Executive Summary / Key Takeaways

• Fulton Financial is strategically leveraging its recent Republic First acquisition and the ongoing FultonFirst efficiency initiative to drive earnings growth and improve operational performance in a challenging macro environment.
• First quarter 2025 results demonstrated positive operating leverage, with revenue exceeding expectations and a notable reduction in operating expenses, contributing to strong operating return metrics.
• The company is actively managing its balance sheet, focusing on prudent, relationship-based loan growth (projected low single digits) and disciplined deposit cost management, while maintaining robust liquidity and capital levels.
• While cautious on credit quality given the volatile environment and potential macro impacts (like tariffs), management's proactive portfolio management and strong reserve coverage provide a degree of resilience.
• The confirmed 2025 operating guidance, incorporating expected rate cuts and integration benefits, signals confidence in continued earnings power, though NII and non-interest income may trend towards the lower end of ranges in a prolonged slower growth scenario.

Setting the Scene: A Regional Bank's Strategic Pivot

Fulton Financial Corporation, a financial holding company rooted in Pennsylvania and serving the Mid-Atlantic region across Pennsylvania, Delaware, Maryland, New Jersey, and Virginia, operates within a competitive banking landscape dominated by larger regional players like PNC Financial Services Group (PNC), M&T Bank (MTB), Citizens Financial Group (CFG), and KeyCorp (KEY), alongside smaller community banks and increasingly agile fintech challengers. Fulton's core business revolves around traditional banking services – gathering deposits and originating loans – supplemented by fee-generating activities like wealth management and commercial banking services.

In this environment, Fulton's strategic positioning has historically leaned on a community-focused model, emphasizing relationship banking and a regional network. While this approach fosters customer loyalty, it presents challenges in achieving the scale and technological sophistication of larger competitors. Compared to peers like PNC and Citizens Financial Group, Fulton's digital banking platforms and operational processes have been noted as less technologically advanced, potentially lagging in areas like transaction speed and user experience. Similarly, while M&T Bank may have limitations in digital innovation, its strength in commercial lending and risk management presents a different competitive challenge. KeyCorp, with its diversified lending and broader reach, also competes for market share.

Fulton's response to these dynamics is multifaceted, centered on strategic inorganic growth and a significant internal transformation program designed to enhance efficiency and sharpen its operational edge. The company recognizes the need to improve productivity and simplify its operating model to compete effectively, particularly against larger institutions that benefit from scale and fintechs offering streamlined digital experiences. While the company appears to lack a specific, unique core technology moat in the vein of a specialized manufacturing process, Fulton's strategic initiatives include efforts to streamline processes (like credit underwriting) and invest in business banking technology, indicating a focus on leveraging operational technology to improve service delivery and efficiency, areas where it seeks to close the gap with more digitally advanced competitors.

A History Forging the Future: Integration and Transformation

Fulton's recent history is defined by strategic moves aimed at expanding its footprint and fundamentally reshaping its operational structure. The 2022 merger with Prudential Bancorp marked a step in this direction, adding scale and market presence. This was followed by the more significant Republic First Transaction in April 2024, an FDIC-assisted acquisition that substantially increased Fulton's assets, deposits, and branch network, particularly enhancing its position in the key Philadelphia and New Jersey markets. This acquisition was not merely about size; it was a strategic opportunity to acquire a deposit base and loan portfolio at favorable terms, providing a significant boost to the balance sheet and earnings power.

Concurrent with the demanding integration of Republic First, Fulton embarked on its ambitious FultonFirst initiative. Launched over a year prior to the Q1 2025 report and planned as a 12-18 month transformation, FultonFirst is designed to simplify the operating model, sharpen the focus on core relationship banking, and significantly enhance productivity. This initiative involves tangible actions such as consolidating financial centers (exceeding initial estimates with 16 locations consolidated), realigning commercial segments to better target specific customer needs, and making targeted investments in high-potential areas like the Business Banking segment, where Fulton sees a vast market opportunity. The exit of the indirect auto lending channel was another strategic decision under FultonFirst, allowing the company to pivot towards higher-margin, relationship-oriented lending products. These historical and ongoing strategic actions are critical to understanding Fulton's current state and future trajectory, aiming to create a more efficient, focused, and competitive institution.

