Fulton Financial Corporation — Q2 2019 Form 10-Q
Business context and period: Regional financial holding company operating through banks in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. This unaudited filing covers the three and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net interest income | $164.5m | $156.1m | $327.9m | $307.4m |
| Non-interest income | $54.3m | $49.1m | $101.1m | $95.0m |
| Net income | $59.8m | $35.2m | $116.4m | $84.7m |
| Diluted EPS | $0.35 | $0.20 | $0.68 | $0.48 |
| FTE net interest margin | 3.44% | 3.39% | 3.46% | 3.37% |
| Efficiency ratio | 64.2% | 63.3% | 64.1% | 65.3% |
- Balance sheet at June 30: Assets were $21.31bn, up 3.0% from year-end; gross loans and leases were $16.37bn, up 1.3%; deposits were $16.39bn, essentially flat; shareholders’ equity was $2.31bn, up 2.7%.
- Funding and debt: Cash and cash equivalents were $498.8m. Short-term borrowings rose 57.4% to $1.19bn; FHLB advances and long-term debt totaled $987.4m. Management reported about $2.3bn of additional FHLB borrowing capacity, $1.5bn of federal funds lines (with $200m drawn), and $312m of available Federal Reserve Discount Window capacity (none drawn).
- Credit: Provision for credit losses was $5.0m in Q2 and $10.1m for the first half. The allowance for credit losses was $176.9m, or 1.08% of loans. Nonperforming loans and leases were $147.7m; nonperforming assets were $155.0m, or 0.73% of assets. First-half net charge-offs were $2.6m.
- Cash flow, first half: Operating activities provided $78.8m, investing activities used $362.5m, and financing activities provided $336.8m. Cash increased $53.1m to $498.8m.
Material changes versus comparable periods
- Q2 net income rose 69.8% and first-half net income rose 37.5%. A major comparator is the $36.8m provision in Q2 2018 tied to one large commercial lending relationship, including a $33.9m charge-off. The much lower 2019 provision materially benefited year-over-year earnings.
- Net interest income grew 5.4% in Q2 and 6.7% for the first half, supported by higher asset yields and loan growth. Funding costs also increased: average deposit cost rose 30 basis points year over year in both comparisons.
- Average deposits increased 5.5% year over year in both Q2 and the first half, while average loans increased 3.5% in Q2 and 3.4% for the first half.
- Non-interest income excluding securities gains rose 10.3% in Q2 and 6.2% for the first half, led by commercial banking and mortgage banking. Non-interest expense rose 8.1% in Q2 and 4.4% for the first half; excluding bank-consolidation expenses, management reported growth of 4.6% and 2.3%, respectively.
- Q2 annualized net recoveries were 0.04% of average loans, compared with net charge-offs of 1.01% in Q2 2018. Nonperforming loans and leases nevertheless increased 5.8% from year-end, to 0.90% of loans.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management expects total credit-loss reserves to increase when CECL is adopted in Q1 2020; the amount will depend on portfolio characteristics and economic conditions. Model development and validation were ongoing.
- Bank-subsidiary consolidation expenses were $6.6m in the first half, versus $0.9m in the prior-year period. The filing also describes continued implementation costs and potential benefits from consolidation.
- The Federal Reserve terminated the 2014 BSA/AML consent order in May 2019. A Department of Justice fair-lending investigation remains ongoing, covering lending activities from 2009 onward; the company cannot determine the resolution or timing, and an enforcement action or settlement could restrict certain activities.
- The SEC staff is investigating accounting determinations that could have affected reported EPS. The company says it is cooperating and cannot predict the timing or outcome.
- Other risks include credit deterioration, interest-rate and funding-cost changes, deposit competition, regulatory and legal outcomes, operational and cyber risks, and potential losses on sold-loan representations and warranties. The filing reports no material changes to previously disclosed risk factors.
- Share repurchases totaled $63.4m in the first half. The prior $75m program was completed; under a new $100m program, approximately $52m was repurchased in Q2, with about $48m remaining authorized at quarter-end.
- Capital ratios remained above fully phased-in minimums with buffers: total capital 12.4%, Tier 1 10.0%, CET1 10.0%, and Tier 1 leverage 8.7%. Ratios declined from year-end, mainly due to repurchases.
Important facts for investors to verify
- Whether earnings growth persists after adjusting for the unusually large 2018 commercial credit provision.
- Trends in funding costs, deposit mix, short-term borrowing reliance and net interest margin as rates and competition change.
- Credit-quality migration, nonperforming loans, criticized/classified commercial loans, and the adequacy of the allowance before CECL adoption.
- Resolution and potential financial or operational impact of the DOJ fair-lending investigation and SEC accounting investigation.
- Remaining share-repurchase activity, capital ratios, and the ongoing costs and expected benefits of bank-subsidiary consolidation.