Fulton Financial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Fulton is a financial holding company with six banking subsidiaries serving Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Figures below are in U.S. dollars; balance-sheet amounts are as of March 31, 2015 unless noted.
Financial performance and position
| Metric | Q1 2015 | Prior comparable period / change |
|---|---|---|
| Net interest income | $123.6 million | $129.6 million in Q1 2014; down 4.6% |
| Net interest margin, FTE | 3.27% | 3.47% in Q1 2014 |
| Net income | $40.0 million | $41.8 million in Q1 2014; down 4.2% |
| Diluted earnings per share | $0.22 | $0.22 in Q1 2014 |
| Non-interest income | $44.7 million | $38.5 million in Q1 2014; includes $4.1 million securities gains |
| Non-interest expense | $118.5 million | $109.6 million in Q1 2014; up 8.1% |
| Loans, net of unearned income | $13.12 billion | Nearly unchanged from December 31, 2014 |
| Deposits | $13.51 billion | Up 1.1% from December 31, 2014 |
| Total assets / shareholders’ equity | $17.36 billion / $2.03 billion | Assets up 1.4%; equity up 1.7% from year-end |
| Borrowings | $1.50 billion | $1.47 billion at December 31, 2014; includes $1.09 billion long-term debt |
| Cash and due from banks | $91.9 million | $105.7 million at December 31, 2014 |
Credit and capital: The provision for credit losses was a negative $3.7 million, versus a $2.5 million provision in Q1 2014. Net charge-offs were $2.6 million, or 0.08% of average loans on an annualized basis, compared with $8.4 million and 0.26%. Non-performing assets were $163.5 million, or 0.94% of assets, versus $150.5 million at year-end and 1.01% of assets in Q1 2014. The allowance for credit losses was $179.7 million, equal to 1.37% of loans and 120.34% of non-performing loans. The corporation reported a 11.2% Common Equity Tier 1 ratio and said it met applicable Basel III capital requirements.
Cash flow and liquidity: Operating activities generated $30.5 million; investing activities used $214.4 million, mainly reflecting a $280.6 million increase in short-term investments; financing activities provided $170.1 million, supported by deposit and short-term borrowing growth. Fulton reported $2.6 billion of additional FHLB borrowing capacity, $1.4 billion of Federal funds line availability and $1.2 billion of collateralized Discount Window availability, with no Discount Window borrowings outstanding.
Material changes versus Q1 2014
- FTE net interest income fell $5.8 million, as the 20-basis-point margin contraction outweighed growth in average interest-earning assets. Asset yields declined 14 basis points while the cost of interest-bearing liabilities rose 11 basis points.
- Non-interest income excluding securities gains increased 5.4%; mortgage banking income rose 30.0%. Q1 2015 included $4.1 million in securities gains, compared with none in Q1 2014.
- Expenses increased $8.9 million, particularly salaries and benefits and outside services. Management noted Q1 2014 expenses were unusually low in some categories, including incentive compensation, benefits and outside services.
- The lower credit-loss provision and net charge-offs supported earnings, but non-performing assets increased from year-end and non-accrual loans rose $8.8 million during Q1.
- Average loans grew 2.6% year over year, while average investment securities fell 11.8%. Average deposits increased 7.2%; the average cost of total borrowings rose to 3.47% from 2.20%, reflecting a shift away from lower-cost short-term funding.
Outlook, risks and unusual items
- Management’s 2015 outlook called for average loan and deposit growth of 3%–7%; average quarterly net interest margin compression of 0–4 basis points in the current rate environment; continued modest credit-loss provisions; mid- to high-single-digit annual growth in non-interest income excluding securities gains; and low-single-digit annual expense growth.
- Cost initiatives included consolidating nine branches, modifying retirement benefits and eliminating positions. Q1 implementation expense was $1.5 million; management expected another $0.7 million in Q2. Annualized savings were estimated at approximately $6.5 million, with $5.3 million expected in 2015; two additional branch consolidations were planned for Q3.
- Fulton and its banking subsidiaries were subject to regulatory enforcement orders concerning deficiencies in the BSA/AML compliance program. Orders require remediation and may restrict expansion; noncompliance could lead to further restrictions, fines or penalties. Compliance-related personnel, consulting, legal and systems costs have adversely affected results and could continue to do so.
- On April 1, 2015, Fulton repaid $100 million of subordinated debt at maturity. In April, it completed a $100 million accelerated share repurchase, receiving 8.3 million shares in total at an average price of $12.05. The board also authorized repurchases of up to $50 million through December 31, 2015.
- Market and credit risks include interest-rate sensitivity, commercial real estate exposure, and illiquid auction-rate securities. The $98.9 million fair value of auction-rate securities relies on a model assuming a return to market liquidity within five years. Legal proceedings were described as not expected to have a material adverse effect, but outcomes are uncertain. Management said there were no material changes to the risk factors reported in the 2014 Form 10-K.
- Management cautioned that quarterly results are not necessarily indicative of full-year results. Forward-looking statements are subject to risks including rates, funding and liquidity, credit quality, regulatory compliance, expenses, competition, operations and cybersecurity.
Important facts for investors to verify
- Whether the projected 2015 loan and deposit growth, margin compression, fee growth and expense targets are achieved.
- Whether credit quality stabilizes, especially given higher non-performing assets versus year-end, recent growth in non-accrual loans, and $12.5 million of recently modified TDRs that experienced a payment default during Q1.
- The ongoing cost, restrictions and remediation progress associated with BSA/AML enforcement orders across the banking subsidiaries.
- The sustainability of earnings excluding Q1 securities gains and the unusually low Q1 2014 expense comparison.
- The effect of the April debt repayment and share repurchase authorization on liquidity, capital and future per-share results; the filing gives no quantified projected impact.
- Valuation and concentration risks in securities, including $98.9 million of illiquid auction-rate securities and a $23.2 million investment in one financial institution’s stock.