Fulton Financial Corporation — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed March 1, 2019. Fulton is a regional bank holding company operating through four bank subsidiaries across Pennsylvania, Delaware, Maryland, New Jersey and Virginia. It reported consolidated annual results; selected fourth-quarter figures are included below.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net interest income | $630.5 million | $575.4 million |
| Provision for credit losses | $46.9 million | $23.3 million |
| Non-interest income | $195.5 million | $208.0 million |
| Non-interest expense | $546.1 million | $525.6 million |
| Net income | $208.4 million | $171.8 million |
| Diluted earnings per share | $1.18 | $0.98 |
| Net interest margin (FTE) | 3.40% | 3.28% |
| Return on average assets | 1.03% | 0.88% |
| Efficiency ratio | 63.8% | 64.5% |
| Net charge-offs / average loans | 0.34% | 0.12% |
- Year-end assets were $20.7 billion, loans were $16.2 billion, deposits were $16.4 billion and shareholders’ equity was $2.25 billion. Loans grew 2.5% and deposits 3.7% year over year.
- Year-end borrowings totaled $1.75 billion: $754.8 million short-term and $992.3 million long-term debt. Cash and cash equivalents were $445.7 million.
- Operating cash flow was $296.8 million; investing activities used $740.7 million, chiefly reflecting net increases in loans and securities; financing activities provided $487.5 million. The loan-to-deposit ratio was 98.7%.
- Capital ratios at year-end: total capital 12.8%, Tier 1 10.2%, CET1 10.2% and Tier 1 leverage 9.0%. All bank subsidiaries were reported well capitalized.
- The common dividend was $0.52 per share for 2018, versus $0.47 in 2017.
Changes, unusual items and quarterly results
- Net income rose 21.3% and diluted EPS rose 20.4%. Higher net interest income (+$55.1 million) and lower income taxes (+$38.1 million) more than offset higher credit-loss provisions, lower fee and securities income, and increased operating expenses.
- Net interest margin increased 12 basis points. Average earning assets rose 3.4%; average loan yield increased 31 basis points, while the cost of interest-bearing liabilities rose 22 basis points.
- The provision included $36.8 million tied to fraud at one large commercial relationship; a related $33.9 million charge-off drove most of the increase in net charge-offs. Excluding that provision, management stated the 2018 provision would have been $10.1 million, below 2017.
- The effective tax rate fell to 10.5% from 26.7%, reflecting the Tax Act’s lower federal corporate rate; 2017 also included a $15.6 million deferred-tax remeasurement charge.
- Non-interest income excluding securities gains declined 1.7%. 2017 included a $5.1 million litigation settlement gain and $9.1 million in net securities gains; 2018 securities gains were $37,000.
- Fourth-quarter 2018 net income was $58.1 million, diluted EPS was $0.33, and the provision for credit losses was $8.2 million. The second-quarter provision was $33.1 million.
Outlook, risks and contingencies
- No specific earnings or financial guidance is provided. Management noted that deposit-cost competition could moderate margin expansion; the January 2019 FOMC statement signaled a “patient” approach to future rate changes.
- Management expects significant implementation costs in 2019 as it continues a multiyear bank-subsidiary consolidation. Completion depends in part on satisfactory remediation of BSA/AML deficiencies and regulatory approvals.
- The Parent Company and Lafayette Ambassador Bank remained subject to a Federal Reserve consent order concerning BSA/AML compliance as of year-end. The filing reports that the Maryland regulator and FDIC terminated their orders for The Columbia Bank on January 15, 2019.
- The DOJ was investigating potential fair-lending violations involving the bank subsidiaries and mortgage lending. The SEC was investigating accounting determinations that could have affected reported EPS. The company said it was cooperating and could not predict timing or outcome; it considered potential outcomes uncertain.
- Commercial, commercial-mortgage and construction loans represented approximately 73% of the loan portfolio; commercial mortgage and construction loans alone were 45.5%. Management highlighted credit, commercial real-estate, interest-rate, deposit-funding and competition risks.
- CECL adoption is expected in 2020. The company was evaluating its impact, anticipated a one-time allowance adjustment and transition and ongoing costs, but could not estimate the magnitude.
- Liquidity resources included approximately $2.4 billion of additional FHLB borrowing capacity, $1.3 billion of federal funds lines and $505.2 million of collateralized Federal Reserve discount-window availability; no discount-window borrowings were outstanding at year-end.
Investor verification priorities
- Review the fraud-related commercial exposure, charge-off and remaining credit risk, along with trends in criticized loans, nonperforming assets and allowance coverage.
- Check developments in the BSA/AML consent order, bank consolidation approvals and expected 2019 implementation costs.
- Monitor the DOJ fair-lending and SEC accounting investigations for outcomes, potential costs or restrictions.
- Assess deposit pricing, funding mix and borrowing needs against loan growth, margin trends and the high loan-to-deposit ratio.
- Verify CECL implementation progress and the eventual transition adjustment, and compare reported performance with non-GAAP measures such as FTE margin and efficiency ratio.