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Good day, ladies and gentlemen, and welcome to the Fulton Financial First Quarter 2019 Results Conference Call. [Operator Instructions]. As a reminder, this conference call may be recorded. I would now turn the call over to Mr. Jason Weber. Sir, you may begin.
Thanks, Joelle. Good morning. Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the first 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 p.m. yesterday afternoon. These documents can be found on our website at www.fult.com by clicking on Investor Relations, then on 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 operation 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 and Slides 11 and 12 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 first quarter financial performance and discusses our 2019 outlook. Overall, we are pleased with our first quarter results. We had seasonally strong loan growth to start the year with stable credit conditions and a 5 basis point increase in our net interest margin. Despite an extremely competitive lending landscape, period end loan balances increased approximately $100 million in the first quarter of 2019 compared to a decrease in period ended balance of approximately $72 million during last year's first quarter.
More importantly, our commercial origination volumes and pipelines are running over 10% higher than this time last year. So we remain confident in our 2019 loan growth outlook. On a consumer front, we continue to see strong growth in our residential mortgage and indirect auto portfolios.
Now turning to credit. The overall asset quality continues to be relatively stable, and we saw a linked quarter decline in nonperforming loans and assets, net charge-offs and the loan loss provision. We are mindful of where we are in the economic cycle and are continuing to assess and analyze the portfolio for signs of weakness or stress.
Now moving to fees. Noninterest income decreased linked quarter driven in part by seasonality. Also, the market selloff in the fourth quarter had a negative impact on our wealth management fees. However, year-over-year noninterest income saw improvements across the majority of products and businesses. The first quarter of 2018 was positively impacted by $1 million of gains from life insurance. Excluding those gains, year-over-year noninterest income was up 4.2%.
The biggest drivers of growth year-over-year were in the commercial loan interest rate swap product and mortgage banking. Our commercial loan interest rate swap product benefited from growth in commercial originations. Mortgage banking income increased 14% year-over-year as spreads improved.
Turning to current pipelines. In several of our major fee income categories, we believe noninterest income will improve throughout 2019. The efficiency ratio for the first quarter of 2019 was 63.9%, inside our stated goal of 60% to 65% and compared to 67.5% in the first quarter of 2018. While seasonality had an impact on the increase in the efficiency ratio linked quarter, we need to continue our focus calling on sales efforts to drive revenues while at the same time, look for opportunities to become more efficient, so we can move our efficiency ratio towards the lower end of our goal.
Our operating expenses were well contained in the first quarter, increasing less than 1% year-over-year. On the capital front, we increased our quarterly common dividend by $0.01 to $0.13. We repurchased approximately 5.9 million of common stock during the quarter and have approximately $105 million left in our share repurchase program, which is authorized through December 31, 2019. With respect to the remaining BSA/AML consent order, we continued to make progress towards the termination of that order. We're moving forward with the consolidation of Fulton Bank of New Jersey and the Fulton Bank in May of this year and planning for the consolidation of the Columbia Bank in September. And once the final order is terminated, we will consolidate Lafayette Ambassador Bank into Fulton Bank, completing our strategic priority of establishing one flagship bank under the Fulton Bank brand.
At this point, I'd like to turn the call over to a Mark McCollom to discuss our financial performance in more detail. Mark?
Great. Thank you, Phil, and good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the fourth quarter of 2018. That being said, we point out that seasonality and day count issues impact all banks in the first quarter. As a result, the analysis of year-over-year trends is also useful when reviewing first quarter results.
Starting on Slide 4. Earnings per diluted share this quarter were $0.33, consistent with the fourth quarter and up nearly 18% from $0.28 a year ago. Our net income was $56.7 million, up 14.5% from the first quarter of 2018 but $1.4 million lower on a linked quarter basis due in part to seasonality and 2 less business days in the first quarter.
In comparison to the fourth quarter of 2018, we a saw slight increase in net interest income despite those two less business days, and we reported declines in noninterest expense and the provision for the credit losses during the quarter as well. Offsetting these positive factors were a decrease in noninterest income and an increase in income taxes. We'll step through each of these components in a moment.
Moving to Slide 5. Our net interest income in the first quarter improved by $371,000, driven by a 5 basis point expansion of our net interest margin to 3.49% and $116 million or a 0.6% increase in average interest-earning assets. Compared to a year ago, our net interest income grew 7.9%, fueled by a 14 basis point expansion at our net interest margin. In the first quarter, our interest-earning asset yields grew 13 basis points, primarily driven by an 11 basis point increase in average loan yields.
On the funding side, our overall cost of funds increased 9 basis points, which was 4 basis points lower than the increase on average interest-earning assets. Our deposit betas were not as pronounced during the quarter as we expected.
