Fulton Financial Corp (FULT) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Fulton Financial fourth-quarter earnings conference call. Today's call is being recorded. All lines are now in a listen-only mode, and we will have a question-and-answer session at the end of today's presentation. Instructions on how to signal for a question will be given at that time.

And now, for opening introductions, I would like to turn the call over to Miss Laura Wakeley. Please go ahead, ma'am.

Thank you. Good morning and thank you for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the fourth quarter and year end of 2007. 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 was released at 4.30PM yesterday. The 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 on certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from those forward-looking statements.

Risks and uncertainties that may affect future results include pricing pressures on loans and deposits; actions of bank and nonbank 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 integration and customers' acceptance of the Corporation's products and services.

Fulton Financial does not undertake any obligation to update any forward-looking statement 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.

Good morning and thanks for joining our call. In the fourth quarter of 2007, we earned $0.22 a share, a 15.8% increase over the $0.19 we reported in the third quarter. We were encouraged to see this progress on a linked-quarter basis.

Compared to 2006, 2007 was a particularly challenging year for us. As you know, we are not alone. Real estate-driven problems continue to impact earnings.

While we took significant resource mortgage-related charges in the first three quarters of last year, the relatively small charges incurred in the fourth quarter give us reason to believe that this problem may be winding down. That assumption, of course, is dependent upon the real estate market not experiencing significant further deterioration in values.

As you can see in our financial information, we have no exposure to collateralized debt obligations, nor do we have exposure to subprime mortgages in our bond portfolio. All our mortgage-backed securities are agency-guaranteed.

Our capital and liquidity positions are strong. Consequently, we have no short-term plans to raise additional capital.

We will focus our attention in 2008 on two themes that will directly impact our earnings growth -- a continuation of our cost reduction initiatives, and investing in revenue-generating activities that include new branches, technology initiatives, product and service enhancements, and the addition of revenue-generating salespeople.

In addition, we will aggressively continue our core deposit marketing initiatives. These include a switch kit to obtain new account relationships that include cash incentives.

We are cautiously optimistic that these activities will give some traction to our core deposit balance growth in 2008. We will also continue the utilization of targeted direct mail using our segmentation capabilities.

During 2002, the most recent low interest rate cycle, we experienced good growth in core deposits as consumers and businesses seemed unmotivated to move money into certificates of deposit and other alternative investments paying relatively low rates. Historically, we have seen core deposit growth when the equity markets are particularly volatile. We are hopeful that these two current trends, along with our promotional activities, will result in improved core deposit growth in 2008.

I'm not suggesting that the continuing uncertain economic environment will make earnings growth any less difficult. However, we are intently focused on returning the Company to stronger financial performance.

The cost of credit is one of the challenges that will need continued close attention. Fourth-quarter annualized charge-offs reached 15 basis points, the number I have mentioned in previous calls as a normal levels for us. Future charge-off levels will obviously be impacted by the economic conditions in our markets. Analysis of both our watchlist and delinquency numbers also reflect a return to historically normalized levels.

We are pleased with our commercial loan growth both year over year and linked quarter, and that pipeline continues to be healthy. The consumer sector, however, is soft. We introduced a new home equity product in the fourth quarter of last year that appears thus far to have been well-received by our customers. It enables them to choose both a fixed- and floating-rate option for a portion of their credit line. And of course, we're closely watching current economic stimulus discussions that could boost consumer confidence and spending.

Looking more closely at the fourth quarter, we had some nonrecurring items that were identified in our release. Excluding those, we're beginning to see the benefits of the consolidation, centralization and standardization initiatives that we shared with you in 2007.

Linked-quarter salary expenses were flat as a result of last year's staff reductions. We also expect to see declining benefit costs as a result of the changes we made in our retirement programs last year.

Linked quarter, other income, although off slightly, also showed some bright spots. Overdraft and NSF income increased significantly with the introduction of a matrix-based overdraft management program. It has enabled us to increase the number of items we pay for our customers. Debit card-related fees showed a nice increase as well.

