Fulton Financial Corp
NASDAQ:FULT
Earnings Call Analysis
Q4-2023 Analysis
Fulton Financial Corp
The company's recent financial performance indicates stability, with a net interest income of $212 million, even though it's slightly down by $2 million from the previous quarter. This slight fall was mitigated by a resilient net interest margin, which only dipped by 4 basis points to 3.36%. Furthermore, loan yields saw a positive uptick of 11 basis points, settling at 5.83%. The cost of deposits grew more significantly by 23 basis points, reaching 1.79%. These changes indicate a careful navigation of interest rate fluctuations and a moderate growth in the company's lending activities.
The asset quality has shown some signs of stress, as nonperforming loans edged up by $12.7 million, bringing the NPL-to-loans ratio from 67 to 72 basis points. Even so, net charge-offs remained diversified and low, totaling $8 million or 15 basis points without any individual charge-off exceeding $2 million. Loan delinquency rates increased marginally to 1.19%, which may indicate a need for attention moving forward despite being relatively low overall.
Wealth management continued its solid performance, contributing $19.4 million in revenue, which is on par with the third quarter and accounting for a third of the fee-based revenue stream. The management of assets under management and administration saw a substantial increase of over $500 million, highlighting the trust customers place in the company's financial management capabilities. Moreover, commercial banking fees rose by $1 million thanks to growth in capital markets and small business activities. However, mortgage banking revenues saw a decline of $900,000 owing to seasonal factors and narrower gain on sale spreads. As for the noninterest expenses, they held steady at $171 million, although there were several exclusions and adjustments, including FDIC assessments and the costs related to the Fulton First initiative.
The company's capital base remains robust, with the tangible common equity ratio improving by 60 basis points to 7.4% at year-end, bolstered by strong earnings and lower rates affecting accumulated other comprehensive income. After considering its held-to-maturity investments, the tangible common equity ratio stands firm at 7%, reflecting $1.9 billion of tangible capital. These figures affirm the company's solid financial footing and capacity to absorb potential economic shocks.
Looking ahead, the company is preparing for a decrease in Federal funds rates by a total of 75 basis points in the latter half of the year. With this assumption, it anticipates a net interest income between $790 million and $820 million, a provision for credit losses between $45 million to $65 million, and noninterest income, excluding securities gains, from $235 million to $250 million. Noninterest expenses are expected to range from $670 million to $690 million, although this forecast does not account for any additional charges from the Fulton First initiative. The effective tax rate is estimated to be in the range of 17% to 18% for the year.
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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 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 continue 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 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 equips $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's 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 noninterest income. Diversity in our fee income businesses continues to serve us well. Noninterest 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 acknowledged 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 3 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 it 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 broker deposits more than offset seasonal outflows in our municipal deposits business of approximately $220 million.
Our noninterest-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 noninterest-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 noninterest-bearing deposits into interest-bearing products throughout 2024 but at a slower pace than we saw in 2023. We currently expect noninterest-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. Nonperforming 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 noninterest income on Slide 10. Wealth management revenues were $19.4 million, consistent with the third quarter. As a reminder, wealth management represents about 1/3 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. Noninterest 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 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 noninterest income, excluding securities gains, to be in the range of $235 million to $250 million; we expect noninterest 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, I will now turn the call over to the operator for your questions.
[Operator Instructions] Our first question comes from Daniel Tamayo with Raymond James.
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.
Yes. Danny, 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'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. So 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 are transparent and that you could understand some of the initial costs as we launch the initiative.
So are you expecting this to be kind of longer-term than in terms of the costs that you're taking? I mean, or is it -- 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 costs you're taking here?
Yes, Danny. I mean, we will have ongoing onetime 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 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. 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 kind of a balance sheet growth estimates embedded in that as well?
Dave, just a comment from 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 with what we know right now, that's the range we're comfortable with.
Would you say the midpoint is -- what's the assumption for -- if you were to hit that $55 million. Is that, I guess, off landing? Or how should we think about what your baseline assumption is?
Yes. 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 at the lower end of that range for 2024.
Our next question comes from Frank Schiraldi with Piper Sandler.
Just wondering if you guys -- you -- obviously, the growth in the quarter was in part -- loan growth in the quarter was -- you talked about, Mark, 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.
Yes. 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 of '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 7s, about [indiscernible]. 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 are 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 you've seen from others.
Okay. And then on the assumption, you mentioned the 3 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 from a 25 basis point move in rates. Is it 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?
Yes. 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 and after that, that rate move occurs. So absent any moves to our nonmaturity 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 with that nonmaturity 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 borrowing costs, obviously, resets down immediately.
And our next question comes from Feddie Strickland with Janney Montgomery Scott, Research Division.
Just wanted to start on deposit costs. I know you have 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?
Yes, 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, kind of 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 into my second question. So that was $1.1 billion in the 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.
