This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good day, and thank you for standing by. Welcome to the Fulton Financial 4th Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1-1 on your phone. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Mr. Matt Jozwiak. Director of Investor Relations. Sir, please go ahead.
spk03: Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the fourth quarter in year-end of December 31st, 2022. Your host for today's conference call is Kurt Myers, Chairman and Chief Executive Officer. Joining Kurt is Mark McCollum, Chief Financial Officer. Our comments today will refer to the financial information the 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 the investor relations section of our website. On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations, and business. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially. Please refer to the Safe Harbor Statement on forward-looking statements in our earnings release and on slide two of today's presentation for additional information regarding these risks, uncertainties, and other factors. Fulton undertakes no obligation other than as required by law to update or revise any forward-looking statements. In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and slides 10 through 13 of 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.
spk05: Well, thanks Matt and good morning everyone. For today's call, I'll be providing some high level thoughts on the year as well as some comments on our quarterly business performance. Then Mark will share the details of our financial results and step through our outlook for 2023. After our prepared remarks, we'll be happy to take any questions you may have. Our results for the fourth quarter and year were very good and we were pleased with our overall performance, operating earnings for both the quarter and the year represent all-time highs for us. Some key highlights for 2022 were that net interest income grew significantly, reaching an all-time high of $782 million. Our loan portfolio had strong growth across most categories. We grew nicely in both commercial and consumer businesses. In the fourth quarter, we eclipsed the $20 billion mark in total loans. Wealth management had another record year despite the market volatility. and our commercial fee business delivered double-digit revenue growth year over year. In addition, we completed the Prudential Bank Corp acquisition in the third quarter and successfully handled the conversion and full integration in the fourth quarter. Our board of directors declared a special dividend of $0.06 to supplement our quarterly common dividend, returning $0.65 per share in dividends for the year. These positives were offset by some of the operating headwinds that materialized throughout the year. Mortgage banking revenues continue to be pressured by the effects of a rising interest rate environment. And expenses continue to migrate higher due to inflationary pressure and elevated incentive compensation accruals. Overall, we were pleased with the performance and the results that 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 then we can serve all of our stakeholders. So now let me turn to our quarterly performance. Overall total loan growth was strong for the quarter at 584 million or 12% annualized. We experienced solid originations and uptick in line utilization and saw continued declines in paydowns and prepayments. Turning to deposits, we saw a decline in overall balances during the quarter due to average balances per household declining. We did see continued growth in our overall customer count and we remain committed to growing our customer base. As always, we are focused on deposit growth over the long term. Turning to our fee income, we continue to benefit from the diversity of our businesses as the macroeconomic environment challenges certain business lines, and we continue to grow other business lines. Mark will share more details in a moment. Moving to credit, the provision for credit losses of $14.5 million was an increase from $11 million last quarter when excluding the CECL day one charge related to the acquisition of Prudential Bancorp. Factors contributing to the $3.5 million increase were predominantly loan growth and the changes in the macroeconomic outlook, as we saw credit metrics remain relatively stable. Length quarter, we saw improvements in NPLs, NPAs, and criticized and classified assets. Finally, we continue to actively manage our financial center network. We plan to open four new locations in 2023 and have recently announced the consolidation of five existing financial centers. We continually evaluate how and where our customers choose to connect with us. So now let me turn the call over to Mark to discuss our financial performance in 2023 outlook in a little more detail.
