Fulton Financial Corp (FULTP) 2025 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Fulton Financial third-quarter 2025 results conference call. (Operator Instructions) 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 third quarter ending September 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 or subject to risks, uncertainties and other factors, and actual results could differ materially.

Please refer to the Safe Harbor statement and 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 30 through 37 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 were pleased with our strong third quarter operating results.

Our community banking strategy and regional scale continued to deliver customer value and strong results for our shareholders. Operating earnings of $101.3 million or $0.55 per share demonstrate the impact of positive operating leverage, strong profitability and a diversified balance sheet. Total revenue increased linked quarter as we grew both net interest income and fee income, while we continue to show strong expense discipline.

All of these positive factors combined to generate quarterly trends that drove our efficiency ratio down to 56.5%, delivered an operating ROA of 1.29% and resulted in an operating ROTCE of 15.79%. These are all strong results for the quarter.

Touching on capital. We repurchased 1.65 million shares during the quarter at a weighted average cost of $18.67 per share. We routinely evaluate all of our capital deployment options and found opportunity to repurchase shares at attractive levels. We plan to continue to use our share repurchase authorization. Even with this quarter's repurchase activity, we grew our tangible book value per share 18% on a linked quarter annualized basis.

Our strong performance, disciplined approach to balance sheet management, and our diversified business model provides us financial flexibility and positions the company for continued success.

Now let me provide a few operating highlights on the quarter. Deposit growth outpaced loan growth at $194 million for the quarter. Deposit growth was primarily driven by targeted sales campaigns and seasonal net inflows of municipal deposits.

During the quarter, total demand and savings balances grew $387 million, offset by declines in brokered and time deposits. We were able to drive this growth while maintaining a disciplined and targeted pricing strategy.

Turning to loans. Originations were up linked quarter as well as compared to the prior period. Total loan balances grew $29 million for the quarter as increased originations were offset by the impact of strategic actions we have been executing on throughout the year.

Year to date, these actions represented more than a $600 million headwind to our loan balance growth. Moving forward, we expect these actions to moderate and loan growth to return to our long-term growth trends.

Turning to the income statement. Revenue growth was driven by a strong net interest margin and a solid linked quarter increase in our noninterest income. As a result, total quarterly revenue hit an all-time high. Our noninterest income as a percentage of revenue ended the quarter at 21% with our fee-generating businesses growing nicely, and we are positioned well for continued growth.

Lastly, let me touch on credit. While we remain cautious on credit given general economic and geopolitical uncertainty, we continue to see steady performance in our portfolio. During the quarter, we saw improvement in non-performing loans and charge-offs. Additionally, we saw improved risk rating migration and a continued reduction in classified and criticized loans.

The provision for loan losses remained favorable to expectations and the allowance ratio was stable compared to the prior quarter. Overall, we are encouraged by the trends we're seeing, but always remain focused on identifying and managing any potential areas of weakness that may arise.

Now let me turn the call over to Rick to discuss the details of our financial results and provide comments on our 2025 operating guidance in more detail.

Thank you, Curt, and good morning. Unless I note otherwise, the quarterly comparisons I discuss are with the second quarter of 2025. Loan and deposit growth numbers I referenced are annualized percentage on a linked-quarter basis.

Starting on slide 5. Operating earnings per diluted share was $0.55 or $101.3 million of operating net income available to common shareholders. Net interest income growth driven by a strong NIM and a stable balance sheet, combined with increasing fee income helped to more than offset the anticipated increase in operating expenses.

We are encouraged by the improved positive operating leverage we generated when compared to the previous quarter and on a year-over-year period basis. Total end-of-period loans increased $29 million during the quarter. Residential and commercial mortgage drove growth, offset by declines in C&I.

We continue to proactively work certain credits out of the portfolio that don't align to our long-term strategy. During the quarter, we saw a runoff of approximately $32 million of indirect auto and sold approximately $40 million of small ticket equipment finance loans. Additionally, we saw about $40 million note sales and resolved an additional $139 million of C&C loans.

Combined, these actions accounted for over $250 million of loan balance headwinds during the quarter. With the exception of the continued planned runoff of indirect auto, we expect the impact of these activities to moderate as we move into 2026 and expect growth to revert towards our long-term historical organic growth trends. Deposits grew $194 million or 3%. Growth of $387 million in demand and savings products offset a $192 million decline in time deposits, which included a $108 million decline in broker deposits.

A primary driver of growth was a seasonal increase in municipal balances of $450 million, in line with expectations. We anticipate outflows in municipal balances in the fourth quarter similar to historical trends. Our noninterest-bearing balances trended lower, ending the quarter at 19.5% of total deposits.

