FULT

Fulton Financial Corp. Q1 2009 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2009. Fulton Financial Corporation is a financial holding company headquartered in Lancaster, Pennsylvania, operating primarily through its subsidiary banks. The quarter was significantly impacted by the ongoing financial crisis, characterized by deteriorating loan quality, increased credit losses, and liquidity challenges in the auction rate securities market.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income available to common shareholders dropped 80.6% year-over-year, primarily driven by a 345.6% increase in the provision for loan losses ($38.8 million increase) and a $6.2 million charge related to auction rate securities (ARCs).
• Asset Quality Deterioration: Non-performing assets increased 86.1% to $269.2 million. This was led by a 231.8% surge in non-performing construction loans and a 98.6% increase in non-performing commercial mortgage loans. Annualized net charge-offs rose to 1.00% of average loans from 0.15%.
• Net Interest Income: Decreased slightly by 1.4% due to a compression in the net interest margin (down 13 basis points) caused by lower yields on earning assets, partially offset by growth in average interest-earning assets.
• Other Income: Increased 24.5% to $46.9 million, driven by a 271.7% jump in gains on the sale of mortgage loans due to high refinancing volumes.
• Expense Increases: Total other expenses rose 10.0%. Notable increases included FDIC insurance premiums (up 397.4%) and operating risk losses (up 398.9%) due to the ARC guarantee liability.

Guidance, Outlook, and Risks

• Auction Rate Securities (ARCs): The company recorded a $6.2 million pre-tax charge related to its guarantee to purchase illiquid ARCs from customers. Management plans to reimburse customers for interest differentials on previously sold ARCs. The obligation to purchase remaining customer ARCs at par value expires May 15, 2009.
• Investment Impairments: The company adopted FSP FAS 115-2 early, resulting in a $6.3 million cumulative effect adjustment to retained earnings. During the quarter, $3.0 million in other-than-temporary impairment (OTTI) charges were recorded, primarily for pooled trust preferred securities and financial institution stocks.
• FDIC Assessments: FDIC premiums increased significantly due to higher assessment rates. Management noted a potential emergency special assessment of 20 basis points proposed by the FDIC, which could result in an additional $20 million in premiums if adopted.
• Capital Position: The company remains "well capitalized" under regulatory standards. It participated in the Treasury's Capital Purchase Program (CPP) in December 2008, issuing $376.5 million in preferred stock.
• Outlook: Management expects continued pressure on asset quality due to weak economic conditions, particularly in the construction and commercial real estate sectors. Net charge-offs are expected to remain elevated.

Investor Verification Checklist

• ARC Liability Exposure: Verify the status of the May 15, 2009 deadline for the ARC purchase guarantee and any potential remaining contingent liabilities.
• Construction Loan Concentration: Review the geographic concentration of non-performing construction loans, specifically in Maryland and Virginia markets, which accounted for 74.2% of non-performing construction loans.
• FDIC Assessment Impact: Monitor the finalization of the proposed FDIC emergency special assessment and its potential impact on future earnings.
• Investment Portfolio Valuation: Assess the fair value of Level 3 assets, particularly pooled trust preferred securities and single-issuer trust preferred securities, given the distressed market conditions.
• Allowance Adequacy: Evaluate whether the $200.1 million allowance for credit losses is sufficient given the rapid increase in non-performing assets and net charge-offs.