spk09: Great. Thank you, Kurt. And good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the third quarter of 2022. And the loan and deposit growth numbers I'll be referencing are annualized percentages on a linked quarter basis. Starting on slide three, operating earnings per diluted share this quarter were $0.48 on operating net income available to common shareholders of $81.2 million. This is consistent with $0.48 of operating EPS in the third quarter of 2022. Our operating results exclude $1.9 million of merger-related charges recorded during the quarter for our acquisition of Prudential Bancorp and $514,000 in core deposit and tangible amortization. At this point, we believe all the costs for our acquisition of Prudential Bancorp have been incurred. Moving to the balance sheet, as Kurt noted, loan growth was very strong for the quarter at $584 million, or 12% annualized. Commercial lending contributed $349 million of this growth, or 10% annualized. CNI lending grew $244 million, led by automobile floor plan increases, agricultural lending, and an overall increase in line utilization, which increased from 22.5% last quarter to 23% this quarter. Commercial real estate lending grew 139 million, or 7% annualized. Consumer lending produced organic growth of 240 million, or 15% during the quarter. Mortgage lending was still the largest component of our consumer loan growth and increased 163 million, with the majority of this growth coming from adjustable rate products. Total deposits, excluding customer repo accounts, declined $727 million during the quarter. Approximately one-third of this decline was attributable to anticipated outflows within our municipal deposit portfolio, consistent with prior year trends. Our investment portfolio was relatively flat for the quarter, closing at $4 billion. Putting together all of those balance sheet trends on slide four, net interest income was $226 million, a $10 million increase linked quarter. Loan yields expanded 59 basis points during the period, increasing to 4.8% versus 4.21% last quarter. Our total cost of deposits increased 24 basis points to 42 basis points during the quarter. cycle to date, our total deposit data is only 9% cumulatively. Our increase this quarter puts us where we expected to be at year end, and we continue to believe a cumulative through the cycle total deposit data of approximately 30% is achievable. Our net interest margin for the third quarter was 3.69% versus 3.54% last quarter. The 15 basis points of improvement resulted primarily from loan betas being higher than deposit betas during the period. Going forward, I would expect our net interest margin expansion to be more modest with additional rate increases due to higher deposit betas and changes in our funding mix. Our loan to deposit ratio increased from 92.1% at September 30th to 98.2% currently. Turning to credit quality, Our NPAs declined $21 million during the quarter, which led to our NPA to assets ratio improving from 76 basis points at September 30th to 66 basis points at year end. Net charge-offs of $12 million were driven by a $12 million write-down on one commercial office loan due to credit-related concerns. Overall, criticized and classified loans continued trending lower with a decline of $26 million or 3% during the quarter, following a $251 million, or a 24% decline, from the second to third quarters of 2022. Despite these positive trends, changes to our macroeconomic outlook and strong portfolio growth led to the increase in our provision for credit losses this quarter. Turning to slide six. Commercial banking fees declined $2.2 million to $18.6 million, with decreases in cash management revenues driven by higher interest rates and capital markets declines driven by reduced interest rate swap activity. Consumer banking fees declined $1.2 million linked quarter to $12.1 million, led by decreases in overdraft fees. As a reminder, during the prior quarter, we implemented changes to our overdraft products and services to improve our customers' experience. Wealth management revenues were effectively flat with the prior quarter at $17.5 million. New business activity continued, and the market value of assets under management and administration increased to $13.5 billion at year-end, compared to $12.7 billion for the prior quarter. Mortgage banking revenues declined and were driven by a decline in mortgage loan sales, as well as a decrease in gain on sales spreads, to 166 basis points this quarter versus 202 basis points last quarter. Moving to slide seven, non-interest expenses, excluding merger-related charges, were approximately $167 million in the fourth quarter, up $4 million in the fourth quarter. As a reminder, many of the cost savings from the Prudential Bank Corp acquisition will not be recognized until the first quarter of 23, as many impacted employees at Prudential Bank had work-through dates of mid-December. We also had certain expenses occurring in the fourth quarter of 22 that we expect to reset to lower levels in the first quarter of 23. Included in this list are incentive compensation and related accruals of $3 million due to strong earnings. Expense accruals of $800,000 for branch consolidations planned for 2023. And lastly, $1.9 million of legal expenses and related reserves for a contingent liability. Turning to slide eight, as of December 31st, we maintain solid cushions over our regulatory capital minimums, and our bank and parent company liquidity remains strong. Accumulated other comprehensive losses improved $57 million during the quarter. Along with strong earnings, this improved our tangible common equity ratio and drove link quarter growth of 6% in our tangible book value per share. Our tangible common equity ratio was 6.9% at quarter end, up from 6.7% last quarter. Excluding the impact of AOCI, Our tangible common equity ratio was 8.2% at December 31st. During the quarter, we did not repurchase any common shares. However, our board has approved a new $100 million share repurchase authorization, which is available and in place until the end of 2023. On slide 9, we are providing our first iteration of guidance for 2023. Our guidance assumes a total of 75 basis points of future Fed funds increases occurring in 2023 as follows, 50 basis points in February and 25 basis points in March. With that, our 2023 guidance is as follows. We expect our net interest income on a non-FTE basis to be in the range of $895 to $915 million. We expect our non-interest income, excluding securities gains, to be in the range of $220 to $235 million. We expect non-interest expenses to be in the range of $645 to $665 million for the year. And lastly, we expect our effective tax rate to be in the range of 19% plus or minus for the year. Many of you also look at pre-provision net revenue, or PPNR. as a key metric to assess the profitability of our core operations. Our version of this metric is included in the financial tables of our press release. PPNR has increased 48% year over year as a result of earning asset growth over the past year, as well as net interest margin expansion from our asset-sensitive balance sheet. With that, we'll now turn the call over to the operator for questions. Chris, please help us.