The 5 basis point increase in the net interest margin from last quarter exceeded the high end of the range we provided on our outlook for 2019, primarily due to slightly higher loan yields, lower deposit betas and a more favorable deposit mix than we had anticipated. Based on the market's views and expectations with respect to future rate increases, we will provide you with updated net interest margin guidance at the end of my comments.
Average loans increased linked quarter by $229 million or 1.4% while ending loans increased $97 million linked quarter or 0.6%. From a funding standpoint, average deposits declined $137 million or 0.8% linked quarter while ending deposits were unchanged.
Turning to credit on Slide 6. The provision for credit losses decreased $3.1 million linked quarter to $5.1 million. The provision for credit losses in the first quarter was within the range we provided in our 2019 outlook. For the first quarter, net charge-offs on an annualized basis improved to 10 basis points as compared to 17 basis points in the fourth quarter of 2018.
Nonperforming loans at March 31, 2019, decreased $1 million in comparison to December 31, 2018. Nonperforming loans as a percentage of total loans decreased slightly during the quarter to 85 basis points as compared to 86 basis points last quarter. The allowance for credit losses to loans at March 31, 2019, was unchanged at 1.05%. The allowance for credit losses coverage ratio as a percentage of nonperforming loans increased slightly to 123% at March 31, 2019, as compared to 121% at December 31, 2018.
Moving to Slide 7. You'll first notice that we made some changes to our presentation in our noninterest income category. Hopefully, this new presentation gives you better insight into the drivers of our fee-based revenues. As we consolidate our banking charters, this change is consistent with our continued migration from managing our company by legal entity to managing our company by line of business.
Our noninterest income, excluding securities gains, decreased $2.8 million in comparison to the fourth quarter of 2018. Certain fee income category such as commercial loan interest rate swap fees, card income, overdraft fees and SBA income is typically lower in the first quarter as compared to the fourth quarter due to seasonality and fewer calendar days in the first quarter. SBA revenues were further hindered in the first quarter due to the government shutdown on the first half of the quarter, which created a backlog in our pipeline.
On a positive note, our mortgage banking revenues, which typically are lower in the first quarter due to seasonality, matched fourth quarter revenues linked quarter and came in ahead of our expectations. Gain on sales increased $260,000 linked quarter due to stronger sales. This increase was offset by lower servicing income as higher prepayment activity accelerated mortgage servicing rates amortization.
Moving to Slide 8. Our noninterest expenses decreased $2.9 million in the first quarter. In the fourth quarter of 2018, expenses were elevated due to $4.9 million of tax credit investment amortization for a certain investment, which generated a corresponding income tax benefit during the quarter. Adjusting for this item, linked quarter expenses increased $2 million or 1.5% principally due to seasonally higher payroll tax and occupancy costs.
Year-over-year, as Phil mentioned, our expenses were well contained, increasing $1.2 million or 0.9%. During the first quarter of this year, costs associated with our charter consolidation efforts were $1.5 million, a $600,000 increase from the fourth quarter. In addition, total cost of $1 million were incurred related to the consolidation and closing of 8 branches during the first quarter. This number was unchanged from costs incurred for this matter in the fourth quarter.
Our income tax expense increased $5 million linked quarter due mainly to the tax credits recognized in the fourth quarter associated with the aforementioned tax credit investment. The effective tax rate for the first quarter was 15.6% as compared to 14.6% for the fourth quarter as adjusted for the impact of the tax credit investment. This effective tax rate was within the range provided in our outlook.
Slide 9 displays our profitability and capital levels over the past 4 years. We continue to see increases in both returns on average assets and returns on tangible equity over the periods presented.
Lastly, we have included our guidance for 2019 on Slide 10. We are making 2 adjustments to our guidance for the remainder of 2019. First, we are tightening our tax guidance to now being an effective tax rate between 14% and 16%. Final analysis of New Jersey tax law changes and 3 months of actual pretax earnings are driving this refinement.
For our net interest margin, we are pleased to start off the year with margin expansion stronger than we had guided. However, the outlook of no future rate increases and a flatter yield curve forecast have caused us to be more tempered in our outlook for the balance of the year. Therefore, we're now expecting our net interest margin to increase 4 to 7 basis points for the full year 2019 versus our full year 2018 net interest margin, which was 3.4%.
With that, we'll now turn the call over to the operator for questions. Joelle, go ahead.
[Operator Instructions]. Our first question comes from Frank Schiraldi with Sandler O'Neill.
