Q4 2024 First Commonwealth Financial Corp Earnings Call
Speaker Change: Please note that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you'd like to ask a question during that time, please press star followed by 1 on your telephone keypad.
Speaker Change: Thank you. I'd now like to hand the call over to Ryan Thomas, Vice President of Finance and Investor Relations. You may now begin.
Speaker Change: Thank you, Ellie, and good afternoon everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation's fourth quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, Jane Grabens, Bank President and Chief Revenue Officer, and Brian Sohocki, Chief Credit Officer.
Speaker Change: As a reminder, a copy of yesterday's earnings release can be accessed by logging on to sdbanking.com and selecting the Investor Relations link at the top of the page.
Speaker Change: We've also included a slide presentation on our Investor Relations website with supplemental information that will be referenced during today's call.
Speaker Change: Before we begin, I need to caution listeners that this call will contain forward-looking statements.
Speaker Change: Please refer to our 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 statement
Today's call will also include non-GAAP financial measures.
Speaker Change: 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. With that, I will turn the call over to Mike.
Mike Price: Hey, thank you, Ryan, and welcome everyone. In the fourth quarter, we met consensus earnings estimates.
of $0.35 per share and preserved relatively strong profitability.
Mike Price: an ROE of 1.23%, a NIM of 3.54%, and a core efficiency ratio of 56.1%.
Reflecting on the year, we stabilized the margin, grew deposits,
Mike Price: managed expenses, and selectively pursued high-yielding loan categories in the face of unanticipated deposit pricing pressure, higher credit costs, and six months of Durban.
Mike Price: We believe that 2024 was a year that sets us up well for 2025. We ended the year in a better capital and liquidity position.
Mike Price: than when we started. We made some key hires that will enable C&I growth.
Mike Price: further integrated our last acquisition and announced another one, all while staying focused on achieving and maintaining top quartile profitability.
Mike Price: Importantly, higher rates led to tepid load demand throughout the year in both CRE and C&I lending.
Demand was tepid in consumer categories as well.
Mike Price: C&I Equipment Finance was a notable bright spot in the portfolio group $61 million alone in the fourth quarter.
Mike Price: Average deposits grew 8.7% in the quarter but were skewed by a large commercial customer deposit that came in at the end of the quarter which drove much of the average balance increase.
A better comparison would be...
Mike Price: for the year where average deposits grew some 451.1 million, or 5%.
Mike Price: That drove our loan-to-deposit ratio down from the high 90s at the end of the year to 92.5% at the end of 2024, leaving us with dry powder to lend.
Mike Price: We're seeing fairly balanced deposit growth across most of our regions.
Mike Price: and our teams are all tasked to grow core deposits with an emphasis on transaction accounts.
Mike Price: More importantly, we feel our balance sheet is now prime for growth and profitability as we turn on the loan growth engine in 2025.
Mike Price: In the fourth quarter, we saw good commercial real estate activity after being selective for some time due to heightened credit, liquidity, and pricing concerns.
Mike Price: We continue to emphasize the acquisition of C&I relationships across middle market, business banking, and small business.
are optimism regarding loan growth in 2025 and beyond.
Mike Price: Thames from we have a strong we have strong regional accountability and two new regional presidents in key growth markets both of whom have strong CNI backgrounds. [inaudible]
Mike Price: We've hired a bevy of talented C&I commercial bankers and leaders over the last 24 months.
Mike Price: We believe we've gotten the portfolio runoff headwinds behind us with the former Centric acquired loans and aspects of CRE.
We've never been stronger in C&I.
Mike Price: Commercial Real Estate, SBA, Equipment Finance, Indirect, and Consumer Lending. We will strive for mid-single-digit loan growth this year.
Mike Price: Jim will expand on the revenue detail, but we believe the evolving interest rate environment that seems to favor higher for longer should help our NIM.
Mike Price: And in terms of fee income, we overcame a meaningful $6.7 million Durbin hit to fee income in the second half of 2024 because Mortgage, SBA, and Wealth Management stepped up.
and other service charges scaled up as well.
Mike Price: Credit costs, driven by lingering pressures in our eccentric acquired loans, were elevated throughout the year, but moderated in the fourth quarter. Encouragingly, NPLs declined from 0.83% to 0.68%.
Mike Price: and reserves to loans remained above peer levels, signaling continued strength in our credit position.
Mike Price: We had elevated charge-offs in this quarter, but a lot of that reflected the charge-offs of three non-performing loans we had recognized and provided for last quarter.
Mike Price: Our 2024 credit metrics were significantly impacted by the Acquired Centric Loan Portfolio. However, our asset migration trends are favorable as we enter 2025.
Mike Price: We announced our first acquisition in two years with CenterBank in Cincinnati. We really like this small acquisition. It's strategic and the bank is well led with a cast of good talent for a bank of its size. We see a lot of upside in this market to leverage our existing presence.
