Fulton Financial (FULT) - 2024 Q2 - Quarterly Report

Glossary of Terms - The glossary defines key acronyms and terms used throughout the report, such as '2024 Repurchase Program' (authorization to repurchase up to $125 million of common stock), 'ACL' (Allowance for credit losses), 'Acquisition Date' (April 26, 2024, for the Republic First Transaction), and 'CDI' (Core deposit intangible)[4][5] Forward-Looking Statements - The report contains forward-looking statements regarding financial condition, results of operations, and business, which are subject to inherent uncertainties, risks, and changes in circumstances that could cause actual results to differ materially[7][8] - Key factors that could affect future financial results include adverse economic conditions, impacts of recent financial services industry events (e.g., increased competition for deposits, stringent regulatory requirements), effects of federal government actions on interest rates, composition of the loan portfolio, and operational risks like cybersecurity threats[8][9][11] - The Republic First Transaction introduces specific risks, such as challenges in integrating the acquired business, potential adverse reactions, changes in estimated fair value of acquired assets and liabilities, increased regulatory scrutiny, and exposure to unknown or contingent risks[11] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Fulton Financial Corporation, including balance sheets, income statements, comprehensive income, shareholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, business combinations, investment securities, loans, and other financial instruments Consolidated Balance Sheets Consolidated Balance Sheets | Metric | June 30, 2024 (Unaudited) ($ in thousands) | December 31, 2023 ($ in thousands) | |:---|:---|:---| | ASSETS ||| | Total Assets | $31,769,813 | $27,571,915 | | Cash and cash equivalents | $1,396,282 | $549,710 | | Net loans (Less: ACL - loans) | $23,730,356 | $21,057,690 | | Investment securities AFS | $2,939,594 | $2,398,352 | | Investment securities HTM | $1,244,433 | $1,267,922 | | Goodwill and net intangible assets | $648,026 | $560,687 | | LIABILITIES ||| | Total Liabilities | $28,668,204 | $24,811,776 | | Total Deposits | $25,559,654 | $21,537,623 | | Total Borrowings | $2,178,597 | $2,487,526 | | SHAREHOLDERS' EQUITY ||| | Total Shareholders' Equity | $3,101,609 | $2,760,139 | Consolidated Statements of Income Consolidated Statements of Income | Metric | Three months ended June 30, 2024 ($ in thousands) | Three months ended June 30, 2023 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2023 ($ in thousands) | |:---|:---|:---|:---|:---| | Total Interest Income | $400,506 | $314,912 | $740,172 | $604,732 | | Total Interest Expense | $158,786 | $102,060 | $291,515 | $176,293 | | Net Interest Income | $241,720 | $212,852 | $448,657 | $428,439 | | Provision for credit losses | $32,056 | $9,747 | $42,981 | $34,291 | | Total Non-Interest Income | $92,994 | $60,585 | $150,133 | $112,339 | | Total Non-Interest Expense | $199,488 | $168,018 | $377,087 | $327,636 | | Net Income | $94,975 | $79,607 | $156,916 | $147,920 | | Net Income Available to Common Shareholders | $92,413 | $77,045 | $151,792 | $142,796 | | Diluted EPS | $0.52 | $0.46 | $0.89 | $0.85 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income | Metric | Three months ended June 30, 2024 ($ in thousands) | Three months ended June 30, 2023 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2023 ($ in thousands) | |:---|:---|:---|:---|:---| | Net Income | $94,975 | $79,607 | $156,916 | $147,920 | | Other Comprehensive Income (Loss), net of tax | $8,934 | $(28,294) | $1,746 | $6,190 | | Total Comprehensive Income | $103,909 | $51,313 | $158,662 | $154,110 | Consolidated Statements of Shareholders' Equity Consolidated Statements of Shareholders' Equity | Metric | Balance at March 31, 2024 ($ in thousands) | Balance at June 30, 2024 ($ in thousands) | Balance at December 31, 2023 ($ in thousands) | |:---|:---|:---|:---| | Total Shareholders' Equity | $2,757,679 | $3,101,609 | $2,760,139 | | Net income | $94,975 | $94,975 | $156,916 | | Common stock issued (shares) | 19,200 | 181,831 | 19,279 | | Common stock issued (amount) | $48,000 | $614,523 | $48,198 | | Treasury stock, at cost | $(886,239) | $(888,994) | $(857,021) | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows | Metric | Six months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2023 ($ in thousands) | |:---|:---|:---| | Net cash provided by operating activities | $321,024 | $216,910 | | Net cash provided (used) by investing activities | $2,185,120 | $(704,165) | | Net cash (used) provided by financing activities | $(1,659,572) | $310,036 | | Net increase (decrease) in Cash and Cash Equivalents | $846,572 | $(177,219) | | Cash and Cash Equivalents at End of Period | $1,396,282 | $504,702 | | Cash paid for interest | $277,841 | $162,377 | | Cash paid for income taxes | $19,308 | $15,183 | | Fair value of tangible assets acquired (Business Combination) | $4,718,909 | — | | Liabilities assumed (Business Combination) | $5,560,160 | — | Notes to Consolidated Financial Statements This section provides detailed notes to the consolidated financial statements, covering the basis of presentation, significant accounting policies, recent accounting standards, business combinations (Republic First Transaction), restrictions on cash, investment securities, loans and allowance for credit losses, mortgage servicing rights, derivative financial instruments, accumulated other comprehensive income, fair value measurements, net income per share, stock-based compensation, employee benefit plans, leases, commitments