Q4 2023 First Commonwealth Financial Corp Earnings Call

January 31, 2024

Our 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. If you would like to ask a question during that time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw. Your question you can press star followed by the number one again 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.

Thank you Erin and good afternoon, everyone. Thanks for joining us today with best first Commonwealth Financial Corporation's fourth quarter financial results.

Okay.

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.

Participating on today's call will be Mike price, President and CEO, Jim <unk>, Chief Financial Officer, <unk>, <unk>, President and Chief revenue officer, and pinch hitting for Brian care of this quarter will be our deputy Chief Credit Officer, Brian its a hockey.

As a reminder, a copy of yesterday's earnings release can be accessed by logging on to FC banking Dot com and selecting the Investor Relations link at the top of the page we.

We've also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call.

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

Before we begin I need to caution listeners that this call will contain forward looking statements. Please refer to the forward look forward looking statements disclaimer on page three 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.

Thank you Erin and good afternoon, everyone. Thanks for joining us today to discuss the first Commonwealth Financial Corporation's fourth quarter financial results.

<unk> on today's call will be Mike price, President and CEO, Jim <unk>, Chief Financial Officer, <unk>, <unk>, President and Chief revenue officer, and pinch hitting for Brian care of this quarter will be our deputy Chief Credit Officer, Brian its a hockey.

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. A reconciliation of these measures can be found in the appendix of today's slide presentation.

As a reminder, a copy of yesterday's earnings release can be accessed by logging on to <unk> banking dot com and selecting the Investor Relations link at the top of the page.

That I will turn it over to Mike.

Great. Thanks, Ryan I will begin with some fourth quarter highlights.

We've also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call.

We are pleased with our fourth quarter earnings per share of <unk> 44.

With a 156% core ROA.

Before we begin I need to caution listeners that this call will contain forward looking statements. Please refer to the forward looking forward looking statements disclaimer on page three 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.

191% core pretax pre provision ROA and.

And a 53% efficiency ratio average deposits for the quarter grew one 6% annualized and loans grew at two 8% annualized.

Loan growth was decidedly commercial with equipment finance, leading the way.

Our margin fell to 365% lower than we had expected driven by our customers' expectations on deposit rates in our markets. While we are always focused on deposit acquisition.

I will turn it over to Mike.

Just as focused on deposit retention still our quarter end cost of deposits at 165% remains strong relative to peers and the quarter over quarter increase in the cost of deposits slowed each quarter of 2024.

Great. Thanks, Ryan I will begin with some fourth quarter highlights.

We are pleased with our fourth quarter earnings per share of <unk> 44 cents.

With a 156% core ROA.

191% core pretax pre provision ROA and.

We had a constructive credit quarter with a $1 9 million release of reserves due in part to improvement in qualitative reserves and a release of unfunded reserves net charge offs totaled $16 $3 million, however, all but $4 $4 million had earmarked spa.

And a 53% efficiency ratio average deposits for the quarter grew one 6% annualized and loans grew at two 8% annualized.

Loan growth was decidedly commercial with equipment finance, leading the way.

Our margin fell to 365% 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.

<unk> 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 222.

At 165% remains strong relative to peers and the quarter over quarter increase in the cost of deposits slowed each quarter of 2024.

2023 at 131% of total loans.

Nonperforming loans fell $8 5 million to $39 $5 million or 44 basis points of total loans and are back to where we started the year.

We had a constructive credit quarter with a one 9 million release of reserves due in part to improvement in qualitative reserves and a release of unfunded reserves net charge offs totaled $16 $3 million, however, all but $4 $4 million had earmarked specifically.

With 2023 behind US, let me turn some some.

Some time now over a year over year highlights, we made $1 70, and core earnings per share backing out merger related items with a core ROA of 156%.

<unk> reserves that had been previously provided for.

2% core pretax pre provision ROA and net interest margin of 381% and $52, 91% efficiency ratio tail wins included well controlled credit expense or organic deposit and loan growth a bigger balance sheet due to the centric acquisition and higher interest rates.

31% of total loans.

Our non nonperforming loans fell $8 5 million to $39 5 million or 44 basis points of total loans and are back to where we started the year.

The latter three tailwind drove a 24% or $73 $6 million increase in net interest income income to 3300, $86 9 million for the year.

With 2023 behind US let me turn.

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 the operating leverage we grew average deposits for the year at $12.

Some time now over a year over year highlights, we made $1 70, and core earnings per share backing out merger related items with a core ROA of one 5% to 6% or 2% core pretax pre provision ROA and net interest margin of 381%.

5% in loans at 17, 6%.

<unk> and a $52 91% efficiency ratio.

Excluding acquired centric deposit and loans loans grew at five 5% and deposits grew at seven 6% compared to the fourth quarter of 2022 like.

Wins included well controlled credit expense or organic deposit and loan growth a bigger balance sheet due to the centric acquisition and higher interest rates. The latter three tailwind drove a 24% or $73 $6 million increase in net interest income to 30.

Like many in our industry are checking and basic savings balances fell but 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.

$386 $9 million for the year.

Business and public funds categories also our business deposits outperformed our expectations.

In our regional approach to deposit gathering and lending we had a good year and carry momentum into 2024 in our three largest regions importantly, we navigated our sixth M&A opportunity, which we now call the capital region and are excited about what lies ahead for this market.

5% in loans at 17, 6%.

Excluding acquired centric deposit and loans loans grew at five 5% and deposits grew at seven 6% compared to the fourth quarter of 2022.

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 improvement.

Many in our industry are checking and basic savings balances fell but 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.

The 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 focus on focused on operating leverage and efficiency. We had a strong 2023, we will continue to build on that success in a few.

And our regional approach to deposit gathering and lending we had a good year and carrying momentum into 2024, and our three largest regions importantly, we navigated our sixth M&A opportunity, which we now call the capital region and are excited about what lies ahead for this market.

Important areas three of our regions are performing very well the three other regions are just beginning to find their stride also as important as the employment market has cooled some we're continuing to attract some very talented banker.

Bankers for key positions, given our talent offerings and leadership, we can grow C&I relationships, we've built solid offerings and our fee businesses and can create partner introductions and lastly, our business mix shifted towards commercial banking. This past year, and we can do an even better job of gathering deposits.

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 focus on focused on operating leverage and efficiency. We had a strong 2023, we'll continue to build on that success and a fee.

<unk> and getting appropriately compensated for lending activities the list could be longer but the point is that effectiveness in the trenches with our core banking is really all about wil and execution and we are 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 third party bank accounts on the summary view within their first Commonwealth online banking profile. This.

Bankers for key positions, given our talent offerings and leadership, we can grow C&I relationships, we've built solid offerings and 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.

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.

Thanks, Mike.

