Fulton Financial Corp (FULT) 2015 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Fulton Financial fourth-quarter year-end 2015 earnings conference call. This call is being recorded. I will now like to turn the call over to Jason Weber, Senior Vice President and Director of Corporate Development. Please go ahead, sir.

Thank you. Good morning. Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for 2015. Your host for today's conference call is Phil Wenger, Chairman, President and Chief Executive Officer of Fulton Financial Corporation. Joining Phil is Pat Barrett, Senior Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released at 4:30 PM yesterday afternoon.

These documents can be found on our website at fult.com, by clicking on Investor Relations and then on news. The slides can also be found on the presentation page, under Investor Relations on our website.

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 as 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've included our Safe Harbor statement and forward-looking statements. We refer you to this section, and we incorporate it into today's presentation. For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the sections entitled risk factors, and Management's discussion and analysis of financial conditions, result of operations set forth in Fulton's filings with the SEC.

In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental information, included with Fulton's earnings announcement yesterday, for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.

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

Thanks Jason, and good morning everyone. Thank you for joining us. I have a few prepared remarks before our CFO, Pat Barrett, shares the details of our 2015 and fourth-quarter financial performance. When he concludes, I will review our 2016 outlook, and then open the phone line for questions.

Turning to slide 3 of our presentation, I will discuss our 2015 highlights. 2015 marked another year of continued progress to strengthen our banking franchise. Of note, we have strong commercial loan and core deposit growth, improved asset quality, and solid fee income.

We successfully completed two funding initiatives to further optimize our balance sheet. To become more efficient and reduce costs, we consolidated 11 branches, while further streamlining our organizational structure and benefit plans. In addition, we continue to actively manage our capital while maintaining strong capital levels.

Turning to slide 4 of our presentation, we reported diluted per-share earnings of $0.85, up 1.2% over the $0.84 we reported for 2014. For the year, our return on assets was 0.86%, and our return on tangible equity was 10.01%.

Average earning assets increased year over year, driven by an increase in average loans of 3.5%, in line with the lower end of our 2015 outlook. Commercial loan growth was strong in the latter half of 2015, due to increased business activity and, to a lesser extent, efforts to take advantage of market disruption. These factors helped accelerate the momentum of our balance sheet growth, with period and commercial loads expanding at an annualized rate of 14.8% in the second half of the year. This growth occurred across a broad range of industries, and was primarily concentrated geographically in our Pennsylvania markets.

Our year-end commercial loan pipeline is down seasonally approximately 15% in the third quarter. However, we're pleased to see levels approximately 19% higher than the same time last year. This positive momentum, coupled with continued investments in talent throughout our footprint, gives us optimism about the prospects for further growth in 2016.

Overall average deposit growth was approximately 6.8% year over year, which is in line with our 2015 outlook. More importantly, average core deposits increased approximately 8.9%, while average timed deposits were essentially flat. The growth in core deposits was split equally between consumer and commercial.

As with loan growth, we believe we are seeing evidence of local market disruption. As an example, our branches that are located in disrupted markets attracted meaningfully higher rates of new consumer household growth in 2015 than branches in our broader footprint. Our loan to deposit ratio ended the year at approximately 98%, comfortably within our historical operating range.

Our net interest margin declined 18 basis points in 2015, slightly outside the range in our original 2015 outlook. However, on a linked quarter basis, the net interest margin was up 1 basis point in the fourth quarter of 2015, marking the first increase since the fourth quarter of 2013.

Turning to credit, overall asset quality continues to improve. Year-over-year delinquencies and net charge-offs were down by approximately $10 million and $15 million, respectively. Delinquencies ended the year at approximately $197 million, while net charge-offs ended the year at approximately $17 million, both the lowest levels since 2007.

Our allowance for credit losses to loans remains healthy, at 1.24%. We saw broad-based increases in most of our non-interest income businesses and products. Excluding security gains, non-interest income increased approximately 4.5% year over year.

In the consumer area, mortgage banking income increased 6.4%, as both volumes and spreads improved. Our mortgage pipeline is seasonally down 27% at the end of December, but is up 16% year over year.

