Fulton Financial Corporation (FULT) Q2 2021 Earnings Call Transcript

Image source: The Motley Fool.

Fulton Financial Corporation (FULT 2.84%)
Q2 2021 Earnings Call
Jul 21, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Fulton Financial Second Quarter 2021 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Matt Jozwiak, Director of Investor Relations.

Matt Jozwiak -- Director of Investor Relations

Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the second quarter of 2021. Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer. Joining Phil are 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 yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations, and then on News. The slides can also be found on the Presentations page under our Investor Relations 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 10 and 11 of today's presentation for a 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, Phil Wenger.

E. Philip Wenger -- Chairman and Chief Executive Officer

Well, thanks, Matt. Good morning, everyone. I'll begin today's call by making a few high-level remarks about our performance for the quarter and factors affecting the markets we serve, and then Curt will discuss our business performance, and Mark will share the details of our financial performance. And after that we'll answer any questions you may have.

Fulton's performance continued to be solid in the second quarter of 2020 and 2021 following our record-setting earnings per share of $0.43 in the first quarter. Our second quarter earnings per share of $0.38 tied our previous record high. And we saw growth in certain segments of our business as Curt and Mark will discuss, and asset quality remained stable. The economy and the markets we serve are showing improvement. Unemployment is in decline and the communities are reopening. In fact, as of July 4, the governments in the five states in which we operate have lifted mask requirements for everyone. As the economy continues to open and business activity moves closer to normal, we are increasingly optimistic about the future.

In recent months we have seen several mergers and acquisitions in and around our market. Fulton has taken a look at a few of these opportunities and we remain interested in supporting our growth through M&A. We will continue to evaluate future opportunities to identify those which would be a good fit for our strategy and our community oriented style of banking. As always, we remain focused on our shareholders and we remain disciplined on pricing. At the end of the second quarter, we have not repurchased any shares under the $75 million share repurchase authorization approved by the Board in February, but we continue to assess share repurchase opportunities. Throughout the past year, I've referenced the challenges brought about by COVID 19. I'm extremely proud of how our entire team adapted to these challenges, and through their efforts we were able to support our customers in the most challenging of times. Now more than a year after the pandemic began, we are pleased to see more people becoming fully vaccinated, our communities reopening, and the life starting to return to some sense of normalcy. Given this improvement, we are now looking forward to bringing more of our own team back to on-site work in early September. While some employees will be permanently remote, most will return to some level of on-site or hybrid work. The ability to connect in person strengthens relationships and our culture, which quite frankly sustained us during the pandemic and allowed us to continue to focus on our customers. Now I will turn things over to Curt to discuss our financial performance.

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Well, thank you, Phil, and good morning. As Phil noted, our second quarter performance produced solid results and I'd like to share some detail on several key areas. Loan growth for the quarter was approximately $170 million or about 4% annualized, excluding the impact of PPP, loan forgiveness and originations. We benefited from the diversity of our business model as strong loan growth from residential mortgage lending offset declines in our commercial business. First, let me talk about the PPP program. PPP originations for Wave 3 ended up at $750 million beyond our original expectations with $60 million originated in the second quarter and $690 million originated in the first quarter. Our average Wave 3 processing fee was 4.5%, which was also well above what we had originally anticipated. While the PPP program has ended for new originations, we continue to focus on loan forgiveness needs of our small business customers. In the second quarter, we processed $639 million of PPP forgiveness request and have remaining Wave 1 and 2 outstanding balances of approximately $360 million. In total, we have $1.1 billion in outstanding PPP loans as of June 30, and $35 million in processing fees yet to be earned.

Turning to commercial loans, commercial real estate showed modest growth while other commercial categories declined, resulting in an overall decline in the commercial balances of $127 million on a linked quarter basis. When excluding PPP loans, we continue to experience commercial loan headwinds due to persistent low line utilization and prepayment activity. Our commercial loan pipeline is down linked quarter, but consistent with year-end levels. Recent weeks, we have experienced growth in the pipeline consistent with all of our markets reopening. We remain cautiously optimistic that commercial loan demand will improve as business activity and customer confidence increase.

In consumer lending, our loan balances grew $284 million or 5.8% linked quarter on an ending balance basis. This growth was driven primarily by residential mortgages. As noted in prior quarters, our asset sensitive balance sheet provides room to continue growing this segment of high quality in-market residential mortgage loans. Overall, we anticipate loan origination levels to continue at a rate that is adequate to support the annual net interest income guidance in our outlook.

