Fulton Financial Corporation — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; quarterly results are noted separately below. Fulton is a regional bank holding company operating through Fulton Bank in Pennsylvania, Delaware, Maryland, New Jersey and Virginia.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $629.2 million | $648.4 million |
| Provision for credit losses | $76.9 million | $32.8 million |
| Net income | $178.0 million | $226.3 million |
| Net income available to common shareholders | $175.9 million | $226.3 million |
| Diluted earnings per share | $1.08 | $1.35 |
| Net interest margin (FTE) | 2.86% | 3.36% |
| Efficiency ratio | 65.7% | 63.7% |
| Return on average assets | 0.73% | 1.06% |
| Net charge-offs / average loans | 0.05% | 0.22% |
- Revenue and margin: Net interest income fell 3.0%. Lower asset yields reduced FTE interest income, partly offset by balance-sheet growth and lower funding costs. Net interest margin contracted 50 basis points.
- Non-interest income and expense: Non-interest income before securities gains rose 7.1% to $226.3 million, led by mortgage banking and wealth management. Non-interest expense increased 2.1% to $579.4 million.
- Balance sheet: Total assets increased 18.4% to $25.9 billion. Net loans were $18.9 billion, up 12.3%; deposits were $20.8 billion, up 19.8%. Cash and cash equivalents rose to $1.85 billion from $518 million.
- Credit quality: The allowance for credit losses (ACL) was $291.9 million, including $277.6 million for loans; ACL to net loans was 1.54%, compared with 0.99% in 2019. Non-performing assets were $151.3 million, or 0.58% of assets, versus $148.0 million, or 0.68%, in 2019. Criticized and classified commercial loans increased 45.0%, with hospitality among the main drivers.
- Cash flow: Operating activities provided $154.5 million; investing activities used $2.50 billion, mainly reflecting loan growth; financing activities provided $3.68 billion, chiefly from deposit growth and new debt and preferred stock issuance.
- Debt, liquidity and capital: Period-end borrowings totaled $1.93 billion, including $1.30 billion long-term. The company issued $375 million of subordinated notes in March. Fulton reported $1.8 billion of federal funds line availability and approximately $3.9 billion of additional FHLB borrowing capacity. Company capital ratios included 14.4% total capital and 9.5% CET1; the bank was well capitalized.
- Shareholder distributions: Common dividends were $0.56 per share for the year. The company paid $90.7 million in common dividends, repurchased $39.7 million of shares, and issued $200 million of Series A preferred stock, receiving $192.9 million net.
Material changes and quarterly results
- Fulton adopted CECL on January 1, 2020. The adoption increased the ACL by $58.3 million and reduced retained earnings by $43.8 million. Because of the accounting change, 2020 credit-loss measures are not directly comparable with prior years.
- The company originated approximately $2.0 billion of Paycheck Protection Program loans during 2020; $1.6 billion remained outstanding at year-end. The SBA guarantees these loans, and Fulton recorded no ACL against the PPP portfolio.
- Average loans grew 11.2%, including average PPP loans of $1.3 billion; excluding PPP, commercial and industrial balances declined slightly. Average deposits increased 15.7%.
- Fourth-quarter 2020 net income was $50.8 million and diluted EPS was $0.30, compared with $47.8 million and $0.29 in fourth-quarter 2019. Fourth-quarter provision for credit losses was $6.2 million versus $20.5 million.
- A strategic expense review incurred $16.2 million of costs in 2020, including severance and branch-closure charges. Fulton expects approximately $25 million in annual expense savings, not fully realized until mid-2021, with some savings to be reinvested in digital initiatives. Twenty-one financial centers closed in January 2021.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management describes the outlook as uncertain, particularly because of COVID-19’s effects on borrowers, economic conditions, demand, and interest rates.
- Management said it was maintaining excess cash and additional borrowing capacity until economic conditions became clearer. The filing highlights risks from pandemic-related borrower stress and relief-program administration, commercial real estate and business lending concentrations, low interest rates and margin pressure, deposit competition, cybersecurity and third-party systems, and the LIBOR transition.
- Mortgage banking gains increased substantially with refinancing and loan-sale volume, but lower rates also led to $10.5 million of mortgage servicing rights impairment charges and higher amortization.
- Fulton completed limited balance-sheet restructurings in 2020: securities gains were $3.1 million, partly offset by $2.9 million in FHLB prepayment penalties.
- The filing refers to a prior SEC enforcement matter concerning accounting determinations that could have affected reported EPS; Fulton consented to an administrative order and paid a $1.5 million penalty. A separate wage-and-hour class and collective action had a settlement agreement awaiting court approval; the company did not expect the financial terms to be material.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The collective-loan ACL valuation was identified as a critical audit matter because it relies on significant estimates and economic assumptions.
Important facts for investors to verify
- Whether post-pandemic borrower performance, deferrals and criticized commercial real estate credits require further ACL increases or lead to higher charge-offs.
- How much of loan and deposit growth is durable after accounting for PPP lending and pandemic-related cash balances, and how these balances affect future margins.
- Whether the projected $25 million annual cost savings are achieved by mid-2021, and how digital reinvestment affects expenses and returns.
- The terms and costs of the new subordinated debt and preferred stock, including the effect of preferred dividends on common earnings and distributions.
- Developments in the wage-and-hour settlement and any other legal or regulatory matters; the filing says outcomes may be unpredictable.