DBRS Ratings of Fulton Financial Unchanged after 4Q12 Results – Senior at A (low); Stable Trend

DBRS, Inc. (DBRS) has today 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 4Q12 results. The trend on all ratings is Stable. During 4Q12, Fulton reported earnings of $40.2 million, down 3.2% from $41.6 million for 3Q12. Lower QoQ earnings reflected some noise along with continued net interest margin (NIM) compression. Specifically, lower earnings were attributable to a 6.0% increase in noninterest expense, partially offset by a 2.1% increase in total revenues, and a 23.9% decrease in provisions for loan loss reserves.

Despite the difficult business environment, the Company’s balance sheet fundamentals remain sound, reflecting loan and deposit growth and continued stabilization in asset quality. Furthermore, Fulton’s capital position remains robust.

During the quarter, the Company divested its Global Exchange Group division, resulting in a pre-tax gain of $6.2 million ($2.2 million after-tax, including the write-off of non-deductible goodwill). Fulton utilized the proceeds from the transaction along with some short term borrowings to prepay roughly $20 million in high cost FHLB advances, which resulted in a $3.0 million pre-tax penalty ($2.0 million, after tax).

Underpinning Fulton’s resilient earning capacity is its solid operating efficiency, which is a hallmark of the Company. A material component of the increase in QoQ noninterest expense was the non-operating FHLB prepayment penalty. Higher expenses also reflected an increase in marketing costs, reversals of reserves for non-income state taxes in 3Q12, and an increase in reserves for losses on previously sold residential mortgages.

Improved QoQ revenues reflected a 14.6% increase in noninterest income, somewhat offset by a 2.7% decrease in net interest income. Higher noninterest income was mostly attributable to the gain on sale of the Global Exchange Group division, higher levels of mortgage banking income (up $2.2 million, or 21%) and an increase in investment management and trust services income (up $182,000, or 1.9%). Net servicing income increased $2.0 million, driven by the non-recurrence of a $2.1 million mortgage servicing rights impairment charge in 3Q12.

Given the low interest rate environment, the Company’s NIM remains under pressure and continues to impact net interest income. Specifically, lower spread income reflected a 9 basis points narrowing of NIM to a still solid 3.65% and a slight 0.2% decline in average earning assets. The narrower NIM was driven by declining earning asset yields outpacing decreasing funding costs. Lower average earning assets reflected a decline in the Company’s securities portfolio. Positively, Fulton’s average loans increased 0.7%, QoQ, driven by higher levels of commercial & industrial loans, commercial real estate loans, residential mortgages and home equity loans.

Despite the challenging business environment, DBRS views Fulton’s asset quality as sound and continuing to improve. During 4Q12, non-performing assets (NPA) continued to contract and represented 1.95% of loans and OREO at December 31, 2012, down from 2.02% at September 30, 2012. Lower QoQ NPA’s reflected decreases across most loan types, except for consumer, residential mortgage and home equity loans, which were negatively impacted by the OCC guidance related to exposures of customers who have gone through Chapter 7 bankruptcy. Meanwhile, net charge-offs increased to 0.91% of average loans for 4Q12, from 0.84% for 3Q12, reflecting additional charge-offs related to the OCC guidance. Finally, DBRS notes that Fulton’s allowance for credit losses remains solid at 1.9% of total loans and 107% 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 continued to grow (up 0.3%, QoQ) and the mix improved. Specifically, higher linked-quarter average deposits were driven by increased levels of demand and savings deposits, partially offset by lower levels of time deposits. The Company’s securities portfolio, which represents 16.9% 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 9.67%, capital remains ample providing the Company with the ability to increase its dividend, grow assets (both organically and through acquisitions) or buyback stock. During 1Q13, Fulton announced that its board of directors had approved the repurchase of up to eight million shares, or approximately 4.0% of the Company's outstanding shares, through June 30, 2013. This repurchase follows its 2012 buyback program which resulted in the repurchase of 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.

[Amended on June 25, 2014 to remove unnecessary disclosures.]