Fulton Financial's (FULT) CEO Phil Wenger on Q1 2016 Results - Earnings Call Transcript

| About: Fulton Financial (FULT)

Fulton Financial Corp (NASDAQ:FULT)

Q1 2016 Earnings Conference Call

April 20, 2016 10:00 AM ET

Executives

Jason Weber - SVP and Director of Corporate Development

Phil Wenger - Chairman President & CEO

Pat Barrett - Senior Executive, VP & CFO

Analysts

Preeti Dixit - JPMorgan

Brody Preston - Piper Jaffray

Bob Ramsey - FBR Capital Markets

Joe Glaude - Merion Capital Group

Matt Schultheis - Boenning & Scattergood

Frank Schiraldi - Sandler O'Neill

Michael Perito - Keefe, Bruyette & Woods

Operator

Good morning, ladies and gentlemen. Welcome to the Fulton Financial First Quarter Results Conference Call. This call is being recorded. I will now like to turn the call over to Jason Weber, Senior Vice President and Director of Corporate Development. Please go ahead, sir.

Jason Weber

Thank you, Tracy. Good morning. Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the first quarter of 2016. Your host for today’s conference call is Phil Wenger, Chairman, President and Chief Executive Officer of Fulton Financial Corporation. Joining Phil is Pat Barrett, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information and related Slide presentation included with our earnings announcements, which we released at 4:30 yesterday afternoon. These documents can be found on our Web site at fulton.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 Web site.

On this call, representatives of Fulton may make forward-looking statements with respect to Fulton’s financial condition, results of operations and business. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors some of which are beyond Fulton’s control and difficult to predict and which could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Fulton undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

In our earnings release, we’ve included our Safe Harbor statement and forward-looking statements, we refer you to this section, and we incorporate into today’s presentation. For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the sections entitled Risk Factors and Management’s Discussion and Analysis of Financial Condition, Results of Operations set forth in Fulton’s filings with the SEC.

In discussing Fulton’s performance, representatives of Fulton may refer to non-GAAP financial measures. Please refer to the supplemental financial information included in the Fulton's earnings announcement released yesterday 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.

Phil Wenger

Thanks, Jason and good morning, everyone. Thank you for joining us. I have a few prepared remarks before our CFO; Pat Barrett, shares the details of our first quarter financial performance and discusses our 2016 outlook. When he concludes, we will open the phone lines for questions.

Before we get into the details of the first quarter, I would like to provide an update on our BSA/AML enforcement actions. We believe we’ve made the investments necessary to comply with the requirements of the enforcement actions and we continue to work on improving execution in order to make our BSA/AML infrastructure sustainable in a manner that is consistent with regulatory expectations. Having said that, we are not certain over what time frame our regulators will lift the enforcement actions could be listed in 2016 is also quite likely that one or more of the enforcement actions will remain in place beyond 2016.

While resolution of the BSA/AML enforcement actions remains a top priority for us, we continue to be focused on initiatives to move the organization forward. Specifically, we are focused on organically growing new organization, simplifying our corporate structure and enhancing our processes, while controlling cost to drive efficiency. As we move through 2016 and beyond, we look forward to telling you more about the changes we are making.

At this time, I’d like to share some highlights from the first quarter. We reported diluted per share earnings of $0.22, which was flat linked quarter and year-over-year. However excluding security gains, pre-provision net revenue increased applications $5.1 million or 11.2% year-over-year. Our return on assets was 0.86% and our return on tangible equity was 10.07% for the quarter.

Average loans increased 4.4% from the prior quarter, loan demand is two points softer than the first quarter, in addition line borrowers declined by 50 million in the quarter reflecting this seasonality. However commercial origination volumes, volumes in the quarter were up 10% compared to this time last year. In addition our commercial pipeline is up approximately 16% compared to this time last year. So we remain optimistic that loan growth will pick up as the year progresses much like we saw in 2015.