Mike's already provided an overview of the year and a few financial highlights for the fourth quarter. So I'll just try to drill down into some detail on the margin.

Try to provide some additional guidance for you.

Net interest income was down $2 million from last quarter, but our net interest margin or NIM came in at 365%, which compares quite favorably to peers.

Looking back at the quarter loan yields actually performed quite well and in line with expectations.

New loans came on the books at seven 8%, which was 162 basis points higher than the loans that ran off.

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.

That increase 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.

Thanks, Mike.

<unk> already provided an overview of the year and a few financial highlights for the fourth quarter. So I'll just try to drill down into some detail on the margin.

The good news is that the pace of increases in the cost of funds continues to slow down.

And try to provide some additional guidance for you.

The 24 basis point increase in the cost of funds in the fourth quarter.

Yeah.

Net interest income was down $2 million from last quarter, but our net interest margin or NIM came in at 365%, which compares quite favorably to peers.

Is lower than the 32 basis points increase in the last quarter.

Which is lower than the 48 basis point increase in the second quarter.

And the 51 basis point increase in the first quarter.

Looking back at the quarter loan yields actually performed quite well and in line with expectations.

We expect that slowdown to continue.

And even with last quarter's increase in the cost of deposits. Our total cost of deposits in the fourth quarter was 165% and our total cost of funds is 194% still an enviable position amongst our peers and a source of competitive advantage for us.

New loans came on the books at seven 8%, which was 162 basis points higher than the loans that ran off.

That increase loan yields by 10 basis points over last quarter.

That wasn't enough to offset a 24 basis point increase in the cost of funds.

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 four basis points.

The increase in deposit costs was mostly due to continued movement of customer deposit balances into higher yielding money market and CD accounts.

To sum up we believe that our net interest margin has been holding up well and that our margins will come through the cycle in a strong competitive position.

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 fourth quarter.

Looking ahead to the first half of 2024, the continued upward repricing of the loan portfolio is expected to roughly match the increase in the bank's cost of funds.

It is lower than the 32 basis points increase in the last quarter.

Which is lower than the 48 basis point increase in the second quarter.

Even so we expect net interest income to improve year over year compared to 2023.

And the 51 basis point increase in the first quarter.

We expect that slowdown to continue.

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.

And even with last quarter's increase in the cost of deposits. Our total cost of deposits in the fourth quarter was $1, 65% and our total cost of funds is 194% still an enviable position amongst our peers and a source of competitive advantage for us.

Fee income was off by about half a million dollars 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 $400000 due to tax receipts last quarter. These.

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 four 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.

These were offset by SBA gains that were up by about $600000 from last quarter.

We expect fee income in the first quarter to be in line with the fourth quarter 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 $6 2 million of interchange income due to the Durbin Amendment.

Looking ahead to the first half of 2024, the continued upward repricing of the loan portfolio is expected to roughly match the increase in the bank's cost of funds.

Even so we expect 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.

As I mentioned net interest income was down $2 million from last quarter, but that was nearly offset by a $2 $2 million decline in expenses the.

The improvement was driven by a $1 2 million positive variance in the Pennsylvania shares tax.

For the reversal of an over accrual of taxes, we had accrued for the central acquisition.

Our advertising spend was also down from last quarter by 472000, but that's mostly just timing.

These were offset by SBA gains that were up by about $600000 from last quarter.

We did however experienced a $308000 positive year end adjustments bully due to higher discount rates in sum, we expect noninterest expense to run at about 60% to $69 million 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.

As I mentioned net interest income was down $2 million from last quarter, but that was nearly offset by a $2 $2 million decline in expenses the.

We had $16 3 million in total net charge offs 12 million of which had been provided for in prior periods.

The improvement was driven by a $1 2 million positive variance in the Pennsylvania shares tax.

Of the total net charge off amount of $16 3 million eight.

For the reversal of an over accrual of taxes, we had accrued for the central acquisition.

$8 3 million was from loans acquired in our last acquisition.

And that group of loans had specific reserves from prior periods of $8 million not the 6 million figure shown in the earnings release.

Our advertising spend was also down from last quarter by 472000, but that's mostly just timing.

We did however experienced a $308000 positive year end adjustments in Bali due to higher discount rates.

The $16 3 million net charge offs total.

Also included a $4 $3 million charge off of an individual commercial real estate credit, which was not an acquired loan.

We expect noninterest expense to run at about 60% to $69 million a quarter in 2024, which is in line with consensus estimates.

And that loan had a $4 1 million specific reserve from prior periods.

We provided some information on credit and charge offs in the earnings release, but I wanted to provide some additional color on the call.

Of our total $39 $5 million of nonperforming loans on our balance sheet for.

We had $16 3 million in total net charge offs 12 million of which had been provided for in prior periods.

$14 6 million or acquired loans.

And those acquired loans.

At $4 $6 million of specific reserves held against them.

Of the total net charge off amount of $16 3 million eight.

In fact that $4 $6 million of specific reserves represents the lion's share of the $5 million of specific reserves left in the entire bank.

$8 3 million was from loans acquired in our last acquisition.

And that group of loans had specific reserves from prior periods of $8 million not the 6 million figure shown in the earnings release.

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 quote unquote normalized net charge off rate of around 20% to 25 basis points Hasnt changed.

The $16 3 million net charge offs total.

Also included a $4 $3 million charge off of an individual commercial real estate credit, which was not an acquired loan.

Turning to the balance sheet loan growth was augmented by securities purchases in the quarter, which brought up the yield on the securities portfolio.

And that loan had a $4 1 million specific reserve from prior periods.

You may recall that we've been holding excess liquidity since the Silicon Valley Bank crisis in March at which time, we borrowed $250 million from the federal home loan Bank and park to that this netting cash.

Of our total $39 $5 million of nonperforming loans on our balance sheet for.

$14 6 million or acquired loans.

And those acquired loans.

At $4 $6 million of specific reserves held against them.

We deploy some of that liquidity into securities in the third quarter and the rest of it in the fourth quarter at yield a little over 6% Fortunately for US just before yields started to fall.

In fact that $4 $6 million of specific reserves represents the lion's share of the $5 million of specific reserves left in the entire bank.

Capital grew by $73 7 million in the quarter.

<unk> improved by $42 3 million in the quarter and we retained $31 4 million in earnings after dividends and some buyback activity, we only bought back $978000 in stock in the quarter buying whenever our stock price dip below $12 50.

Turning to the balance sheet loan growth was augmented by securities purchases in the quarter, which brought up the yield on the securities portfolio.

The combination of our strong capital growth and moderate balance sheet growth had a positive impact on capital ratios. Our tangible common equity ratio grew from seven 7% to eight 4%, while our CET one ratio grew from 10, 9% to 11, 2%.

