Fulton Financial Corporation
Q1 2021 Earnings Call Transcript

Published: 21 Apr 2021

[Operator:]

Good morning, ladies and gentlemen and welcome to the Fulton Financial First Quarter 2021 Results. I would now like to turn the conference over to your host, Matt Jozwiak, Director of Investor Relations. Thank you. Sir, please go ahead.

[Matt Jozwiak:]

Good morning and thanks for joining us for Fulton Financial’s conference call and webcast to discuss our earnings for the first 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:]

Thanks, Matt and good morning everyone. I will begin today’s call by sharing a high-level overview of the quarter. Then we will hear Curt’s thoughts on our business performance and Mark will follow Curt and he will discuss the details of our financial performance. And after that, we will be happy to take your questions. The Fulton’s performance was solid in the first quarter of 2021. In fact, our earnings per share of $0.43 in the first quarter, was a quarterly record for us, surpassing our previous record of $0.38 per share, which was in the third quarter of 2020. Though the lasting presence of COVID-19 and the prolonged low interest rate environment have brought some challenges, our customers and our team members continue to meet those challenges. Throughout the past year, Fulton has continuously worked to serve our customers while keeping everyone safe. Our financial centers remained accessible and customers escalated their use of our telephone, digital and online platforms. So, our banking and financial services delivery remained largely uninterrupted.

[Curt Myers:]

Thank you, Phil and good morning everyone. As Phil noted, our first quarter performance produced solid results and I would like to share some detail on several key areas. Loan growth for the quarter was modest as we experienced strong growth in residential mortgage originations and generated PPP Wave 3 performance that exceeded our expectations. These results were offset by continued line of credit utilization headwinds and greater than expected residential mortgage prepayments. First, let me touch on PPP. We continue to support our small business customers by both satisfying forgiveness requests and processing Wave 3 applications. As I mentioned on last quarter’s call, we anticipated between $500 million and $600 million in total Wave 3 PPP funding. As of the end of the first quarter, we were at $685 million and we expect to modestly exceed $700 million from the program before it expires. This is well beyond our expectations. At this point, applications continue to come in, but at a significantly reduced pace. We continue to also work diligently to support our Wave 1 and 2 customers with their forgiveness request. In the first quarter, we successfully processed $579 million of PPP forgiveness requests and have remaining Wave 1 and 2 outstanding balance of approximately $1 billion. Turning to commercial loans, balances declined $48 million or 0.4% on a linked quarter basis, excluding PPP loans. Originations were down modestly from the fourth quarter as we – and we experienced continued decline in line utilization. These factors combined to contribute to the slight pullback in overall commercial balances. Looking forward, our commercial loan pipeline at March 31 was up approximately 9% versus year end 2020. However, it was down 10% year-over-year.

[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 fourth quarter of 2020. Starting on Slide 3, earnings per diluted share this quarter were $0.43 on net income available to common shareholders of $70.5 million. This is $0.13 higher than the fourth quarter of 2020. Our first quarter performance included a lower provision for credit losses and higher net interest income. We also reported higher non-interest income and higher non-interest expense, largely due to a balance sheet restructuring I will discuss in more detail in a minute. Moving to Slide 4, our net interest income was $164 million, a $3 million increase linked quarter, primarily due to additional fees earned on PPP loans forgiven during the quarter. As Curt noted, during the quarter, we originated $685 million of new PPP loans, and this was offset by forgiveness of $579 million of PPP loans that were originated in 2020. The latest round of PPP loans have a larger average fee, 4.54% due to a smaller average loan size for this wave of funding. As of March 31, we have approximately $45 million of PPP loan fees yet to be recognized, $15 million from 2020 originations and $30 million from our first quarter originations. We grew our investment portfolio $272 million during the first quarter as we selectively redeployed some of our excess cash into mortgage-backed securities as the yield curve steepened during the quarter.

[Operator:]

Your first question is from Frank Schiraldi of Piper Sandler. Your line is open.

[Frank Schiraldi:]

Good morning.

[Mark McCollom:]

Good morning Frank.

[Frank Schiraldi:]

I wondered just, Mark, you mentioned the updated guide obviously includes the balance sheet restructuring and the second – or the latest round of PPP. The interest rate picture has also improved a bit. I am wondering if that provides some potential upside, do you think to NII guide or is that just not impactful enough unless the short end moves and is that already baked into updated guide?

[Mark McCollom:]

Yes. On the short end of the curve definitely impacts us a lot more than the long and would. We did take advantage in the first quarter, as I noted, and put some money to work in the investment portfolio out of cash. But we are still sitting, obviously, on a lot of excess liquidity. Our expectation is that the tenure is going to stay relatively range-bound to where it is right now. And candidly, the trade-off is if we invest too much into the investment portfolio today, then at some point in the future, when PPP funds are burned through, we think we are going to start to see line utilization draws happening again, and we would rather use our liquidity for our core loan growth other than putting too much in the investment portfolio at this point.

