First Commonwealth (NYSE:FCF) Financial Corporation (NYSE: FCF) held its Third Quarter 2024 Earnings Call, reporting core earnings per share of $0.31, with stable loans, increased deposits, and a slight decline in net interest margin (NIM) to 3.56%. The company faced challenges, including a $3 million drop in interchange income due to the Durbin amendment, counterbalanced by gains in SBA income and wealth management.
The provision expense rose to $10.6 million, largely due to specific reserves related to two legacy loans and charge-offs from the Centric acquisition. Looking ahead, the company expects non-interest income between $22 million and $24 million for Q4 and non-interest expenses ranging from $67 million to $68 million. The bank also anticipates a beneficial impact on NIM from the expiration of received fixed macro swaps in upcoming years, despite potential challenges from rate cuts.
Key Takeaways
- Core Earnings Per Share at $0.31 for Q3 2024.
- Net interest margin slightly declined to 3.56%.
- Provision expense increased to $10.6 million due to specific reserves and charge-offs.
- Non-interest income impacted by a $3 million drop, offset by gains in other areas.
- Anticipated non-interest income for Q4 between $22 million and $24 million.
- Projected non-interest expenses for Q4 between $67 million and $68 million.
- The bank recognized as the second-largest SBA lender in Western Pennsylvania for FY 2024.
- Customer satisfaction reached five-year highs.
- Share repurchases at an average price of $16.83.
- The forecasted Fed funds rate to end at 4.29% for 2024 and 2.95% for 2025.
Company Outlook
- Non-interest income projected between $22 million and $24 million for Q4 2024.
- Non-interest expenses expected to range from $67 million to $68 million for Q4.
- Customer satisfaction metrics at a five-year high.
- Capital management strategies include share repurchases and securities portfolio growth.
- Deposit growth saw a significant inflow, with a positive trend in non-interest-bearing accounts.
Bearish Highlights
- A $3 million decrease in interchange income due to the Durbin amendment.
- Provision expense rose due to specific reserves and charge-offs.
- Rate cuts pose a challenge, with NIM expected to decline to the mid-340s by the end of 2025.
- Criticized loans from the Centric acquisition remain a concern.
Bullish Highlights
- Gains in SBA income and wealth management offset the drop in interchange income.
- The expiration of macro swaps expected to positively impact NIM in the future.
- Tangible book value per share increased, supported by a reduction in AOCI.
- Positive impact on fees from potential mortgage refinancing as rates decrease.
Misses
- Net interest margin decreased slightly, with further declines expected.
- Non-interest income was impacted by regulatory changes.
- Increased provision expense due to specific reserves related to legacy loans.
Q&A Highlights
- Deposit beta projected around 25% during rate cuts, with quick repricing of variable-rate loan portfolio.
- Normal cash level for the bank to be below $50 million.
- Ongoing interest in M&A opportunities, with over 60 reviewed but only six pursued.
- Loan portfolio approximately 50.67% variable, with a duration of 2.76 years.
- Anticipated swap benefit could result in an 8 basis point advantage if Fed funds reach 300 basis points by 2025.
In conclusion, First Commonwealth Financial Corporation has demonstrated resilience in the face of regulatory challenges and market shifts. While the bank is navigating through the complexities of rate cuts and their impact on the net interest margin, it remains focused on capital management, customer satisfaction, and strategic growth opportunities. The earnings call revealed both the hurdles and the strategic moves that the company is making to maintain its financial health and support future growth.
InvestingPro Insights
First Commonwealth Financial Corporation's (NYSE: FCF) recent earnings call paints a picture of a company navigating challenges while maintaining a strong financial foundation. InvestingPro data provides additional context to the company's performance and outlook.
As of the latest data, FCF boasts a market capitalization of $1.73 billion, reflecting its substantial presence in the financial sector. The company's P/E ratio of 10.83 suggests that it may be undervalued compared to industry peers, which aligns with the company's focus on capital management and shareholder value.
One of the InvestingPro Tips highlights that FCF "has maintained dividend payments for 38 consecutive years." This impressive track record of consistent dividends underscores the company's commitment to returning value to shareholders, even in challenging economic environments. The current dividend yield stands at 3.08%, offering an attractive income stream for investors.
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The company's revenue for the last twelve months as of Q3 2024 was $456.47 million, with a modest growth of 1.76%. While this growth is not explosive, it demonstrates FCF's ability to generate steady income in a complex banking environment.
