Fulton Financial Corporation (NASDAQ:FULT) Q4 2022 Earnings Call Transcript

Fulton Financial Corporation (NASDAQ:FULT) Q4 2022 Earnings Call Transcript January 18, 2023

Operator: Good day, and thank you for standing by. Welcome to the Fulton Financial Fourth Quarter 2022 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. Please be advised that today’s conference is being recorded. And, I would now like to hand the conference over to your speaker today, Mr. Matt Jozwiak, Director of Investor Relations. Sir, please go ahead.

Photo by Leohoho on Unsplash

Matt Jozwiak: 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, 2022. 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 section 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 10 through 13 of today’s presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.

Now, I would like to turn the call over to your host, Curt Myers.

Curt Myers: Well, thanks, Matt and good morning, everyone. For today’s call, I’ll be providing some high level thoughts on the year, as well as some comments on our quarterly business performance. Then Mark will share the details of our financial results and step through our outlook for 2023. After our prepared remarks, we’ll be happy to take any questions you may have. Our results for the fourth quarter and year were very good and we were pleased with our overall performance. Operating earnings for both the quarter and the year represent all-time highs for us. Some key highlights for 2022 were that net interest income grew significantly, reaching an all-time high of $782 million. Our loan portfolio had strong growth across most categories.

We grew nicely in both commercial and consumer businesses. In the fourth quarter, we eclipsed the $20 billion mark in total loans. Wealth management had another record year despite the market volatility, and our commercial fee business delivered double-digit revenue growth year-over-year. In addition, we completed the Prudential Bancorp acquisition in the third quarter and successfully handled the conversion and full integration in the fourth quarter. Our Board of Directors declared a special dividend of $0.06 to supplement our quarterly common dividend, returning to $0.65 per share in dividends for the year. These positives were offset by some of the operating headwinds that materialized throughout the year. Mortgage banking revenues continued to be pressured by the effects of a rising interest rate environment.

And expenses continued to migrate higher due to inflationary pressure and elevated incentive compensation accruals. Overall, we are pleased with the performance and the results that 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 then we can serve all of our stakeholders. So now let me turn to our quarterly performance. Overall, total loan growth was strong for the quarter at $584 million, or 12% annualized. We experienced solid originations, an uptick in-line utilization and saw continued declines in paydowns and prepayments. Turning to deposits. We saw a decline in overall balances during the quarter due to average balances per household declining.

We did see continued growth in our overall customer count, and we remain committed to growing our customer base. As always, we are focused on deposit growth over the long-term. Turning to our fee income. We continue to benefit from the diversity of our businesses as the macroeconomic environment challenges certain business lines, and we continue to grow other business lines. Mark will share more details in a moment. Moving to credit. The provision for credit losses of $14.5 million was an increase from $11 million last quarter, when excluding the CECL Day 1 charge related to the acquisition of Prudential Bancorp. Factors contributing to the $3.5 million increase were predominantly loan growth and the changes in the macroeconomic outlook, as we saw credit metrics remained relatively stable.

Linked quarter, we saw improvement in NPLs, NPAs and criticized and classified assets. Finally, we continue to actively manage our financial center network. We plan to open four new locations in 2023 and have recently announced the consolidation of five existing financial centers. We continually evaluate how and where our customers choose to connect with us. So now let me turn the call over to Mark to discuss our financial performance in 2023 outlook in a little more detail.

See also 15 Biggest Window Manufacturing Companies and 12 Biggest Ocean Cleaning Companies in the World.

Mark McCollom: Great. 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 2022. And the loan and deposit growth numbers I will be referencing are annualized percentages on a linked quarter basis. Starting on Slide 3, operating earnings per diluted share this quarter were $0.48, on operating net income available to common shareholders of $81.2 million. This is consistent with $0.48 of operating EPS in the third quarter of 2022. Our operating results exclude $1.9 million of merger related charges recorded during the quarter for our acquisition of Prudential Bancorp, and $514,000 in core deposit in tangible amortization. At this point, we believe all the costs for our acquisition of Prudential Bancorp had been incurred.

