Fulton Financial Corp (FULT) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Fulton Financial third quarter results conference call. This call is being recorded.

I would now like to turn the call over to Senior Vice President, Director of Corporate Development, Jason Weber. Please go ahead, sir.

Thanks, Camille. Good morning. Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the third 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 Executive 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 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 statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, and actual results could differ materially.

Please refer to the Safe Harbor statement on forward-looking statements in our earnings release and on slide 2 of the presentation for additional information regarding these risks, uncertainties and other factors. Fulton undertakes no obligation other than is required by law to update or revise any forward-looking statements.

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 released yesterday, and slides 13 and 14 of the presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Unless otherwise noted, quarterly comparisons are with the second 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 third-quarter financial performance and discusses our 2016 outlook. When he concludes, we will open the phone lines for questions.

We reported diluted per share earnings of $0.24 for the third quarter, an increase of 4.3% linked quarter. Pre-provision net revenue increased approximately $5.5 million or 10.4% linked quarter, and approximately $9.4 million or 19% year over year. Our return on assets was 0.89%, and our return on tangible equity was 10.38% for the quarter.

Overall, we were pleased with the third-quarter results. Despite a challenging interest rate and operating environment, we were able to grow revenues and reduce expenses, and as a result we generated meaningful, positive operating leverage.

The loan portfolio increased 6.7% linked quarter annualized, driven by growth in our residential and commercial real estate portfolios. In addition, our commercial leasing portfolio continues to be a nice growth story.

The residential mortgage portfolio increased 6.6% linked quarter and 11.6% year over year. Over the last year, we made a strategic decision to retain certain jumbo mortgages, driving growth in the portfolio.

The commercial mortgage portfolio increased 3.3% linked quarter and 9% year over year. Our growth was spread throughout our footprint, but primarily in our Pennsylvania and Maryland markets.

Our C&I loan portfolio decreased 1.8% linked quarter, but increased 2.4% year over year. C&I loan demand is typically softer in the third quarter, and our line borrowings declined by $30 million, reflecting this seasonality. In addition, we had some criticized credits pay off in the amount of $29 million, creating downward pressure on C&I loan balances.

While our markets remain highly competitive, commercial originations and the commercial pipeline remain stable. We continue to focus on our calling efforts and on adding talent, so we remain optimistic that we can drive meaningful loan growth going forward.

We continue to look for opportunities to add high-performing talent throughout all of our revenue-producing areas. In the third quarter, we hired a regional president for the Philadelphia market. Over the past year, we have added commercial relationship managers throughout our footprint.

We've also made several key additions in our SBA, commercial leasing and agriculture specialty lending areas, as well as in our mortgage banking Company. We were able to keep our total head count relatively stable during this time. We believe these additions will help drive growth in 2017 and beyond.

Core deposit growth continued to be strong, increasing 5.9% linked quarter and 9% year over year. Linked-quarter growth was driven primarily by seasonal inflows of state and municipal deposits, while retail and commercial deposits were the primary drivers year over year.

Credit conditions remain consistent with prior quarters, despite an uptick in delinquencies and non-accrual loans.

Non-accrual generation was approximately $34 million in the third quarter, compared to approximately $19 million in the prior quarter. The uptick was related to a few relationships that experienced isolated events. We believe those are not indicative of broader portfolio or macro trends.

Non-interest income had another strong quarter, driven by our commercial loan interest rate swap business and mortgage banking income. Despite retaining more of our production over the last several quarters, mortgage banking continues to drive meaningful revenue growth.

Mortgage banking was $4.5 million in the third quarter, an increase of 16.2% linked quarter and 17.2% year over year.

Mortgage originations increased 4% linked quarter and 33% year over year. Purchased originations represented 68% of total originations in the third quarter. However, applications in the quarter were split equally between refinance and purchase.

The mortgage pipeline increased 3% linked quarter, and 48% year over year. And despite the fourth quarter historically being seasonally weak, early results in the fourth quarter suggest continued positive momentum in mortgage banking.

Turning to expenses in the third quarter, we saw a linked-quarter decline in our non-interest expenses. The efficiency ratio was 65.2%. We continually look for ways to make our organization more efficient to drive our efficiency ratio towards our goal of 60% to 65%.

On the capital front, we paid a quarterly common stock dividend of $0.10 and repurchased 176,000 shares of common stock in the quarter. We have approximately $31 million left in our current share repurchase plan authorization.

Before I turn things over to Pat to discuss our financial performance, I would like to make a few brief comments on the BSA AML enforcement actions and how we are moving our Company forward.

