Fulton Financial Corporation (NASDAQ:FULT) Q4 2023 Earnings Call Transcript

Fulton Financial Corporation (NASDAQ:FULT) Q4 2023 Earnings Call Transcript January 17, 2024

Fulton Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Matt Jozwiak: Hi, good morning, and thanks for joining us for Fulton Financial’s Conference Call and Webcast to discuss our Earnings for the Fourth Quarter and Year Ended December 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 — under Investor Relations on our website. On this call, representatives of Fulton may make forward-looking statements with respect to Fulton’s financial condition, results of operations, and business.

These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially. Please refer to the Safe Harbor statement on forward-looking statements in our earnings release and on Page — 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 16 through 20 of today’s presentation for 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. For today’s call, I’ll be providing some high-level thoughts on the year, I will discuss our fourth quarter business performance and share some key objectives for us in 2024. Then Mark will review our financial results in more detail and step through our guidance for 2024. After our prepared remarks, we will be happy to take any questions you may have. Our performance in 2023 was a result of an extraordinary effort by our team in what was an unprecedented year. In 2023, our commitment to our customers was on display as we adapted quickly to customer needs and delivered on their expectations. As a result, in a very challenging environment, we grew customer households and now serve more than 534,000.

We continue to invest in growing our market presence and enhancing the customer experience. We added four new financial centers, two new loan production offices, and talented team members throughout our company to support our continued growth. We continue to invest in and develop our customer digital experience with customers now using our digital solutions over 6 million times a month. We also made tremendous positive impact on the communities we serve. In 2023, we launched our Diverse Business Banking program, accelerating our outreach to businesses that have been traditionally underserved by our industry. Through this program, we are adding new customers and new revenue for our company, while making a difference in our communities. For more information on our overall community impact, please review our 2022 Corporate Social Responsibility Report that was issued in 2023.

In this report, you can see how we are changing lives for the better. Our 2023 financial performance was very solid. Pre-provision net revenue eclipsed $400 million, a new record, and our operating EPS of $1.71 was the second best in the long history of our company. While continuing our strong focus on pricing, profitability, and credit strength, loan growth exceeded $1 billion for the second year in a row. We increased our liquidity during the year, maintaining $8 billion in committed liquidity at year-end. Our net interest margin expanded 15 basis points during the period of significant interest rate volatility. We managed and deployed capital with discipline. During the fourth quarter, we increased our common dividend for a second time during the year, returning $0.64 in common dividends to our shareholders in 2023.

In addition, we repurchased just over 5 million shares of Fulton stock throughout the year at a blended cost of $15.15. Even with these capital actions, we maintained strong capital ratios. We also navigated the credit environment effectively in 2023 as performance was even better than we anticipated at the beginning of the year. And as a result, we delivered a 15% return on tangible common equity in 2023. Overall, we were pleased with our performance and the results our team generated this year. We look forward to continuing to execute on our corporate strategy to grow the company by delivering effectively for customers and operating with excellence, so that we can serve all of our stakeholders. Now let me turn to our quarterly performance, with particular emphasis on growth, credit, and our forward outlook.

Operating earnings per share for the quarter was $0.42. Loan growth moderated as we anticipated during the quarter to $174 million or 3% on an annualized basis. Deposit growth was modest as total deposit balances grew $116 million or 2% on an annualized basis during the quarter. Our loan-to-deposit ratio ended at 99.1%, relatively stable with the last quarter and well within our long-term operating target of 95% to 105%. Turning to our non-interest income, diversity in our Fee Income businesses continues to serve us well. Non-interest income was $59.4 million with Wealth, Commercial, and Consumer and Small business continuing to deliver solid results on an overall basis. Moving to credit, the provision for credit losses was $9.8 million, down slightly from $9.9 million last quarter.

We saw some migration in our credit quality metrics during the quarter and remain focused on how higher interest rates and higher costs are impacting our customers. We’re cautious in our outlook for 2024. Now looking forward, this year will be full of opportunity for us. Our focus remains on growth and profitability, actively managing credit, and taking action on improving efficiency overall. Even with solid results for the quarter and the year, we acknowledge the need to grow appropriately in this market and improve our productivity and efficiency in 2024. As you saw in our press release, we took implementation charges related to a new initiative we launched in the fourth quarter. This initiative named FultonFirst is a process to evaluate and improve all aspects of how we operate, to support our continued growth we recognized and have begun to act on the need to streamline operations, create efficiencies, and leverage our significant investment in technology.

We have three key tenants driving our strategic transformation, simplicity, focus, and productivity. We are very excited about FultonFirst and believe that over the next several years it will accelerate our growth rates and improve our operating efficiency on a sustained basis. We will have more discrete details to share with you during the year. The 2024 impact of FultonFirst will be most visible in our expense line items as it will help us meet the limited expense growth rate in our guidance. Longer-term, FultonFirst will also support accelerated growth. Mark will step you through the 2024 guidance in a moment. These high-priority initiatives and the leadership team that we have in place will drive performance and deliver the next phase of long-term success for our company.

