First Commonwealth Financial Corp

NYSE:FCF

Earnings Call Analysis

Capital Growth and Stable Margins Outshine Fee and NII Dip

In a recent fiscal quarter, the company saw a small increase in fee income but expects it to remain roughly consistent with the prior year's results. Net interest income (NII) declined by $2 million but was balanced by a $2.2 million reduction in expenses, with anticipation for noninterest expenses to remain between $68 to $69 million per quarter in 2024. Notably, charge-offs increased to $16.3 million, yet the normalized net charge-off rate should stay within 20-25 basis points. The company capitalized on timely securities purchases, boosting yields over 6%. Importantly, capital surged by $73.7 million, with tangible book value per share up by 9% to $9.09. The guidance suggests focusing on stability rather than expansion in net interest margins (NIM) as accretion is expected to fade.

Steadfast Performance Amidst Market Challenges

Despite market headwinds and a decrease in net interest margin (NIM) to 3.65%, lower than expected, the company reported a strong performance with fourth-quarter earnings per share (EPS) of $0.44, a 1.56% core return on assets (ROA), and an efficiency ratio at 53%. The decline in NIM was influenced by competitive deposit rate expectations in the company's operating markets.

Navigating the New Normal in Credit Quality

The credit environment was favorable, with a $1.9 million release of reserves thanks to improvements in qualitative reserves. Net charge-offs came in at $16.3 million, with a significant portion attributed to inherited Centric loans. However, overall reserve levels ended the year stable at 1.31% of total loans.

Growth Strategy Bearing Fruit

The company continued to expand, with average deposits and loans growing at annualized rates of 1.6% and 2.8%, respectively. Commercial loans, led by equipment finance, were particularly robust. Further growth was fueled by strategic acquisitions, such as the Centric acquisition, which contributed to a 24% increase in net interest income totaling $386.9 million for the year.

Digital Advancements and Regional Progress

Investments in digital infrastructure, including enhancements for online and mobile banking for consumers and businesses, were highlighted as key areas of focus. The company also mentioned strong regional performance, setting the stage for continued momentum into 2024.

Financial Projections and Fee Income Outlook

Fee income is projected to remain on par with 2023. The company expects to balance the estimated loss of approximately $6.2 million in interchange income due to the Durbin amendment with growth in SBA loans and other revenue sources.

Cost Management and Capital Strength

The company successfully reduced expenses by $2.2 million, offsetting a $2 million decrease in net interest income from the previous quarter. Looking ahead, noninterest expenses are expected to be between $68 million to $69 million per quarter in 2024. The strong capital position was evident with tangible common equity and CET1 ratios improving, and a noteworthy 9% increase in tangible book value per share.

Interest Rate Sensitivity and Forward-Looking Guidance

With its loan portfolio balanced between fixed and variable rates, the company is poised to manage the anticipated federal interest rate cuts. While asset sensitivity remains, the company forecasts stability in the NIM for the first half of the year despite expected rate declines. However, a forecasted Fed funds rate of 4.25% by year-end signals potential NIM compression in the later months of 2024.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation Q4 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn our call over to Ryan Thomas, Vice President of Finance and Investor Relations. Ryan, please go ahead.

[Ryan Thomas, executive]

Thank you, Aaron, 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; and Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; and pinch hitting for Brian Karrip this quarter will be our Deputy Chief Credit Officer, Brian Sohock. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We've also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to the forward-looking statements disclaimer on Page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for, our reported results prepared in accordance with GAAP. Reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn it over to Mike.

