First Commonwealth Financial Corp (FCF) 2024 Q4 法說會逐字稿

Hello, and welcome to First Commonwealth Financial Corporation fourth-quarter 2024 earnings conference call. Please note that this call is being recorded. (Operator Instructions). I'd now like to hand the call over to Ryan Thomas, Vice President of Finance and Investor Relations. You may now begin.

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 Grebenc, Bank President and Chief Revenue Officer; and Brian Sohocki, Chief Credit Officer.

As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental information that will be referenced during today's call.

Before we begin, I need to caution listeners that this call will contain forward-looking statements. 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 statements.

Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for our reported results prepared in accordance with GAAP. 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.

Thank you, Ryan, and welcome, everyone. In the fourth quarter, we met consensus earnings estimates of $0.35 per share and preserve relatively strong profitability. We ended the year with a fourth quarter pretax pre-provision ROA of 1.77%, 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, managed expenses and selectively pursued high-yielding loan categories in the face of unanticipated deposit pricing pressure, higher credit costs and six months of Durbin. 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 than when we started, we made some key hires that will enable C&I growth, further integrated our last acquisition announced another one, all while staying focused on achieving and maintaining top quartile profitability.

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. C&I Equipment Finance was a notable bright spot and the portfolio grew $61 million alone in the fourth quarter. 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 for the year where average deposits grew some $451.1 million or 5%. 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. We're seeing fairly balanced deposit growth across most of our regions, and our teams are all tasked to grow core deposits with an emphasis on transaction accounts.

More importantly, we feel our balance sheet is now primed for growth and profitability as we turn on the loan growth engine in 2025. 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. We continue to emphasize the acquisition of C&I relationships across middle market, business banking and small business.

Our optimism regarding loan growth in 2025 and beyond, stems from we have strong regional accountability and two new regional presidents in key growth markets, both of whom have strong C&I backgrounds. We've hired a bevy of talented C&I commercial bankers and leaders over the last 24 months. 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, commercial real estate, SBA, equipment finance, indirect and consumer lending. We will strive for mid-single-digit loan growth this year. 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.

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.

Credit costs, driven by lingering pressures and our Centric acquired loans were elevated throughout the year but moderated in the fourth quarter. Encouragingly, NPLs declined from 0.83% to 0.68%, and reserves to loans remained above peer levels signaling continued strength in our credit position. We had elevated charge-offs in this quarter, but a lot of that reflected the charge-off of three nonperforming loans we had recognized and provided for last quarter.

Our 2024 credit metrics were significantly impacted by the acquired Centric loan portfolio. However, our asset migration trends are favorable as we enter 2025. 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 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 math.

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.

And with that, I'll turn it over to Jim Reske, our CFO.

Thanks, Mike. Fourth quarter core earnings per share of $0.35 is up $0.04 from last quarter, largely driven by a $4.1 million improvement in provision expense. On a linked-quarter basis, we saw our combined improvement in fee income and expense of $1.9 million that was somewhat offset by a $1.4 million decline in spread income.

We had total NIM compression of 2 basis points in the quarter, but purchase accounting contributed 7 basis points to the NIM in the third quarter, and 5 basis points in the fourth quarter. So without the fade out of the purchase accounting, the reported NIM would have been unchanged.

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 towards the end of last quarter. Average deposits were up in the fourth quarter by $207 million or 8.7% annualized over the last quarter.

So the average was up largely, though not entirely due to that large commercial deposit. The new growth came as we continue to acquire new deposits at less than our borrowing costs, all while pricing down our overall book.

The result was a modest 1 basis point decline in our total cost of deposits to 2.07%. The other dynamic affecting deposits was movement in public funds. 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, which always decline toward the end of every year before coming back in the first quarter.

Turning to loans. Loans grew by $23.5 million in the fourth quarter for an annualized growth rate of 1.04%. 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, as Mike talked about, and so in the portfolio runoff headwinds that we had in 2024 get behind us.

So putting that together, growing spread income in 2025 will be a function of loan growth in the NIM. We believe that the net interest margin can expand in 2025. Our internal forecasting is now based on only two rate cuts next year. And in that scenario, the NIM is relatively stable in the first quarter, but expand steadily over the remainder of 2025 to end the year 10 to 20 basis points higher than it is now.