Now I’ll turn the call over to Mark to discuss our financial performance and 2024 guidance in more detail.

Mark McCollom: Thank you, Curt, and good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the third quarter of 2023 and the loan and deposit growth numbers I will be referencing are annualized percentages on a linked-quarter basis. Starting on Slide 6, operating earnings per diluted share this quarter were $0.42 on operating net income available to common shareholders of $68.8 million. This compares to $0.43 of operating EPS in the third quarter of 2023. Moving to the balance sheet, as Curt noted, loan growth was modest during the quarter, growing $174 million, or 3% annualized. Commercial lending contributed $120 million of this growth, or 3% annualized. Construction lending grew $142 million, driven by additional draws and new originations during the quarter.

Commercial real estate lending growth slowed to $22 million, or 1% annualized, and C&I lending declined modestly, down $32 million, or 3%. Consumer lending produced growth of $54 million or 3% during the quarter. While at a slower pace, we continued to originate and portfolio adjustable rate mortgages. Total deposits increased $116 million during the quarter. Growth in CDs and broker deposits more than offset seasonal outflows in our municipal deposits business of approximately $220 million. Our non-interest-bearing DDA balances ended the year at $5.3 billion, or 24.7% of total deposits, which was modestly better than we anticipated during our third quarter earnings call. Our shift from non-interest-bearing deposits to interest-bearing was $552 million for the second half of 2023 versus a shift of $1.1 billion in the front half of the year.

Our NII guidance for 2024 assumes we’ll continue to see migration from non-interest-bearing deposits into interest-bearing products throughout 2024, but at a slower pace than we saw in 2023. We currently expect non-interest-bearing deposits to end 2024 at approximately 22% of total deposits. Our investment portfolio was relatively flat for the quarter, closing at $3.7 billion. During the quarter, we did repurchase a small portion of subordinated debt, $5 million, which generated a $750,000 gain reflected in other expense. This gain was offset by a similar level of securities losses as we sold $120 million of securities yielding 1.4% using the proceeds to pay down overnight borrowings at 5.35%. This very small repositioning will add modestly to our net interest income and net interest margin in 2024 and is included in the guidance, which I’ll step through in a few minutes.

Putting together all of these balance sheet trends on page or on Slide 8, our net interest income was $212 million, a $2 million decline in the link quarter. We were pleased with how well our net interest margin held up, declining only 4 basis points to 3.36% versus 3.4% last quarter. Loan yields expanded 11 basis points during the period, increasing to 5.83% versus 5.72% last quarter. Cycle to date, our loan beta has been 49%. Our total cost of deposits increased 23 basis points to 179 basis points during the quarter. Cycle to date, our total deposit beta has been 34%. Turning to asset quality, non-performing loans increased $12.7 million during the quarter, which led to our NPL to loans ratio increasing from 67 basis points at September 30th to 72 basis points at year end.

Net charge-offs of $8 million, or 15 basis points were diversified with no individual charge off greater than $2 million. Overall, loan delinquency increased modestly but remains at a low level, increasing to 1.19%. Our allowance for credit loss as a percent of loans was relatively flat at 1.37% at year end. Turning to non-interest income on Slide 10, wealth management revenues were $19.4 million, consistent with the third quarter. As a reminder, wealth management represents about a third of our fee based revenues with over 80% of these revenues recurring. The market value of assets under management and administration increased over $500 million during the quarter to $14.8 billion at year-end, a new record for our company. Commercial banking fees increased $1 million to $20.8 million as capital markets and SBA revenue increases drove the quarter.

Consumer banking fees of $12.1 million were consistent with the third quarter in all areas and continues to deliver a very consistent fee income stream. Mortgage banking revenues declined $900,000 to $2.3 million, and were driven by a seasonal decline in mortgage originations, as well as a decline in gain on sales spreads. A net market value change of $1.1 million in other fee income was recorded during the period related to the LIBOR to SOFR transition. Moving to Slide 11. Non-interest expenses on an operating basis were $171 million in the fourth quarter, in line with the prior quarter. Material items excluded from operating expenses were charges of $6.5 million for the special FDIC assessment and $3.2 million related to our FultonFirst initiative.

Additionally, our operating expenses were impacted by $1.6 million increase in marketing expense and a $700,000 gain on the aforementioned debt extinguishment. Turning to Slides 12 and 13, we are providing you with updates on our capital base. As of December 31, we maintained solid cushions over the regulatory minimums and our bank and parent company liquidity remains strong. We’ve also provided you with an alternative view of our regulatory ratios, including the impact of AOCI. Our tangible common equity ratio improved to 7.4% at year-end, a 60 basis point increase during the quarter, driven by solid earnings and a material decrease in AOCI due to lower interest rates. Our accumulated other comprehensive income balance on the available-for-sale portion of our investment portfolio and derivatives is currently $299 million versus $480 million last quarter.

