First Commonwealth Financial Corporation (NYSE:FCF) Q4 2024 Earnings Call Transcript

First Commonwealth Financial Corporation (NYSE:FCF) Q4 2024 Earnings Call Transcript January 29, 2025

Operator: Hello. And welcome to First Commonwealth Financial Corporation Fourth Quarter 2024 Earnings Conference Call. Please note that this call is being recorded. After the speaker’s prepared remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I’d now like to hand the call over to Ryan Thomas, Vice President of Finance and Investor Relations. You may now begin.

Ryan Thomas: Thank you, Ellie, and good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation’s fourth quarter financial results. Participating on today’s call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; and Brian Sohocki, Chief Credit Officer. As a reminder, a copy of yesterday’s earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We’ve 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 statement. 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 or are reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today’s slide presentation. With that, I will turn the call over to Mike.

Mike Price: Hey. Thank you, Ryan, and welcome, everyone. In the fourth quarter, we met consensus earnings estimates of $0.35 per share and preserved relatively strong profitability. We ended the year with a fourth quarter pre-tax pre-provision ROA of 1.77% and ROE of 1.23%, a NIM of 3.54% and a core efficiency ratio of 56.1%. Reflecting on the year, we’ve stabilized the margin, grew deposits, managed expenses and selectively pursued high-yielding loan categories in the face of unanticipated deposit pricing pressure, higher credit costs and six months of Durbin. We believe that 2024 was a year that sets us up well for 2025. We ended the year in a better capital and liquidity position than when we started. We made some key hires that will enable C&I growth, further integrated our last acquisition and announced another one, all while staying focused on achieving and maintaining top quartile profitability.

Importantly, higher rates led to tepid low demand throughout the year in both CRE and C&I lending. Demand was tepid in consumer categories as well. C&I equipment finance was a notable bright spot and the portfolio grew $61 million alone in the fourth quarter. Average deposits grew 8.7% in the quarter, but were skewed by a large commercial customer deposit that came in at the end of the quarter, which drove much of the average balance increase. A better comparison would be for the year where average deposits grew some $451.1 million or 5%. That drove our loan-to-deposit ratio down from the high 90s at the end of the year to 92.5% at the end of 2024, leaving us with dry powder to lend. We’re seeing fairly balanced deposit growth across most of our regions and our teams are all tasked to grow core deposits with an emphasis on transaction accounts.

More importantly, we feel our balance sheet is now primed for growth and profitability as we turn on the loan growth engine in 2025. In the fourth quarter, we saw good commercial real estate activity after being selective for some time due to heightened credit, liquidity and pricing concerns. We continue to emphasize the acquisition of C&I relationships across middle market, business banking and small business. Our optimism regarding loan growth in 2025 and beyond stems from we have a strong regional accountability and two new regional presidents in key growth markets, both of whom have strong C&I backgrounds. We’ve hired a bevy of talented C&I commercial bankers and leaders over the last 24 months. We believe we’ve gotten the portfolio runoff headwinds behind us with the former Centric acquired loans and aspects of CRE.

We’ve never been stronger in C&I, commercial real estate, SBA, equipment finance, indirect and consumer lending. We will strive for mid-single-digit loan growth this year. Jim will expand on the revenue detail, but we believe the evolving interest rate environment that seems to favor higher for longer should help our NIM. And in terms of fee income, we overcame a meaningful $6.7 million, Durbin hit to fee income in the second half of 2024, because mortgage, SBA and wealth management stepped up, and other service charges scaled up as well. Credit costs, driven by lingering pressures in our Centric acquired loans, were elevated throughout the year, but moderated in the fourth quarter. Encouragingly, NPLs declined from 0.83% to 0.68%, and reserves-to-loans remained above peer levels, signaling continued strength in our credit position.

We had elevated charge-offs in this quarter, but a lot of that reflected the charge-offs of three non-performing loans we had recognized and provided for last quarter. Our 2024 credit metrics were significantly impacted by the acquired Centric loan portfolio. However, our asset migration trends are favorable as we enter 2025. We announced our first acquisition in two years with CenterBank in Cincinnati. We really like this small acquisition. It’s strategic and the bank is well-led with a cast of good talent for a bank of its size. We see a lot of upside in this market to leverage our existing presence and build more critical mass in Cincinnati that will help us replicate the success we’ve had in Ohio’s other major metro markets, all of which goes above and beyond the deal mass.