Just first on buybacks, just given the announcement of the new authorization back in mid-March. Just wondering if you could talk a little bit about your -- how we should think about that, your appetite for buybacks here? Is that more of a back-burner sort of thing to -- in case the stock -- bank stock fell off again? Or is that something you're interested in pulling down with the stock at these levels?
So Frank, our level of repurchase activity will depend a lot on our growth and on the stock price.
Okay. I just -- in the fourth quarter obviously, there was a lot of activity, and this program is even larger. So obviously, those were -- the stock was quite weak. And in December, I don't recall exactly when you guys did the majority of the buyback. But just trying to think about at these levels, what the stock at the current levels are you planning to be active on this, on the program here in a meaningful way?
Well, Frank, as you know, I mean -- this is Mark. We run this cash flow model in our company, and we have what we believe, we think, intrinsic value of the stock is. But as Phil said, our capital waterfall is organic growth, so we're going to look at that. And then if organic growth comes in differently than what we had forecasted and we have excess capital available of this authorization, it gives us the ability to potentially use that.
Okay. And then just secondly on the NIM. So the guidance would imply sort of flattish NIM from here and -- I assume. And so just wondering, I'm assuming you expect continued deposit pricing pressures for the -- at least a couple of quarters. And just wondering if you could talk about the offset on the asset side of things.
Yes. Sure, Frank. We had -- I mean our guidance that we refined for this quarter is really no different than what we had guided in the fourth quarter. I think there was a question raised in the fourth quarter as to what would happen with no rate increases, and our comment was, well, that would guide us to the lower end of the previous guidance we gave. So if you run the math of how we've laid this out now on a year-over-year basis, we're really just guiding to the lower half of that wider guidance we had disclosed last quarter. We are anticipating that we will continue to see some deposit pricing pressures, although we commented that in the -- particularly in the second half of the first quarter, we saw some of those deposit pricing pressures abate somewhat. Whether they continue or not, it is still very early in the year to know that. Our assumption is that they will continue somewhat. So if we're wrong on that, that could be a positive upside to this.
And our next question comes from Russell Gunther with D.A. Davidson.
Just stick with the margin commentary for a minute, I appreciate the updated guide there. Throughout the quarter, we saw the Fed fund features curve, implying rate cuts by the end of the next year or 2. How would the margin trend if we were to get a 25, 50 basis point cut?
If there's a 50 basis point cut, there would be a decline in our margin. We haven't -- we are certainly not forecast in that based on what we're seeing and [indiscernible] and other things that we read in the market. I think that most folks believe that we're going to see no rate increases and no cuts for this year, there's certainly questions around that. We have had a mildly asset-sensitive balance sheet for a couple of years now. We've been slowly drifting that back to a more neutral posture, and we're continuing to do that as an insurance policy if indeed we either get to a prolonged no rate increase or if we would actually even see a rate decrease here.
Okay. Great. I appreciate the color there, Mark. And then just switching gears to the loan growth and particularly focusing on the Philadelphia area, I saw the new branch down there. Just could you give us an update on how that's trending, what your outlook is for that market, maybe broken down kind of commercial or retail? Just any expectations on how it's tracking so far?
So right now, our loan portfolio in Philadelphia is about $350 million and there's another $50 million in deposits. Most of our loan growth is on the commercial side. We expect that to continue. Now that we've been able to open 3 branches this quarter, we expect the growth rate of the deposits to increase. And we are very optimistic about our potential to grow in that market.
I appreciate that, Phil. And then just any comment on sort of the competition in the Philadelphia in any way?
It's like everywhere else. I mean that's -- there's a lot of competition, more from larger banks in Philadelphia than anything else, very little from smaller banks and actually even from banks our size. So it's larger banks. And we -- on the small business side, we tend to compete pretty well in that market.
And our next question comes from Daniel Tamayo with Raymond James.
Just a question on the charter consolidation cost. Do you still expect $7 million to $9 million in total cost there? Would -- I guess there would be about $4.5 million to $6.5 million over the next two quarters. Am I reading that right?
Yes, it would actually be $5.5 million to $7.5 million. We had $1.5 million on charter consolidation cost in the first quarter. And yes, we're still consistent with that $7 million to $9 million budget. We had said last quarter, we expect the majority of those costs to occur in the second and third quarters, and that's still the case.
Okay. And then on the branch consolidation costs, what are the expectations there going forward?
The branches are all closed. So we incurred costs in the fourth quarter and the first quarter this year, but that should now be behind us, and we'll start seeing the benefits to that.
Okay, terrific. And then if I could ask one more on the NIM. You gave some good color on the guidance, but what would get you to the 4 basis points of expansion relative to the 7 basis points? If you could flush out what might be built into that assumption?
