Fulton Financial Corp (FULT) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Fulton Financial second-quarter results conference call.

This call is being recorded.

I will now turn the call over to Jason Weber.

Please go ahead, sir.

Thank you, Haley.

Good morning, everyone.

Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the second quarter of 2018.

Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer of Fulton Financial Corporation.

Joining Phil Wenger is Mark McCollom, 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 p.m.

yesterday afternoon.

These documents can be found on our website at fult.com by clicking on investor relations, 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 Financial'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 today's presentation for additional information regarding these risks, uncertainties, and other factors.

Fult undertakes no obligation other than as required by law to update or revise any forward-looking statements.

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

Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and slides 11 and 12 of today's presentation 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 Mark McCollom shares the details of our second-quarter financial performance and discusses our 2018 outlook.

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

As you know, our second-quarter results were impacted by a loss arising from a single large commercial lending relationship resulting from internal fraud at the borrower.

Excluding the loss, we were pleased with our financial performance for the quarter.

Positives for the quarter relative to the first quarter included a 4-basis-point increase in our net interest margin, growth in noninterest income, a decline in non-interest expenses, and an improvement in our credit quality.

Our pre-provision net revenue reached an all-time high, increasing approximately $11.3 million or 18.2% linked quarter; and $10.5 million or 16.7% year over year.

Average loans increased 0.7% or $107 million linked quarter and 4.2% or $641 million year over year.

We had several items that created downward pressure on loan growth this quarter.

Our line borrowings declined.

We had several criticized and classified credits pay off, and we had higher-than-normal prepayments, driven primarily by pricing pressure.

From a market perspective, our competition for loans appears as strong as it has ever been.

As a result, our loan growth has moderated this year relative to the prior two years, given our desire to remain disciplined on pricing and structure.

Despite this lower-than-expected loan growth, we believe we can deliver a near double-digit growth in net interest income for the year as we continue to benefit from a rising rate environment.

Our average C&I loan portfolio increased 1.1% linked quarter and 2.7% year over year.

Our growth linked quarter was spread across a broad range of industries and concentrated in our Pennsylvania and Maryland markets.

The commercial leasing portfolio continues to be a nice growth story.

The average commercial leasing portfolio increased 4.4% linked quarter and 13% year over year.

The residential mortgage portfolio increased 3.5% linked quarter and 18.6% year over year.

Growth was spread throughout our footprint linked quarter, but primarily in our Maryland and Virginia markets.

For the quarter, approximately 88% of the portfolio originations were adjustable-rate mortgages.

Our consumer portfolio increased 9% linked quarter and 14.8% year over year.

Growth was in our indirect auto portfolio, primarily in our core Pennsylvania market.

The portfolio is predominantly comprised of super prime and prime credits.

Philadelphia presents a tremendous long-term growth opportunity for us, so I wanted to give an update on our recent investments in that market.

If you recall, we hired a regional president and a team of commercial relationship managers in 2016.

The team has developed a nice pipeline of opportunities and has generated over $120 million of net balances since 2017.

We opened a mortgage loan production office in May and received regulatory approval to open two full-service branch offices.

The branches are targeted to open in the fourth quarter of 2018.

Turning to credit quality, as I mentioned in my earlier comments, we incurred a loss arising from a single large commercial lending relationship resulting from internal fraud at the borrower.

Mark will provide some financial details in his prepared remarks.

Absent the loss, overall asset quality improved linked quarter.

Our agriculture portfolio is an area we have been monitoring carefully over the last couple years due to compressed commodity prices.

The portfolio saw a noticeable decrease in delinquencies in the second quarter, while net charge-offs were minimal.

Moving to fees, noninterest income growth was strong linked quarter, reflecting seasonal growth and higher volumes.

We saw growth across most noninterest income categories.

Mortgage banking income increased linked quarter.

Mortgage production improved, and gain on sale spreads increased after two consecutive quarters of noticeable declines.

