Fulton Financial Corporation
Q1 2010 Earnings Call Transcript

Published: 21 Apr 2010

[Operator:]

Good day, and welcome to the Fulton Financial first quarter earnings call. As a reminder, today's call is being recorded. At this time, for opening remarks and introduction, I'd like to turn the conference over to your host, Laura Wakeley, Vice President and Corporate Communications Manager. Please go ahead, ma'am.

[Laura Wakeley:]

Good morning, and thank you for joining us today for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the first quarter of 2010. Your host for today’s conference call is Scott Smith, Chairman and Chief Executive Officer of Fulton Financial. Joining him are Phil Wenger, President and Chief operating officer; and, Charlie Nugent, Senior Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information included with our earnings announcement, which we released around 4

[Scott Smith:]

Thank you, Laura, and good morning, everyone. It's nice to have you with us. Before Phil's credit review and Charlie's financial discussion, I have a few introductory remarks on the quarter. We reported diluted net income per share of $0.13, an 18.2% increase over the $0.11 reported last quarter. There are a number of factors supporting our earnings momentum. We were pleased to see a healthy increase in our net interest margin as our funding costs continued to decline. This margin expansion helped offset lower average loan balance. Credit metrics showed further signs of stabilization. Helping us again this quarter was a $5 million decrease in the provision for loan losses. Charge-offs were down slightly, and our coverage ratio – excuse me, our coverage ratio improved. Construction loan exposure continued to decline. However, credit challenges remain. And while there's certainly more optimism about economic recovery, the pace of improvement, at least from our perspective, is slow. The persistent low interest rate environment continues to affect some of our non-interest income categories like cash management. Actually, a portion of our deposit growth over the last several quarters came from those accounts, hedge clients sought total (inaudible) in this environment. We anticipate additional pressure on deposit accounts related – I'm sorry, we anticipate additional pressure on deposit account-related revenue for the remainder of the year. A decrease in refinance volume caused mortgage share gains to be down as well. Other expenses were flat linked quarter. Over the last few quarters, I frequently talked about how we're positioning the company for the future, and I believe we are positioned well. Continued earnings momentum is largely contingent on two other – on two factors, further credit cost reduction and further improvement in overall economic activity. We have a good handle on our credit issues and continue to manage them effectively. With our strong liquidity, we are eager to lend to credit-worthy, financially-sound borrowers. And we are seeing some early signs of renewed economic confidence. I think one of the biggest (inaudible) for us and for the industry right now is the pace of economic recovery and its impact on earning asset growth. Overall, we're off to a good start in 2010, and our capital position has been and remains strong. In prior calls, you've asked about our intentions to redeem the capital purchase preferred stock held by the US Treasury. As I've said, we intend to do this when the Board and management feel that it's prudent to do so. We have ongoing discussions on this topic and we continue to look at a variety of factors, including the performance of our stock, the corporation's earnings, the condition of the overall economy, and the actions of our regulators and peers. When we believe the timing is right for our shareholders, we will take the necessary steps to obtain regulatory approval and payback the TARP funds.

[Thank you:]

