Fulton Financial Corp (FULT) 2006 Q2 法說會逐字稿

Good day everyone and welcome to today’s Fulton Financial Second 2006 Earnings Conference Call and Web cast. This call is being recorded. At this time I would like to turn the call over the Ms. Laura Wakeley. Please go ahead.

Good morning and thank you for joining us for Fulton Financial Corporation’s conference call and webcast to discuss our earnings for the second quarter of 2006. Your host for today’s conference call is Scott Smith, Chairman, Chief Executive Officer, and President of Fulton Financial Corporation. Joining him is Charlie Nugent, Senior Executive Vice President, and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement, which we released at 4:30 yesterday afternoon. These documents can be found on our Web site at fult.com by clicking on investor information and then on news.

Please remember that during this webcast representatives of Fulton Financial Corporation may make certain forward-looking statements regarding future results or future financial performance of Fulton Financial Corporation. Such forward-looking information is based upon certain underlying assumptions, risks and uncertainties.

Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements. Risks and uncertainties that may affect future results include pricing pressures on loans and deposits, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Federal Reserve Board, credit worthiness of current borrowers, the corporation’s success in merger and acquisition integration and customers’ acceptance of the corporation’s products and services.

Fulton Financial Corporation does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the date on which such statements were made. Now I’d like to turn the call over to your host, Scott Smith.

Thank you, Laura, and good morning everyone and thank you for joining us. I hope you’ve had an opportunity to review our earnings release and accompanying financials. Later in the call both Charlie and I will be happy to respond to your questions.

We were pleased to report second quarter diluted earnings per share of $0.27, an 8% increase over the $0.25 as we stated for the same period last year despite some continuing head winds that we along with the industry continue to manage.

As you know CD rates are at levels we haven’t seen in years and customers have taken notice. We continue to see the low-cost funds shift to higher yielding money market accounts and certificates of deposit as customers seek more attractive returns. The best way to offset those rising costs is to make certain these costlier deposits flow into higher yielding quality loans that support our net interest margin goals.

We saw a good growth in commercial loans for the quarter that enabled us to maintain a stable margin despite the challenges of the yield curve. We remain cautiously optimistic that the positive trends we are seeing in the commercial loan demand and in net interest margin will continue for the remainder of 2006. But both are dependant upon a continued, reasonable pace of economic growth. Competition for both loans and deposits remains fierce in all our markets. We are carefully monitoring our CD rates and are pricing more aggressively in the short to midrange maturities as opposed to the long end, thinking that we may be nearing the end of the Fed rate hikes.

An important factor in our second half of 2006 performance will be continued strong loan demand and subsequent loan growth. The current loan pipeline around the corporation is quite good. While we do expect funding costs to stabilize somewhat longer term, we do not see them decreasing in the short term as customers try to lock in higher CD rates.

We anticipate when we acquired them, that Columbia Bank, would be a strong contributor and they have been to overall company performance. We expect Columbia’s presence in the dynamic Baltimore-Washington corridor to make a positive contribution to our overall organic growth in the future as well.

We continue to be encouraged by the results of our State College, Pennsylvania, loan production office and it is generating returns and we are looking forward to supplementing that growth with two de novo branches in 2007.

Within our five-state footprint our three largest affiliates, which represent one-half of our corporate assets are experiencing good solid growth in their respective markets. They include Fulton Bank in Central and Eastern Pennsylvania, Columbia Bank in Central Maryland, and The Bank in Southern New Jersey.

In fact, these are the three banks in the holding company that have been most aggressively pursuing de novo branching opportunities. They include Fulton in Chester and Centre counties in Pennsylvania, The Bank in Atlantic, Burlington, and Camden counties in New Jersey, and Columbia in the Baltimore-Washington corridor.

These three affiliates expect to open a total of six new offices in 2007. And if we include other affiliates, Lafayette Ambassador, Resource Bank in Virginia and Premier in Bucks County Pennsylvania, we expect to open an additional three offices in 2007, bringing our total new office count to nine next year.

