Q4 2021 Fulton Financial Corp Earnings Call
Returns from our efforts related to the paycheck protection program or PPP.
Credit costs were down significantly during the year as asset quality remained stable.
And operating expenses, which we managed aggressively.
We achieved all of this due to a tremendous effort by our team during times that continues to be challenging.
These items offset continued pressure on our net interest margin.
However, we are seeing some encouraging signs as well.
Mark will share more details on those.
Despite the world's ongoing COVID-19 related struggles the economy and the markets, we serve show signs of acceleration.
Unemployment continues to decline.
Business activity continues to expand.
And the communities we serve continue to move forward.
Similar to last quarter M&A activity and discussions remain active.
And as I've shared previously Fulton is interested in select opportunities that will support further growth with our within our current markets.
As always we will take an active but disciplined approach to opportunities to grow by acquisition.
During the quarter, we were able to take advantage of a dip in our stock price and have now utilized approximately 60% of our $75 million share repurchase authorization.
We will continue to repurchase stock under that authorization.
If it makes financial sense to do so.
We also declared a special cash dividend of <unk> <unk> per share in 2021 double what we declared the previous year.
As we begin the new year. We appreciate the continued partnership we have with our shareholders our customers and our team members.
They are helping to grow our company to achieve operational excellence and to change lives for the better.
Now I'll turn things over to Kurt to discuss our business performance.
Well, thank you Phil and good morning, everyone. As Phil noted, we continued to produce solid results in the fourth quarter I want to share some additional detail on several key areas.
Unless I note otherwise the quarterly loan and deposit balances I will discuss our own an ending balance basis.
First we saw loan growth accelerate during the quarter, we experienced strong loan growth from residential mortgages commercial and residential construction and commercial real estate.
This was further enhanced by modest growth in C&I and consumer loans.
Total loan growth was approximately $345 million or about seven 8% annualized up from four 5% annualized in the third quarter when excluding PPP loans.
In our consumer lending businesses business.
One balances grew 136 million or nine 9% on an annualized basis. This was driven primarily by strong growth in residential mortgages.
Residential mortgage banking activity remains solid as we continue to experience elevated originations as compared to prior to the beginning of the pandemic.
We continue to have opportunities to either sell or conforming originations in the secondary market at historically healthy spreads or increase our balance sheet at beneficial yields with the recent change in the interest rate outlook, we will continue to evaluate adding to the portfolio versus originating for gain on sale income.
<unk>.
Residential mortgage originations for the quarter were $582 million. This is a decrease of 12% from the prior quarter and a decrease of 28% from the year ago period purchase.
Nations at $390 million accounted for approximately 67% of total residential mortgage originations during the quarter.
At December 31, the mortgage pipeline sits at $372 million after another solid quarter of originations.
As I mentioned last quarter, our recent Fintech partnership for student loan refinance business continues to progress adding growth to the overall commercial loan portfolio as well.
Offsetting overall consumer loan growth is a modest decline in home equity portfolio predominantly based on line utilization.
Turning to commercial lending the commercial loan portfolio grew $209 million or six 9% on an annualized basis.
An increase from last quarter's annualized growth rate of one 4%.
Commercial mortgages grew $134 million or seven 5% on an annualized basis due to increased originations.
I'd also note that the growth was at higher yields on a linked quarter basis.
C&I loans increased $44 million or four 5% annualized driven by a modest increase in line utilization. This is the second quarter row, where we've seen increases in line balances, which drove C&I growth for the quarter.
Last commercial construction loans grew $18 million or seven 7% annualized.
We are encouraged by our ability to grow loan originations this quarter and by our customers increased business activity.
The commercial pipeline ended the year down slightly after strong originations during the fourth quarter our pipeline typically built back in the first quarter and we expect that trend to continue.
Turning to deposits, we saw an overall decline for the quarter, However, core commercial and consumer deposits increased modestly during the quarter. The overall decline was driven by the expected seasonal outflow of municipal balances.
Total deposit balances declined $501 million or two 3% linked quarter.
We were able to continue to reduce our overall cost of deposits from 12 basis points to 11 basis points for the quarter.
Moving to our fee income businesses, we were pleased with another strong quarter as fee income increased $1 3 million or two 1% linked quarter, we generated growth in core commercial fees capital markets consumer banking and in wealth management.
