Fulton Financial Corporation
Q2 2021 Earnings Call Transcript

Published: 21 Jul 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Fulton Financial's Second Quarter 2021 Results Conference Call. As a reminder, this conference call may be recorded. I would now like to turn the conference over to your host, Mr. Matt Jozwiak, Director of Investor Relations.

[Matt Jozwiak:]

Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the second quarter of 2021. Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer. Joining Phil are Curt Myers, President and Chief Operating Officer; and Mark McCollom, Chief Financial Officer.

[Phil Wenger:]

Well, thanks, Matt. Good morning, everyone. I'll begin today's call by making a few high-level remarks about our performance for the quarter and factors affecting the markets we serve. And then Curt will discuss our business performance, and Mark will share the details of our financial performance. And after that, we will answer any questions you may have. Fulton's performance continued to be solid in the second quarter of 2021 following our record-setting earnings per share of $0.43 in the first quarter our second quarter earnings per share of $0.38 tied our previous record high. And we saw growth in certain segments of our business, as Curt and Mark will discuss, and asset quality remains stable. The economy and the markets we serve are showing improvement. Unemployment is in decline and the communities are reopening. In fact, as of July 4, the governments in the 5 states in which we operate have lifted mask requirements for everyone. As the economy continues to open and business activity moves closer to normal, we are increasingly optimistic about the future.

[Curt Myers:]

Well, thank you, Phil, and good morning. As Phil noted, our second quarter performance produced solid results, and I'd like to share some detail on several key areas. Loan growth for the quarter was approximately $170 million or about 4% annualized, excluding the impact of PPP loan forgiveness and originations. We benefited from the diversity of our business model as strong loan growth from residential mortgage lending offset declines in our commercial business. First, let me talk about the PPP program. PPP originations for Wave 3 ended up at $750 million beyond our original expectations, with $60 million originated in the second quarter and $690 million originated in the first quarter. Our average Wave 3 processing fee was 4.5%, which was also well above what we had originally anticipated. While the PPP program has ended for new originations, we continue to focus on loan forgiveness needs of our small business customers. In the second quarter, we processed $639 million of PPP forgiveness request and have remaining Wave 1 and 2 outstanding balances of approximately $360 million. In total, we have $1.1 billion in outstanding PPP loans as of June 30 and $35 million in processing fees yet to be earned.

[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 first quarter of 2021. Starting on Slide 3. Earnings per diluted share of this quarter were $0.38, while net income available to common shareholders was $62.4 million. This represents a decline of $0.05 per share versus the first quarter of 2021. Our second quarter performance included a slightly lower net interest income as well as lower noninterest income, offset by negative provision expense and lower operating expenses, which I'll cover in more detail later in my comments.

[Operator:]

And your first question comes from Frank Schiraldi with Piper Sandler.

[FrankSchiraldi:]

Good morning. Just wondered, I realized that there hasn't been any change to NII guide. Just wondering about some of the moving parts there. And I wondered if you could talk a little bit about outlook for loan growth and within that commercial loan growth in the back half of the year?

[MarkMcCollom:]

Yes, Frank, for the NII guide, there is -- as you've seen so far this year, we've recognized $19.5 billion and $11.5 billion in PPP fees in the first 2 quarters of the year. We still have $35 million to go -- and the timing of that, I mean, we have our own estimates as to when that will be recognized, which may differ from yours. But we would anticipate to possibly see a slight decrease in PPP fees in the third quarter and then have that step back up again in the fourth quarter just based on the timing of this third wave of PPP recognition. And then we've seen results now through the first half of the year. We would expect business results to improve in the back half of the year, and Curt can give you more color on that.

[CurtMyers:]

Yes, Frank, we look at originations -- commercial originations in the first 2 quarters. They were pretty consistent. The second quarter, we saw elevated prepayment activities. So I think the growth, as we look forward, would be based on what prepayment activity is. The pipelines have been building over the last 6 weeks. And as things reopen and business activity increases, we do think pipelines will continue to grow. So we think we have more momentum in the second half. I think the growth will depend though on those prepayment factors. Just as an additional information, car dealers. Our floor plan portfolio linked quarter was down $70 million because car dealers can't get cars. So floor plans are not as utilized as they were. So things like that can provide us some momentum in the second half.

[FrankSchiraldi:]

Okay. And then you mentioned, Phil, you've looked at some of the deals in terms of M&A that have taken place in the market, is it fair to say that you feel you can more actively pursue deals in the back half of the year, given your confidence level now on the macro environment? And I wondered if you could just remind us of what's sort of too small in terms of asset size to pursue in terms of whole bank deals? Thanks.

[PhilWenger:]

Yes. I mean, I think we'll be as active as there are opportunities, Frank. And I think they will continue in the second half of the year. We'd like to be looking at banks over $1 billion. But wouldn't be impossible that we could look at something smaller that was really strategically positioned well within our footprint.

