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 rating at R-1 (low). The trend on all ratings is Stable. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

Fulton’s ratings and Stable trend reflect the Company’s entrenched community banking franchise that extends into five mid-Atlantic States, its pressured, yet resilient earnings generation, relatively sound asset quality, and healthy capital position. The ratings also take into consideration the Company’s elevated concentration in commercial real estate loans (CRE).

Except for a lone quarterly loss in 4Q08, driven by a goodwill impairment charge, Fulton has been consistently profitable, evidencing its resilient earnings generation capabilities. This solid track record of profitability, in part, reflects its disciplined expense control, which is a hallmark of the Company. Nonetheless, as with most banks, the sustained low interest rate environment and higher regulatory/compliance costs, continue to pressure earnings. Importantly, quarterly provisions for loan loss reserves continue to trend down, reflecting the Company’s stabilizing credit quality. Nonetheless DBRS notes that the level of provisions remains elevated, especially when compared to the Company’s income before provisions and taxes.

Benefiting from lower credit costs and higher mortgage banking income, the Company reported $39.9 million of net income for 2Q12, up modestly from $38.1 million for 1Q12. Higher earnings were driven by an 8.9% decrease in provisions for loan loss reserves and a 3.3% increase in noninterest income, partially offset by a 0.8% decrease in spread income. Higher fee income was mostly attributable to a 10.9% increase in mortgage banking income. Meanwhile, slightly lower spread income reflected a 7 basis point narrowing of net interest margin (NIM) to a still high 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. Meanwhile, the Company’s higher level of average earning assets was mostly attributable to a 4.0% increase in securities, partially offset by a 0.1% decrease in loans. Although most loan types contracted QoQ, the Company had some success in growing its commercial real estate (up 0.4%) and residential mortgage (up 3.7%) loan portfolios.

Another rating consideration for Fulton is its sound funding position, which is underpinned by a sizable core deposit base that mostly funds its loans. A securities portfolio, which represents 17.6% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve round out Fulton’s liquidity profile. DBRS notes that the Company’s securities book consists mostly of good quality agency CMOs and MBS.

Despite the challenging business environment, the Company’s asset quality continues to stabilize. During 2Q12, Fulton expedited the reduction of its troubled loans through the sale of $44.1 million of non-accrual CRE, C&I, and construction loans. The sale contributed to a 16% decline in nonperforming assets to $266.3 million, or 2.22% of loans and OREO at June 30, 2012, from $317.5 million, or 2.65%, at March 31, 2012. Meanwhile, 2Q12 net charge-offs (NCOs) increased to 1.55% of average loans from 0.94% for 1Q12. Excluding the $21.2 million of charge-offs associated with the loan sale, Fulton’s NCOs declined to 0.84% of loans and OREO.

DBRS considers Fulton’s relatively high level of CRE loans, which represent 39% of total loans, a concentration risk. Somewhat reducing this risk, a material component of this portfolio is owner occupied loans, which have a risk profile more akin to C&I loans.

Fulton’s healthy capital position provides solid loss absorption capacity and the potential for balance sheet growth through either organic means or acquisitions. Utilizing some of its excess capital, in June 2012, the Company announced a five million (2.5% of outstanding stock) share repurchase program that will terminate at YE12. Fulton’s strong capital profile includes a tangible common equity ratio of 9.49%, a Tier 1 capital ratio of 13.2% and a Total capital ratio of 15.4%, as of June 30, 2012. DBRS notes that Fulton’s is already in compliance with the latest NPR for Basel III capital requirements. Specifically, the Company estimates its Tier 1 common ratio to be 11.1%, which is comfortably above the 7% minimum.

Fulton Financial Corporation, a bank holding company headquartered in Lancaster, PA, had $16.3 billion in assets at June 30, 2012.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Rating Committee Chair: William Schwartz
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.