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 equipment expenses, leading to positive operating leverage in 2025. We were confident of our ability to grow top line revenue before the recently announced CenterBank acquisition, but that acquisition will create modest additional operating leverage after we close as planned in the second quarter of this year, contributing about $0.01 a share to EPS per quarter starting in the third quarter of 2025.

Fee income was an interesting and generally positive story in the fourth quarter. Fees improved by $800,000 over last quarter, despite the fact that the third quarter had a benefit of about $900,000 in onetime BOLI income. Fee income rose quarter-over-quarter nevertheless, due to a $700,000 increase in swap income, combined with about a $0.5 million gain on a limited partnership investment and $0.5 million improvement in mortgage gain on sale income over the last quarter net of hedging costs, of course.

Stepping back a bit, fee 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.

Looking back at 2024 as a whole, debit card-related interchange income was indeed $6.7 million lower than last year due to Durbin but fee income in total was up year-over-year by $2.6 million, primarily because of improvement in our core fee income businesses, including mortgage, wealth and SBA. As we look ahead to 2025, we believe we'll generate fee income of about $22 million to $23 million in the quarter -- in the first quarter of '25, growing gradually as the year goes on. The CenterBank acquisition contributes a few hundred thousand dollars of fee income per quarter in the second half of the year.

Noninterest expense improved by $1 million in comparison to the last quarter, largely due to some items that we experienced last quarter, including elevated operational losses and severance expense. Fraud losses declined compared to recent quarters as we began to realize the benefits of investments in enhanced fraud detection software and staffing.

We believe that noninterest expense will be approximately $68 million to $69 million in the first quarter of 2025, jumping by about $2 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 closed the previously announced CenterBank acquisition in the second quarter.

Turning to provision. Total provision expense was $6.5 million, down from $10.6 million in the third quarter. You may recall that our credit experience last quarter was the tail of just a handful of credits and this quarter's elevated charge-off experience is largely driven by the charge-off of three of those credits totaling about $8 million.

In fact, in total, approximately $8 million of our charge-offs in the fourth quarter for loans specifically reserved from prior periods. Capital ratios improved as a result of strong earnings 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.

And with that, we will take any questions you may have.

(Operator Instructions)

Daniel Tamayo, Raymond James.

Thank you, good afternoon, guys. Maybe we can just start on the fees, if you don't mind, Jim. The -- I appreciate the guidance and very clear how you laid it out. But just curious if you can talk a little bit about 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 Durbin last year, but just curious if you think that particularly on the card, you're at a decent run rate now?

On the card income, we are. We felt the Durbin 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 of credit cards as opposed to debit cards, but the run rate there is pretty solid. The SBA business continues to grow. Mortgage had a really good year, and that's actually at a time when you think that might be slow is actually doing well for us.

And then Wealth had a tremendous year towards the summer selling fixed income annuities at a time that customers thought rates were going to go down, generate a lot of fee income. 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 with this coming year as well.

And then Mike, I don't know if you want to add anything on the fundamental business as there are other things as well. Just one more thing, the swap fee income we got in the fourth quarter was good. That's really driven by customer preferences on the back-to-back swap business. So it's swapping fixed to floating depending on where the rate movements are, what expectations for rate movements are. That was really good in the fourth quarter.

And in fact, we generated a bit more in the fourth quarter than we expect to generate next year. So we think that actually is prime for growth next year. We're underestimated the amount of swap fee income we could generate next year. So swaps might be a good source of fee income for us. Mike?

Yeah, I just think Jim stated it well as the year-over-year difference from the third -- fourth quarter of '23 to '24 is about a $3.3 million downdraft. That's a little less than we thought it would be. I think we pegged at about $6.7 million. So maybe at $3.35 million.

Here you go.

So very close. But I think where there's some uptick that really helped just compensate for it was gain on sale in SBA. This time last year was $1.7 million, it's $3.1 million. Gain on sale of mortgage was $776 million in the fourth quarter last year, $1.6 million. 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 million. This year is $3 million. So just really not spectacular but pretty solid growth year-over-year that helped compensate and really blunt the impact of Durbin.

That's great color. Thank, guys. Yeah, absolutely. And then maybe one for Mike on the loan growth. I got your guidance for mid-single-digit growth next year, coming off headwinds in 2024. Curious if that's something that you expect to really start to accelerate early 2025 or if 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 guidance?

