DBRS: Fulton’s 2Q14 Earnings Lower on BSA/AML Compliance Costs

Summary:
• Fulton reported 2Q14 net income of $39.6 million, reduced from the $41.8 million earned in 1Q14, as higher expenses (in part related to the recent BSA/AML Consent Order) were partially offset by an increase in revenues.
• DBRS views the quarterly results as sound, although earnings remain pressured by NIM compression and heightened compliance related costs.
• DBRS rates the Company’s Issuer & Senior Debt rating at A (low) with a Stable trend.

DBRS, Inc. (DBRS) considers Fulton Financial Corporation’s (Fulton or the Company) 2Q14 earnings as relatively sound, despite the impact of headwinds from continued net interest margin (NIM) pressure and the costs associated with building out the Company’s risk regulatory compliance and IT infrastructures. For 2Q14, results equated to a still relatively sound 0.94% return on assets and a 10.3% return on average tangible equity, slightly lower than returns achieved in 1Q14. Previous expense initiatives helped offset the added costs from outside services, primarily related to risk management and compliance initiatives. A broad-based increase in non-interest income provided some offset to elevated expenses. Higher noninterest income included better results from mortgage banking, seasonally higher merchant fees and increased service charges on deposits quarter-on-quarter. Meanwhile, a slight decline in net interest income reflected continued NIM shrinkage, reflecting both the interest rate environment as well as completive loan pricing pressures.

During 2Q14, the Company’s board approved a 4.0 million common share repurchase program, representing 2.1% of outstanding shares. Fulton continues to report strong capital ratios, which included a tangible equity to tangible assets ratio of 9.50%, up from the previous quarter, reflecting both earnings retention and a relatively flat balance sheet.

Despite the impact of the BSA/AML Consent Order, DBRS sees Fulton’s financial profile as relatively sound as the Company’s asset quality has improved and it continues to maintain substantial levels of capital and liquidity.

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