Fulton Financial Corp (FULT) 2007 Q1 法說會逐字稿

Good day and welcome to today's Fulton Financial first-quarter 2007 earnings conference call and webcast. This call is being recorded. At this time I'd like to turn the call over to 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 first quarter of 2007. Your host for today's conference call is Scott Smith, Chairman, Chief Executive Officer and President of Fulton Financial. 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 announcements which were release yesterday at 4:30 PM. These documents can be found on our website 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, creditworthiness of current borrowers, the Corporation's success in merger and acquisition integrations, and customers' acceptance of Fulton Financial Corporation and its products and services.

Fulton Financial 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 would like to turn your call over to your host, Scott Smith.

Good morning, everyone, and thanks for joining us for our first-quarter 2007 conference call. I trust that you all have had an opportunity to review yesterday's release and Charlie Nugent will provide some additional detail on the numbers in a few minutes.

We reported first-quarter earnings per share of $0.24. Needless to say, this was a challenging quarter in many respects. In addition to contending with slower growth, an unfriendly yield curve, higher funding costs and persistent economic headwinds, we also recorded a $5.5 million contingent loss as a result of a repurchase request from one investor on our Alternative-A 80/20 mortgages at our resource bank affiliate.

These stated income mortgages were sold subject to certain conditions regarding repayment during the first 90 days of the loan, that if not met could result in a repurchase request. Some of these loans did not meet those warrantees and as a result repurchase requests were made. The $5.5 million contingent loss that we recognized is based on the information that is available to us today.

I'm pleased to tell you that the contingent liability exposure on this loan product has dropped from $94 million to $40 million and the balance has continued to decrease daily. Of course an announcement of this nature is not typical of us. Be assured that this particular program was discontinued at the end of February.

There's another important point I want to make regarding the issue. Notwithstanding this event a conservative loan underwriting standard that enabled us to absorb an item of this nature remain intact and ingrained in our credit culture. In fact, we experienced net recoveries for the quarter. We also saw a reduction in delinquencies in the 90-day category. Going forward we will work with the borrowers under this program to help them remain in their homes and to help keep our actual losses as low as possible. We have no similar problem at any of our other affiliate banks nor do we anticipate any.

Our excellent credit quality and loan workout efforts enabled us to simultaneously recognize an interest recovery of $3.4 million along with a $400,000 recovery to our allowance for loan losses, thus limiting the net reduction to a penny per share factoring in both events. We believe our conservative credit culture will help us to effectively manage this situation. We immediately assigned a member of our senior management team who also serves as our chief risk management officer to review and oversee all the lending activities at Resource Mortgage.

When we make loans we expect them to be paid back. If we charge off a loan we still expect it to be paid back and our people work very hard to make sure that it is. This preoccupation with loan quality helped us achieve the recoveries that significantly mitigated the reduction to this quarter's earnings per share.

Growth in earnings per share at rates that we are accustomed to in the past will continue to be difficult until we see a more positively sloping yield curve and subsequent expansion of our net interest margin. Time deposit growth this quarter put even more pressure on the margin, yet despite that growth our net interest margin showed stabilization on a linked quarter basis when adjusted for nonrecurring items and investment portfolio runoff.

All through the cycle we have conservatively priced our time deposits, keeping one eye on our funding needs and another on our margin. As long as we continue to operate in this slower economy and unfriendly interest rate environment we must reduce expenses and we are aggressively working to do so.

We also continue to focus on our organic growth through the use of ongoing incentive sales based products across the Corporation. We just completed a three-month contest to increase our referral activity in non-interest income producing areas. On April 2nd we launched our second annual corporate wide sales contest to increase our new core deposits and consumer loan acquisitions.

The quarter produced very good growth in commercial loans and commercial mortgages; however, that growth was offset by slower than normal activity in the consumer sector. We're very pleased with the significant contribution that our newest affiliate, The Columbia Bank, continues to make to our earnings. For the first quarter of 2007 Columbia is the third best net income producer among our affiliates after Fulton Bank in Pennsylvania and The Bank in New Jersey.

Two initiatives will figure prominently into our future progress -- first, affiliates serving strong mass markets continue to pursue growth through de novo branches. Over the last three years our de novo branching activity has produced deposits of $190 million and new loans of $230 million. From a funding standpoint 56% of the deposit growth in those branches is in low-cost core deposits. We believe that our increased small-business product and promotional emphasis will help us obtain additional new low-cost (inaudible) as well as increasing our loan volume.

Secondly, we'll increase productivity through our continued investment in technology. Over the past two years we have focused on completing the infrastructure necessary to shorten the time frame between deployment of new technology and the anticipated returns on that investment. We are now focused on enhancing our front-line systems and creating more efficient processes.

