Fulton Financial Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The unaudited filing covers Fulton Financial and its six banking subsidiaries across Pennsylvania, Delaware, Maryland, New Jersey, and Virginia. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $129.4 | $132.5 | $386.8 | $394.2 |
| Provision for credit losses | $3.5 | $9.5 | $9.5 | $38.0 |
| Non-interest income | $41.9 | $47.4 | $125.3 | $146.9 |
| Non-interest expense | $115.8 | $116.6 | $341.5 | $344.7 |
| Income before taxes | $52.0 | $53.8 | $161.1 | $158.5 |
| Net income | $38.6 | $39.9 | $119.9 | $119.8 |
| Diluted earnings per share | $0.21 | $0.21 | $0.64 | $0.61 |
- Margins and returns: FTE net interest margin was 3.39% for Q3 and 3.42% for the first nine months, down from 3.45% and 3.51%, respectively. Return on average assets was 0.90% for Q3 and 0.95% year to date; return on average equity was 7.32% and 7.72%.
- Balance sheet at September 30: Total assets were $17.24 billion; net loans $12.84 billion; deposits $13.33 billion; total shareholders’ equity $2.08 billion. Loans grew 1.9% and deposits 6.7% from December 31, 2013.
- Funding and debt: Short-term borrowings fell 55% to $565.0 million, while FHLB advances and long-term debt rose 15% to $1.02 billion. Total borrowings declined 26% to $1.58 billion, primarily as deposit growth funded repayment of short-term wholesale borrowings and a shift to longer-term FHLB funding.
- Cash flow, first nine months: Operating activities provided $147.9 million; investing activities used $293.5 million; financing activities provided $148.0 million. Cash and due from banks ended at $220.9 million.
- Liquidity and capital: The company reported $2.1 billion of additional FHLB borrowing capacity, $1.3 billion available on Federal funds lines, and $1.1 billion of Discount Window capacity; no Discount Window borrowings were outstanding. Corporate total capital, Tier 1 risk-based capital, and Tier 1 leverage ratios were 14.5%, 13.0%, and 10.6%. Management said current capital levels were expected to meet fully phased-in Basel III requirements, including buffers.
Changes versus comparable periods
- Q3 pretax income fell 3.4% year over year; nine-month pretax income rose 1.6%. Net income was down 3.5% for Q3 and essentially unchanged year to date.
- Lower credit costs supported results: provision expense declined 63% in Q3 and 75% for the first nine months. Nine-month net charge-offs fell to $23.3 million from $50.6 million; annualized net charge-offs were 0.24% versus 0.54%.
- Net interest income and margin declined as asset yields fell more than funding costs. Loan growth partly offset lower yields and reduced investment balances.
- Non-interest income excluding securities gains fell 6.5% in Q3 and 10.7% year to date, notably due to weaker mortgage banking and deposit service-charge income. Securities gains were also substantially lower than in 2013.
- Non-interest expense decreased modestly. Savings from branch and management consolidations and employee-benefit changes were partly offset by increased outside consulting costs for compliance and risk management.
- Asset quality improved: non-performing assets were $157.3 million, or 0.91% of assets, versus $186.5 million, or 1.09%, a year earlier. Total delinquency was 1.69%, down from 1.97%.
Outlook, risks, contingencies, and unusual items
- No specific earnings guidance was provided. Management cited continued low interest rates, sluggish loan demand, competition, and the potential for further net interest margin pressure among factors affecting future results.
- Regulatory compliance is a significant issue. Three bank subsidiaries entered OCC consent orders in July 2014, and the corporation and Lafayette Ambassador Bank entered a Federal Reserve cease-and-desist order in September concerning deficiencies in the Bank Secrecy Act/anti-money-laundering compliance program. Orders require program improvements and include restrictions on expansion. Management expected that another subsidiary bank could also face an enforcement action. Related outside-services expense was approximately $6 million for the first nine months; further compliance expense and investment could materially affect future results.
- Cost actions: Management targeted approximately $7 million of expense reductions in 2014 and $8 million annualized from branch consolidations, organizational changes, and benefit reductions. Thirteen branches were consolidated; implementation costs and gains were recorded during the year.
- Credit and market risks: Commercial real estate and construction loans totaled approximately $5.8 billion, or 44.9% of the loan portfolio. Auction-rate securities had a $148.5 million fair value and remained illiquid; valuations assume a return to market liquidity within five years. The company also held below-investment-grade pooled trust preferred securities and disclosed significant interest-rate sensitivity.
- Contingencies: Mortgage repurchase requests were $543,000 at quarter-end, down from $8.8 million at year-end after a $4.5 million settlement. Management considered recorded reserves adequate but noted future losses could rise. The company stated pending legal matters were not expected to materially harm its financial condition, results, or liquidity, while noting outcomes are uncertain.
- After quarter-end: On November 5, 2014, the board declared a special cash dividend of $0.02 per share, payable December 15 to holders of record December 1.
Important facts for investors to verify
- Progress, costs, and any additional restrictions or enforcement actions relating to the BSA/AML orders.
- Whether credit quality and lower loan-loss provisions remain sustainable, particularly as construction loans grew 19.9% from year-end.
- Whether loan yields and net interest margin stabilize, and how the shift toward longer-term borrowings affects funding costs.
- Realized values and liquidity assumptions for auction-rate and other lower-rated securities, plus any further impairment charges.
- Delivery of targeted cost savings and the trend in mortgage banking, overdraft fees, and other fee income.