[Frank Schiraldi:]

Okay. So, does the guide then just sort of assume the securities book is kind of flattish at these levels or is there some of that excess cash gets redirected through the rest of the year?

[Mark McCollom:]

No. I would expect for the balance of the year, the securities book will stay relatively range bound, unless if we would see an opportunity if the tenure would pop up to 180 again temporarily, we could put a little bit of work there. But I would expect it to stay relatively consistent as a percentage of the balance sheet.

[Frank Schiraldi:]

Okay. And then just thinking about reserve levels, I mean it seems like this could be a fairly – I mean, it’s still early in the year, but it seems like it could be a fairly normal year in terms of charge-off levels. And so as qualitative factors continue to normalize, do you think there is opportunity for additional reserve release, I guess where is a good level to assume the reserve to loan ratio could move back to, is it where it was with CECL day 1, Mark, can you just give us a little – your thoughts there?

[Mark McCollom:]

Yes. We went from 99 basis points to 120 basis points when CECL was first implemented. And then we – and then – or I am sorry, to 140 basis points. And then we went from 140 basis points up to our current level as a result of COVID. Do I think it can drift down to day 1 CECL again, yes, I do. But again, that’s obviously dependent – that’s assuming our business mix stays the same. That assumes that our pace of growth stays relatively the same as well as what we were historically. But I think there is definitely opportunity for that to happen, Frank, just it’s obviously hard to predict the timing.

[Frank Schiraldi:]

Sure, okay. Thank you.

[Mark McCollom:]

Thank you.

[Operator:]

Your next question is from Daniel Tamayo of Raymond James. Your line is open.

[Daniel Tamayo:]

Good morning guys. I am not sure if I missed this or not, but did you provide the – I mean you gave some fee numbers from PPP, but did you provide the impact that had on the margin in the first quarter?

[Mark McCollom:]

Yes. So the way to think about the margin, I mean, what I can share you is that our fee income totals, Danny, were $19.4 million in the first quarter, that’s up from $14 million in the fourth quarter. But we also saw increased excess liquidity in the first quarter. To me, when you are talking about the effect of PPP and the margin, you really have to consider both size, you need to think about the fees, but then you also need to think about the fact that we are sitting on some excess liquidity. If both of those would normalize, the impact is about 7 basis points in the first quarter.

[Daniel Tamayo:]

Okay, that’s helpful. And then maybe if you can talk a little bit about the assumptions embedded in your net interest income guidance within the NIM and then maybe on the balance sheet as well?

[Mark McCollom:]

Well, yes, I mean we were intentional when we gave our guidance to not provide NIM guidance for the year, because the timing and the volatility with PPP makes it a little bit harder to predict balance sheet size. And I think as you have seen from the whole industry, the whole industry is sitting on a crush of excess liquidity that wasn’t even there back when that fourth quarter guidance was originally put out. So, I can comment that our guide does include our current assumptions on PPP. We assume that, as I said earlier, we have $14 million, $14.7 million of Wave 1 and 2 fees yet to be amortized. And then with the new originations that have just come on, we have a little over $30 million. So, you have $45 million of fees that still need to be recognized. I would anticipate of that remaining $1 billion that somewhere between 80% and 90% of that gets forgiven and is off the books by the end of the year. How much of the new originations, which is approximately $700 million, how much of that comes off by the end of the year is a little bit more of a wildcard. But our assumptions on that are baked into the guidance. What’s also baked into that guidance, again, would be the full year – well or the stub year impact of the restructuring, which really didn’t take place until the last 2 weeks of March. So you really didn’t see any material impact of that in the first quarter. But you’ll see a 9 months effect of that $17 million would be factored into ‘21. And then the full year impact of that restructuring would be factored into 2022.

[Daniel Tamayo:]

Okay. That’s terrific. And then I guess last thing here on the balance sheet restructuring you mentioned reducing asset sensitivity a bit, but coming into the quarter pretty strong given the increase in deposits. So how does the bank from an asset-sensitive perspective now relative to maybe before COVID or this increase in asset sensitivity. How would you guys expect to benefit from rising short-term rates relative to prior periods?

[Mark McCollom:]

It’s a great question. And the answer is, with everything we’ve done, we’re really just kind of treading water. I mean, we’ve reduced our asset sensitivity slightly. But then remember, every time you get excess liquidity, if you got a non-maturity deposit and it’s sitting in overnight cash, that’s inherently very asset-sensitive because that non-maturity deposit, even if it’s government stimulus, it’s going to be sticking around for a little bit of time. So our asset sensitivity would have gone up a lot more had we not done this. This is reined it back into acceptable levels. But depending on that dynamic of how quickly as loans get forgiven on our books, I mean you’re taking off a loan and replacing that with cash. So unless that cash gets used and unless your balance sheet shrinks, both in terms of excess cash and in deposits, that is going to increase asset sensitivity a little bit more. So we are still very well positioned to benefit from rising rates.

