Fulton Financial Corporation — 2015 Form 10-K
Business and reporting period. This annual report covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Fulton is a Pennsylvania-based bank holding company operating six community banks across Pennsylvania, Delaware, Maryland, New Jersey and Virginia, with 243 branches and approximately 3,460 full-time-equivalent employees at year-end.
Financial performance and condition
- Earnings: Net income was $149.5 million, down 5.3% from $157.9 million in 2014. Diluted EPS was $0.85 versus $0.84, supported by a 5.6% decline in weighted-average diluted shares. Income before taxes was $199.4 million.
- Revenue and margins: Net interest income was $500.0 million, down 2.9%; fully taxable-equivalent net interest income was $518.5 million. Net interest margin fell 18 basis points to 3.21%, as lower asset yields outweighed balance-sheet growth. Non-interest income rose 8.6% to $181.8 million, including $9.1 million of securities gains; excluding those gains, it increased 4.5%. The efficiency ratio worsened to 68.61% from 65.65%.
- Credit quality: Provision for credit losses fell to $2.3 million from $12.5 million; net charge-offs declined to $16.8 million from $31.5 million. Non-performing assets were $155.9 million, or 0.87% of assets, versus $150.5 million, or 0.88%, a year earlier. The allowance for credit losses was $171.4 million, 1.24% of loans.
- Balance sheet and liquidity: Total assets were $17.9 billion, up 4.6%; loans, net of unearned income, were $13.84 billion, up 5.5%; deposits were $14.13 billion, up 5.7%. Average deposits grew 6.8%, faster than average loans, bringing the average loan-to-deposit ratio down to 97.0% from 100.1%. Year-end shareholders’ equity was $2.04 billion.
- Debt and capital: Year-end total borrowings were $1.45 billion, slightly below $1.47 billion in 2014; short-term borrowings increased to $497.7 million while long-term debt declined to $949.5 million. The company issued $150 million of 10-year subordinated notes and redeemed $150 million of trust preferred securities, recording a $5.6 million redemption loss. The Corporation’s capital ratios included a 13.2% total risk-based ratio and 10.2% Tier 1 and common equity Tier 1 ratios; its banks exceeded applicable “well capitalized” thresholds.
- Cash flow: Operating activities provided $177.0 million; investing activities used $818.0 million, primarily for loan growth and securities purchases; financing activities provided $636.5 million, mainly from deposit growth and borrowing activity.
Changes versus 2014
- Loan balances and average deposits grew, but lower yields compressed net interest margin and reduced net interest income.
- Asset-quality trends were mixed: charge-offs and delinquencies improved, but non-performing assets rose modestly and non-accrual loans increased to $129.5 million from $121.1 million.
- Non-interest expense increased 4.6% to $480.2 million, reflecting higher compensation, data processing and software costs, as well as the $5.6 million debt-redemption loss. Excluding that loss, expenses rose 3.3%.
- Common dividends increased to $0.38 per share from $0.34. The company completed $50 million of repurchases in 2015 and authorized a further $50 million program through December 2016.
Outlook, risks and unusual items
- 2016 outlook: Management expected mid- to high-single-digit growth in average loans and deposits; a stable annual net interest margin, with modest quarterly movement of 0–3 basis points; credit-loss provision driven primarily by loan growth; mid- to high-single-digit growth in non-interest income excluding securities gains; and low- to mid-single-digit expense growth excluding the 2015 TruPS redemption loss. Management said capital would support growth and shareholder returns.
- Regulatory orders: The Corporation and its bank subsidiaries remained subject to 2014–2015 consent orders concerning deficiencies in the Bank Secrecy Act/anti-money-laundering compliance program. Required remediation and retrospective reviews, added staffing and consultants, and restrictions on expansion may increase costs or constrain growth; noncompliance could lead to further actions, fines or restrictions.
- Legal contingency: The Department of Justice opened a 2015 investigation into potential fair-lending violations by Fulton Bank, N.A. in certain geographies. The company was cooperating; the outcome and any resulting settlement, fines or remedial actions were uncertain. Management did not expect pending matters overall to materially affect financial condition, but acknowledged an unfavorable resolution could materially affect a particular period’s results.
- Strategy and regulatory threshold: Fulton was planning a multi-year consolidation of its six banks into one subsidiary, subject to regulatory approval and sustainable progress on compliance remediation. Fulton Bank, N.A. had $9.8 billion of assets; crossing $10 billion, including through consolidation, would trigger additional oversight and requirements.
- Other risks and items: Management cited persistent low-rate margin pressure, commercial and commercial-real-estate credit concentration, competition, liquidity and funding sensitivity, cybersecurity and vendor risks, and execution risks from the business-model transition. The $98.1 million auction-rate securities portfolio remained illiquid, valued using significant unobservable assumptions. One goodwill reporting unit had fair value less than 5% above adjusted net book value, although the annual test found no impairment. Management and the auditor reported effective internal control over financial reporting.
Investor verification priorities
- Track remediation milestones, regulatory restrictions and related compliance spending under the BSA/AML consent orders.
- Check developments in the DOJ fair-lending investigation and any associated reserves, costs or remedial obligations.
- Assess whether loan growth, especially commercial and construction lending, is matched by stable credit performance and adequate loss reserves.
- Monitor net interest margin, deposit pricing and funding mix against management’s 2016 outlook.
- Review progress and regulatory implications of bank consolidation and the approach to the $10 billion asset threshold.
- Verify liquidity capacity, capital ratios, dividend and repurchase plans, and valuation assumptions for illiquid auction-rate securities.