First Commonwealth Financial Q4 2023 Earnings Call Transcript

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Provided by Quartr
January 31, 2024

Key Takeaways

  • In Q4 the company reported $0.44 EPS, a 1.56% core ROA, 2.8% annualized loan growth and 1.6% annualized deposit growth, although net interest margin fell to 3.65%.
  • Credit quality improved with a $1.9 million reserve release, net charge-offs of $16.3 million (mostly previously reserved) and nonperforming loans declining to 44 bps of total loans.
  • For full-year 2023 core EPS was $1.70, net interest income rose 24% to $386.9 million, loans grew 17.6% (5.5% organically) and deposits grew 12.5% (7.6% organically).
  • Net interest margin held at 3.65% while the pace of deposit cost increases slowed (24 bps in Q4 vs. 32 bps in Q3), keeping total cost of funds at 1.94%.
  • The 2024 outlook calls for relatively stable NIM in 1H24, year-over-year net interest income improvement, flat fee income, and non-interest expenses of about $68–69 million per quarter.
AI Generated. May Contain Errors.
Earnings Conference Call
First Commonwealth Financial Q4 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Thank you for standing by. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation Q4 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn our call over to Ryan Thomas, Vice President of Finance and Investor Relations. Ryan, please go ahead.

Speaker 1

Thank you, Aaron, and good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation's 4th quarter financial results. Participating on today's call will be Mike Price, President and CEO Jim Rieske, Chief Financial Officer Jane Gribentz, Bank President and Chief Revenue Officer and pinch hitting for Brian Karap this quarter will be our Deputy Chief Credit Officer, Brian Zalhockey. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We've also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call.

Speaker 1

Before we begin, I need to caution listeners that this call will contain forward looking statements. Please refer to the forward looking statements disclaimer on Page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward looking statements. Today's call will also include non GAAP financial measures. Non GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliation of these measures can be found in the appendix of today's slide presentation.

Speaker 1

With that, I will turn it over to Mike.

Speaker 2

Thanks, Ryan. I will begin with some 4th quarter highlights. We are pleased with our 4th quarter earnings per share of $0.44 with a 1.56 percent core ROA, a 1.91 percent core pre tax pre provision ROA and a 53% efficiency ratio. Average deposits for the quarter grew 1.6 percent annualized and loans grew at 2.8% annualized. The loan growth was decidedly commercial with equipment finance leading the way.

Speaker 2

Our margin fell to 3.65%, lower than we had expected, driven by our customers' expectations on deposit rates in our markets. While we are Always focused on deposit acquisition, we're just as focused on deposit retention. Still, our quarter end cost of deposits At 1.65 percent remains strong relative to peers and the quarter over quarter increase in the cost of deposits slowed each quarter of 2024. We had a constructive credit quarter with a $1,900,000 release to reserves due in part to improvement in qualitative reserves and release of unfunded reserves. Net charge offs totaled $16,300,000

Speaker 3

However, all but

Speaker 2

$4,400,000 had earmarked specific reserves that had been previously provided for. A good portion of the charge offs were former Centric loans stemming from our acquisition, which closed on January 31, 2023. Essentially, our reserve levels ended the year roughly where they began in January of 2023 at 1.31 percent of total loans. Our non performing loans fell $8,500,000 to $39,500,000 or 44 basis points of total loans and are back to where we started the year. With 2023 behind us, let me turn some time now over for year over year highlights.

Speaker 2

We made $1.70 in core earnings per share backing out merger related items With a core ROA of 1.56 percent, a 2% core pre tax pre provision ROA a net interest margin of 3.81 percent and a 52.91 percent efficiency ratio. Tailwinds included well controlled credit expense organic deposit and loan growth, a bigger balance sheet due to the Centric acquisition and higher interest rates. The latter three tailwinds drove a 24% or $73,600,000 increase and net interest income to $386,900,000 for the year. Headwinds included markedly higher deposit rates for the year and flat fee income. As we reflect on the year, We had good expense control and drove some additional cost savings through our acquisition, which also helped operating leverage.

Speaker 2

We grew average deposits for the year at 12.5% and loans at 17.6%. Excluding acquired Centric deposit and loans, loans grew at 5.5% And deposits grew at 7.6% compared to the Q4 of 2022. Like many in our industry, our checking and basic savings balances fell, the growth in higher cost money market and CD balances more than offset the downdraft. However, the lower cost accounts did not attrite in number nor did the mix of deposits change meaningfully between the consumer business and public funds categories. Also, our business deposits outperformed our expectations.

