Fulton Financial Corporation (NASDAQ:FULT) Q1 2023 Earnings Call Transcript April 19, 2023
Fulton Financial Corporation misses on earnings expectations. Reported EPS is $0.39 EPS, expectations were $0.48.
Company Representatives Curt Myers – Chairman, Chief Executive OfficerMark McCollom – Chief Financial OfficerMatt Jozwiak – Director of Investor RelationsConference Call Participants Daniel Tamayo – Raymond JamesChris McGratty – KBWFeddie Strickland – Janney Montgomery ScottMatthew Breese – Stephens Inc.Frank Schiraldi – Piper SandlerManuel Navas – D.A. Davidson & Co.David Bishop – Hovde GroupOperator Good day and thank you for standing by. Welcome to the Fulton Financial, First Quarter 2023 Results Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [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.Matt Jozwiak Good morning, and thanks for joining us for Fulton Financial Corporation’s call and webcast to discuss our earnings for the first quarter which ended March 31, 2023. Your host for today’s conference call is Curt Myers, Chairman and Chief Executive Officer. Joining Curt is Mark McCollom, 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 the Investor Relations tab of 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 in Slides 15 through 19 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.Curt Myers Well, thanks Matt and good morning everyone.
Today I’ll provide some high level thoughts on the banking industry and our business strategy. I’ll also give you some perspectives on our balance sheet, liquidity, credit quality, and the impact of these items on our first quarter earnings. Then Mark will share more details on our financial results and step through a revised outlook for the remainder of 2023. After our prepared remarks, we’ll be happy to take any questions you may have.Fulton’s business strategy is built on a community banking model, which focuses on taking local deposits, lending locally and banking all segments of our community. The events of the past few weeks have brought into sharp focus the benefits of our model and the value that can be created through cultivating lasting customer relationships.
On that point, I want to thank our team for the remarkable way that they’ve performed this past quarter. The team went above and beyond to truly make banking personal. These past few weeks we reached out to and talked with many of our customers. We talked to them about our financial position and our stability and our customer base continued to expand. We now serve more than 570,000 households. Our industry is built on trust and the Fulton Bank team has been earning the trust of our customers for 141 years. With a long-term strategy, at times it is necessary to make decisions which may impact near-term results in order to strengthen the balance sheet, improve our liquidity, support our customers, and position our company for future success.So let me talk first about our funding and the balance sheet.
You can see on Slide 13 that we expanded the disclosures on our deposit base. We have approximately 734,000 accounts with an average life of 12 years on a balanced weighted basis. This highlights the loyalty, longevity, and value created by our stable customer base. You will also notice on this slide that we’ve bolster our deposit funding by approving the utilization of broker deposits in the quarter. This was done prior to the market disruption as we focused on slowing the increase in our loan to deposit ratio, to maintain our internal target of 95% to 105% and to make sure we can continue to meet our customers borrowing needs. Our balance sheet was also strengthened during the quarter as our tangible common equity ratio improved and our liquidity position increased to over $8.4 billion in committed funds.
Early in the quarter we were buying back shares and utilized $40 million of our $100 million repurchased authorization. In total we repurchased about 2.4 million shares during the quarter. We paused that program in early March. Turning to credit, we provided more detail on our loan portfolio and specifically on our office portfolio on slides six and seven. As noted last quarter we performed a comprehensive review of all real estate loans, casting a wide net to include any loans with an office component. Under this approach last quarter we reported balances of $1.05 billion. On slides six and seven we isolated our discrete, office-only portfolio, which includes all loans with a primary revenue stream from office rents. As you can see this segment is a diversified and granular portfolio, originated consistently over time, spread throughout the footprint and with very limited large exposures.
As we discussed last quarter, we have a large office loan on non-accrual status, which was charged down in the fourth quarter. Given the challenge to office environment, we have further charged down this loan. Here are a few more details on this credit. The loan was originated in 2019 in the DC Suburbs. The original loan balance was $42 million, with a loan-to-value at origination of 72%. COVID impacted the rent role and an underlying ground lease further impacts the marketability of this property. We have decided to further charge down this loan to enable a flexible work out strategy to maximize value. The remaining book balance of this loan is $8 million.Looking at our overall credit, net charge-offs of $14 million were driven by the $13.3 million write-down on the loan that I just discussed.
Our remaining loan portfolio credit performance has been in line with our expectations. NPAs, NPLs and loan delinquency have all declined for the past two quarters. Our higher provision for credit losses this quarter is due to changes in macroeconomic factors and our loan growth.Moving to our quarterly results, our first quarter earnings were $0.39 per share. Pre-provision net revenue, or PPNR for the first quarter was approximately $108 million, an increase of 51% year-over-year. This was a result of asset growth and net interest margin expansion.During the first quarter we saw deposit growth of $667 million and loan growth of $391 million. Fee income declined linked quarter and year-over-year as interest rates and seasonal declines impacted several of our business units.We managed expenses prudently during the period as expenses declined $9 million from the fourth quarter.