Operational Execution and Financial Performance: Driving Positive Leverage

Fulton operates as a single reportable segment, with its financial performance reflecting the consolidated results of its banking activities. Revenue is primarily generated from net interest income – the difference between interest earned on assets (loans, investments) and interest paid on liabilities (deposits, borrowings) – supplemented by non-interest income from various fee-based services. Expenses include interest expense, provision for credit losses, operating expenses, and income taxes.

The first quarter of 2025 demonstrated the initial benefits of the Republic integration and the FultonFirst initiative. Operating earnings per share of $0.52 reflected positive operating leverage, with revenue exceeding expectations and a noticeable reduction in total operating expenses linked quarter. Net income available to common shareholders increased significantly to $90.4 million for the three months ended March 31, 2025, compared to $59.4 million for the same period in 2024. Net interest income rose to $251.2 million, a substantial increase from $206.9 million in the prior year quarter, driven primarily by volume growth from the Republic acquisition. The net interest margin (FTE) for Q1 2025 was 3.43%, an 11 basis point increase year-over-year, although it saw a slight linked-quarter increase of 2 basis points. While the yield on total loans decreased slightly by 4 basis points linked quarter to 5.86%, the cost of total deposits also decreased by 11 basis points linked quarter to 2.03%, primarily due to active deposit pricing management and a favorable shift in deposit mix.

Non-interest income saw a healthy increase, rising to $67.2 million in Q1 2025 from $57.1 million in Q1 2024. This growth was broad-based, including a $4.1 million increase from equity method investments, a $1.6 million increase in wealth management revenue (driven by higher assets under management), a $1.5 million increase in cash management fees (as commercial customers shifted funds), and a $0.9 million increase in consumer card income (partly from acquired Republic accounts). This highlights the diversified nature of Fulton's revenue streams, with non-interest income contributing meaningfully to the top line (over 20% of total revenue in 2024).

Operating non-interest expense decreased linked quarter in Q1 2025, reflecting realized cost savings. On a year-over-year basis, total non-interest expense increased to $189.5 million in Q1 2025 from $177.6 million in Q1 2024. This increase was primarily driven by higher salaries and employee benefits ($8.3 million, reflecting incentive compensation, base salaries, and the impact of the Republic transaction), increased intangible amortization ($5.7 million from the Republic core deposit intangible), and higher net occupancy expense ($2.1 million due to rent from the sale-leaseback transaction and acquired leases). These increases were partially offset by a $3.3 million decrease in professional fees due to a recovery. The operating efficiency ratio improved to 56.7% in Q1 2025, demonstrating progress towards efficiency goals.

Balance Sheet Strength and Credit Resilience

Fulton maintains a robust balance sheet, actively managed to support growth while mitigating risk. Total assets stood at $32.13 billion as of March 31, 2025, a modest increase from $32.07 billion at December 31, 2024. Net loans decreased slightly by $182.3 million (0.8%) linked quarter to $23.86 billion, a decline management attributes to strategic decisions including the planned runoff of the indirect auto portfolio, electing not to convert certain commercial construction projects to permanent financing, and accelerated resolution of troubled assets, despite consistent originations. The loan portfolio remains diversified, with commercial mortgage and construction loans representing 45.5% of the total. Management actively monitors concentrations, particularly in commercial real estate, including detailed tracking of non-owner occupied office and multi-family portfolios by MSA and LTV.

Total deposits increased by $199.5 million (0.8%) linked quarter to $26.33 billion, driven by growth in savings and money market deposits, partially offset by decreases in brokered, noninterest-bearing, and interest-bearing demand deposits. The loan-to-deposit ratio declined to 91% in Q1 2025, providing ample balance sheet flexibility and alleviating funding pressure. On-balance sheet liquidity remains strong, supplemented by additional investment securities purchases. The company also has significant borrowing capacity available through the FHLB and FRB.

Credit quality remains a key focus, with management maintaining a cautious outlook. The provision for credit losses was $13.9 million in Q1 2025, resulting in an allowance for credit losses (ACL) attributable to net loans of $379.7 million, or 1.59% of total net loans. This compares to a provision of $10.9 million in Q1 2024 and an ACL of 1.39% of total net loans. Net charge-offs were 0.21% of average loans annualized in Q1 2025, a slight increase from 0.16% in Q1 2024. Non-performing loans decreased by $26.9 million (14.2%) linked quarter to $162.4 million, representing 0.68% of total net loans, down from 0.79% at year-end 2024. Total non-performing assets also decreased. Management attributes the decrease in non-accrual and non-performing loans primarily to payments and charge-offs, partially offset by additions. Criticized and classified loans decreased by $65.2 million linked quarter, driven by a reduction in special mention loans. While asset quality metrics showed improvement in Q1 2025, management acknowledges that certain borrowers continue to struggle in the higher rate/cost environment and that CECL modeling is sensitive to economic forecasts, which are expected to be incrementally negative in the near term. Proactive portfolio management, including monitoring specific segments like agriculture for potential tariff impacts (though none seen yet), is ongoing.

