QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019, or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission File No. 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
23-2195389
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania
17604
(Address of principal executive offices)
(Zip Code)
(717) 291-2411
(Registrant’s telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $2.50 Par Value –168,810,000 shares outstanding as of May 1, 2019.
1
FULTON FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2019
Federal Reserve Bank and Federal Home Loan Bank stock
85,533
79,283
Loans held for sale
27,768
27,099
Investment securities:
Available for sale, at estimated fair value
2,159,806
2,080,294
Held to maturity, at amortized cost
588,443
606,679
Loans and leases, net of unearned income
16,262,633
16,165,800
Less: Allowance for loan and lease losses
(162,109
)
(160,537
)
Net Loans and leases
16,100,524
16,005,263
Premises and equipment
239,004
234,529
Accrued interest receivable
62,207
58,879
Goodwill and intangible assets
535,356
531,556
Other assets
734,620
612,883
Total Assets
$
20,974,649
$
20,682,152
LIABILITIES
Deposits:
Noninterest-bearing
$
4,255,043
$
4,310,105
Interest-bearing
12,122,935
12,066,054
Total Deposits
16,377,978
16,376,159
Short-Term Borrowings
829,016
754,777
Accrued interest payable
11,219
10,529
Other liabilities
390,105
300,835
Federal Home Loan Bank advances and long-term debt
1,065,312
992,279
Total Liabilities
18,673,630
18,434,579
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 600 million shares authorized, 221.8 million shares issued in 2019 and in 2018
554,485
554,377
Additional paid-in capital
1,491,870
1,489,703
Retained earnings
980,708
946,032
Accumulated other comprehensive loss
(37,633
)
(59,063
)
Treasury stock, at cost, 51.9 million shares in 2019 and 51.6 million shares in 2018
(688,411
)
(683,476
)
Total Shareholders’ Equity
2,301,019
2,247,573
Total Liabilities and Shareholders’ Equity
$
20,974,649
$
20,682,152
See Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per-share data)
Three months ended March 31
2019
2018
INTEREST INCOME
Loans and leases, including fees
$
183,744
$
160,136
Investment securities:
Taxable
15,435
13,193
Tax-exempt
3,279
2,965
Dividends
—
5
Loans held for sale
240
216
Other interest income
2,002
1,172
Total Interest Income
204,700
177,687
INTEREST EXPENSE
Deposits
29,689
16,450
Short-term borrowings
3,582
2,041
Federal Home Loan Bank advances and long-term debt
8,114
7,878
Total Interest Expense
41,385
26,369
Net Interest Income
163,315
151,318
Provision for credit losses
5,100
3,970
Net Interest Income After Provision for Credit Losses
158,215
147,348
NON-INTEREST INCOME
Wealth management fees
13,239
12,871
Commercial banking income
14,763
13,956
Consumer banking income
11,377
11,408
Mortgage banking income
4,772
4,193
Other income
2,535
3,428
Non-Interest Income Before Investment Securities Gains
46,686
45,856
Investment securities gains, net
65
19
Total Non-Interest Income
46,751
45,875
NON-INTEREST EXPENSE
Salaries and employee benefits
77,757
75,768
Net occupancy expense
12,909
13,632
Data processing and software
10,353
10,473
Other outside services
8,352
8,124
Professional fees
3,960
4,816
Equipment expense
3,342
3,534
FDIC insurance expense
2,609
2,953
Marketing
2,160
2,250
State Taxes
2,002
2,302
Amortization of tax credit investments
1,491
1,637
Intangible amortization
107
—
Other
12,782
11,172
Total Non-Interest Expense
137,824
136,661
Income Before Income Taxes
67,142
56,562
Income taxes
10,479
7,082
Net Income
$
56,663
$
49,480
PER SHARE:
Net Income (Basic)
$
0.33
$
0.28
Net Income (Diluted)
0.33
0.28
Cash Dividends
0.13
0.12
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three months ended March 31
2019
2018
Net Income
$
56,663
$
49,480
Other Comprehensive Income (Loss), net of tax:
Unrealized gain (loss) on securities
20,298
(27,644
)
Reclassification adjustment for securities gains included in net income
(51
)
(16
)
Amortization of net unrealized losses on available for sale securities transferred to held to maturity
974
—
Non-credit related unrealized (loss) gain on other-than-temporarily impaired debt securities
(82
)
224
Amortization of net unrecognized pension and postretirement income
291
339
Other Comprehensive Income (Loss)
21,430
(27,097
)
Total Comprehensive Income
$
78,093
$
22,383
See Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except per-share data)
Common Stock
Retained
Earnings
Treasury
Stock
Total
Shares
Outstanding
Amount
Additional Paid-in
