Fulton Financial (US:FULT)2022-11-08 16:00PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents Fulton Financial Corporation's unaudited consolidated financial statements as of September 30, 2022, and for the periods then ended, along with detailed notes on accounting policies and key financial items Consolidated Balance Sheets As of September 30, 2022, total assets were $26.15 billion, a slight increase from $25.80 billion at year-end 2021, driven by a $1.35 billion increase in net loans, funded by a $1.11 billion decrease in cash and cash equivalents and a $0.39 billion increase in borrowings, while total shareholders' equity decreased by $241.5 million to $2.47 billion due to a significant increase in accumulated other comprehensive loss Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $528,715 | $1,638,614 | | Net loans | $19,428,361 | $18,076,349 | | Investment securities (AFS & HTM) | $3,936,694 | $4,167,774 | | Goodwill and net intangible assets | $561,495 | $538,053 | | Total Assets | $26,146,042 | $25,796,398 | | Liabilities & Equity | | | | Total Deposits | $21,376,554 | $21,573,499 | | Total borrowings | $1,424,681 | $1,038,109 | | Total Liabilities | $23,674,883 | $23,083,718 | | Accumulated other comprehensive (loss) income | ($442,947) | $27,411 | | Total Shareholders' Equity | $2,471,159 | $2,712,680 | Consolidated Statements of Income For the third quarter of 2022, net income was $70.9 million, or $0.40 per diluted share, compared to $75.6 million, or $0.45 per diluted share, in Q3 2021, driven by an $19.0 million provision for credit losses and higher non-interest expenses, which offset a 25.9% increase in net interest income, while for the nine months ended September 30, 2022, net income was $205.1 million, down from $213.6 million in the prior-year period Key Income Statement Data (in thousands, except per-share data) | Metric | Q3 2022 (in thousands) | Q3 2021 (in thousands) | Nine Months 2022 (in thousands) | Nine Months 2021 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $215,582 | $171,270 | $555,723 | $498,118 | | Provision for credit losses | $18,958 | ($600) | $13,508 | ($9,600) | | Total Non-Interest Income | $59,162 | $62,577 | $172,809 | $209,864 | | Total Non-Interest Expense | $169,558 | $144,596 | $465,266 | $463,811 | | Net Income | $70,871 | $75,583 | $205,148 | $213,611 | | Net Income Available to Common Shareholders | $68,309 | $73,021 | $197,462 | $205,896 | | Diluted EPS | $0.40 | $0.45 | $1.20 | $1.26 | Consolidated Statements of Comprehensive Income The company reported a total comprehensive loss of $67.9 million for Q3 2022, a significant shift from a comprehensive income of $54.0 million in Q3 2021, primarily due to a $138.7 million other comprehensive loss driven by unrealized losses on available-for-sale (AFS) investment securities and interest rate swaps, reflecting the impact of rising interest rates Comprehensive Income (Loss) (in thousands) | Component | Q3 2022 (in thousands) | Q3 2021 (in thousands) | Nine Months 2022 (in thousands) | Nine Months 2021 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $70,871 | $75,583 | $205,148 | $213,611 | | Other Comprehensive (Loss)/Income | ($138,737) | ($21,586) | ($470,358) | ($39,476) | | Total Comprehensive (Loss) Income | ($67,866) | $53,997 | ($265,210) | $174,135 | Consolidated Statements of Shareholders' Equity Total shareholders' equity decreased from $2.71 billion at the end of 2021 to $2.47 billion as of September 30, 2022, primarily caused by a $470.4 million other comprehensive loss, which more than offset the $205.1 million in net income for the period, while the acquisition of Prudential Bancorp contributed to an increase in common stock and paid-in capital through the issuance of shares - Accumulated Other Comprehensive Income (AOCI) shifted from a positive $27.4 million at Dec 31, 2021, to a loss of $442.9 million at Sep 30, 2022, a swing of nearly $470.4 million, driving the overall decrease in equity13 - The acquisition of Prudential Bancorp involved the reissuance of 6.2 million treasury stock shares valued at $89.7 million13 Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, the company experienced a net decrease in cash and cash equivalents of $1.11 billion, driven by net cash used in investing activities of $928.4 million (primarily for net loan growth) and net cash used in financing activities of $700.7 million (primarily from a net decrease in deposits), partially