Q3 2019 Earnings Call
Yes.
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If you acquire any assistance during this call. Please press star than zero I would now like to hand, the conference over to your speaker today, Jason Webber. Thank you. Please go ahead Sir.
Thank you Justin good morning, Thanks for joining us for Fulton Financial's Conference call webcast to discuss our earnings for the third quarter 2019.
Your host for today's conference call as Phil Wenger, Chairman and Chief Executive Officer.
Corporation.
Our comments today, well refer to the financial information.
Slide presentation included with our earnings announcement, which we released at 430 P.M. yesterday afternoon.
These documents can be found in our website at www dot dot com by clicking on Investor relation and then news.
As far as can also be found these presentations page under Investor relations on our website.
On this call Representatives, a full we may make forward looking statements with respect to focus financial condition results of operations and business.
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 are forward looking statements in our earnings release.
Slide two of today's presentation for additional information regarding these risks and uncertainties.
[laughter] undertakes no obligation.
That is required by law update or revise any forward looking statements.
Discussing in discussing Fulton's performance represented as a former refer to certain non-GAAP financial measures. Please refer to the supplemental financial information.
With that was earnings announcement released yesterday tens fives called in 13 of today's presentation. A reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.
Now I'd like to turn the colder your host.
Thanks, Jason and good morning, everyone.
Thank you for joining us Ive, a few prepare remarks before CFO Mark Mccollum chairs the details <unk> third quarter financial performance.
And discusses our 2019 outlook.
When he concludes me well open the phone line.
[noise] before I talk briefly about a third quarter performance I wanted to highlight two important milestones we accomplished in recent months.
First we consolidated our last remaining affiliate bank sloppy and Ambassador Bank and ended the quarter be a bank.
Into our largest baking subsidiary Fulton Bank in September .
This transaction completes our multiyear initiatives consent consolidating all of our newly upright.
Right.
Second in early October the Department of Justice informed us that it's completed its fair lending investigation or Fulton without taking any action against the company.
Achieving these milestones would not have impossible without the efforts of so many dedicated and hard working full time employees.
Together, achieving these milestones will not only help unify our Brad.
It also facilitate growth moving forward.
Now I'd like to talk about our third quarter performance, but overall, we were 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.
Well in growth accelerated towards quarter end, Dan as a result period end loan balances increased $318 million were 7.6% linked quarter annualized.
Much higher than the a 132 million dollar increase in period end balances during last years kirker.
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 close in third quarter.
Commercial originations increased linked quarter and year over year.
While prepayments were down by quarter.
Growth was spread throughout our.
<unk> print, but primarily in our south eastern Pennsylvania, and Delmore burden.
Line utilization increase last 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.
[noise]. Despite the growth we saw this quarter the lending environment remains extremely competitive.
Well, 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 residential mortgage portfolio with the drop in rates, we saw the work refinance activity during the quarter.
Approximately 75.
Per cent of our originations during the quarter, where adjustable rate mortgages.
The growth was spread throughout our footprint.
Our indirect auto portfolio continues to grow a solid pace.
Gross linked quarter and year over year was primer, primarily in our Pennsylvania markets and to a lesser extent in our New Jersey, Delaware markets.
As we mentioned in the past Philadelphia onboard more present tremendous flow moral term first opportunities before us.
And in the third quarter of 2019, we opened our first financial center in the downtown area Baltimore.
Turning to credit overall asset quality continues to continues to be relatively stable.
We are mindful, where we are the economic cycle and are continuing to assess and analyzed worth portfolio for signs.
Weakness or stress.
Moving to fees, a commercial or an interest rate swap income benefited from strong commercial originations.
And was up linked quarter and year over year.
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 remains 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 getting the business.
We recently had the opportunity to purchase a small wealth management business located in the Harrisburg area, Pennsylvania, adding approximately $70 million of assets under management to our brokerage platform.
We have now completed two small wealth management acquisitions. This year, which has added approximately $320 million two assets under management and administration door 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 into 2020, we see opportunities become more efficient as we continue to optimize our delivery channels and upgrade or origination and servicing platforms.
When the capital bright we paid a quarterly common dividend of 13 cents per share in the third quarter.
