Fulton Financial Corporation (NASDAQ:FULT) Q4 2022 Earnings Conference Call January 18, 2023 10:00 AM ET
Company Participants
Matt Jozwiak – Director, IR
Curt Myers – Chairman & CEO
Mark McCollom – Senior Executive Vice President & CFO
Conference Call Participants
Frank Schiraldi – Piper Sandler
Daniel Tamayo – Raymond James
Chris McGratty – KBW
Feddie Strickland – Janney Montgomery Scott
David Bishop – Hovde Group
Manuel Navas – D.A. Davidson
Operator
Good day, and thank you for standing by. Welcome to the Fulton Financial Fourth Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] 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.
Matt Jozwiak
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, 2022. 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 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 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 10 through 13 of today’s presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.
Now, I would like to turn the call over to your host, Curt Myers.
Curt Myers
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 Bancorp 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 to $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 continued to be pressured by the effects of a rising interest rate environment. And expenses continued to migrate higher due to inflationary pressure and elevated incentive compensation accruals.
Overall, we are 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, an 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 1 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 remained relatively stable.
Linked quarter, we saw improvement 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.
Mark McCollom
Great. 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 2022. And the loan and deposit growth numbers I will be referencing are annualized percentages on a linked quarter basis.
Starting on Slide 3, 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 in tangible amortization. At this point, we believe all the costs for our acquisition of Prudential Bancorp had been incurred.
Moving to the balance sheet. As Curt 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. C&I lending grew $244 million, led by automobile floorplan increases, agricultural lending and an overall increase in-line utilization, which increased from 21 — sorry, 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 to $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 4, 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 beta is only 9% cumulatively.
Our increase this quarter puts us where we expect it to be at year-end, and we continue to believe a cumulative through the cycle total deposit beta 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 30 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 30 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 6. 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 266 basis points this quarter versus 202 basis points last quarter.
Moving to Slide 7. Non-interest expenses excluding merger related charges were approximately $167 million in the fourth quarter, up $4 million linked quarter. As a reminder, many of the cost savings from the Prudential Bancorp acquisition will not be recognized until the first quarter of ’23 as many impacted employees of Prudential Bank had worked 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, our incentive compensation 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 8. As of December 31, we maintained 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 linked quarter growth of 6% and 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 31. 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 million to $915 million; we expect our non-interest income, excluding securities gains to be in the range of $220 million to $235 million; we expect non-interest expenses to be in the range of $645 million 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, I’ll now turn the call over to the operator for questions. Chris, please help us.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] Our first question will come from Frank Schiraldi of Piper Sandler. Your line is open.
Frank Schiraldi
Good morning.
Curt Myers
Good morning, Frank.
Mark McCollom
Good morning, Frank.
Frank Schiraldi
Just wanted to see, if I get a little more color on components of outlook. Just — I don’t know how much you can share in terms of your expectations on deposit flows from here and loan growth in 2023.
Mark McCollom
Yeah, Frank. I would say for loan growth in there, I mean, we’ve — as you know, our long term average for loan growth has been kind of in that 4% to 6% range on an organic basis. So I think you can assume, we’re kind of in that range for 2023. And on the deposit side, clearly, it will be lower than what our long term averages have been with some of the industry-wide challenges right now on deposit growth.
Frank Schiraldi
I guess when you think about the loan-to-deposit ratio, if you could just remind us where you’d allow that sort of to, or where you expect that or target that to get to? I assume, given your commentary, you assume that will continue to tick up from here.
Curt Myers
Frank, as you look at the long term, we’ve really operated in to 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 a definitely a different year with the excess liquidity and deposits coming off the balance sheet that has been 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.
Frank Schiraldi
Okay. And then just wondering, I know, Mark, you mentioned the new buyback program that was announced that you guys tend to have a program out there to be opportunistic. Just wondering maybe your general thoughts given the macro picture, given outlook for 2023, your general thoughts on buybacks as we sit here today?
Mark McCollom
Yeah. We’re going to — we do think it’s just good corporate practice to have that optionality in place. And we’re going to continue to weigh earnings growth and interest rates and credit and evaluate all of that. And there’s a possibility we could tap that line throughout 2023, and there’s a possibility we could not, depending on how those factors play out.
