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 Company’s somewhat concentrated position in commercial real estate loans (CRE). The ratings also consider Fulton’s improving earnings trajectory, although the level of earnings lags some higher-rated peers. Positively, in 2019, Fulton’s remaining regulatory consent orders related to BSA/AML compliance were lifted. This development has enabled Fulton to finalize the consolidation of its bank charters, optimize the branch network, as well as potentially grow through bank acquisitions.

RATING DRIVERS
DBRS Morningstar considers Fulton’s current ratings as well placed. Over the longer-term, upward pressure on the ratings could result if Fulton shows a sustainable improvement in profitability metrics that are in-line with higher rated peers, while reducing its reliance on spread income and exposure to commercial real estate. Conversely, sustained weaker profitability metrics, an increase in risk appetite or overly aggressive capital management could pressure ratings lower.

RATING RATIONALE
Over the last few years, Fulton’s franchise investment strategy of hiring lenders, especially in some of its larger urban markets, has generated solid loan and deposit growth, increased revenues and enhanced the franchise. Additionally, positive operating leverage has contributed to earnings momentum as well as improving profitability metrics and efficiency.

The Company reported net income of $226.3 million for 2019, 9% higher than the $208.4 million earned in 2018. Returns equated to a return on assets of 1.06%. Higher earnings reflected strong revenue growth and a lower provision for credit losses, partially offset by an increase in non-interest expenses. The Company’s net interest income increased due to growth in average interest earning assets partially offset by a declining net interest margin.

Consistently strong asset quality has remained a key strength for the Company. However, over the last two years, the Company experienced loan losses from two large commercial lending relationships. DBRS Morningstar views these as idiosyncratic events and not representative of larger underwriting issues or asset quality deterioration. Despite this uptick in losses, overall net charge-offs remain low, reflecting in part the benign credit environment. DBRS Morningstar considers Fulton’s relatively high level of CRE and construction loans, which represented approximately 43% of total loans at YE19, a concentration risk. Somewhat reducing this risk is 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, as deposits have grown in tandem with loans, fully funding the loan portfolio. For 2019, Fulton increased its common stock dividend by 8% and repurchased approximately $111 million in stock. Fulton’s targeted dividend payout ratio is 40% to 50% of earnings while maintaining a minimum 7.5% tangible common equity to tangible assets ratio. As of YE19, Fulton’s capital profile reflected a strong tangible common equity to tangible assets ratio of 8.5%, a CET1 ratio of 9.7% and a total capital ratio of 11.8%.

Lancaster, Pennsylvania-based Fulton Financial Corporation reported $21.9 billion in assets at December 31, 2019.

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/Good; Capitalisation – Strong/Good.

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

The principal methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

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.

This 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 and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

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