Fulton Financial Corp (FULT) 2016 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Fulton Financial second-quarter results conference call. This call is being recorded. And I would now like to turn it over to Jason Weber. Please go ahead.

Thanks Kayla. Good morning. Thanks for joining us for the Fulton Financial's conference call and webcast to discuss our earnings for the second 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 announcement which we released at 4:30 PM yesterday afternoon. The documents can be found on our website at Fulton.com by clicking on the Investor Relations tab then on News. The slides can also be found in the Presentations 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 have included our Safe Harbor statement of forward-looking statements. We refer to you 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 Condition and Results 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 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.

Unless otherwise noted, quarterly comparisons are with the first quarter of 2016.

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 second-quarter financial performance and discusses our 2016 outlook. When he concludes, we will open the phone line for questions.

Overall, we were pleased with the second-quarter results. Our loan growth accelerated towards quarter end with continuing favorable credit conditions. Noninterest income grew across most categories, and expense management was disciplined. In all, we were able to generate positive operating leverage, a goal we set at the beginning of the year.

Loan growth continued to be driven by our commercial portfolio. Growth was spread across a broad range of industries and was primarily concentrated geographically in Pennsylvania, and to a lesser extent in our New Jersey market. Our residential mortgage portfolio increased over 5% linked quarter and year-over-year, driven by new portfolio product offerings that we introduced in 2015.

Our commercial pipeline remains strong and is up approximately 6.4% compared to this time last year, so we remain optimistic that loan growth will continue as the year progresses. A concentrated in-house calling effort combined with our increased focus on adding revenue-generating talent and market disruption has aided online growth of late and bodes well for future growth and market share gains.

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

Similar to commercial loan growth, market disruption continues to create opportunities to generate consumer accounts from disrupted markets. As consumers begin to see changes for example when branches are rebranded or systems converted, we have experienced meaningfully higher rates of new consumer checking accounts at our branches located near those of affected institutions as compared to our broader branch network. We have and will continue to have active business development initiatives and strategies to take advantage of the market disruption.

Credit continues to be denied. All of our credit metrics improved linked quarter and year-over-year.

Our nonperforming loans and nonperforming assets as a percentage of loans both continue to decline and remain at levels we have not seen since 2007.

Noninterest income had a strong quarter, reflecting seasonal growth and higher volumes across most categories. Of note, noninterest income growth was driven by our commercial loan interest rate swap business as well as contributions from merchant SBA loan sales and cash management. On the consumer side, debit card income and service charges also contributed to the increase.

Mortgage banking had a solid quarter. Mortgage originations increased 83% linked quarter. Purchase originations represented 69% of total originations in the second quarter compared to 51% in the second quarter of 2015. And the mortgage pipeline increased 14% linked quarter, so we believe mortgage is in a position to have a solid third quarter.

Our mortgage banking income was down linked quarter and year-over-year as we took a non-cash mortgage servicing rights impairment charge. Pat will have more on this in his prepared remarks.

Noninterest expense increased modestly linked quarter and year-over-year. We continually look for ways to make our organization more efficient while not compromising your customer experience.

On the capital front, we were pleased to increase our orderly cash common stock dividend in the second quarter to $0.10 per share. In addition, we repurchased approximately $5.1 million of common stock in the quarter.

Before I turn it over to Pat to discuss our financial performance, I'd like to make a few brief comments on the BSA AML enforcement actions and how we are moving our Company forward. My update has not changed since last quarter. It's possible that one or more of the actions could be lifted in 2016. It's also quite likely that one or more of the enforcement actions will remain in place until 2017.

Emerging from the BSA AML enforcement actions remains a top priority for us, but we continue to move the organization forward in other ways. For example, we are focusing on organically growing the Company, simplifying our corporate structure and enhancing our processes while controlling costs.

In closing, we believe the positive operating performance and momentum from the second quarter will transition into the third quarter and beyond. This should translate into meaningful growth and continued positive operating leverage.

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.

Starting on Slide 4, earnings per diluted share this quarter were $0.23 on net income of $40 million, up from $38 million in the first quarter. Earnings per diluted share increased 4.5% from the first quarter and 9.5% from the second quarter of 2015 due to higher net income and to a lesser degree the net impact of share repurchases. Second-quarter earnings reflected improvements in noninterest income and lower income taxes, partially offset by an increase in the provision for credit losses and a modest increase in noninterest expense.

Moving to Slide 5, our net interest income remained relatively flat from last quarter, driven by lower net interest margin, offset by the impact of earning asset growth. Net interest margin declined 3 basis points driven by lower yields on interest-earning assets while the cost of average interest-bearing liabilities was unchanged.

The yield on interest earning assets declined by 3 basis points from the first quarter. This decrease was due to a 2 basis point decline in loan yields reflecting the impact of the lower rate environment, combined with a 7 basis point decline in yields on investment securities reflecting higher premium amortization.

