FULT

Fulton Financial Corp. 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Fulton Financial Corporation, a Pennsylvania-based financial holding company, for the period ended June 30, 2009. The company operates primarily through its subsidiary banks, offering commercial and consumer banking services. The report reflects the impact of the 2008-2009 financial crisis, including increased credit losses, regulatory capital purchases, and shifts in funding sources.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income available to common shareholders dropped significantly compared to the prior year. For the six months ended June 30, 2009, net income was $16.1 million, down from $67.2 million in the same period in 2008. This represents a 76% decrease.
• Provision for Loan Losses: The provision for loan losses surged to $100.0 million for the first half of 2009, compared to $27.9 million in the first half of 2008. This increase was driven by a deterioration in asset quality, with non-performing assets rising from 1.02% of total assets in June 2008 to 1.73% in June 2009.
• Net Charge-offs: Annualized net charge-offs increased to 0.99% of average loans for the first half of 2009, compared to 0.24% in the first half of 2008. Significant charge-offs occurred in construction, commercial mortgage, and commercial loan categories.
• FDIC Insurance Expense: FDIC insurance expense increased by $15.0 million for the six-month period, largely due to a special assessment of 5 basis points on insured deposits and higher assessment rates.
• Investment Securities: Other-than-temporary impairment (OTTI) charges decreased significantly compared to 2008. In the first half of 2009, OTTI charges were $6.4 million, compared to $28.6 million in the first half of 2008. This reduction was primarily due to lower charges on financial institution stocks.
• Mortgage Banking Gains: Gains on sales of mortgage loans increased by $11.0 million for the six-month period, driven by a 266% increase in loan origination volume due to low interest rates and high refinance activity.
• Deposit Growth: Total deposits increased by $1.2 billion (11.0%) from December 31, 2008, primarily due to growth in demand, savings, and time deposits, which helped reduce reliance on short-term borrowings.

Guidance, Outlook, Risks, and Contingencies

• Capital Purchase Program (CPP): The company participated in the U.S. Treasury's CPP in December 2008, issuing $376.5 million of preferred stock. This capital injection is included in regulatory capital. Pro-forma capital ratios excluding this amount would be lower but still above minimum requirements.
• Asset Quality Risks: Management highlights continued weakness in the economy and real estate markets, particularly in construction and commercial real estate sectors in Maryland and Virginia. Non-performing construction loans increased by 178% year-over-year.
• Auction Rate Securities (ARCs): The company purchased illiquid ARCs from customers to fulfill a guarantee. As of June 30, 2009, the company held $289.6 million in ARCs (fair value) with a cost basis of $298.8 million. The company does not currently consider these other-than-temporarily impaired but notes the risk of liquidity issues and potential future valuation changes.
• Residential Lending Contingencies: The company maintains reserves for potential repurchases of previously sold residential mortgages. As of June 30, 2009, total reserves/write-downs for these contingencies were $6.6 million.
• Interest Rate Risk: The company manages interest rate risk through Asset/Liability Management. Simulations indicate that a 100 basis point increase in rates would increase net interest income by approximately 1.9%, while a 100 basis point decrease would reduce it by 0.9%.
• Regulatory Capital: As of June 30, 2009, the company and its subsidiaries met all regulatory capital requirements and exceeded the thresholds to be considered "well capitalized."

Key Facts for Investor Verification

• Asset Quality Deterioration: Verify the trend in non-performing assets (up to 1.73% of total assets) and the adequacy of the allowance for loan losses ($214.2 million) given the significant increase in charge-offs, particularly in construction and commercial real estate.
• Provision Sustainability: Assess whether the $100 million provision for loan losses in the first half of 2009 is a one-time adjustment or indicative of ongoing credit stress in the portfolio.
• Auction Rate Securities Exposure: Review the valuation methodology and potential liquidity risks associated with the $289.6 million portfolio of ARCs, which are currently illiquid.
• Net Interest Margin Pressure: Monitor the impact of the low interest rate environment on the net interest margin (3.44% for the six months), which has compressed compared to prior periods.
• FDIC Assessment Impact: Confirm the ongoing impact of increased FDIC insurance assessments on future operating expenses.
• Capital Adequacy: Verify the company's regulatory capital ratios, both with and without the CPP preferred stock, to ensure continued compliance and "well capitalized" status.