Turning to deposits, growth for the quarter was modest. However, total deposit balances were up $4.3 billion or 25% since pre-pandemic levels. During the quarter we continue to actively manage our deposit costs down and we are encouraged by the work of our team and the loyalty of our customer base. Our total cost of deposits for the quarter was down to 15 basis points. Moving on to fee income, wealth management, commercial banking and consumer banking fee-based businesses all delivered growth in revenue on a linked-quarter and year-over-year basis. Our wealth management business continues to perform very well. During the quarter, we purchased a small investment advisory firm which helps support the growth of our wealth business. Our assets under management administration grew to $13.7 billion at quarter end, up from $13.1 billion last quarter and $11.1 billion at the end of the second quarter of 2020. These trends drove record quarterly wealth management income for the third quarter in a row.

Turning to mortgage banking business, originations were $875 million for the quarter, an increase of 22% from the first quarter. However, a significant decline in gain on sale spreads combined with continuing to hold an elevated amount of loans on the balance sheet led to an overall decline in mortgage banking revenue linked quarter. In addition, the decline in longer-term rates also led to a $2 million increase to our mortgage servicing rights valuation allowance, further reducing overall mortgage banking income. Overall, the mortgage banking business remained strong, as we continue to experience solid origination activity and opportunities to either sell our conforming loans in the secondary market or increase our balance sheet with this product. Purchase activity represents approximately 60% of total originations and has steadily increased in recent quarters. The mortgage pipeline sits at $620 million remaining more than two times our pre-pandemic levels. Capital markets revenue, which are primarily commercial loan interest rate swap fees declined in the second quarter. This decline was partially driven by our willingness to provide longer term balance sheet fixed rates. We expect swap revenue to return to more historical levels as we move forward. However, this is dependent on customer preferences, commercial loan demand and interest rate expectations.

Moving to credit, asset quality remained stable. Delinquency remained low. Nonperforming loans were flat linked quarter and remained relatively stable. This is prior to the beginning of the pandemic. Net charge-offs were $6.9 million or 15 basis points for the quarter. This compares to $6.2 million or 13 basis points of net charge-offs in the first quarter. On slide 13, we have again provided updated loan deferral trends through June 30, 2021. Commercial deferrals further declined to approximately $122 million and stand at 0.9% of the commercial portfolio. Consumer loans on deferral and forbearance also declined and are now at $57 million or 1.1% of the consumer loan portfolio. In previous calls, we noted selected industries we believe may be at more risks due to COVID 19. Slide 15 provides an updated summary of these selected industries. Overall, our credit outlook remains cautiously optimistic for the remainder of 2021 and as a result we have further reduced our 2021 provision for credit loss outlook. Now I'll turn the call over to Mark to discuss our financial results in more detail.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Thank you, Curt, and good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss with the first quarter of 2021. Starting on slide 3, earnings per diluted share this quarter were $0.38, or [Phonetic] net income available to common shareholders of $62.4 million. This represents a decline of $0.05 per share versus the first quarter of 2021. Our second quarter performance included a slightly lower net interest income as well as lower non-interest income offset by negative provision expense and lower operating expenses, which I'll cover in more detail later in my comments.

Moving to slide 4, our net interest income was $162 million, a $2 million decline linked quarter mainly due to less fees earned on PPP loans forgiven during the second quarter as compared to the first quarter. Forgiveness for the quarter was $639 million and this represents only waves one and 2. Wave 3 is not expected to begin requesting forgiveness until late in the third quarter and into the fourth quarter of 2021. The latest wave of PPP loans also have a larger average fee, 4.5%, due to a smaller average loan size for this wave of funding. As of June 30th, we have approximately $35 million of PPP loan fees yet to be recognized. $4 million coming from the 2020 originations and $31 million from our first and second quarter originations this year.

Turning to the investment portfolio, we selectively redeployed some of our excess cash in the mortgage-backed securities and short-term money market instruments. As a result investments grew $308 million during the second quarter. As Curt noted, we saw deposits grow by approximately $90 million on an ending balance base -- ending balance basis and our cost of deposits for the quarter was only 15 basis points, a decline of three basis points linked quarter. We would expect our deposit cost to still migrate moderately lower in future quarters as we have approximately $660 million of CDs maturing over the next few quarters at a cost of approximately 80 basis points, which is significantly higher in current market replacement costs. Our average loan to deposit ratio declined during the quarter from 89.9% in the first quarter to $86.9 in the second quarter. As I discussed last quarter, Fulton completed a balance sheet restructuring, which reduced our interest rate risk and improved several of our performance metrics going forward. This restructuring was fully reflected in the second quarter and is incorporated into the updated guidance I will provide at the end of my remarks. Our net interest margin for the second quarter was 2.73% versus 2.79% in the first quarter. The six basis point decline linked quarter was largely a result from lower PPP loan fee recognition as well as additional cash on our balance sheet.