In the second half of 2015, we hired a new regional sales manager, who is actively adding loan originators across the footprint. So despite a projected rising rate environment and a decline in industry originations, we believe that we are positioned to grow mortgage banking income in 2016. Also, we saw increases in debit card income and other service charges on deposit accounts, with each category increasing over 5% year over year.

In the commercial area, interest rate swap, cash management and merchant services businesses all had a strong year. Interest rate swap income benefited from growth in commercial loans, while merchant services and cash management benefited from an improving economy and market share gains. Non-interest expenses increased 3.3% year over year, excluding the expenses related to the trust preferred redemption, and were in line with our 2015 outlook.

Salaries and benefits increased due to continued expenses in risk management, including BSA/AML and general merit increases. Data processing software and equipment expenses all increased in 2015, in part through our continued focus on building out our risk compliance and technology infrastructures.

Strategically, the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. In 2015, we increased our quarterly common stock dividend by $0.01, paid a $0.02 special common stock dividend in the fourth quarter, and repurchased $50 million of common stock. In all, we distributed nearly 80% of our net income to shareholders. We did not repurchase any common stock in the fourth quarter, given our loan growth.

Finally, we made significant progress towards building out our risk management infrastructure in 2015, specifically around BSA/AML. We also feel that we have made substantial progress towards satisfying regulatory expectations relative to this important area, and we are hopeful that the BSA/AML enforcement actions will be lifted in 2016.

At this point, I'd like to turn the call over to Pat, to discuss our financial performance in more detail. Pat?

Thank you Phil, and good morning to everyone on the call. Unless I note otherwise, quarterly comparisons are with the third quarter of 2015, and annual comparisons are with 2014.

Turning to fourth-quarter results on slide 5, earnings per diluted share this quarter were $0.22, on net income of $39 million, an increase of $4.3 million, or 12.5%. Earnings per diluted share were $0.02 higher, linked quarter, and $0.01 higher than prior year. Fourth-quarter earnings reflected an increase in net interest income, an increase in the provision for credit losses, an increase in non-interest income, and lower non-interest expenses. Returns on average assets and tangible equity were 86 basis points and 10.16% respectively, and our efficiency ratio improved to 66.6%.

Moving to slide 6, our net interest income for the fourth quarter increased $2.1 million, or 1.7%, driven by growth in earning assets and a 1 basis point increase in net interest margin. The yield on average earning assets declined by 1 basis point, while the cost of average interest-bearing liabilities decreased 3 basis points. Average earning assets were up 1.5%, due mainly to a $289 million increase in average loans.

Average interest-bearing liabilities were up 1.2%, as the $225 million increase in interest-bearing deposits was partially offset by a decrease in borrowings. A 1 basis point decrease in earning asset yields resulted from a 6 basis point decrease in loan yields, partially offset by a 7 basis point improvement in yields on the investment portfolio. The decline of the cost of interest-bearing liabilities reflected stable deposit costs, combined with lower long-term borrowing costs.

As a reminder, in September 2015, we refinanced approximately $200 million of Federal Home Loan Bank advances, with an average rate of 4.45%, to new borrowings carrying an average rate of 2.95%. This transaction accounted for the 21 basis point linked quarter decrease in our cost of long-term borrowings, and the 3 basis point decrease in our cost of interest-bearing liabilities.

At that same time, we also entered into forward agreements to refinance an additional $200 million of FHLB advances, upon their maturity in December 2016. That refinancing will lower the current average rate of 4.03% to 2.4%, and we will begin to realize the benefits from that transaction in the first quarter of 2017.

Turning to credit on slide 7, for the year, our provision for credit losses was down significantly from 2014, reflecting improvements in net charge-offs and delinquencies. This fourth quarter, we recorded a $2.8 million provision for credit losses, $1.8 million higher than the third quarter. While asset quality continued to improve, the higher provision reflected recent loan growth in the loan portfolio.