We repurchased approximately $48 million of common stock during the third quarter, completing our 100 million dollar share re purchase program announced in March of this year.
Recently, our board of directors approved a new 100 million dollar share repurchase program.
Which is authorized through December 31st 2001.
And at this point I'd like to turn the call over to Mark Mccollum to discuss our financial performance in more detail Mark.
Thank you Bill and good morning, everyone.
Turning to our earnings unless noted otherwise the quarterly comparisons I will discuss it with the second quarter 2019.
Starting on slide five earnings per diluted share. This quarter were 37 cents on net income of $62.1 million.
Increase of two cents or 5.7% from the second quarter 2019, and consistent with our third quarter of 2018.
Well no dive a bit deeper components of our earnings and give you some additional color.
Moving on to slide six our net interest income was 161 point Threemillion a decrease of 3.3 million linked quarter, driven primarily by a 13 basis point decrease in our net interest margin.
Mostly offset by the impact them an increase in interest, earning assets and then additional day of interest accruals during the quarter.
Gross an average loans linked quarter was 120 million for 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.
Andy deposits grew 954 million or 5.8% linked quarter and a $1.1 billion were 6.7% compared to the prior year.
The net interest margin decrease was driven by 225 basis points fed funds rate decreases which occurred during the quarter.
Due to the variable nature of our loan portfolio, our third quarter loan yields drop more quickly than our deposit costs.
Going forward, we would expect our deposit cost to decline from third quarter levels due to run off of our municipal deposits as well as planned deposit rate decreases they're taking place in the fourth quarter.
Mainly as a result of the rate decreases average loan yields in the third quarter 2019 declined 14 basis points and average yields on interest, earning assets were down 12 basis points.
Our cost of funds increased by one basis point due in part to the large inflows of higher cost municipal deposits during the quarter.
Turning to slide seven our overall credit performance in the third quarter was relatively stable.
Nonperforming loans decreased 11.7 million to $136 million.
Nonperforming loans as a percentage of total loans decreased to 81 basis points at the end of the third quarter.
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 two $2.2 million.
The allowance for credit losses, as a percent of loans decreased to 1.4% from one point.
8% at the end of the second quarter.
However, due to the improvement in our nonperforming loans the coverage on the allowance to nonperforming loans increased to 127% from 120% last quarter.
Moving to slide eight we saw another solid quarter with respect to fees as our noninterest income excluding securities gains grew $1.2 million were 2.2% linked quarter.
Consumer banking income increased approximately $1 million from the prior quarter, primarily in card income.
Mortgage banking revenues increase and remains strong for the second quarter Roe.
Gain on sales were higher than last quarter, but were largely offset by higher amortization on mortgage 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 2019, we completed a balance sheet restructuring involving the sale of approximately $400 million of investment securities and a corresponding prepayment of certain FHLB advance.
These transactions impacted both noninterest income and expense with $4.5 million of investment securities gains being offset by $4.3 million a prepayment penalties on those FHLB advances.
It is expected to this restructuring will contribute approximately $4 million to net interest income over the coming here.
Moving to slide nine noninterest 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 the 2.6 million dollar FDIC insurance credit earned during the quarter as a result of the deposit insurance fund, reaching the specified lub.
Net occupancy expenses also decreased during the third quarter, largely resulting from improvements in property management costs.
For 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 on profitability and capital levels over the past five quarters.
Turns on assets and equity were higher for this quarter due to net income growth.
Our tangible common equity ratio remained strong.
Lastly, where you were updating some of our outlook for 2019 action by the underline items 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 died 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're now expecting our net interest margin to decrease three to five 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 for December 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're increasing our outlook to a high single digit growth rate for the full year 2019.
With that I'll now turn call over to the operator for questions Justin Please.
Thank you Sir.
As a reminder to ask your question you need to press Star one on your telephone to withdraw your question. Please press the pound key stambolic compiled the Q and a roster and again that is star one to ask a question.
And then next my first question comes from shrank from Frank Schiraldi from Sandler O'neill.
Let's now open.
Good morning.
Greg Brent.
Just wanted to start off with the with the NIM guidance.
In terms of you know if I just do the math it seems like for Q, you're anticipating another 10 basis points in compression linked quarter and.
