Fulton Financial - Q4 2023
January 17, 2024
Transcript
Matt Jozwiak (Director of Investor Relations and Corporate Development)
Hi, good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the fourth quarter and year-ended December 31, 2023. Your host for today's conference call is Curt Myers, Chairman and Chief Executive Officer. Joining Curt is 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 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 page 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, in slides 16 through 20 of today's presentation for 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, Curt Myers.
Curt Myers (Chairman and CEO)
Thanks, Matt, and good morning, everyone. For today's call, I'll be providing some high-level thoughts on the year. I will discuss our fourth quarter business performance and share some key objectives for us in 2024. Then Mark will review our financial results in more detail and step through our guidance for 2024. After our prepared remarks, we will be happy to take any questions you may have. Our performance in 2023 was a result of an extraordinary effort by our team in what was an unprecedented year. In 2023, our commitment to our customers was on display as we adapted quickly to customer needs and delivered on their expectations. As a result, in a very challenging environment, we grew customer households and now serve more than 534,000. We continued to invest in growing our market presence and enhancing the customer experience.
We added 4 new financial centers, 2 new loan production offices, and talented team members throughout our company to support our continued growth. We continued to invest in and develop our customer digital experience, with customers now using our digital solutions over 6 million times a month. We also made tremendous positive impact on the communities we serve. In 2023, we launched our diverse business banking program, accelerating our outreach to businesses that have been traditionally underserved by our industry. Through this program, we are adding new customers and new revenue for our company while making a difference in our communities. For more information on our overall community impact, please review our 2022 corporate social responsibility report that was issued in 2023. In this report, you can see how we are changing lives for the better. Our 2023 financial performance was very solid.
Pre-provision net revenue eclipsed $400 million, a new record, and our operating EPS of $1.71 was the second best in the long history of our company. While continuing our strong focus on pricing, profitability, and credit strength, loan growth exceeded $1 billion for the second year in a row. We increased our liquidity during the year, maintaining $8 billion in committed liquidity at year-end. Our net interest margin expanded 15 basis points during the period of significant interest rate volatility. We managed and deployed capital with discipline. During the fourth quarter, we increased our common dividend for a second time during the year, returning $0.64 in common dividends to our shareholders in 2023. In addition, we repurchased just over 5 million shares of Fulton stock throughout the year at a blended cost of $15.15.
Even with these capital actions, we maintained strong capital ratios. We also navigated the credit environment effectively in 2023, as performance was even better than we anticipated at the beginning of the year. As a result, we delivered a 15% return on tangible common equity in 2023. Overall, we were pleased with our performance and the results our team generated this year. We look forward to continuing to execute on our corporate strategy to grow the company by delivering effectively for customers and operating with excellence, so that we can serve all of our stakeholders. Now let me turn to our quarterly performance, with particular emphasis on growth, credit, and our forward outlook. Operating earnings per share for the quarter was $0.42.
Loan growth moderated, as we anticipated, during the quarter, to $174 million, or 3% on an annualized basis. Deposit growth was modest as total deposit balances grew $116 million, or 2%, on an annualized basis during the quarter. Our loan-to-deposit ratio ended at 99.1%, relatively stable with the last quarter, and well within our long-term operating target of 95%-105%. Turning to our non-interest income, diversity in our fee income businesses continues to serve us well. Non-interest income was $59.4 million, with wealth, commercial, and consumer and small business, continuing to deliver solid results on an overall basis. Moving to credit, the provision for credit losses was $9.8 million, down slightly from $9.9 million last quarter.
We saw some migration in our credit quality metrics during the quarter and remain focused on how higher interest rates and higher costs are impacting our customers. We're cautious in our outlook for 2024. Now, looking forward, this year will be full of opportunity for us. Our focus remains on growth and profitability, actively managing credit, and taking action on improving efficiency, overall. Even with solid results for the quarter and the year, we acknowledge the need to grow appropriately in this market and improve our productivity and efficiency in 2024. As you saw in our press release, we took implementation charges related to a new initiative we launched in the fourth quarter. This initiative, named Fulton First, is a process to evaluate and improve all aspects of how we operate.
To support our continued growth, we've recognized and have begun to act on the need to streamline operations, create efficiencies, and leverage our significant investment in technology. We have three key tenets driving our strategic transformation: simplicity, focus, and productivity. We're very excited about Fulton First and believe that over the next several years, it will accelerate our growth rates and improve our operating efficiency on a sustained basis. We will have more discrete details to share with you during the year. The 2024 impact of Fulton First will be most visible in our expense line items, as it will help us meet the limited expense growth rate in our guidance. Longer term, Fulton First will also support accelerated growth. Mark will step you through the 2024 guidance in a moment.
These high-priority initiatives and the leadership team that we have in place will drive performance and deliver the next phase of long-term success for our company. Now I'll turn the call over to Mark to discuss our financial performance and 2024 guidance in more detail.
