DBRS: Fulton’s Earnings Increase on Lower Credit Costs; Securities Gains

Summary:
• Fulton reported 1Q15 net income of $40.0 million, increased from the $37.9 million earned in 4Q14, largely due to the Company recording a $3.7 million negative provision for credit losses this quarter following a sharp drop in charge-off levels.
• DBRS views the quarterly results as sound, despite the ongoing challenges of NIM compression and heightened expenses for compliance and risk management.
• 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) 1Q15 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 1Q15, results equated to a 0.95% return on assets and a 10.96% return on average tangible equity; improved from returns achieved in 4Q14.

A decrease in net interest income reflected NIM pressure as well as a shorter day count and flat levels of earning assets. 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. Noninterest income, excluding securities gains, declined modestly on lower overdraft fees and seasonally lower debit card and merchant fees, partially offset by improved mortgage banking volumes. Expenses were also up modestly quarter-on-quarter (QoQ). Quarterly expenses reflected $1.5 million of implementation costs associated with cost savings initiatives including the consolidation of nine branches. Absent these expenses, linked quarter expenses declined reflecting lower outside services.

The negative loan loss provision was driven by lower allocation needs for impaired loans and the sharp decline in net charge-offs (NCOs). Fulton’s quarterly NCO rate was just 0.08% (annualized) of average loans this quarter improved from 0.25% linked quarter and the lowest level since 3Q07. However, NPLs did increase this quarter largely reflecting the deterioration of two commercial credits totaling $17.0 million.

The Company recently completed a $100 million accelerated share repurchase program and announced a new $50 million share repurchase program and an increase in its quarterly common stock dividend. Fulton remains committed to returning capital to shareholders. Fulton continues, however, to report strong capital ratios, which included a tangible common equity to tangible assets ratio of approximately 8.9% at quarter-end.

DBRS rates the Company’s Issuer & Senior Debt rating at A (low) with a Stable trend.

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