Ladies and gentlemen, thank you for standing by, and welcome to the Fulton Financial Fourth Quarter 2019 Results Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I’d now like to hand the conference over to your speaker today, Jason Weber. Thank you, sir. Please go ahead.

Thank you, Dylan. Good morning. Thanks for joining us for Fulton Financial’s conference call and webcast to discuss our earnings for 2019. Your host for today’s conference call is Phil Wenger, Chairman and Chief Executive Officer. Joining Phil Wenger is Curt Myers, President and Chief Operating Officer; and Mark McCollom, 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 PM 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 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 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 14 and 15 of these non-GAAP financial measures to the most comparable GAAP measures. Now I’d like to turn the call over to your host, Phil Wenger.

Well, thanks Jason and good morning, everyone. Thanks for joining us. I have a few prepared remarks before our President and Chief Operating Officer Curt Myers provides insights on our business performance for 2019. When Curt’s finished, our Chief Financial Officer, Mark McCollom will share the details of our financial performance and discuss our 2020 outlook. When Mark concludes, we’ll open the line for questions. Overall, 2019 was another good year for our company as we hit record levels of revenue and net income. Our financial results in 2019 reflected our continued progress in executing our growth strategies. On the corporate front, we had several key milestones during 2019, though our last remaining BSA/AML consent order was terminated. We completed our multiyear initiative to consolidate all of our affiliate banks into Fulton Bank. And the Department of Justice informed us that it completed it’s fair lending investigation of Fulton without taking any action against the company. Achieving these milestones would not have been possible without the efforts of so many dedicated and hardworking Fulton employees. Together, achieving these milestones will not only help unify our brand, but also facilitate growth moving forward. We continue to grow in Philadelphia and Baltimore, both markets have a team of commercial and consumer relationship managers serving the markets to help us take advantage of what we view as a tremendous long-term growth opportunities. In Philadelphia, we opened three financial centers in 2019 and have one targeted to open in 2021. In Baltimore, we opened one financial center and one loan production office in 2019 and we have one financial center targeted to open in early 2020 and one in 2021. Despite these openings, we had a net reduction of four financial centers in 2019, so we ended the year at 230. Since 2014 we…

Thank you, Phil and good morning, everyone. Our commercial and consumer lines of business performed well in 2019. We are pleased with our overall loan and deposit growth during the year. In addition, fee income had a strong year-over-year growth driven by commercial interest rate swap fees, mortgage banking income and wealth management fees. In our commercial line of business, we saw double digit growth in loan origination, but that was partially offset with higher prepayments as the lending environment remained extremely competitive throughout the year. Even in this highly competitive market, our commercial loan pipeline at December 31, 2019 increased 28% year-over-year reflecting our focus calling and sales efforts and our generally good business activity with our customers and prospects. Moving to fees. Our commercial loan interest rate swap income grew by over 50% year-over-year, benefiting from strong growth in commercial originations, treasury services as well as our SBA business made notable contributions benefiting from improved business activity and solid sales performance. In our consumer line of business, our mortgage company continues to grow at a strong pace by increasing market share and benefiting from the low rate environment. Total residential mortgage originations for 2019 were approximately $1.8 billion, an increase of 34% year-over-year. Refinance activity accounted for 30% of the originations in 2019 compared to 21% in 2018. Our residential mortgage portfolio increased 17% year-over-year. This portfolio is comprised of in-footprint, fixed and adjustable rate mortgages with a weighted average borrower credit score of 753. Despite retaining more of our production in 2019 mortgage banking income continued to drive meaningful revenue growth. Mortgage banking [Audio Dip] 21% year-over-year on strong originations and stable gain on sale. Our indirect auto portfolio continues to grow at a solid pace. That portfolio is comprised of in footprint, new and used auto…

