Fulton Financial Corporation (NASDAQ:FULT) Q1 2024 Earnings Call Transcript

Fulton Financial Corporation (NASDAQ:FULT) Q1 2024 Earnings Call Transcript April 17, 2024

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Operator: Good day, and thank you for standing by. Welcome to the Fulton Financials’ First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will 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 Financials’ conference call and webcast to discuss our earnings for the first quarter ended March 31, 2024. Your host for today’s conference call is Curt Myers, Chairman and Chief Executive Officer. Joining Curt today is Betsy Chivinski, Interim Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations, and then on News. The slides can also be found on the Presentations page under Investor Relations on our website. On this call representatives of Fulton may make forward-looking statements with respect to Fulton’s financial condition, results of operations, and business.

These statements are not guarantees of future performance 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 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 17 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: Well, thanks Matt, and good morning, everyone. For today’s call, I’ll be providing high level thoughts on our performance for the quarter and provide a few comments on the company. Then I’ll turn the call over to Betsy Chivinski, Interim Chief Financial Officer to 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. We were pleased with our first quarter results. Operating earnings of $0.40 per share were a solid start to the year. We saw both deposit and loan growth. The net interest margin was in line with our expectations. We continue to have stable asset quality metrics and our capital position remains strong.

During the quarter, we also increased our committed liquidity by $1 billion. We repurchased 1.9 million shares of Fulton stock. I’d like to note that with this repurchase, we’ve now repurchased all 6.2 million shares of common stock issued in connection with the Prudential Bancorp Inc., acquisition in 2022. As of March, 31, 95 million remains from our 125 million 2024 repurchase authorization. Turning to growth for the quarter. First quarter deposits outpaced loan growth at $204 million, or 4% annualized. Pricing, growth, and mix remain our focus as we continue to position our product offering to support and grow our customer base. Loan growth as we anticipated moderated to $93 million, or 2% on an annualized basis. Profitable growth and prudent credit decisions remain our focus.

Our loan-to-deposit ratio ended the quarter at 98.6%, a linked quarter decline and well within our long-term operating target of 95% to 105%. Despite ongoing market pricing pressures, net interest margin remained in line with our expectations drifting lower by 4 basis points to 3.32%. Our non-interest expense income was solid at $57.1 million. We delivered record results in wealth management that helped offset a decline in customer interest rate swap income this quarter. Overall, we are pleased with our fee income performance and continue to benefit from the diversification of this revenue stream. Now, let me provide some comments on credit. The provision for credit losses was $10.9 million, up slightly from $9.8 million last quarter and in line with our expectations.

While overall credit metrics remain historically strong, we saw some migration in certain credit metrics during the quarter. Criticized and classified loans drifted modestly higher. This migration is not specific to any particular industry, portfolio or region, and we continue to focus on how higher interest rates and higher costs are impacting our customers. We remain cautious in our outlook for 2024. Now looking forward, as I mentioned last quarter, our Fulton First initiative is an internal process to evaluate and improve how we operate. Three key tenets of this initiative to drive our strategic transformation are simplicity, focus, and productivity. During the quarter, we made good progress on this initiative with more work ahead of us.

We anticipate sharing more details as appropriate in coming quarters. Overall, a solid start to the new year. Now I’ll turn the call over to Betsy to discuss our financial performance and 2024 guidance in more detail.

Betsy Chivinski: Thank you, Curt, and good morning. Unless I note otherwise, the quarterly comparisons I mentioned are with the fourth quarter of 2024, and loan and deposit numbers, I’ll be referencing are annualized percentage growth on a linked quarter basis. So starting on Slide 8, operating earnings per diluted share this quarter were $0.40 on operating net income available to common shareholders of $65.4 million. This compares to $0.42 of operating EPS in the fourth quarter of 2023. As Curt noted, loan growth was modest during the quarter, increasing $93 million, or 2%. Commercial lending contributed $73 million of this growth, or 2%. The primary contributors included commercial real estate of $124 million or 6% and construction loan growth of $24 million, or 9%, offset by a decline in C&I loans of $78 million, primarily due to slightly lower line utilization.

