DBRS Downgrades Fulton Financial Corporation to A (low); Trend Stable

DBRS has today downgraded all ratings for Fulton Financial Corporation (Fulton or the Company) and its rated subsidiaries, including its Issuer & Senior Debt rating to A (low) from “A”. The trend on all ratings is Stable. This rating action concludes the Under Review with Negative Implications status initiated on December 17, 2008.

The rating action follows the release of Q4 2008 and FY 2008 results, which resulted in a net loss available to common shareholders of $102.3 million and $6.1 million, respectively. The weak results for the quarter and year were negatively impacted by a large goodwill impairment charge, a significant increase in loan loss provisioning, other-than-temporary impairment (OTTI) charges on securities and losses related to a voluntary guarantee to purchase customer auction rate securities. The recent decline in financial performance combined with an increased reliance on wholesale funding led to the downgrade.

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 an increasing dependence on wholesale funding. DBRS notes that continued weakened performance stemming from asset quality pressure and loans growing faster than core deposits could place additional pressure on the ratings. Conversely, a return to historical financial performance and core deposit growth outpacing loan growth could have positive rating implications.

Previously, the Company announced several charges that materially affected fourth-quarter 2008 earnings. The largest charge was a $90 million goodwill impairment related to Fulton’s Columbia Bank reporting unit. While large, the impairment is a non-cash charge that does not impact regulatory capital ratios or affect liquidity; however, it may be indicative of declining franchise value. Fulton had also indicated pending OTTI charges related to pooled trust preferred securities. While these charges came in slightly lower than expectations, Fulton also incurred an additional $13.3 million in OTTI charges related to bank equity securities. Meanwhile, loan loss provisioning came in as previously announced at an elevated $65 million in Q4 2008, primarily related to deteriorating economic conditions and real estate collateral values.

Given the rapidly deteriorating economy that is showing little sign of stabilizing, Fulton’s asset quality remains under pressure in both the loan and securities portfolios. Non-performing assets (NPAs) rose to 1.82% of total loans and other real estate owned (OREO) in the fourth quarter, from 1.57% in the previous quarter and 1.08% in Q4 2007. Real estate construction loans remain the most problematic asset class, but there has been deterioration in all loan categories. Meanwhile, annualized net charge-offs (NCOs) increased to 0.89% of average loans for the fourth quarter from 0.38% in the prior quarter and 0.15% a year earlier. For the year, NCOs were 0.45% of average loans compared with only 0.09% in 2007. The outsized loan loss provision did exceed NCOs during the quarter, resulting in a significant loan loss reserve build of 28 basis points to 1.44%. In addition to continued elevated provisioning needs, DBRS notes that the difficult operating environment could result in additional OTTI charges from the remaining exposures related to pooled trust preferred and equity securities. These exposures totaled approximately $60 million and the Company has an additional $96 million in single name trust preferreds at December 31, 2008. Consequently, DBRS expects these headwinds to mute earnings in 2009.

In light of the $376.5 million preferred shares investment by the U.S. Treasury, DBRS notes that holding company liquidity and regulatory capital ratios have been greatly enhanced. The investment also provides an additional capital cushion to absorb future credit costs and other impairments.

While Fulton did exhibit strong time deposit growth in Q4 2008, demand and savings deposit balances have declined over the past year. However, roughly half of the time deposit growth was related to brokered CDs and jumbo time deposits, which DBRS does not consider core in nature. Overall, deposits grew 4.4% in 2008, while loans grew 7.5%, which increased the Company’s reliance on wholesale funding.

Fulton Financial Corporation, a bank holding company headquartered in Lancaster, Pennsylvania, had $16.2 billion in assets at December 31, 2008.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.