Well, really, after not doing a lot of commercial real estate in the first two or three quarters of 2024, we had a nice solid quarter with good quality credits in commercial real estate in the fourth quarter. So that helped jump start it.

We are -- we hope that it will be yoked between CRE and C&I. Likely, it will be probably a good portion will be CRE. Long term, I think if we can get a balance sheet that is 25%-plus C&I, we will have a best-in-class bank.

And that's the goal. And we put the mechanisms in place with that with talent, vision, treasury management support. So that is coming. And then we also have really capable consumer lending businesses 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 roots a little bit in 2025, where we really metered them because of liquidity and pricing in 2024. And last but not least, and perhaps most importantly, our equipment finance group continues to ramp up. It had a nice year, good spreads. We were satisfied with the lost content and just the handle that our leader has on that business.

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 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 of years where we grew every region every line of business for about two years straight. And we were falling out of bed and grown 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. Thanks for taking the questions.

Thank you.

Karl Shepard, RBC Capital Markets.

Hi, good afternoon. 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. Can you talk a little bit about the other piece of it? And just what gives you confidence when you look at your model? And how much of it is from loan growth versus the balance sheet or the deposits repricing?

Karl, 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 we think about that. So a couple of things. One is you're right, about half of it comes from the macro swaps amount. There's a table in the supplement we put out on the Investor Relations portion of our website shows just the -- in the rate environment that we're looking at the macro swaps alone will add 8 to 10 basis points of NIM for a year.

And so the question is where does the rest of it come from? 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're projecting NIM maybe a year ago on the way up when rates are on the upswing, the weakness in our projections was consistently the ability to predict customer deposit behavior. And we're very aware of that.

So we would do what we thought was fairly aggressive, predicting customer behavior and then customers made their own choices and the deposits priced up, and we saw that. So as we forecast now, we're very conservative, maybe too conservative in the way we're forecasting deposit costs now. So the NIM forecast I just gave you, our cost of deposits is not going out at all.

We do have embedded beta assumptions in some of the loans on rack rates and all the rest. But we also are generally in our philosophy, pricing for deposit growth. We want to grow the loan, so we want to grow deposits commensurate with that growth.

We like the fact that we've got the loan-to-deposit ratio from the high 90s down to low 90s. We'd like to keep it there. So we want to keep growing deposits. 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 is reducing deposit costs. We see it in our own internal market studies that show what everybody is doing. So there's opportunity for us to lower deposits. I'll give you an example, we have a $1.75 billion CD book, about $0.5 billion of that is going to mature in the first quarter and about $900 million, almost -- actually about $1 billion or $1.75 billion in the first half of next year because we kept everything so short, like everybody else.

So we have opportunities to manage the deposit costs down, but we're not banking on it. What's happening in the forecast is all on the loan side, and that's because of positive replacement yields. They're about 40 basis points positive next year. They were about 100 basis points positive in the first half of '24. We saw that come down as the year went on, about 50 basis points positive as the year went on.

So we look at positive replacement yields next year about 40 basis points. So that brings the overall loan portfolio yield up from close to 6%, just under 6% to about 6.25%, so about 25 basis points of loan portfolio yield improvement.

So when I give that NIM forecast for us, it's all the forecast is all on the asset side. Of course, it depends on the rates. We have two cuts in the new forecast. They're towards the end of next year, things gyrate and move, we'll update the guidance as appropriate. And we're also trying to stay conservative by saying next -- quarter-over-quarter, next quarter, we don't expect a lot.

It's really going to kick in when those macro swaps start to come off and that really -- the first $150 million comes off out of the $250 million this year. The first $150 million comes off on May 1. So we're counting on the days. So that's a lot of color, but I hope that helps.

No, I appreciate all of it. And then maybe one for Mike on Center. Having 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?

Yeah, I mean I've known Stewart for about six or seven years through the Ohio Bankers league and then just through our acquisition down there. And I love that his franchise straddles an area called Indian Hill with -- on either side, on Madeira or Milford, where we have a branch. So it just fits nicely and it's -- and then he has some good mortgage and commercial lenders that seem to complement ours pretty well. And he's pretty ingrained in the community and his board is a good board that hopefully will refer some business.

