DBRS Comments on Fulton Financial’s 2Q13 Results – Senior at A (low); Stable Trend

DBRS, Inc. (DBRS) has today commented on Fulton Financial Corporation’s (Fulton or the Company) 2Q13 financial results. DBRS rates the Company’s Issuer & Senior Debt rating at A (low) with a Stable trend. For 2Q13, Fulton reported earnings of $40.6 million, up 3.5% from $39.2 million earned in 1Q13. Earnings equated to a return on average assets and return on average common shareholders’ equity of 0.97% and 7.89%, respectively, in line with recent results. Specifically, higher earnings were attributable to a 4.2% increase in total revenues and a 10.0% decrease in provisions for loan loss reserves, partially offset by a 5.6% increase in non-interest expense and 12.2% higher income tax expense.

The Company’s balance sheet fundamentals remain sound, reflecting loan and core deposit growth and continued stabilization in asset quality. Average loans grew 2.2% on a linked quarter basis with good growth in C&I and CRE and its Pennsylvania markets fueling 71% of the growth. Additionally, loan growth is expected to continue as the Company’s loan pipeline remains relatively strong. Furthermore, despite the repurchase of approximately 2.2 million common shares during the quarter, Fulton’s capital position remains robust.

Higher QoQ revenues reflected a 1.9% increase in net interest income and a 10.4% increase in non-interest income (excluding securities gains). Despite the modestly declining NIM, net interest income increased QoQ largely reflecting higher interest recoveries and calls on debt securities and a decline in premium amortization on MBS and CMOs. Meanwhile, the growth in non-interest income reflected a broad based increase across most sources of fee income including mortgage banking income, which was up 34.6% due to an increase in the fair value of the mortgage servicing rights as well as a an increase in gains on sales of loans. Additionally, seasonal growth in merchant fee and debit card income drove the 11.7% increase in other service charges and fees. Service charges on deposit accounts and investment management and trust services revenues also increased QoQ.

Operating expenses increased QoQ. The increase reflected higher salaries and employee benefits driven by an increase in stock-based compensation expense, merit increases and higher headcount. Additionally, increased consulting costs, associated with regulatory compliance and risk management, as well as implementation costs for a new core processing system drove the QoQ bump in expenses. Despite this increase, DBRS views the Company’s expense base as well managed with the efficiency ratio remaining in the low 60% range.

Fulton’s asset quality continued to show improvement this quarter. Specifically, non-performing assets contracted and represented a manageable 1.66% of loans and OREO, at June 30, 2013, down from 1.87%, at March 31, 2013. A non-performing loan sale drove the bulk of the decrease. Meanwhile, net charge-offs decreased to 0.56% of average loans for 2Q13, from 0.62% for 1Q13. Finally, DBRS notes that Fulton’s allowance for credit losses remained solid at 1.72% of total loans and 115% of non-performing loans.

With a tangible equity ratio of 9.06%, Fulton’s capital position remains ample and is in excess of Basel III requirements, providing the Company with the ability to increase its dividend, grow assets (both organically and through acquisitions) or continue to buyback stock. During 2Q13, Fulton announced that its board of directors had extended its repurchase plan of up to eight million shares, or approximately 4.0% of the Company's outstanding shares through September 30, 2013. During the quarter, approximately 2.2 million shares were repurchased with approximately 1.6 million shares remaining authorized for repurchase under this plan.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]