DBRS Comments on Fulton Financial’s 3Q13 Results – Senior at A (low); Stable Trend

DBRS, Inc. (DBRS) has today commented on Fulton Financial Corporation’s (Fulton or the Company) 3Q13 financial results. DBRS rates the Company’s Issuer & Senior Debt rating at A (low) with a Stable trend. For 3Q13, Fulton reported earnings of $39.9 million, down 1.6% from $40.6 million earned in 2Q13. Earnings equated to a return on average assets and return on average common shareholders’ equity of 0.93% and 7.81%, respectively, slightly below recent results. Specifically, lower earnings were attributable to a decrease in fee income, namely mortgage banking, partially offset by lower provisions for credit losses. Net interest income and operating expenses were relatively flat QoQ.

The Company’s balance sheet fundamentals remain sound, reflecting loan and core deposit growth and continued stabilization in asset quality. Average loans grew 1.6% on a linked quarter basis with good growth in CRE and home equity. Overall, its Pennsylvania markets fueled 40% of the growth and over half of the growth came from new customers. Additionally, loan growth is expected to continue as the Company’s loan pipeline remains relatively strong although slowing somewhat in recent weeks. Furthermore, despite the continuing share repurchase program, Fulton’s capital position remains robust.

Lower QoQ revenues reflected a 9.6% decrease in non-interest income (excluding securities gains) partially offset by a 0.4% increase in net interest income. Despite the seven basis point decline in the net interest margin (NIM), net interest income increased QoQ largely reflecting growth in average interest earning assets partially offset by lower interest recoveries. Meanwhile, as with many banks, the drop in non-interest income largely reflected a decrease in mortgage banking income from lower gains on sales of loans as both volumes and spreads compressed. Service charges on deposit accounts also declined QoQ.

Operating expenses decreased 0.4% QoQ, reflecting lower lending related expenses, OREO and repossession expenses and state taxes. These declines were partially offset by an increase in provisions for losses on previously sold mortgages. The implementation costs for a new core processing system also impacted expenses. DBRS notes that all six banks have now been converted to the new system and the costs associated with the conversion totaled approximately $3.9 million YTD. 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 1.45% of loans and OREO, at September 30, 2013, down from 1.66%, at June 30, 2013. Meanwhile, net charge-offs decreased to 0.45% of average loans for 3Q13, from 0.56% for 2Q13. Finally, DBRS notes that Fulton’s allowance for credit losses remained solid at 1.66% of total loans and 126% of non-performing loans.

Fulton’s capital position remains ample providing the Company with the ability to increase its dividend, grow assets (both organically and through acquisitions) or continue to buyback stock. During the quarter, approximately 1.6 million common shares were repurchased completing an eight million share repurchase program. A new four million share repurchase program, representing 2.1% of outstanding shares, was approved to run through 1Q14.

Following the earnings call, Fulton announced that they had hired Patrick S. Barrett to replace the retiring Charles Nugent as CFO. Mr. Barrett’s resume includes stints at both SunTrust Banks, Inc., JPMorgan Chase & Co. as well as public accounting firms.

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

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