Fulton Financial Corp (FULT) 2023 Q4 法說會逐字稿

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 ful.com by clicking on Investor Relations and then on News.

The slides can also be found on the Presentations page under Investor Relations on our website.

On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations, and business.

These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially.

Please refer to the Safe Harbor statement on forward-looking statements in our earnings release and on slide 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 16 through 20 at today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.

Now I'd like to turn the call over to your host, Curt Myers.

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 four new financial centers, two new loan production offices, and talented team members throughout our company to support our continued growth.

We continue 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.

And 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% to 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 are 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 recognize 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 are 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.

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 continue to originate and portfolio adjustable-rate mortgages.

Total deposits increased $116 million during the quarter.

Growth in CDs and brokered deposits more than offset seasonal outflows in our municipal deposit 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 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 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 four 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 to 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 of $12.1 million were consistent with the third quarter in all areas and continue to deliver a very consistent fee income stream.

Mortgage banking revenues declined $900,000 to $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 remain 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 to $820 million.

We expect our provision for credit losses to be in the range of $45 million to $65 million.

We expect our non-interest income, excluding securities gains, to be in the range of $235 million to $250 million.

We expect non-interest expenses on an operating basis to be in the range of $670 million to $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% to 18% for the year.

With that, we'll now turn the call over to the operator for your questions.

(Operator Instructions) Daniel Tamayo, Raymond James.

Good morning, guys.

Thanks for taking my question.

Maybe just to start on the Fulton First initiative, 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 would be great.

Thanks.

Yeah, Danny, thanks.

Thanks for the question.

Our team is really excited about the Fulton First initiative.

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 we are 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.

So to answer your specific question, we don't have targets at this point, but we feel that 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.

I'm going to share more over time, and we wanted to be early with this so that we are transparent and that you could understand some of the initial costs as we launch the initiative.

Are you expecting this to be kind of longer term than in terms of the costs that you're taking, I mean, or is the bulk of it what you took in the fourth quarter?

Or should we expect this to be kind of an ongoing initiative in terms of cost you're taking here?

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 throughout the year.

Okay, and then maybe one for Mark on credit and I guess the range that you gave for provision for the year.

I'm just curious how you're thinking about what may drive the low and the high end of that range if that's mostly just credit volatility or if there's a balance sheet growth [element] embedded in that as well.

Just a comment for me and then Mark can add to it if he wants.

As we look at the provision, it's predominantly charge-offs normalizing.

Your charge-offs were 15 basis points in the last quarter.

Our long-term average in charge-offs has been a little less than 20 to 20 basis points in recent history.

So charge-offs drive that and then our growth rate would drive that.

What's the unknown variable for everybody is just economic conditions as we move forward in the base allocation.

But with what we know right now, that's the range we're comfortable with.

Would you say the midpoint is -- what's the assumption if you were to hit that $55 million?

Is that, I guess, a soft landing?

Or how should we think about what your baseline assumption is?

Danny, if you think about the baseline assumption, the baseline assumption right now from Moody's does assume a softer landing.

So our baseline assumption would be, again, continuing to revert in the fourth quarter.

We got closer to our long-term average on net charge-offs, but the midpoint of our guide would assume we get back to that longer-term average of between 15 and 20 basis points in net charge-offs and then a growth rate in loans that's consistent with that kind of 4% to 6%, probably more of the lower end of that range for 2024.

Got it.

Thank you for all the color.

I'll step back.

I appreciate it.

Thanks, Dave.

Thanks, Dave.

Frank Schiraldi, Piper Sandler.

Good morning.

Just wondering, obviously, the growth in the quarter was in part -- loan growth in the quarter was -- you talked about March driven by construction balances with 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.

Is there more opportunity on the commercial real estate side given where your concentration limits are?

Just general thoughts there.

Thanks.

Yeah, I mean, Frank, if you think about -- for us, historically, we tend to operate on an organic basis in that kind of 4% to 6% range.

I would say for what you've seen in the back half '23 has been kind of at the low end of that range.

And I think you should expect that to continue into 2024.

We've been protecting profitability in the fourth quarter, new originations, pretty much across all channels.

We're in that kind of high sevens yield, about 7.77%, 7.75%.

It was kind of our rate on new originations.

So with that, until we would see any kind of expected rate decreases, which again, we currently expect or expecting in the back half of 2024, I would expect to see growth continue to be moderate.

But we are open for business.

We are not shutting down any lines of business as maybe as you've seen from others.

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, given the variable rate book, about a little over $20 million annually for me, a 25-basis-point move in rates.