Turning to credit on Slide 6, we recorded a $2.5 million provision for credit losses, $1 million higher than the provision in the first quarter. The allowance for loan and lease losses declined slightly as a percentage of loans from 1.20% to 1.17% while coverage of nonperforming loans improved to 129%. Net charge-offs decreased linked quarter and year-over-year to $3.5 million, resulting in an annualized net charge-off rate of 10 basis points, half of the 20 basis point rate in the first quarter. Nonperforming loans declined $9.4 million from the first quarter to $127 million or 0.90% of total loans. Nonaccrual loan generation for the quarter was $19.2 million, in line with the first quarter.

Moving to Slide 7, noninterest income, excluding securities gains, increased 9.2%, reflecting higher commercial loan interest rate swap fees due to higher levels of commercial loan originations as well as strong growth in merchant fees. Most other categories, including SBA sales gains and debit card fees, also showed solid growth.

Overall mortgage banking income was down 3% from the first quarter. However, underlying sales gains reflected a 66% or $1.8 million increase. This strong growth was offset by a $1.9 million decrease in servicing income, which was driven by a $1.7 million impairment charge on mortgage servicing rights, reflecting the impact of lower interest rates on expectations for future prepayments.

In comparison to the second quarter 2015, noninterest income, excluding security gains, grew 4.5%, reflecting increases in commercial swap fees, other service charges and gains on sale of SBA loans, partially offset by a decrease in mortgage banking income, again driven by the MSR impairment charge. Excluding that impairment charge and securities gains, noninterest income increased 13.2% linked quarter and 8.4% year-over-year.

Moving to Slide 8, noninterest expense increased by approximately 1% in the second quarter, due mainly to higher professional fees and salaries and benefits, partially offset by net decreases in outside services, furniture and equipment and occupancy expense. In comparison to the second quarter of 2015, noninterest expense increased approximately 3%, reflecting increases in salaries and benefits, professional fees, data processing and software, partially offset by decreases in certain other categories, most notably a $2.6 million decline in outside services.

Income tax expense was 7% lower than the first quarter with the effective tax rate decreasing to 22% from 24%. This decline reflected the timing of net tax credits earned on investments and low income housing projects, which can be volatile. We expect our effective tax rate to be in the low to mid 20% range for the remainder of 2016 with the possibility of modest volatility quarter to quarter.

Turning to Slide 9, overall BSA AML cost remains elevated with BSA AML rated outside services costs not declining as rapidly as anticipated.

Slide 10 displays our profitability and capital levels over the past five quarters. ROA and ROE both improved in the second quarter of 2016, driven mainly by higher earnings, while capital levels remained stable.

In conclusion, we've included on Slide 11 a summary of our outlook for the year. Our guidance remains unchanged except for net interest margin. As you'll recall, our original outlook was for stable margin for the year, and assumed a 25 basis point rate hike midyear. Absent any further rate increases, we expect low single-digit quarterly margin compression.

Now we will turn the call back to the operator for questions.

(Operator Instructions). Frank Schiraldi, Sandler O'Neill.

Good morning guys. Just a couple of questions. First, on the BSA expense, Pat, I think you mentioned that while it ticked up linked quarter and I think you mentioned they have been a little higher than you had anticipated, what is the expectation as we sit today for that BSA expense through the end of 2016? Should consulting expense stay around these levels?

It's Phil. I would say, until we are out of the orders, the expenses will stay at the levels, close to the levels that they are at.

Okay. And I don't know if I missed it, but I think you indicated that some of these orders will likely remain into 2017. But that would make it sound like you anticipate some coming off before the end of the year?

I think we said it's possible. So that's the best I can tell you. It's possible that they will still all be on in 2017. It's possible some will be off at the end of the day. We don't make the decisions.

Sure.

And it all revolves around timing of exams from different regulators.

Right. I thought you had one earlier this year in April, call it, and you were hopeful that the results would be to see -- to get a better sense of when one or more of those orders was going to come off. Is that accurate or --?

We are still in the process of establishing sustainability, and we are working hard to do that, and we will continue to spend the levels that we are spending to get there as quick as we can.

Okay. And then just the only other question I had was on the securities book, the premium amortization ticking up in the second quarter. Is that based off of actual prepayment speeds, or on expectations? I'm just trying to get a sense if much of it, the higher premium amortization would be expected to be baked in already into 2Q, or that could be partially a 3Q event.

To the extent we continue investing at pretty high premium rates, that balance could grow. It did tick up in the capitalized premiums that just amortized, ticked up by about 10% during the quarter, but a bigger part of the increase in amortization that we saw, probably two-thirds of it, was from prepayments.

That's from prepayment fees? Okay.

Correct.

I guess, I don't know, would you be able to say if, based on where rates were at sort of a low at the end of the quarter, and early in the third quarter, do you think that prepayment speed, that change in prepayment speed, has already been baked into numbers, or could we see another tick up in premium amortization based on prepayments in 3Q?

If everything stays the same as where we were when we ended the second quarter, including our reinvestment profile and prepayments, you could see another basis point of margin compression due to the securities book in the third quarter.