Net charge-offs for the year dropped by nearly 50%, to an annualized net charge-off rate of 13 basis points, compared to 24 basis points in 2014. Although ending non-performing loans increased slightly compared to 2014, non-performing loans as a percentage of total loans decreased 1 basis point, to 1.05%. The allowance for credit losses to loans decreased from 1.42% to 1.24%, while the allowance for credit losses to non-performing loans decreased from 134% to 118%.

Turning to fourth-quarter non-interest income on slide 8, we saw a $2 million or 4.7% increase, excluding securities gains. Interest rate swap fee income grew by $1.2 million, largely attributable to strong commercial loan origination volumes. Debit card income saw a seasonal $600,000 increase, and mortgage banking income grew by $450,000 or 12%, mainly due to higher servicing income.

Moving to slide 9, total non-interest expenses decreased $800,000 or 0.7%, excluding the $5.6 million loss incurred in the third quarter, on the resumption of trust preferred securities. Expenses were lower in a number of categories, including outside services, down $840,000, and marketing, down $350,000. For the quarter, income tax expense increased $3.6 million or 35%, mainly due to higher pretax earnings and an increase in state income tax liabilities.

Our effective tax rate was 26.5% for the quarter, compared to 23.2% in the third quarter. For the year, our effective tax rate was 25%, unchanged from 2014. We believe this is a reasonable estimate for our expected rate in 2016.

Turning to slide 10, while we have made significant progress towards building out our regulatory compliance infrastructure, overall BSA/AML costs remain elevated. Total BSA/AML related staffing and outside services costs have not declined as rapidly as anticipated, and we've incurred higher temporary staffing costs.

Slide 11 presents our profitability and capital levels over the past four years. The decreases in ROA and tangible ROE reflect lower net income, and the decrease in the tangible common equity ratio reflects share repurchases and asset growth.

At this point, I'd like to turn the call back to Phil, who will review our 2016 outlook shown on slide 12.

Thank you, Pat. We expect the growth rate for average loans and deposits to be in the mid to high single digits, and we expect net interest margin to be stable on an annual basis, with modest volatility, plus to minus zero to 3 basis points, on a quarterly basis. With respect to asset quality, we expect the provision to increase, driven primarily by loan growth. We expect the growth rate for non-interest income to be in the mid to high single digits, and we expect the growth rate for non-interest expenses to be in the low to mid single digits. Finally, we will manage our capital to support growth, and to provide appropriate return to our shareholders.

In closing, as we have discussed, we are making investments in our talent and our infrastructure. And we believe these investments position us to drive meaningful growth and generate positive operating leverage in 2016, especially in light of expectations for a generally improving business environment, and changes in the competitive landscape in a number of our markets. So thank you for your attention and for your continued interest in Fulton Financial Corporation, and now we will be glad to answer your questions.

(Operator Instructions)

Chris McGratty, KBW.

Hi, good morning, everybody.

Good morning, Chris.

Pat, I want to talk about the BSA. It seems -- and correct me if I'm wrong -- the timeline keeps getting pushed out a little bit. And your comments about the expenses not dropping as quick would support that.

Number one, has something materially changed, I think it was mid-year, to sometime in 2016? And then, if that is the case, and given the volatility we have seen in the market, and where your stock has come in over the last month or so, doesn't the buyback make a lot more sense over the next quarter or so?

So, Chris, let me try to address that. So, regarding our BSA progress, we think we've made significant progress. The timing of everything really is difficult for us to judge. And I know we were hoping for the first half of 2016, but I think a much more conservative estimate would be sometime in 2016. And we just don't have a lot of control over a lot of that timing right now.

As far as the buybacks are concerned, our priority use of capital is first to fund organic growth. So, that is what we will do, going forward. So, I think the extent that we repurchase stock will be dependent on our growth rates.

Okay. And just a follow-up, Pat: I missed the borrowing changes that were put on in the quarter, and the impact in Q1. Could you just review that, I think, for the FHLB?

Sure. So, this was a end of third quarter transaction, where we had about a little over $400 million of long-term FHLB advances. We took $200 million of that, and took a pre-payment penalty, rolled it into new borrowings, and lowered our rate on that $200 million by about -- I think is was 160 basis points.

