DBRS Comments on the Q3 2009 Earnings of Fulton Financial Corporation – Senior at A (low)

DBRS commented today on the Q3 2009 earnings of Fulton Financial Corporation (Fulton or the Company). DBRS rates Fulton’s Issuer & Senior Debt at A (low) with a Stable trend. The Company reported net income available to shareholders of $18.3 million for the quarter, up from $8.1 million in the previous quarter, but down from $29.1 million in Q3 2008. The improvement on a sequential quarter basis was driven by margin expansion, lower provisioning needs and no FDIC special assessment this quarter. DBRS notes that other-than-temporary impairment charges were almost entirely offset with other securities gains. Positively, Fulton reported strong demand and savings deposits growth. This combined with certificate of deposit (CD) maturities repricing considerably lower helped improve the margin by 12 basis points (bps). Overall, DBRS views the quarter as solid and anticipates that the Company will continue generating acceptable results for its rating category.

The rate of deterioration in nonperforming assets (NPAs) has slowed and net charge-offs (NCOs) even declined during the quarter. Nevertheless, asset quality remains a challenge for Fulton. Specifically, nonperforming assets (NPAs) reached 2.51% of total loans and OREO from 2.46% in the second quarter. Meanwhile, annualized net charge-offs (NCOs) declined to 0.81% of average loans from 0.97% in the second quarter. The slower rate of growth in NPAs, as well as lower loan losses, allowed Fulton to decrease its loan loss provision by $5 million in Q3 2009. DBRS notes that the provision still exceeded NCOs, bolstering the loan loss reserve to an adequate 1.96% of loans outstanding. Housing prices have stabilized in much of Fulton’s footprint, but New Jersey and Maryland are still having problems. DBRS notes that the Company has been effective in bringing down its exposure to construction loans, which decreased another 6.1% to just over $1 billion. Residential mortgage and home equity loans saw the largest increase in NPAs as job losses continue to hamper the consumer’s ability to pay, but losses remain manageable.

Fulton’s net interest margin (NIM) increased 12 bps to 3.55% during the quarter, driven by lower funding costs. With more higher-priced CDs and wholesale funding maturing in Q4 2009, the margin should continue to benefit. Margin expansion is important as it helps improve the Company’s ability to work through asset quality issues without invading capital. DBRS notes that deposit trends remain favorable, as growth in core deposits more than offset a decline in time deposits.

All core fee business lines showed growth during the quarter with the exception of gains on sales of mortgage loans, as volume slowed from a very strong second quarter. Specifically, gains on the sales of mortgage loans declined $4.5 million, or 62.4%. The Company incurred another $2.8 million in other-than-temporary impairment charges stemming from two bank stocks and pooled trust-preferred securities, but Fulton was able to almost completely offset the loss with other securities gains. DBRS notes that the single issuer trust-preferred securities owned by the Company did partially recover in value, helping push other comprehensive income (OCI) into a gain position. The improved OCI, earnings and relatively stable balance sheet substantially improved Fulton’s tangible common equity to tangible assets ratio to 6.26% from 5.81% in the second quarter.

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.