Fulton Financial Corp (FULT) 2010 Q1 法說會逐字稿

Good day, and welcome to the Fulton Financial first-quarter earnings call. As a reminder, today's call is being recorded. At this time, for opening remarks and introduction, I would like to turn the conference over to your host, Laura Wakeley, Vice President and Corporate Communications Manager. Please go ahead, ma'am.

Good morning, and thank you for joining us today for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the first quarter of 2010. Your host for today's conference call is Scott Smith, Chairman and Chief Executive Officer of Fulton Financial. Joining him are Phil Wenger, President and Chief Operating Officer, and 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 around 4.30 yesterday afternoon. These documents may 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 may make certain forward-looking statements regarding future results or the future financial performance of Fulton Financial Corporation. Such forward-looking statements reflect the Corporation's current views and expectations, based largely on information currently available to its management, and on its current expectations, assumptions, plan, estimates, judgments and projections about its business and its industry, and they involve inherent risks, contingencies, uncertainties and other factors.

Although the Corporation believes that these forward-looking statements are based on reasonable estimates and assumptions, the Corporation is unable to provide any assurance that its expectations will in fact occur or that its estimates or assumptions will be correct. Actual results could differ materially from those expressed or implied by such forward-looking statements, and such as statements are not guarantees of future performance.

Many factors could affect Fulton Financial's results, including, without limitation, the factors listed in the Safe Harbor Statement section of yesterday's earnings news release. 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. Accordingly, investors and others are cautioned not to place undue reliance on such forward-looking statements.

Now I would like to turn the call over to your host, Scott Smith.

Thank you, Laura, and good morning, everyone. It is nice to have you with us. Before Phil's credit review and Charlie's financial discussion, I have a few introductory remarks on the quarter.

We reported diluted net income per share of $0.13, an 18.2% increase over the $0.11 reported last quarter. There are a number of factors supporting our earnings momentum. We were pleased to see a healthy increase in our net interest margin, as our funding costs continued to decline. This margin expansion helped offset lower average loan balances.

Credit metrics showed further signs of stabilization. Helping us again this quarter was a $5 million decrease in the provision for loan losses. Charge-offs were down slightly and our coverage ratio improved.

Construction loan exposure continued to decline. However, credit challenges remained, and while there is certainly more optimism about economic recovery, the pace of improvement, at least from our perspective, is slow.

The persistent low interest-rate environment continues to affect some of our noninterest income categories, like cash management. Actually, a portion of our deposit growth over the last several quarters came from those accounts as clients sought to avoid [teeth] in this environment. We anticipate additional pressure on deposit accounts related -- I'm sorry -- we anticipate additional pressure on deposit-account-related revenue for the remainder of the year.

The decrease in refinance volume caused mortgage sale gains to be down as well. Other expenses were flat linked quarter. Over the last few quarters, I frequently talked about how we are positioning the Company for the future, and I believe we are positioned well. Continued earnings momentum is largely contingent on two factors, further credit cost reduction and further improvement in overall economic activity.

We have a good handle on our credit issues and continue to manage them effectively. With our strong liquidity, we are eager to lend to creditworthy, financially-sound borrowers, and we are seeing some early signs of renewed economic confidence. I think one of the biggest unknowns for us and for the industry right now is the pace of economic recovery and its impact on earning asset growth.

Overall, we are off to a good start in 2010, and our capital position has been and remains strong. In prior calls, you've asked about our intentions to redeem the capital purchase preferred stock held by the US Treasury. As I've said, we intend to do this when the Board and management feel that it is prudent to do so. We have ongoing discussions on this topic and we continue to look at a variety of factors, including the performance of our stock, the Corporation's earnings, the condition of the overall economy and the actions of our regulators and peers. When we believe the timing is right for our shareholders, we will take the necessary steps to obtain regulatory approval and pay back the TARP funds.

Thank you for your attention, and now I would like to turn the call over to Phil Wenger for our credit discussion.

