Fulton Financial Corp (FULT) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Fulton Financial first quarter results conference call.

This call is being recorded.

I will now like to turn the call over to Jason Weber, Senior Vice President, Director of Corporate Development.

Please go ahead, sir.

Thanks, Tracy.

Good morning.

Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the first quarter of 2016.

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 announcements which we released at 4:30 yesterday afternoon.

These documents can be found on our website at Fulton.com by clicking on the Investor Relations and then on News.

The slides can also be found on the presentations page under the Investor Relations section 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 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 on forward-looking statements.

We refer you to this section and we incorporate it in today's presentation.

For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the sections entitled Risk Factors and Management Discussion and Analysis of Financial Condition and Results of Operation set forth in Fulton's filings with the SEC.

In discussing Fulton's performance, representatives of Fulton may refer to non-GAAP financial measures.

Please refer to the supplemental financial information included with Fulton's earnings announcement released 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 first quarter financial performance and discusses our 2016 outlook.

When he concludes, we will open the phone line for questions.

Before we get into the details of the first quarter, I would like to provide an update on our BSA/AML enforcement action.

We believe we've made the investments necessary to comply with the requirements of enforcement actions and we continue to work on improving execution in order to make our BSA/AML infrastructure sustainable in a manner that is consistent with regulatory expectations.

Having said that, we are not certain over what time frame our regulators will lift the enforcement actions.

While we remain hopeful that one or more of the actions could be lifted in 2016, it is also quite likely that one or more of the enforcement actions will remain in place beyond 2016.

While resolution of the BSA/AML enforcement actions remain a top priority for us, we continue to be focused on initiatives to move the organization forward.

Specifically, we are focused on organically growing the organization, simplifying our corporate structure and enhancing our processes, while controlling costs to drive efficiency.

As we move through 2016 and beyond, we look forward to telling you more about the changes we are making.

At this point, I'd like to share some highlights from the first quarter.

We recorded diluted per share earnings of $0.22, which was flat, linked quarter and year-over-year.

However, excluding security gains, pre-provision net revenue increased approximately $5.1 million, or 11.2% year-over-year.

Our return on assets was 0.86% and our return on tangible equity was 10.07% for the quarter.

Average loans increased 1.4% from the prior quarter.

Loan demand is typically softer in the first quarter.

In addition, line borrowings declined by $50 million in the quarter, reflecting this seasonality.

However, our commercial origination volumes in the quarter were up 10% compared to this time last year.

In addition, our commercial pipeline is up approximately 16% compared to this time last year.

So we remain optimistic that loan growth will pick up as the year progresses, much like we saw in 2015.

As we've mentioned in prior calls, 2015 was a transitional year for the organization as we increased our focus on adding revenue generating talent.

For example, in the past year, we have made several key additions in our SBA, commercial leasing and agriculture specialty lending areas.

We continue to look for opportunities to add high performing talent throughout all of our revenue producing areas.

We believe this transition, along with opportunities created by market disruption, bode well for future growth and market share gains.

Year-over-year, average loans increased 5.8%, which is in line with our 2016 full year outlook.

We continued to see meaningful growth in our commercial loan portfolio while consumer loans continued to lag.

Deposit growth continued to be strong, especially core deposits, which increased 9.9% year-over-year.

The growth in core deposits was split equally between consumer and commercial.

We continued to see high levels of customer retention from our branch consolidations in 2014 and 2015.

As with loan growth, consumer household growth continued to benefit from local market disruption.

Our branches that are located in disrupted markets continued to attract meaningfully higher rates of new consumer household growth than branches in our broader footprint.

We have and will continue to have active business development initiatives and strategies to take advantage of the market disruption.

For the second consecutive quarter we saw an improvement in the net interest margin.

As a result, our net interest income continued to improve.

Most credit metrics were stable to slightly improving.

Nonperforming loans and nonperforming assets as a percent of loans continued to decline and now stand at the lowest levels since the last quarter 2007.

Our loan loss provision decreased linked quarter by $1.2 million.

We did see a slight uptick in total delinquencies linked quarter, which were related to a few relationships that experienced isolated events.

And we believe those are not indicative of broader portfolio or macro trends.

Similar to loan growth, non-interest income is typically softer in the first quarter.

Non-interest income, excluding security gains, was down linked quarter, reflecting this seasonality.

Year-over-year, non-interest income, excluding security gains, increased 3.9% with improvements across most of our fee income categories with the exception of mortgage banking.

Mortgage originations were down year-over-year, as refinancing activities slowed.

Refinancing represented 64% of originations in the first quarter of 2015, compared to 48% in the first quarter of 2016.

