Fulton Financial Corporation (NASDAQ:FULT) Q3 2023 Earnings Call Transcript

Fulton Financial Corporation (NASDAQ:FULT) Q3 2023 Earnings Call Transcript October 18, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Fulton Financial Third Quarter 2023 Results. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like now to turn the conference over to Matt Jozwiak, Director of Investor Relations. Please go ahead.

Matt Jozwiak: Thank you, Michelle, and good morning, and thanks for joining us for Fulton Financial Corporation’s conference call and webcast to discuss our earnings for the third quarter, which ended September 30, 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 was 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 our Investor Relations 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 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 as well as Slides 16 through 20 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.

Curtis Myers: Thanks, Matt, and good morning, everyone. Today, I’ll provide a summary comments on our company, including comments on our financial results, our growth and an overview of the credit environment. Then Mark will share more details on the financial results and step through our outlook for the remainder of 2023. After our prepared remarks, we’ll be happy to take any questions you may have. We were pleased with our third quarter results. Operating earnings of $0.43 per share were solid. We saw deposit and loan growth. Our net interest margin was stable, and we maintained solid asset quality. Our pre-provision net revenue was down 4% as fee income on an operating basis was down linked quarter. We generated strong results in Wealth Management that helped offset a decline in capital markets income this quarter.

Operating expenses were higher during the quarter, largely driven by additional technology expense as well as higher salaries and benefits expense. Our core operating expenses are expected to decline in the fourth quarter from the third quarter levels. We are focused on our current level of core operating expenses and are committed to realizing the full benefit of recent technology investments, continuing to generate smart growth and obtaining staffing efficiencies to drive core operating expenses to average assets down in future periods. In addition to our solid operating results, we repurchased 2.2 million shares in the third quarter and continue to monitor deployment – capital deployment opportunities. As of September 30, $29 million remains from our $100 million 2023 repurchase authorization.

Turning to growth. Total loan growth moderated this quarter, growing $133 million or 2.5% annualized. These results were in line with our expectations as communicated in prior quarters. Commercial loans experienced modest growth and a mixed shift occurred as commercial mortgage loans moved from construction to permanent status. Consumer loan growth was driven by residential mortgages. However, that growth continues to moderate as expected. Overall, we are focused on originating loans at the appropriate risk-adjusted spreads and acknowledge the impacts of a higher for longer interest rate environment and current economic conditions may have on this loan growth. Deposit growth outpaced loan growth and was $215 million for the quarter. This was driven by seasonal inflows of municipal deposits of $270 million.

As a result, our loan-to-deposit ratio benefited declining from declining to 98.9%, this remains well within our long-term target range of 95% to 105%. We continue to invest in long-term organic growth. During the quarter, we opened one new financial center in Philadelphia, in addition, we have financial centers targeted to open in the Philadelphia, Richmond and the Wilmington MSAs in the fourth quarter. We also recently opened a loan production office in Norfolk, Virginia in order to further accelerate growth in that market. Turning to credit quality. Our credit quality metrics remained stable. Net charge-offs were $5 million or 10 basis points annualized. Credit size and class loans declined, nonperforming assets declined and delinquencies remained historically low.

We have again provided detail on our loan portfolio and specifically on office portfolio on Slides 4 and 5. I’d like to note that our overall concentration in commercial real estate is approximately 185% of total capital well below our proxy peer average. Overall, we remain pleased with our credit metrics. However, we acknowledge the market trends and their potential impacts on credit quality. Now I’ll turn the call over to Mark to discuss the details of our third quarter financial performance and our 2023 outlook in a little more detail.

Mark McCollom: Thanks, Curt, and thank you to everyone for joining us on the call this morning. Unless I knew it otherwise, the quarterly comparisons I will discuss are with the second quarter of ’23. And the loan and deposit growth numbers I’ll be referencing are annualized percentages on a linked quarter basis. Starting on Slide 6. As Curt noted, operating earnings per diluted share this quarter was $0.43 on operating net income available to common shareholders of $72.2 million. This compares to $0.47 of operating EPS in the second quarter of 2023. Moving to the balance sheet. As we anticipated, loan growth slowed in the third quarter to $133 million, or 2.5% annualized. On the commercial side, growth moderated to $47 million or 1.4% and was a mix of certain categories offsetting others during the quarter.

Consumer loan growth also moderated to $86 million or 4.7% during the quarter. While mortgage lending remained the majority of our consumer loan increase, the third quarter growth rate slowed considerably from prior quarters due to higher loan pricing and overall demand. We have raised new loan rates across the board with most new loan yields falling between 7% and 8.5% depending on product and borrower-specific criteria. Total deposits grew $215 million during the quarter. Interest-bearing deposits grew $506 million or approximately 13% with seasonal growth in our municipal deposit portfolio contributing $270 million of that total. This growth was offset by a decline in our noninterest-bearing DDA accounts. Noninterest-bearing balances declined $290 million during the period, which was down from $538 million decline in the second quarter and a $603 million decline back in the first quarter.