Lastly, customer experience metrics improved as the Net Promoter Score and branch customer satisfaction reached historic highs for First Commonwealth. Our organization continues to rally around living our mission and that is to improve the financial lives of our neighbors and their businesses. And with that, I’ll turn it over to Jim Reske, our CFO.

Jim Reske: Thanks, Mike. Fourth quarter core earnings per share of $0.35 is up $0.04 from last quarter, largely driven by a $4.1 million improvement in provision expense. On a linked-quarter basis, we saw a combined improvement in fee income and expense of $1.9 million that was somewhat offset by a $1.4 million decline in spread income. We had total NIM compression of 2 basis points in a quarter, the purchase accounting contributed 7 basis points to the NIM in the third quarter and 5 basis points in the fourth quarter. So without the fade out of the purchase accounting, the reported NIM would have been unchanged. If you look at our deposits, there were two dynamics happening in our deposit book this quarter. The first one is the previously disclosed $175 million corporate deposit that we received toward the end of last quarter.

Average deposits were up in fourth quarter by $207 million or 8.7% annualized over last quarter, so the average was up largely, though not entirely, due to that large commercial deposit. The new growth came as we continued to acquire new deposits at less than our borrowing cost, all while pricing down our overall book. The result was a modest 1 basis point decline in our total positive deposits to 2.07%. The other dynamic affecting deposits was movement in public funds. Our end-of-period deposits were down by $67.5 million, largely as a result of a seasonal $206.5 million decline in public fund balances, which always declined toward the end of every year before coming back in the first quarter. Turning to loans, loans grew by $23.5 million in the fourth quarter for an annualized growth rate of 1.04%.

We are projecting mid-single-digit loan growth next year, as we build upon some of the groundwork we’ve laid for C&I growth that Mike talked about and some of the portfolio runoff headwinds that we had in 2024 get behind us. So putting that together, growing spread income in 2025 will be a function of loan growth and the NIM. We believe that the net interest margin can expand in 2025. Our internal forecasting is now based on only two rate cuts next year, and in that scenario, the NIM is relatively stable in the first quarter, but expands steadily over the remainder of 2025 to end the year 10 basis points to 20 basis points higher than it is now. Together with the return of moderate loan growth per our guidance, topline revenue should steadily improve over 2025 and do so at a faster clip in expenses, leading to positive operating leverage in 2025.

We were confident of our ability to grow topline revenue before the recently announced CenterBank acquisition, but that acquisition will create modest additional operating leverage after we close as planned in the second quarter of this year, contributing about a $0.01 a share to EPS per quarter starting in the third quarter of 2025. Fee income was an interesting and generally positive story in the fourth quarter. Fees improved by $800,000 over the last quarter, despite the fact that the third quarter had a benefit of about $900,000 in one-time BOLI income. Fee income rose quarter-over-quarter nevertheless due to a $700,000 increase in swap income, combined with about a $0.5 million gain on a limited partnership investment and a $0.5 million improvement in mortgage gain on sale income over the last quarter, net of hedging costs, of course.

Stepping back a bit, fee income was a good story for us, not just because of the quarter-over-quarter improvement, but because of how the bank has been able to more than offset the long-expected Durbin impact on interchange income that hit us in the second half of 2024. Looking back at 2024 as a whole, debit card-related interchange income was indeed $6.7 million lower than last year due to Durbin, but fee income in total was up year-over-year by $2.6 million, primarily because of improvement in our core fee income businesses, including mortgage, wealth and SBA. As we look ahead to 2025, we believe we’ll generate fee income of about $22 million to $23 million a quarter in the first quarter of 2025, growing gradually as the year goes on. The CenterBank acquisition contributes a few hundred thousand dollars of fee income per quarter in the second half of the year.

Non-interest expense improved by $1 million in comparison to the last quarter, largely due to some items that we experienced last quarter, including elevated operational losses and severance expense. Fraud loss has declined compared to recent quarters, as we began to realize the benefits of investments and enhanced fraud detection software and staffing. We believe that non-interest expense will be approximately $68 million to $69 million in the first quarter of 2025, jumping by about $2 million in the second quarter as merit increases kick in and increasing by another $1.3 million per quarter in the second half once we close the previously announced CenterBank acquisition in the second quarter. Turning to provision, total provision expense was $6.5 million down from $10.6 million in the third quarter.