Mark McCollom (Senior EVP and CFO)
Thank you, Curt, and good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the third quarter of 2023, and the loan and deposit growth numbers I will be referencing are annualized percentages on a linked quarter basis. Starting on slide 6, operating earnings per diluted share this quarter were $0.42, on operating net income available to common shareholders of $68.8 million. This compares to $0.43 of operating EPS in the third quarter of 2023. Moving to the balance sheet, as Curt noted, loan growth was modest during the quarter, growing $174 million, or 3% annualized. Commercial lending contributed $120 million of this growth, or 3% annualized. Construction lending grew $142 million, driven by additional draws and new originations during the quarter.
Commercial real estate lending growth slowed to $22 million, or 1% annualized, and C&I lending declined modestly, down $32 million or 3%. Consumer lending produced growth of $54 million or 3% during the quarter. While at a slower pace, we continued to originate in portfolio adjustable-rate mortgages. Total deposits increased $116 million during the quarter. Growth in CDs and broker deposits more than offset seasonal outflows in our municipal deposits business of approximately $220 million. Our non-interest-bearing DDA balances ended the year at $5.3 billion, or 24.7% of total deposits, which was modestly better than we anticipated during our third quarter earnings call.
Our shift from non-interest-bearing deposits to interest-bearing was $552 million for the second half of 2023, versus a shift of $1.1 billion in the front half of the year. Our NII guidance for 2024 assumes we'll continue to see migration from non-interest-bearing deposits into interest-bearing products throughout 2024, but at a slower pace than we saw in 2023. We currently expect non-interest-bearing deposits to end 2024 at approximately 22% of total deposits. Our investment portfolio was relatively flat for the quarter, closing at $3.7 billion. During the quarter, we did repurchase a small portion of subordinated debt, $5 million, which generated a $750,000 gain, reflected in other expense.
This gain was offset by a similar level of securities losses as we sold $120 million of securities yielding 1.4%, using the proceeds to pay down overnight borrowings at 5.35%. This very small repositioning will add modestly to our net interest income and net interest margin in 2024 and is included in the guidance, which I'll step through in a few minutes. Putting together all of these balance sheet trends on page or on slide 8, our net interest income was $212 million, a $2 million decline linked quarter. We were pleased with how well our net interest margin held up, declining only 4 basis points to 3.36% versus 3.4% last quarter.
Loan yields expanded 11 basis points during the period, increasing to 5.83% versus 5.72% last quarter. Cycle to date, our loan beta has been 49%. Our total cost of deposits increased 23 basis points to 179 basis points during the quarter. Cycle to date, our total deposit beta has been 34%. Turning to asset quality, non-performing loans increased $12.7 million during the quarter, which led to our NPL to loans ratio increasing from 67 basis points at September 30-72 basis points at year-end. Net charge-offs of $8 million, or 15 basis points, were diversified, with no individual charge-off greater than $2 million. Overall, loan delinquency increased modestly, but remains at a low level, increasing to 1.19%.
Our allowance for credit loss as a percent of loans was relatively flat at 1.37% at year-end. Turning to non-interest income on slide 10, wealth management revenues were $19.4 million, consistent with the third quarter. As a reminder, wealth management represents about a third of our fee-based revenues, with over 80% of these revenues recurring. The market value of assets under management and administration increased over $500 million during the quarter to $14.8 billion at year-end, a new record for our company. Commercial banking fees increased $1 million to $20.8 million, as capital markets and SBA revenue increases drove the quarter. Consumer banking fees at $12.1 million were consistent with the third quarter in all areas and continued to deliver a very consistent fee income stream.
Mortgage banking revenues declined $900,000-$2.3 million and were driven by a seasonal decline in mortgage originations, as well as a decline in gain on sale spreads. A net market value change of $1.1 million in other fee income was recorded during the period related to the LIBOR to SOFR transition. Moving to slide 11, non-interest expenses on an operating basis were $171 million in the fourth quarter, in line with the prior quarter. Material items excluded from operating expenses were charges of $6.5 million for the special FDIC assessment and $3.2 million related to our Fulton First initiative. Additionally, our operating expenses were impacted by a $1.6 million increase in marketing expense and a $700,000 gain on the aforementioned debt extinguishment.
Turning to slides 12 and 13, we're providing you with updates on our capital base. As of December 31, we maintained solid cushions over the regulatory minimums, and our bank and parent company liquidity remains strong. We've also provided you with an alternative view of our regulatory ratios, including the impact of AOCI. Our tangible common equity ratio improved to 7.4% at year-end, a 60 basis point increase during the quarter, driven by solid earnings and a material decrease in AOCI due to lower interest rates. Our accumulated other comprehensive income balance on the available for sale portion of our investment portfolio and derivatives is currently $299 million, versus $480 million last quarter.