You may recall that we've been holding excess liquidity since the Silicon Valley Bank crisis in March at which time, we borrowed $250 million from the federal home loan bank and part of that this netting cash.

We deploy some of that liquidity into securities in the third quarter and the rest of it in the fourth quarter that yields a little over 6% Fortunately for US just before yields started to fall.

Perhaps more importantly, tangible book value per share improved by 9% from $8.35 a share last quarter to $9 90 per share this quarter.

And with that we'll take any questions you may have.

Capital grew by $73 7 million in the quarter.

Operator questions.

At this time, ladies and gentlemen, I would like to remind everyone that in order to ask a question. Please press Star then the number one on your telephone keypad will pause just for a moment to compile the Q&A roster.

Our first question comes from the line of Daniel Tamayo with Raymond James.

Your line is live.

Thank you good afternoon guys.

We start first on just your.

NIM and net interest income guidance Jim.

Perhaps more importantly, tangible book value per share improved by 9% from $8 35, a share last quarter to $9 90 per share this quarter.

I guess first.

What was the the accretion in the in the quarter.

Purchase accounting accretion.

Just to make sure we're on the same page.

And with that we'll take any questions you may have.

The guidance you gave us for stable.

Yes.

Operator questions.

Stated.

NIM guidance, including accretion.

Yes. It is stated including accretion the accretion was nine basis points in the fourth quarter, we would expect that to fade out by one to two basis points.

Per quarter next year.

Our first question comes from the line of Daniel Tamayo with Raymond James.

Okay.

So it's coming off of one to two basis points per quarter.

Your line is less.

So you are expecting.

Thank you good afternoon guys.

Really the margin to expand over the next couple of quarters.

We start first on just your.

Based on.

NIM and net interest income guidance Jim.

Have you seen that.

Yes, I mean, the guidance is more for stability and an extra couple of quarters.

I guess first.

What was the the accretion in the in the quarter.

Driven by the fundamentals of the change in the cost of funds and the.

Purchase accounting accretion.

Yields on our loans, which we think are going to roughly match you can never pin it exactly.

Just to make sure we're on the same page.

The guidance you gave us for stable.

And so we're just trying to give guidance within an appropriate range.

Stated.

NIM guidance, including accretion.

The.

Larger factors or the cost of funds and yoga the loans are going to drive that much more than we paid out of the yield on the purchase accounting.

Yes. It is stated including accretion the accretion was nine basis points in the fourth quarter, we would expect that to fade out by one to two basis points.

Understood understood.

Per quarter next year.

And then I guess just following up on that just curious how you expect rate cuts to impact the <unk>.

Okay.

So it's coming off of one to two basis points per quarter.

The margin when they when they would happen.

So you are expecting.

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.

Really the margin to expand over the next couple of quarters.

Based on.

So think of it this way the portfolio.

Have you seen that.

Yes, I mean, the guidance is more for stability and an extra couple of quarters.

Disclose or talk about this all the time, but the loan portfolios about half fixed half variable.

Driven by the fundamentals of the change in the cost of funds and the.

So with the rate cuts happen they hit the variable portfolio right away and then the fixed portfolio acts as a buffer.

Yields on our loans, which we think are going to roughly match you can never pin it exactly.

But the fixed portfolio.

And so we're just trying to give guidance within an appropriate range.

Been repricing upward.

The.

And has proven repricing opportunity even without rate hikes for the last half of last year. So that's when I disclose in our prepared remarks, the 162 basis points of positive replacement yields.

Larger factors or the cost of funds and the yield on the loans are going to drive that much more than we paid out of the yield on the purchase accounting.

Understood understood.

And then I guess just following up on that just curious how you expect.

The fixed portfolio repricing upward because of the variable components already repriced, so with 162 basis points of upward repricing in the fixed portfolio and you can probably have a few cuts and still have upward repricing in the fixed portfolio.

Cuts to impact the <unk>.

The margin when they when they would happen.

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.

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 think of it this way the portfolio.

Disclose or talk about this all the time, but the loan portfolio is about half fixed half variable.

Also to offset each other but generally we are still we dispose asset sensitivity in our regulatory filings on base.

So with the rate cuts happen they hit the variable portfolio right away and then the fixed portfolio acts as a buffer.

Based on parallel cuts but.

We're still asset sensitive and at some point the cuts will overtake.

But the six portfolio.

Pricing.

Been repricing upward.

Fixed side of the portfolio.

And has proven repricing opportunity even without rate hikes for the last half of last year. So that's when I disclose it in our prepared remarks, the 162 basis points of positive replacement yields that's largely a fixed portfolio repricing upward because of the variable components already repriced, so with 162 basis points of upward repricing.

Just one more comment if I can the other side of it of course, it is a liability side of the balance sheet and the deposit behavior.

And without any cuts taking place yet just the threat of cuts in the hands of cuts we've already seen some easing up of competition our market. So some.

Relief on the deposit pricing side.

The fixed portfolio and you can 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 for.

But thats.

It takes some time to bring the cost of deposits down.

So.

So that gives you a little color on how.

Contemplate Stephane.

Understood.

That's helpful.

I don't have a.

So those two offset each other but generally we are still we dispose asset sensitivity in our regulatory filings on <unk>.

Kind of an explicit budget or a thought and true to how much the margin would move.

Based on parallel cuts but.

For a cut I guess, putting everything that you talked about in terms of the variable rate.

We're still asset sensitive and at some point the cuts will overtake.

Loans and deposit repricing together I get that it would be.

Pricing on the fixed side of the portfolio.

Steeper at the beginning and then there'd be some kind of catch up on the funding side, but.

Just one more comment if I can the other side of it of course, it is a liability side of the balance sheet and the deposit behavior.

Is there like an all in type of.

And without any cuts taking place yet just the threat of cuts in the hands of cuts we've already seen some easing up of competition in our markets. So some relief on the deposit pricing side.

NIM compression that you think it would be.

We useful in modeling yes.

Yes, we used to say rule of thumb five basis points impact per cup and that was when deposit behavior was much more stable now I'm not sure that rule of thumb holds very well.

But thats.

It takes some time to bring the cost of deposits down.

Is that given where we are in the cycle.

So hopefully that gives you a little color on comp.

There are other dynamics at play that the rule of thumb doesn't really hold that well anymore.

Contemplates that.

Understood.

Our own internal forecast is not blind to rate cuts.

That's helpful.

You don't have a.

Put in from baseline.

<unk> forecast we purchase.

Kind of an explicit.

Blended forecast that has the fed funds rate ended the year at 425.

<unk> thought and true to how much the margin would move.

For <unk>, I guess, putting everything that you talked about in terms of variable rate.

I think that was 425 at the time, we did our budgeting exercises and keep agenda today.

Loans and deposit repricing together I get that it would be.

