Fulton Financial Corp (FULT) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Fulton Financial Corporation's third-quarter earnings call. This call is being recorded.

I would now like to turn the call over to Laura Wakeley, Senior Vice President of Corporate Communications. Please go ahead.

Thank you, and good morning, everyone. Thanks for joining us for today's conference call and webcast to discuss our earnings for the third quarter of 2013.

Your host for today's call is Phil Wenger, Chairman, President and Chief Executive Officer of Fulton Financial; and joining Phil is Charlie Nugent, Senior Executive Vice President and Chief Financial Officer. Our comments today will refer to financial information included with our earnings announcement, which we released at 4.30 yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News.

On this call representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations and business. These forward-looking statements are not guarantees of future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond Fulton's control and difficult to predict, and which could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Fulton undertakes no obligation other than required by law to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

In our earnings release, we have included our Safe Harbor statement, and will refer you to this section of the earnings release, and we incorporate it into today's presentation. For a more complete discussion of the certain risks and uncertainties affecting Fulton, please see the sections entitled Risk Factors and Management Discussion and Analysis of Financial Condition and Results of Operations set forth in Fulton's filings with the SEC.

Now I'd like to turn the call over to your host, Phil Wenger.

Thank you, Laura, and good morning, everyone. We are pleased to have you join us. I will briefly touch on highlight this quarter, and Charlie will review the financial details. Then we will both be happy to take your questions.

We reported diluted per-share earnings of $0.21, unchanged from the second quarter and from the same period last year. Our return on average assets for the quarter came in at 0.93%, and our return on tangible equity was 10.69%.

We were pleased to see loans grow by $200 million, or 1.6%, representing the fourth consecutive quarter of strong growth. On an ending balance basis, our loan portfolio has grown by approximately $652 million, or 5.4%, since December 2012. Our largest increase this quarter came in the commercial mortgage category, followed by home equity and residential mortgages. Pipeline has been strong throughout 2013, and the strength of our current pipeline provides a foundation for continued earning asset growth, although it has weakened slightly going into the fourth quarter. Of our $200 million loan growth, $80 million came from Pennsylvania, $38 million from Maryland, $31 million from Virginia, $30 million from New Jersey, and $21 million from Delaware. 53% of our growth came from new customers, and 47% from existing customers.

Asset quality has been consistently improving. This quarter was no exception. We experienced a decrease in nonperforming loans at $21 million, or 11%, which gave us the opportunity to lower the provision by $4 million to $9.5 million for the quarter. Total loan delinquency decreased $23 million from $275 million, or 2.18%, of total loans at the end of last quarter to $252 million, or 1.97%, as of September 30. This is the lowest level of loan delinquency we have seen since the first quarter of 2008.

Nonperforming assets also fell to $186 million from $210 million, partly due to $16.4 million of loan sales, as well as a decrease in new, non-accrual loans. We are particularly pleased to report that the $22 million inflow in the non-accruals this quarter, down from $38 million last quarter, as the lowest we have seen since before the economic downturn. Our residential mortgage activity was, as expected, impacted by higher rates. We closed 1848 loans this quarter compared to 2148 last quarter.

On September 30, our mortgage pipeline stood at $200 million, down from $368 million at the end of the second quarter. 63% of that total is purchase, 37% refinancing. The third quarter also saw the completion of our 8 million share stock repurchase program. Since we began repurchasing our stock in the third-quarter of 2012, we have bought back a total of 10 million shares at an average cost of $11 per share. We also completed our three-year conversion project to a new core processing system. Each of the conversions went very smoothly, with virtually no adverse impact on our customer base. While this particular project is successfully behind us, our investment in technology throughout all of our delivery channels remains an ongoing commitment.

Pressure on our net interest margin continued this quarter, but to a lesser extent than in prior quarters. Total interest earning asset yields decreased at a faster pace than the cost of total interest-bearing liabilities. However, our margin decreased by only three basis points on a normalized basis, and Charlie will give you more details on the margin in his comments.

The slowdown in residential mortgage banking and resulting lower sales gains impacted our noninterest income. There was also pressure on service charges and deposit account-related revenue this quarter. Generally, our noninterest income line has held up well throughout 2013, despite a number of regulatory changes. Bright spot has been our investment management trust services income, which is up about 9% year over year.

Other expenses fell slightly [in the] quarter and near the middle of the range we gave you on our last call. As we have emphasized, expense line items can, and will be, volatile. Outside services and professional fees remain elevated. Like many of our peers, we have engaged outside assistance in the areas of stress testing, new mortgage rules, Bank Secrecy Act and compliance, among others. We remain intent on building out our risk management compliance and technology infrastructures in order to position us for future growth and to proactively meet higher levels of regulatory expectations.