So it's just a nice little deal that could be really powerful to help us maybe -- we have a really good leader down there now, and I feel like she can get that franchise. We grew from $186 million in loans to $700 million. And perhaps we can double or triple it with the combination of our new market president in this acquisition. So it just could be just really nice and powerful way beyond the size of the bank.

And 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. It really -- 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 nice.

And with the small acquisitions as such it's 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.

Okay, that question for somebody else. But thanks for the help from both Thank you for the help from both of you.

Thank you.

Kelly Motta, KBW.

Hi, thanks for the question. I guess I'll take that follow-up on that. It's really nice to see that the deal you announced in December, this little deal here. Wondering, 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?

Yeah, we're on the ground the day after we announced the deal with whatever bank we acquire and have the privilege to partner with. Just we meet the people 2 or 3 times over the course of the first month and assess them. And they typically, we find people with talent that can really help us. So we get enthused about that.

And our market president there is already been integrated with the leader there, the CEO. And so it's exciting. And it's exciting to grow your bank. And like I said before, we did a little $186 million acquisition with the family down there, family-owned, and they helped us really grow that to [$0.75 billion] in about five or six years. So that's just -- those are powerful, nice little deals.

And I mean just line them up. It's just -- we're pretty thoughtful around pricing. So we'll leave something on the table for a couple of bucks a share and maybe to a fault, unfortunately.

And -- but 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. And so pretty enthused about the growth prospects, some of the talent we've put on in the last 1.5 years to 2 years and what the bank could look like at $15 billion or $20 billion. We feel like our best years are ahead of us.

Got it. that's very helpful. I also want to touch on credit. I appreciate the charge-off you took was our 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 NPAs are related to credits that were acquired in prior acquisitions. But as you look ahead, can you provide -- just remind us specific reserves remaining on NPAs, and kind of how you guys are working through the risk rating of your portfolio?

Yes, I'm going to turn it over to Brian Sohocki, our Chief Credit Officer, who's 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, we -- 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. But Brian?

No, thanks, Mike. I'll answer a couple of ways. First, overall, the asset migration in the portfolio, we saw some positive trends in the -- especially over the last two quarters, starting with improvement from our watch-rated credits through delinquency, through criticized assets and NPLs. And I know your focus is on the Centric -- acquired Centric portfolio.

We saw some nice improvement in each of those categories across the board. So as we look at it, watch assets on the Centric portfolio for the year were down $148 million, a nice reduction. And then the criticized assets, we saw a further reduction. In the third quarter, we saw the first nice drop in criticized assets, and we've built on that in the fourth quarter. And then last, some really nice movement in the NPLs. The nonperforming loans overall decreased by just over $13 million in the fourth quarter.

Centric loans decreased 9.5% in the quarter. So as we turn the page 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 Centric portfolio.

Great. That's helpful. And how about looking beyond the Centric portfolio into just originated credits. How is credit more broadly holding up? How are conversations with your borrowers? Are you seeing any signs of stress, particularly with rates potentially staying higher for longer?

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. 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? And so it's just pretty good news. I think we're stealing it a little bit with the SBA portfolio. Those are higher rates. But even there, you have a 75% guarantee. And so we're monitoring it closely. And I think the guidance we have for charge-offs longer term is, guys?

25 to 30 basis points.

Got it, thank you

Matthew Breese, Stephens Inc.

Good afternoon.

Hey, Matt.

A few questions for me. The first one, just maybe on balance sheet stuff. Cash balances seem to be a little bit on the lower side. And I was hoping, Jim, you could just 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 had previously disclosed and talked about this. It was about $500 million when we were able to lock that rate in. We kept it to around and put some of that money back on deposit with Fed and benefited from that arbitrage to some small extent, but it had -- we were carrying a lot of that cash through three quarters of the year. We've paid off most of that in the first three days of the fourth quarter. And then the remaining, I think we had $80 million left we've paid off in November.

So it's nice, but actually that had such a distortive effect on things. So it's really nice to have that behind us. And now we're basically at a much more normal position. So I think looking 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.

On the securities portfolio, we're generally going to keep it about where it is. We have a plan for very modest growth. And there's -- obviously, there's some runoff but with the rates where they are, that's still pretty slow.

We did do a little prefunding 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 prefunded about $125 million of expected runoff, bought the securities, that's when we thought rates are going to be following, so we bought it locked in the rates, and then we went out on the curve when the yield curve was inverted, and to your borrowing to fund that.