and contingencies, and subsequent events NOTE 1 – Basis of Presentation - The unaudited Consolidated Financial Statements are prepared in conformity with GAAP for interim financial information and Form 10-Q instructions, requiring management estimates and assumptions[22] - Significant accounting policies remain unchanged from the December 31, 2023 Annual Report on Form 10-K[23] - Recently adopted accounting standards (ASU 2022-03 on Fair Value Measurement and ASU 2023-01 on Leases) had no material impact on the consolidated financial statements[23][24] - Recently issued accounting standards (ASU 2023-07 on Segment Reporting, ASU 2023-08 on Crypto Assets, ASU 2023-09 on Income Tax Disclosures, and ASU 2024-01 on Stock Compensation) are not expected to have a material impact upon adoption, with the Corporation currently holding no crypto assets[25][26][27] NOTE 2 – Business Combinations - On April 26, 2024 (Acquisition Date), Fulton Bank acquired substantially all assets ($4.8 billion) and assumed substantially all deposits and certain liabilities ($5.6 billion) of Republic First Bank from the FDIC, receiving $0.8 billion in cash from the FDIC[29][32] - The Republic First Transaction enhanced Fulton Bank's presence in Philadelphia, Pennsylvania, and New Jersey[29] - A preliminary gain on acquisition of $47.4 million (net of income taxes) was recorded, representing the excess of acquired net assets and cash received over assumed liabilities[31][32] - The acquisition resulted in a $79.4 million addition to the Allowance for Credit Losses (ACL), including $55.9 million for PCD Loans and $23.4 million for non-PCD Loans[35] Estimated Fair Values of Assets Acquired and Liabilities Assumed (Acquisition Date) | Category | Estimated Fair Value ($ in thousands) | |:---|:---| | Cash payment received from FDIC | $809,920 | | Total assets acquired | $4,811,509 | | Total liabilities assumed | $5,560,160 | | Net assets acquired | $(748,651) | | Gain on acquisition, before income taxes | $61,269 | | Gain on acquisition, net of income taxes | $47,392 | Acquisition-Related Expenses (Three months ended June 30, 2024) | Expense Category | Amount ($ in thousands) | |:---|:---| | Salaries and employee benefits | $805 | | Professional fees | $7,624 | | Charitable donation | $5,000 | | Other | $374 | | Total Acquisition-related expenses | $13,803 | NOTE 3 – Restrictions on Cash and Cash Equivalents - Cash collateral posted with counterparties to secure derivatives and other contracts, included in 'interest-bearing deposits with other banks,' amounted to $10.9 million as of June 30, 2024, down from $17.4 million at December 31, 2023[41] NOTE 4 – Investment Securities Investment Securities (June 30, 2024) | Category | Amortized Cost ($ in thousands) | Estimated Fair Value ($ in thousands) | |:---|:---|:---| | Available for Sale (AFS) ||| | State and municipal securities | $965,392 | $820,109 | | Corporate debt securities | $368,901 | $337,398 | | Collateralized mortgage obligations | $724,602 | $713,769 | | Residential mortgage-backed securities | $589,267 | $557,191 | | Commercial mortgage-backed securities | $610,960 | $511,127 | | Total AFS | $3,259,122 | $2,939,594 | | Held to Maturity (HTM) ||| | Residential mortgage-backed securities | $384,956 | $326,363 | | Commercial mortgage-backed securities | $859,477 | $707,076 | | Total HTM | $1,244,433 | $1,033,439 | - In May 2024, the Corporation sold $345.7 million of AFS securities, recording a pre-tax loss of $20.3 million, and reinvested the proceeds into higher-yielding securities of similar type and duration[43] Net Realized Gains (Losses) on Securities Sales | Period | Net Gains (Losses) ($ in thousands) | |:---|:---| | Three months ended June 30, 2024 | $(20,282) | | Three months ended June 30, 2023 | $(4) | | Six months ended June 30, 2024 | $(20,282) | | Six months ended June 30, 2023 | $19 | - No Allowance for Credit Losses (ACL) was required for state and municipal securities or corporate debt securities as of June 30, 2024, and December 31, 2023, as the Corporation does not intend to sell these securities prior to recovery of their fair value to amortized cost[49][50] NOTE 5 – Loans and Allowance for Credit Losses Loans and Leases, Net of Unearned Income | Loan Type | June 30, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | |:---|:---|:---| | Real estate - commercial mortgage | $9,289,770 | $8,127,728 | | Commercial and industrial | $4,967,796 | $4,545,552 | | Real estate - residential mortgage | $6,248,856 | $5,325,923 | | Real estate - home equity | $1,120,878 | $1,047,184 | | Real estate - construction | $1,463,799 | $1,239,075 | | Consumer | $692,086 | $729,318 | | Leases and other loans | $323,112 | $336,314 | | Net loans | $24,106,297 | $21,351,094 | Allowance for Credit Losses (ACL) Activity | Metric | Three months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | |:---|:---|:---| | Balance at beginning of period | $297,888 | $293,404 | | CECL Day 1 Provision | $23,444 | $23,444 | | Initial PCD allowance for credit losses | $55,906 | $55,906 | | Net loans (charged off) recovered | $(11,302) | $(19,900) | | Provision for credit losses | $10,005 | $23,087 | | Balance at end of period | $375,941 | $375,941 | | Reserve for OBS credit exposures | $14,540 | $14,540 | - The increase in ACL - loans for Q2 2024 and the six months ended June 30, 2024, was primarily due to loans acquired in the Republic First Transaction[56] Non-Accrual Loans by Class Segment | Loan Type | June 30, 2024 Total ($ in thousands) | December 31, 2023 Total ($ in thousands) | |:---|:---|:---| | Real estate - commercial mortgage | $46,192 | $44,805 | | Commercial and industrial | $57,274 | $39,952 | | Real estate - residential mortgage | $24,463 | $20,824 | | Real estate - home equity | $6,339 | $4,753 | | Real estate - construction | $1,226 | $1,341 | | Consumer | $183 | $52 | | Leases and other loans | $9,953 | $9,893 | | Total Non-Accrual Loans | $145,630 | $121,620 | - Non-accrual loans without a specific valuation allowance within the ACL totaled $71.8 million at June 30, 2024, as the collateral's fair value exceeded their carrying amount or loans were previously charged down[59] - The increase in special mention loans ($799.0 million) and substandard or lower loans ($277.8 million) as of June 30, 2024, was primarily due to loans acquired in the Republic First Transaction[61] Loan Modifications to Borrowers Experiencing Financial Difficulty (Term Extension) | Loan Type | Three months ended June 30, 2024 Amortization Cost Basis ($ in thousands) | Six months ended June 30, 2024 Amortization Cost Basis ($ in thousands) | |:---|:---|:---| | Real estate - commercial mortgage | $20,603 | $20,603 | | Real estate - residential mortgage | $2,966 | $5,651 | | Real estate - home equity | $129 | $129 | | Real estate - construction | — | $541 | | Total | $23,698 | $26,924 | - Loan modifications primarily involved term extensions, reducing monthly payment amounts for borrowers. For example, commercial mortgage loans had a weighted-average 2.00 years added to their life for the three and six months ended June 30, 2024[69][72] - There were no loan modifications with principal balance forgiveness during the three and six months ended June 30, 2024 and 2023[74] NOTE 6 – Mortgage Servicing Rights - Mortgage Servicing Rights (MSRs) represent the economic value of contractual rights to service mortgage loans sold to third parties, with a total portfolio of $4.0 billion serviced as of June 30, 2024[75] Mortgage Servicing Rights (MSRs) Carrying Value and Fair Value | Metric | Three months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | |:---|:---|:---| | Amortized cost at end of period | $30,646 | $30,646 | | Estimated fair value of MSRs at end of period | $51,724 | $51,724 | - The fair value of MSRs is estimated using discounted cash flows, considering prepayment projections and a discount rate commensurate with risk. No valuation allowance was required as of June 30, 2024[76] NOTE 7 – Derivative Financial Instruments - The Corporation uses derivatives to manage interest rate and foreign currency risks and for customer risk management, not for speculative purposes[77] - In January 2023, the Corporation terminated $1.0 billion in interest rate derivatives designated as cash flow hedges; the original unrealized loss of $70.6 million in AOCI will be recognized as a reduction to interest income in future periods[78] Summary of Notional Amounts and Fair Values of Derivative Financial Instruments (June 30, 2024) | Derivative Type | Notional Amount ($ in thousands) | Fair Value Asset (Liability) ($ in thousands) | |:---|:---|:---| | Interest Rate Derivatives with Customers | $546,330 | $8,091 | | Interest Rate Derivatives with Dealer Counterparties | $4,132,103 | $166,461 | | Interest Rate Derivatives used in Cash Flow Hedges | $2,300,000 | $245 | | Foreign Exchange Contracts with Customers | $25,730 | $639 | | Foreign Exchange Contracts with Correspondent Banks | $4,798 | $127 | - During the six months ended June 30, 2024, $14.1 million of unrealized losses from terminated cash flow hedges were reclassified as a reduction of interest income on loans[78][81] - The Corporation estimates an additional $15.9 million of unrecognized losses will be reclassified as a decrease to net interest income over the next twelve months[81] NOTE 8 – Accumulated Other Comprehensive (Loss) Income Changes in Accumulated Other Comprehensive (Loss) Income (Net of Tax) | Component | Three months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | |:---|:---|:---| | Net unrealized gain (loss) on securities | $(14,199) | $(30,864) | | Reclassification adjustment for securities net change included in net income | $15,688 | $15,688 | | Net unrealized holding gains on interest rate derivatives used in cash flow hedges | $2,256 | $6,553 | | Reclassification adjustment for net change realized in net income on interest rate derivatives | $3,891 | $7,790 | | Amortization of net unrecognized pension and postretirement items | $(105) | $(211) | | Total Other Comprehensive Income (Loss) | $8,934 | $1,746 | - The balance of Accumulated Other Comprehensive Loss (AOCI) improved from $(319,468) thousand at March 31, 2024, to $(310,534) thousand at June 30, 2024, primarily due to OCI before reclassifications and amounts reclassified from AOCI[88] NOTE 9 – Fair Value Measurements - The Corporation categorizes assets and liabilities measured at fair value into a three-level hierarchy based on the observability of inputs: Level 1 (quoted prices in active markets), Level 2 (observable market data other than quoted prices), and Level 3 (unobservable inputs)[89] Assets and Liabilities Measured at Fair Value on a Recurring Basis (June 30, 2024) | Category | Level 1 ($ in thousands) | Level 2 ($ in thousands) | Level 3 ($ in thousands) | Total ($ in thousands) | |:---|:---|:---|:---|:---| | Assets ||||| | Loans held for sale | — | $26,822 | — | $26,822 | | AFS investment securities | — | $2,939,594 | — | $2,939,594 | | Investments held in Rabbi Trust | $34,339 | — | — | $34,339 | | Derivative assets | $766 | $175,762 | — | $176,528 | | Total Assets | $35,105 | $3,142,178 | — | $3,177,283 | | Liabilities ||||| | Deferred compensation liabilities | $34,339 | — | — | $34,339 | | Derivative liabilities | $548 | $280,130 | — | $280,678 | | Total