TEXT-Fitch Downgrades Fulton Financial Corp's Rtgs to 'BBB+/F2' Following Mid-Tier Regional Peer Review

Thu Feb 14, 2013 6:26pm EST

NEW YORK, February 14 (Fitch) Fitch Ratings has downgraded the long-term and short-term Issuer Default Ratings (IDRs) of Fulton Financial Corporation and its subsidiaries to 'BBB+/F2' from 'A-/F1'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

Fitch reviewed Fulton Financial Corporation as part of a peer review that included 16 mid-tier regional banks. The banks in the peer review include: Associated Banc-Corp., Bank of Hawaii Corporation, BOK Financial Corporation, Cathay General Bancorp, Cullen/Frost Bankers, Inc., East West Bancorp, Inc., First Horizon National Corporation, First National of Nebraska, Inc., First Niagara Financial Group, Inc., Fulton Financial Corporation, Hancock Holding Company, People's United Financial, Inc., Synovus Financial Corp., TCF Financial Corporation, UMB Financial Corp., Webster Financial Corporation. Refer to the release titled 'Fitch Takes Rating Actions on Its Mid-Tier Regional Bank Group Following Industry Peer Review' for a discussion of rating actions taken on the entire mid-tier regional bank group.

The mid-tier regional group is comprised of banks with total assets ranging from $10 billion to $36 billion. IDRs for this group is relatively dispersed with a low of 'BB-' and a high of 'A+'. Mid-tier regional banks typically lag their large regional bank counterparts by asset size, geographic footprint and product/revenue diversification. As such mid-tier regional banks are more susceptible to idiosyncratic risks such as geographic or single name concentrations. Fitch's mid-tier regional bank group has fairly homogenous business strategies. The institutions are mostly reliant on spread income from loans and investments.

With limited opportunity to improve fee-based income in the near term, Fitch expects that mid-tier banks will continue to face greater earnings headwinds in 2013 than larger institutions with greater revenue diversification. Share repurchases is common theme amongst the mid-tier banks. As mid-tier banks face earnings headwinds, institutions have begun repurchasing common shares to improve shareholder returns. Fitch anticipates continued repurchase activity in 2013 as return on equity lags historical norms for the group.

In addition to share repurchases, Fitch has observed that some mid-tier banks have looked to their investment portfolio to improve returns. Most notably, CLOs and CMBS have become more popular amongst mid-tier banks. Although such securities are beneficial to yields and returns, Fitch notes that such purchases can be a negative ratings driver if the risks are not properly measured, monitored and controlled. Asset quality continues to improve throughout the banking sector. Both nonperforming assets (NPAs) and net charge-offs (NCOs) are down significantly year over year. Fitch anticipates further asset quality improvement as nonperforming loan (NPL) inflow slows. Reserve levels have also declined as asset quality improves, which has been beneficial to earnings in 2012. Fitch expects further reserve releases in 2013 but at a slower pace.

RATING ACTION AND RATIONALE

Fulton Financial Corporation's (FULT) long-term IDRs and short-term IDRs were downgraded to 'BBB+/F2' from 'A-/F1'. The Outlook is Stable. The downgrade primarily reflects FULT's relatively stagnant charge off rates, challenging economic environment in one of its core markets and funding costs which exceed most banks in the mid-tier group. Although Fitch believes FULT is well reserved, the level of NCOs has not declined at the rate of other 'A-' rated institutions that recognized the bulk of their credit costs earlier in the cycle. As such, FULT's NCO rates remain at elevated levels compared to 'A-' rated institutions. Moreover, in Fitch's opinion, FULT's Fulton Bank of New Jersey subsidiary operates in a relatively more challenging economic environment, which may continue to put pressure on overall asset quality measures. Currently, the Fulton Bank of New Jersey has the highest NPA and NCO rates amongst FULT's six banking subsidiaries.

FULT's has a solid retail branch network throughout mid-Atlantic region which provides a solid source of funding for the institution. However, FULT's cost of funds is amongst the highest of the entire mid-tier group. As such, Fitch views the overall franchise strength of FULT is better situated at the 'BBB+' category. The Stable Outlook incorporates FULTs continued sound operating performance. FULT has solid earnings with a 0.99% ROAA for the year, which places them above the median for mid-tier banks. Fitch expects FULT to continue to post solid earnings in the near term despite earnings headwinds which will be a challenge throughout the banking industry. Fitch regards FULT's capital levels as a ratings strength for the institution. FULT's tangible capital levels rank near the top of the mid-tier group with a 9.65% TCE at the end of third quarter 2012. That said, Fitch does not anticipate meaningful capital growth in the near term given the institution's share repurchase plan.

