Fulton Financial Corporation — Q3 2011 Form 10-Q
Business context and reporting period. Fulton Financial is a Pennsylvania-based financial holding company. This unaudited filing covers the three and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010. Unless otherwise noted, dollar amounts below are in millions.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $141.5 | $140.2 | $421.7 | $417.9 |
| Provision for credit losses | $31.0 | $40.0 | $105.0 | $120.0 |
| Other income | $48.9 | $53.0 | $142.4 | $136.2 |
| Other expenses | $106.6 | $102.7 | $310.6 | $303.8 |
| Net income | $39.3 | $37.7 | $109.5 | $96.8 |
| Net income available to common shareholders | $39.3 | $31.5 | $109.5 | $80.5 |
| Diluted earnings per share | $0.20 | $0.16 | $0.55 | $0.43 |
| Net interest margin, FTE | 3.93% | 3.81% | 3.93% | 3.79% |
- Balance sheet at September 30: Total assets were $16.30 billion, loans net of unearned income were $11.90 billion, and deposits were $12.64 billion. Total shareholders’ equity was $1.98 billion. Compared with year-end 2010, assets were nearly unchanged, loans declined $37.7 million, deposits rose $249.0 million, and equity increased $104.3 million.
- Credit: Allowance for credit losses was $268.8 million, or 2.26% of loans; non-performing assets were $348.0 million, or 2.14% of assets. Q3 net charge-offs were $30.8 million (1.04% annualized); nine-month net charge-offs were $111.7 million (1.25% annualized).
- Cash flow, nine months: Operating activities generated $249.0 million; investing activities used $67.0 million; financing activities used $89.1 million. Cash and due from banks increased $92.9 million to $291.9 million. These cash-flow figures do not include the separately reported $256.4 million of interest-bearing deposits with other banks.
- Debt and liquidity: Short-term borrowings were $449.0 million and FHLB advances and long-term debt were $1.03 billion, both down from year-end 2010. Fulton reported $891.9 million of additional FHLB borrowing capacity and $1.4 billion of collateralized Federal Reserve borrowing availability, with no Federal Reserve borrowings outstanding.
- Capital: September 30 regulatory ratios were 15.0% total capital to risk-weighted assets, 12.4% Tier 1 capital to risk-weighted assets, and 10.1% Tier 1 capital to average assets. Fulton said it met minimum requirements; subsidiary banks exceeded “well capitalized” thresholds. Tangible common equity to tangible assets was 9.1%.
Material changes versus comparable periods
- Net income rose 4.4% in Q3 and 13.1% for the first nine months year over year; income before taxes increased 4.5% and 14.0%, respectively. Common earnings comparisons also reflect preferred-stock dividends and discount accretion in 2010, unlike 2011.
- Lower credit-loss provisions supported earnings: down $9.0 million in Q3 and $15.0 million year to date. However, nine-month net charge-offs increased 20.5% year over year, despite a Q3 decline of 13.2%.
- Margin improvement reflected lower funding costs, while interest income was pressured by lower asset yields and reduced average interest-earning assets. FTE net interest margin increased 12 basis points in Q3 and 14 basis points year to date.
- Mortgage banking income fell $4.5 million in Q3, partly because Q3 2010 included a $3.3 million gain from a change in the valuation methodology for mortgage interest-rate locks. Q3 2011 other income also included $443,000 of securities losses, compared with $1.8 million of securities gains in Q3 2010.
- Average deposits shifted from time deposits toward demand and savings accounts; total deposits at quarter-end rose 2.0% from year-end. Construction loans declined 19.1% from year-end as paydowns exceeded originations.
Outlook, commentary, risks and unusual items
- Management said economic conditions were slowly improving but continued to stress borrowers and affect the pace of asset-quality improvement. It considered the allowance adequate at September 30. No specific earnings or financial guidance was provided.
- Effective April 1, Fulton revised its credit-loss allowance methodology, including more frequent review of impaired loans and more granular collective loan analysis. Management said the change did not alter its March 31 conclusion that the allowance was sufficient; it changed allocation patterns among loan categories.
- Credit risks include commercial real estate and construction exposures, continued charge-offs, troubled debt restructurings, and potential further weakness in borrower or collateral values. Non-performing loans declined year over year, but commercial loan and commercial mortgage non-performing balances increased.
- Investment risks include illiquid auction-rate certificates (ARCs), trust-preferred securities, and financial-institution equity holdings. ARCs had a $240.7 million fair value and were valued using Level 3 cash-flow assumptions, including an assumed return to market liquidity within three years. The filing reports additional impairment charges may be needed; two private-student-loan-backed ARCs had collateral parity of about 85% and underlying defaults of about 16%.
- Regulatory changes to debit-card interchange fees took effect October 1, 2011. Management estimated that if the revised pricing rules had applied in Q3, debit-card income of $4.5 million would have been about half as much. Other stated risks include interest-rate and market changes, deposit and loan growth, regulatory conditions, FDIC assessments, litigation, and the economy and real estate markets.
- Fulton increased its common dividend to $0.05 per share for Q3, from $0.03 a year earlier. The filing disclosed no material changes to previously reported risk factors and said pending litigation was not expected to materially adversely affect financial position, results, or liquidity, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether lower provisions and improving non-performing assets persist, given the increase in year-to-date net charge-offs and the changed allowance methodology.
- Credit performance in commercial, commercial mortgage, and construction portfolios, including charge-offs, delinquencies, TDRs, and collateral values.
- Valuation assumptions and impairment exposure for ARCs and trust-preferred securities, particularly Level 3 holdings and securities with weak or illiquid markets.
- The effect of lower debit interchange fees and mortgage-banking activity on fee income, and whether expense growth—especially compensation—continues.
- Capital and liquidity resilience, including the availability and terms of contingent borrowing capacity and the effects of future regulatory requirements.