As we've mentioned in prior calls 2015 was a transitional year for the organization as we increased our focus on adding revenue generating talent. For example in the past year we have made several key additions in our SBA, commercial, leasing and agriculture specialty lending areas. We continue to look for opportunities to add high performing talent throughout all of our revenue producing areas. We believe this transition along with opportunities created by market disruption bode well for future growth and market share gains.

Year-over-year average loans increased 5.8% which is in line with our 2016 full year outlook. We continue to see meaningful growth in our commercial loan portfolio while consumer loans continue to lag. Deposit growth continued to be strong especially core deposits which increased 9.9% year-over-year.

The growth in core deposits was equally between consumer and commercial. We continue to see high levels of customer retention from our branch consolidation in 2014 and 2015. As with loan growth consumer household growth continued to benefit from local market disruption. Our branches that are located in disrupted markets continued to attract meaningfully higher rates of new consumer household growth than branches in our broader footprint.

We have and will continue to have active business development initiatives and strategies to take advantage of the market disruption. For the second consecutive quarter we saw an improvement in the net interest margin as a result our net interest income continues to improve. Most credit metrics were stable to slightly improving, non-performing loans and non-performing assets as a percent of loans continued to decline and now stand at the lowest levels since the last quarter 2007. And our loan loss provision a decrease in the quarter by $1.2 million. We did see a slight uptick compared to delinquencies linked quarter, which were related to a few relationships that experienced isolated events and we believe those are non-indicative of broader portfolio on [indiscernible].

Similar to loan growth non-interest income was typically softer in the first quarter. Non-interest income excluding security gains was down linked quarter reflecting the seasonality. Year-over-year non-interest income excluding security gains increased 3.9% with improvements across most of our B-income categories with the exception of mortgage banking. Mortgage originations were down year-over-year as refinancing activities slowed. Refinancing represented 64% of originations in the first quarter of 2015 compared to 48% in the first quarter of 2016. The mortgage pipeline increased 73% linked quarter so we believe mortgage will bounce back as we head into the spring selling season. As a reminder we hired a new director of sales, and a new regional sales manager in late 2015 and they are actively adding loan originators across the footprint.

We are optimistic that these new hires will result in meaningful impact to the bottom line throughout the year. Non-interest expense increased modestly which is typical in the first quarter and we continually look for ways to make organizations more efficient while not compromising the customer experience. Lending capital for us we stated quarterly common stock dividend of $0.09 per share and repurchased approximately $11 million of common stock in the quarter. We have approximately $39 million left in our current share repurchase [indiscernible] authorization.

So at this point I’d like to turn the call over to Pat to discuss our financial performance in more detail. Pat?

Pat Barrett

Thank you, Phil, and good morning to everyone on the call, unless I heard, otherwise quarterly comparisons with the fourth quarter of 2015, starting on Slide 4. Phil noted earnings per diluted share this quarter were $0.22 on net income of $38 million representing a slight decrease from prior quarter.

Earnings per diluted share were unchanged from both the first and fourth quarters of 2015 reflecting the impact of share repurchases. First quarter earnings reflected an increase in net interest income and a decrease from the provision for credit losses partially offset by the effects of seasonality that resulted in lower fee income a slight increase in non-interest expenses.

Moving to Slide 5, our net interest income improved by more than 4%, despite one less day in the quarter. This improvement was driven by a 4 basis point increase in net interest margin, and 1% increase in average earnings assets, primarily the result of $194 million increase in average loans. The yield on average earnings assets improved 5 basis points, outpacing the slight increase in the cost of average interest bearing liabilities. 5 basis point increase in earning asset yields was driven by higher yields on loans, largely reflecting the impact of the short term rate increase in December. Average interest bearing liabilities were up 1.7% due largely to $164 million increase in average short term borrowings. This change in funding mix to lower cost short term borrowings partially mitigated a 2 basis point increase in interest bearing deposit cost.

Turning to credit on Slide 6, based on our valuation of all relevant credit quality factors, we recorded $1.5 million provision for credit losses in the first quarter, which is $1.2 million lower than the provision in the previous quarter. The allowance for loan and lease losses declined slightly as a percent of loans from 1.24% to 1.20%, while coverage and non-performing loans increased to 121%. Net charge offs increased linked quarter and year-over-year.

