Fulton Financial Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with 2010. Fulton is a Pennsylvania-based financial holding company operating six community banks across Pennsylvania, Delaware, Maryland, New Jersey and Virginia.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $560.2 million | $558.7 million |
| Net interest margin (fully taxable-equivalent) | 3.90% | 3.80% |
| Net income | $145.6 million | $128.3 million |
| Net income available to common shareholders | $145.6 million | $112.0 million |
| Diluted earnings per share | $0.73 | $0.59 |
| Provision for credit losses | $135.0 million | $160.0 million |
| Net charge-offs | $152.3 million | $142.1 million |
| Other expenses | $416.5 million | $408.3 million |
- Total assets were $16.37 billion, up 0.6%; loans were $11.97 billion, up 0.3%; and deposits were $12.53 billion, up 1.1%.
- Cash from operating activities was $372.0 million; investing activities used $231.8 million and financing activities used $46.6 million. Cash and due from banks ended the year at $292.6 million.
- Short-term borrowings were $597.0 million and long-term debt was $1.04 billion, together down from $1.79 billion at year-end 2010. Shareholders’ equity rose 6.0% to $1.99 billion.
- Regulatory capital strengthened: total risk-based capital was 15.2% versus 14.2%; Tier 1 risk-based capital was 12.7% versus 11.6%. All bank subsidiaries met well-capitalized thresholds. Tangible common equity to tangible assets was 9.2%.
- Management reported $3.0 billion in liquid assets, 18.4% of total assets, and additional borrowing capacity of approximately $970 million at the FHLB and $1.7 billion at the Federal Reserve discount window.
Material changes and credit quality
- Net income increased 13.4%, supported by lower credit-loss provisions and funding costs. The common-shareholder earnings comparison also reflects the absence of preferred-stock dividends in 2011; the company redeemed its Treasury preferred stock in 2010.
- Other income excluding investment securities gains rose 0.9% to $183.2 million. Overdraft fees declined 10.0%, while mortgage banking income fell 12.4%. Investment securities gains were $4.6 million, including $2.9 million of other-than-temporary impairment charges.
- Non-performing assets declined 12.3% to $317.3 million, or 1.94% of total assets, from $361.7 million, or 2.22%. Non-performing loans fell to $286.5 million. However, net charge-offs increased 7.2%, and the allowance for loan losses declined to $256.5 million, or 2.14% of loans; allowance coverage of non-performing loans was 90.1%.
- Fulton sold $34.8 million of non-performing residential mortgage and home-equity loans in December. Net proceeds were $17.4 million, resulting in a $17.4 million charge-off; $12.4 million had already been allocated to the allowance.
- Commercial mortgage and construction loans totaled approximately $5.2 billion, or 43.6% of loans. Construction loans declined 23.2% year over year; commercial mortgage loans increased 5.2%.
Outlook, risks and notable items
- Management provided no specific numerical earnings or growth guidance. For 2012, it said priorities include market-share growth, prudent capital deployment, reduced credit costs and customer service.
- Management described economic conditions as improving but challenging, with sluggish loan demand, weak real estate conditions in some markets, and historically low rates pressuring asset yields and margins. It identified New Jersey as a more challenging market than several of its other regions.
- Debit interchange regulation reduced debit-card income; the filing reports a $2.4 million, 51.9% decline in that income from the third to the fourth quarter of 2011. Increasing regulation and compliance costs, deposit-insurance assessments, competition and potential further credit deterioration are additional risks.
- The portfolio includes $225.2 million of illiquid student-loan auction-rate securities valued using significant unobservable inputs. Management reported that these securities were current on interest payments, but future impairment remains possible. The filing also identifies credit and valuation risks in financial-institution securities.
- Fulton plans a phased conversion to a new core processing system over two years. Management expects moderate implementation costs and cites potential service and efficiency benefits; execution problems could disrupt customer and operational processes.
- The annual goodwill test found two reporting units below carrying value in the initial test, but subsequent valuation procedures resulted in no impairment charge. Three other units had less than a 5% fair-value cushion over book value.
- Management said pending litigation was not expected to have a material adverse effect, while noting litigation outcomes are uncertain. The company’s auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether asset-quality improvement continues, particularly in commercial mortgages, construction loans and the New Jersey portfolio, and whether the allowance remains adequate as charge-offs evolve.
- The sensitivity of net interest income and margins to persistently low rates, deposit repricing and loan floors; management estimated a 2.7% decline in net interest income under its 100-basis-point downward shock scenario.
- The valuation assumptions and liquidity outlook for auction-rate and financial-institution securities, including possible additional impairment charges.
- The cost, schedule and operational risks of the core-system conversion, and the effects of regulatory changes on fee income and expenses.
- Capital distributions and liquidity at the parent-company level, given restrictions on bank-subsidiary dividends and the company’s reliance on subsidiary distributions.