Fulton Financial Corp (FULT) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fulton Financial Third Quarter 2019 Results.

(Operator Instructions) I would now like to hand the conference over to your speaker today, Jason Weber.

Thank you.

Please go ahead, sir.

Thank you, Justin.

Good morning.

Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the third quarter of 2019.

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 www.fult.com by clicking on Investor Relations, and then 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 today's presentation for additional information regarding these risks, uncertainties and other factors.

Fulton 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 refer to certain non-GAAP financial measures.

Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and Slides 12 and 13 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 third quarter financial performance and discusses our 2019 outlook.

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

Before I talk briefly about our third quarter performance, I wanted to highlight 2 important milestones we accomplished in recent months.

First, we consolidated our last remaining affiliate banks, Lafayette Ambassador Bank and The Columbia Bank into our largest banking subsidiary, Fulton Bank, in September.

This transaction completes our multiyear initiative consolidating all of our affiliate banks into Fulton Bank.

Second, in early October, the Department of Justice informed us that it completed its fair lending investigation of Fulton without taking any action against the company.

Achieving these milestones would not have been possible without the efforts of so many dedicated and hard-working Fulton employees.

Together, achieving these milestones will not only help unify our brand but also facilitate growth moving forward.

Now I'd like to talk about our third quarter performance.

Overall, we were pleased with our financial performance for the third quarter.

We continue to execute on our strategic initiatives such as focusing on growth, efficiency and profitability to maximize shareholder value.

Loan growth accelerated towards quarter end, and as a result, period end loan balances increased $318 million, or 7.6% linked quarter annualized, much higher than the $132 million increase in period end balances during last year's third quarter.

Our growing commercial pipeline throughout 2019 translated into solid loan growth in our commercial business.

Growth also benefited from timing of a few large loans that were anticipated to close in the second quarter and closed in the third quarter.

Commercial originations increased linked quarter and year-over-year, while prepayments were down linked quarter.

Growth was spread throughout our footprint but primarily in our Southeastern Pennsylvania and Delmarva regions.

Line utilization increased linked quarter after 2 consecutive quarters of declines, and it's slightly above the level we saw in the third quarter of last year.

Our commercial pipeline increased slightly linked quarter and remains approximately 25% higher than this time last year.

So we remain cautiously optimistic about our growth prospects for the remainder of 2019 and into 2020.

Despite the growth we saw this quarter, the lending environment remains extremely competitive.

While we compete on price in certain situations, we remain disciplined on credit and structure.

Moving on to our consumer business.

We continue to see strong growth in our residential mortgage portfolio.

With the drop in rates, we saw more refinance activity during the quarter.

Approximately 75% of our originations during the quarter were adjustable rate mortgages, and growth was spread throughout our footprint.

Our indirect auto portfolio continues to grow at a solid pace.

Growth linked quarter and year-over-year was primarily in our Pennsylvania markets, and to a lesser extent, in our New Jersey and Delaware markets.

As we mentioned in the past, Philadelphia and Baltimore represent tremendous long-term growth opportunities for Fulton.

And in the third quarter of 2019, we opened our first financial center in the downtown area of Baltimore.

Turning to credit.

Overall asset quality continues to be relatively stable.

We are mindful of where we are in the economic cycle, and are continuing to assess and analyze the loan portfolio for signs of weakness or stress.

Turning to fees.

Our commercial loan interest rate swap income benefited from strong commercial originations and was up linked quarter and year-over-year.

The pipeline remains strong and it has increased every quarter in 2019.

Mortgage banking income increased linked quarter and year-over-year on both improving spreads and higher originations driven by a pickup in refinance activity and the overall rate environment.

The mortgage pipeline remains strong and is up 24% year-over-year.

Our wealth income was down slightly linked quarter due to overall market performance and seasonality of fees, but increased year-over-year.

Brokerage revenue increased approximately 10% year-over-year and continues to be one of our fastest-growing segments in the business.

We recently had the opportunity to purchase a small wealth management business located in the Harrisburg area of Pennsylvania, adding approximately $70 million of assets under management to our brokerage platform.

