First Commonwealth Financial Corp

NYSE:FCF

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to the First Commonwealth Financial Corporation Third Quarter 2024 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Ryan Thomas, Vice President of Finance and Investor Relations. You may begin.

[Ryan Thomas, executive]

Thanks, Rob, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's third 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; Brian Taake, Chief Credit Officer; and Mike McEwen, our Chief Lending Officer.

As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and select 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. 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.

[Thomas Michael Price, executive]

Thank you, Ryan, and welcome, everyone. Third quarter 2024 core earnings per share were $0.31. Loans were essentially flat. Deposits grew and the net interest margin fell 1 basis point to 3.56% as rates declined in anticipation of the Fed rate cut in September. Growth in other fee income offset a $3 million decrease in interchange income as we incurred the long anticipated impact of Durbin.

Expenses were elevated primarily due to several onetime items. All of this led to pretax pre-provision ROA of 1.73%, an efficiency ratio of 56.6% and core pretax pre-provision net revenue of $50.9 million, which was within $1 million of analyst consensus.

Turning to credit. The provision expense at $10.6 million was up $2.8 million over the second quarter. Our credit story in the third quarter was largely the tale of 4 credits. Embedded within the elevated provision expense or specific reserves for 2 legacy loans and 2 charge-offs related to the Centric acquisition now in our capital region. Most, but not all of the 2 Centric charge-offs had been previously provided for, but they together accounted for approximately $1.5 million of provision expense this quarter on top of to $5.5 million for the 2 legacy loans.

Over the last 7 quarters, a disproportionate share of our credit costs have stemmed from our acquisition of Centric, that closed in the first quarter of 2023. As we've shared previously, we understood the credit profile going in, so we marked the credit and priced the deal accordingly. However, the acquired portfolio continues to impact our credit performance. For a bank that was 10% of our size, the former Centric loans have accounted for 76% of commercial charge-offs and 51% of total charge-offs in 2023.

In 2024 year-to-date, former Centric loans have accounted for 86% of commercial charge-offs and 42% of total charge-offs. At September 30 criticized loans were 2.68% of total loans. Excluding Centric loans, that ratio would be 1.69%, which is actually an improvement from the [ 1.72% ] figure on the day that Centric closed. However, we continue to make substantive progress with Centric credits in the capital region each quarter.

Also important, stronger third quarter gain on sale income and SBA alongside increases in service charge and wealth management income and $926,000 in BOLI income, all worked together to blunt the $3 million impact of having our debit card interchange income cut in half due to the Durbin amendment. In fact, noninterest income drifted down only $683,000.

Looking ahead, we expect noninterest income to be in the $22 million to $24 million range in the fourth quarter. Turning now to expenses. We had elevated expenses this quarter of $70.1 million, up $4.3 million over the prior quarter. Third quarter expenses reflect approximately $1.8 million of onetime items, including a $1.1 million operational loss in credit card and it's $750,000 in severance expense. We expect noninterest expense to be $67 million to $68 million -- in the $67 million to $68 million range in the fourth quarter.

Beyond the financials, there are a few other items worth mentioning. First Commonwealth earned recognition as the #2 SBA lender by dollars in Western Pennsylvania for the 2024 fiscal year ending in September. As of October 15, our overall Customer Satisfaction Score and Net Promoter Scores have hit 5-year peaks at [ 90.4 ] and [ 70.3 ], respectively. We've seen a steady trend of increases in these figures since 2020 with both exceeding industry benchmarks. These are important metrics for us, especially as we cross $10 billion in assets.

Although we are disappointed by our third quarter earnings per share miss, I'm encouraged by the momentum in our businesses and prospects for stronger growth ahead. Despite a relatively healthy level of loan originations this year our overall loan growth has, in some ways, been purposely muted by: one, our rebuilding of the Centric portfolio; two, our strategic decision to reduce exposure to certain sectors like sponsor finance, and three, the shift to selling nearly all of our mortgage originations. More importantly, our regional presidents have a growth mindset, have attracted new commercial banking talent that will drive the bank forward for years to come. Our new capital regions credit performance will converge with the strong credit metrics at First Commonwealth overall and become a key source of future growth in attractive central and Eastern PA markets.

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

[James Reske, executive]

Thanks, Mike. Mike has already talked about the major financial metrics, so I'll take a closer look at the net interest margin and then wrap up with about 30 seconds on capital. Last quarter, our NIM guidance was for "Stability or even slight improvement from current levels for the remainder of '24, give or take 5 basis points as usual".