Turning to credit on slide 5, our second quarter provision for credit losses was a negative $3.5 million versus a negative $5.5 million for the first quarter and a positive $20 million a year ago. Compared to the year-ago period, the initial impact of COVID had a significant impact on our allowance for credit losses in the first half of 2020. But as the economic outlook continues to improve, the amount required in our allowance for credit losses has declined. As always, this will change in future periods based on new loan origination volumes, loan mix, net charge-off activity, and economic projections. Slide 5 also shows our normal quarterly credit metrics. Our allowance for credit losses excluding PPP loans has declined 14 basis points since the end of last year and currently stands at 1.46%.

Moving to Slide 6, non-interest income excluding securities gains was $52 million, down $10 million from last quarter, and down $1 million from a year ago. Our fee-based revenue showed modest increases in wealth management, commercial banking, and consumer banking but were outweighed by a decline in mortgage banking revenues. Mortgage banking revenues were impacted by decline in gain on sale spreads of 114 basis points linked quarter, down to 1.85% after spending much of the past year at approximately 3%. We also elected the portfolio about $230 million of salable mortgages onto to our balance sheet thus far this year. This has impacted our short-term mortgage banking revenues but may provide a significant long-term benefit in net interest income versus the purchase of investment securities.

Lastly, our MSR asset was $36 million on the balance sheet at June 30. This balance is net of a $6.5 million mortgage servicing rights valuation allowance. As Curt noted, during the quarter, we recorded an addition to the valuation allowance of $2.2 million due to decline in longer-term interest rates. Wealth management revenues were $17.6 million for the quarter, an increase of 1.7% from the first quarter and an increase of 31% from the prior year. Moving to Slide 7, noninterest expenses were approximately $141 million in the second quarter, down $38 million linked quarter. This decline was largely due to $32 million of debt extinguishment costs we recorded in the first quarter related to our balance sheet restructuring. Excluding those items, our remaining expenses declined approximately $5 million primarily due to lower salaries and benefits expenses compared to the prior quarter. This was due to lower bonus accruals, the full quarter impact of our cost reductions and the absence of a one-time COVID bonus paid to frontline personnel in the first quarter 2021. We also saw seasonal declines in occupancy expense of approximately $1.5 million. Our effective tax rate was 16% for the quarter, consistent with the first quarter.

Slide 8 gives you more detail on our capital ratios. As of June 30th 2021, we maintained strong cushions over the regulatory minimums and our bank and parent company liquidity remained very strong. On slide 9, we provide our updated guidance for 2021. We expect our net interest income to be in the range of $640 million to $660 million. We expect our provision for credit losses to be in the range of $10 million to $20 million. We expect our noninterest income to be in the range of $220 million to $230 million and we expect operating expenses excluding charges related to the balance sheet restructuring to be in the range of $560 million to $570 million for the year. Lastly, we are aware that many of you look at pre-provision net revenue or PPNR as a key metric to assess the profitability of core operations. We also know the many of you calculate this metric differently. We have included our version of this metric in the financial tables of our press release. We will also like to point out a couple of additional items to consider as you assess our PPNR results. First, our PPP fees earned have declined $7.5 million from the first quarter to the second quarter. Also, MSR valuation allowance adjustments resulted in an $8.3 million swing from a $6.1 million decrease in the valuation allowance in the first quarter to a $2.2 million increase to the valuation allowance in the second quarter. When considering these additional items, we believe our PPNR has shown marked improvement in the first quarter to the second quarter as a result of our first quarter balance sheet restructuring, earning asset growth, and better cost containment. With that, I will now turn the call over to the operator for questions. Aster [Phonetic]

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from Frank Schiraldi with Piper Sandler.

Frank Schiraldi -- Piper Sandler -- Analyst

Food morning.

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Good morning, Frank.

Frank Schiraldi -- Piper Sandler -- Analyst

I just wondered -- I realize that there hasn't been any change to NII guide. Just wondering about some of the moving parts there, and I wondered if you could talk a little bit about outlook for loan growth, and within that commercial loan growth in the back half of the year.

