DBRS Ratings on Fulton Financial Unchanged after 3Q12 Results – Senior at A (low); Stable Trend

DBRS, Inc. (DBRS) today has commented 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 3Q12 results. The trend on all ratings is Stable. Despite a modest narrowing of its net interest margin (NIM) and decline in interest earning assets, Fulton’s earnings increased by 4.2% to $41.6 million for 3Q12, from $39.9 million for 2Q12. Driving the improved linked-quarter results was the Company’s stabilizing credit costs and lower non-interest expense. Specifically, higher QoQ earnings reflected a 9.8% decrease in provisions for loan loss reserves and a 1.9% decrease in non-interest expense, partially offset by a 1.6% decrease in total revenues.

DBRS notes that a hallmark of Fulton has been its low cost base and solid efficiency, which reflects positively on the Company’s conservative management profile. On a linked-quarter basis, higher salaries and employee benefits, and outside consultant expense for compliance and risk management initiatives, were more than offset by lower OREO/repossession expense, provisions for potential losses on previously sold residential mortgages and reserves for state taxes.

Lower QoQ revenues reflected a 1.2% decrease in net interest income and a 2.5% decline in non-interest income. Spread income contraction was attributable to 4 basis points narrowing of NIM to a still solid 3.74% along with a 1.0% decline in average earning assets. The narrower NIM was driven by declining earning asset yields outpacing decreasing funding costs. Lower average earning assets mostly reflected a decline in the Company’s securities portfolio and to a far lesser extent, in its loan portfolio.

Lower QoQ non-interest income mostly reflected a decline in gains on securities sales. Excluding these gains, fee income was up a modest 0.3%, driven by higher other service charges and fees and other revenues including investment, corporate and life insurance. During 3Q12, mortgage banking income was down 4.9%, reflecting a decrease in mortgage servicing income, partially offset by an increase in gains on sale of loans. The decline in mortgage serving income was driven by an increase in the valuation allowance for mortgage servicing rights. While, higher gains on sales of loans were driven by higher pricing spreads and an increase in the volume of new loan commitments.

Despite the challenging business environment, DBRS views Fulton’s asset quality as sound and improved. During 3Q12, non-performing assets (NPAs) declined by $24.3 million, or 9.1%, and represented 2.02% of loans and OREO at September 30, 2012, down from 2.22% at June 30, 2012. Lower NPAs reflected decreases across most loan types. Meanwhile, net charge-offs (NCOs) decreased to 0.84% of average loans for 3Q12, from 1.55% for 2Q12. Lower NCOs mostly reflected the non-recurrence of the prior quarter’s loan sale, which included charge-offs. Excluding these charge-offs, linked-quarter NCOs were flat. Finally, DBRS notes that Fulton’s allowance for credit losses remains solid at 1.97% of total loans and 110% of non-performing loans.

The Company’s sound funding profile is underpinned by a high level of core deposits which mostly funds the loan portfolio. During the quarter, average deposits increased by 1.9%, driven by higher levels of non-interest and interest bearing demand, and savings deposits. Higher demand and savings deposits mostly reflected higher business and municipal account balances. The Company’s securities portfolio, which represents 17.1% 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 9.65%, capital remains ample providing the Company the ability to increase its dividend, grow assets (both organically and through acquisitions) or buyback stock. Fulton recently raised its dividend by 1 cent/share (increase of 14.3%) and currently has a 5 million share repurchase program in place that expires at YE2012. During 3Q12, the Company bought back 2.1 million shares. Finally, the Company believes that its current capital levels meet the fully phased in minimum capital requirements of Basel III, including capital conservation buffers, as proposed in the latest NPR.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. 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
Approver: Roger Lister
Initial Rating Date: 19 January 2005
Most Recent Rating Update: 25 September 2012

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