At the same time, the other half of that bucket, which is scheduled to mature late -- or at the end of 2016, we locked in Forward Rate Agreements. So, that will continue to roll at the existing about 4% coupon, until the end of 2016, at such point we will start new borrowings, also at about a 150-basis-point reduction.

So, in the fourth quarter, you saw the full impact -- positive impact of all of our balance sheet optimization. So, that's a good run rate that you see.

Okay.

What I called out was just a drop from third quarter to fourth. And I just reminded folks that you will see a similar drop -- it's about a $3 million a year savings on our interest expense line item, for 2017, that should begin right at the beginning of the year.

Great. If I could come back, just on the buyback, real quickly, just to make sure I'm on the same page. So, you've guided to mid- to upper-single-digit loan growth. Obviously, there's some seasonality in your Business.

But I guess my question is: If you hit the guidance, would we anticipate no buybacks in 2016? I'm just trying to wrestle with the fact that your capital levels are still pretty healthy, and your stock is off 20%.

Yes, so, we have a $50 million program in place, and I think we will try to strategically use that at this point in time. So, our stock is off, and I think our goal is still to utilize what we have in place.

Got it. Thank you.

Casey Haire, Jefferies.

Thanks, good morning, guys. Apologies if I missed this, but on the NIM guide, can you let us know what kind of Fed policy you are baking in for 2016, in terms of how many more incremental hikes?

Sure. We've already had one, a little earlier than we anticipated originally, back in December. We've got another one at mid-year, and then a third right at the end of the year, which really doesn't have an impact.

Okay. So, if we don't get any help from the Fed, is this still good? Is that range still comfortable, or is there further downside?

Yes, I think that you probably -- that's why we do the plus/minus on the 0 to 3 basis points. If we don't get another increase -- we will see, probably, some positive momentum in the first quarter, just because the loan growth will continue to roll into the quarter. But the second quarter, we wouldn't necessarily see an increase, and could see a contraction in the third quarter, if we don't get another increase, in margin. I think we will still see positive revenue growth, regardless.

Got you. Okay.

Switching to fees, can you just talk to -- what do you see as the drivers? It sounds like you guys [admittedly] a little bit overearned this quarter on swap fees and debit card income. If I take the midpoint of your guide, that's an average of about $46 million a quarter, which is a decent uptick from this fourth-quarter level. If you just give us some color on what the drivers are for some -- what appears to be pretty aggressive growth on the fee side?

So, in general, we believe, with the talent that we are bringing in on the mortgage side, that we can drive growth in mortgage fee income. We really were flat in our investment management and trust this past year, and that is an area of emphasis for us that we can drive growth. Our overdraft income in the fourth quarter appears as though it has stabilized, which will take away that pressure that we've had in the past of that decreasing. And really, all the other categories are being driven by growth of accounts, especially on the commercial side, and we believe that can continue.

Okay, great.

And just finishing up, on the asset quality front, your guide -- provision driven primarily by loan growth -- is that safe to say that, in terms of a net charge-off outlook, that you expect it to remain relatively benign, near term, at this 13 bps level that we saw in 2015? And then secondarily, on the loan loss reserve ratio at 1.24%, is that a good bottom?

So, let me start with the loan loss ratio first. In this past year, we went from 1.42% to 1.24%, so it dropped 18 basis points.

I wouldn't say that 1.24% is necessarily the bottom, but I don't think we'll have another 18-basis-point drop. But the peer average is somewhere around 1%. We don't want to get there, but we could go a little lower than we currently are.

As far as a charge-off is concerned, I think, right now, they look pretty benign. But for the year, I think we're looking at flat charge-offs right now, based on what we know.

Did I cover all your questions, Casey?

Yes. Thank you. Very helpful.

Preeti Dixit, JPMorgan.

Hi, good morning, everyone.

How are you doing?

To start with the strong C&I growth in the quarter, can you give us some color on the drivers of the growth, both by type and geography? And then, how much of this is tied to higher line utilization versus new relationships that you are seeing come on?