Skylands and Lafayette Ambassador Bank each recently opened a new office and Resource Bank and Premier Bank expect to open new offices this year as well. We will continue to open new branches in markets that hold the greatest promise for success. Incidentally, we view new branches and the balances they generate as organic growth when they are opened by current affiliates in existing or contiguous markets.

The residential mortgage business has been very good to the corporation over the last several years. This business has slowed somewhat and all indications are that growth will continue to be a challenge for the remainder of this year and into 2007. However, knowing the volatility of residential mortgage business we’ve developed corporate initiative that focus on other sources of noninterest income growth.

To summarize the quarter, our biggest challenges were funding costs and the soft residential mortgage business offset by positive strong loan growth, interest income growth, and prudent expense control. As you recall, we announced a 5% stock dividend in April and increased our dividends to $0.1475 per share.

As a result of that action, the dividend just received by our shareholders was 6.8% greater than the dividend they received in April. As I look at the remainder of 2006, we continue to focus on organic growth at our affiliates in order to grow both interest and noninterest income.

We will carefully monitor our funding cost and seek low cost deposits to continue marketing and promotional activities, and of course, any future progress in returning a more normally sloped yield curve would be very helpful. At this point, Charlie will give you the financial details and then we’ll both answer your questions. Charlie?

Okay, thank you Scott and good morning everyone. We’re happy that you’ve joined us today. Please make a note of any questions that you have as I review our results. We can respond to your questions after I’m finished. Unless otherwise noted, comparisons are of this quarter’s results to the first quarter.

We reported diluted earning per share of $0.27 for the second quarter, which represents an 8% increase over the second quarter of last year and the first quarter this year. Our acquisition of The Columbia Bank on February 1st of this year continued to have a significant impact on our results.

Other highlights of the quarter were strong organic loan growth, approximately 11.6% annualized, good internal growth in time deposits, approximately 17.6% annualized, excellent asset quality, a relative stable net interest margin and an internal reduction in operating expenses.

Offsetting these positive items were a decline in investment management and trust revenues and a slight decline in demand deposit account balances. Net interest income improved $7.8 million or 6.8%, which primarily represents the contribution of the Columbia Bank. Internal growth in net interest income was approximately 2.3% as a result of 2% internal growth in average earning assets and a slight improvement in our net interest margin.

Average loans increased $618 million or 6.7%, including The Columbia Bank and $245 million or 2.9% excluding Columbia. Organic loan growth occurred in all categories. Commercial loans grew $78 million at 3.7%. Construction loans increased $66 million or 7.5%. Commercial mortgage loans grew $54 million or 1.9%. Residential mortgages increased $26 million or 4.6% and home equity loans grew $18.4 or 1.5%.

Loan growth occurred throughout all of our markets. Our asset growth was funded by a combination of deposits and short-term borrowings. Average deposits increased $542 million or 5.7%, including Columbia, and $180 million or 2% excluding The Columbia Bank. This quarter we saw strong internal growth in certificates of deposits of $150 million or 4.4%.

We’re continuing to see customers becoming more price sensitive. Non-interest-bearing deposits were essentially flat. Interest bearing demand accounts decreased $21 million or 1.3%, while savings balances increased $55 million or 2.5%. The savings increase was primarily in business and government municipal money market accounts.

The migration of the deposits to higher interest-bearing accounts is a trend that if it continues will drive the total cost of our deposits upward, and similar to all banks we’re trying to prudently manage these costs. The net interest margin improved slightly to 3.9% in the second quarter. We are pleased that the margin has held up in light of increasing deposit costs.

The yield on our earning assets improved 25 basis points while the cost of funds increased 24 basis points. Asset quality continues to be very good. Non-performing assets were 29 basis points in total assets at June 30 compared to 35 basis points at March 30 and 27 basis points last June. Net charge offs were also with 2 basis points in the second quarter compared to 3 basis points in the first quarter and 2 basis points last year.