We have now completed 2 small wealth management acquisitions of this year, which has added approximately $320 million to assets under management and administration to our brokerage platform, and we continue to look at organic and inorganic opportunities to grow our wealth business.

Now turning to expenses.

The efficiency ratio for the third quarter was 63.6%, compared to 64.2% in the second quarter.

As we look into the fourth quarter, in 2020, we see opportunities to become more efficient as we continue to optimize our delivery channels and upgrade our origination and servicing platforms.

On the capital front, we've paid a quarterly common dividend of $0.13 per share in the third quarter.

We repurchased approximately $48 million of common stock during the third quarter, completing our $100 million share repurchase program announced in March of this year.

Recently, our Board of Directors approved a new $100 million share repurchase program, which is authorized through December 31, 2020.

And 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 would discuss are with the second quarter of 2019.

Starting on Slide 5, earnings per diluted share of this quarter were $0.37 on net income of $62.1 million, an increase of $0.02 or 5.7% from the second quarter of 2019 and consistent with our third quarter 2018.

I'll now dive a bit deeper in the components of our earnings and give you some additional color.

Moving on to Slide 6. On our net interest income of $161.3 million, a decrease of $3.3 million linked quarter, driven primarily by a 13 basis point decrease in our net interest margin, partially offset by the impact of an increase in interest-earning assets and an additional day of interest accruals during the quarter.

Growth in average loans linked quarter was $120 million or an annualized loan growth rate of 3%.

Average deposits increased $575 million or 3.5% linked quarter mainly due to seasonal increases in municipal accounts.

Our loan and deposit growth was more pronounced in September, which resulted in higher growth rates period-to-period.

Period-end loans grew $318 million or 1.9% linked quarter and $762 million, or 4.8% year-over-year.

Ending deposits grew $954 million or 5.8% linked quarter and $1.1 billion or 6.7% compared to the prior year.

The net interest margin decrease was driven by 2 25 basis point Fed funds rate decreases, which occurred during the quarter.

Due to the variable nature of our loan portfolio, our third quarter loan yields dropped more quickly than our deposit costs.

Going forward, we would expect our deposit costs to decline from third quarter levels due to runoff of our municipal deposits as well as planned deposit rate decreases that are taking place in the fourth quarter.

Mainly as a result of the rate decreases, average loan yields in the third quarter of 2019 declined 14 basis points, and average yields on interest-earning assets were down 12 basis points.

Our cost of funds increased by 1 basis point due in part to the large inflows of higher cost municipal deposits during the quarter.

Turning to Slide 7. Our overall credit performance in the third quarter was relatively stable.

Nonperforming loans decreased $11.7 million to $136 million.

Nonperforming loans as a percentage of total loans decreased to 81 basis points at the end of the third quarter as compared to 90 basis points at the end of the second quarter.

Net charge-offs were $6.3 million for the quarter as compared to net recoveries of $1.5 million in the second quarter.

The provision for credit losses for the third quarter decreased by $2.9 million from the second quarter to $2.2 million.

The allowance for credit losses as a percent of loans decreased to 1.04% from 1.08% at the end of the second quarter.

However, due to the improvement in our nonperforming loans, the coverage of the allowance to nonperforming loans increased to 127% from 120% last quarter.

Moving to Slide 8. We saw another solid quarter with respect to fees as our noninterest income excluding securities gains grew $1.2 million or 2.2% linked quarter.

Consumer banking income increased approximately $1 million from the prior quarter primarily in card income.

Mortgage banking revenues increased and remained strong for the second quarter in a row.

Gain on sales were higher than last quarter but were largely offset by higher amortizations on mortgage servicing rights as mortgage rates decreased during the quarter.

Wealth management fees were down slightly linked quarter but up 6.1% year-over-year.

Entering the third quarter of 2019, we completed a balance sheet restructuring involving the sale of approximately $400 million of investment securities and a corresponding prepayment of certain FHLB advances.

These transactions impacted both noninterest income and expense, with $4.5 million of investment securities gains being offset by $4.3 million of prepayment penalties on those FHLB advances.

