Fulton Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022 unless noted. Fulton is a regional bank holding company operating in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Figures below are rounded; dollar amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Net income | $72.1 million | $70.9 million, Q3 2022 |
| Net income available to common shareholders | $69.5 million; diluted EPS $0.42 | $68.3 million; diluted EPS $0.40, Q3 2022 |
| Net interest income | $213.8 million | $215.6 million, Q3 2022 |
| Net interest margin (FTE) | 3.40% | 3.54%, Q3 2022 |
| Noninterest income | $56.0 million | $59.2 million, Q3 2022 |
| Noninterest expense | $171.0 million | $169.6 million, Q3 2022; excluding prior-year merger expenses, expense increased 5.2% |
| Return on average assets | 1.04% | 1.07%, Q3 2022 |
| Efficiency ratio (non-GAAP) | 61.5% | 57.8%, Q3 2022 |
For the first nine months of 2023, net income was $220.0 million and diluted EPS was $1.27, compared with $205.1 million and $1.20 in 2022. Net interest income increased 15.6% to $642.3 million, and FTE NIM rose to 3.44% from 3.13%. Noninterest income declined 2.6% to $168.3 million; noninterest expense was $498.7 million, up 7.2% as reported and 9.2% excluding 2022 merger costs.
Financial position, funding and liquidity
- Total assets were $27.38 billion, up 1.6% from year-end 2022. Net loans were $21.18 billion, up 4.4%; growth was led by residential and commercial mortgage loans.
- Deposits totaled $21.42 billion, up 3.7%. Noninterest-bearing deposits fell $1.43 billion, while time deposits rose $850.7 million and brokered deposits rose $732.6 million. Estimated uninsured deposits were $7.6 billion.
- Borrowings were $2.37 billion, down 17.5%. Cash and cash equivalents were $420.5 million, down $261.5 million. The Bank reported about $5.5 billion of remaining FHLB borrowing capacity, $2.0 billion of combined federal funds and discount-window capacity, and $1.7 billion available through the Bank Term Funding Program; the latter two facilities had no outstanding balance.
- For the nine months, operating cash flow was $420.4 million, investing cash outflow was $798.5 million, and financing cash inflow was $116.6 million. Cash declined $261.5 million over the period.
- Regulatory capital ratios exceeded stated requirements: total risk-based capital 14.0%, Tier 1 risk-based 11.1%, CET1 10.3%, and Tier 1 leverage 9.4%. Fulton Bank met the well-capitalized standard.
Credit, securities and other key items
- Allowance for credit losses on loans was $292.7 million, versus $269.4 million at year-end; the allowance equaled 208% of nonperforming loans. Nine-month provision expense was $44.2 million, and net charge-offs were $21.1 million, including a $13.3 million commercial office loan charge-off.
- Nonperforming assets were $143.5 million, down from $177.7 million at year-end; they represented 0.52% of assets versus 0.66%. Nonaccrual loans were $113.0 million, down from $144.4 million.
- Available-for-sale securities had a reported fair value of $2.42 billion and gross unrealized losses of $480.0 million. Held-to-maturity securities had a fair value of $1.02 billion versus amortized cost of $1.28 billion. Management attributed mortgage-security value declines primarily to interest rates and said it did not expect to need to sell securities before recovery.
- Accumulated other comprehensive loss widened to $472.8 million from $385.5 million at year-end, primarily reflecting securities valuation losses. Shareholders’ equity was $2.57 billion.
Changes, outlook and risks
- Q3 net income increased modestly despite lower net interest income and margin. Higher loan yields and balances lifted interest income, but sharply higher deposit and borrowing costs offset the benefit. The average cost of deposits rose to 1.56% from 0.18% a year earlier; average noninterest-bearing deposits fell $1.9 billion year over year.
- Management attributed the nine-month increase in provision primarily to loan growth and changes in the macroeconomic outlook. It cited higher operating costs from compensation, outside services, data processing and FDIC insurance assessments. Mortgage banking revenue fell with lower loan-sale volumes and margins.
- A $3.0 million Q3 reduction in other noninterest income reflected market valuation movement in legacy customer interest-rate swaps during the LIBOR-to-SOFR transition. The company said substantially all products had transitioned away from LIBOR by June 30, 2023. It also expects $22.7 million of accumulated cash-flow-hedge losses to reduce net interest income over the next 12 months.
- The filing provides no specific earnings or NIM guidance. Management cautions that results depend on rates, deposit competition and funding costs, economic conditions, credit performance, liquidity, regulation, cybersecurity and operational risks. Its rate-sensitivity model estimated net interest income would rise 3.9% under a +400 bp shock and fall 14.1% under a −400 bp shock; model assumptions and customer behavior can make actual outcomes differ.
- The company authorized up to $100 million of 2023 share repurchases and had repurchased $70.9 million through September 30, leaving approximately $29.1 million available. Q3 repurchases were $30.5 million. Management reported no material change to previously disclosed risk factors; pending legal matters were not expected to materially affect financial condition, though outcomes remain uncertain.
Investor verification priorities
- Track deposit mix, uninsured deposits, brokered and time-deposit growth, and the resulting funding costs and margin pressure.
- Review commercial real estate exposure and office-loan performance, criticized/classified loans, charge-offs, and the adequacy of the allowance.
- Assess the potential liquidity and capital implications of unrealized securities losses, including the distinction between AFS and HTM holdings.
- Monitor expense growth, FDIC assessments, and whether recurring cost increases outpace revenue growth.
- Confirm future recognition of hedge-related losses, the effects of the LIBOR-to-SOFR transition, and execution of the remaining repurchase authorization.