The low level of loan loss provision for this quarter is a result of our detailed analysis of the loan portfolio. Our goal was to maintain excellent asset quality levels. However, levels this low will difficult to sustain in the future. Excluding security gains our other income increased $651,000 or 1.9% primarily as a result of Columbia Bank. Internal other income growth was flat.

Investment management trusts revenues declined by $1 million or 10% mostly in brokerage revenue, which showed a seasonal increase in the first quarter. In addition, customers are favoring certificates of deposits over annuities in the current interest rate environment.

Gains on mortgage sales increased $415,000 or 8.7%. Residential mortgage loans sold were $490 million in the second quarter compared to $500 million last quarter. The spread on sales increased slightly to 106 basis points in the second quarter.

Other fee categories showing organic growth were overdraft fees, cash management revenues, debit card fees and letter of credit income. We realized investment security gains of $1.4 million in the second quarter compared to $2.7 million in the first quarter.

Excluding the impact of Columbia, operating expenses declined $1.2 million or 1.5%. However, without the impact of the $1.6 million [fax] litigation charge in the first quarter, there would have been an increase of $400,000 or one-half of 1%.

Our efficiency ratio was 55.4%, an improvement over last quarter and consistent with last year. Salaries and benefits increased $1.5 million or 3.2%. In the first quarter a $1 million reduction in healthcare expense was recorded based on prior favorable claims experience.

Occupancy and equipment expense declined $240,000 or 2% primarily due to lower utility cost. Advertising expenses increased $660,000 or 32% due to the timing of promotional expenditures. The other expense line decreased $2.2 million due to the $1.6 million fax litigation in the first quarter and approximately $700,000 of expense recoveries on problem loans.

Okay, thank you for your attention and for your continued interest in Fulton Financial Corporation. Now we will be glad to answer any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS] We’ll take our first question from Wilson Smith with Boenning & Scattergood.

Charlie can you elaborate a little bit on the improvement in asset quality? That was a nice move in NPLs during the quarter. Was that, you know one large relationship or was it just kind of a general improvement?

Wilson, it was two, primarily two loans in New Jersey that were satisfactorily resolved.

They’re no longer with the bank?

No.

And on a more general sense, how does the watch list look? I just got off the call with a Midwestern Bank and their watch list actually increased substantially.

You know our watch list is stable. There haven’t been any significant changes.

Are there any portions of your market that you watch more closely than others?

I think Wilson we look - watch them all and I guess we watch more intensely our newer markets so we get an understanding of what’s going on. But we haven’t seen any problems in any of the markets.

Great, great. And I guess I ask this question every quartet but you know loan growth was great this quarter. Were there any significant concentrations either geographic-wise or sector-wise?

No Wilson. This is Scott. As I mentioned, we had the three banks I mentioned, Fulton, Columbia, and The Bank in New Jersey all had really nice loan growth. And we’re seeing a little more line utilization which is always helpful.

That was one of the things I think that we were concerned about over the past few quarters is just that our line utilization from customers was at historic lows. That’s moved up a little. That helps us be a little more optimistic about the rest of the year. It seems like some businesses are now spending some money, so--

Terrific one last question. You’ve done a great job of managing your margin and do you see more or less pressure as we go into the third and fourth quarter on the cost of funds and matching that up with [inaudible]?

Well, if our loan volume and growth continues, I mean what’s frustrating is we could really be knocking the cover off the ball right now if we had and upward sloping yield curve with what our loan volume has done and particularly with some of variable rate lending. But, you know that isn’t the case. So that at least helps us maintain it. If that continues that’s as I mentioned earlier dependent upon the economy. But, you know we’ve seen the second quarter kind of repeating itself third and fourth quarter in terms of where we expect the margin to be.

Great, thank you.

Charlie, anything to add to that?

Yes. I would say Wilson, that I wouldn’t expect any significant change in our margin favorable or unfavorable until the yield curve steepens. And we’re under constant pressure because of the cost of deposits keep on going up and we’re having a shift where we see balances in core accounts being shifted to certificates of deposits.

