Fulton Financial Corp. 10-Q Summary: Quarter Ended September 30, 2009
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009, for Fulton Financial Corporation, a Pennsylvania-based financial holding company. The filing includes unaudited consolidated financial statements and management's discussion and analysis. The company operates primarily through its subsidiary banks, focusing on commercial and consumer lending, deposit gathering, and investment management services.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Income (Total) | $23.3 million | $49.5 million |
| Net Income Available to Common Shareholders | $18.3 million | $34.4 million |
| Diluted EPS (Common) | $0.10 | $0.20 |
| Net Interest Income | $132.8 million | $384.9 million |
| Provision for Loan Losses | $45.0 million | $145.0 million |
| Total Assets | $16.53 billion | (Balance Sheet Item) |
| Total Deposits | $12.03 billion | (Balance Sheet Item) |
| Allowance for Loan Losses | $234.5 million | (Balance Sheet Item) |
| Net Cash Provided by Operating Activities | (N/A) | $206.4 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income available to common shareholders decreased 37.1% for the quarter and 64.2% for the nine-month period compared to 2008. Income before taxes dropped 24.8% (quarter) and 55.1% (nine months).
- Provision for Loan Losses: The provision increased significantly by 68.5% ($18.3 million) for the quarter and 165.4% ($90.4 million) for the nine months, driven by rising non-performing assets and net charge-offs.
- Net Interest Margin Compression: The net interest margin (FTE) declined to 3.55% for the quarter and 3.48% for the nine months, down from 3.77% and 3.71% in the prior year periods, due to lower asset yields in a falling rate environment.
- Asset Quality Deterioration: Non-performing assets rose to $300.9 million (1.82% of total assets) from $186.4 million (1.15%) in the prior year. Net charge-offs increased to $24.2 million for the quarter.
- Deposit Growth: Total deposits increased by $1.48 billion (14.0%) year-over-year, largely due to growth in time deposits and noninterest-bearing demand accounts.
Outlook, Risks, and Management Commentary
- Investment Impairments: The company recorded $2.8 million in other-than-temporary impairment (OTTI) charges for the quarter, primarily related to financial institution stocks and pooled trust preferred securities. This is a significant reduction from the $10.7 million recorded in the same period in 2008.
- Auction Rate Securities (ARCs): The company completed the repurchase of all eligible ARCs held by customers during the first half of 2009, eliminating the associated financial guarantee liability. The company holds $285.6 million in ARCs as investments, which are currently illiquid but rated mostly investment grade.
- FDIC Expenses: FDIC insurance expense surged 357% for the quarter due to increased assessment rates and a special assessment in the second quarter of 2009.
- Capital Position: The company remains "well capitalized" under regulatory standards. Total shareholders' equity increased to $1.92 billion. The company holds preferred stock issued to the U.S. Treasury under the Capital Purchase Program (CPP).
- Market Risk: Management notes exposure to interest rate risk and equity market price risk, particularly regarding financial institution stocks and mortgage-backed securities. The company utilizes simulation and gap analysis to manage these risks.
Key Facts for Investor Verification
- Non-Performing Assets: Verify the trend in non-performing loans, specifically the $104.8 million in construction loans, which represent a significant portion of the deterioration in asset quality.
- Allowance Adequacy: Assess whether the $241.7 million allowance for credit losses is sufficient given the 0.81% annualized net charge-off rate and the concentration of risk in real estate sectors.
- Investment Portfolio Valuation: Review the valuation of $285.6 million in Auction Rate Securities and $112.6 million in corporate debt securities issued by financial institutions, which are subject to liquidity and credit risks.
- Dividend Policy: Note the reduction in the common stock dividend to $0.03 per share from $0.15 per share in the prior year, reflecting the pressure on earnings.
- Regulatory Capital: Confirm the impact of the $376.5 million preferred stock issuance to the U.S. Treasury on the company's pro-forma capital ratios.