On slide 13, including the loss on our held to maturity investments, which is $140 million after tax on an HTM portfolio of $1.3 billion, our tangible common equity ratio would still be 7% at December 31, representing $1.9 billion of tangible capital. On slide 15, we are providing guidance for 2024. Our guidance assumes a total of 75 basis points of Fed funds decreases occurring in the second half of the year. Our 2024 guidance is as follows: We expect our net interest income on a non-FTE basis to be in the range of $790 million-$820 million. We expect our provision for credit losses to be in the range of $45 million-$65 million.
We expect our non-interest income, excluding securities gains, to be in the range of $235 million-$250 million. We expect non-interest expenses on an operating basis to be in the range of $670 million-$690 million. This estimate excludes any potential charges we may incur as a result of Fulton First throughout the year. And lastly, we expect our effective tax rate to be in the range of 17%-18% for the year. With that, we'll now turn the call over to the operator for your questions.
Operator (participant)
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. Please stand by while we compile the Q&A roster. Our first question comes from Daniel Tamayo with Raymond James. Please proceed.
Daniel Tamayo (Director)
Good morning, guys. Thanks for taking my question.
Mark McCollom (Senior EVP and CFO)
Good morning.
Daniel Tamayo (Director)
Maybe just to start on the Fulton First initiative. You know, I appreciate your comments, Curt, on kind of what's behind it. But just curious if there are any profitability targets or goals associated with that program. And then if there's, I think you mentioned that the expense guidance doesn't include any other potential charges in 2024. If you have an estimate of what that might be coming in that line, that'd be great. Thanks.
Curt Myers (Chairman and CEO)
... Yeah, Danny, thanks, thanks for the question. You know, our team's really excited about the Fulton First initiative. You know, we're really focused on the long-term growth strategy for the company, as well as the operating efficiency. We're being really transparent with the program early on, because we wanted to help you understand some short-term cost impacts that happened this past quarter. And then explain how we're going to meet the guidance, specifically on the expense guide going forward, because it's probably a little light relative to expectations. So you know, we're being very strategic in an overall review of the company. It's not just a simple cost-cutting initiative, but really a strategic initiative to grow more efficiently over time.
To answer your specific question, we don't have targets at this point, but we feel this initiative is going to help us meet our 2024 guidance, and then probably even more importantly, lead to long-term sustained improved efficiency for the company. But at this point, we don't have any specific targets, and we're going to share more over time. And we wanted to be early with this so that we were transparent, and that you could understand some of the initial costs as we launch the initiative.
Daniel Tamayo (Director)
So, are you expecting this to be kind of a longer term than, in terms of the costs that you're taking? I mean, or is it the bulk of it what you took in the fourth quarter, or should we expect this to be kind of an ongoing?
Curt Myers (Chairman and CEO)
Yeah
Daniel Tamayo (Director)
... initiative in terms of costs you're taking? Yeah.
Curt Myers (Chairman and CEO)
Yeah, Danny, I mean, we will have ongoing one-time costs to implement the changes that we decide to implement, and then we'll match them with cost saves and revenue expectations as we move forward. So more to come. This is the beginning of the initiative, and we're being very, very thoughtful, diligent about working through the process, and we wanted to be transparent with everyone. It is not just a simple cost-cutting initiative, but there will be cost cutting that is associated with it. We'll keep you informed, you know, throughout the year.
Daniel Tamayo (Director)
Okay. And then, and maybe one for Mark on credit, and I guess the range that you gave for provision for the year. Just curious how you're thinking about, you know, what may drive the low and the high end of that range, if that's mostly just credit volatility or if there's kind of balance sheet growth estimates embedded in that as well? Thanks.
Curt Myers (Chairman and CEO)
Danny, just a comment from me, and then Mark can add to it if he wants. You know, as we look at the provision, it's, you know, it's predominantly, you know, charge-offs normalizing. You know, charge-offs were 15 basis points in the last quarter. Our long-term average in charge-offs has been, you know, a little less than 20, 20 basis points in recent history. So charge-offs drive that, and then our growth rate would drive that. You know, what's the unknown variable for everybody is just economic conditions as we move forward in the base allocation. With what we know right now, that's the range we're comfortable with.
Daniel Tamayo (Director)
Would you say the midpoint is? What's the assumption for, you know, if you were to hit that $55 million, is that, I guess, soft landing? Or how should we think about what your baseline assumption is?
Mark McCollom (Senior EVP and CFO)
Yeah, yeah, Danny, if you think about the baseline assumption, the baseline assumption, you know, you know, right now, you know, from Moody's does assume, you know, a softer landing. You know, so, so our baseline assumption, you know, would be, again, continuing to revert. You know, in the fourth quarter, we got closer to our long-term average on net charge-offs, but, you know, the midpoint of our guide would assume we get back to, you know, that, that longer-term average of between 15 and 20 basis points in net charge-offs. And then, you know, a, a growth rate in loans that's, you know, consistent with, you know, the, that, that kind of 4%-6%, you know, probably more, more the lower end of that range, you know, for 2024.
