Fulton Financial - Earnings Call - Q1 2025
April 16, 2025
Executive Summary
- EPS beat on strong operating leverage; operating diluted EPS was $0.52 vs S&P Global consensus $0.43, while GAAP diluted EPS was $0.49 (efficiency ratio improved to 56.7%, PPNR rose). Q1 EPS (S&P Primary EPS) beat by $0.09 per share*.
- Revenue definition matters: company “total revenue” (Net Interest Income + non-interest income) was $318.4M, but S&P Global tracked revenue at $304.5M vs $314.9M consensus, implying a modest miss on S&P’s basis*. For estimate comparisons, we anchor to S&P Global.
- Balance sheet and credit improved: NIM rose 2 bps to 3.43% as total deposit costs fell 11 bps to 2.03%; NPAs declined to 0.62% of assets; CET1 climbed to ~11.0%.
- 2025 operating guidance maintained; rate path assumption updated (now four 25 bp cuts starting June). Effective tax rate guidance raised to 18–19% (from ~18%), and management flagged potential NII/fee trending to the lower half of ranges given slower growth.
What Went Well and What Went Wrong
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What Went Well
- Operating efficiency and profitability improved: “Operating earnings per share of $0.52 … positive operating leverage … efficiency ratio dropped to 56.7% … operating ROA 1.25% … operating ROTCE 15.95%”.
- Funding costs eased and NIM ticked up: NIM 3.43% (+2 bps q/q); total cost of deposits fell 11 bps to 2.03% through “disciplined deposit pricing”.
- Credit and liquidity strengthened: NPAs fell to $199.0M (0.62% of assets), ACL/NPLs rose to 193%, and available liquidity covered net estimated uninsured deposits by 276%.
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What Went Wrong
- Loans declined $182M linked qtr as risk actions and strategic choices weighed on balances; loan yields fell 11 bps to 5.86% and NII decreased $2.5M with rate/day-count headwinds.
- Near-term NIM pressure items: ~$195M of sub-debt reset from fixed to SOFR+230 bps, adding “$6+ million” annual interest expense; management expects NIM to be “a little pressured” near term.
- Fee revenues showed mixed prints beneath the headline: day count/transactional softness and lower mortgage spreads offset a $2.4M equity-method income benefit; management guides fee income towards the lower half of the range on market sensitivities (wealth, mortgage).
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to the Fulton Financial first quarter 2025 results conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. I would now like to hand the conference over to your speaker today, Matt Jozwiak, Director of Investor Relations.
Matt Jozwiak (Director of Investor Relations and Corporate Development)
Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the first quarter ending March 31st, 2025. Your host for today's conference call is Curt Myers, Chairman and Executive Officer. Joining Curt is Rick Kraemer, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released yesterday afternoon. These documents can be found on our website at fulton.com by clicking on Investor Relations and 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 operations, and business. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially.
Please refer to the safe harbor statement on forward-looking statements in our earnings release and on slide two 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 16 through 22 of today's presentation for reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Now, I would like to turn the call over to your host, Curt Myers.
Curt Myers (Chairman and CEO)
Thanks, Matt, and good morning, everyone. For today's call, I'll be providing a summary of the first quarter operating highlights and an update on certain corporate initiatives. Rick will review our financial results and discuss our 2025 operating guidance. After our prepared remarks, we'll be happy to take any questions you may have. We were pleased with our first quarter operating results and encouraged by the strong start of the year. We continue to remain customer-focused, deliver solid operating performance, and execute on our strategy. Operating earnings per share of $0.52 represents a $0.04 increase late quarter as we continue to produce positive operating leverage and maintain a strong balance sheet. With revenue exceeding expectations and a continued reduction in total operating expenses, PPNR increased nicely, and we continue to become more efficient.
