Fulton Financial Corporation — Q2 2015 Form 10-Q
Business and period: Regional financial holding company operating six banking subsidiaries in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. This unaudited report covers the quarter and six months ended June 30, 2015; balance-sheet comparisons are with December 31, 2014. Amounts below are in U.S. dollars.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $122.9 million | $127.9 million | $246.5 million | $257.5 million |
| Non-interest income | $46.5 million | $44.9 million | $91.2 million | $83.4 million |
| Non-interest expense | $118.4 million | $116.2 million | $236.8 million | $225.7 million |
| Net income | $36.7 million | $39.6 million | $76.7 million | $81.4 million |
| Diluted EPS | $0.21 | $0.21 | $0.43 | $0.43 |
| FTE net interest margin | 3.20% | 3.41% | 3.24% | 3.44% |
| Return on average assets | 0.86% | 0.94% | 0.90% | 0.97% |
| Return on average equity | 7.24% | 7.63% | 7.64% | 7.92% |
FTE means fully taxable equivalent. Income before taxes fell 8.0% in Q2 and 6.2% for the first half year over year. The filing attributes weaker results mainly to lower net interest income and higher expenses, partly offset by lower credit-loss provisioning and higher fee income.
- Balance sheet at June 30: Assets were $17.37 billion, up 1.4% from year-end; loans net of allowance were $13.08 billion, and deposits were $13.51 billion. Loans grew 1.0% and deposits 1.0% from December 31.
- Funding and debt: Short-term borrowings were $409.0 million and FHLB advances and long-term debt were $1.13 billion. Total borrowings, including short-term funding, were $1.54 billion. Noninterest-bearing deposits were $3.81 billion.
- Cash flow, first half: Operating activities provided $77.0 million; investing activities used $248.3 million; financing activities provided $166.0 million. Cash and due from banks ended at $100.5 million.
- Capital: Common Equity Tier 1 was 10.7%, total capital 14.8%, Tier 1 risk-based capital 10.9%, and Tier 1 leverage 9.4%. The company reported meeting applicable Basel III minimums and that bank subsidiaries exceeded “well capitalized” thresholds.
- Liquidity: Available capacity included approximately $2.7 billion of additional FHLB borrowing, $1.2 billion of Federal funds lines, and $1.2 billion of Discount Window capacity; there were no borrowings outstanding on the latter two facilities.
Material changes and asset quality
- Q2 FTE net interest income declined $4.7 million, with the 21-basis-point margin contraction outweighing growth in average interest-earning assets. Asset yields fell while funding costs rose; average loans increased 3.1% year over year.
- Six-month non-interest income excluding securities gains rose 2.9%; reported total non-interest income increased 9.4%, boosted by $6.6 million of securities gains versus $1.1 million a year earlier. Non-interest expense rose 4.9%, including higher salaries, outside services, data processing and software costs.
- Provision for credit losses was $2.2 million in Q2 versus $3.5 million a year earlier; for the first half it was a negative $1.5 million versus a $6.0 million provision. The allowance for credit losses was $169.5 million, or 1.28% of loans, down from $185.9 million and 1.42% at year-end.
- Q2 annualized net charge-offs were 0.38% of average loans versus 0.28% a year earlier; the six-month rate improved to 0.23% from 0.27%. Non-performing loans were $149.5 million, nearly unchanged from June 2014 but higher than year-end. Non-performing assets were $162.3 million, 0.93% of assets; allowance coverage of non-performing loans was 113.34%.
- Shareholders’ equity rose 1.4% in the first half to $2.02 billion, primarily on net income, partly offset by $31.9 million of dividends and $19.0 million of share repurchases. The quarterly dividend increased to $0.09 per share from $0.08 a year earlier.
Outlook, commentary and risks
- Updated 2015 outlook: average loan and deposit growth of 3%–7%, with loan growth likely at the low end; net interest margin compression of 5–8 basis points over the remaining six months; continued modest credit-loss provision, subject to individual credits; and non-interest income growth at the low end of the mid- to high-single-digit range.
- Management left its original low-single-digit non-interest expense growth outlook unchanged excluding the July 2015 trust-preferred redemption loss. The redemption generated a $5.6 million loss in July, outside the reported quarter. The $150 million, 4.50% subordinated notes issued in June funded redemption of $150 million of 6.29% trust preferred securities in July.
- Cost reductions included branch consolidations and staffing and benefit changes. 2015 actions incurred $2.0 million of implementation expense in the first half; projected annualized savings were about $6.5 million, with about $4.8 million expected in 2015. Two more branches were consolidated in July, with about $0.2 million of expected Q3 implementation costs.
- The company and its banking subsidiaries remained subject to regulatory enforcement orders concerning deficiencies in the centralized Bank Secrecy Act/anti-money-laundering program. Required remediation and restrictions on expansion have increased compliance costs and could lead to further restrictions, fines or penalties if requirements are not met.
- In Q2, Fulton Bank received a Department of Justice letter advising of an investigation into potential fair-lending violations in certain geographies. The bank was cooperating; the matter was described as preliminary and could lead to proceedings, settlement, fines or remedial action. The company said pending proceedings were not expected to materially affect financial condition, while noting an unfavorable outcome could materially affect results in a particular period.
- Other risks include interest-rate and funding sensitivity, credit quality and commercial real estate exposure, securities valuation and liquidity (including auction-rate securities), regulatory compliance, operational and cybersecurity risks, and mortgage repurchase representations and warranties. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track net interest margin and funding costs against management’s 5–8-basis-point compression outlook for the second half.
- Review trends in net charge-offs, non-performing loans, criticized/classified loans, TDR defaults and allowance coverage; Q2 charge-offs increased year over year despite improved first-half provisioning.
- Monitor progress, costs and restrictions associated with BSA/AML regulatory orders, and developments in the DOJ fair-lending investigation.
- Confirm realization and timing of projected expense savings, and account for the $5.6 million July redemption loss separately from Q2 results.
- Assess the valuation and liquidity assumptions for auction-rate securities and other Level 3 assets, as well as the concentration of commercial mortgage and construction lending.