We’ve mentioned in the past the net charge offs can be somewhat volatile given the relatively low levels we’ve experienced in recent quarters. This quarter illustrated that volatility with net charge offs increasing to $6.9 million and less than $1 million in the fourth quarter resulting in an annualized net charge off rate of 20 basis points. Non-performing loans improved linked quarter, declining $7.6 million to $137 million, or 0.99% of total loans. In addition, new non-accrual loan generation for the quarter was $18.6 million, an $8 million improvement than last quarter.

Moving to Slide 7, non-interest income excluding securities gains decreased 6.4% like in seasonal decreases in certain areas such as overdrafts, debit card fees and mortgage banking income. In addition, commercial swap fee decreased by almost $1 million reflecting the lower levels of commercial loan originations. In comparison to the first quarter of 2015, non-interest income excluding securities gains increased 3.9% reflecting increases in merchant fees, commercial swap fees and other service charges, primarily offset by a decrease in mortgage banking gains.

Moving to Slide 8, non-interest expenses increased by approximately 2% in the first quarter due to higher salaries and benefits driven by seasonally higher payroll taxes and higher costs healthcare benefits. We also saw a seasonal increase and 6% in occupancy costs. These increases were partially offset by lower state taxes and smaller reductions in a number of other expense categories.

In comparison to the first quarter of 2015, non-interest expenses also increased approximately 2%, reflecting increases in salaries and benefits, data processing and software, partially offset by decreases in other categories such as occupancy and state taxes. Income tax expense decreased $1.9 million, or 14%, resulting in an effective tax rate of 24%. This reflects the impact largely of tax credit investment activity. We expect our effective tax rate to continue in the mid-20% range for the remainder of 2016 with the possibility of modest volatility from quarter-to-quarter.

Turning to Slide 9 and to reiterate Phil’s earlier remarks, we’ve made significant progress with building out our regulatory compliance infrastructure and work continues. While BSA/AML costs remained elevated compared to staffing costs at moderated slightly. Slide 10 displays our profitability and capital levels over the past five quarters. These metrics remain stable, reflecting relatively flat net income and the net impact of share repurchases.

And in conclusion, we’ve included in Slide 11 a summary of our outlook for the year, which remains unchanged. Now I’ll turn this call back to the operator for questions.

Question-and-Answer Session

Operator

Thank you [Operator Instructions]. And we’ll go first to Preeti Dixit with J. P. Morgan.

Preeti Dixit

Phil, just to follow up on the consent orders, could you give us some more color on what developments took place in the quarter, is it now easy to believe one or more enforcement actions could extend to 2017?

Phil Wenger

So, I think we had normal updates. I don’t think we can really comment that specifically on what happens with our regulators. So I am sorry I can’t give you more detail.

Preeti Dixit

Okay. But is it the where maybe there is different regulatory expectations across various subsidiaries?

Phil Wenger

I think that could be one of the situations here.

Preeti Dixit

Second, your thought on expenses, could you have what the seasonal FICO impact was this quarter? And as we look through the balance of the year to get to that low to mid-single digit growth, it sounds like expenses would be flat to ramping a bit higher from the $120 million this quarter? Is that the right way to think about it? Maybe you could give us some color on your expectations for the expense line?

Phil Wenger

Sure, we typically see you went from a $1 million to $2 million hit in the first quarter from the seasonal uptick in payroll taxes and I think your assumption is pretty reasonable.

Preeti Dixit

Okay. Helpful. Then on the fees, obviously fourth quarter was a pretty strong result but you're keeping your mid to high single-digit growth expectations. Could you give us some color on where you're seeing the most opportunity to move the needle on the fee revenues?

Phil Wenger

Well, I would say as we go through the balance of the year we believe that mortgage, SBA loans and swap fees will be large contributors to our increase.

Preeti Dixit

Okay. That's helpful. I'll step out for now. Thank you.

Operator

[Operator Instructions] And we'll go next to Matthew Breese with Piper Jaffray.