While we didn't get the slight improvement part, we did get the stability part. Our NIM guidance didn't contemplate a 50 basis point rate cut in September. So in that sense, we were pleased to see our NIM exhibit relative stability by only going down by 1 basis point from last quarter. The NIM is facing various headwinds and tailwinds that largely offset each other in the third quarter, but they do give us some insight into where the NIM is going.

One headwind is excess cash. We've been holding excess cash all year because we locked in low-cost borrowings through the Fed's BFP program early in the year, and we were reluctant to pay that off. Plus, loan growth was slightly negative in the third quarter, while deposits continue to grow, resulting in a steady build above excess cash. On top of that, we received a large commercial deposit right at the end of the third quarter. All of this cash had a suppressive effect on the NIM, even though it's additive to earnings because it pumps up both sides of the balance sheet with a very thin margin asset. That cash had a suppressive effect of 6 basis points on the NIM in the second quarter, but in the third quarter, that suppressive effect of 9 basis points.

Neutralizing the effect of excess cash in both quarters, will, therefore, changed our 1 basis points of impression to 2 basis points of expansion. But realistically, that's all still within the range of what we call stability. Looking forward, the headwind of excess cash has been largely removed because on October 3, we used it to pay down $436 million of the $516 million of BFP borrowings that we had, and we will likely pay down the remaining $80 million when the Fed raises rates here in November.

Another headwind to the NIM was the 8 basis point increase in our cost of deposits. That 8 basis point increase, however, was down from 10 basis points in the second quarter and a 25 basis point increase in the first quarter. We expect that downward trend to continue. The pace of what we call deposit rotation that is the migration of deposit dollars from lower-cost deposit categories to higher cost ones continue to slow down in each month of the third quarter.

Another indicator of the slowdown was the cost of interest-bearing, non-time deposits or savings in new accounts, which have been moving up by 3 to 4 basis points per month in the second quarter, but didn't go up at all in the third quarter. Perhaps more importantly, the incremental cost of deposit growth in the first quarter was about 4.21%, in the second quarter it fell to 3.61%. And in the third quarter, it fell again to 3.22%.

In terms of competition, we see deposit pricing pressures abating rapidly in our markets, allowing for lower deposit repricing upon maturity without jeopardizing our deposit growth trajectory. And that trajectory has been remarkable. 8% deposit growth on an annualized basis so far this year. That deposit growth helped bring our loan-to-deposit ratio down by 360 basis points in the third quarter to 92.5% at September 30.

As for loans, replacement yields have been a tailwind to the NIM all through this rising rate cycle. Loan yields went up by 3 basis points for the third quarter, largely because new loans still came on the books at about 50 basis points higher than the ones that ran off. About 1/3 of our total loan production in the third quarter was fixed rate loans, and those fixed rate loans actually came on the books at 172 basis points higher than the fixed rate loans that ran off. We believe that this upper repricing should continue for a while even in the face of falling rates.

This environment is one in which we're glad to have built a diversified bank with a broad mix of fixed and variable loans and loan types both in our portfolio and in our origination mix. In addition to all of that, there are a few other tailwinds to the NIM that are incorporated into our forecast as well. Purchase accounting contributed about 7 basis points in the third quarter, down by about 1 basis point from the prior quarter. We do, however, expect that benefit to fall to only 4 to 5 basis points next quarter. And we are looking forward to the expiration of received fixed macro swaps in the near future, $50 million of received fixed macro swaps would mature in the fourth quarter of 2024, $250 million mature in 2025 and $175 million mature in 2026. These expirations should provide a lift to our NIM in 2025 and in 2026.

That, however, brings us to the biggest headwind to our NIM, rate cuts. About 50% of our loan portfolio is priced off of 1 month SOFR, so rate cuts are felt immediately. Our latest forecast calls for Fed funds to end 2024 at 4.29% and end 2025 at 2.95%. That's about 40 to 50 basis points lower than our rate forecast -- than the rate forecast that we used last quarter. So taking all of these tailwinds into account, our guidance for the fourth quarter -- for the fourth quarter sounds a lot like what we said last quarter, stability, at least for the near term.

In our latest forecast, our NIM stays in the [ mid-3.50s ] range through the first quarter of 2025, as always, give or take 5 basis points for normal variability, then gradually falls over the course of the year to end the year 2025 in the mid-40s, about 10 basis points lower than where we are today. That is too, by the way, a return to normalized mid-single-digit loan growth in 2025.

You might sum it up this way. All of the NIM tailwinds we have, removal of excess cash, following deposit rates, positive loan replacement yields, macro swap expirations. All of them work together to blunt the effect of falling rates, but aren't quite enough to overcome them if rates fall fast enough. So bracket this for you and give you some idea of the impact of rates on our balance sheet, if the Fed funds rate falls to the projected year-end level year-end 2024 level, of 4.29% and then just holds at that level through year-end 2025, the tailwinds would went out.