[Thomas Michael Price, executive]

Thanks, Ryan. I will begin with some fourth quarter highlights. We are pleased with our fourth quarter earnings per share of $0.44 with a 1.56% core ROA, a 1.91% core pretax pre-provision ROA and a 53% efficiency ratio. Average deposits for the quarter grew 1.6% annualized and loans grew at 2.8% annualized. The loan growth was decidedly commercial with equipment finance leading the way. Our margin fell to 3.65%, lower than we had expected, driven by our customers' expectations on deposit rates in our markets. While we are always focused on deposit acquisition, we're just as focused on deposit retention. Still, our quarter end cost of deposits at 1.65%, remains strong relative to peers and the quarter-over-quarter increase in the cost of deposits slowed each quarter of 2024. We had a constructive credit quarter with a $1.9 million release of reserves due in part to improvement in qualitative reserves and release of unfunded reserves. Net charge-offs totaled $16.3 million, however, all but $4.4 million had earmarked specific reserves that had been previously provided for. A good portion of the charge-offs were former Centric loans stemming from our acquisition, which closed on January 31, 2023. Essentially, our reserve levels ended the year roughly where they began in January of 2023 at 1.31% of total loans. Our nonperforming loans fell $8.5 million to $39.5 million or 44 basis points of total loans and are back to where we started the year. With 2023 behind us, let me turn some time now over for year-over-year highlights. We made $1.70 in core earnings per share, backing out merger-related items with a core ROA of 1.56%, a 2% core pretax pre-provision ROA, a net interest margin of 3.81% and a 52.91% efficiency ratio. Tailwinds included well-controlled credit expense organic deposit and loan growth, a bigger balance sheet due to the Centric acquisition and higher interest rates. The latter 3 tailwinds drove a 24% or $73.6 million increase in net interest income to $386.9 million for the year. Headwinds included markedly higher deposit rates for the year and flat fee income. As we reflect on the year, we had good expense control and drove some additional cost savings through our acquisition, which also helped operating leverage. We grew average deposits for the year at 12.5% and loans at 17.6%.

Excluding acquired Centric deposit and loans, loans grew at 5.5% and deposits grew at 7.6% compared to the fourth quarter of 2022. Like many in our industry, our checking and basic savings balances fell, the growth in higher-cost money market and CD balances more than offset the downdraft. However, the lower-cost accounts did not attrite in number nor did the mix of deposits change meaningfully between the consumer business and public funds categories. Also, our business deposits outperformed our expectations. In our regional approach to deposit gathering and lending, we had a good year and carry momentum into 2024 in our 3 largest regions. Importantly, we navigated our sixth M&A opportunity, which we now call the capital region and are excited about what lies ahead for this market. As we look through the year and into 2025 thematically, we will wake up every day and think about live the mission every day at all levels of the organization, grow our deposit funding and lending businesses commensurately and at the appropriate spread, improve in every region, line of business and support unit every year become digital in every facet of our business, continue to invigorate talent, leadership and culture and remain focused on operating leverage and efficiency. We had a strong 2023. We'll continue to build on that success in a few important areas. Three of our regions are performing very well. The 3 other regions are just beginning to find their stride. Also, as the employment market has cooled some, we are continuing to attract some very talented bankers for key positions. Given our talent offerings and leadership, we can grow C&I relationships. We've built solid offerings in our fee businesses and can create partner introductions. And lastly, our business mix drifted towards commercial banking this past year and we can do an even better job of gathering deposits in getting appropriately compensated for lending activities. The list could be longer but the point is that effectiveness in the trenches with our core banking is really all about will in execution, and we're enthused about the opportunity in front of us. Lastly, we continue to build out our core digital capabilities to include back-office efficiencies and customer-focused online and mobile banking enhancements for both consumers and businesses. In 2024, we will allow customers to aggregate their third-party bank accounts on the summary view within their first Commonwealth online banking profile. This complete view of finances across institutions supports our core mission of helping our customers improve their financial lives. And with that, I'll turn it over to Jim.