The biggest detractor from other income category is the decline in mortgage sale gains that was expected. The Board announced a first-quarter 2008 dividend of $0.15 per share. At the current price of our stock, the dividend yield is almost 6%.

To summarize, in 2008 we will focus on the basics -- increasing interest income with quality loans, decreasing funding costs through increased core deposits, increasing other income and aggressively managing other expenses. We will remain focused on those basics because they have worked effectively for us and because we believe that if we continue to do them well, our financial performance will improve.

Thanks for your attention, and now I'd like to turn the call over to Charlie Nugent for a discussion of our financials. Charlie?

Thank you, Scott, and good morning, everyone. Thank you for joining us today.

We reported earnings per share of $0.22 for the fourth quarter, which was a 15.8% increase over the third quarter and an 18.5% reduction from the fourth quarter of last year. On a year-over-year basis, earnings per share declined 17% to $0.88. Unless otherwise noted, comparisons are this quarter's results to the third quarter.

Net interest income improved $1.2 million or 1%. Average earning assets increased $398 million or 2.9%. Average loans grew $225 million or 2.1%, while average investment securities increased $240 million or 8.6%.

Our loan growth to $225 million occurred throughout the portfolio. Commercial loans grew $80 million or 2.8%. Of that growth, $46 million was in Pennsylvania, $16 million in New Jersey, and $12 million in Maryland.

Commercial line of credit usage was 40% at the end of December compared to 38% at the end of September and to 37% at the end of December 2006. Commercial mortgages increased $55 million or 1.6%, with most of the growth occurring in New Jersey, due to continued strength in those local economies and our solid market presence.

Construction lending declined $5.6 million or 0.4%. A $25 million reduction in the Columbia, Maryland, market was offset with moderate growth in other markets. The decline in Maryland is due to softening demand in the real estate acquisition and development loan sector.

Residential mortgages grew $62 million or 8.1%. Approximately $25 million of this increase is due to repurchased and reclassified loans. Growth of $35 million represented loans originated from Fulton Mortgage Company and retained in our portfolio. $28 million of these loans were adjustable-rate mortgages, with $7 million fixed rate.

Home equity loans increased $31 million or 2.2%, with $25 million representing growth in floating lines and $6 million representing growth in term loans. This improvement occurred primarily within the Fulton Bank and Columbia Bank markets. Fulton Bank's successful promotion of a new home equity line product, along with some of the larger banks becoming less competitive in the Maryland market, contributed to this improvement.

Average investment securities increased due to purchases made in both the third and fourth quarters. During the fourth quarter, we purchased securities totaling $335 million at an average yield of 5.79%.

The Corporation realized net losses on securities sales of $537,000 in the fourth quarter compared to net losses of $134,000 in the third quarter. Net security losses of $670,000 were offset by gains on bank stocks of $133,000.

Debt securities of $37 million were sold during the fourth quarter, including $29 million in nonagency-issued collateralized mortgage obligations. Now, with these sales, all the Corporation's mortgage-backed securities are agency-guaranteed, and the Corporation does not have any collateralized debt obligations.

Attracting and retaining reasonably priced customer deposits continued to be challenge in the fourth quarter, with total customer funding decreasing $110 million or 1%. We saw declines in all categories of deposits, and in business, personal and municipal accounts, reflecting the continuing competitive market and our decision not to overpay for certificates of deposit in a declining rate environment.

Noninterest-bearing demand deposits declined $28 million or 1.6%, while NOW accounts decreased $7.5 million or 0.4%. Savings and money market accounts decreased $79 million or 3.5%, with $36 million of this decline occurring in resource banks, Internet and money market accounts. The reduction in time deposits was $22 million or 0.5%.

We have continued to use our new checking account promotions to generate core deposits. While the balances do not show increases, we're optimistic about its success based on recent new account openings. Also, because of the importance of core deposits, we have recently established a formal deposit committee and have designated a Chief Deposit Officer.

