Business context and reporting period
Fulton Financial Corporation filed this Form 10-K for the fiscal year ended December 31, 2014. It is a Pennsylvania-based financial holding company operating six community banks across Pennsylvania, Delaware, Maryland, New Jersey and Virginia, alongside non-bank financial businesses. The filing also reports unaudited fourth-quarter results.
Financial performance and condition
- Full-year earnings: Net income was $157.9 million, down 2.4% from $161.8 million in 2013. Diluted EPS increased to $0.84 from $0.83, helped by a 3.7% decline in weighted-average diluted shares.
- Revenue and margin: Net interest income was $514.9 million, down 2.3%; net interest margin fell 11 basis points to 3.39%. Non-interest income declined 10.8% to $167.4 million, primarily from lower mortgage banking income and securities gains.
- Profitability and expenses: Return on average assets was 0.93% versus 0.96%; return on average equity was 7.62% versus 7.88%. Non-interest expense decreased 0.5% to $459.2 million, but the efficiency ratio worsened to 65.65% from 63.39%, reflecting revenue pressure and higher compliance-related outside services expense.
- Credit and asset quality: Provision for credit losses decreased 69.1% to $12.5 million. Net charge-offs fell to $31.5 million from $61.0 million; non-performing assets were $150.5 million, down from $169.3 million. The allowance for credit losses was $185.9 million, or 1.42% of loans.
- Balance sheet and funding: Total assets rose 1.1% to $17.1 billion; loans, net of unearned income, increased 2.6% to $13.1 billion; deposits rose 7.0% to $13.4 billion. Period-end borrowings were $1.47 billion, down 31.4%, as short-term borrowing reductions more than offset higher long-term debt.
- Liquidity and cash flow: Operating activities provided $210.4 million; investing activities used $275.4 million and financing activities used $47.8 million. Liquid assets totaled $2.9 billion, or 16.8% of assets, versus $3.1 billion, or 18.1%, a year earlier. The company reported $2.6 billion of additional FHLB borrowing capacity.
- Capital and shareholder returns: Total capital, Tier 1 risk-based capital and Tier 1 leverage ratios were 14.7%, 12.3% and 10.0%, respectively. The annual dividend was $0.34 per share. The company repurchased $175.3 million of stock during 2014 and entered a $100 million accelerated share repurchase agreement, with final settlement scheduled by April 17, 2015.
- Fourth quarter: Net income was $37.9 million and diluted EPS was $0.21, compared with $42.1 million and $0.22 in fourth-quarter 2013.
Material changes versus prior periods
- Net interest income and margin continued to contract amid low rates and reduced asset yields; average loans nevertheless grew 2.4% and average demand and savings deposits grew 5.7%.
- Lower mortgage refinancing volumes contributed to a 44.2% decline in mortgage banking income. Overdraft fees and investment securities gains also decreased.
- Credit quality improved, reducing the provision and charge-offs. Non-performing assets and criticized commercial loans also declined.
- Non-interest expense was nearly flat after approximately $7 million in 2014 cost savings, including 13 branch consolidations; outside services expense rose substantially with compliance and risk-management work.
- Shareholders’ equity declined 3.2% to $2.0 billion, primarily due to share repurchases and dividends, partly offset by earnings and improved unrealized securities values.
Outlook, risks and unusual items
- Management anticipated 2015 average loan and deposit growth of 3%–7%, net interest margin compression averaging 0–4 basis points per quarter, and mid- to high-single-digit growth in non-interest income excluding securities gains. It expected low-single-digit non-interest expense growth, with cost savings partly offsetting staffing costs.
- Management expected a modest provision for credit losses in 2015, subject to individual credit performance. These projections are forward-looking and depend on economic conditions, competition, interest rates and regulatory developments.
- Regulatory enforcement orders required the company and its banks to strengthen Bank Secrecy Act/anti-money-laundering controls; some orders required retrospective account and transaction reviews and restricted expansion activities. Fulton Bank of New Jersey entered additional consent orders on February 25, 2015. The company recorded approximately $8 million of outside-services expense in 2014 for BSA/AML remediation; future costs, restrictions or penalties could be material.
- The company was planning a multi-year consolidation of its six banks, but timing depended on compliance-program progress and regulatory approval. Fulton Bank, N.A. had $9.5 billion in assets, near the $10 billion threshold for additional oversight requirements.
- Notable exposures include $100.9 million of illiquid student-loan auction-rate securities valued using significant unobservable assumptions and a $30.4 million equity investment representing 72.7% of its publicly traded financial-institution stock portfolio. Management reported no impairment charge for the auction-rate securities at year-end.
- Other items include a $4.5 million settlement with a secondary-market investor over mortgage repurchase requests and a $1.5 million postretirement-plan curtailment gain. Management said pending legal proceedings were not expected to have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Progress, costs and any further regulatory actions related to the BSA/AML consent orders, including their effect on growth plans and bank consolidation.
- Whether projected loan and deposit growth, fee-income growth and margin expectations are achieved in 2015.
- Credit trends, especially commercial real estate and construction exposures, troubled debt restructurings and the adequacy of the allowance as provisions decline.
- Valuation, liquidity and eventual recoveries of auction-rate securities and other concentrated or lower-rated investments.
- Final settlement of the $100 million accelerated share repurchase and the effect of continued repurchases and dividends on capital and liquidity.