Fulton Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Balance-sheet comparisons are to December 31, 2020 unless noted. Amounts are in U.S. dollars.
Business context and financial performance
Fulton is a bank holding company whose revenue is primarily generated from net interest income and customer fees. For Q3, net income available to common shareholders was $73.0 million, or $0.45 per diluted share, compared with $61.6 million, or $0.38, in Q3 2020. For the first nine months, common net income was $205.9 million, or $1.26 per diluted share, versus $127.2 million, or $0.78.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income (GAAP) | $171.3 million | $154.1 million | $498.1 million | $467.6 million |
| Net interest margin (FTE) | 2.82% | 2.70% | 2.78% | 2.90% |
| Provision for credit losses | $(0.6) million | $7.1 million | $(9.6) million | $70.7 million |
| Non-interest income | $62.6 million | $63.2 million | $209.9 million | $173.8 million |
| Non-interest expense | $144.6 million | $139.1 million | $463.8 million | $424.7 million |
Q3 return on average assets was 1.13%, return on average common equity 10.64%, and efficiency ratio 60.3%. For the nine months, those measures were 1.09%, 10.28%, and 62.3%, respectively. The filing reports tangible return on average common equity of 14.56% for Q3 and 21.36% year to date; this is a non-GAAP measure.
Balance sheet, cash flow, debt and liquidity
- Total assets were $26.39 billion, up 1.9%; deposits were $22.07 billion, up 5.9%. Growth was concentrated in demand and savings accounts, while time and brokered deposits declined.
- Cash and cash equivalents were $2.47 billion, up $623.2 million. Net loans were $18.27 billion, down 3.3%, largely reflecting PPP loan forgiveness; residential mortgage balances grew 18.4% and commercial mortgage balances grew 0.6%.
- Total borrowings fell to $1.10 billion from $1.93 billion. Long-term borrowings declined 51.6% to $627.4 million, following repayment of FHLB advances and debt tenders.
- For the first nine months, operating cash flow was $322.2 million, investing cash flow was $25.7 million, and financing cash flow was $275.3 million. Cash increased $623.2 million.
- At September 30, the Bank had $5.5 billion of additional FHLB borrowing capacity, $2.1 billion in federal funds lines with no borrowings, and $875 million of Discount Window capacity with no borrowings.
- Regulatory capital ratios included a 10.1% common equity Tier 1 ratio and 14.4% total risk-based capital ratio. The Bank met well-capitalized requirements; the Corporation reported meeting fully phased-in minimum capital requirements, including buffers.
Material changes, outlook and risks
- Improved economic conditions reduced the estimated allowance for credit losses, producing a provision credit of $0.6 million for Q3 and $9.6 million for the first nine months. Total allowance for credit losses was $271.5 million; non-performing assets were $152.1 million, or 0.58% of assets. Criticized and classified commercial loans increased to $1.05 billion from $961.1 million at year-end.
- Q3 net interest income improved from lower funding costs, PPP fee income and higher earning-asset volumes. Year-to-date net interest margin declined 12 basis points, as lower asset yields outweighed lower funding costs.
- Year-to-date non-interest income included $33.5 million of net securities gains, principally a $34.0 million gain from sale of Visa shares. The first-quarter balance-sheet restructuring also generated $32.6 million of debt extinguishment expense, including FHLB prepayment penalties and debt tender costs.
- Mortgage banking income declined in Q3 as mortgage sales volume and gain-on-sale spreads fell. Wealth management income rose with higher client asset levels and market performance. Management said previously announced annual expense savings of $25 million were fully realized on an annualized basis by the end of Q2 2021, with some savings reinvested in digital initiatives.
- No specific earnings or financial guidance is provided. Management described continuing uncertainty from COVID-19, potential renewed outbreaks, economic conditions, interest rates, loan demand, credit quality and deposit behavior. PPP lending totaled approximately $2.7 billion since inception; $2.1 billion had been forgiven and repaid by the SBA by September 30.
- Interest-rate sensitivity modeling estimated net interest income increases of 6.8% under an immediate +100 basis-point shock and 28.4% under +400 basis points. The modeled +300 and +400 basis-point changes exceed the company’s stated policy limits for those shock sizes. Management cautions that assumptions and customer behavior can make actual results differ.
- The Kress wage-and-hour matter had a settlement agreement and a magistrate’s recommendation for preliminary approval; court approval remained pending. The company did not expect the settlement’s financial terms to be material. Management said legal and regulatory matters could nevertheless create future expense or adverse effects.
Most important facts for investors to verify
- Whether credit quality, criticized loans and the allowance remain consistent with the improved economic assumptions underlying the 2021 provision releases.
- Whether deposit balances remain strong and funding costs stay low as stimulus support fades and customer liquidity changes.
- How PPP forgiveness, loan growth and asset yields affect future net interest income and margin, including the transition from LIBOR to SOFR.
- Whether mortgage banking weakness, technology spending, state taxes and other operating costs affect expense trends and efficiency.
- How market-rate changes affect securities values and modeled earnings sensitivity, and whether the pending Kress settlement receives court approval.