Mike Price: and build more critical mass in Cincinnati that will help us replicate the success we've had in Ohio's other major metro markets, all of which goes above and beyond the deal mass.
Mike Price: Lastly, customer experience metrics improved as the net promoter score and branch customer satisfaction reached historic highs for First Commonwealth. Our organization continues to rally around living our mission and that is to improve the financial lives of our neighbors and their businesses.
Mike Price: And with that, I'll turn it over to Jim Reske, our CFO.
Thanks, Mike.
Mike Price: Fourth quarter co-earnings per share of 35 cents is up 4 cents from last quarter, largely driven by a 4.1 million dollar improvement in provision expense.
Mike Price: On a linked quarter basis, we saw a combined improvement in fee income and expense of $1.9 million that was somewhat offset by a $1.4 million decline in spread income.
Mike Price: We had total NIM compression of two basis points in a quarter. The purchase accounting contributed seven basis points to the NIM in the third quarter and five basis points in the fourth quarter. So without the fade-out of the purchase accounting, the reported NIM would have been unchanged.
Mike Price: If you look at our deposits, there were two dynamics happening in our deposit book this quarter. The first one is the previously disclosed $175 million corporate deposit that we received toward the end of last quarter.
Mike Price: average deposits were up in fourth quarter by $207 million, or 8.7% annualized, over last quarter, so the average was up largely, though not entirely, due to that large commercial deposit.
Mike Price: The new growth came as we continued to acquire new deposits at less than our borrowing costs, all while pricing down our overall book.
Mike Price: The result was a modest one basis point decline in our total cost of deposits to 2.07%.
Mike Price: The other dynamic affecting the process was movement in public funds.
Mike Price: Our end-of-period deposits were down by $67.5 million, largely as a result of a seasonal $206.5 million decline in public fund balances.
Mike Price: which always declined toward the end of every year before coming back in the first quarter.
Speaker Change: Turning to loans, loans grew by 23.5 million in the fourth quarter for an annualized growth rate of 1.04 percent. We are projecting mid-single-digit loan growth next year as we build upon some of the groundwork we've laid for C&I growth that Mike talked about and some of the portfolio runoff headwinds that we had in 2024 get behind us.
Speaker Change: So putting that together, growing spread income in 2025 will be a function of loan growth M&M.
Speaker Change: We believe that the net interest margin can expand in 2025.
Speaker Change: Our internal forecasting is now based on only two rate cuts next year.
Speaker Change: And in that scenario, the NIM is relatively stable in the first quarter.
Speaker Change: that expands steadily over the remainder of 2025 to end the year 10 to 20 basis points higher than it is now.
Speaker Change: Together with the return of moderate loan growth per our guidance, top line revenue should steadily improve over 2025 and do so at a faster clip in expenses leading to positive operating leverage in 2025.
Speaker Change: We were confident of our ability to grow top line revenue before the recently announced central bank acquisition, but that acquisition will create modest additional operating leverage after we close as planned in the second quarter of this year.
Speaker Change: contributing about a penny a share to EPS per quarter starting in the third quarter of 2025.
Speaker Change: Fee income was an interesting and generally positive story in the fourth quarter. Fees improved by $800,000 over the last quarter, despite the fact that the third quarter had a benefit of about $900,000 in one-time bolding income.
Speaker Change: Fee income rose quarter over quarter nevertheless due to a $700,000 increase in swap income combined with about a half million dollar gain on a limited partnership investment and a half million dollar improvement in mortgage gain on sale income over the last quarter net of hedging costs of course.
Speaker Change: Stepping back a bit, the income was a good story for us, not just because of the quarter-over-quarter improvement, but because of how the bank has been able to more than offset the long-expected Durbin impact on interchange income that hit us in the second half of 2024.
Speaker Change: Looking back at 2024 as a whole, debit card-related interchange income was indeed $6.7 million lower than last year due to Durbin.
Speaker Change: But fee income in total is up year over year by $2.6 million, primarily because of improvement in our core fee income businesses, including mortgage, wealth, and SBA.
Speaker Change: As we look ahead to 2025, we'll believe we'll generate fee income of about $22 to $23 million a quarter in the first quarter of 2025, growing gradually as the year goes on.
Speaker Change: The Center Bank acquisition contributes a few hundred thousand dollars of fee income per quarter in the second half of the year.
Speaker Change: Noninterest expense improved by 1 million dollars in comparison to last quarter largely due to some items that we experienced last quarter including elevated operational losses and severance expense.
Speaker Change: Fraud loss has declined compared to recent quarters as we began to realize the benefits of investments in enhanced fraud detection software and staffing.
Speaker Change: We believe that non-interest expense will be approximately 68 to 69 million in the first quarter of 2025.
Speaker Change: jumping by about two million in the second quarter as merit increases kick in and increasing by another 1.3 million per quarter in the second half once we close the previously announced central bank acquisition in the second quarter.