Our funding shortfall was covered by an increase in federal funds purchased of $219 million and in repurchase agreements of $297 million. Also during the fourth quarter, Federal Home Loan Bank advances and long-term debt declined $31 million.

Our net interest margin for the third quarter was 3.56%, a 6 basis point decline from the third quarter. Yields on earning assets decreased 15 basis points, while the cost of interest-bearing liabilities decreased 13 basis points, and our noninterest-bearing funding declined.

The provision for loan losses increased $2.2 million to $6.8 million in the fourth quarter. Net charge-offs were 15 basis points or $4 million in the fourth quarter compared to 8 basis points in the third quarter. Nonperforming assets to total assets increased to 76 basis points at December 31 compared to 69 basis points at September 30 and 39 basis points at December 2006. The balance increase from the end of September was $13.8 million.

I would like to point out to you the change we have made in the reporting of our allowance for credit losses. Generally accepted accounting principles require the allowance for loan losses to be allocated solely on outstanding loans and a separate loan to be maintained for committed loans, which is reported as a liability.

Historically, we and many other banks in the industry have reported both of these items as part of the allowance for loan losses due to immateriality. As at December 31, 2007, we have begun to report these items separately in our financial statements.

Now, excluding security gains, our other income decreased $1.1 million or 3%. Service charges on deposits increased $2.1 million or 18%. Cash management fees were up $234,000 or 8.2%, due to growth in customer accounts. Overdraft fees increased $1.8 million or 34%, due to the rollout of the new overdraft program on November 1. We do believe the contribution from this program will moderate from the current level.

Gains on mortgage loan sales decreased $351,000 or 13.9%. Residential mortgage loans sold were $170 million in the fourth quarter compared to $265 million in the third quarter. Residential -- Resource Mortgage Company's volume dropped $76 million or 53%, while Fulton Mortgage Company's volume dropped $17 million or 16%.

The other category decreased $2.7 million to $2.5 million in the fourth quarter. And during the third quarter, we recognized a gain of $2.1 million related to the settlement of litigation and the sale of certain assets, as well as approximately $500,000 of nonrecurring items.

Operating expenses decreased $9.5 million or 8.8%. We took charges totaling $16 million in the third quarter related to the repurchase and potential repurchase issues at Resource Mortgage. During the fourth quarter, total charges were $640,000.

Total reserves were $18.6 million at December 31 compared to $19.8 million at September 30. We believe that the reserves recorded as of December 31, 2007, for the known resource mortgage issues are adequate. However, continued declines in collateral values or the identification of additional loans to be repurchased could necessitate additional reserves in the future.

Now, Fannie repurchase requests increased $9.1 million during the fourth quarter, from $10.7 million at September 30 to $19.8 million at December 31. $6.2 million of this increase relates to loans we had identified as of September 30 as potentially having instances of misrepresentation of borrower information and were reserved for as of that date.

Foreclosed real estate totaled $14.9 million at December 31 compared to $12.5 million as of September 30. The amounts attributable to resource totaled $14.4 million at December 31 compared to $11.4 million at September 30. 13 properties were added during the fourth quarter at a total value of $4 million. Sales and insurance proceeds of $670,000 were received. There were no significant gains or losses on the four properties sold during the fourth quarter. Of the foreclosed properties held at the end of the year, 80% are in Virginia or Maryland.

Other operating expenses increased $4.1 million or 22%. Included in the fourth-quarter amount were the following -- a $1.5 million loss accrual related to our exposure as a member of Visa USA. This accrual represents our share of Visa's settlement with American Express, as well as our estimated share of other outstanding litigation. As you are probably aware, Visa is expected to undergo a public offering in 2008. If this offering is successful, we could expect to recover this loss -- a $1.1 million write-off of trade name intangible assets related to our recent internal bank mergers; and a $1 million cost related to our special review of Resource Mortgage.