Daniel Tamayo (Director)
Got it. Thank you for all the color. I'll step back, guys. Appreciate it.
Curt Myers (Chairman and CEO)
Thanks, Danny.
Mark McCollom (Senior EVP and CFO)
Thanks, Danny.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from Frank Schiraldi with Piper Sandler. Your line is now open.
Frank Schiraldi (Managing Director)
Good morning.
Curt Myers (Chairman and CEO)
Morning, Frank.
Mark McCollom (Senior EVP and CFO)
Hey, Frank.
Frank Schiraldi (Managing Director)
Just wondering if you guys, you know, obviously, the growth in the quarter was in part, loan growth in the quarter was, you talked about, Mark, driven by construction balances with, you know, some of that being additional drawdowns, and some of that being new origination. I wonder if you could just talk a little bit about your thoughts on growth going forward in the loan book and what that complexion of growth might look like. You know, the more opportunity on the commercial real estate side, given where your concentration limits are. Just general thoughts there. Thanks.
Mark McCollom (Senior EVP and CFO)
... Yeah, I mean, Frank, if you think about, you know, for us historically, you know, we tend to operate on an organic basis, you know, in that kind of 4%-6% range. You know, I would say for, you know, what you've seen in the back half of 2023, you know, has been kind of at the low end of that range. You know, and I think, you know, you should expect that to continue into 2024. You know, we've been, you know, protecting profitability, you know, in the fourth quarter, you know, new originations pretty much across all channels, you know, we're in that kind of high sevens, you know, about 7.70, 7.75, it was kind of our rate on new originations.
You know, so with that, you know, until we would see any kind of expected rate decreases, you know, which again, we currently, you know, expect- are expecting in the back half of 2024, you know, I would expect to see growth continue to, you know, be moderate, but, you know, we are open for business. You know, we are not, you know, you know, shutting down any, any lines of business, you know, as, as maybe you've, you've seen from others.
Frank Schiraldi (Managing Director)
Okay. And then, on the assumption, you mentioned, the three rate cuts in the back half of the year. Any sort of color you can provide—I know you talked about it last quarter on the way up, that the NII would be impacted, you know, given the variable rate book about a little over $20 million annually from a 25 basis point move in rates. Is it the right way to think about the same on the way down, you know, offset by the back book repricing? But what's your... You know, what is the incremental 25 basis points kind of due to, to full year margin or NII?
Mark McCollom (Senior EVP and CFO)
Yeah, yeah. On an annualized basis, we have, you know, about $10 billion of loans tied to SOFR, and about $9 billion of that $10 billion are adjustable-rate loans, you know, which would reset, you know, within 30 days after that rate move occurs. You know, so, you know, absent, you know, any moves to our, you know, non-maturity deposit book, you know, that, that's how you get to that $20 million on an annualized basis for a 25 basis point move. You know, what we've assumed, you know, is, you know, we've taken a, you know, what we think is a conservative stance, that for the first couple of rate moves downward, you know, that you're not necessarily going to see, you know, deposit pressures abate.
You know, but at some point, you know, whether that's 50 basis points, 75 basis points, 100 basis points, at some point, you know, I think, you know, the industry will start to feel relief, you know, on deposit pricing pressure and be able to react with that non-maturity deposit book.
Frank Schiraldi (Managing Director)
Okay. So maybe incremental rate cuts would be less impactful to the bottom line, just given, hopefully, deposits start repricing or providing some benefit on the deposit side to offset any contraction on the loan yield side. Is that the way to think about it?
Mark McCollom (Senior EVP and CFO)
That's correct.
Frank Schiraldi (Managing Director)
Okay. All right.
Mark McCollom (Senior EVP and CFO)
Yeah.
Frank Schiraldi (Managing Director)
Great.
Mark McCollom (Senior EVP and CFO)
Yeah, and then overnight borrowings costs, obviously, you know, resets down immediately.
Frank Schiraldi (Managing Director)
Right. Okay, thanks.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from Feddie Strickland with Janney Montgomery Scott, Research Division. Your line is now open.
Feddie Strickland (Senior Analyst)
Hey, good morning, Curt and Mark. Just wanted to start on deposit costs. I know you discussed this a little bit, but are you starting to see that pressure lessen a little bit with the pause in rates and any different behavior from competitors there as well?
Mark McCollom (Senior EVP and CFO)
Yeah. Yeah, yeah, the one other thing, Feddie, is that, you know, when, you know, we've been obviously repricing our CD book, and we've been growing CDs throughout the year, and, and those have been repricing higher, as you've seen, you know, kind of roll rates of what matures per quarter. In the first quarter of 2024, you know, we have $1.1 billion, roughly, of deposits that will, you know, CDs that will mature. But that cost now of what's maturing is now up to almost 4.40%. You know, so that, so that churn that you've been seeing upward in our, our, CD cost, you know, is definitely going to lessen, you know, throughout 2024.