Speaker Change: Turning to provision, total provision expense was $6.5 million down from $10.6 million in the third quarter.
Speaker Change: You may recall that our credit experience last quarter was at the tail of just a handful of credits. And this quarter's elevated charge of experience is largely driven by the charge-off for three of those credits.
Speaker Change: totaling about $8 million. In fact, in total, approximately $8 million of our charge off in the fourth quarter were loans specifically reserved for a prior period.
Capital ratio has improved as a result of strong earnings.
Speaker Change: with limited balance sheet growth. We've repurchased 477,000 shares of stock in the quarter but shut off the buyback after we announced the center acquisition and we won't be resuming buybacks until after that deal closes.
Speaker Change: And with that, we will take any questions you may have.
Speaker Change: We are now opening the floor for question and answer session. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. Your first question comes from Danielle Tamayo from Raymond James. Your line is now open.
Thank you. Good afternoon, guys.
Maybe we can just start on...
Speaker Change: The fees, if you don't mind, Jim, I appreciate the guidance.
Speaker Change: very clear how you laid it out, but just curious if you can talk a little bit about
Speaker Change: some of the lines, specifically mortgage banking and then the other loan sale gains, as well as the card income. I know you had the impact from Durban last year, but just curious if you think that particularly on the card, you're at a decent run right now.
Speaker Change: On the card income we are, we felt that Urban Impact has really hit us in the third quarter and continue to fourth quarter, but that's been pretty consistent. There's some long-term benefits perhaps of doing more with credit cards as opposed to debit cards, but the run rate there is pretty solid.
Speaker Change: The SBA business continues to grow. Mortgage had a really good year and that's actually a time when you think that might be slow is actually doing well for us.
Speaker Change: And then Wells had a tremendous year towards the summer, selling fixed income annuities at a time when customers thought the rates were going to go down, generate a lot of fee income.
Speaker Change: That faded out a little bit towards the end of the year, but that actually looks, we look really, we expect really good things for that business this coming year as well.
Speaker Change: And then, Mike, I don't know if you want to add anything on the fundamental businesses. There are other things as well. Oh, one more thing. The swap fee income we got in the fourth quarter was good. That's really different by customer preferences on...
They're back-to-back swappers, and so they're swapping.
Speaker Change: fixed to floating depending on where the rate movements are, what expectations for rate movements are. That was really good in the fourth quarter.
Speaker Change: In fact, we generated more in the fourth quarter than we expect to generate next year, so we think that actually is prime for growth next year. They were underestimating the amount of swap fee income we could generate next year, so the swap's not going to be a good source of fee income for us. Mike? Yeah, I just think Jim stated it well as...
Speaker Change: The year-over-year difference from the third, fourth quarter of 23 to 24 is about a 3.3 million dollar downdraft. That's a little less than we thought it would be. I think we pegged it at about
Speaker Change: 6.7, so maybe at 3.35. There you go. So very close, but I think where there's some uptick that really helped compensate for it was gain on sale in SBA. This time last year was 1.7, it's 3.1.
Speaker Change: Gain on sale of mortgage was $7.76 in the fourth quarter last year, $1.6 million.
Speaker Change: We saw a nice little uptick and we're seeing better spreads there and then also trust income in our wealth management group Last year this time was 2.5
Speaker Change: This year is three, so just really not spectacular, but pretty solid growth year over year that help compensate and really blunt the impact of Durban.
That's a great color. Thanks, guys.
Yeah, absolutely.
Speaker Change: And then maybe one for Mike on the loan growth. You know, I got your guidance for mid-single-digit growth next year coming off, you know, headwinds in 2024. Curious if that's...
something that you expect to really start to accelerate.
Thanks.
Speaker Change: you know, early 2025, that's more of a ramp. And if that's more C&I driven or commercial real estate or consumer, just curious what the drivers are between in that 2025 loan growth guide.
Speaker Change: Well, really, after not doing a lot of commercial real estate in the first two or three quarters of...
Speaker Change: 2024. We had a nice solid quarter with good quality credits.
Speaker Change: in commercial real estate in the fourth quarter, so that helped jumpstart it.
Speaker Change: We hope that it will be yoked between CRE and CNI.
likely it will be
Speaker Change: probably a good portion will be CRE. Long term, I think if we can get a balance sheet that is 25% plus CNI, we will have a best-in-class bank.
Speaker Change: and that's the goal. And we put the mechanisms in place with that, with talent, vision, treasury management, support. So that is common. And then we also have really capable consumer lending businesses.
Speaker Change: Like indirect where the spreads have just bumped up a little bit. The team has done a really great job of managing that and we're probably going to turn those.
Speaker Change: and 24. And last but not least, and perhaps most importantly,
Speaker Change: Our Equipment Finance Group continues to ramp up. We've had a nice year, good spreads.
Speaker Change: We were satisfied with the lost content and just the handle that our leader has on that business.