Thank you, Scott. We continue to see credit quality stabilization, a trend that began in the second quarter of 2009. The resources that we have committed to the loan review function, workout and remediation of our portfolio have been effective in identification and management of problem credit relationships. We are cautiously optimistic that this stabilization will continue.

We are beginning to see some signs of economic recovery, although early indications are that the rebound will be slow. Loan demand remains flat. We continue to monitor the portfolio very closely and to take prompt action on signs of deterioration. While we cannot predict results for the remainder of the year, if the forecasts for continued economic recovery hold true, we would anticipate improvement in our credit quality throughout 2010.

Unless I indicate otherwise, my remarks will focus on our linked-quarter results. Ending loans, net of unearned income, were basically flat, which is a reflection of continued weak loan demand across our footprint. Within the portfolio, the two categories showing growth linked-quarter were commercial mortgages, with an increase of $30 million or 0.7%, and residential mortgages, with an increase of $30 million, or 3.2%. This growth was offset by a reduction of $41 million in construction loans, a reflection of management's continued efforts to reduce exposure in this area. Since the first quarter of 2009, we have reduced our construction exposure by $268 million, or 22%.

Regarding the growth in commercial mortgages, we believe the demand in this area is a result of a lack of alternative funding sources, such as the secondary market or private placements. We have been and will continue to be very selective in taking on additional business. We are supporting our existing customers, as well as requiring conservative terms and significant relationships in any new business we undertake.

Our portfolio of $4.3 billion is comprised of 40% owner-occupied financing, and the average loan size is just under $500,000. We believe these characteristics serve to mitigate much of the risk that has been widely discussed regarding commercial mortgage financing. However, we continue to monitor this portfolio closely.

Given the relatively flat demand throughout the first quarter of 2010, we cannot be certain how strong our growth in earning assets will be for the remainder of the year, nor can we be certain what effect that potentially rising rate environment will have on residential mortgage activity. As we mentioned last quarter, we are gaining market share in many of our markets. We continue to benefit from our consistent calling efforts and referral relationships that are generating high-quality new business across our community banking franchise.

Our allowance to loans came in at 2.25% at March 31, 2010 versus 2.15% at the end of 2009. Our allowance coverage in nonperforming loans increased from 91% to 94% linked-quarter. Nonperforming assets were $312 million, or 1.9% of total assets, at March 31, 2010, compared to $305 million, or 1.83% of total assets, at December 31, 2009. The $7.2 million increase was primarily due to a $4.3 million increase in nonperforming loans and a $2.9 million increase in other real estate owned.

Net charge-offs were $28.2 million in the first quarter, with $20.2 million coming from the construction category, $2.5 million from our C&I portfolio, $2.2 million from our commercial mortgage portfolio, $1.9 million from consumer, $1.4 million from residential mortgages.

Within our nonperforming loan portfolio of $286 million, approximately $88 million, or 31%, are in our Pennsylvania banks, $87 million, or 30%, are in our New Jersey banks, $52 million, or 18%, are in our Maryland banks, $49 million, or 17%, are in the Virginia division of Fulton Bank, and $10 million, or 4%, are in our Delaware bank. The distribution of the nonperforming loan portfolio reflects a small reduction in Virginia and an increase in New Jersey.

The geographic distribution of our total loan portfolio remains unchanged from last quarter, with approximately 55% of loans domiciled in Pennsylvania, 21% in New Jersey, 12% in Maryland, 9% in Virginia and 3% in Delaware.

We reported a 29 basis point or $33 million uptick in delinquency linked-quarter, from 3.42% to 3.71%. We expected this first quarter to be a period of tight seasonal cash flow for many of our customers. Specifically, commercial loan and commercial mortgage delinquencies were up 33 and 66 basis points, respectively.

$30 million of the $33 million increase in delinquency was in the 30-day category and included a couple of large accounts that we have been monitoring very closely. Construction delinquency increased 55 basis points, but remained flat in dollars. The increase in the percentage was the result of a further reduction in construction portfolio outstandings. Residential delinquency, including loans held for sale, decreased 78 basis points, and consumer delinquency remained unchanged.