4%, so we anticipate declines or you just think about some stability because of all these offsets going on for the first half of the year, but I think that if the fed funds rate ended the year at 425 by the end of the year there'll be NIM compression.

Steeper at the beginning and then there'd be some kind of catch up on the funding side, but is.

Is there like an all in type of.

NIM compression that you think it would be.

Okay.

We useful in modeling yes.

Alright, well I appreciate all that color you're taking my question you are taking my questions. Thanks, Jim.

Yes, we used to say rule of thumb five basis points impact per cup and that was when deposit behavior was much more stable now, but I'm not sure that rule of thumb holds very well.

You bet. Thanks, Dan. Thank you. Thank you for your question.

Our next question comes from the line of Carl Shepard with RBC capital markets. Your line is live.

That given where we are in the cycle.

There are other dynamics at play that the rule of thumb doesn't really hold that well anymore.

Hey, good afternoon.

Our own internal forecast is not blind to rate cuts.

Okay.

Maybe just start again on the margin Jim could you just talk a little bit about your level of confidence in the cost of funds increases slowing I know you mentioned competition.

Put in from baseline.

<unk> forecast we purchase.

Blended forecast that has the fed funds rate ended the year at 425.

Competition easing a little bit, but just kind of wondering what are you seeing that makes you a little bit more confident this quarter.

I think that was 425 at the time, we did our budgeting exercises if agenda today.

4%, so we anticipate declines or you just think about some stability because of all these offsets going on for the first half of the year, but I think that if the fed funds rate goes to end the year at 425 by the end of the year there'll be NIM compression.

At the end of it.

So I'm looking at the pattern of the decreases over the past, that's where 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 be it will still be increasing even if rates cut but that should slow down to the 10 or 15 basis point range. So 10 to 15 basis points of increase continue to increase in the cost of deposits, even with easing of pressure in the market even with rate cuts still some increase in the cost of funds is more deposits received higher rates.

Okay.

Alright, well I appreciate all that color you're taking my question you are taking my questions. Thanks, Jim.

You bet. Thanks, Dan. Thank you. Thank you for your question.

Our next question comes from the line of Carl Shepard with RBC capital markets. Your line is live.

Hey, good afternoon.

But that's.

That's the slowdown, but I'm anticipating kind of the reason why.

Okay.

Maybe just start again on the margin Jim could you just talk a little bit about your level of confidence in the cost of funds increases slowing I know you mentioned competition.

<unk>.

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.

Competition easing a little bit, but just kind of wondering what are you seeing that makes you a little bit more confident this quarter, but we're getting to the end of it.

Part of what helps us is that.

We've already kind of tried to structure the maturities in the deposit book fairly short about two thirds of the CD book will reprice in calendar year 2024.

So looking at the pattern of decreases over the past, that's why I kind of rattled them off during the prepared remarks, that's just been coming down so I think that next quarter.

We have money market specials like everybody else space six months Max on money market specials, so there'll be opportunities for us.

The cost of deposits.

Should still be increasing even if rates cut but that should slow down to the 10 or 15 basis point range. So 10 to 15 basis points of increase continue to increase in the cost of deposits, even with easing of pressure in the market even with rate cuts still some increasing the cost of funds is more deposits received higher rates.

To reprice.

The deposits downward.

So.

All of that is baked into the thinking I hope that helps a little bit.

Definitely and this is probably more of a of my 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 let again.

But that's.

The slowdown, but I'm anticipating kind of the reason why.

I think it will be we have.

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.

We've pinched the consumer a bit just because of spreads, but we're still certainly opened for business.

Certainly enough to keep our top.

Part of what helps us is that.

Performers plus those are big portfolios, we have a little bit of runoff there that needs to be replaced but on the commercial side, we just feel a little.

We've already kind of tried to structure the maturities in the deposit book fairly short about two thirds of the CD book will reprice in calendar year 2024.

Reinvigorated around the C&I business equipment finance.

We have money market specials like everybody else space six months Max on money market specials, so there'll be opportunities for us.

We brought in.

Pretty good number of.

New larger relationships last year, maybe a half a dozen to a dozen and our top three markets and we feel like we can continue and kind of accenture accentuate that momentum. We also have just found some access.

To reprice.

The deposits downward.

So.

All of that is baked into the thinking I hope that helps a little bit.

In the last quarter or two to some different caliber of athlete that can help us just two or three doesn't sound like a lot but.

It's good at our size so that's kind of.

I think it will be we have.

We've pinched the consumer a bit just because of spreads, but we're still certainly opened for business certainly enough to keep our top performers.

And our from 10000 feet I would also just say we are.

We really are shifting our approach to markets and.

Performers plus those are big portfolios, we have a little bit of runoff there that needs to be replaced but on the commercial side, we just feel a little.

As my Bank President likes to say, it's a matter of will and execution and we're pretty good at that and we've been consistently we've gotten better every year over the last.

Reinvigorated around the C&I business equipment finance.

We brought in.

Pretty good number of.

Five to 10 years.

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.

Deposits seven 5% now we had to hang right.

In the last quarter or two to some different caliber of athlete that can help us just two or three doesn't sound like a lot but.

To do it but sort of everybody else.

Yeah.

Okay. Thank you both.

Thanks for your question.

It's good at our size so.

Question comes from the line of Michael Perito with K B W. Your line is live.

That's kind of.

From 10000 feet I would also just say.

We really are shifting our approach to markets and.

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

As my Bank President likes to say, it's a matter of will and execution and we're pretty good at that and we've been consistently we've gotten better every year over the last.

Hey, Michael.

Was wondering if.

You can maybe spend a minute to $68 million to $69 million I think if I heard correctly on the the overhead per quarter in 'twenty four just where are you guys looking to spend some more money.

Five to 10 years.

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.

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 theyre not being allowed to pursue growth because theyre whether capital liquidity issue. So just curious if theres anything built into the budget around that and just generally speaking.

Deposit seven 5% now we had to hang right.

To do it but sort of everybody else.

Yes.

Okay. Thank you both.

Thanks for your question.

Question comes from the line of Michael Perito with K B W. Your line is live.

Beyond that what you guys are allocating investment dollars to in 'twenty four.

Really.

Some new talent on the commercial side, we have good talent.

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

And that's probably the primary place.

Hey, Michael.

And then also just.

Was wondering if.

A better run rate in our new capital region, where we had a transition between lending teams and.

You can maybe spend a minute to $68 million to $69 million I think if I heard correctly on the the overhead per quarter in 'twenty four just where are you guys looking to spend some more money.

We lost.

A portion of the people and we will certainly be replacing some of those.

Is there any kind of 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 theyre not being allowed to pursue growth because whether capital liquidity issues. Just curious if theres anything built into the budget around that and just generally speaking.

Is that helpful. Michael Yeah, It is and.

Okay.