You may recall that our credit experience last quarter was the tail of just a handful of credits and this quarter’s elevated charge of experience is largely driven by the charge-offs of three of those credits, totaling about $8 million. In fact, in total, approximately $8 million of our charge-offs in the fourth quarter were loans specifically reserved for a prior period. Capital ratio has improved as a result of strong earnings with limited balance sheet growth. We’ve repurchased 477,000 shares of stock in a quarter, but shut off the buyback after we announced the Center acquisition and we won’t be resuming buybacks until after that deal closes. And with that, we will take any questions you may have.

Q&A Session

Operator: [Operator Instructions] Your first question comes from Daniel Tamayo from Raymond James. Your line is now open.

Daniel Tamayo: Thank you. Good afternoon, guys. Maybe we can just start on the fees, if you don’t mind, Jim. The — I appreciate the guidance and it’s very clear how you laid it out, but just curious if you can talk a little bit about some of the lines, specifically mortgage banking and then the other loan sale gains, as well as the card income. I know you had the impact from Durbin last year, but just curious if you think that’s particularly on the card, you’re at a decent run right now.

Jim Reske: On the card income, we are. We felt the Durbin impact has really hit us in the third quarter and continue to fourth quarter, but that’s been pretty consistent. There’s some long-term benefits, perhaps, of doing more with credit cards as opposed to debit cards, but the run right there is pretty solid. The SBA business continues to grow. Mortgage had a really good year and that’s actually a time when you think that might be slow. It’s actually doing well for us. And then wealth had a tremendous year towards the summer, selling fixed income annuities at a time when customers thought rates were going to go down, generate a lot of fee income. That faded out a little bit towards the end of the year, but that actually looks really — we expect really good things for that business this coming year, as well.

And then, Mike, I don’t know if you want to add anything on the fundamental businesses. There are other things, as well. But one more thing. The swap fee income we got in the fourth quarter was good. That’s really different by customer preferences on your back-to-back swap business, so it’s swapping fixed or floating, depending on where the rate movements are, what expectations for rate movements are. That was really good in the fourth quarter, and in fact, we generated more in the fourth quarter than we expect to generate next year, so we think that actually is prime for growth next year. They were underestimating the amount of swap fee income we could generate next year, so swap might be a good source of fee income for us. Mike?

Mike Price: Yeah. I mean, I just think Jim stated it well, as the year-over-year difference from the third — fourth quarter of 2023 to 2024 is about a $3.3 million down draft. That’s a little less than we thought it would be. I think we pegged it at about $6.7 million, so maybe at $3.35 million. There you go. So, very close. But I think where there’s some uptick that really helped just compensate for it was gain on sale in SBA. This time last year was $1.7 million. It’s $3.1 million. Gain on sale of mortgage was $7.76 million in the fourth quarter last year, $1.6 million. We saw a nice little uptick and we’re seeing better spreads there. And then also trust income in our wealth management group. Last year this time was $2.5 million. This year is $3 million. So, just really not spectacular, but pretty solid growth year-over-year that helped compensate and really blunt the impact of Durbin.

Daniel Tamayo: That’s great color. Thanks, guys. Yeah. Absolutely. And then maybe one for Mike on the loan growth. I got your guidance for mid-single-digit growth next year coming off, headwinds in 2024. Curious if that’s something that you expect to really start to accelerate, early 2025 or if that’s more of a ramp and if that’s more C&I-driven or commercial real estate or consumer. Just curious what the drivers are in that 2025 loan growth guide?

Mike Price: Well, really, after not doing a lot of commercial real estate in the first two or three quarters of 2024, we had a nice solid quarter with good quality credits in commercial real estate in the fourth quarter. So that helped jumpstart it. We hope that it’ll be yoked between CRE and C&I. Likely it will be, probably a good portion will be CRE. Long-term, I think, if we can get a balance sheet that is 25% plus C&I, we will have a best in class bank. And that’s the goal and we’ve put the mechanisms in place with that, with talent, vision, treasury management support. So that is coming. And then we also have really capable consumer lending businesses like indirect where the spreads have just bumped up a little bit.

The team has done a really great job of managing that and we’re probably going to turn those loose a little bit in 2025, where we really metered them because of liquidity and pricing in 2024. And last but not least, and perhaps most importantly, our equipment finance group continues to ramp up. We had a nice year, good spreads. We were satisfied with the lost content and just the handle that our leader has on that business and so that feels good. The other thing he’s done that’s so impressive is he’s built a bridge over to the corporate bank and we’ve done just a handful of true leases out of that division that really complements our corporate bank. So we’re enthused, but I know where you’re at, Dan, kind of show me. And we had a couple of years where we grew every region, every line of business for about two years straight.