To sum up, the challenges we faced are real and will be with us at least for the short-term. For the remainder of 2007 we will focus on expense control and on allocating resources into areas that position us best for stronger earnings per share growth in the future. Long-term shareholders have been rewarded throughout the history of our company and we have every reason to believe they will continue to be in the future.

Yesterday our Board approved a repurchase of up to 1 million shares of our stock. We believe the stock is a good investment and that current valuation levels make the case for repurchase even more compelling. We also announced an increase in our quarterly dividend from $0.1475 to $0.15 per share. Now on current valuation that produces a yield of approximately 4%, making our stock more attractive to both current and potential investors.

Thanks for your attention and now I'd like to turn the call over to our CFO, Charlie Nugent, for details on this quarter's financials. Charlie?

Thank you, Scott, and good morning, everyone. I'm glad that you were able to join 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 and the fourth quarter of last year.

As Scott mentioned, we reported earnings per share of $0.24 for the first quarter, which was an 11% decline from the fourth quarter and a 4% reduction from the first quarter of last year. Reported net income declined $5.5 million. Net interest income was virtually flat increasing only $31,000. During the first quarter we received a total of $3.7 million in interest recoveries compared to $480,000 in the fourth quarter. $3.3 million of the recoveries in the first quarter related to one customer. Net interest income was down $2.7 million after adjusting for the interest recoveries and other nonrecurring items.

This decline primarily resulted from the fewer number of days in the first quarter compared to the fourth quarter. Both earning assets in the quarter net interest margin were relatively flat with the fourth quarter. Average loans increased $102 million or 1% while investment securities decreased $108 million or 3.6%. During the first quarter we sold $250 million of investment securities with an average yield of 520 and paid down federal funds at an average rate of 5.3%. Net gains of $777,000 were realized on the sale transaction.

Our loan growth occurred primarily in commercial loans and commercial mortgages. Commercial loans grew $92 million or 3.6% while commercial mortgages increased $44 million or 1.4%. Residential mortgages grew $13 million to 1.9% and the growth was primarily in adjustable-rate mortgages. Construction loans declined $32 million or 2.2% and home equity loans declined $21 million or 1.4%. Commercial line of credit usage was 38% at the end of March compared with 37.3% at the end of December. Our loan growth occurred throughout most of our markets.

On the funding side long-term borrowings replaced declines in customer deposits and short-term borrowings. Total customer deposits declined $56 million or 0.5%. Certificates of deposits grew $51 million or 1.2%, but that was not enough to offset the $107 million decrease in interest and non-interest bearing demand accounts and savings and money market deposits. The core account decline was entirely in business accounts as personal, government and not-for-profit accounts showed slight increases.

We believe that the first-quarter reduction in business balances is a result of seasonal conditions. We continue to see customers being price sensitive; however, we have not priced our certificates of deposits as aggressively as some of our competitors. Customer repurchase agreements and commercial paper also declined $34 million or 5.7% as a result of one large municipal customer transferring funds to one of our investment management accounts. Long-term borrowings increased $273 million or 23% and during the first quarter new federal home loan bank advances totaled $290 million.

Our net interest margin for the first quarter was 3.74% and was a 6 basis point improvement over the fourth quarter. This improvement was the result of the increase in interest recoveries. If we factor out interest recoveries and other nonrecurring items, the net interest margin was relatively flat with the fourth quarter. The decrease in margin as a result of the decline in low-cost customer funding was offset by an increase related to the sale of the investments and the replacement of overnight borrowings with longer-term federal home loan bank advances.

Asset quality continues to be strong. We generated net recoveries in the first quarter of $58,000 compared to net charge-offs of $1.6 million in the fourth quarter and $643,000 in the first quarter of last year. Nonperforming assets were 40 basis points as of March 31st, compared to 39 basis point at December 31st and 35 basis points last March. As a result of our continued strong asset quality and our allocation of the loan loss allowance, our provision for loan losses was consistent at approximately $1 million.

Excluding security gains our other income was reduced by $1.2 million or 3% primarily due to reductions in the gains on the sale of other real estate which were $635,000 in the first quarter compared to $2.5 million in the fourth quarter. Investment management trust service revenues increased $344,000 or 3.6% due to the strong results in both the trust and brokerage areas. We are pleased with these strong results.

Service charges on deposits were down $661,000 or 5.9% primarily in the overdraft area; $280,000 of this amount represents fee charge-offs that were previously recorded in operating expenses. Other service charges and fees increased $506,000 or 7.4%. This improvement was a result of both strong merchant processing activity and additional revenues from processing foreign currency transactions.