We are pleased that the improvement in our earnings that began in the second half of 2009 continued in the first quarter of 2010. Beyond those contributing to the earnings increase include 1.8% improvement in net interest income; stabilizing asset quality, which resulted in our lower provision for loan losses; and, well-controlled core operating expenses. The $2.4 million or 1.8% of net interest income was the result of a continuing expansion of our net interest margin. The net interest margin increased 11 basis points this quarter, from 3.67% in the fourth quarter to 3.78% in the first quarter. Consistent with the trends we saw in the last two quarters, the improvement was due to the decline in time deposit costs. Our time deposit costs were 2.30% in the fourth quarter, compared to 2.08% in the first quarter. Yields on earning assets decreased only three basis points, from 5.2% in the fourth quarter to 5.17% in the first quarter. In the second quarter of 2010, there are significant amount of time deposits and federal home loan bank advances maturing, which should have a positive impact on our net interest margin. However, we do not believe that it will be as significant as in the past few quarters. $1.3 billion of time deposits will mature in the second quarter at a weighted average rate of 1.78%. By comparison, new certificates of deposit originated in the month of March have a weighted average rate of 1.25%. $75 million of federal home loan bank advances will mature in the second quarter at a weighted average rate of 5.52%. Total average earning assets were essentially unchanged from the fourth quarter of 2009. Average loans decreased $17 million in one-time (inaudible) at, while average investments increased $59 million dollars or 2%. Other interest earning assets, consisting primarily of mortgage loans available for sale (inaudible) $43 million or 45%. Federal average deposits decreased $143 million or 1% from the fourth quarter of 2009. We continue to experience growth in core demand and savings accounts, with average balances increasing $69 million or 1%. However, this growth was offset by $212 million or 4% decrease in average time deposits. The increase in average core deposit accounts was realized primarily in savings accounts, which grew $75 million or 3%. This growth occurred primarily in personal money market accounts. Non-interest-bearing demand deposits decreased $18 million or 1%. This decline was entirely in business accounts. Interest-bearing demand deposits shared a modest $12 million or 6.10% increase. Excluding net security losses, are other income for the first quarter declined $1.5 million or 3.6%. Mortgage sale gains decreased $516,000 or 13% as the volume of loans sold declined to $234 million in the first quarter from $355 million in the fourth quarter. Service charges on deposit accounts were also down by $900,000 or 6%. Much of this decrease was in overdraft fees, which will often exhibit seasonal declines in the first quarter. Net security losses of $2.2 million were $350,000 higher than the fourth quarter. Other than temporary impairment charges of $4.1 million on pooled-trust preferred securities and $800,000 on bank stocks were partially offset by realized gains on sales of debt securities of $1.9 million and bank stocks of $800,000. Our investments and pooled-trust preferred securities had a cross basis of $34 million at a book value of $16 million at the end of the first quarter. Operating expenses decreased $1.1 million or 1%, salaries and benefit expenses were $1.3 million or 2.4% lower, and marketing costs and other outside services also declined by $800,000 and $500,000, respectively. Thank you for your attention and for your continued interest in Fulton Financial Corporation. Now we will be glad to answer your questions.

[Operator:]

Thank you. (Operator Instructions) We will pause for just a moment. We’ll go first to Craig Siegenthaler with Credit Suisse.

[Craig Siegenthaler:]

Thanks and good morning.

[Scott Smith:]

Good morning, Craig.

[Charlie Nugent:]

Good morning.

[Craig Siegenthaler:]

First, just really on that credit side. I wonder if you can help us think about the moving pieces in both the construction and the commercial buckets this quarter. Specifically, what we saw was a pickup in construction losses and decline in commercial side. And I’m trying to really back into a better run rate for the second quarter.

[Charlie Nugent:]

So is there a specific question, Craig? We’re having trouble understanding–

[Craig Siegenthaler:]

Can you hear me? Can you hear me right now?

[Scott Smith:]

Yes.

[Charlie Nugent:]

Yes.

[Craig Siegenthaler:]

Yes. Were there any lumpy large loans on – in the construction bucket that drove charge offs? That could be my first question.

[Charlie Nugent:]

Okay. Yes, there were. I would say there were two large – two large accounts that had a fairly large charge off. So I do think it’s the – the construction charge offs in the first quarter were lumpy.

[Craig Siegenthaler:]

And the commercial bucket, the improvement we saw, is that sustainable? Or do you say there was – given that was going to the back half of that cycle, is that – is that really sustainable throughout 2010? Do you see the lower level of losses there?

[Charlie Nugent:]

I think that’s a great question, Craig, and I’m not sure I can – I think all three categories, construction, CNI, and commercial real estate will be, as you use the term, lumpy over the entire year.

[Craig Siegenthaler:]

Got it. And then just one follow-up question on the NIM, when you think about the ability to further reduce funding costs, which you touched on briefly on that call, how much additional upward lift could we get in the NIM, really independent of what they decide to do this year?

[Charlie Nugent:]

Craig, a lot of moving parts of the net interest margin. And we try to give you the biggest indication that we think the margin will go up and that's that we'll have $1.3 billion in certificates of deposits maturing in the second quarter. And the average yield is 178. And we’re putting (inaudible) on it. It marks to 125, so we expect some pick up, but there’s a lot of moving parts on that.

[Craig Siegenthaler:]

I got it, great. Thank you for taking my questions.

[Charlie Nugent:]

You’re welcome, Craig.

[Operator:]

We’ll go next to Rick Weiss with Janney Investment.