Turning to expenses, we saw a linked-quarter decline in our noninterest expenses.

Our efficiency ratio was 63.3%, which was within our stated goal of 60% to 65% and actually reach the lowest -- its lowest level since the second quarter of 2013.

We were pleased to see a decline in our efficiency ratio and we believe there are more opportunities to gain efficiencies.

These opportunities exist as we continue to optimize our delivery channels, upgrade our origination and servicing platforms, consolidate our bank charters, and exit our BSA/AML orders.

In May, we received regulatory approval to consolidate two of our subsidiary banks: FNB Bank and Swineford National Bank into our largest banking subsidiary, Fulton Bank.

The consolidation is expected to be completed in the fourth quarter of 2018.

On the capital front, we paid a quarterly common cash dividend of $0.12 per share.

We did not repurchase any common stock during the quarter and we have approximately $31.5 million left in our current share repurchase program, which is authorized through December 31, 2018.

Turning to regulatory matters, during the fourth quarter of 2017, the BSA/AML consent orders were issued to three of our subsidiaries -- issued to three of our subsidiary banks were terminated.

With respect to the remaining BSA/AML consent orders, we are confident that we are progressing towards achieving a similar resolution.

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

Mark?

Thank you, Phil, and good morning, everyone.

Turning to our earnings, unless noted otherwise, the quarterly comparisons I will discuss are with the first quarter of 2018.

Starting on slide 4, earnings per diluted share this quarter were $0.20 on net income of $35.2 million.

During the quarter, we recorded a $36.8 million provision for credit losses related to a single large commercial relationship.

This increase to our credit provision equates to approximately $0.16 per diluted share.

Now I'm going to dive a little bit deeper into the components of our earnings and provide some additional color.

Moving to slide 5, our net interest income was $156 million, an increase of $4.7 million linked quarter, driven by growing net interest margin, which expanded 4 basis points, as well as modest balance sheet growth.

For net interest margin, we have seen our assets reprice faster than our liabilities throughout the first half of the year.

Our loan yields increased 13 basis points in the second quarter as compared to the first quarter, whereas our deposit cost increased at a slower rate of 7 basis points.

The 25-basis-point Fed rate increases in March and June of this year, coupled with the increases we've seen to our interest-bearing deposit rates, have resulted in year-to-date deposit betas of approximately 21%.

These deposit betas will likely be higher for future rate increases.

And as a result, we anticipate the deposit costs will increase at a faster rate than they have on a year-to-date basis so far, slowing down our net interest margin expansion.

I also want to remind everyone that our balance sheet remains asset-sensitive, as 42% of our loan portfolio is variable, 36% is adjustable, and only 22% is fixed rate.

Growth in average loans linked quarter was $107 million for an annualized loan growth rate of 2.7%.

Average deposits increased $97 million or a $2.5 million linked-quarter annualized growth rate.

At the end of June, our commercial loan pipeline was approximately $120 million higher than it was at the end of March.

Turning to slide 6, other than the significant provision for credit losses recorded for the noted commercial relationship, our credit performance in the second quarter was very strong.

Nonperforming loans decreased $11 million to $124 million, even after giving effect to $7 million added to the total for the noted commercial relationship.

Total delinquencies also improved by 1 basis point to 1.18%.

In the second quarter of 2018, we recorded a $33.1 million provision for credit losses.

Approximately $36.8 million of this was for the aforementioned commercial relationship, which results in a negative credit provision being applied to the rest of our portfolio.

This is supported by the improving overall credit metrics just discussed as well as payoffs of certain larger loans with higher risk ratings that had allowance for credit loss allocations in prior periods.

The allowance for credit losses as a percent of loans decreased linked quarter from 1.07% from 1.12% at the end of the first quarter.

However, the coverage of the allowance to nonperforming loans increased during the quarter to 137% from 131% last quarter.

Annualized net charge-offs to average loans were 101 basis points for the quarter or $39.9 million.

Of that amount, $33.9 million was for the previously referenced commercial relationship.