And we were falling out of bed and growing at a pretty good clip. We hope to get back there, but it will probably be a bit of a ramp this year, but hopefully this will be in our rear view mirror and we’ll be talking about how much growth in 2026.

Daniel Tamayo: Terrific. Thank you for taking my questions.

Mike Price: Thank you.

Operator: Your next question comes from Karl Shepard from RBC Capital Markets. Your line is now open.

Karl Shepard: Hey. Good afternoon, everybody.

Mike Price: Hi, Karl.

Karl Shepard: Jim, let’s start with you. The guidance calls for NIM expansion next year and I don’t know, maybe half of that is just from the swaps. Can you talk a little bit about the other piece of it and just what gives you confidence when you look at your models and how much of it’s from loan growth versus the balance sheet or the positive three pricing?

Jim Reske: Karl, I’m so glad you asked, because it gives us a chance to talk about it. The guidance number is pretty high. We see that. And I want to tell you how I think about that. So a couple of things. Now one is you’re right, about half of it comes from the macro swaps loan. There’s a table in the supplement we put out on the investor relations portion of our website shows just in a free environment that we’re looking at the macro swaps alone. We’ll add 8 basis points to 10 basis points of NIM for the year. And so you ask — so the rest — so the question is, where does the rest of it come from? The short answer is in our projections, it’s all on the asset side. And I’ll tell you why. It’s because looking at the way we were projecting NIM maybe a year ago on the way up when rates were on the upswing, the weakness in our projections was consistently the ability to predict customer deposit behavior.

And we’re very aware of that. So we would view what we thought was fairly aggressive, predicting customer behavior and then customers made their own choices and predicted deposits priced up. We saw that. So as we forecast now, we’re very conservative, maybe too conservative in the way we’re forecasting deposit costs now. So in the NIM forecast I just gave you, our cost of deposits is not going down at all. We do have embedded beta assumptions in some of the loans on rack rates and all the rest, but we also are generally in our philosophy pricing for deposit growth. We want to grow the loans, so we want to grow deposits commensurate with that growth. We like the fact that we’ve gotten a loan-to-deposit ratio from the high 90s down to the low 90s, we’d like to keep it there.

So we want to keep growing deposits. But the deposit pricing that we have in there ends up showing almost no reduction in deposit costs. Now, if you look at banks that have reported so far this quarter, everybody’s reducing deposit costs. We see it in our own internal market studies that show what everybody’s doing. So there’s opportunity for us to lower deposits. I’ll give you an example. We have a $1.75 billion CD book, about $0.5 billion of that is going to mature in the first quarter and about $900 million, almost actually about a $1 billion at $1.75 billion in the first half of next year, because we kept everything so short, like everybody else. So we have opportunities to manage the deposit costs now, but we’re not banking on it.

What’s happening in the forecast is on the loan side and that’s because of positive replacement yields. They’re about 40 basis points positive next year. They were about 100 basis points positive in the first half of 2024. We saw that come down as the year went on, about 50 basis points positive as the year went on. So we look at positive replacement yields next year at about 40 basis points and that brings the overall loan portfolio yield up from close to 6 basis points, just under 6 basis points to about 6.25 basis point, so about 25 basis points of loan portfolio yield improvement. So when I give that NIM forecast for us, it’s all — the forecast is all on the asset side. Of course, it depends on the rate. We have two cuts in the new forecast that are towards the end of next year if things gyrate and move, we’ll update the guidance as appropriate.

And we’re also trying to stay conservative by saying next the quarter-over-quarter — next quarter don’t expect a lot. It’s really going to kick in when macro swaps start to come off. Now really the first $150 million comes off out of the $250 million this year. The first $150 million comes off on May 1st, so we’re counting down the days. So that’s a lot of color, but I hope that helps.

Karl Shepard: No. I appreciate all of it. And then maybe one for Mike on Center. Adding assets in Cincinnati makes a lot of sense to us, but can you just walk through a little bit how you got to know them and what you like about that franchise and some of the key pieces that attracted you?