Well, there's a lot of assumptions obviously that go into something as large as net interest income for our company. If we -- depending on mix, depending on spreads, on loans, there's a lot of competition for loan spreads depending on mix, loan spreads and deposit betas. I would say that the interplay between those 3 would determine where we are in that range.
And our next question comes from Matt Schultheis with Boenning.
Looking forward, say, 2 or 3 years, obviously with your move into Philadelphia, assuming that, that sort of works out as you anticipate, are there any other markets that you have identified that you would like to try to duplicate that effort in?
Well, definitely Baltimore and we've begun that. We have our loan production office open in the city. And we expect to have retail branch in the city of Baltimore before the end of the year and probably 2 or 3 more next year. And so that would be in the next 2 to 3 years, I'd say, the primary market.
Okay. And with regard to your consent orders and M&A, would you feel comfortable announcing a deal tomorrow, if it was appropriate, realizing that sort of in anticipation of your consent orders being lifted?
I can't specifically answer that because if we were in that situation, we would have a lot of discussions with the Fed. And if they were okay with it, we would consider it. And if they said no, we wouldn't.
And our next question comes from Joe Gladue with Alden Securities.
I think the last question I had, that had been addressed. Just wondering if you could give us some thoughts on CSO and your preparations for that and your expectations.
Sure. Sure, Joe. It's Mark. Yes. As we've mentioned in prior quarters, we have a lot of people that were working really hard internally as well as third-party consultants who are assisting us with that implementation. We feel confident we will be in a position to be in compliance with that rule when it becomes effective for the first quarter of 2020. And if we have any further updates to give before then, we'll certainly let you know.
And our next question comes from Chris McGratty with KBW.
This is actually Kelly Motta on for Chris McGratty. I appreciate all the color on the NIM. Maybe if we could just circle back to the deposit side. I was hoping if you could give us a bit more color on the competition you're seeing there and kind of what your NIM guidance bakes in, in terms of the overall outlook for deposit cost pressure. Should we be expecting it to moderate a bit more? Or how should we be thinking about that?
Well, we had assumed in our 2019 internal forecast when we're putting together our budget for 2019, we assumed the deposit betas would be higher than what they were in 2018. But we had also assumed, as you're aware, rate increases in June and December of 2019, which we now think to not be the case. So with that, we've pulled back our expectations for deposit betas, but in the first quarter, they even came in a little bit lower than what our revised forecast was. So that's good news. But I think if loan growth, which for us was seasonally strong as we reported in the first quarter, as we go through earnings season, if it's strong for everybody else, well, then that's going to mean that people need to fund their balance sheets. And as the year goes on, there could be increased deposit pricing pressure. Also, for us, just as a reminder, with the municipal business that we have, we always see our biggest influx of deposits in the third quarter, and then we tend to see those run off in the fourth quarter and first quarter of this year. And then we supplement some of that with either other organic growth or with some wholesale funding options.
[Operator Instructions]. Our next question comes from Brody Preston with Piper Jaffray.
I just want to maybe talk a little bit about the composition of growth this quarter, maybe skewed more towards the residential and consumer and construction. I just wanted to get your sense for if that would be the composition you expect for the remainder of the year or if you expect other categories to pick up a little bit.
Well, I think we were pleased with our C&I growth also. But I would anticipate that residential will continue, our indirect lending will continue, I think C&I will continue. CRE actually went down. I would anticipate that, that is more of a seasonal trend. So I think the growth will stay in the categories that they are, but I think CRE will pick up. And construction was strong because we had some large deals settle late in the fourth quarter and they started rolling in the first quarter.
Okay. Great. And I wanted to get -- I'm sorry if you addressed this already, some in your commentary. I hopped on late. But just wanted to get your sense for the deposit market and whether it's something -- the competition softened at all since the Fed outlook has changed to a more neutral stance?
Sure. Yes, the -- what we mentioned was that in the -- particularly in the second half of the first quarter, we did see deposit pricing pressure abate somewhat, which led in part to some of our margin outperformance for the quarter. Whether or not that continues as the year goes on, it's something we're obviously watching very, very closely. But we did see a little bit of easing of deposit pricing pressure and obviously deposit betas, our interest-bearing deposit clause, those type of things was lower than what it was in the quarter.
Okay, great. And then I also want to get an update from a credit perspective on the agribusiness and dairy portfolio and how things are performing there?
Yes, I'd say that the dairy portfolio's performing about how it has been. I think it -- I think on our last call, we said we thought it was stabilizing and we still feel that way.
I'm not showing any further questions at this time. I would now like to turn the call back over to Phil Wenger for any closing remarks.
Well, thank you, all for joining us today. We hope you will be able to be with us when we discuss second quarter results in July.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.