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 that would be.
That December break out would be some somewhat impactful.
Yes, so obviously than the October Ray Scott and then.
If you can just again you've talked in the past you've offered what you thought you now a given 25 basis point rate cut would.
Due to the NIM and I think you've talked about two to three beps of compression.
If if thats still reasonable and sort of a normalized basis. Thanks.
Yes, sure Frank a couple initial thoughts on margin for this quarter and then ill try to answer your question directly when you look at the 13 basis points of linked quarter decline that we had a we think that on a core basis. We think that number is more like eight to nine 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 note net charge offs allows a result, we had more nonaccrual interest income that was recorded in the second quarter than what we typically see that decline from Twoq to Threeq you just the decline in.
Nonaccrual interest income was about $1.5 million. So so that had an impact. We also saw our noninterest earning assets grow by $74 million linked quarter, which is principally due to while we purchase.
Some bank owned life insurance during the beginning of the third quarter, we were under weighted.
In that asset class that had an impact obviously on margin, but that will improve on 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 municipal deposits in the month of August .
As the month of September .
We still have just under $2.5 billion.
And about 1.5 billion of that is index.
So historically were about 50% index, but right now we're closer to 60% index, so that tends to be it a little bit higher costs.
So that kind of so again you take those three factors, we think we're more to core basis about eight or nine basis points.
Fast forward into the fourth quarter in our guidance I think it's going to depend on clearly one.
How much we were able to move deposit rates now in fourth quarter has the most significant significant impact on that guidance.
We.
We when 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 start cycling through boots and promotional rates. But then also looking at the back book when 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 the end of October .
But.
I think early one Frank I think the two to three Baselining three basis points is still a pretty good numbers 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 2025 basis point rate cut on an annualized basis is between $6 million to $8 million.
So that would be kind of three to four basis points I think longer term, we're getting ourselves down into that three and maybe even could be down into two basis point range in the latter part of a decrease in cycle as our deposit betas on the way back down catch up but an early stages here rate decreases just.
Like our deposit cost lagged on the way up.
There's going to be a natural lag on the way back down as well.
Okay, and then just one other one if I could on on.
On the buyback you guys have been quite aggressive which has been a nice tailwind just wondering if you see you know you announced another program as you mentioned.
Would you expect to be more measured in this program or could you continue to be you know just as aggressive here and sort of a connected to that just Tc ratio has been pretty flat over the last several quarters and just wondering if you could.
See that dipped 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 maintains 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.
Okay, and then and then on capital I mean is 8.5% kind of where you I know in the past you've been accrued in capital and the offsets from the buyback I mean is 8.5% a pretty good level to assume pretty good.
I think you know we're comfortable between eight and they may have percent.
Great. Thank you.
Thank you.
And our next question comes from Casey Haire from Jefferies. Your line is now open.
Thanks, Good morning, guys couple more follow ups on the on the NIM the.
Just to get a sense.
On the on the funding side could you give us a.
Any idea as to where deposit costs sort of exited the quarter versus that 84 bips.
In the third quarter.
Where they exited.
Me on what you mean.
Like so as 84 businesses the average for the quarter as of 930, where where was that number.
Yes.
Deposit costs of peak.
Right 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 high watermark as an August you start to see those outflows in September , but but then that's going to be a little bit more pronounced.
As a.
Tallies, you'll end up spending there that their tax rules.
So I would say September and August we're both pretty similar.
No. The one thing we did see which I think gives us.
Competence that the third quarter is higher than what we expect to fourth quarter to be is we did see for some of our promotional Cds that we were offerings in the month in July you know those we've significantly pull back.
What those with his new role 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.
Gotcha, Okay, and the balance sheet repositioning.
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 on the borrowings that you guys prepaid.
Yes. So most of it occurred later in the quarter, we did do smaller piece of that early in the quarter about 100 million.
What about about 270 280 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 all.
In the borrowings we pull up it was actually a negative carry of between five and 10 basis points and then we don't run an investment portfolio for Ges wholesale leverage and we needed for liquidity purposes.
So what we put back one.
Was that a positive Kerry obviously by 100 basis points there for you guys.