Capital
Accumulated Other Comprehensive
Income (Loss)
Three months ended March 31
Balance at December 31, 2018
170,184
$
554,377
$
1,489,703
$
946,032
$
(59,063
)
$
(683,476
)
$
2,247,573
Net income
56,663
56,663
Other comprehensive income
21,430
21,430
Stock issued
115
108
607
942
1,657
Stock-based compensation awards
1,560
1,560
Acquisition of treasury stock
(376
)
(5,877
)
(5,877
)
Common stock cash dividends - $0.13 per share
(21,987
)
(21,987
)
Balance at March 31, 2019
169,923
$
554,485
$
1,491,870
$
980,708
$
(37,633
)
$
(688,411
)
$
2,301,019
Balance at December 31, 2017
175,170
$
552,232
$
1,478,389
$
821,619
$
(32,974
)
$
(589,409
)
$
2,229,857
Net income
49,480
49,480
Other comprehensive loss
(27,097
)
(27,097
)
Stock issued
234
450
1,646
694
2,790
Stock-based compensation awards
1,510
1,510
Reclassification of stranded tax effects (1)
7,101
(7,101
)
—
Common stock cash dividends - $0.12 per share
(21,047
)
(21,047
)
Balance at March 31, 2018
175,404
$
552,682
$
1,481,545
$
857,153
$
(67,172
)
$
(588,715
)
$
2,235,493
See Notes to Consolidated Financial Statements
(1) The Corporation adopted the Accounting Standards Codification ("ASC") Update 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" in the first quarter of 2018 which permitted a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017, which changed the federal corporate income tax rate from 35% to 21%. As a result, $7.1 million of stranded tax effects were reclassified from AOCI to retained earnings during the first quarter of 2018.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three months ended March 31
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
$
56,663
$
49,480
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
5,100
3,970
Depreciation and amortization of premises and equipment
6,888
7,329
Amortization of tax credit investments
8,155
8,364
Net amortization of investment securities premiums
2,075
2,517
Investment securities gains, net
(65
)
(19
)
Gain on sales of mortgage loans held for sale
(3,122
)
(2,645
)
Proceeds from sales of mortgage loans held for sale
142,739
170,693
Originations of mortgage loans held for sale
(140,286
)
(159,968
)
Amortization of intangible assets
107
—
Amortization of issuance costs and discounts on long-term debt
211
194
Stock-based compensation
1,560
1,510
Increase in accrued interest receivable
(3,328
)
(150
)
Increase in other assets
(23,415
)
(6,923
)
Increase in accrued interest payable
690
364
Decrease in other liabilities
(15,701
)
(2,890
)
Total adjustments
(18,392
)
22,346
Net cash provided by operating activities
38,271
71,826
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale
37,660
1,444
Proceeds from principal repayments and maturities of securities held to maturity
18,687
—
Proceeds from principal repayments and maturities of securities available for sale
51,097
78,150
Purchase of securities available for sale
(143,588
)
(161,944
)
(Purchase) redemption of Federal Reserve Bank and Federal Home Loan Bank stock
(6,250
)
3,862
Net (increase) decrease in loans and leases
(101,123
)
67,928
Net purchases of premises and equipment
(11,363
)
(14,840
)
Net cash paid for acquisition
(3,907
)
—
Net change in tax credit investments
(8,003
)
(20,783
)
Net cash (used in) provided by investing activities
(166,790
)
(46,183
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand and savings deposits
(108,185
)
(278,626
)
Net increase (decrease) in time deposits
110,004
(41,803
)
Increase in short-term borrowings
74,239
320,328
Additions to long-term debt
75,000
—
Repayments of long-term debt
(2,026
)
(100,041
)
Net proceeds from issuance of common stock
1,657
2,790
Dividends paid
(20,592
)
(19,329
)
Acquisition of treasury stock
(5,877
)
—
Net cash provided by (used in) financing activities
124,220
(116,681
)
Net Decrease in Cash and Cash Equivalents
(4,299
)
(91,038
)
Cash and Cash Equivalents at Beginning of Period
445,687
402,096
Cash and Cash Equivalents at End of Period
$
441,388
$
311,058
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
$
40,695
$
26,005
Income taxes
1,485
154
See Notes to Consolidated Financial Statements
7
FULTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 – Basis of Presentation
The accompanying unaudited consolidated financial statements of Fulton Financial Corporation (the "Corporation") have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The Corporation evaluates subsequent events through the date of filing of this Form 10-Q with the U.S. Securities and Exchange Commission ("SEC").