And the mortgage pipeline increased 73% linked quarter.

So we believe mortgage will bounce back as we head into the spring selling season.

As a reminder, we hired a new Director of Sales and a new Regional Sales Manager in late 2015, and they are actively adding loan originators across the footprint.

We are optimistic that these new hires will result in meaningful impact to the bottom line throughout the year.

Non-interest expense increased modestly, which is typical in the first quarter, and we continually look for ways to make our organization more efficient while not compromising the customer experience.

On the capital front, we paid a quarterly common stock dividend of $0.09 per share and repurchased approximately $11 million of common stock in the quarter.

We have approximately $39 million left in our current share repurchase plan authorization.

So 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 fourth quarter of 2015.

Starting on slide 4, Phil noted earnings per diluted share this quarter were $0.22 on net income of $38 million, representing a slight decrease from the prior quarter.

Earnings per diluted share were unchanged from both the first and fourth quarters of 2015, reflecting the impact from share repurchases.

First quarter earnings reflected an increase in net interest income and a decrease in the provision for credit losses, partially offset by the effects of seasonality that resulted in lower fee income and a slight increase in non-interest expenses.

Moving to slide 5, our net interest income improved by more than 4%, despite one less day in the quarter.

This improvement was driven by a 4 basis point increase in net interest margin and a 1% increase in average earning assets, primarily the result of a $194 million increase in average loans.

The yield on average earning assets improved 5 basis points, outpacing the slight increase in the cost of average interest bearing liabilities.

5 basis point increase in earning asset yields was driven by higher yields on loans, largely reflecting the impact of the short-term rate increase in December.

Average interest bearing liabilities were up 1.7%, due largely to a $164 million increase in average short-term borrowings.

This change in funding mix to lower cost short-term borrowings partially mitigated a 2 basis point increase in interest bearing deposit costs.

Turning to credit on slide 6, based on our valuation of all relevant credit quality factors, we recorded a $1.5 million provision for credit losses in the first quarter, which was $1.2 million lower than the provision in the previous quarter.

The allowance for loan and lease losses declined slightly as a percent of loans from 1.24% to 1.2% while coverage of nonperforming loans increased to 121%.

Net charge-offs increased linked quarter and year-over-year.

We've mentioned in the past that net charge-offs can be somewhat volatile given the relatively low levels we've experienced in recent quarters.

This quarter illustrated that volatility with net charge-offs increasing to $6.9 million from less than $1 million in the fourth quarter, resulting in an annualized net charge-off rate of 20 basis points.

Non-performing loans improved linked quarter, declining $7.6 million to $137 million, or 0.99% of total loans.

In addition, new non-accrual loan generation for the quarter was $18.6 million, an $8 million improvement from last quarter.

Moving to slide 7, non-interest income, excluding securities gains, decreased 6.4%, reflecting seasonal decreases in certain areas such as overdrafts, debit card fees and mortgage banking income.

In addition, commercial swap fees decreased by almost $1 million, reflecting the lower levels of commercial loan origination.

In comparison to the first quarter of 2015, non-interest income, excluding securities gains, increased 3.9%, reflecting increases in merchant fees, commercial swap fees and other service charges, partly offset by a decrease in mortgage banking gains.

Moving to slide 8, non-interest expenses increased by approximately 2% in the first quarter due to higher salaries and benefits driven by seasonally higher payroll taxes and higher costs for healthcare benefits.

We also saw a seasonal increase of 6% in occupancy costs.

These increases were partially offset by lower state taxes and smaller reductions in a number of other expense categories.

In comparison to the first quarter of 2015, non-interest expense has also increased approximately 2%, reflecting increases in salaries and benefits, data processing and software, partially offset by decreases in other categories such as occupancy and state taxes.

Income tax expense decreased $1.9 million, or 14%, resulting in an effective tax rate of 24%.

This reflects the impact largely of tax credit investment activity.

We expect our effective tax rate to continue in the mid-20% range for the remainder of 2016, with the possibility of modest volatility from quarter to quarter.

Turning to slide 9, to reiterate Phil's earlier remarks, we've made significant process towards building out our regulatory compliance infrastructure and work continues.

While BSA/AML costs remain elevated, temporary staffing costs have moderated slightly.

Slide 10 displays our profitability in capital levels over the past five quarters.

These metrics remain stable, reflecting relatively flat net income and the net impact of share repurchases.

And in conclusion, we've included in slide 11 a summary of our outlook for the year, which remains unchanged.

Now, we'll turn the call back to the operator for questions.

(Operator Instructions) We'll go first to Preeti Dixit with JPMorgan.

Good morning, everyone.