Liabilities | $34,887 | $280,130 | — | $315,017 | Level 3 Financial Assets Measured at Fair Value on a Nonrecurring Basis | Category | June 30, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | |:---|:---|:---| | Loans, net | $121,942 | $102,135 | | OREO | $1,444 | $896 | | MSRs | $51,724 | $49,696 | | Total Assets | $175,110 | $152,727 | - Fair values for loans and time deposits are estimated by discounting future cash flows using current rates, adjusted for liquidity considerations, and include estimated credit losses[105] NOTE 10 – Net Income Per Share - Basic net income per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding[106] - Diluted net income per share includes the incremental number of shares from common stock equivalents (stock options, restricted stock, RSUs, and PSUs) using the treasury stock method[106] Net Income Per Share Data | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | |:---|:---|:---|:---|:---| | Weighted average shares outstanding (basic) | 175,305 | 165,854 | 169,006 | 166,227 | | Weighted average shares outstanding (diluted) | 176,934 | 167,191 | 170,769 | 167,809 | | Basic EPS | $0.53 | $0.46 | $0.90 | $0.86 | | Diluted EPS | $0.52 | $0.46 | $0.89 | $0.85 | NOTE 11 – Stock-Based Compensation - The Corporation grants equity awards (restricted stock, RSUs, PSUs) to employees under its Employee Equity Plan and to non-employee directors under the Directors' Plan[108] - As of June 30, 2024, approximately 3.9 million shares were reserved for future grants under the Employee Equity Plan and 330,000 shares under the Directors' Plan[109] Stock-Based Compensation Expense (Net of Tax) | Metric | Three months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | |:---|:---|:---| | Compensation expense | $2,758 | $3,425 | | Tax benefit | $(620) | $(764) | | Total stock-based compensation, net of tax | $2,138 | $2,661 | NOTE 12 – Employee Benefit Plans Net Periodic Pension Cost for the Pension Plan | Component | Three months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | |:---|:---|:---| | Interest cost | $789 | $1,579 | | Expected return on plan assets | $(975) | $(1,951) | | Net amortization and deferral | — | — | | Net periodic pension cost | $(186) | $(372) | Net Benefit for the Postretirement Plan | Component | Three months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | |:---|:---|:---| | Interest cost | $9 | $19 | | Net accretion and deferral | $(136) | $(271) | | Net periodic benefit | $(127) | $(252) | - The Corporation recognizes the funded status of its Pension Plan and Postretirement Plan on the consolidated balance sheets and changes in funded status through OCI[113] NOTE 13 – LEASES - On May 10, 2024, the Bank completed a sale-leaseback transaction for 40 financial center office locations, receiving $55.4 million and recording a pre-tax gain of approximately $20.3 million[115] Lease Expense Components | Expense Type | Three months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | |:---|:---|:---| | Operating lease expense | $7,633 | $12,697 | | Variable lease expense | $716 | $1,480 | | Sublease income | $(300) | $(583) | | Total lease expense | $8,049 | $13,594 | Operating Lease Liabilities (June 30, 2024) | Metric | Amount ($ in thousands) | |:---|:---| | ROU assets | $131,796 | | Lease liabilities | $138,389 | | Weighted average remaining lease term | 9.23 years | | Weighted average discount rate | 5.14% | NOTE 14 – Commitments and Contingencies - The Corporation is a party to financial instruments with off-balance-sheet risk, including commitments to extend credit and letters of credit, to meet borrower financing needs[120] Commitments to Extend Credit and Letters of Credit | Commitment Type | June 30, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | |:---|:---|:---| | Commitments to extend credit | $9,100,013 | $8,790,511 | | Standby letters of credit | $254,067 | $264,440 | | Commercial letters of credit | $64,605 | $67,396 | - A reserve for estimated losses related to residential mortgage loans sold to investors was $2.5 million as of June 30, 2024, including for representation and warranty and credit loss exposures[125] - The Corporation believes that liabilities from pending legal proceedings or regulatory inquiries will not have a material adverse effect on its financial condition, though ultimate resolution could be material to future operating results[128] NOTE 15 – Subsequent Events - On July 16, 2024, the Board of Directors approved a plan to close 13 financial center offices, consolidating operations into nearby locations as part of the Republic First Transaction integration and FultonFirst strategic initiative[129] - The planned closures are expected to incur approximately $10 million in pre-tax costs (write-offs, lease termination, severance) but will reduce annual pre-tax operating expense by approximately $8 million starting Q1 2025[130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the financial condition and results of operations, including an overview of the business, financial highlights, critical accounting policies, non-GAAP financial measures, and a detailed comparison of results for the three and six months ended June 30, 2024 and 2023, as well as an analysis of the financial condition OVERVIEW - Fulton Financial Corporation, through its banking subsidiary, provides retail and commercial financial services across Pennsylvania, Delaware, Maryland, New Jersey, and Virginia, generating most revenue from net interest income[133] - Recent significant events include the acquisition of Republic First Bank (April 26, 2024), a common stock offering ($273.5 million net proceeds on May 1, 2024), a sale-leaseback