Mike Price: Yeah. I mean, I’ve known Stewart for about six years or seven years through the Ohio Bankers League, and then just through our acquisition down there. And I love that his franchise straddles an area called Indian Hill with on either side on Madeira or Milford where we have a branch. So it just fits nicely and it’s — and then he has some good mortgage and commercial lenders that seem to complement ours pretty well. And he’s pretty ingrained in the community and his Board is a good Board that hopefully will refer us some business. So it’s just a nice little deal that could be really powerful to help us, maybe — we have a really good leader down there now and feel like she can get that franchise. We grew from $186 million in loans to $700 million, and perhaps, we can double or triple it with the combination of our new market president in this acquisition.

So it just could be just really nice and powerful, way beyond the size of the bank. And so that’s, Jim, anything you want to add?

Jim Reske: No. We love these small acquisitions like this. I mean, they built a great bank. We’re really happy to partner with them. It really — we think of it in terms of time, we were going to build out a big nice bank in Cincinnati anyway, but this moves us maybe half a decade forward. It’s just really nice. And with the smaller acquisitions, it’s a lower risk. So we’ve got a great receptivity to these small positions. By the way, not that we wouldn’t do larger acquisitions. We’re open to that too. It all depends on what’s available.

Mike Price: Okay. I hope…

Karl Shepard: I’ll leave that question for somebody else, but thanks for the help from both of you.

Mike Price: Thank you.

Operator: Your next question comes from Kelly Motta from KBW. Your line is now open.

Kelly Motta: Hi. Thanks for the question. I guess I’ll take that follow up on that. It was really nice to see the deal you announced in December, this little deal here. Wondering, I mean, it seems obviously relatively small, how the pace of conversations have been going and your appetite and willingness to potentially string along some more of these?

Mike Price: Yeah. We’re on the ground the day after we announced the deal with whatever bank we acquire and have the privilege to partner with. Just we meet the people two times or three times over the course of the first month and assess them. And they — typically we find people with talents that can really help us. So we get enthused about that. And our market president there is already getting integrated with the leader there, the CEO. And so it’s exciting and it’s exciting to grow your bank. And like I said before, we did a little $186 million acquisition with a family down there, family owned and they helped us really grow that to three quarters of a $1 billion in about five years or six years. So those are powerful, nice little deals.

And I mean, just line them up. It’s just — we’re pretty thoughtful around pricing. So we’ll leave something on the table for a couple bucks to share and maybe to a fault, unfortunately. And we just want to grow our company and we just have a good team and we’re getting to a point where we’ve kind of got through $10 billion and we’re still profitable. And so pretty enthused about the growth prospects, some of the talent we’ve put on in the last year and a half to two years and what the bank could look like at $15 billion or $20 billion. We feel like our best years are ahead of us.

Kelly Motta: Got it. That’s really helpful. I also want to touch on credit. I appreciate the charge-off you took was our previously reserved for. We are hearing more banks talk about the normalization of credit and what that looks like. I understand a good portion of your NPAs are related to credits that were required in prior acquisitions. But as you look ahead, can you provide, just remind us specific reserves remaining on NPAs and kind of how you guys are working through the risk rating of your portfolio?

Mike Price: Yeah. I’m going to turn it over to Brian Sohocki, our Chief Credit Officer, who’s intimately involved in all of this. But credit is just vital to the future of our bank and we feel like notwithstanding this recent acquisition, our numbers are really clean. Nonetheless, we — as we get through this, we look at the prospects in Harrisburg and to grow that market and we really like where we’re at and the team we have in place, but Brian?

Brian Sohocki: Yeah. No. Thanks, Mike. I’ll answer a couple of ways. First, overall, the asset migration in the portfolio, we saw some positive trends, especially over the last two quarters, starting with improvement from our watch-rated credits through delinquency, through criticized assets and NPLs. And I know your focus is on the Centric — acquired Centric portfolio. We saw some nice improvement in each of those categories across the Board. So as we look at it, watch assets and the Centric portfolio for the year were down $148 million, a nice reduction. And then the criticized assets, we saw a further reduction. In the third quarter, we saw the first nice drop in criticized assets, and we built on that in the fourth quarter.

And then last, some really nice movement in the NPLs. The non-performing loans overall decreased by just over $13 million in the fourth quarter. Centric loans decreased $9.5 million in the quarter. So as we turn the page into next year, it surely provides a headwind as a percentage of our asset base. But we’ve seen some nice favorable trajectory in those trends and look for more of a normalization in the Centric portfolio.