Salaries and benefits increased $668,000 or 1.3%. Contributing to this increase was a decline in the amount of costs deferred related to loan originations. I would like to point out that in the third quarter, adjusting for nonrecurring items, salary and benefits were down $2.5 million or 4.6%. This reflected the impact of our workforce reduction plan, which reduced salary and benefit expense by $1.1 million, as well as staff reductions at Resource Mortgage, which contributed $1.4 million to the savings.

Thank you for your attention and for your continued interest in Fulton Financial Corporation. Now we would be glad to answer your questions.

(OPERATOR INSTRUCTIONS). Rick Weiss, Janney.

I was wondering if you could talk about the net interest margin in relation to the Fed cuts. Since you guys are asset-sensitive, I was wondering if you're going to try to increase your use of leverage, possibly, to offset that pressure?

When we do our rate [shocks] on our static balance sheet, we think the 0.75% cut will reduce our net interest income over time by $1.6 million. And so we are really a little bit liability-sensitive.

We've done everything that we could in the third and fourth quarter to improve our balance sheet and get ready for interest rate cuts, but it's still going to affect our margin and our net interest income. And the $1.6 million is the effect on the static balance sheet, but you know as well as I do that change in the composition of the balance sheet will have an effect on the margin too.

Okay, so you're not really thinking about adding to leverage offset.

Not now. We try to -- our static GAAP position we reduced to 0.85 by buying securities. Securities that we were going to have to buy, we thought ahead of time. The Federal Home Loan Bank advances are mature. We let them mature. And all of our bonds have been short term. And when rates stabilize, we won't be buying as much as investments. But I think we might be locking in some longer-term debt at favorable rates.

Okay. And then I'm wondering, I guess on your deposit service charge, that's increased to $13.4 million --

Right.

-- versus $11.3 million. And yet the deposits decreased their average balances. So I just wanted to know what was going on there.

I think there were two things. One was the increase in the cash management fees from adding customers and growth in those accounts. And the other thing was just introduction of our new overdraft program. Before, we were less -- we didn't honor overdrafts as much as we are doing now, and that is adding a lot to our fee income.

Rick, this is Scott. We put in that automated system, as others have done, that allows us to do a more thorough analysis and pay more overdraft than we have historically. So that is a product that we added back in November.

So you wouldn't attribute the decline in deposits to your new charges?

No. I think it's a combination of things. As you saw, our line usage went up from 37%, I think, last year to 40%. And what you are seeing, I think, is that businesses are using up what was excess cash, and the fact that they are increasing their line usage would indicate that that is the case. And then there is typically a seasonal reduction in deposits, particularly retail, in the fourth-quarter and, frankly, first-quarter timeframes, is when those tend to seasonally back off a little.

And one more -- I'm wondering if you can give some guidance on where you see charge-offs ratios for 2008?

Well, this economy is so uncertain, Rick, it's really difficult for us to say that. I think we feel, as I mentioned in my comments, we feel like we're back to the more normalized levels. And by that, I mean normalized levels, not levels that are extraordinarily high or low.

So we're going to ride this economy out and see what happens. If the Fed and others that are attempting to stimulate the economy can be successful, then I think we feel pretty good about where they are going. But who knows what this economy is going to do.

(OPERATOR INSTRUCTIONS). Robert Hughes, KBW.

Another quick question on the overdraft side. I wasn't entirely clear on that. Is it a function of waiving fewer fees, or is it a function of sort of a policy change in how you order checks? What is the real catalyst there for the higher overdrafts?

It's an automated system that looks at each individual overdraft, and based on the history of that customer's balances and overdrafts and what have you, allows us to pay more than we had typically paid before, and it reduces the waivers as well, because it's all automated and done centralized as opposed to at individual branches.

I think I get that. Scott, I was curious about your comments up front. I know you haven't provided any EPS guidance for '08, but I think if you could clarify comments initially, I think you suggested that you see really no more deterioration in housing values, or at least you're not assuming that at this point with respect to the credit outlook. Am I characterizing that fairly?

I think we are cautious about it. I think what we're saying is in the values that we put in our reserves for the Resource issue, we think they are adequate, unless there are significant deteriorations in housing values. So we marked those down a couple of times and feel like we're okay for now.