So that will, you know, provide some relief and allow those betas to ultimately slow.
Feddie Strickland (Senior Analyst)
Gotcha. That was—you actually beat me into my second question. So that was $1.1 billion in the CDs maturing. What, what was the cost they were rolling off versus what was—they're rolling on at?
Mark McCollom (Senior EVP and CFO)
4.40 is what they're rolling off at. You know, and then rolling on, you know, it would depend on obviously, you know, you know, whether they're, they're retail or, you know, or brokered.
Feddie Strickland (Senior Analyst)
Got it. And I'll just, sorry, go ahead.
Curt Myers (Chairman and CEO)
Feddie, it's Curt. I was just gonna add that, we, we continue to have high roll rates, blind roll rates, in CDs. So as we're adding customers, we still have really strong metrics in the blind roll rate. And, you know, promotional acquisition rate and blind roll rate, you know, you know, are different. So that, that helps as well, that we've been able to, continue to do a good job for customers and roll a lot of CDs over, and, and keep that business.
Feddie Strickland (Senior Analyst)
Understood. That's helpful. Then just switching gears for a second here, appreciate the continued disclosure on office and the deck. Is that $683 million in outstanding inclusive of medical office? And if so, do you have on-hand ballpark, how much is medical office?
Curt Myers (Chairman and CEO)
... It does include all office. It depends on the use overall. We're digging here for the stratification in that. You know, as we will look, we're looking for it here. Just on office overall, you know, balances came down linked quarter. We actually had a really positive. We had one trending in the wrong direction, and it was already in a classified criticized that it's about $30 million that paid off. And we originated a new $30 million that's a really strong credit that kind of replaced that. So we're seeing, as we continue to manage that overall book, you know, we continue to manage effectively through those dynamics.
So we were pleased with being able to move out a significant credit trending in the wrong way this past quarter. So we have the numbers here. The healthcare is really split. It depends on use. So some of that would be in our healthcare outstanding, and some would be in office as well. So we'd have to follow up with you on that specific number that's in the office. That would be specific medical office.
Feddie Strickland (Senior Analyst)
Sure. That'd be great. Yeah, I just know it's generally perceived as a little lower risk. So just curious, you know, how much was there. But, anyway, thanks for taking my questions, guys.
Curt Myers (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from Manuel Navas with D.A. Davidson & Co. Your line is now open.
Manuel Navas (Senior Research Analyst and Managing Director)
Thank you. Good morning.
Curt Myers (Chairman and CEO)
Hi, Manuel.
Manuel Navas (Senior Research Analyst and Managing Director)
Can you kind of comment on what NIM you kind of expect with your NII estimates, like a Q4 2024 exit NIM assumption? I know that the rate forecast can definitely change, but just kind of thoughts on that.
Curt Myers (Chairman and CEO)
Yeah. Yeah, we have, we have purposely, Manuel, over the last couple of years, you know, kind of backed away from, from giving specific NIM guidance. And instead, you know, you know, by giving you, you know, you know, NII and, and, you know, you guys can calculate your own balance sheet and, and come up with that number. What we have said, you know, is that we do expect, you know, in the first half of 2024, again, for, for what I mentioned about deposit, you know, pricing pressure to continue, you know, I would expect in, in the, in the first half of the year, you would continue to see, you know, our deposit costs going up more than, than our loan yields.
You know, so I would expect it would be sometime, you know, in the back half of 2024 is when you would see that trough, and then margins start to expand from there.
Manuel Navas (Senior Research Analyst and Managing Director)
Okay. Shifting gears a bit, does the Fulton First initiative contemplate any like improvement to the fee or improved fee growth, any new fee lines or anything that is helpful on that side of things?
Curt Myers (Chairman and CEO)
Yeah, it certainly will consider fee income businesses. And we feel there's opportunities to accelerate growth in loan deposit business as well as fee and service business. So it's a comprehensive review of the entire company.
Manuel Navas (Senior Research Analyst and Managing Director)
And, with kind of a little bit better swing in AOCI, does any shift in your appetite for buybacks or any other capital deployment, and thoughts? Happy to kind of just hear the latest on that front.
Curt Myers (Chairman and CEO)
Yeah. So, as we look forward, we renewed our buyback in December. The board renewed that, so we have that full availability for us for the year. That's $125 million. We will look at that opportunistically over time. If you look back over this past year, we've been pretty active throughout the year. And, you know, if it's conducive, the environment's conducive to that going forward, we will continue to be active.
Manuel Navas (Senior Research Analyst and Managing Director)
Appreciate it. I'll hop back into the queue.
Curt Myers (Chairman and CEO)
Thanks.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from David Bishop with Hovde Group. Your line is now open.
David Bishop (Director)
Hey, good morning, gentlemen.
