Fulton Financial Corporation (FULT) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Fulton is a regional financial holding company operating through Fulton Bank in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. The Prudential Bancorp acquisition closed July 1, 2022; its results are included in 2023 but not the comparable 2022 periods, affecting year-over-year comparisons.
Financial performance
| Metric | Q2 2023 | Comparable-period change |
|---|---|---|
| Net interest income | $212.9 million | Up 19.0% year over year |
| Net interest margin, FTE | 3.40% | Up 36 basis points |
| Noninterest income | $60.6 million | Up 3.8% excluding securities gains |
| Provision for credit losses | $9.7 million | Compared with $1.5 million |
| Noninterest expense | $168.0 million | Up 13.0% excluding prior-year merger expenses |
| Net income | $79.6 million | Compared with $70.0 million |
| Net income available to common shareholders | $77.0 million; diluted EPS $0.46 | Compared with $67.4 million and $0.42 |
| Efficiency ratio | 60.1% | Compared with 61.4% |
For the six months ended June 30, net income was $147.9 million and diluted EPS was $0.85, versus $134.3 million and $0.80 in 2022. Net interest income was $428.4 million and FTE NIM was 3.46%, compared with $340.1 million and 2.91%. The six-month provision was $34.3 million, versus a $5.5 million provision release in 2022.
Financial position, liquidity and capital
- Total assets were $27.4 billion at June 30, up 1.8% from year-end 2022. Net loans were $21.0 billion, up 3.8%; residential mortgage loans rose $410.0 million.
- Deposits totaled $21.2 billion, up 2.7% from year-end. The mix shifted: noninterest-bearing demand deposits declined $1.14 billion, while brokered deposits rose $740.8 million and time deposits rose $612.4 million.
- Borrowings were $2.72 billion, down 5.3% from year-end; cash and cash equivalents were $504.7 million, down $177.2 million. Fulton Bank reported approximately $5.3 billion of remaining FHLB borrowing capacity, $1.9 billion of unused federal funds lines, and no outstanding borrowings under the discount-window or Bank Term Funding Program facilities.
- Six-month cash flows: $216.9 million provided by operations, $704.2 million used in investing, and $310.0 million provided by financing; cash declined $177.2 million.
- At June 30, the Corporation’s total risk-based capital ratio was 13.8%, CET1 was 10.1%, and Tier 1 leverage was 9.3%. Fulton Bank met the well-capitalized regulatory requirements.
- Common equity was supported by earnings but partly offset by dividends and $40.4 million of first-quarter share repurchases. Repurchases were paused in March and resumed in July under the authorization of up to $100 million through year-end.
Credit, securities and other material changes
- Nonperforming assets declined to $151.6 million, or 0.55% of assets, from $177.7 million, or 0.66%, at year-end. The allowance for credit losses on loans was $287.4 million, up from $269.4 million.
- Six-month net charge-offs were $16.0 million, primarily reflecting a $13.3 million first-quarter charge-off on a commercial office loan. Criticized and classified commercial loans increased to $802.3 million from $752.1 million; classified balances rose, notably in commercial and industrial loans.
- Commercial mortgage and construction loans totaled approximately $9.2 billion, or 43.5% of the loan portfolio. Real estate represented 46.7% of the combined commercial mortgage and commercial and industrial portfolio’s reported industry mix.
- Available-for-sale securities had $344.1 million of gross unrealized losses; held-to-maturity securities had a $207.9 million fair-value shortfall versus amortized cost. Management attributed mortgage-backed and municipal-security valuation declines mainly to interest rates, stated it did not intend to sell and did not expect to be forced to sell before recovery. AOCI was negative $379.3 million.
- Interest expense rose sharply as deposit and borrowing costs increased. Management cited the Federal Reserve’s rate increases, greater use of higher-cost funding, and reduced noninterest-bearing deposits. The cost of total deposits was 1.32% in Q2 versus 0.11% a year earlier.
- Noninterest expense growth reflected compensation, outside services, technology, FDIC insurance and acquisition-related effects. Mortgage banking income and overdraft fees were lower for the six-month period, partly offset by commercial banking income growth.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue, margin or credit-loss guidance. Management says actual results may differ from forward-looking statements and identifies economic and financial-market conditions, deposit competition and funding costs, interest-rate sensitivity, credit quality and allowance estimates, liquidity and capital, regulation, cybersecurity and operational risks, and acquisition integration among key uncertainties.
At June 30, modeled net interest income increased 6.5% under an instantaneous +400-basis-point shock and declined 15.2% under a -400-basis-point shock. The filing notes model assumptions and customer behavior may cause actual results to differ. Terminated cash-flow hedges carry a $70.6 million unrealized loss scheduled to reduce future interest income as forecasted transactions occur; management estimated a further $28.3 million of hedge losses would be reclassified to interest income over the next 12 months. Legal matters are described as ordinary-course proceedings; management did not expect them to materially affect financial condition, while noting an unfavorable resolution could materially affect a future period. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether deposit outflows from noninterest-bearing accounts continue, and how brokered and time-deposit reliance affects funding costs and margins.
- Trends in commercial real estate and office credit, criticized/classified loans, charge-offs and the adequacy of the loan-loss allowance.
- The scale and timing of securities valuation recovery, AOCI effects, and scheduled cash-flow-hedge losses flowing through interest income.
- Whether loan growth and higher rates can continue to offset rising deposit costs and operating expenses, including acquisition-related costs.
- How much of the $100 million repurchase authorization is used after the July resumption, and the resulting effect on capital and liquidity.