[Daniel Tamayo:]

I appreciate all the color, Mark.

[Operator:]

Your next question is from Erik Zwick from Boenning & Scattergood. Your line is open.

[Phil Wenger:]

Hey, Erik. Good morning.

[Erik Zwick:]

Good morning guys.

[Phil Wenger:]

Hey, Erik, we can’t hear you. If you were on mute by any chance?

[Erik Zwick:]

How about now?

[Phil Wenger:]

It’s better.

[Erik Zwick:]

Okay. Great. Sorry, sorry about that. Maybe first, just a question for Mark on the non-interest expense outlook for the year, if I remove the restructuring charges from the first quarter and then kind of annualize that level of kind of $145 million in a quarterly rate kind of coming towards the top end of that range. Just curious, you mentioned investing in new branches, some of the urban markets, the tech investments. Just curious where is the opportunity potentially improve from that quarterly run rate that would get you closer to the bottom end of that outlook range?

[Mark McCollom:]

Yes, you should definitely, great question, Erik. You should definitely not be taking that number and just kind of multiplying by 4. In the first quarter, we had some items that definitely won’t repeat. We did have some bonus payments that were just related to our frontline personnel for all the great work they have done throughout COVID. There was some kind of final true-ups of some of our 2020 bonus plans. I referenced snow removal. It was a tougher winter this year for us than some prior years. And just in terms of the number of incidents, not necessarily the amount of snowfall but the number of incidents, which increased cost there. And if you look at our five-quarter trend on occupancy expense, because of that seasonality, both in terms of heating as well as snow removal, the first quarter always tends to be our highest level. So when you strip those things out, the reason – and if you look at what our guide was a quarter ago, versus what it is now, we increased it by about $5 million, and that increase was really the amount that would be attributable to bonus accrual adjustments for this year’s plans.

[Erik Zwick:]

Thanks. That’s helpful. And then one for maybe Phil or Curt and then for our prepared comments, you mentioned that you’re expecting loan growth to support the NII guide. Just curious where you’re seeing opportunities to grow? I mean I spoken to a couple of smaller banks in your market, and they are still seeing pretty tepid loan growth. So I’m curious if maybe it’s just your access to some larger customers, but maybe just access to some of the urban markets that might present more opportunities. Where do you see the opportunities for improved loan growth this year?

[Phil Wenger:]

Yes. So we’re seeing opportunities across all our markets, maybe a little more in the urban markets. It’s really hard to grow your loan portfolio ex PPP when all that PPP money is coming in and a lot of it’s paying down lines. So as that disappears and people start using their lines of credits like they have in the past, we see just great opportunity for growth there. So we’re still entertaining a lot of requests and we are settling. It’s just hard to show growth when that PPP money is coming in.

[Curt Myers:]

Yes, Erik, this is Curt. Just one point to that, just linked quarter, the line of credit utilization headwind that we had was over $100 million just linked quarter. So – and for the 18 months, it’s been $700 million if we would get back to kind of normal long-term utilization rates.

[Erik Zwick:]

Got it. Thanks for the color there. And then just one last one, thinking about the mortgage banking line and if I exclude the impact from the mortgage servicing assets valuation of what the run rate was maybe kind of $8 million or so. I’m just curious thoughts going forward. We’re entering the peak home selling season. It seems like inventories definitely shortened with the increase in 10-year yield. I’m guessing a refi maybe starts to tail off a little bit. Just curious what you’re thinking in terms of what you can generate from that business line.

[Phil Wenger:]

Yes. We see that business continuing to be strong. We are putting loans on the balance sheet. So it depends if you look at fee income or if you look at the balance sheet growth, that operation really funds and fuels both of those. So we expect seasonal improvement just moving from first quarter into then the normal higher home buying season. But the business remains strong for us. We continue to have really high gain on sale spreads and we expect them to moderate over time, it will really depend on the pace of that margin moderating, but we still see strong volume.

[Erik Zwick:]

Great. Thanks for taking my questions today.

[Phil Wenger:]

Thank you.

[Operator:]

Your next question is from Russell Gunther from Davidson. Your line is open.

[Russell Gunther:]

Let me just first start, if I could, on the NII guide. One other follow-up, please. So the $640 million to $660 million, you guys mentioned includes PPP assumptions. Do you have a number for how much of that $45 million of remaining fees is included in that guide?