Curt Myers (Chairman and CEO)
Hey. Hey, David.
David Bishop (Director)
Hey, Mark, in terms of the fee income guidance there, just curious, as how we should think about the individual components. You know, wealth management was up, you know, I guess, mid-single digits, commercial banking, high single digits, you know, consumer, maybe, you know, down mid-single digits. Just in terms of deriving that forecast, how are you thinking about maybe some of the individual components this year?
Mark McCollom (Senior EVP and CFO)
Yeah, yeah, we continue, you know, to be very bullish on, you know, on our wealth group. Again, hitting a high water mark, you know, for assets under management administration. You know, and with a lot of those revenues, you know, tied to that balance, as we continue to grow customers and grow assets, you know, the revenue will come with it. You know, we have, you know, commercial banking, you know, also had a very, you know, strong, year, you know, eclipsing $80 million in fees, which I think was, may have also been a record for the year, you know, or close to it.
... You know, you know, there's a little bit more volatility in there in our capital markets business, you know, but there's good, you know, fundamentals in there in, I, you know, in merchant and cash management, which will continue. You know, consumer banking, you know, has been down a little bit, you know, but both due to some, you know, changes we made to overdraft at the beginning of 2023, in addition to, you know, mortgage banking being impacted by the current rate environment. But when you think about those, you know, together, you know, each of those is going to be somewhere right around a third of our total revenue.
You know, this past year, you know, consumer has been a little bit lower because we've been off a little bit in mortgage banking. You know, but we made up some of that then with, you know, stronger results in commercial banking. So we really like the, you know, kind of balance that we have in those fee income businesses in total.
David Bishop (Director)
Got it. Appreciate the color. And then how should we think about maybe the overall level of maybe investment securities here? I think maybe about, you know, 13%-14% of average earning assets. Do you think that's sort of a near floor here at this point? And remind us what the annual cash flow expectations are on that portfolio.
Mark McCollom (Senior EVP and CFO)
Yeah. Yeah, right now, cash flow is, you know, pretty small. You know, it's about $10 million a month. And, yeah, you know, I do think it's near its floor. I mean, I mean, our target there is kind of between where it sits today and about 15% of the balance sheet. You know, we, we purposely run it, you know, maybe a little bit, you know, you know, a little bit skinnier than, than some others do because we don't view our investment portfolio as an earnings enhancement, you know, stream, but it's really there, you know, truly just to balance liquidity and, depending on where our overall loan deposit ratios are.
You know, I think, I think somewhere between where we sit today and 15% of the balance sheet, you know, is a good place for you to model.
David Bishop (Director)
Great. Appreciate the color.
Mark McCollom (Senior EVP and CFO)
You bet.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from Matthew Breese with Stephens Inc. Your line is now open.
Matthew Breese (Managing Director)
Hey, good morning.
Mark McCollom (Senior EVP and CFO)
Hey, Matt.
Curt Myers (Chairman and CEO)
Good morning, Matt.
Matthew Breese (Managing Director)
I was hoping to touch on expenses, the $670 million-$690 million guide. It implies an average quarterly run rate of roughly $170 million, so pretty in line with where we were in the fourth quarter. Do you expect—you know, with that in mind, do you expect the quarterly expense run rate to basically hold flat from here throughout the year, or is there gonna be any sort of, you know, undulation, as the year progresses? And it's important because our exit pace for 2024 into 2025 is impacted by some of this. So I'd love some color there.
Mark McCollom (Senior EVP and CFO)
Yeah. Yeah, sure, Matt. As you know, as Kurt noted, you know, in his prepared remarks, I mean, I mean, we for the, you know, expense guide, you know, for the year, you know, we, we, we have assumed that we'll start to see, you know, some of the productivity enhancements from Fulton First in the back half of the year. You know, so in the first half of the year, you know, I would expect to see, you know, expenses higher, you know, than what that kind of, you know, exit number is gonna be in the fourth quarter of 2024, you know, going into 2025.
You know, you know, you know, we also have, you know, as a reminder, you know, in the first quarter, you know, you know, kicking in in April, we have annual merit, you know, which, you know, for us historically, then, you know, always, you know, kind of takes, you know, second quarter expenses up a little bit. But, you know, as we work through Fulton First, Fulton First, you know, we'll have both growth initiatives, which, you know, tend to be a little bit longer term, you know, in terms of when those are realized.
But the productivity enhancements, you know, we'd expect to start seeing some of those, you know, come through in the back half of 2024, with, you know, then, you know, more of them and the, and the annualized run rate impact of those really, you know, manifesting themselves in 2025 and beyond.
Matthew Breese (Managing Director)
Just along those lines, I'm curious: you've mentioned, you know, productivity improvements a couple of times. You've also mentioned kind of leveraging technology. Can you give us some examples that are gonna drive the overall productivity improvements across the bank?