[James Reske, executive]

Thanks, Mike. Mike has already provided an overview of the year and a few financial highlights for the fourth quarter. So I'll just try to drill down into some detail on the margin and try to provide some additional guidance for you. Net interest income was down $2 million from last quarter but our net interest margin or NIM came in at 3.65%, which compares quite favorably to peers. Looking back at the quarter, loan yields actually performed quite well and in line with expectations. New loans came on the books at 7.80%, which was 162 basis points higher than the loans that ran off. That increased loan yields by 10 basis points over last quarter but that wasn't enough to offset a 24-basis point increase in the cost of funds. The increase in deposit costs was mostly due to continued movement of customer deposit balances into higher-yielding money market and CD accounts. The good news is that the pace of increases in the cost of funds continues to slow down. The 24-basis point increase in the cost of funds in the fourth quarter is lower than the 32 basis points increase in the last quarter, which is lower than the 48-basis point increase in the second quarter and the 51-basis point increase in the first quarter. We expect that slowdown to continue. And even with last quarter's increase in the cost of deposits, our total cost of deposits in the fourth quarter was 1.65% and our total cost of funds was 1.94%, still [indiscernible] position amongst our peers and a source of competitive advantage for us. Our cumulative through-the-cycle beta to this point is only 36% in part because we started this cycle with a total cost of deposits of only 4 basis points. To sum up, we believe that our net interest margin has been holding up well and that our margin will come through the cycle in a strong competitive position. Looking ahead to the first half of 2024, the continued upward repricing of the loan portfolio is expected to roughly match the increase in the bank's cost of funds. Even so, we expect net interest income to improve year-over-year compared to 2023. We would caution, however, that we expect a wider range of potential margin outcomes than usual due to the unpredictability of both rate movements and deposit behavior. Fee income was off by about $0.5 million from last quarter, mostly due to mortgage gain on sale income that was down by about that much, along with trust income that was down by about $400,000 due to tax receipts last quarter. These were offset by SBA gains that were up by about $600,000 from last quarter. We expect fee income in the first quarter to be in line with the fourth quarter and for the year 2024, we would expect fee income to be roughly equal to 2023 as growth in SBA and other sources offsets the impact of losing approximately $6.2 million of interchange income due to the Durbin amendment. As I mentioned, net interest income was down $2 million from last quarter but that was neatly offset by a $2.2 million decline in expenses. The improvement in NII was driven by a $1.2 million positive variance in the Pennsylvania share tax for the reversal of an over accrual of taxes we had accrued for the Centric acquisition. Our advertising spend was also down from last quarter by $472,000 but that's mostly just timing. We did, however, experience a $308,000 positive year-end adjustment to BOLI due to higher discount rates. In sum, we expect noninterest expense to run at about $68 million to $69 million a quarter in 2024, which is in line with consensus estimates. We provided some information on credit and charge-offs in the earnings release but I wanted to provide some additional color on the call. We had $16.3 million in total net charge-offs, $12 million of which have been provided for in prior periods. Of the total net charge-off amount of $16.3 million, $8.3 million was from loans acquired in our last acquisition, and that group of loans had specific reserves from prior periods of $8 million, not the $6 million figure shown in the earnings release. The $16.3 million net charge-off total also included a $4.3 million charge-off of an individual commercial real estate credit, which is not an acquired loan and that loan had a $4.1 million specific reserve from prior periods. Of our total $39.5 million of nonperforming loans on the balance sheet, $14.6 million are acquired loans and those acquired loans at $4.6 million of specific reserves held against them. In fact, that $4.6 million of specific reserves represent the lion's share of the $5 million of specific reserves left in the entire bank. We thought this additional detail might be helpful because charge-offs were elevated this quarter. However, given our business mix, our long-term view of a "normalized" net charge-off rate of around 20 to 25 basis points hasn't changed. Turning to the balance sheet. Loan growth was augmented by securities purchases in the quarter, which brought up the yield on the securities portfolio. You may recall that we've been holding excess liquidity since the Silicon Valley Bank crisis in March, at which time we borrowed $250 million from the Federal Home Loan Bank and [ parked ] at the fed in cash. We deployed some of that liquidity into securities in the third quarter and the rest of it in the fourth quarter and yield a little over 6%, fortunately for us, just before yields started to fall. Capital grew by $73.7 million in the quarter as AOCI improved by $42.3 million in the quarter, and we retained $31.4 million in earnings after dividends and some buyback activity. We only bought back $978,000 in stock in the quarter, buying whenever our stock price dipped below $12.50. The combination of the strong capital growth and moderate balance sheet growth had a positive impact on capital ratios. Our tangible common equity ratio grew from 7.7% to 8.4%, while our CET1 ratio grew from 10.9% to 11.2%. perhaps more importantly, tangible book value per share improved by 9% from $8.35 a share last quarter to $9.09 per share this quarter. And with that, we'll take any questions you may have.