We reduced the provision from $45 million in the fourth quarter to $40 million this quarter. Our process of early identification of troubled credits is ongoing. We have noted a slowing of the pace of allocations for specific credits and a slowing of the pace of adding credits to our watchlist. We have aggressively, we believe, moved credits to nonperforming status over the last two years.

Our construction portfolio continues to decline, and our coverage ratio has increased. For these reasons, we are comfortable with our reduction in the provision.

Our lending teams across the footprint provided anecdotal information that business conditions showed little change from the fourth quarter. However, there are indications that customers and prospects are looking ahead to potentially more business activity and working to ensure they have their relationships with their bank that will support future business needs.

Our loan pipeline is lean, but steady. The market uncertainty seems to be abating. As the economy rebounds, we are increasing our new business development activity, continuing to book new, high-quality credits as those opportunities become available, continuing to diversify our loan portfolio, proactively addressing distressed credits and working to further reduce our construction exposure.

In summary, while the credit challenges remain, we are continuing to see stabilization. We are cautiously optimistic that if the indications of an economic recovery are accurate, 2010 should reflect improvement in our credit quality.

Thank you. I would like to turn the call over to our CFO, Charlie Nugent.

Thank you, Phil, and good morning, everyone. Thank you for joining us today. Unless otherwise noted, comparisons are of this quarter's results to the fourth quarter of 2009.

As Scott mentioned, we reported net income available to common shareholders of $22.4 million, or $0.13 per share, in the first quarter, compared to $0.11 in the fourth quarter. We are pleased that the improvement in our earnings that began in the second half of 2009 continued in the first quarter of 2010.

The items contributing to the earnings increase included a 1.8% improvement in net interest income, stabilizing asset quality which resulted in a lower provision for loan losses and well-controlled core operating expenses.

The $2.4 million, or 1.8%, improvement in net interest income was the result of the continuing expansion of our net interest margin. The net interest margin improved 11 basis points this quarter, from 3.67% in the fourth quarter to 3.78% in the first quarter. Consistent with the trends we saw in the last two quarters, the improvement was due to the decline in time deposit costs. Our time deposit costs were 2.30% in the fourth quarter compared to 2.08% in the first quarter.

Yields on earning assets decreased only 3 basis points, from 5.2% in the fourth quarter to 5.17% in the first quarter.

In the second quarter of 2010, there are a significant amount of time deposits and Federal Home Loan Bank advances maturing, which should have a positive impact on our net interest margin. However, we do not believe that it will be as significant as in the past few quarters. $1.3 billion of time deposits will mature in the second quarter at a weighted average rate of 1.78%. By comparison, new certificates of deposit originated in the month of March had a weighted average rate of 1.25%. $75 million of Federal Home Loan Bank advances will mature in the second quarter at a weighted average rate of 5.52%.

Total average earning assets were essentially unchanged from the fourth quarter of 2009. Average loans decreased $17 million, or 0.1% percent, while average investments increased $69 million, or 2%. Other interest earning assets, consisting primarily of mortgage loans available for sale, declined $43 million or 45%.

Total average deposits decreased $143 million or 1% from the fourth quarter of 2009. We continue to experience growth in core demand and savings accounts, with average balances increasing $69 million, or 1%. However, this growth was offset by a $212 million or 4% decrease in average time deposits. The increase in average core deposit accounts was realized primarily in savings accounts, which grew $75 million, or 3%. This growth occurred primarily in personal money market accounts.

Non-interest-bearing demand deposits decreased $18 million, or 1%. This decline was entirely in business accounts. Interest-bearing demand deposits showed a modest $12 million, or 0.6%, increase.

Excluding net security losses, our other income for the first quarter declined $1.5 million, or 3.6%. Mortgage sale gains decreased $516,000, or 13%, as the volume of loans sold declined to $234 million in the first quarter from $355 million in the fourth quarter.