Frank Schiraldi
Okay. And then just lastly, if I could, just on credit. It seems like generally, you’re seeing — continuing to see good trends. Any concerns in the CRE book outside of office here today. Do you see more challenges in the near term, in terms of that office portfolio? And any additional color in terms of the loan that you charged off in the quarter?
Curt Myers
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 CRE standpoint. Specifically on the office portfolio, we continue to work hard to understand that portfolio and just to confirm a couple of balances in that portfolio. We’ve talked about it over the last couple of 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 $1.50 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, but we’re monitoring it very closely.
Frank Schiraldi
Okay. Great. Just for clarification, Curt, you mentioned a couple of numbers there in terms of $1 billion, I think $1.50 billion and $550 million. The difference is, the $550 million is office over — office loans over $5 million. Is that what you said?
Curt Myers
Correct. And then the $1.50 billion is all office. So the difference between those is really the smaller credits through our footprint.
Frank Schiraldi
Got you. Thank you.
Curt Myers
Thank you, Frank.
Operator
Thank you. [Operator Instructions] Our next question will come from Daniel Tamayo of Raymond James. Your line is open.
Daniel Tamayo
Thank you. Good morning, everybody.
Curt Myers
Good morning, Dan.
Daniel Tamayo
Maybe first, just a clarification. In the slide deck, I think it says the NII guidance, the $895 million to $915 million is fully tax equivalent. I thought I heard you say, it was non — not fully tax equivalent in your comments, Mark. I just wanted to make sure we’re on the same page there.
Mark McCollom
Yeah. To clarify that, we had actually filed an amended 8-K this morning, correcting that footnote, Danny, it should say non…
Daniel Tamayo
Got it. Okay. Thank you.
Mark McCollom
I apologize for that clarification.
Daniel Tamayo
No, not a problem. Then 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.
Curt Myers
Yeah, Dany. We see wealth management, as we look forward, 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, a pretty stable year-to-year. We’re going to have pluses and minuses. As I referenced in my comments, 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.
Daniel Tamayo
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 thinking about through the rest of the year with the 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?
Mark McCollom
Well, I mean, well, Daniel, I would say that, again, under an expected loss model, I mean, 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 but that’s a function of — I mean we did have a charge-off of $12 million on a loan that was on non-accrual that we charged down.
So that’s going to then have — our portfolio did get better. So I mean underlying credit trends are better, which then maybe allowed the total allowance to go down a couple of basis points. But that was offset by changes to our macroeconomic outlook, which does assume that things are going to get a little bit worse over time, hence, with the allowance staying relatively stable linked quarter.
Daniel Tamayo
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 in the — from the fourth quarter with the $3 million and the $0.8 million and the $1.9 million. Are those annual or quarterly and what’s the timing we would expect on that?
Mark McCollom
Yeah. Those are all quarterly numbers and all of these quarterly numbers, I would expect to see reset immediately in the first quarter.
Daniel Tamayo
Okay. Terrific. All right. That’s all from me. Thanks for the color.
Curt Myers
Thanks, Dan.
Operator
Thank you. [Operator Instructions] Our next question will come from Chris McGratty of KBW. Your line is open.
Chris McGratty
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 million or $11 million. Do you have a size of like the largest exposures, I mean you referenced the $5 million. How big do you guys go in office like for a particular relationship?
Curt Myers
Yeah, Chris. So we have five — stratification is we have five credits over $20 million with 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.
Chris McGratty
Okay. So this would be in the $10 million to $20 bucket. Okay. In terms of what — I guess, what changed. You talked about reserving the last quarter. I guess what — 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? Like what changed to drive loss?
Curt Myers
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. It’s really the details behind that. So we identified that, allocate it, trying 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.
Chris McGratty
Okay. But I guess based on that math, it would imply that the value of the building dropped fairly dramatically from where you underwrote it?
Curt Myers
Correct. We would think that the release of office space in that metro would be at a much lower cash flow and lease amount then was in place.
Chris McGratty
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?