Especially tying back to kind of the growth in commercial leading the way I think that makes a lot of sense what about on the.

On the fee income side understanding the year on year comp is a little tough because of the interchange hit but Danny.

Beyond that what you guys are allocating investment dollars to in 'twenty four.

Any expectations in your local area for kind of mortgage activity to pick up if it 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 theres any kind of initiatives or conversations you guys are having that we should be mindful of as we think about where that growth rate.

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.

Could move.

If we just back out the interchange for a minute.

We lost.

<unk> coupe through some of the positive drivers in 'twenty four.

A portion of the people and we will certainly be replacing some of those.

We feel like our teams, particularly on the gain on sales side with SBA and mortgage are already.

Is that helpful. Michael Yeah, It is and.

Very capable and build out so I would just start with SBA.

Okay.

Especially tying back to kind of the growth in commercial leading the way I think that makes a lot of sense what about on the.

Gain on sale there has been down.

And we just we have that tied to a regional model and underneath our regional presidents and that's gotten better every year.

On the fee income side understanding the year on year comp is a little tough because of the interchange hit but.

As you and I, both know could come back in a given quarter.

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.

Growth rate could move.

If we just back out the interchange for a minute.

And cross selling the consumer businesses.

<unk> coupe through some of the positive drivers in 'twenty four.

And.

We feel like our teams, particularly on the gain on sales side with SBA and mortgage are already.

Just the basics of blocking and tackling.

Yeah.

Jane do you want it.

Very capable and build out so I would just start with SBA.

Okay.

Yeah, No I mean, I'm, sorry, I didn't mean to cut her off Jane if theres anything you loved that I'd love to hear it.

Gain on sale there has been down.

And we just we have that tied to a regional model and underneath our regional presidents and that's gotten better every year.

No I think Mike covered it thanks.

Okay.

And then just lastly for me and I'll jump back just to the $12 50 kind of.

As you and I, both know could come back in a given quarter.

Buyback level, where you guys become less active.

I'm wondering is there a level of capital where you know if you guys continue to accrete capital and grow where that drifts higher as I mean, I understand theoretically right.

And that doesn't change this because you have more capital, but just wondering if there is any kind of.

What some of the inputs are that you guys look at where we should be mindful of that level may be moving in.

And cross selling the consumer businesses.

Capital deployment materializing in buybacks in 'twenty four at some point.

And.

Just the basics of blocking and tackling.

Yeah.

Jay do you want it.

Yes, we have thought of it as a way to manage capital levels of capital those get to be excessive.

Okay.

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

Could you.

Deploy some of that in buybacks, we've been kind of very willing to do that in the past part of it is where we're trading we're trading at a nice premium valuation of one eight times tangible and so.

No I think Mike covered it thanks.

Okay.

And then just lastly for me and I'll jump back just to the $12 50 kind of.

That makes a buying back stock at these levels a little more difficult and then there are other alternative uses of capital we always say organic funding our organic growth is the first use of capital.

Buyback level, where you guys become less active.

I'm wondering is there a level of capital where do you guys continue to accrete capital and grow where that drifts higher as I mean, I understand theoretically right.

So we want to make.

Always be clear about that.

But if capital continues to build and loan growth is moderate you can get some really nice capital build.

<unk> on that doesn't change this because you have more capital, but just wondering if there is any kind of.

Which could allow for further buybacks the big thing in the capital Horizon for US is that we have two tranches of subordinated debt outstanding $50 million and $50 million for a total of $150 million of that became callable last June.

What some of the inputs are that you guys look at where we should be mindful of that level may be moving in.

Capital deployment.

<unk> and buybacks in 2004 at some point.

Yes, we have thought of it as a way to manage capital levels of capital of those get to be excessive.

And the tier two treatment of that started to fade out another 20% will fade out this coming June and so is capital ratios continue to capital levels continue to build with may be in a position to call that.

Could you.

Deploy some of that in buybacks, we've been kind of very willing to do that in the past part of it is where we're trading we're trading at a nice premium valuation of one eight times tangible and so.

And.

That would affect tier two capital wouldn't affect <unk>.

TCE.

Got it and sorry, Jim do you mind, just trying to do that again, so you have $50 million, that's callable already the other $50 million callable win.

Yeah, it'll be another four years from this oh, okay alright.

So.

Always be clear about that.

But if capital continues to build and loan growth is moderate you can get some really nice capital build.

Sorry go ahead.

<unk> issued it reached a $100 to 50 million tranches, one was a 10 year.

Which could allow for further buybacks.

<unk> 10 year maturity. The other was 10 year note call 15 year maturities. So we'll be living with the other $50 million I think it's another four years from this June it'll be callable.

Thinking of the capital Horizon for US is that we have two tranches of subordinated debt outstanding $50 million and $50 million for a total of $150 million of that became callable last June.

And the rate on the first $50 million tranches I can look it up but if you have it handy.

And the tier two treatment of that started to fade out another 20% will fade out this coming June and so if capital ratios continue to capital levels continued to build with may be in a position to call that.

It's floating yes about seven 1% right now so if we refunded it we'd save some money because we were just borrow.

Even at overnight rates, a 536% right now, we borrow and pay it off it takes some money, but given this of course, if you truly do you want to make sure. Your total capital ratios were building to the point, where you could absorb that.

And.

That would affect tier two capital wouldn't affect <unk>.

Yeah.

Got it and sorry, Jim do you mind, just trying to do that again, so you have $50 million, that's callable already the other $50 million callable one.

It would affect total risk base by about 40 basis points to call that $50 million.

It will be another four years from this oh, okay alright.

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

Sorry go ahead, yes.

Thank you. Thanks. Thanks for your question. Our next question comes from the line of men will novice with D. A Davidson.

Issue that we used a $100 million 50 million tranches, one was a 10 year.

You May know called 10 year maturity. The other was 10 year no call 15 year maturities. So we will be living with the other $50 million I think it's another four years from this June it will first be callable.

Your line is live.

Another way to.

Ask about the margin.

Kind of are you.

And the rate on the first $50 million tranches I could look it up but if you have it.

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

You said you have I think seven 750, new loans was kind of.

It's floating yes about seven 1% right now so we've funded it we'd save some money because we were just borrow even.

Our <unk> funding and the NIM that's added on those new assets.

Even at overnight rates at 536% right now we borrow to pay it off it save some money, but you lose of course <unk>.

Oh yeah.

<unk>.

Yes, the incremental rate on the new originations is about 780 <unk>.

<unk> do you want to make sure. Your total capital ratios are building to the point, where you could absorb that.

The incremental cost of funds is right around 5%, if we borrow the money overnight at 536%.

Would affect total risk base by about 40 basis points to call that $50 million.

But if we gathered money through our.

