Fulton Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is primarily with the three months ended March 31, 2018. Balance-sheet comparisons are with December 31, 2018. Fulton is a financial holding company providing retail and commercial banking services across Pennsylvania, Delaware, Maryland, New Jersey and Virginia.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Net income | $56.7 million | $49.5 million, Q1 2018; up 14.5% |
| Diluted earnings per share | $0.33 | $0.28, Q1 2018 |
| Net interest income | $163.3 million GAAP; $166.6 million FTE | $151.3 million GAAP; $154.2 million FTE, Q1 2018 |
| Net interest margin | 3.49% FTE | 3.35% FTE, Q1 2018 |
| Non-interest income | $46.8 million | $45.9 million, Q1 2018 |
| Non-interest expense | $137.8 million | $136.7 million, Q1 2018 |
| Efficiency ratio | 63.9% | 67.5%, Q1 2018 |
| Return on average assets / equity | 1.11% / 10.15% | 1.01% / 9.02%, Q1 2018 |
| Total assets | $21.0 billion | $20.7 billion, December 31, 2018 |
| Loans and leases, net of unearned income | $16.26 billion | $16.17 billion, December 31, 2018 |
| Deposits | $16.38 billion | $16.38 billion, December 31, 2018 |
| Cash and cash equivalents | $441.4 million | $445.7 million, December 31, 2018 |
| Total borrowings | $1.89 billion | $1.75 billion, December 31, 2018 |
| Shareholders’ equity | $2.30 billion | $2.25 billion, December 31, 2018 |
Revenue growth reflected a 14-basis-point increase in net interest margin and 3.8% growth in average interest-earning assets. Average loans rose 3.4% year over year and average deposits rose 5.5%. The 42-basis-point rise in asset yields exceeded the 31-basis-point rise in funding costs, though deposit costs increased notably.
Credit provision was $5.1 million, versus $4.0 million in Q1 2018. Net charge-offs were $4.1 million, or 0.10% of average loans on an annualized basis, broadly unchanged year over year. Non-performing assets were $147.7 million, or 0.70% of assets, versus $150.2 million, or 0.73%, at year-end 2018. The allowance for credit losses was $170.4 million; allowance for loan and lease losses was 1.00% of loans.
Operating cash flow was $38.3 million, compared with $71.8 million in Q1 2018. Investing activities used $166.8 million, while financing activities provided $124.2 million; cash and cash equivalents declined $4.3 million during the quarter. Reported liquidity sources included approximately $2.6 billion of additional FHLB borrowing capacity, $1.5 billion of federal funds line availability and $542 million of Discount Window borrowing availability, with no borrowings against the latter two sources at quarter-end.
At March 31, 2019, regulatory capital ratios were 12.6% total capital, 10.1% Tier 1 and common equity Tier 1, and 8.9% Tier 1 leverage. Management stated that the Corporation met fully phased-in capital requirements and subsidiary banks were well capitalized.
Material changes and notable items
- Compared with Q1 2018, net income rose 14.5%, diluted EPS rose 17.9%, and net interest margin improved 14 basis points. Higher interest income was partly offset by substantially higher interest expense.
- Non-interest expense increased 0.9%. Salaries and benefits rose 2.6%; other expenses included $1.0 million related to closing eight branches and a $975,000 increase in operating risk loss.
- Fulton acquired the assets of a wealth management business with approximately $250 million in assets under management or administration in January 2019.
- Fulton adopted lease accounting effective January 1, 2019, recognizing a right-of-use asset of $103.8 million and a lease liability of $110.7 million at March 31. The adoption-date amounts were $106.3 million and $112.6 million, respectively.
- Shareholders’ equity rose $53.4 million during the quarter. The company paid a $0.13-per-share dividend and repurchased 376,228 shares for approximately $5.9 million. It had authorization for up to $100 million of additional repurchases through December 31, 2019, in addition to the remaining authorization under its earlier program.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management cautions that Q1 results are not necessarily indicative of full-year 2019 results. It expects credit loss reserves to increase when it adopts the current expected credit loss standard in Q1 2020; the size of the increase was not yet determined and will depend on portfolio characteristics and economic conditions.
- Regulatory matters: The Corporation and Lafayette Ambassador Bank remained subject to a 2014 Federal Reserve BSA/AML consent order, including restrictions on expansion while it remains in effect. The company reported program enhancements and completion of the required retrospective review.
- Fair lending investigation: The Department of Justice investigation concerns potential lending discrimination in certain geographies and lending activity dating from January 1, 2009. The company is cooperating and could not predict timing or resolution.
- SEC investigation: The SEC Division of Enforcement is investigating accounting determinations that could have affected reported EPS. Fulton said it is cooperating and could not predict the outcome or timing.
- Legal proceedings: Management did not expect pending matters to have a material adverse effect on financial condition, but acknowledged an unfavorable outcome could materially affect results in a future period.
- Rate sensitivity: The company’s model estimated annual net interest income would rise 9.8% under an instantaneous +300-basis-point shock and fall 5.5% under a -100-basis-point shock; a -300-basis-point scenario was not shown because of prevailing rate levels. Model results depend on assumptions and may differ from actual outcomes.
- Other cited risks include economic and credit conditions, deposit pricing and funding access, interest-rate changes, regulatory costs, litigation, acquisitions, cybersecurity and operational risks, and capital and liquidity requirements.
Important facts for investors to verify
- Progress and potential consequences of the BSA/AML consent order, DOJ fair lending investigation and SEC accounting investigation.
- Whether loan quality, criticized and classified loans, non-performing assets and credit costs remain stable as the portfolio grows.
- Deposit pricing, funding mix and borrowing growth, and their effects on net interest margin and liquidity.
- The eventual CECL transition impact on reserves, retained earnings and regulatory capital.
- Costs and expected benefits from branch closures, subsidiary-bank charter consolidation, the wealth-management acquisition and share repurchases.
- That capital, liquidity and interest-rate sensitivity remain within applicable requirements and management limits.