Fulton Financial Corporation (NASDAQ:FULT) Q2 2023 Earnings Call Transcript

Fulton Financial Corporation (NASDAQ:FULT) Q2 2023 Earnings Call Transcript July 19, 2023

Operator: Good day, and thank you for standing by. Welcome to the Fulton Financial Second Quarter 2023 Results. At this time, all participants are in a listen-only mode. After the speakers’ 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 Financial Corporation’s conference call and webcast to discuss our earnings for the second quarter which ended June 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 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 tab 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 takes 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 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 summary comments on our company and on our financial performance. Then Mark will share more details on our financial results and step through our outlook for the remainder of 2023. After our prepared remarks, we will be happy to take any questions you may have. We were pleased with our second quarter results. We continue to support our customers and generated solid loan growth. We saw credit metrics remain stable and credit losses return to historically low levels. In addition, fee income was strong across the entire company. Operating earnings were $0.47 per share. Pre-provision net revenue, or PPNR, for the second quarter was approximately $106 million, an increase of 19% year-over-year.

This was a result of earning asset growth and net interest margin expansion year-over-year. During the second quarter, we saw loan growth of $374 million and deposit declines of $110 million. As a result, our loan-to-deposit ratio increased to 99%, right in the middle of our long-term target of 95% to 105%. Fee income increased $8.9 million, significantly above the first quarter levels. Commercial Banking had a record quarter, driven by strong capital markets and merchant and card processing income. Wealth Management continued to deliver strong results as the market value of assets under management and assets under administration reached $14.3 billion. Mortgage banking fees were up modestly linked quarter and consumer banking fees were solid as well.

Expenses increased during the period. However, they were in line with our expectations for the quarter. In addition, we also had other positive notable events during the quarter. We released the second edition of our corporate social responsibility report, highlighting achievements on our purpose of changing lives for the better. We raised our quarterly common dividend by 7% to $0.16 per share. We welcomed a new member of our executive team, Karthik Sridharan joined us as a newly created role of Chief Operations and Technology Officer. In this role, he will lead our efforts to further enhance our operational excellence for our customers and our team. We celebrated our first full-year impact of the Prudential Bancorp acquisition. In looking back on the acquisition, we were pleased with our ability to get regulatory approval and close the transaction in under four months.

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We achieved the systems conversion on time and on budget. We realized our cost savings and met our onetime merger cost targets, and we are pleased to have the Prudential team on board and contributing to Fulton’s success every day. Our second quarter results met our expectations, and we believe we are positioned well for continued success. We remain focused on growing core deposits, effectively managing our deposit mix, achieving the appropriate risk-adjusted return on our loan portfolio and improving our operating efficiency. During the quarter, we and the industry continue to experience the migration from non-interest-bearing balances into higher cost deposit products. What is critically important is to continue to grow households and customer accounts.

During the quarter, we grew 4,000 total net new households and 8,000 total net new deposit accounts. We believe those are meaningful increases in this environment. On Slide 3, we have provided updated disclosures on our deposit base. We have approximately 742,000 deposit accounts with an average age of 11.4 years on a weighted balance basis. The average balance of these accounts is only $28,500. Our balance sheet remains strong, and our capital ratios continue to improve. Our liquidity position increased to over $8.2 billion in committed funds. Turning to credit. We have provided more detail on our loan portfolio and specifically on our office portfolio on Slides 4 and 5. I’d like to note our overall concentration in commercial real estate remains at approximately 180% of total capital, well below our proxy peer average.

On Slides 4 and 5, a small component of our CRE portfolio is the discrete, office-only portfolio, which includes all loans with a primary revenue stream from office rents. As a reminder, this segment is a diversified and granular portfolio, originated consistently over time, spread throughout our footprint and with only five individual loans in excess of $20 million. Looking at overall credit, net charge-offs were $2 million or 4 basis points annualized. Overall credit performance remains within our expectations and NPAs, NPL and loan delinquency have all declined for the past three quarters. While we are encouraged by these credit trends, we remain focused on potential economic headwinds that could affect future performance and our credit outlook.

Now I’ll turn the call over to Mark to discuss our second quarter financial performance and 2023 outlook in more detail.

Mark McCollom: Thanks, Curt, and good morning to all of you on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the first 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. As Curt noted, operating earnings per diluted share this quarter were $0.47 on operating net income available to common shareholders of $77.8 million. This compares to $0.39 of operating EPS in the first quarter of 2023. Looking at the balance sheet. Loan growth slowed marginally in the second quarter to $374 million or 7% annualized. Commercial loans were $119 million of this increase or about one-third of our overall growth.