transaction ($55.4 million cash, $20.3 million pre-tax gain on May 10, 2024), and a securities restructuring (sold $345.7 million AFS securities, $20.3 million pre-tax loss in May 2024)[134][136][137] Financial Highlights Net Income Available to Common Shareholders and Diluted EPS | Metric | Three months ended June 30, 2024 ($ in thousands) | Three months ended June 30, 2023 ($ in thousands) | Six months ended June 30, 2024 ($ in thousands) | Six months ended June 30, 2023 ($ in thousands) | |:---|:---|:---|:---|:---| | Net income available to common shareholders | $92,413 | $77,045 | $151,792 | $142,796 | | Diluted net income available to common shareholders per share | $0.52 | $0.46 | $0.89 | $0.85 | - Six-month results for 2024 were impacted by a preliminary gain on acquisition of $47.4 million (net of tax), $92.6 million in Core Deposit Intangible (CDI) with $4.1 million intangible amortization expense, $23.4 million provision for credit losses on non-PCD Loans, $13.8 million in acquisition-related expenses, and $12.7 million in FultonFirst implementation and asset disposal costs[138][139] Critical Accounting Policies - The Corporation's critical accounting policies, which involve significant management judgments and estimates, are detailed in its Annual Report on Form 10-K for the year ended December 31, 2023[140][141] Supplemental Reporting of Non-GAAP Based Financial Measures - The report includes non-GAAP financial measures to provide useful and comparative information for assessing operational trends, consistent with internal performance evaluation and industry practices[142] Operating Net Income Available to Common Shareholders (Diluted) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | |:---|:---|:---|:---|:---| | Operating net income available to common shareholders (numerator) ($ in thousands) | $82,494 | $77,765 | $147,857 | $143,923 | | Weighted average shares (diluted) | 176,934 | 167,191 | 170,769 | 167,809 | | Operating net income available to common shareholders, per share (diluted) | $0.47 | $0.47 | $0.87 | $0.86 | Operating Return on Average Assets (Annualized) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | |:---|:---|:---|:---|:---| | Operating net income (numerator) ($ in thousands) | $85,056 | $80,327 | $152,981 | $149,047 | | Total operating average assets ($ in thousands) | $30,706,657 | $27,229,150 | $29,076,483 | $27,062,360 | | Operating return on average assets | 1.11% | 1.18% | 1.06% | 1.11% | Efficiency Ratio | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | |:---|:---|:---|:---|:---| | Non-interest expense (numerator) ($ in thousands) | $194,940 | $166,946 | $364,681 | $325,890 | | Total revenue (denominator) ($ in thousands) | $311,452 | $277,846 | $579,969 | $549,578 | | Efficiency ratio | 62.6% | 60.1% | 62.9% | 59.3% | RESULTS OF OPERATIONS This section provides a comparative analysis of the Corporation's financial performance for the three and six months ended June 30, 2024, versus the corresponding periods in 2023, focusing on net interest income, provision for credit losses, non-interest income, non-interest expense, and income taxes Three months ended June 30, 2024 compared to the three months ended June 30, 2023 Net Interest Income - FTE net interest income increased by $29.0 million (13.3%) to $246.3 million for the three months ended June 30, 2024, compared to the same period in 2023, with the Net Interest Margin (NIM) increasing by 3 basis points to 3.43%[148] - The increase in FTE total interest income ($85.7 million, or 26.9%) was primarily driven by a $44.2 million increase due to volume changes (mainly average net loans) and a $41.5 million increase due to yield changes (mainly net loans)[152] - Interest expense increased by $56.7 million, primarily due to a $36.1 million increase from higher rates on interest-bearing liabilities (savings, money market, demand, and time deposits) and volume increases in average time deposits, partly due to Republic First Transaction deposits[153] - Average net loans increased by $2.5 billion (11.9%), primarily due to $1.8 billion from the Republic First Transaction. Excluding the acquisition, average net loans increased by $655.4 million[155] - The yield on total loans increased by 60 basis points to 6.12%, driven by rising interest rates and acquired loans being accounted for at current market rates[155] - The cost of deposits increased by 82 basis points to 2.14%, due to higher rates and a change in deposit mix. Average deposits increased by $3.4 billion, with $2.9 billion from the Republic First Transaction[156][157] Provision for Credit Losses - The provision for credit losses increased to $32.1 million for the three months ended June 30, 2024, from $9.7 million in the prior year, primarily due to a $23.4 million provision for non-PCD Loans acquired in the Republic First Transaction[159] Non-Interest Income - Total non-interest income increased by $32.4 million (53.5%) to $92.994 million for the three months ended June 30, 2024, compared to the same period in 2023[160] - Excluding investment securities gains/losses and the acquisition gain, non-interest income increased by $5.3 million (8.7%), driven by $2.8 million from acquired operations, $2.3 million in wealth management, $1.1 million in cash management, and $1.0 million in mortgage banking income[160] - This increase was partially offset by a $3.6 million decrease in commercial customer interest rate swap fee income (capital markets)[160] - A pre-tax loss of $20.3 million was recorded from the sale of $345.7 million AFS securities in May 2024[161] Non-Interest Expense - Total non-interest expense increased by $31.5 million (18.7%) to $199.488 