Fulton Financial Corp
NASDAQ:FULT
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
14.02
21.61
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Fulton Financial Corp
You don't have any saved screeners yet
Ladies and gentlemen, thank you for standing by and welcome to the Fulton Financial Third Quarter 2019 Results. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Jason Weber. Thank you. Please go ahead, sir.
Thank you, Justin. Good morning. Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the third quarter of 2019. Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer of Fulton Financial Corporation. Joining Phil Wenger is Mark McCollom, Senior Executive Vice President and Chief Financial Officer.
Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released at 4:30 PM yesterday afternoon. These documents can be found on our website at www.fult.com by clicking on Investor Relations and then News. The slides can also be found on the Presentations page 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 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 12 and 13 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, Phil Wenger.
Thanks, Jason, and good morning, everyone. Thank you for joining us.
I have a few prepared remarks before our CFO Mark McCollom shares the details of our third quarter financial performance and discusses our 2019 outlook. When he concludes, we will open the phone line for questions.
Before I talk briefly about our third quarter performance, I wanted to highlight two important milestones we accomplished in recent months. First, we consolidated our last remaining affiliate banks Lafayette Ambassador Bank and the Columbia Bank into our largest banking subsidiary Fulton Bank in September. This transaction completes our multi-year initiative to consolidate all of our affiliate banks into Fulton Bank.
Second in early October, the Department of Justice informed us that it completed its fair lending investigation of Fulton without taking any action against the company. Achieving these milestones would not have been possible without the efforts of so many dedicated and hardworking Fulton employees. Together, achieving these milestones will not only help unify our brand, but also facilitate growth moving forward.
Now I'd like to talk about our third quarter performance. Overall, we were pleased with our financial performance for the third quarter. We continued to execute on our strategic initiatives such as focusing on growth, efficiency and profitability to maximize shareholder value.
Loan growth accelerated towards quarter end, and as a result, period-end loan balances increased $318 million or 7.6% linked-quarter annualized, much higher than the $132 million increase in period-end balances during last year's third quarter.
Our growing commercial pipeline throughout 2019 translated into solid loan growth in our commercial business. Growth also benefited from timing a few large loans that were anticipated to close in the second quarter and closed in the third quarter.
Commercial originations increased linked-quarter and year-over-year, while prepayments were down linked-quarter. Growth was spread throughout our footprint, but primarily in our Southeastern Pennsylvania and Delaware regions. Line utilization increased linked-quarter after two consecutive quarters of declines and is slightly above the level we saw in the third quarter of last year.
Our commercial pipeline increased slightly linked-quarter and remains approximately 25% higher than this time last year. So we remain cautiously optimistic about our growth prospects for the remainder of 2019 and into 2020.
Despite the growth we saw this quarter, the lending environment remains extremely competitive, and while we compete on price in certain situations, we remain disciplined on credit and structure.
Moving onto our Consumer business, we continue to see strong growth in our residential mortgage portfolio, with the drop-in rates, we saw some more refinance activity during the quarter. Approximately 75% of our originations during the quarter were adjustable-rate mortgages and growth was spread throughout our footprint.
Our indirect auto portfolio continues to grow at a solid pace, growth linked-quarter and year-over-year was primarily in our Pennsylvania markets and to a lesser extent in our New Jersey and Delaware markets.
As we mentioned in the past, Philadelphia and Baltimore represent tremendous long-term growth opportunities performance, and in the third quarter of 2019, we opened our first financial center in the downtown area of Baltimore.
Turning to credit, overall asset quality continues to be relatively stable. We are mindful of where we are in the economic cycle and our continuing to assess and analyze the loan portfolio for signs of weakness or stress.
Moving to fees, our commercial loan interest rate swap income benefited from strong commercial originations and was up linked-quarter and year-over-year. The pipeline remains strong and it has increased every quarter in 2019.
Mortgage banking income increased linked-quarter and year-over-year on both improving spreads and higher originations, driven by a pickup in refinance activity, and the overall rate environment. The mortgage pipeline remained strong and is up 24% year-over-year.