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

Mike Price: Yeah. We’re watching equipment finance closely. We’re pretty pleased there with how that’s unfolding. Same thing with indirect auto and just consumers having higher interest rates and more debt, credit card debt, things like that. We’re pleased with what happened with delinquency here in the last quarter. I think it was almost cut in half from like 50 basis points to 25 basis points. Am I in the ballpark? And so it’s just pretty good news. I think we’re feeling it a little bit with the SBA portfolio. Those are higher rates. But even there, you have a 75% guarantee. And so, we’re monitoring it closely and I think the guidance we have for charge-offs longer term is guys?

Brian Sohocki: 25 basis points to 30 basis points.

Mike Price: Right.

Kelly Motta: Got it. Thank you.

Operator: Your next question comes from Matthew Breese from Stephens, Inc. Your line is now open.

Matthew Breese: Hey. Good afternoon.

Mike Price: Hey, Matt.

Matthew Breese: A few questions for me. The first one just maybe on balance sheet stuff. Cash balances seem to be a little bit on the lower side. And I was hoping, Jim, you could just give us some update or some outlook on securities and the securities portfolio as a whole for 2025?

Jim Reske: Yeah. Thanks, Matt. Very straightforward. We were carrying a ton of excess cash through three quarters of last year. We participated in the Fed’s BTFP program, and we had previously disclosed and talked about this, it was about $500 million when we were able to lock that rate and we kept it to put some of that money back on deposit with the Fed and benefited from that arbitrage to some small extent. But it had a — we were carrying a lot of that cash through three quarters of the year. We paid off most of that in the first three days of the fourth quarter. And then the remaining, I think we had $80 million left, we paid off in November. So it’s nice, but actually then it had such a distortive effect on things and it’s really nice to have that behind us.

Now we’re basically in a much more normal position. So I think yesterday we were borrowing $50 million on any given day. That’s just about right. That’s a pretty well-balanced and well-funded bank in my view, so that’s pretty normal. On the securities portfolio, we’re generally going to keep it about where it is. We have a plan for very modest growth. There is — obviously there’s some runoff with the rates where they are. That’s still pretty slow. We did do a little pre-funding of runoff at the beginning of the fourth quarter. So if you look really into the details in our financials, you’ll see a term borrowing and that’s because we pre-funded about $125 million of expected runoff. Bought the securities. That’s when we thought rates were going to be falling, so we bought it and locked in the rates and then we went out on the curve when the curve was inverted and did a two-year borrowing to fund that.

So that’s just kind of a one-off event, but that was nice. But for 2025, the securities portfolio is going to stay pretty flat.

Matthew Breese: Got it. Okay. Mike, you had discussed the equipment book a little bit and certainly kind of up into the right trajectory for C&I as a whole. Where do you start to draw the line in terms of concentration on equipment finance in the portion of the total loan book?

Mike Price: We’ve thought about that. And probably in the vicinity of 10% or less is where my head’s at, and my team and I will debate that. And we really like the business. We just like the way it’s run. I think we have a very good athlete there that can build a bridge to the corporate bank. Maybe that could take a bigger portion of the pie. But I — we just like the business. We like, I don’t know, it’s almost consumer-like business, helping small business with essential business equipment. A lot of that is in market. So it kind of fits us, like SBA even. And so that’s probably going to get some blowback from somebody at 10% or less. But it can’t be 20% of the book, that’s for sure.

Matthew Breese: Right. And as I think about your comments on mixing all this growth next year, but thinking about what’s going to drive C&I, it feels like equipment could be the biggest driver again. Is it fair to assume that this portion of the book is going to grow by 15% a quarter or so until you kind of get to that 10% of loans level?

Mike Price: Well, the equipment finance in and of itself will grow at that rate. You have about a $1 billion book outside of equipment finance in C&I that has to go grow through its own volition and that’s the book that we want to grow aggressively. We feel like that’s kind of that and small business and that business banking segment and then the middle market segment is one of the most valuable segments in any bank in terms of profitability. You have lending, you have deposits, you have owner’s accounts and family-owned businesses, you have employees, you have cross-sell treasury management services and you know the people. And you get to know them and get through things over decades in a good C&I relationship. And that’s hard for banks smaller than us to build those kinds of relationships and we just feel like we’ll be able to do that very well, particularly with the concentration of talent we have and also the credit acumen and skill and so we are — that’s probably a segment we’re most excited about.

And commercial real estate will still grow. However, I think over five years, 10 years, I think, I’d like to see the C&I become a prominent piece of the portfolio, 16%, 17%, 18% to more like 25% to 30%.

