DBRS Confirms Fulton Financial Corporation at A (low); Trend Stable

DBRS has today confirmed the ratings of Fulton Financial Corporation (Fulton or the Company) and its rated subsidiaries, including Fulton’s Issuer & Senior Debt rating at A (low) and Short-Term Instruments at R-1 (low). The trend on all ratings is Stable.

The rating action follows the Company’s Q2 2009 earnings release, in which Fulton delivered positive results in a very difficult operating environment. Specifically, Fulton reported $8.1 million in net income available to shareholders in the second quarter, bringing year-to-date 2009 earnings to $16.1 million. While year-to-date earnings are down 76% from the prior year, the results show the resiliency of the franchise, as it works through asset quality issues that are driven by the current recession. This resiliency is also evident in the Company’s ability to generate sufficient income before provisions and taxes (IBPT) to cope with credit costs. Positively, the Company has delivered its third consecutive quarter of robust deposit growth, which has enhanced liquidity and funding and lessened DBRS’s concern over a previously increasing wholesale funding reliance.

The Company’s ratings are underpinned by a robust community banking franchise and historically strong asset quality. The ratings also take into consideration elevated concentrations in commercial real estate (including construction) and a dependence on wholesale funding. DBRS notes that, if asset quality deteriorates more than currently anticipated to the point where increased loan loss provisioning invades capital, there would likely be negative ratings pressure. Conversely, a return to historical financial performance and generation of core deposit growth that continues to outpace loan growth could have positive rating implications.

On a linked quarter basis, earnings were basically flat. Higher net interest income, increased other services charges and fees, and lower charges related to the Company’s repurchase of client auction rate securities (ARS) were offset by a $7.7 million FDIC special assessment, and lower but still strong mortgage banking results. Excluding the FDIC special assessment and ARS charges, expenses would have declined modestly, which evidences solid expense control. DBRS notes that loan loss provisioning remained constant at $50 million, but is still elevated. Compared to the first six months of 2008, provisioning has increased $72.1 million, or 258%, and is the primary driver of the 76% decline in net income available to common shareholders.

Working through asset quality issues remains the primary challenge for Fulton, but DBRS notes that the pace of nonperforming asset (NPAs) growth slowed during the quarter. In Q2 2009, NPAs increased another $22.9 million to $292.2 million, or 2.46% of total loans and OREO. This compares to 2.24% in Q1 2009 and 1.42% a year ago. Construction remains the most problematic, but Fulton has seen deterioration across most of the loan portfolio given the recession. While NPAs did increase, Fulton did see declines in some asset classes in Q2 2009, including consumer and commercial real estate (excluding construction) loans. Positively, net charge-offs (NCOs) declined modestly to 0.97% of average loans compared to 1.00% of average loans in the prior quarter. Maryland and Virginia remain the most problematic regions within Fulton’s footprint, with particular weakness in construction loans. DBRS notes that Fulton has done a good job bringing the construction exposure down to 9% of the total loan portfolio, including a reduction of $142.7 million during Q2 2009 alone. With unemployment and the overall economy yet to stabilize, DBRS expects credit costs and NPAs to remain elevated at least through the remainder of the year.

Once a major concern, Fulton has delivered three consecutive quarters of solid deposit growth, which has reduced its reliance on wholesale funding, especially since loan demand has cooled. On a linked quarter basis, deposits grew another 2.6%, while the loan portfolio shrunk by 1.2%. The mix of the deposits has improved as well. Specifically, the Company grew overall deposits in Q2 2009 through growth in demand and savings deposits, even though CD balances declined. With another $3.1 billion in more expensive CDs maturing over the next six months, the margin should benefit as these CDs are replaced with lower yielding CDs or other deposit products.

Overall, liquidity remains solid, especially with new deposit growth being invested in shorter duration, low risk securities. Furthermore, tangible common equity to tangible assets remains adequate at 5.81%.

Fulton Financial Corporation, a bank holding company headquartered in Lancaster, PA, had $16.9 billion in assets at June 30, 2009.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.