Gains on mortgage loan sales decreased $254,000 or 4.5%. Residential mortgage loans sold were $440 million in the first quarter compared to $450 million in the fourth quarter. The spread on sales declined to 114 basis points in the first quarter from 126 basis points in the fourth quarter. The other income category decreased $1.1 million or 21% reflecting the reduction in real estate gains. Operating expenses increased $6.1 million or 6.5% primarily as a result of the $5.5 million charge related to our mortgage banking operation. If you excluded this charge our operating expenses only increased by a modest 7/10 of 1%.

Our efficiency ratio increased to 61%; without the mortgage charge the efficiency ratio would have been 57.6%. Salaries and benefits increased $746,000 or 1.3% as a result of the seasonal increase in employment taxes offset by a reduction in affiliate bonus expense as a result of the mortgage charge. Occupancy and equipment expense increased $814,000 or 6.2% of the increases due to the seasonally higher utilities and snow removal costs as well as approximately $250,000 in volume related rebates received in the fourth quarter. The other expense line increased $4.5 million or 24% due to the mortgage charge. In the fourth quarter other expense was increased by approximately $800,000 of nonrecurring items.

Thank you for your attention and for your continued interest in Fulton Financial Corporation. Now we'd be glad to try to answer any of your questions.

(OPERATOR INSTRUCTIONS). Wilson Smith.

Good morning, gentlemen. Scott, if I could, can you give us a little bit of your thoughts on the direction of the overall reserve? I guess when I look at it over the last year or so its nonperformers have been creeping up, but the reserve as a percentage of loans continues to come in. I know that you have a specific methodology but is there some point here where you just feel that you need to have a certain amount of coverage?

The answer, Wilson, is the methodology. As you know, we've got regulators in one end of that and the accountants on the other and we have to come up with a methodology we think accurately reflects the portfolio and that's where we are. So it will be what it is and that's where it comes out. And as I think both Charlie and I mentioned, we still see significant strength in the portfolio as far as credit quality is concerned.

So it is where it is. It isn't at levels that we were traditionally at, but it's at levels where we think if you take the methodology and put the numbers through the process it comes out to where we think it needs to be and to be as candid with everybody involved as we can be.

Okay. And how does the overall watch list look? And do you have any geographic bumps in terms of asset quality?

The answer to the second question is no, nothing significant. We have had -- no, no geographic areas that are coming to mind where we have significant -- it's pretty clean everywhere. We've got a problem loan here or there that we know about in different geographies, but not anything to be concerned about.

And as far as the watch list is concerned, it's fairly stable. I think it's up slightly in dollar amounts, but as a percent of the portfolio it's down a little bit. So we're right kind of steady as she goes there.

In terms of the Alt-A issue down at Resource, can you give us an update on the volume of loans that have been put back to you to date? It sounds like you have made excellent progress, if you're down to $40 million of balances that are subject to repurchase.

I'll let Charlie get into the numbers there, but one thing you need to understand is we haven't put back any loans yet, they've just requested -- there's a request for us to repurchase some loans that hasn't been executed yet. But based on our evaluation of what might happen if we do repurchase those loans and we have to liquidate them, we've set aside that or we have that 5.5 million that we charged against them. Now we're still negotiating that whole process and we'll see where that all comes out. Charlie, anything to a add as far as specifics are concerned?

Wilson, I think we're feeling a little bit better now. When we put the press release out there was still $94 million if these Alt-A stated income loans that would still be put back to us. Yesterday it was only $40 million. And a lot of these loans -- I think only five loans have been actually put back to us, the rest we just received a notice and we came up with that reserve and it's not a black and white calculation, it's judgmental and we feel pretty comfortable with that $5.5 million.

Have they actually increased the number of loans -- since your initial discussion of this have they increased the number of loans they've asked you to repurchase?

Yes. Originally it was $28 million when we sent the press release out and it's increased to about $34 million now. Some of the loans that are being -- we received a notice on we're receiving current payments on. And we think it fits within that $5.5 million reserve. We're talking to the one investor about some of these loans being put back that we don't think they should be put back and we're making I think pretty good progress talking to them.

Great, thanks very much.

Thank you, Wilson.

Rick Weiss.

Good morning. I guess the first question would be where's the commercial loan growth coming from and is it sustainable?

It's coming from all the markets. The largest numbers of course are coming from our larger affiliates like Fulton and The Bank. And it's interesting, there's a lot of commercial activity in construction -- well, not a lot, but there's more than there has been and that's where we're seeing some life. And I think it's sustainable. I think our folks believe it's sustainable. But we'll have to see. Where we've been disappointed, as I mentioned earlier, is in the consumer end.