Adjusted for this, net charge-offs were 15 basis points or 5 basis points higher than the first quarter, but in line with our recent history.

Moving to slide 7, for the second quarter, our noninterest income excluding securities gains was $49.1 million, an increase of $3.2 million linked quarter.

The increase was driven by commercial loan interest rate swap fees, which increased $1.1 million linked quarter.

As a reminder, our swap fees will continue to be impacted by future levels of commercial loan originations as well as interest rates and the shape of the yield curve.

We saw seasonal increases in both debit card and merchant fees.

As Phil mentioned previously, mortgage banking income also showed a seasonal increase, while gains on sales of small business administration loans also grew during the quarter.

Moving to slide 8, noninterest expenses were $133.3 million, a decrease of $3.3 million from the first quarter.

Decreases were seen across most expense categories, but notably in professional fees, salaries and benefits expense, and net occupancy expense, which is seasonally higher in the first quarter.

Income tax expense decreased $4 million linked quarter due to lower pre-tax income, driven by the higher provision for credit losses.

For the second quarter of 2018, our effective tax rate was 9%, which is slightly below our guidance and is due to the fairly constant level of tax preference items applied to a lower pre-tax earnings levels than what we assumed when setting that range.

Absent the credit loss for the commercial relationship, our effective tax rate for the quarter would have been 14.9%, driven by higher pre-tax income.

Our year-to-date effective tax rate is approximately 11%, which is at the low end of the range within our outlook.

Moving to slide 9, slide 9 displays our profitability and capital levels over the past five quarters.

Returns on assets and equity were lower for this quarter due to the credit provision for the previously discussed commercial relationship, which impacted our earnings.

Our tangible common equity ratio remains strong.

Slide 10 provides a summary of our outlook for the year, which does have some changes from the outlook we provided on last quarter's call.

Average annual loan and core deposit growth has been revised from a mid-single-digit growth rate to a low- to mid-single digit growth rate based on our results for the first six months of 2018 and our expectations for the remainder of the year.

While we believe a mid-single-digit growth rate is possible during the last two quarters on a linked-quarter annualized basis, it will likely not be enough to make up for the slower growth we've experienced through the first six months of the year.

Asset quality has been revised simply to recognize that the provision for credit losses has always been impacted by factors other than loan growth, including asset quality measures, risk rating migration, and the results of our allowance allocation methodology.

Noninterest income has been revised from a low-single-digit growth rate to a flat to low-single-digit growth rate based on our results for the first six months of 2018 and our expectations for the remainder of the year.

Finally, we are increasing our net interest margin guidance from an increase of 5 to 10 basis points to an increase of 7 to 12 basis points.

This improved outlook expectation for our margin mitigates the lower outlook for earning asset growth.

And with that, we will now turn the call over to the operator for questions.

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

Good morning.

Just a couple of questions.

I wondered first, just following up on loan growth, if you can talk about, Phil, talk about where the best opportunity for growth is.

Do you think the driver in the back half of the year will be C&I?

Will it be resi?

And then if you could also just talk about where -- in what bucket the growth came in originations in Philly.

Is that mostly CRE?

You know, we see growth I think in the second half really in all our portfolios.

I think resi will continue to grow.

I think installment loans, consumer loans will continue to grow.

We believe C&I will pick up.

And commercial real estate may be the toughest because that is where we are getting most of our payoffs and a price -- pricing competition is really tough.

In Philadelphia, we are getting -- our growth has been in both C&I and commercial real estate.

And probably a little heavier on the commercial real estate side.

Okay.

All right, thanks.

Then just maybe a question probably for Mark.

But in terms of the margin, the updated margin guidance, it seems like you are already sort of at that level, even at the midpoint of that level, maybe, where the margin came in in 2Q.

And you noted still you remain asset-sensitive.

So just wondering what are your thoughts for a margin impact from a given 25-basis-point rate hike at this point?

Yes, Frank, good morning.