This moderation in the mix shift from noninterest-bearing to interest-bearing deposits was slightly better than our expectations and helped increase our NII guidance that I will provide at the end of my comments. As Curt mentioned, our loan-to-deposit ratio ended the quarter at 98.9%, down from 99.2% at the end of last quarter. We had no net broker deposit purchases during the quarter and that component of our funding remains low at only 4% of total deposits. Moving to Slide 7. Last quarter, we shared with you this 33-year history of our noninterest-bearing deposit percentage. We believe we should end the year between 23% and 24% noninterest-bearing deposits, down from 27.7% at June 30 and 26% at September 30. This estimate assumes that we’ll have an additional deposit shift of approximately $350 million to $400 million of interest-bearing deposits during the fourth quarter of 2023.

Our investment portfolio declined approximately $200 million during the quarter, closing at $3.7 billion. Going forward, we expect our investment portfolio to migrate upward as market conditions dictate, ultimately equaling about 15% of our balance sheet. Putting together those balance sheet trends on Slide 8, net interest income was $214 million, a $1 million increase linked quarter. Our net interest margin for the third quarter was 3.40%, consistent with 3.4% in the second quarter. Our loan yields expanded 20 basis points during the period, increasing to 5.72% versus 5.52% last quarter. Cycle-to-date, our loan beta has been 46%. Our total cost of deposits increased 24 basis points to 1.56% during the quarter. Cycle-to-date, our total deposit beta has been 29%.

Turning to credit quality on Slide 9. Our nonperforming loans decreased $6.3 million during the quarter, which led to our NPL loans ratio decreasing to 67 basis points at September 30 versus 70 basis points at June 30. Loan delinquency remains historically low at 1.12% at September 30 versus 1.05% last quarter. Our allowance for credit loss as a percent of loans increased from 1.37% of loans at June 30 to 1.38% at quarter end. Turning to noninterest income on Slide 10. Our wealth management revenues were $19.4 million, up from $18.7 million for the second quarter. We continue to invest in our wealth business, and it now represents about 1/3 of our fee-based revenues. The market value of assets under management and administration declined $17 million during the quarter to close at $14.2 billion.

Commercial banking fees declined to $19.7 million during the quarter. Reduced loan originations, tempered capital markets revenue in our customer swaps business coming off of a very strong second quarter. Other categories within commercial fees were solid as both merchant and card revenues have exceeded our expectations year-to-date. During the quarter, we recorded a charge of $3 million in other fee income related to our final transition from LIBOR to SOFR. In order to minimize customer disruption and rewriting certain loan and swap contracts, this resulted in a valuation difference that must be recorded this quarter. This unrealized accounting loss will be recouped over the expected life of the underlying swap contracts. Consumer Banking fees were up modestly for the quarter, with pickups in credit card revenues and overdraft fees.

Mortgage banking revenues picked up linked quarter as an increase in volume offset a slight decrease in gain on sale spreads in the third quarter. Application volumes, however, were down 6% year-over-year as rate increases and low housing inventories influenced applications, originations and overall loan sale volumes. Moving to Slide 11. Noninterest expenses were $171 million in the third quarter, a $3 million increase from the second quarter. The following items contributed to this increase, higher base salary expense, due to one additional calendar day in the quarter and higher outside services costs associated with certain technology initiatives. On Slides 12 and 13, we are continuing to provide you with expanded metrics on capital and liquidity.

First, on Slide 12, as of September 30, we maintained solid cushions over the regulatory minimums for all of our regulatory capital ratios. We’ve also provided you with an alternative view of our regulatory ratios, including the impact of accumulated other comprehensive income. Our tangible common equity ratio was 6.8% at quarter end, down from the prior quarter due to higher long-term interest rates and the related impact on OCI. Included in tangible common equity is the accumulated other comprehensive loss on the available-for-sale portion of our investment portfolio in derivatives. This totaled $374 million after tax on a total AFS portfolio of $2.9 billion. On Slide 13, including the loss on our held-to-maturity investments, which is $203 million after tax on an HTM portfolio of $1.3 billion, our tangible common equity ratio would be 6.2% at September 30, still representing over $1.6 billion in tangible capital.

On Slide 14, we provided you with a comprehensive look at our liquidity profile. We’re 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 $8.7 billion at September 30. In addition, we maintain over $2.5 billion in Fed fund lines with other institutions. On Slide 15, we are providing our updated guidance for the remainder of 2023. Our guidance now assumes a final 25 basis point Fed funds increase at their November meeting. 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 855 – sorry, $845 million to $855 million. We expect our provision for credit losses to be in the range of $55 million to $65 million.

We expect our core noninterest income, excluding securities gains, to be in the range of $220 million to $230 million but we are trending to the higher end of this range. And we expect our core noninterest expenses to be $665 million, plus or minus, for the year. And lastly, we expect our effective tax rate to be in the range of 17.5%, plus or minus for the year. With that, I’ll now turn the call over to the operator for your questions. Michelle?

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Q&A Session

Operator: [Operator Instructions] The first question comes from Daniel Tamayo with Raymond. Your line is now open. Daniel, your line is now open. Daniel, can you hear us? Your line is open. Please stand by for the next question. The next question will come from Chris McGratty with KBW. Your line is open.

