Fulton Financial Corporation — Q1 2011 Form 10-Q
Business context and reporting period. Fulton Financial is a Pennsylvania-based financial holding company. This unaudited report covers the three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Earnings: Net income was $33.8 million, up from $27.5 million; diluted EPS was $0.17 versus $0.13. Income before taxes increased 25.6% to $46.2 million. Common-shareholder income also benefited from no preferred-stock dividends or discount accretion in Q1 2011, compared with $5.1 million in Q1 2010.
- Net interest and margin: GAAP net interest income rose 0.8% to $139.6 million. Fully tax-equivalent net interest margin increased 13 basis points to 3.91%, as lower funding costs offset declining yields and average interest-earning assets.
- Revenue and expenses: Other income increased 20.6% to $46.2 million, including $2.3 million of net securities gains versus a $2.2 million loss a year earlier. Excluding securities gains or losses, other income rose 8.4% to $43.9 million. Other expenses increased 1.5% to $101.6 million.
- Credit costs: The provision for credit losses was $38.0 million, down from $40.0 million. Net charge-offs increased to $42.3 million from $28.3 million; the annualized net charge-off ratio rose to 1.42% from 0.95%. The allowance for credit losses was $271.2 million, or 2.28% of loans.
- Cash flow: Operating activities provided $141.4 million and investing activities provided $253.2 million; financing activities used $328.2 million. Cash and due from banks increased $66.4 million during the quarter to $265.4 million. Interest-bearing deposits at other banks were $83.3 million at quarter-end.
- Balance sheet and liquidity: Total assets were $16.0 billion, down 1.9% from year-end 2010. Net loans were $11.6 billion, down 0.5%; deposits were $12.4 billion, up slightly. Short-term borrowings fell to $414.4 million from $674.1 million, and FHLB advances and long-term debt declined to $1.04 billion from $1.12 billion. The filing reports $3.77 billion of commitments to extend credit and $506.5 million of letters of credit.
- Capital and shareholder returns: Shareholders’ equity was $1.91 billion. Regulatory capital ratios included total capital of 14.7%, Tier 1 risk-based capital of 12.0%, and Tier 1 leverage of 9.7%; the filing states the company and bank subsidiaries met applicable minimums, and bank subsidiaries exceeded “well capitalized” thresholds. The common dividend increased to $0.04 per share.
Material changes versus comparable periods
- Lower interest expense, reflecting lower deposit and borrowing costs and a shift toward demand and savings deposits, helped lift net interest margin despite lower interest income and a 2.5% decline in average interest-earning assets.
- Average demand and savings deposits increased 15.3% year over year, while average time deposits declined 12.9%. Average loans were nearly flat; construction loans declined 19.0% and residential mortgages increased 8.2%.
- Non-performing assets were $355.1 million, or 2.22% of assets, versus $312.3 million, or 1.90%, a year earlier; they were down from $361.7 million at December 31, 2010. Non-performing loans were $318.0 million, down sequentially but up year over year.
- Total troubled debt restructurings were $137.4 million at March 31, 2011, up from $119.0 million at year-end 2010. Other real estate owned increased to $37.0 million from $33.0 million at year-end.
- Investment securities declined to $2.69 billion from $2.85 billion at year-end, as sales and maturities were not fully reinvested. Total assets also fell partly due to settlement of securities sales previously included in other assets.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said results for the quarter are not necessarily indicative of full-year results.
- Management cited gradual economic improvement and some stabilizing credit measures, but noted continued stress in real estate and commercial credit. It considered the allowance adequate at quarter-end. Construction lending exposure was being reduced.
- Management estimated that proposed debit-card interchange pricing rules could reduce affected annual interchange income by approximately $9.7 million, based on 2010 levels, if adopted as proposed. The company said it would consider fee changes to mitigate the impact.
- Student-loan auction rate securities had $267.3 million amortized cost and $256.4 million fair value. Auctions remained illiquid, though all securities were current and paying scheduled interest; management’s valuation assumes a return to market liquidity within three years. These are Level 3 fair-value assets.
- The company recorded $1.3 million of other-than-temporary investment impairment losses, including $994,000 on pooled trust preferred securities. Further impairments may be required. The filing also identifies potential exposure to further losses on mortgage repurchases; the related reserve was $2.4 million against $3.3 million of loan principal potentially subject to repurchase.
- Forward-looking risks include adverse economic and real estate conditions, credit deterioration, interest-rate and market changes, funding and liquidity pressures, regulatory developments, and competition. Management reported no material change in previously disclosed risk factors; no material legal proceedings were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether elevated net charge-offs, non-performing loans, and troubled debt restructurings continue to improve, particularly in commercial mortgage, commercial, and residential mortgage portfolios.
- The valuation assumptions, liquidity outlook, and credit performance of auction rate securities and trust preferred securities, including the potential for additional impairment.
- Whether proposed debit-card interchange rules take effect and how much of the estimated annual revenue reduction is offset by other fees or actions.
- Whether margin gains from lower funding costs can persist as asset yields remain under pressure and loan demand is weak.
- Whether capital, liquidity, and the mortgage repurchase reserve remain adequate in light of the company’s credit commitments and changing market conditions.