Speaker Change: and so that feels good. The other thing he's done that's so impressive is he's built a bridge over to the corporate bank and we've done just a handful of true leases.
Speaker Change: out of that division that really complements our corporate bank. So we're enthused, but I know where you're at, Dan, kind of show me. And we had a couple years where we grew every region, every line of business for about two years straight.
Speaker Change: and we were falling out of bed and growing at a pretty good clip. We hope to get back there, but it will probably be a bit of a ramp this year, but hopefully this will be in our rearview mirror and we'll be talking about how much growth.
in 2026.
Terrific. Thank you for taking my questions.
Thank you.
Hey, good afternoon, everybody.
Hi, Carl.
Speaker Change: Jim, let's start with you. The guidance calls for NIM expansion next year, and I don't know, maybe half of that is just from the swaps.
Speaker Change: Can you talk a little bit about the other piece of it and just what gives you confidence when you look at your models and how much of it's from loan growth versus the valid sheet or the deposits repricing?
Speaker Change: Carl, I'm so glad you asked because it gives us a chance to talk about it. The guidance number is pretty high. We see that and I want to tell you how I think about that.
Speaker Change: So, a couple of things. One is you're right, about half of it comes from the macro swaps alone. There's a table in the supplement we put out on the investor relations portion of our website, shows just the, in a free environment that we're looking at the macro swaps alone.
Speaker Change: 8 to 10 basis points of NIMH for the year. And so the question is, where does the rest of it come from?
Speaker Change: The short answer is in our projections, it's all on the asset side, and I'll tell you why. It's because looking at the way we were projecting them maybe a year ago on the way up when rates were on the upswing, the weakness in our projections was consistently the ability to predict customer deposit rate.
Speaker Change: and we're very aware of that. So, we thought we were fairly aggressive, predicting customer behavior and then customers made their own choices and projected deposits priced up. We saw that.
Speaker Change: So as we forecast now, we're very conservative, maybe too conservative, in the way we're forecasting deposit costs now. So in the NIM forecast I just gave you...
Our cost of deposits is not going down at all.
Speaker Change: We do have embedded beta assumptions in some of the loans on rack rates and all the rest. We also are generally in our philosophy pricing for deposit growth.
Speaker Change: We want to grow the loans, so we want to grow deposits commensurate with that growth. We like the fact that we've gotten low in the deposit ratio from the high 90s down to low 90s. We'd like to keep it there. So we want to keep growing deposits.
Speaker Change: But the deposit pricing that we have in there ends up showing almost no reduction in deposit costs. Now, if you look at banks that have reported so far this quarter, everybody's reducing deposit costs. We see it in our own internal.
Speaker Change: market studies to show what everybody's doing. So there's opportunity for us to lower deposits. I'll give you an example. We have a 1.75 billion dollar CD book, about half a billion of that
Speaker Change: is going to mature in the first quarter, and about 900 million, actually about a billion of 1.75 in the first half of next year because we kept everything so short, like everybody else.
Speaker Change: So we have opportunities to manage the deposit costs now, but we're not banking on it.
Speaker Change: What's happening in the forecast is on the loan side, and that's because of positive replacement yields.
They're about 40 basis points positive next year.
Speaker Change: They were about 100 basis points positive in the first half of 2004. We saw that come down as the year went on, about 50 basis points positive as the year went on.
Speaker Change: We look at positive replacement yields next year at about 40 basis points, and that brings the overall loan portfolio yield up.
Speaker Change: from close to six, just under six to about six and a quarter, so about 25 days going into low portfolio yield improvement. So when I give that NIM forecast for us, the forecast is all on the asset side. Of course, it depends on the rates.
Speaker Change: We have two cuts in the new forecast. They're towards the end of next year. If things gyrate and move, we'll update the guidance as appropriate.
Speaker Change: And we're also trying to stay conservative by saying next quarter, don't expect a lot, it's really going to kick in when those macro swaps start to come off. The first $150 million comes off out of the $250 million this year, the first $150 million comes off on May 1st.
Speaker Change: So that's a lot of color, but I hope that helps.
No, I appreciate all of it.
Speaker Change: And then maybe one for Mike on Center. Adding assets in Cincinnati makes a lot of sense to us, but can you just walk through a little bit how you got to know them and what you like about that franchise and some of the key pieces that attracted you?
Speaker Change: On either side on Madeira or Milford where we have a branch. So it just fits nicely and it's
Speaker Change: and then he has some good mortgage and commercial lenders that seem to compliment ours pretty well. And he's pretty ingrained in the community and his board.
Here's a good board that...
Speaker Change: You know, hopefully we'll refer some business. So it's just a nice little deal that could be...
Speaker Change: really powerful to help us, you know, maybe we have a really good leader down there now and feel like she can get that franchise. We grew from 186 million in loans to 700 million.