[Operator:]

Your next question comes from Daniel Tamayo with Raymond James.

[DanielTamayo:]

Good morning, guys. If I could dig into the NII from the NIM side a little bit. What is your assumption for excess cash levels? It sounds like they increased again in the second quarter. What is your assumption for those levels within the guidance for the rest of the year?

[MarkMcCollom:]

In our guidance is that they tick up a little bit again during the third quarter because that's when we tend to see our business at its high watermark for the year and then coming back down a little bit in the back half. But candidly, we don't see much decline in the excess cash levels because I think as an industry, we've been wrong as an industry as to deposit levels. And deposit levels continue to stick around longer than we anticipate. So we're -- while we'd like to run with a lower level of cash than we currently have, I think the expectation is going to remain elevated certainly through the end of the year.

[DanielTamayo:]

Okay. And then switching over to fee income, I heard the comment you made about the interest rate swaps within capital market income going back to normal. What kind of environment do you need for that? Do you need rates to go up from here or do you think this level of swaps would be kind of the run rate, assuming we don't get an interest in rates or even without that, you think that this was a depressed level in the second quarter?

[CurtMyers:]

Yes. Dan, it's Curt. Just a little more color there. The second quarter was a light quarter for us. We were putting more fixed rate loans on the balance sheet. We are continuing to offer that. It really comes down to loan origination mix and larger deal mix and types of loans. So we do think linked quarter as we look at the third quarter will be stronger. And again, just to remind you, we're coming off the high watermark. I think we did $16.8 million in last year, which was our best year ever from that. We do expect it to moderate from there. But again, the second quarter was light.

[Operator:]

Your next question comes from Russell Gunther with D.A. Davidson.

[RussellGunther:]

I wanted to -- just a follow-up on expense comments earlier, see if I caught this right. So you guys have done a really nice job keeping a lid on that and the recent initiatives. Could you just remind us of those previously announced, are they fully in the run rate now as of the second quarter or is there more to come?

[MarkMcCollom:]

Yes, they are fully in the run rate. But remember, Russell, when we announced that $25 million, we did say that we were going to invest a portion of that into some of our digital technology initiatives. So if you look at our income statement, you can see on the category for data processing and software, you can see the first 2 quarters of this year, that's been running anywhere from $1 million to $2 million higher per quarter than what our run rate was in the prior year. So that's going to be the one offset to those cost savings. But other than that, yes, you should expect them to be fully in the run rate.

[RussellGunther:]

Okay. That's helpful, Mark. And then I guess as you look out and start thinking about 2022, do you contemplate additional initiatives to continue to keep a tight lid on expenses? Are there opportunities to do something similar going forward?

[MarkMcCollom:]

I think there will be constant reinvestment in our franchise, but I don't anticipate there being investment in the franchise that's going to change the trajectory of our expense levels. I would expect at this point that there would be nominal increases in certain categories, but nothing materially off the run rate that you've seen.

[RussellGunther:]

Okay. That's great. And then just switching gears, Phil, you touched on the buyback a bit in prepared remarks and with the discussion around M&A. I mean, how should we think about you guys being active or not with repurchases? Is it more a hope to land a deal and so we shouldn't expect to see it in the market or how are you guys contemplating that?

[PhilWenger:]

I'd say, Russell, it would be driven more by the price of our stock. So we do think we have enough capital to do a deal and buyback, but we want to do both of them at the right price.

[RussellGunther:]

Okay. Understood. And then just a reminder as to sort of what that price to tangible book multiple or earn back is for repurchases for you guys?

[MarkMcCollom:]

Yes. So if you look at kind of current levels for us right now, that ends up being a TBV dilution earn back of about 2.2 to 2.5 years, if you're kind of in the mid-15s right now, which is fairly attractive relative to certain M&A transactions, so it would be kind of equivalent to buying a bank that's kind of in that more $120 to $130 a tangible book well.

[Operator:]

Your next question comes from Erik Zwick with Boenning and Scattergood.

[ErikZwick:]

First question, I guess for Mark, maybe on your comments about the gain on sale margins declining for the residential mortgage. I think you said from kind of the 3% range down to about 185 or so. Now, curious, is that largely just market dynamics? Or has there just been a change with you holding more of those loans on your balance sheet and what you're putting into the secondary market. Curious what's impacted that? And then I guess second part would just be, do you think those gain on sale margins settle out here in this range? Or is there more downward pressure as we move through the year?

[MarkMcCollom:]

Yes. Yes. I think it's more been -- I mean while we have shifted the mix a little bit in terms of our originations, have shifted a little bit from last quarter. They're about 49% purchase, 51% refi to this quarter, they were 60% purchase, 40% refi. So there's been a little bit of a shift in terms of product type, but I would say it's more just a demand of our product has driven down gain on sale margins. And if you look back to where we were sort of first quarter of '20 and earlier, so going back to pre-pandemic, you had a 4- or 5-quarter stretch there. Our gain on sales spreads were fairly tightly banded between about 135 basis points and 155 basis points. We would expect and our original expectations internally, was that it was going to migrate back to that by the end of the year. I think things came down a little bit more quickly than we anticipated in the second quarter. But I think where we're going to end up by the end of the year is still going to be in line with our expectations for spreads.