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASC Update 2016-02, "Leases (Topic 842)." This standards update requires a lessee to recognize for all leases with an initial term greater than twelve months: (1) a "right-of-use" ("ROU") asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term; and (2) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, each measured on a discounted basis. This standards update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Corporation adopted ASC Update 2016-02 in the first quarter of 2019 using the alternative transition method, which eliminates the requirement to restate the earliest prior period presented in an entity’s financial statements. As such, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
This standards update provides for a number of practical expedients in transition. The Corporation elected to apply the package of practical expedients permitted within the new standard, which, among other things, allowed it to carryforward the prior conclusions on lease identification, lease classification and initial direct costs. In addition, the Corporation elected to not separate lease and non-lease components. The Corporation did not elect the practical expedient to apply hindsight in determining the lease term and in assessing impairment of the ROU assets.
At January 1, 2019, the ROU asset and corresponding lease liability were recognized on the consolidated balance sheets for $106.3 million and $112.6 million, respectively. See "Note 6 - Leases" for additional information and expanded lessee disclosures.
This standards update also provides additional guidance on lessor accounting. The Corporation provides equipment lease financing to its customers, which are categorized as direct financing leases. The adoption of this standards update did not result in any changes to the accounting for this type of lease as the lessor.
In March 2017, the FASB issued ASC Update 2017-08, "Premium Amortization on Purchased Callable Debt Securities." This standards update requires that a company amortize the premium on callable debt securities to the earliest call date versus current GAAP which requires amortization over the contractual life of the securities. The amortization period for callable debt securities purchased at a discount was not impacted by the new accounting standards update. ASC Update 2017-08 was effective for annual and interim reporting periods beginning after December 15, 2018. The Corporation adopted this standards update effective with its March 31, 2019 quarterly report on Form 10-Q and the adoption of ASC Update 2017-08 did not have a material impact on its consolidated financial statements.
8
Recently Issued Accounting Standards
Standard
Description
Date of Anticipated Adoption
Effect on Financial Statements
ASC Update 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The new impairment model prescribed by this standards update is a single impairment model for all financial assets (i.e., loans and held to maturity investments). The recognition of credit losses would be based on an entity’s current estimate of expected losses (referred to as the Current Expected Credit Loss model, or "CECL"), as opposed to recognition of losses only when they are incurred under current GAAP. This update also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This adjustment will also be recognized in regulatory capital. This update is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
In November 2018, the FASB issued ASC Update 2018-19, "Codifications Improvements to Topic 326, Financial Instruments - Credit Losses" which clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments.
First Quarter of 2020
The Corporation intends to adopt these standards updates effective with its March 31, 2020 quarterly report on Form 10-Q. The Corporation believes that total credit loss reserves will increase at the adoption date and that the magnitude of the increase will depend on the composition, characteristics and quality of its loan portfolio and off balance sheet credit exposures as well as the prevailing economic conditions and forecasts as of the adoption date. The Corporation’s steering committee and working group, which are comprised of individuals from various functional areas, are finalizing the processes, accounting policies and interpretations and systems requirements and solutions for the implementation of these standard updates. Current activities also include data gathering and testing the loss models. The Corporation anticipates it will begin full parallel runs of the new processes, systems and controls in mid-2019.
ASC Update 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
The FASB issued this update to simplify the subsequent quantitative measurement of goodwill by eliminating Step 2 of the goodwill impairment test. Instead, identifying and measuring impairment will take place in a single quantitative step. In addition, no separate qualitative assessment for reporting units with zero or negative carrying amounts is required. Entities must disclose the existence of these reporting units and the amount of goodwill allocated to them. This update should be applied on a prospective basis, and an entity is required to disclose the nature of and reason for the change in accounting principle upon transition. This update is effective for annual or interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted.
Fourth Quarter of 2020, in line with its annual impairment testing in October of each year
The Corporation does not expect the adoption of this update to have a material impact on its consolidated financial statements. The Corporation has not needed to perform step 2 since its 2012 impairment testing.