The decline in balances appears to be driven by normal corporate customer activity as our number of commercial accounts remained stable. As a result, our loan-to-deposit ratio ended the quarter at 91%.

Moving to investments. Securities purchases lagged cash flows by about $100 million, partially offset by an improvement in AOCI. Investments as a percentage of total assets were 15.8%, a level that provides balance sheet optionality moving forward. Net interest income on a non-FTE basis was $264.2 million, a $9.3 million increase linked quarter, while net interest margin increased 10 basis points to 3.57%.

Loan yields increased 7 basis points to 5.93%. Fixed rate asset repricing represented a tailwind during the quarter. We believe this will continue to provide some cushion for margin in the face of declining short-term rates as illustrated on slide 21 of our earnings presentation.

Over the next 12 months, we have approximately $5.4 billion of fixed and adjustable rate earning assets subject to repricing, currently at a blended yield of 5.08%. Our net interest margin further benefited from a modestly higher level of accretion interest, which was up $1.3 million linked quarter to $12.7 million.

For the quarter, our average cost of total deposits decreased 2 basis points to 1.96%, while our total cost of funds declined 4 basis points due to quarterly wholesale repositioning aided by municipal inflows. Through the current rate cutting cycle, our cumulative interest-bearing deposit beta has been 33%, while our total deposit beta has been 22%.

Our deposit pricing strategy continues to balance the desire to fund future balance sheet growth while defending margin. Turning to slide 7. Non-interest income for the quarter was $70.4 million. The linked quarter increase was driven by our wealth and consumer businesses and aided by modest gains from asset sales.

Non-interest income as a percentage of total revenue equaled 21% for the third quarter. Notably, our wealth management business, Fulton Financial Advisors, reached $17 billion in assets under management and administration and continues to be a material driver of fee income growth.

Moving to slide 8. Non-interest expense on an operating basis was $191.4 million, an increase of $3.8 million linked quarter. This was mostly attributable to an increase in salaries and benefits driven by one extra day in the quarter, a lower level of deferred loan origination costs and outside service spend related to planned internal projects.

Items excluded from operating expenses as listed on slide 8 include charges of $5.4 million of core deposit intangible amortization and $207,000 benefit of other items. Turning to asset quality. Provision expense of $10.2 million was slightly higher than last quarter, however, well within the guidance we provided last call.

As Curt mentioned, we saw positive trends throughout the book. Net charge-offs declined to 18 basis points, while non-performing assets to total assets improved 4 basis points to 0.63%. Our allowance for credit losses to total loans ratio remained at 1.57%, while our ACL to non-performing loan coverage increased to 189%.

Slide 10 shows a snapshot of our capital base. We maintain a healthy capital position that provides us with balance sheet flexibility. During the quarter, we repurchased 1.65 million shares at a weighted average cost of $18.67. As of September 30, we had remaining buyback authorization of $86 million under the current plan.

Inclusive of the share repurchases, internal capital generation was robust at $84 million. This was driven by a combination of strong earnings and a $44 million benefit to AOCI from the impact of lower interest rates. Our tangible common equity to tangible asset ratio increased to 8.3%, while CET1 increased to 11.5%.

On slide 11, we are updating our operating guidance for 2025. Considering the recent Fed action and associated dot plot, we have updated our rate forecast to include the recent 25 basis points cut in September, one 25 basis point cut in October and an additional 25 basis point cut in December.

Given these macro assumptions and our strong year-to-date performance, we have made the following adjustments to our guidance with emphasis on the midpoint of the ranges. We are increasing net interest income to a range of $1.025 billion to $1.035 billion. We are lowering and tightening provision expense to a range of $45 million to $55 million.

We are raising the bottom end of fee income tightening to a range of $270 million to $280 million. We are lowering the top end of operating expense to a range of $750 million to $760 million. We are modestly increasing our effective tax rate to a range of 19% to 20%. And last, lowering our estimate of nonoperating expenses from $10 million to $7 million.

And with that, we'll now turn the call over to the operator for some questions.

(Operator Instructions) Daniel Tamayo, Raymond James.

Maybe first on the net interest income guidance being revised higher, it looks like it implies some margin compression, if that's correct, in the fourth quarter, presumably related to the rate cut. Just curious for your thoughts around the impact -- if that's correct, the impact of this first cut that we had last quarter relative to future cuts, if there's kind of a rebound or less impact after -- with future cuts going forward?

Yes. Thanks for the question, Danny. Yes, you're right. The interpretation is right. I mean that would imply a little bit of margin pressure in 4Q.

Look, I'll say this, for every 25 basis points on an annualized basis, it's about $2 million of annualized NII headwind.