The quarterly operating efficiency ratio dropped to 56.7%, operating return on assets increased to 1.25%, and operating return on average tangible common equity grew to 15.95%. Through disciplined management of the balance sheet, we maintained historically strong liquidity and grew our equity base. We remain focused on creating long-term value for our customers, communities, and our shareholders, and our team performed well for all stakeholders again this quarter, growing our tangible book value per share 13.8% on an annualized basis. Now let me turn and provide a few highlights of the quarter. We continue to execute on our strategic transformation through the implementation of Fulton First. During the quarter, we made tangible progress in areas related to talent alignment, reinvestment for growth, and operational simplification. We are seeing positive benefits and outcomes both operationally and financially. Now let me turn to the balance sheet.
Customer deposit growth was solid this quarter as we continue to win new customers while effectively managing overall deposit costs. Deposit accounts and balances are up while deposit costs are down. On the lending side, we remain focused on relationship lending to generate prudent and profitable loan growth over the long term. During this past quarter, total loans declined even though originations were relatively consistent late quarter as several strategic actions impacted overall balances. During the quarter, we saw a $38 million decline in indirect auto balances as we've previously forecasted. We also saw a $231 million decline in commercial construction balances as there were certain projects we elected not to convert to permanent. Finally, overall balances were also impacted by accelerated resolutions of troubled assets. Given these strategic decisions and the overall current environment, loan growth is expected to be in the low single-digit range for the year.
Turning to the income statement, while revenue was relatively consistent, we've seen strong performance generated through a meaningful expense reduction late quarter. Finally, let me provide some updates on our credit performance. As a result of several portfolio management actions, many of our asset quality metrics improved. Our NPL to total loan ratio declined as we resolved certain non-performing loans. Even with the accelerated non-performing loan resolutions, net charge-offs declined one basis point late quarter. Saying all of that, we remain cautious in our outlook for credit quality as customers navigate the current volatile environment. Now I'll turn the call over to Rick to discuss the impact of these initiatives on our financial results and provide comments on our 2025 operating guidance in more detail.
Rick Kraemer (CFO)
Thank you, Curt, and good morning. Unless I note otherwise, the quarterly comparisons I discuss are with the fourth quarter of 2024. Loan and deposit growth numbers I may reference are annualized percentages on a linked quarter basis. Starting on slide four, operating earnings per diluted share was $0.52 or $95.5 million of operating net income available to common shareholders. Consistent revenue, a stable balance sheet, and net interest margin combined with a decline in operating expenses drove positive operating leverage again this quarter. Deposit growth of $200 million or 3% was driven by strong growth in interest-bearing money market products offset by modest declines in municipal and a $105 million decline in brokered deposits. Our non-interest-bearing balances ended the quarter at 20.6% of total deposits down marginally. Total loans declined $182 million during the quarter due in part to the portfolio management activities Curt discussed earlier.
Offsetting some of those declines was growth in commercial mortgage and residential mortgage. With these results, our loan-to-deposit ratio declined this quarter to 91%. As part of our broader balance sheet management, we continue to strengthen our on-balance sheet liquidity by way of additional investment securities. The weighted average coupon on new purchases this quarter was approximately 5.56% and carried an effective duration of approximately three years. The impact of these balance sheet trends is shown on slide five. Net interest income on a non-FTE basis was $251 million, a $2.5 million decrease late quarter, while net interest margin increased two basis points to 3.43%. Loan yields declined 11 basis points late quarter to 5.86%. Included in the loan yield is $13.1 million of accretion attributable to the purchase accounting marks on the acquired Republic loan portfolio.
Our average cost of total deposits decreased 11 basis points to 2.03% late quarter. Through the cycle, our cumulative non-maturity deposit beta has been 29%, and our total deposit beta has been 25%. We continue to manage deposit costs with discipline while balancing the potential for future balance sheet growth. Turning to slide 6, non-interest income for the quarter was $67.2 million. This included $2.5 million from income distributions and fair value adjustment related to equity method investments. Excluding this adjustment, fee income declined modestly, primarily due to day count and transactional activity. Fee income as a percentage of revenue was 21% for the quarter. Moving to slide 7, non-interest expense on an operating basis was $182.9 million, a decrease of $7.8 million late quarter. This decline was impacted by the timing of realized savings and the benefit of a $4.4 million decline related to professional fees this quarter.
