Fulton Financial Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Fulton is a financial holding company operating six banking subsidiaries across Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Financial statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $125.7m | $129.4m | $372.2m | $386.8m |
| Net interest margin, FTE | 3.18% | 3.39% | 3.22% | 3.42% |
| Noninterest income | $44.8m | $41.9m | $136.0m | $125.3m |
| Noninterest expense | $124.9m | $115.8m | $361.7m | $341.5m |
| Net income | $34.3m | $38.6m | $111.0m | $119.9m |
| Diluted EPS | $0.20 | $0.21 | $0.63 | $0.64 |
Q3 pretax income was $44.6m, down 14.2%; nine-month pretax income was $147.0m, down 8.8%. Q3 return on average assets/equity was 0.78%/6.72%, versus 0.90%/7.32%; nine-month figures were 0.86%/7.33%, versus 0.95%/7.72%. Q3 cash dividend was $0.09 per share; year-to-date dividends were $0.27 per share.
- Balance sheet at September 30: Assets $17.84bn, up 4.2% from year-end 2014; loans, net of unearned income, $13.54bn, up 3.2%; deposits $14.08bn, up 5.4%; shareholders’ equity $2.03bn, up 1.5%.
- Credit: Q3 provision was $1.0m versus $3.5m; nine-month provision was a $0.5m credit versus $9.5m expense. Nine-month net charge-offs were $16.0m versus $23.3m. Allowance for credit losses was $169.4m, or 1.25% of loans, versus $185.9m and 1.42% at year-end.
- Problem assets: Nonperforming assets were $155.6m (0.87% of assets), compared with $150.5m (0.88%) at year-end. Nonperforming loans were $145.0m; nonaccrual loans increased 9.1% from year-end to $132.2m. Criticized and classified risk-rated loans declined to $576.2m from $628.9m.
- Cash flow and funding: Nine-month operating cash flow was $134.9m; investing cash use was $714.5m and financing cash provided was $567.7m. Cash and due from banks ended at $93.8m. FHLB advances and long-term debt totaled $979.4m, down 14.0% from year-end; total borrowings were $1.41bn. Liquidity included $2.1bn of additional FHLB capacity, $1.2bn of Federal funds lines and $1.3bn of Discount Window availability, with no borrowings outstanding under the latter two sources.
- Capital: September 30 ratios were 10.8% Common Equity Tier 1, 13.8% total capital, 10.8% Tier 1 risk-based and 9.4% Tier 1 leverage. The company reported meeting fully phased-in Basel III minimums, including conservation buffers; subsidiary banks exceeded well-capitalized thresholds.
Changes and notable items
- Margin pressure drove lower net interest income: FTE margin fell 21 basis points in Q3 and 20 basis points year to date. Management cited lower asset yields, including loan repricing, refinancing and new production at lower rates; year-to-date funding costs also rose.
- Noninterest income excluding securities gains rose 2.9% in both comparison periods. Securities gains were $1.7m in Q3 and $8.3m year to date, up from $0.1m and $1.2m, respectively.
- Noninterest expense rose 7.9% in Q3 and 5.9% year to date. It included a $5.6m loss on redemption of $150m in trust preferred securities. The company issued $150m of 10-year subordinated notes at an effective rate of about 4.69% and used proceeds to redeem securities bearing an effective 6.52% rate.
- Management attributed improved credit costs to broadly better credit measures and lower net charge-offs, while nonaccrual loans and nonperforming assets increased from year-end.
- Cost actions included 11 branch consolidations and staffing/benefit changes. The company estimated approximately $6.5m in annualized savings when 2015 initiatives are complete, with about $4.8m expected in 2015; implementation expense was $2.1m year to date.
- In October, the board authorized a new share repurchase program of up to $50m through December 31, 2016. The previous $50m program was completed during Q3. Year-to-date treasury stock purchases were $50m.
Outlook, risks and contingencies
- Updated 2015 outlook: Average loan and deposit growth of 3%–7%, with loan growth likely at the lower end; Q4 net interest margin compression of 0–3 basis points; continued modest credit provision, subject to individual credit performance; noninterest income growth at or just below the lower end of the mid- to high-single-digit range; and, excluding the TruPS redemption loss, noninterest expense growth at or slightly above the low-single-digit range.
- Interest-rate sensitivity modeling estimated annual net interest income increases of 3.7%, 8.6% and 13.3% under +100, +200 and +300 basis-point shocks, respectively, and a 3.3% decline under a -100 basis-point shock. Management said economic-value-of-equity results were within policy limits.
- Regulatory enforcement orders issued in 2014 and 2015 require remediation of BSA/AML compliance deficiencies, including reviews of past activity. Orders restrict certain expansion activities; noncompliance could result in further restrictions, fines or penalties and continued compliance costs.
- The Department of Justice opened a preliminary fair-lending investigation concerning certain Bank geographies. Fulton said it was cooperating; possible outcomes could include proceedings, settlement, fines or remedial actions. The company stated pending legal matters were not expected to materially affect financial condition, but an unfavorable result could materially affect a particular period’s results.
- Other risks include interest-rate and liquidity changes, credit deterioration, regulatory costs, competition, execution of growth and cost plans, operational and cyber risks, and potential effects of regulatory restrictions. Management cautioned that interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Track whether margin compression and loan/deposit growth develop in line with the updated outlook.
- Review credit migration, especially nonaccrual loans, commercial real estate exposure, TDR defaults and allowance adequacy.
- Monitor BSA/AML remediation progress, related costs and restrictions, and the outcome of the DOJ fair-lending inquiry.
- Assess whether reported earnings trends persist excluding the $5.6m redemption loss and elevated securities gains.
- Verify realization of cost savings and the effect of buybacks, dividends and debt refinancing on capital and funding costs.
- Review valuation and liquidity assumptions for Level 3 auction-rate securities and other illiquid investments, including the assumed return to market liquidity within five years.