With a little over ten weeks remaining in 2016, it is becoming increasingly likely that the enforcement actions will remain as we move into 2017. We continue to make progress on our remediation efforts, and emerging from the BSA AML enforcement actions remains a priority for us.

In the meantime, we continue to move the organization forward in other ways. We are focusing on organically growing the Company, simplifying our corporate structure, and enhancing our processes while controlling costs.

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

Thanks, Phil, and good morning to everyone on the call.

Starting on slide 4, earnings per diluted share this quarter were $0.24 on net income of $41.5 million, an increase of 4.3%. Third-quarter earnings reflected improvements in net interest income, non-interest income, and non-interest expense, partially offset by a modest increase in the provision of credit losses.

Moving to slide 5, we also had a modest increase in net interest income, driven by earning asset growth and an additional day in the quarter. Partially offset by the impact of a 6 basis point decline in the net interest margin. This was driven by lower yields on interest earnings assets as the costs of bearing liabilities was unchanged.

The yield on interest-earning assets declined by 6 basis points from the second quarter. Primarily driven by a 5 basis point decline in loan yields, reflecting both the impact of lower yields on new originations as well as lower loan fees. This was combined with the seasonal impact of higher liquidity from municipal deposit inputs.

Turning to credit on slide 6, we reported a $4.1 million provision for credit losses, $1.6 million higher than the provision in the second quarter.

The allowance for loan losses was essentially flat linked quarter at $165 million, as the loan loss provision matched net charge-offs. The increase in the loan loss provision was due to growth of the loan portfolio.

Net charge-offs, up 11 basis points, were relatively flat and certain other credit metrics ticked up modestly. These increases were largely driven by a single $13 million credit that deteriorated during the quarter. Absent this deterioration, these metrics would have been relatively flat linked quarter.

Moving to slide 7, non-interest income, excluding securities gains, increased 4.5% reflecting higher commercial loan interest rate swap fees, as well as higher mortgage banking income, SBA sale gains and service charges on deposits.

Our commercial loan interest rate swap business continues to benefit from growth in commercial loans and more dedicated resources. Fee income from this business increased over 50% linked quarter and 100% year over year.

Mortgage banking income increased $632,000 from the second quarter. Sales gains increased $420,000 due mainly to higher volumes of new loan commitments, while servicing income increased $215,000.

Excluding the impact of the mortgage servicing right impairment charges in both the second and third quarters, servicing income declined modestly.

In comparison to the third quarter of 2015, non-interest income, excluding securities gains, grew 11.9%, reflecting increases in the commercial swap fees, mortgage banking income and SBA loan and sales gains.

Moving to slide 8, non-interest expenses decreased 1.5% due to lower FDIC insurance expense, data processing, and professional fees, partially offset by net increases in salaries and benefits, other real estate owned and repossession expense, and other outside services.

In comparison to the third quarter of 2015, non-interest expenses decreased 4%, mainly driven by the $5.6 million loss on redemption of trust preferred securities we incurred in 2015.

Excluding that loss, non-interest expense was relatively flat with decreases in other outside services and FDIC insurance expense being offset by increases in salaries and benefits and occupancy.

Income tax expense was 7.5% higher than the second quarter, with the effective tax rate increasing to 24%, in line with our expectations. We expect our effective tax rate to continue in the low to mid-20% range in the fourth quarter.

Turning to slide 9, overall BSA AML costs have improved modestly from both the prior quarter and year. We continue to expect that outside services costs will shrink meaningfully over time, but likely remain elevated in the near term.

I should note that we combined outside services and temporary staffing expense on this slide compared to the prior quarter to simplify the presentation of third-party expenses. The label on the 2015 bar should read $5.9 million rather than $4.5 million.

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

In conclusion, we've included on slide 11, a summary of our outlook which remains unchanged from June 30.

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

(Operator Instructions)

We'll start with our first question from Frank Schiraldi with Sandler O'Neill.

Just a couple of questions. First I wanted to ask on the SBA business. Could you guys just summarize where you -- I know it's to ramp up in the back half of this year, so just wondering how much ramp-up has taken place, where that is in terms of supporting revenue and income, and if that could accelerate again into the fourth quarter?

Good morning, Frank. This is Phil. So I think in the first quarter our SBA fee income was up pretty nominal. Second quarter it was in th $250,000 range, third quarter we're about $550,000, and we anticipate that going to $750,000 probably in the fourth quarter in that range.