[Thomas Michael Price, executive]

Operator, questions.

[Operator]

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

[Daniel Tamayo, analyst]

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

[James Reske, executive]

Yes, this state including accretion. The accretion was 9 basis points in the fourth quarter, and we'd expect that to fade out by 1 to 2 basis points per quarter next year.

[Daniel Tamayo, analyst]

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

[James Reske, executive]

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

[Daniel Tamayo, analyst]

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

[James Reske, executive]

Yes. So the rate cuts will affect us. We remain asset sensitive. Some of it depends on the timing of the rate cuts and the speed of the rate cuts. So think of it this way. The portfolio we've disclosed we talked about this all the time but the loan portfolio is about half fixed and half variable. So when the rate cuts happen, they hit the variable portfolio right away and then the fixed portfolio ex is a buffer.

But the fixed portfolio, that's been repricing upward and has been repricing upward even without rate hikes for the last half of last year. So that's -- when I disclosed in the prepared remarks, the 162 basis points of positive replacement yields that's largely a fixed portfolio repricing upward because the variable proposal is already repriced. So with 162 basis points of upward repricing in the fixed portfolio, you could probably have a few cuts and still have upward repricing in the fixed portfolio, which we like as a buffer on the way down and an offset to some of the impact of the rate cuts on the variable portfolio but those are to offset each other. But generally, we are still -- we disclose asset sensitivity in our regulatory filings on -- based on parallel cuts. But we're still asset sensitive. And at some point, the cuts will overtake the pricing on the fixed side of the fixed side of portfolio.

Just one more comment, if I can. The other side of it, of course, is the liability side of the balance sheet and the deposit behavior. And without any cuts taking place yet, just the threat of cuts and the [indiscernible], we've already seen some easing up of competition in our market. So some relief on the deposit pricing side. And -- but that takes some time to bring the cost of deposits down. So hopefully, that gives you a little color on how to play the [ fed cuts ].

[Daniel Tamayo, analyst]

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

[James Reske, executive]

Yes. We used to say rule of thumb 5 basis points impact per cut but that was when deposit behavior was much more stable as it is now. So I'm not sure that rule of thumb holds very well. And given where we are in the cycle and I think there are other dynamics at play that the rule of thumb doesn't really hold that well anymore. Our own internal forecast is not blind to rate cuts. We've put in from based on forecast we purchased blended forecast that has the Fed funds rate end of the year at 4.25%. I think that was 4.25% at the time we did our budgeting exercises. And if you get it today to be 4%. So we anticipate declines. We just think give us some stability because of all these offsets going on for the first half of the year. But if the Fed funds rate goes ends the year at 4.25%, by the end of the year, there will be NIM compression.

[Operator]

Our next question comes from the line of Karl Shepherd with RBC Capital Markets.

[Karl Shepard, analyst]

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

[James Reske, executive]

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

And that roughly matches what we anticipate 10 to 15 basis points increase on the benefit of increasing loan yields even in that kind of rate environment. Part of what helps us is that we've already kind of tried to structure the maturities and the deposit look fairly short. About 2/3 of the CD book will reprice in calendar year 2024. we have money market specials like everybody else. There's 6 months max on money market specials. So there'll be opportunities for us to reprice the deposits downward. So all that is baked into the thinking. I hope that helps a little bit.