Speaker 2

In our regional approach to deposit gathering and lending, we had a good year and carry momentum into 20 24 in our 3 largest regions. Importantly, we navigated our 6th M and A opportunity, which we now call the capital region and are excited about what lies ahead for this market. As we look through the year and into 2025 thematically, we will wake up every day and think about live the mission every day at all levels of the organization, grow our deposit funding and lending businesses commensurately and at the appropriate spread, improve in every region, line of business and support unit every year, become digital in every facet of our business, continue to invigorate talent, leadership and culture and remain focused on operating leverage and efficiency. We had a strong 2023. We'll continue to build on that success in a few important areas.

Speaker 2

3 of our regions are performing very well, but 3 other regions are just beginning to find their stride. Also as the employment market has cooled some, We are continuing to attract some very talented bankers for key positions. Given our talent offerings and leadership, we can grow C and I relationships. We've built solid offerings in our fee businesses and can create partner introductions. And lastly, Our business mix drifted towards commercial banking this past year and we can do an even better job of gathering deposits and getting appropriately compensated for lending activities.

Speaker 2

The list could be longer, but the point is that effectiveness in the trenches with our core banking is really All of that will and execution and we're enthused about the opportunity in front of us. Lastly, we continue to build out Our core digital capabilities to include back office efficiencies and customer focused online and mobile banking enhancements for both consumers and businesses. In 2024, we will allow customers to aggregate their 3rd party bank accounts on the summary view within their first Commonwealth online banking profile. This complete view of finances across institutions supports our core mission of helping our customers improve their financial lives. And with that, I'll turn it over to Jim.

Speaker 3

Thanks, Mike.

Speaker 2

Mike's already provided an overview

Speaker 3

of the year and a few financial highlights for the 4th quarter. So just try to drill down into some detail on the margin and try to provide some additional guidance for you. Net interest income was down $2,000,000 from last quarter, but our net interest margin or NIM came in at 3.65 percent, which compares quite favorably to peers. Looking back at the quarter, loan yields actually performed quite well and in line with expectations. New loans on the books at 7.80 percent, which was 162 basis points higher than the loans that ran off.

Speaker 3

That increased loan yields by 10 basis points over last quarter, But that wasn't enough to offset a 24 basis point increase in the cost of funds. The increase in deposit costs was mostly due to continued movement of customer deposit balances into higher yielding money market and CD accounts. The good news is that the pace of increases in the cost of funds continues to slow down. The 24 basis point increase in the cost of funds in the 4th quarter is lower than the 32 basis points increase in last quarter, which is lower than the 48 basis point increase in the 2nd quarter and the 51 basis point increase in the Q1. We expect that slowdown to continue.

Speaker 3

And even with last quarter's increase in the cost of deposits, Our total cost of deposits in the Q4 was 1.65 percent and our total cost of funds was 1.94%, still an enviable position amongst our peers and a source of competitive advantage for us. Our cumulative through the cycle beta to this point is only 36%, in part because we started this cycle with a total cost of deposits of only 4 basis points. To sum up, we believe that our net interest margin has been holding up well and that our margin will come through the cycle in a strong competitive position. Looking ahead to the first half of twenty twenty four, the continued upward repricing of the loan net interest income to improve year over year compared to 2023. We would caution however that we expect a wider range of potential margin outcomes than usual due to the unpredictability of both rate movements and deposit behavior.

Speaker 3

Fee income was off by about $500,000 from last quarter, mostly due to mortgage gain on sale income that was down by about that much Along with trust income that was down by about $400,000 due to tax receipts last quarter. These were offset by SBA gains that were up about $600,000 from last quarter. We expect fee income in the Q1 to be in line with the Q4 and for the full year 2024, We would expect fee income to be roughly equal to 2023 as growth in SBA and other sources offsets the impact of losing approximately $200,000 of interchange income due to the Durbin Amendment. As I mentioned, Net interest income was down $2,000,000 from last quarter, but that was neatly offset by a $2,200,000 decline in expenses. The improvement in NIE was driven by a $1,200,000 positive variance in Pennsylvania shares tax for the reversal of an over accrual of taxes we had accrued for the Centric acquisition.

Speaker 3

Our advertising spend was also down from last quarter by $472,000 But that's mostly just timing. We did however experience a $308,000 positive year end adjustment to BOLI due to higher discount rates. In sum, we expect non interest expense to run at about $68,000,000 to $69,000,000 a quarter in 2024, which is in line with consensus estimates. We provided some information on credit and charge offs in the earnings release, but I wanted to provide some additional color on the call.

