Morningstar DBRS Confirms Fulton Financial Corporation Long-Term Issuer Rating at A (low); Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Fulton Financial Corporation (Fulton or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, Morningstar DBRS confirmed the credit ratings of its primary banking subsidiary, Fulton Bank, N.A. (the Bank). The trend for all credit 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 CREDIT RATING CONSIDERATIONS

Fulton’s credit ratings confirmation and Stable trend reflect the Company’s solid community banking franchise operating in a number of states and historically good asset quality that is supported by consistent and conservative loan underwriting and a fairly granular loan portfolio. Additionally, the Company exhibits good core deposit funding, as well as a sound capital position. Fulton’s ratings also consider the Company’s limited scale and somewhat concentrated position in commercial real estate loans (CRE).

Morningstar DBRS expects that the Company’s credit fundamentals, earnings, funding and liquidity levels will remain sound despite an uncertain operating environment that includes increasing funding costs, slowing economic growth and the expectation for weakening asset quality, especially in some CRE segments.

CREDIT RATING DRIVERS

Over the longer term, the credit ratings would be upgraded if Fulton grew its franchise resulting in greater scale and revenue diversity including a lower reliance on commercial real estate lending, while maintaining solid profitability metrics. Conversely, a credit ratings downgrade would result from sustained below-peer profitability levels or a significant deterioration in asset quality.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good / Moderate
Lancaster, Pennsylvania-based Fulton is a regional banking company with $27.6 billion in assets at March 31, 2024. The Company operates a community banking model with local decision making through approximately 200 financial centers in Pennsylvania, Maryland, Delaware, New Jersey and Virginia. Fulton also provides investment management and planning services for individuals and corporations through Fulton Financial Advisors and Fulton Private Bank. In addition, the Company offers residential mortgage services through Fulton Mortgage Company. The recent FDIC-assisted acquisition of Republic First Bank is on strategy and increases the Company’s presence in the Philadelphia MSA, a key growth area for the Company.

Earnings Combined Building Block (BB) Assessment: Good
Fulton’s earnings were solid in recent periods including an operating ROAA and ROAE for 1Q24 of 1.00% and 13.08%, respectively. For 2023, the Company reported net income of $284.3 million, 1% lower than the $287.0 million earned in 2022. Higher revenues, including a 9% increase in net interest income, was offset by a higher provision for credit losses and higher expenses. Fulton’s asset-sensitive balance sheet benefited from higher interest rates in 2023 although the net interest margin has been slowly declining as the cost of funds has been increasing.

Risk Combined Building Block (BB) Assessment: Strong / Good
Consistently strong asset quality and conservative underwriting have remained a key strength for the Company and help underpin the credit ratings. Morningstar DBRS considers Fulton’s relatively high level of CRE and construction loans, which represented approximately 40% of total loans, a concentration risk. Somewhat reducing this risk are the highly granular exposure limits the Company has maintained for both borrowers and projects, low LTVs as well as a large percentage of owner-occupied CRE exposures that are typically less risky. Net charge-offs were 0.16% for 1Q24 while non-performing loans represented 0.73% of loans at March 31, 2024, remaining highly manageable and roughly in-line with recent trends. Morningstar DBRS continues to view current asset quality metrics as unsustainably low and expects these metrics to continue to normalize.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
Morningstar DBRS views the Company’s funding and liquidity as solid. Deposits increased 4% in 2023. The Company fully funds its loan portfolio with deposits and is not reliant on wholesale funding. On balance sheet liquidity remains sound and the Company has ready access to additional sources of liquidity, if needed. Uninsured and uncollateralized deposits represented 24% of total deposits and the Company has committed sources of liquidity to more than cover these deposits.

Capitalization Combined Building Block (BB) Assessment: Strong / Good
Regulatory capital ratios remain sound. Specifically, the CET1 ratio was 10.2% as of March 31, 2024, 320 basis points above the regulatory minimum. On May 1, 2024, The Company completed an equity raise to facilitate the Republic First Bank acquisition, raising approximately $273.5 million. The proforma CET1 ratio is estimated at approximately 9.9%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/433789.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is the Global Methodology for Rating Global Methodology for Rating Banks and Banking Organisations https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations (April 15, 2024). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents, Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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