Fulton Financial Corporation (FULT) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results. Fulton Financial is a bank holding company; the filing attributes substantial uncertainty to COVID-19 and related economic disruption.
Financial performance and position
| Metric | Q2 2020 | Comparable period / change |
|---|---|---|
| Net income | $39.6 million; diluted EPS $0.24 | Net income down 33.8% and diluted EPS down $0.11 from Q2 2019 |
| Net interest income (GAAP) | $152.8 million | Down 7.2% year over year; FTE net interest margin was 2.81%, down 63 basis points |
| Provision for credit losses | $19.6 million | Compared with $5.0 million in Q2 2019 |
| Non-interest income | $55.9 million, including $3.0 million securities gains | Excluding securities gains, down 2.3% year over year |
| Non-interest expense | $143.0 million | Down 0.8% year over year; included $2.9 million FHLB prepayment penalty |
| Efficiency ratio | 66.4% | Compared with 64.2% in Q2 2019 |
- For the first half, net income was $65.6 million and diluted EPS was $0.40, down 43.7% and 41.2%, respectively, from first-half 2019. FTE net interest margin was 3.01%, versus 3.46%.
- At June 30, total assets were $24.62 billion; cash and cash equivalents were $1.06 billion, up from $517.8 million at year-end 2019. Deposits were $19.88 billion, up 14.3% since year-end.
- Loans were $18.70 billion before the $256.5 million loan allowance; reported net loans were $18.45 billion. Loan growth since year-end was driven largely by $1.9 billion of PPP lending.
- Total allowance for credit losses was $272.9 million, including $256.5 million for loans. Nonperforming assets were $145.2 million, or 0.59% of assets; nonperforming loans were 0.75% of total loans.
- Borrowings totaled $1.87 billion at quarter-end, including $1.30 billion of long-term borrowings. The company issued $375 million of subordinated notes in March. Total capital ratio was 14.0%; Fulton Bank met the regulatory “well capitalized” requirements.
- First-half operating cash flow was negative $35.3 million; investing cash outflow was $1.94 billion, largely reflecting loan growth, while financing cash inflow was $2.51 billion, principally from deposit growth.
- Cash dividends were $0.13 per share for Q2. The company repurchased $39.7 million of shares in Q1, then suspended its repurchase program in mid-March.
Material changes versus prior periods
- Profitability declined as lower asset yields and a substantially higher credit-loss provision outweighed growth in balances and reduced funding costs. Management reported a 105-basis-point year-over-year decline in Q2 yields on interest-earning assets, partly offset by a 40-basis-point reduction in funding costs.
- CECL adoption on January 1 increased the allowance by $58.3 million and reduced retained earnings by $43.8 million; prior-year credit-loss results use the former incurred-loss methodology and are not directly comparable.
- Mortgage banking gains benefited from higher mortgage loan sale volume and spreads, but mortgage servicing income was reduced by a $6.6 million Q2 MSR valuation allowance charge; the first-half charge was $7.7 million.
- Asset growth reflected PPP lending and strong deposit inflows, including stimulus funds and customer cash balances. The company funded approximately 10,000 PPP loans totaling $1.9 billion by June 30.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management said COVID-19’s effects remained evolving and uncertain and could affect credit losses, loan demand, fee income, funding and net interest margins. It cautioned that results for the first half are not necessarily indicative of full-year results.
- Management increased qualitative credit-loss adjustments amid uncertain economic forecasts and the performance of borrowers receiving COVID-related payment relief. Approximately $3.9 billion of qualifying payment modifications were excluded from TDR classification under applicable guidance; this does not eliminate underlying borrower credit risk.
- The SEC Division of Enforcement is investigating accounting determinations that could have affected reported EPS. The company said it is cooperating and cannot predict the timing or outcome.
- A putative class action against Fulton Bank alleges failure to compensate certain hourly employees for time spent on branch-opening security procedures. The company also describes ordinary-course legal and regulatory matters, whose ultimate outcomes are uncertain.
- Other notable exposures include $8.14 billion of commitments to extend credit and $346.7 million of standby and commercial letters of credit. The company reported $4.2 billion of additional FHLB borrowing capacity, $1.8 billion of federal funds lines and $383 million of Discount Window availability at June 30.
- Interest-rate simulations estimated net interest income would rise 4.4% under an instantaneous +100-basis-point shock and 9.1% under +200 basis points; management noted such models depend on assumptions and do not precisely predict actual results.
Most important facts for investors to verify
- Whether subsequent economic conditions, PPP forgiveness and the expiration of government support change borrower repayment capacity, provisions, charge-offs or the adequacy of the allowance.
- How much loan growth and deposit growth persist after PPP-related balances and temporary customer liquidity unwind, and how low rates affect net interest margin.
- The performance and risk profile of COVID-related payment deferrals, criticized and classified loans, commercial real estate exposures and the large unfunded commitment book.
- Any developments, findings or financial consequences from the SEC investigation and the employee wage-and-hour litigation.
- Whether liquidity, capital ratios and planned capital distributions remain resilient; note the share-repurchase suspension and the reliance on deposits and borrowing facilities.