Speaker 4

We have $16,300,000

Speaker 3

in total net charge offs, dollars 12,000,000 of which have been provided for in prior periods. Of the total net charge off amount of $16,300,000 $8,300,000 was from loans acquired in our last acquisition And that group of loans had specific reserves from prior periods of $8,000,000 not the $6,000,000 figure shown in the earnings release. The $16,300,000 net charge off total also included a $4,300,000 charge off of an individual commercial real estate credit, which was not an acquired loan and that loan had a $4,100,000 specific reserve from prior periods. Of our total $39,500,000 of non performing loans on the balance sheet, $14,600,000 are acquired loans and those acquired loans have $4,600,000 of specific reserves held against them. In fact, that $4,600,000 of specific reserves represents the lion's share of the $5,000,000 of specific reserves left in the entire bank.

Speaker 3

We thought this additional detail might be helpful because charge offs were elevated this quarter. However, given our business mix, Our long term view of a normalized net charge off rate of around 20 to 25 basis points hasn't changed. Turning to the balance sheet, loan growth was augmented by securities purchases in the quarter, which brought up a yield in the securities portfolio. You may recall that we've been holding excess liquidity since the Silicon Valley Bank crisis in March, at which time we borrowed $250,000,000 from the Federal Home Loan Bank and parked it at the Fed and cash. We deployed some of that liquidity into securities in the 3rd quarter and the rest of it in the 4th quarter at yields a little over 6%, Fortunately for us, just before yields started to fall.

Speaker 3

Capital grew by $73,700,000 in the quarter As AOCI improved by $42,300,000 in the quarter and we retained $31,400,000 in earnings after dividends and some buyback activity. We only bought back $978,000 in stock in the quarter, buying whenever our stock price dipped below $12.50 The combination of the strong capital growth and moderate balance sheet growth had a positive impact on capital ratios. Our tangible common equity ratio grew from 7.7 percent to 8.4 percent, while our CET1 ratio grew from 10.9% to 11.2%. Perhaps more importantly, tangible book value per share improved by 9% from $8.35 a share last quarter to $9.09 per share this quarter. And with that, we'll take any questions you may have.

Speaker 3

Operator, questions?

Operator

Thank you. Our first question comes from the line of Daniel Tamayo with Raymond James. Your line is live.

Speaker 5

Thank you. Good afternoon, guys. Maybe we start first on just your NIM and net interest income guidance, Jim. I guess first, what was The accretion in the quarter or purchase accounting accretion and just to make sure we're on the same page, The guidance you gave is for stable is a stated NIM guidance including accretion?

Speaker 3

Yes, it is stated including accretion. Accretion was 9 basis points in the Q4 and we'd expect that to fade out by 1 to 2 basis points Per quarter next

Speaker 5

year. Okay. So that it's coming off of 1 to 2 basis points per quarter. So you're expecting really the margin to Spans then over the next couple of quarters based

Speaker 6

on how are you based on that?

Speaker 3

Yes. I mean, the guidance is more for stability in the next couple of quarters, And that's driven by the fundamentals of the change in the cost of funds and the yield on loans, which we think are going to roughly match. You can never pin it exactly, Dan, so we're just trying to give guidance within an appropriate range. But The larger factors of the cost of funds and the yield of the loans are going to drive it much more than the fade out of the yield on the purchase accounting.

Speaker 5

Understood, understood. And then I guess just following up on that, just curious how you expect rate cuts to impact the margin when they would happen?

Speaker 3

Yes. So the rate cuts will affect us. We remain asset Sensitive. Some of it depends on the timing of the rate cuts and the speed of the rate cuts. So, think of it this way, the portfolio, we disclosures talk about this all the time, but the loan portfolio is about half fixed and half variable.

Speaker 3

So when the rate cuts happen, they hit the variable right away and then the fixed portfolio acts as a buffer. But the fixed portfolio, that's been repricing upward And has been re pricing upward even without rate hikes for the last half of last year. So that's when I disclosed in the prepared remarks, the 162 basis points of positive replacement yields, that's largely a fixed portfolio repricing upward because the variable portfolio is already repriced. So with 162 basis points of upward repricing in the fixed portfolio, you could probably have a few cuts and still have upward repricing in the fixed portfolio, which will act as a buffer on the way down and offset to some of the impact of the rate cuts on the variable portfolio. So those are 2 offset each other.

