Fulton Financial Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2013. Fulton is a regional bank holding company operating in Pennsylvania, Delaware, Maryland, New Jersey and Virginia.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $127.9m | $132.1m | $257.5m | $261.7m |
| Non-interest income | $44.9m | $52.3m | $83.4m | $99.6m |
| Non-interest expense | $116.2m | $117.1m | $225.7m | $228.1m |
| Provision for credit losses | $3.5m | $13.5m | $6.0m | $28.5m |
| Net income | $39.6m | $40.6m | $81.4m | $79.8m |
| Diluted EPS | $0.21 | $0.21 | $0.43 | $0.41 |
| Net interest margin, FTE | 3.41% | 3.52% | 3.44% | 3.54% |
- Q2 pretax income was $53.1m, down 1.2%; first-half pretax income was $109.1m, up 4.2%. Q2 net income fell 2.4%, while first-half net income increased 2.0%.
- Management attributed lower net interest income to asset-yield declines outpacing funding-cost reductions. Average loans rose 2.1% in Q2 year over year, but average loan yield fell to 4.21% from 4.42%.
- Mortgage banking income declined 47.8% in Q2 and 51.2% in the first half, mainly reflecting lower mortgage refinancing volumes and pricing spreads. Deposit service charges also fell, particularly overdraft fees. Investment management and trust revenue increased.
- Credit quality improved: Q2 annualized net charge-offs were 0.28% of average loans versus 0.56% a year earlier; the first-half rates were 0.27% and 0.59%, respectively.
Financial position, liquidity and capital
- At June 30, total assets were $17.03bn, loans net of allowance were $12.65bn, deposits were $12.69bn and shareholders’ equity was $2.10bn. Total assets rose 0.6% and deposits rose 1.6% from year-end.
- Allowance for credit losses was $193.4m, or 1.51% of loans, versus $204.9m and 1.60% at December 31. Non-performing assets were $162.8m, or 0.96% of assets, down from $169.3m and 1.00% at year-end.
- Total borrowings were $1.98bn, down 7.7% from year-end; short-term borrowings fell $250.3m while long-term debt increased $84.8m. Cash and due from banks was $258.8m.
- For the first half, operating activities provided $94.4m cash, investing activities used $14.8m and financing activities used $39.3m; cash and due from banks increased $40.3m.
- Reported capital ratios at June 30 were 14.8% total capital to risk-weighted assets, 13.2% Tier 1 capital to risk-weighted assets and 10.8% Tier 1 capital to average assets. The company said it and its bank subsidiaries met applicable minimums; bank subsidiaries exceeded “well capitalized” thresholds.
- Liquidity sources included approximately $1.7bn of additional FHLB borrowing capacity, $1.6bn of aggregate Federal funds lines (with $384.0m outstanding), and $1.2bn of available Federal Reserve Discount Window collateralized borrowing capacity.
Changes, outlook and material matters
- Credit-loss provision fell sharply year over year as asset quality improved. Non-performing loans were $149.3m, down 21.1% from June 2013; delinquency was 1.75% versus 2.18% a year earlier.
- Lower credit costs and expenses partly offset weaker net interest income and fee revenue. The first-half expense decline included lower OREO and operating-risk costs, offset in part by higher consulting expense for compliance and risk-management work.
- Cost-reduction initiatives announced in Q1 targeted approximately $7.0m of 2014 savings and included consolidating 13 branches and streamlining management and employee benefits. The filing reported $800,000 of branch-related savings in Q2 and estimated $1.6m of additional branch savings for the rest of 2014; management estimated $2.4m of additional savings from other actions. Implementation costs and gains were also recorded. These are management estimates, not earnings guidance.
- Regulatory issue: In July 2014, three bank subsidiaries entered into OCC consent orders concerning deficiencies in the centralized Bank Secrecy Act/anti-money-laundering compliance program. The company and Lafayette Ambassador Bank anticipated a Federal Reserve cease-and-desist order; other subsidiaries could face additional actions. Orders may restrict expansion, require added investment and expense, and noncompliance could lead to further restrictions or penalties.
- Management warned of ongoing risks from weak loan demand, low rates and margin pressure, credit deterioration, regulatory scrutiny and compliance costs, competition, operational and cyber risks, and securities valuation changes. It provided no specific earnings or revenue forecast and cautioned that interim results are not necessarily indicative of full-year results.
- Other notable items: the company repurchased 4.0m shares in Q1 at an average $12.45 per share and authorized another program for up to 4.0m shares through year-end; no shares had been repurchased under the new program by June 30. A first-quarter settlement with a mortgage investor required a $4.5m payment and reduced outstanding repurchase requests.
Most important facts for investors to verify
- Progress, costs, restrictions and potential penalties associated with the BSA/AML consent orders and anticipated enforcement actions.
- Whether declining net interest margin and mortgage-related fee revenue stabilize, and whether planned expense savings are achieved after implementation costs.
- Whether asset-quality improvement continues, including trends in non-performing loans, delinquencies, charge-offs, criticized loans and the adequacy of the allowance.
- Execution and funding of the new share repurchase authorization, alongside capital and liquidity needs.
- Exposure to securities whose valuation relies on less observable inputs, particularly $146.9m of illiquid auction-rate securities and the concentrated financial-institution equity investment.