In that scenario, we would expect that our NIM would actually increase steadily over the course of 2025 into the [ mid-3.60s ]. I would note that the futures market is currently projecting a year-end 2025 Fed funds rate at 3.40%, which is about 45 basis points higher than our latest rate forecast. So reality will likely play out somewhere in the middle.

In terms of capital management, tangible book value per share increased $0.47 from the previous quarter to $10.03 due in part to a $28.7 million reduction in AOCI. We raised the threshold for share repurchases this quarter, buying on prices below $17 a share. And so this quarter, we repurchased 146,850 shares at an average price of $16.83.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Daniel Tamayo from Raymond James.

[Daniel Tamayo, analyst]

Maybe first to start, just on -- as we think about overall asset growth, just curious where you stand on where you want the size of the securities portfolio going forward. You touched a little bit on the loan-to-deposit ratio kind of similar. Just curious if you still want that coming down from these levels or you're comfortable in the 92% level?

[Unknown Executive]

Joe?

[James Reske, executive]

Yes. No, just we expect the securities portfolio to expand a little bit over the next year, maybe by about $100 million over the course of 2025 from where it is today. Not a huge expansion, but going to grow it a little bit. Is that what you're asking, Danny?

[Daniel Tamayo, analyst]

Yes, yes. And then just a follow-up, switching gears to credit. Just maybe if you could provide a little detail on the loans, I apologize if I did miss this earlier, but the loans that you took specific reserves on in the quarter.

[Thomas Michael Price, executive]

I'll turn it over to Brian [indiscernible] .

[Unknown Executive]

Daniel, yes, on the reserve side, there was 2 credits that drove the specific reserve for the period in the provision. First was a $2.7 million specific reserve taken on a $10 million fully funded construction loan, it was for a mixed-use office property located here in Pittsburgh. This is a participation in a global $58 million loan. The property came to a maturity in the third quarter.

And while an amendments being negotiated, the current level of vacancy, combined with the uncertain outlook resulted in the move of the entire $10 million balance to nonperforming. The second driver and that provision was a $2.8 million specific reserve taken on a $4.8 million term loan. That loan was in our sponsor finance portfolio. The credit specifically was in the distribution space. And while payments do remain current, the long-term outlook is challenged. That accounted for $5.5 million of the provision in the primary increase in the specific.

[James Reske, executive]

The 2 combine.

[Unknown Executive]

Es

The 2 combined.

[Operator]

Your next question comes from the line of Carl Shepherd from RBC Capital Markets.

[Karl Shepard, analyst]

Just to pick up on credit for a second. Can you -- anything you can say about expected loss content from those 2 legacy credits?

[Thomas Michael Price, executive]

Lost content on legacy credit.

[Unknown Executive]

Sure. The driver of the short-term outlook for our charge-offs will be through the specifics that we've made. We've had appraisals for the real estate property, and we expect to come to resolution over the next short-term period, next quarter to 2.

[Karl Shepard, analyst]

Okay. So maybe not much in the way of incremental provisioning for those 2? [indiscernible]

[Unknown Executive]

Yes, that would be the expectation.

[Karl Shepard, analyst]

Okay. And then just to follow up on the Centric credit piece. You mentioned convergence with the broader portfolio. Kind of over what time line would you expect any more erosions or charge-offs or kind of anything to emerge before we get to kind of a [indiscernible] state back with the larger book?

[Thomas Michael Price, executive]

I'll just start out at a little higher level, Carl. Just looking at Centric, the criticized loans decreased from $124 million in the second quarter to $102 million this quarter. The watch loans decreased [ $271 million to $261 million ]. So we are seeing those come down from highs and watch has been consistently improving from $376 million to start the year. So we have a group of SWAT lenders that are out there in early stage collections and are really working the bank, and that's -- we've seen nice results from that. What do you want to add, Brian?

[Unknown Executive]

Yes. I think that's helpful, Mike. From a global perspective, we'd anticipate the Centric headwind to start dissipating in 2025. It will be somewhat offset by normalized net charge-off levels in the core portfolio. I would add one point to Mike, is as you look at our charge-off ratio, year-to-date through the third quarter, it was 39 basis points on an annualized basis -- I apologize, just in the quarter, it was 39 basis points annualized [ 27 ] of that came from the Centric portfolio. So the core franchise charge-off level is in the low teens, and we're excited about that performance.

