Fulton Financial Corp. 10-Q Summary: Quarter Ended September 30, 2007
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2007, for Fulton Financial Corporation, a Pennsylvania-based financial holding company. The company operates primarily through traditional banking activities, including lending, deposit gathering, and wealth management. The reporting period includes the full impact of the February 2006 acquisition of Columbia Bancorp.
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Net Income (in thousands) | $33,566 | $48,342 | $114,539 | $138,922 |
| Diluted EPS | $0.19 | $0.28 | $0.66 | $0.80 |
| Net Interest Income (in thousands) | $122,410 | $125,924 | $365,093 | $363,818 |
| Net Interest Margin (FTE) | 3.62% | 3.85% | 3.69% | 3.88% |
| Total Assets (in thousands) | $15,438,177 | $14,633,611 (Avg) | $15,438,177 | $14,114,512 (Avg) |
| Total Loans (in thousands) | $10,988,307 | $10,167,362 (Avg) | $10,988,307 | $9,750,452 (Avg) |
| Total Deposits (in thousands) | $10,291,186 | $10,181,192 (Avg) | $10,291,186 | $9,876,911 (Avg) |
| Shareholders' Equity (in thousands) | $1,554,120 | $1,446,312 (Avg) | $1,554,120 | $1,424,558 (Avg) |
| Return on Average Assets | 0.88% | 1.31% | 1.03% | 1.32% |
| Return on Average Tangible Equity | 15.76% | 25.14% | 18.42% | 24.34% |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 30.6% in Q3 2007 compared to Q3 2006, and 17.6% for the nine-month period. This was primarily driven by a significant increase in operating expenses and a higher provision for loan losses.
- Operating Risk Loss: The most significant driver of expense growth was a $16.0 million charge in Q3 (and $24.9 million for the nine months) related to mortgage banking operations at Resource Bank. These charges stemmed from actual and potential repurchases of residential mortgage loans and home equity loans sold to secondary market purchasers due to misrepresentations of borrower information and delinquencies.
- Net Interest Margin Compression: The net interest margin declined 23 basis points in Q3 2007 to 3.62% from 3.85% in 2006. This was caused by a shift in funding mix from lower-cost demand and savings accounts to higher-cost time deposits and borrowings, alongside lower interest income recoveries.
- Asset Quality Deterioration: Non-performing assets increased 84.9% to $107.0 million (0.69% of total assets) from $46.8 million in the prior year. This increase was largely due to the repurchase of approximately $35 million in residential mortgage loans, of which $20.8 million were classified as non-performing.
- Loan Growth: Despite the asset quality issues, the loan portfolio grew 6.8% in Q3 and 8.9% for the nine months, driven by commercial and commercial mortgage loans.
Guidance, Outlook, and Risks
- Resource Mortgage Restructuring: Management has exited the national wholesale residential mortgage business at Resource Bank to mitigate future repurchase risks. Resource Mortgage now reports directly to Fulton Mortgage, and the company intends to merge Resource Bank into Fulton Bank in Q1 2008.
- Reserve Adequacy: Management believes the $19.8 million in reserves recorded as of September 30, 2007, for known Resource Mortgage issues are adequate. However, they caution that continued declines in collateral values or identification of additional loans for repurchase could necessitate further reserves.
- Interest Rate Environment: The Federal Reserve lowered the federal funds rate by 50 basis points in September 2007. While this reduced funding costs, competitive pressures prevented deposit rates from falling as significantly, continuing to pressure the net interest margin.
- Equity Market Risk: The company holds a portfolio of bank stocks with a net unrealized loss of $12.9 million as of September 30, 2007. Declines in this portfolio have reduced realized gains, a historical component of earnings.
- Capital Position: As of September 30, 2007, the Corporation and its subsidiaries exceeded regulatory requirements to be considered "well capitalized."
Investor Verification Checklist
- Resource Mortgage Exposure: Verify the sufficiency of the $19.8 million reserve against outstanding repurchase requests ($11 million) and identified potential repurchases ($24 million).
- Non-Performing Assets Trend: Monitor the trajectory of non-performing assets, specifically the $13.7 million in repurchased loans placed on non-accrual status.
- Net Interest Margin Sustainability: Assess the company's ability to manage funding costs as customers continue to shift from core deposits to higher-yielding time deposits.
- Equity Portfolio Impairment: Review the status of the $12.9 million net unrealized loss in the bank stock portfolio for potential "other-than-temporary" impairment charges.
- Provision for Loan Losses: Evaluate the $4.6 million Q3 provision, which included a $1.1 million charge-off related to a single commercial mortgage company customer.