Our CRE growth was not concentrated in any one category or geography and as shown in our earnings deck, remains well diversified. Consumer lending produced growth of $20 million, or 1% during the quarter, an increase of $70 million in residential mortgages, primarily adjustable rate was offset by decreases in other categories including consumer, direct and indirect loans, residential construction, and home equity. Total deposits increased $204 million during the quarter. Growth in time deposits, primarily with maturities less than one year more than offset the seasonal outflows in our municipal deposits of $137 million. Non-interest-bearing DDA balances ended the quarter at $5.1 billion, or 23.4% of total deposits in line with our expectations.

Our net interest income guidance for 2024 assumes we will continue to see migration from non-interest bearing to interest-bearing products throughout this year, but at a slower pace than we saw last year. Our investment portfolio was up modestly for the quarter closing at $3.8 billion, or 13.7% of assets. During the quarter, we purchased $210 million of MBS and CMO securities. These balance sheet trends are summarized in Slide 10. You can see net interest income was $207 million, a $5 million decline linked quarter, primarily driven by the modest change in the mix of our deposit portfolio. And as a result, net interest margin declined 4 basis points to 3.32% versus 3.36% last quarter. Loan yields increased 7 basis points during the period, increasing to 5.9% versus 5.83% last quarter, and cycle to date, our loan beta has been 50%.

Our cost of total deposits increased 16 basis points to 195 basis points during the quarter and cycle to date, our total deposit beta has been 36%. Turning to asset quality in Slide 11. NPLs increased $2.8 million during the quarter, resulting in a slight increase in the NPL to loans ratio from 72 basis points at 12/31 to 73 basis points at quarter end. Net charge-offs were $8.6 million, or 16 basis points. Gross charge-offs of $11 million were fairly granular, with the largest being $2.5 million on a C&I loan. Our allowance for credit losses as a percentage of loans increased slightly to 1.39% at quarter end. Turning to non-interest income on Slide 12. Wealth management revenues were $20.2 million, up $766,000 compared to the fourth quarter, passing the $20 million mark for the first-time in company history.

Wealth management represents about a third of our fee-based revenues, with over 80% of those revenues recurring. Also, the market value of assets under management and administration increased over $700 million to $15.5 billion at March 31, also a new record for our company. Commercial banking fees declined $2 million to $18.8 million as customer swap revenue, heavily reliant on new originations declined compared to a strong fourth quarter. Consumer banking fees declined approximately $400,000 to $11.7 million. First quarter seasonality played a part in that linked quarter decline. Our consumer banking business continues to deliver a very consistent income stream. Mortgage banking revenues increased $802,000 to $3.1 million and were driven by a seasonal increase in mortgage originations, as well as gain on sales spreads that rebounded from a low last quarter.

We have a number of investments that are accounted for under the equity method on which we recorded a loss of $1.6 million reflected in the other income line. Moving to Slide 13. Non-interest expenses on an operating basis were $170 million in line with the prior quarter and in line with our guidance. The material items we exclude from operating expenses include charges — the following charges, $1 million for special FDIC assessment, $3.6 million related to the closure of some financial centers, $2.5 million of consulting expense, and $200,000 of severance expense. Slide 14 shows a snapshot of our capital base and you can see as of March 31, we maintained solid cushions over the regulatory minimums. Also, both bank and parent company liquidity improved during this quarter.

On Slide 16, we are reiterating our guidance for 2024. Our guidance assumes that a total of 75 basis points of Fed funds decreases will occur in the second half of 2024. So our guidance is as follows. We expect net interest income on a non-FTE basis to be in the range of $790 million to $820 million. We expect the provision for credit losses to be in the range of $45 million to $65 million. We expect non-interest income, excluding security 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 for the year and to reinforce that estimate excludes potential non-operating charges we may incur as we move through the year. And lastly, we expect our effective tax rate to be in the range of 17% to 18% for the year.

With that, we’ll now turn the call over to Abigail for questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Frank Schiraldi with Piper Sandler. Please proceed with your question.

Frank Schiraldi: Good morning.

Curtis Myers: Good morning, Frank.

