Fulton Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015 unless otherwise noted. Fulton is a financial holding company with six banking subsidiaries operating in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. Unaudited interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2016 | Comparison |
|---|---|---|
| Net interest income (GAAP) | $129.1 million | Up 4.4% from $123.6 million |
| Net interest income (FTE); net interest margin | $134.0 million; 3.23% | FTE income up 4.6%; margin down 4 basis points from 3.27% |
| Non-interest income | $43.1 million | Down 3.6%; excluding securities gains, up 3.9% |
| Non-interest expense | $120.4 million | Up 1.6% |
| Provision for credit losses | $1.5 million | Versus a $3.7 million benefit (negative provision) in Q1 2015 |
| Net income; diluted EPS | $38.3 million; $0.22 | Net income down 4.4%; diluted EPS unchanged |
| Returns; efficiency | ROAA 0.86%; ROAE 7.47%; efficiency ratio 68.33% | Q1 2015: 0.95%; 8.05%; 70.16% |
| Operating cash flow | $34.1 million | Versus $30.7 million |
Net income declined mainly because of the higher credit-loss provision, lower investment securities gains and higher expenses, partly offset by increased net interest income. Securities gains were $0.9 million versus $4.1 million a year earlier. Salaries and benefits rose 6.7% to $69.4 million.
Financial condition, liquidity and capital
- Scale and lending: Total assets were $18.12 billion, up 1.2% from year-end. Loans, net of unearned income, were $13.87 billion, up 0.2%; average loans were up 5.8% year over year. Commercial mortgage and construction loans together represented about 45.9% of loans.
- Funding and debt: Deposits rose 1.9% to $14.40 billion. Total borrowings were $1.32 billion, down 8.9%; short-term borrowings fell $144.8 million while long-term debt rose $16.1 million to $965.7 million. Interest expense declined 8.7%, primarily reflecting a shift in funding mix and lower-cost debt.
- Liquidity: Cash and due from banks were $83.5 million; interest-bearing deposits with other banks were $346.6 million. The company reported $2.7 billion of additional FHLB borrowing capacity, $1.2 billion of federal funds line availability, and $1.2 billion of collateralized Federal Reserve Discount Window availability; no Discount Window borrowings were outstanding.
- Credit quality: Non-performing assets were $148.1 million, or 0.82% of assets, down from $155.9 million at year-end. Non-performing loans were $137.2 million. However, quarterly net charge-offs increased to $6.9 million from $2.6 million, or 0.20% versus 0.08% of average loans on an annualized basis. The allowance for credit losses was $166.1 million, 1.20% of loans.
- Capital and shareholder returns: Common equity increased to $2.07 billion. Regulatory ratios were 13.1% total capital, 10.1% Tier 1 and common equity Tier 1, and 8.9% Tier 1 leverage. The company reported meeting fully phased-in Basel III minimums, including conservation buffers. It paid a $0.09-per-share dividend and repurchased 917,200 shares for $11.2 million during the quarter.
Outlook and management commentary
Management’s 2016 outlook called for mid- to high-single-digit annual growth in average loans and deposits; a broadly stable annual net interest margin, with quarterly variation of plus or minus 0–3 basis points; credit-loss provision driven primarily by loan growth; mid- to high-single-digit growth in non-interest income excluding securities gains; and low- to mid-single-digit expense growth excluding the 2015 TruPS redemption loss. Management also cited using capital to support growth and provide appropriate shareholder returns. These are forward-looking expectations, not guarantees.
Risks, contingencies and unusual items
- The company and its bank subsidiaries remained subject to federal and state BSA/AML enforcement orders issued in 2014 and 2015. The orders require remediation and may restrict expansion; noncompliance could result in further restrictions, fines or penalties.
- Fulton Bank was under a Department of Justice fair-lending investigation initiated in 2015 and was cooperating. The outcome was not predictable and could involve proceedings, settlement, fines or remedial action.
- A lawsuit filed March 31, 2016 alleges the bank failed to monitor an account allegedly connected to a Ponzi scheme. Plaintiffs seek damages alleged to exceed $11.3 million, as well as other relief. The bank removed the case to federal court on April 29, 2016.
- Commitments to extend credit totaled $5.93 billion; standby and commercial letters of credit totaled $407.5 million. Mortgage-sale representations and warranties create potential repurchase exposure; outstanding repurchase requests were approximately $543,000. Management considered recorded reserves adequate but noted possible future increases.
- Interest-rate, credit, liquidity, regulatory, litigation, operational and cybersecurity risks could affect results. Auction-rate securities had a $97.3 million fair value and were illiquid, with valuation dependent on unobservable assumptions, including a return to market liquidity within five years.
Most important facts for investors to verify
- Whether loan growth can be sustained while net interest margin remains near management’s stable-margin outlook.
- Whether higher net charge-offs persist and how credit quality, criticized loans and the allowance evolve.
- Progress toward satisfying BSA/AML enforcement orders and the status and potential financial impact of the fair-lending investigation and litigation.
- Whether deposit growth continues to fund lending and maintain liquidity without materially increasing funding costs.
- Execution against expense and fee-income guidance, including the effect of securities gains and other nonrecurring items.