Our wealth income was down slightly linked-quarter due to overall market performance and seasonality of fees, but increased year-over-year. Brokerage revenue increased approximately 10% year-over-year and continues to be one of our fastest growing segments in the business. We recently had the opportunity to purchase a small wealth management business located in the Harrisburg area of Pennsylvania, adding approximately $70 million of assets under management to our brokerage platform.
We have now completed two small wealth management acquisitions of this year, which has added approximately $320 million to assets under management and administration to our brokerage platform, and we continue to look at organic and inorganic opportunities to grow our wealth business.
Turning to expenses, the efficiency ratio for the third quarter was 63.6% compared to 64.2% in the second quarter. As we look into the fourth quarter and 2020, we see opportunities to become more efficient as we continue to optimize our delivery channels and upgrade our origination and servicing platforms.
On the capital front, we paid a quarterly common dividend of $0.13 per share in the third quarter. We repurchased approximately $48 million of common stock during the third quarter, completing our $100 million share repurchase program announced in March of this year. Recently, our Board of Directors approved a new $100 million share repurchase program, which is authorized through December 31, 2020.
And at this point, I'd like to turn the call over to Mark McCollom to discuss our financial performance in more detail. Mark?
Thank you, Phil, and good morning, everyone.
Turning to our earnings, unless noted otherwise the quarterly comparisons I will discuss are with the second quarter of 2019. Starting on Slide 5, Earnings per diluted share this quarter were $0.37 on net income of $62.1 million, an increase of $0.02 or 5.7% from the second quarter of 2019 and consistent with our third quarter of 2018. I will now dive a bit deeper into the components of our earnings and give you some additional color.
Moving on to Slide 6, our net interest income was $161.3 million, a decrease of $3.3 million linked-quarter, driven primarily by a 13-basis point decrease in our net interest margin, partially offset by the impact of an increase in interest earning assets and an additional day of interest accruals during the quarter.
Growth in average loans linked-quarter was $120 million on an annualized loan growth rate of 3%. Average deposits increased $575 million or 3.5% linked-quarter, mainly due to seasonal increases in municipal accounts.
Our loan and deposit growth was more pronounced in September, which resulted in higher growth rates period-to-period. Period-end loans grew $318 million or 1.9% linked-quarter and $762 million or 4.8% year-over-year. Ending deposits grew $954 million or 5.8% linked-quarter and $1.1 billion or 6.7% compared to the prior year.
The net interest margin decrease was driven by two 25 basis point fed funds rate decreases, which occurred during the quarter. Due to the variable nature of our loan portfolio, our third quarter loan yields dropped more quickly than our deposit costs.
Going forward, we would expect our deposit costs to decline from third quarter levels, due to run-off of our municipal deposits as well as planned deposit rate decreases that are taking place in the fourth quarter.
Mainly as a result of the rate decreases, average loan yields in the third quarter of 2019 declined 14 basis points and average yields on interest earning assets were down 12 basis points. Our cost of funds increased by 1 basis point due in part to the large inflows of higher cost municipal deposits during the quarter.
Turning to Slide 7, our overall credit performance in the third quarter was relatively stable. Non-performing loans decreased $11.7 million to $136 million. Non-performing loans as a percentage of total loans decreased to 81 basis points at the end of the third quarter as compared to 90 basis points at the end of the second quarter.
Net charge-offs were $6.3 million for the quarter as compared to net recoveries of $1.5 million in the second quarter. The provision for credit losses for the third quarter decreased by $2.9 million from the second quarter to $2.2 million. The allowance for credit losses as a percent of loans decreased to 1.04% from 1.08% at the end of the second quarter. However, due to the improvement in our non-performing loans. The coverage of the allowance to non-performing loans increased to 127% from 120% last quarter.
Moving to Slide 8, we saw another solid quarter with respect to fees as our non-interest income, excluding securities gains grew $1.2 million or 2.2% linked-quarter. Consumer banking income increased approximately $1 million from the prior quarter, primarily in card income.
Mortgage banking revenue increased and remained strong for the second quarter in a row. Gain on sales were higher than last quarter but were largely offset by higher amortization on mortgage servicing rights, as mortgage rates decreased during the quarter.