Curt Myers
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 commercial mortgage and consumer or 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, really focused on, and the overall trends are still pretty stable when you look at delinquency and underlying credit metrics. But moving into a credit environment, we’re being very diligent on all portfolios.
Chris McGratty
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, call it, second quarter into the end of the year, 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 just talk about opportunities to perhaps offset that through security shrinkage, moderating loan growth, that would be great. Thanks.
Mark McCollom
Yes. So answer is, correct, Chris. I’m saying for the last six months when people ask that question, when do you think your margin is going to peak out in the cycle? And my answer is, one month to one quarter after the Fed stock raising interest rates, right? So depending on what your bias is on that, I think that’s going to drive when we max-out on our margin.
In terms of opportunities going forward, we are — we have — to date kept a lot of dry powder from a liquidity perspective on certain wholesale channels, which could potentially be lower than some of our current overnight borrowings costs. So we’ve looked — there are some 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 if you believe in the forward curve, 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.
Chris McGratty
Okay. Great. And just the monthly cash flows or the quarterly cash flows off the bond book, if you have it, and that’s 30% beta that was total, just to make sure that’s not interesting, that’s total beta, right?
Mark McCollom
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. So 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 your question.
Chris McGratty
Just, what’s coming off the bond portfolio?
Mark McCollom
Yeah. On this bond portfolio, it’s obviously slowed, but it’s around $20 million a month.
Chris McGratty
Okay. Great. Thank you.
Operator
Thank you. [Operator Instructions] Our next question will come from Feddie Strickland of Janney Montgomery Scott, Research Division. Your line is open.
Feddie Strickland
Hey. Good morning.
Mark McCollom
Hey, Feddie. Good morning.
Feddie Strickland
Saw that HLB advances rose by about $1 billion linked 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?
Mark McCollom
Yeah, I think it’s really more the latter, Feddie, 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 and very short-term FHLB advances and pick up some funding advantage over overnight, but that’s — we’re going to be opportunistic on all of those wholesale funding sources. And — but I would anticipate in the near term, certainly for that number to be higher than what it was certainly as an average for 2022.
Feddie Strickland
Got it. Along those same lines, I was just curious, how do you view FHLB advances versus broker deposits just in terms of how you look at what types of wholesale funding to use?
Mark McCollom
Yeah. I mean, generally, we’re looking at both rate, but also then depending on what we have in terms of collateral for those advances as well.
Feddie Strickland
Got it. And just one — sorry, go ahead.
Mark McCollom
No, sorry. So I mean I was just going to add that as of right now, our immediate overnight available liquidity is well in excess of $7 billion to $8 billion.
Feddie Strickland
Got it. And then just one last modeling question. Look like Wealth Management held up pretty well. Do you happen to have the market value of AUM handy just for modeling purposes?
Mark McCollom
The market value of are — AUM…
Feddie Strickland
Asset under management.
Mark McCollom
Yeah. It was $13.5 billion at year-end.
Feddie Strickland
Got it. Perfect. Thanks for taking my questions.
Mark McCollom
You bet.
Curt Myers
Thanks, Feddie.
Operator
Thank you. [Operator Instructions] Our next question will come from David Bishop of the Hovde Group. Your line is open.
David Bishop
Yeah. Good morning, gentlemen.
Curt Myers
Good morning, David.
Mark McCollom
Good morning, David.
David Bishop
Most of my questions have been asked. But curious, Mark, in terms of the operating expense guide, it looks like at the high end, that’s basically annualizing the fourth quarter run rate, maybe what are the opportunities to hit the lower end or maybe where you can more easily more achievable carve-out expenses to hit the lower end of guidance?
Mark McCollom
Yeah. So if you take the — if you take our $168.5 million in the fourth quarter, subtract down $1.9 million for one-time merger charges on Prudential, take out $3 million for incentive compensation and other accruals. Take out $800,000 for the branch closures that are planned in 2023 and then 1.9 million 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 4 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 [indiscernible] increases and things like that, which is why we have a range. And then additional things to 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 without them having to add the expense basis on a maybe we’ve added in the past.
And then lastly, I would also comment that while this is maybe more of a 2024 event, we, like everybody else are taking a hard look at corporate real estate. And we think there’s going to be some opportunities there over a multiyear period of time to reduce our spend there as well.