I know last quarter, we spent some time talking about the difference in appraisals from, say, June 30 to September 30. Do you have any update for what you saw between September 30 and December 31 in terms of appraised values on --

No, I don't. As Charlie mentioned, the houses we were able to liquidate, we got about where we thought were going to be. So I don't have any real new information on that.

And then finally, maybe you could -- still a lot of concern out there about construction portfolios. I think your credit numbers, actually, in the quarter looked better than what most would have assumed. Can you give us some sense for what type of deep drilling you're doing on the construction book, how you feel about borrowers' ability to sell properties in this environment, and any reassessment of collateral values that you have done?

It's spotty, and it depends on the markets, but in some markets we have developments that are sitting and then we have -- and in the same markets there are other developments that seem to be selling.

In most of our markets, the lower-priced housing continues to move, and in a couple of markets the higher-priced is moving. But I think as said, we deal with mostly local developers and feel comfortable about their liquidity and ability to carry this. But that depends, as we have said in the past, how long this goes.

But right now, we're feeling okay about their -- and of course, the cost of that will go down somewhat with the rates coming down. But it just -- what I keep hearing anecdotally is longer term, we're okay, but nobody will tell me what longer term means. I don't know whether this clears up in midyear or whether this goes into '09. And then in some of our markets, the prices are holding up.

Pennsylvania market's real estate prices seem to be holding up, and some others. The [A zone] market I think continues to creep up, but there's still some sales activity going on. And then if you look at the job growth predictions that everybody has about that Baltimore/Washington corridor and all that's going on in that Northern Virginia market, I think, again, at some point in time that inventory is going to get wound down. But it's going to take a little while.

Collyn Gilbert, Stifel Nicolaus.

Could you all discuss a little bit on the deposit front and how that environment is looking? It seems as if you've, relative to what I have seen in other companies, been pretty successful in lowering deposit costs this quarter.

Well, we did. We cut our CD rates when the Fed lowered rates. And as you can see, it hurt our growth. But we just did not want to pay up in what we anticipated as a declining market.

We will have to see as funding needs developed here in this quarter where we are going to be. But it looks like -- well, given what happened earlier in the week, we're going to be able to probably get some CD money and non-CD money at lower rates than we would have in the fourth quarter. The trick is going to be growing it.

I'm sorry, say that again, Scott?

The trick is going to be growing those funding options.

Are you finding that the borrowing costs are less than deposit costs and you may shift gears and build borrowings more than deposits?

Traditionally, we have always preferred to fund through deposits, because when you do that, you are creating customer relationships, and that means all the multiple things you can cross-sell them. So we always like to do it with deposits when we can.

We use wholesale funding as needed and when there are opportunities cost-wise to replace what I will call hot money from the retail part of the business with wholesale funds. But we're very focused on growing core deposits and trying to get market share of those core deposits again, so we can fund with them, but also, importantly, so we can cross-sell them into other products.

Okay. Could you just talk about the migration of NPAs this quarter, I mean, if there were any big credits that went off or were added, and just give a little bit more color to those trends?

The nonperformings increased $13.8 million. And in the nonaccrual category, if you look at the earnings release, it was up $4.6 million. There were not a lot of big things in there. It was a marina in New Jersey; it was two gas stations; it was a renovation at the shore. They were the big things, so nothing big. But there's always things moving in and out, but that was the big increase in the nonaccrual.

The $2.4 million increase in ORE was all related to mortgages that were repurchased that we foreclosed on and are trying to sell. There was a $6.4 million increase in 90 days and accruing, but it was some medical equipment, an MRI lease that we think will get paid on. There was a residential development in Maryland, a sports bar in Northern New Jersey, and a spec townhouse project in New Jersey. I guess it's just the typical things coming in and coming out; nothing big.

Okay. And then in terms of the construction, primarily Colombia's business, do you guys have much exposure in more of the rural Virginia markets? Because it sounds like that is where a lot of the pressure is coming, is a little bit further out. But the Baltimore/D.C. metro markets are strong, but it is when you push further out into some of the rural markets is where some of these developers are seeing the pain.