million for the three months ended June 30, 2024, compared to the same period in 2023[162] - Excluding the gain on sale-leaseback, acquisition-related expenses, and FultonFirst costs, non-interest expense increased by $31.6 million (18.8%), primarily due to $21.1 million from acquired operations and $6.9 million in salaries and benefits[162] Income Taxes - The effective tax rate (ETR) was 7.9% for the three months ended June 30, 2024. Excluding the $47.3 million gain on acquisition, the ETR was 14.7%, down from 16.8% in the prior year[163] Six months ended June 30, 2024 compared to the six months ended June 30, 2023 Net Interest Income - FTE net interest income increased by $20.5 million (4.7%) to $457.8 million for the six months ended June 30, 2024, compared to the same period in 2023, while NIM decreased by 9 basis points to 3.37%[164] - The increase in FTE total interest income ($135.8 million) was due to $85.2 million from yield changes (mainly net loans) and $50.5 million from volume changes (mainly average net loans)[167] - Interest expense increased by $115.2 million, primarily due to an $82.4 million increase from higher rates on interest-bearing liabilities and a $32.8 million increase from volume (average time and brokered deposits), partly due to Republic First Transaction deposits[168] - Average net loans increased by $1.7 billion (8.2%), with $912.1 million from the Republic First Transaction. Excluding the acquisition, average net loans increased by $780.1 million[169] - The yield on total loans increased by 66 basis points, driven by rising interest rates and acquired loans being accounted for at current market rates[170] - The cost of total deposits increased by 97 basis points to 2.05%, due to rising interest rates and a change in deposit mix. Average deposits increased by $2.1 billion, with $1.4 billion from the Republic First Transaction[171][172] Provision for Credit Losses - The provision for credit losses increased to $43.0 million for the six months ended June 30, 2024, from $34.3 million in the prior year, primarily due to a $23.4 million provision for non-PCD Loans from the Republic First Transaction, partially offset by an elevated provision in 2023 due to a $13.3 million commercial office loan charge-off[174] Non-Interest Income - Total non-interest income increased by $37.8 million (33.6%) to $150.133 million for the six months ended June 30, 2024, compared to the same period in 2023[175] - Excluding investment securities gains/losses and the acquisition gain, non-interest income increased by $10.7 million (9.5%), driven by $2.8 million from acquired operations, $4.4 million in wealth management, $2.1 million in mortgage banking, and $1.9 million in cash management fee income[175] - A pre-tax loss of $20.3 million was recorded from the sale of $345.7 million AFS securities in May 2024[176] Non-Interest Expense - Total non-interest expense increased by $49.5 million (15.1%) to $377.087 million for the six months ended June 30, 2024, compared to the same period in 2023[177] - Excluding the gain on sale-leaseback, acquisition-related expenses, and FultonFirst costs, non-interest expense increased by $43.3 million (13.2%), primarily due to $21.1 million from acquired operations, $12.8 million in salaries and benefits, $3.0 million in data processing and software, and $2.7 million in net occupancy costs[177] Income Taxes - The effective tax rate (ETR) was 12.2% for the six months ended June 30, 2024. Excluding the $47.3 million gain on acquisition, the ETR was 16.6%, down from 17.3% in the prior year[178] FINANCIAL CONDITION This section analyzes the Corporation's financial position, including changes in investment securities, loan portfolio composition and credit quality, deposit and borrowing trends, shareholders' equity, and regulatory capital compliance Investment Securities Investment Securities Carrying Amount | Security Type | June 30, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | Increase (Decrease) ($ in thousands) | Increase (Decrease) (%) | |:---|:---|:---|:---|:---| | Available for Sale (AFS) ||||| | Total AFS securities | $2,939,594 | $2,398,352 | $541,242 | 22.6% | | Held to Maturity (HTM) ||||| | Total HTM securities | $1,244,433 | $1,267,922 | $(23,489) | (1.9)% | | Total Investment Securities | $4,184,027 | $3,666,274 | $517,753 | 14.1% | - The increase in AFS securities was primarily due to increases in collateralized mortgage obligations ($602.3 million) and residential mortgage-backed securities ($360.4 million), partially offset by decreases in state and municipal securities and corporate debt securities[180] - The decrease in HTM securities was primarily driven by a $22.1 million decrease in residential mortgage-backed securities due to payments[181] Loans Ending Net Loans Outstanding by Type | Loan Type | June 30, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | Increase (Decrease) ($ in thousands) | Increase (Decrease) (%) | |:---|:---|:---|:---|:---| | Real estate - commercial mortgage | $9,289,770 | $8,127,728 | $1,162,042 | 14.3% | | Commercial and industrial | $4,967,796 | $4,545,552 | $422,244 | 9.3% | | Real estate - residential mortgage | $6,248,856 | $5,325,923 | $922,933 | 17.3% | | Real estate - home equity | $1,120,878 | $1,047,184 | $73,694 | 7.0% | | Real estate - construction | $1,463,799 | $1,239,075 | $224,724 | 18.1% | | Consumer | $692,086 | $729,318 | $(37,232) | (5.1)% | | Leases and other loans | $323,112 | $336,314 | $(13,202) | (3.9)% | | Net loans | $24,106,297 | $21,351,094 | $2,755,203 | 12.9% | - Net loans increased by $2.8 billion (12.9%) during the six months ended June 30, 2024, primarily due to $2.5 billion in net