Yes, you're right; we are up 9 basis points so far year to date, year over year.

And we did revise the guidance upwards.

As you know, what's going to impact that as much as anything are the positive betas in the back half of the year.

We had a positive beta of 8% in the first quarter of the year.

That positive beta in the second quarter of the year was 30%, so year to date, that blends down to 21%.

But as we have said all year, we've expected those deposit betas to pick up as the year progresses.

How much those pick up here in the third quarter I think will ultimately impact whether we see a couple more ticks of margin expansion like we've seen the last couple of quarters.

Or whether that pulls things in line being a little bit more flat.

As you also know, in the third quarter is when we tend to see an influx of public deposits.

So from an overall deposit mix perspective, we just have a little bit higher percentage of some higher cost money as well.

All right, thank you.

Chris McGratty, KBW.

Good morning, everybody.

So maybe a question on capital.

Given that the balance sheet is not growing as fast as some of your peers and your ROE is still running in excess of that, you talked about the buyback on the prepared remarks.

I guess, what's preventing you from either utilizing the rest of the buyback, given where the valuation is?

Or perhaps even coming back for more?

Yes, so that's a great question, Chris.

And I would say as we go through the second half of the year and if we don't see growth pick up that we could be more inclined to start buying back.

And we will keep -- the plan that we have in place runs through the end of the year and then we will be looking at whether we want to put another one in place, which I'd be surprised if we wouldn't.

Okay.

And can you remind us, on that point, the capital levels that you are looking at most closely when evaluating that decision?

Is it TCE?

And if so, what level is kind of where you guys are hoping it to keep above?

Yes, hey, this is Mark.

Our longer-term targets are 8.5% Tier 1 risk-based, 11.5% total risk-based.

As you know, we are significantly above those levels today.

Got it.

Great.

And Mark, if I got you, on the tax rate and the tax am, I think in the first half of the year, your quarterly tax am was around $1.6 million.

Correct.

It would suggest that based on the tax rate year to date, it would suggest -- correct me if I'm wrong -- that the tax rate would be higher in the back half of the year.

And would the offset be that number going lower on the am expense?

Maybe just walk us through those dynamics would be great.

We continue to be comfortable with the tax guidance, the previous tax guidance we had out there for our effective rate for the year.

And as far as the amortization on the tax credit investments, I think you should expect to continue to see the back half of the year be consistent with what you saw in the first half, about $1.6 million or so per quarter.

Okay, great.

Thank you.

Daniel Tamayo, Raymond James.

Good morning, guys.

I was wondering if you could just kind of talk about some of the drivers of the increased loan yield in the second quarter?

And then also if -- I don't know if you gave the number of the payoffs in the commercial real estate portfolio.

We don't -- first off, on the payoffs, we don't give a total number.

But in the second quarter, they were about $100 million more than what we had been experiencing in the past.

And $20 million of the $100 million was non-accrued loans.

In terms of the second half of your question in terms of the increase in loan yields, again, we have 78% of our loan portfolio is either variable or adjustable.

If you break that down further, of that 78%, 36% of that is tied to prime, 24% is tied to one-month LIBOR, 5% to 6-month LIBOR, and about 8.5%, 9% to a one-year LIBOR.

So as you've seen those rates go up, typically depending on when that variable rate loan resets, we usually see the full impact of that within about 30 days after the rate increase.

Okay, thank you.

And then on the deposit side, the Philadelphia branches that you will be opening next quarter, what's the -- are those expected to be a similar mix in terms of loan to deposits and kind of a one-to-one in terms of what you are running now?

Or are you hoping to have more of a deposit generation capability in Philadelphia?

I think we are projecting that it will be similar.

But typically, while you get some more loan growth ahead of the deposit growth.

But we expect it to be similar to the rest of our footprint.

And then in terms of kind of keeping up with the deposit, with the loan growth on the deposit side, any specials or programs you are running for time deposits or anything like that?

