DBRS Comments on the Q4 Earnings of Fulton Financial Corporation – Senior at A (low)

DBRS commented today on the Q4 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 $19.3 million for the quarter, up from $18.3 million in the previous quarter and from a net loss available to common shareholder of $102.3 million in Q4 2008. The improvement on a sequential quarter basis was driven by margin expansion that improved net interest income and more than offset higher other-than-temporary impairment charges. Excluding securities gains and losses, non-interest income was flat as strong mortgage banking results were countered by decreasing revenues across other fee categories. With only a minor increase in nonperforming assets (NPAs), Fulton provisioned $45 million for loan losses, which was consistent with Q3 2009 levels. Fulton continues to do a good job of growing lower-cost core deposits, which has benefited the net interest margin (NIM).

Although stabilizing, asset quality remains the largest challenge facing the Company. NPAs inched up 1.4% to $305.0 million, or 2.54% of total loans and OREO. This compares to 2.51% in the third quarter and 1.82% a year ago. Nonperforming loans (NPLs) were flat and construction NPLs, which represent 33% of total NPLs, declined approximately $12 million. However, early-stage delinquencies trended up and economic uncertainty remains, which could keep asset quality pressured. Meanwhile, annualized net charge-offs (NCOs) increased to 0.97% of average loans from 0.81% in the third quarter. The increase in NCOs was primarily driven by higher construction and C&I charge-offs. The provision exceeded NCOs by $15.8 million, which increased the allowance for credit losses to a sufficient 2.15% of loans outstanding. Management indicated that businesses remain cautious, which should keep loan growth muted.

Driving the improvement in earnings, NIM increased another 12 bps to 3.67% during the quarter. Fulton has been able to decrease funding costs faster than asset yield declines as more expensive CDs repriced lower. More importantly, the Company continues to attract lower cost core deposits. Noninterest and interest bearing deposits both grew nicely during the quarter and more than offset declining CD balances. Margin expansion should continue as another $1.3 billion in CDs mature in Q1 10 as well as $151 million in higher cost FHLB advances. Even with a modest earning asset decline, net interest income improved $3.3 million, or 2.5%, on a linked quarter basis.

Tangible common equity to tangible assets strengthened 4 bps to an adequate 6.30%. Nonetheless, Fulton has yet to make definitive plans to repay its $376.5 million in TARP funds. Management has indicated it would repay TARP in a shareholder friendly way once the fragile economic recovery becomes more solid and the regulators settle on appropriate capital guidelines.

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.