Fulton Financial Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Fulton Financial Corporation (FULT) is a regional financial services provider offering a range of banking, investment, and insurance solutions primarily in Pennsylvania, Maryland, New Jersey, and Virginia, through its wholly owned banking subsidiaries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Fulton Financial Corporation (FULT) operates as a regional bank, focusing on relationship banking, diverse income streams, and cost management across the mid-Atlantic region.

Business Explanation

Fulton Financial Corporation operates as a regional bank, providing financial services to consumers, businesses, and institutional clients. The company is not a “pure-play” bank; rather, its diversified operations include a range of services including consumer and commercial banking, mortgage banking, wealth management, and insurance, which is all done mainly through its banking subsidiaries.

  • Revenue Distribution:
    • Net Interest Income (NII): A substantial portion of Fulton’s revenue is derived from NII, the difference between interest earned on loans and interest paid on deposits. The profitability of NII is influenced by loan volumes, deposit costs, interest rates, and other factors.
  • Fee and Commission Income: Fee income plays a significant role in FULT’s business, accounting for almost half of total net revenues. This comes from sources like wealth management, interchange fees, brokerage, trust services, and mortgage origination.
  • Other: A smaller portion of revenue comes from non-banking activities.
  • Industry Trends:
    • The banking industry is intensely competitive. With new FinTech companies and an increasingly complex landscape, especially for regional banks, it is hard to maintain profitability and growth in a sustainable way.
    • Interest rates fluctuations impact the banks negatively. When interest rates rise, their interest costs on deposits can rise before the company can increase the interest on their loans, which leads to compression of net interest income margin.
  • Competitive Landscape:
    • FULT operates within a competitive landscape populated by other regional and national banks, credit unions, and non-bank financial institutions. Regional banks such as M&T, Keycorp, and First Citizens are their main competitors in their areas of operation. They compete through interest rates, fees, customer service, branch access, and online and mobile offerings.
  • What Makes FULT Different:
  • FULT emphasizes relationship banking, with branches in communities, to maintain a strong customer base. The company has managed to increase loans and deposits, which shows the bank is well-regarded in its areas of operations. The emphasis on technology is notable in their annual reports. However, FULT is nowhere close to tech companies and hence the pace of technology innovation would be slow.
  • The company’s wide variety of services such as brokerage, insurance, and wealth management gives it some edge over pure-play banks.
  • Financial Highlights:
    • Revenues: FULT has shown an increasing interest income in its latest reports and calls. The management has made it clear that they expect a continued increase in net interest income due to high rates in the future. The company also tries to generate more fee revenue to mitigate low net interest margin. The revenues were $212.5 million in the first quarter of 2024, a decrease from $215 million in the first quarter of 2023.
    • Margins: Net interest margins were 3.30% in 1Q24, compared to 3.26% in 4Q23 and 3.24% in 1Q23. FULT has been able to increase its interest income over time and the company expects this trend to continue because of high interest rates. The company tries to increase its revenues from different sources to reduce reliance on interest income.
    • Profitability: The company’s ROA has been under severe pressure because of increase in operating expenses. The ROE of 6.7% as of first quarter of 2024 was also not particularly compelling. The company had a loss of $31 million, including the FDIC charge of $104 million in the most recent quarter. Without the charge, net income was $73 million and earnings per share was $0.30 per share.
    • Growth: Total loans, which were $24.1 billion, increased by 1.1 percent annualized from the previous quarter (4Q23), and deposits also increased at around 4% annualized to 21.6 billion from the prior quarter. The management has guided for continued growth. However, the growth depends on the strength of the economy.
    • Capital Strength: The company’s capital ratios also declined in 1Q24, but it is still well-capitalized. The management has stated their commitment to maintaining a good capital position and also to return capital to shareholders through dividends and share buybacks.

The main takeaway is that FULT has some good tailwinds because of the increasing interest rate and the company should have no problems with long term profitability. The company has to improve on its efficiency and must maintain good capital levels to continue its growth.

Moat Analysis

Fulton Financial Corporation has a narrow moat (3/5) based on a few factors:

  • Switching Costs (Narrow Moat): The bank’s customer base exhibits some stickiness, driven by established banking relationships. Customers often incur implicit costs in the form of time, hassle, and learning a new banking system, thus creating a level of inertia for some portion of the customer base. This is a mild tailwind for the company, but not sufficient to create a wide moat.
  • Regulatory Advantage (Narrow Moat): The banking industry is heavily regulated, and established banks like Fulton enjoy some protection from new entrants through regulatory hurdles and compliance costs. This gives Fulton some edge against smaller institutions. However, there are too many banks to really call it wide moat.
  • Brand Loyalty (Mild Moat): FULT also enjoys brand loyalty with a large customer base in its area of operations. The company has been providing its services for a long time and most of the people in its areas of operation are used to the brand name.

FULT lacks a wide moat because of the commoditized nature of its services and the ease of availability of other alternatives. Also, as we have seen in the previous years, technology companies and new fintech startups can easily disrupt the established player.