Notably, FCF has seen a significant price total return of 43.81% over the past year, and a 30.2% return over the last six months. This performance suggests that investors have been optimistic about the company's prospects, possibly due to its strategic initiatives and capital management practices mentioned in the earnings call.
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Full transcript - First Commonwealth Financial Corp (FCF) Q3 2024:
Operator: Thank you for standing by and welcome to the First Commonwealth Financial Corporation Third Quarter 2024 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.
Ryan Thomas: Thanks, Rob, and good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation's third quarter financial results. Participating on today's call will be Thomas Michael Price, President and CEO; James Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; Brian Sohocki, Chief Credit Officer; and Mike McCuen, our Chief Lending 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 statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike.
Thomas Michael Price: Thank you, Ryan, and welcome, everyone. Third quarter 2024 Core Earnings Per Share were $0.31 Loans were essentially flat, deposits grew and the net interest margin fell 1 basis point to 3.56% as rates declined in anticipation of the Fed rate cut in September. Growth in other fee income offset a $3 million decrease in interchange income as we incurred the long anticipated impact of Durbin. Expenses were elevated primarily due to several one-time items. All of this led to pretax pre-provision ROA of 1.73%, an efficiency ratio of 56. 66% and core pretax pre-provision net revenue of $50.9 million which was within $1 million of analyst consensus. Turning to credit, the provision expense at $10.6 million was up $2.8 million over the second quarter. Our credit story in the third quarter was largely the tale of four credits. Embedded within the elevated provision expense are specific reserves for two legacy loans and two charge offs related to the Centric acquisition now in our capital region. Most, but not all of the two Centric charge offs had been previously provided for, but they together accounted for approximately $1.5 million of provision expense this quarter on top of the $5.5 million for the two legacy loans. Over the last seven quarters, a disproportionate share of our credit costs has stemmed from our acquisition of Centric that closed in the first quarter of 2023. As we've shared previously, we understood their credit profile going in, so we marked the credit and priced the deal accordingly. However, the acquired portfolio continues to impact our credit performance. For a bank that was 10% of our size, the former Centric loans have accounted for 76% of commercial charge offs and 51% of total charge offs in 2023. In 2024 year-to-date, former Centric loans have accounted for 86% of commercial charge offs and 42% of total charge offs. At September 30, criticized loans were 2.68% of total loans. Excluding Centric loans, that ratio would be 1.69%, which is actually an improvement from the 1.72% figure on the day that Centric closed. However, we continue to make substantive progress with Centric credits in the Capital Region each quarter. Also important, stronger third quarter gain on sale income in SBA alongside increases in service charge and wealth management income and $926,000 in BOLI income all work together to blunt the $3 million impact of having our debit card interchange income cut in half due to the Durbin amendment. In fact, non-interest income drifted down only $683,000 Looking ahead, we expect non-interest income to be in the $22 million to $24 million range in the fourth quarter. Turning now to expenses, we had elevated expenses this quarter of $70.1 million up $4.3 million over the prior quarter. Third quarter expenses reflect approximately $1.8 million of one-time items, including a $1.1 million operational loss in credit card and a $750,000 in severance expense. We expect non-interest expense to be in the $67 million to $68 million range in the fourth quarter. Beyond the financials, there are a few other items worth mentioning. First Commonwealth earned recognition as the number two SBA lender by dollars in Western Pennsylvania for the 2024 fiscal year ending in September. As of October 15, our overall customer satisfaction score and net promoter scores have hit 5-year peaks at 90.4 and 70.3, respectively. We've seen a steady trend of increases in these figures since 2020 with both exceeding industry benchmarks. These are important metrics for us, especially as we cross $10 billion in assets. Although, we are disappointed by our third quarter earnings per share miss, I'm encouraged by the momentum in our businesses and prospects for stronger growth ahead. Despite a relatively healthy level of loan originations this year, our overall loan growth has in some ways been purposefully muted by: One, our rebuilding of the Centric portfolio. Two, our strategic decision to reduce exposure to certain sectors like sponsor finance and three, the shift to selling nearly all of our mortgage originations. More importantly, our regional presidents have a growth mindset, have attracted new commercial banking talent that will drive the bank forward for years to come. Our new capital region’s credit performance will converge with the strong credit metrics at First Commonwealth overall and become a key source of future growth in attractive Central and Eastern PA markets. And with that, I'll turn it over to Jim Reske. Jim?
