Fulton Financial Corporation — Q1 2021 Form 10-Q
Business context and reporting period: The unaudited filing covers the three months ended March 31, 2021, with balance-sheet comparisons to December 31, 2020. Fulton is a bank holding company whose primary revenue source is net interest income. Comparisons of operating results are to Q1 2020.
Financial performance and position
- Earnings: Net income was $73.1 million, versus $26.0 million; net income available to common shareholders was $70.5 million, or $0.43 diluted per share, versus $26.0 million, or $0.16. Results included a $33.5 million net securities gain and $32.2 million in debt-extinguishment expense.
- Revenue and margin: Net interest income rose 2.3% to $164.4 million. FTE net interest income was $167.4 million. Net interest margin declined 42 basis points to 2.79%, as lower asset yields more than offset lower funding costs. Non-interest income was $95.4 million, including securities gains; excluding those gains, it increased 13.4% to $61.9 million.
- Credit costs and asset quality: Provision for credit losses was a negative $5.5 million, compared with $44.0 million of expense in Q1 2020, reflecting improved economic forecasts and lower individual loan allocations. Net charge-offs were $6.2 million, or 0.13% annualized of average loans, versus $11.1 million and 0.26%. Nonperforming assets were $156.1 million, 0.60% of assets, up from $151.3 million and 0.58% at year-end. The loan allowance was $266.0 million; total ACL, including off-balance-sheet exposures, was $280.3 million.
- Balance sheet and liquidity: Total assets were $25.9 billion. Net loans were $18.7 billion, up 0.5% from year-end; deposits were $21.6 billion, up 3.8%. Cash and cash equivalents were $1.66 billion. Q1 operating cash flow was $203.4 million; investing activities used $351.0 million and financing activities used $38.4 million.
- Debt and capital: Borrowings totaled $1.15 billion, down $778.9 million from year-end after repayment of $536.0 million in long-term FHLB advances and tender purchases of $135.0 million of notes. At March 31, the company’s total capital, Tier 1, CET1 and leverage ratios were 14.3%, 10.7%, 9.7% and 8.2%, respectively. The Bank met applicable well-capitalized requirements.
- Other metrics: Return on average assets was 1.14%; return on average equity was 11.24%; and the efficiency ratio was 63.0% (company-reported non-GAAP measure). Common cash dividends were $0.14 per share.
Material changes, outlook and risks
- Balance-sheet restructuring: Fulton sold all Visa shares held, recognizing a $34.0 million gain, and sold other securities at a net loss of approximately $0.4 million. It also incurred $32.2 million of debt-extinguishment costs, including FHLB prepayment penalties. Separately, $376.2 million of mortgage-backed securities was transferred from available-for-sale to held-to-maturity.
- Loans and deposits: Average loans increased 12.6% year over year, driven largely by PPP lending; average deposits increased 23.3%, reflecting customer liquidity and relief-related inflows. PPP loans outstanding were $1.7 billion at quarter-end; $958.6 million of cumulative PPP originations had been forgiven and repaid by the SBA through March 31.
- COVID-19 and credit risks: Management described continued uncertainty around the pandemic, borrower repayment capacity, loan demand, deposit balances and economic conditions. Criticized and classified commercial loans totaled $1.01 billion, up from $961.1 million at year-end; substandard-or-lower commercial mortgage loans rose. COVID-related payment modifications excluded from TDR classification totaled $3.6 billion.
- Interest-rate exposure: The company reported that an immediate +100 basis-point shock was estimated to increase annual net interest income by 5.8%; a +400 bp shock by 24.1%. These are model estimates and exclude potential changes in customer behavior, balance-sheet mix and competitive pricing. Fulton entered into $500 million of receive-fixed/pay-variable swaps during the quarter.
- Guidance and management commentary: The filing provides no specific earnings or financial guidance. Management cautioned that Q1 results are not necessarily indicative of full-year results. It cited pandemic developments, credit-loss estimates, interest rates, deposit funding, regulation, cyber and operational risks, and litigation among factors that could affect future results.
- Contingencies and shareholder actions: The company reported ordinary-course legal matters and a wage-and-hour class/collective settlement awaiting court approval; settlement costs were not expected to be material. A share-repurchase authorization of up to $75 million through December 31, 2021 was approved; no shares were repurchased under it in Q1.
Important facts for investors to verify
- How much of reported earnings reflects the nonrecurring Visa gain, and how should the debt-extinguishment costs be treated when assessing underlying performance?
- Whether the negative credit provision and improved forecasts remain supportable as COVID-related payment relief expires and borrower conditions evolve.
- Trends in nonperforming assets, criticized/classified loans, charge-offs and the adequacy of the ACL, particularly in commercial real estate and affected industries.
- Whether deposit growth persists and how loan yields, funding costs and the falling net interest margin affect future net interest income.
- The realized impact of debt repayment, the $500 million swap position, and planned or actual use of the $75 million repurchase authorization.