RATING DRIVERS AND SENSITIVITIES - IDRs and VRs Fitch believes FULT is solidly situated at its 'BBB+' rating.

Further ratings improvement is unlikely in the near term given the level of NPAs, NCOs and overall franchise strength. The achievement of ratings above the 'BBB+' level in the mid-tier group typically precludes any operational or financial metrics which significantly lag peers. Conversely, negative ratings pressure could occur if credit metrics deteriorate or if tangible capital levels are significantly reduced.

RATING DRIVERS AND SENSITIVITIES - Support Ratings and Support Floor Ratings:

All of the mid-tier regional banks in the peer group have Support Ratings of '5' and Support Floor Ratings of 'NF'. In Fitch's view, the mid-tier banks are not considered systemically important and therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any government support for any of the banks in the mid-tier regional bank peer group.

RATING DRIVERS AND SENSITIVITIES - Subordinated Debt and Other Hybrid Securities:

Subordinated debt and hybrid capital instruments issued by the banks are notched down from the issuers' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. The ratings of subordinated debt and hybrid securities are sensitive to any change in the banks' VRs or to changes in the banks' propensity to make coupon payments that are permitted but not compulsory under the instruments' documentation.

RATING DRIVERS AND SENSITIVITIES - Holding Company:

All of the entities reviewed in the mid-tier regional bank group have a bank holding company structure with the bank as the main subsidiary. All subsidiaries are considered core to parent holding company supporting equalized ratings between bank subsidiaries and bank holding companies. IDRs and VRs are equalized with those of its operating companies and banks reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.

RATING DRIVERS AND SENSITIVITIES - Subsidiary and Affiliated Company Rating:

All of the entities reviewed in the mid-tier regional bank group factor in a high probability of support from parent institutions to its subsidiaries. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults.

Fitch has taken the following rating actions:

Fulton Financial Corporation

--Long-term IDR downgraded to 'BBB+' from 'A-'; Stable Outlook;

--Short-term IDR downgraded to 'F2' from 'F1';

--Viability Rating downgraded to 'bbb+' from 'a-';

--Subordinated debt downgraded to 'BBB' from 'BBB+';

--Support affirmed at '5';

--Support Floor affirmed at 'NF'. Fulton Bank, N.A.

--Long-term IDR downgraded to 'BBB+' from 'A-'; Stable Outlook;

--Long-term deposits downgraded to 'A-' from 'A';

--Short-term IDR downgraded to 'F2' from 'F1';

--Short-term deposits downgraded to 'F2' from 'F1';

--Viability Rating downgraded to 'bbb+' from 'a-'

--Support affirmed at '5';

--Support Floor affirmed at 'NF'. The Columbia Bank

--Long-term IDR downgraded to 'BBB+' from 'A-'; Stable Outlook; --Long-term deposits downgraded to 'A-' from 'A';

--Short-term IDR downgraded to 'F2' from 'F1';

--Short-term deposits downgraded to 'F2' from 'F1';

--Viability Rating downgraded to 'bbb+' from 'a-'

--Support affirmed at '5';

--Support Floor affirmed at 'NF'. Lafayette Ambassador Bank

--Long-term IDR downgraded to 'BBB+' from 'A-'; Stable Outlook;

--Long-term deposits downgraded to 'A-' from 'A';

--Short-term IDR downgraded to 'F2' from 'F1';

--Short-term deposits downgraded to 'F2' from 'F1';

--Viability Rating downgraded to 'bbb+' from 'a-'

--Support affirmed affirmed at '5';

--Support Floor affirmed at 'NF'. Fulton Bank of New Jersey

--Long-term IDR downgraded to 'BBB+' from 'A-'; Stable Outlook;

--Long-term deposits downgraded to 'A-' from 'A';

--Short-term IDR downgraded to 'F2' from 'F1';

--Short-term deposits downgraded to 'F2' from 'F1';

--Viability Rating downgraded to 'bbb+' from 'a-'

--Support affirmed at '5';

--Support Floor affirmed at 'NF'. Fulton Capital Trust I

--Preferred stock downgraded to 'BB-' from 'BB'.

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