While our first quarter earnings did not meet our overall expectations, we took the necessary steps to strengthen the balance sheet, improve our liquidity, support our customers and position the company for future success.Now, let’s turn the call over to Mark to discuss our first quarter financial performance and our 2023 outlook in more detail.Mark McCollom Thank you, Curt and good morning to everyone in the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the fourth quarter of 2022. And the loan and deposit growth numbers I will be referencing are annualized percentages on a linked quarter basis.Starting on slide three, operating earnings per-diluted share this quarter were $0.39 on operating net income available to common shareholders of $65.8 million.
This compares to $0.48 of operating EPS in the fourth quarter of 2022. These operating results in the fourth quarter, excluded $2.4 million of merger related charges and intangible amortization recorded during that quarter for our acquisition of Prudential Bank Corp.Moving to the balance sheet, loan growth for the quarter was $391 million or 8% annualized. This is down from $584 million or a 12% annualized growth rate that we saw in the fourth quarter 2022 and this percentage decline is in line with what we typically see moving from the fourth quarter to the first quarter.Commercial loans were $238 million of this increase or about 60% of our overall growth. C&I lending grew $123 million across a diversified customer base. Commercial real-estate lending grew $53 million, or 3% annualized.Consumer lending produced growth of $153 million, or 9% during the quarter.
Mortgage lending was still the majority of this consumer loan growth and increased $144 million, with most of this growth coming from adjustable rate products.Total deposits increased $667 million during the quarter or 13% annualized. We did see a meaningful shift in our deposit mix during the quarter as our non-interest bearing DDA balances declined approximately $600 million during the period. Almost all of this shift in the deposit mix occurred earlier in the quarter as our non-interest bearing deposit balances were essentially flat from the end of February to the end of March.We increased our deposit pricing across several products throughout the quarter, and we also acquired broker deposits early in the quarter, well ahead of the sector-wide concerns over liquidity.
Our loan to deposit ratio ended the quarter at 97%, down from 98.2% at year-end. Our investment portfolio declined modestly during the quarter, closing at $3.95 billion. Putting together this balance sheet trends on slide four, net interest income was $216 million, a $10 million decrease linked quarter. Our net interest margin for the quarter was 3.53% versus 3.69% in the fourth quarter. Loan yields expanded 41 basis points during the period, increasing to 5.21% versus 4.8% last quarter.Our total cost of deposits increased 40 basis points to 82 basis points during the quarter. Cycle-to-date, our total deposit beta is 16% cumulatively. We have previously communicated to you that our deposit beta would accelerated in 2023. With the first quarter beta higher than we anticipated due to a mix shift away from DDAs, we now believe that through the cycle deposit beta of approximately 35% is more likely.
Turning to credit quality on slide five, our NPLs declined $7 million during the quarter, which led to our NPL loans ratio improving from 85 basis points at year end to 80 basis points at March 31. Overall loan delinquency was lower to 1.27% at March 31 versus 1.39% at year end. Despite these positive trends, changes to our macroeconomic outlook and loan growth during the period led to the increase in our provision for credit losses this quarter. Our allowance for credit loss as a percentage of loans increased from 1.33% of loans at year end to 1.35% at March 31. Turning to slide eight, wealth management revenues were up modestly from the prior quarter at $18.1 million. We continue to build out this business line with new hires. New business activity continued and the market value of assets under management and administration increased to $14.2 billion at March 31, compared to $13.5 billion at year end.
Commercial banking fees declined $1.1 million to $17.5 million with seasonal declines in most categories. Year-over-year commercial banking fees increased $1.5 million or 9%. Consumer banking fees declined $0.9 million to $11.2 million, led by decreases in overdraft fees as a result of changes to our overdraft programs. Mortgage banking revenues declined as expected and were driven by a decline in both mortgage loan sales, as well as a decrease in gain on sales spreads. Moving to slide nine, non-interest expenses were approximately $160 million in the first quarter, a $9 million decline linked quarter. As we noted last quarter, several items contributed to the linked quarter decline. Those included higher incentive compensation accruals in the fourth quarter of ’22; merger related charges in the fourth quarter of 2022 which did not repeat in the first quarter; branch closure cost in the fourth quarter of 2022 for the closure of five branches this year, one of which occurred in March with remaining four occurring later this month; lower legal and contingent liability accruals in the first quarter of 2023; and lastly, run rate expenses from the 2022 acquisition of Prudential Bank Corp.