spk01: Thank you, sir. As a reminder, to ask a question, you'll need to press star 1 1 on your phone. And please stand by as we compile the Q&A roster. One moment, please, for our first question. Our first question will come from Frank Chiraldi of Piper Sandler. Your line is open.
spk07: Good morning. Just wanted to see if I could get a little more color on components of outlook. Just don't know how much you can share in terms of your expectations on deposit flows from here and loan growth in 2023.
spk09: Yeah, Frank, I would say for loan growth, you know, in there, I mean, we've, you know, as you know, our long-term average for loan growth has been, you know, kind of in that, you know, 4% to 6% range on an organic basis. You know, so I think you can assume, you know, we're kind of in that range for 2023. And on the deposit side, you know, clearly it will be, you know, lower than what our long-term averages have been you know, with, you know, some of the industry-wide, you know, challenges right now in deposit growth.
spk07: I guess when you think about the loan-to-deposit ratio, if you could just remind us where, you know, you'd allow that sort of to, or where you expect that or target that to get to. I assume, you know, given your commentary, you assume that'll continue to tick up from here.
spk05: Frank, as you look at the long-term, we've really operated into 95% to 105%. over the long term. So we're comfortable with where we're at. We are focused on growing deposits and funding. We think it can comfortably drift a little higher, but we are very focused on growing the balance sheet equally as we move forward, really as we have done in the past. This year was definitely a different year with the excess liquidity and deposits coming off the balance sheet that had built up throughout the pandemic and strong loan growth. So it was a different dynamic this past year. We see next year returning to more of a normal trend where we focused on balanced growth between loans and deposits.
spk07: Okay. And then just wondering, I know, Mark, you mentioned the new buyback program that was announced. You guys tend to have a program out there. you know, to be opportunistic. Just wondering maybe your general thoughts, given the macro picture, given outlook for 2023, your general thoughts on buybacks, you know, as we sit here today.
spk09: Yeah, we do think it's just, you know, good corporate practice to have that optionality in place. And we're going to continue to weigh earnings, growth, and, you know, interest rates and credit, you know, and evaluate, you know, all of that. And, you know, there's a possibility we could tap that line, you know, throughout 2023, and there's a possibility we could not depending on how those factors play out.
spk07: Okay. And then just lastly, if I could just on credit, it seems like generally you're seeing some, you know, continuing to see good trends. Any concerns in the Cree book outside of office here today? You know, do you see more challenges in the near term in terms of that office portfolio? And any additional color, you know, in terms of the loan that you charged off in the quarter?
spk05: Yeah, Frank, from an overall CRE standpoint, I think the portfolio has been pretty stable. Underlying metrics are stable. We're monitoring it very closely from an overall Cree standpoint. Specifically on the office portfolio, you know, we continue to work hard to understand that portfolio. And just to confirm a couple balances in that portfolio, we've talked about it over the last couple quarters. Originally, we talked publicly about our office over $5 million, and that balance is roughly about $550 million. With the acquisition of Prudential, it added a little bit to that. So the office over $5 million is about $590 million. And then we referenced a little higher number later when we had time to go through the entire portfolio. And the entire portfolio is about $1.5 billion. And it is geographically diversified. It's tenant diversified. and very granular. The average note in that portfolio is $1.8 million. We have about 585 notes. So we monitor that and can monitor that portfolio really closely. So we do have this credit that was previously identified. We allocated for it last quarter. And as we review that credit, we decided to charge that allocation down this past quarter. We are monitoring office very closely, and we see stable trends there right now, you know, but we're monitoring it very closely.