Chris McGratty: Hello, good morning. Curt, maybe starting with you on capital. You talked about the slowing of the balance sheet, which is reflective in [H8] trends but you tipped at the buyback. How do we think about, I guess, finishing it, additional buybacks, other uses of capital given the – I would say, still uncertain economic environment.

Curtis Myers: Yes. So our capital strategy remains the same. We’re going to support organic growth as we look in the fourth quarter here first, and then we would look at all, other alternatives like buybacks. We do have $29 million remaining in that authorization. And we’re active in the third quarter, we make those determinations based on pricing and capital use.

Chris McGratty: And then maybe two follow-ups. Mark, I think you said you have a November hike in the guide. I think the market is kind of 50-50 if we get it. Can you just remind us what each 25 is? I think you provided it on a on a monthly basis in the past?

Mark McCollom: Yes. Yes, I would say that if we don’t get that, you have just under $9 billion of variable rate loans that would reprice. So if you don’t get that benefit, that number ends up being a little bit north of $20 million annually, so a little bit under $2 million a month. But then obviously, the wildcard question is what if we don’t get that? Does that change your glide upward in the deposit costs? So there’ll be some offset to that.

Chris McGratty: And then maybe my last, there was a report overnight about Interchange making its way through regulation again. Can you just remind us, obviously, you’re above $10 billion, but just what the potential – or remind us what the impact was previously and how much might be at risk if we get more regulation?

Curtis Myers: Yes, Chris, we really didn’t look at the numbers yet because we don’t know what will happen. I mean we have the sensitivity on it. We are in it. So we benefit and have cost offsets with that as well. So we have to model on both sides of that, depending on what plays out from a legislative standpoint or from a market standpoint, pricing with customers. So we do benefit in some regards, and then we would have an offset. It was a net reduction for us previously when Durbin was put in place originally but not a material reduction for us at that time.

Chris McGratty: Okay. Thanks.

Operator: Our next question comes from Feddie Strickland with Janney Montgomery. Your line is open.

Feddie Strickland: Hi. Good morning. Just wonder if you can talk about upcoming maturities in the loan portfolio over the next couple of quarters in ballpark, what’s the rate on those – on average as they come off as they mature versus renewal?

Mark McCollom: Yes, I would say on ones that are maturing, I mean, again, it’s going to be a pretty wide swath steady depending on the category. But I mean, it could be – as I mentioned, our new loan anywhere from 7% to 8.5% that we’re putting on right now, maturities are coming off anywhere from sort of that 5.5% to 7% range depending on loan category.

Feddie Strickland: Got it. And then can you remind us of the timing of when those public funds flow back out and what the rate was on those? Because I’m assuming when they flow back out at some point in 2024, the margin benefits a little bit is – those are generally higher rate, right?

Mark McCollom: They are lower than our marginal cost of borrowings. Obviously, like right now, because I mean in our municipal business, I mean, we do have a lot of the core operating accounts for those municipalities. Over the last year, with the increase in rates, the overall yield on that portfolio has crept up to where it’s a little bit under 2% today, about 1.9%. And our normal cyclicality there, what we’ve seen in the last two years has been a consistent around like that 300-ish like we saw this past quarter, increase in the third quarter. And then in the fourth quarter, you tend to see a similar amount in the last two years. Three years ago, it used to be a little more, but right now, it’s more about $200 million to $300 million of outflows.

Feddie Strickland: Got you. Just one last one for me. We’ve seen steady growth in wealth fees for, I think, three quarters now. Do you feel like that trajectory could continue? Or do we see a bit of a pullback in future quarters?

Curtis Myers: We consistently grow that business. It is market sensitive in some of the products but it’s a recurring fee business, and we grow the underlying assets under management. So while it will ebb and flow with the market, those changes should be muted. And if you look at the long-term trends in growth in wealth, we expect those to continue.

Feddie Strickland: Understood. Thanks for taking my question.

Operator: Please stand by for our next question. The next question comes from David Bishop with Hovde Group. Your line is open.

David Bishop: Hi, good morning. I appreciate the commentary with regard to the percent of capital allocated to commercial real estate. I think you said 185%. Clearly, in the Northeast, a lot of your peers are bumping up against that 300% threshold, some are well above that. Do you see that – does that give you any opportunity here in the near to intermediate term to maybe take market share? Are you seeing some of the competitors migrate out good credits that you guys could all stop up here with some excess capacity?

Curtis Myers: Yes. We are being very strategic about that. It does create opportunities for us. We’ve kept our commercial real estate team intact, and we are getting opportunities that may not have been available to us. We are being disciplined around credit and pricing and it’s an opportunity for us from a high-quality customer standpoint, but also to get the pricing credit parameters that that we need in this environment. So it is an opportunity for us, and that’s how we’re looking at it.

David Bishop: Got it. And then within the – I appreciate the disclosures regarding office theory and central business district exposure. Any sort of inter-quarter weakness there or any update in terms of what you’re seeing in terms of credit trends within that portfolio?