Matthew Breese: Okay. On the CenterBank deal, can you help me out with a few items? Just basic accounting stuff. What is the projection for share issuance or what was their share count? And Jim, do you have any idea of what expected accredible yield should look like the first quarter of integration, just to kind of get the NIM right?

Jim Reske: Yeah. Second question. First, I don’t think the accredible yield will be much. I don’t have the exact figure for you yet, but I’ll disclose it when I have it. It’s not going to be much. I’m glad you asked, though, because I’m not sure it’s fully appreciated in our estimates. We look at their revenue and expense per quarter in the second half of this year, about a little over $4 million of spread income. I mentioned in my prepared remarks a couple hundred grand of fee income, about $1.3 million of expenses. So that’s enough after-tax to be about $2.5 million of net income benefit, but we’re issuing 3 million shares together. That’s why you get to about a $0.01 a share pickup. I hope that some of those details help you.

Matthew Breese: Very helpful. Yeah. Yeah. Gets me in the ballpark. Okay. And then, Jim, the last one for me, just, your prior comment on loan yields, that basically loan yields can go from 6 basis points to 6.25 basis points. I think you had said you’re expecting two cuts this year. And from prior comments, I think you’ve said you have about a third of the book that floats. And so if I think about, the floating rate portion is going to be repricing down from Fed cuts, and then the other two thirds of the book is going to have to go pretty sharply up into the right. It just feels like a steep ramp to get the whole loan book from 6 basis points to 6.25 basis points. Can you help me square all that and maybe provide some additional color on what new loan yields are to help get you that 25 bps?

Jim Reske: Yeah. The new loans are coming in like at 7.4 basis points, 7.5 basis points. We look at next year’s projection because we took rates down. We’re taking rates on 50 basis points next year. The new loan yields are in the high 6s, 50 basis points, so about 6.7 basis points. So that helps. The rate cuts that we have planned in our forecast don’t come in towards late in the year. They’re like in September, November. So you don’t really get that down draft in the variable rate portfolio that you’re talking about. That is in our modeling, but you don’t get until towards the end of the year. So that’s kind of what helps to work together to get the yield in the portfolio up, even in the year when rates are going to be declining.

Matthew Breese: Got it. Okay. That might square the difference. That’s all I had. I’ll leave it there. Thank you for taking my questions.

Mike Price: Thanks, Matt.

Operator: [Operator Instructions] Your next question comes from Manuel Navas of D.A. Davidson. Your line is open.

Manuel Navas: Hey. Good afternoon. What happens if we have one less cut? Could that range of 4Q exit NIM be even 25 basis points on the high end? What other wildcards do you think with that range for the end of the year?

Jim Reske: So it’s funny, I remember a year ago before the Fed cut it all, we were kind of asked what’s the Goldilocks scenario for us, we said one cut, because one cut lets us cut the positive rates and doesn’t price on the portfolio much. So we’ve had four cuts since then and now we’re looking at a two. So the answer to your question is if they just stay where they are right now, it’s a great environment. If rates are one cut instead of two, it’s better than our forecast because we have the two bacon. So there’s another aspect to this with the shape of the yield curve, because we find that when the 10-year drops a little bit, we get a lot of refinance out of our commercial list that goes to the permanent market and so the prepayment speeds pick up and the 10-year picks up again, that slows down.

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

Manuel Navas: Okay. That’s helpful. And if we get those two cuts and then have a steeper yield curve, like, would you kind of expect the mint to stay stable at that point in 2026? I know there’s a lot in that question. I just kind of thought, thinking about, like, could it get higher after that point or would it kind of be stable at that point?

Jim Reske: I’ll have to take the answer, Manuel, because all our projections going to 2026 had rates been dropping, dropping and dropping, and I haven’t run it to see what it looks like if you just do what you just laid out. I’ll have to look at that and maybe give more guidance next quarter to get more 2026 guidance. Off the cuff, I would think we continue to be better. If we get it stopped, we’ll continue to be issuing new loans in the 7s or high 6s at least, and that’s higher than the portfolio yield, and that’ll just keep going and be able to bring deposit prices down from where they are now. We’re not even banking on that to get to our forecast. So I would think that there’s upside for us over the forecast in 2026, but I was just looking at this, and even the outside vendor we use that everybody uses for a rate forecast still has quite a bit of cuts in 2026. So we just have to run it differently to see what that looks like.