[Karl Shepard, analyst]

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

[Thomas Michael Price, executive]

I think it will be. We've pinched the consumer a bit just because of spreads but we're still certainly open for business, certainly enough to keep our top performers, plus those are big portfolios we have a little bit of runoff there that needs to be replaced. But on the commercial side, we just feel a little reinvigorated around the C&I business, equipment finance. We brought in a pretty good number of new larger relationships last year, maybe a half a dozen to a dozen in our top three markets. And we feel like we can continue and kind of accentuate that momentum. We also have just found some access in the last quarter or 2 to some different caliber of athlete that can help us. Just 2 or 3 doesn't sound like a lot but it's good at our size. So that's kind of from 10,000 feet.

I would also just say, we are -- we really are shifting our approach to markets. And as my bank President likes to say, it's a matter of will and execution. And we're pretty good at that. And we've been consistently -- we've gotten better every year over the last 5 to 10 years at just executing in the trenches. And we need to do that, quite frankly, on the deposit side. But last year, notwithstanding the acquisition, we grew deposits 7.5%. Now we had to hang rate to do it but so it everybody else.

[Operator]

Our next question comes from the line of Michael Perito with KBW.

[Michael Perito, analyst]

I was wondering if you could maybe spend a minute, the $68 million to $69 million, I think, if I heard correctly, on the overhead per quarter in '24. Just where are you guys looking to spend some more money? Is there any kind of has disruption or anything settled a bit from some of the volatility we saw earlier in the year? Are you starting to see lenders maybe get a little uncomfortable at their banks where they're not being allowed to pursue growth because whether capital liquidity issues. Just curious if there's anything built in the budget around that? And just generally speaking, beyond that, what you guys are allocating investment dollars to in '24?

[Thomas Michael Price, executive]

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

[Michael Perito, analyst]

Yes, it is. And especially tying back to kind of the growth in commercial leading the way. I think that makes a lot of sense. What about on the fee income side, understanding the year-on-year comp is a little tough because of the interchange hit. But any expectations in your local area for kind of mortgage activity to pick up, particularly if rates start to leak back down? Or we've also seen some other banks choose to exit the insurance business. Just curious if there's any kind of initiatives or conversations you guys are having that we should be mindful of as we think about where that growth rate could move even if we just back out the interchange for a minute, what could be some of the positive drivers in '24?

[Thomas Michael Price, executive]

Yes. We feel like our teams, particularly on the gain on sale side with SBA and mortgage, are already very capable and build out. So I would just start with SBA. Gain on sale there has been down. And we just -- we have that tied to our regional model and underneath our regional presidents, and that's gotten better every year. Mortgage as you and I both know, could come back in a given quarter. And it could be off to the races and the economics of that could change. And so that could certainly be an opportunity. But a lot of the rest of it is just slugging it out, cross-selling, doing the things we can do well for our clients connecting them to wealth and other services, and cross-selling the consumer businesses and just the basics and blocking and tackling. Jane, anything you want to add?

[Michael Perito, analyst]

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

[Jane Grebenc, executive]

No, I think Mike covered it. Thanks.

[Michael Perito, analyst]

Okay. And then just lastly for me, and I'll jump back. Just the $12.50 kind of buyback level where you guys become less active, just wondering, is there a level of capital where if you guys continue to accrete capital and grow where that drifts higher? I mean I understand theoretically, right, the ROI on that doesn't change just because you have more capital. But just wondering if there's any kind of -- what some of the inputs are that you guys get where we should be mindful of that level may be moving and capital deployment materializing in buybacks in '24 at some point?