Commercial real estate lending grew $100 million or 5% annualized, with most of this growth coming in owner-occupied commercial real estate. As noted earlier, our commercial real estate concentration remains low, approximately 180% of total capital. Consumer lending produced growth of $256 million or 15% during the quarter. Mortgage lending was the majority of our consumer loan growth as the second quarter is typically the peak of the home buying season. We continue to raise new loan rates across all products and remain focused on the risk-adjusted returns we are getting on new originations. As a result, we expect to see loan growth moderate both in residential mortgage and in the overall portfolio during the back half of 2023. Total deposits declined $110 million during the quarter.

Interest-bearing deposits grew $428 million during the period or approximately 11%. This growth was offset by the pace of decline in our non-interest-bearing DDA accounts. Non-interest-bearing balances declined $538 million during the period, which is down from a $603 million decline in the first quarter. Our loan-to-deposit ratio ended the quarter at 99.2%, up from 97% at the end of the first quarter. As many investors are focused on where non-interest-bearing deposit levels will ultimately end up, we’ve included on Slide 7 a 30-plus year history of our non-interest-bearing deposit percentage. As our bank has grown and our C&I capabilities have expanded, this percentage has trended upward over time. Recently, rising rates have caused the deposit mix shift to occur and we believe we should end the year at around 23% non-interest-bearing deposits as a percentage of total deposits, down from 28% at June 30.

This estimate assumes an additional deposit shift of approximately $800 million into interest-bearing deposits during the back half of 2023. This mix shift is reflected in the refreshed NII guidance I will provide at the end of my comments. Our investment portfolio declined modestly during the quarter, closing at $3.9 billion. During the first quarter, we chose to build cash reserves from the cash flows in our investment portfolio. Going forward, we expect to revert back to our longer-term cash targets with incremental cash flows used to reduce overnight borrowings. Putting together those balance sheet trends on Slide 8, our net interest income was $213 million for the quarter, a $3 million decrease from the first quarter. Our net interest margin for the second quarter and for the month of June were both 3.40% versus 3.53% in the first quarter.

Loan yields expanded 31 basis points during the period, increasing to 5.52% versus 5.21% last quarter. Cycle-to-date, our loan beta has been 46%. Our total cost of deposits increased 50 basis points to 132 basis points during the quarter. Cycle-to-date, our total deposit beta is approximately 26%. Where are through-the-cycle deposit beta ultimately ends up will be very closely tied to where the non-interest-bearing percentage ends up landing. Based on our earlier estimate of around 23% by the end of the year, this will imply a deposit beta of approximately 40%. But we expect our loan beta to continue to drift up between now and the end of the year as well. So ultimately, we believe our ending loan beta will remain meaningfully higher than our ending deposit beta due to the asset-sensitive nature of our balance sheet.

Turning to credit quality on Slide 9. Our non-performing loans declined $17 million during the quarter, which led to our NPL-to-loans ratio improving from 80 basis points at March 31 to 70 basis points at June 30. Overall loan delinquency improved to 105 basis points at June 30 versus 128 basis points last quarter. Despite these positive trends, our loan growth during the second quarter and modest changes to the economic outlook led to the increase in our allowance for credit losses. Our ACL as a percentage of loans increased slightly during the quarter from 1.35% of loans at March 31 to 1.37% at quarter end. Turning to non-interest income on Slide 10. Wealth Management revenues were $18.7 million, up from $18.1 million for the first quarter.

We continue to invest in our wealth business, and it now represents almost one-third of our fee-based revenues. The market value of assets under management and administration increased $100 million to $14.3 billion at June 30. Commercial banking fees increased significantly to $23.1 million during the quarter. Capital markets revenue was very strong and merchant and card revenues bounced back from seasonal declines we typically see in the first quarter. SBA gains on sale were also strong during the quarter. Consumer banking fees were up modestly for the quarter, with seasonal pickups in debit and credit card revenues, offset by a continuing decline in overdraft fees. Mortgage banking revenues picked up from seasonal lows in the first quarter.

However, application volumes are down 14% year-over-year, and rate increases are beginning to influence applications and overall volumes. Moving to Slide 11. Non-interest expenses were $168 million in the second quarter, an $8 million increase from the first quarter. The increase in day count accounted for about one quarter of this increase. In addition, the following material items are noted. Higher salaries and benefits costs are due to the April 1 merit increases as well as higher healthcare claims as we are largely self-insured and also higher data processing costs of $700,000 due to the timing of certain IT 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 June 30, we maintained solid cushions over the regulatory minimums for all of our regulatory capital ratio.