Risks to the Moat and Business Resilience

Despite some structural advantages, Fulton faces several risks that could erode its moat and impact its business resilience:

  • Macroeconomic Factors: FULT’s financial performance is tied to the overall health of the economy. This means periods of recession could have an impact on its loan portfolio and also on its ability to grow its revenues.
  • Interest Rate Risk: Fluctuations in interest rates can impact FULT’s net interest income. Rising interest rates may raise funding costs faster than loan yields, compressing margins and reducing profitability.
  • Competition Risk: The banking industry is fiercely competitive, with other banks, credit unions, and non-bank lenders all competing for the same customer base.
    • Smaller players with better financial technology can eat into the profits of banks such as FULT which have a slow rate of adoption to new trends in the financial industry.
    • Also, fintech companies, which are less regulated than traditional banks, could cause disruption and cut into the share of the company.
  • Regulatory and Compliance Risks: Changes in banking regulations could also lead to large expenses for traditional banks. Many compliance rules, especially around loan origination, are expected to bring huge costs. The constant change in regulation means more uncertainty.
    • As banks grow, they need higher capital requirements and must try to find ways to attract and maintain capital. The capital requirement may also hamper growth.
  • Credit Quality Risk: FULT’s business is highly reliant on its ability to make loans and receive payments on time. In case of downturns or recessions, more borrowers may default on loans. This would greatly impact the profitability of the company.
  • Technological disruption: Fintech companies and digital banking platforms are rapidly innovating and threaten to displace traditional brick-and-mortar banks like FULT. If the company fails to innovate or adopt new technologies, it could lose market share.
  • Acquisition Risk: A key reason for FULT’s growth has been acquisition of other regional banks. Integration of businesses can be difficult, and synergies between acquired and existing business might not materialize as intended. There is a risk that the companies will end up worse off after acquisition.

FULT has taken multiple steps to mitigate these risks, including diversifying its revenue streams and customer base, leveraging technology to offer its services more efficiently, and maintaining a well-capitalized and diversified loan portfolio. However, these risks are ever-present and investors must keep an eye on all these trends.

Understandability

Fulton Financial Corporation’s business is relatively complex and requires a deep understanding of banking, investment, and insurance to understand the key moving parts. It receives a 2/5 for understandability. The factors to consider are:

  • Multiple Revenue Streams: Diversified operations add to the complexity. The range of services—from core banking to wealth management—makes it difficult to analyze the drivers of growth for the company.
  • Financial Regulations: The banking sector has a complicated regulatory framework. In addition to understanding how FULT’s business operates, it is important to have a basic understanding of financial regulations to understand what type of risks the company faces.
  • Financial Complexity: Banks are complex and often opaque businesses. It is hard to fully understand the details of their business as balance sheets tend to be complicated and often misleading for casual investors. The calculation of key parameters such as NII, ROIC, and FCF are hard to understand and use for non-financial experts.
  • Impact of macro-economic data: FULT’s revenue and profitability depend a lot on economic growth. It is hard to know the macro outlook and it makes the forecasting and valuations hard for most non-professional investors.

Balance Sheet Health

Fulton Financial Corporation has a decent balance sheet (4/5), however, there are some signs of concern. Key factors are:

  • Capital Adequacy: The company is well capitalized, having a Tier 1 risk-based capital ratio of 9.3% (above the minimum requirement of 8%). This is not the highest compared to its peers, but still within a comfortable range.
  • Loan Portfolio Quality: While the loan portfolio has grown steadily, there is a need to be watchful of deteriorating asset quality, with an increasing provision for credit losses, reflecting challenges ahead. However, net charge offs are at historically low levels.
  • Liquidity: Banks are generally illiquid in nature. The company’s cash and liquid assets are enough to meet its short term funding needs.
  • Debt: The company has around 2 billion in short-term and long term debt. That amount is not huge compared to its 14.2 billion in equity. Also, the company’s liquidity is above the required minimum. The company has a history of repayment and also strong cash flow to support its obligations.
  • Contingent Liabilities: The company has contingent liabilities, but they are not significant, compared to the assets of the company. However, a failure to understand and prepare for them might impact the value of the company.

Overall, the balance sheet of FULT is good but must be carefully tracked for any weakness in the quality of assets because of the deteriorating economic situation. Also, their capital adequacy ratios must be tracked to ensure they meet regulatory requirements while growing their loan books.

Recent Concerns and Management Outlook

Fulton has recently faced the following challenges, with details provided from earnings calls and the latest reports:

  • Decline in Profitability: The bank’s profits have been declining in recent quarters because of higher provisioning for credit losses. However, management expects that this is temporary and the profitability will recover.
  • Increased Expenses: The increase in personnel costs and one-time expenses have resulted in the decline in earnings. However, management has plans to manage expenses effectively in the near term.
  • Effect of Merger: Although the merger of Fulton and Prudential has been completed, the management has mentioned that there are still some challenges integrating them.

FULT’s management seems optimistic about the future and also expects a recovery in the near future. They plan to improve performance through initiatives such as technology deployment, better operating efficiency, and new products. They are also committed to returning capital to investors. The company’s management stated their commitment to creating value and shareholder returns.