DBRS: Fulton Reports Positive Core Op Leverage in 3Q; Earnings Lower QoQ on Trust Pref. Redemption

Summary:
• Fulton reported 3Q15 net income of $34.3 million, down from the $36.7 million earned in 2Q15, lower largely due to a $5.6 million loss on redemption of $150 million trust preferred securities.
• DBRS views Fulton’s core results as sound, despite the ongoing challenges of NIM compression, as revenues were up quarter-on-quarter (QoQ) and expenses were up just modestly.
• 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) 3Q15 earnings as relatively sound, despite the impact of headwinds from continued net interest margin (NIM) pressure, and the ongoing costs associated with building out the Company’s risk, regulatory, compliance, and IT infrastructures.

An increase in net interest income reflected growth in average earning assets and an extra day in the quarter partially offset by a two basis point drop in the NIM. Overall, 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. Positively, the Company has taken steps to lower the cost of wholesale borrowings including the repayment of $150 million in trust preferred securities and the refinancing of $200 million of FHLB advances. Noninterest income, excluding securities gains, decreased on lower mortgage sales gains. Excluding the loss on the redemption of the trust preferred securities, expenses were up modestly on higher other real estate expense, operating risk loss and software.

Asset quality trends continue to be very favorable. Net charge-offs decreased QoQ to a very modest, although likely unsustainable, three basis points. Additionally, non-performing loans trended modestly lower this quarter.

Recently, the Company announced a new $50 million share repurchase program after completing a previous $50 million repurchase program during the quarter. Fulton remains committed to returning capital to shareholders. Nonetheless, Fulton continues to report strong capital ratios, which included a tangible common equity to tangible assets ratio of approximately 8.6% 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.