Speaker Change: and perhaps we can double or triple it with the combination of our new market president in this acquisition. So it just could be really nice and powerful, way beyond the size of the bank.
Speaker Change: So that's, Jim, anything you want to add? No, we love these small acquisitions like this. I mean, they built a great bank. We're really happy to partner with them. We think of it in terms of time. We were going to build out a big, nice bank in Cincinnati anyway, but this moves us maybe half a decade forward. It's just really...
Speaker Change: Nice. And with the smaller acquisitions, it's at a lower risk. So we've got great receptivity to these small acquisitions. By the way, not that we wouldn't do larger acquisitions. We're open to that, too. It all depends on what's available.
Speaker Change: Okay, I'll leave that question for somebody else but thanks for the help from both of you.
Thank you.
Speaker Change: Your next question comes from Kelly Mara from KBW. Your line is now open.
Speaker Change: Hi, thanks for the question. Um, I guess I'll take that follow-up on that.
Speaker Change: It was really nice to see the deal you announced in December, this little deal here. Wondering, I mean it seems obviously relatively small, how the pace of conversations have been going and your appetite and willingness to...
potentially string along some more of these.
Speaker Change: Yeah, we're on the ground the day after we announce a deal with whatever bank we acquire and have the...
Speaker Change: privilege to partner with just we meet the people you know two or three times over the course of the first month and and assess them and and they you know typically
Speaker Change: We find people with talents that can really help us, so we get enthused about that.
Speaker Change: and our market president there is already getting integrated with the leader there, the CEO, and so it's...
It's exciting, and it's exciting to grow your bank.
Speaker Change: Like I said before, we did a little $186 million acquisition with a family down there, family-owned.
Speaker Change: They helped us really grow that to three quarters of a billion dollars in about five or six years. So, you know, that's just those are powerful, nice little deals. And I mean, just line them up. It's just we're pretty.
Speaker Change: thoughtful around pricing so you know we'll leave something on the table for a couple bucks a share.
Speaker Change: and maybe to a fault, unfortunately. And we just want to grow our company and we just have a good team and we're getting to a point where we've kind of got through $10 billion and we're still profitable.
Speaker Change: and so pretty enthused about the growth prospects, some of the talent we've put on in the last year and a half to two years, and what the bank could look like at $15 or $20 billion.
We feel like our best years are ahead of us.
Speaker Change: Got it. That's really helpful. I also want to touch on credit. I appreciate the charge off you took was our
Speaker Change: previously reserved for. We are hearing more banks talk about the normalization of credit and what that looks like. I understand a good portion of your MPAs are related to
Speaker Change: credits that were required in prior acquisitions. But as you look ahead, can you provide ... Just remind us ...
Speaker Change: specific reserves remaining on NPAs and kind of how you guys are working through the risk rating of your portfolio.
Speaker Change: I'm going to turn it over to Brian Sahaki, our Chief Credit Officer, who's
Speaker Change: are intimately involved in all of this, but credit is just vital to the future of our bank and we feel like notwithstanding this recent acquisition, our numbers are really clean. Nonetheless, as we get through this, we look at the prospects in Harrisburg and to grow that market and we really like where we're at and the team we have in place.
Ryan
Ryan Thomas: Thanks, Mike. I'll answer a couple of ways. First, overall, the asset migration in the portfolio, we saw some positive trends, especially over the last two quarters, starting with improvement from our watch-rated credits.
through delinquency, through criticized assets and NPLs.
We saw some nice improvement in each of those categories.
and, you know, then the criticized assets.
Ryan Thomas: We saw a further reduction, you know, in the third quarter, we saw the first nice drop in criticized assets.
Ryan Thomas: and we built on that in the fourth quarter. And then last, some really nice movement in the NPLs.
Ryan Thomas: You know, the non-performing loans overall decreased by just over $13 million in the fourth quarter.
Ryan Thomas: Centric loans decreased nine and a half in the quarter. So as we turn the page,
Ryan Thomas: into next year. It surely provides a headwind as a percentage of our asset base, but we've seen some nice favorable trajectory and in those trends and look for more of a normalization in the in the centric portfolio.
Speaker Change: just originated credits, how is credit more broadly holding up? How are conversations with your borrowers? Are you seeing, you know, any signs of stress, particularly with rates potentially staying higher for longer?
Speaker Change: Yeah, we're watching equipment finance closely. We're pretty pleased there with how that's unfolding. Same thing with indirect auto and just consumers having higher interest rates and more debt, credit card debt, things like that.
Speaker Change: We're pleased with what happened with delinquency here in the last quarter. I think it was almost cut in half, Brian, from like 50 basis points to 25. Am I in the ballpark?
Speaker Change: So it's just pretty good news. I think we're feeling it a little bit with the SBA portfolio. Those are higher rates.
Speaker Change: but even there you have a 75% guarantee and so you know we're monitoring it closely and I think the guidance we have for charge-offs longer term is guys
So 25 to 30 basis points. Right.
