Fulton Financial Corp (FULT) 2025 Q2 法說會逐字稿

Welcome to the Fulton Financial second-quarter 2025 results conference call. (Operator Instructions) Again, please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Jozwiak, Director of Investor Relations. Please go ahead.

Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the second-quarter ending June 30, 2025. Your host for today's conference call is Curt Myers, Chairman and Chief Executive Officer. Joining Curt is Rick Kraemer, Chief Financial Officer.

Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released 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 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 slide 16 through 22 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, Curt Myers.

Well, thanks, Matt, and good morning, everyone. For today's call, I'll be providing a few high-level comments as well as some operating highlights for the quarter. Then Rick will review our financial results in more detail and discuss updates to our 2025 operating guidance. After our prepared remarks, we'll be happy to take any questions you may have. We are pleased with our strong second quarter operating earnings.

Our community banking strategy continues to attract and retain valuable customers. We are delivering great customer outcomes, which translate into strong results for our shareholders. We are also proud to reinvest in our communities making a positive impact in changing lives for the better. This impact is made clear by the many stories in our corporate social responsibility report, which we released in June, and you can find on our Investor Relations website.

So let me turn to the numbers. Operating earnings of $100.6 million or $0.55 per share represents a $0.03 linked-quarter increase and a record for the company. These results demonstrate the impact of consistent positive operating leverage while maintaining a strong balance sheet. Total revenue increased linked-quarter as we delivered growth in net interest income and fee income. Effective expense management continues to contribute nicely to our overall profitability as well.

Combining those positive trends, our quarterly efficiency ratio was 57.1%. Our operating return on average assets increased to 1.3% and operating return on average tangible common equity increased to 16.26%. With these results, we were able to deliver our first $100 million operating net income quarter in company history.

During the quarter, we were opportunistic and repurchased shares while growing tangible book value per share of 9.5% on a linked-quarter annualized basis. Our strong performance, disciplined approach to balance sheet management, diversified business model and strong liquidity and capital position the company for continued success. Now let me provide a few more comments on the quarter.

Total loans grew $150 million or 2.5% as originations were solid. This growth was more than offset the strategic runoff of our indirect auto portfolio and managed reductions in certain commercial loans. Based on our year-to-date performance and our origination trends, we continue to expect low single-digit loan growth for the year.

Turning to deposits. We remain focused on balancing long-term deposit growth with prudent interest cost management. During the quarter, we saw a modest decline in balances, largely due to seasonal trends. Based on new customer acquisition and overall customer sentiment, we continue to be positioned for long-term deposit growth. Turning to the income statement.

Revenue growth was driven by a strong net interest margin and a solid linked-quarter increase in non-interest income. All non-interest income categories grew linked quarter. Wealth Management hit an all-time high in quarterly revenue. We're adding team members and continuing to grow our customer base. Commercial banking fees also hit an all-time high as customer activity continues to drive growth. Consumer Banking and our residential mortgage business delivered solid linked-quarter growth as well.

Overall, our non-interest income businesses continue to make a consistent and meaningful contribution to overall revenue and we have a solid strategy for continued growth. Lastly, let me touch on credit. Overall, we remain cautious given general economic and geopolitical uncertainty. However, we continue to see steady performance in our portfolio. Charge-offs and our provision expense were down linked-quarter.

We experienced an uptick in accrual -- nonaccrual loans. However, these balances remain in line with recent periods. Overall, our coverage ratio remains appropriate given our cautious outlook.

Now I'll turn the call over to Rick to discuss the details of our financial results and provide comments on our 2025 operating guidance in a little more detail.

Thank you, Curt, and good morning. Unless I note otherwise, the quarterly comparisons I discuss are with the first-quarter of 2025.

Loan and deposit growth numbers I reference are annualized percentages on a linked-quarter basis. Starting on slide 4. Operating earnings per diluted share was $0.55 or $100.6 million of operating net income available to common shareholders. Revenue growth, a stable balance sheet and an increase in net interest margin offset a modest increase in operating expenses driving positive operating leverage when compared to the year ago period.