Is that the right way to think about the same on the way down, offset by the back-book repricing?

What's your -- what is the incremental 25 basis points kind of due to full-year margin or NII?

On an annualized basis, we have about $10 billion of loans tied to SOFR, and about $9 billion of that $10 billion are adjustable-rate loans, which would reset within 30 days after that rate move occurs.

So absent any moves to our non-maturity deposit book, that's how you get to that $20 million on an annualized basis for a 25-basis-point move.

What we've assumed is we've taken what we think is a conservative stance that for the first couple of rate moves downward that you're not necessarily going to see deposit pressures abate.

But at some point, whether that's 50 basis points, 75 basis points, 100 basis points, at some point, I think the industry will start to feel relief on deposit pricing pressure and be able to react within that non-maturity deposit book.

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?

That's correct.

And then overnight borrowings costs obviously resets outs immediately.

Okay.

Thanks.

Feddie Strickland, Janney Montgomery Scott.

Hey, good morning, Curt and Mark.

Just wanted to start on deposit costs.

I know you've discussed this a little bit, but are you starting to see that pressure less than a little bit with the pause in rates and seeing different behavior from competitors there as well?

Yeah.

The one other thing, Feddie, is that when -- we've been obviously repricing our CD book and we've been growing CDs throughout the year, and those have been repricing higher as you've seen roll rates of what matures per quarter.

In the first quarter of '24, we have $1.1 billion roughly of deposits that will -- CDs that will mature, but that cost now of what's maturing is now up to almost $440 million.

So that churn that you've been seeing upward in our CD cost is definitely going to lessen throughout 2024.

So that will provide some relief and allow those betas to ultimately slow.

Got you.

That was -- you actually beat me to my second question.

So that was $1.1 billion of CDs maturing.

What was the cost they were rolling off versus what they're rolling on at?

$440 million is what they're rolling off at.

And then rolling on, it would depend on, obviously, whether they're retail or brokered.

Got it.

And I'll just -- sorry, go ahead.

Hey, it's Curt.

I'm just going to add that we continue to have high roll rates, bond roll rates in CDs.

So as we're adding customers, we still have really strong metrics in the blind roll rate.

Promotional acquisition rate and blind roll rate are different, so 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 keep that business.

Understood.

That's helpful.

And then just switching gears for a second here.

Appreciate the continued disclosure on office in the deck.

Is that $683 million outstanding inclusive of medical office?

And if so, do you have on hand ballpark how much is medical office?

It does include a whole lot of -- it depends on the use overall.

We're [divvying] there for the stratification in that as we look -- we're looking for it here.

On office, overall, balances came down linked quarter.

We actually had a really positive -- we have one trending in the wrong direction and was already classified/criticized that -- it is about $30 million that paid off.

And we originated the new $30 million that's a really strong credit that kind of replaces that.

So we're seeing -- as we continue to manage that, that overall book, we continue to manage effectively through those dynamics.

And 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.

Healthcare is really split.

It depends on use, so some of that would be in our healthcare outstandings as 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.

Sure, that would be great.

Yeah.

I just know it's generally perceived as a little lower risk.

So just curious how much was there.

But anyway, thanks for taking my questions.

Thank you.

Manuel Navas, D.A. Davidson & Co.

Thank you.

Good morning.

Can you kind of comment on what NIM you kind of expect with your NII estimates, like a 4Q '24 exit NIM assumption?

I know that the rate forecast can definitely change, but just kind of thoughts on that.

We have purposely, Manuel, over the last couple of years kind of backed away from giving specific NIM guidance and instead by giving you NII, and you guys can calculate your own balance sheet and come up with that number.

What we have said is that we do expect in the first half of 2024, again, for what I mentioned about deposit pricing pressure to continue, I would expect, in the first half of the year, you would continue to see our deposit costs going up more than our loan yields.

So I would expect it would be sometime in the back half of '24 is when you would see that trough and then margins start to expand from there.

Okay.

Shifting gears a bit, does the Fulton First initiative contemplate any improvement to the fee or improved fee growth?

Any new fee lines or anything that is helpful on that side of things?

Yes, it certainly will consider fee income businesses, and we feel there's opportunities to accelerate growth in loan deposit business as well as fee-in-service business.

So it's a comprehensive our review of the entire company.

And with a little bit better swing in AOCI, any shift in your appetite for buybacks or any other capital deployment and thoughts you happen to just hear the latest on that front?

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.

It'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 if it's conducive -- the environment's conducive to that going forward, we will continue to be active.

Appreciate it.

I'll hop back into the queue.

Thanks.

David Bishop, Hovde Group.