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

Money market specials are four in our CD specials are split between five and a quarter for seven months and $485 in 11 months. So the all in rate of New fund acquisition is probably in the high fours that gives you the high fours funded originations in the high Sevens that gives you a 50% spread coming in roughly.

Thank you. Thanks. Thanks for your question. Our next question comes from the line of men will novice with D. A Davidson.

Your line is live.

Another way to.

Ask about the margin what kind of are you.

What's the marginal NIM added assets right now.

Okay.

And what what.

What kind of.

You said you have I think seven 750, new loans was kind of.

Can you just kind of review your deposit channels, and where youre seeing more success.

<unk> funding in.

And which ones you can accentuate over the course of the year.

And then Thats added on those new assets.

Yes, the partner channels around retail, we do not deem brokered deposits. We just really don't believe that gives us any credit and quite frankly, the economically it hasnt been a cheaper than wholesale borrowings or really have not tried to do any of that.

Yeah.

<unk>.

Yes, the incremental rate on the new originations was about 780.

The incremental cost of funds is right around 5%, if we borrow the money overnight at 536%.

But if we gathered money through our <unk>.

The deposits are retail and refine that.

Money market specials or four in our CD specials are split between five and a quarter for seven months and 485 for 11 months. So the all in rate of New fund acquisition is probably in the high fours that gives you the high fours to fund originations in the high Sevens. It gives you a 50% spread coming in roughly.

Our customers have responded to the specials that we offer in the market like everybody else. The specials that are all in money markets and Cds not in other categories like savings are now and once that we'd like to say, which is buried in one of our disclosures is that for every.

Dollar that we bring in and the specials about 60% census, new money.

That 60, <unk> knew about half is new money from our own customers and the other half is new money from new customers.

Okay.

And what kind of.

Can you just kind of review your deposit channels, and where youre seeing more success.

I think that's pretty well, but Jane I know if you want to give any other color on the deposit channels and the origination channels to add what I would say.

And which ones you're going to accentuate over the course of the year.

No. Thanks for the question.

Yes, we are the partner channels are all retail we do not view brokered deposits. We just really don't believe that gives us any credit and quite frankly, the economically it hasnt been a cheaper than wholesale borrowings. So I really have not tried to do any of that.

We are investing in digital channels were opening digital accounts.

But we still like branch generated deposits.

Stickier and they are generally lower cost.

And.

The deposits are retail and refine that.

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

Our customers have responded to specials that we offer in the market like everybody else. The specials that are all in money markets and Cvs not in other categories like savings are now and once that we'd like to say, which is buried in one of our disclosures is that for every.

We also somewhat unusually have branch managers, calling on small business customers calling on.

Public entities, and we think Thats a very effective.

Dollar that we bring in and the specials about 60 cents is new money.

Okay.

I appreciate that you highlighted at one point.

At 60, <unk> knew about half is new money from our own customers and the other half is new money from new customers.

Investing in our central region.

You had some hires there can you just talk about the opportunity there and as I kind of have built out a b centric acquisition.

I think thats pretty well, but Jane I know if you want to give any other color on the deposit channels and origination channels to add to what I would say.

Daniel sure.

No. Thanks for the question.

We love Central Pennsylvania, It feels a lot like our.

We are investing in digital channels were opening digital accounts.

Sure.

Footprint in southwest, Pennsylvania, and in our community markets net and while we've had some good luck.

But we still like branch generated deposits.

Stickier and they are generally lower costs.

And.

Hiring some folks from some of the largest banks by necessity need to run a very concentrated.

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

We also somewhat unusually have branch managers, calling on small business customers calling on.

Concentrated line of business model, and we're a little bit more regionally focused.

Public entities, and we think thats very effective.

And so we've been able to hire some good <unk>.

Commercial lenders, good Treasury management portfolio management folks and.

Okay.

I appreciate that you highlighted at one point.

Bush on that we love Harrisburg, We love Lancaster invest our kind of geography.

Investing in our central region.

You had some hires there can you just talked about the opportunity there and as I kind of have that built out.

That's great color. My last question is that is that a regional focus for you in terms of.

Centric acquisition.

January sure.

We love Central Pennsylvania, It feels a lot like our.

Potential M&A can you talk about that in general as well.

Yes, I mean as you know we've been very picky on M&A, we've done six things that looked at 60.

Sure.

Footprint in southwest, Pennsylvania, and in our community markets net and while we've had some good luck.

You also.

When we did this acquisition.

Hiring some folks from some of the largest banks by necessity need to run a very concentrated.

We're 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.

Concentrated line of business model, and we're a little bit more regionally focused.

And so we've been able to hire some good <unk>.

Our vantage point in our box might even be a little tighter, but there's opportunities out there.

Commercial lenders, good Treasury management portfolio management folks and.

But we were our batting average is about one in 10 and Thats more of self choice. So.

Bush on that we love Harrisburg, We love Lancaster invest our kind of geography.

But we like doing M&A, we feel like we can integrate banks and we get excited about the geography, particularly if it's strategic it adds.

That's great color. My last question is that the region is a focus for you in terms of.

Adds to our geography, it's contiguous.

Potential M&A can you talk about that in general as well.

We really see it as accretive longer term.

But.

Yes, I mean as you know we've been very picky on M&A, we've done six things that looked at 60.

We're pretty conservative.

And we just don't do a deal every year to do a deal.

You also.

When we did this acquisition.

I appreciate that.

Thank you.

We're 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.

Thank you for your question.

Ladies and gentlemen, once again, if you would like to ask a question. Please hit star followed by the number one on your Touchtone phone and we'll bring in our next question is from the line of Matthew Breese with Stephens incorporated.

Add to our liquidity.

So our vantage point in our box might even be a little tighter, but there's opportunities out there.

Your line is live.

But we.

Hey, good afternoon everybody.

Our batting average is about one in 10 and Thats more of self choice. So.

Yeah, Matt I'm going to apologize upfront I might've missed this what was the loan growth guide for the year and then what do you expect for deposit growth as well.

But we like doing M&A, we feel like we can integrate banks and we get excited about the geography, particularly if it's strategic it adds.

Our loan growth guide is probably low to mid single digits.

Adds to our geography, it's contiguous.

We really see it as accretive longer term.

And I use the word commensurate in my opening remarks, but it's somewhat tied to how we build the path.

But.

Okay.

I don't think too worried long term about <unk>.

We're pretty conservative.

And we just don't do a deal every year to do a deal.

Growing deposits loans I feel like we can grow loans, we have a lot of engines, we build them over the years.

I appreciate that.

Thank you.

Thank you for your question.

And we feel like our capabilities.

Continue to improve.

This year with <unk>.

Be a little strained by.

Liquidity, but we will have to fix that and solve that.

And.

We are resolute to do that.

Your line is live.

Hey, good afternoon everybody.