Yes, we've really for -- since the first quarter been running a money market special.

Okay.

That's all I have.

Thank you.

Russell Gunther, D.A. Davidson.

Good morning, guys.

I appreciated the color on the loan growth guide for 2018.

Just curious what you think the biggest potential headwinds out there are that would keep you from hitting that kind of mid-single-digit annualized pace in the back half of this year?

Our competition.

And that's primarily within CRE or C&I as well?

It's in both, but CRE probably a little more than C&I just because you have a lot of -- we have a lot of nonbank petition in CRE right now.

Okay, great.

And then just last one, switching gears for me here.

You guys mentioned the overall improving credit performance in the quarter; touched on the commodities portfolio.

As you look at the portfolio as a whole, are there any kind of pockets of weakness that have you concerned at this point in the cycle, be it an asset class or within your different geographies?

So I would say in general, no.

We continue to watch our agricultural portfolio closely.

Although I think we did see some nice improvement this quarter, we continue to watch that pretty closely.

Got it.

And then sorry, just one last one here.

With the kind of idiosyncratic credit event this quarter, did you guys undertake any sort of larger portfolio review within the loan book as a whole?

Yes, we've done that.

And we're pretty confident that it was an isolated situation.

Very good.

Okay, great, that's it for me.

Thanks so much.

(Operator Instructions) Matthew Breese, Piper Jaffray.

Good morning, everybody.

Phil, I wanted to go back to your loan growth commentary.

You noted commercial real estate is especially competitive.

You noted some of the nonbank players.

So I guess I wanted to get a sense anecdotally for how that is flowing through.

Are you seeing lower spreads?

Are you seeing relaxed credit and underwriting terms?

And then as a follow-up to that and switching a bit to C&I, are your borrowers in that line of business behaving the way you thought they would post tax reform?

And if not, what are you hearing from them?

So first off on CRE pricing, both of those items you mentioned, I would say yes to.

In addition to lower price or lower rates, we are also seeing very long-term fixed rates.

And we are seeing extended amortization.

We actually -- we recently saw a 10-year bullet loan.

And then help me with the other part of your question.

The other part of the question was C&I.

If we were to -- in our picture of the world post tax reform, I think we would have pointed to C&I borrowers potentially tapping lines of credit, growing their own businesses.

And I wanted to get a sense for is that showing up.

And if not, what are those (multiple speakers)?

You know, I think where we've seen it so far, Matthew, is that our corporate deposits are being spent.

So they are running; there is pressure on our corporate deposits.

The average balance per account is dropping.

And I think that is the first step in this process, and so the next step should be increased line borrowings.

Got it.

Okay.

And maybe as a follow-up to that, if we are going to see a little bit less loan growth, is there going to be any change in strategy for the securities portfolio?

Should we see some growth there as an offset?

This is Mark.

Good morning, Matthew.

I don't anticipate any change.

Our general philosophy for the investment portfolio is not as much for earnings as it is for liquidity.

We are a commercial bank that likes to take deposits and make loans.

So no, I don't anticipate any material changes to either mix or size of the investment portfolio over the next couple of quarters.

Okay.

And then on the reserve, over the past couple of years, it has come steadily down, slow but surely, down to 1.07% of total loans this quarter.

Where is the stabilizing point on that?

And if you can give us any color in terms of your own thoughts on modeling on CECL, that would be helpful.

So where that bottoms is a great question.

I don't know that we have an answer to it.

Our provisions, our numbers are driven by our models and which are -- they are impacted by a number of factors.

A big factor is the migration of our risk ratings and that continues to be positive.

And can you give us any color and sense for your --

We are still working on CECL.

I think we are making good progress, but I would say it's still a little early for us to give you any kind of guidance on what the impact to our provision would be.

Okay.

That's all I had.

Thank you very much.

All right, thank you.

And thank you all for joining us today.

We hope you will be able to be with us when we discuss third-quarter results in October.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program and you may all disconnect.

Everyone, have a great day.