Total end-of-period loans increased $150 million or 2.5% during the quarter, primarily in our residential mortgage portfolio, home equity portfolio and certain commercial categories. Deposits declined $191 million or 2.9%. Growth of $120 million in money market balances and an increase of $89 million in wholesale channels were offset by seasonal declines in municipal balances of $135 million and non-interest-bearing balances of $98 million.

Our non-interest-bearing balances ended the quarter at 20% of total deposits. We expect to see municipal balance inflows in line with historical trends in the third quarter. With these results, our loan-to-deposit ratio ended the quarter at 92%. As part of our ongoing balance sheet management, we added $117 million of securities to offset investment portfolio cash flows and to maintain our on-balance sheet liquidity.

The weighted average coupon on new purchases this quarter was approximately 5.44%. These additions carried an effective duration of approximately 3.2 years. The impact of these balance sheet trends are shown on slide 5.

Net interest income on a non-FTE basis was $254.9 million, a $3.7 million increase linked-quarter while net interest margin increased 4 basis points to 3.47%. Loan yields remained steady at 5.86%. While fixed rate asset repricing represented a tailwind during the quarter, accretion interest attributable to the acquired Republic portfolio declined $1.7 million linked-quarter to $11.4 million, offsetting most of that benefit.

For the quarter, our average cost of total deposits decreased 5 basis points to 1.98%. Through the cycle, our total deposit beta has been 28%. We continue to identify opportunities and manage deposit costs with discipline and to be supportive of our overall balance sheet growth.

As a reminder, we had $195 million of subordinated debt reset to floating rate in late March. Repricing from a fixed 3.25% to approximately 6.6%. This security is SOFR-based and will float at 2.3% over three-month term SOFR.

Turning to slide 6. Non-interest income for the quarter was $69.1 million. The linked-quarter increase was broad-based. When excluding the benefit from equity method investment adjustment of $2.7 million in the first quarter of 2025, fee income increased 7% linked-quarter.

Non-interest income as a percentage of total revenue remained at 21% during the second quarter. Moving to slide 7. Non-interest expense on an operating basis was $187.6 million, an increase of $4.8 million linked-quarter. As we indicated last quarter, we expected operating expenses to fall in the $190 million to $195 million per quarter range for the remaining three quarters of 2025.

While the second quarter was below that range, we are confirming the range for both the third and fourth quarters of 2025. When looking at our expense base, items excluded from operating expenses as listed on slide 7 include $5.5 million of core deposit intangible amortization and a $270,000 benefit of other items.

Turning to asset quality. Provision expense declined approximately $5.3 million linked-quarter to $8.6 million. As Curt mentioned, modest loan growth, combined with no material changes to our outlook, contributed to lower provisioning in linked-quarter. Our allowance for credit losses to total loans ratio ended the period at 1.57% and our ACL to non-performing loan coverage was 177%.

The slide 9 shows a snapshot of our capital base. As of June 30, we maintain a solid capital position that provides us with future balance sheet flexibility. During the quarter, we repurchased 522,000 shares at a weighted average price of $16.09. Including repurchases, internal capital generation added $55 million in total equity. AOCI ended the quarter flat at $272 million and our CET1 increased to 11.3%.

On slide 10, we are updating our operating guidance for 2025. Considering more recent events and additional economic data, we have updated our rate forecast to now include two 25 basis point rate cuts in 2025, one in September and one in December.

This is down from four assumed cuts previously. In addition to this macro assumption, we have made the following adjustments to our guidance, increasing net interest income to a range of $1.005 billion to $1.025 billion. We are lowering provision expense to a range of $50 million to $70 million. There is no change to the fee income range remaining at $265 million to $280 million.

We are lowering our operating expense to a range of $750 million to $765 million. We are increasing our effective tax rate to a range of 18.5% and to 19.5%. And lastly, lowering our estimate of nonoperating expenses from $14 million to $10 million.

And with that, I'll now turn the call over to our operator, Gigi, to open up for questions.

(Operator Instructions)

Daniel Tamayo, Raymond James.

