Fulton Financial Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results. Fulton is a regional bank holding company operating seven community banks across Pennsylvania, Delaware, Maryland, New Jersey, and Virginia.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Net interest income | $558.7 million | $521.0 million |
| Other income | $184.9 million | $175.9 million |
| Net income | $128.3 million | $73.9 million |
| Net income available to common shareholders | $112.0 million | $53.8 million |
| Diluted earnings per share | $0.59 | $0.31 |
| Net interest margin | 3.80% | 3.52% |
| Efficiency ratio | 53.49% | 57.88% |
| Return on average assets | 0.78% | 0.45% |
| Provision for credit losses | $160.0 million | $190.0 million |
- Balance sheet: Total assets were $16.28 billion, down 2.2%; loans were $11.93 billion, down 0.3%; deposits were $12.39 billion, up 2.4%. Investment securities declined 12.4% to $2.86 billion.
- Credit quality: Net charge-offs rose to $142.1 million, or 1.19% of average loans, from $112.6 million, or 0.94%. Non-performing assets increased to $361.7 million, or 2.22% of assets, from $305.0 million, or 1.83%. The allowance for loan losses was $274.3 million, 2.30% of loans.
- Cash flow: Operating activities provided $284.8 million; investing activities provided $145.9 million; financing activities used $516.3 million. Cash and due from banks ended at $199.0 million.
- Debt and liquidity: Year-end short-term borrowings were $674.1 million and long-term debt was $1.12 billion. Liquid assets were $3.1 billion, or 19.3% of assets, compared with $3.6 billion, or 21.8%, a year earlier. The company reported $1.1 billion of additional FHLB borrowing capacity and $1.5 billion of borrowing availability at the Federal Reserve Discount Window.
- Capital: The company reported total capital of 14.2% of risk-weighted assets, Tier 1 capital of 11.6%, and tangible common equity to tangible assets of 8.5%. All bank subsidiaries exceeded well-capitalized regulatory thresholds.
- Dividends: Common cash dividends were $0.12 per share for the year, or $0.03 per quarter.
Material changes versus 2009
- Common shareholder income more than doubled, supported by higher net interest income, lower credit-loss provision, increased fee income, and reduced operating expenses.
- Net interest margin rose 28 basis points, mainly from lower funding costs and growth in demand and savings deposits. Core demand and savings balances increased 19.5% on average.
- Credit measures worsened year over year despite a lower provision: non-performing assets, net charge-offs, and troubled debt restructurings increased. Management reported that non-performing assets and delinquencies improved in the fourth quarter.
- Loans were broadly flat. Construction loans fell 18.1%, while commercial mortgages increased 1.9%; management cited weak demand and efforts to reduce construction exposure.
- In May, Fulton issued 21.8 million common shares for net proceeds of $226.3 million. It redeemed $376.5 million of Treasury preferred stock in July and repurchased the Treasury warrant for $10.8 million in September, completing its exit from the Capital Purchase Program.
Outlook, risks, and unusual items
- The filing gives no specific earnings or revenue guidance. Management described the economic recovery as slow and uncertain, while noting fourth-quarter improvement in some credit indicators.
- Credit and real-estate exposure is significant: commercial mortgage and construction loans were approximately $5.2 billion, or 43.4% of the loan portfolio. Management warned that further deterioration could increase provisions and charge-offs.
- The investment portfolio includes $260.7 million of illiquid auction-rate securities; fair value relies on an expected-cash-flow model and significant unobservable inputs. Fulton reported that these securities were current on interest payments at year-end. It also recorded $14.0 million of investment impairment charges, largely related to pooled trust preferred securities and financial-institution stocks.
- Other notable exposures include $122.2 million of corporate debt securities issued by financial institutions and potential valuation sensitivity in goodwill ($535.5 million recorded). No goodwill impairment was recorded in 2010, although two reporting units failed the initial impairment test and passed the subsequent valuation step.
- A correction to the valuation method for mortgage interest-rate locks increased 2010 mortgage banking income by $3.3 million; the filing says the change did not materially affect prior periods. Proposed debit-card interchange rules were estimated to reduce affected income by about $9.7 million in 2011 if adopted as proposed.
- Management reviewed foreclosure procedures following industry scrutiny and regulatory inquiries; it did not expect identified or potential deficiencies to materially affect financial position or results. The filing says no pending legal proceedings were expected to have a material impact.
- Management identified Dodd-Frank implementation, FDIC assessment changes, interest-rate movements, competition, liquidity access, and local economic and property conditions as important uncertainties. It estimated annual FDIC assessments of approximately $12 million under the new assessment framework, based on year-end balances.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2010; the auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the improvement in fourth-quarter delinquencies and non-performing assets continued, and how credit losses developed after year-end.
- The adequacy of the $274.3 million loan-loss allowance against rising non-performing loans, charge-offs, and troubled debt restructurings.
- The valuation assumptions, liquidity outlook, and eventual recovery of the $260.7 million auction-rate securities portfolio and other Level 3 investments.
- Whether loan growth, deposit mix, and a 3.80% net interest margin can be sustained as rates and funding costs change.
- The realized impact of debit-card interchange regulation, Dodd-Frank implementation, and FDIC assessment changes on future earnings.
- The dilution and capital effects of the 2010 common-stock offering and the company’s post-Treasury capital position.