And we’re closely monitoring new account openings and we’re opening a lot of accounts in all the core account areas; DDA, Now, Super Now, money market and savings. But the balances are shifting to higher cost. But I think our, I’m bad a predicting the future, so -- but I would think our margin’s going to stay stable.

Excellent, thank you.

We hope.

We’ll take our next question from Fred Cummings with KeyBanc Capital Markets.

Yes, good morning.

Good morning Fred.

Yes, Scott or Charlie, can you -- Charlie, you talked about opening up a number of new accounts. Can you somehow quantify that on a year-to-date basis in terms of you core transaction account customer’s demand, interest growing demand savings? Do you have some sense of how fast you’re growing that part of the customer base?

You know Fred, we monitor this, our ALCO committee monitors - looks at this every month and I don’t know if these numbers are going to be meaningful, but we opened 2,00 new accounts in June. And throughout this year of 2006, we’ve had good growth in new account openings, especially in personal checking and business checking and CDs, so--

Small business checking, I think, has been quite good.

Okay. I don’t know if that helps. We monitor it and--

We haven’t done it for a long time so, Fred, we can’t tell you if that’s, you know we don’t have the historic data to help decide whether that’s a good -- that’s one of the reasons we don’t really publish it is that we’re not - we don’t have enough data to know how good or bad that is.

Yes, and then Scott, with respect to deepening your relationships with your, in particular your consumer customers, how effective have you been at getting a number of products into their hands?

We’re not nearly as effective as we should be, Fred. We’re improving. And again, we don’t have a lot of historic data on that. But what we’re looking at is household penetration and then product into household to try to get at a market share from a different angle as opposed to just deposits by looking at how many households are in a market, how many we are involved with, and then what is the level of service penetration into that household.

But I don’t have enough historic data and I’m not comfortable enough with it to really, to give you those numbers yet until we get a little more history so that we’re certain we’re giving you accurate data.

Okay, thank you.

But the data shows we’re improving. I’ll tell you that much at this point.

Okay, thanks Scott.

We’ll go next to Adam Barkstrom with Stifel Nicolaus.

Scott, you were mentioning C&I utilization rate was improving. What is that now?

Well it was in the low 30s. It’s now approaching the mid-30s percent.

So that’s still relatively low.

Yes, I mean, I’m an old man but I remember when it was 50% though and maybe those days are over, but you know there’s still room for improvement there.

Right, right, okay. And then, I guess kind of circling back to the margin, looking at the quarter and considering the Columbia acquisition in the first quarter, looking specifically at this quarter you talked about deposit pricing and pressure and I guess looking at the balance sheet, it looked like the securities portfolio was rundown a little bit this quarter.

Was that more of a funding issue to fund loan growth? Was that a deliberate runoff of some of Columbia’s securities portfolio question one? And then question two, should we - would you potentially rely on that as a source of funding going forward giving the, you know expected -- or given your optimism toward further loan growth and the continued pricing pressure on deposits?

You know on the Columbia portfolio we restructured that, Adam, before the merger actually took place. And our loans grew internally excluding Columbia $250 million and our deposits went up $180 million, on average. So we had $70 million that we needed. Some of that we borrowed in Fed funds and some came out of the investment portfolio.

So would you, I guess going forward, do you anticipate letting some, continuing using that as a funding source, the runoff from the securities portfolio?

It could be, and we would look at all the alternatives. And hopefully, we’ve had very good growth in deposit growth and ideally we’ve deposits to fund that loan growth. We look at everything but hopefully it’s going to be deposits funding all our loan growth. But I hope we have that problem that we’re going to be for funding for the loans.

Okay. I guess you guys have highlighted pretty well the deposit pricing competition that you’re facing. Are you seeing the same fervor on the loan side? I would guess given your growth that perhaps you’re not.