ASC Update 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
This update changes the fair value measurement disclosure requirements of ASC Topic 820 "Fair Value Measurement." Among other things, the update modifies the disclosure objective paragraphs of ASC 820 to eliminate: (1) "at a minimum" from the phrase "an entity shall disclose at a minimum;" and (2) other similar disclosure requirements to promote the appropriate exercise of discretion by entities.
First Quarter of 2020
The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q. This standard will impact the Corporation's Fair Value Measurement disclosure, but the Corporation does not expect the adoption of this update to have a material impact on its consolidated financial statements.
9
Standard
Description
Date of Anticipated Adoption
Effect on Financial Statements
ASC Update 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
This update amends ASC Topic 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. This update is effective for annual reporting periods beginning after December 15, 2020. Early adoption is permitted.
First Quarter of 2021
The Corporation intends to adopt this standards update effective with its March 31, 2021 quarterly report on Form 10-Q. This standard will impact the Corporation's disclosure relating to employee benefit plans, but the Corporation does not expect the adoption of this update to have a material impact on its consolidated financial statements.
ASC Update 2018-15 Intangibles - Goodwill and Other - Internal Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
This update requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Subtopic 350-40 to determine which implementation costs to capitalize as assets. This update is effective for annual or interim reporting periods beginning after December 15, 2019. Early adoption is permitted.
First Quarter of 2020
The Corporation intends to adopt this standards update effective with its March 31, 2020 quarterly report on Form 10-Q and does not expect the adoption of this update to have a material impact on its consolidated financial statements.
Reclassifications
Certain amounts in the 2018 consolidated financial statements and notes have been reclassified to conform to the 2019 presentation.
NOTE 2 – Restrictions on Cash and Cash Equivalents
The Corporation’s subsidiary banks are required to maintain reserves against their deposit liabilities. These reserves are in the form of cash and balances with the Federal Reserve Bank ("FRB"), included in "interest-bearing deposits with other banks." The amounts of such reserves as of March 31, 2019 and December 31, 2018 were $86.3 million and $156.8 million, respectively.
In addition, collateral is posted by the Corporation with counterparties to secure derivative contracts and other contracts, which are included in "interest-bearing deposits with other banks." The amounts of such collateral as of March 31, 2019 and December 31, 2018 were $89.3 million and $45.1 million, respectively.
10
NOTE 3 – Investment Securities
The following table presents the amortized cost and estimated fair values of investment securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
March 31, 2019
(in thousands)
Available for Sale
U.S. Government sponsored agency securities
$
26,900
$
624
$
—
$
27,524
State and municipal securities
293,116
5,840
(1,272
)
297,684
Corporate debt securities
122,006
1,610
(2,328
)
121,288
Collateralized mortgage obligations
889,046
5,561
(7,202
)
887,405
Residential mortgage-backed securities
447,924
1,530
(8,596
)
440,858
Commercial mortgage-backed securities
282,483
1,320
(1,566
)
282,237
Auction rate securities
107,410
—
(4,600
)
102,810
Total
$
2,168,885
$
16,485
$
(25,564
)
$
2,159,806
Held to Maturity
State and municipal securities
$
155,998
$
5,710
$
—
$
161,708
Residential mortgage-backed securities
432,445
9,454
—
441,899
Total
$
588,443
$
15,164
$
—
$
603,607
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
December 31, 2018
(in thousands)
Available for Sale
U.S. Government sponsored agency securities
$
31,586
$
185
$
(139
)
$
31,632
State and municipal securities
282,383
2,178
(5,466
)
279,095
Corporate debt securities
111,454
1,432
(3,353
)
109,533
Collateralized mortgage obligations
841,294
2,758
(11,972
)
832,080
Residential mortgage-backed securities
476,973
1,583
(15,212
)
463,344
Commercial mortgage-backed securities
264,165
524
(3,073
)
261,616
Auction rate securities
107,410
—
(4,416
)
102,994
Total
$
2,115,265
$
8,660
$
(43,631
)
$
2,080,294
Held to Maturity
State and municipal securities
$
156,134
$
1,166
$
(93
)
$
157,207
Residential mortgage-backed securities
450,545
3,667
—
454,212
Total
$
606,679
$
4,833
$
(93
)
$
611,419
Securities carried at $896.6 million at March 31, 2019 and $973.4 million at December 31, 2018, were pledged as collateral to secure public and trust deposits and customer repurchase agreements.
11
The amortized cost and estimated fair values of debt securities as of March 31, 2019, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities as certain investment securities are subject to call or prepayment with or without call or prepayment penalties.