Service charges on deposit accounts were also down by $900,000, or 6%. Much of this decrease was in overdraft fees, which often exhibit seasonal declines in the first quarter. Net security losses of $2.2 million were $350,000 higher than the fourth quarter. Other than temporary impairment charges of $4.1 million on pooled trust-preferred securities and $800,000 on bank stocks were partially offset by realized gains on sales of debt securities of $1.9 million and bank stocks of $800,000.

Our investments in pooled trust-preferred securities had a cost basis of $34 million and a book value of $16 million at the end of the first quarter.

Operating expenses decreased $1.1 million, or 1%. Salaries and benefit expenses were $1.3 million, or 2.4% lower. And marketing costs and other outside services also declined by $800,000 and $500,000, respectively.

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

(Operator Instructions) Craig Siegenthaler, Credit Suisse.

First, just really on the credit side, I wonder if you can help us think about the moving pieces in both the construction and the commercial bucket this quarter. Specifically, what we saw was a pickup in construction losses and decline on the commercial side. And I'm trying to really back into a better run rate for the second quarter.

So is there a specific question, Craig? We are having trouble understanding.

Can you hear me right now?

Yes.

Were there any lumpy, large loans in the construction bucket that drove charge-offs? That could be my first question.

Yes, there were. I would say there were two large accounts that had a fairly large charge off. So I do think the construction charge-offs in the first quarter were lumpy.

And on the commercial bucket, the improvement we saw, is that sustainable, or did you say it was -- given that we are going to the back half of that cycle, is that really sustainable throughout 2010, the lower level of losses there?

I think that is a great question, Craig, and I'm not sure I can -- I think all three categories -- construction, C&I and commercial real estate -- will be, as you used the term, lumpy, over the entire year.

Got it. And then just one follow-up question on the NIM. When you think about the ability to further reduce funding costs, which you touched on briefly in the call, how much additional upward lift could we get in the NIM, really independent of what the Fed decides to do this year?

You know, Craig, a lot of moving parts of the net interest margin. And we tried to give you the [biggest] indication that we think the margin will go up. And that said, we will have $1.3 billion in certificates of deposits maturing in the second quarter, and the average yield is 1.78%. And we are putting them on at March at 1.25%. So we expect some pickup, but there is a lot of moving parts on that.

Got it. Great. Thank you for taking my questions.

Rick Weiss, Janney Investments.

I wonder if you could talk -- overview on the balance, sheet, it has been continuing to shrink slightly. At what point would you start to think that loans would grow or investment securities, and I guess you would see increases in those kind of things?

Rick, this is Scott. The economy is the tricky question, as I mentioned in my opening comments. We are seeing customers a little more optimistic than they were. I chatted with a construction builder -- large builder yesterday. And he is saying, well, we broke even last year. We are probably going to break even this year. But next year, it looks like we are going to make some money. So if that is any indication anecdotally of what could happen, then we could see some pickup in loan demand in the fall.

But it is hard for us to sit here now and be specific about that because it is not happening yet. As I think we are all seeing, there is a general feeling that the economy is moving forward and we are hearing more and more economists and experts indicating that is the case. But it has to happen first.

So loan demand is soft. But we are -- as I mentioned, we are ready, willing and able to lend to creditworthy customers. There is some credit demand out there now from some marginal customers that are having difficulty getting loans, and the reason is they've had some issues and -- they are difficult to make loans to those folks.

But as the economy picks up, as everybody suspects, I think our stronger customers are going to want to expand and borrow some money. But it is hard to say whether that happens in August, November or February of next year. I mean, it is just difficult.

Okay. And second question would be with respect to your loan-loss allowance over the last probably eight quarters or so, the provision has exceeded charge-offs. Would you think that is going to continue, or at some point would provisions kind of equal charge-offs or even fall below that?

Well, I think while we are at least -- what's the right word -- we're not happy about stabilization, but at least we think some stabilization in the credit metrics. I think that begins to -- the reserves get better when we see nonperformings start to edge down and those metrics really improve, Rick, as opposed to --. We are pleased they are not getting worse, but they are still in what I will call a stabilization mode and not a declining.

And then when things get better, would you expect to see recoveries on stuff that was previously provided for?