offset by $519.2 million in net cash provided by operating activities Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Activity | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $519,219 | $322,172 | | Net cash (used in) provided by investing activities | ($928,394) | $25,737 | | Net cash (used in) provided by financing activities | ($700,724) | $275,268 | | Net (decrease) increase in Cash and Cash Equivalents | ($1,109,899) | $623,177 | Notes to Consolidated Financial Statements This section provides detailed explanations supporting the financial statements, including accounting policies, the Prudential Bancorp acquisition, investment securities, loan portfolio, derivatives, and commitments Note 2: Business Combinations On July 1, 2022, the Corporation completed its acquisition of Prudential Bancorp for a total consideration of $119.1 million, consisting of cash and stock, resulting in $16.3 million of goodwill and adding approximately $933.6 million in assets and $830.8 million in liabilities, with merger-related expenses of $8.4 million recognized for the nine months ended September 30, 2022 - The acquisition of Prudential Bancorp was completed on July 1, 2022, to enhance presence in the Philadelphia region25 Acquisition Summary (in thousands) | Item | Value (in thousands) | | :--- | :--- | | Total Consideration Transferred | $119,056 | | Fair Value of Net Assets Acquired | $102,800 | | Goodwill Recognized | $16,256 | | Total Assets Acquired | $933,563 | | Total Liabilities Assumed | $830,763 | - Total merger-related expenses for the nine months ended Sep 30, 2022, were $8.4 million, including a $2.0 million charitable donation41 Note 4: Investment Securities As of September 30, 2022, the total investment securities portfolio was $3.94 billion, down from $4.17 billion at year-end 2021, with the portfolio including $2.60 billion in Available-for-Sale (AFS) securities and $1.34 billion in Held-to-Maturity (HTM) securities, and its fair value was significantly impacted by rising interest rates, resulting in gross unrealized losses of $411.0 million in the AFS portfolio and $197.6 million in the HTM portfolio, while during Q2 2022, securities with a fair value of $415.2 million were transferred from AFS to HTM Investment Securities Summary (in thousands) | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Available for Sale (AFS) | $2,597,384 | $3,187,390 | | Held to Maturity (HTM) (Fair Value) | $1,141,710 | $965,867 | | Total (Carrying Amount) | $3,936,694 | $4,167,774 | - On May 1, 2022, the Corporation transferred securities with an amortized cost of $479.0 million and a fair value of $415.2 million from AFS to HTM classification49 - As of Sep 30, 2022, the AFS portfolio had gross unrealized losses of $411.0 million, compared to $16.3 million at Dec 31, 2021, primarily due to rising interest rates54 Note 5: Loans and Allowance for Credit Losses (ACL) Net loans increased to $19.7 billion at September 30, 2022, from $18.3 billion at year-end 2021, partly due to the Prudential acquisition, with the total ACL standing at $282.5 million, and the provision for credit losses for the nine months was $13.5 million, which included an $8.0 million CECL Day 1 provision for acquired loans, while non-performing assets rose to $198.6 million (0.76% of total assets) from $153.9 million (0.60% of total assets) at year-end 2021 Loan Portfolio Composition (in thousands) | Loan Type | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Real estate - commercial mortgage | $7,554,509 | $7,279,080 | | Commercial and industrial | $4,243,392 | $4,208,327 | | Real estate - residential mortgage | $4,574,228 | $3,846,750 | | Net loans | $19,695,199 | $18,325,350 | Allowance for Credit Losses (ACL) Activity - Nine Months 2022 (in thousands) | Description | Amount (in thousands) | | :--- | :--- | | Balance at Dec 31, 2021 | $263,534 | | CECL Day 1 Provision expense | $7,954 | | Net loans recovered | $4,351 | | Provision for credit losses | $5,554 | | Balance at Sep 30, 2022 | $282,528 | Non-Performing Assets (in thousands) | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Non-accrual loans | $178,204 | $143,666 | | Loans 90+ days past due & accruing | $14,559 | $8,453 | | OREO | $5,877 | $1,817 | | Total non-performing assets | $198,640 | $153,936 | Note 7: Derivative Financial Instruments The Corporation uses derivatives, including interest rate swaps and foreign exchange contracts, to manage interest rate