Curt Myers (Chairman and CEO)
Yeah, Matt, it's Curt. You know, we have a lot of things that we're taking a look at. So productivity could just, you know, be operating productivity, contracts, different things that create opportunities for us from a cost or utilization standpoint. So it's either cost or benefit realization from the activities that technology and digital platform provide for us. And then as we look at focusing the business on certain things, we're gonna have growth opportunities and we're gonna have expense opportunities as we move forward.
Matthew Breese (Managing Director)
Understood. Maybe moving on to the NIM and just deposit balances. I would love some color on how DDA balances trended throughout the quarter. You know, given where we are in the rate hiking cycle, it, it feels like, you know, most businesses and consumers should, if they were gonna move to rate, they, they would have already done so. So I'm curious if you're, you're seeing kind of a, a lag effect there, and it sounds like it'll persist for a little bit longer. And then I would love some color just on how the NIM performed on a monthly basis to get a sense for the NII starting point in 2024.
Mark McCollom (Senior EVP and CFO)
... Yeah, yeah, sure, Matt. So, you know, first on DDA, yeah, you're correct. I would say, you know, the consumer, you know, it feels like we're nearing, you know, a trough, you know, on kind of that migration out of non-interest-bearing, you know, into interest-bearing products. You know, so where we are still seeing impact, you know, is on the commercial side, you know, where you still have, you know, I think some of the remnants of, you know, stimulus money, you know, is migrating from non-interest-bearing into interest-bearing.
As you know, we also had, you know, just kind of the seasonal impact in the fourth quarter, you know, migration in our municipal deposits book, you know, which had, you know, a little bit of non-interest-bearing DDAs, but a lot of interest-bearing DDAs that, you know, migrated out as those, you know, tax receipts, you know, were spent. And then, remind me the second half of your question again, NIM?
Matthew Breese (Managing Director)
I was looking for the monthly NIM, if you have it?
Mark McCollom (Senior EVP and CFO)
Right.
Matthew Breese (Managing Director)
If you have it. Because, I mean, look, from where we are now, NII wise, it—the guidance implies a pretty healthy step down in the quarterly pace of NII, and I just want to get a sense for, you know, kind of where we should end up in the first quarter, so I have a good idea of where the year will end up.
Mark McCollom (Senior EVP and CFO)
Yeah, yeah. I mean, if you take, you know, our December NIM was within, you know, a basis point of our quarterly NIM. You know, so, really for us, you know, as we give our guide, as I said, you know, our assumption, which may prove to be conservative, you know, but our assumption is that, you know, we're going to continue to see deposit pricing pressure, you know, throughout our markets, you know, which will cause, you know, our deposit costs, you know, to continue to increase. You know, even, you know, when you get to the back half of the year and start to see, you know, those first couple of rate cuts.
You know, if we are wrong on that, you know, you know, then that's certainly going to provide, you know, upside, you know, you know, to this guidance, and, and we'll be refreshing that, you know, as the year plays out.
Matthew Breese (Managing Director)
Okay. I appreciate that. Last one from me. You'd mentioned in the release, just generally weakening credit trends. You know, obviously, NPAs were up a little bit, charge-offs were up a little bit. Is there anything else you're watching or seeing that drove that comment? I would just really appreciate some additional color on the credit front and what you're seeing on the ground.
Curt Myers (Chairman and CEO)
Yeah, I mean, it's really based on that comment. I mean, we had four consecutive quarters of NPLs coming down, classified, criticized, being stable or down. So those trends just ticking up, you know, is what we're referring to. You know, that could be just event-driven or time of the year-driven, or it could be something as we move forward. But it's modest changes, but it's the first we've really had any changes in an upward direction versus continuing to improve. You know, we've been really pleased with credit over the last six, eight quarters. And this is the first where we saw any tick in the wrong direction. So no more color than what you're seeing there.
We're just being prudent and cautious as we look at those numbers.
Matthew Breese (Managing Director)
Great. That's all I had. I appreciate you taking my questions. 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 and wait for your name to be announced. To withdraw your question, please press star one, one again. One moment for our next question. Our next question comes from Chris McGratty with KBW. Your line is now open.
Chris McGratty (Managing Director)
Hey, good morning.
Mark McCollom (Senior EVP and CFO)
Hey, Chris.
Chris McGratty (Managing Director)
Mark, I just had a clarifying question on the NII sensitivity. I want to make sure I heard your comments right. I'm looking at your 10-Q disclosures. I think in a down 100 shock, it was around, I don't know, 37, 38, $38 million for 100, which would work out to, like, $9 million for every 25. I thought I heard a higher number earlier in the call. I think you said it's closer to 20 on an annualized basis. I guess, what number would you point me to?