spk07: Okay, great. Just for clarification, Kurt, you mentioned a couple of numbers there in terms of a billion, I think a billion fifty and five hundred fifty million. The difference is The $550 million is office over, office loans over $5 million. Is that what you said?
spk05: Correct. And then the $1.5 billion is all office. So the difference between those is really the smaller credits throughout the footprint.
spk07: Gotcha. Thank you.
spk05: Thank you, Frank.
spk01: Thank you. One moment, please, for our next question. And again, one moment for our next question. Our next question will come from Daniel Tamayo of Raymond James. Your line is open.
spk02: Thank you. Good morning, everybody.
spk00: Good morning.
spk02: Maybe first just a clarification. In the slide deck, I think it says the NII guidance, the 895 to 915, is fully tax equivalent. I thought I heard you say It was not fully tax equivalent in your comments, Mark. Just wanted to make sure we're on the same page there.
spk09: Yeah, to clarify that, we had actually filed an amended 8K this morning, correcting that footnote, Danny. It should say non.
spk02: Got it. Okay.
spk09: Thank you. Apologize for that clarification.
spk02: Not a problem. Then, you know, I guess just... On the fee income guidance, if we take the midpoint of that guidance, it seems to be about stable from 2022, considering the headwinds in mortgage banking and overdraft with your recent policy. What are the items that you're kind of expecting to see offsets to those headwinds in 2023?
spk05: Yeah, Danny, we see wealth management growth. as we look forward, you know, it's somewhat market dependent, but that business continues to grow and I think will be positive. And the underlying treasury management and commercial and the payments overall, those activity-based fees in commercial and consumer, we see positive momentum there. So those are the We see mortgage stabilizing year over year, and we see those positives potentially giving us growth opportunity. But overall, pretty stable year to year. We're going to have pluses and minuses. As I referenced in my comment, we really see the diversification of all of our different fee income business lines helping us as you're always going to have things going up, things going down.
spk02: Great. Thank you. And then switching gears to credit here, I know that things seem to be really strong still overall, but just curious on reserves. They came down a bit, if I'm not mistaken, this quarter. And, you know, thinking about through the rest of the year with potential for a recession coming, how you're thinking about where that number could go if things do worsen a bit from a macro standpoint, kind of putting aside what happens with the charge-offs.
spk09: Well, Danny, I would say that, again, under an expected loss model, we've already assumed that things are going to get a little bit worse, which is the basis for a lot of the provision that we took this quarter. When you look at the total allowance and basis points, it went down just a couple of basis points, you know, but that's a function of, I mean, we did have, you know, a charge off of a, you know, $12 million of a loan that was on non-accrual that we charged down. You know, so that's going to, you know, then have our portfolio did get better. You know, so, I mean, underlying credit trends are better, you know, which then maybe allow the total allowance to go down a couple of basis points. But, you know, that was offset by changes to our macroeconomic outlook, which does assume that things are going to get a little bit worse over time. You know, hence, you know, with the allowance being relatively stable.
spk02: Understood. Yeah. No, it's, there's a lot going on there for sure. And just a clarification, finally, the expense numbers that you gave that are going to be coming down from the fourth quarter with the $3 million and the $0.8 and the $1.9, are those annual or quarterly? And what's the timing we would expect on that?
spk09: Yeah, those are all quarterly numbers. And all of those quarterly numbers I would expect to see reset immediately in the first quarter.
spk02: Okay, terrific. All right, that's all from me. Thanks for the color. Thanks, Dave.
spk01: Thank you. One moment, please, for our next question. Our next question will come from Chris McGrathy of KBW. Your line is open.
spk10: Oh, great. Thanks. I just want to go back to the office portfolio. Hey, good morning, everybody. Just wanted to go back to the office book for just a moment. In the release, you talked about this one credit driving the majority of the $10, $11 million. Do you have a size of the largest exposures? You referenced the $5 million. How big do you guys go in office for a particular relationship?
spk05: Yeah, Chris, so we have five. The stratification is we have five credits over $20 million. We have 23 credit exposures between 10 and 20. And then we have 23 between 5 and 10. So we have 48 credits over $5 million. So it's a pretty small book, and we monitor it very closely.