In addition, we recently undertook a comprehensive review of our expense structure, and have identified a number of areas for cost reduction. These reductions are intended to control expenses throughout the Corporation. I am not prepared to discuss specifics at this time, but plan to do so as these decisions are implemented.

So, to summarize the quarter in light of our corporate objectives, we were pleased with our reported EPS, our loan growth, the improvement in our asset quality, and our ability to manage the net interest margin. One of our priorities is to continue to deploy capital prudently. Yesterday we announced a new share repurchase program of up to 4 million shares, or 2.1% of our stock, through March 31, 2014. These shares will be repurchased in the open market at prevailing prices as permitted by security laws and other legal requirements, and subject to market conditions.

At this point, I would like to turn the call over to Charlie to review the financial details. Then we will both be happy to respond to your questions. Charlie?

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

As Phil mentioned, for the third quarter we reported net income of $0.21 per share, which is the same as the second quarter. Net income decreased 1.6%, $39.9 million in the third quarter from $40.6 million in the second quarter. My comments are based on comparisons of this quarter's results to the second quarter. Reduction in net income resulted from the decline in noninterest income, exceeding the combined impact of an increase in net interest income and decreases in the provision for credit losses and noninterest expenses.

Net interest income increased $468,000, or approximately 0.5%. This improvement resulted from growth in interest earning assets, an additional day in the third quarter, and a $394,000 decrease in premium amortization on mortgage-backed securities and collateralized mortgage obligations. These improvements were partially offset by a $1.8 million decrease in interest income received from recoveries and calls on debt securities from the second to the third quarter. Our net interest margin declined 7 basis points to 3.45%, as compared to 3.52% in the second quarter. Second-quarter net interest margin would have been 3.48%, excluding interest recoveries and calls on debt securities. The normalized decrease was approximately 3 basis points.

Average interest-earning assets grew $239 million, or 1.5%. The average yield on interest-earning assets decreased 11 basis points, while the average cost of interest-bearing liabilities declined 4 basis points. The average yield on new loans originated during the third quarter was approximately 11 basis points higher than on loans originated in the second quarter. Average deposits increased $186 million, or 1.5%, net effect of a $290 million increase in demand and savings account balances, and a $104 million decrease in [time of] deposits. The growth in demand and savings accounts reflected a seasonal increase in municipal accounts, as well as increases in business accounts.

Our projections forecast at core margin compression will continue in the fourth quarter, with the net interest margin expected to be in the range of 3.39% to 3.44%. Noninterest income for the second quarter decreased $4.7 million, or 9.6%, excluding the impact of security gains. Mortgage banking income decreased $3.9 million, or 35%, mortgage sale gains declining $4.2 million, or 49%, and mortgage servicing income increasing $347,000, or (technical difficulty). The impact of higher long-term interest rates resulted in a 41% decline in new loan commitments, and a 24 basis point decrease in spreads. The increase in servicing income resulted from a $550,000 decline in the amortization of mortgage servicing rights as prepayments slowed. This is partially offset by a $300,000 decrease in MSR valuation allowance reversals, which totaled $1.7 million in the third quarter as compared to $2 million in the second quarter.

Service charges on deposits decreased $713,000, or 4.9%, as overdraft fees declined $432,000 and other deposit service charges declined $312,000. In the third quarter, net security gains were $2.6 million, as compared to $2.9 million in second quarter. During the third quarter, realized gains included $2.1 million on sales of bank stocks and $500,000 on sales of debt securities. Our bank stock portfolio had $8.3 million of net unrealized gains at the end of the third quarter, and we will continue to realize gains when considered appropriate. Noninterest expense decreased $525,000, or 4/10 of a percent. Loan repurchase losses grew by $1.9 million, and this increase, however, was more than offset by a $584,000 decrease of state taxes, a $490,000 reduction in other real estate expenses, and $1 million decline in lending-related expenses. Other outside service expenses decreased $267,000, or 5%, due mainly to the timing of consulting engagements related to regulatory compliance and risk management activities.

As Phil mentioned, during the third quarter, the final three of our six subsidiary banks converted to our new core processing system. Total implementation expenses related to these conversions were approximately $1.6 million, as compared to $1.2 million in the second quarter, and $340,000 in the first quarter. These expenses in the third quarter included in other outside services, marketing, salaries and benefits, and other expenses. Our in total projections indicate that our total noninterest expenses should be in the range of $114 million to $118 million for the fourth quarter. However, certain expenses, such as on real estate owned, repossession expenses, mortgage repurchase losses, operating risk loss, and outside services, can experience volatility based on timing or events that cannot always be reasonably predicted. Such volatility could result in expense levels being higher or lower than projections.

