Fulton Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Fulton Financial is a Pennsylvania-based financial holding company providing retail and commercial banking and related services primarily in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and condition
| Metric | Q1 2022 | Comparable / change |
|---|---|---|
| Net income | $64.3 million | $73.1 million in Q1 2021 |
| Net income available to common shareholders | $61.7 million; diluted EPS $0.38 | $70.5 million; diluted EPS $0.43 |
| Net interest income | $161.3 million GAAP; $164.6 million FTE | GAAP down 1.9%; FTE down $2.8 million |
| Net interest margin | 2.78% FTE | 2.79% in Q1 2021 |
| Non-interest income | $55.3 million | $95.4 million in Q1 2021; excluding securities gains, down 10.8% |
| Non-interest expense | $146.0 million | $178.4 million in Q1 2021 |
| Cash flows | Operating $(107.8) million; investing $(288.9) million; financing $(83.9) million | Cash and cash equivalents decreased $480.6 million during the quarter |
| Assets / deposits / loans | Total assets $25.6 billion; deposits $21.5 billion; net loans before ACL $18.5 billion | From December 31, 2021: assets down 0.8%, deposits down 0.1%, net loans up 0.8% |
| Borrowings | Short-term $452.4 million; long-term $556.5 million | Long-term borrowings decreased $64.9 million from year-end |
| Capital | CET1 10.0%; total risk-based capital 13.8%; Tier 1 leverage 8.9% | Company reported meeting fully phased-in capital requirements; bank met “well capitalized” requirements |
Material changes and drivers
- Common earnings declined year over year. Net interest income was pressured by a $15.0 million decline in PPP loan fees and lower average loan balances, partly offset by lower deposit and borrowing costs.
- Average loans fell 3.1% year over year, largely reflecting a $1.5 billion reduction in PPP loans; residential mortgage and commercial mortgage balances grew. Average deposits increased 1.7%, supported by noninterest-bearing deposits and savings and money market accounts.
- Non-interest income excluding securities gains fell 10.8%, primarily because mortgage banking income declined $9.4 million. Wealth management income increased $2.1 million.
- Non-interest expense declined $32.4 million, mainly because Q1 2021 included $32.2 million of debt extinguishment costs. Q1 2022 included $0.4 million of merger-related expense.
- Q1 2021 earnings included $33.5 million of net investment securities gains, principally associated with the sale of Visa shares, making the reported year-over-year decline in total non-interest income unusually large.
- Shareholders’ equity fell $143.1 million from year-end, principally due to a $186.3 million after-tax comprehensive loss, including unrealized losses on securities and derivatives. AOCI moved from a $27.4 million gain to a $158.9 million loss.
Credit, liquidity, outlook and risks
- The provision for credit losses was a negative $7.0 million, reflecting an ACL reduction that management attributed to improved economic conditions. Total ACL was $257.6 million, including $243.7 million for loans. Annualized net charge-offs were negative 0.02% of average loans.
- Non-performing assets were $163.0 million, or 0.64% of assets, versus $153.9 million, or 0.60%, at December 31, 2021. Non-performing loans rose to 0.87% of total loans from 0.83%.
- Cash and cash equivalents were $1.16 billion at quarter-end. Available additional liquidity included approximately $5.8 billion of FHLB borrowing capacity, $2.1 billion in federal funds lines and $1.1 billion of discount-window borrowing availability; none was outstanding at quarter-end.
- Interest-rate sensitivity analysis estimated that an instantaneous upward shock of 100 basis points would increase annual net interest income by 5.6%; a 400-basis-point shock was estimated to increase it by 22.8%. Management cautioned that model assumptions and customer behavior may cause actual results to differ.
- Fulton announced its proposed acquisition of Prudential Bancorp on March 2, 2022. The filing anticipated closing in Q3 2022, subject to approvals and other conditions. Management expected the transaction to be accretive to EPS beginning in the first year after closing, excluding one-time charges; this was based on preliminary estimates. The agreement provides $3.65 cash plus 0.7974 Fulton share for each Prudential share.
- Key risks include interest-rate and securities-value changes, credit deterioration, liquidity and funding conditions, regulatory matters, litigation, and acquisition approval, timing, integration, cost, and benefit-realization risks. The filing also notes that COVID-19’s economic effects remained uncertain. The Kress wage-and-hour class settlement awaited court approval; its financial terms were not expected to be material.
- The board authorized up to $75 million of common-share repurchases through December 31, 2022. No shares were repurchased under the prior program during the quarter.
Most important facts for investors to verify
- Whether loan and non-performing asset trends, criticized credit exposures and the negative credit-loss provision remain consistent with improving credit conditions.
- How rising rates affect deposit pricing, net interest margin, securities values and AOCI; the filing reports substantial unrealized securities losses and modeled sensitivity that depends on assumptions.
- Whether mortgage banking weakness persists and how recurring fee income develops, apart from the unusual prior-year securities gain.
- Prudential merger approvals, closing timetable, final transaction and integration costs, and whether expected accretion is achieved.
- Capital, liquidity and share repurchase developments after quarter-end. The filing does not provide formal full-year financial guidance.