Fulton Financial Corporation — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; filed March 3, 2014. Fulton is a regional financial holding company operating six community banks across Pennsylvania, Delaware, Maryland, New Jersey and Virginia.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net interest income | $527.2 million | $544.3 million |
| Non-interest income | $187.7 million | $216.4 million |
| Net income | $161.8 million | $159.8 million |
| Diluted earnings per share | $0.83 | $0.80 |
| Net interest margin (FTE) | 3.50% | 3.76% |
| Efficiency ratio | 63.39% | 57.61% |
| Return on average assets | 0.96% | 0.98% |
- Net income rose 1.2%, supported primarily by a $53.5 million decline in credit-loss provision and lower income taxes. The benefit was partly offset by weaker net interest income and non-interest income, plus higher operating expenses.
- Loans, net of unearned income, grew 5.2% to $12.78 billion; total assets increased 2.4% to $16.93 billion. Deposits were nearly unchanged at $12.49 billion.
- Credit quality improved: provision for credit losses fell 56.9% to $40.5 million; net charge-offs declined to $61.0 million from $126.7 million. Non-performing assets fell to $169.3 million from $237.2 million, and the allowance for credit losses was $204.9 million.
- Operating cash flow was $301.6 million. Investing activities used $598.7 million, mainly reflecting loan growth; financing activities provided $259.4 million. Cash and due from banks ended at $218.5 million.
- Period-end shareholders’ equity was $2.06 billion. Regulatory capital ratios were 15.0% total capital, 13.1% Tier 1 risk-based capital and 10.6% Tier 1 leverage. The filing says the company and its bank subsidiaries met applicable capital requirements; subsidiaries were well capitalized.
Material changes and notable items
- Net interest margin compressed 26 basis points as asset yields fell faster than funding costs. Average loans increased 5.1%, but average loan yield declined to 4.39% from 4.81%.
- Non-interest income declined 13.3%. Mortgage banking income fell 31.3% as rising mortgage rates reduced commitments and refinancing activity; foreign-currency processing income also dropped following the 2012 sale of Global Exchange.
- Non-interest expense increased 2.7% to $461.4 million, including higher compensation and technology, compliance and risk-management costs. The core processing system conversion was completed; related implementation costs were about $3.5 million in 2013.
- Short-term borrowings rose 44.9% to $1.26 billion, while long-term debt edged down to $883.6 million. Total borrowings increased 21.5% to $2.14 billion, as loan growth exceeded deposit growth.
- Available-for-sale securities had a $39.8 million pre-tax net unrealized loss at year-end, compared with a $41.5 million gain a year earlier, largely reflecting higher interest rates. Accumulated other comprehensive loss was $37.3 million.
- The company repurchased 8.0 million shares for $90.9 million during 2013. It completed a further 4.0 million-share program in February 2014 at an average $12.45 per share.
Outlook, risks and contingencies
- Management said margin compression slowed during 2013 and expected that trend to continue in 2014. The filing provides no specific earnings or revenue guidance.
- Management planned expense initiatives estimated to reduce annual costs by about $8 million, including consolidation of 13 branches. Approximately $2 million of branch-related lease termination and write-off costs were expected in 2014; other initiatives were expected to generate $2.7 million in net one-time gains and about $5 million in annual savings.
- Key risks include persistent low rates and margin pressure, competition for loans and deposits, local economic and real-estate weakness, and the portfolio’s commercial mortgage and construction exposure—about 44% of loans at year-end.
- Regulatory compliance is a significant concern. Three bank subsidiaries had recently received civil money penalties related to alleged Flood Disaster Protection Act violations. Management said further enforcement action was increasingly possible and that remediation and compliance spending could materially affect future results.
- Liquidity resources included $2.8 billion of liquid assets (16.6% of total assets), about $1.7 billion of additional FHLB borrowing capacity, $1.6 billion of Federal funds lines with $582.4 million outstanding, and $2.0 billion of collateralized discount-window availability with no borrowings.
- Mortgage loan repurchase requests outstanding were about $6.1 million; reserves for mortgage-sale credit and representation-and-warranty exposures totaled $8.6 million. The company reported ordinary-course litigation and inquiries, while stating that resulting liabilities were not expected to materially affect financial position, results or liquidity; outcomes remain uncertain.
- The company held $159.3 million of illiquid auction-rate securities, valued using Level 3 assumptions that include a return to market liquidity within five years. It reported that these securities were current and paying scheduled interest.
- Basel III capital rules were due to begin applying in 2015 and phase in through 2019. Management believed year-end capital would meet fully phased-in requirements. Fulton Bank, N.A. had $9.5 billion in assets, near the $10 billion threshold for additional regulatory oversight.
Investor facts to verify
- Whether improved credit trends persist as loans grow, including commercial real estate concentrations, criticized loans, charge-offs and allowance adequacy.
- Whether deposit growth can fund loan growth without continued reliance on increased short-term borrowings, and how funding costs respond to higher rates.
- Whether margin pressure and mortgage-related fee declines stabilize, and whether planned cost savings offset compliance, staffing and technology expenses.
- Progress and potential financial impact of regulatory remediation, mortgage repurchase exposures, and other legal or supervisory matters.
- Valuation assumptions and liquidity/recovery prospects for auction-rate securities and other securities with unrealized losses.
- Capital and dividend capacity after share repurchases, including the impact of Basel III and restrictions on bank-subsidiary dividends.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management and the auditor concluded internal control was effective as of December 31, 2013.