Fulton Financial Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Fulton is a financial holding company with banking operations in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2017 / June 30, 2017 | Comparison |
|---|---|---|
| Net income | $45.5; diluted EPS $0.26 | Up 14.4% from $39.8; EPS was $0.23 |
| Net interest income | $141.6 GAAP; $147.3 fully taxable-equivalent (FTE) | GAAP up $12.6; FTE up 10.1% year over year |
| FTE net interest margin | 3.29% | Up 9 basis points year over year |
| Non-interest income | $52.4 | Up 13.5%; includes $1.4 securities gains |
| Non-interest expense | $132.7 | Up 9.1%; includes $3.2 tax-credit investment amortization |
| Credit provision | $6.7 | Compared with $2.5 in Q2 2016; management attributed increase mainly to loan growth and portfolio risk changes |
| Total assets | $19,647.4 | Up 3.7% from December 31, 2016 |
| Loans, net of unearned income | $15,346.6 | Up 4.4% from year-end 2016 |
| Deposits | $15,357.4 | Up 2.3% from year-end 2016 |
| Borrowings | $1,732.8 total | Up 17.8% from year-end; short-term borrowings $694.9 and long-term debt $1,038.0 |
| Shareholders’ equity | $2,191.8 | Up 3.3% from year-end |
For the six months ended June 30, net income was $88.8 million, up 13.9%, and diluted EPS was $0.51 versus $0.45. Operating cash flow was $75.0 million; investing activities used $673.3 million, principally reflecting loan growth and short-term investments; financing activities provided $574.5 million. Cash and due from banks ended at $94.9 million.
Q2 return on average assets was 0.94%, return on average equity 8.36%, and efficiency ratio 65.33%. Annualized net charge-offs were 0.11% of average loans. Non-performing assets were $147.2 million, or 0.75% of assets; the allowance for credit losses was $175.0 million, 1.14% of loans.
Material changes and management commentary
- Growth in average loans, up $1.2 billion or 8.3% year over year in Q2, drove higher interest income; growth was concentrated in commercial mortgage, residential mortgage and commercial lending.
- Loan growth outpaced deposit growth, increasing short-term funding and borrowings. Total borrowings increased $262.1 million from year-end.
- In March, Fulton issued $125 million of 3.60% senior notes due 2022; proceeds partly funded repayment at maturity of $100 million of 5.75% subordinated notes.
- Non-performing assets were slightly higher than at year-end ($147.2 million versus $144.5 million), while the total delinquency rate was 1.20%, down from 1.30% in June 2016. Classified loans rose 25.8% from year-end, a credit-quality trend to monitor.
- The company reclassified $28.9 million of student loans to loans held for sale after deciding to sell the portfolio; it recorded a $0.44 million loss and expected the sale to close in Q3 2017.
- Q2 included a $1.3 million reversal of a mortgage-servicing-rights valuation allowance and $1.4 million of securities gains. These items supported non-interest income. The effective tax rate was 16.6%; management said it would have been 21.2% if certain tax-credit amortization were classified in tax expense rather than non-interest expense.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results. Its forward-looking discussion identifies interest-rate and funding sensitivity, credit quality, economic conditions, regulatory scrutiny, operating and cybersecurity risks, and competition as factors that could affect results. The company’s interest-rate simulation estimated annual net interest income would rise 5.7% under a +100 basis-point shock and fall 8.4% under a −100 basis-point shock; modeled results depend on assumptions and are not forecasts.
- Regulatory BSA/AML consent orders remained in effect. The company reported implementing enhancements and completing required retrospective reviews, but expansion restrictions apply while the orders remain in effect; noncompliance could lead to further restrictions, fines or penalties.
- The Department of Justice fair-lending investigation, expanded in 2016 to additional subsidiaries and geographies, remained ongoing. The company said it could not reliably estimate resolution timing, settlement, penalties or remediation costs.
- A lawsuit involving alleged fraud by a former bank customer sought damages alleged to exceed $11.3 million, plus other damages and costs. The case entered discovery after the court denied the bank’s substantive preliminary objections; the company said final litigation outcomes could be material to results for a particular period.
- Commitments to extend credit were $6.38 billion; standby and commercial letters of credit were $350.0 million and $41.5 million, respectively. The company also disclosed mortgage repurchase and indemnification exposure.
- Regulatory capital ratios exceeded minimum requirements. At June 30, total capital was 12.9%, CET1 was 10.2%, and Tier 1 leverage was 9.1%. The company reported additional FHLB borrowing capacity of approximately $3.0 billion and $932.0 million of federal funds lines, of which $206.3 million was drawn.
Most important facts for investors to verify
- Whether loan growth continues to outpace deposit growth, and the resulting effects on funding costs, borrowings and net interest margin.
- Whether higher classified loans and credit provisions translate into further deterioration in non-performing assets or charge-offs.
- Progress and potential costs or business restrictions from the BSA/AML consent orders and DOJ fair-lending investigation.
- Resolution and potential financial exposure from the Agostino litigation and sold-loan representations and warranties.
- Completion and proceeds of the planned student-loan portfolio sale, and whether the unusual securities gains and MSR allowance reversal recur.