Thank you, Curt, and good morning to everyone in the call. Unless noted otherwise, the quarterly comparisons I would discuss are with the third quarter of 2019 and annual comparisons are with 2018. Starting on Slide 7, earnings per diluted share this quarter were $0.33 on net income of $54 million. Fourth quarter earnings in comparison to the third quarter were impacted by a higher provision for credit losses and lower net interest income. However, operating expenses decreased and non-interest income was unchanged for the quarter. We’ll step through each of these components in a moment. Moving to Slide 8, our net interest income was $159 million, a decrease of $2 million linked quarter driven primarily by a 9 basis point decrease in our net interest margin, partially offset by the impact of balance sheet growth. Our net interest margin for the quarter was 3.22% and our full year margin was 3.36% both in line with our expectations. The quarterly net interest margin decrease was driven by two 25 basis point Fed funds rate decreases in September and October of 2019, due to the level of variable and adjustable rate loans on our portfolio. Our fourth quarter loan yields decreased more than our deposit costs. Primarily due to the interest rate decreases, average loan yields in the fourth quarter of 2019 declined 24 basis points and average yields on interest-earning assets declined 18 basis points compared to the third quarter. Our cost of funds decreased 11 basis points, our deposit costs declined 7 basis points and our cost of short term borrowings was down 49 basis points. Since we started reducing our deposit costs in the back half of 2019, we are pleased with the deposit retention we have maintained thus far. We believe this gives us deposit pricing flexibility…

Thank you, sir. [Operator Instructions] I show our first question comes from Casey Haire from Jefferies. Please go ahead.

Yes, thanks. Good morning guys. Mark, I wanted to touch on the NIM guide. If it does have a Fed cut in there? If you did not get that Fed cut, what would the NIM guide look like?

Yes. On an annualized basis, not getting that cut would add between 3 and 5 basis points, on an annualized basis. Now we’re assuming that happens in the second quarter, so you’d have to take sort of a nine months impact of that – nine or eight months impact.

Okay, great. And just as we – as I look at the components of the NII guide, piecing together the balance sheet and the NIM, if I take the midpoints of the guide that you guys provided, it is – it’s tricky to get to NII growth next year. And I’m just – I think there’s a lot of confusion about this. And I just was wondering if you guys could clarify how A plus B is sort of not equal to C?

Well, yes, if you take our net interest income for this year, which was right around $650 million and again, if you grow loans and deposits in that low to mid-rate, and then if you don’t factor in the rate cut for next year, again, I just said that, that rate cut is giving you an extra 3 to 5 basis points. Annualized, we have about $21 billion – $20.5 billion of interest-earning assets for next year. If you run the math, I’m happy to take this offline with you, but we think there would be low-digit growth in our NII. One of the wildcards in that, I would say, Casey, is we need to look – we were pleased, and I said this in my prepared remarks, we were pleased with our ability to cut deposit costs in the fourth quarter of 2019. And despite cutting those costs, we actually held on to deposits a little bit better than we anticipated in the fourth quarter, which led to some of that fourth quarter average deposit growth that you saw. That growth was not just in – as you’re aware, we have third quarter growth related to public funds, which tends to come out in the fourth quarter, but a lot of the growth that we saw in the fourth quarter was more in our core commercial business and not necessarily in the public fund. So to the extent we’re able to hold on to those deposits in 2020, that also factors into our NII and NIM guide for the year.

Okay. All right. Just moving on to the fees. So what is your starting point for the guide there? And then what do you have as drivers of the fee growth, given that you guys are coming off of a very strong year in terms of capital markets and mortgage banking, so to get to mid-single digits would be a very strong outcome off of a very good 2019.

Yes. So the starting point for that, Casey, would be, we were for the year right around $211 million, if you strip out the securities gains. So strip out the securities gains as your starting point, to start with the $211 million, for that midpoint guide and when you look to areas of growth, I think the area that we’ve been the most bullish on and have invested in has been wealth management. Wealth management was up, I think, around 6.5% for this year, 6.8% year-over-year. We do not expect the same certainly percentage growth in our swaps business for next year, but we would still expect to see growth in that category next year. And I would say, those would be the two areas I would single out the most as well as card revenues.