Let’s see, how do I answer that question? We are seeing significant competition on the loan side as well Adam. You know, we’re, as you know fairly conservative. So we’re after the high-quality deals and so is everybody else. And there’s still a lot of competition there. We have just spent a lot of time nurturing our relationship, customer relationships, strategies and service and calling efforts over the years, and particularly in some of our mature banks that’s really paying off.

Any…

And some of that growth is market share.

Right. Any particular markets where you’re seeing very aggressive terms that would concern you? I mean, any markets different than the others as far as the competition in terms?

No, just anecdotally we’ve got, you know everybody’s got the worst competition as you know. Each bank thinks its market’s the toughest. But I think when you step back and look at it, and a lot of them and particularly the large banks are the same competitors in all those markets.

So I don’t think there’s any particular market that’s any tougher than others. It’s just, you know generally, as you know banks are after asset growth and particularly quality asset growth. So that’s something we face. But, you know we’ve been able to do fairly well. As I said particularly in Central Pennsylvania and Southern New Jersey and now with Columbia on board they’re doing nicely as well.

We’ll take our next question from Rick Weiss with Janney Montgomery Scott.

Hey Scott, hey Charlie.

Morning Rick.

I was wondering if, you talked a little bit about what you see in the merger and acquisition area. It seems like a lot of companies are having some problems now with earnings challenges. Do you expect more activity?

Well Rick, I think there are a couple things. The price expectations in my mind are a little on the high side, continue to be on the high side. And then you get an announcement or two like we’ve seen for some pretty aggressive prices and that, I guess encourages sellers to have those expectations.

I would say there’s generally more activity right now than there has been for some time. But whether there’ll be deals or not I’m not sure because I’m taking your advice. I think it was you that wrote that article that said you know patience is going to pay off now. There are going to be some banks sold but I don’t think at the prices that they’re expecting at this point in time. We’ll see.

Okay, thank you.

We’ll take our next question from Colin Dunn with Keefe, Bruyette & Woods.

Good morning guys. How are you?

Good thanks.

Good morning Colin.

Must -- a couple of quick questions. Most of them you’ve touched on. But with respect to the loan growth, how much of it was from increased line utilization on the construction and commercial side and how much of it was new relationships or new credit?

I’m not sure we have that. Do you Charlie?

No.

It’d just be anecdotal. I mean, we’ve gotten some nice new credits but…

All right. In construction side, is some of that rebound seasonal just given just more activity probably in the warmer months?

Sure, sure.

You mentioned the $700,000 of expenditure recoveries on problem loans?

Right.

That was benefit to this quarter’s expenses right?

Yes, that’s right.

Okay, and then that wouldn’t necessarily be recurring in the third quarter and fourth quarter?

No, no it wouldn’t.

And the CD growth, could you add some color behind - around that as far as what the terms were and then kind of the average rate you think guys are paying on those?

You know, it depends based on the market we’re in, Colin.

Okay.

But at our lead bank, the six-month rate is as low. It was 285. One year is, what we’re pushing is 5% and then we also have a promotional CD at 9%, a no penalty bump up CD at 4.25.

Nine months, you said nine percent

I’m sorry, nine months, I’m sorry. I’m sorry nine months at 4.25, I’m sorry.

Have you seen any more willingness from your customers to go out a little further on the term spectrum for the CDs beyond the year yet?

Usually the customer won’t go out more than a year. Usually all the growth is in the shorter terms. They don’t foresee that we’re at the top of the market yet or at that the top of the cycle yet I guess.

So we’re kind of where we want to be right now with customers because we’re trying to keep it short because, not that we’re betting the bank on it, but our expectation is that by this time next year, we’re going to see lower CD costs.

So we’d rather be repricing it next year than keeping it for two or three year. But, you know, we’re trying to get a mix of all of it, but our promotional activities are more around the short end, midterm.

All right.

You know what’s interesting though, we’ve seen if we move the rates up where we need the money. We’ve been able to grow the certificates of deposit portfolio. We were up $150 internally and that was at 4.4% quarter-to-quarter and annualized at 17%.

We’ve seen the ability that as Adam said; you have strong loan growth how’re you going to fund it? We have been able to move up the CD rates and the customers have been willing to buy the CDs.