We always have recoveries. I think this has been a fairly unique situation through these last few years, and there were some real losses in the portfolio. So I think it might not be as typical as you've seen in past recessions, and particularly from the residential development area, where the values of those properties have declined substantially, and the recoveries out of those aren't going to be like the old days, when you had a C&I loan and you had some real estate and some other things behind them, and you worked your way through it and then got the collateral and there was value in that collateral. I think some of the -- it will depend on real estate values, quite frankly; as they come back, that will help. But I don't think anybody suspects that will be strong anytime soon.

Okay. Thank you.

Frank Schiraldi, Sandler O'Neill.

Just a couple quick questions. I wonder, Charlie, if you could just remind us, if you have the numbers, in terms of how much of the CD book repriced this quarter.

I do. I think it was -- I think we had $1.6 billion mature in the first quarter. I think that's pretty close. And they repriced it -- I forget the yield; it was a pretty good yield. But it brought our overall costs from [230] in the first quarter to [208]. And -- I'm sorry -- in the first quarter $1.3 billion repriced, when they rolled over, and the yield -- the average weighted yield of what rolled over was 2.16%.

And again, we'll see another $1.3 billion row over this quarter -- in 2Q?

Yes, and the rate is not as high. Instead of the 2.16%, it is 1.78%. But that is why we don't expect a significant increase in the margin that we saw the last two quarters.

And they are basically repricing to where -- I mean, in terms of where these -- you said 1.25%. Has that gone up at all? Is that basically pretty stable from --?

I think that has been pretty stable over the last couple quarters. We haven't moved up our CD rates. They've been staying the same.

Okay. And then just on the provision, is there any color you can give in terms of specific provision of the $40 million? Specifically, how much was for commercial real estate?

No, I don't think we do have that. Sorry, Frank.

And just on 30 to 89 days, just wondering -- I think you had mentioned that before, Phil, about the total delinquencies. But in terms of linked-quarter, do you have those number, what that has done, that bucket?

Yes. At 12/31, our 30-day delinquencies were $83 million, and at 3/31 they were $113 million. And the 60-day delinquency at 12/31 were $47 million, and at 3/31, they are $46 million.

And just finally, this is always a tough question to answer -- maybe it's kind of an annoying question to get. But in terms of -- Scott, you talked about TARP and TARP repayment. Do you think there is a possibility here that you maybe could hang onto TARP for a bit and maybe build capital just through earnings and not go and do a common equity raise at all?

Well, as I said, we have been in discussion about this since last summer, and we continue those discussions. And that's about all I can say, is that we look at all the options on a continual basis, and if we decide to make a permanent decision, we will announce it. But at this point, we are still in discussions.

All right. Thank you.

Matthew Schultheis, Boenning & Scattergood.

Quick question for you on the decrease in construction loans -- payoffs or do these go into perm?

Almost all were payoffs this quarter.

Okay. And lastly, you talked about anecdotal evidence from your lenders that things seem to be improving. Are there certain geographies that seem to be doing better than others as far as the sense of things improving?

As far as improvement?

Yes.

I think Virginia is showing improvement probably more than some of the other areas. And the one area that I would say is improving the least would be southern New Jersey.

Okay, all right. Thank you very much.

Collyn Gilbert, Stifel Nicolaus.

Charlie, would you mind -- just, you know, you've given some color as to the impact that CD repricing is going to have on the margin. Can you give any color on the asset side? If we are seeing any loan resets come up or just kind of some of the dynamics of the maturity schedule on the asset side, when we might start to see improvement in the yield there.

Collyn, it has been pretty stable, when you think about it. It only declined 3 basis points from [520] to [517]. It seems like we're getting pretty good pricing and rates are stable. So I think that yield will stay relatively stable. I am a bad predictor, you know that, but I would think that they would stay relatively stable. It has for the last couple quarters.

Okay. But the pricing that you are seeing on the loans coming on, I presume the spreads are better than what would be rolling off. Not that there is a lot of new loans coming on, but --.

Yes, the problem is there is not a lot of new loans coming on, so it is not driving our yield up.