When excluding this and several smaller items, operating expenses for the quarter would have been $187.2 million. Material items excluded from operating expenses as listed on slide seven were charges of $6.2 million of core deposit intangible amortization. As a reminder, in the second quarter, we will realize the full impact of annual merit and related increases, as well as the impact of an increased day count on our expense base. Giving effect to these items, we expect operating expenses to range between $190 million and $195 million for the remaining three quarters of 2025. These items and trends have been factored into our annual operating guidance. Also, as a reminder, for the remainder of 2025, we expect to incur up to $14 million of additional Fulton First non-operating expense. Turning to reserve metrics, provision expense declined approximately $2.8 million late quarter to $13.9 million.
Our allowance for credit losses to total loans ratio increased to 1.59%, and our ACL to non-performing loan coverage increased to 1.93%. Slide nine shows a snapshot of our capital base. As of March 31, we maintained solid cushions over the regulatory minimums. During the quarter, total internal capital generation added $77 million in total equity, including the benefit of $16 million of other comprehensive income. AOCI ended the quarter at $272 million and our CET1 ratio at 11%. On slide 10, we are confirming our operating guidance ranges for 2025. Our original guidance incorporated a projected decrease in Fed funds of 25 basis points in March and 25 basis points in June of 2025. Considering more recent events, we have updated our rate forecast to include four 25 basis point cuts in 2025, with the first beginning in June.
Inclusive of these changes, we remain comfortable with our current guidance ranges. That said, our net interest income and non-interest income could trend towards the lower half of the respective ranges given the potential for a prolonged slower growth environment. With that, we'll now turn the call over to the operator, Josh, for questions.
Operator (participant)
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Frank Schiraldi with Piper Sandler. You may proceed.
Frank Schiraldi (Managing Director)
Thanks. Good morning. Wondering if you guys can talk a little bit more about loan growth here. Do you still have some strategic offsets that make growth more of a second half of the year story? Are you assuming a return to net growth in the second quarter? Can you just talk a little bit more about what you're seeing in terms of loan demand amid some of this macro uncertainty?
Curt Myers (Chairman and CEO)
Yeah, Frank, I'll give you a little more color on that. Overall pipelines actually went up a little bit year-over-year, and we continue to be cautious in the pull-through rate as customers are really deciding whether to move forward with projects. We have a good pipeline, and we're just not sure on how that will convert given the environment. Our originations late quarter were pretty consistent. We do think we have momentum, and most of the first quarter was because of the strategic headwinds and the specific actions that we took.
Frank Schiraldi (Managing Director)
Okay. Just in terms of, I mean, I don't want to try to split hairs here, but Rick, you mentioned you talked about comfortable with the range on NII and could trend towards the lower end just given some risks to growth. Would you say that the low single digits is kind of the base case here? Is getting to the lower, is the risk, I guess, that you don't get any loan growth, can you still get to kind of the lower end of that range with flattish balances, I guess, is what I'm trying to ask here?
Rick Kraemer (CFO)
I'd say, Frank, yes, depending on what happens with rates, right? It will be more challenging if you get no growth and four cuts. Still feel comfortable at the very low end of that, but otherwise, you should be above that. I think it's definitely balance sheet growth helps. The interest rates at this point have a more muted effect on our NII just given what we've done on some hedging and repositioning.
Frank Schiraldi (Managing Director)
Okay. And then just last question on that follow-up there. What would you say in terms of still, I guess, you retain some asset sensitivity. What does a 25 basis point cut, how does that impact total NII at this point, would you say?
Rick Kraemer (CFO)
It would be a headwind of about $1.7 million annual.
Frank Schiraldi (Managing Director)
A 25 basis point?
Rick Kraemer (CFO)
Correct.
Frank Schiraldi (Managing Director)
Okay. All right. Great. Appreciate the color. Thanks.
Operator (participant)
Thank you. Our next question comes from Daniel Tamayo with Raymond James. You may proceed.
Daniel Tamayo (Director)
Hey, good morning, guys.
Curt Myers (Chairman and CEO)
Hey, Danny.