Wealth management fees were down slightly linked-quarter, but are up 6.1% year-over-year. And during the third quarter of 2019, we completed a balance sheet restructuring involving the sale of approximately $400 million of investment securities and a corresponding prepayment of certain FHLB advances.
These transactions impacted both non-interest income and expense with $4.5 million of investment securities gains being offset by $4.3 million of prepayment penalties on those FHLB advances. It is expected that this restructuring will contribute approximately $4 million to net interest income over the coming year.
Moving to Slide 9, non-interest expenses were $146.8 million, an increase of $2.6 million from the second quarter. Total expenses related to charter consolidation activities were $5.2 million, which was comparable to the second quarter. Other notable items impacting expenses in the third quarter, included the previously mentioned FHLB advance prepayment penalty which is recorded in other expenses.
We also recognized a $2.6 million FDIC insurance credit earned during the quarter as a result of the deposit insurance fund reaching the specified level. Net occupancy expenses also decreased during the third quarter, largely resulting from improvements in property management costs. With the third quarter of 2019, our effective tax rate was 13.9% which is a decrease from 14.2% in the second quarter.
Slide 10 displays our profitability and capital levels over the past five quarters. Returns on assets and equity were higher for this quarter due to net income growth. Our tangible common equity ratio remained strong.
Lastly, we were updating some of our outlook for 2019 as shown by the underlying items points on Slide 11. For our net interest margin, we were pleased to start off the year with margin expansion that was stronger than we had guided.
However, the recent rate decreases and the shape of the yield curve has caused us to change our outlook for the balance of the year. We are now expecting our net interest margin to decrease 3 basis points to 5 basis points full year 2019 versus our full year 2018 net interest margin, which was 3.4%.
We expect our net interest income to grow at a low single-digit growth rate. This revised guidance assumes two more 25 basis point rate decreases to occur in October and December of this year. For non-interest income based on our year-to-date results and our expectations for the remainder of the year, we are increasing our outlook to a high single-digit growth rate for the full year of 2019.
With that, we'll now turn the call over to the operator for questions. Justin go ahead, please.
[Operator Instructions] Our first question comes from Frank Schiraldi from Sandler O'Neill. Your line is now open.
Just wanted to start off with the NIM guidance in terms of, if I just do the math, it seems like 4Q you're anticipating another 10 basis points in compression linked-quarter. And so just kind of - just wanted to see if you could talk a little bit about the factors there, I know you mentioned the two rate cuts. I don't recall exactly when in December that would be - but I guess that would be - that December rate cut would be somewhat impactful though less so obviously than the October rate cut. And then if you can just, again, you've talked in the past you've offered what you thought given 25 basis point rate cut would - due to the NIM. And I think you've talked about 2 to 3 bps of compression, if that's still reasonable on sort of a normalized basis? Thanks.
Sure, Frank. A couple of initial thoughts on margin for this quarter and then I'll try to answer your question directly. When you look at the 13 basis points of linked-quarter decline that we had. We think that on a core basis, we think that number is more like 8 basis points to 9 basis points and there are three factors contributing to that.
First is, as you may recall, in the second quarter, we had net recoveries instead of net charge-offs, so as a result, we had more non-accrual interest income that was recorded in the second quarter than what we typically see. That decline from 2Q to 3Q - just the decline in non-accrual interest income was about $1.5 million. So that had an impact.
We also saw our non-interest earning assets grow by $74 million linked-quarter, which is principally due to we purchased some bank and life insurance during the beginning of the third quarter. We were underweighted in that asset class and that had an impact obviously on margin, but will improve fee income going forward.
And then lastly, is the municipal deposits which as you know, we always tend to see an influx. We actually saw our high watermark in the municipal deposits in the month of August.
As of the month of September, we still have just under $2.5 billion and about $1.5 billion of that is index. So historically, we are about 50% index, but right now, we're closer to 60% index. So that tends to be a little bit higher cost money. So that kind of - so again, if you take those three factors, we think we're more on a core basis about 8 or 9 basis points.