loans acquired from the Republic First Transaction[183] - Commercial mortgage loans and construction loans comprised approximately $10.8 billion, or 44.6%, of the loan portfolio as of June 30, 2024[184] - The Corporation identified office and multi-family commercial mortgage loan portfolios as posing heightened risks and moderated new loan originations in these areas[185] Non-Performing Assets | Metric | June 30, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | |:---|:---|:---| | Non-accrual loans | $145,630 | $121,620 | | Loans 90 days or more past due and still accruing | $26,962 | $31,721 | | Total non-performing loans | $172,592 | $153,341 | | OREO | $1,444 | $896 | | Total non-performing assets | $174,036 | $154,237 | | Non-performing loans as a percentage of total net loans | 0.72% | 0.72% | - Non-accrual loans increased by approximately $24.0 million (19.7%) during the six months ended June 30, 2024, largely due to $22.7 million from the Republic First Transaction[190] - Total criticized and classified loans (special mention or substandard/lower) increased to $2.0 billion at June 30, 2024, from $0.9 billion at December 31, 2023, primarily due to acquired loans from the Republic First Transaction[194][195] Deposits and Borrowings Ending Deposits by Type | Deposit Type | June 30, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | Increase (Decrease) ($ in thousands) | Increase (Decrease) (%) | |:---|:---|:---|:---|:---| | Noninterest-bearing demand | $5,609,383 | $5,314,094 | $295,289 | 5.6% | | Interest-bearing demand | $7,478,077 | $5,722,695 | $1,755,382 | 30.7% | | Savings and money market deposits | $7,563,495 | $6,616,901 | $946,594 | 14.3% | | Brokered deposits | $995,975 | $1,144,692 | $(148,717) | (13.0)% | | Time deposits | $3,912,724 | $2,739,241 | $1,173,483 | 42.8% | | Total deposits | $25,559,654 | $21,537,623 | $4,022,031 | 18.7% | - Total deposits increased by $4.0 billion (18.7%), largely due to $4.1 billion of deposits assumed in the Republic First Transaction, which subsequently declined by $357.3 million[199] - Total uninsured deposits were estimated at $8.7 billion at June 30, 2024, up from $7.2 billion at December 31, 2023[200] Ending Borrowings by Type | Borrowing Type | June 30, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | Increase (Decrease) ($ in thousands) | Increase (Decrease) (%) | |:---|:---|:---|:---|:---| | Federal funds purchased | — | $240,000 | $(240,000) | N/M | | Federal Home Loan Bank advances | $750,000 | $1,100,000 | $(350,000) | (31.8)% | | Senior debt and subordinated debt | $535,741 | $535,384 | $357 | 0.1% | | Other borrowings | $892,856 | $612,142 | $280,714 | 45.9% | | Total borrowings | $2,178,597 | $2,487,526 | $(308,929) | (12.4)% | - Total borrowings decreased by $308.9 million (12.4%), primarily due to decreases in FHLB advances and Federal funds purchased, partially offset by an increase in other borrowings[201] Shareholders' Equity - The Board approved a 2024 Repurchase Program authorizing up to $125.0 million for common stock repurchases (with up to $25.0 million for preferred stock and subordinated notes) through December 31, 2024[202] - During the six months ended June 30, 2024, 1,934,297 shares were repurchased for $30.3 million under the 2024 Repurchase Program; no shares were repurchased in Q2 2024[202] - On May 1, 2024, the Corporation completed a public offering of 19,166,667 common shares at $15.00 per share, generating approximately $273.0 million in net proceeds for general corporate purposes, including supporting the Republic First Transaction[136][203] Regulatory Capital - The Corporation and Fulton Bank are subject to Capital Rules requiring minimum Common Equity Tier 1 (4.50%), Tier 1 Leverage (4.00%), and Total Capital (8.00%) ratios, plus a 2.50% capital conservation buffer[204] - As of June 30, 2024, the Corporation's capital levels met all minimum regulatory requirements, including the capital conservation buffers[205] Corporation's Capital Ratios vs. Regulatory Requirements | Capital Ratio | June 30, 2024 | December 31, 2023 | Regulatory Minimum for Capital Adequacy | With Capital Conservation Buffer | |:---|:---|:---|:---|:---| | Total Risk-Based Capital | 13.8% | 14.0% | 8.0% | 10.5% | | Tier I Risk-Based Capital | 11.1% | 11.2% | 6.0% | 8.5% | | Common Equity Tier I | 10.3% | 10.3% | 4.5% | 7.0% | | Tier I Leverage Capital | 9.2% | 9.5% | 4.0% | 4.0% | - Fulton Bank met the well-capitalized requirements under the regulatory framework for prompt corrective action as of June 30, 2024[206] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section describes the Corporation's exposure to market risks, primarily interest rate risk, and the strategies employed to manage these risks, including asset/liability management, derivative financial instruments, cash flow hedges, and liquidity management Interest Rate Risk, Asset/Liability Management and Liquidity - Interest rate risk impacts the Corporation's liquidity and can cause fluctuations in net interest income and economic value of equity[208] - The Asset/Liability Management Committee (ALCO) manages interest rate risk using net interest income simulation (for short-term earnings exposure) and economic value of equity estimates (for longer-term repricing risks)[208][209] - Policy limits for net interest income exposure to non-parallel instantaneous shocks range from 10% for a 100 bps shock to 25% for a 400 bps shock[210] Expected Impact of Abrupt Interest Rate Changes on Net Interest Income (June 30, 2024) | Rate Shock | Annual change in net interest income ($ in millions) | % change in net interest income | |:---|:---|:---| | +400 bp | +$47.6 | +4.2% | | +300 bp | +$36.9 | +3.3% | | +200 bp | +$26.2 | +2.3% | | +100 bp | +$15.5 | +1.4% | | –100 bp | -$36.1 | -3.2% | | –200 bp | -$73.3 | -6.5% | | –300 bp | -$104.6 | -9.3% | | –400 bp | -$127.7 | -11.4% | - As of June 30, 2024, the Corporation was within economic value of equity policy limits for every 100 bps shock[212] Interest Rate Derivatives - The Corporation uses interest rate derivatives with commercial loan customers and simultaneously with dealer counterparties to manage interest rate risk, resulting in customers paying a fixed rate and the Corporation receiving a floating rate[213] Cash Flow Hedges - Interest rate derivatives designated as cash flow hedges are used to reduce volatility in interest income and expense, with unrealized gains/losses recorded in AOCI and reclassified to interest income/expense as the hedged transaction affects earnings[214] - Following the termination of $1.0 billion in cash flow hedges in January 2023, $14.1 million of unrealized losses were reclassified as a reduction of interest income on loans during the six months ended June 30, 2024[215] Liquidity - The Corporation maintains liquidity through scheduled payments on investments and loans, deposits, and borrowings, supplemented by secondary sources like interest-bearing deposits and customer funding[216][217] - As of June 30, 2024, Fulton Bank had $6.5 billion in available borrowing capacity with the FHLB and $2.6 billion in federal funds lines, with $0 outstanding[218] - Cash provided by operating activities was $321.0 million, investing activities provided $2.2 billion (mainly from AFS securities sales and Republic First Transaction cash), and financing activities used $1.7 billion (primarily for borrowing repayments) for the six months ended June 30, 2024[220] Debt Security Market Price Risk - Debt security market price risk is the exposure to economic loss from changes in debt security values unrelated to interest rate changes[221] - The Corporation's debt investments primarily consist of U.S. government-sponsored agency mortgage-backed securities, collateralized mortgage obligations, state and municipal securities, and corporate debt securities[221] State and Municipal Securities - As of June 30, 2024, the Corporation held $0.8 billion in state and municipal securities, with approximately 100% supported by the general obligation of the issuing states or municipalities, and 73% being school district issuances[222] Item 4. Controls and Procedures This section details the evaluation of the Corporation's disclosure controls and procedures and reports on changes in internal control over financial reporting, particularly in light of the Republic First Transaction Evaluation of Disclosure Controls and Procedures - The Corporation's Chief Executive Officer and Interim Chief Financial Officer concluded that, as of June 30, 2024, the disclosure controls and procedures were effective[223] Changes in Internal Control Over Financial Reporting - During Q2 2024, the Corporation commenced evaluation, design, and implementation of new controls related to the Republic First Transaction, with the evaluation ongoing[224] - Otherwise, there were no material changes in internal control over financial reporting during the three months ended June 30, 2024[224] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section incorporates by reference the information regarding legal proceedings from Note 14, 'Commitments and Contingencies,' in the Notes to Consolidated Financial Statements - Information on legal proceedings is incorporated by reference from Note 14, 'Commitments and Contingencies,' in the Notes to Consolidated Financial Statements[225] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Corporation's Annual Report on Form 10-K and prior Quarterly Report on Form 10-Q - There have been no material changes to the risk factors previously disclosed in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2023, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2024[226] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Corporation's 2024 Repurchase Program, including the authorization amount and the absence of repurchases during the second quarter of 2024 - The 2024 Repurchase Program, approved on December 19, 2023, authorizes the Corporation to repurchase up to $125.0 million of common stock (with up to $25.0 million for preferred stock and subordinated notes) through December 31, 2024[227] - No shares were repurchased under the 2024 Repurchase Program during the three months ended June 30, 2024[228] Item 3. Defaults Upon Senior Securities This item is marked as not applicable in the report - This item is not applicable[2] Item 4. Mine Safety Disclosures This item is marked as not applicable in the report - This item is not applicable[2] Item 5. Other Information This section confirms that no directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fiscal quarter ended June 30, 2024 - None of the Corporation's directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter ended June 30, 2024[229] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including underwriting agreements, purchase and assumption agreements, corporate organizational documents, and certifications - The report includes various exhibits such as the Underwriting Agreement (May 1, 2024), Purchase and Assumption Agreement for Republic First Bank (May 2, 2024), Articles of Incorporation, Bylaws, and certifications (302 and 906 of Sarbanes-Oxley Act)[231] Signatures - The report was signed on August 8, 2024, by Curtis J. Myers, Chairman and Chief Executive Officer, and Beth Ann L. Chivinski, Senior Executive Vice President and Interim Chief Financial Officer[233]