Daniel Tamayo (Director)
Maybe just switching over to the credit side. I mean, things seem to be still strong for you guys. Certainly, everything is trending in the right direction. Just curious your thoughts on the environment, what's happening with tariffs, and in terms of what you're seeing from the borrowers, how that could change depending on how the environment changes as the year goes on.
Curt Myers (Chairman and CEO)
Yeah. So really two regards. We're looking at the credit portfolio, working through making sure we understand potential tariff impact, potential government cost-cutting impact on our portfolio. That work is ongoing, like you would expect us to do, really know the portfolio. We really benefit from a very granular portfolio and a deep understanding of the originations in that portfolio. From looking forward, we're really monitoring what impact it's going to have on growth, on margins, and underlying performance of each individual business. At this point, it's really analyzing and understanding the portfolio so that we can react to things that happen within the credit book.
Daniel Tamayo (Director)
Is there anywhere in the portfolio that you've identified that is most at risk should these tariffs stay down? I know they're changing almost daily, but have you zeroed in on a segment or a part of the portfolio that you think might be at risk, and have you changed risk ratings at all in those portfolios?
Curt Myers (Chairman and CEO)
The biggest one that we look at first or looked at first is the ag portfolio. It's about a $1 billion portfolio. It's been one of our strongest portfolios for decades. That portfolio is impacted by commodity prices, and we also have an equipment business underlying there. We are looking at that business. Our portfolio is very domestic. It doesn't have a lot of import-export actual business, but commodity price changes would impact that. We are always following commodity prices. Tariffs could impact that, and we're doing sensitivity and really understanding that from our portfolio. That has been a strong portfolio, very well diversified and granular, and we're used to weathering cycles with the ag portfolio. That's probably where we would see it the most. We also look at our manufacturing business, and we're looking at margins and procurement.
We do not do a lot of import-export, so it is really the impact of cost for those businesses, and we are working through it in a real granular basis, but we really have not seen impact yet. The one other thing I would point to is auto dealers. Part of those headwinds on loan growth for the first quarter is a few car dealers that we are no longer doing business with, and I think that reflects some actions that we have taken as well.
Daniel Tamayo (Director)
Okay. Great. I guess lastly, just on credit as well, you've got pretty strong reserves here. You're basically stable in the quarter, really above where you guys were in the pandemic. Does it feel like the reserves are at the point now where even if things got worse, you'd probably be okay? I know it's CECL-driven to a large extent, but just curious your thoughts on where reserves may have to go if we go into a recession given the strength of the balances already.
Rick Kraemer (CFO)
Yeah, Daniel, let me take that. I think specifically for the quarter, there's a couple of pluses and minuses. I think benefiting the ACL were really, one, declining loan balances; two, some migration out of construction; and obviously, lower non-accruals. Offsetting that is the more qualitative or the forecasted element in terms of where Moody's goes on their forecast going forward and our usage of, call it, more impactful economic or downside scenarios, right? I don't know that we'll see a substantial change on the surface. There's obviously a lot of moving pieces underneath. I would expect Moody's to get incrementally negative and call it more current periods, call it next quarter or two, based on where they've been trending. That will have an impact for everybody.
Daniel Tamayo (Director)
Okay. All right. Thank you for all the color. Very helpful.
Rick Kraemer (CFO)
Thanks, Danny.
Operator (participant)
Thank you. Our next question comes from Chris McGratty with KBW. You may proceed.
Hey, how's it going? This is Angela Eicher for Chris McGratty.
Curt Myers (Chairman and CEO)
Morning.
Just on the buyback, with the stock trading at $120, CET1 11%, and credit trends pretty stable, I guess what's preventing you from resuming the buyback right now? Thanks.
Yeah. Our capital strategy is the same. First, we want to support organic growth, then any corporate initiatives, then buybacks would follow that. In an environment like this where there's limited organic growth opportunities, maybe limited other corporate opportunities as well, buybacks certainly make a lot more sense right now, especially given the prices that we're trading at. We did purchase a few shares, about 30,000 shares in the first quarter, right at the end of the quarter when we start to see the stock price go down.