Phil, just to follow up on the consent order, could you give us some more color on what developments took place in the quarter that now lead you to believe one or more enforcement actions could extend to 2017?

I think we had normal updates.

I don't think we can really comment specifically on what happens with our regulators.

I'm sorry I can't give you more detail.

Okay.

Is it a case where maybe there's different regulatory expectations across various subsidiaries?

I think that could be one of the situations, yes.

Okay.

Understood.

Shifting gears, Pat, on the expenses, do you have what the seasonal FICO impact was this quarter?

And then as we look through the balance of the year to get to that low to mid-single digit growth, it sounds like expenses would be flat to ramping a bit higher from the $120 million this quarter?

Is that the right way to think about it?

Maybe you could give us some color on your expectations for the expense line?

Sure.

We typically see anywhere from a $1 million to $2 million hit in the first quarter from the seasonal uptick in payroll taxes.

And I think your assumption is pretty reasonable.

Okay.

Helpful.

Then on the fees, obviously fourth quarter was a pretty strong result but you're keeping your mid to high single-digit growth expectations.

Could you give us some color on where you're seeing the most opportunity to move the needle on the fee revenues?

I would say as we go through the balance of the year, we believe that mortgage, selling SBA loans and swap fees will be large contributors to our increase.

Okay.

That's helpful.

I'll step out for now.

Thank you.

(Operator Instructions) We'll go next to Matthew Breese with Piper Jaffray.

Hi, guys.

This is Brody Preston on the call for Matt Breese.

Can you speak up, please?

I'm sorry, can we have your name again?

This is Brody Preston on the call for Matt Breese.

I saw you guys -- you said you repurchased $11 million.

Could you give me the average price paid for that and the amount of shares?

It was 917,000 shares.

So the average price would be $11.9956; call it $12.

Thank you.

Do you guys have a near-term outlook for the margin in light of guidance for 2016 of a flat margin versus 2015, like next quarter or two?

There's so much near-term volatility that can move it 1 basis point or 2 basis points around things that are tough to predict like non-interest, the effect of nonaccrual loans moving into and out of, and interest recoveries and loan fees on repayments.

We tried to kind of stick to a general range.

We still think the 0 basis point to 3 basis point volatility on a quarterly basis resulting in essentially a pretty stable margin throughout the year is the right way to think about that.

So if you did the math, we could give back a little bit of the margin percentage improvement we saw this quarter, if growth comes in at levels that we've guided to.

So Brody, in addition to that, I would say if in quarters that we don't have a rate increase, we still have some pressure on margin, and the guidance that we gave, we have essentially one more rate increase this year in that guidance.

In the early third quarter.

So if we get that, we could see positive impact.

If we don't get that, you could see a negative fall-off as we pass midyear.

Great.

Thank you.

And one more for you guys.

Does the current loan pipeline suggest that the mid to high single-digit loan growth is still achievable in 2016?

We believe that it is, yes.

Okay.

Thank you very much.

We'll go next to Bob Ramsey with FBR.

Hey, good morning, guys.

Saw a nice improvement on the outside services and professional fees.

I'm just curious if it's a good trajectory to expect through 2016, those items to continue to gradually drift lower?

And then, I know you gave color on timing or the uncertainty around timing of getting the consent orders lifted.

Just kind of curious, is there much of a direct tie between that and seeing some of these regulatory costs come down?

Or are you guys making your investments and doing what needs to be done and there's not a direct link between the timing of expenses coming down and the consent order getting lifted?

There were a number of things in there, so if I don't hit them all --

Sorry.

-- let me know.

But I think a gradual reduction is a valid assumption.

They could have some volatility to them.

We will continue to spend whatever we need to on the BSA/AML side and I think the guidance that we gave you assumes that.

And I'll just remind you too that the BSA/AML costs from an outside services and consulting perspective are a minority of what we spend in outside services and consulting.

So we've got a lot of activities going on, platform investment, whether it's IT or process or other.

And there's some impact from a processing perspective as well on that line volume-related.

Okay.

Fair enough.

And then shifting gears to talk about provision, given where credit sits today, I know you guys have said provision will be driven by loan growth.

Is it fair to think that you'll apply something similar to the allowance to loan ratio today to net loan growth, and that's a way to think about what provision expense will be?

I think we've been guiding that provision on a quarterly basis, it will be in a range between zero and $5 million, and I would continue to give that guidance.

And I'd say that in quarters, if we have a quarter where there's not much loan growth, it should be to the lower end of that guidance.

Then the higher the loan growth is, the closer you would get to the higher end.

Okay.

Fair enough.

That's all I got.

Thank you.