Now fast-forward into the fourth quarter and our guidance, I think it's going to depend on - clearly on how much we were able to move deposit rates down in the fourth quarter, it has the most significant impact on that guidance. We won the first rate cut occurred in July, it takes a couple of weeks to really be able to react to that and get that the historical cycling through both in promotional rates but then also looking at the back book on deposits that you have.
So if we do not see two rate decreases, clearly, if we don't see one in December that would have less impact and if we don't get news here at the end of October. But I think early one, Frank, I think the 2 to 3 basis - I think 3 basis points is still a pretty good number.
I mean another way to think about our net interest income is that we are just shy of $20 billion in interest earning assets, and we think that a 25-basis point rate cut on an annualized basis is between $6 million to $8 million. So that would be kind of 3 basis points to 4 basis points.
I think longer term, we're getting ourselves down into that 3 basis points and maybe even, it could be down in the 2-basis point range in the latter part of a decrease in cycle as our deposit betas on the way back down will catch up. But in the early stages here rate decreases just like our deposit cost lag on the way up, there is going to be a natural lag on the way back down as well.
And then just one other one if I could on the buyback, you guys have been quite aggressive, which has been a nice tailwind, and just wondering if you see - you announced another program, as you mentioned, would you expect to be more measured in this program or could you continue to be just as aggressive here? And sort of connected to that just TCE ratio has been pretty flat over the last several quarters, and just wondering, if you could see that dip down a little bit even in order to transact that buyback? Thanks.
Yes. So Frank, the pace of the buyback, as we've said in the past is contingent upon a lot of things and one of the main things are our growth rate. We did see a higher growth in third quarter and anticipate that that may continue. So just that one factor could slow down the pace of the buyback this year.
And then on capital, I mean is 8.5% kind of where you - I know in the past, you've been accreting capital and the offset has been the buyback. I mean is 8.5% a pretty good level to assume for you guys--
I think we're comfortable between 8% and 8.5%.
And our next question comes from Casey Haire from Jefferies. Your line is now open.
Couple more follow-ups on the NIM. Just to get a sense on the funding side. Could you give us any idea as to where deposit costs sort of exited the quarter versus that 84 bps in the third quarter?
Where they exited, help me on what do you mean by that?
Like so, as 84 bps is the average for the quarter as of 9/30. What was that number? Just want to get a sense if deposit costs have peaked?
Right. In September, they were still pretty close to that quarterly average because again, you've got the influx, you got the influx of the municipal deposits, again, the high watermark is in August. You start to see those outflows in September, but then that's going to be a little bit more pronounced as municipalities end up spending their tax rules.
So obviously, September and August were both pretty similar. Now the one thing we did see, which I think gives us confidence that the third quarter is higher than what we expect the fourth quarter to be is that we did see for some of our promotional CD's that we were offering in the month of July.
We've significantly pulled back what those - what this new money rates have been, and as a result, we've seen a significant flip in terms of what our new money rate is that we're putting on CDs versus what's rolling off.
And the balance sheet repositioning, I appreciate the color on the $4 million per annum. What was that late in the quarter? And then sort of what are the securities that were sold off? What was the yield there? And then the rate on the borrowings that you guys prepaid?
Yes. So most of it occurred later in the quarter, we did do a smaller piece of that early in the quarter about $100 million, but about $270 million, $280 million of it occurred later late in the quarter. And in terms of what we pulled off, if you took the investments that we pulled off and the borrowings that we pulled off. It was actually a negative carry of between 5 basis points and 10 basis points.
And then we don't run an investment portfolio for this wholesale leverage. I mean we need it for liquidity purposes. So what we put back on was that a positive carry, obviously, about a 100 basis points there for the guidance to-date.
And just lastly on the capital management front, can you just give us some updated thoughts on the M&A landscape? And is that active or is that - do you see a lot of opportunities within your footprint?
It's somewhat active.
I think we see opportunities within the footprint. I don't know that I would say we see a lot right now, but there are some opportunities and we're going to take a look when it's appropriate.
And our next question comes from Chris McGratty from KBW. Your line is now open.