Speaker 3

But generally, we are still we disclose asset sensitivity in our regulatory filings on based on parallel cuts, but We're still asset sensitive and at some point the cuts will overtake either pricing of the fixed side of the portfolio. Just one more comment if I can. The other side of it, of course, is the liability side of the balance sheet and the deposit behavior. And without any cuts taken place yet, just the threat of cuts, with the hands of cuts, we've already seen some easing up of competition in our markets, so some relief on the deposit pricing side. And but that's takes some time to bring the cost of deposits down.

Speaker 3

So That gives you a little color on how to play.

Speaker 5

Understood. No, that's helpful. I mean, so you don't have Kind of an explicit budget or thought into how much the margin would move For a cut, I guess, putting everything that you talked about in terms of the variable rate loans and deposit repricing together. I get that it would be steeper at the beginning and then there'd be some kind of catch up on the funding side. But is there like an all in type of NIM compression that you think it would be useful in modeling?

Speaker 4

Yes. We used to say rule

Speaker 3

of thumb 5 basis points impact per cup, but that was when behavior was much more stable than it is now. I'm not sure that rule of thumb holds very well. Given where we are in the cycle and I I think there are other dynamics at play that the rule of thumb doesn't really hold that well anymore. Our own internal forecast is not blind to rate cuts. We've Put in from based on forecast repurchase, blinded forecast that has the Fed funds rate end of the year at 4.25.

Speaker 3

I think that was 425 at the time we did our budgeting exercises and if you did it today, it would be 4%. So we anticipate We just think there are some stability because of all these offsets going on for the first half of the year. But if the Fed funds rate goes to end the year $425,000,000 By the end of the year, there'll be an in compression.

Speaker 6

Okay. All right.

Speaker 5

Well, I appreciate all that color. You taking my questions.

Operator

Our next question comes from the line of Karl Sheppard with RBC Capital Markets. Your line is live.

Speaker 6

Hey, good afternoon. Maybe to start again on the margin. Jim, could you just talk a little bit about your level of confidence in the cost of fund increases slowing? Know you mentioned competition easing a little bit, but just kind of what are you seeing that makes you a little bit more confident this quarter that we're getting to the end of it?

Speaker 3

Well, so I'm looking at the pattern of decreases over the past, which is why I kind of rattled them off during the prepared remarks. That's just been coming down. So I think that next quarter, The cost of deposits should it will still be increasing even if rates cut, but that should slow down to the 10 basis point or 15 basis point range. So 10 to 15 basis points of increase, continued increase in the cost of deposits, even with easing up of pressure in the market, even with Rate cuts, still some increase in the cost of funds as more deposits seek higher rates. But that's the slowdown that I'm anticipating and kind of the reason why.

Speaker 3

And that roughly matches what we anticipate 10 to 15 basis points increase on the benefit of increasing loan yields even in that kind of rate environment. Part of what helps us is that, we've already kind of tried to structure the maturities in the deposit book fairly short. About 2 thirds of the CD book will reprice in calendar year 2024. We have money market specials like everybody else. There's 6 months max on money market specials.

Speaker 3

So there'll be opportunities for us to reprice the deposits downward. So all that is baked into the thinking. Hope that helps a little bit.

Speaker 6

Yes, definitely. And this is probably more of a Mike question, but you sounded pretty optimistic. Can you sketch out some of your loan growth expectations for the year? And do you think it will be commercial led

Speaker 2

I think it will be. We've pinched the consumer a bit just because of spreads, but we're still Certainly open for business, certainly enough to keep our top performers, plus those are big portfolios. We have a little bit of runoff there that needs to be But on the commercial side, we just feel a little reinvigorated around the C and I business, equipment finance. We brought in a pretty good number of new larger relationships last year, maybe a half a dozen to a dozen in our top three markets. And we feel like we can continue and kind of accentuate that momentum.

Speaker 2

We also have just found some access in the last quarter or 2 to some different caliber of athlete that can help us. Just 2 or 3 doesn't sound like a lot, It's good at our size. So that's kind of from 10,000 feet. I would also just say, We really are shifting our approach to markets. And as my bank President likes To say, it's a matter of will and execution and we're pretty good at that.

Speaker 2

And we've been consistently We've gotten better every year over the last 5 to 10 years at just executing in the trenches. And we need to do that quite frankly on the deposit side. But last year notwithstanding the acquisition, we grew Deposit 7.5%. Now we had the hang rate to do it, but so did everybody else.

Operator

Okay. Thank you both. Thanks for your question. Our next question comes from the line of Michael Perito with KBW. Your line is live.

Speaker 7

Hey, guys. Good afternoon. Thanks for taking my questions.

Speaker 2

Hey, Michael.