Okay. Appreciate that, thank you. And then secondly, just wondered if you could give any more detail, Pat, on that $13 million credit you indicated, moved NPAs higher? Just in terms of type of collateral, industry, any color you can provide there would be helpful.

I'll defer to Phil to talk about that one.

So we believe we're fully collateralized, and it was -- it's a C&I credit, and I think that's pretty much the information we'd like to provide.

Okay. And then I guess just finally on loan growth, I think in the past you've indicated that it's a 50/50 split in terms of growth being provided by increased demand. I think you said this last quarter, actually, 50/50 split in terms of increased demand and dislocation on the market.

Is that still a fair assessment? How are -- if you look at are you thinking about demand out there versus dislocation? What's the bigger, if there is one, driver of growth in this quarter and going forward?

So, I think that percentage is still holding. We are seeing -- we did see our C&I demand go down a little in the third quarter. I think that's -- I think probably what a lot of people are experiencing.

Sure, that's consistent with the [state]. Okay, great. Thank you.

Our next question comes from Kevin Fitzsimmons with the Hovde Group.

Morning, Kevin.

Hey, it's Hovde Group. How are you guys?

Good, how are you?

Good. Wanted to just follow on to the loan growth question a bit more. So can you give any color on what your -- whether it's increasing or consistent, the market share gain opportunity from the few large deals that you've seen in your footprint by an out of region player over the last few years and how that is playing out? Whether it's in line with your expectations, whether there's more to come?

And then on that same topic, if you could touch on the commercial real estate regulatory thresholds on, I believe it's not an issue for you-all, but is it -- are you finding it as any opportunity? In other words, are there commercial real estate heavy banks in your footprint that are retrenching and maybe pricing or opportunities are looking appealing to you?

Yes, so on the commercial real estate side, I would say that there is some less competition, and pricing I think has stabilized and perhaps increased some. Threshold, on the thresholds we're fine, and the first part of your question, Kevin?

Was about market share gains from those few large deals.

Yes, so as we look at our backlog, we've been experiencing an opportunity from market disruption. And as we look at our backlog going into the fourth quarter, I think the percent of our backlog remains about the same when we look at what's coming from market disruption. So we believe it will continue at least in the short term.

Okay, great. And one quick follow-up on -- I know there's not much specifically you can say on the BSA issues, other than what you've said. But can I ask if -- when you talk about the progress, is it more event driven at this point?

In other words, are there -- basically there are I would assume examinations scheduled for the sub banks and it's a matter of waiting for those to take place and get the results? Or is it more of an evolving waiting for them to sift through all of the progress you've demonstrated to them?

And again, I know you're dealing with different regulators with different timetables, but is it more an evolving thing or is there more of a waiting for these things on the calendar to occur?

Kevin, I would say it's both. So we continue to make improvements, and we're certainly subject to the schedules that are set by the regulators.

Okay. All right, great, guys. Thanks.

Our next question comes from Chris McGratty with KBW.

Hey good morning, thanks for taking the question.

Morning, Chris.

Good morning, Phil. The C&I softness that you talked about was the seasonal was obviously a player in the third quarter. But if I look year to date, residential mortgage and commercial real estate have driven the lion's share of the net growth.

I'm wondering if that's more the reason that the margin guidance is still down or is there other environmental factors? Maybe some color here on the mix of earning assets, and then direction of the margin.

Hey, Chris, this is Pat. So yes, you're right about the actual shift in the mix, but the one thing we are seeing whether it's C&I or CRE is a continued shift away from fixed into the floating. So that trend probably isn't affected by the mix shift.

Certainly from a resi perspective, the popularity of the jumbo product is very much 15-year fixed. But as a percentage of total, it hasn't had a huge impact on originations because those remain at historically low levels as well.

Okay. And maybe, Pat, while I have you, the LIBOR move in the quarter. Can you just remind us the exposure to one-month and three-month, and whether there was any benefit in the quarter?

Sure. So we've got of the total loan book about 80% is non-fixed, of that $10 billion or so, about 40% is LIBOR the rest being prime, $4 billion. And we've got about $2.5 billion of exposure within that $4 billion to LIBOR, either on the swap curve or the one and two month.

Okay. Great.

Okay. It wasn't -- it was not a meaningful impact though on the quarter on our NII.

Got it, great. Maybe a last one on the FDIC insurance. It came down, I've seen other banks this quarter that number has gone up. Is that a sustainable number, or should we be thinking about going back to where we were last quarter for the FDIC insurance?

