DBRS Morningstar Confirms Fulton Financial Corporation at A (low); Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Fulton Financial Corporation (Fulton or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Fulton Bank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
Fulton’s ratings confirmation and Stable trend reflect the Company’s solid community banking franchise and sound asset quality that is supported by conservative loan underwriting and a fairly granular loan portfolio. Additionally, the Company exhibits good core deposit funding, as well as a solid capital position.

Fulton’s ratings also consider the challenging operating environment and the Company’s somewhat concentrated position in commercial real estate loans (CRE). The ratings also consider Fulton’s solid performance in 2020, despite substantial reserve building and net interest margin pressure.

RATING DRIVERS
DBRS Morningstar considers Fulton’s current ratings as well placed. Over the longer term, an upgrade of ratings would result if Fulton achieved greater revenue diversity, resulting in sustained improvement in profitability metrics that are in-line with higher rated peers. Conversely, sustained weaker profitability metrics, an increase in risk appetite or overly aggressive capital management would result in a downgrade of ratings.

RATING RATIONALE
Despite the difficult operating environment and elevated provisioning in 2020, Fulton’s earnings proved resilient with volume growth partially offsetting net interest margin pressure and strong results from non-interest income sources.

The Company reported net income of $178.3 million for 2020, 21% lower than the $226.3 million earned in 2019. Still, results equated to a return on assets of 0.73%, which was respectable given the operating environment. Results reflected reserve building as well as CECL implementation, as the provision for credit losses increased $37.8 million year-over- year. Non-interest income, driven by mortgage banking, moved higher and the Company was able to achieve positive operating leverage again in 2020.

Consistently strong asset quality and conservative underwriting has remained a key strength for the Company. While there remains a high level of uncertainty in the current operating environment, key asset quality metrics at Fulton remain largely in-line with historical levels. DBRS Morningstar considers Fulton’s relatively high level of CRE and construction loans, which represented approximately 43% of total loans at YE20, a concentration risk. Somewhat reducing this risk are the highly granular exposure limits the Company has maintained for both borrowers and projects, as well as a large percentage of owner-occupied CRE exposures that are typically less risky.

DBRS Morningstar views the Company’s funding and liquidity as solid. Deposit growth in 2020 was exceptional, as deposits increased 20% year-over-year, reflecting, in part, government stimulus, as well as customers holding additional liquidity. The Company fully funds its loan portfolio with deposits and is not reliant on wholesale funding. During 2020, Fulton augmented both Tier 1 and Tier 2 capital through the issuance of perpetual preferred stock and subordinated debt. Regulatory capital ratios remain sound. Specifically, the CET1 ratio ticked modestly lower to 9.5%, reflecting growth in risk-weighted assets while the total capital ratio was 14.70% at year-end.

Lancaster, Pennsylvania-based Fulton Financial Corporation reported $25.9 billion in assets at December 31, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Fulton Financial are as follows: Franchise Strength –Strong/Good; Earnings Power –Strong/Good; Risk Profile –Strong/Good; Funding & Liquidity –Strong; Capitalisation – Strong/Good.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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