That said, as we continue to manage the deposit side of this and try to reach for higher betas, that does offset some of that over time. But there's a lag to that, right? So for every 25 bps that happens, you really don't catch up on the cost -- on the interest expense side for probably about three months all in.

So there will be some kind of near-term pressure. But you're right. If the Fed stops or when the Fed stops cutting, you will start to level out several months after that.

Got it. Okay. Helpful. And then maybe one more high level for you, Curt. Just curious of your thoughts on positive operating leverage in 2026. It sounds like that rate cuts could certainly have an impact on that.

But just curious how you're thinking about if that's a possibility for the company, if it's likely? And if there is some kind of breakeven point in terms of cuts, how you're thinking through that?

Yes. So I mean, we're focused on continuing to generate organic growth so that we can drive positive operating leverage. There's a lot of components, expense levels, revenue levels, some things within our control and some things that are not. But we're going to manage to a point that we are -- our goal is to generate positive operating leverage on a consistent basis.

To Rick's point, your prior question around impact of rate cuts, I mean, we are more neutral on our balance sheet than we have been in prior periods, and we think that will help. And then we will manage the other components of that operating leverage calculation to focus on generating that.

Casey Haire, Autonomous.

I guess one more follow-up on sort of the NIM outlook, Rick. The cumulative interest-bearing deposit beta, I think you mentioned was 33%. Just where do you expect that to trend as the Fed cuts?

Yes. I think that's a level we aim to maintain, if not try to get a little bit more. Obviously, as we start to revert to more normalized loan growth, that could be some pressure. But I think around that 30% level is really the target.

Okay. Very good. And on the asset side of things, fixed rate asset repricing was a nice tailwind. Can you -- any color on where new money yields are versus, I think you mentioned that 5.08% coupon on what's coming -- what's maturing in the next year?

Yes. New originations during the quarter were right around 6.5%, just I think a couple of bps below that, like [6.48%].

Okay. Great. And just lastly on capital management. So you guys have been one of the banks that has been openly kind of looking for deals. Just wondering -- it feels like it is active in that part of the market, that $1 billion to $5 billion asset bank crowd.

Just wondering what is -- why we haven't seen a deal from you? Is it a bid-ask, lack of targets? Just some color there.

Yes. So our strategy remains the same. And that as you referenced, and I previously referenced that $1 billion to $5 billion community bank that would be an infill to give us greater market penetration in our five-state market is the focus.

We feel we continue to have opportunities there, and we want to be positioned to always be able to move forward with the things that we want to move forward with. and it is an active strategy for us.

Christopher Marinac, Janney Montgomery Scott.

Curt, I want to extend on your answer there and just look further at sort of your organic opportunities in Virginia, Maryland and even Philadelphia? And how much more opportunity do you see there in the next several quarters?

We definitely have opportunity for organic growth. So primarily, we drive that by winning customers each and every day. We also drive that by adding to our commercial banking team, our wealth team, and we're always focused on talent recruitment, one strategy.

And then we have first strategies around small business to enhance growth there. And we're really -- we have a lot of levers for organic growth. And I think what you've seen this year is we have decent originations, and we've had some strategic headwinds that have offset balances this year.

So underlying, we're really focused on those organic originations really throughout the company, but in those areas where we have a lot more growth potential with more limited market share.

Good. And then just a follow-up on the commercial fee income line from your commercial deposits. Does that track typically with the growth of those deposits? Or do you see other opportunities even if those balances were to be flat to grow the fee income side?

Yes. So there's a lot of components to that. So on the account level, cash management and account level fees, they track with account growth and then activity expansion within or contracting within those accounts like the activity volume. We also have our swap fees are in that, that are tied to originations as well.

So it's a real mix of transactional account level growth and then things that are more tied to originations. And we've had steady performance overall, I feel good about the overall fee income or commercial fee income trajectory.

Matthew Breese, Stephens Inc.

Rick, in your opening remarks, I thought you had mentioned a little bit of a mismatch in securities purchases versus maturities and maybe there's some optionality there going forward. Could you just talk a little bit about to what extent we might see securities purchases and maybe some framing for where you want cash and securities as a percentage of total assets?

Yes. I think we kind of positioned in the past. We'd probably coming into the year, we're a little light from a liquidity perspective on securities. So we've moved that higher. I think managing around that 16% to 17% level of assets is about right for investments from where we are.

We've been fairly opportunistic and kind of pick our points when we want to invest and when we have additional liquidity.

I think there's -- the expectation, obviously, we mentioned earlier is that you'll get some municipal headwinds in the fourth quarter. So deposits will -- those deposit balances will be down a little bit. So I think just managing kind of for those balances really depends on when we buy. But like I said, 16% to 17% long term is probably the right target.