Capital levels remain solid, with the CET1 ratio at 11% as of March 31, 2025, well above regulatory minimums. The tangible book value per share saw strong annualized growth of 13.8% in Q1 2025. Management's capital strategy prioritizes supporting organic growth, then corporate initiatives (including potential M&A), with share buybacks as the third priority. While buybacks were limited in Q1 2025, management views them as making sense given the stock's trading price relative to tangible book value and may pursue them in 2025 depending on market conditions and other strategic needs.

Outlook and Guidance: Building on Momentum

Fulton's confirmed 2025 operating guidance reflects confidence in the company's ability to leverage its strategic initiatives to drive performance, even amidst potential economic headwinds. The guidance incorporates an updated forecast of four 25 basis point Fed rate cuts in 2025, starting in June.

Key components of the 2025 operating guidance include:

• Net Interest Income (non-FTE): Expected in the range of $995 million to $1.02 billion. While comfortable with the range, management notes NII could trend towards the lower half if a prolonged slower growth environment materializes. A 25 basis point rate cut is estimated to be an annual headwind of approximately $1.7 million on total NII.
• Provision for Credit Losses: Expected in the range of $60 million to $80 million, reflecting the larger balance sheet and an expectation for credit performance similar to 2024.
• Non-Interest Income (operating): Expected in the range of $265 million to $280 million. Similar to NII, this could trend towards the lower half in a slower growth environment, as businesses like wealth management and mortgage banking are sensitive to market conditions and rates.
• Operating Non-Interest Expense: Expected in the range of $755 million to $775 million for the year. This guidance excludes potential additional FultonFirst non-operating charges ($14 million expected for the remainder of 2025) and CDI amortization ($22.5 million estimated). Management views keeping operating expenses flat year-over-year as a significant achievement, driven by realized Republic cost saves and anticipated FultonFirst efficiencies. Operating expenses for the remaining three quarters of 2025 are expected to range between $190 million and $195 million, factoring in merit increases and day count.

Loan growth is projected to be in the low single-digit range, influenced by cautious customer demand and strategic portfolio adjustments. Deposit growth is expected to eventually align with loan growth, managed through disciplined pricing. The maturity profile of the CD book in 2025 presents a significant opportunity for downward repricing of funding costs, which could partially offset pressure from falling asset yields in a declining rate environment.

The FultonFirst initiative is a critical driver of the future outlook, with approximately $25 million in cost savings anticipated to be realized in 2025, building towards over $50 million in fully realized annual recurring savings by 2026. These savings are net of reinvestment in growth initiatives, particularly in the business banking segment, which is targeted for transformative growth.

Conclusion

Fulton Financial is executing a clear strategy centered on integrating its recent acquisition and driving efficiency through its internal transformation program. The Republic First transaction has significantly expanded its scale and earnings base, while the FultonFirst initiative is designed to simplify operations, enhance productivity, and sharpen the company's competitive edge in its Mid-Atlantic markets. First quarter 2025 results demonstrate tangible progress, with positive operating leverage, strong revenue growth driven by the acquisition, and improving efficiency metrics.

While the macro environment presents challenges, particularly regarding credit quality and loan demand, Fulton's proactive risk management, strong capital position, and disciplined approach to balance sheet management provide a solid foundation. The confirmed 2025 guidance, incorporating expected rate cuts and the realization of integration and efficiency benefits, points to continued earnings power. The ability to effectively manage deposit costs, leverage the downward repricing opportunity in the CD book, and realize the full potential of FultonFirst cost savings will be crucial in navigating the expected decline in interest rates and achieving the guided NII and expense targets. For investors, the story of Fulton Financial is one of a regional bank actively reshaping itself through strategic growth and operational discipline, aiming to unlock value by becoming a more efficient and focused competitor in its core markets.