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 reflects 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).
The Stable trend reflects our view 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 segments of commercial real estate.
Over the longer term, the ratings would be upgraded if Fulton grew its franchise resulting in greater scale and revenue diversity, driving a sustained improvement in profitability metrics. Conversely, a ratings downgrade would result from sustained below-peer profitability levels, a significant deterioration in asset quality, or an inability to maintain funding at a reasonable cost.
Franchise Combined Building Block (BB) Assessment: Good / Moderate
Lancaster, Pennsylvania-based Fulton reported $27.1 billion in assets at March 31, 2023. The Company maintains a solid community banking franchise offering a full range of banking products to its customers in each of its markets. The Company operates approximately 200 branches in five states, utilizing a community banking model with local decision making. Fulton’s strategic focus in recent years has been to grow its franchise in larger markets, including Philadelphia and Baltimore. Last year’s acquisition of Philadelphia-based Prudential Bancorp, Inc. has accelerated this endeavor adding 10 branches and approximately $1.1 billion in assets.
Earnings Combined Building Block (BB) Assessment: Good
Fulton’s earnings were solid in recent periods with an improving net interest margin and loan growth leading to growth in net interest income. The Company reported net income of $287.0 million for 2022, 4% higher than the $275.5 million earned in 2021. Results were boosted by significantly higher net interest income, partially offset by a higher provision for credit losses, lower non-interest income, and higher expenses. Fulton’s asset-sensitive balance sheet benefitted from higher interest rates in 2022, although that advantage is likely to dissipate in 2023 as funding costs increase similar to what was seen in 1Q23. Specifically, 1Q23 earnings remained solid although the net interest margin began to contract as funding costs increased and overall returns declined.
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 ratings. DBRS Morningstar 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, as well as a large percentage of owner-occupied CRE exposures that are typically less risky. Net charge-offs were 0.27% for 1Q23, higher than recent periods although remaining highly manageable. DBRS Morningstar continues to view current asset quality metrics as unsustainably low and expects these metrics to continue trending back towards more normalized levels.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
DBRS Morningstar views the Company’s funding and liquidity as solid. Deposits declined in 2022, decreasing 4% year-over-year. 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.
Capitalization Combined Building Block (BB) Assessment: Strong / Good
Regulatory capital ratios remain sound. Specifically, the CET1 ratio was 9.8% while the total capital ratio was 13.4% at March 31, 2023. The Company repurchased $40.4 million of stock during 1Q23 as a part of its $100 million 2023 authorization. However, this program was paused in March 2023. At March 31, 2023, at 6.7% of tangible assets, tangible capital levels remain solid despite the impact of unrealized losses in the investment securities portfolio.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/415625
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations: https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-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://www.dbrsmorningstar.com/about/methodologies.
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purpose of providing this 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. 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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