We have also provided you with an alternative view of our regulatory ratios, including the impact of AOCI. While we do not expect banks of our size to be required to calculate our ratios this way, we believe this information maybe useful to you. Our tangible common equity ratio was 7% at quarter end, in line with last quarter. Included in tangible common equity is accumulated other comprehensive loss on the available-for-sale portion of our investment portfolio and derivatives. This number totaled $312 million after tax on a total AFS portfolio of $2.6 billion. On Slide 13, if we include the loss on our held-to-maturity investments, which is $115 million after tax on an HTM portfolio of $1.3 billion, our tangible common equity ratio would still be 6.6% at June 30, representing over $1.7 billion intangible capital.

On Slide 14, we provided you with a comprehensive 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 $8.2 billion at June 30. In addition, we maintained over $2.5 billion in Fed funds lines with other institutions. On Slide 15, we are providing you our updated guidance for 2023. Our guidance now assumes a 25 basis point Fed funds increase at the July meeting, followed by constant rates for 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 $830 million to $840 million.

We expect our provision for credit losses to be in the range of $55 million to $65 million. We expect our non-interest income, excluding securities gains to be in the range of $220 million to $230 million. We expect core non-interest expenses to be in the range of $645 million to $660 million for the year. This core amount excludes any special FDIC assessment, which may need to be recorded in the second half of the year if finalized during that period. And lastly, we expect our effective tax rate to be in the range of 17.5%, plus or minus for the year. And with that, I’ll now turn the call over to the operator for your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Frank Schiraldi from Piper Sandler. Your line is open.

Frank Schiraldi: Good morning.

Curtis Myers: Good morning, Frank.

Frank Schiraldi: Just Mark, first on the non-interest-bearing by year-end, the 23%, is that ultimately where you expect Fulton to sort of end up? Do you think it could continue to trend lower? And then I just – it’s interesting to me, it seems like with all the focus on rates over the last few months, guys who wanted to shift out non-interest-bearing would have. I guess there’s some sort of stimulus dollars that are still running down, and that’s where they’re running out of. But – are you starting to see a slowdown in that mix shift as well that gives you comfort on your year-end expectations?

Mark McCollom: Yes, Frank. So ultimately, where that number ends up beyond 2023, we’ll obviously be coming out with 2024 guidance at the early part of 2024, which will reflect that. But to answer the second part of your question, I would tell you that in the months of February, March and April, in each of those months, our total cost of deposits increased about 20 basis points on average per month. In May and June, that average fell to about 10 basis points. So we’re still seeing an increase month-to-month, but we are starting to see that lessen a little bit. Now that can still change, obviously, but that certainly influenced some of the guidance that we are giving today.

Frank Schiraldi: Got it. And from here, is it more of just kind of running down balances as opposed to shifting balances into interest-bearing balances when these clients you’re thinking about moving money around?

Mark McCollom: I mean, again, we’re still seeing some shift out of non-interest bearing. I mean, obviously, we’re giving guidance that still thinks we’re going to have $800 million of that shift in the back half of the year. But that’s down from what we saw in the first half of the year.

Frank Schiraldi: Okay. And then just on the capital. Just given all the focus in these flow about new capital rules, obviously, for a larger contingent of banks than Fulton. Just curious your thoughts on what the right sort of capital ratios are, either CET1 or TCE? And what sort of ratio do you guys target here? Thanks.

Mark McCollom: Yes, Frank, in terms of what we target, we look at the regulatory minimums and then by ratio, depending on that ratio, our house minimums are going to be 100 to 150 basis points above that. But where we sit right now, particularly on all of those regulatory ratios, which is our primary focus, on those, we have comfortable cushions even to our house amount.

Frank Schiraldi: Okay. I guess asked another way, do you expect these ratios to build in the near-term, not necessarily? Any color there tied into the earnings guide?

Mark McCollom: Frank, I think we would see them build over time with the earnings stream. Really, the question is then how would we deploy that capital. Our capital strategy is to support organic growth first and then use for M&A or buybacks as we move forward. So we feel comfortable with our current capital levels. And as we generate more capital, we’ll look to deploy that in those ways.

Frank Schiraldi: Okay. All right. Great. Thank you.

Operator: [Operator Instructions] Our next question comes from the line of Daniel Tamayo from Raymond James. Your line is open.

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

Mark McCollom: Hey, Danny.