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). 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 sound and improving asset quality, and healthy capital position. The ratings also take into consideration the Company’s pressured core earnings generation, as measured by DBRS-calculated adjusted income before provisions and taxes (IBPT), and concentration in commercial real estate loans (CRE). DBRS views improving IBPT to be an ongoing challenge for Fulton as well as the industry given the difficult operating environment.

Given these challenges, DBRS currently views Fulton to be placed at the lower-end of similarly rated peers and a further degradation of IBPT could place negative pressure on the Company’s ratings. DBRS will look for the Company to deliver on its projected 2015 outlook and show improvements in generating revenue. DBRS currently does not see any positive rating pressure given the Company’s current rating level and the difficult interest rate environment for asset sensitive banks like Fulton.

Except for one quarterly loss in 4Q08, driven by a goodwill impairment charge, Fulton was consistently profitable through the financial crisis. 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 the previously higher levels of OREO and NPAs have improved.

DBRS considers Fulton’s earnings in recent periods as highlighting the difficult operating environment especially for asset sensitive banks like Fulton. The decline in NPAs and lower NCOs allowed for a much smaller loan loss provision. However, revenues declined YoY stemming from lower net interest income, due to ongoing NIM pressure, as well as a drop in noninterest income garnered from mortgage banking and overdraft fees. Meanwhile, expenses were modestly lower as the Company completed a number of efficiency initiatives to help fund a further investment in technology as well as increased regulatory costs, including costs entailed with complying with BSA/AML enforcement actions. These actions should help stem the decline in IBPT going forward.

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 reducing this risk, is the granular exposure limits the Company has maintained for both borrowers and projects.

Fulton’s healthy capital position provides solid loss absorption capacity and the potential for balance sheet growth through either organic means or acquisitions. During 2014, the Company repurchased 14.5 million shares of its common stock or approximately 7.5% of YE13 outstanding shares. The remainder of $100 million accelerated share repurchase program is expected to be finalized by 2Q15. Still, at December 31, 2014, Fulton reported solid capital ratios including a tangible common equity to tangible assets ratio of 8.83%.

Fulton Financial Corporation, a bank holding company headquartered in Lancaster, PA, had $17.1 billion in assets at December 31, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). All DBRS methodologies and criteria can be found on DBRS website under Methodologies.

The primary 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: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: 19 January 2005
Most Recent Rating Update: 28 January 2014

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