[Karl Shepard, analyst]

Okay. That's helpful, Brian. To follow up, then I wanted to ask about loan growth. You guys have been pretty deliberate and measured kind of managing to a pace. What gives me confidence that it's going to reaccelerate here and is what kind of near-term visibility do you have for the quarter into 2025?

[Thomas Michael Price, executive]

On the commercial side, in particular, the production has been really good. The headwinds have been probably for the year, about $49 million in payoffs and sponsor and probably another $97 million in Centric. And the other thing is we've just added a lot of talent to our regional teams in corporate banking and they're really starting to hit the ground running. So we just feel that we can mid-single digit and is very achievable next year and perhaps a little higher. We shall see.

Hopefully, we get some tailwinds with economic growth and -- but -- that's the reason. And we've also been able to fund it, and that is -- we're proud of that. And at the same time, we've had -- we'll have ample liquidity to grow loans. We've paid down borrowings, retired sub debt with increasing capital ratios and kind of supported the margin. So I think the team can do it.

[Operator]

Your next question comes from the line of Kelly Motta from KBW.

[Kelly Motta, analyst]

I was hoping to kind of dig into the deposit growth you saw this quarter. It looks like NIBs were up meaningfully, although not so on an average basis. I'm wondering, as we're thinking about that line, was there vulnerability that we should manage -- managing here? And also any comments as to whether or not we've seen a [indiscernible] in the pressure on noninterest-bearing accounts?

[Thomas Michael Price, executive]

Yes. We had a nice big win at the end of the quarter with business person in one of our regional markets who sold a company, and we had a pretty significant inflow of about $170 million in deposits in the last week of the month. And some of that was parked in noninterest-bearing.

Jim, what do you want to add?

[James Reske, executive]

Yes. So that really helped the quarter numbers. So that's what you're looking at all, that's what you'll see. But the other thing I would just want to point out, this is kind of behind the scenes in my deposit rotation comments. I just look at the trend in NIB month-to-month in the third quarter.

In July, there was [ $20 million ] of outflows. In August, there were [ $2.6 million ] of inflows. And in September, [ $35 million ] of inflows. So those are averages, not end of period. So the rotation seems to have really slowed down overall. We're really happy that we get a large deposit like that anytime. But for the rest of the bank, it seems like it's all moving in the right direction.

[Kelly Motta, analyst]

Okay. That's absolutely -- that's super helpful. And then I appreciate all the color and commentary you've given around sort of your outlook for margin. Just wondering, if you could expand a bit on how we should be thinking about deposit betas during rate cuts, it looks like during the tightening part of the cycle, you're [indiscernible] deposit beta was about 50%. Wondering if you could just provide some color on how you're thinking about that on the way down at least initially?

[James Reske, executive]

Yes. No, happy to address that. Our deposit beta assumption is generally about 25%. That's just backed up by long-term look back studies that kind of look at what the historical average has been. The number you're thinking about, there's always a slight variation in the way people calculate cumulative through the cycle beta because it depends on when you start the "cycle" and when you end it. But we were just looking at that the other day, and it looked like for what I -- the calculation I was doing internally or my team is doing internally, showed that we had a cumulative through-the-cycle beta on the deposit side of about 46%.

Just starting from right before when the fed started this rate hike cycle to that last -- the first rate cut in September, about 46% and accumulative. And the odd thing about that was we tried to look at the loan beta over the same period. And it was also about 46%. Just what you see is like in any bank, the timing is different. So in the early stages, we were able to reprice the loans upward very quickly, and then the deposit pricing caught up, but it evens out over time.

So in this downward cycle, we'd expect the loan deposit -- sorry, the loan beta to hit us pretty quickly with the fallen rates of the variability portfolio. And then deposit beta at about 25% able to kind of reprice those downward to kind of make up for it.

[Kelly Motta, analyst]

Got it. That's very helpful. And then you talked about cash being elevated during 3Q because -- and you used some of that to pay down BTST. I apologize if you already answered this, but what are you guys doing as a more normalized level of cash as we look to just manage the size of the balance sheet?

[James Reske, executive]

Yes. The normal level of cash will be just in the below $50 million. It just depends on any given day, how much we need to fund the bank. So I think I'm not sure if -- It's not top of my head what it is right now today. But at any given day, it might be $10 million, $20 million of excess cash you have, just to make sure you can balance the bank the end of the day. But it's not going to be $400 million lying around like it was on September 30.

If you look at the balance sheet in the press release financials that we issued, that number sticks out like a sore thumb, there's a huge increase in cash, and it's not going to stay at that level long term. It's just going to be a minimal amount of balance the bank.