On Slide 13, including the loss on our held-to-maturity investments, which is $140 million after tax on an HTM portfolio of $1.3 billion, our tangible common equity ratio would still be 7% at December 31, representing $1.9 billion of tangible capital. On Slide 15, we are providing guidance for 2024. Our guidance assumes a total of 75 basis points of Fed funds decreases occurring in the second half of the year. Our 2024 guidance is as follows. We expect our net interest income on a non-FTE basis to be in the range of $790 million to $820 million. We expect our provision for credit losses to be in the range of $45 million to $65 million. We expect our non-interest income, excluding securities gains, to be in the range of $235 million to $250 million.

We expect non-interest expenses on an operating basis to be in the range of $670 million to $690 million. This estimate excludes any potential charges we may incur as a result of FultonFirst throughout the year. And lastly, we expect our effective tax rate to be in the range of 17% to 18% for the year. With that, I’ll now turn the call over to the operator for your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Daniel Tamayo with Raymond James. Please proceed.

Daniel Tamayo: Good morning, guys. Thanks for taking my question.

Curtis Myers: Hey, Danny, good morning.

Daniel Tamayo: Maybe just to start on the FultonFirst initiative, I appreciate your comments, Curt, on kind of what’s behind it, but just curious if there are any profitability targets or goals associated with that program? And then if there’s — I think you mentioned that the expense guidance doesn’t include any other potential charges in 2024, if you have an estimate of what that might be coming in that line would be great. Thanks.

Curtis Myers: Yes, Danny, thanks for the question. Our team is really excited about the FultonFirst initiative. We’re really focused on the long-term growth strategy for the company, as well as the operating efficiency. We’re being really transparent with the program early on because we wanted to help you understand some short-term cost impacts that happened this past quarter and then explain how we’re going to meet the guidance specifically on the expense guide going forward because it’s probably a little light relative to expectations. So, we’re being very strategic, and an overall review of the company, it’s not just a simple cost-cutting initiative, but really a strategic initiative to grow more efficiently over time. So to answer your specific question, we don’t have targets at this point, but we feel this initiative is going to help us meet our 2024 guidance and then probably even more importantly lead to long-term sustained improved efficiency for the company.

But at this point, we don’t have any specific targets. We’re going to share more over time and we wanted to be early with this so that we are transparent and that you could understand some of the initial costs as we launch the initiative.

Daniel Tamayo: Sorry, are you expecting this to be kind of a longer term than in terms of the costs that you’re taking, I mean — or is it — is the bulk of it what you took in the fourth quarter or should we expect this to be kind of an ongoing initiative in terms of costs you’re taking here?

Curtis Myers: Yes, Danny. I mean, we will have ongoing one-time costs to implement the changes that we decide to implement and then we’ll match them with cost saves and revenue expectations as we move forward, so more to come. This is the beginning of the initiative, and we’re being very thoughtful, diligent about working through the process and we wanted to be transparent with everyone. It is not just a simple cost-cutting initiative, but there will be cost cutting that is associated with it. We’ll keep you informed throughout the year.

Daniel Tamayo: Okay. And then, maybe one for Mark on credit, and I guess the range that you gave for provision for the year. Just curious how you’re thinking about what may drive the low and the high-end of that range if that’s mostly just credit volatility or if there is kind of balance sheet growth estimates embedded in that as well? Thanks.

Curtis Myers: Just a comment from me and then Mark can add to it if he wants. As we look at the provision, it’s predominantly charge-offs normalizing, and charge-offs were 15 basis points in the last quarter. Our long-term averaging charge-offs has been a little less than 20 basis points in recent history. So charge-offs drive that and then our growth rate would drive that. What’s the unknown variable for everybody is just economic conditions as we move forward in the base allocation with what we know right now that’s the range we’re comfortable with.

Daniel Tamayo: Would you say the mid-point is — what’s the assumption for — if you were to hit that $55 million, is that like a soft landing or how should we think about what your baseline assumption is?

Mark McCollom: Yes, Danny, if you think about the baseline assumption, the baseline assumption right now from Moody’s does assume a softer landing, so our baseline assumption would be, again, continuing to revert. In the fourth quarter, we got closer to our long-term average on net charge-offs, but the mid-point of our guide would assume we get back to that longer-term average of between 15 basis points and 20 basis points of net charge-offs, and then a growth rate in loans that’s consistent with that kind of 4% to 6%, probably more the lower end of that range for 2024.

Daniel Tamayo: Got it. Thank you for all the color. I’ll step back, guys. I appreciate it.

Curtis Myers: Thanks, Danny.

Mark McCollom: Thanks, Danny.

Operator: Thank you. One moment for our next question. Our next question comes from Frank Schiraldi with Piper Sandler. Your line is now open.

Frank Schiraldi: Good morning.

Curtis Myers: Good morning, Frank.

Mark McCollom: Hi, Frank.

Frank Schiraldi: Just wondering if you guys — obviously, the growth in the quarter was in part — loan growth in the quarter was, you talked about, Mark, driven by construction balances with some of that being additional drawdowns, and some of that being new origination. I wonder if you could just talk a little bit about your thoughts on growth going forward in the loan book and what that complexion of growth might look like? Is there more opportunity on the commercial real estate side, given where your concentration limits are? Just general thoughts there. Thanks.