James Reske: Thanks, Mike. Mike has already talked about the major financial metrics, so I'll take a closer look at the net interest margin and then wrap up with about 30 seconds on capital. Last quarter, our NIM guidance was for “stability or even slight improvement from current levels for the remainder of 2024 give or take 5 basis points as usual.” While we didn't get the slight improvement part, we did get the stability part. Our NIM guidance didn't contemplate a 50 basis points rate cut in September, so in that sense, we were pleased to see our NIM exhibit relative stability by only going down by 1 basis point from last quarter. The NIM is facing various headwinds and tailwinds that largely offset each other in the third quarter, but they do give us some insight into where the NIM is going. One headwind is excess cash. We've been holding excess cash all year because we locked in low-cost borrowings through the Fed's BPFP program early in the year and we were reluctant to pay that off. Plus loan growth was slightly negative in the third quarter while deposits continue to grow resulting in a steady build above excess cash. On top of that, we received a large commercial deposit right at the end of the third quarter. All of this cash had a suppressive effect on the NIM even though it's additive to earnings because it pumps up both sides of the balance sheet with a very thin margin asset. That cash had a suppressive effect of 6 basis points on the NIM in the second quarter, but in the third quarter that's depressive effect of 9 basis points. Neutralizing the effect of excess cash in both quarters will therefore have changed our 1 basis points of the impression to 2 basis points of expansion, but realistically that's all still within the range of what we would call stability. Looking forward, the headwind of excess cash has been largely removed because on October 3rd, we used it to pay down $436 million of the $516 million of BPFP borrowings that we had and we will likely pay down the remaining $80 million when the Fed raises rates here in November. Another headwind to the NIM was the 8 basis points increase in our cost of deposits. That 8 basis points increase however was down from 10 basis points in the second quarter and a 25 basis points increase in the first quarter. We expect that downward trend to continue. The pace of what we call deposit rotation that is the migration of deposit dollars from lower cost of the categories to higher cost ones continue to slow down in each month of the third quarter. Another indicator of the slowdown is the cost of interest-bearing non-time deposits or savings in Now accounts, which had been moving up by 3 to 4 basis points per month in the second quarter, but didn't go up at all in the third quarter. Perhaps more importantly, the incremental cost of deposit growth in the first quarter was about 4.21%, in the second quarter it fell to 3.61%, and in the third quarter it fell again to 3.22%. In terms of competition, we see deposit pricing pressures abating rapidly in our markets allowing for lower deposit repricing upon maturity without jeopardizing our deposit growth trajectory and that trajectory has been remarkable, 8% deposit growth on an annualized basis so far this year. That deposit growth helped bring our loan to deposit ratio down by 360 basis points in the first quarter at 92.5% at September 30th. As for loans, replacement yields have been a tailwind to the NIM all through this rising rate cycle. Loan yields went up by 3 basis points in the third quarter largely because new loans still came on the books at about 50 basis points higher than the ones that ran off. About a third of our total loan production in the third quarter was fixed rate loans and those fixed rate loans actually came on the books at 172 basis points higher than the fixed rate loans that ran off. We believe that this upper repricing should continue for a while even in the face of falling rates. This environment is one in which we're glad to have built a diversified bank with a broad mix of fixed and variable loans and loan types both in our portfolio and in our origination mix. In addition to all of that, there are a few other tailwinds to the NIM that are incorporated into our forecast as well. Purchase accounting contributed about 7 basis points in the third quarter, down by about 1 basis point from the prior quarter. We do however expect that benefit to fall to only 4 to 5 basis points next quarter and we are looking forward to the expiration of received fixed macro swaps in the near future, $50 million of received fixed macro swaps would mature in the fourth quarter of 2024, $250 million mature in 2025 and $175 million mature in 2026. These expirations should provide a lift to our NIM in 2025 and in 2026. That however brings us to the biggest headwind to our NIM, rate cuts. About 50% of our loan portfolio is priced off of one-month SOFR, so rate cuts are felt immediately. Our latest forecast calls for Fed funds to end 2024 at 4.29% and to end 2025 at 2.95%. That's about 40 to 50 basis points lower than the rate forecast that we