[Kelly Motta, analyst]

Understood. And then finally, I was hoping you could provide any update or color on the M&A environment and the pace of conversations as it pertains to deal activity.

[Thomas Michael Price, executive]

There's been a conversation or 2, nothing has materialized and we're very interested in M&A. I think you know we will do smaller as well as larger and if the 6 deals that we've done and had the privilege to do -- have ranged from $55 million to [ $1.1 billion ]. So there have been deals that we feel like we could appropriately control the risk. And I've also shared with you that we have a team that could scale and do a larger transaction.

It just -- it would have to be just right. And Jim always likes to share we've we looked at well over 60 deals to do 6, so we're pretty disciplined. But there are -- there have been 1 or 2 things out there, and I think we've passed on 1 or 2 asked on both, actually, into the process. So hopefully, there'll be some nice opportunities to grow our bank in contiguous markets and do strategic things and rural depositories and all the kinds of things you've heard us say before.

[James Reske, executive]

Kelly, just to go back to just for what it's worth, cash this morning was stood at $45 million. It's kind of a normal level for us.

[Operator]

Your next question comes from the line of Matthew Breese from Stephens.

[Matthew Breese, analyst]

Jim, I was hoping to start -- you had mentioned that 50% of your loan portfolio reprices, I think you said of a 1-month SOFR. In the past, might even been last quarter, you whittled that down, that number to like 30% and even a piece of that is affected by the swap. So the true floating rate portion of the book, I think was closer to 27% in total loans. Could you just clarify for us -- and I'm sorry if it's going to put you on repeat a little bit, the true floating rate portion of the book, if it's 50% or 27% just because it matters a lot as we head into downward cycle.

[James Reske, executive]

Yes. I was so glad you asked that and gave me a chance to clarify. So I wanted to make sure I didn't misspeak before. About half of the portfolio is variable half [indiscernible]. That's just kind of a general rule of thumb. It does vary a little bit from kind of time. At the end of the third quarter, it was 50.67% was variable, okay? So very, very close to 50%.

But the part that is linked to SOFR is only 33% of the total portfolio, not 50%. The other section, the other 17% that's tied to all kinds of things along the yield curve. So it's variable over time, might be like a mortgage rate with a [indiscernible] arm or [ 71 arm ] that's going to reprice time's variable, but it's not going directly to SOFR, that's only 33%. And even those -- SOFR it's prime. There's still 1 or 2 [indiscernible] left that we're phasing up because that's going away. But it's 33% is all the short stuff. Thank you for letting me clarify that.

[Matthew Breese, analyst]

And I would assume as well as these swaps expire it won't be 27%, it will actually be truly more like 30 -- sound like the low 30% range, the tax year as well.

[James Reske, executive]

Well, the numbers I was giving you was irrespective of swaps. I didn't adjust the number I was just giving you to say that some of that portion swap into fixed rates. So those are just the raw underlying portfolio numbers I was giving you. .

Don't have the [indiscernible] that you're talking about. It will take away these low rate, received swaps, and we've I got on the books and let the stuff float again, and it will start floating upward. And what the cash [indiscernible] receive will be the higher floating rate.

[Matthew Breese, analyst]

Okay. Setting the true floating rate stuff aside, could you help us a little bit understand what the maturity profile is like for the fixed rate portion of the book? What's the -- either duration or how much you expect it to kind of come up to maturity next year?

[James Reske, executive]

Yes, I don't -- I don't have it broken down by like type of loan. The overall loan portfolio duration is only 2.76 years. But that reflects the -- that portion of loan portfolio that [ 32% ] linked to the short end of the curve, the other part that is variable and then a fixed rate stuff as well.

Conceptually, if this helps you, we think about the concept of what we call yield curve diversity and not really need is return, but it's something we talk about. So we have things that are priced at the long end of the curve, things like fixed rate mortgages and upon the books. But you also have things here at very short end of the curve. When you have in the middle of the curve where things like indirect auto. So we're a $1 billion portfolio, over $1 billion that reprices at the 2.5 year part of the curve.

And then the equipment finance to falling we're building. Those are almost all 5-year loans that don't really prepay at all. We call it sometimes leasing but 85% of those are loans. And when the loans and leases, they have almost a perfect 5-year duration that doesn't prepay. So that kind of builds that duration overall in case it's kind of those repricing characteristics that smooth out the repricing of the portfolio over time. But the total duration on loans, 2.76 years on securities [ 4.35 years ]. Total assets that would be -- it's 2.79 years on total assets.