Thank you, good morning everyone. Maybe just starting on the expense guidance. You had a nice quarter, and you talked about kind of keeping the back half in that $190 million to $195 million range. And you lowered the overall 2025 range as well.

But I guess just curious, how you see the pace in the back half of the year getting there? It's been a -- you had kind of a steep decline in the first quarter and then there's been a little bit of a ramp since then implied in the back half of the year as well. So just curious kind of if there was -- if there's like some help you can give us on geography and timing of the increase in the expenses in the back half?

Yeah, thanks, Danny. Look, I think you're directionally right. All else equal, I think the range of $190 million and $195 million should land below the midpoint of that. A little bit of timing just on day count alone, obviously, additional day, but recognize the magnitude of increase in 2Q had a lot to do with merit in the second quarter, which accounted for a couple of million dollars of the increase. So you don't have that kind of step up in 3Q and 4Q.

I think what we're trying to do is provide a little bit of optionality for some initiatives that may start in the second half, so which could increase a little bit. But I don't expect geographically, I guess, on the expect line to see any major outlier moves for the second half.

Okay. So if you end up kind of below that midpoint then that points us to, I guess, below the midpoint of the overall range for the year. Is that a fair way to think about it?

That's a fair way to think about it. With the caveat of there are obviously -- we're leaving ourselves a little room to start certain projects in the second half, which could incur costs more immediately and move that up a little higher.

Okay, all right, fair enough, appreciate that color. And then kind of a similar question on the fee income guidance. I just assume kind of a modest pace of increase in the back half gets us to kind of above the midpoint of the guidance that you guys have in there.

It's been certainly a nice quarter, a nice year of growth on the wealth management side. But I just want to make sure as we're working our way through the models that we're not missing any kind of onetime increases that you think may back off and cash management looks like it was pretty strong in the second quarter. Card income bounced back. But just as we look through the fee income side, if there's anything that you'd point us towards in terms of moving parts in the back half of the year?

Yeah, Danny, the second quarter was good across the board, as you mentioned, in fee income. As we look forward, we do have good strategies in place. As we look forward, if we get that kind of consistent outperformance in each category, we're going to trend to the top end that range. If we hit any headwinds in any one of those business units, we would trend to the midpoint or low end of the range. We feel pretty good about the overall outlook there.

And again, that's one of the outlook items that we did not change. So we think we are tracking as expected and are pretty happy about the quarter and the consistent performance in each of the fee income categories.

Great. All right. Well, thanks for all the color. Appreciate it, guys.

You bet.

David Bishop, Hovde Group.

Yeah, good morning, gentlemen.

We did.

Hey, just curious, for Rick, maybe, just bring us up to speed on the status of the loan pipeline. Just curious what you're seeing and hearing from your relationship managers and your commercial clients if we're starting to see any impact from some of the uncertainty from tariff talk starting to impact pipeline and loan demand? Thanks.

Yeah, pipeline linked-quarter is up. So we feel that, that's encouraging in this environment. But again, we still have the pull-through rate being below historical norms as customers are cautious about new projects, the more certainty we get in the marketplace, whether it's taxes or tariffs or all of the many things that you could point to.

We're hoping that, that pull-through rate increases, and we get some tailwinds for loan growth linked-quarter. We were pleased with our loan growth in the second quarter and we're hoping that continues. But pipelines are up, and we're really monitoring pull-through rates. It really comes down to customers deciding to spend that money and move forward with that project.

Got it. And then a follow-up, Curt, maybe just remind us, appetite for M&A here with Republic in the rearview mirror. Just curious where any sort of M&A focus might be sort of geographically and maybe size parameters? Thanks

Yes. So our M&A strategy remains the same. We will stick to that strategy. As a reminder, we look at community banks in the $1 billion to $5 billion range really the focal point for our strategy. They add to the company.

We're predominantly focused on end market, and we think those opportunities would be additive. And then we would look at bigger deals, but they're very -- there's a few of them, so we monitor that. But our primary focus remains the same. I think the key message is, as usual, we will be disciplined in metrics, and we'll be disciplined on strategy.

Perfect. Thanks.

David Konrad, KBW.