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now being fully recognized.Turning to slides 10 through 12, given recent industry events we are providing you with expanded metrics and a discussion on capital and liquidity this quarter. First on slide 10, as of March 31 we maintained solid cushions over the regulatory minimums for all of our regulatory capital ratios. Our tangible common equity ratio was 7% at year-end up to the 6.9% – sorry, at quarter end, up from 6.9% last quarter.Included in tangible common equity is the accumulated other comprehensive loss on the available for sale portion of our investment portfolio and derivatives. This totaled $282 million after tax on a total AFS portfolio of $2.6 billion, including the loss on our held to maturity investments, which was $94 million after tax on a held to maturity portfolio of $1.3 billion, our tangible common equity ratio would still be 6.7% at March 31, which represents over $1.7 billion in tangible capital.Despite share repurchases during the quarter, a combination of net income and an improvement in accumulated other comprehensive loss during the period combined to produce linked quarter growth of 3.3% and our tangible book value per share.Slide 12 provides you with an expanded look at our liquidity profile.
When combining cash, committed and available FHLB capacity, the Fed discount window, and unencumbered securities available to pledge under the Fed’s bank term funding program, our committed liquidity is $8.4 billion at March 31. In addition, we maintain over $2.5 billion in Fed funds lines with other institutions.Our uninsured deposits totaled $6.7 billion at March 31 or 31.3% of total deposits. Excluding municipal deposits for which we hold collateral, this balance drops to $4.6 billion or $21.4% of total deposits. Some investors have started to focus on a liquidity coverage ratio, which takes committed available sources of liquidity, divided by uninsured deposits less collateral held. Our calculation of these non-gap metric at March 31 shows coverage of 185%.We have also provided you with details of our deposit portfolio shown on slide 13.
As Curt noted, our deposits are granular with an average balance per account of $29,000 and have an average life of 12 years. On slide 14 we are providing our updated guidance for 2023. Our guidance now assumes a total of one additional 25 basis point increase to Fed funds occurring in May, followed by constant rates through the balance of the year.Based on this rate outlook, our 2023 guidance is as follows: We expect our net interest income on a non-FTE basis to be in the range of $850 million to 870 million. We expect our provision for credit losses to be in the range of $55 million to $70 million. We expect our non-interest income excluding securities gains to be in the range of $220 million to $230 million. We expect non-interest expenses to be in the range of $645 million to $660 million for the year, and lastly, we expect our effective tax rate to be in the range of 18.5% plus or minus for the year.Lastly, as Curt noted, PPNR for the first quarter was approximately $108 million, an increase of 51% year-over-year, as a result of earning asset growth and net interest expansion over the past year.
With that, we’ll now turn the call over to the operator for questions. Gigi?
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Question-and-Answer Session Operator Thank you. [Operator Instructions].
Our first question comes from the line of Daniel Tamayo from Raymond James.Daniel Tamayo Hey! Good morning, everybody.Curt Myers Good morning Dan. Daniel Tamayo Well, thanks for all the additional disclosures this quarter. I mean we all appreciate that. I guess my first question just around the net interest income guidance, obviously a big decline from last quarter, and I appreciate the color that you gave in your prepared remarks there Mark. But I guess if we could just get a little bit more detail on the driver there. How much of it is margin? How much of it is balance sheet? If you’re able to give any kind of period-end margin or funding cost there to give us a better sense of how things are trending through the quarter.
Thanks.Mark McCollom Yeah, sure Dan. Yeah, so margin for the month of March was 3.45% during the month and the question of whether it was more margin or balance related, our outlook [inaudible] assumes. We really didn’t back off at all from loan and deposit assumptions for the year. So I would say it is primarily the mix shift that occurred in the first quarter and as I noted, that mix shift largely stabilized in the month of March.Curt Myers Hey Danny, it’s Curt. I would just add that during the quarter we did both things. We kind of stepped in to a short funding through adding a broker deposit based on the outflows that we really saw from November 15 to about February 15 that have now stabilized, so we had the effect of that and then we had the effect of re-pricing our current deposits.
You see the mix is going from non-interest bearing to growing the money market and the CD portfolios. So we really look at the first quarter as having a big impact because we had both of those occurrence. As we look forward we’re going to continue to have mix changes, which should over time be more muted than the impact that we saw both times in the first quarter. Daniel Tamayo Understood, I appreciate that color. And then maybe just your guidance assumes one more rate hike and then flat rates. Where does the sensitivity of the balance sheet stand now and then if we do get rate cuts in the back of the year like the forward curve is assuming, how does that impact your guidance?Mark McCollom Yeah, we are modestly more asset sensitive from where we were at year end, but we continue to look at ways to mute that overall asset sensitivity.
