DBRS Comments on the Q1 Earnings of Fulton Financial Corporation – Senior at A (low)

DBRS commented today on the Q1 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 $8.1 million for the quarter, up from a $102.3 million loss in the previous quarter, but down from $41.5 million in Q1 2008. Excluding goodwill, securities gains/losses (includes other-than-temporary-impairment (OTTI)) and expenses associated with a guarantee to purchase customer auction rate securities, sequential quarterly net income available to shareholders was up slightly to $10.1 million from $8.7 million. Strong mortgage banking results and lower loan loss provisioning more than offset margin compression, lower service charges on deposit accounts, higher expenses and a full quarter’s worth of preferred stock dividends related to the Treasury’s Capital Purchase Program. Positively, DBRS notes that Fulton was able to increase deposit funding, albeit with higher cost certificates of deposit, and lower its reliance on wholesale funding during the quarter.

Asset quality remains pressured as residential construction and loans related to the housing sector continue to weigh on results. Non-performing assets (NPAs) increased across every loan category during the quarter as the economic recession continued. Specifically, NPAs rose to an elevated 2.24% of total loans and other real estate owned (OREO) in the first quarter, from 1.82% in the previous quarter and 1.27% in Q1 2008. Meanwhile, annualized net charge-offs (NCOs) increased to 1.00% of average loans for the first quarter from 0.89% in the prior quarter and only 0.15% a year earlier. Credit quality remains the weakest in the Washington D.C.-Baltimore corridor for construction loans, while New Jersey is showing the most signs of stress for other types of commercial real estate. Positively, Fulton’s direct consumer and home equity portfolios are performing better than expected. DBRS notes that the loan loss provisions exceeded NCOs by almost $20 million and built the loan loss reserve to 1.60% of loans outstanding. With housing prices yet to stabilize and unemployment increasing, DBRS expects credit costs to remain elevated the remainder of 2009.

As an early adapter of new FASB rules on marking securities, Fulton’s OTTI charges declined substantially to $3 million from $26 million the previous quarter. The Company was able to more than offset the Q1 OTTI charge with securities gains from debt securities. Fulton took another $6.2 million of charges to increase its guarantee liability associated with the decision to repurchase illiquid auction rate securities (ARS) held by customers. With $92 million in remaining exposure to ARS purchased by clients and the credit picture for Fulton’s securities still deteriorating, similar charges are likely in the second quarter.

Deposit growth outpaced earning asset growth, which reduced Fulton’s reliance on more volatile wholesale funding. While Fulton did run promotions to attract the deposits, DBRS views the deposit growth positively even with net interest margin (NIM) contraction. Specifically, NIM compressed 23 basis points to 3.45% during the quarter as assets yields fell more quickly than funding costs. With loans continuing to reprice at lower yields combined with a competitive deposit environment, NIM will likely remain under pressure.

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.