Hi, good morning. Just want to talk a little bit about the deposits and the outlook there. This quarter, you saw about 3 bps increase in savings, but really good growth and able to push down really expensive broker deposits. So just wondering as you kind of look at the NIM outlook, kind of your ability to continue to remix the deposits?

Yeah, thanks, David. I think there's a couple of things to consider when it comes to the cost. Obviously, we do have some seasonality in our portfolio driven by the municipal kind of inflows and outflows. And at times to offset that, we do utilize some more wholesale methods and more costly method than short term.

So that obviously has a mitigating effect on lower cost. I think we still kind of there's still -- as rates stay higher, this drift that is occurring in non-interest-bearing. So that's a trend on mix, you're kind of consistently fighting.

But we are seeing, I think, increased competition across the board for deposits more recently. And candidly, our desire is to fund all of our future loan growth with customer deposits. So that may amplify a little bit. So our betas are slowing. I don't -- it may be too early to say there's a trough in deposit costs, but I think we're closer to the bottom, barring any future rate cuts.

Got it thanks. And then on the NII guide, I guess it feels like if you hold things flat here for a couple of quarters, you'd be kind of the midpoint, above the midpoint and towards the higher end. So just maybe some comments on the exit rate of this year. And I think you have two cuts in, but the December cut probably doesn't matter too much. So maybe just some thoughts on the exit rate of NII?

Yeah, I -- look, I think, obviously, what I just mentioned on the funding side is a little bit of a headwind. I think we fully recognize the tailwind from the fixed rate asset repricing. What I would say there is, though, there are also competitive pressures that haven't flow at any given time, which can impact yields and spreads. So it's a tough business, and spreads are not always expanding.

So I think you'll see a natural -- assuming no Fed moves, you see this kind of steady state, modest growth in NII from here on out. But obviously, there's lots of things from the macro that can change that.

Okay, thank you.

Matthew Breese, Stephens Inc.

Good morning.

Hi, Matt.

I was hoping we could go back to the pipeline for just a second, maybe discuss the components. More recently, we've seen growth in the form of commercial real estate and resi. Historically, I know Fulton has been more of a C&I-focused type bank. So I wanted to get a sense for what we might see in terms of near-term loan growth?

And then secondly, Rick, you had mentioned spreads are not always constant. What are you seeing for new loan spreads? Are you seeing competition kind of erode spreads in the hunt for growth?

Matt, I'll first respond just on growth and strategy. We're very committed to a diversified loan book. I think that served us well over time. So we're looking to grow each category as appropriate from a risk standpoint. Quarter-to-quarter, that ebbs and flows based on where loan originations are and opportunities are.

You mentioned C&I loan growth, we are focused on C&I loan growth. It's a good business for us and drive treasury and a lot of our other business lines. So strategically, C&I is really important. C&I customers, it's very competitive right now, and it also is where they're dealing most with tariffs and costs and uncertainties.

So we're looking at each segment trying to grow that prudently and responsibly. And we think we have opportunities in each. We have market disruption. We've got good pipelines. So I think we can grow each category, but you're going to see quarter to quarter, maybe even year to year, our ability to grow certain segments more than others. But again, the strategic focus is to grow each segment appropriately.

Maybe, Matt, I'll just comment quickly on spreads. I think what I would say is spreads are still healthy and overall yields are still healthy. But when we go back maybe to the third and fourth quarter of last year, you probably see new origination spreads and we were in the 7 plus. And so over time, that was probably unsustainable in certain categories. So you're seeing, I think, quarter-over-quarter compression on new origination yields of around [1/8% to 25%] depending on what portfolios you're looking at.

Now that is a little bit choppy, and this is probably more normalized, but recognizing that just industry pressure and competitive pressure puts overall pressure on that for everybody.

Got it. Okay. Hey, And Rick, you had also mentioned and it's in the release too, but accretable yield step down. Should we use this $11.4 million as a new starting point? And maybe you could just help us out for the new trend? Is it down and to the right, what does the current deal look like three or four quarters from now?