We'll go next to Joe Gladue with Merion Capital Group.

Good morning.

Just to follow up a little bit on that last question from Bob, just in regards to asset quality.

There's been good trends there and I think you alluded to it in the remarks.

But just wondering what the trends were in the classified and early stage delinquencies, if they're moving in the same direction as the MBLs or anything to notice there?

Yes, I would say that those metrics moved down more than some of the ones that we stated in the call.

Okay.

That's all for me.

We'll go next to Matt Schultheis with Boenning.

Hi.

Good morning.

Couple of quick questions.

It looks to me like in March you hired an SBA lender and was wondering if she came over with her whole team or if that was a one-off?

And if you anticipate her bringing her whole team over?

It has been in the newspapers that we hired Lynn Moser and we've hired in addition to her, a number of SBA people and some are from her team, and some were from other areas.

But we have made a substantial investment into the SBA category.

And did she hit the ground running, or was she sort of in a garden period with her former employer?

I don't know that we can really comment on anything regarding that.

Understood.

With deposit growth in the quarter, was any of that tied to the quasi-solving of the Pennsylvania budget impasse where they freed up some state funds late in the year and so there were some seasonal municipal flows that normally would have happened earlier in the year but all got jumped into the first quarter?

Did you experience some of that as well?

Or is that not what happened?

I would say the answer to that question is no.

(multiple speakers) Right at the end of the quarter, and we had the same curiosity about what impact it would have, but it ended up being nothing that was measurable.

Is that budget impasse affecting you guys in any way beside those deposit flows?

Any concerns that your borrowers or your customers have or some of maybe your nonprofits regarding just the environment in general?

I don't -- We've not seen any impact on credit.

We did put some short-term financing packages in place for school districts and municipalities.

But I would say that there really hasn't been that much borrowing against them.

Okay.

That's it for me.

Thank you very much.

We'll go next to Frank Schiraldi with Sandler O'Neill.

Good morning.

Just a couple of follow-ups on some things already been discussed.

Just on the provisioning again, Phil, correct me if I'm wrong, I think in the past you've suggested the reserve to loan ratio will probably bottom out somewhere above the 1% level.

Just wondering, am I remembering that right and is that still the thinking?

Yes, I would say it could still go a little lower.

But it should bottom out above the 1%.

Great.

But, that will depend on a lot of metrics.

Sure.

Then on the mid to high single-digit loan growth for the year, is there a specific geography within the footprint that would be an outlier in terms of driving that growth?

As a followup to that, we've heard a lot about potential market dislocation in Southeast PA.

Has that started to flow through into loan growth already or is that largely something we should see go forward?

We are expecting loan growth in all our markets.

I would say on the market disruption side, there is more of that happening in Pennsylvania.

And that started really in the second half of last year and we see it continuing this year.

Okay.

All right.

Thank you.

(Operator Instructions) We'll go next to Michael Perito with Keefe, Bruyette & Woods.

Good morning.

Couple quick questions.

I jumped on the call a little late so I apologize if I missed this.

First, on the share repurchase, I know you guys mentioned how much you have left on the authorization.

But any comments on your outlook for the remainder of the year, given where the share price has moved up to and how you guys are thinking about incremental buybacks going forward?

We don't have a lot of comments.

I will say things that factor into that are how much growth we get because we do want to fund our growth first and the price has some impact.

Is it fair to assume that if you guys hit your growth guidance and the share price remains where it is, that you guys will have some level of activity in the buyback for the balance of the year?

Yes, I think that's fair.

Okay.

Thanks.

Then the second question, kind of more detailed question on the margin.

It looks like in the savings and interest-bearing demand products that over the last, call it, four or five quarters, you guys have actually had some real modest but some slight pickup in pricing.

Any thoughts on how you guys are thinking about your deposit pricing going into the rest of the year here?

Is that something you expect to continue, or will it be relatively flat?

Obviously, I know it depends on what the rates do, but any update there would be helpful.

This is Pat.

We've got a couple of things at work.

One is the impact of short-term rate increases.

And we did see some impact in the quarter from the 25 bip increase in December that rolled through probably 20% to 25% of our demand deposit line.

These would be index linked deposits that automatically reprice.

Other than that, it would be competitive pressure that would really cause rates to change.

To date, we really haven't seen much, if any, impact on competition for deposits in our markets.

So pricing competition is still generally not there as it stands today?

Correct.

Yep.

Okay.

All right.

Thanks, guys.

Appreciate it.

Thank you.

It appears there are no further questions at this time.

I'd like to turn the conference back 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 second quarter results in July.

This does conclude today's conference.

We thank you for your participation.

You may now disconnect.