I would say we're not seeing a lot of pain, but I think we are hearing anecdotally that -- I guess it's gas prices; I'm not sure. But the closer in to the metropolitan areas seem to be doing better than the further-out developments. But we have some exposure there, but I'm not hearing of anything that is a big concern right now.

We have $395 million in construction loans in Virginia, but for the most part, they're centralized in Fairfax County in the north, centralized around the city of Richmond, and a lot Norfolk, Virginia Beach and Tidewater. And they are still pretty vibrant areas. Most of our loans are concentrated in pretty good, vibrant areas, we think.

Particularly the Virginia Beach market. That continues to be doing well -- doing okay, given the environment we are in.

(OPERATOR INSTRUCTIONS). Matthew Schultheis, Ferris, Baker Watts.

I had a quick question on this overdraft product. Is this something customers have to sign up for or is this just automatic?

It's automatic.

So this isn't like an honors checking, you have to come in and sign some paperwork, etc., etc.?

That's correct.

How much of the nonperformance did you say were tied to repurchases, etc.?

In ORE, the increase was $2.4 million

I don't know if that's total nonperforming assets.

I'm sorry. The total nonperforming is $120 million. That includes ORE, and $30 million relates to repurchases from mortgages at Resource Bank. There's $16.5 million in nonperforming loans and there's $14.3 million in ORE property related to the repurchases. So it's 25%; 25% of the $120 million.

And as far as the Baltimore market is concerned, do you know how much lending you did sort of in the downtown area with people rehabbing houses primarily for resale? There are some neighborhoods downtown that have gone from rehab and sale to rehab and rent. Can you comment on your exposure specifically to that downtown area?

Matt, I don't have those numbers. And again, I'm not hearing anecdotally that we have any major issues as a result of the situation you're talking about. But I don't have those numbers.

Mac Hodgson, SunTrust Robinson Humphrey.

A couple of questions. On the expense side, I know you have been making some pretty good efforts on personnel expense to lower some of those costs, and I didn't know if you could give us a sense of a good run rate for salary and benefits. Is that $53 million this quarter pretty indicative of where you expect to be in '08 per quarter?

I would say, Mac, we cut back on the profit-sharing and stopped the pension plan. We will start seeing the savings from that starting January 1. You will see it in the first quarter. But we have really been watching expenses. I would say a 1% or 2% increase would be reasonable, I would think, if you are looking for a run rate. Hopefully, it will be below that.

And then on the advertising expense, it upticked this quarter. Is that mainly due to seasonality or is there something else in there?

We are, as we talked earlier, are focused on trying to increase our core funding base. And so we did some fairly heavy advertising in the fourth quarter to try to do that. It looks like it's working. So my sense is we are going to continue to use the marketing dollars as we have in the fourth quarter to continue to penetrate markets and to get market share. But we don't have significant increases in that area of budget.

Then maybe finally, speak a little bit about your branching plans. I know you've mentioned a desire to increase the footprint of the legacy Resource Bank in Northern Virginia. What are the plans for '08?

I was told yesterday that we're getting back on the 29th of January a complete analysis that we hired outside folks to do for us for the Virginia market. So we are going to be looking at that in the first quarter and begin the process there of looking for ways to expand the retail franchise there. And as I have said in the past, we are ready to do it whether we can get the locations actually bought and then approved for branch sites. It can vary from months to years.

But we are looking at it very carefully and we have some branches in some other parts of our markets that we're looking at as well. So I expect -- we've budgeted as we have in the past typically for 12-ish branches. My expectation, in the mix of all of that, we will do about that many this year.

Gentlemen, we have no further questions. I will turn the call back over to Mr. Smith for any additional or closing remarks.

Thank you. I would like to end the call by thanking everyone for joining us here today, and we hope that you will be able to be with us again for our first-quarter earnings conference call, which is scheduled for April 23 at 10AM.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.