Good morning, gentlemen.

Hey, David.

Mark, in terms of the fee income guidance there, just curious as how we should think about the individual components.

Wealth management was up, I guess, mid-single digits; commercial banking, high single digits; consumer, maybe down mid-single digits.

Just in terms of deriving that forecast, how are you thinking about maybe some of the individual components this year?

Yeah, we continue to be very bullish on our wealth group, again, hitting a high watermark for assets under management administration and with a lot of those revenues tied to that balance.

As we continue to grow customers and grow assets, the revenue will come with it.

We have -- commercial banking also had a very strong year, eclipsing $80 million in fees, which I think was -- may have also been a record for the year or close to it.

There's a little bit more volatility in there in our capital markets business.

But there's good fundamentals in there in merchant and cash management, which will continue.

Consumer banking has been down a little bit, both due to some changes we made to overdraft at the beginning of 2023 in addition to mortgage banking being impacted by the current rate environment.

But when you think about those together, each of those is going to be somewhere right around a third of our total revenue.

This past year, consumer has been a little bit lower because we've been off a little bit in mortgage banking, but we made up some of that then with stronger results in commercial banking.

So we really like the kind of balance that we have in those fee income businesses in total.

Yeah, I appreciate the color.

And then how should we think about maybe the overall level maybe of investment securities here?

I think it'll be about 13%, 14% of average earning assets.

Do you think that's sort of a near floor here at this point?

Remind us what the annual cash flow expectations are on that portfolio.

Right now, cash flow is pretty small.

It is about $10 million a month.

And I do think it's nearer to floor.

I mean, our target there is kind of between where it sits today and about 15% of the balance sheet.

We purposely run it maybe a little bit skinnier than some others do because we don't view our investment portfolio as an earnings enhancement stream.

But it's really there, truly just a balanced liquidity and depending on where overall loan deposit ratios are.

So I think somewhere between where we sit today and 15% of the balance sheet is a good place for you to model.

Great.

I appreciate the color.

You bet.

Matthew Breese, Stephens Inc.

Hey, good morning.

I was hoping to touch on expenses.

The $670 million to $690 million guide 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 -- with that in mind, do you expect the quarterly expense run rate to basically hold flat from here throughout the year?

Or is there going to be any sort of undulations as the year progresses?

And it's important because our exit pace for 2024 into 2025 is impacted by some of them.

So I'd love some color there.

Yeah, sure, Matt.

As you as Curt noted in his prepared remarks, I mean, for the expense guide for the year, we have assumed that we'll start to see some of the productivity enhancements from Fulton First in the back half of the year.

And so in the first half of the year, I would expect to see expenses higher than what that kind of exit number is going to be in the fourth quarter of '24 going into 2025.

We also have -- as a reminder, in the first quarter, kicking it in April, we have annual merit, which for us, historically, then always kind of takes second quarter expenses up a little bit.

But as we work through Fulton First, we'll have those growth initiatives, which tend to be a little bit longer term in terms of when those are realized.

But the productivity enhancements, we'd expect to start seeing some of those come through in the back half of '24 with then more of them and an annualized run rate impact of those really manifesting themselves in 2025 and beyond.

Just along those lines, I'm curious, you've mentioned productivity improvements a couple of times.

You've also mentioned kind of leveraging technology.

Can you give us some examples that are going to drive the overall productivity improvements across the bank?

Yeah, it's Curt.

We have a lot of things that we're taking a look at.

So productivity could just 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 that technology and digital platform provide for us.

And then as we look at focusing the business on certain things around growth opportunities, then we're going to have expense -- opportunity as we move forward.

Understood.

Maybe moving on to the NIM and just deposit balances, I would love some color on how DDA balances trended throughout the quarter.

Given where we are in the rate hiking cycle, it feels like most businesses and consumers should have -- if they were going to move the rate, they would have already done so.

So I'm curious if you're seeing kind of a lag effect there, and it sounds like it will 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 '24.

Yeah, sure, Matt.

So first on DDA, yeah, you're correct.

I would say the consumer -- it feels like we're nearing a trough on that migration out of non-interest bearing and interest-bearing products.

So where we are still seeing impact is on the commercial side where you still have, I think, some of the remnants of stimulus money.

It's migrating from non-interest bearing and interest bearing.

As you know, we also had just the seasonal impact in the fourth-quarter migration in our municipal deposits book, which had a little bit of non-interest-bearing DDAs but a lot of interest-bearing DDAs that migrated out as those tax receipts were spent.

And then -- remind me the second half of your question again.