Got it. Thank you.
Speaker Change: ... comes from Matthew Reese from Stephens, Inc. Your line is now open.
Okay, good afternoon.
Hey, Matt.
Speaker Change: A few questions for me. The first one, just maybe on balance sheet stuff.
Speaker Change: Cash balances seem to be a little bit on the lower side, and I was hoping Jim you could just
Jim Reske: give us some update or some outlook on securities and the securities portfolio as a whole for 2025. Yeah, thanks, Matt. Very straightforward. We were carrying a ton of excess cash through three quarters of last year. We participated in the Fed's BTFP program, and we've had previously disclosed and talked about this.
Speaker Change: It was about $500 million when we were able to lock that rate in. We kept it.
Jim Reske: Turn around and put some of that money back on a positive Fed and
Jim Reske: Benefited from that arbitrage to some small extent, but it had a we were carrying a lot of that cash through three quarters of the year. We paid off most of that.
Jim Reske: in the first three days of the fourth quarter. And in the remaining, I think we had 80 million left that we paid off in November, so...
Um...
Jim Reske: It's nice, but actually then it had such a distortive effect on things, and it's really nice to have that behind us. Now we're basically in a much more normal position. So I think, for example, yesterday we were borrowing $50 million on a given day. That's just about right. That's a pretty well-balanced and well-funded bank in my view, so that's pretty normal.
Jim Reske: On the securities portfolio, we generally gonna keep it about where it is. We have a plan for very modest growth. And you know, there's obviously there's some runoff, but with the rates where they are, that's still pretty.
Jim Reske: pretty slow. We did do a little pre-funding of runoff at the beginning of the fourth quarter, so if you look, dig really into the details in our financials, you'll see a term borrowing, and that's because we pre-funded about $125 million of expected runoff.
Jim Reske: bought the securities. That's when we thought rates were going to be falling, so we bought it, locked in the rates, and then we went out on the curve when the yield curve was inverted and did a two-year borrowing to fund that. So that's just kind of a one-off event, but that was nice. But for 2025, the securities portfolio is going to stay pretty flat.
Got it. Okay.
Ryan Thomas: Mike, you had discussed the equipment book a little bit, and certainly a kind of up-and-to-the-right trajectory for C&I as a whole. Where do you start to draw the line as, you know, in terms of concentration on equipment finance as a portion of the total loan book?
Ryan Thomas: You've thought about that, and you're probably in the vicinity of 10% or less.
is where my head's at in my...
Speaker Change: My team and I will debate that, and we really like the business. We just like the way it's run. I think we have a very good athlete there that can build a bridge to the corporate bank. You know, maybe that could take a bigger portion of the pie, but I just like the business. We like
Speaker Change: I don't know, it's almost consumer-like business, helping small business with essential business equipment. A lot of that is in market, so it kind of fits us like SBA even.
Speaker Change: That's probably, I'm probably going to get some blowback from somebody at 10% or less, but you know, it can't be 20% of the book, that's for sure.
Speaker Change: Right, and as I think about your comments on mid-single-digit growth next year, but thinking about...
Speaker Change: What's going to drive C&I? It feels like equipment could be the biggest driver. Again, is it fair to assume that this portion of the book is going to grow by...
Speaker Change: 15% a quarter or so until you kind of get to that 10% of loans level.
Speaker Change: Well, the equipment finance in and of itself will grow at that rate. You have about a billion-dollar book outside of equipment finance.
Speaker Change: in C&I that has to go grow through its own volition. That's the book that we, you know, we want to grow aggressively. We feel like that's part of that in small business and that business banking segment and then the...
Speaker Change: The middle market segment is one of the most valuable segments at any bank in terms of profitability. You know, you have lending, you have deposits, you have owner's accounts and family-owned businesses, you have employees.
Speaker Change: You cross sell treasury management services, and you know the people, and you get to know them and get through things over decades in a good C&I relationship. And that's hard for...
Speaker Change: banks smaller than us to build those kinds of relationships and we just feel like we'll be able to do that very well particularly with
Speaker Change: the concentration of talent we have, and also the credit acumen and skill. And so that's probably a segment we're most excited about. And commercial real estate will still grow. However, I think over...
Speaker Change: five, ten years, I think I'd like to see the CNI become a prominent piece of the portfolio, you know, 16, 17, 18 percent to more like 25 to 30.
Thank you.
Speaker Change: On the center bank deal, could you help me out with a few items? Just basically accounting stuff.
Speaker Change: What is the projection for share issuance or what was their share count?
Speaker Change: And Jim, do you have any idea of what expected accretable yield should look like, you know, the first quarter of integration, just to kind of get the name right?
Jim Reske: Yes, second question first. I don't think the credible yield will be much. I don't have the exact figure for you yet, but I'll disclose it when I have it.
