Fulton Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results; amounts below are in U.S. dollars. Fulton provides retail and commercial banking and related financial services, primarily in Pennsylvania and nearby states.
Financial performance and position
- Q3 earnings: Net income was $70.9 million, versus $75.6 million a year earlier; net income available to common shareholders was $68.3 million, or $0.40 diluted per share, versus $73.0 million, or $0.45. Nine-month net income was $205.1 million versus $213.6 million; diluted EPS was $1.20 versus $1.26.
- Net interest: Q3 GAAP net interest income rose 25.9% to $215.6 million; fully taxable-equivalent (FTE) net interest income was $219.6 million. FTE net interest margin increased 72 basis points to 3.54%. For nine months, GAAP net interest income was $555.7 million, up from $498.1 million; FTE margin was 3.13%, versus 2.78%.
- Noninterest income and expense: Q3 noninterest income was $59.2 million, down from $62.6 million, principally reflecting lower mortgage banking income. Noninterest expense was $169.6 million, up 17.3%, including $7.0 million of merger-related costs. The reported efficiency ratio improved to 57.8% from 60.3%. Nine-month noninterest income was $172.8 million versus $209.9 million, largely because 2021 included securities gains; noninterest expense was $465.3 million versus $463.8 million.
- Credit and asset quality: Q3 provision for credit losses was $19.0 million, compared with a $0.6 million release in Q3 2021. The quarter included an $8.0 million CECL day-one provision for acquired loans. At September 30, nonperforming assets were $198.6 million, or 0.76% of assets, compared with $153.9 million, or 0.60%, at year-end 2021. The loan allowance was $266.8 million; annualized nine-month net charge-offs were negative 0.05% of average loans, reflecting net recoveries.
- Balance sheet and funding: Total assets were $26.15 billion, up 1.4% from year-end 2021. Net loans were $19.43 billion, up 7.5%; deposits were $21.38 billion, down 0.9%; total borrowings were $1.42 billion, up 37.2%. Cash and cash equivalents fell to $528.7 million from $1.64 billion. Shareholders’ equity declined 8.9% to $2.47 billion.
- Cash flow and capital: For the first nine months, operating activities provided $519.2 million; investing activities used $928.4 million and financing activities used $700.7 million. The company reported a $1.11 billion net decrease in cash and cash equivalents. September 30 capital ratios were 13.6% total risk-based, 10.9% Tier 1 risk-based, 10.0% CET1 and 9.2% Tier 1 leverage; management stated the company met applicable fully phased-in minimums and the banks met “well capitalized” requirements.
Material changes and notable items
- Fulton completed its acquisition of Prudential Bancorp on July 1, 2022 for approximately $119.1 million of consideration, including $89.7 million in Fulton shares. It recorded $16.3 million of goodwill. Prudential contributed $8.1 million of net interest income after provision in Q3, but reported a $2.1 million net loss, including $7.6 million of credit-loss provision. Fulton merged Prudential Bank into Fulton Bank on November 5, 2022.
- Loans grew by $1.4 billion from year-end, including acquired loans and growth in residential and commercial mortgages. Deposit balances declined modestly, while the company added borrowing, including borrowings assumed in the acquisition.
- Unrealized losses on securities and cash-flow hedges drove other comprehensive loss of $470.4 million for the first nine months. AOCI moved from positive $27.4 million at year-end to negative $442.9 million at September 30, contributing to the decline in equity. Management attributed securities valuation declines primarily to interest rates and stated it did not intend, and did not expect to be required, to sell the affected securities before recovery.
- Fulton transferred securities with $479.0 million amortized cost from available-for-sale to held-to-maturity in May. The related securities’ fair value was $415.2 million at transfer. Securities gains were nearly nil in the first nine months of 2022, versus $33.5 million in 2021, which included a gain from Visa share sales.
- Q3 nonperforming loans increased, particularly commercial real estate non-accrual loans. Criticized and classified commercial loans nevertheless declined to $781.2 million from $1.08 billion at year-end.
Outlook, risks and contingencies
- The filing provides no specific earnings or margin guidance. Management expects the Prudential acquisition to expand its Philadelphia presence and customer base and create scale benefits, but cautions that integration costs, delays or unrealized synergies could impair expected benefits. The filing’s pro forma results do not include expected future cost savings.
- Management’s September 30 rate-sensitivity model estimated that an immediate +100 basis-point shock would increase next-12-month net interest income by 3.7%, while a −100 basis-point shock would reduce it by 6.5%; modeled impacts were +14.3% at +400 bps and −15.6% at −200 bps. These are model estimates, not forecasts, and exclude potential customer behavior and competitive effects.
- Liquidity sources included approximately $5.7 billion of FHLB borrowing capacity, $2.2 billion of federal funds lines and $1.2 billion of collateralized Federal Reserve discount-window capacity. Higher rates paid to attract funding could pressure net interest margin.
- Risks cited include economic and market deterioration, rising credit losses and nonperforming assets, interest-rate and deposit competition, securities valuation, liquidity, regulatory and compliance matters, cyber and operational risks, litigation, and acquisition integration. Management reported no material changes to previously disclosed risk factors.
- Commitments to extend credit totaled $8.55 billion, with standby and commercial letters of credit of $267.2 million and $51.9 million. The company also disclosed mortgage repurchase and indemnification exposures and ordinary-course legal and regulatory matters. Management did not expect pending matters to materially affect financial condition, while noting an unfavorable outcome could affect future results. The Kress wage-and-hour case received final settlement approval on November 2, 2022; settlement terms were described as immaterial.
Key investor verification points
- Track whether acquired-loan marks, the $8.0 million day-one provision and subsequent credit performance lead to additional provision or charge-offs.
- Assess the trajectory of nonperforming loans, especially commercial real estate, and the coverage and assumptions behind the allowance for credit losses.
- Verify deposit trends, funding costs, borrowing needs and liquidity availability as rates and competition change.
- Monitor the recovery or further deterioration of securities fair values, AOCI and capital, including whether any securities sales become necessary.
- Compare post-merger expenses and results with management’s anticipated integration benefits; distinguish GAAP results from management’s adjusted, non-GAAP measures.
- Review the full filing’s regulatory capital, legal-contingency and interest-rate-sensitivity disclosures; modeled rate impacts are assumption-dependent.