DBRS Changes Trend on Fulton Financial Corporation to Negative

DBRS has today changed the trend on the ratings of Fulton Financial Corporation (Fulton or the Company) and its rated subsidiaries to Negative from Stable, including Fulton’s Issuer and Senior Debt of “A” and its Short-Term Instruments of R-1 (middle). The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The change of trend to Negative from Stable reflects DBRS’s concern that financial performance and overall credit fundamentals have materially declined over the past few years. Consequently, Fulton’s credit metrics are now at or near the bottom of its “A”-rated peer group. With regard to financial performance, deposit funding, capital levels, profitability and asset quality have all deteriorated over the past several years, putting pressure on the Company’s current ratings. DBRS notes that the retail deposit franchise has shown signs of erosion, which potentially points to decreased franchise strength if not addressed. Furthermore, Fulton has a large commercial real estate (CRE) concentration, which could add further stress to credit quality given the turmoil in real estate markets that is likely to worsen.

The Company’s ratings are underpinned by a robust community banking franchise and historically strong asset quality. The ratings also take into consideration elevated CRE (including construction) concentrations and an increasing dependence on wholesale funding.

Return on assets (ROA) has slipped from 1.48% in 2004 to 1.01% in 2007, with Q1 2008 showing minor improvement at 1.05%. Meanwhile, tangible common equity to tangible assets has fallen 169 basis points to 6.23% at the end of the first quarter of 2008 from 2004, primarily as a result of acquisitions. Lastly, loan growth has far outpaced deposit growth, causing Fulton to rely more heavily on wholesale funding. Indeed, wholesale funding reliance totaled 39% at the end of the first quarter of 2008 compared with 25% at the end of 2004. Consequently, most of Fulton’s credit metrics rank at or below the median for similarly rated peers. Additionally, the Company’s CRE concentration totals 51% of the loan portfolio, or 605% of tangible common equity, which is significantly higher than its peers. Partially mitigating the CRE concentration concern is that Fulton has an excellent track record managing credit through adverse market conditions and that 30% of all CRE loans are owner-occupied loans that tend to be less risky.

Like most banks, Fulton’s loan loss provisioning increased dramatically in 2007 to deal with the more difficult operating and credit environment. However, the Company also incurred $25.1 million in charges related to problematic mortgages originated at Resource Bank (Resource), an affiliate that has subsequently been consolidated into Fulton Bank. The Company has also exited the national wholesale mortgage origination business as a result of these losses. Excluding the Resource charges, ROA would have been 1.13%. DBRS expects Fulton to continue to work through the Resource-related issues in 2008, incurring minimal additional charges.

Asset quality has deteriorated but remains comparable with its peers. Non-performing assets (NPAs) rose to 1.27% of total loans and other real estate owned (OREO) in Q1 2008 from 1.08% in Q4 2007 and 0.55% in Q1 2007. Non-accrual loans are roughly divided among commercial, commercial mortgage, construction and residential mortgage loans. Loans related to Resource represent almost all of the OREO balance and 19% of non-accrual loans. Positively, net charge-offs (NCOs) remained stable and very manageable at 0.15% of average loans and were related to construction and real estate-related loans. DBRS believes that modest further erosion in Fulton’s asset quality and elevated provision levels are likely, given the confluence of unrelenting turmoil in the housing sector and a recessionary economy.

The holding company’s stand-alone risk profile is adequate. Adjusted double leverage is elevated at 121% (at March 31, 2008), but the holding company has sufficient unencumbered liquidity of its own and access to other assets to cover its operating expenses and debt service obligations. However, the holding company does rely on dividends from its banking subsidiaries to pay dividends and interest on debt.

DBRS notes that a lack of financial performance improvement and loan growth continuing to outpace deposit growth could result in negative rating actions. Specifically, DBRS will closely monitor Fulton’s retail deposit franchise and its ability to fund the balance sheet with core deposits. Conversely, earnings improvement, an increase in capitalization and/or decrease in reliance on wholesale funding could result in the restoration of the Stable trend.

Fulton Financial Corporation, a bank holding company headquartered in Lancaster, Pennsylvania, had $16.1 billion in assets at March 31, 2008.

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