FULT

Fulton Financial Corp. 10-Q Summary: Quarter Ended September 30, 2004

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2004, for Fulton Financial Corporation, a Pennsylvania-based financial holding company. The company operates twelve separate banks providing traditional banking services. The reporting period was significantly influenced by the acquisition of Resource Bankshares Corporation in April 2004 and the pending acquisition of First Washington Financial Corp, expected to close on December 31, 2004.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Growth: Net income increased 13.8% in Q3 and 10.1% for the nine-month period compared to 2003. This was driven primarily by an $18.7 million increase in net interest income and a $1.1 million decrease in the provision for loan losses.
• Acquisition Impact: The acquisition of Resource Bankshares (April 2004) and Premier Bancorp (August 2003) significantly expanded the balance sheet. Average earning assets grew 16.2% in Q3 and 19.0% for the nine months.
• Asset Quality Improvement: Non-performing assets decreased to 0.34% of total assets in Q3 2004 from 0.41% in Q3 2003. Net charge-offs improved to 0.06% of average loans (annualized) in Q3 2004, down from 0.14% in 2003.
• Expense Increases: Total other expenses rose 18.7% in Q3, largely due to the Resource acquisition ($8.3 million impact) and increased health insurance costs.
• Investment Gains: Investment securities gains decreased 52.3% in Q3 ($3.3 million vs. $7.0 million) due to lower sales of debt securities, though equity sales remained a revenue component.

Outlook, Risks, and Management Commentary

• Interest Rate Environment: Management notes that rising interest rates (Federal funds rate increased 75 basis points in 2004) have positively impacted the net interest margin as floating-rate assets reprice faster than deposits. However, higher rates may continue to suppress mortgage refinance volumes.
• Acquisition Strategy: The company is actively pursuing growth through acquisitions. The pending merger with First Washington Financial Corp (estimated purchase price $124 million) is expected to close by year-end 2004, expanding operations into New Jersey.
• Capital Management: The company maintains a "well-capitalized" status under regulatory guidelines. A new stock repurchase plan approved in June 2004 allows for the repurchase of up to 4.0 million shares; 1.37 million shares were repurchased by September 30.
• Risks: Key risks include credit deterioration in specific accounts, the impact of rising rates on borrower ability to pay, and equity market volatility affecting investment portfolio values and trust revenue.

Investor Verification Checklist

• Acquisition Integration: Verify the successful closing and integration of the First Washington Financial Corp acquisition by December 31, 2004.
• Loan Portfolio Quality: Monitor the commercial and commercial mortgage loan categories, which saw significant growth, for any signs of credit deterioration in a rising rate environment.
• Non-Interest Expense Control: Track the trajectory of health insurance costs and intangible amortization expenses to ensure they do not erode the margin benefits from rate increases.
• Mortgage Banking Revenue: Assess the sustainability of mortgage banking income given the saturated refinance market and the shift toward higher rates.
• Capital Ratios: Confirm that the company maintains its "well-capitalized" status as it integrates new assets and manages regulatory requirements.