We have put on about a total of about $1.5 billion of either cash as card orders or flows to protect ourselves in a down rate environment. So we are thinking about that possibility. While our forecast assumes no declines, we are starting and to put on some protection should rates start to decline more quickly than what our models assume. Daniel Tamayo Okay. All right, thanks for the color guys. I’ll step back.Operator Thank you. One moment for our next question. Our next question comes from the line of Chris McGratty from KBW. Chris McGratty Hey, good morning. Maybe some of the balance sheet questions that’s top of mind. And Mark we’ve see some of your peers flex the balance sheet up or down based on the pressures that we’re seeing on deposits.
I guess number one, with your loan-to-deposit ratio where it is and kind of the environmental changes to deposits, is there a situation where you might consider just slowing. I think you’re updated NII guide was just a margin play. Would you consider slowing the balance sheet since I would presume the profitability on a marginal loan is a little bit lower?Curt Myers Yeah Chris, it’s Curt. As we look at future growth, I mean we want to continue to support our customers and grow on the loan side and the deposit side we expect those to be more in-line.We really stepped in to slow the pace of increase in the loan deposit ratio and we think we’ve done that effectively and we will look for balanced growth and really be mindful of that incremental margin as we evaluate loan opportunities, as we move forward really focused on maximizing risk adjusted return.
Chris McGratty Okay thanks. On capital, how should we – I totally appreciate the pause in the buyback seems like the right move. How do we think about the direction of capital ratios in today’s environment? Curt Myers We are going to continue to be prudent and grow our capital base as we typically do. We did pause the buyout. We would potentially reevaluate that as we move forward. But first and foremost, we are focused on capital preservation and being prudent with the balance sheet.Chris McGratty Okay. And then maybe just one more if I could go a little bit into credit. Your provision guide Mark would suggest that the last two quarters run rates, given the one credit you’ve been talking about would step down pretty notably. I’m just trying to get a sense of I guess why throw out the target that, I won’t say aggressive, but much lower given how uncertain the environment is and investors looking for reserve builds.
Any thoughts there would be great. Mark McCollom Yeah Chris, as we look at credit, the last two quarters to the fourth quarter and first quarter we had combined $26 million in charge-offs and $25 million of that was this individual credit that we talked about. As we look at the credit portfolio right now and the forward look on credit and large end/or isolated credits, we feel comfortable with the guidance and we thought it was appropriate to give guidance. This one significant unique credit for us really had a significant impact over the last two quarters.Curt Myers Yeah. And what I would also add Chris is, your provision is largely a function of growth, and the loan growth, 8% of linked quarter was a solid first quarter for us. Now again, stepping down from a very solid fourth quarter, I would anticipate that our first quarter loan growth is going to be higher than what our overall loan growth would be for the full year based on just kind of where you see macroeconomic factors go.Chris McGratty Okay, that’s helpful.
Thanks a lot.Operator Thank you. One moment for our next question. Our next question comes from the line of Feddie Strickland from Janney Montgomery Scott.Feddie Strickland Hey! Good morning. A – Curt Myers Good morning Freddy.Feddie Strickland Was just curious, is the FHLB borrowing capacity you listed on slide 12, is that what’s currently pledged at FHLB or is that inclusive of all potential loan and securities collateral in the balance sheet?Curt Myers That is what we currently have that is committed.Feddie Strickland Got it, okay. And then, kind of along that same line, I appreciate the detail on liquidity on slide 12, but was curious if you can talk about the bank term funding program and just how you view that versus other liquidity sources.
I think it says on the additional that you haven’t used any of it so far, but was just order of operations. How do you view it?Curt Myers Yeah, correct. We view that similarly to the way we view the discount window and it’s great that it’s there, but we view that more as a lender of last resort for us. And we would tap FHLB and other things before we would consider using it.Feddie Strickland Got it. And then just one more for me would be, most of the changes to your 2023 outlook make sense, but was curious what drove the slightly lower top end on non-interest expense? Are you seeing a little less wage pressure, just wondering what changed the guide there?Curt Myers Yeah, yeah, so when you just consider the guide to NII and that results in lower earnings for the year.
So a lot of that for us is going to be lower incentive compensation accruals.Feddie Strickland Got it. That makes sense. I’ll step back in the queue. Thanks for taking the question.Curt Myers You bet.Operator Thank you. One moment for our next question. Our next question comes from the line of Matthew Breese from Stephens Inc.Matthew Breese Good morning everybody.Curt Myers Good morning Matt.Mark McCollom Hey Matt!Matthew Breese I wanted to touch on the office loan. What was the ultimate change in value from origination to now? And was there anything else more idiosyncratic to this particular credit beyond COVID impact and pardon my ignorance, could you go into color, add a little more color on the ground lease impacts? It just feels like a Jurassic change in valuation from the rough math I have here, and I want to get a sense of the pin support direct picture for the rest of the theory office book.A – Curt Myers Yeah Matt, so original value is $58 million.