Mark, if I could just - can I just follow up on the M&A question. Could you remind us markets I think in the past you've said fill-in for scale maybe size and kind of accretion metrics that might be the boundaries that you might be looking at?
Yes. So we continue with the strategy to fill-in for scale. And those places exist in every state that we're in, Chris. As far as size, I would say, between 500 million and 8 billion, it'd be a range and I think we would like to start off with a smaller one.
And in terms of kind of hurdles and earn backs accretion, how - it's been a while since you guys have done a deal. What's kind of the parameters that you would judge yourself?
Yes. So IRR in excess of cost of capital, accretive to earnings within the first year combined operations. In terms of tangible book value dilution and earn back that becomes a little bit contingent on size of the deal. I would say for a smaller transaction, we would want it to be in the kind of two to three-year range on our earn-back for a larger transaction.
We would be willing to go up to five, but that will be something that would be pretty at the top end of the range, Phil had articulated. So typically for us, most transactions in the smaller end of that range would be in the sort of two to four-year earn back range.
And if I could just ask one on credit, charges were a little higher not high at all. But looking quarter a little bit up. Any color on the industry type whether this was currently or previously on non-accrual or any kind of color on the portfolio? Thanks.
Well, the biggest charge-offs were on loans that were already on non-accrual.
And was there an industry commonality, Phil.
Well, I think we had talked about in the past a large credit that we've put on non-accrual, that was in manufacturing company, in the food industry, and the biggest charge-off was on that, Chris.
[Operator Instructions] Our next question comes from Russell Gunther from D.A. Davidson. Your line is now open.
I appreciate all the color on the loan growth strength in the quarter. I wanted to circle back to your comments about the opportunities in Philadelphia and Baltimore. Maybe if you could share with us just how hiring is going in that market, your ability to attract talent and does it really get up and humming there, is there the ability for that contribution to kind of push your prior guided growth rate in low- to mid-single digits even higher?
So a lot with the growth rate is going to depend on what happens in the economy, but we now have a 19 people in Philadelphia in addition to the folks that we have in our branches. So out of 19, 11 of them are C&I, two are CRE and then just various other folks. And in Baltimore, we have a team of - just specifically in Baltimore on the commercial side, we have about probably three folks.
And then circling back to the asset quality question. I appreciate your thoughts on what occurred in the period. But if you could just give us a sense for the outlook going forward. Is there anything, any particular portfolio geography that is of concern to you or flashing even just yellow warning signs and in particular, any update on your ag portfolio?
Well, I'll start with the ag portfolio, I think it's stabilized. And we've had most - some increases in milk prices, which are helping those folks. So I think we actually feel a little better about the ag portfolio today than we probably did 12 months ago.
And then I can't - we can't really look at any other specific industry that we're seeing a lot of negative trends on. So we're just watching everything closely and you always have one or two new credits pop up in the quarter, but I don't think it's tied to any type of industry.
Thank you, Phil. And then last one, guys, for me, a bit ticky-tacky but on the - in the expense detail about $1 million step-up in intangible amortization. Is that a base that will amortize lower? Or is there anything that occurred why that would revert back to kind of first quarter, second quarter levels?
So about $990,000 of our consolidation costs was the write-off of the trade NIM, of our bank in Maryland. So that is--
I think one should then - okay, thank you for that.
I think correct, that'll come back soon. That's a one-time write off of a trade receivable asset.
[Operator Instructions] Next question comes from Daniel Tamayo from Raymond James. Your line is now open.
So I think you mentioned that loan growth accelerated in September. Is there anything unusual driving that or have you seen an uptick in demand?
We've had really good backlogs and we've had good demand. And just it's timing of settlements is the best way I can explain it.
And then I think you just talked about being really comfortable with where credit is right now. So nothing I'm assuming is, I guess am I clear to say there's nothing out there that's causing you any concern enough to change the standards in terms of how you're lending?
I would say, no.
Thank you. And I am showing no further questions. I would now like to turn the call over to Phil Wenger, Chairman and CEO.
Thank you, everyone, for joining us today, and we hope you'll be able to be with us, when we discuss fourth quarter results in January.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all now disconnect.