FULT

Fulton Financial Corp. 10-Q Summary: Quarter Ended June 30, 2003

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2003, for Fulton Financial Corporation, a Pennsylvania-based financial holding company. The company operates ten community banks and provides investment management and trust services. As of July 31, 2003, there were 105,219,000 shares of common stock outstanding. The filing notes the completion of the acquisition of Premier Bancorp, Inc. on August 1, 2003, which will be accounted for prospectively.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Growth: Net income increased 3.2% in Q2 and 4.4% YTD compared to 2002, driven by higher non-interest income and a lower loan loss provision, which offset a decline in net interest income.
• Net Interest Margin Compression: The net interest margin decreased 57 basis points in Q2 (to 3.91%) due to Federal Reserve rate cuts. Average yields on earning assets fell 104 basis points, outpacing the 60 basis point decline in the cost of funds.
• Non-Interest Income Surge: Total other income rose 29.2% in Q2. Mortgage banking income jumped 110% to $5.8 million due to increased refinancing activity and lower mortgage rates. Investment securities gains increased 143.9% to $4.8 million.
• Asset Mix Shift: Average investment securities increased 29.6% as deposit growth outpaced loan growth. Conversely, the average loan portfolio decreased slightly, with residential mortgages declining 15.6% due to refinancing.
• Expense Management: Total other expenses increased 2.8% in Q2, primarily due to higher salaries (driven by commissions) and occupancy costs, partially offset by lower data processing and advertising expenses.

Outlook, Risks, and Management Commentary

• Interest Rate Risk: Management anticipates further net interest margin compression in Q3 2003 following the June Federal Reserve rate cut. The company is managing a positive gap position by increasing floating-rate commercial loans and utilizing Federal funds purchased to reduce sensitivity.
• Mortgage Banking Volatility: While mortgage banking income is currently strong due to low rates, management warns that a sustained increase in mortgage rates (which rose to 5.80% in July 2003) could reduce future income.
• Debit Card Revenue Risk: Recent legal settlements between Visa/MasterCard and third parties are expected to reduce earnings rates on debit card purchase volumes by at least one-third starting August 1, 2003.
• Asset Quality: Non-performing assets increased to $38.9 million (0.45% of total assets) from $32.9 million in the prior year, largely due to one commercial account. Net charge-offs remained low at 0.15% of average loans (annualized).
• Capital and Liquidity: The company remains "well-capitalized" under regulatory standards. Liquidity is supported by strong deposit growth and access to Federal Home Loan Bank advances. The company repurchased 1.2 million shares of treasury stock in the first half of 2003.

Investor Verification Checklist

• Margin Sustainability: Verify the impact of the June 2003 Fed rate cut on Q3 net interest margin and the effectiveness of the company's asset/liability management strategies.
• Mortgage Rate Sensitivity: Monitor the trajectory of 30-year fixed mortgage rates to assess the sustainability of the 110% increase in mortgage banking income.
• Debit Card Settlement Impact: Quantify the specific revenue reduction expected from the Visa/MasterCard settlement effective August 2003.
• Acquisition Integration: Review the final purchase price allocation and goodwill recognition for the Premier Bancorp acquisition completed in August 2003.
• Equity Impairment: Confirm if additional "other than temporary" impairment charges are required for the equity portfolio, given the $3.2 million charge already taken in Q1.