Speaker 7

I was wondering if You can maybe spend a minute, the $68,000,000 to $69,000,000 I think if I heard correctly on the overhead per quarter in 2024. Just where are you guys looking to spend some more money? Is there any kind of has disruption or anything settled a bit from Some of the volatility we saw earlier in the year, are you starting to see lenders maybe get a little uncomfortable at their banks where they're not being allowed to pursue growth because they're whether capital liquidity issues. Just curious if there's anything built into the budget around that. And just generally speaking beyond What you guys are allocating investment dollars to in 2024?

Speaker 2

Really, some new talent on the commercial side. We have good talent And that's probably the primary place. And then also just a better run rate in our new capital region where We had a transition between lending teams and we lost a portion of the people and we'll certainly be replacing some of those. Is that helpful, Michael?

Speaker 7

Yes, it is. And especially tying back to kind of the growth and Commercial leading the way. I think that makes a lot of sense. What about on the fee income side? Understanding the year on year comp is a little tough because of the interchange hit.

Speaker 7

But change hit, but any expectations in your local area for kind of mortgage activity to pick up, particularly if rates start to leak back down or we've also seen some other banks choose to exit the insurance business. Just curious if there's any kind of initiatives conversations you guys are having that we should be mindful of as we think about where that growth rate could move even if we just back out the interchange for a minute. What could be some of the positive drivers in 2024?

Speaker 2

Yes. We feel like our teams, particularly on the gain on sale side with SBA and mortgage are already Very capable in build out. So I would just start with SBA. Gain on sale there has been down And we just we have that tied to our regional model and underneath our regional presidents and that's gotten better every year. Mortgage, as you and I both know, could come back in a given quarter.

Speaker 2

And it could be off to the races and The economics of that could change and so that could certainly be an opportunity, but a lot of the rest of it is just slugging it out, cross selling, doing the things we can do well for our clients, connecting them to wealth and other services. And cross selling the consumer businesses and just the basics and blocking and tackling. Jane, anything you want to add?

Speaker 3

Okay.

Speaker 7

Yes. No, I mean, I'm sorry, I didn't mean to cut it off. Jane, if there's anything you'd love to add, I'd love to hear

Speaker 4

No, I think Mike covered it. Thanks.

Speaker 7

Okay. And then just lastly for me and I'll jump back. Just the $12.50 kind of Buyback level where you guys become less active. Just wondering, is there a level of capital where If you guys continue to accrete capital and grow where that drifts higher, I mean, I understand theoretically, right, the ROI on that doesn't change just because you have more capital. But just wondering If there's any kind of what some of the inputs are that you guys look at where we should be mindful of that level maybe moving and Capital deployment materializing in buybacks in 2024 at some point?

Speaker 3

Yes. We have thought of this as a way to manage capital. And so Capital levels get to be excessive. We could deploy some of that buybacks. We've been kind of very willing to do that in the past.

Speaker 3

Part of it is where we're trading. We're trading at a nice Premium valuation, trading 1.8 times tangible and so that makes buying back stock of these loans a little more difficult. And then there are other These are the capital. We always say organic funding our organic growth is the first use of capital. So, we want to always be clear about that.

Speaker 3

But if capital continues to build and loan growth is moderate, you can get some really nice capital build, which could allow for further buybacks. The big thing in the capital horizon for us is that we have 2 tranches of subordinated debt $50,000,000 $50,000,000 for a total of $100,000,000 $50,000,000 of that became callable last June. And the Tier 2 treatment of that started to fade out. Another 20% will fade out this coming June. And so if capital ratios continue capital levels continue to build, we may be in a position to call that.

Speaker 3

And that would affect Tier 2 capital, wouldn't affect PCE or CEC.

Speaker 8

Got it. And sorry, do you

Speaker 7

mind just running through that again? So you have $50,000,000 that's callable already. The other $50,000,000 is callable when?

Speaker 3

Yeah. It'll be another 4 years From this Okay.

Speaker 7

All right. But that first,

Speaker 8

sorry, go ahead.

Speaker 3

Yes. No, when we issued it, we issued $100,000,000 250,000,000 tranches. 1 was a 10 year This 5 year no call, 10 year maturity, the other was 10 year no call, 15 year maturity. So we'll be living with the other $50,000,000 I think it's another 4 years from this June, it will first be callable.

Speaker 2

And the rate on

Speaker 7

the first $50,000,000 tranches, I

Operator

could look it up, but if you have it handy.