It is for a couple of quarters. We'll see this kind of run rate, so we were at, call it, $3.2 million a quarter overall pretty steadily historically and that's dropped down to about $1.9 million. That will continue for the fourth quarter and the first quarter, but then it will tick back up again.

We'll get back about 60% of that savings because Fulton Bank is over $10 billion. So we really just benefited from Fulton Bank, because it went over $10 billion early this year. But you have a four-quarter average before you get to the large bank premium schedule.

So it will be the same run rate for the next two quarters, then it will gradually increase. Once we consolidate all the banks, which over time, we will return that to the approximately the run rate that we've been experiencing at around $3.2 million a quarter.

Great. And maybe I could ask one more. The evolution of the BSA, once that comes off, you guys have talked both about charter collapse and you've also talked about potentially doing deals.

Is there -- obviously you're seeing a few quarters away or a few months away, is there a preference on when that occurs what the shift -- what the pivot will be strategically?

Well, the charter consolidation will begin as soon as we can, and we'll do one bank at a time. So if when we're allowed and a strategic acquisition develops, we can delay the consolidation.

But I would anticipate that we will begin it immediately or as quickly as we can and then complete it. If a strategic acquisition doesn't develop, or if it does we can delay.

Great. Thanks a lot for taking the question.

Our next question comes from Joe Gladue with Merion Capital Group.

Good morning.

Morning Joe.

I think most of the stuff I was interested in has been answered. But I wanted to touch on a few of the other expense categories.

You had some noticeable declines in professional services as well as data processing fees, and wondering if, again, if those declines are sustainable and what's driving them?

Hey, Joe, this is Pat. So I'll take those in reverse order.

So the DP reduction was meaningful this quarter, and it will probably be choppy and volatile certainly based on volume. But these are largely major technology contracts that don't come due every year, every quarter. We're working hard to renegotiate these for more favorable terms, so we're able to benefit from that this quarter.

But that doesn't necessarily mean that next quarter or the quarter after we won't renegotiate one that's been in place for ten years, and have a higher rate on that.

So we're going to work hard to sustain the level that we've dropped to, but I just wanted to highlight that. But it's not necessarily as simple as yes, it's sustainable.

Okay. Fair enough.

On the professional services, that can be pretty volatile quarter to quarter. But I guess I'd tell you that if you look at the run rate that we've seen year to date or the run rate for the last year full year, I think that's maybe around $2 million, $2.1 million a quarter, then that would be a good run rate to use. We're not going to try to give guidance on intra-quarter volatility based on timing and billings.

All right. That's it for me. Thanks.

Thank you.

Our next question comes from Matthew Keating with Barclays.

Yes, good morning. I was hoping you could help me with net interest margin trends.

So obviously, you gave the guidance without rate hikes. Maybe if you could just quantify what impact a 25 basis point move in rates in December of this year might have on the Bank's 2017 net interest margin? Thanks.

Hey, Matt, this is Pat. So just general rule of thumb, we'd benefit by about $6 million of pre-tax NII on a full-year run rate basis for every 25 basis points.

That's helpful, thank you. Also I'd like to just ask about the performance at the Bank by the various geographies in the quarter, maybe both from a loan growth perspective and from a return on assets perspective. What are you seeing in the various markets in the last quarter? Thanks.

So, Matt, the loan growth primarily came in our Pennsylvania and Maryland markets, and I don't have the specific ROAs for the banks in front of me.

Is New Jersey still a market where profitability is below average relative to the group overall?

New Jersey would be below average, yes.

Okay. And then could you talk -- you mentioned obviously about the hiring this quarter of a Philadelphia market president.

Can you size the Bank's Philadelphia business, so in Philadelphia and in southeastern Pennsylvania at this point? And maybe talk about the potential opportunity you see, at least on an organic basis for the Bank over the intermediate term in growing that business?

Well specifically in Philadelphia we'd be close to zero, and we'd anticipate or move into Philadelphia to be an area that will provide growth for us.

Okay. So how many people are under that Philadelphia president market structure at this point?

So currently we have just the one person that we hired who is in the market to hire additional lenders, and we now have two mortgage originators in Philadelphia.

Okay, great. Thanks very much. Appreciate it.

(Operator Instructions)

Okay, it actually looks like we have no more time for questions. I'll turn the call back over to our speakers for closing remarks.

Thank you all for joining us today. We hope you'll be able to be with us when we discuss fourth-quarter results in January.

That does conclude today's call. We appreciate your participation.