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). At the same time, DBRS discontinued the ratings of two trust preferred securities which were redeemed. 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 still resilient earnings generation, sound and improving asset quality, and healthy capital position. The ratings also take into consideration the Company’s somewhat elevated concentration in commercial real estate loans (CRE) and pressured DBRS-calculated adjusted income before provision and taxes (IBPT). As it is for most banks in the current environment, DBRS views improving IBPT to be the Company’s foremost challenge. Additionally, a further erosion of IBPT from current levels could place negative pressure on the Company’s ratings.

Except for one quarterly loss in 4Q08, driven by a goodwill impairment charge, Fulton has been consistently profitable through the cycle. This solid track record of profitability, in part, reflects its longstanding focus on expense management, which continues today. However, as with most banks, the sustained low interest rate environment and higher regulatory/compliance costs continue to pressure earnings. Positively, credit quality as well as the costs associated with higher levels of OREO and NPAs have continued to improve.

DBRS considers Fulton’s 2013 earnings as highlighting both its progress, but also the challenges facing the industry, especially around revenue generation. The decline in NPAs and lower NCOs allowed for a much smaller loan loss provision. However, revenues declined YoY stemming from a volume driven drop in mortgage banking activity and lower net interest income which declined despite in average earning assets growth due to ongoing NIM pressure. Meanwhile, expenses were higher as the Company completed its core processing system conversion, as well as higher professional fees. Some of these expense increases are likely to be temporary. For 2014, the Company is keeping an eye on expenses and is focused on a number of efficiency initiatives to help fund further investments in technology as well as increased regulatory costs. Management anticipates these initiatives, including a branch consolidation, will reduce annual expenses by approximately $8.0 million. These actions should help the Company to improve IBPT.

DBRS sees Fulton’s financial profile as returning to its more historical levels, providing support for its ratings, as the Company’s asset quality has improved and it continues to maintain solid levels of capital and liquidity. DBRS considers Fulton’s relatively high level of CRE and Construction loans, which represent 44% of total loans, a concentration risk. Somewhat mitigating 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. During 2013, the Company repurchased eight million shares of its common stock and is authorized to repurchase up to four million additional shares, or approximately 2.1% of its outstanding shares, through March 31, 2014. Still, at December 31, 2013, Fulton reported solid capital ratios including a tangible equity to tangible assets ratio of 9.33%.

Fulton Financial Corporation, a bank holding company headquartered in Lancaster, PA, reported $16.9 billion in assets at December 31, 2013.

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:Support Assessment for Banks and Banking Organisations and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All DBRS methodologies and criteria can be found on DBRS website under Methodologies.

The sources of information used for this rating include company documents 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: 25 September 2012

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