Yeah, I think $11 million to $12 million is a reasonable range, assuming some level of prepayments. Obviously, we are there is an estimate there in terms of prepayment speeds. If you had no prepayments, that number would be closer to $10.5 million to high $10 million.

And then last one for me. You bought back some stock this quarter. You still have, I think, around $100 million, $125 million repurchase authorization. But I noticed that, that authorization also includes preferred and sub debt. You've mentioned sub debt is now floating or a portion is now floating.

Curious if there is an appetite, one for additional common repurchases or alternative forms of capital repurchase, including that sub debt? What circumstances would you kind of execute on this?

Yeah, so the overall capital planning strategy is the same. We want to support organic growth. We really like organic growth to continue to -- the growth rates continue to improve. So that's always the first use of capital. And then any corporate initiatives that we would want to invest in, and then we would get to buybacks. And we look at those opportunistically.

We had some opportunity in the second quarter. We used about $10 million of that. We have $115 million remaining for stock buybacks or other uses. So we are evaluating that -- as we move forward, it really depends on outlook and overall capital and balance sheet strategy.

Great. That's all I had. Thanks for taking my questions.

Thanks, Matt.

Manuel Navas, D.A. Davidson.

Hey. How would you describe like kind of the consumer pipelines. That was pretty strong this quarter. Is that still going to have some seasonality or kind of carry over to the third quarter? And with the pipeline building on commercial, are you going to kind of see a handoff in better growth there in the back half of the year? Just kind of talk about those dynamics, please.

Yes, so there's definitely some seasonal effect on the consumer business. The second quarter is good home buying opportunity projects, consumer projects driving the home equity we referenced both of those categories growing nicely in the second quarter. So there is some seasonality in the business, but all of those underlying businesses were focused on attracting customers, adding new customers and driving business organically. So I think there's a base level of growth in each of those businesses.

And then it will be either more significant or lower quarter to quarter based on seasonality. We really didn't see anything specific in the second quarter that would be an anomaly. That was a good, solid second quarter consumer growth.

Is -- kind of shifting over to pretty strong performance in fees and OpEx. Could you kind of map out if any of that outperformance has been kind of driven by the FultonFirst initiative?

On the fee side, you talked about a little bit before. It was a good quarter for us. We grew in each category. We feel we have just good underlying strategies there. There are some FultonFirst initiatives that we're focused on accelerating growth over time.

It's hard to separate those from core business. But as we move forward, the growth related initiatives for FultonFirst will show up in accelerating growth rates in certain categories. There's really not anything specific FultonFirst to that growth rate that we would call out. It's just really managing those businesses in a way that our long-term growth trajectory is higher than expected.

On the expense side?

Yeah, on the expense side, it was about -- we're about $8.5 million of net realized benefit from FultonFirst in 2Q. So still remain well on track, obviously, just annualizing that number well ahead of our original $25 million net save for 2025. So I don't -- I wouldn't necessarily say that the program in total has grown, I think a lot of that is just getting pulled forward in 2025 versus '26.

That's helpful. Any -- you talked about credit trends being very solid. There was a little bit of tick up in NPLs, I think, in construction. Any color there, just kind of -- and any broader comments on credit.

Yeah, most of that increase in commercial construction, most of that was one project. It's a mixed-use project, predominantly multifamily. But mixed-use project. We feel we have an appropriate reserve. It's an identified issue that we've been working on. So we already have a reserve for and are working towards resolution. But what you see there is just that migration from classified criticized to nonaccrual for the quarter. So an identified issue we're working through to resolution.

And then the second part of your question, just more broadly in credit. Metrics have remained stable. We feel good about the credit performance, but we remain cautious. There's just a lot of moving parts in the marketplace. A lot of factors that consumers and businesses are dealing with.

But at this point, the portfolio has been very resilient and the credit metrics are holding strong, but we still do have a cautious outlook just based on the overall environment.

Thank you very much. I appreciate the comments.

Thank you. At this time, I would now like to turn the conference back over to Curt Myers for closing remarks.

Well, thank you again for joining us today. We hope you'll be able to be with us when we discuss third-quarter results in October. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.