E. Philip Wenger -- Chairman and Chief Executive Officer

Yes, Frank, for the NII guide there is -- as you've seen so far this year we've recognized $19.5 million and $11.5 million in PPP fees in the first two quarters of the year. We still have $35 million to go, and the timing of that. I mean, we have our own estimates as to when that will be recognized which may differ from yours, but we would anticipate to possibly see a slight decrease in PPP fees in the third quarter and then have that step back up again in the fourth quarter, just based on the timing of this third wave of our PPP recognition. And then we've seen results now through the first half of the year, we would expect business results to improve in the back half of the year and Curt can give you more color on that.

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Yeah, Frank, we look at originations -- commercial originations in the first two quarters, they were pretty consistent. The second quarter, we saw elevated prepayment activity. So I think the growth as we look forward would be based on what prepayment activity is. The pipelines have been building over the last six weeks, and as things reopen and business activity increases we do think pipelines will continue to grow. So we think we have more momentum in the second half. I think the growth will depend though on those prepayment factors. Just as an additional information, car dealers, our floor plan portfolio linked quarter was down $70 million because car dealers can't get cars. So floor plans are not as utilized as they were. So things like that can provide us momentum in the second half.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. And then you mentioned Phil, you looked at some of the deals in terms of M&A that have taken place in market. Is it fair to say that you feel you can more actively pursue deals in the back half of the year given your confidence level now on the macro environment? And I wondered if you could just remind us of what sort of too small in terms of asset size to pursue in terms of whole bank deals. Thanks.

E. Philip Wenger -- Chairman and Chief Executive Officer

Yeah, I mean, I think will be as active as there are opportunities, Frank. And I think that will continue in the second half of the year. We'd like to be looking at banks over $1 billion. But when -- would be impossible that we could look at something smaller that was really strategically positioned well within our footprint.

Frank Schiraldi -- Piper Sandler -- Analyst

Great. Okay, thank you.

Operator

Your next question comes from Daniel Tamayo with Raymond James.

Daniel Tamayo -- Raymond James -- Analyst

Good morning, guys.

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Good morning, Daniel.

Daniel Tamayo -- Raymond James -- Analyst

Maybe if I could dig into the NII from the NIM side a little bit. What is your assumption for excess cash levels? It sounds like they increased again in the second quarter. What is your assumption for those levels within the guidance for the rest of the year?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

[Indecipherable] And our guidance is that they tick up a little bit again during the third quarter because that's when we tend to see our muni business at a tied watermark [Phonetic] for the year, and then coming back down a little bit in the back half. But candidly, we don't see much decline in the excess cash level CUVs [Phonetic]. I think as an industry, we've been wrong as an industry as to deposit levels, and deposit levels continue to stick around longer than we anticipate. So we -- while we'd like to run with a lower level of cash than we currently have, I think the expectation is going to remain elevated certainly through the end of the year.

Daniel Tamayo -- Raymond James -- Analyst

Okay. Thanks for that. And then switching over to fee income. I heard the comment you made about the interest rate swaps within capital market income going back to normal. What kind of environment do you need for that? Do you need rates to go up from here? Do you think this level of swaps would be kind of the run rate, assuming we don't get an interest in rates or even without that you think that this was a depressed level in the second quarter?

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Yeah, Dan, it's Curt, just a little more color there. The second quarter was a light quarter for us. We were putting more fixed rate loans on the balance sheet. We are continuing to offer that. It really comes up -- comes down to loan origination mix and larger deal mix and types of loans. So we do think linked quarter as we look at the third quarter will be stronger. And again, just to remind you, we're coming off the high watermark. I think we did $16.8 million in last year, which was our best year ever. From that we do expect it to moderate from there. But again, the second quarter was one.

Daniel Tamayo -- Raymond James -- Analyst

Great. I appreciate the color. Thanks for the -- answering the questions guys.

Operator

Your next question comes from Russell Gunther with DA Davidson.

Russell Gunther -- DA Davidson -- Analyst

Hey, good morning guys.

E. Philip Wenger -- Chairman and Chief Executive Officer

Hey, Russell.

Russell Gunther -- DA Davidson -- Analyst

There are two -- hey, as a follow-up on the expense comments earlier to see if I got this right. So you guys have done a really nice job keeping a lid on that and the recent initiatives. Can you just remind us of those previously announced are they fully in the run rate now as of the second quarter, or is there more to come?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, they are, they are fully in the run rate. But remember, Russell, when we announced that $25 million we did say that we were going to invest a portion of that in the similar digital technology initiatives. So if you look at our income statement, you can see on the category for data processing and software, you can see the first two quarters of this year. That's been running anywhere from $1 million to $2 million higher per quarter than what our run rate was in the prior year. So that's going to be the one offset to those cost savings, but other than that, yes, you should expect them to be fully in the run rate.