Moving to the balance sheet. As Curt noted, loan growth was very strong for the quarter at $584 million or 12% annualized. Commercial lending contributed $349 million of this growth or 10% annualized. C&I lending grew $244 million, led by automobile floorplan increases, agricultural lending and an overall increase in-line utilization, which increased from 21 — sorry, 22.5% last quarter to 23% this quarter. Commercial real estate lending grew $139 million, or 7% annualized. Consumer lending produced organic growth of $240 million, or 15% during the quarter. Mortgage lending was still the largest component of our consumer loan growth and increased to $163 million with the majority of this growth coming from adjustable rate products. Total deposits excluding customer repo accounts declined $727 million during the quarter.

Approximately, one-third of this decline was attributable to anticipated outflows within our municipal deposit portfolio, consistent with prior year trends. Our investment portfolio was relatively flat for the quarter, closing at $4 billion. Putting together all of those balance sheet trends on Slide 4, net interest income was $226 million, a $10 million increase linked quarter. Loan yields expanded 59 basis points during the period, increasing to 4.8% versus 4.21% last quarter. Our total cost of deposits increased 24 basis points to 42 basis points during the quarter. Cycle to date, our total deposit beta is only 9% cumulatively. Our increase this quarter puts us where we expect it to be at year-end, and we continue to believe a cumulative through the cycle total deposit beta of approximately 30% is achievable.

Our net interest margin for the third quarter was 3.69% versus 3.54% last quarter. The 15 basis points of improvement resulted primarily from loan betas being higher than deposit betas during the period. Going forward, I would expect our net interest margin expansion to be more modest with additional rate increases, due to higher deposit betas and changes in our funding mix. Our loan-to-deposit ratio increased from 92.1% at September 30 to 98.2% currently. Turning to credit quality. Our NPAs declined $21 million during the quarter, which led to our NPA to assets ratio improving from 76 basis points at September 30 to 66 basis points at year-end. Net charge-offs of $12 million were driven by a $12 million write-down on one commercial office loan due to credit related concerns.

Overall criticized and classified loans continued trending lower with a decline of $26 million or 3% during the quarter, following a $251 million or a 24% decline from the second to third quarters of 2022. Despite these positive trends, changes to our macroeconomic outlook and strong portfolio growth led to the increase in our provision for credit losses this quarter. Turning to Slide 6. Commercial banking fees declined $2.2 million to $18.6 million, with decreases in cash management revenues driven by higher interest rates and capital markets declines driven by reduced interest rate swap activity. Consumer banking fees declined $1.2 million linked quarter to $12.1 million led by decreases in overdraft fees. As a reminder during the prior quarter, we implemented changes to our overdraft products and services to improve our customers’ experience.

Wealth management revenues were effectively flat with the prior quarter at $17.5 million. New business activity continued and the market value of assets under management and administration increased to $13.5 billion at year-end compared to $12.7 billion for the prior quarter. Mortgage banking revenues declined and were driven by a decline in mortgage loan sales as well as a decrease in gain on sales spreads 266 basis points this quarter versus 202 basis points last quarter. Moving to Slide 7. Non-interest expenses excluding merger related charges were approximately $167 million in the fourth quarter, up $4 million linked quarter. As a reminder, many of the cost savings from the Prudential Bancorp acquisition will not be recognized until the first quarter of ’23 as many impacted employees of Prudential Bank had worked through dates of mid-December.

We also had certain expenses occurring in the fourth quarter of ’22 that we expect to reset to lower levels in the first quarter of ’23. Included in this list, our incentive compensation related accruals of $3 million due to strong earnings. Expense accruals of $800,000 for branch consolidations planned for 2023. And lastly, $1.9 million of legal expenses and related reserves for a contingent liability. Turning to Slide 8. As of December 31, we maintained solid cushions over our regulatory capital minimums and our bank and parent company liquidity remains strong. Accumulated other comprehensive losses improved $57 million during the quarter. Along with strong earnings, this improved our tangible common equity ratio and drove linked quarter growth of 6% and our tangible book value per share.

