DBRS: Fulton’s Earnings Pressured on NIM Decline, Expenses

Summary:
• Fulton reported 4Q14 net income of $37.9 million, reduced from the $38.6 million earned in 3Q14, largely due to higher expenses as well as a modest decline in revenues.
• DBRS views the quarterly results as sound, despite the ongoing challenges of heightened regulatory, compliance and technology infrastructure spend as well as the difficult rate environment.
• 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) 4Q14 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 4Q14, results equated to a 0.88% return on assets and a 9.96% return on average tangible equity.

A decrease in net interest income reflected NIM pressure, partially offset by modest earning asset growth. DBRS views the Company as well positioned for rising rates, although near term modest NIM compression is expected to continue due to ongoing pressure on earning asset yields. Non-interest income declined on lower overdraft fees and a drop in mortgage banking income as decreasing spreads resulted in lower sales gains. Expenses were up QoQ, although previous expense reduction initiatives helped offset the added costs from higher salaries and employee benefits. Additional expense reduction activities are in the works including further branch consolidations.

During the quarter, the Company entered into a $100 million accelerated share repurchase program (ASR), funded by a subordinated debt issuance, and paid an additional special common stock dividend. This activity capped a year of capital management activity that returned approximately 100% of earnings to shareholders. Nonetheless, Fulton continues to report strong capital ratios, which included a tangible common equity to tangible assets ratio of approximately 8.8%.

Despite the ongoing impact and added expenses 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.