Brody Preston

Hi, guys. This is Brody Preston on the call for Matt Breese.

Phil Wenger

Can you speak up please, I'm sorry can we have your name again.

Brody Preston

This is Brody Preston on the call for Matt Breese. I saw you guys -- you said you repurchased $11 million. Could you give me the average price paid for that and the amount of shares?

Phil Wenger

It was 917,000 shares, so the average price would 11.9956 or $12.

Brody Preston

Thank you. Do you guys have a near-term outlook for the margin in light of guidance for 2016 of a flat margin versus 2015, like next quarter or two?

Phil Wenger

You know there's so much near term volatility that can move it one or two basis points around things that are tough to predict like non-interest to be effective of non-accrual loans moving into and out of an interest recovery and loan fees and repayments. And we try to kind of just stick to a general range we still think that the zero to three basis point volatility on a quarterly basis resulting in potentially a pretty stable margin throughout the year is the right way to think about that. So you do the math, we could give back a little bit of the margin percentage improvement we saw this quarter it was about comes in at levels that we guided to. So Brody in addition to that I would say in quarters that we don't have a rate increase we still have some pressure on margin and the guidance that we gave we have essentially one more rate increase this year in that guidance. It's the early third quarter so if we hit that we could see the positive impact if we don't get that you could see negative fall off as we pass mid-year.

Brody Preston

Great. Thank you. And one more for you guys. Does the current loan pipeline suggest that the mid to high single-digit loan growth is still achievable in 2016?

Phil Wenger

We believe that it is yes.

Brody Preston

Okay, thank you very much.

Operator

And we'll go next to Bob Ramsey with FBR.

Bob Ramsey

Hey, good morning, guys. Saw a nice improvement on the outside services and professional fees. I'm just curious if it's a good trajectory to expect through 2016 those items that continue to gradually drift lower? And then, I know you gave color on timing or the uncertainty around timing of getting the consent orders lifted. Just kind of curious, is there much of a direct tie between that and seeing some of these regulatory costs come down? Or are you guys making your investments and doing what needs to be done and there's not a direct link between the timing of expenses coming down and the consent order getting lifted?

Phil Wenger

So there were a number of things in there. You know I think a gradual reduction is a valid assumption, they could have some volatility till then. We will continue to spend whenever we need to on the BSA AML side and I think the guidance that we gave you assumes that. Remind you too that the BSA AML cost from an outside services and consulting perspective are a minority of what we spend in outside services and consulting so we've had a lot of activity going on, platform investment, whether it's IT or process or other and there's some impact from a processing perspective as well on that line volume.

Bob Ramsey

Okay, fair enough. And then shifting gears to talk about provision, given more credits today, I know you guys have source that provisional be driven by loan growth. Is it fair to think that you apply something similar to the allowance to loan ratio today to net loan growth and that’s the way to think about what provision expense will be?

Phil Wenger

I think we’ve been guiding that the provision on a quarterly basis it will be in the range between 0 and $5 million, and I would continue to give that guidance. And say that in quarters, if we have a quarter where there is not much loan growth, it should be to the lower end of that guidance. And then the higher the loan growth is, the closer you would get to the higher end.

Operator

And we’ll go next to Joe Glaude with Merion Capital Group.

Joe Glaude

Just follow up a little bit on that last question from Bob, just in regards to asset quality and good trends there. And I think you alluded to it in the remarks. But just wondering what the trends were and such far and early stage delinquencies are there moving in the same direction as the MPLs or anything to notice there.

Phil Wenger

Yes, I would say that there was metrics move down more than some of the ones that we stated in the call.

Operator

And we’ll go next to Matt Schultheis with Boenning.

Matt Schultheis

Couple of quick questions, it looks to me like in March you hired an SBA lender. And I was wondering if she came over with her whole team, or if that was a one-off? And if you anticipate or brining her whole team over?

Phil Wenger

So, it has been in the newspapers that we hired Lynn Ozer. And we hired in addition to her a number of SBA people and some are from her team and some were from other areas. But we have made a substantial investment into the SBA category.

Matt Schultheis

Continues to going around that she's sort of in garden period with her former employer?