used last quarter. So taking all of these headwinds and tailwinds into account, our guidance for the fourth quarter sounds a lot like what we said last quarter, stability, at least for the near term. In our latest forecast, our NIM stays in the mid-350s range through the first quarter of 2025 as always give or take 5 basis points for normal variability, then gradually falls over the course of the year to end the year 2025 in the mid-340s about 10 basis points lower than where we are today. That assumes by the way, a return to normalized mid-single digit loan growth in 2025. You might sum it up this way, all of the NIM tailwinds we have, removal of excess cash, falling deposit rates, positive loan replacement yields, macro swap expirations, all of them work together to blunt the effect of falling rates, but aren't quite enough to overcome them if rates fall fast enough. To bracket this for you and give you some idea of the impact of rates on our balance sheet, if the fed funds rate falls to the projected year end 2024 level of 4.29% and then just hold at that level through year end 2025, the tailwinds would win out. In that scenario, we would expect that our NIM would actually increase steadily over the course of 2025 into the mid-360s. I would note that the futures market is currently projecting a year end 2025 Fed funds rate at 3.40%, which is about 45 basis points higher than our latest rate forecast. So, reality will likely play out somewhere in the middle. In terms of capital management tangible book value per share increased $0.47 from the previous quarter to $10.03 due in part to a $28 million reduction in AOCI. We raised the threshold for share repurchases this quarter buying on prices below $17 a share and so this quarter we repurchased 146,850 shares at an average price of $16.83. And with that, we'll take any questions you may have.
Operator: Thank you. [Operator Instructions]. Your first question comes from the line of Daniel Tamayo from Raymond James. Your line is open.
Daniel Tamayo: Sorry about that. Good afternoon, guys. Hopefully you can hear me okay. Maybe first to start, just on as we think about overall asset growth, just curious where you stand on where you want the size of the securities portfolio going forward. You touched a little bit on the loan to deposit ratio kind of similar. Just curious if you still want that coming down from these levels or you're comfortable in the 92% level? Thanks.
James Reske: Yeah. No, just to be we expect the securities portfolio to expand a little bit over the next year, maybe by about a $100 million over the course of 2025 from where it is today. Not huge expansion, but, we want grow it a little bit. Is that what you're asking, Danny?
Daniel Tamayo: It is. Yes. Thank you. And then, just to follow-up, switching gears to credit, just maybe if you could provide a little detail on the loans, I apologize if I did miss this earlier, but the loans that you took specific reserves on in the quarter? Thanks.
James Reske: I'll turn it over to Brian Sohocki.
Brian Sohocki: Hi, Daniel. Yes, on the reserve side, there was two credits that drove the specific reserve for the period in the provision. First was a $2.7 million specific reserve taken on a $10 million fully funded construction loan as for a mixed-use office property located here in Pittsburgh. So the participation in a global $58 million loan, the property, came to a maturity in the third quarter and while an amendment is being negotiated, the current level of vacancy combined with the uncertain, outlook resulted in move of the entire $10 million balance, to nonperforming. The second driver and that provision was a $2.8 million specific reserve taken on a $4.8 million term loan. That loan was in our sponsor finance portfolio. The credit specifically was in the distribution space. And while payments do remain current, the longer long-term outlook is challenged. That accounted for $5.5 0 million of the provision, in the primary increase in the specific.
Daniel Tamayo: The two combined?
Brian Sohocki: The two combined. Thank you.
Operator: Your next question comes from the line Karl Shepard from RBC Capital Markets. Your line is open.
Karl Shepard: Hey, good afternoon, guys. Just to pick up on credit for a second. Can you anything you can say about expected block content from those two legacy credits?
James Reske: Lost content on legacy credits.
Brian Sohocki: Sure. The driver of the short-term outlook for our charge offs will be through the specifics that we've made. We've had appraisals for the real estate property and we expect to come to resolution over the next short term period next quarter to two.
Karl Shepard: Okay. So maybe not a much in the way of incremental provisioning for those two.
Brian Sohocki: That would be the next big thing.
Karl Shepard: Okay. And then just to follow-up on the Centric credit piece. You mentioned convergence with the broader portfolio. Kind of over what time line and would you expect any more originations or charge offs or kind of anything to emerge before we get to kind of a steady state back with the larger book?