And 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. Mike, you'd discussed the equipment book a little bit and certainly kind of up into the right trajectory for C&I as a whole. Where do you start to draw the line in terms of concentration on an equipment finance as a portion of total loan book?

We thought about that and probably in the vicinity of 10% or less, is where my head is at and 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. Maybe that could take a bigger portion of the pie.

But I -- we just like the business. We like -- 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. And so that's probably -- I'm probably going to get some blowback at 10% or less, but it can't be 20% of the book. That's for sure.

Right. And as I think about your comments on mid-single-digit growth next year, but thinking about 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 15% a quarter or so until you kind of get to that 10% allowance level?

Well, the equipment finance in and itself will grow at that rate. You have about $1 billion book outside of equipment finance in C&I that has to go grow through its own volition. That's the book that we want to grow aggressively. We feel like that out of -- that in small business and that business banking segment and then the middle market segment is one of the most valuable segments at any bank in terms of profitability.

You have lending, you have deposits, you have owners' accounts and family-owned businesses, you have employees, you have 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 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 the concentration of talent we have and also the credit acumen and skill.

And so we're -- that's probably a segment we're most excited about. And commercial real estate will still grow. However, I think over 5, 10 years, I think I'd like to see the C&I become a prominent piece of the portfolio, 16%, 17%, 18% to more like 25% to 30%.

On the CenterBank deal, could you help me with a few items.

Just basically accounting stuff. What is the projection for share issuance? Or what was their share count? And Jim, do you have any idea of what expected accretable yield should look like the first quarter of integration just to kind of get the NIM right?

Second question first. I don't think the accretable yield will be much. I don't have the exact figure for you yet, but I'll disclose it when I have it. It's not going to be much. I'm glad you asked, though, because I'm not sure it's fully appreciated in our estimates. We look at the -- their revenue and expense per quarter in the second half of this year, it's about a little over $4 million of spread income.

I mentioned in my prepared remarks, a couple of hundred grand of fee income, about $1.3 million of expenses. So that's enough after tax to be about $2.5 million of net income benefit, but we're issuing 3 million shares to get it. That's why you get to about $0.01 a share pickup.

I hope that some of those details help you.

Very helpful. Yes. Yeah, gets me in the ballpark. Okay. And then, Jim, the last one for me is just your prior comment on loan yields that basically loan yields can go from 6% to 6.25%. I think you had said you're expecting two cuts this year. And from prior comments, I think you've said that you have about one-third of the book that floats.

And so if I think about the floating rate portion is going to be repricing down from Fed cuts. And then the other two-third of the book is going to have to go pretty sharply up into the -- it just feels like a steep ramp to get to whole loan book of 6% to 6.25%. Can you help me square all that and maybe provide some additional color on what new loan yields are to help get you that 25 bps?

Yeah, the new loans are coming in like 7.4%, 7.5%. When we look at next year's projection because we took rates down -- we're taking rates around 50 basis points next year. The new loan yields are in the high 6s, 50 basis points, about 6.7%. So that helps. The rate cuts that we have planned and our forecast don't come in towards late in the year.

They're like in September, November. So you don't really get that downdraft in the variable rate portfolio that you're talking about. That is in our model, but we don't get until towards the end of the year. So that's kind of what helps to work together, get the yield on the portfolio up even in the year when rates are going to be declining.

Got it. Okay, that might score the difference. That's all I had. I'll leave it there. Thank you for taking my questions.

Thanks, Matt.

(Operator Instructions)

Manuel Navas, DA Davidson.

Hey, good afternoon. What happens if we have one less cut. Could that range of 4Q exit NIM 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?

So it's funny. I remember a year ago before the Fed cut at all, we were kind of asked what's the Goldilocks scenario for us. We had said one cut because one cut lets us cut deposit rates and doesn't price on the portfolio much. So we had four cuts since then, and now we're looking at it, too. So the answer to your question is, if rates just stay where they are right now, it's a great environment.

If rates are one cut instead of two, it's better than our forecast because we have the two baked in there. So there's another aspect to this with the shape of the yield curve because we find that with a 10-year drops a little bit, we get a lot of refinance out of our commercial book that goes to the permanent market and so the prepayment speeds pick up.

