DBRS Ratings on Fulton Financial Unchanged after 2Q12 Results – Senior at A (low); Stable Trend

DBRS, Inc. (DBRS) has commented today that its ratings for Fulton Financial Corporation (Fulton or the Company), including its A (low) Issuer & Senior Debt rating, are unchanged following the release of 2Q12 results. The trend on all ratings is Stable. Despite the challenging operating environment, Fulton reported earnings of $39.9 million for 2Q12, up modestly from $38.1 million for 1Q12. Fulton’s higher QoQ earnings reflected higher fee revenues and lower provisions for loan loss reserves, somewhat offset by lower spread income and higher expenses. Specifically, the modest improvement in earnings reflected a 0.3% increase in total revenues and an 8.9% decrease in provisions for loan loss reserves, partially offset by a 1.3% increase in noninterest expense.

Higher QoQ revenues reflected a 3.3% increase in noninterest income, which more than offset a 0.8% decrease in net interest income. Higher noninterest income was mostly driven by an increase in mortgage banking income (up 10.9%), and, to a lesser extent, higher deposit service charges and other fees. Stronger mortgage banking income reflected higher pricing spreads and an increase in volume of new loan commitments. DBRS notes that Fulton reported gains on sale of securities of $1.5 million for 2Q12 and $1.3 million for 1Q12. Excluding these gains, fee income increased by 2.8% QoQ.

Lower linked-quarter spread income was attributable to a 7 basis point narrowing of Fulton’s net interest margin (NIM) to a still ample 3.78%, somewhat offset by a 0.9% increase in average earning assets. The narrower NIM reflected declining earning asset yields outpacing decreasing funding costs. As with most banks, DBRS anticipates that Fulton’s NIM will remain pressured over the intermediate term. Higher average earning assets were mostly driven by a 4.0% increase in securities, partially offset by a 0.1% decrease in loans. The decline in loans was driven by modest contraction across most loan types. Nonetheless, the Company did have some success in growing its commercial real estate (up 0.4%) and residential mortgage (up 3.7%) loan portfolios.

Higher QoQ noninterest expense mostly reflected higher other expenses (up 15%) and professional fees (up 15.6%). The increase in other expenses reflected higher consulting service cost, mostly related to the Company’s enterprise wide risk management and compliance effort.

Despite the challenging business environment, DBRS views Fulton’s asset quality as relatively sound. During 2Q12, the Company sold $44.1 million of non-accrual commercial mortgage, commercial & industrial and construction loans, which contributed to a 16% decline in nonperforming assets to $266.3 million, or 2.22% of loans and OREO at June 30, 2012, as compared to $317.5 million, or 2.65%, at March 31, 2012. Meanwhile, net charge-offs (NCOs) increased to 1.55% of average loans for 2Q12, up from 0.94% for 1Q12, reflecting the $21.2 million of charge-offs associated with the loan sale. Excluding these charge-offs, NCOs declined to 0.84% of loans and OREO. Finally, DBRS notes that Fulton’s allowance for credit losses remains solid at 1.98% of total loans.

The Company’s sound funding profile is underpinned by a high level of core deposits that mostly funds its loan portfolio. During the quarter, average deposits decreased by 0.7%, as lower levels of savings and time deposits more than offset higher levels of demand deposits. The Company’s securities portfolio, which represents 17.6% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve round out its liquidity profile. DBRS notes that Fulton’s securities book consists mostly of good quality CMOs and MBS.

With a tangible common equity ratio of 9.49%, capital remains ample providing the Company the ability to increase its dividend, grow assets (both organically and through acquisitions) or buyback stock.

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 DBRS Criteria – 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
Approver: Alan G. Reid
Initial Rating Date: 19 January 2005
Most Recent Rating Update: 23 August 2011

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