And looking at securities yields, 3.70% today, I'm guessing what you're putting on the books has either a high 4%, maybe low 5% handle on it.

That's right.

When might we see a more pronounced acceleration in securities yields? Is like -- is there a cash flow year that's better than others and work towards that 4% and 5% level? Sorry to interrupt you.

No, no, sorry. Yes, I think you're right on the yields. And more recently, it's been in the high 4s. But no, there really isn't a pronounced cash flow. It's pretty steady stream, barring any acceleration of prepayments.

So I think that's kind of the wildcard, which we haven't really seen a material pickup yet.

But no, it's pretty steady. And we kind of -- we gave a little bit of additional color. I think it's on slide 21 of our deck on some of that fixed repricing -- fixed and adjustable repricing schedule. So when you go out beyond 12 months, so basically everything right on that left column, the weighted average yields on those segments combined are around 4.5%.

That just gives you some idea of upside in the outer years as well, assuming elevated rates.

Okay. And then also in both your opening remarks and Curt's, you made reference to loan growth headwinds dissipating. You talked about reverting to kind of longer-term levels of loan growth. Could you just talk a little bit about the pipeline, how is your strength of pipeline, where you're expecting to see growth over the next few quarters?

And is it fair to say that, that longer-term average is kind of low to mid-single digits? And if you had to pick aside low or mid, where would you lean over the next few quarters?

Yes. So the long-term trends have been 4% to 6%. And I think we're trying to climb back to that 4%. We've been below that given the headwinds and the strategic actions we've taken. So we want to first get to the low end of that and see where we go from there.

The pipelines are up a little bit year over year, and we've had an increasing trend. But the pull-through rate is still lower than historical norms. Customers still remain cautious in spending. So we do see improvement, but it's modest at this point.

Overall, where we want the growth, having a very diversified balance sheet has served us really well over time, and we want to grow in all categories, and we feel like we're positioned that we can grow in all categories.

Even CRE, our position relative to the market is good. So we can really attract high-quality borrowers, high-quality projects there. So really across the board, we're trying to get organic growth because we want to win customers. And that really is the engine behind the growth over the long haul.

Great. And then just last one for me. Curt, as you climb back to that 4% loan growth threshold, does that leave room in kind of the capital stack for continued repurchases? Or what are your capital priorities as you get to a 4% loan growth rate? That's all I had.

Yes. So thanks, Matt. The priorities are the same, organic growth, then corporate activities, whether it be M&A or asset purchases or uses of capital and then buybacks. And I think you saw us in this last quarter that in the absence of those first two things and really strong capital generation, we leaned more into the buyback.

I think if those things persist like we think over the next couple of quarters, then we'll probably be more in that buyback focus. We have $86 million, I believe, left in the authorization. And then we typically look at that each year, but we still have $86 million remaining on the buyback that we have in place.

Matt, and maybe just to add, I mean you made reference to climbing back to 4%. I want to just reiterate that the strategic actions we took this year, as Curt said earlier, we're over $600 million. It's about 3.5% annualized growth if you added that back in.

So I think moving from 3.5% to 4% is not that big of a lift here. So we are seeing the growth. It's just you're -- obviously, we're masking that with some very strategic runoff.

David Bishop, Hovde Group.

This is actually Kyle Gierman asking questions on behalf of Dave. So with the recent scrutiny around loans to NDFIs, could you update us on your current exposure levels and how you think about the sector?

Yes. So we have very low levels, pretty de minimis levels of NDFI overall. And the primary in that is loans to bank holding companies, community bank holding companies in our market. We put them in that bucket if they're non-rated debt issuances. So that's the primary.

So we really are not heavily engaged in that activity.

Yes. It's Tier 2 sub debt structured as notes because they're non-rated non-CUSIP institutions. That's the primary thing in our NDFI disclosures, as you would see in the call report.

David Konrad, KBW.

Real quick follow-up for me. And I think, Rick, you already answered this one a little bit, but deposit costs came down 4 bps quarter over quarter as you paid off the broker CDs. With the municipality seasonality in the fourth quarter, is the 245 a good jumping off point? Or will you increase your broker CDs? Or will it just be a reduction in cash and a smaller balance sheet?

Yes. So we did -- we ran off some broker during the quarter, obviously. We also had some declines in FHLB as well. So I think as we look towards fourth quarter and run out, typically, we saw about $450 million come in, in municipal during third quarter.

We usually see 40% to 50% of that move out. So look -- we'll look towards the most cost-effective way to manage that. And it could also be customer deposits and specials on that end, too. So we're going to continue to manage our loan-deposit ratio appropriately, but any of those alternatives work for us.

And I'm currently showing no further questions at this time. I'd like to turn the call 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 fourth quarter results and year-end results in January. Thank you.

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