This growth was offset by a seasonal decline in mortgage banking income.
Turning to the commercial line of business total commercial fees were up $1 7 million or 10, 4% linked quarter. We saw strong linked quarter increases in capital markets and SBA income, while merchant banking and cash management were consistent contributors.
Capital markets activity, which is primarily commercial loan interest rate swaps increased in the fourth quarter as a result of increased originations.
Expect capital markets revenue to track this more historic trend over time. However, this will continue to be dependent on customer preferences commercial loan demand and interest rate expectations.
SBA gain on sale fees increased linked quarter. After 10 delivered a record year for us.
This SBA income is separate from the PPP program and is generated by our dedicated SBA team.
Overall, we remain encouraged by the performance of our commercial business and the increased business activity of our customer base during the quarter.
Our wealth management business had an outstanding year producing record results. This performance was driven by strong sales efforts client retention and the cumulative effect of several small acquisition.
Our recurring <unk> business also benefited from the strength in the equity markets throughout the year.
Assets under management and administration grew to $14 6 billion in the fourth quarter up from $14 billion and the end of the third quarter and $12 8 billion at the end of the prior year.
Turning to our consumer banking line of business residential mortgage banking delivered a solid quarter on a modest decline in loan sales. However gain on sale margins continue to remain elevated as compared to historic levels.
With interest rates moving higher during the quarter a portion of our mortgage banking revenues were driven by a reduction in the mortgage servicing rights valuation allowance.
Which mark will discuss in more detail.
In addition to mortgage banking fee income consumer transactional fees were up two 8% linked quarter or 11, 1% annualized as customer activity continues to expand.
Moving to credit and asset quality remains stable delinquency low and deferrals and forbearance continued to decline as nonperforming loans remained relatively flat and within a very narrow range since prior to the beginning of the pandemic.
During the quarter, we booked net charge offs of $3 million or seven basis points annualized.
This compares to $2 3 million or five basis points of annualized net recoveries in the third quarter for.
<unk> for the year, we booked $13 8 million or seven basis points of net charge offs.
Our fourth quarter provision for credit losses was a negative $5 million and a negative $14 6 million for the year the.
The allowance for credit losses, excluding PPP loans stands at 138%. We feel this reserve is appropriate given our credit outlook.
As always our allowance for credit loss trends could change in future periods based on new loan origination volumes loan mix net charge off activity and longer term economic projections.
For all our credit outlook remains stable heading into 2022.
Now I'll turn the call over to Mark to discuss our financial results and outlook in a little more detail.
Thanks, Kurt and good morning to everyone on the call unless I note otherwise the quarterly comparisons I will discuss it with the third quarter of 2021.
Starting on slide three earnings per diluted share this quarter were 37.
On net income available to common shareholders of $59 $3 million.
Our solid fourth quarter performance included a decline in net interest income an increase in non interest income a negative provision for the quarter and higher operating expenses, which I'll cover more detail on all of these items later in my comments.
Moving to slide four our net interest income was $166 million or $5 million decline linked quarter.
This was primarily due to an $8 million decrease in fees earned on PPP loans forgiven during the fourth quarter as compared to the third quarter.
This decrease was offset by strong loan growth relatively stable yields on earning assets and a modest decline in interest expense.
With respect to our PPP program at the end of the third quarter, we had $590 million of outstanding PPP loans and $18 million of unearned fees during.
During the fourth quarter PPP loan forgiveness was $289 million and the fees earned on that were $10 million down from $18 million in the third quarter.
Since the start of the program. The SBA is forgiven approximately 88% of our PPP loans and at yearend, we had $301 million of PPP loans on our books with approximately $8 million, a PPP loan fees yet to be recognized.
Turning to the investment portfolio balance.
Balances grew modestly during the period, increasing $167 million to end the quarter at $4 2 billion.
We also saw a sizable decrease in deposits that we keep with other institutions during the quarter, which helped to slow our decline in earning asset yields during the period.
Turning to deposits total deposits declined approximately $500 million on an ending balance basis, we lowered our cost of deposits for the quarter from 12 basis points to 11 basis points and we would expect this to go slightly lower in the future.