Our tangible common equity ratio was 6.9% at quarter end, up from 6.7% last quarter. Excluding the impact of AOCI our tangible common equity ratio was 8.2% at December 31. During the quarter, we did not repurchase any common shares. However, our Board has approved a new $100 million share repurchase authorization, which is available and in place until the end of 2023. On Slide 9, we are providing our first iteration of guidance for 2023. Our guidance assumes a total of 75 basis points of future Fed funds increases occurring in 2023 as follows, 50 basis points in February, and 25 basis points in March. With that, our 2023 guidance is as follows: we expect our net interest income on a non-FTE basis to be in the range of $895 million to $915 million; we expect our non-interest income, excluding securities gains to be in the range of $220 million to $235 million; we expect non-interest expenses to be in the range of $645 million to $665 million for the year; and lastly, we expect our effective tax rate to be in the range of 19% plus or minus for the year.

Many of you also look at pre-provision net revenue or PPNR as a key metric to assess the profitability of our core operations. Our version of this metric is included in the financial tables of our press release. PPNR has increased 48% year-over-year as a result of earning asset growth over the past year, as well as net interest margin expansion from our asset-sensitive balance sheet. With that, I’ll now turn the call over to the operator for questions. Chris, please help us.

Q&A Session

Operator: Thank you, sir. Our first question will come from Frank Schiraldi of Piper Sandler. Your line is open.

Frank Schiraldi: Good morning.

Curt Myers: Good morning, Frank.

Mark McCollom: Good morning, Frank.

Frank Schiraldi: Just wanted to see, if I get a little more color on components of outlook. Just — I don’t know how much you can share in terms of your expectations on deposit flows from here and loan growth in 2023.

Mark McCollom: Yeah, Frank. I would say for loan growth in there, I mean, we’ve — as you know, our long term average for loan growth has been kind of in that 4% to 6% range on an organic basis. So I think you can assume, we’re kind of in that range for 2023. And on the deposit side, clearly, it will be lower than what our long term averages have been with some of the industry-wide challenges right now on deposit growth.

Frank Schiraldi: I guess when you think about the loan-to-deposit ratio, if you could just remind us where you’d allow that sort of to, or where you expect that or target that to get to? I assume, given your commentary, you assume that will continue to tick up from here.

Curt Myers: Frank, as you look at the long term, we’ve really operated in to 95% to 105% over the long term. So we’re comfortable with where we’re at. We are focused on growing deposits and funding. We think it can comfortably drift a little higher, but we are very focused on growing the balance sheet equally as we move forward, really as we have done in the past. This year was a definitely a different year with the excess liquidity and deposits coming off the balance sheet that has been built up throughout the pandemic and strong loan growth. So it was a different dynamic this past year. We see next year returning to more of a normal trend where we focused on balanced growth between loans and deposits.

Frank Schiraldi: Okay. And then just wondering, I know, Mark, you mentioned the new buyback program that was announced that you guys tend to have a program out there to be opportunistic. Just wondering maybe your general thoughts given the macro picture, given outlook for 2023, your general thoughts on buybacks as we sit here today?

Mark McCollom: Yeah. We’re going to — we do think it’s just good corporate practice to have that optionality in place. And we’re going to continue to weigh earnings growth and interest rates and credit and evaluate all of that. And there’s a possibility we could tap that line throughout 2023, and there’s a possibility we could not, depending on how those factors play out.

Frank Schiraldi: Okay. And then just lastly, if I could, just on credit. It seems like generally, you’re seeing — continuing to see good trends. Any concerns in the CRE book outside of office here today. Do you see more challenges in the near term, in terms of that office portfolio? And any additional color in terms of the loan that you charged off in the quarter?

Curt Myers: Yeah, Frank. From an overall CRE standpoint, I think the portfolio has been pretty stable. Underlying metrics are stable. We’re monitoring it very closely from an overall CRE standpoint. Specifically on the office portfolio, we continue to work hard to understand that portfolio and just to confirm a couple of balances in that portfolio. We’ve talked about it over the last couple of quarters. Originally, we talked publicly about our office over $5 million and that balance is roughly about $550 million with the acquisition of Prudential, it added a little bit to that. So the office over $5 million is about $590 million. And then we referenced a little higher number later when we had time to go through the entire portfolio.