Fulton Financial Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Fulton is a financial holding company providing retail and commercial banking and related financial services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. This unaudited report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless otherwise noted.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net income | $65.6 million | $48.9 million | $150.3 million | $137.8 million |
| Diluted EPS | $0.37 | $0.28 | $0.85 | $0.78 |
| Net interest income | $160.1 million | $146.8 million | $467.5 million | $426.0 million |
| Net interest margin, FTE | 3.42% | 3.27% | 3.39% | 3.27% |
| Non-interest income | $51.0 million | $52.0 million | $146.0 million | $151.0 million |
| Non-interest expense | $135.4 million | $132.2 million | $405.4 million | $387.1 million |
| Provision for credit losses | $1.6 million | $5.1 million | $38.7 million | $16.6 million |
- Q3 net income rose 34.2%; nine-month net income rose 9.1%. Q3 return on average assets was 1.28% and return on average equity was 11.48%; nine-month figures were 1.00% and 8.94%, respectively.
- Q3 net interest income increased 9.1%, and nine-month net interest income increased 9.8%. Management attributed growth to higher asset yields, rate increases and loan growth; higher deposit and borrowing costs partly offset the benefit. FTE net interest margin expanded 15 basis points in Q3 and 12 basis points year to date.
- Non-interest income excluding securities gains rose 7.7% in Q3 and 1.4% year to date. Reported non-interest income was lower year to date largely because 2017 included $7.1 million of securities gains. The Q3 2017 comparison also included $4.6 million of gains, mainly from equity securities.
- At September 30, total assets were $20.36 billion, loans net of allowance were $15.77 billion, deposits were $16.25 billion, and shareholders’ equity was $2.28 billion. Loans increased 1.0% and deposits increased 2.9% from December 31, 2017.
- Ending borrowings were $1.48 billion, down 10.8% from year-end. Cash and restricted cash at the end of the nine-month cash-flow period was $213.3 million; operating activities provided $232.7 million, investing activities used $478.8 million, and financing activities provided $212.6 million.
- Q3 efficiency ratio was 62.5% versus 64.3%; year-to-date ratio was 64.4% versus 64.6%. Cash dividends were $0.12 per share in Q3 and $0.36 per share for the nine-month period.
- Regulatory capital ratios at September 30 were 13.3% total capital, 10.8% Tier 1 and common equity Tier 1, and 9.3% Tier 1 leverage. The filing says the corporation met fully phased-in minimum requirements, including capital conservation buffers, and subsidiary banks were well capitalized.
Material changes and unusual items
- A single large commercial relationship, with losses attributed to suspected fraudulent activity by borrower-related employees, drove a $36.8 million provision and a $33.9 million loan charge-off in Q2 2018. Nine-month net charge-offs rose to $47.0 million from $13.2 million; annualized net charge-offs were 0.40% versus 0.12%. The Q3 provision was lower than in 2017, and management reported improved overall asset-quality metrics.
- Non-performing assets were $130.8 million, or 0.64% of assets, at September 30, compared with $144.6 million at December 31, 2017. Non-performing loans were $120.1 million; delinquency was 1.15% of loans. The allowance for loan losses was $157.8 million, or 0.99% of loans; the total allowance for credit losses, including unfunded commitments, was $167.8 million.
- The federal corporate tax rate fell to 21% in 2018. Effective tax rates were 11.5% for Q3 and 11.3% year to date, versus 20.5% in the comparable 2017 periods. Q3 included discrete tax benefits from finalizing deferred-tax remeasurement and the 2017 federal return; excluding the cited discrete items, management calculated a 13.9% Q3 effective rate.
- On August 1, the company transferred securities with $641.7 million fair value from available-for-sale to held-to-maturity, citing intent and ability to hold them to maturity. Nine-month other comprehensive loss was $44.6 million, primarily reflecting unrealized securities losses as rates rose; accumulated other comprehensive loss was $84.6 million at quarter-end.
- FNB Bank and Swineford National Bank were merged into Fulton Bank, N.A. in October 2018. Q3 outside-services costs included expenses preparing for that merger.
- The company reported a cash-flow presentation correction following adoption of restricted-cash guidance and a reclassification of 2017 tax-credit-investment cash flows. It stated these presentation changes did not affect net income or retained earnings.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue or margin guidance. Management cautions that interim results are not necessarily indicative of full-year results and forward-looking statements are subject to risks and uncertainties.
- Interest-rate sensitivity modeling estimated annual net interest income changes of +3.8% under a 100-basis-point upward shock, +7.4% under 200 basis points, +10.8% under 300 basis points, and −6.2% under a 100-basis-point decline. The filing notes model assumptions and customer behavior can make actual results differ.
- Liquidity sources include deposits, FHLB facilities, federal funds lines and Federal Reserve discount-window capacity. At September 30, FHLB borrowing capacity was approximately $3.2 billion; federal funds lines totaled $1.4 billion, with $50 million drawn; discount-window collateralized availability was $572.5 million, with no borrowing outstanding.
- Regulatory and legal matters include continuing BSA/AML enforcement orders affecting the corporation and two bank subsidiaries, although certain orders for Fulton Bank of New Jersey were terminated in August 2018. The company also disclosed a Department of Justice fair-lending investigation covering lending activity from 2009 onward and an SEC Enforcement Division investigation concerning accounting determinations that could have affected reported EPS. Outcomes and potential costs were not reliably estimable. The company said other pending proceedings were not expected to materially affect financial condition, while noting unfavorable outcomes could affect results or business.
- Other key risks identified include credit quality and economic conditions, funding costs and interest rates, regulatory compliance and restrictions, competition, operating and cyber risks, litigation, and the company’s ability to manage expenses, capital and liquidity.
Most important facts for investors to verify
- Updates on recovery, collateral, remaining exposure and any further losses related to the large commercial relationship and suspected fraud.
- Developments, potential financial exposure and possible business restrictions from the BSA/AML orders, fair-lending investigation and SEC investigation.
- Whether deposit pricing and short-term borrowing costs continue to rise faster than yields on loans and investments, and the resulting impact on margin and liquidity.
- Credit trends, including criticized and classified commercial loans, delinquencies, non-performing assets and the adequacy of reserves after the unusual charge-off.
- Effects of the bank subsidiary mergers and related integration costs, as well as the company’s progress on its stated accounting-standard implementation timetable.