Thomas Michael Price: I'll just start out at a little higher level, Karl. Just looking at Centric, the criticized loans decreased from $124 million in the second quarter to $102 million this quarter. The watch loans decreased $271 million to $261 million. So we are seeing those come down from highs and watch has been consistently improving from $376 million to start the year. So, we have a group of SWOT lenders that are out there in early-stage collections and a really working bank and that's we've seen nice results from that. What do you want to add, Brian?
Brian Sohocki: Yeah. I think that's helpful, Mike. From a global perspective, we'd anticipate the Centric headwind to start dissipating in 2025. It'll be somewhat offset by normalized net charge off levels in the core portfolio. I would add, one point to Mike's as if you look at our charge off ratio, year to date through the third quarter, it was 39 basis points on an annualized basis. I apologize, just in the quarter was 39 basis points annualized, 27 of that came from the Centric portfolio. So the core franchise charge off, level is in the low teens and, we're excited about that performance.
Karl Shepard: Okay. That's helpful, Brian. To follow-up, then I wanted to ask about long term. You guys have been pretty deliberate and measured kind of managing to a pace. What gives you confidence that it's going to reaccelerate here? And just what kind of near-term visibility do you have for the quarter into 2025?
Thomas Michael Price: On the commercial side, in particular, the production has been really good. The headwinds have been, probably for the year about $49 million in payoffs in sponsor and probably another $97 million in Centric and the other thing is we've just added a lot of talent to our regional teams in corporate banking and they're really starting to hit the ground running. So we just feel that we can -- mid-single digit and is very achievable next year and perhaps a little higher. We shall see hopefully get some tailwinds with economic growth and but -- that's the reason and we've also been able to fund it, and that is we're proud of that and at the same time, we'll have ample liquidity to grow loans. We've paid down borrowings, retired sub debt with increasing capital ratios and kind of supported the margin. So I think the team can do it.
Karl Shepard: Okay, great. I'll let someone else pepper Jim on the margin, but thanks for the help.
Operator: Your next question comes from the line of Kelly Motta from KBW. Your line is open.
Kelly Motta: Hey. Good afternoon. Thanks for the question. I was hoping to dig into the deposit growth you saw, this quarter. It looks like NIBs were up, meaningfully, although, not so on an average basis. I'm wondering as we're thinking about the that line, was there any sort of end of quarter volatility that we should be managing here? And, also, any kind of broader comments as to whether or not we've seen a asset trough in the pressure on non-interest bearing accounts?
Thomas Michael Price: Yes. We had a nice big win at the end of the quarter with a business person in one of our regional markets who sold the company and we had a pretty significant inflow of about $170 million in deposits in the last week of the month and some of that was parked in non-interest bearing. Jim, what do you want to add?
James Reske: Yeah. So, yeah. So that really helped the quarter end number. So if that's what you're looking at, I will that's what you'll see, but the, the other thing I would just want to point out, this is kind of behind the scenes in my deposit rotation comments. If I just look at the trend in NIB month to month in the third quarter. In July, there was $20 million of outflows. In August, there were $2.6 million of inflows. In September, $35 million of inflows and those are averages, not end of period. So, the rotation seems to really slow down overall. We're really happy that we get a large deposit like that anytime. But the for the rest of the bank, it seems like it's all moving in the right direction.
Kelly Motta: Absolutely. That's super helpful. And then I appreciate all the color and commentary you've given around sort of your outlook for margin. Just wondering, if you could expand a bit on how we should be thinking about, deposit betas during, rate cuts. It looks like during the tightening part of the cycle your interest-bearing deposit beta was about 50%. Wondering if you if you could just, provide some color on how you're thinking about that on the way down, at least initially.
James Reske: Yeah. No. Happy to address that. Our deposit beta assumption is generally about 25%. That's just backed up by long term, look back studies that kind of look at what the historical average has been. The number you're thinking about, there's always slight variation in the way people calculate cumulative through the cycle betas because it depends on when you start the, you know, “cycle” and when you end it. When we were just looking at that the other day, and it looked like for what I calculation I was doing internally or my team was doing internally, showed that we had a cumulative through the cycle beta on the deposit side of about 46%. Just starting from the right before when the Fed started, there were this rate hike cycle to that last the first rate cut in September, about 46%, and accumulative and the odd thing about that was we tried to look at the loan beta over the same period, and it was also about 46%. Just above what you see is like in any bank, the timing is different. So in the early stages, we're able to reprice the loans upward very quickly and then, the deposit pricing caught up, but it evens out over time. So in this downward cycle, we'd expect the loan, deposit I'm sorry. The loan beta to, hit us pretty quickly with the, fallen rates at a variable rate portfolio. And then, you know, deposit beta at about 25% able to kind of reprice those downward to kind of make up for it.