spk10: Okay. So this would be in the 10 to 20 bucket. Okay. In terms of, I guess, what changed – you talked about reserving the last quarter – I guess, number one, what market is this in? And then, I guess, what changed? Because I think most of the banks, your peers talk about how these credits were underwritten with 50%, 60% LTVs, good debt service. What changed to drive the loss?
spk05: Yeah, so this credit was underwritten consistent with our overall portfolio. It's in the Washington MSA. It's a large single tenant. There's a few other tenants in the building. and you have a lease termination. So we're trying to understand current values of that property as it's released is really the details behind that. So we identify that, allocate it, try to understand what we think is current value of that underlying property with that event and decided to take the charge down versus just the allocation.
spk10: Okay, but I guess based on that math, it would imply the value of the building dropped fairly dramatically from where you underwrote it.
spk05: Correct. We would think that the release of office space in that metro would be at a much lower cash flow and lease amount than was in place.
spk10: Okay, great. And then just taking a step back, I mean, aside from office, which is getting a ton of attention, I guess where else is the wall of worry? if there is one in terms of particular portfolios going into the year?
spk05: Yeah, we're monitoring all of our portfolios on the consumer side and commercial side. So we're looking diligently at the consumer portfolio on rate resets, on adjustable rates, and just the overall performance in the residential mortgage and consumer portfolio. Again, underlying credit metrics don't see any emerging trends, but diligently monitoring that. Specifically on commercial, office is what we're really focused on, and the overall trends are still pretty stable when you look at delinquency and underlying credit metrics. Moving into a credit environment, we're being very diligent on all portfolios.
spk10: Perfect. Thank you for that. If I could just, getting back to the NII guide, Mark, I think in your prepared remarks, you said the rate of change would slow, which is fairly consistent with most banks, given the catch-up on the liabilities. But it would imply the margin begins to roll over, right? you know call it second quarter into the end of the year um if if i take the balance sheet comments at face value i guess number one is that a fair assessment and then maybe two could you um just talk about opportunities to to perhaps offset that through security shrinkage um you know moderating the loan growth that'd be great thanks yeah so um so that is uh
spk09: Correct, Chris. You know, I've been saying for the last six months when people ask that question, when do you think your margin is going to peak out in a cycle? And my answer is, you know, one month to one quarter after the Fed stops raising interest rates, right? So depending on what your bias is on that, you know, I think that that's going to drive, you know, when we max out on our margin. You know, in terms of opportunities going forward, you know, we are, you know, we have, you know, to date, You know, kept a lot of dry powder from a liquidity perspective on certain wholesale channels, which, you know, could potentially be lower, you know, than some of our current overnight borrowings costs. You know, so we've looked, you know, there's some, you know, dips in the intermediate part of the curve right now where I think there are some opportunities to go out a little bit in duration. And depending, you know, if you believe in the forward curve, you know, I think there's some opportunities to extend out liabilities a little bit as well. And then lastly, I mean, we just had a year with 11% year-over-year loan growth. I would expect that to moderate in 2023.
spk10: Okay, great. And just the monthly cash flows or the quarterly cash flows off the bond book, if you have it, and that 30% beta, that was total, just to make sure that's not interest-based. That's total data, right?
spk09: Correct. Yeah, that's our estimate for total deposit beta. And roughly for us, our interest-bearing deposit beta would be about 50% higher than that, just because we have roughly about one-third of our deposits are non-interest-bearing. And I'm sorry, what was the second half of the question?
spk10: Oh, just what's coming off the bond portfolio.
spk09: Yeah, on the bond portfolio, it's obviously slowed, but, you know, it's around $20 million a month.
spk10: Okay, great. Thank you.
spk01: Thank you. One moment, please, for our next question. Again, one moment, please. Our next question will come from Fetty Strickland of Jenny Montgomery Scott Research Division. Your line is open.
spk04: Hey, good morning. Hey, Teddy, good morning. Saw FHLB advances rose by about a billion-link quarter. Assuming that has occurred near the end of the quarter, just given where average balances were. Mark, I know you said before that we should expect some level of FHLB, just given that's kind of where you guys were before we had all this liquidity. But is that kind of at the level you want to be at? or do you have a target level, or is it just going to kind of follow different loan opportunities? You'll just augment the funding base with that. I was just curious what your strategy was with the FHLB funding.