I don't know if that's weather-related or not, Rick. Typically we see a pop in consumer lending in the spring, we haven't seen that yet, but we haven't had a spring here in most of our markets.

What is the average size of your commercial loans? Just a range.

I think the average size of commercial loans is around $0.5 million, it's like $480,000 or something -- it's just shy of $500,000.

Okay, so that's pretty much your traditional size I believe, right?

Right.

Okay. And also if you can kind of go into like why did you increase the long-term debt this quarter versus funding with CDs if you're going to have lower rates?

Rick, our asset sensitivity position was more biased towards rate reductions and current economic conditions -- we're trying to make it neutral. So we took on some debt and reduced Fed funds to try to make it less liability sensitive and more of a neutral position.

Okay, that's fair enough. And One final question, just if you can give me some of your thoughts on the M&A market. What do you expect to happen in (inaudible) region?

Rick, there continues to be some activity out there. As I think I said earlier, given the relative PEs for the buyers and sellers it's difficult to make the numbers work. But I suspect you'll see some consolidation going on.

Okay, thank you very much.

Collyn Gilbert.

Just a follow-up to the Alt-A discussion, Charlie. You had said that you guys originally anticipated a potential of $94 million to be pushed back and you said as of yesterday it was $40 million. What changed to cause that reduction?

We didn't expect $94 million to get put back. They were the number of Alt-A loans under this one investor program that we sold that could come back if they missed one of the first three payments on a timely basis. We discontinued the program in February and it's winding down. And this was just a number that could potentially come back if somebody missed a payment.

Okay. But what you're saying is that roughly $54 million of that did not miss a payment so you know they're not coming back?

Past the 90 days.

So the $5.5 million that you have sort of reserved against that, was that under the $94 million number or --?

That was under the $28 million. That's the $28 million that we received notices on that could be put back.

What you said now is bumped up to 34?

Yes.

Okay, all right. And of the five that have actually been put back, what's the total dollar amount of those?

I would guess at -- I'm not sure. I think the average loan was about $250,000.

Okay, that's fine. And then I think I know the answer to this, but just to clarify. In terms of any additional exposure, because I think didn't -- weren't you all doing some Alt-A product at Fulton Bank?

We do some Alt-A products at Fulton Bank and last year I think it was about $40 million. But it's a different type of Alt-A program. It's done for our customers and it's not stated incomes, so the income will be verified. It's not similar to the program that they had at Resource.

Okay. So you're not seeing any deterioration in that product?

No.

Okay, okay. And then Scott, you had talked about in terms of some of the initiatives that you've outlined, wanting to focus more on profitable businesses. What are your most profitable business lines?

The business lines that we have I think a competitive advantage and where we make our best return is what I'll call the stable retail market and small business banking. And by stable retail market I mean the markets -- the individual customers that are in markets and are somewhat stabilized in that market and either have grown up there and stayed there or have moved there and said this is where we're putting down roots. Those are the Community Bank kinds of customers where we can have I think a more natural feel to.

And then with our service levels, as we've talked about in the past, we tend to once we get those customers keep them. And the most profitable customers are the ones that come and stay and that's part of that. And they're a significant source of funding for us and, as you can see, over half of those customers coming into those new branches were core deposits and so that becomes a very -- and then we have the other side with lending activities to them and as they grow wealth management and all the rest.

Then small business funding, again, the Community Bank model and approach appeals to business owners particularly where they're smaller businesses and the owner is the manager and wants a relationship with their bank. The margins in small business loans tend to be better than those in the larger businesses. Now to get volume you do need to make loans that are larger than our average size of $0.5 million, but when you start making $12 million and $15 million loans you just don't get the margins you get -- and you don't get the diversification.

So we'd rather have ten $1 million loans to small business than one $10 million loan to a larger one. Although we certainly do and need to make those larger loans. But those are the areas where we're most focused and where I think our returns are the best.

Okay. And then in terms of the enhancement of your front-line systems that you mentioned, what does that entail exactly?

What we're trying to do is to enhance our sales capacity, to deliver more specific information to front-line folks so that as they're meeting with customers they have a total understanding of what the customer's relationship is with us. Also incorporated in that are sales prompts so that given certain situations about the customer they can know what that customer is most likely to be interested in talking about that day.

Plus we've done some market segmentation in some of our advertising through direct mail and it will prompt the servicing officer to know that this customer most likely is interested in a home equity loan and they got a mailer last week that told them about it and that prompts a conversation. And all those kinds of things to try to enhance that sales capacity or people out there and making sure they have complete information about the customer so they can talk intelligently, recognize needs and that kind of thing.