During the quarter, we saw seasonal outflows of municipal deposit balances and anticipate that to continue into this year.
Non municipal deposits increased approximately $35 million during the quarter, whereas municipal deposit outflows represented $536 million.
Our ending loan to deposit ratio increased from 82, 8% in the third quarter to 84, 9% at year end due to a combination of increased loans outstanding and a decline in deposits.
Our non our net interest margin for the fourth quarter was 277% versus two 2% in the third quarter.
The five basis points of linked quarter decline resulted primarily from declining PPP loan fee recognition offset by an improvement in the mix of interest, earning assets and continued decline in deposit costs.
Turning to slide six noninterest income I'll provide some additional detail on the business results Kirk discussed.
Mortgage banking revenues were driven by solid loan mortgage.
Mortgage loan sales and historically elevated gain on sales spreads, which were 174 basis points this quarter versus 194 basis points last quarter.
During the quarter. We also recorded a reduction to the valuation allowance of our mortgage servicing rights asset of $2 $5 million due to higher interest rates and slower prepayment speeds. Our MSR asset was $35 4 million on balance sheet at December 31.
This balance is net of a $600000 mortgage servicing rights valuation allowance, which remains as of year end.
Other fee income increased $1 $8 million linked quarter. This was primarily due to gains of $3 8 million from equity method investments.
Our investment in a Fintech fund again generated very strong increases in valuation during the quarter.
Moving to slide seven noninterest expenses were approximately $154 million in the fourth quarter up $9 $4 million linked quarter.
This increase was driven by the following factors many of which are not expected to repeat in 2022.
Total salaries and benefits were up $2 $8 million linked quarter, driven by a vaccine bonus of $1 3 million for our team members as well as providing additional bonus pay of $2 $3 million for team members, who do not participate in other bonus programs.
We had higher occupancy costs of $1 4 million due to changes in the useful lives of certain leasehold assets, which accelerated depreciation by approximately $1 million.
And we had higher outside services cost due to the timing of certain technology projects, which totaled $1 7 million and.
And lastly, we had higher other expenses of $2 5 million.
Due in part to an additional $1 million contribution to our Fulton forward Foundation.
Turning to taxes, our effective tax rate was 23% for the quarter higher than normal and due to supply chain challenges, which cause project delays and certain tax credit investments, which we expect to come online in 2022.
We also saw increases in allocated revenues to higher tax jurisdiction states and also higher overall revenue for the year contributed to the higher effective tax rate.
Slide eight gives you more detail on our capital ratios as of December 31, we maintained solid cushions over the regulatory minimums, and our bank and parent company liquidity remained very strong.
During the quarter, we repurchased approximately one 1 million shares at an average price of $15 98.
And have utilized approximately 60% of our $75 million share repurchase authorization.
On slide nine we provide our updated guidance for 2022.
Our guidance assumes $2 25 basis point rate increases occurring in March and September .
We expect our net interest income to be in the range of $660 million to $680 million.
We expect our noninterest income excluding securities gains to be in the range of $230 million to $245 million.
We expect operating expenses to be in the range of $580 million to $600 million for the year.
And lastly, we expect our effective tax rate to be in the range of 16, five to 17, 5% for the year.
Many of you look at pre provision net revenue or <unk> as a key metric of success the profitability of core operations. We also know that many of you calculate this metric differently we've.
We've included our version of this metric in the financial tables of our press release.
We would also like to point out a couple of additional items to consider as you assess our <unk> results.
First PPP fees earned have declined $8 million from the third quarter to the fourth quarter.
MSR valuation allowance adjustments resulted in an additional $2 $5 million decrease in the allowance in the fourth quarter.
And also our fourth quarter contained several expense items, which we do not expect to continue in future periods.
When removing the impact of these items, we believe RP PNR has shown continued improvement each quarter in 2021 as a result of our first quarter balance sheet restructuring, earning asset growth.
Core margin stabilization.
Fee income business results and continued cost containment efforts.
With that I will now turn the call over to the operator for questions Kevin.
Ladies and gentlemen, if you have a question or a comment at this time. Please press Star then the one key on your Touchtone telephone.
Question has been answered we should move yourself from the queue. Please press the pound key.
Our first question comes from Frank Schiraldi with Piper Sandler.