And the 10-year picks up again, that slows down. So there's -- that affects loan balances, loan growth and has some effect also on consumer demand because a lot of the consumer products are priced in the middle of the yield curve and so when it goes up, then consumer demand slows down a little bit. So there are lots of effects across the curve, but generally speaking, two cuts is better than four and one cut is better than two.

That's helpful. And if we get those two cuts and then have a steeper yield curve, like would you kind of expect the NIM 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 could it get higher after that point or would it kind of be stable at that point?

I'll hesitate to answer anyone because all our projections going to '26 had rates been 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 have to look at that and maybe give more guidance next quarter to get more 2026 guidance.

Off the cup, I would think it would -- we continue to be better because it gets stopped, we'll continue to be issuing new loans in the 7s or high 6s at least, and that's higher than the portfolio yield, and that will just keep going and be able to bring 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. But I was just looking at this and even the outside vendor we use that everybody uses for rate forecast still has quite a bit of cuts in '26. So we just have to run it differently to see what that looks like.

Yeah. Since I'm a non-profit finance guy, the only thing I would add is a scenario like that primes the pub for demand. It helps consumers. It will 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. If that mortgage rate gets into the mid-5s. And so yeah, there's another side to that, too, aside from just the impact on the NIM is the demand, what it could do for us.

Switching to the deposit side for a moment. You talked about it wasn't that much of deposit cost decline this quarter. But if you look at the components, there a lot of components, but your product rates did come down in the quarter. Do you feel that, that's continuing and maybe the mix shift to CDs will slow as well?

Yes. I'm really glad you asked because there is stuff going on below the surface. Some of it was distorted by the large deposits we disclosed. So we brought that in deposits. And so that alone, I think, added 3 or 4 basis points of total cost of deposits, just that one deposit.

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 just -- we try to track the intra category movement in our deposit categories.

Again, because it's what we got wrong on the way up, looking at how many of our low-cost money markets, for example, would reprice upward to higher cost lending market, take advantage of the special we had in the branch window.

And so if 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%.

And then in the third quarter, it was only 43% of that category -- 43% total money markets were over 4%. And in the fourth quarter, that was down to 36%. So now they're not falling to 1%. They're going to the next tier, right? So -- but it does show you that what we saw happening the way up was this deposit rotation. It was a story on every earnings call, 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. 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 on the mature anyway. So there's a real opportunity there on the deposit side.

All right. Just swinging back to your 2026 for a second. Should I expect you to try to defend the NIM across this year or towards end of the year? Is that something you would consider if you have that view on next year and you're getting like a strong NIM this year, would you try to defend it and keep it up synthetically or otherwise?

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 ROE, grow ROA, all those things. 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 our shareholders.

So a lot of what we're doing for next year, for example, we keep talking about is loan growth. We come off a period of relatively low loan growth, a great deposit growth. That's really helped our liquidity and capital position. That's been great. But we want to just return to normalcy mid-single digit loan growth is not reaching for the stars.

It's been normal for us and very achievable. So a lot of what we're thinking is grow the balance sheet, table stakes, just normal organic growth, fund that as you go. And then let's see what happens to NIM. But we wouldn't upset that apple cart just to defend the NIM. If you see what I'm saying. I think we understand it as opportunity, NIM will rise anyway, but there's a place we want to take the bank organically, and that's really what's driving the business. I hope that.

Yeah, that's something we look at relative profitability pretty closely. If you look at 82 banks between $10 billion and $100 billion, we're looking at where we stack rank in terms of our profitability every quarter. And the quality of the bank, part of that equation is profitability, part of it is growth.

And -- but also you can get to ROA a couple of 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 in any three or four year horizon, a return on tangible common equity ROA, we want to be in the upper quartile. It's the way we think and kind of obsess about our financial performance.

And Manuel, I'm going to give you one more thought on that. Hopefully, this puts a fine point on it. For example, 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 really bring down deposit costs because you don't need the deposit growth in this given quarter. We could have -- we could manage the NIM even higher, manage deposit costs down even lower.

We generally don't do that because we manage the bank for the long term, and we want to continue to have a nice steady clinical 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.

We're very coachable, by the way, less than everybody.

I appreciate this extra commentary. Thank you.

Thank you.

There are no further questions at this time. I will turn it to Mike Price, President and CEO.

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. Have a great remainder of the winter. Take care. Thanks, operator.

Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.