Fulton Financial Earnings Call Nuggets: Margin Outlooks and This Year’s Strategy Focus
Fulton Financial Corp (NASDAQ:FULT) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Robert Ramsey – FBR: I was curious, with the net interest margin, was there any impact this quarter from accelerated premium amortization on mortgage-backed securities or was that not a factor this quarter?
E. Philip Wenger – Chairman, President and CEO: Yeah, it’s always a factor, Bob. In the third quarter, it was $4.6 million and it went up to $4,740,000 this quarter. So, it is a factor. It’s a high level and it grew third to fourth quarter.
Robert Ramsey – FBR: As you all sort of look forward, is the expectation that prepayment activity and accelerated premium amortization will remain elevated?
E. Philip Wenger – Chairman, President and CEO: It’s hard to guess. It depends a lot on refinancing activity. Our guess is, it would remain about where it is now or down slightly. That’s our guess, and that’s going to depend on refinancing, so, we don’t know exactly what they are going to be in the quarter.
Robert Ramsey – FBR: To be sure I understood your margin outlook clearly. I think you said you expect something in the range of 5 basis points down next quarter from 3.65%. Is that a fair synopsis?
Charles J. Nugent – SEVP and CFO: That’s fair. That’s our estimate and there are a lot of guesses that go in there.
Robert Ramsey – FBR: As we sort of move forward through 2013 assuming the world remains as it looks today. Do you think that that level of pace you stay in that ballpark or do we get further down the road to more of the higher yielding assets or you sort of moved off just the pace of compression (indiscernible)?
Charles J. Nugent – SEVP and CFO: We are still going to have compression we think, given where interest rates are. But you know loan growth comes that fast. The premium amortization on mortgage-backed is going to have a big effect on that, that can really change. We also have for the rest of the year we have $2.3 billion of CDs maturing this year. The weighted average yield on that is 85 basis points. During the fourth quarter we were able to keep CDs – we are putting CDs on it – on weighted average yield of 37 basis points, so that’s $11.5 million (and give there), if you go from 85 basis points to 35 basis points. So, there is – a lot of things go into that margin, but we think there is going to be compression but we don’t think it is going to be significant.
Robert Ramsey – FBR: Just roughly what is the timing of the CD maturities is it early in the year, late in the year?
Charles J. Nugent – SEVP and CFO: It is even throughout the year. First quarter is a little bit less than it usually is. In first quarter it is – I think it is 585 million and – 585 million or maturing, the weighted average yield is 65 basis points, the second quarter is about 96 basis points, but just give there, there’s an opportunity to reduce our cost of deposits.
Robert Ramsey – FBR: Then last question and I’ll hop back out. But you took a big hit in the yield on taxable investment securities this quarter. I know you highlighted some of the pieces that are in there. I mean, as you look forward from 2.35 is that sort of a good base point to sort of start projecting forward and then where are you all purchasing new securities in the market today? Sort of what is that 2.35 trending towards, if 2.35 is the right starting point?
Charles J. Nugent – SEVP and CFO: I would think the municipal security yield is going to continue to be down, but I don’t think they’ll get down a lot. We are still buying securities. On average we’re down (140 million) and the more cash flows from the mortgage-backed portfolio is about 135 million during the quarter. During the quarter, we continue to buy securities, and it was primarily short mortgage-backed securities and we bought some municipals, they were (indiscernible) and then we bought, primarily municipal securities (indiscernible).
Robert Ramsey – FBR: The mortgage-backs that you are buying are they yielding some 2% or what sort of roughly the yield you get at the margin…?
Charles J. Nugent – SEVP and CFO: The mortgage-backs we were buying, the average yield is 1.37 in the quarter and the average life is (4.3 years). So, the yields are extremely low in all market.
E. Philip Wenger – Chairman, President and CEO: The cash flows coming off the yield on those are about (3.50), so that’s part of the compression in that net interest margin.
Robert Ramsey – FBR: How much more do you all have on the portfolio – like even the portfolio that’s got yields around that (3.50). So, I guess I’m just curious. Obviously, I can see what the average yield is, but how big are the tails at the high-end anyway?
Charles J. Nugent – SEVP and CFO: I would think. This would be my guess, the higher yields are the (3.50, 3.60). Most of the other ones have already paid off, but there will be some in there that have higher growth.
This Year’s Strategy Focus
Collyn Gilbert – Stifel Nicolaus: So, Phil, just a question on your comment about this strategy focus this year in terms of quality interest earning asset growth. Would you say that that’s a slight change from what maybe the objective would have been going into 2012 or how should we frame that?
E. Philip Wenger – Chairman, President and CEO: Collyn, it’s a good question. I think historically, we went through a time period ’02 to ’06, where our primary focus was on growth and it was really external focus, and then I think, we went through a period ’07 through ’11, where we were more internally focused working on credit issues and working on some – just becoming stronger as an organization internally. So, now moving forward, I think, the strategy has shifted some and I think we are much more balanced, but I think we are – in general, our focus started to shift in the April to June timeframe last year and we are starting to see the benefits from that shifting and I think we will continue that into ’13.
Collyn Gilbert – Stifel Nicolaus: So, in terms of the loan growth that maybe we will start to see is that a function of your originators just extending their reach a little bit more, is that a function of you are seeing more stuff come to loan committees. I am just trying to sort of understand what would drive this pick up in potential loan growth?
E. Philip Wenger – Chairman, President and CEO: I think it is multi-faceted. I do think that we are in some areas gaining market share, our lenders are doing a good job of that. I think we have seen increased activity from existing customers which helps. We are seeing increased activity from the consumer which helps. So, the market share part we are going to continue to push. The activity from our existing customers is still going to depend a lot on what happens in the economy as we move forward in ’13 and to some degree we’ve been in the same position the last couple of years and we get this slowdown in May. So, we are not 100% certain that what we see now will continue, but we do feel better than we have in the past.
Collyn Gilbert – Stifel Nicolaus: And in terms of quantifying, is there any kind of target you can kind of give us or thoughts you can give us as to how much asset growth you could potentially see in 2013? Let’s assume, you know what you know today and under the current scenario, because I know we don’t know the future, but as things stand today, if we assume this environment continues throughout the rest of the year, what kind of growth rate do you think you could see?
Charles J. Nugent – SEVP and CFO: Yeah, well again, that’s tough. I think we’re encouraged on what we see could happen in the first quarter, and then, as we go into the summer, we tend to see seasonal slowdowns and then it picks up again in the fall. So, I’m not necessarily sure I would take that 2% and annualize it and say that’s what we can do for the year, but our goal is to have more growth than we’ve had the last couple of years. So, I would say somewhere between that zero and 8%.
Collyn Gilbert – Stifel Nicolaus: And then just one final question. You mentioned in your opening comments again, that you would expect to improve performance this year and I guess, given the environment and if we think about the margin pressure, I mean, are you kind of looking at it and saying, we’re going to do whatever we can to try to keep that 1% ROA or should we assume that profitability profile is going to decline? I guess, what I’m saying is, to me it seems hard that the performance, as measured by profitability would actually accelerate this year, but do you think it can?
E. Philip Wenger – Chairman, President and CEO: Well, we certainly want to earn more money this year, than we did last year. I don’t want you to think that it’s not going to be a battle. Margin compression is going to be difficult to offset and loan growth will help that tremendously. We still think we have a little credit leverage, some credit leverage to take, as that continues to improve. So, it’s going to be a battle, but we think we’re positioned pretty well.