[Matthew Breese, analyst]

Very helpful. And just one more on this topic and apologies if it's belaboring the point, but you'd also mentioned that there's still a positive repricing gap on a fixed rate book by I think, 170-ish basis points. You mind providing for us what those -- what the before and after those numbers are, what is it repricing to and from?

[James Reske, executive]

Yes.ae- I might take a second to find it, but I have it here...

[Matthew Breese, analyst]

While you're looking for that -- sure go ahead.

[James Reske, executive]

It will take me a second. Go ahead and ask if you have another question.

[Matthew Breese, analyst]

Yes. While you're looking through your papers. Mike, just one for you. We've seen a little bit of a pickup here in NPAs. It sounds like some of it is your own some of it from Centric. Where would you be surprised to see MPA's client to I mean, are we near the top in your view? Or are you expecting a little bit more than for normalization? And maybe some color on how you expect charge-offs to behave as well.

[Thomas Michael Price, executive]

I do. I think we're near the peak. It could pick up a little bit, but I think it would come down in the ensuing quarters. We have about 1/3 of that NPL and NPA stack is Centric. We feel like we have good line of sight on those credits. We're not being surprised as much anymore, and they're well marked, as Brian outlined. So I think, hopefully, that's a peak. In terms of charge-offs, I think Brian shared as well our charge-off figure this past quarter versus what it would be normalized that would be in the low teens. And that feels right to us longer term. And I hope that's helpful.

[James Reske, executive]

It's helpful to me because it gave me some time to find the answer to the [indiscernible] . So going back to what you're asking, I think what you're asking is the replacement yields on fixed rate loans, when I talked about 170 basis points, what are the underlying numbers. And here we are, for better or worse. In the third quarter, we originated $290 million of fixed rate loans at 7.24%. And -- but $265 million ran off at 5.52%. So the nice thing about that is rates fall on the 25 basis points. Hopefully, you replacing yields on those are 150 basis points and then another 25 basis point cut, replacing still 125 basis points, and you still get a lift even in a falling rate environment. That's how we think about it.

[Matthew Breese, analyst]

I appreciate that. Wouldn't that have a bit of a dampening effect on the loan data? It just feels like that's a steep gap, and it's more than half the book. So I'm just curious, would that -- wouldn't that dampen the 45% expected loan beta over time? And that's my last question.

[James Reske, executive]

Yes. I think it's baked in there. I just think about whether it dampens it and to what extent. We -- when we think about our loan beta for next year, it's not that far off our deposit beta. I mean, just thinking about -- it depends a little bit on when you start the falling cycle, you started in September, just on get the math the loan beta for next year. One actually was a little less than that. It was like 10% to 15% next year with a deposit beta is like 25%. So, my other point, by the way, was just over time, you go through the whole cycle. So whenever this cycle ends 3 years from now, they tend to even out over time.

[Operator]

Your next question comes from the line of Frank Schiraldi from Piper Sandler.

[Frank Schiraldi, analyst]

Just question on the large deposit that came in at the end or near the end of the quarter, last week of the quarter. Should that -- or would that tend to create some volatility in the fourth quarter? Just curious if you expect some of that to flow back out or perhaps even seeing some of that already, given we're at the end of October here.

[Thomas Michael Price, executive]

I think our best line of sight right now is that we'll have a good portion of that, that might flow out in the first quarter of next year. We'll do everything we can to hold on to it. And we'll take it while we can get it.

[Frank Schiraldi, analyst]

Sure. And then just a follow-up on the trends in deposit costs. Jim, I thought you had mentioned that you thought we'd see and maybe I'm wrong, but I thought we'd see another quarter of increased deposit cost, perhaps at a lower level. But first of all, is that what you said? And then secondly, is it possible just given 50 basis points we've seen here already in September in terms of cuts that maybe this is an inflection point for deposits in the third quarter here?

[James Reske, executive]

Well, on the last point, it felt like it. It felt like the 50 basis point cut in September. Felt like it was reflected in the markets. We could just see the market competition dissipate and the deposit movements kind of change. And it feels like everyone's got the message that rates are falling. So it's much easier to pass along falling deposit rates and still grow deposits at the same time.

So that did seem to be -- it felt like a shift in September to the last part of your question. On the first part of your question, I'm not sure I said but you said I hope I didn't. If I did, let me clarify a little bit. I do think that, that rate -- the rate of increase in the cost of deposits was moving downward over the course of the year. That's the point I was trying to make in the prepared remarks. So, it was up in the first quarter, it was up less than the second quarter, it was up less than the third quarter by only 8 basis points.