Okay, great. Thank you. I’ll leave it there.

Thank you. Our next question comes from Chris McGratty from KBW. Please go ahead.

Hey, good morning.

Good morning, Chris.

Mark, maybe just same question that Casey asked about starting point, but can you give us a dollar amount that we’re starting on expenses, ex what were the charter and total charger charges?

Yes, sure. Those were around $12 million rounded. So I think a good number to start out would be kind of $556 million, $557 million of expenses, would be a good starting point to have that low single-digit growth rate off of.

Okay. And then maybe just coming back to the margin, I guess I’m a little confused because the last couple of years, your margin certainly benefited from higher rates. And now we’re factoring in a cut in the income – the NII – the margin guide is a little bit higher than the Street had expected. So structurally, I mean, how do we think about any tweaks or changes you made to the balance sheet because we’re just seeing that if rates are going to get cut, that margins would be expanding.

Yes, well, again, you really have to go back and look at deposits. Our deposit beta on the way up, our deposit beta was around 20 – mid-20s. We are expecting on the way down, we’re going to be able to exceed that. And again, based on the success we saw in the fourth quarter, that actually led to some of the guide that were given.

Okay, so it’s purely on liabilities. Okay. Maybe on capital, I don’t think you repurchased stock in the quarter. I guess, two questions. One, can you remind us what’s authorized? And two, was there anything maybe inorganic that may have prohibited you guys from buying stock? Or is that just the price of the stock? Thanks.

Yes. I mean, as you know, when you look at the capital waterfall, we always look at organic growth first. We did have a solid quarter of loan growth during the fourth quarter. We also look at stock price levels. We currently have $100 million authorized for 2020.

Okay. And so based on where the stock is trading today, I mean, would you assume that you would pick away at that in the coming quarters? Or is this at a level where you might not be in the market?

Yes. I think, again, Chris, there’s always going to be organic growth first. And then we look at the stock price, look at inorganic growth opportunities, those all play into that.

Okay. Thanks.

Thank you. Our next question comes from Frank Schiraldi from Piper Sandler. Please go ahead.

Good morning. Just – I wanted to ask on the commercial loan. You guys have not – you haven’t provided that much information. Maybe, I guess, that’s by design. But in terms of the larger provision in the quarter than the one commercial loan, real commercial relationship you cite, can you give us any more color on industry type or total exposure, collateral? Anything you can provide would be welcome. Thanks.

Thanks, Frank. It’s Curt. I’ll give you a little bit. It’s an active situation. We’re continuing to work with the borrower. So I can’t provide a lot of information, but it is a C&I credit. It’s not in the ag portfolio. So it’s a general C&I credit. Has been a core relationship for a number of years. The company is operating, and we’re working diligently through the situation. It did drive, as our prepared remarks said. It did drive the provisioning and the nonperforming for the quarter.

Okay. So it was basically the increase in nonperforming. We can – can you say – outline basically all this relationship here?

It was the primary driver.

Okay. And then can you just say whether – was this relationship already in classified, criticized prior to the quarter? Or just a new problem of credit?

Yes, it is a new problem of credit. Correct.

Okay. Thanks. And then just in terms of, you guys mentioned buybacks, Mark, of course, you said organic growth takes priority. But in terms of M&A versus buybacks, just wondering how you would prioritize those two, given where stocks trading here? And then if you could give any further thoughts on M&A? I know you’ve done something on the wealth management side, but in terms of whole bank M&A, your thoughts on – just remind us on size here that you guys are – would likely consider as sort of the first deal in some time.

Yes. So from a size standpoint, Frank, I think we’ve said between $500 million and $8 billion or $9 billion. We would like the first deal to be at the lower end of that range.