I was looking for the monthly NIM if you have it because -- I mean, look, from where we are now, NII wise, the guidance implies a pretty healthy step down in the quarterly pace of NII.

And I just wanted to get a sense for kind of where we should end up in the first quarter, so I have a good idea of where the year will end up.

Yeah, I mean, if you take -- our December NIM was within a basis point of our quarterly NIM.

So really, for us, as we give our guide, as I said our assumption, which may prove to be conservative -- but our assumption is that we're going to continue to see deposit pricing pressure throughout our markets, which will cause our deposit costs to continue to increase even when you get to the back half of the year and start to see those first couple of rate cuts.

If we are wrong on that, then that's certainly going to provide upside to this guidance.

And we'll be refreshing that as the year plays out.

Appreciate that.

Last one from me.

You had mentioned in the release just generally weakening credit trends.

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 -- I really appreciate some additional color on the credit front and what you're seeing on the ground.

Yeah, Matt, 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 is what we're referring to.

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.

We've been really pleased with credit over the last six, eight quarters.

And this is the first where we saw any ticket in a 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.

Great.

That's all I have.

I appreciate you taking my questions.

Thank you.

Thanks.

(Operator Instructions) Chris McGratty, KBW.

Hey, good morning.

Hi, Chris.

Mark, I just have 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 -- a $100 million shock, it was around, I don't know, $37 million, $38 million for $100 million, which would work out to like $9 million for every $25 million.

I thought I heard a higher number earlier in the call.

I think it's closer to $20 million on an annualized.

I guess, where am I -- what number would you point me to?

Yeah, again, on the $20 million -- again, that $20 million is just on the variable portion of our loan book, on the loans that are tied to SOFR on an annualized basis.

So when you're -- and when you're looking at our 10-K disclosures and our Q disclosures, I mean, those are based off a parallel instantaneous shock, where this is -- where I'm giving you more guidance on a ramp downward.

And in that ramp, we're assuming that again, in the first 25 or 50 basis points down that you wouldn't see corresponding decreases to our non-maturity deposits, but we may be conservative on that.

And the market might start to see deposit relief earlier than 50, 75 basis points of rate cuts.

Okay, got it.

Thank you.

And then maybe -- somebody asked on the buybacks, any signs of thawing in the M&A market, maybe more books going or any kind of commentary on that?

Yeah, we have M&A opportunity that we're looking at.

It continues to be challenging to make the math work on rate marks and things.

But we -- I would say, compared to six months ago, I think the environment is different and improved for pursuing appropriate M&A as we move forward.

And on that, Curt, just -- can you just remind us, in this kind of environment, what would be that kind of sweet spot in the deal, size wise, business mix, stuff like that?

Thanks.

Yeah, thanks for that question.

We really look at it in two buckets, like the $1 billion to $5 billion community bank.

That acquisition would supplement our growth, add to our franchise, have lower execution risk.

We're really, really focused on those.

The $5 billion to then $15 billion that would fill out, what we would be willing to look at -- that $5 billion to $15 billion are 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 that's how we look at it in those two buckets.

But the lower, the $1 billion to $5 billion, makes a lot of sense in the market with what's going on right now.

And if we have those opportunities and we can come to terms with folks, we would -- we feel we're in a position to do that.

So it feels like if something came, it would be the smaller end based on what I'm hearing, unless something really materially changes.

Correct.

Got it.

Okay, perfect.

Thank you.

Frank Schiraldi, Piper Sandler.

Hi, guys, just a follow up on -- we talked about the variable rate book and the size there.

I'm trying to think through the rest of the book and the back-book repricing.

Generally, is it reasonable to think in 2024 maybe a fifth of that book reprices?

And if so, I'm just trying to get a sense of where rates are going on the books versus coming off where they're repricing to.

Yeah, Frank, in the fourth quarter, pretty much across most of our material loan categories, we were coming on somewhere between

[7% to 15%, 8%].

The average for the quarter was about

[7%, 70%].

So that's the current kind of new money across the board.

Okay.

All right, great.

And I guess, you mentioned it last quarter where they're repricing from.

I would assume that hasn't changed much quarter over quarter.

Yes, correct.

Yeah -- sorry, go ahead.

No, go ahead.

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 to $100 million level over time.

I just wondered, in your guidance for 2024, are we seeing 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 now?

No, nothing's really changed in the past quarter with respect to cash and liquidity.

Okay, so you're not -- the 2024 guide doesn't assume really much of a change then from where you guys were in the 4Q?

That's correct.

Okay.

All right, great.

Thanks.

Thanks, Frank.

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.

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.

This concludes today's conference call.

Thank you for participating.

You may now disconnect.