[Rick Weiss:]

Hey, good morning.

[Scott Smith:]

Hi, Rick.

[Charlie Nugent:]

Good morning.

[Rick Weiss:]

I was just wondering if I could – overview on the balance sheet. It has been continuing to shrink slightly. At what point would you start to think that loans would grow or investment securities? I guess you would see increases in those kinds of things.

[Scott Smith:]

Rick, this is – Rick, this is Scott. The economy is the tricky question. As I mentioned in my opening comments, we are seeing customers a little more optimistic than they were. I chatted with a construction – a builder – large building yesterday. And he’s saying, “Well, we broke even last year. We’re probably going to breakeven this year. But next year, it looks like we’re going to make some money.” So it ties in to the indication and it's totally what could happen. And we could see some pick-up in loan demand in the fall. But it’s hard for us to sit here now and be specific about that because it’s not happening yet. And I think we’re all seeing that there's a general feeling that the economy is moving forward. And we’re hearing more and more economists and experts indicating that’s the case. But it has to happen first. And so loan demand is soft, but we are due, as I mentioned, we are ready, willing, and able to lend to creditworthy customers. There’s some credit demand out there now from some marginal customers that are having difficulty getting loans. And the reason is they’ve had these issues. And it's difficult to make loans to those folks. But as the economy picks up, as everybody suspects, I think our stronger customers are going to want to expand and borrow some money. But it’s hard to say whether that happens in August, November, or February of next year. It’s difficult.

[Rick Weiss:]

Okay. And the second question would be with respect to your loan loss allowance over the last eight quarters or so. The provision has exceeded charge offs. Would you think that’s going to continue or at some point would provision kind of equal charge offs or even far below that?

[Scott Smith:]

Well, while were – at least – what’s the right word? We’re not happy about stabilization, but at least, we think such stabilization and the credit metric. That begins to – the reserves get better when we see non-performing starts to hedge down and there’s metrics really improve, Rick I suppose. We’re pleased they're not getting worse but they're still in what I call stabilization mode and not on the decline.

[Rick Weiss:]

And then when things get better, would you expect to see recoveries on stuff that was previously provided for?

[Scott Smith:]

We always have recovery. This has been a fairly unique situation through this last two years. And there were some real offers in the portfolio. So it might not be as typical as you've seen in past recessions and particularly from the presidential development area where the values of these properties have declined substantially. And the recoveries out of those aren’t going to be like the old days when you have to see and (inaudible) them and you have to. Real estates, some other things behind them, and yes, you worked you’re your way through it then got the collateral and there was value in that collateral. Some of the – it will depend on real estate value quite frankly though. As they come back that’ll help, but I don't think anybody suspects that it continues to be strong anytime soon.

[Rick Weiss:]

Okay. Thank you.

[Scott Smith:]

You’re welcome.

[Operator:]

We’ll go next to Frank Schiraldi with Sandler O’Neill.

[Frank Schiraldi:]

Good morning, guys.

[Phil Wenger:]

Good morning, Frank.

[Scott Smith:]

Good morning, Frank.

[Frank Schiraldi:]

Hi. Just a couple of quick questions, I wonder if – Charlie, if you could just remind us if you have the numbers and in terms of how much of the CD book re-priced in this quarter.

[Phil Wenger:]

Thing [ph] for two.

[Charlie Nugent:]

I think it was – we have $1.6 billion mature in the first quarter. Frank, I think that’s pretty close. And they re-price to the – I forget the yield. It was a pretty good yield but it brought our overall cost from 230 in the first quarter to 208. And – yes, I’m sorry – in the first quarter $1.3 billion re-price and when they were rolled over, and the yield – or the average weighted yield of what rolled over was 2.16%

[Frank Schiraldi:]

So we should so – and again you’ll see – we’ll see another $1.3 billion roll over this quarter in 2Q.

[Charlie Nugent:]

Yes. And the rate's not as high so the 216 into 178. But that’s why we don't expect a significant increase in the margin that we saw the last two quarters.

[Frank Schiraldi:]

And they're basically re-pricing to where – and in terms of where this – you said 125? Has that gone up at all, or is that basically pretty stable from where–?

[Charlie Nugent:]

That’s been pretty stable the last couple of quarters. We haven't moved up our CD rates, they have been staying the same.