Speaker 3

It's floating. Yes, it's about 7.1% right now. So if we refunded it, we'd save some money because we would just borrow Even at overnight rates of 5.36 percent right now, we borrow and pay it off, it takes the money, but you lose, of course, the Tier 2 treatment, you want to make sure your total capital ratios are building to the point where you could absorb that and it would affect total risk based by about 40 basis points to call that 50,000,000

Speaker 7

Perfect. Thank you guys. I appreciate the color as always.

Speaker 3

Thank you.

Operator

Thanks for your questions. Our next question comes from the line of Manuel Nieves with D. A. Davidson. Your line is live.

Speaker 8

Hey, another way to ask about the margin,

Speaker 3

what kind of are you

Speaker 8

What's the marginal NIM of added assets right now?

Speaker 3

You said you have like

Speaker 8

I think $750,000,000 new loans was kind of Current funding and the NIM that's added on those new assets?

Speaker 3

Yes. Yes, the incremental rate on the new originations is about 780. The incremental cost of funds is right around 5 If we borrow the money overnight, it's 5.36%. But if we gather the money through our money market specials are 4 and our CD specials are split between 5.25 for a 7 month and 4.85 for 11 months. So the all in rate of new fund acquisition is Probably in the high fours.

Speaker 3

That gives you high fours. Fund originations in the high sevens, it gives you 3% Spread coming in roughly. Okay. If that helps.

Speaker 8

And what kind of Can you just kind of review your deposit channels and where you're seeing the most success and which ones you're going to accentuate over the course of the year?

Speaker 3

Yes. The deposit channels are all retail. We do not see broker deposits. We just really don't believe it gives us any credit. And quite frankly, economically, It hasn't been any cheaper than wholesale borrowings, so I really have not tried to do any of that.

Speaker 3

Since the deposit are retail, we find that Our customers have responded to the specials that we offer in the market like everybody else. The specials are all in money markets and CDs, not in other categories like savings or now. And one stat we'd like to say, which is buried in one of our disclosures, is that for every dollar that we bring in in these specials, about $0.60 is new money. And of that $0.60 it's new about half is new money from our own customers and the other half is new money from new customers. So I think that's pretty well.

Speaker 3

But I don't know if you want to give any other color on the deposit channels and the origination channels to add to what I was saying.

Speaker 4

Manuel, thanks for the question. We are investing in digital channels. We're opening digital accounts. But we still like branch generated deposits. They're stickier and they're generally lower cost.

Speaker 4

And we do a good job in that channel. We still like it.

Speaker 2

We also somewhat unusually have branch managers calling on small business customers, calling on public entities and we think that's very effective.

Speaker 8

I appreciate that. You highlighted at one point investing in the Central PA region and you had some hires there. Can you just talk about the opportunity there? And that's kind of the build out of the Centric acquisition?

Operator

Jane, do you

Speaker 4

want to start? Sure. We love Central Pennsylvania. It feels a lot like our footprint in Southwest Pennsylvania and in our community markets, Manuel, we've had some good luck hiring some folks from some of the largest banks who By necessity, we need to run a very concentrated line of business model and we're a little bit more regionally focused. And so we've been able to hire some good commercial lenders, good treasury management, good portfolio management folks And we're bullish on that.

Speaker 4

We love Harrisburg. We love Lancaster. That's our kind of geography.

Speaker 8

That's great color. My last question is, is that a region of focus for you in terms of Potential M and A, can you talk about that in general as well? Yes.

Speaker 2

I mean, as you know, we've been very picky on M and A. We've done 6 things and looked at And you also when we did this acquisition, we were all flushed with cash, right, summer of 2022. And so now we might be looking at more of a depository with a loan to deposit ratio that would add to our liquidity. So our vantage point in our box might even be a little tighter, but there's opportunities out there. But we were our batting average is about 1 in 10 And that's more of self choice.

Speaker 2

So, but we like doing M and A. We feel like we can integrate banks and We get excited about the geography, particularly if it's strategic. It adds to our geography. It's contiguous. We really see it as accretive longer term, but you know us, we're pretty conservative and we just don't do a deal every year to do a deal.

Speaker 8

I appreciate that. Thank you.

Operator

Thank you for your question. Our next question is from the line of Matthew Breese with Stephens Incorporated. Your line is live.

Speaker 6

Hey, good afternoon, everybody.

Speaker 2

Hey, Matt.

Speaker 9

I'm going to apologize upfront, I might have missed this. What was the loan growth guide for the year? And then What do you expect for deposit growth as well?