Good morning.
Alright, Thank you Greg.
Just curious on the on the guide.
Obviously higher rates here.
<unk> seen the 10 year move.
Significantly higher over the quarter, just wondering how that plays into strategy and if that NII guide anticipates.
Meaning full.
Securities purchases or not.
Yes so.
No Frank it doesn't we would anticipate that our investment portfolio, which again is now at $4 2 billion, we'd expect that to stay relatively consistent as a percent of the balance sheet. So as you see our loan growth.
In 2022, you could expect to see a commensurate increase in our investment portfolio, but I don't see with <unk>.
And I think most expectations are for the curve, probably flattened a little bit in 2022.
With the 10 year up I don't see that materially changing our near term strategy in terms of securities purchases. Instead, we would expect to see that excess liquidity soaked up by loan growth in 2022.
Got you, Okay and then.
On the.
Mark I know you mentioned some of the onetime costs that are unlikely that are not going to repeat.
In the first quarter.
It still seems like the.
Noninterest expense guide.
Growth is pretty contained there so.
Given.
The inflationary.
The inflation numbers just wondering your thoughts on.
How.
How have you baked that in and does that guide include specific.
Cost cuts.
In terms of legacy infrastructure.
Frank It wouldn't include any new cost cuts as you know back in.
In the fourth quarter of 'twenty, we announced some cost reduction initiatives, so really what youre seeing in the 2022 guide is kind of the first full year impact of all of those and when you look at our categories.
In a year over year basis from 'twenty to 'twenty one.
We did contain salary and benefits expense.
Where you saw larger increases were in data processing and software and outside services, which is consistent with the guidance. We gave a year ago that we would be reducing head count back in the fourth quarter of 'twenty, but then reinvesting a portion of those proceeds.
For technology related projects.
For 2022.
You can expect to.
See the fruits of some of that.
Come to roost, but.
But in that guide.
Good.
Acknowledged that there is definitely inflationary pressure.
Great, Okay, and if I could just sneak in one more just just sorry back to NII just you.
You mentioned, the two rate hikes for 2022 baked in.
Color or guidance on if you get an additional rate hike.
What that does for NIM.
Yes. So if you think about our balance sheet right now we have about.
$10 billion of loans that are either tied to prime sofa or one month LIBOR.
That's $10 billion that are unhedged, we have $11 billion total there was a $1 billion of hedges that were put on in 2021 10 billion unhedged.
So 25 basis point on that is an easy number to calculate $25 million annually.
Question, then becomes what's the deposit beta is going to be on that and when you look back over the last up rate cycle for most of the midsize banks for the first couple of increases deposit betas were under 10%. They were between five and 10%, which would just be then a couple of basis points.
So most of that these early rate increases, we would expect to be able to drop to the bottomline. What's also changed but also an unknown is that on the deposit side.
We will be surge deposits acts similarly to other noninterest bearing DDA, so where will they.
Move off the bank's books fast.
Great. Okay. Thank you for all the color I appreciate it.
Thank you you bet right.
Our next question comes from Chris Mcgratty with Keyw.
Okay.
Hey, How's it going this is Andrew <unk> on for Chris Mcgratty.
Alright.
So thinking about the margin going forward.
Can you provide your deposit growth assumptions.
We don't we don't typically provide we provided NII guide, we don't provide assumptions.
Assumptions.
Specifically on loans or deposit categories bulk, but what when I can provide is to give you some color.
One we have a municipal book, which obviously has some volatility throughout the year on a high point of that is typically in the third quarter, then tends to run off in the fourth quarter and first quarter and then start to build back up again.
And we also have a CD book.
Which in the first half of 'twenty, two you have about $600 million of Cds that come due.
And the weighted average rate on those.
As.
On the 25 basis points.
In the back half of the year, we have 700 million of Cds that mature at a weighted average rate of one to five.
And we're seeing replacement yields on the new Cds coming in at about 12 or 13 basis points.
Okay, great thanks for that color.
I have a similar subject.
Provide the securities reinvestment yields versus what's rolling off the books right now thanks.
Yes.
I would say on and again, we're not we're just growing the investment portfolio commensurate with our growth in other earning assets.
Versus what's rolling off and what's rolling on you've probably seen a pickup right now of about 20% to 25 basis points.