[James Reske, executive]

Yes. We have thought of it as a way to manage capital levels. So if capital levels get to be excessive, could you have deployed some of that in buybacks. We've been kind of very willing to do that in the past. Part of it is where we're trading. We're trading at a nice premium valuation, trading at 1.8x tangible. And so that makes buying back stock at [indiscernible] little more difficult. And then there are other alternatives of capital. We always say organic -- funding our organic growth is the first piece of capital. So we want to always be clear about that. But if capital continues to build and loan growth is moderate, you can get some really nice capital build, which could allow for further buybacks. The big thing on the capitalizer for us is that we have 2 tranches of subordinated debt outstanding, $50 million and $50 million for a total of $100 million. $50 million of that became callable last June. And the Tier 2 treatment of that started to fade out. Another 20% will fade out this coming June. And so if capital ratios continue -- capital levels continue to build, we may be in a position to call that. And that would affect Tier 2 capital wouldn't affect PCE.

[Michael Perito, analyst]

Got it. And sorry, Jim, do you mind just run through that again? So you have $50 million that's callable already. The other $50 million is callable when?

[James Reske, executive]

Yes, it will be another 4 years from this day.

[Michael Perito, analyst]

sorry, go ahead.

[James Reske, executive]

Yes. No, when we issued it, we issued $100 million, $250 million tranches. One was a 10-year -- was 5-year, now called 10-year maturity, the other was 10-year now called 15-year maturities. So we'll be living with the other $50 million, I think it's another 4 years from this June. It will first be callable.

[Michael Perito, analyst]

And the rate on the first $50 million tranches, I could look it out but if you haven't idea?

[James Reske, executive]

It's floating, yes, it's about 7.1% right now. So if we funded it, we save some money because we would just borrow even at overnight rates of 5.36% right now, we borrow and pay it off. It takes some money but you lose, of course, Tier 2 treatment, you want to make sure your total capital ratios are building to the front where you could absorb that. And it would affect total risk base by about 40 basis points to call that $50 million.

[Operator]

Our next question comes from the line of Manuel Navas with D.A. Davidson.

[Manuel Navas, analyst]

Another way to ask about the margin. What kind of are you -- what's the marginal NIM of added assets right now? You said you have, I think, 7.50% new loans was kind of current funding and the NIM that's added on those new assets?.

[James Reske, executive]

Oh, yes. Yes. The incremental rate on the new originations is about 7.80%. The incremental cost of funds is right around 5%. If we borrow the money overnight, it's 5.36%. But if we gather the money through -- our money market specials are 4% and our CD specials are split between 5.25% for 7 months and 4.85% for the 11 months. So the all-in rate of new fund acquisition is probably in the high 4s. That gives you high 4s funds originations in the high 7s, that gives you a 3% spread coming in roughly.

[Manuel Navas, analyst]

Okay. That's helpful. And what kind of -- can you just kind of review your deposit channels and where you're seeing the most success? And which ones you're going to accentuate over the course of the year?

[James Reske, executive]

Yes. The deposit channels are all retail. We do not see broker deposits. We just really don't believe it gives us any credit. And quite frankly, economically, it hasn't been any cheaper than wholesale borrowings, so really have not tried to do any of that. The deposit retail, we find that our customers have responded to specialists that we offer in the market like everybody else, the specials are all in money markets and CDs, not in other categories like savings are now. And one stat we'd like to say, which is buried in one of our disclosures is that for every dollar that we bring in, in these specials, about $0.60 is new money. And of that $0.60, it's new, about half is new money from our own customers and the other half is new money from new customers. So I think that's pretty well. But Jane, I don't know if you want to give any other color on the deposit channels and the origination channels to add to what I was saying.

[Jane Grebenc, executive]

Manuel, thanks for the question. We are investing in digital channels. We're opening digital accounts but we still like branch-generated deposits. They're stickier and they're generally lower cost. And we do a good job in that channel. We still like it.

[Thomas Michael Price, executive]

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

[Manuel Navas, analyst]

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

[Thomas Michael Price, executive]

Jane, do you want to start?