Okay. But theoretically, if loans did start to come on -- just trying to gauge if in the event we should have loan growth what the potential impact could be on the differential on that loan yield side.

That's a lot of ifs, and one of the ifs is how aggressive the rest of the world is going to be on pricing when we finally see some loan demand. I think we will just have to play it out. My suspicion is we will get decent yields. I think pricing for risk is a new discipline that is in the industry and that will stay for a while anyway.

Okay. Kind of a follow-up on that front. Can you guys give some color on the competitive landscape, like who you are seeing coming in to some of these deals, who you are seeing most frequently in some of the deals? And I'm speaking mostly on the commercial side, on the lending side.

Well, again, just anecdotally, Collyn, there are not as many players in what deals are there as there once was. But it just -- it depends on the deal, the size of it and the geography. And we are seeing every competitor we have at some point in time. But I don't think that we could say there's any one in particular that is more than others.

Again, it depends. If it is a small deal, then the community banks are in it more. If it is a larger deal, then some of the regionals and larger banks are in it. But I can't give you a list of who is most competitive or whatever. There is, frankly, not enough deals to give us much color on that.

Okay, that is all I had. Thanks.

[Eric Beardsley], Barclays Capital.

You had mentioned that the charge-offs should be lumpy for the rest of the year, but do you think we're at a point where those have possibly peaked?

Well, you tell me what the economy is going to do. If the economy is going to get better, yes. If we get some setback in the economy, then the lumps are going to be bigger.

And just to clarify, Eric, I think what I said was that the category of our charge-offs will be lumpy.

Okay. And then just secondly, I was wondering if you could provide any numbers on TDRs that you saw in the quarter -- at the end of the quarter.

Our TDRs increased from $54 million to $67 million.

And those that are non-accruing -- or those that are not in that category?

There are currently $15 million of that $67 million is in non-accruing.

All right. And then I was wondering if you could comment on any progress you've had in overdraft options or if you're really in that process yet.

We are still in the process, and it would be too early, I think, to say.

Great. That's all for me.

(Operator Instructions) Matthew Clark, KBW.

First, on the nonperformers in the quarter, just incrementally, we saw an uptick in CRE and C&I. And those are, I think, two categories that had been fairly stable, at least for the last couple of quarters. And I'm just trying to get a sense for what really is driving that uptick here in the latest quarter. And I apologize, because I was on another conference call until the Q&A, if you already talked about it.

Well, we are seeing some -- have seen some weakening in both C&I and CRE. I don't think the upticks have been huge, but they did both go up.

Then can you attribute it to something? Can you talk to what you saw, what types of issues that were -- what types of businesses, projects, so forth?

On the CRE side, I would say it was primarily from a loss of renters -- loss of leasers, leasees. And on the C&I side, it is widespread. I think most industries are being impacted. We did have one larger company in the printing business that is having some substantial problems.

Okay. And then on the comp line, I think we tend to see a seasonal increase here in the first quarter. And I'm just curious why that line was down this quarter and whether or not that is sustainable going forward.

There are a lot of things going through there. One thing, Matt, is that there are two less days in the first quarter. That helps us a little bit. I think we are continually reducing staff. It might be 3% if you go back to last year.

There was also our incentive plans. We had a lot more accrue -- not a lot -- we had more accrued than we paid out, and there was a reversal of $1.4 million in there. But there is also in there, the tax -- the taxes are a lot higher because of the -- just the first quarter of the year and it's about $700,000 higher from just the taxes.

Okay, great.

But every time you look, I think you see our salary and benefit costs going down, I think.

Okay, so I guess that's a good run rate here. This isn't -- is your sense, I assume.

Yes, it's a good run rate.

Thanks.

That concludes the question-and-answer session. At this time, I would like to turn the conference over to Scott Smith for any additional or closing comments.

Thank you all for joining us today, and we hope you will be able to be with us again at the second quarter 2010 earnings conference call, which is scheduled for July 21, 2010 at 10 a.m. Talk to you then.

That concludes today's conference. We thank you for your participation.