Jim Reske: It's not going to be much. I'm glad you asked though because I'm not sure it's fully appreciated our estimates. We look at their revenue and expense.
Jim Reske: per quarter in the second half of this year. It's about a little over $4 million of spread income. I mentioned the micro parity marks a couple hundred grand of...
income about 1.3 million of expenses
Jim Reske: So that's enough extra tax to be about two and a half million of net income benefit, but we're issuing three million shares together. That's why you get to about a penny a share pickup.
Hope that some of those details help you.
Speaker Change: Very helpful. Yep, yep. Gets me in the ballpark. Okay. And then, Jim, the last one for me is just, you know, your prior comment on loan yields. That, you know, basically loan yields can go from six to six and a quarter.
Speaker Change: Feels like a steep ramp to get the whole loan book of six to six and a quarter. Can you help me square all that?
Speaker Change: Maybe provide some additional color on what new loan yields are to help get you that 25 dips
Speaker Change: Yeah, the new loans are coming in like at 7.4, 7.5. When we look at next year's projection because we took rates down, we're taking rates down 50 base points next year. The new loan yields are in the high sixes, 50 base points, so about 6.7.
So that
Speaker Change: That helps. The rate cuts that we have planned in our forecast don't come in towards late in the year. They're like in September, November.
Speaker Change: So you don't really get that downdraft in the variable rate portfolio that you're talking about. That is in our modeling, but you don't get until towards the end of the year. So that's kind of what helps to work together to get the yield in the portfolio up, even in the year when rates are going to be declining.
Speaker Change: Got it, okay, that might square the difference. That's all I had, I'll leave it there. Thank you for taking my questions.
Thanks for that.
Speaker Change: Once again, ladies and gentlemen, if you have a question, it is star 1 on your telephone keypad.
Speaker Change: Your next question comes from Manuel Navas of DA Davidson. Your line is open.
Hey, good afternoon.
Manuel Navas: What happens if we have one less cut? Could that range of 4Q exit and in be a little bit, be even 25 basis points on the high end? What other wildcards are you thinking with that range for the end of the year?
Manuel Navas: So, it's funny, I remember a year ago, before the Fed cut it all,
Speaker Change: We're kind of asked what's the Goldilocks scenario for us. We would say one cut because one cut lets us cut the positive rates and doesn't
Speaker Change: on the portfolio March. So we've had four cuts since then, and now we're looking at a two. So the answer to your question is, if Hs stay where they are right now, it's a great environment.
Speaker Change: rates are one cut instead of two, it's better than our forecast because we have the two baked in. So there's another aspect to this with the shape of the yield curve because we find that when the 10-year drops a little bit, we get a lot of...
Speaker Change: We finance out of our commercial book that goes to the permanent market and so the prepayment speeds pick up And the tenure picks up again that slows down. So there's that affects the loan balances on growth and
Speaker Change: It has some effect also on consumer demand, because a lot of consumer products are priced in the middle of the yield curve, and so when that goes up, then consumer demand slows down a little bit. So there's lots of effects across the curve, but generally speaking, you know, two cuts is better than four, and one cut is better than two.
That's helpful.
Speaker Change: If we get those two cuts and then have a steeper yield curve, like...
Speaker Change: Would you kind of expect the NIMT to stay stable at that point in 2026? I know there's a lot in that question. I just kind of thought, thinking about like...
Speaker Change: Could it get higher after that point or would it kind of be stable at that point?
Speaker Change: You know, I'll have to take the answer anyway because all our projections going to 26 had rates been dropping
Speaker Change: dropping and dropping and I haven't run it to see what it looks like if you just do what you just laid out. I'll have to look at that and maybe give more guides next quarter.
to get more 2026.
Speaker Change: I would think we continue to be better because if it is stopped, we'll continue to be issuing new loans in the sevens or high sixes at least, and that's higher than the portfolio yield and that'll just keep going and be able to bring...
Speaker Change: Deposit prices down from where they are now, we're not even banking on that to get to our forecast, so I would think that there's upside for us over the forecast in 2026.
Speaker Change: but I was just looking at this and even the outside vendor we use that everybody uses for a rate forecast still has quite a bit of cuts in 26. So we have to run it differently to see what that looks like.
Speaker Change: Since I'm a non-profit finance guy, the only thing I would add is a scenario like that primes the pub for demand.
Speaker Change: It helps consumers, it'll help our fee businesses, and so there'll be a nice counterbalance there in terms of demand. All of a sudden, we're not really expecting a lot in mortgage and other kinds of fee businesses. They could be back on the table.
Speaker Change: If that mortgage rate gets into the mid-fives and So yeah, there's another side to that too aside from just the impact on the NIN is the demand Yeah, what it could do for us
Speaker Change: Switching to the deposit side for a moment, you talked about
Speaker Change: rates did come down in the quarter. Do you feel that that's continuing and maybe the next shift to CDs will slow as well? Yes, and I'm really glad you asked because
Speaker Change: There is stuff going on below the surface. Some of it was distorted by the large deposit that we disclosed. So we brought them in and that's our deposit. And so that alone, I think, added three or four basis points to the total cost of deposit. It's just that one deposit.
