Fulton Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Comparisons are primarily with the same 2020 periods; balance-sheet comparisons are with December 31, 2020. Figures below are rounded.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income (GAAP) | $162.4 million | $152.8 million | $326.8 million | $313.5 million |
| Net interest margin (FTE) | 2.73% | 2.81% | 2.76% | 3.01% |
| Provision for credit losses | $(3.5) million | $19.6 million | $(9.0) million | $63.6 million |
| Net income available to common shareholders | $62.4 million | $39.6 million | $132.9 million | $65.6 million |
| Diluted earnings per share | $0.38 | $0.24 | $0.81 | $0.40 |
| Non-interest income | $51.9 million | $55.9 million | $147.3 million | $110.6 million |
| Non-interest expense | $140.8 million | $143.0 million | $319.2 million | $285.6 million |
Q2 return on average assets was 1.00%; the efficiency ratio was 63.8% (a non-GAAP measure). Management attributed higher earnings mainly to improved credit-loss estimates, higher net interest income and lower quarterly expenses. Net interest income rose despite margin compression as lower funding costs and asset growth offset reduced asset yields.
Financial position, funding and credit
- Balance sheet: Total assets were $26.08 billion at June 30, up 0.7% from year-end. Cash and cash equivalents were $1.90 billion; deposits were $21.72 billion, up 4.2%.
- Loans: Net loans were $18.59 billion, down 1.7% from year-end, largely reflecting approximately $1.2 billion of PPP forgiveness. Residential mortgage loans grew 13.2%; commercial and industrial loans fell 12.1%. PPP loans outstanding were $1.1 billion.
- Borrowings and liquidity: Short- and long-term borrowings totaled approximately $1.16 billion, down 39.7% from year-end. The company reported $5.4 billion of additional FHLB borrowing capacity, $2.1 billion of federal funds lines with no borrowings, and $799 million of Discount Window availability with no borrowings.
- Cash flows: For the first half, operating activities provided $233.6 million, investing activities used $217.3 million and financing activities provided $39.9 million. Cash increased $56.2 million to $1.90 billion.
- Credit quality: Nonperforming assets were $156.5 million, or 0.60% of assets, versus $151.3 million, or 0.58%, at year-end. Nonperforming loans were 0.83% of loans versus 0.78%. The allowance for credit losses was $269.8 million, down from $291.9 million. Q2 annualized net charge-offs were 0.15% of average loans, up from 0.09% a year earlier.
- Capital: Fulton Financial reported total capital of 14.5%, Tier 1 capital of 11.0%, common equity Tier 1 of 10.0% and Tier 1 leverage of 8.5%. Fulton Bank met well-capitalized requirements.
Material changes and unusual items
- Net income available to common shareholders increased 58% year over year in Q2 and more than doubled for the first half. Negative credit-loss provisions were a major contributor; the company cited improved economic forecasts and other factors in reducing its required allowance.
- First-half non-interest income included $33.5 million of net investment securities gains, principally a $34.0 million gain from selling Visa shares. The first-quarter balance-sheet restructuring also generated $32.6 million of debt-extinguishment costs, including FHLB prepayment penalties and costs related to debt tenders.
- For the first half, net interest margin fell 25 basis points year over year as asset yields declined more than funding costs. Q2 mortgage banking income fell 71.5% year over year, reflecting lower mortgage-sale gains and a $2.2 million addition to the mortgage-servicing-rights valuation allowance. Wealth-management fees increased 31.5% in Q2.
- Criticized and classified commercial loans rose to $1.10 billion from $961 million at year-end; they represented 8.4% of internally risk-rated loans versus 7.0%. The filing linked some downgrades to COVID-related disruptions, particularly in hospitality and food services and arts, entertainment and recreation.
- COVID-related payment modifications with $3.5 billion of recorded investment were excluded from TDR classification under applicable relief guidance. The filing also reported $112.5 million of total TDRs, including $60.5 million of non-accrual TDRs, at June 30.
- The board authorized up to $75 million of common-stock repurchases through December 31, 2021; no repurchases had occurred under the program by June 30. Annual expense savings of $25 million from a prior cost review were fully realized by the end of Q2, with some savings reinvested in digital initiatives.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management described continued uncertainty around COVID-19, future economic conditions, loan demand and borrower performance, deposit levels, and the effects of interest rates on margins and funding. Other cited risks include credit-loss estimation, LIBOR transition, regulation, cybersecurity and operational risks, litigation, and the possibility of higher-cost funding if customer deposits decline. The company said approximately 25% of locations were expected to retain appointment-only lobby access long term and planned a return to onsite or hybrid work for most remote employees late in Q3 2021.
The filing states that the company’s modeled net interest income increased 7.3%, 15.1%, 22.7% and 30.4% under +100, +200, +300 and +400 basis-point shocks, respectively. These results appear above the stated policy limits at the larger shocks; investors should confirm how the scenarios compare with those limits. A proposed settlement in the Kress wage-and-hour case was not yet assured of court approval; the company did not expect its financial terms to be material. Management said pending legal and regulatory matters were not expected to materially affect financial condition, while noting an unfavorable outcome could affect future-period results.
Important facts for investors to verify
- Whether credit quality, criticized loans, nonperforming assets and charge-offs improve or deteriorate, and whether the lower allowance remains appropriate as economic forecasts change.
- How PPP forgiveness and remaining PPP balances affect loan growth, interest income and reported credit metrics.
- Whether deposit balances remain elevated and how changes in funding costs and asset yields affect net interest margin.
- Whether mortgage banking and servicing income stabilize, including future mortgage-servicing-rights valuation adjustments.
- The realized costs and benefits of the debt restructuring, the status of the share-repurchase authorization and the court’s decision on the Kress settlement.
- How management assesses the interest-rate sensitivity results against its stated policy limits.