[Jane Grebenc, executive]

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

[Manuel Navas, analyst]

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

[Thomas Michael Price, executive]

Yes. I mean, as you know, we've been very picky on M&A. We've done six things and looked at 60. And you also -- when we did this acquisition, we were off flush with cash, right, summer of 2022. And so now we might be looking at more of a depository with a loan-to-deposit ratio that would add to our liquidity. So our vantage point in our box might even be a little tighter but there's opportunities out there. But we were -- our betting average is about 1 in 10, and that's more of self-choice. So -- but we like doing M&A. We feel like we can integrate banks, and we get excited about the geography, particularly if it's strategic. It adds to our geography, it's contiguous. We really see it as accretive longer term. But you know us, we're pretty conservative and we just don't do a deal every year to do a deal.

[Operator]

[Operator Instructions] Our next question is from the line of Matthew Breese with Stephens Incorporated.

[Matthew Breese, analyst]

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

[Thomas Michael Price, executive]

Our loan growth guide is probably low to mid-single digits. And I used the word commensurate in my opening remarks but it's somewhat tied to how we do on deposit. I don't think it's too worried long term about growing deposits -- or loans, I feel like we can grow loans. We have a lot of engines. We build them over the years and we feel like our capabilities continue to improve. This year, we'll probably be a little strained by liquidity but we'll have to fix that and solve that and we're resolute to do that.

[James Reske, executive]

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

[Matthew Breese, analyst]

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

[Thomas Michael Price, executive]

Yes. I just like our deposit portfolio. I mean I think we have a slide in the supplemental deck, I talked about it. Our average deposit size is $18,000, so $11,000 on the retail side, $68,000 on the business side, we'll take tons and tons of that. And that's what we call on. As a matter of fact, Jane and I and the people in the room here are all making calls tomorrow after our all-employee call. And that's what we do. And we get out and we get after it and it's fun. And so we expect to continue to grow that. In terms of how big the pie is, I think ours has always been pretty good and we expect to maintain a good advantage with depository and a granular core deposit franchise and that's really important to the long-term profitability of our bank. Jane, what would you add? You're the...

[Jane Grebenc, executive]

Well, already, we're starting to see deposit specials cooling off in the markets. It seems throughout in August, September, October, November that you couldn't keep up with the specials. They're starting to cool. And I'm gratified by that. So you've seen our exception -- pricing exceptions going down. I think that I'm optimistic that if we haven't hit the floor, we're very, very close when it comes to deposit cost increases. And we are getting much better. I am -- I'll take the views that we're much, much better now at requiring the full relationship with the extension of credit because we're still finding that our balance sheet is a strength. We're still open for business. We just want to lend to relationships. We're less interested in the transaction for the transaction's sake.

[James Reske, executive]

The other thing we've seen at this additional color is helpful to you is the responsiveness of the consumer rate. We see more response to this is some of the specials we have than we even probably would have. In other words, deposit pricing is all trial and air. You put up this rate. You think I'll get -- for x rate, I'll get wide the volume of deposits. And we've seen more than we expected, which kind of tells you the competitive pressures are easing and that gives us the ability to be a little bit of pricing part to lower the rates we're offering. So that gives us some confidence to continue rates down.

[Jane Grebenc, executive]

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

[James Reske, executive]

And so one more thing that just kind of your question on that NIB as a percentage of total deposits. I remember a year ago, people were saying, we're 33% where you think you'll end '23 and we are thinking about 25%, I think we're 26%. So that kind of comes up where we thought [indiscernible] signal back in 2003, it was 14% or so. And it could be, it just hasn't played out that way. And given the granular it is and where it's moved to this point, the NIB part feels pretty stable.

[Matthew Breese, analyst]

Yes, I guess might the cycle of matters, too.

[James Reske, executive]

That's right. Thank you, yes. Exactly.