Okay. So the infrastructure is there, it's just now a function of implementing it?

Some of the infrastructure is being put in as far as what I just talked about and pulling all those systems together to get that done. The infrastructure we've put in are things that help us manage the total systems. For instance, one of the things we put in last year -- I think it's like eight people in a room somewhere we can manage all the PCs that are out there in the system without going -- what they say, we don't use sneakerware any more, we use electronics so that if somebody has a problem with their PC they can dial in and have it fixed from a remote area.

And the systems that tie things together, it's not the kind of thing that's obvious to the customer, but it's the king of thing that gets done in the back room so the systems are more effectively talking to each other. And then that provides the ability then to enhance these systems and then deliver it more quickly.

Okay. And then have you all cited specific areas where there are opportunities to cut costs, to flat out cut expenses?

Yes, we have. We haven't communicated them totally internally, so we're still working on that. But certainly centralization and standardization are two important things, areas where we think we can save some money and not change the relationship with customers. As we've merged banks over the years we've accumulated a lot of different product codes on the system that complicates things when we're working through those and we're under the -- right now working with a group that's looking at standardizing products more throughout the system so that we can deliver products that are just as effectively marketed to customers, but they're not 14 different ways to do the same kind of thing or whatever it might be.

As you know, we've merged some banks together and that's getting us some cost savings. We've had some staff folks that were outstanding. Affiliates, as we acquired them we kept them in place and over time we're seeing that maybe they're more effectively managed from a central location and probably can reduce numbers as we do that. And that's things like marketing, finance, some of those others where we have some -- probably some efficiencies we can get. And then just the typical things that everybody looks at -- branch staffing, all those things we'll be looking at over time or are in the process of relooking to find ways.

Things are changing. We don't get as much volume into the branches as we used to. This remote capture thing we're doing now for our businesses, as we get more and more interest in that, that means that a customer who's a business customer instead of delivering 50 checks to a branch and making a deposit, does it all electronically. So I think there will be opportunities to do some staffing reductions there as our volume numbers change and we watch them -- we're going to be watching them very carefully to do that.

Okay. Do you anticipate further affiliate consolidations?

We don't anticipate any as we speak today, but that's an ongoing process that's evolved over the years. We've done 25 acquisitions and we'll be down to -- we're down to 14 now and reducing some more and that kind of bubbles up from them and from us and we look at what makes sense in the market so that we don't lose this community bank identity and yet we can get all the efficiencies out of the system we can get.

Okay. Just one quick final question. Charlie, you mentioned that you guys are not the top payers of CDs in your market. Do you anticipate having to raise your rates?

Not right now. I think if we see stronger loan growth we could move the CD rates up and it would help us, but not right now.

Okay, great. That's it. Thanks, guys.

Frank Shiraldi.

Good morning. I just wondered, the service charges that were down sequentially. You mentioned, Charlie, that the overdraft was responsible for that. Is that seasonal?

It might be a little seasonal. But one thing we did, we changed from an accounting standpoint was previously we recorded an overdraft fee and it wasn't collected it would be put down in operating expenses and now we've been applying that against the service charge income.

Okay. And then just a clarification on my end on if you do get some more of these repurchase requests, if they do actually become repurchases (multiple speakers) back to you, would they go -- they'd immediately go on to say onto nonperforming balances, is that how it would work?

Yes. We would take them back and I think we'd have to evaluate it. And we would write it down to their net realizable value, whatever we thought that was and we might try to sell if we could sell it, if not we'd move it into the loan portfolio.

Okay. And I apologize if I missed this, but when you talk about -- I know you've done a couple already very recently -- bringing the banks into each other and creating costs saves. Do you think this is just sort of what you've been doing all along or have you gotten more aggressive on that front?

I think it's what we've been doing all along. As I said, we've done 25 acquisitions over the years and it's kind of a natural thing. Banks get -- as they expand and do some branching they get closer to each other and then once they're part of us for a few years that brand that they're now communicating changes a little bit. So what we do is look at what's a natural geographic market for this bank to serve so that it can be legitimately known as a community bank in that market. And that's kind of the way it evolves and the way it's been evolving.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS). Matt Schultheis.

Actually my question has been answered. Thank you very much.

It appears we have not further questions. I'd like to turn the conference back over to Scott Smith for any closing remarks.

Thank you all for attending the teleconference today. We'll end this call at this point and we hope that you'll be able to join us again in the second-quarter earnings conference call which is scheduled for July 18th. I'll see you all then.

Once again, ladies and gentlemen, that does conclude today's conference. We do appreciate your participation.