and foreign currency risks, with notional amounts of interest rate swaps with customers totaling $3.98 billion and a net liability fair value, and $1.0 billion in notional interest rate swaps designated as cash flow hedges to manage volatility in net interest income, which had a negative fair value of $10.5 million as of September 30, 2022 - The Corporation uses derivatives for mortgage banking, customer interest rate risk management, and as cash flow hedges for its own interest rate risk management. None are for speculative purposes868791 Notional Amounts of Key Derivatives (Sep 30, 2022) | Derivative Type | Notional Amount | | :--- | :--- | | Interest Rate Swaps with Customers | $3,980,850,000 | | Interest Rate Swaps used in Cash Flow Hedges | $1,000,000,000 | | Interest Rate Locks with Customers | $105,773,000 | Note 13: Commitments and Contingencies As of September 30, 2022, the Corporation had off-balance sheet commitments totaling $8.87 billion, primarily consisting of $8.55 billion in commitments to extend credit, with a reserve for losses on these unfunded commitments of $11.0 million, and a legal proceeding, Kress v. Fulton Bank, N.A., regarding employee wage claims was settled and dismissed in November 2022 with a non-material financial impact Off-Balance-Sheet Commitments (in thousands) | Commitment Type | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Commitments to extend credit | $8,552,736 | $8,731,168 | | Standby letters of credit | $267,247 | $298,275 | | Commercial letters of credit | $51,852 | $54,196 | - The Kress v. Fulton Bank, N.A. lawsuit was granted final approval for settlement on November 2, 2022, and dismissed with prejudice. The financial terms are not material to the Corporation149 Management's Discussion and Analysis (MD&A) Management discusses the company's financial performance and condition, highlighting the impact of rising interest rates and the Prudential Bancorp acquisition on net interest income, non-interest income, and asset quality - On July 1, 2022, the Corporation completed the acquisition of Prudential Bancorp, which contributed to balance sheet growth and incurred $8.4 million in merger-related expenses for the first nine months of 2022164165 - The Federal Open Market Committee (FOMC) increased the Fed Funds Rate target range six times by November 2, 2022, to 3.75% - 4.00%, significantly impacting interest income and the valuation of financial instruments163 Results of Operations For Q3 2022, net interest income grew 25.9% year-over-year to $219.6 million (FTE), with the net interest margin expanding 72 basis points to 3.54%, offset by a $19.0 million provision for credit losses and a 61% drop in mortgage banking income, while for the nine-month period, net interest income rose 11.7% to $566.4 million (FTE), and non-interest income (ex-gains) fell 2.0% due to the slowdown in mortgage banking Q3 2022 vs Q3 2021 Performance | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | FTE Net Interest Income | $219.6M | $174.4M | +$45.2M | | Net Interest Margin (FTE) | 3.54% | 2.82% | +72 bps | | Provision for Credit Losses | $19.0M | ($0.6M) | +$19.6M | | Non-Interest Income (ex-gains) | $59.2M | $62.6M | -$3.4M | Nine Months 2022 vs Nine Months 2021 Performance | Metric | Nine Months 2022 | Nine Months 2021 | Change | | :--- | :--- | :--- | :--- | | FTE Net Interest Income | $566.4M | $507.2M | +$59.2M | | Net Interest Margin (FTE) | 3.13% | 2.78% | +35 bps | | Provision for Credit Losses | $13.5M | ($9.6M) | +$23.1M | | Non-Interest Income (ex-gains) | $172.8M | $176.4M | -$3.5M | Financial Condition As of September 30, 2022, total assets grew to $26.1 billion, up 1.4% from year-end 2021, with net loans increasing by 7.5% to $19.7 billion, driven by organic growth and the Prudential acquisition, while deposits decreased by 0.9% to $21.4 billion, and shareholders' equity fell 8.9% to $2.5 billion, primarily due to a $470.4 million increase in accumulated other comprehensive loss from unrealized losses on securities and derivatives - Net loans increased by $1.4 billion (7.5%) in the first nine months of 2022, driven by growth in residential mortgage, commercial mortgage, consumer loans, and $554.3 million in loans acquired from the Merger221 - Total deposits decreased by $196.9 million (0.9%), with declines in time and interest-bearing demand deposits partially offset by growth in savings and money market accounts232 - Shareholders' equity decreased