Mark McCollom (Senior EVP and CFO)
Yeah, yeah, yeah. Again, on the 20, again, the, you know, that 20 is just on the variable portion of our loan book, you know, on the loans that are tied to SOFR, you know, on an annualized basis. You know, so, you know, when you're, and when you're looking at, you know, our 10-K disclosures, you know, and our Q disclosures, I mean, those are based off, you know, a parallel instantaneous shock. You know, where this is, you know, where I'm giving you more guidance on a ramp downward. And in that ramp, you know, we're assuming, you know, that again, in the first, you know, 25 or 50 basis points down, that you wouldn't see, you know, corresponding decreases to our non-maturity deposits.
You know, but you know, we may be conservative on that, and the market might start to see deposit relief, you know, you know, earlier than you know, 50-75 basis points of rate cuts.
Chris McGratty (Managing Director)
Okay, got it. Thank you. And then maybe somebody asked on the buybacks. Any, any signs of buying in the M&A market? Maybe more books going around. Any kind of commentary on that?
Curt Myers (Chairman and CEO)
Yeah, we have M&A opportunity that we're looking at. You know, continues to be challenging to make the math work on rate marks and things. But I would say, compared to six months ago, you know, I think the environment is different and improved for you know, pursuing appropriate M&A as we move forward.
Chris McGratty (Managing Director)
... On that, Curt, just, can you just remind us in this kind of environment, what would, what would be that kind of sweet spot of a deal, size-wise, business mix, kind of stuff like that? Thanks.
Curt Myers (Chairman and CEO)
Yeah, thanks for that question. And we really look at it in two buckets. The one billion to five billion dollar community bank, you know, we—that acquisition would supplement our growth, add to our franchise, have lower execution risk. You know, we're really focused on those. The five to then fifteen billion, that would fill out what we would be willing to look at. That five to fifteen billion are, you know, much more significant and strategic. There's very few on that list, that we would consider. I think those are still harder to do in this environment. But, you know, we—that's how we look at it in those two buckets.
But the lower the $1 billion-$5 billion, you know, makes a lot of sense in the market with what's going on right now. And if we have those opportunities and can come to terms with folks, we would, we feel we're in a position to do that.
Chris McGratty (Managing Director)
It feels like if something came, it would be the smaller end, based on what I'm hearing, unless something really materially changed?
Curt Myers (Chairman and CEO)
Correct.
Chris McGratty (Managing Director)
Got it. Okay, perfect. Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from Frank Schiraldi with Piper Sandler. Your line is now open.
Frank Schiraldi (Managing Director)
Hey, guys, just to follow up on, you know, we talked about the variable rate book and, and, the size there, and just, trying to think through, the rest of the book and, and the back book repricing. And, generally, you know, is it reasonable to think, in 2024, maybe, you know, a fifth of that book reprices? And if so, just trying to get a sense of, where rates are, are going on the books versus, you know, coming off, where they're repricing to.
Mark McCollom (Senior EVP and CFO)
Yeah, yeah, Frank, in the fourth quarter, you know, pretty much across, you know, most of our, you know, material loan categories, you know, we were coming on somewhere between 7.50%-8%, you know, with, you know, the average for the quarter at about 7.70%. You know, so that's, so that's the current, you know, kind of new money across the board.
Frank Schiraldi (Managing Director)
Okay. All right, great. And I guess, you know, you mentioned it last quarter, where they're, repricing from. I would assume that hasn't changed much, quarter over quarter.
Mark McCollom (Senior EVP and CFO)
Yeah, correct.
Frank Schiraldi (Managing Director)
Yeah. Okay.
Mark McCollom (Senior EVP and CFO)
Yep.
Frank Schiraldi (Managing Director)
Sorry, go ahead.
Mark McCollom (Senior EVP and CFO)
No, go ahead.
Frank Schiraldi (Managing Director)
And then, I guess, just while I got you, just, a last one on, you talked, I think, in the deck, about, cash levels returning to sort of a $50 million-$100 million level over time. Just wondered, in your guidance for 2024, are we seeing a, you know, a significant move lower from wherever it is now, $250 million, down to that, towards that level? Or, how much excess liquidity, I guess, is baked into that guide?
Mark McCollom (Senior EVP and CFO)
No, no, no, no, nothing's really changed in the past quarter, you know, with respect to cash and liquidity.
Frank Schiraldi (Managing Director)
Okay, so your 2024 guide doesn't assume really much of a change then, from where you guys were on the Q4 2022?
Mark McCollom (Senior EVP and CFO)
That's correct.
Curt Myers (Chairman and CEO)
Correct.
Frank Schiraldi (Managing Director)
Okay. All right, great. Thanks.
Curt Myers (Chairman and CEO)
Thanks, Frank.
Mark McCollom (Senior EVP and CFO)
Thanks, Frank.
Operator (participant)
Thank you. I'm showing no further questions at this time. I would now like to turn it back to Curt Myers for closing remarks.
Curt Myers (Chairman and CEO)
Well, thank you again for joining us today. We hope you'll be able to be with us as we discuss first-quarter results in April. Thank you, everyone.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.