Okay, Great and just just lastly on the capital management front can you just give us some updated thoughts on on the M&A landscape and is that active or is that do you see a lot opportunities within your footprint.
Hi.
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.
Okay.
Great. Thank you.
Thank you and our next question comes from charters Mcgrady.
KBW Your line is an open.
The call Walker.
[laughter].
Yes.
Mark I guess or sorry, just follow up on the M&A question.
Could you remind us markets I think you 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 we continue with that strategy to fill in for scale.
And.
You know those places exit in every state that we're in a Chris.
You know as far as size.
I would say.
No our.
Between 500 million and 8 billion.
Be range.
And.
I think we would like to start off with it with a smaller one.
Okay.
Great and in terms of kind of hurdles earn backs accretion hurt you spent a whilst you guys were done deal, what's what kind of the parameters that you would get yourself.
Yes, so I'm still IR or in excess of cost to capital accretive to earnings within the first year combined operations.
In terms of tangible book value dilution and earn back you know that becomes a little bit contingent on one size of the deal.
I would say for a smaller transaction, we wanted to be in the kind of two to three year range when our back for a larger.
Transaction.
We would be willing to go up to five but that would be something that would be pretty.
The top end of the range filled articulated so typically for us. It's the most transactions in the smaller end of that range would be in the sort of two to four year or.
Okay, great and if I could just ask one on credit.
Sorry, just for a little higher not not high at all but one quarter a little bit up.
Any color on the industry type whether this is currently or previously on non accrual or any kind of.
Colour on the portfolio. Thanks.
Well the.
The biggest charge offs were on loans that were already on non accrual.
Was there an industry commonality.
Oh, well I think we had talked about in the past a large credit that we put on non accrual that was.
In right.
Manufacturing company.
In the food industry.
And the biggest charge off was that correct.
Great. Thank you.
Thank you and again, ladies and gentlemen, if you have the question. Please press Star then one again star one Touchstone telephone. Our next question comes from Russell Gunther from D.A. Davidson. Your line is now.
Hey, good morning, guys. Good morning, everyone Russell.
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 Baltimore, maybe if you could share was this just how how hiring is going in that market the ability to attract talent.
Yes, it really get up and coming there is there the ability for that contribution to kind of push here.
Brian guided growth rates in low to mid single digits, even higher.
So you know the a lot with the growth rate is going to depend on what happens in economy, but we now have a night 19 people.
In Philadelphia in addition to the folks that we have it in our branches so out of 1911 of them or see an eye to RCR a.
And and then just various other.
Folks.
And.
In Baltimore.
We have a team.
I just specifically in Baltimore.
On the commercial side, we have probably three folks.
Yes.
Gotcha, Okay, I appreciate that and then.
Circling back to the asset quality question.
I appreciate your thoughts on what occurred indicated, 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.
Particular any update on your AG portfolio.
Okay.
Well start with the portfolio I think it's stabilized.
We've had knows some increases in milk prices, which.
Are helping those folks so.
Yes, 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 border, but I I don't think it's tied to.
Any type of industry.
Alright. Thank you Phil and then last one guys to me a bit ticky tacky, but on the.
In the expense detailed about a million dollar step up in intangible amortization that a base that will amortize lower or is there anything that occurred why that would revert back to kind of first quarter see other levels so about $990000.
Our consolidation costs.
Was the right off of the.
Okay trade name.
Of our bank in Maryland.
So that and so that should then.
Thank you for the holiday.
That will come I assume that's a onetime write off of a premium received.
Perfect.
Thank you guys.
Thank you and again, ladies and gentlemen that is star. One next question comes from Daniel its a mail from Raymond James Non is now open.
I agree with you guys didn't.
So I think you mentioned that loan growth accelerate.
Number there anything unusual driving that or have you seen an uptick in demand.
No.
We've had really good backlogs and we've had good demand and just it's timing a settlement is the best way I can explain it.
Okay.
And then I think.
You just talked about being really comfortable with where credit is right now so.
Nothing I'm assuming.
Okay to say, there's nothing out there that that's causing you any concern enough to the teams the standards in terms of.
Of how your lending.
I would say no no.
Okay.
Right. That's all I have thank you guys.
Great. Thank you.
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 participating you may now disconnect.