It is expected that this restructuring will contribute approximately $4 million to net interest income over the coming year.

Moving to Slide 9. Noninterest expenses were $146.8 million, an increase of $2.6 million from the second quarter.

Total expenses related to charter consolidation activities were $5.2 million, which was comparable to the second quarter.

Other notable items impacting expenses in the third quarter included the previously mentioned FHLB advanced prepayment penalty, which is recorded in other expenses.

We also recognized the $2.6 million of FDIC insurance credit earned during the quarter as a result of the deposit insurance funds reaching a specified level.

Net occupancy expenses also decreased during the third quarter, largely resulting from improvements in property management costs.

For the third quarter of 2019, our effective tax rate was 13.9%, which is a decrease from 14.2% in the second quarter.

Slide 10 displays our profitability and capital levels over the past 5 quarters.

Returns on assets and equity were higher for this quarter due to net income growth.

Our tangible common equity ratio remained strong.

Lastly, we were updating some of our outlook for 2019 as shown by the underlying items on Slide 11.

For our net interest margin, we were pleased to start off the year with margin expansion that was stronger than we had guided.

However, the recent rate decreases and the shape of the yield curve has caused us to change our outlook for the balance of the year.

We are now expecting our net interest margin to decreased 3 to 5 basis points full year 2019 versus our full year 2018 net interest margin, which was 3.4%.

We expect our net interest income to grow at a low single-digit growth rate.

This provided guidance assumes 2 more 25 basis point rate decreases to occur in October and December of this year.

For noninterest income, based on our year-to-date results and our expectations for the remainder of the year, we are increasing our outlook to a high single-digit growth rate for the full year 2019.

With that, we'll now turn the call over to the operator for questions.

Justin, your help, please?

(Operator Instructions) And our first question comes from Frank Schiraldi from Sandler O'Neill.

I just wanted to start off with the NIM guidance in terms of, if I just do the math, it seems like 4Q, you're anticipating another 10 basis points in compression linked quarter.

And so just kind of -- just wanted to see if you can talk a little bit about the factors there.

I know you mentioned 2 rate cuts, I don't recall exactly when in December that would be, but I guess, that would be -- that December rate cut would be somewhat impactful, but less so obviously than the October rate cut.

And then if you can just -- again, you talked in the past you've offered what you thought a given 25 basis point rate cut would -- due to the NIM, and I think you've talked about 2 to 3 bps of compression, if that's still reasonable in sort of a normalized basis?

Yes, sure, Frank.

A couple of initial thoughts on margin for this quarter, and then I'll try to answer your question directly.

When you look at the 13 basis points of linked quarter decline that we had, we think that on a core basis, we think that number is more like 8 to 9 basis points, and there are 3 factors contributing to that.

First is, as you may recall, in the second quarter, we had net recoveries instead of net charge-offs.

So as a result, we had more nonaccrual interest income that was recorded in the second quarter [under what] we typically see.

That decline from 2Q to 3Q, just the decline in nonaccrual interest income, was about $1.5 million.

So that had an impact.

We also saw our noninterest assets grow by $74 million linked quarter, which is principally due to when we purchased some bank-owned life insurance during the beginning into the third quarter.

We were under-weighted in that asset class.

That had an impact, obviously, on margin but will improve the income going forward.

And then lastly, as the municipal deposits, which as you know, we always tend to see an influx, we actually saw a high watermark in municipal deposits in the month of August.

As the month of September, we still have just under $2.5 billion, and about $1.5 billion of that is indexed.

So historically, we're about 50% indexed, but right now, we're closer to 60% indexed, so that tends to be a little bit higher-cost [money] . So to that kind of, again, if you take those 3 factors, we think we're more, on a core basis, about 8 or 9 basis points.

Now fast forward into the fourth quarter and our guidance, I think it's going to depend on clearly on how much we're able to move deposit rates down in the fourth quarter has the most significant impact on that guidance.

We -- when the first rate cut occurred in July, it takes a couple of weeks to really be able to react to that and get that to sort of start cycling through both in promotional rates, but then also looking at the back book on the deposits that you have.