[ErikZwick:]

That's great detail. And then the second question for me. Phil, I believe in your prepared remarks, you mentioned that you're bringing more of your workforce back to the office starting in September, but there'll still be a component works remotely. Curious what that ultimate kind of percentage of employees that will work remotely will be kind of compared to pre-pandemic levels? And how that makes you think about your real estate needs going forward over the mid- to long term?

[PhilWenger:]

Yes. So pre-pandemic, I'd say we had a few people who worked remotely. As we are moving forward, I'd say 6% to 10% of our staff will be fully remote. A big chunk will be hybrid. So we will be looking at all our real estate. And I would suspect over time it would decrease.

[Operator:]

And your next question comes from Matthew Breese with Stephens Inc.

[MatthewBreese:]

I was hoping for a little bit of more detail on the interest rate sensitive loan portfolio. So last quarter, you provided that, I think you had $12.6 billion of loans, either tied to prime or LIBOR. How much of that is subject to floors where you wouldn't benefit from higher rates until rate hike 2 or 3? And maybe talk a little bit about the last rate cycle, where we really didn't see loan yields inflect until the second or third hike along the way? Any differences this time you expect?

[MarkMcCollom:]

Yes. So Matt, we have about $2.5 billion of loans that are currently at their floors. We have total loans with floors, its about $4.8 billion, but we have bill loans that are below their floors. So your question really gets to if there's a rate increase, would we need to see 2 before rate impact? The answer is really no on that. We would see sort of the full reset of that with rate increases.

[MatthewBreese:]

Okay. So we wouldn't see the same delays last time?

[MarkMcCollom:]

We would not.

[MatthewBreese:]

And then the other question I had is residential loans continue to drive a big portion of the recent loan growth. Balances there up to 19% of total loans. At what point do we start to see you take your foot off the gas pedal where exposure is enough and where you sell more of the production versus retaining?

[MarkMcCollom:]

Yes. So we continue to be asset sensitive one of the more assets that banks -- that we track in our peer group. So we think there's still room to continue putting high-quality customer-based mortgages on our balance sheet. We have, based on our current origination levels, I mean, I think there's capacity to at least through the balance of this year to continue to do that. And your trade-off is that again, right now, if you're -- year-to-date, we've taken $230 million of production that we haven't sold. We just said in the second quarter, our average gain on sale spread was 185 basis points. So there's a real short-term impact right there about $3.5 million to $4 million in mortgage banking gains. When you put those loans on your books, you have a Year 1 reserve that you have to put on one of those residential loans under CECL. But then if you assume that those loans are going to stick around on your books for 5 or 7 years, then there's going to be a very material positive impact to your NII, having those mortgages on the books versus say, the alternative right now with that $1.4 billion, $1.5 billion of cash we have and deploying that into MBS, let's just say, versus those residential mortgages.

[MatthewBreese:]

Okay. And could you talk a bit about the securities portfolio outlook for the balance of the year?

[MarkMcCollom:]

Yes. I think I would expect it to stay pretty range bound from where we ended up in the second quarter. We did -- I mean a lot of that depends on, obviously, where the 10-year goes. And the last couple of days, it's been going the opposite direction. But we -- as I said in my prepared comments, we selectively redeploy some of that excess cash in MBS as longer term rates went up. We'll continue to be opportunistic to maybe put some of it there. But we don't want to extend duration too much in the investment portfolio, because investment portfolio is primarily there as a liquidity tool. And ultimately, we want that excess cash balance to be redeployed into loans as opposed to investment securities.

[MatthewBreese:]

Last one from me. As I exclude commercial swap fees, the other commercial fee income line item, so merchant, card income, cash management, other commercial banking, all really quarters, up sequentially. What were the drivers behind those type of fee income improvements?

[PhilWenger:]

I would just point to increased business activity and underlying transactional activity as well as effectively managing earnings credit that would offset any of those fees in -- on the treasury business. But we're seeing increased activity in business in all those categories.

[MatthewBreese:]

Do you feel like these kinds of levels are sustainable or levels you can grow off of from here?

[PhilWenger:]

Yes. We expect them to continue to grow. We'll see what pace they grow and it really be tied to kind of underlying business activity of our customers, but we do anticipate then continuing to grow.

[Operator:]

At this time, there are no further questions. I will hand the call back for closing remarks.

[Phil Wenger:]

Well, thanks to everyone, again, for joining us today. We hope you'll be able to be with us when we discuss third quarter results in October.

[Operator:]

That concludes today's conference. Thank you for your participation. You may now disconnect.