans totaled $796.4, up from $662.6 at year-end. Total TDRs were $107.2; COVID-related payment modifications of $3.8 billion were excluded from TDR classification under regulatory guidance.
- Balance sheet and liquidity: Assets were $25.54 billion, up 16.7% from year-end. Net loans were $18.76 billion, up 12.5%; deposits were $20.73 billion, up 19.2%; cash and cash equivalents were $1.53 billion versus $517.8 million. Management said deposit growth reflected government stimulus funds and municipal seasonality. Available liquidity included $3.8 billion of additional FHLB borrowing capacity, $1.8 billion of federal funds lines and $373 million of Discount Window capacity; none of the latter two facilities was drawn at quarter-end.
- Debt and capital: Long-term borrowings were $1.30 billion, up 47.0%, reflecting $375 million of subordinated notes issued in March. The company reported September 30 capital ratios of 13.8% total capital, 9.6% Tier 1 and common equity Tier 1, and 7.5% Tier 1 leverage; Fulton Bank met “well capitalized” requirements. In October, the company issued $200 million of preferred depositary shares and received $193.7 million net proceeds before transaction expenses.
- Cash flow and shareholder returns: For nine months, operating cash flow was $29.5, investing cash flow was negative $2.39 billion, and financing cash flow was positive $3.38 billion. Dividends were $0.13 per common share in Q3. The company repurchased $39.7 million of shares in Q1 and suspended repurchases in mid-March.
Material changes versus comparable periods
- Nine-month earnings fell primarily because of weaker net interest income and higher credit-loss provision. The 2020 CECL adoption increased the allowance by $58.3 million and reduced opening retained earnings by $43.8 million; prior-period results use the former incurred-loss model and are not fully comparable.
- Average loans grew 14.9% in Q3 and 10.5% for nine months, driven substantially by PPP lending. Fulton had funded approximately 10,000 PPP loans totaling $2.0 billion by September 30.
- Average deposits grew 20.3% in Q3 and 14.5% for nine months. Interest rate reductions lowered funding costs, but also reduced loan and asset yields and compressed margin.
- Mortgage banking benefited from stronger loan-sale gains, while mortgage servicing income was affected by a $9.2 million nine-month increase in the MSR valuation allowance. Consumer banking income declined, especially overdraft fees.
Outlook, risks, contingencies and unusual items
- No specific earnings or margin guidance is provided. Management described COVID-19 effects as evolving and uncertain, including possible impacts on borrower creditworthiness, loan demand, fees, credit losses and interest income. It noted stimulus and unemployment support had helped limit impacts, but expiration or reduction could worsen borrower performance.
- A strategic expense program announced in October is expected to produce $25 million of annual savings, with full savings expected by mid-2021 and some savings reinvested in digital initiatives. The company expects $17–$19 million of pretax charges, primarily in Q4 2020; 21 financial-center closures or consolidations are expected to be completed in early 2021. The filing cautions that savings and timing are uncertain and the initiative could affect customer retention and growth.
- The SEC accepted a settlement on September 28 concerning accounting determinations that could have affected reported EPS in Q4 2016 through Q2 2017. Fulton consented to a cease-and-desist order without admitting or denying the findings and agreed to a $1.5 million civil penalty.
- A putative wage-and-hour class action had a tentative agreement on financial terms; the company accrued the potential settlement and said it did not expect the amount to be material. It cautioned that other legal or regulatory matters could still have material future effects.
- Other notable items: a Q2 2020 securities restructuring generated $3.1 million of net gains and incurred $2.9 million of FHLB prepayment penalties. The Q3 2019 restructuring generated $4.5 million of gains and $4.3 million of penalties, affecting year-over-year comparisons. The filing also identifies interest-rate, liquidity, credit, operational, regulatory and cyber risks.
Important facts for investors to verify
- Whether COVID-19 conditions, borrower relief expirations and updated economic forecasts require further credit provisions, and how criticized loans and TDRs evolve.
- How much PPP lending is forgiven or repaid, and the resulting effect on loan balances, interest income and fee recognition.
- Whether margin stabilizes as asset yields and deposit costs adjust, and whether deposit growth persists after stimulus-related balances normalize.
- Delivery and timing of the $25 million expense savings against the expected $17–$19 million restructuring charges and potential customer impacts.
- Performance and valuation assumptions for mortgage servicing rights, including prepayments, and the trajectory of mortgage banking revenue.
- Regulatory capital and liquidity effects of the October preferred issuance, and the status of suspended common-stock repurchases.
- Developments in the SEC settlement, the wage-and-hour matter and any other legal or regulatory proceedings.