Mike Price: Yes. Since I’m a non-finance guy, the only thing I would add is, the scenario like that primes the pub for demand. It helps consumers, it’ll help our fee businesses and so there’ll be a nice counterbalance there in terms of demand. All of a sudden, we’re not really expecting a lot in mortgage and other kinds of fee businesses. They could be back on the table. If that mortgage rate gets into the mid-5s, and so, yeah, there’s another side to that too, aside from just the impact on the NIM is the demand…

Jim Reske: Yeah.

Mike Price: … and what it could do for us.

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

Jim Reske: Yes. And I’m really glad you asked because there is stuff going on below the surface. Some of that was distorted by the large deposit that we disclosed, so we brought that in…

Manuel Navas: Sure.

Jim Reske: … and that’s our large deposit and so that alone, I think, added 4 basis points or 4 basis points to the total cost of deposits, just that one deposit. So there is movement in different categories. But let me give you one example. I pulled this out. I’m so glad you asked because I wanted to have a chance to talk about this. We just — we try to track the intra-category movement in our deposit categories, again, because it’s what we got wrong on the way up, looking at how many of our low-cost money markets, for example, would reprice upward to higher-cost money markets, take advantage of the special we had in the branch window. And so we segment it, and we stratify it, and so, for example, in the second quarter of last year, we stratified by rate.

Over 50% of our entire money market category, which is our largest deposit category, was over 4%, 50% over 4%, and then in the third quarter, it was only 43% of that category. 43% of total money markets were over 4%, and in the fourth quarter, that was down to 36%. So now they’re not falling to 1%. They’re going to the next tier, right? So, well, but it does show you that what we saw happening on the way up was this deposit rotation. It was a story of every earnings call is really kind of ground to a halt, and we’re able to, along with other banks, because they’re competition, everybody’s doing the same thing, bring these deposit costs down. I mentioned the CD maturities earlier. We already have plans in place at every maturity to bring the renewal rates down and we’ve been very good at retaining about 80% of the CD maturities when they mature anyway.

So there’s real opportunity there in the deposit side.

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

Jim Reske: It’s a great question. It’s an interesting use of language because I don’t think that we think about the bank, we have fundamentals. We want to grow earnings per share. We want to develop value for shareholders, grow ROE, grow ROA, all those things. We try to understand the NIM, but we would not try to just defend the NIM at the expense of all the other things we’re trying to do to grow the bank and grow shareholders. So a lot of what we’re doing for next year, for example, we keep talking about is the loan growth. We’ve come off a period of relatively low loan growth, but great deposit growth. That’s really helped our liquidity and capital position. That’s been great. But we want to just return to normalcy.

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

Mike Price: Yeah. I also think we look at relative profitability pretty closely. If you look at 82 banks between $10 billion and $100 billion, we are looking at where we stack rank in terms of our profitability every quarter, and the quality of the bank, part of that equation is profitability, part of it is growth. But also you can get to ROA a couple different ways. You can get there with credit, you can get there with NIM, you can get there with costs. We’re pretty good cost managers. So it’s all in there, but we want to be at any three-year or four-year horizon that we turn on tangible common equity, ROA, we want to be in the upper quartile. We have a — it’s the way we think and kind of obsess about our financial performance.

Jim Reske: And then I’m going to give you one more thought on that, hopefully this puts a fine point on it. For example, just that thinking, I hope this illustrates it for you. If we look at any given quarter where we have, for example, 1% loan growth, and we say, oh, in this quarter, we have opportunity to really bring down deposit costs because we don’t need the deposit growth in this given quarter. We could manage the NIM even higher, manage deposit costs down even lower. We generally don’t do that because we’re managing the bank for the long-term and we want to continue to have a nice, steady, quote-unquote, glide path of deposit growth to make sure we’re funding the bank for the long-term. It’s more, that’s the way we think of it, for better or worse.

Mike Price: We’re very coachable, by the way. We listen to everybody.

Jim Reske: That’s true.

Manuel Navas: I appreciate this extra commentary and thank you.

Mike Price: Thank you.

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

Mike Price: I think we put everybody to sleep, Jim.

Jim Reske: That’s for you.

Mike Price: Hey. Thank you. We appreciate your sincere interest in our company and we look forward to being with a number of you over the course of the next quarter. Have a great remainder of the winter. Take care. Thanks, Operator.

Operator: Thank you. This concludes today’s conference call. Thank you for joining. You may now disconnect.