[Frank Schiraldi:]

Okay. And then just on the provision, is there any color you can give in terms of specific provision of the $40 million? Specifically how much was for commercial real estate?

[Charlie Nugent:]

No. I don't think we do have that. Sorry Frank.

[Frank Schiraldi:]

And just on 30 to 89 days, I was just wondering, it – (inaudible) for Phil about the total delinquencies but in terms of win quarter. Do you have those numbers? What that’s on that pocket?

[Charlie Nugent:]

Yes. At 12/31 our 30-day delinquencies were $83 million. At 3/31 they're $113 million. And at 60-day delinquency at 12/31 we're at $47 million. And at 3/31, they're $46 million.

[Frank Schiraldi:]

And just finally, this is – always a tough question to answer maybe, kind of annoying question to get, but in terms of – Scott, you talked about TARP and TARP repayments. Do you think there is a possibility here that you’d – you maybe could hang on to TARP for a bit and maybe build capital just through earnings and not go and do a common equity raise at all?

[Scott Smith:]

Well as I said, we are – we have been in discussion about this since last summer, and we continue those discussions and that's about all I can say is that we look at all the options on a continual basis and if we decide to make a permanent decision we’ll announce it, but at this point it’s still in discussion.

[Frank Schiraldi:]

All right, thank you.

[Scott Smith:]

You’re welcome.

[Charlie Nugent:]

That’s right.

[Operator:]

Your next question comes from Matthew Schultheis with Boenning and Scattergood.

[Matthew Schultheis:]

Hi, good morning, gentlemen.

[Scott Smith:]

Hi Matt.

[Charlie Nugent:]

Hi, Matt.

[Matthew Schultheis:]

A quick question for you. The decrease in construction loans, payoffs, are these going to perm?

[Scott Smith:]

Almost all were payoffs this quarter.

[Matthew Schultheis:]

Okay. And lastly, you talk about anecdotal evidence from your lenders that – things seem to be improving. Are there certain geographies that seem to be doing better than others as far as the sense of things improvement?

[Charlie Nugent:]

As far as improvement? I think Virginia is showing improvement probably more than some of the other areas. And the one area that I would say is improving the least, would be Southern New Jersey.

[Matthew Schultheis:]

Okay. All right. Thank you very much.

[Operator:]

We’ll go next to Collyn Gilbert with Stifel Nicolaus.

[Collyn Gilbert:]

Thanks. Good morning, guys.

[Scott Smith:]

Hi Collyn.

[Collyn Gilbert:]

Charlie, would you mind, just – you've given some color as to and impact that CD re-pricing is going to have on the margin. Can you give any color on the asset side? If we're seeing any loan resets come up or just some of the dynamics of the maturity schedule on the asset side when we might start to see improvement in the yield there?

[Charlie Nugent:]

Collyn, it’s has been pretty stable when you think about it. It doesn’t need to climb three basis points from 520 to 517. It seems like we're getting pretty good pricing and rates are stable. So I think that yield will stay relativity stable. I’m a bad predictor, you know that. But I would think that they would stay relativity stable. It has been this couple of quarters.

[Collyn Gilbert:]

Okay. But the pricing that you’re seeing on the loans coming on, I presume the spreads are better than what would be rolling off? I mean not that there are a lot of new loans coming on but …

[Charlie Nugent:]

Yes. The problem is there’re not a lot of new loans coming on. So it’s not driving our yield up.

[Collyn Gilbert:]

Okay. But theoretically, if loans did start to come on, to try to gauge – if in the event we should have loan growth what potential impact could be on the differential on that loan you applied?

[Scott Smith:]

Well, Collyn this is Scott. And that’s a lot of ifs, and one of the ifs is how aggressive the rest of the world is going to be on pricing when we have – we finally see some loan demands. I think we’ll just have to play it out. My suspicion is we’ll get decent yields. I think pricing for risk is a new discipline that’s in the industry and will stay for a while anyway.

[Collyn Gilbert:]

Okay. A kind of a follow up on that front, can you guys give some color on the competitive landscape, like, who you’re seeing coming in to some of these deals? Who you’re seeing most frequently and some of these deals? I’m speaking mostly on the commercial side and the lending side.