[Thomas Michael Price, executive]

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

[Matthew Breese, analyst]

That was great. I appreciate all the color from everybody. The last one for me is just on, Jim, I heard you loud and clear kind of moving towards normalized charge-offs. Given some of the movement this quarter in the reserve -- in the specific reserves. Is this a good level, this 130 level for the year? Or do you anticipate maybe building a little bit? And I'm asking because I'm trying to get a frame of reference for the provision.

[Thomas Michael Price, executive]

I don't know that we're expecting to build. I think our view is that we're still 15 or 20 basis points higher than at least the peers we're looking at in our region. But that's not the determiner. We have a model. We run the traps, we are very thoughtful. We try to anticipate things that are around the corner. And we look closely at the stacks in the commercial real estate portfolio and all kinds of good stuff just to make sure we're comfortable with where we're at.

[Operator]

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

[Frank Schiraldi, analyst]

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

[James Reske, executive]

Yes. Glad you asked that, Frank. I mean the -- generally speaking, if the rates stay high like this, that's better for us. There's -- I would think personally, a goldilocks scenario for us would be 1 or 2 cuts because that burst the bubble a little bit on deposit. Expectations might take pressure off deposit rates but like James said earlier, we've already seen some easing of that even without the actual cuts. But that was if you have a slow pace of rate cuts or no cuts, then that takes the repricing pressure off the variable rate portfolio and the fixed portfolio will continue to price upwards. So that -- like I said, that would be a good scenario. I guess to put it in a different way, if things play out the way the Federal Reserve keeps saying they will, which is if there are cuts, it will be slow, that's good for us. If the futures market is right and there's a lot of cuts fast. Well, then that will take some time. Even then, by the way, our deposit base, we reprice eventually, that recovers, right? So it's just that the loan side will reprice downward in a fast -- cutting scenario faster than we will be able to move on the deposit side. Hope that place [indiscernible] the color on the pace of change and how the effect helps a little bit.

[Frank Schiraldi, analyst]

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

[James Reske, executive]

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

[Frank Schiraldi, analyst]

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

[James Reske, executive]

Yes. Yes, I would say -- yes, I'm kind of given the commentary from more of a long-term perspective. Over the long haul, that's what I kind of think, given our mix of businesses. And I think we've used that figure for some time. We say it pretty often, we [indiscernible] investors want to make sure we say it on the call so that we're clear with the markets. That's kind of our general expectation for the portfolio.

[Frank Schiraldi, analyst]

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

[James Reske, executive]

For now. We still have about [ $18 million ] of authorization left. So obviously, if there's a dip in the price, we would see in action. But we're going to see how the year plays out. And if we are still good in capital build, the AOCI has moved in the right direction last quarter, if that keeps going, our capital ratios keep coming up. if we're able to call the sub debt, save some money on that and still have capital build, we might raise that $12.50 threshold to get back in the market and buy back some stock. Like I said, we're not hesitant. We look at it as a capital management tool to manage capital levels but probably less activity, you'll probably say that assuming very little activity in the first half.

[Operator]

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

[Thomas Michael Price, executive]

Just a couple of things. We appreciate your keen interest in our company and the time we get to spend together throughout the course of the year. It's meaningful to us. Just would also just turn your attention to the deck that Jim and the team put out. There's a couple of good slides on the investment portfolio, the securities portfolio, the granular core deposit franchise, which we feel is a gem of our company. And then there's also some good color on commercial real estate on Pages 16 and 17. And I think particularly on the commercial real estate side, an average loan size of $5.1 million portfolio with very little in central business district, about $82 million of a $400 million-plus portfolio. And with the bulk of that residing in Columbus and Pittsburgh, just some good color on the portfolio, the debt service coverage ratios, the average rents really low by the standard that you're used to looking at for perhaps some larger banks and just good risk control and perhaps these might be of interest to you. But thank you again, and look forward to being with a number of you in the first and second quarter. Thank you, operator.

[Operator]

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