Fulton Financial Corporation — 2016 Form 10-K
Business context and period. Fulton Financial is a Pennsylvania-based bank holding company operating six community banks across Pennsylvania, Delaware, Maryland, New Jersey and Virginia. It provides retail and commercial banking and related financial services. This annual report covers the fiscal year ended December 31, 2016; financial comparisons are primarily with 2015.
Financial performance and condition
| Metric | 2016 | 2015 / change |
|---|---|---|
| Net income | $161.6 million | $149.5 million; up 8.1% |
| Diluted earnings per share | $0.93 | $0.85 |
| Net interest income (GAAP) | $520.8 million | $500.0 million; up 4.2% |
| Net interest margin (FTE) | 3.18% | 3.21%; down 3 basis points |
| Provision for credit losses | $13.2 million | $2.3 million |
| Non-interest income, excluding securities gains | $187.6 million | $172.8 million; up 8.6% |
| Non-interest expense | $489.5 million | $480.2 million; up 1.9% |
| Return on average assets / equity | 0.88% / 7.69% | 0.86% / 7.38% |
| Total assets | $18.94 billion | $17.91 billion; up 5.7% |
| Loans, net of unearned income | $14.70 billion | $13.84 billion; up 6.2% |
| Deposits | $15.01 billion | $14.13 billion; up 6.2% |
- Loan growth and higher fee income supported earnings, while net interest margin narrowed. Average loans grew 6.0% and average deposits 6.1%; the period-end loan-to-deposit ratio was 97.9%.
- Asset quality improved overall: non-performing assets were $144.5 million, or 0.76% of assets, versus $155.9 million, or 0.87%, a year earlier. Net charge-offs were 0.09% of average loans versus 0.13%. The allowance for credit losses was $171.3 million, or 1.17% of loans.
- Operating cash flow was $185.4 million; investing activities used $1.00 billion, principally reflecting loan and securities growth; financing activities provided $832.6 million, mainly from deposit growth. Cash and due from banks ended the year at $118.8 million.
- At year-end, short-term borrowings were $541.3 million and long-term debt was $929.4 million. Shareholders’ equity was $2.12 billion. The Corporation’s total capital ratio was 13.2%, Common Equity Tier 1 ratio 10.4%, and leverage ratio 9.0%; management reported compliance with fully phased-in Basel III minimums and buffers.
- The Corporation reported $3.1 billion of additional FHLB borrowing capacity, $1.1 billion of Federal funds line availability (with $278.6 million borrowed), and $1.2 billion of Discount Window availability with no borrowings.
Material changes versus 2015
- Net income increased $12.1 million, helped by higher net interest income and non-interest income, partly offset by a $10.9 million increase in credit-loss provision and higher operating expenses.
- Net interest income rose with growth in earning assets, despite lower asset yields and a 3-basis-point decline in margin. Deposit growth was concentrated in demand and savings accounts; time deposits declined on average.
- Non-interest expense growth was driven principally by salaries and benefits, up $22.5 million, and software expense, up $2.2 million. Other outside services declined as BSA/AML remediation costs eased.
- Investment securities gains fell to $2.6 million from $9.1 million. The 2015 comparison also included a $5.6 million loss on redemption of trust preferred securities, absent in 2016.
- Common dividends declared rose to $0.41 per share from $0.38. The Corporation repurchased approximately 1.5 million shares for $18.5 million during 2016.
Outlook, commentary and principal risks
- Outlook: The filing provides no specific earnings, revenue or margin guidance. Management’s stated priorities include profitable growth, strengthening compliance and risk management, and transitioning toward a customer-segment-oriented business model.
- Regulatory orders: The Corporation and its six bank subsidiaries remain subject to 2014–2015 BSA/AML consent orders requiring program enhancements and, in some cases, retrospective reviews. The orders restrict expansion activities, including acquisitions and branching. Management said progress had been made but gave no expected termination date.
- Fair-lending investigation: The Department of Justice expanded an investigation into potential discrimination based on race and national origin involving Fulton Bank and three other subsidiaries, covering lending activity from January 1, 2009 onward. The Corporation said it could not estimate the timing, settlement, penalties or remediation costs.
- Asset-size regulation: Fulton Bank reported $10.7 billion in assets. If it remained above the threshold through March 31, 2017, the filing expected additional CFPB supervision, stress-testing requirements and potentially higher FDIC assessments. The planned multi-year consolidation of the six banks is conditional on regulatory approval and sustainable compliance-program improvements.
- Credit and market exposure: Commercial, commercial-mortgage and construction loans represented 74.5% of the loan portfolio; commercial mortgage and construction loans together were 46.7%. Rate sensitivity modeling estimated net interest income changes of +4.9% under a 100-basis-point increase and −5.8% under a 100-basis-point decrease, subject to model assumptions and customer behavior.
- Contingencies and unusual assets: The company disclosed a DOJ fair-lending inquiry and a lawsuit alleging more than $11.3 million in damages, plus other relief, against Fulton Bank and other defendants; outcomes remain uncertain. Student-loan auction-rate certificates had a $97.3 million fair value, were illiquid and valued using significant unobservable inputs. The securities portfolio had a net pre-tax unrealized loss of approximately $35.0 million.
- Other items: A $1.3 million valuation allowance was recorded against mortgage servicing rights in 2016. The filing identifies adoption of the CECL expected-credit-loss standard, which management intended for its first quarter of 2020, as a potential material change to allowance methodology, capital and results.
Important facts for investors to verify
- Progress toward satisfying the BSA/AML consent orders, the scope of any retrospective remediation, related costs and restrictions on growth.
- Developments and potential financial or operational consequences from the DOJ fair-lending investigation and the Agostino litigation.
- Whether Fulton Bank crossed the $10 billion asset threshold through March 31, 2017, and the resulting CFPB, stress-testing and FDIC assessment requirements.
- Loan growth, commercial real estate concentrations, criticized-loan trends, allowance adequacy and performance of modified loans.
- Deposit retention and funding costs as rates change, sensitivity of net interest margin, and the assumptions behind liquidity and interest-rate models.
- Valuation and liquidity assumptions for auction-rate certificates, securities unrealized losses, and the effect of CECL implementation.
- The maturity and refinancing of debt, including $100 million of subordinated notes due May 1, 2017, and the capacity of subsidiary banks to upstream dividends.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2016; management also concluded that disclosure controls were effective.