Feddie, it's Curt. I'm just going to add that 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 promotional acquisition rate, blind roll rate are different. So that helps as well that we've been able to continue to do EBITDA 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 all office. It depends on the use overall and we're digging here for the stratification. Yes. We -- we're looking forward here. Just on office overall, balances came down linked quarter, we actually -- really positive. We have one trending in the wrong direction and it was already in a classified criticized that is about $30 million that paid off. And we originated the 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 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 health care is really split. It depends on use, so some of that would be in, our health care outstanding is that 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. Yes. I just know it's generally perceived as a little lower risk. So just curious how much was there.
And our next question comes from Manuel Navas with D.A. Davidson & Co.
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.
Yes. Yes. We have purposely, and well, 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 to 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 like 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 and service business. So it's a comprehensive review of the entire company.
Okay. And with kind of the a -- little bit better swing in AOCI. Any shift in your appetite for buybacks or any other capital deployment thoughts? Happy to kind of just hear the latest on that front.
Yes. 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. We will -- 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 is conducive to that going forward, we will continue to be active.
Our next question comes from David Bishop with Hovde Group.
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 driving that forecast, how are you thinking about maybe some of the individual components this year.
Yes. We continue to be very bullish in our wealth group, again, hitting a high watermark for assets under management and 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, but 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 1/3 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.
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 13%, 14% of average earning assets, you think that's sort of at the near floor here at this point and remind us what the annual cash flow expectations are on that portfolio?
Yes. Right now, cash flow is pretty small. It's about $10 million a month, and I do think it's near its 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 to balance liquidity and depending on where overall loan deposit ratios are. And so I think somewhere between where we sit today and 15% of the balance sheet is a good place for you to model.
Our next question comes from Matthew Breese with Stephens Inc.
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 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.
Yes. Sure, Matt. As Curt noted in his prepared remarks, I mean, we -- 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. 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 fourth quarter of '24 going into 2025. We also have, as a reminder, in the first quarter, kicking in, 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, Fulton First will have both 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 the annualized run rate impact that really manifesting themselves in 2025 and beyond.
Tease you 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?
Yes, Matt, 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 technology and digital platform provide for us. And then as we look at focusing the business, on certain things, we're going to have growth opportunities, and we're going to have expense opportunities as we move forward.
Understood. Maybe moving on to the NIM and just deposit balances. I'd 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 -- they're 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 performs on a monthly basis to get a sense for the NII starting from '24.
Yes. Sure, Matt. So first, on DDA, yes, you're correct. I would say the consumer, it feels like we are nearing a trough on kind of that migration out of noninterest-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 is migrating from noninterest-bearing into interest-bearing. As you know, we also had just kind of the seasonal impact in the fourth quarter, migration in our municipal deposits book, which had a little bit of noninterest-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?
NIM. 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.
Yes. Yes. 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 cost 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.
I appreciate that. Last one for 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 really appreciate some additional color on the credit front and what you're seeing on the ground.
Yes, Matt, it's really based off on that comment. I mean we had 4 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 6, 8 quarters. And this is the first where we saw any ticking 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.
[Operator Instructions] Our next question comes from Chris McGratty with KBW.
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 million, $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, where am I -- what number would you point me to?
Yes. Yes, again, on the 20, again, that 20 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 nonmaturity 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. And then maybe, somebody asked on the buybacks. Any signs of [ decline ] in the M&A market, maybe more books going around any kind of commentary on that?
Yes. We have M&A opportunity that we're looking at continues to be challenging to make the math work on rate marks and things. But we -- I would say, compared to 6 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 of a deal, size wise, business mix kind of, stuff like that?
Yes. Thanks for that question. And we really look at it in 2 buckets, the $1 billion to $5 billion community bank, we -- 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 the $15 billion that would fill out what we would be willing to look at. That $5 billion to $15 billion or 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 we -- that's how we look at it in those 2 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 can come to terms with folks, 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 changed.
Correct.
Our next question comes from Frank Schiraldi with Piper Sandler.
Just a follow-up on -- we talked about the variable rate book and the size there. And just trying to think through the rest of the book and the back book repricing and generally, is it reasonable to think, in 2024, maybe an effect to 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 too.
Yes. Frank, in the fourth quarter, pretty much across most of our material loan categories. We were coming on somewhere between 7.50% and 8% with the average for the quarter at about 7.70%. So that's the current kind of new money across the board.
Okay. All right. Great. And I guess you mentioned in the last quarter, whether repricing from, I would assume that hasn't changed much quarter-over-quarter.
Yes, correct.
Okay. Sorry, go ahead.
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. Just wondered in your guidance for 2024, are we seeing a significant move lower from wherever it is now, 250 down to that -- towards that level? Or how much excess liquidity, I guess, is baked into that guide?
No, no, nothing's really changed in the past quarter with respect to cash and liquidity.
Okay. So you're not -- 2024 guide doesn't assume really much of a change then from where you guys were in the 4Q?
That's correct.
Correct.
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.