Okay. Great. Thank you. Just shifting back to the balance sheet, I know in your opening remarks you mentioned your broader balance sheet strategy to continue to grow the investment portfolio. I guess going from here, should we expect a similar level of growth this quarter going forward? On that low single-digit interest earning asset guide, what is the base number there? Is that the 2024 average or end of period?
Rick Kraemer (CFO)
Period. The last part is period end, and then your first question. Yeah, I would expect it, candidly, reinvesting cash flows is kind of priority number one, and those have been looking on a monthly basis, $40 million-$50 million. In terms of additions to securities, I think it's going to be somewhat market dependent, and my guess is it will slow as the year goes on.
Okay. Great. Thank you.
Operator (participant)
Thank you. Our next question comes from Manuel Navas with D.A. Davidson. You may proceed.
Manuel Navas (Senior Research Analyst and Managing Director)
Hey, good morning. Is there any give in the OpEx guide if the revenue comes in at the lower end or would it have to be a little bit more drastic fall? Just kind of talk about flexibility on OpEx under different maybe a downside scenario.
Rick Kraemer (CFO)
I think there's potentially a little give really on timing, so whether it occurs in 2025 or it gets pushed out. I mean, you saw some of the delayed spend in first quarter when we talked about realized timing, right? We'll start to catch up on a little bit of that. We are pretty comfortable overall with that midpoint of our expense range for now.
Manuel Navas (Senior Research Analyst and Managing Director)
Where is sentiment potentially impacting fees? Can you add a little bit of color there?
Rick Kraemer (CFO)
I'm sorry, could you repeat that?
Manuel Navas (Senior Research Analyst and Managing Director)
Where is sentiment, this kind of more dour sentiment around tariffs slowing any part of the fee guide?
Curt Myers (Chairman and CEO)
Yeah. The fee-income business overall, if you look first quarter last year to first quarter this year, we've had nice growth, over 10% growth. Linked quarter, you have some seasonal changes in fees. As we look forward in fees, obviously our wealth business has some market dependence on recurring fees that are on a portfolio balance. There's some headwinds there. Interest rates have had some volatility, and that really affects our mortgage business. There are potentials that there's headwinds in the fee income overall. I think that's why we're guiding to the lower half of the range in fee income as we look at those businesses that they may be impacted as we move forward. Those underlying businesses are strong, but they do have some market sensitivity.
Manuel Navas (Senior Research Analyst and Managing Director)
Switching over to the margin for a moment, you do not have a cut expected in the second quarter. Loan betas are seemingly performing better than they did in the prior cycle. Deposit costs have come down. Can you kind of put those together for a near-term NIM expectation?
Rick Kraemer (CFO)
Yeah. I think without giving guidance on NIM, I would point to a couple of things. Our spot rate on deposit costs at the end of March finished, I think, one or two basis points below our quarterly average. You do not have that kind of initial tailwind headed into Q2. That would imply that deposit betas are slowing from here. You also have—I am not sure if it has been contemplated—but the sub-debt feature we had in March, I think it was March 15th. We had $195 million move from fixed to float, and that was at a 325 basis point moving to SOFR plus 230, so call it 335-340 basis points upwards. That is a little over $6 million of annual interest expense as well that you have to factor in. All else equal, margin should be a little pressured from here.
Manuel Navas (Senior Research Analyst and Managing Director)
The last piece is the CD renewals in the second quarter. How much of that is brokered versus retail CD renewals?
Rick Kraemer (CFO)
Yeah. I think about 80% of it was retail or 85% of it was retail.
Manuel Navas (Senior Research Analyst and Managing Director)
Eighty percent last quarter, but how about in the second quarter?
Rick Kraemer (CFO)
It's a similar number.
Manuel Navas (Senior Research Analyst and Managing Director)
Great. Okay. I appreciate it. I'll step back into the queue. Thanks for the questions.
Operator (participant)
Thank you. Our next question comes from Matthew Breese with Stephens. You may proceed.
Matthew Breese (Managing Director and Research Analyst)
Hey, good morning.