spk09: Yeah, I think it's really more the latter, Fetty, than the former. You saw FHLB grow more than, say, Fed funds would because there was opportunities to just maybe do some one-month, two-month, three-year kind of laddering in very short-term FHLB advances and, you know, pick up some funding advantage over overnight. But that's, you know, we're going to be opportunistic on all those wholesale funding sources. And, you know, but I would anticipate in the near term, certainly, for that number to be higher than what it was, you know, certainly as an average for 2022.
spk04: Got it. Along those same lines, I was just curious, how do you view FHLB advances versus broker deposits, just in terms of, you know, how you look at what types of wholesale funding to use?
spk09: Yeah, I mean, generally, we're looking at both rate, you know, but also then, you know, depending on, you know, what we have in terms of collateral, you know, for those advances as well. Got it.
spk04: Sorry, go ahead.
spk09: No, sorry. But I mean, I was just going to add that, you know, as of right now, our immediate overnight, you know, available liquidity is well in excess of $7 to $8 billion. Got it.
spk04: And then just one last modeling question. It looks like wealth management held up pretty well. Do you happen to have the market value of AUM handy just for modeling purposes? The market value of our AUM. The assets under management?
spk09: Yeah, yeah. It was $13.5 billion at year end. Got it.
spk04: Perfect. Thanks for taking my question. You bet. Thanks, buddy.
spk00: Thank you. One moment, please, for our next question. Again, one moment, please.
spk01: Our next question will come from David Bishop of the Hope Group. Your line is open.
spk08: Yeah, good morning, gentlemen. Good morning, David. Good morning. Most of my questions have been asked, but I'm curious, Mark, in terms of the operating expense guide. It looks like it's a high end that's basically annualizing the fourth quarter run rate. Maybe what are the opportunities to hit the lower end, maybe where you can
spk09: More easily a more achievable carve out expenses to hit the lower end of guns yes, so so if you take the If you take our 168 five, you know in the fourth quarter subtract out a million nine for one-time merger charges on Prudential Take out three million for incentive compensation and other accruals. They got eight hundred thousand for the branch closures that are planned in 2023 and And then 1.9 between legal and reserves that we set aside for a contingent liability during the fourth quarter. You take those numbers out, you get just below $161 million, which then that times four kind of does get you to that low end of the guide. Now, I would say that you've got offsets to that. You've got wage pressure and you've got annual merit increases and things like that. you know, which is why we have a range, you know, and then, you know, additional things to, you know, then get you back down to the lower end of that guide are going to be we've been investing a lot in technology over the past five years and to start to see some of that technology pay off to allow us to leverage and grow, you know, without then having to add, you know, the expense basis on it maybe we've added in the past. And then lastly, I would also comment that while this is maybe more of a 2024 event, you know, we, like everybody else, are taking a hard look at corporate real estate. And, you know, we think there's going to be some opportunities there over a multi-year period of time to, you know, reduce our spend there as well.
spk08: Got it. And then from a macro perspective, obviously, you remain in a healthy capital position. You've got the potential cost savings and looming From an M&A appetite, just curious, taking your pulse there, what's the appetite for additional M&A from here?
spk05: Yeah, our M&A strategy would be the same. We do think we'll have M&A opportunities as we move forward. We'll see if we would pursue any of those. But we do think it's an opportunity for us, and our strategy is consistent.
spk08: From a size perspective, is there a minimum target size these days? I'm not sure, you know, about $20 billion, $2 billion, $3 billion. Just curious how you think about the size and maybe what markets have the best opportunities. I would see some, you know, some exposure in Maryland and Virginia and Delmarva. Is that a key infill opportunity?
spk05: Yeah, we definitely want to focus on infill in our existing footprint. We feel we have opportunities in all five of our states. You know, they could be, you know, market increases or cost and synergy opportunities depending on where they are. Acquisitions in that one to three billion really add to our organization. They add talent. They add scale. and they're acquisitions that we can easily integrate, just like we did this past year with Prudential. So that $1 billion to $3 billion is the primary focus. But as we get opportunities above that, we would certainly consider it.