[Mark McCollom:]

Well, we’re not providing that specific guidance. But again, what I can tell you is that of the $15 million that relates to the first wave, we’re assuming that between 80% and 90% of those loans, so it’s about $1 billion left on our balance sheet. We’re assuming that, that comes off by the end of the year. Now keep in mind that one of the other things that’s going to create more volatility, not just for us but for everybody who’s participating in Wave 3, these Wave 3 loans are actually accreted that the fee is accreted over 5 years because it’s a 5-year note unlike the first wave, which were a 2-year note. So the $30 million of fees that we have yet to be recognized from this current wave, those are going to be – until they start being forgiven, there is going to be a little bit lower amount that’s going to be coming in on a more normalized basis until the forgiveness process starts. We would expect these Wave 3 forgiveness would start in the third quarter, in the middle of the third quarter.

[Russell Gunther:]

Okay. That’s helpful. Thanks a lot. And then just following up on Erik’s question on the loan growth expectations, I know you don’t put too fine a point on it and talked about some of the geographic contributors, but how about mix for the year? I know you mentioned portfolio some residential real estate, but the organic growth that you do show, do you have a sense for how that might contribute from the different loan verticals.

[Curt Myers:]

Yes, Russell, it’s Curt. We do still see residential mortgage continuing to be a significant provider of growth as it has, and we have the ability to balance sheet that activity and that activity is strong. On the commercial side, we continue to focus on being diversified in our portfolio. So we really are trying to grow each segment, and we feel that mix is going to be very similar to what we’ve experienced over the last three to five quarters. So you’ll have a mix of C&I and CRE driving the commercial growth.

[Russell Gunther:]

Okay. Great. Thank you. And then just last one for me. You mentioned the $75 million buyback authorization. Could you discuss your appetite to buy back stock at current levels?

[Phil Wenger:]

At current levels, Russell, we run a model and just look at that, like what the earn-back will be on that dilution. So obviously, as the stock price goes up, and you’re buying at a higher premium to tangible book value increases the earn-back length. So we want to continue to have that out there as one tool in the toolbox, But at current levels, I think it would be unlikely that we tap it. But that’s going to ultimately be a question of what other opportunities are there to use capital for which would include organic growth, it would include inorganic growth using cash as a component in M&A transactions as well.

[Russell Gunther:]

Got it. Great. Thanks Mark. Thanks guys for taking my questions. That’s it for me.

[Mark McCollom:]

Thanks, Russell.

[Operator:]

Your next question is from Zach Westerlind from Stephens. Your line is open.

[Zach Westerlind:]

Hey, guys. It’s Zach Westerlind here covering from Matt Breese. How are you?

[Phil Wenger:]

Hi, Zack. How are you doing?

[Zach Westerlind:]

Good. Just to go back to the margin really quickly. I was just hoping that you could provide a little color on incremental loan yields coming on the book and what new deposit costs are kind of looking like?

[Phil Wenger:]

What I can share is we do – without answering your question directly, but what I would share is that I had stated in the last quarter’s earnings call, which I know you or Matt was on, I said that we expect within the next quarter or so to be at our trough on margin on a core basis. And I would say that with the balance sheet restructuring that we’ve just affected, we do feel confident that on a go-forward basis, if you stripped out the impact of PPP other than on a core basis now, we are out of floor and should expect to see some modest margin expansion going forward. The only wildcard in that, again, is going to be what that utilization of excess deposit from PPP on the time of that.

[Zach Westerlind:]

Great. I appreciate that. And I know you talked a little bit about asset sensitivity of the loan book. Are you able to share what percentage of the loan book is floating and how much of that is at the loan for if you’re able to share that?

[Phil Wenger:]

Yes. So when we look at it today, our loan book appears on the surface to be 31% fixed rate, but that includes PPP. So when you strip out PPP, the fixed rate of our loan portfolio is about 23%. And so we would still be then about 77% between adjustable and variable and if you – in total, we have about $12.6 billion of loans that are tied to either prime or LIBOR, so about two-thirds of the loan book.

[Zach Westerlind:]

Great. I appreciate that. And then last one for me, just kind of on the M&A landscape, while obviously, we’ve seen some pretty big deals in your market in lately. Just kind of curious about if how these larger deals are impacting the conversations have conversations been picking up, slowing down? Or just any color you’re willing to share on that front.

[Curt Myers:]

I would just say, over the last 6 months, conversations have picked up.

[Zach Westerlind:]

Perfect. That’s it for me. Thanks for taking my questions.

[Phil Wenger:]

Thank you.

[Curt Myers:]

Thanks, Zach.

[Operator:]

I’m showing no further questions at this time. I would now like to turn the conference back to you, Phil Wenger.

[Phil Wenger:]

Well, thank you again for joining us today, and we hope you’ll be able to be with us when we discuss second quarter results in July. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day. You may all disconnect.