Russell Gunther -- DA Davidson -- Analyst

Okay, that's helpful, Mark. And then I guess as you look out and start thinking about 2022, do you contemplate additional initiatives to continue to keep a tight lid on expenses, are there opportunities to do something similar going forward?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

I think there will be constant reinvestment in our franchise, but I don't anticipate there being investment in the franchise that's going to change the trajectory of our expense levels, I would expect at this point that there would be not -- nominal increases in certain categories, but nothing materially off the run rate that you've seen.

Russell Gunther -- DA Davidson -- Analyst

Okay, that's great. And then just switching gears. Phil, you touched on the buyback a bit in prepared remarks and with the discussion around M&A. I mean how should we think about you guys being active or not with repurchases. Is that more of a hope to land a deal and so we shouldn't expect to see in the market or how are you guys contemplating that?

E. Philip Wenger -- Chairman and Chief Executive Officer

I'd say Russell, it would be driven more by the price of our stock. So we do think we have enough capital to do a deal and buyback but we want to do both of them at the right price.

Russell Gunther -- DA Davidson -- Analyst

Okay, understood. And Phil, thanks for that. And then just a reminder as to sort of what that price to tangible book multiple or earnback is for repurchases for you guys.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah. So if you look at kind of current levels for us right now, that ends up being a by [Indecipherable] dilution or earnback of about 2.2 to 2.5 years, if you're kind of in the mid fifteens right now which is fairly attractive relative to certain M&A transactions, so it would be kind of equivalent to buying a bank that's kind of in that more 120 to 30th tangible book [Indecipherable].

Russell Gunther -- DA Davidson -- Analyst

Yeah. No, absolutely. Okay, guys. Well, thanks for taking my questions. That's it for me.

E. Philip Wenger -- Chairman and Chief Executive Officer

Thanks.

Operator

Your next question comes from Erik with Boenning & Scattergood.

Erik Zwick -- Boenning & Scattergood -- Analyst

Good morning, guys.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Hey, good morning.

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Good morning.

Erik Zwick -- Boenning & Scattergood -- Analyst

First question I guess for Mark, maybe on your comments about the gain on sale margins declining for the residential mortgage I think you said from kind of 3% range down to about 1.85% or so. Now curious is that largely just market dynamics or is [Phonetic] there just been a change with you holding more of those loans on your balance sheet and what you're putting into the secondary market. Curious what's impacted that. And then I guess, second part would just be, do you think those gain on sale margins settle out here in this range or is there more downward pressure as we move through the year?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, yeah. I think it's more been -- I mean, while we have shifted the mix a little bit in terms of our originations, have shifted a little bit from last quarter there about 49% purchase 51% refi to this quarter they were 60% purchase, 40% refi. So there's been a little bit of a shift in terms of product type, but I would say it's more just demand of our product has driven down again on sale margins. And if you look back to where we were sort of first quarter of '20 and earlier, so going to -- back to pre-pandemic, you had a four or five quarter stretch there where our gain on sale spreads were fairly tightly banded between about 135 basis points and 155 basis points. We would expect and our original expectations internally was -- there was it was going to migrate back to that by the end of the year. I think things came down a little bit more quickly than we anticipated in the second quarter, but I think where we're going to end up by the end of the year is still going to be in line with our expectations for spreads.

Erik Zwick -- Boenning & Scattergood -- Analyst

That's great detail. Thank you. And then the second question from me. Still, I believe, in your prepared remarks, you mentioned that you're bringing more of your workforce back to the office starting in September, but there will still be a component that works remotely. Curious what that ultimate kind of percentage of employees that will work remotely will be kind of compared to pre-pandemic levels and how that just makes you think about your real estate needs going forward over the mid to long-term?

E. Philip Wenger -- Chairman and Chief Executive Officer

Yeah, so pre-pandemic, I'd say we had a few people who worked remotely. As we are moving forward, I'd say, 6% to 10% of our staff will be fully remote. A big chunk will be hybrid. So we will be looking at all our real estate, and I would suspect that over time it would decrease.

Erik Zwick -- Boenning & Scattergood -- Analyst

Great, thanks for taking my questions today.

Operator

[Operator Instructions] And your next question comes from Matthew Breese with Stephens Inc.

