Fulton Financial Corporation — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2022. Fulton provides retail and commercial banking services primarily in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Prudential Bancorp’s results are not included: Fulton completed the acquisition on July 1, 2022, after quarter-end.
Key financial metrics
| Metric | Q2 2022 | Comparable period / change |
|---|---|---|
| Net income | $70.0 million | $65.0 million in Q2 2021 |
| Net income available to common shareholders | $67.4 million; diluted EPS $0.42 | $62.4 million; diluted EPS $0.38 |
| Net interest income | $178.8 million GAAP; $182.3 million FTE | GAAP $162.4 million; FTE $165.4 million |
| Net interest margin | 3.04% FTE | 2.73% in Q2 2021 |
| Non-interest income | $58.4 million, excluding securities gains | Up 12.6% year over year |
| Non-interest expense | $149.7 million, including $1.0 million merger costs | $140.8 million in Q2 2021 |
| Selected returns and efficiency | ROAA 1.10%; return on average common equity 11.57%; efficiency ratio 61.4% | ROAA 1.00%; common equity return 10.11%; efficiency ratio 63.8% |
For the six months, net income was $134.3 million and diluted EPS was $0.80, versus $138.0 million and $0.81 in 2021. Six-month FTE net interest income rose 4.2% to $346.9 million and NIM increased to 2.91% from 2.76%. Six-month non-interest income excluding securities gains was essentially flat; reported income was lower largely because 2021 included a $33.5 million net securities gain. 2021 expenses also included $32.6 million of debt-extinguishment costs.
Financial condition, cash flow and capital
- At June 30, total assets were $25.25 billion, net loans were $18.67 billion and deposits were $21.14 billion. Since year-end 2021, net loans increased 3.3%, while deposits declined 2.0%.
- Cash and cash equivalents fell $1.19 billion to $449.7 million, reflecting loan growth and lower deposits. For the first six months, operating cash flow was negative $15.7 million, investing cash flow was negative $669.5 million and financing cash flow was negative $503.8 million.
- Shareholders’ equity declined $241.6 million to $2.47 billion. A $331.6 million after-tax other comprehensive loss, primarily from unrealized securities and derivative losses, was the main driver; AOCI moved from a $27.4 million gain at year-end to a $304.2 million loss.
- Total borrowings were approximately $1.01 billion at quarter-end. Fulton repaid $65 million of senior notes at maturity in March. It reported no FHLB advances outstanding and cited approximately $5.9 billion of FHLB borrowing capacity, $2.1 billion of federal funds lines and $1.2 billion of FRB discount-window capacity.
- Regulatory capital ratios remained above fully phased-in requirements: total risk-based capital 13.7%, Tier 1 10.8%, common equity Tier 1 9.9% and Tier 1 leverage 9.1%. Fulton Bank met the well-capitalized standard.
Material changes and credit quality
- Q2 earnings and margins improved year over year, with higher asset yields and lower interest expense contributing to stronger net interest income. The Fed raised its target range to 1.50%–1.75% in June 2022; management reported that rising rates supported asset yields.
- Average loans remained below the prior-year period, mainly because of a $1.4 billion decline in PPP loans, while residential mortgage, commercial mortgage and construction lending grew. Average deposits declined 1.1% year over year in Q2, with growth in noninterest-bearing deposits offset by declines in time and interest-bearing demand deposits.
- Non-performing assets rose to $178.3 million, or 0.71% of assets, from $153.9 million, or 0.60%, at year-end. Non-performing loans were 0.92% of loans versus 0.83%. The allowance for credit losses was $262.9 million, including $248.6 million for loans; loan allowance coverage of non-performing loans was 143%.
- The six-month provision was a $5.45 million release, compared with a $9.0 million release in 2021. Management said Q2 provision reflected loan growth and the economic outlook; lower COVID-related qualitative adjustments helped reduce the allowance need. Net loan recoveries were $4.8 million for the first six months.
- AFS securities had $256.1 million of gross unrealized losses at June 30. Management attributed mortgage-backed and collateralized mortgage security valuation declines primarily to interest rates, and said it did not intend, nor expect to be required, to sell securities before recovery. Fulton transferred securities with $479.0 million amortized cost from AFS to HTM in May; the transfer-date fair value was $415.2 million.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management described the Prudential acquisition as an opportunity to expand in Philadelphia, grow the customer base and seek operating-scale benefits. The bank subsidiary merger was planned for Q4 2022; acquisition accounting was to be completed in Q3. The company also made a $2 million post-close contribution to the Fulton Forward Foundation.
- Interest-rate simulation estimated that an immediate +100 bp rate shock would increase annual net interest income 4.5%, with larger modeled increases at +200, +300 and +400 bp. The filing cautions that modeling assumptions, customer behavior and competitive pricing may cause actual results to differ.
- Key disclosed risks include economic weakness and deterioration in borrowers’ credit, interest-rate and securities-market volatility, deposit competition and funding costs, liquidity, regulatory and operational risks, litigation, and the costs and execution risks of integrating Prudential. Risk factors were reported as having no material change from prior filings.
- A proposed settlement in the Kress wage-and-hour case received preliminary court approval on June 30; final approval was scheduled for November 2, 2022. Fulton said the financial terms were not expected to be material, subject to final approval.
Important facts for investors to verify
- Whether the increase in non-performing assets continues and whether loan-loss provisions and the allowance remain adequate as economic conditions evolve.
- How deposit balances, deposit pricing and funding costs respond to rising rates, and whether modeled net-interest-income benefits are realized.
- The effect of unrealized securities losses and AOCI on capital, liquidity choices and any future securities sales or classification decisions.
- Prudential integration progress, realized costs and savings, acquisition accounting, and the planned bank merger timetable.
- Cash-flow trends and the company’s use of available borrowing facilities if deposits decline or loan growth accelerates.