Frank Schiraldi: Just on the — on the Fulton First initiative, I get that it’s sort of a work in progress and you’re looking for efficiencies kind of across the board, but I assume that includes some expense saves as you close financial centers and so forth. So can you just remind us when we look at the guide, I know there’s — you take out the non-operating stuff, but in terms of run rate expenses, does that include some benefit from Fulton First? Is it sort of your best guess at this point or what you get from Fulton First, or is that something that could as we go through the year move that expense guide lower?

Curtis Myers: Yeah, Frank. We have certain expense saves in the back half of the year, as we begin to implement Fulton First. So we really are in the analysis stage and building our plan. So the overall plan is really driven to accelerate growth in certain areas as we focus even more in certain areas. But we do expect to see benefits from operating efficiencies and doing things a little differently as well. So there are some expense components to the save. I’d just like to remind everybody that the Fulton First initiative is really an 18 month to 24 month journey, and we’re in that four or five months of that work. So what you’re really seeing right now is the investment or spend to develop the plan for implementation. And when we get to the point of implementing, we’ll be able to share more details with you around expected benefits.

Frank Schiraldi: Okay. And then, on the loan growth, just looking at your guide on NII, is it fair to say, does that just assume sort of 1Q like loan growth spread across the year? And then, as a follow-up to that, if you could just remind us what the, on the deposit side, what the muni outflows were this quarter and how the time frame goes to flow back in?

Curtis Myers: Yeah. Let me talk a little bit about loan growth, then I’ll give it to Betsy for the municipal outflows, just the seasonality to that. So on loan growth, we’ve talked about our long-term organic growth targets in the 4% to 6% range. I think in this environment, we’re going to be at the low end or maybe even under the low end of that long-term range. So I think the growth in the first quarter, we may exceed that as we look forward, but it’s going to be in the same ballpark. We are being prudent and disciplined on pricing and credit as we originate loans moving forward.

Betsy Chivinski: And the municipal outflows were $137 million. So with at least in certain of our areas, certain taxes are paid in the second quarter, we should see a blip up, not huge, in the second quarter. And then the third quarter is where we tend to see those spike.

Frank Schiraldi: Got you. Okay. Thanks for the color.

Curtis Myers: Thanks, Frank.

Operator: One moment for our next question. Our next question comes from Daniel Tamayo with Raymond James. Please proceed with your question

Daniel Tamayo: Thanks. Good morning, everyone.

Curtis Myers: Good morning, Danny.

Daniel Tamayo: Maybe first, just on the NII guidance, reiterated from last quarter and you kept the three rate cuts assumed, which I understand given where we were at the end of the quarter. But maybe if you could give us your best guess as to what that guidance might look like without the June cut and if there’s any kind of other details in terms of how you’re thinking about the impact of fewer rate cuts on that guidance, that would be helpful?

Betsy Chivinski: So Dan, this is Betsy. We’ve kind of modeled that out. Really, we can tell on our loans that reprice immediately, it’s $25 million on an annualized basis, but the harder thing to protect is deposits. But we’ve kind of modeled all that out and with no cuts, we’re — we think we’re going to tilt towards the high end of the range, maybe a little bit higher. But again, they’re going to occur later in the year. So the impact on the year is going to be moderated.

Daniel Tamayo: Okay. All right. That’s with no cuts, high end of the range. Okay. All right. And then switching gears here if I can, just to the office portfolio. I appreciate all the detail you guys put in the deck on that. Just wanted to know, if you had within that group of loans what the amount that’s either substandard or criticized or classified or however you think about the early stage for that, I’m just curious how that portfolio is trending relative to the rest of your book.

Curtis Myers: Yeah, Danny. We’ve seen stability in that overall portfolio balances are stable, we’ve done — we’ve moved some out or paid off. We’ve had some originations that we did not much this past quarter, but we did some in the fourth quarter, so that portfolio is really stable. We’re pretty direct in sharing what we have in classified criticized there, and it’s shown stability as of to date.

Daniel Tamayo: Okay. All right. Understood. All right. Appreciate you taking my questions.

Curtis Myers: You bet, Danny.

Operator: One moment for our next question. Our next question comes from Feddie Strickland with Janney Montgomery Scott, Research Division. Your line is open.

Feddie Strickland: Hey. Good morning, everybody.

Curtis Myers: Good morning, Feddie.