Phil Wenger

I don’t know that we can really comment on anything, we could…

Matt Schultheis

Understood. With the positive growth in the quarter, was any of that tied to the quasi solving of the Pennsylvania budget in past where they freed up some state funds late in the year, and so there was some seasonal municipal flows that normally happened earlier in the year but all got jumped into the first quarter. Did you experienced some of that as well, or is that…

Phil Wenger

I would say the answer to that question is no. Right at the end of the quarter and we had the same curiosity about what impact it would have, but it ended up being nothing that was measurable.

Matt Schultheis

And is that budget impasse affecting you guys in anyway besides those deposit flows, any concerns that your borrowers or your customers have, or some of your, even maybe your nonprofits regarding the environment in general.

Phil Wenger

I don’t -- we have not seen any impact on credit, we did put some short term financing packages in place for school districts and municipalities. But I would say that there really hasn’t been that much borrowing against them.

Operator

And we’ll go next to Frank Schiraldi with Sandler O'Neill.

Frank Schiraldi

Good morning. Just a couple of follow-ups on some things already been discussed. Just on the provisioning again, Phil, correct me if I'm wrong. I think in the past you've suggested the reserve to loan ratio will probably bottom out somewhere above the 1% level. Just wondering, am I remembering that right and is that still the thinking?

Phil Wenger

I would say it could still go a little lower, but it should bottom out above the 1%. But that will depend on a lot of metrics.

Frank Schiraldi

And then just on the mid to high single-digit loan growth for the year, is there a specific geography within the footprint that would be an outlier in terms of driving that growth? And as a follow-up to that, we've heard a lot about potential market dislocation in Southeast PA. Has that started to flow through into loan growth already or is that largely something we should see go forward?

Phil Wenger

So we are expecting loan growth in all our markets and I would say on the market disruption side, there is more of that happening in Pennsylvania and that started really in the second half of last year and we see it continuing this year.

Frank Schiraldi

Okay, thank you.

Operator

[Operator Instructions] And we'll go next to Michael Perito with Keefe, Bruyette & Woods.

Michael Perito

Good morning. Couple quick questions. I jumped on the call a little late so I apologize if I missed this. First, on the share repurchase, I know you guys mentioned how much left you have on the authorization. Any comments on your outlook for the remainder of the year, given where the share prices moved up to and how you guys are thinking about incremental buybacks going forward?

Phil Wenger

We don't have a lot of comments, I will say, in factor, things that factor into that are how much growth we get because we do want to fund our growth first and the price has some impact.

Michael Perito

Is this fair to assume that if you guys hit your growth guidance and this share price remains where it is, that you guys will have some level of activity in the buyback for the balance of the year?

Phil Wenger

I think that's a fair.

Michael Perito

Thanks. And then the second question kind of more detailed question on the margin. It looks like in the savings and interest growing demand products that over the last, call it, four or five quarters, you guys have actually had some real modest but some slight pickup in pricing. Any thoughts on how you guys are thinking about your deposit pricing going into the rest of the year here? Is that something you expect to continue, or will it be relatively flat? Obviously, I know it depends on what the rates do, but any update there would be helpful.

Phil Wenger

We've got impact, we've got couple of things that we're, one is in fact the short term rate increases and we did see some impacts in the quarter from the 25 bip increase in December that rose to probably 20 to 25% of our demand deposit line, these would be index linked deposits that automatically reprice. And other than that it would be competitive pressure that would really cause rates to change and to date we really haven't seen much if any impact on competition for deposits in our markets.

Michael Perito

So pricing competition still generally not there as it stands today?

Phil Wenger

Correct, yes.

Michael Perito

Alright thanks guy, appreciate it.

Phil Wenger

Thank you.

Operator

It appears there are no further questions at this time, I'd like to turn the conference back to Phil Wenger for any additional or closing remarks.

Phil Wenger

Well thank you all for joining us today, we hope you will be able to be with us when we discuss second quarter results in July.

Operator

This does conclude today's conference, we thank you for your participation, you may now disconnect.

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