Fulton Financial Corporation — Q1 2023 Form 10-Q
Business context and reporting period. Fulton Financial is a regional financial holding company providing retail and commercial banking services across Pennsylvania, Delaware, Maryland, New Jersey and Virginia. This unaudited report covers the three months ended March 31, 2023. The July 2022 acquisition of Prudential Bancorp affects comparability: its results are included in Q1 2023 but not in reported Q1 2022 results.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net income | $68.3 million; common shareholders $65.8 million | $64.3 million; common shareholders $61.7 million in Q1 2022 |
| Diluted earnings per share | $0.39 | $0.38 in Q1 2022 |
| Net interest income | $215.6 million; FTE net interest margin 3.53% | $161.3 million; FTE margin 2.78% in Q1 2022 |
| Provision for credit losses | $24.5 million | $7.0 million provision reversal in Q1 2022 |
| Total noninterest income | $51.8 million | $55.3 million in Q1 2022 |
| Noninterest expense | $159.6 million | $146.0 million in Q1 2022 |
| Total assets | $27.1 billion | $26.9 billion at December 31, 2022 |
| Deposits | $21.3 billion | $20.6 billion at December 31, 2022 |
| Total borrowings | $2.45 billion | $2.87 billion at December 31, 2022 |
| Cash and cash equivalents | $566.8 million | $681.9 million at December 31, 2022 |
| Operating cash flow | $46.0 million provided | $107.8 million used in Q1 2022 |
Net loans were $20.67 billion, up 1.9% from year-end. The allowance for credit losses on loans was $278.7 million, or approximately 1.35% of net loans. Net charge-offs were $14.0 million; annualized net charge-offs to average loans were 0.27%. Nonperforming assets were $167.9 million, or 0.62% of total assets, down from $177.7 million, or 0.66%, at year-end.
Regulatory capital ratios at March 31 were 13.4% total risk-based, 10.6% Tier 1 risk-based, 9.8% Common Equity Tier 1 and 9.2% Tier 1 leverage. Fulton Bank met the well-capitalized regulatory requirements. The filing reports approximately $5.5 billion of remaining FHLB borrowing capacity; it also reports $2.5 billion of federal funds lines, with $0.5 billion outstanding.
Material changes versus comparable periods
- Net interest income rose 33.6% year over year and FTE margin expanded 75 basis points. Higher asset yields and loan growth drove the increase, partly offset by materially higher deposit and borrowing costs.
- Average net loans increased 11.3% year over year, while average deposits decreased 4.2%. Average borrowings and other interest-bearing liabilities increased approximately $2.0 billion.
- Year-end-to-quarter-end deposits rose $667.0 million, but the mix shifted: noninterest-bearing demand deposits fell $602.9 million, while brokered deposits rose $752.5 million and time deposits rose $304.9 million. Borrowings declined $424.4 million from year-end.
- Noninterest income fell 6.3%, principally because of lower mortgage banking and wealth management income. Noninterest expense rose 9.3% reported, reflecting higher compensation, outside services, FDIC insurance, technology spending and other costs.
- Credit provision increased from a reversal in Q1 2022 to an expense in Q1 2023, reflecting loan growth and changes in the macroeconomic outlook. Net charge-offs also increased substantially from the prior-year quarter.
- Accumulated other comprehensive loss improved to $351.0 million from $385.5 million at year-end. AFS securities had $304.5 million of gross unrealized losses and HTM securities had $182.7 million at March 31; management attributed mortgage-security valuation declines primarily to interest rates and said it did not expect to have to sell securities before recovery.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, margin, loan-growth or expense guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Management identified recent financial-industry events and regional-bank confidence concerns as risks that could prompt deposit outflows, higher funding costs, reduced margins, increased regulatory requirements or higher FDIC assessments. The filing discusses monitoring deposit granularity and uninsured deposits but does not provide a clear uninsured-deposit balance in the supplied text.
- In January 2023, Fulton terminated cash-flow hedges with $1.0 billion notional. The related $70.6 million loss in accumulated OCI is expected to reduce interest income as the forecasted hedged transactions affect earnings; $5.5 million was reclassified as a reduction of loan interest income in Q1. Management estimated a further $28.3 million of derivative losses would be reclassified as a reduction to interest income over the next 12 months.
- Fulton repurchased 2.4 million shares for $40.4 million under its $100 million 2023 authorization, then paused the program in March. The quarterly common dividend was $0.15 per share.
- Legal proceedings and regulatory inquiries are described as ordinary-course matters; management did not expect their liabilities to be materially adverse to financial condition, while acknowledging an unfavorable resolution could materially affect future-period results. A $0.8 million contingent liability contributed to higher other expense.
- Commercial real estate and construction loans totaled approximately $9.1 billion, or 43.9% of the loan portfolio. Criticized and classified commercial loans rose to $792.2 million from $752.1 million at year-end. The filing also identifies interest-rate, liquidity, deposit competition, credit, cybersecurity, regulatory and acquisition-integration risks.
Most important facts for investors to verify
- Whether deposit trends, especially noninterest-bearing and uninsured balances, remain stable and whether reliance on higher-cost brokered and time deposits continues.
- Whether net interest margin holds up as deposit and borrowing costs reprice, including the scheduled recognition of terminated-hedge losses.
- Whether credit quality weakens further, particularly in commercial real estate, construction and criticized/classified commercial loans, and whether charge-offs and provisions rise.
- How much of the securities portfolio’s unrealized losses could become relevant if liquidity needs require sales, and how available borrowing capacity changes.
- Whether operating expenses, FDIC assessments and Prudential Bancorp integration costs align with management’s expectations; the filing gives no quantified forward guidance.
- Whether capital remains comfortably above regulatory requirements and whether the share repurchase pause continues.