Fulton Financial Corp. 10-Q Summary: Q2 2007
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2007, for Fulton Financial Corporation, a Pennsylvania-based financial holding company. The company operates through its subsidiary banks, providing traditional banking services, investment management, and trust services. As of July 31, 2007, there were 173,257,000 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q2 2007 (3 Months) | Q2 2006 (3 Months) | YTD 2007 (6 Months) | YTD 2006 (6 Months) |
|---|---|---|---|---|
| Net Income | $39.8 million | $46.7 million | $81.0 million | $90.6 million |
| Diluted EPS | $0.23 | $0.27 | $0.46 | $0.52 |
| Net Interest Income | $120.9 million | $122.9 million | $242.7 million | $237.9 million |
| Net Interest Margin (FTE) | 3.70% | 3.90% | 3.72% | 3.89% |
| Provision for Loan Losses | $2.7 million | $0.9 million | $3.7 million | $1.9 million |
| Total Assets | $15.08 billion | $14.22 billion (Avg) | $15.08 billion | $13.85 billion (Avg) |
| Total Deposits | $10.32 billion | $9.99 billion (Avg) | $10.32 billion | $9.72 billion (Avg) |
| Return on Average Assets | 1.08% | 1.32% | 1.10% | 1.32% |
| Return on Average Equity | 10.52% | 13.01% | 10.79% | 12.92% |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 14.7% in Q2 and 10.6% YTD compared to the prior year. This was driven by higher operating expenses and increased loan loss provisions, partially offset by growth in non-interest income.
- Margin Compression: The Net Interest Margin (NIM) declined 20 basis points in Q2 to 3.70%. This was caused by a 50 basis point increase in the cost of interest-bearing liabilities (driven by a shift from low-cost demand deposits to higher-cost time deposits) outpacing a 25 basis point increase in asset yields.
- Expense Increases: Total other expenses rose 8.1% in Q2 and 11.3% YTD. A significant portion of this increase was due to $3.4 million in contingent losses recorded in Q2 (totaling $8.9 million YTD) related to the potential repurchase of residential mortgage loans sold into the secondary market.
- Asset Quality: Non-performing assets increased 28.2% to $74.1 million (0.49% of total assets) from $42.8 million in Q2 2006. Net charge-offs rose to $3.7 million in Q2, largely due to a $2.6 million charge-off related to a single non-prime mortgage originator customer.
- Loan Growth: Total loans increased 7.5% in Q2 and 10.1% YTD, with strong growth in commercial and commercial mortgage loans.
Outlook, Risks, and Management Commentary
- Mortgage Repurchase Risk: Management highlighted significant risk regarding loans originated by its Resource Bank affiliate. In July 2007, the company repurchased $34.7 million of loans, placing $21 million on non-accrual status. The company is phasing out its wholesale residential mortgage business to mitigate future repurchase liabilities.
- Interest Rate Environment: The company faces a flat to downward-sloping yield curve, which negatively impacts net interest income. Competitive pressures have forced repricing of deposits to higher rates.
- Equity Portfolio: The company holds a portfolio of financial institution stocks with a net unrealized loss of $8.8 million as of June 30, 2007. Declines in this portfolio have reduced investment securities gains.
- Capital and Liquidity: The company remains "well capitalized" under regulatory standards. In May 2007, it issued $100 million of ten-year subordinated notes to strengthen liquidity and fund growth.
- Stock Repurchases: The company completed a 2.1 million share repurchase plan in Q1 2007 and approved a new 1.0 million share plan in April 2007.
Investor Verification Checklist
- Contingent Losses: Verify the status of the $8.9 million contingent loss reserve and any additional repurchase requests for residential mortgage loans sold to secondary market investors.
- Non-Performing Assets: Monitor the trend of non-performing assets, specifically the $21 million in repurchased loans placed on non-accrual status in July 2007.
- Deposit Mix: Assess the sustainability of the shift from low-cost demand deposits to higher-cost time deposits and its long-term impact on Net Interest Margin.
- Equity Valuation: Review the valuation of the bank stock portfolio and the potential for further unrealized losses or write-downs.
- Single Borrower Concentration: Confirm the resolution of the $2.6 million charge-off related to the non-prime mortgage originator and ensure no similar concentrations exist.