David Bishop
Got it. And then from a macro perspective, obviously, it remains in a healthy capital position you’ve got in the Prudential cost saves, and let me, from an M&A appetite, just curious taking your pulse there, what’s the appetite for additional M&A from here?
Curt Myers
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.
David Bishop
From a size perspective, is there a minimum target size of these days not mature (ph)? Well that $20 billion, $2 billion, $3 billion. Just curious how do you think about the size and maybe what markets have the best opportunities, obviously, some exposure in Maryland and Virginia and Delmarva, is that a key infill opportunity?
Curt Myers
Yeah. We definitely want to focus on infill in our existing footprint. We feel we have opportunities in all five of our states. There could be market increases or cost and synergy opportunities depending on where they are. Acquisitions in that $1 billion to $3 billion really add to our organization. They had talent, they add scale and their 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. .
David Bishop
Great. Thank you for the color.
Operator
Thank you. [Operator Instructions] Our next question will come from Manuel Navas of D.A. Davidson & Company. Your line is open.
Manuel Navas
Hey. Good morning.
Curt Myers
Good morning, Manuel.
Manuel Navas
A lot of my questions have been answered. But just in contemplating the PPNR outlook and your growth. Is there — is it more front-end loaded when we look at 2023 and for loan growth? Is that — is there any real difference between the front half of the year and the back half of the year with how you are looking at it beyond just the ranges? Is it — 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.
Mark McCollom
Yeah. Couple of things, one is, I mean, we did have a strong fourth quarter in terms of earning asset growth, which did set up the table nicely for first quarter NII. And then also with our loan betas have consistently been in kind of the low to mid-40s versus deposit betas, which have been cumulatively, it looks more like 9% on a total deposit cycle to date. We do expect deposit betas to increase.
If we’re going to get to 30% through the cycle beta, you could expect in the back half of the year then that would imply that we would probably have a sequential deposit betas that are in excess of 30% to get back to that cumulative number. So that would — like there was an earlier question about margin, again, we would expect to see our margin if we’re right, and the Fed stopped to raise the rates after the first quarter, we would expect to see our margin peak soon after that. And then as deposit betas catch up, you would expect to see NII come moderate a little bit more on the half of the year.
Manuel Navas
I think that the deposit betas analysis makes a lot of sense to me. Do you — how do you see 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 of deposit beta assumption. But has there been any shift during the quarter in the aggressiveness of competitors?
Mark McCollom
Yeah. Well, yes, and what I would say for us as well is, I mean, we had — 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 kind of a weighted average Fed funds rate for the quarter.
And then — but then for the fourth quarter, 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 our interest-bearing deposit costs went up 37 basis points, kind of spot to spot. But we saw more of that in the back half of the fourth quarter and would expect, again, that to continue here into the first half of the year.
Manuel Navas
On the — that’s great. On the loan side, have you seen much pushback yet on pricing — on higher loan yields?
Curt Myers
Well, the markets remain competitive for good loan opportunities, but it is not a more aggressive from a margin standpoint than it has been. I think it’s a more conservative stance in the marketplace as we kind of pick and choose the right growth opportunities for us.
Manuel Navas
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 bucket? Do you have that type of data?
Curt Myers
Yeah. What we had referenced before is one of the larger deals. It is that 65% that was referenced fee 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 a point of an appraisal or update. So it’s a moving target. Underwriting criteria has been conservative in the same over time. And then without reduction in asset value would reduce from that point. But the 65% specifically is for those larger credits I referenced before.
Manuel Navas
So you don’t have a number for the $1 billion.
Curt Myers
Correct. The overall $1 billion, we do not have handy.
Manuel Navas
Okay. I appreciate it. Thank you. Thank you so much.
Curt Myers
You’re welcome.
Operator
[Operator Instructions] And speakers, I do not see any further questions in the queue. I would now like to turn the call back over to Mr. Curt Myers for closing remarks.
Curt Myers
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.
Operator
This will conclude today’s conference call. Thank you all for participating. You may now disconnect and have a pleasant day.
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