Fulton Financial Corporation — 2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012, with comparisons to 2011 and 2010. Fulton is a Pennsylvania-based financial holding company operating six community banks across Pennsylvania, Delaware, Maryland, New Jersey and Virginia. The filing also provides unaudited fourth-quarter results.
Financial performance and condition
- Earnings: 2012 net income was $159.8 million, up 9.8% from $145.6 million; diluted EPS rose to $0.80 from $0.73. Fourth-quarter net income was $40.2 million, versus $36.1 million in fourth-quarter 2011.
- Revenue and margins: Net interest income was $544.3 million, down 2.8%. On a fully taxable-equivalent basis, net interest income was $561.2 million and net interest margin was 3.76%, down 14 basis points. Non-interest income was $216.6 million, up 15.4%. The efficiency ratio worsened to 57.63% from 54.28%.
- Credit costs and asset quality: Provision for credit losses declined to $94.0 million from $135.0 million; net charge-offs fell to $126.7 million from $152.3 million. Non-performing assets declined to $237.2 million, or 1.44% of assets, from $317.3 million, or 1.94%. The allowance for credit losses was $225.4 million, 1.86% of loans, versus $258.2 million, 2.16%.
- Balance sheet and funding: Total assets were $16.53 billion, up 1.0%; loans, net of unearned income, were $12.14 billion, up 1.5%. Deposits were $12.47 billion, down 0.4%, as growth in demand deposits was offset by falling time deposits. Short-term borrowings increased 45.5% to $868.4 million; long-term debt declined 14.0% to $894.3 million. Total shareholders’ equity was $2.08 billion, or 12.6% of assets.
- Cash flow and liquidity: Operating activities provided $296.3 million; investing activities used $320.1 million and financing activities used $12.5 million. Liquid assets were $3.1 billion, 18.9% of assets. Fulton reported $1.4 billion of additional FHLB borrowing capacity and $1.8 billion of Federal funds lines, of which $592.5 million was drawn. Discount Window borrowing availability was $1.9 billion, with none outstanding.
- Capital and shareholder returns: Regulatory capital ratios were 15.6% total capital, 13.4% Tier 1 risk-based capital and 11.0% Tier 1 leverage. The annual common dividend increased to $0.30 per share from $0.20. Fulton repurchased 2.1 million shares in 2012.
Material changes versus 2011
- Net income improved mainly because of lower credit-loss provision and stronger mortgage banking income; these gains were partly offset by lower net interest income and higher expenses.
- Mortgage banking income increased 73.7% to $44.6 million, reflecting higher mortgage commitments and sale spreads. Debit-card income fell 43.9% to $8.7 million, principally due to interchange-fee limits.
- Non-interest expense rose 7.9% to $449.5 million. Increases included salaries and benefits, compliance and risk-management consulting, operating risk losses and a $3.0 million FHLB prepayment penalty.
- Commercial mortgage and construction loans together were approximately $5.2 billion, or 43.2% of the loan portfolio. Residential mortgages increased 14.6%; construction loans declined 5.1%.
Outlook, risks and unusual items
- Outlook: Management identified quality earning-asset growth as its primary 2013 focus, with priorities including loan growth, demand and savings deposits, non-interest income and expense control. It anticipated higher loan growth and further asset-quality improvement if the economy continued to expand, but said the 2012 mortgage growth pace was unlikely to recur. No numerical earnings or revenue guidance was provided.
- Interest rates and economy: Management cited sluggish loan demand, intense competition and persistently low rates as pressures on loan yields and net interest margin. Its modeled 12-month net interest income impact was +1.5% for a 100-basis-point rate increase and −3.8% for a 100-basis-point decrease.
- Credit and investments: Real-estate exposure, borrower repayment capacity and collateral values remain significant risks. Fulton held $149.3 million of illiquid auction-rate securities, valued using Level 3 assumptions including a return to market liquidity within five years. Further impairment is possible.
- Contingencies and operations: Three bank subsidiaries faced potential civil money penalties related to alleged Flood Act compliance failures; amounts were not finalized and statutory penalties were capped at $135,000 per institution. Mortgage-sale representations and warranties and the FHLB Mortgage Partnership Finance program generated $4.9 million of 2012 loss charges; the reserve for sold-loan exposures was $6.0 million. Fulton planned a phased core-processing conversion in 2013 and disclosed execution and customer-service risks.
- Other notable items: Fulton sold its Global Exchange division in December for a $6.2 million gain, with a $2.2 million after-tax gain; it expected lower related revenue in 2013. Goodwill impairment testing found no charge, although three reporting units failed the first-step test. The board approved a new repurchase authorization for up to 8 million shares through June 30, 2013. CEO R. Scott Smith retired effective January 1, 2013, succeeded by E. Philip Wenger.
- Controls and litigation: Management and the auditor concluded internal control over financial reporting was effective as of year-end. Management said pending legal proceedings were not expected to materially affect financial position, results or liquidity, while noting litigation outcomes are uncertain.
Investor verification checklist
- Track whether net interest margin stabilizes and whether loan growth offsets continued asset-yield pressure.
- Verify that improved non-performing assets and lower credit costs persist, particularly in commercial real estate and residential mortgages; assess allowance adequacy and TDR performance.
- Monitor deposit mix, reliance on short-term Federal funds, borrowing capacity and parent-company liquidity.
- Review valuation assumptions and liquidity developments for auction-rate securities, as well as concentration in the single financial-institution stock investment.
- Confirm outcomes of Flood Act matters and mortgage repurchase/MPF claims, and execution of the core-system conversion.
- Assess the sustainability of mortgage-sale gains, expense increases, the expanded dividend and the 2013 share repurchase authorization.