Fulton Financial Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed February 21, 2020. Fulton is a regional banking and financial-services holding company operating in Pennsylvania, Delaware, Maryland, New Jersey and Virginia; its banking subsidiaries were consolidated into Fulton Bank, N.A. in September 2019. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
- Earnings: Net income was $226.3 million, up 8.6% from $208.4 million in 2018. Diluted EPS rose 14.4% to $1.35 from $1.18. Return on average assets was 1.06%; return on average equity was 9.81%.
- Revenue and margin: Net interest income was $648.4 million, up 2.8%; non-interest income was $216.2 million, up 10.6%, including $4.7 million of securities gains. Net interest margin (FTE) slipped to 3.36% from 3.40%, as funding costs rose faster than asset yields. The efficiency ratio was 63.7%, approximately flat year over year.
- Credit costs and asset quality: Provision for credit losses declined to $32.8 million from $46.9 million. Net charge-offs were $36.0 million, or 0.22% of average loans, versus $53.6 million, or 0.34%, in 2018. Non-performing assets were $148.0 million, 0.68% of total assets, compared with $150.2 million, or 0.73%, a year earlier. The allowance for credit losses was $166.2 million, 0.99% of loans and leases.
- Balance sheet and funding: Total assets rose 5.8% to $21.89 billion; loans and leases increased 4.2% to $16.84 billion, and deposits rose 6.2% to $17.39 billion. The year-end loan-to-deposit ratio was 96.8%, down from 98.7%. Cash and cash equivalents totaled $517.8 million.
- Debt and capital: Short-term borrowings were $883.2 million and FHLB advances and long-term debt were $881.8 million. Corporation capital ratios were 11.8% total capital, 9.7% Tier 1 and 9.7% CET1; Fulton Bank was described as well capitalized. Shareholders’ equity was $2.34 billion.
- Cash flow and shareholder returns: Operating activities provided $127.7 million; investing activities used $893.3 million and financing activities provided $837.7 million. Dividends were $0.56 per share, up from $0.52; the company repurchased $111.5 million of shares during 2019.
Material changes and fourth-quarter results
- Compared with 2018, net income increased $17.9 million. Higher net interest income, lower credit-loss provision, higher fee income and securities gains contributed; higher operating expenses and income taxes partly offset these items.
- Average loans and leases grew 3.9% and average deposits 5.9%. Interest expense increased 38.2%, reflecting higher deposit and short-term borrowing costs; the FTE net interest margin declined four basis points.
- In the third quarter, Fulton sold approximately $400 million of securities and prepaid related FHLB advances as part of a balance-sheet restructuring. The transactions generated $4.5 million in securities gains and $4.3 million in prepayment penalties.
- Q4 2019: Net income was $47.8 million, or $0.29 diluted EPS, versus $58.1 million, or $0.33, in Q4 2018. Provision for credit losses was $20.5 million versus $8.2 million. The filing reports a $20.0 million provision for a commercial borrower that was subsequently charged off in 2019.
- Non-interest expense increased 4.0% for the year, to $567.7 million; 2019 included $10.9 million of bank-charter consolidation costs, compared with $3.6 million in 2018. The effective tax rate rose to 14.3% from 10.5%, partly because 2018 included a one-time New Jersey tax benefit.
Outlook, risks and contingencies
- The filing provides no specific earnings or growth guidance. Management noted that 2019 rate cuts may reduce loan yields, while deposit-rate changes generally lag loan repricing; the net impact depends on rates, funding costs, balance-sheet mix and competition.
- Fulton expected to adopt CECL in the first quarter of 2020 and estimated that the allowance for credit losses would increase approximately 25%–35% at adoption. The estimate remained subject to model review, scenario testing and final assumptions; the company planned to phase in the day-one regulatory-capital effect over three years.
- Credit risk warrants attention: approximately 72% of the loan portfolio was commercial, commercial mortgage or construction lending. Criticized loans increased 1.5% overall, with substandard-or-lower balances rising $63.7 million, partly offset by a decline in special-mention loans.
- Liquidity depends primarily on customer deposits, including state and municipal deposits that represented approximately 12% of deposits and may be rate-sensitive. Fulton reported $3.7 billion of additional FHLB borrowing capacity, $1.7 billion available under federal-funds lines and $334.3 million of Discount Window availability, with no Discount Window borrowings.
- Key risks include interest-rate and liquidity sensitivity, commercial real-estate and borrower credit exposure, competition, cybersecurity and third-party service providers, regulatory compliance, and the phaseout of LIBOR. Management’s rate-shock analysis showed estimated 12-month net interest income changes of +3.6% for a 100-basis-point increase and −5.6% for a 100-basis-point decrease.
- The company was responding to an SEC Division of Enforcement investigation into accounting determinations that could have affected reported EPS; it said it was cooperating and could not predict the outcome. A putative New Jersey wage-and-hour class action was also disclosed. The 2014 Federal Reserve BSA/AML consent order was terminated in May 2019.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of year-end. The auditor identified the allowance for loan losses as a critical audit matter.
Most important facts for investors to verify
- Progress and final financial and capital effects of CECL adoption, including whether the estimated 25%–35% allowance increase was realized.
- Developments and any financial consequences of the SEC accounting investigation and the disclosed wage-and-hour lawsuit.
- Commercial credit trends, including criticized loans, the charged-off commercial borrower, concentrations in real estate-related lending and subsequent charge-offs.
- Whether deposit growth and funding costs sustain margins, and how interest-rate changes affect net interest income and liquidity.
- Results of the bank consolidation and balance-sheet restructuring, including recurring expense levels after one-time costs and securities gains.