spk00: Great. Thank you for the call. Thank you.
spk01: And again, to ask a question, please press star one one on your phone. Stand by as we compile the Q&A roster.
spk00: One moment please for our next question. Our next question will come from Manuel Navas of DA Davidson and Company. Your line is open.
spk06: Hey, good morning. Good morning, Manuel. A lot of my questions have been answered, but just in contemplating the PPNR outlook and your growth, is it more front-end loaded when we look at 2023 and for loan growth? Is there any real difference between the front half of the year and the back half of the year with how you're looking at it beyond just the ranges? Do you kind of have a little bit more uncertainty for the back half of the year? Any kind of... color on that thought process with your guidance?
spk09: Yeah, a couple of things. One is, I mean, we did have a strong fourth quarter in terms of earning asset growth, which, you know, did set up the table nicely, you know, for first quarter NII. And then also with, you know, our loan betas, you know, have consistently been, you know, in kind of the, you know, low to mid 40s. versus deposit betas, which have been cumulatively, like I said, more like 9% on a total deposit cycle to date. You know, we do expect deposit betas to increase. If we're going to get to a 30% through the cycle beta, you could expect in the back half of the year, you know, then that would imply that we would probably have sequential deposit betas that are in excess of 30% to get back to that cumulative number. You know, so, you know, that would You know, like there was an earlier question about margin. You know, again, we would expect to see our margin if we're right. You know, and the Fed stopped raising rates after the first quarter. We would expect to see, you know, our margin peak soon after that. And then as deposit betas catch up, you know, you would expect, you know, to see, you know, NII, you know, come, you know, moderate a little bit more in the back half of the year.
spk06: I think that deposit beta analysis makes a lot of sense to me. How have you seen it progress in the fourth quarter? I've heard some of the increased deposit costs were a little bit stronger maybe in October versus December. Obviously, you're still keeping the same type of through-the-cycle deposit beta function, but has there been any shift during the quarter in the aggressiveness of competitors?
spk09: Yeah, well, yes. And what I would say, you know, for us as well is, I mean, we had, you know, for the third quarter, our total deposit beta was around 5%. And our interest-bearing deposit beta in the third quarter was 8%. And again, I know each of you calculate a little bit differently. We actually use, you know, kind of a weighted average Fed funds rate for the quarter. And then, but then for the fourth quarter, you know, our interest-bearing deposit beta went from 8% in the third quarter up to almost 25% in the fourth quarter for us. So, I mean, we did see, you know, our interest-bearing deposit costs went up 37 basis points, you know, kind of spot to spot. But, you know, we saw more of that in the back half of the fourth quarter and would expect, you know, again, that to continue here into the first half of the year.
spk06: That's great. On the loan side, have you seen much pushback yet on pricing on higher loan yields?
spk05: Well, the markets remain competitive for good loan opportunities, you know, but it is not a more aggressive from a margin standpoint than it has been. I think it's a a more conservative stance in the marketplace as we kind of pick and choose the right growth opportunities for us.
spk06: That's helpful. And I think my last question is, I think last quarter you brought up the loan-to-value ratio on some of that office exposure. I think it was more on the small, on the 500 million bucket was about 65%. What is it on the full $1 billion market? bucket. Do you have that type of data?
spk05: Yeah, what we had referenced before is on the larger deals. It is that 65% that was referenced before. The overall portfolio has a lot of small deals in there, granular, and the loan-to-value we referenced at that point of origination or point of a appraisal or update. So it's a moving target. Underwriting criteria has been conservative and the same over time. And then, you know, without reduction in asset value would reduce from that point. But the 65% specifically is for those larger credits I referenced before.
spk06: So you don't have a number for the $1 billion?
spk05: Correct. The overall $1 billion we do not have handy here.
spk06: Okay, I appreciate it. Thank you so much.
spk01: Thank you. Once again, to ask a question, please press star 1-1 on your phone.
spk00: Stand by as we compile the Q&A roster. And speakers, I do not see any further questions in the queue.
spk01: I would now like to turn the call back over to Mr. Kurt Myers for closing remarks.
spk05: Well, thank you again for joining us today. We hope you'll be able to join us when we discuss the first quarter results in April. Have a great day.
spk01: This will conclude today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.
Disclaimer