Speaker 2

Our loan growth guide is probably low to mid single digits. And I use the word commensurate in my opening remarks, but it's somewhat tied to how we do on deposits. I don't think we're too worried long term about Growing deposits or loans, I feel like we can grow loans. We have a lot of engines. We build them over the years, and we feel like our capabilities continue to improve.

Speaker 2

This year, we'll probably be a little strained by liquidity, but we'll have to fix that and solve that. And we're resolute to do that.

Speaker 3

If I can just add to that in Planning, we are planning for deposit growth to be just a little bit of excess of loan growth to gradually bring the loan to deposit ratio down. That's the way we would like to play out.

Speaker 9

As you look at non interest bearing deposits as the overall percentage of the pie, obviously, it took a step down this quarter. Are you starting to see signs of stabilization and or where do you expect to see that kind of floor out?

Speaker 2

Yes, I just like our deposit portfolio. I mean, I think we have a slide in the supplemental deck that talks about it. Our average deposit size is $18,000 so 11,000 on the retail side, dollars 68,000 On the business side, we'll take tons and tons of that and that's what we call on. A matter of fact, Jane and I and the people in the room here are all making calls tomorrow after our all employee call. And that's what we do.

Speaker 2

We get out and we get after it and it's fun. And so we expect to continue to grow that. In terms of how big the pie is, I think Ours has always been pretty good and we expect to maintain a good advantage with depository and A granular core deposit franchise and that's really important to the long term profitability of our bank. Jane, what

Speaker 4

would you add? Well, already we're starting to see deposit specials cooling off in the markets. It seems throughout in August, September, October, November that You couldn't keep up with the specials. They're starting to cool. And I'm gratified by that.

Speaker 4

So you've seen our exceptions, pricing exceptions Going down, I think that, I'm optimistic that If we haven't hit the floor, we're very, very close, when it comes to deposit cost increases. And we are getting much better. I'll take the views that we're much, much better now at requiring the full relationship with the extension of credit because we're still finding that our balance sheet is the strength. We're still open to business. We just want to lend to relationships.

Speaker 4

We're less interested in the transaction for the transaction's sake.

Speaker 3

The other thing we've seen if this additional color is helpful to you is responsiveness of the consumer rate. We've seen more responsiveness to some of the specials we have than we even thought we would have. In other words, deposit pricing is all trial and error. You put out this rate, you think I'll get For X rate, I'll get wide volume of deposits and we've seen more than we expected, which kind of tells you the competitive pressures are easing and that gives us the ability to a little bit of pricing power to lower the rates we're offering. So that gives us some confidence we can bring the rates down.

Speaker 4

Yes. I also think that because our customer base, By and large has been with us for a long time. They don't need the absolute highest rate. They need to be treated fairly and they want to think that they're being treated fairly.

Speaker 3

And sorry, one more thing, Matt. Just kind of your question on that NIB as a percentage of total deposits. I remember a year ago, people were saying, we are 33%, where do you think you'll end 23% and we are thinking about 25%, I think we're 26%. So it kind of comes up where we thought. It was draconian signal.

Speaker 3

Back in 2003, it was 14% or something. And It could be, it just hasn't played out that way and given how granular it is and where it's moved to this point. The NIB part feels pretty stable.

Speaker 9

Yes, I guess, Mike, the cycle matters too.

Speaker 3

That's right. I do, yes, exactly.

Speaker 2

I just also feel that our average Size of 18,000 on the consumer and 68,000 on the business side, there's just there's a different type of opportunity cost with that dollar amount versus a larger bank that might have deposits that are 3 or 4 or 5 times that size, maybe 10 times. So, it's just Not as much money. And we do expect that attrition for that deposit cost to slow.

Speaker 9

That was great. I appreciate all the color from everybody. The last one for me is just on, Jim, I heard you loud and clear, I kind of moving towards normalized charge offs. Given some of the movement this quarter in the reserve, specific reserves,

Speaker 3

is

Speaker 9

this a good level, this 130 level For the year, do you anticipate maybe building a little bit? And I'm asking because I'm trying to get a frame of reference for the provision.

Speaker 2

I don't know that we're expecting to build. I think Our view is that we're still 15 or 20 basis points higher than at least the peers we're looking at in our region. But that's not the determiner. We have a model. We run the traps.

Speaker 2

We are very thoughtful. We try to anticipate things that are around the corner. And we look closely at the stacks in the commercial real estate portfolio and All kinds of good stuff just to make sure we're comfortable with where we're at.

Speaker 9

That's great. I appreciate it. Thank you for taking all my questions.

Operator

Thank you. We have a final question from the line of Frank Schiraldi with Piper Sandler. Go ahead. Your line is live.