If I could just add to that in our planning we are planning for deposit growth to be just a little bit in excess of loan growth to gradually bring the loan to deposit ratio down.

Yeah, Matt I'm going to apologize upfront I might've missed this what was the loan growth guide for the year and then what do you expect for deposit growth as well.

That's the way, we like to play out.

And as you look at noninterest bearing deposits. The overall percentage of the pie, obviously took a step down this quarter are you starting to see signs of stabilization.

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 build the path.

And or where do you expect to see that kind of floor out.

Too worried long term about.

Yes.

Growing deposits loans I feel like we can grow loans, we have a lot of engines, we build them over the years.

Just like our deposit portfolio I mean, I think we have a slide in the supplemental deck that talks about it.

And we feel like our capabilities.

<unk> to improve.

Our average deposit size 18 Grand 11000 on the retail side 68000.

This year will probably be a little strained by.

Liquidity, but we'll have to fix that and solve that.

On the business side will take tons and tons of that and Thats, what we call on and matter of fact, Jean and I and the people in the room here are all making calls tomorrow.

And we're resolute to do that.

If I could just add to that in our planning we are planning for deposit growth to be just a little bit in excess of loan growth to gradually bring the loan to deposit ratio down.

After our all employee call.

And that's what we do 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.

Absolutely we are going to play out.

And as you look at non interest bearing deposits. The overall percentage of the pie, obviously took a step down this quarter.

Are you starting to see signs of stabilization.

A good advantage with depository.

And or where do you expect to see that kind of floor out.

Granular core deposit franchise.

Yes.

And that's really important to the long term profitability of our bank Jane what would you add your the well already we're starting to see deposit specials cooling off in the markets.

Just like our deposit portfolio I mean, I think we are.

Have a slide in the supplemental deck that talks about it.

Average deposit sizes 18, Grand So 11000 on the retail side 68000.

Sure.

It seems throughout in August September October November.

On the business side will take tons and tons of that and Thats, what we call on and matter of fact, Jean and I and the people in the room here are all making calls tomorrow.

That you Couldnt keep up with respect those theyre starting to cool and.

And im gratified by that.

After our all employee call and Thats, what we do 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.

So you've seen.

Our exceptions pricing.

Pricing acceptance going down I think that.

I'm optimistic that.

If we haven't hit the floor, we're very very close.

A good advantage with depository.

When it comes to deposit cost increases.

Granular core deposit franchise, and Thats really important to the long term profitability of our bank Jane what would you add your the well already we're starting to see deposit specials cooling off in the markets.

And we are getting much better.

I'll take the.

The view that we're much much better now at <unk>.

Requiring the full relationship with the extension of credit because we are still finding that our balance sheet strength, we're still open for business.

Sure.

It seems throughout in August September October November.

We just want to lend to relationships were less interested in the transaction for the transaction's sake.

That you Couldnt keep up with especially they are starting to cool and.

Yes, the other thing we've seen at this <unk>.

And.

Gratified by that.

Color is helpful to you as the responsiveness of the consumer right.

So you've seen.

Our exceptions.

It's been more responsiveness as some of the specials, we'd have that we even coffee would have in other words deposit pricing is all trial and error you put out. This way do you think I'll get for X rate I'll get wide that volume of deposits and we've seen more than we expected.

Pricing acceptance going down I think that.

Im optimistic that.

If we haven't hit the floor, we're very very close.

It tells you that competitive pressures are easing and that gives us the ability to get 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 yes, I also think that because our customer base.

When it comes to deposit cost increases.

And we are getting much better.

I'll take the.

The views that were much much better now at.

By and large has been with us for a long time.

Requiring the full relationship.

They don't need the absolute highest rate they need to be treated fairly and they want to they want to think that they're being treated fairly.

And sorry, one more thing that just kind of your question on that.

As a percentage of total deposits I remember a year ago people, saying, we are 33% where do you think you'll end 'twenty three and we are thinking about 25% I think we're 26%. So that's kind of comes out where we thought.

More responsiveness to some of the specials, we'd have that we even probably would have in other words deposit pricing is all trial and error you put out. This way do you think you'll get for X rate I'll get why the 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 see a little bit of pricing power to lower the rates. We're offering so that gives us some confidence that complete debates.

Draconian single back in 2003, it was 14% or so.

It.

It could be just hasnt played out that way and given that granular it is and where it's moved to this point.

The niv part feels pretty stable.

Yes.

Yes, I also think that because our customer base by and large has been with us for a long time.

Mike can cycle matters too.

Yes exactly.

I just also field our average size of 18000 in the consumer at 68000 on the business side. There's just there's a different type of an opportunity cost with that dollar amount versus a larger bank that might have deposits that are three or four or five times that size, maybe 10 side. So is it just.

We are 33% where do you think you'll end 'twenty three and we are thinking about 25% I think we're 26%. So it's kind of comes out where we thought sandoz draconian single back in 2003, it was 14% or so.

Not as much money and.

So we do expect that attrition for that deposit cost are slow.

That was great I appreciate all the color from everybody. The last one from me is just on Jim I heard you loud and clear I kind of moving towards normalized charge offs.

It could be just hasnt played out that way and given the granular it is and where it's moved to this point.

Niv part feels pretty stable.

Given given some of the movement this quarter and the reserve specific mirrors.

Yes.

Mike and cycle matters too.

Is this a good level of its 130 levels of year are you do you anticipate maybe building a little bit and I'm, asking because I'm trying to get a frame of reference for the permission.

That's right.

Great.

I just also fueled our average size of the 18000 in the consumer at 68000 on the business side. There's just there's a different type of an opportunity cost with that dollar amount.

I don't know that were expecting to build I think.

Our view is is that.

Versus a larger bank that might have deposits that are three or four or five times that size, maybe 10 side. So is it just not.

We're still.

A 15 or.

20 basis points higher than at least the peers, we're looking at in our region, but thats not the determined or we have a model we run the traps we.

Not as much money.

We do.

Spect that attrition for that deposit cost to slow.

Very thoughtful.

That was great I appreciate all the color from everybody. The last one from me is just on Jim I heard you loud and clear I kind of moving towards normalized charge offs.

Try to anticipate things that are around the corner.

<unk>.

And.

And we look closely at.

That's 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.

Given given some of the movement this quarter in the reserve.

Specific mirrors.

Is this a good level of its 130 levels of year are you do you anticipate maybe building a little bit and I'm, asking because I'm trying to get a frame of reference for the commission.

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

Thank you.

We have a final question from the line of Frank <unk> with Piper Sandler.

I don't know that were expecting to build I think.

Our view is is that.

Go ahead your line is license.

Still.

Hey, guys good afternoon.

A 15 or.

Sure.

Just.