Alright, Thank you and if I can.
Squeeze one more in.
Loan growth.
Can you provide any comments on.
The C&I demand that you're seeing.
Utilization.
Sure. This is Kurt I'll give you some additional color on that we saw growth in all of our markets.
Which was a positive sign.
We saw accelerated growth in <unk>.
All of our Washington Delmarva region.
As well.
And.
Yes.
We continue to see.
Pretty strong demand.
In those markets so.
Where we saw good growth in the prior quarter.
The other thing I would mention is it was pretty much across the board most loan categories grew as well.
Thanks for that color. Thanks.
Thanks for the questions.
Our next question comes from Erik Zwick with Boenning <unk> Scattergood.
Yeah.
Good morning, guys.
Eric.
Hey, Curt maybe one quick follow up on the C&I line utilization do you have.
Number today as well as kind of what the historical.
<unk> would be.
Yes, we increased in the third quarter.
The overall just just.
Four basis points.
Our 40 basis points and then in this quarter 40 basis points. So really it's just started to increase so we think we had continued momentum.
For 2022 as that.
Utilization continues to normalize where essentially about 8%.
Below historical levels.
And what would that historical kind of average level.
Yes mid thirties.
Great. Thanks.
Turning to capital a little bit you were active in the fourth quarter with share repurchases and I think that the current authorization by about 40% left that would expire at the end of this first quarter. If I'm correct I'm curious about your inclination to continue buying back shares today and would you expect the board to approve another authorization.
<unk> going forward.
Okay.
How do we use what's remaining really is going to be driven by our stock price.
But I do expect us to have a buyback in place going forward.
Thanks, and then just last one for me in the opening comments.
Mentioned that Youre still interested in select opportunities for M&A. Just curious if you could remind us what you would look for what type of characteristics you would look for in a partner bank as well as what size. Thank you.
Our undertaking and acquisition of.
And while we would be looking at.
Ed institutions that.
Have similar operating models to ours have similar cultures to ours that are located within our existing footprint.
And.
We'd probably be looking at banks between 1 billion, an 8% to $10 billion.
Thanks for taking my questions today.
Sure.
Thanks, and our next question comes from Russell Gunther with D. A Davidson.
Hi, good morning, guys.
I had a question on the NII Guide I'm wondering if you could share a range of organic growth expectations for 'twenty, two and what that might mean from a mix perspective, as well I know yet.
Talked about the.
The give and take within portfolio in <unk>, but just any thoughts on magnitude and mix of organic growth for this year.
Yes, Russell as you know, we don't we don't give out specific growth targets for loans or segments I mean instead.
We're electing to give guidance related to the components of <unk>.
So we're happy to talk more about NII, but specific categories for loans. I mean, you can you can start to develop your own trends based off what you are seeing over the last couple of quarters.
Got you and would you expect that Denmark to accelerate from the fourth quarter pace that was stronger than you guys have demonstrated some positive momentum in the back half of this year.
Is the comment that that is sustainable around the current range or is there an outcome that could see that accelerate.
I think thats.
I think thats going to largely be contingent Russell on the continued reopening of the economy.
The smoothing out of supply chain issues, which are impacting multiple sectors.
Okay, Great I appreciate that color and then just to clarify the NII guide includes.
You said $18 million remaining under PPP fee is that right.
<unk> 8 billion.
$8 eight.
$8 million of which we would expect most of that to be recognized.
By mid second quarter.
Okay. Thank.
Thank you for the clarification, there and then just lastly on the on the expense side of things you talked about some of the moving pieces in the quarter. So.
On the occupancy side of things that accelerated depreciation of $1 million you would expect.
To normalize and then similar question on the on the $1 seven within outside services that was just a timing issue that.
<unk> step back before growing as you continue to invest with just appreciate any additional directional guidance on those two items.
So on the occupancy, yes, I would expect that to normalize with respect to outside services thats always going to be a little bit more sensitive to the timing of certain technology projects.
And.
So you will see certain quarters, where where that line item is going to tend to be a little bit more choppy than some others.
But overall, we feel pretty good again about our expense containment year over year.
When you strip out our debt restructuring costs.
And looking at what our guide is.