Our effective income tax rate was 25.7% in the third quarter, as compared to $24.5 million in the second quarter. Our projections indicate that our annual effective tax rate will be in the range of 24% to 26%. Quarterly rates will vary based on the timing of credits and deductions in the level of pretax income.

Thank you for your attention and for your continued interest in Fulton Financial Corporation, and now we will be glad to answer your questions. Before I end today's call, I (technical difficulty) -- I'm sorry. Questions?

(Operator Instructions) Casey Haire, Jefferies.

Good morning, guys. Thanks. Quick question on the provision outlook. It seems like credit migration trends are favorable and loan growth remains positive, but wheezing a little bit. Is it safe to say that provision can run at this low level going forward?

From what we see right now, Casey, I think it is fair to say that. Yes. It certainly would be subject to change, but that is what we see right now.

Okay. And the loan loss reserve ratio at 1.7%, I know it is mix-dependent, but is it safe to say you're not let that go below pre-crisis levels?

Well, definitely not below pre-crisis levels, which were too low. So, I think we were under 1%, at one point. Very close to 1%. So I don't anticipate that we will get that low. We do think that it has room to come down.

Okay. And then just switching to mortgage banking, ex the MSR write-up, that the run rate was pretty much cut in half this quarter. Is that the right way to think about that line going forward? Or is there room for more MSR write-ups in the future?

The ongoing MSRs are stronger than they were prior. But, I don't think we will have more write-ups on MSRs.

Okay, thank you.

Thank you.

Bob Ramsey, FBR.

Hey. Good morning, guys. If I missed it -- I probably missed it, Charlie, but did you give an expected range for fee income in the fourth quarter?

No, we didn't.

Okay. Any way to think about it, either in total, at least how you are thinking about the mortgage banking line, excluding MSR write-ups, what is going on with the origination side of the business?

Well, our pipeline going into the fourth quarter is lower than what it was going into the third quarter.

Okay. And I guess the pipeline, you all gave those numbers as down 45%-ish? Is that a good proxy to what is going to happen to origination income? Have margins stabilized, do you think?

Well, Bob, like we say every quarter, the mortgage numbers change really quickly, depending on rates. But, we have seen refinancing activity continue to drop off. So, the pipeline going into the quarter was at $200 million, and going into the third quarter was $368 million.

Okay. Shifting to loan growth, you guys obviously had really tremendous commercial real estate growth this quarter, just curious if there is anything unusual, if there is any area of CRE that seem to be growing faster than others? Or what some of the qualitative thoughts are around the commercial loan growth you guys had this quarter?

The commercial mortgage growth, Bob, so much of that is just timing. I would say we had three or four larger deals that happened to settle in the quarter to drive that. The same thing can happen on the C&I side. You'll get a couple of large deals to drive that, also. But, I don't think anything outside of that.

Okay. I guess if I look over the last year, maybe it strips out some of the timing or the strong quarters and weak quarters, but you think that it's reasonable to expect total loan growth will continue to be in kind of a mid to high single-digit range as we go forward on an annualized basis? Or year-over-year basis?

You know, for this year, at this point I would say we are looking in between 6% and probably 7.5%. And just based on what we see right now, I'd say we think that could be possible again next year.

Okay. Great. Thank you.

Yes.

Frank Schiraldi, Sandler O'Neill.

Good morning, guys.

Good morning, Frank.

Just a couple of questions. First, on expenses, it seems like some of these expense builds are certainly behind you. And Phil, you even talked about some potential saves up and coming, which sounds like maybe next year. Just wondering if -- your thoughts on efficiencies. Do you believe that you could see the efficiency ratio drop back down to, say, the 60% level, or even below, as we go through 2014, as we close out 2014?

So, that is a great question. I don't see us going under 60%. And between -- I would say, based on what we know right now, Frank, we are looking at 60% to 65% range. Could go a little higher.

Okay. That's helpful. Thanks. Wondering if you could talk a little bit about timing on -- Charlie, I believe, is set to retire at the end of this year, and if you can give us some sense of how the search is going and any possible timing around an announcement?

We have identified a candidate that we are pleased with. And we will be anticipating making an announcement very soon.

Okay. Great. And would you say, or could you say, is it external or internal? Or is it something you wouldn't want to comment on?

It is external.

Great. Thank you very much.

Christopher McGratty, KBW.

Good morning, guys. This is John Barber filling in for Chris. The taxable securities were down about 29 basis points versus last quarter. I was just wondering what drove that, and do you still expect security yields to inflect this quarter and the fourth quarter?