Matthew Breese -- Stephens Inc -- Analyst

Good morning.

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Morning.

Matthew Breese -- Stephens Inc -- Analyst

Hey, I was hoping for a little bit of more detail on the interest rates into your loan portfolio. So last quarter you provided that I think you had $12.6 billion of loans either tied to prime or LIBOR. How much of that is subject to floors where you wouldn't benefit from higher rates until rate hike two or three, and maybe talk a little bit about the last rate cycle where we really didn't see loan yields inflect until the second or third hike along the way. Any differences this time you expect.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes. So, Matt, we have about $2.5 billion of loans that are currently at their floors. We have total loans with floors is about $4.8 billion. But we have no loans that are below their floor so your question really gets to if there is rate increase would we need to see too before rate impact. The answer is really no on that. We would see sort of the full reset of that with rate increases.

Matthew Breese -- Stephens Inc -- Analyst

Okay. So we wouldn't see the same delay as last time.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

We would not.

Matthew Breese -- Stephens Inc -- Analyst

And then the other question I had is residential loans continue to drive our big portion of the recent loan growth. Balances there are up to 19% of total loans. At what point do we start to see you take your foot off the gas pedal where exposure is enough and where you you sell more of the production versus retaining.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah. So we continue to be asset sensitive. One of the more assets of the banks that we track in our peer group. So we think there is still room to continue putting high quality customer base mortgages on our balance sheet. We have based on our current origination levels, I mean I think there is capacity to at least through the balance of this year to continue to do that. And your trade off is at again right now if your year-to-date we've taken $230 million of production that we haven't sold. We just said in the second quarter, our average gain on sale spread was 185 basis points. So there is a real short-term impact right there of about $3.5 million to $4 million in mortgage banking gains. When you put those loans on your books, you have a year one reserve that you have to put on those residential loans under CECL. But then if you assume that those loans are going to stick around on your books for five or seven years, then there is going to be a very material positive impact to your NII [Indecipherable] mortgage is on the books versus say the alternative right now with that $1.4 billion, $1.5 billion in cash we have in deploying that in the MBS, let's just say versus those residential mortgages.

Matthew Breese -- Stephens Inc -- Analyst

Okay. And could you talk a bit about the securities portfolio outlook for the balance of the year?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, I think I would expect it to stay pretty range bound from where we ended up in the second quarter. We did -- I mean a lot of that depends on obviously where the tenure goes, and the last couple of days have been going in the opposite direction. But we, as I said in my prepared comments, I mean we selectively redeploy some of that excess cash in MBS as longer term rates went up, we will continue to be opportunistic to maybe put some of it there, but we don't want to extend duration too much in the investment portfolio because our investment portfolio is primarily there as a liquidity tool, and ultimately we want that excess cash balance to be redeployed into loans as opposed to investment securities.

Matthew Breese -- Stephens Inc -- Analyst

Understood. Okay. Last one from me. If I exclude commercial swap fees, the other commercial fee income line item so merchant card income, cash management, other commercial banking, all really nice quarters up sequentially. What were the drivers behind those type of fee income improvements?

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Yeah, I would just point to increased business activity and underlying transactional activity as well as effectively managing the earnings credit that would offset any of those fees in the treasury business. But we're seeing increased activity in business in all those categories.

Matthew Breese -- Stephens Inc -- Analyst

Do you feel like these kinds of levels are sustainable or level you can grow off of from here?

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Yeah, we expect them to continue to grow. We will see what pace they grow and it would really be tied to kind of underlying business activity of our customers, but we do anticipate them continuing to grow.

Matthew Breese -- Stephens Inc -- Analyst

Okay, that's all I had. Thanks for taking my questions.

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Thanks, Matt.

Operator

At this time there are no further questions, I will hand the call back for closing remarks.

Matt Jozwiak -- Director of Investor Relations

Well, thanks everyone again for joining us today. We hope you'll be able to be with us when we discuss third quarter results in October.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Matt Jozwiak -- Director of Investor Relations

E. Philip Wenger -- Chairman and Chief Executive Officer

Curtis J. Myers -- President and Chief Operating Officer of Fulton Financial and Chairman and Chief Executive Officer o

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Frank Schiraldi -- Piper Sandler -- Analyst

Daniel Tamayo -- Raymond James -- Analyst

Russell Gunther -- DA Davidson -- Analyst

Erik Zwick -- Boenning & Scattergood -- Analyst

Matthew Breese -- Stephens Inc -- Analyst

More FULT analysis

All earnings call transcripts