Speaker Change: So there is movement in different categories, but let me give you one example. I pulled this out. I'm so glad you asked because I wanted to have a chance to talk about this. We try to track the intra-category movement in our deposit categories. Again, because it's what we got wrong.
Speaker Change: on the way up, looking at how many of our low-cost money markets, for example, would reprice upward to higher-cost money markets, take advantage of the special we have in the branch window.
Speaker Change: And so we segment it and we stratify it. And so, for example, in the second quarter of last year, we stratified by rate. Over 50% of our entire money market category, which is our largest deposit category, was over 4%, 50% over 4%.
Speaker Change: And then in the third quarter, it was only 43% of that category of 42% total money markets were over 4%.
Speaker Change: and in the fourth quarter that was down to 36 percent.
Speaker Change: So, now they're not falling to 1%, they're going to the next tier, right? So, well, but it does show you that what we saw happening on the way up was this positive rotation. It was a story on every earnings call.
Speaker Change: is really kind of ground to a halt. And we're able to, along with other banks, because of competition, everybody's doing the same thing, bring these deposit costs down.
Speaker Change: I mentioned the CD maturities earlier. We already have plans in place at every maturity to bring the renewal rates down. And we've been very good at retaining about 80% of the CD maturities when they mature anyway. So there's real opportunity there in the deposit time.
Just swinging back to your 2026 for a second.
Speaker Change: Should I expect you to try to defend the NIM across this year or towards the end of the year? Is that something you would consider if you have that view?
Speaker Change: next year, and you're getting like a strong win this year, would you try to defend it and keep it up synthetically or otherwise?
Speaker Change: It's a great question. It's an interesting use of language because I don't think as we think about the bank, we have fundamentals. We want to grow earnings per share. We want to develop value for shareholders, grow ROA, grow ROA, all those things.
Speaker Change: We try to understand the NIM, but we would not try to just defend the NIM at the expense of all the other things we're trying to do to grow the bank and grow shareholders. So a lot of what we're doing for next year, for example, we keep talking about is loan growth. We've come off a period of relatively low loan growth, but great deposit growth. That's really helped our liquidity and capital position. That's been great.
Speaker Change: But we want to just return to normalcy. That single-digit loan worth is now reaching for the stars. It's normal for us.
Speaker Change: and very achievable. So a lot of what we're thinking of is grow the balance sheet, table stakes, just normal organic growth, fund that as you go, and then let's see what happens to them, but we wouldn't upset that apple cart just to defend the net.
Speaker Change: if you see what I'm saying. I think we understand it as opportunity. Minimum rise anyway, but there's a place we want to take the bank organically. And that's really what's driving the balance.
Speaker Change: Yeah, I also think we look at relative profitability pretty closely. If you look at...
Speaker Change: 82 banks between 10 and 100 billion. We're looking at where we stack rank in terms of our profitability.
Speaker Change: every quarter. And the quality of the bank, part of that equation is profitability, part of it is growth. But also you can get to ROA a couple different ways. You can get there with credit, you can get there with NIM, you can get there with costs. We're pretty good cost managers.
So it's all in there, but we want to be
Speaker Change: you know, in any three or four-year horizon, the Return on Tangible Common Equity, ROA, you know, we want to be in the upper quartile.
Speaker Change: It's the way we think and kind of obsess about our financial performance. Emmanuel, I'm going to give you one more thought on that. Hopefully this puts a fine point on it.
Speaker Change: Just that thinking, I hope this illustrates it for you. If we look at any given quarter where we have, for example, 1% loan growth, and we say, oh, in this quarter we have opportunity to...
Speaker Change: really bring down deposit costs because you don't need to deposit growth in this given quarter. We could have, we could manage the need even higher, manage deposit costs down even lower. We generally don't do that because you're managing the bank for the long term and we want to continue to have a nice
Speaker Change: study quote-unquote glide path of deposit growth to make sure we're funding the bank for the long term. It's more, that's the way we think of it for better or worse.
Speaker Change: We're very coachable, by the way. We listen to everybody. That's true. I appreciate this extra commentary, and thank you.
Thank you.
Thank you.
Speaker Change: There are no further questions at this time. I will turn it to Mike Price, President and CEO.
Speaker Change: I think we put everybody to sleep, Jim. Thank you. We appreciate your sincere interest in our company and we look forward to being with a number of you over the course of the next quarter.
Speaker Change: Have a great remainder of the winter. Take care. Thanks, Operator.
Speaker Change: Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.
[music]
Speaker Change: Matthew Breese, Frank Schiraldi, Thomas Price, Manuel Navas, Thomas Price, Manuel Navas
and the