DBRS Confirms Fulton Financial Corporation at A (low); Trend Stable

DBRS Inc. (DBRS) has today confirmed the ratings of Fulton Financial Corporation (Fulton or the Company) and its rated subsidiaries, including Fulton’s Issuer & Senior Debt rating at A (low) and Short-Term Instruments at R-1 (low). The trend on all ratings is Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The Company’s ratings and Stable trend are underpinned by its solid community banking franchise located across five Mid-Atlantic States, resilient earnings generation, pressured, yet sound asset quality and healthy capital position. Ratings also take into consideration the Company’s elevated concentration in commercial real estate (CRE) and construction lending. As with most banks, Fulton’s challenges going forward will be to maintain its trend of improving asset quality and generating sustained loan growth.

Excluding its 4Q08 loss, Fulton has maintained quarterly profitability throughout the economic downturn. Indeed, the Company’s resilient earnings reflect its solid net interest margin (NIM) and solid expense controls, which is a hallmark of the Company. Despite the difficult operating environment, Fulton reported net income available to common shareholders of $36.4 million for 2Q11, up from $33.8 million for 1Q11. Improved earnings were attributable to stabilizing credit costs, higher fee revenues and a wider NIM. The driver for the 5.3% or $2 million decline in provisions for loan loss reserves was the Company’s improved credit metrics. Higher non-interest income (up 2.6%) reflected increases across most line items, including service charges on deposits and mortgage banking income. Excluding its investment securities gains/losses, the Company’s non-interest income expanded by a sizable 8.7% to $47.7 million. Meanwhile, spread income was up modestly (up 0.8%), reflecting a 4 basis point widening of the Company’s NIM to a solid 3.95%, partially offset by a 1% contraction in average earning assets. Lower earning assets were attributable to declines in both securities and loans. Nonetheless, Fulton did have some success in growing its commercial and residential mortgage loan portfolios.

Another rating consideration is Fulton’s sound funding position, which is underpinned by a sizable core deposit base that represents 92% of net loans. During 2Q11, average deposits grew by a slight 0.4% and reflected a better mix, which contributed to the wider NIM. Specifically, higher cost time deposits contracted by 4.0%, while non-interest bearing demand deposits expanded by 5.6%. Positively, $841 million of time deposits (weighted average rate of 1.23%) will mature during 3Q11, which should further reduce funding costs. The Company’s securities portfolio, which represents approximately 17% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve round out its liquidity profile.

Although still strained by the protracted slow growing economy, the Company’s asset quality appears to have improved during the quarter. Specifically, NPAs, most of which are CRE and C&I related, contracted by 1.9% to $348 million during 2Q11 and represented 2.93% of total loans and OREO at June 30, 2011 as compared to 2.98% at March 31, 2011. Meanwhile, NCOs declined by $3.8 million to $38.5 million and equated to 1.30% of average loans (annualized) for 2Q11, down from 1.42% for 1Q11. Furthermore, at June 30, 2011, early stage delinquencies (30-89 days past due) modestly contracted to 0.85%, from 0.88% at March 31, 2011. With NCOs exceeding provisions for loan loss reserves by $2.5 million, Fulton’s allowance for credit losses was slightly down, yet still adequate at 2.27% of loans. Additionally, the allowance for credit losses to non-performing loans was an adequate 86.4%, slightly up from 85.3% at March 31, 2011

DBRS notes that Fulton has a concentration in CRE and construction loans, which equates to roughly 43% of total loans. Somewhat mitigating the CRE concentration is the Company’s conservative underwriting standards, sizable component of owner-occupied properties, and overwhelming majority of properties within the Company’s footprint. Positively, since YE07, Fulton’s construction portfolio has contracted by approximately 50% to $682 million, and now represents a more manageable 5.8% of loans.

Fulton’s healthy capital position provides solid loss absorption capacity, especially given current loss rates. The strong capital profile at June 30, 2011 includes a tangible common equity ratio of 9.1%, a Tier 1 capital ratio of 12.3% and Total capital ratio of 14.8%.

Fulton Financial Corporation, a bank holding company headquartered in Lancaster, PA, had $16.0 billion in assets at June 30, 2011.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Mark Nolan
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 19 January 2005
Most Recent Rating Update: 27 August 2010

For additional information on this rating, please refer to the linking document under Related Research.