Rick Kraemer (CFO)
Morning, Matt.
Matthew Breese (Managing Director and Research Analyst)
Just sticking with the NIM for a second, did net interest income include any sort of interest recapture from the payoffs you saw in special mention and substandard? If so, how much did it impact the NIM?
Rick Kraemer (CFO)
No. Nothing material in there, Matt.
Matthew Breese (Managing Director and Research Analyst)
Got it. Okay. Curt, you had mentioned in your prepared remarks a couple of times, and it's also in the presentation that risk management actions impacted loan growth. Can you provide a little bit more color on what's going on there? It's mentioned on page three. What are you being more careful on, and to what extent is that driving the lower loan growth outlook?
Curt Myers (Chairman and CEO)
Yeah. So really in the quarter, I mean, we're always working the challenge loan book. In this quarter, we had more than typical resolutions just happen to hit this quarter. It really is ongoing management of the credit book to get resolutions on troubled assets. Really just highlighting that was a pretty successful quarter for us to be able to move some assets out. I also referenced a couple of the things that we did that weren't troubled assets, the auto dealer book and a couple of things like that, and the conversion of commercial construction to permanent.
We're being very prudent in what we commit to long-term as we look at those portfolios. It's really just active management that had a more significant result, which created the headwind for growth for the quarter. Again, I mentioned that originations were pretty similar fourth quarter to first quarter. Those actions were really highlighting just to show the impact on growth.
Matthew Breese (Managing Director and Research Analyst)
Got it. Okay. Last one for me, in your kind of bigger picture concern bucket, I didn't hear you talk about it at all, but I was curious with all the government efficiency stuff going on, could you remind us of your exposures to DC office or anything DC kind of government with government exposure?
Curt Myers (Chairman and CEO)
Yeah. Federal government exposure in that DC market was very limited. We have historically been very cautious of government leases on real estate because they can be canceled. I think that's what we're seeing in this marketplace. Because we've been cautious in that, our portfolio is very limited for overall federal, whether it's office or other types of business for federal government leases. In office, we have $105 million in the DC Metro, and that's really the surrounding areas of DC. Those loans have been performing. We don't have any reason to believe there's more risk this quarter than in prior quarters in that portfolio, and it's pretty small and granular for that market.
Matthew Breese (Managing Director and Research Analyst)
Great. If I could just squeeze in one more just on the professional fee reversal, Rick, I'm assuming that that line can go back to kind of the $3 million range on a quarterly basis. Is that fair?
Rick Kraemer (CFO)
Yeah. I would say historical run rate is going to be more accurate moving forward.
Matthew Breese (Managing Director and Research Analyst)
Perfect. Thank you.
Curt Myers (Chairman and CEO)
Thanks.
Operator (participant)
Thank you. As a reminder, to ask a question, please press star one one on your telephone. Our next question comes from David Bishop with Hovde Group. You may proceed.
David Bishop (Director)
Yeah. Good morning, gentlemen. Most of my questions have been asked and answered. Curious that the indirect auto portfolio, just a reminder, that remains on runoff and just curious the overall size of that exiting the quarter.
Rick Kraemer (CFO)
Yeah. It does remain. We're estimating around $40 million per quarter. It's around $260 million remaining.
Curt Myers (Chairman and CEO)
Yeah. Got it. The one housekeeping item, I think last quarter, ring fencing, purchase accounting accretion in that $13 million range for the year. Does that sort of hold true on a quarterly basis? Thanks.
Rick Kraemer (CFO)
Yeah. It'll trend a little bit lower over the remainder of the year. I think probably a good quarterly run rate is in that $12 million, closer to $12 million for the rest of the year.
Curt Myers (Chairman and CEO)
Great. Thank you.
Rick Kraemer (CFO)
You're welcome.
Operator (participant)
Thank you. I would now like to turn the call back over to Curt Myers for any closing remarks.
Curt Myers (Chairman and CEO)
Thank you again for joining us today. We hope you're able to be with us when we discuss second quarter results in July. Thank you.
Operator (participant)
Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.