First off, the line utilization did not change. So, it was -- the growth really is still being split close to 50/50 by new relationships and from expansion from existing customers. And it was primarily in the Pennsylvania market, although we did have some growth in all our markets, but the largest growth area was Pennsylvania. And it was highly diversified across a number of industries, and not one in particular.

Okay. Okay, that's helpful color.

And then, as you think about funding the mid- to high-single-digit loan growth with deposit growth, how should we think about deposit costs here, based on what you are seeing in the marketplace? It seems like most banks aren't really passing on the rate hike. But given your loan-to-deposit ratio, how are you thinking about your need to be more competitive here?

So, we've managed that loan-to-deposit ratio in a range between 95% and 105%, and we think we are well within that. We still have really no wholesale deposits whatsoever. So, we do have outlets we can go to if we need to, although our deposit growth continues to be pretty strong, and we're going to continue to push that. We have not really had any pressure on deposit pricing so far.

Okay, got it.

And then, Phil, I know you alluded to this in your prepared remarks, but could you give us some metrics around household growth that you saw this past year, given the disruption in the marketplace? And maybe how that's compared to recent years?

So, we've never really given guidance on household growth. I would say, in the last six months, in disrupted areas, our new account openings are running about 29% higher at branches that are in disrupted markets than in branches that aren't in disrupted markets.

Got it. Good color. Thank you so much.

Frank Schiraldi, Sandler O'Neill.

Good morning.

Good morning, Frank.

First, a follow-up on the regulatory order: So, what is the estimate, if you have it at this point, on how long it's going to take from here to reach compliance, or do everything you need to do under those orders? And then, is the uncertainty on timing more because, at that point, you have to wait, basically, on regulators to review? Or are there scheduled exams that you were trying to reach completion by?

There are scheduled exams. And the timing is difficult because we do have to go through a period where we show that we have sustained the BSA. And that period of time has not been clearly defined, quite frankly. So, it's really hard to say.

I guess I would assume that period has not started yet, because you are still working on compliance, or on (multiple speakers).

Yes, it's started for some things, but not for everything.

Okay. So, what is the main piece of this to be completed? Is it going around to all the low-risk customers, and then collecting one or two pieces of data from them? What's really the time-consuming portion that's left to complete, to get you out of deficiency, in your mind?

I think the biggest piece for us is to consistently show that our investigative unit is doing a really, really good job.

Okay, so, it's more just -- okay, I see. So, more the sustaining, I guess -- or is that more of a look-back, then?

Look-backs are all complete.

Okay. And then, sorry if I missed any commentary on this, but the charter consolidation, going forward -- is that still something that will take place, most likely, after the orders come off?

Again, it's possible that we could begin that before the orders come off completely. But again, that really has not been completely defined for us, either.

Okay. And then, just on fee income, could you give us a sense for your investment management and trust line item -- just the percentage of revenues that are tied to fees calculated off of AUM, AUA levels?

I think it's about -- our investment management and trust revenues are broken out almost 50% through brokerage, and 50% in our trust and investment areas.

Okay. Would it be a small percentage overall of that -- of 50%? Or would it be a larger portion that you would just look at -- you could -- as modeling this from the outside, you could look at the markets and say -- the market is down 5%, 10%, whatever it is. And that could affect fees by this amount, regardless of new business you were able to add over the period?

I would say, as far as the fees tied to the market, I would guess that, of the 50% that is not brokerage, most of that is probably -- those fees are tied to the value of the investment accounts that would be driven by changes in the market.

As well as floats, in and out.

Right. Okay. Thank you.

Bob Ramsey, FBR.

Hey, good morning, guys

Hi, Bob.

Just a couple points of clarity: I know you said you all have not seen any pressure on deposit pricing so far. Is it fair to say that you all have not increased deposit pricing on any of your products since the Fed moved rates?

I would say that's generally true. We do have some deposits that are tied to indexes that have increased, but --

Less than 10% of our total.

Yes, about $800 million.

Okay. What are they indexed to, out of curiosity?

Fed funds and --

Okay.

Yes, primarily Fed funds.