20 basis points higher than at least the peers, we're looking at in our region, but thats not the determined or we have a model we run the traps we.

One more on the NIM, if I could in terms of I just want to make sure I understand trajectory it sounds like <unk> maybe.

Short of expectations for for a flattish results and then in the absence of rate cuts.

Very thoughtful.

Try to anticipate things that are around the corner.

<unk>.

And when.

Would you expect that Thats.

We look closely at.

Trough for for margin here in the first quarter, given what youre seeing on the.

That's 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.

Deposit cost side, yes.

Yes, glad you asked that Frank.

Generally speaking if the rates stay highlight that's better for us.

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

I would think personally a goldilocks scenario for us would be one or two cuts.

Thank you.

We have a final question from the line of Frank Schiraldi with Piper Sandler.

Because that burst above a little bit on deposit.

Go ahead your line is license.

Expectations.

Hey, guys good afternoon.

I E take pressure off deposit rates, but like James said earlier, we've already seen some easing of that even without the actual cuts.

Alright.

Just.

One more on the NIM, if I could in terms of I just want to make sure I understand trajectory it sounds like <unk> maybe.

But that was it for you if you have a slow pace of rate cuts or no cuts then that takes the repricing pressure off our 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.

Short of expectations for for a flattish results and then in the absence of rate cuts.

Would you expect that that's.

To put it differently if things play out the way the federal reserve keeps saying they will which is if there are cuts that will be slow.

Trough for for margin here in the first quarter, given what youre seeing on the.

Deposit cost side, yes.

That's good for us if the futures market is right and theres lots of cuts faster than that.

Yes, glad you asked that Frank.

Generally speaking if the rates stay highlight that's better for us.

That will take some time, even then by the way their deposit basically reprice eventually that recovers right. So it's just that the loan loan side will reprice downward in a fast cutting scenario faster then we will be able to move on the deposit side.

I would think personally the goldilocks scenario for us would be one or two cuts.

Because that burst the bubble a little bit on deposit.

Expectations.

He will take pressure off deposit rates, but like James said earlier, we've already seen some easing of that even without the actual cuts.

Alright.

At a pace that would be the color on the pace of traders and how it affects us perhaps a little bit.

Yeah, No definitely and then.

But that would be for you. If you have a slow pace of rate cuts or no cuts and 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.

In terms of the NII outlook.

Doug you mentioned in your in your earlier commentary year over year for 2024, what is the base case for that is that the fed's three rate cuts or how many rate cuts are kind of baked into that.

To put it differently if things play out the way the federal reserve keeps saying they will which is if there are cuts that will be slow.

Expectation, our official budget forecast, which we stress has the fed funds ended the year 425, So it's FICA okay.

That's good for us if the futures market is right and theres lots of cuts faster than.

That will take some time, even then by the way our deposit basically reprice eventually that recovers right. So it's just that the loan loan side will reprice downward in a fast cutting scenario faster then we will be able to move on the deposit side.

Okay.

And then just.

Commentary Jim.

On the 20 to 25 basis points kind of more normalized charge offs.

So is that just want to make sure I understand that's kind of the expectation that we are.

Alright.

And a pretty normalized environment, so that's sort of the expectation for 2024.

That piece of it as a color on the pace of trade doesn't really affect us, perhaps a little bit.

Yeah, Yeah, I would say.

Yeah, No definitely and then.

In terms of the NII outlook.

Yes, so im kind of given the commentary for more of a long term perspective.

That you mentioned in your in your earlier commentary year over year for 2024, well what is the base case for that is that the fed's three rate cuts or how many rate cuts are kind of baked into that.

Over the long haul that's always kind of think given our given.

Given our mix of businesses and I think we.

We use that figure for some time, we say it very often when we meet with investors want to make sure. We say it on the call. So that we're clear with us with our markets, that's kind of our general expectation for the portfolio.

Expectation, our official budget forecast, which we stress has the fed funds ended the year 425, So it's fine okay.

Okay.

And then finally, just on buybacks you mentioned, where you were buying back stock dipped below that level, and obviously thankfully a bit away from that level now and just.

Okay.

And then.

The commentary Jim on the on the 2025 basis points kind of more normalized charge offs.

So does that just mean buybacks are pretty unlikely.

So is that just want to make sure I understand that's kind of the expectation that we are.

Where we sit today.

For now we still have about $18 million of authorization left so obviously, if there is a dip in the price maybe it's three inaction.

In a pretty normalized environment, so thats sort of the expectation for 2024.

Yes, yes, I would say.

But we're going to see how the year plays out and if we still grew and capital build.

Yes, so im kind of given the commentary from over a long term perspective.

The <unk> move in the right direction last quarter, if that keeps going our 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 saw 50 threshold and get back in the market and buy back some stock like I said, we're not hesitant and we looked at it as a capital management tool.

We are clear with them with a market that's kind of our general expectations for the portfolio.

Okay.

And then finally, just on buybacks you mentioned, where you were buying back stock dipped below that level, and obviously thankfully a bit away from that level now and just.

To manage capital levels, but.

Probably less activity you've heard me say that assuming very little activity in the first half.

Gotcha.

So does that just mean buybacks are pretty unlikely.

Okay, great. Thanks for all the color.

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

Where we sit today.

For now we still have about $80 million of authorization left so obviously, if there's a dip in the pricing between action.

But we're going to see how the year plays out and if we have still good capital built.

Just a couple of things we appreciate your keen 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.

The <unk> move in the right direction last quarter, if that keeps going our 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 at 12 50 threshold to get back in the market and buy back some stock like I said, we're not hesitant, we look at it as a capital management tool.

And on the investment portfolio.

The securities portfolio, the granular core deposit franchise, which we feel is.

To manage capital levels, but.

A gem of our company and then there is also some good color on commercial real estate on pages 16 and 17.

Probably less activity, you're probably safe in assuming very little activity in the first half.

Gotcha.

Okay, great. Thanks for all the color.

I think particularly on the.

Commercial real estate side, and an average loan size of $5 1 million portfolio with <unk>.

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

Very little in the Central business district about $82 million of our $400 million plus portfolio and with.

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 <unk>.

On the investment portfolio.

Have some larger banks and just good risk control and.

The securities portfolio, the granular core deposit franchise, which we feel is.

Perhaps.

Might be of interest too, but thank you again and look forward to being with a number of you in the first and second quarter. Thank you operator.

A gem of our company and then there's also some good color on commercial real estate on pages, 16, and 17 and I think.

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

Particularly on the commercial real estate side.

Average loan size of $5 1 million portfolio with <unk>.

Very little in the Central business district about $82 million of our $400 million plus portfolio and with.

At four <unk>.

Or have some larger banks and just good risk control and.

Perhaps.

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.

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

Okay.

Yeah.

Okay.

Yeah.

Yes.

Okay.

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