by $241.5 million, mainly due to a $470.4 million negative swing in AOCI from unrealized losses on investment securities and derivatives, which offset retained earnings growth216235 Asset Quality Asset quality metrics showed some deterioration in the first nine months of 2022, with non-performing loans increasing by $40.6 million to $192.8 million, representing 0.98% of total loans, up from 0.83% at year-end 2021, while total criticized and classified loans decreased by $297.0 million to $781.2 million, and the allowance for credit losses (ACL) to non-performing loans ratio decreased to 138% from 164% Asset Quality Indicators | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Non-performing loans (NPLs) | $192,763,000 | $152,119,000 | | NPLs to Total Loans | 0.98% | 0.83% | | Total Criticized & Classified Loans | $781,151,000 | $1,078,128,000 | | ACL - loans to NPLs | 138% | 164% | Regulatory Capital As of September 30, 2022, the Corporation and its subsidiary banks remained well-capitalized, with all regulatory capital ratios exceeding the minimum requirements, including the capital conservation buffer, with the Common Equity Tier 1 (CET1) ratio at 10.0% and the Total Risk-Based Capital ratio at 13.6% Capital Ratios vs. Regulatory Minimums (with buffer) | Ratio | Sep 30, 2022 | Required for Well-Capitalized | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 10.0% | 7.0% | | Tier I Risk-Based Capital | 10.9% | 8.5% | | Total Risk-Based Capital | 13.6% | 10.5% | | Tier I Leverage Capital | 9.2% | 4.0% | - Both Fulton Bank and Prudential Bank met the well-capitalized requirements under the regulatory framework for prompt corrective action as of September 30, 2022240 Quantitative and Qualitative Disclosures about Market Risk The Corporation manages market risk, primarily interest rate risk, through its Asset/Liability Management Committee (ALCO), using net interest income (NII) simulation and economic value of equity models, and as of September 30, 2022, an instantaneous +100 basis point rate shock was projected to increase NII by 3.7% over 12 months, while a -100 basis point shock would decrease it by 6.5%, with the company maintaining ample liquidity with $5.7 billion in FHLB borrowing capacity and $1.2 billion in FRB discount window capacity Net Interest Income Sensitivity (as of Sep 30, 2022) | Rate Shock Scenario | % Change in Net Interest Income | | :--- | :--- | | +200 bp | +7.3% | | +100 bp | +3.7% | | -100 bp | -6.5% | | -200 bp | -15.6% | - The Corporation has significant secondary liquidity sources, including approximately $5.7 billion in borrowing capacity with the FHLB and $1.2 billion at the FRB discount window as of September 30, 2022254255 Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2022, and following the acquisition of Prudential Bancorp on July 1, 2022, the Corporation has extended its oversight and monitoring processes to the acquired operations, with no other material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of the end of the reporting period262 - Internal control oversight has been extended to include the newly acquired Prudential Bancorp operations, but no other material changes to internal controls were reported for the quarter263 PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, and a specific case, Kress v. Fulton Bank, N.A., was settled and dismissed with prejudice on November 2, 2022, with the financial impact of the settlement not material to the Corporation - The lawsuit Kress v. Fulton Bank, N.A. was resolved via a settlement agreement, which received final court approval on November 2, 2022. The financial terms are not material149264 Risk Factors 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, 2021, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 - No material changes to risk factors were reported since the Q1 2022 Form 10-Q filing265 Unregistered Sales of Equity Securities and Use of Proceeds The Corporation has a board-approved share repurchase program for up to $75 million of its common stock, effective through December 31, 2022, and no shares were repurchased under this program during the three months ended September 30, 2022 - During the three months ended September 30, 2022, no shares were repurchased under the existing $75 million share repurchase program267 Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, certifications by the CEO and CFO as required by the Sarbanes-Oxley Act, and interactive data files (XBRL)