We think we've had now a couple of years in a row, where we've had.
Under 2%.
Expense growth.
Yes, that's very helpful. And then just last one.
Apologize if I could sneak this one in but any color you can share in terms of the nature of the tech initiatives spend that any particular objectives to accomplish for 'twenty two.
Russell for the fourth quarter those costs are predominantly related to doing a full implementation of salesforce.
That debt, we did launch across the entire company in the fourth quarter. We have a project plan this year that were.
Investing in some core technology upgrades add client benefit and efficiency and we're investing in some upgraded origination systems in certain business lines to.
To again focus on customer capability as well as internal efficiency.
I appreciate it guys. Thanks for taking my questions.
You bet. Thanks Russell.
Our next question comes from Matthew Brzycki with Stephens, Inc.
Good morning.
Hey, good morning.
I wanted to discuss the mix of the loan portfolio, just a little bit over the last couple of years resident Reggie it's been a big driver of loan growth.
Up to 21% of total loans and just having.
Discussing with you guys this topic for a while now.
I understand that.
The framework was we can give up a little bit asset sensitivity just given the.
The balance sheet positioning interest rate positioning, but where do you get to the point, where Reggie is enough quote unquote or too much is it 25% of total loans at 30%, maybe just some color there.
Yes, I think it is going to be not weighted on a particular percentage, but obviously our outlook on interest rates and what our overall interest rate risk position looks like but.
With where rates and the shape of the curve and forecast looks like right now I would think that's going to be probably closer to 25% and 35%.
If we expect.
The economy too.
Open as Moody's and other economic forecasts are saying.
I would expect you to start to see more quarters similar to this past, one where commercial growth was more than.
50% of our overall, earning asset growth.
And then I would expect to see if rates do continue to rise and as that translates into the 10 year you would expect to see just overall mortgage volumes come down a little bit.
Ross the industry, which theyre the MBA is predicting for 'twenty two as well.
Got it okay.
And then I also wanted to discuss the liquidity position of the balance sheet, you still have over $1 billion five of cash.
At this point, how much of that do you sign a bit more of a.
A more volatile label too just given COVID-19 related deposit flows how much do you expect to use this year, maybe a year from now what do you think the cash position of the bank.
The balance sheet looks like.
I think that is a great question for the entire industry right now.
How do these how did these surge deposits and government stimulus deposits do they react the same as <unk>.
Other noninterest bearing DDA money.
But.
I think if you look back to where we were pre pandemic.
Like to run our overnight cash position between 50 and $100 million.
So that gives you a sense of the magnitude and that current excess liquidity on our balance sheet right now is actually about 20 basis points to margin.
So it's a big number.
We would expect that to start to come down a little bit in the first quarter.
And.
Again, if you see more loan growth that will also obviously drive that number down as well.
Okay.
Last one from me is just.
On M&A and in all of the reasons why you might participate in M&A.
What are kind of the top three priorities you are looking to accomplish strategically.
It sounded like market share gains in existing markets are one of them, but what else are you looking to accomplish strategically and then maybe just a reminder of some of the financial metrics you would look to check off in any given transaction.
So yes.
Increased our market share in areas that we are currently.
I don't have the level of market share we want is our top priority.
Building some scale too.
<unk>.
To pay for the.
Back office things that we build over the years would be another priority.
And.
Picking up talent.
<unk>.
Growth.
And I'll, let mark whoever that financial.
Metrics the financial metrics.
Accretive to earnings in the first year combined operations first full year combined operations.
We.
Typically want to see tangible book value dilution earn back of three years or less.
And then we want to see an internal rate of return in excess of our cost of capital.
Those are three primary ones, we look at the.
The trade off sometimes some folks are going to look at tangible book value dilution out of the gate, but you can't really look at that without looking at the EPS accretion in concert you can accept a little bit more out of the gate dilution. If you got a little bit more accretion of earnings to keep the earned back in check.
Got it okay I appreciate all the comments that's all I had thank you.
Thank you thanks, Matt.
And im not showing any further questions at this time I'd like to turn the call back over to our host.
Well. Thank you again, everyone for joining us today, and we hope you'll be able to be with us when we discuss our first quarter results in April .
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
[music].
[music].
[music].
Speaker 1: taught me that.