And the credit commentary, shifting gears, sounds very positive in everything you were saying. I'm just curious if anywhere, across your book or across your markets, if you are seeing any signs of softness anywhere, or anything that is peaking any concern or not?

I would say, in general, the answer to that would be no. There might have been just a very slight uptick in some of the consumer areas, but nothing that causes us any concern right now.

Okay. Great.

Last question: I know you've talked about the BSA/AML compliance cost maybe not coming down quite as quick as had been hoped. Did you give an estimate of what that expense will be in 2016?

We did not. We do expect it to -- we expect outside services to go down. But overall, we expect expenses will go up by the numbers in our outlook, because we are investing in technology, and we are investing in revenue-generating talent. And I think that's --

Got it.

-- the biggest difference right now than the past. When we were investing in people in the past, they were not necessarily revenue-generating. And now, going forward, we are focused on bringing in revenue-generating people.

I know you all highlighted that the growth in new accounts and so forth of some of the disrupted markets has been better than other markets. Have you all had opportunity yet to hire some of this revenue-generating talent away from disrupted companies yet, or is there some of that in the pipeline, out of curiosity?

We have hired some, and there are some in the pipeline.

Okay, great. Thank you.

And I failed to mention that on the fee income side, we do anticipate increasing fees from our SBA lending group. And that is an area that we are adding talent. I think we've added four folks to date, and probably will be adding some more.

David Darst, Guggenheim Securities.

Good morning.

Good morning, David.

Phil, just following up on the competitive dynamics, are you bringing over relationships where your commercial officers have maintained long-standing relationships, and just haven't been able to get the business? Or are you expecting your new hires to bring the business?

So, I would say, to date, most of it has been from relationships that we've -- even if we didn't have the business, that we had developed relationships. So that if anything happened, we would be where they would turn. But we are actively looking for revenue-generating people, and we generally would expect some additional business coming from them.

Okay. And then, do you have any thoughts on your ability to continue to penetrate the urban Philadelphia market, from a commercial perspective, and maybe just the multi-family dynamics there?

So, Philadelphia is an area that we would like to move into. And when the BSA orders are lifted, that will be a top priority for us. But I'm not sure how much of that would happen in 2016. And our multi-family exposure in the city of Philadelphia right now is probably very, very close to zero.

Okay. Would you like to enter the market through an acquisition or de novo, or by adding commercial teams?

If possible, all three (laughter).

Okay. Great. Thank you.

(Operator Instructions)

Matthew Breese, Piper Jaffray.

Good morning, everybody.

Hey, Matt.

Going back to the BSA/AML compliance issues, I know you said you expect relief in 2016. Just a point of clarity: Do you expect (technical difficulty) given all of your regulators, you will begin to see progress towards full resolution? Or do you expect them to still act in unison, and lift all at the same time?

We said that we are hopeful for 2016. We did not say we would expect. We said we were hopeful.

And I'm not positive about that second question. I think it is possible that they could not be in unison, but I really don't know the answer to that.

Okay. And then just going back to the provision real quick, if growth comes in, in line with your expectations, would the fourth-quarter provision be a good starting point throughout the year?

Yes, I think it probably would. Charge-offs in the fourth quarter were incredibly low. So, depending on charge-offs, it could be a little higher. But having said that, the first quarter is also our toughest quarter for growth. So, it's going to be a factor of growth and charge-offs.

Okay. And then my last question, I just was curious if you have looked at the recent FDIC proposal to get the DIF up to 1.35%? And if so, what impact would that have on your insurance premium through 2018? And is that baked into your overall expense expectations for 2016?

So, on that FDIC, we still don't have any banks that are over $10 billion. So, I think the increase is only for banks over $10 billion. So, we do not anticipate that it will have an impact on us in 2015 -- or 2016, excuse me.

Got it. Okay. That's all I had. Thank you.

And at this time, there are no further questions. I would like to turn the call back over to Phil Wenger for any additional or closing remarks.

Thank you all for joining us today. We hope you will be able to be with us when we discuss our first-quarter results in April.

And that will conclude today's call. We thank you for your participation.