The big thing was the interest recovery that we mentioned. (technical difficulty) Additional interest related to the calls on (technical difficulty) --

Okay.

It's funny. The yield on -- we are projecting that (technical difficulty) -- We are putting on the securities that we are buying (technical difficulty) -- I think you could see we buy securities that (technical difficulty) --

Okay, thanks. I'm just wondering, now that the systems conversion is behind you, what are some of the new capabilities that that offers you? Maybe that you couldn't do before?

Well, it gives the line a much better view, 360 view of our customer. It also now gives us the capability to enhance a lot of our other technology systems throughout the Company, tying into that core processing system, giving us much better data across all different kinds of lines. But we do need to continue to invest in some technology to get that accomplished.

Thanks. And the last one I had, has your appetite for M&A changed now that the systems conversion is behind you? And also, how does the upcoming stress test impact your impact to pursue deals or deploy capital?

I would say, in general, we are still internally focused. We still have technology initiatives we want to get accomplished. We are still building out some risk management areas. We have the stress test coming up. We are getting ready for the new qualified mortgage rules. So, we still have a lot to accomplish internally.

Great. Thank you.

(Operator Instructions) Nicholas Karzon, Credit Suisse.

Good morning.

Hey, Nick.

Just to start, on the fee income side, on the decline in the service charges on deposit accounts, you noted that there was a pretty significant drop-off in overdraft fees. I was wondering if there's been a change in your product offering? Or is this something that you're seeing more so on the consumer behavior side?

I would say it's almost all on the consumer behavior side, and we've seen this trend consistently now over the last 18 months.

Okay, thanks. Moving to -- you noted in your release that there was an increase in the mortgage repurchase provision this quarter. Some of your peers have added reserves following a change in the scope of further GSE reviews. Is this something that you've seen, as well? Can you give us some thoughts on the drivers there?

Our mortgage repurchase reserve has been driven more by mortgages we're getting back from privately held companies, as compared from the GSEs.

Okay. And then lastly, on the loan growth side, we have seen a lot of strong CRE growth this quarter. But we've been hearing some commentary that life insurance companies are starting to take share, given their ability to fund some longer term loans. I was wondering if you've seen any impact from that? And in general, commentary on the pricing environment that you are seeing in commercial real state and C&I?

In general, I would say we have not seen a lot of competition from the life insurance companies. Because in general, we tend to be at a lower end. I think they are getting back in. I am hearing that. But, I don't think they are down, really, to the markets that we are playing in yet. They had gotten there pre-crisis. They were doing a lot smaller deals, but we haven't seen them back in our space yet.

Okay. Thanks for taking my questions this morning.

Matthew Keating, Barclays.

Good morning. Thank you. You mentioned that you don't expect MSR write-ups to be a big part of your revenue stream next quarter after having a benefit the past couple of quarters. Could you update us on where your valuation allowance for MSR stood at the end of the third quarter?

The valuation allowance is zero, and when we booked (technical difficulty) -- -- the value is, we don't write them up market value, but we do write them down for impairment. (technical difficulty) [$3.7] million of that has been reversed in the last two quarters. (technical difficulty) $1.7 million.

Okay, thanks. That's helpful. On the M&A front, understanding that there's some near-term issues you want to get through before you look towards that, but if we look out maybe towards the middle part of 2014 or later, do you expect a pickup in M&A activity, maybe more broadly in your footprint? And if Fulton would be interested, maybe you could outline a few of the geographies that might make sense to add to the franchise? Thanks.

Yes. It is really hard to say what is going to be happening out there. We keep saying at some point, we expect things to pick up. Just in general, in our five-state footprint, we have physical locations in 54 counties. And in 12 of those 54 counties, we have a market share position that is either one through five. We'd like to increase those areas. Ultimately, we have a lot of places within our existing footprint where we want to grow. And I think over time, some of that's going to be through acquisition. Those areas exist in all five states that we operate in.

Thanks. The rest of my questions have been addressed. Thanks very much. Charlie, good luck if I don't speak to you in the near term with the retirement.

Thanks.

Before I end today's call, I would like to recognize Charlie Nugent and thank him for his two decades of service to our Company. As I mentioned earlier in the call, Charlie will retire on December 31, so this is his last earnings call. I'm sure you know from working with Charlie, he has a tremendous understanding of financial service industry. He's been instrumental in helping to guide our Company over the years, and we'll certainly miss him. Also, wanted to thank you all for joining us today. We hope you will be able to be with us when we discuss fourth-quarter and year-end 2013 results in January.

This concludes today's presentation. Thank you for your participation.