FULT: Raising EPS Estimates on Solid Loan Growth, Expense Control, and Asset Quality Outlook; Raising Target Price, Reaffirming Neutral Rating.
Fulton Financial Corporation (FULT – NASDAQ GS – Recent Intraday Price: $17.00)
Rating: Neutral / Buy Price: $15.00 / Target (Sell) Price: $17.00
4Q19 Results: Fulton reported 4Q19 net income of $54.1 million or $0.33 per share, down 12.9% compared to the $62.1 million or $0.37 in 3Q19. Reported 4Q19 results fell $0.02 shy of our $0.35 estimate and the $0.35 Street consensus estimate. A bigger-than-anticipated loan loss provision was the main driver of the shortfall, aided by greater-then-expected NIM compression. These were offset partially by higher noninterest income and lower-than-expected noninterest expenses, along with a slightly lower-than-expected effective tax rate. Highlights for the quarter include:
· Gross loans held for investment grew 1.0% sequentially, reaching $16.9 billion. The sequential quarter advance was led by the Commercial mortgage category, which rose $96.1 million or 1.5% linked-quarter, accounting for roughly 56.3% of loan growth in the quarter. The residential mortgage segment also contributed substantially, rising $70.7 million or 2.7% sequentially, while the construction segment added $57.4 million or 6.3%. Meanwhile, C&I loans declined $27.8 million or 0.6%, and home equity loans fell $31.2 million or 2.3%. Average loans held-for-investment for 4Q19 grew at a slightly faster pace than period-end loans, rising 2.0% compared to 3Q19, with the commercial mortgage and residential mortgage categories leading the way.
· Deposits advanced a modest $51.2 million or 0.3% compared to 3Q19, but this comes on the heels of 5.8% growth in the prior quarter. Noninterest bearing accounts rose $212.8 million from the prior quarter, and interest bearing core deposit accounts advanced $8.6 million. Meanwhile, time and brokered deposits decreased $170.3 million or 5.3%. Noninterest bearing deposits rebounded to 25.6% of total deposits from 24.5% at September 30, 2019, while time and brokered deposits decreased to 17.6% of deposits from 18.7%.
· Net interest income fell 1.2% linked-quarter, as a 1.5% rise in average earning assets was offset by 9 bps of NIM compression to 3.22% (on a fully-tax equivalent basis). The average yield on loans declined 24 bps linked-quarters, leading to an 18 bps drop in average earning asset yields. The average cost of interest bearing deposits fell 10 bps sequentially, as the cost of time deposits held steady, but the average cost of savings and interest bearing demand deposits declined 10 bps and 9 bps, respectively while the average cost of brokered deposits fell 46 bps. Meanwhile, short-term borrowings declined in the funding mix, and the average cost of these borrowings decreased 49 bps. Consequently, the average cost of interest bearing liabilities slipped 13 bps to 1.16% from 1.29% in 3Q19.
· Core noninterest income slipped $40k or 0.1% sequentially to $55.3 million. Gains in wealth management revenues and higher commercial loan interest swap fees were largely offset by a seasonal decline in mortgage banking and lower consumer banking fees, primarily card income. In the prior quarter, Fulton completed a balance sheet restructuring that the sale of $400 million of investment securities and a corresponding prepayment of FHLB advances. These transactions resulted in $4.5 million in securities gains (included in “other” noninterest income) offset by $4.3 million in prepayment penalties (recorded in “other” noninterest expenses).
· Noninterest expenses decreased $6.9 million or 4.7% compared to 3Q19. The previous quarter included $5.2 million of charter consolidation expenses and the previously mentioned $4.3 million in prepayment penalties, as well as a $2.6 million credit received as the bank insurance fund reached a threshold level. Excluding these irregular items from both periods, “core” noninterest expenses of roughly $146.8 million were little changed from the prior quarter.
· Fulton recorded an income tax expense of $8.1 million in 4Q19, down $2.0 million compared to 3Q19. This translates to a 13.0% effective tax rate versus the 13.9% rate in the prior quarter. We had projected a similar 13.9% effective tax rate for the quarter.
· The 4Q19 loan loss provision was $12.5 million, up $10.4 million from the $2.2 million recorded in 3Q19. The company recorded net charge-offs of $7.1 million in 4Q19 compared to net charge-offs of $6.3 million in the prior quarter. This represents an annualized net charge-off ratio of 0.17% of average loans in 4Q19 compared to 0.15% in 3Q19. Meanwhile, NPLs/Loans climbed to 0.86% from the 0.74% posted in the prior quarter. As a result, the allowance for loan losses fell to 111% of NPLs versus 127% at September 30, 2019.
· Tangible book value per share rose 1.2% to $11.04 at December 31, 2019 from $10.91 at September 30, 2019, while the TCE ratio edged up to 8.49% from 8.45%. Fulton’s regulatory capital ratios were relatively stable, with most ratios moving up 3-4 bps but the leverage ratio slipping 5 bps to 8.47%. In any case, the regulatory ratios remain well above the minimums required to be considered “well-capitalized”.
Earnings Estimates: Despite a $0.02 EPS shortfall versus our estimate, Fulton’s results were largely as expected. We did not make many substantial changes to our model as a result of the announced results. We still expect low single-digit growth in loans and deposits for 2020, though our model now shows slightly larger average earning asset balances for the year. While we are not anticipating any rate cuts in our model (management expects a 25 bps cut in 2Q20 in their guidance), we still we are projecting a fairly stable NIM of roughly 3.15% (on a fully tax-equivalent basis) in 2020. The combination of earning asset growth and a stable NIM leads to a modest increase of roughly 0.5% in net interest income for the year, where we had previously forecast a 2.5% decline. We have also modestly reduced our projections for noninterest expenses.
After making the adjustments above, we are raising our 2020 EPS estimate to $1.41 from $1.31. We are also raising our 2021 EPS estimate to $1.47 from $1.34.
Valuation: Fulton stock is currently valued at 156.3% of tangible book value and 12.4x trailing twelve months EPS. Both of these multiples are relatively close to the peer median valuations of 163.8% of TBV and 12.3x TTM EPS. Our longer-term outlook for Fulton remains largely unchanged. With the BSA/AML orders terminated and all the subsidiary banks consolidate, Fulton should become more efficient while having greater flexibility in deploying capital. We are raising our 12-month price target by $1.00 to $17.00, based on a 12.0x forward EPS multiple applied to our $1.41 EPS estimate for the next four quarters (1Q20-4Q20). With the stock is currently trading close to this target, we are reaffirming our Neutral rating on shares of FULT.