We actually think it should come down a little bit in the fourth quarter. It's just a projection. So I didn't need to say that I think it will increase, is talking about the trend of increases coming down. We think we might turn the quarter on the fourth quarter. It's -- I will touch that with a huge fan of [indiscernible] , predicting deposit cost and deposit rate movements have been the hardest thing of this whole cycle. So I wouldn't put too much stock in that, but we don't -- we do not predict any one on internal forecast that the cost of deposits will continue to increase next quarter it should plateau.

[Frank Schiraldi, analyst]

Okay. So said another way, is it maybe thinking that the trough is in the fourth quarter here?

[James Reske, executive]

Yes. Yes.

[Frank Schiraldi, analyst]

That's right. And then just lastly, I mean, I think you're just given the numbers you gave around margin by the end of next year based on a couple of scenarios. It seems like that still kind of translates to about 5 basis points in margin compression for a given 25 basis point cut. And I think you've maybe even said that in the past. So I just wanted to double check if that's kind of still a reasonable guidepost for a given 25 basis points?

[James Reske, executive]

Yes. That's kind of a rule of thumb. And the way I thought about that, in particular, over the last couple of days was, we in our last forecast, we're thinking carrying on at the stable at these rates. And now we have a new forecast that it's -- I think is 40 to 50 basis points lower. And so it's 10 basis points lower than what the last rate forecast. So for another 50 basis points of cuts to get down 10 basis points, and that's your 25 basis points per cut.

Of course, the way it all plays itself out with those headwinds and tailwinds I was talking about is that you don't just have a pure 5 basis point or 25 basis point cut because if you go from [ 550 ] to 3% and you're down 250 basis points in rates -- a lot that's a lot of cuts, and I wouldn't take that number [ 5 ] and things like that into the NIM. The tailwinds offset a lot of that. That's why I was trying to give the model -- the forecasted numbers in our model.

[Operator]

Your next question comes from the line of Manuel Navis from D.A. Davidson.

[Manuel Navas, analyst]

Starting on the fees for fourth quarter. That range is -- it's a little lighter, $24 million to $22 million, if I got it right. Can you just talk about what gets you to the higher end? Is it like SBA sales? And then can you think -- talk about fees going forward into next year if rates come down, mortgage should pick up? Just kind of thoughts on that benefit as well on the fee side?

[Thomas Michael Price, executive]

I'll give you some broad stroke and then jump [indiscernible] . But we do think rates come down, that will help all across the board with revenue and volume on the commercial lending side and the consumer side as well as our fee businesses, we've really built a pretty formidable SBA offering and continue -- we'll continue to invest there. Our mortgage banking could snap back pretty nicely. We have good share, good deposits in our core markets that could turn into refis and other things. So we do feel that could be a tailwind. some other guidance you would provide?

[James Reske, executive]

Yes, we see fee engines baked into the bank that kind of hum along and some of them done really nicely. One we don't talk about a lot of insurance, but that keeps coming along adding on fee income. We have a wealth division, we spend really well this year. You think about growth for next year, I think you're hitting on it in a changing rate environment, you hope that you're able to do more mortgage refi and then more SBA -- keep that -- just grow that business as well. The mortgage refi a little bit is it dependent on just the short-term rates, though. We are really hopeful that we see see refi business in that middle part of the curve went up again a little bit. And so just want to get too excited just because the Fed funds rate comes down doesn't mean mortgage rates come down, you get a lot of refi business. So we got to take that into account.

[Thomas Michael Price, executive]

Yes, the wealth management piece provided [ $500,000 ] quarter-over-quarter of offset to the $3 million headwind with Durbin. That business continues to mature. We also have treasury management, we've just built a really nice offering on the back of the corporate bank. We continue to get service charge income from there and just do a nice job for our commercial clients.

We're just trying to move the bank into the future and make sure as we get to $15 billion and higher, we're more commercially oriented. We've built mature businesses. We're doing a better job of cross-selling through the regional model. So there's real emphasis on relationship banking, C&I small business based, getting the deposits we've already always been pretty good at, but also cross-selling the relationship capabilities of our company.

[James Reske, executive]

And Manuel, just for your modeling purposes, that wide range kind of brackets the number that we were thinking of $5 million on either side. That's why this way it is.

[Manuel Navas, analyst]

That's helpful. Just on the swap benefit, is the baseline scenario you're getting Fed funds to 300 basis points by year-end '25.

[James Reske, executive]

Yes. I think the swap benefit you'll see in the earnings deck -- right, of 8 basis points. That, I think, is based on the previous rate forecast, which had Fed funds at [ 3.29% ] at end of 2025. It might be. So maybe it's 7 basis points if rates go to [ 2.95 ] like our revised forecast. Hard to say.