[Scott Smith:]

Well, again I can’t just end it there, like Collyn. There are not as many players in what deals are there as there once was. But it just – it depends on the deal, the size of it and the geography. And we're seeing – we're seeing every competitor we have at some point in time, but I don't think we can say that there’s anyone in particular that’s more than others. Again it depends. It's a small deal and the community banks are in it more. If it’s a larger deal then some of the regional and larger banks are in it. But I can't give you a list of who’s most competitive or whatever. It’s a – there’s frankly not enough deals to give us much color on that.

[Collyn Gilbert:]

Okay. That’s all I had. Thanks.

[Scott Smith:]

Right. You’re welcome.

[Charlie Nugent:]

Thank you.

[Operator:]

We’ll go next to Erik Dybesland with Barclays Capital.

[Erik Dybesland:]

Hi. Thanks. You've mentioned that charge offs should be lumpy for the rest of the year. But you think we're at a point where it could possibly peak?

[Scott Smith:]

Well, you tell me what the economy’s going to do. If the economy is going to get better, yes. If we get some setback in the economy, then the lumps are going to be bigger.

[Phil Wenger:]

And just to clarify, Erik, I think what I said was that the category of our charge offs will be lumpy.

[Erik Dybesland:]

Okay. And just secondly, I was wondering if you could provide any numbers on TDR space on the quarter – at the end of the quarter?

[Phil Wenger:]

Yes, our TDRs increase from a $54 million to $67 million.

[Erik Dybesland:]

And those that are in non-accruing or not in that category?

[Charlie Nugent:]

There are currently $15 million of the $67 million is in non-accruing.

[Erik Dybesland:]

All right. And then I’m wondering if you could comment on any progress you've had in overdraft option, if you’re really in that process yet?

[Charlie Nugent:]

We’re still in the process, and it would be too early to say.

[Erik Dybesland:]

Okay. Great. That’s all for me.

[Charlie Nugent:]

Thanks.

[Operator:]

(Operator Instructions) We’ll go next to Matthew Clark with KBW.

[Matthew Clark:]

Hi, good morning, guys. First on the non-performers in the quarter, just incrementally, we saw an uptick in theory and CNI, and just – those are in two categories that had been fairly stable at least for the last couple of quarters. And I’m just trying to get a sense for what really is driving that uptick in the latest quarter. And I apologize because I was on another conference call until the Q&A, if you already talked about it.

[Charlie Nugent:]

Well, we're seeing some – have seen some weakening in both CNI and the CRE. I don't think the upticks had been huge, but they did both go up.

[Matthew Clark:]

Think you can you attribute it to something? Can you talk to what you saw, what types of issues it were, what types of businesses projects, and so forth?

[Phil Wenger:]

On the CRE side, I would say, it was primarily from loss of renters, loss of leasers. And on the CNI side, it’s widespread. I think most industries are being impacted – we did have one larger company in the printing business that is having some substantial problems.

[Matthew Clark:]

Okay. And then on the comp line, I think we can a seasonal increase here in the first quarter. And I’m just curious why that line was down this quarter and whether or not that’s sustainable going forward?

[Charlie Nugent:]

Yes, there are a lot of things going through there. One thing mad is that there are two less days in the first quarter that helps us a little bit. I think we'll continue reducing staff. It might be 3% if we go back to last year. There was also – our incentive plans, we had a lot more accrue – not a lot. We had more accrued than we paid out. There was a reversal of $1.4 million in there. Also in there, the tax was affected. Tax was a lot higher because of the – it’s just this first quarter of the year and it’s about $700,000 higher from just the taxes.

[Matthew Clark:]

Okay.

[Phil Wenger:]

Every time you look, I think you see our salary and benefit cost go down, I think.

[Matthew Clark:]

Okay. So that’s a good run rate here. It's your (inaudible).

[Phil Wenger:]

Yes. It’s a good run rate.

[Matthew Clark:]

Thanks.

[Operator:]

That concludes the question-and-answer session. At this time, I’d like to turn the conference over to you, Scott Smith, for any additional or closing comments.

[Scott Smith:]

Well thank you all for joining us today. And we hope you’ll be able to be with us again on the second quarter 2010 earnings conference call, which is scheduled for July 21st, 2010 at 10 a.m. We'll talk to you then.

[Operator:]

That concludes today's conference. We thank you for your participation.