All right and then, you know, final question. Given I know you’re, I understand your hesitant to, you know do too much on the predictive front with margin, Charlie. But, you know, assuming the Fed stops after August, what sort of catch up do you think there will be on some of your other deposit funding costs, you know into the fourth quarter?

You know, Colin, I think a lot is going to depend on what the yield curve does. And, you know the short-term effect is going to be good because we had the June increase. So that should help us.

But the thing that’s going to hurt us as CDs roll over and go into higher rates, that’ll put some pressure on the margin. But I don’t think it’s going, you know looking back our margin has been pretty stable and I think will continue to be.

We’ll take our next question from Beth Messmore with Merrill Lynch.

So just to follow up on the last question. Do you expect transaction deposit costs to level off when the Fed backs off its tightening cycle, or do you see lagged increases over the next 12 months?

On core accounts Beth?

Yes just your savings transactions deposits. It appears to me that you’ve significantly lagged increases in the Fed funds and so I’m wondering do you continue sort of catching up over the next 12 months, or do you think the cheaper deposits will just level off when the Fed’s done?

Okay, we’ve-- the savings rates and the money market rates have been moved up. And we offer, I think competitive rates on our special edition. It seems like very bank has a special money market account that pays a higher rate. And then, but the money market account had been going up especially in the municipal area where we have a more competitive rate and the business area. But I think they’ll be moving up gradually but not significantly.

Okay. Where does your charge off ration normalize in ’07 please?

In ’07?

Yes please.

Well, you tell me what the economy is going to be in ’07. What we do is, you know, we’ve been as high as the mid-20s in basis points and as low as 2 basis points is where we are now. We basically look at 15 basis points when we’re looking, projecting out and saying what is a normalized charge off rate for us. But I’ve been saying for 12 months now, this is as good as it’s going to get and it’s stayed. So and as you know we’re not unique in that. So, you know I hope we can tell two basis points again, but I wouldn’t bet any money on it. But I don’t see anything personally in the economy or in our portfolio that says we’re going to be, you know drastically changing that. But, you know a lot can change in 90 days.

Perfect. Thanks so much.

You’re welcome.

[OPERATOR INSTRUCTIONS] We’ll go next to Andy Borrmann with SunTrust Robinson Humphrey.

Okay. I may have missed this earlier, but did you all talk about kind of what organic growth has been running at, excluding the Columbia deal,the last couple of quarters, on the balance sheet side, like earning asset growth?

The earning asset growth, quarter-to-quarter, was 2% Andy. And the organic loan growth first quarter to second quarter was 2.9%--

Okay.

--and that’s not annualized. And deposit, if you factored out deposit growth, you factor out Columbia was 2% and that was nearly all in certificates of deposits. Our transaction accounts, primarily NOW and Super NOW were down about a percent. They were down $25 million.

Okay.

That’s a non-interest bearing DDA and NOW and Super NOW.

I figured you guys had hit that but I think I just missed it. So I appreciate it.

You know Andy, if you go back a year, our loan growth excluding acquisitions 9.6%. Ad I think the loan growth is picking up, especially in the commercial area and our deposit growth was 6.1%. But as we grow our loans, we need more deposits, we increase our rates and that internal growth rate of 6% from second quarter to second quarter, if you look first quarter to second quarter it’s gone up to 8%.

Right, right.

I guess that loan growth is driving all of our growth, including…

Not a bad thing.

No.

Not a bad thing. Well good quarter guys. Thanks again.

Thank you.

Thank you.

We are standing by with no further questions at this time. I would like to turn the conference back over to Mr. Smith for any additional or closing comments.

I want to thank everyone for joining us today. We appreciate your interest in Fulton Financial Corporation and please plan on joining again for our third quarter conference call, which will take place on Wednesday, October 18 at 10:00 a.m. Thanks again.

Once again ladies and gentlemen that concludes today’s call. Thank you for your participation. You may disconnect at this time.