Okay. Great. That's all I had. Thank you.

Bob Ramsey, FBR.

Good morning. This is actually Kyle Peterson speaking for Bob today. I was wondering if you guys could share a little bit more on your thoughts kind of on share repurchases and capital management in general. I think, if I heard that right in the prepared remarks, you guys repurchased was it a little over $5 million in stock is quarter? I guess if you guys could talk a little bit more about kind of the outlook for that moving forward.

So, we have a $50 million program in place. We currently use about $17 million to $18 million of it, so as we move forward, we will be in the market when we feel it's appropriate.

Okay. All right, great. I think just my only other question would be I guess what are your guys' thoughts on ways to grow net interest income, especially with kind of rates where they are at now? I know Obviously you guys said there would be a little bit of NIM pressure without any rate hikes. I guess is it just mainly coming from loan growth? I know you guys said the pipeline was looking pretty good right now.

Yes, if our margin declines 3 basis points in the quarter, we need $170 million approximately of average loan growth to offset that. And we think that is doable.

All right, great. That's very helpful. I think that's all for me.

Chris McGratty, KBW.

This is actually Kelly Motta on for Chris McGratty. Thank you for taking my question. In terms of the mortgages you booked this quarter, you have a lot of growth there on the resi mortgage side of things. I'm assuming these are ARMs that you're putting on the balance sheet, but can you give a bit more color on what you are adding and what your appetite is for putting these on balance sheet going forward?

So, strategically, we made a decision that we could put some fixed-rate loans into our portfolio. And so they are predominantly jumbos, and a program we call our homebuyer program, which is for first-time homebuyers, and would be more CRA-related.

Okay. Do you see that growth going forward in future quarters?

I see it going forward in the third quarter. I would not commit beyond that, but I do see it in the third.

Okay, thanks. And then in terms of your revised NIM guidance, I apologize if I missed this, but was the change there just taking rates out of your forward guidance?

That's basically it.

Okay. Thank you so much.

Brody Preston, Piper Jaffray.

This is Barry Preston filling in for Matt Breese. How are you this morning? Most my questions have been answered so far, but you guys touched on market disruption that you were seeing earlier in terms of consumer checking accounts coming on. I was hoping maybe you could give me an update on any hires you've made from the market disruption that you alluded to earlier.

I don't know if I have a number in front of me, but we continue to hire folks from disrupted organizations, and also other organizations, and we will continue to look for those revenue-producing people.

Okay. Great, thanks. And in terms of the loan growth for the second half of the year, you touched on the pipeline being pretty robust. You sort of broke down what you expect for residential. I was hoping you might be able to touch on what the pipeline looks like for commercial loan growth back half of the year.

Sure. Actually, I think I mentioned it in the script. But our pipeline going into the third quarter was 6.4% higher than it was a year ago, which -- and I think pretty much the same linked quarter. So it's what we would consider to still be a strong pipeline.

Okay, great. And then it was $5 million of stock repurchases for this quarter?

Yes, approximately.

It was 393,000 shares, $5.1 million.

Great. Thank you very much guys.

Matt Schultheis, Boenning.

Good morning. So, quick questions. What percentage of your loan growth -- I mean even if it's just ballpark -- do you estimate is from market share grab and gain? And how much is from GDP growth, your clients who are optimistic want to expand their business (multiple speakers) their investments.

We've been I think consistently running those two 50-50 over the past I'd say year.

Okay. And then can you talk about sort of lumpiness in deposit growth? I think, last quarter, you had a very strong quarter in deposit growth. This quarter was not quite as strong. And I don't think there were any municipal inflows last quarter. So can you just address that?

Part of the dynamic in deposits underlying usually is municipals. The thing is, in the last couple of years, we haven't really seen the outflows as much as we would normally expect. So a bigger part of our quarter-on-quarter growth was more from the personal deposit side, while CDs and munis did go down as we would expect. The third quarter is typically when we see the biggest inflow from munis, as the property and school tax payments are made if you got a house and you have to write a check in the third quarter. And so we would expect some recovery in that space in the third quarter.

Okay. And related, and final question, does the Commonwealth of Pennsylvania coming close to passing a finalized budget cost of funding, does that actually do anything for your business, or is it sort of a shoulder shrug for you guys at this point?

At this point, it is a shoulder shrug.

Okay. Thank you very much.

(Operator Instructions). Joe Gladue, Merion Capital Group.

Good morning. Just a quick question. I'm just wondering if you could I guess give us some color on where the ramp up of the SBA platform stands with some of the additions you've made over the last year or so.

That's a great question, Joe. I would say that the ramp up occurred a little slower than we thought, but the backlog we have there right now is pretty strong, and we anticipate the second half the year to be substantially stronger than the first.

That's it for me. Thanks.

We have no further questions at this time. I'd like to turn it back to our speakers for additional remarks.

Thank you, everyone, for joining us today. We hope you will be able to be with us when we discuss third-quarter results in October.

That concludes today's conference. We thank you for your participation. You may now disconnect.