Okay. And then in terms of priority, buybacks, given where the stock is now or M&A – whole bank M&A?

The M&A, it’s really hard to predict when. And in our mind, it’s more about how strategic it is for us. So if the right strategic opportunity came along, it would be a high priority.

Okay. And then just finally on the deposits. You’ve seen some really nice growth. I think you would see some – you might even have mentioned about some muni runoff this quarter off of sort of higher levels. So assuming that continues in the coming quarter, can you talk about what sort of pickup you get on, forget about the betas and repricing, but just thinking about a mix shift away from that muni book sort of seasonally, what sort of pickup you get on deposit costs?

Well, yes, Frank, I mean, if we have our muni book at year-end was around $2.1 billion, about 55% of that was indexed. The blended rate, though, on that muni book was still much more attractive than wholesale funding. That was about 90 basis points. But if you compare that, to say, our core deposit rate and, obviously, that’s still high relative to our overall book. So to the extent that we’re able to grow more in our core consumer and commercial businesses, we’d have the ability to pick up significant basis points from that.

When does that peak again in the muni book?

In the third quarter.

Okay. All right, great. Thanks.

Thank you. Our next question comes from Daniel Tamayo from Raymond James. Please go ahead.

Good morning, guys. Sorry to go back to this, but I just wanted to clarify, Mark, your comments on the NII guidance because you were talking about the impact of the rate cut not happening. So the low single digits for NII, does not – it includes – I’m sorry, it includes that 125 basis point rate cut. Is that right?

That is correct.

Okay. So the lack of rate that would be incremental to that guide. On the balance sheet, the securities portfolio growth, is that – are you expecting that to be similar to the loan and deposit growth?

Yes. I mean our investment portfolio is for liquidity purposes only. So I mean I wouldn’t anticipate that to grow beyond the overall growth in other earning assets.

Okay. Perfect. And then switching gears here, looking at the wealth management, you’ve talked about that being a strong driver of growth in the fees. In the past year or so, has most of that been organic? What’s been the driver of that accelerated growth there? Have you been hiring teams? Or have you seen just strong performance from the current team is kind of outside of the market performance?

Yes, it’s really been – Dan, it’s been all those factors. So we did make the two acquisitions with added assets. We are gathering assets, and then, obviously, the market performance helps that business. So it’s really across the board.

Sure. Yes, you had the acquisitions there. And I guess, that would do it for me. Thank you. Appreciate you guys.

Thank you.

Thank you. [Operator Instructions] I show our next question comes from Russell Gunther from Davidson. Please go ahead.

Hey, good morning, guys. Just a quick follow-up on the fee guidance. I appreciate everything you’ve commented so far. But if you could give us some detail in terms of what you’re assuming for mortgage banking that’s embedded in that mid-single-digit guide?

Yes. It is assuming that the volumes come down a little bit and spreads stay relatively flat to where they were this year. So it would come off a little bit from this year?

Got it. Okay, great. Thanks, Mark. And then just with regard to the loan growth outlook, so that mid-single digits, could you guys give us some color as to, both from an asset class and geographic mix perspective, what you would think the drivers of that growth would be?

Well, in the last couple of years, we’ve had nice growth in C&I, some CRE, on the consumer side, residential mortgage and our indirect lending book. And I think as we go into 2021, we’re looking pretty much at the same kind of mix.

Okay, great. Thanks, Phil. And then last question, and this came up with regard to the C&I credit, but just your thoughts on your ag portfolio, asset quality in 2020?

In the ag portfolio, we think, it’s really stabilized, and we are seeing improvement in – on the credit side of that portfolio.

All right. Great. Thanks. That’s it for me.

Thank you.

Thank you. I show no further questions in the queue. At this time, I’d like to turn the call over to Phil Wenger, CEO, for closing remarks.

Well, thanks, everyone, for joining us today, and we hope you’ll be able to be with us when we discuss first quarter results in April. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.