[Manuel Navas, analyst]

If by the end of next year, the yield curve is a little steeper could -- how how would that impact kind of your NIM thoughts that is a very positive scenario. What would -- what could be that upside for the second half of next year into 2026.

[James Reske, executive]

We talk about that all the time -- I'm sorry, go ahead.

[Manuel Navas, analyst]

No, no, go ahead. I just want to put a caveat to it. I know it's a very positive scenario, but like what could be the upside of that type of scenario for you?

[James Reske, executive]

Yes. In the near term, we think about changes in the cost of funds as we try to grow the deposit book and the yield on the new loans come on and replacement, all that stuff in the long term, we think is bankers positive slope to the yield curve. It's an environment where we can make the money.

[Thomas Michael Price, executive]

[indiscernible] because he just gave me for budget passes 4 scenarios for 2025, Jim, I think it's about [ $0.10 ] .

[James Reske, executive]

Yes. Long term, a positive slope is great for banks. So that's our story, and we're sticking to it. .

[Manuel Navas, analyst]

Okay. And then my last question is deposit growth has been really strong. You talked about that large deposit. what kind of the appetite from here with that marginal cost of [ $3.20 ] for new deposits? Is it a loan-to-deposit ratio target? Is it pre-funding loan growth next year? What's kind of the appetite on the deposit growth side?

[James Reske, executive]

The appetite on deposit growth side is for -- I'll tell you exactly how we think about this internally. We think about a smooth, steady glide path and the phrase live path keeps coming up again and again. A smooth steady glidepath on deposit growth. So for example, this last quarter, if we say, hey, loans were not growing that fast, we could have taken our foot off the gas in terms of deposit growth. You don't want to do that. We want to keep it growing it at 3% per quarter, we would do a 3.2% average overage average in the third quarter.

We want to keep that going in the fourth quarter. The point is we want to bring that loan-to-deposit ratio down and to get ourselves liquidity for loan growth going forward. And so in terms of the real dynamic that you're getting at, it's really driven the desire to grow the bank on the asset side and just make sure that you fund it on the liability side. In any given period, those may not match but long term, that's what we want to do. Loan-to-deposit ratio down to 92.5%. We got a long way to go before it gets over 100%. So we see we got the liquidity to grow.

Mike?

[Thomas Michael Price, executive]

As our bank President, Jane was trying to say we are relentless around the closets nonstop. Jane, anything you want to add? You're the impetus behind our great core depository.

[Jane Grebenc, executive]

Only -- there's really 2 kinds of deposits. There's the the transaction accounts that represent new households, whether commercial or consumer. And then there's the time and the money market stuff that has the volatility of exception pricing and goes up and down with rates. And we're always in the business to grow the transaction accounts and transaction households as rapidly and as aggressively as we can.

[Thomas Michael Price, executive]

That is your answer.

[Operator]

Your next question comes from the line of Daniel Cardenas from Janney Montgomery Scott.

[Daniel Cardenas, analyst]

4 Just a quick question on the size of your participation portfolio. How big is that? And are there any other loans within that portfolio that you're watching, given the migration of one larger credit into NPL status?

[Unknown Executive]

Yes, I'll take that. We've actually really shrunk the portfolio over time as we focused on the credit risk appetite that shared national credit book is just over $115 million today and only 10 relationships. So it's really not a factor as we look at it, the one commercial real estate credit that move to nonperforming was obviously in that share national portfolio, but very much not a focus, and it's manageable 10 relationships.

[Daniel Cardenas, analyst]

Okay. Was the -- was the reason for the nonperforming move-in in that specific loan? Was it related to just that management of the facility or lack of tenants filling up the space? Can you give us a little color on that?

[Unknown Executive]

More or more so the latter. The construction was a rehabilitation that started right before COVID. they experienced COVID delays as well as some significant construction cost increases over the period of time, that pushed them to the higher end of their budget. Since then, the rehabilitation has been completed, but the tenancy has not met expectation. It is mixed use. It's not your typical office. There's a grocery space. There's a call center, a 911 call center and some other storage and office. They have some prospective tenants, but we're still working through a longer-term road to stability.

[Daniel Cardenas, analyst]

And was that located in the central business district?

[Unknown Executive]

Just outside still in Alleghany County, but not in the downtown district.

[Operator]

And that concludes our question-and-answer session. I will now turn the call back over to Mike Price for some final closing remarks.

[Thomas Michael Price, executive]

Just appreciate the questions and your engagement with us. We're excited about the future of our company. We feel like we're building good momentum in acquiring talent in our 6 regions and our regional presidents are moving the bank forward positively. Thank you for your time today.

[Operator]

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