So if we do not see 2 rate decreases, clearly, if we don't see one in December, that would have less impact and if we don't get news here at the end of October.

But I think, early on, Frank, I think the 2 to 3 basis -- I think 3 basis points is still a pretty good number.

Another way to think about our net interest income is that we are just shy of $20 million in interest-earning assets, and we think that a 25 basis point rate cut on an annualized basis is between $6 million to $8 million.

So that would be kind of 3 to 4 basis points.

I think, longer term, we're getting ourselves down into that 3 and maybe even -- it could be down in the 2 basis point range in the latter part of a decreasing cycle as our deposit betas on the way back down to catch up.

But in the early stages here of rate decreases, just like our deposit cost lagged on the way up, there's going to be a natural lag on the way back down as well.

Okay.

And then just one other one if I could.

On the buyback, you guys have been quite aggressive, which has been a nice tailwind.

And just wondering if you see you -- you announced another program, as you mentioned.

Would you expect to be more measured in this program?

Or could you continue to be just as aggressive here?

And sort of connected to that, just TCE ratios have been pretty flat over the last several quarters and just wondering if you could see that dip down a little bit even in order to transact that buyback?

Yes.

So Frank, the pace of the buyback, as we've said in the past, is contingent upon a lot of things, and -- one of the main things is our growth rate.

We did see a higher growth in third quarter and anticipate that, that may continue.

So just that one factor could slow down the pace of the buyback this year.

Okay.

And then on capital, I mean is 8.5% kind of where you -- I know in the past, you've been accreting capital and the offset has been the buyback.

I mean is 8.5% a pretty good level to assume, pretty good...

Yes.

I think we're comfortable between 8% and 8.5%.

And our next question comes from Casey Haire from Jefferies.

A couple more follow-ups on the NIM.

Just to get a sense on the funding side, could you give us a -- any idea as to where deposit cost sort of exited the quarter versus that 84 bps in the third quarter?

Where they exited?

Help me out on what you mean by that.

Like so 84 bps is the average for the quarter as of 9/30.

What was that number -- deposit cost at peak?

Right, right.

In September, they were still pretty close to that quarterly average.

Because, again, you've got the influx -- you've got the influx of the municipal, the deposit began high watermark in August, you start to see those outflows in September, but then that's going to be a little bit more pronounced as municipalities end up spending their tax rolls.

So obviously, September and August were both pretty similar.

Now the one thing we did see, which I think gives us confidence that the third quarter is higher than what we expect the fourth quarter to be is we did see for some of our promotional CDs that we were offering in the month of July.

Those we've significantly pulled back what those new money rates have been.

And as a result, we've seen a significant flip in terms of what our new money rate is and what we're putting on CDs versus what's rolling off.

Got you.

Okay.

And the balance sheet repositioning, appreciate the color on the $4 million per annum.

What -- was that late in the quarter?

And then sort of what are the securities that were sold off [or what's] the yield there, and then the rate on the borrowings that you guys prepaid?

Yes.

So most of it occurred later in the quarter.

We did do a smaller piece of that early in the quarter, about $100 million, but about $270 million, $280 million have occurred later -- late in the quarter.

And in terms of what we pulled off, if you took the investments that we pulled off and the borrowings that we pulled off, it was actually a negative carry of between 5 and 10 basis points.

And then we don't run an investment portfolio for just wholesale leverage, I mean we need it for liquidity purposes.

So what we put back on was that a positive carry, obviously, about 100 basis points in the forward guidance we gave.

Okay, great.

And just lastly, on the capital management front, can you just give us updated thoughts on the M&A landscape?

And is that active, or do you see a lot of opportunities within your footprint?

It's somewhat active.

I think we see opportunities within the footprint.

I don't know that I would say we see a lot right now, but there are some opportunities.

And we're going to take a look when it's appropriate.

And our next question comes from Charles McGratty (sic) [Chris McGratty] From KBW.

Mark, I guess, if I can just follow-up on the M&A question.

Could you remind us, markets, I think in the past you've said fill in for scale, maybe size and kind of accretion metrics that might be the boundaries that you might be looking at?

