Fulton Financial Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Fulton is a regional bank holding company operating in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net interest income | $160.7 | $163.3 |
| Provision for credit losses | $44.0 | $5.1 |
| Non-interest income | $54.6 | $46.8 |
| Non-interest expense | $142.6 | $137.8 |
| Net income | $26.0 | $56.7 |
| Diluted earnings per share | $0.16 | $0.33 |
| Net interest margin (FTE) | 3.21% | 3.49% |
| Efficiency ratio | 64.5% | 63.9% |
- Net income fell 54.0% year over year, primarily reflecting the higher credit-loss provision amid COVID-19-related economic deterioration and CECL adoption. The effective tax rate was 9.6%, versus 15.6%.
- Net interest income declined 1.6%; lower asset yields outweighed balance-sheet growth and reduced funding costs. Average loans grew 4.1% and average deposits 5.2% year over year.
- Non-interest income excluding securities gains rose 16.9%, led by commercial banking, wealth management and mortgage banking. Non-interest expense increased 3.4%, mainly due to salaries and technology costs.
- At March 31, total assets were $22.93 billion, deposits $17.37 billion, and total borrowings $2.77 billion. Cash and cash equivalents were $856.4 million, up from $517.8 million at year-end. Balance-sheet net loans after the loan allowance were $16.84 billion; gross loans were $17.08 billion.
- Total allowance for credit losses was $257.5 million, including $238.5 million for loans and $19.0 million for off-balance-sheet exposures. Non-performing assets were $146.5 million, or 0.64% of total assets; annualized net charge-offs were 0.26% of average loans.
- Operating cash flow was negative $46.9 million; investing cash flow was negative $526.6 million and financing cash flow was positive $912.0 million. Financing inflows included increased short- and long-term borrowings.
- Shareholders’ equity was $2.29 billion, down 2.4% from year-end. Regulatory capital ratios at quarter-end included total capital of 13.8%, CET1 of 9.4%, and Tier 1 leverage of 7.9%. The bank met the well-capitalized standard.
Material changes and unusual items
- Fulton adopted CECL on January 1, 2020. Adoption increased the allowance by $58.3 million, reduced retained earnings by $43.8 million and increased deferred tax assets by $12.4 million. Prior-period credit-loss figures use the prior incurred-loss method and are not fully comparable.
- The company recorded a $44.0 million Q1 provision for credit losses, versus $5.1 million a year earlier. Management said deteriorating COVID-19 economic forecasts drove much of the increase and warned that worsening forecasts could require additional reserves.
- In March, Fulton issued $375 million in subordinated notes: $200 million due 2030 and $175 million due 2035. Long-term borrowings increased accordingly; the issuance also supported growth in investment securities.
- The company repurchased 2.9 million shares for $39.7 million during the quarter, then suspended the repurchase program in mid-March to preserve liquidity. The quarterly dividend remained $0.13 per share.
- Under the PPP, as of April 30 Fulton had funded approximately 7,200 applications totaling $1.8 billion, with another approximately $200 million in process. It reported $1.0 billion of COVID-related payment modifications excluded from TDR classification under regulatory guidance.
Outlook, management commentary and risks
- The filing provides no formal earnings or financial guidance. Management described the pandemic’s effects as evolving and uncertain and expected impacts on credit losses, net interest income, non-interest income and customer activity to persist for an uncertain period.
- FOMC rate cuts may pressure asset yields, net interest income and margins; management expected deposit costs to decline significantly in Q2 following March rate cuts. Its March 31 sensitivity analysis estimated that a 100-basis-point upward shock would increase annual net interest income by 3.5%, subject to model assumptions.
- Management reported approximately $3.3 billion of additional FHLB borrowing capacity, $1.8 billion of federal funds lines (with $200 million drawn), and $465 million of available Discount Window capacity (none drawn). It also held excess cash for liquidity.
- COVID-19 risks include borrower stress and future reserve needs, deposit and loan demand changes, interest-rate pressure, operational and cybersecurity risks from remote work and digital banking, and potential PPP compliance or guarantee disputes. Deferred payments may make deterioration harder to identify.
- The SEC Division of Enforcement is investigating certain accounting determinations that could have affected reported EPS. Fulton said it is cooperating, believes its filings fairly present its financial statements, and cannot predict the investigation’s timing or outcome.
- Other disclosed matters include a putative employee wage-and-hour class action. Management said it did not expect pending legal or regulatory matters to materially affect financial condition, while noting unfavorable outcomes could affect future results.
Most important facts for investors to verify
- Whether subsequent CECL provisions and credit performance reflect the economic assumptions used at March 31, especially as COVID-related deferrals end.
- PPP loan funding, forgiveness and guarantee compliance, and the borrower performance of the approximately $1.0 billion of payment modifications.
- Whether net interest margin stabilizes after rate cuts, and the effect of asset repricing, deposit-cost reductions and funding mix.
- Liquidity and capital trends, including borrowings, available facilities, the subordinated-note costs and any resumption of share repurchases.
- Developments in the SEC accounting investigation and the wage-and-hour litigation, including any change in estimated exposure.