Speaker 10

Hey, guys. Good afternoon.

Speaker 2

Hi, Frank.

Speaker 10

Just One more on the NIM, if I could. In terms of just want to make sure I understand trajectory. It sounds like 1Q maybe Sort of expectations for flattish results? And then in the absence of rate cuts, would you expect that that's trough for margin here in the Q1 given what you're seeing on the deposit cost side?

Speaker 3

Yes. Glad you asked that, Frank. Generally speaking, if the rates stay high like this, that's better for us. I would think personally a Goldilocks scenario for us would be 1 or 2 cuts because that burst the bubble a little bit on deposit expectations, and might take pressure off deposit rates. But like James said earlier, We've already seen some easing of that even without the actual cuts.

Speaker 3

But that would if you have a slow pace of rate cuts or no cuts, Then that takes the repricing pressure off the variable rate portfolio and the fixed portfolio will continue to price upwards. So that, like I said, that would be a good scenario. I guess, To put it differently, if things play out the way the Federal Reserve keeps saying they will, which is if there are cuts, it will be slow. That's Good for us if the futures market is right and there's a lot that cuts fast, well then that will take some time. Even then by the way, Our deposit base, we reprice eventually that recovers, right?

Speaker 3

So it's just that the loan side will reprice downward in a fast cutting scenario, faster than we will be able to move on the deposit side.

Speaker 10

Right.

Speaker 3

So hope that pace color on the pace of changes and how they affect us helps a little bit.

Speaker 10

Yes, no, definitely. And then in terms of the NII outlook that you mentioned in your earlier commentary year over year for 2024. But what is the base case for that? Is that the Fed's 3 rate cuts? Or how many rate cuts are kind of baked into that expectation?

Speaker 3

Our official budget forecast, which we stress, has the Fed funds end of the year 4.25, so it's 5 cuts.

Speaker 10

Okay. Okay. And then just a commentary, Jim, on the 20 basis points to 25 basis points kind of more normalized charge offs. So is that I just want to make sure I understand that that's kind of the expectation that we're in a Pretty normalized environment, so that's sort of the expectation for 2024?

Speaker 3

Yes. I would say yes. But I'm kind of given the commentary from over a long firm perspective. Over the long haul, that's what we kind of think given our mix of businesses. And I think We use that figure for some time.

Speaker 3

We say it pretty often. We'll leave it with investors. We want to make sure we say it on the call so that we're clear with the markets. That's kind of our general expectation for the portfolio.

Speaker 10

Okay. And then finally, just on buybacks, you mentioned where you were buying back and stock dipped below that level and Obviously, thankfully a bit away from that level now. And just so does that just mean buybacks are pretty unlikely here Where we sit today?

Speaker 3

For now, we still have about $18,000,000 of authorization left. So obviously, if there's a dip in the price, we would swing in action. But we're going to see how the year plays out. And if we have still good capital build, the AOCI has moved in the right direction that keeps going, capital ratios keep coming up. If we're able to call the sub debt, save some money on that and still have capital build, we might raise that 12.50 threshold and get back in the buy back some stock.

Speaker 3

Like I said, we're not hesitant. We look at it as a capital management tool to manage capital levels, but Probably less activity. You probably say that assuming very little activity in the first half.

Speaker 10

Got you. Okay, great. Thanks for all the color.

Speaker 4

Thank you.

Operator

Thank you. Thank you for your question. And ladies and gentlemen, that will conclude our Q and A session here for today. I would like to turn the call back over to Mr. Price for any closing remarks.

Speaker 2

Just a couple of things. We appreciate your Key and interest in our company, and the time we get to spend together throughout the course of the year, it's meaningful to us. Just would also just turn your attention to the deck that Jim and the team put out. There's a couple of good slides on the investment portfolio, The securities portfolio, the granular core deposit franchise, which we feel is A gem of our company. And then there's also some good color on commercial real estate on pages 1617.

Speaker 2

And I think, particularly on the commercial real estate side, an average loan size of $5,100,000 portfolio with Very little in Central Business District, about $82,000,000 of $400,000,000 plus portfolio. And With the bulk of that residing in Columbus and Pittsburgh, just some good color on the portfolio, the debt service coverage ratios, the average rents really low by the standard that you're used to looking at for perhaps some larger banks and just good risk control and Perhaps these might be of interest to you, but thank you again and look forward to being with a number of you in the first and second quarter. Thank you, operator.

Operator

Thank you. And ladies and gentlemen, that will conclude today's call. Thanks for joining. You may now disconnect. Have a great day.

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