Yes, so we continue with the strategy of filling in for scale.

And those places exist in every state that we're in, Chris.

As far as size, I would say, between $500 million and $8 billion would be a range, and I think we would like to start off with a smaller one.

Great.

And in terms of kind of hurdles, earnbacks, accretion, it's been a while since you guys have done a deal, what's kind of the parameters you would judge yourself?

Yes, so IRR in excess of cost of capital, accretive to earnings within the first year combined operations.

In terms of tangible book value dilution and earnback, that becomes a little bit contingent on the size of the deal.

I would say, for a smaller transaction, we would want it to be in the kind of 2- to 3-year range earnback for a larger transaction.

We would be willing to go up to 5, but that would be something that would be pretty, at the top end of the range, Phil had articulated.

So typically, for us, most transactions in the smaller end of that range would be in the sort of 2- to 4-year earnback ratio.

Okay, great.

And if I could just ask one on credit.

Charge offs were a little higher, not high at all, but linked quarter a little bit up.

Any color on the initial tie up, or this is currently or previously a nonaccrual or any kind of color on the portfolio?

Well, the biggest charge-offs were on loans that were already on nonaccrual.

And was there an industry commonality?

Well, I think we had talked about in the past, a large credit that we have put on nonaccrual that was a manufacturing company, in the food industry, and the biggest charge-off was on that credit.

(Operator Instructions) Our next question come from Russell Gunther from D.A. Davidson.

Appreciate all the color on the loan growth strength in the quarter.

I wanted to circle back to your comments about the opportunities in Philadelphia and Baltimore.

Maybe if you could share with us just how hiring is going in that market, your ability to attract talent [you guys are really up and coming there,] is there the ability for that contribution to kind of push your prior guided growth rate in low to mid-single digits even higher?

So a lot with the growth rate is going to depend on what happens in the economy.

But we now have 19 people in Philadelphia in addition to the folks that we have in our branches.

So out of 19, 11 of them are C&I, 2 are CRE and then just various other folks.

And in Baltimore, you have a team of -- just specifically in Baltimore, on the commercial side, we have probably 3 folks.

Got you.

Okay, appreciate that.

And then circling back to the asset quality question.

I appreciate your thoughts on what occurred in the quarter, but if you could just give us a sense for the outlook going forward.

Is there anything, any particular portfolio, geography that is of concern to you, or flashing even just a yellow warning sign?

In particular, any update on your Ag portfolio?

So certainly, the Ag portfolio, I think, it's stabilized.

I mean we've had some of increases in milk prices, which are helping those folks.

So I think we actually feel a little better about the Ag portfolio today than we probably did 12 months ago.

And then I can't -- we can't really look at any other specific industry that we're seeing a lot of negative trends on.

So we're just watching everything closely.

You always have 1 or 2 new credits pop-up in the quarter, but I don't think it's tied to any type of industry.

And then last one, guys, for me, a bit ticky tacky, but in the expense detail, the about $1 million dollars step-up in intangible amortization, is that a base that will amortize lower?

Or is there anything that occurred why that would revert back to kind of first quarter, second quarter levels?

So about $990,000 of our consolidation costs was the write-off of the trade name of our Bank in Maryland.

So that is a...

[And that should have been...]

Correct.

That will come back down.

That's a onetime write-off of a trading receivable asset.

(Operator Instructions) Next question comes from Daniel Tamayo of Raymond James.

So I think you've mentioned that loan growth accelerated in September.

Is there anything unusual driving that?

Or have you seen an uptick in demand?

No, we've had really good backlogs and we've had good demand.

Just it's timing of settlements is the best way I can explain it.

Okay.

And then I think you just talked about being really comfortable with where credit is right now.

But nothing, I'm assuming -- am I appropriate to say there's nothing out there that's causing you any concern enough to change the standards in terms of how you're lending?

I would say no.

And I am showing no further questions.

I would now like to turn the call over to Phil Wenger, Chairman and CEO.

Thank you, everyone, for joining us today.

And we hope you'll be able to be with us when we discuss fourth quarter results in January.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may all disconnect.