Kelly Motta: Got it. That's very helpful. And then you talked about, you know, cash being elevated, during 3Q because, and you use some of that, to pay down BTFP. I apologize if you already answered this, but what are you guys doing as a more normalized level of cash as we look to, just manage the size of the balance sheet?
James Reske: Yeah. The normal level of cash will be just in the below $50 million. It just depends on any given day, how much we need to fund the bank. So, I think, I'm not sure off the top of my head what it is right now today, but in any given day, it might be $10 million, $20 million of excess cash you have to make sure you can balance the bank at the end of the day, but it's not going to be $400 million lying around like it was on September 30th. If you look at the balance sheet in the press release financials that we issued, that number sticks out like a sore thumb. There's huge increase in cash and it's not going to stay at that level long term. It's just going to be a minimal amount to bounce the bank.
Kelly Motta: Understood. And then, finally, I was hoping you could provide any update or color on the M&A environment and, the pace of conversations as it pertains to deal activity.
Thomas Michael Price: There's been a conversation or two. Nothing has materialized, and, we're very interested in M&A. I think you know we will do smaller as well as larger and if the six deals that we've done and had the privilege to do have ranged from $55 million to $1.1 billion. So they've been deals that we feel like we could appropriately control the risk and I've also shared with you that we have a team that could scale and do a larger transaction. It just it would have to be just right. And Jim always likes to share we've we looked at well over 60 deals to do six, so we're pretty disciplined, but there are there have been one or two things out there and I think we've passed on one or two, passed on both actually into the process. So hopefully there'll be some nice opportunities to grow our bank in contiguous markets and do strategic things and rural depositories and all the kinds of things you've heard us say before.
James Reske: Hey, Kelly, just to go back to the just for what it's worth, cash this morning was stood at $45 million. It's kind of a normal level for us.
Kelly Motta: Awesome. Thank you so much for the color. I will step back.
Operator: Your next question comes from the line of Matthew Breese from Stephens. Your line is open.
Matthew Breese: Good afternoon, everybody. Jim, I was hoping to start, you had mentioned that 50% of your loan portfolio reprices, I think you set off a one-month SOFR. In the past, it might have even been last quarter, you whittled that down, that number to like 30% and even a piece of that was affected by the swaps. So, like the true floating rate portion of the book, I think was closer to 27% of total loans. Could you just clarify for us and I'm sorry if it's going to put you on repeat a little bit, the true floating rate portion of the book, if it's 50% or 27% just because it matters a lot as we head into a downward cycle.
James Reske: Yes. I'm so glad you asked that and you gave me a chance to clarify. So, I want to make sure I didn't speak before. About half the portfolio is variable, half six. That's just kind of a general rule of thumb. It does vary a little bit of from, time to time. At the end of the third quarter, it was 50.67% was variable. Okay? So very, very close to 50%, but the part that is linked to one-month SOFR is only 33% of the SOFR portfolio, not 50%. So the other section the other 17%, that's tied to all kinds of things along the yield curve. So if it's variable over time, it might be like a mortgage rate with a five one arm or seven one arm that's going to be priced over time. So it's a variable, but it's not going directly to SOFR. That's only 33%. And even those, most are all it's SOFR, it's prime. There's still one or two BISB loans left that we're phasing up because that's going away, but 32% is all the short stuff. Thank you for letting me clarify that.
Matthew Breese: And I would assume as well as these swaps expire, it won't be 27%. It will actually be truly more like 30% -- sound like the low 30% range. That's accurate as well.
James Reske: Well, the numbers I was giving you was irrespective of swaps. I didn't adjust the number I was just giving you to say that some of that portion was swapped in the fixed rate. So those are just the raw underlying portfolio numbers I was giving you.
Matthew Breese: Okay.
Thomas Michael Price: They don't have the same the same that you're talking about. It'll take away these low rate fixed swaps that we've got on the books and let this stuff float again and it'll start floating upward and what the cash flow actually we see will be the higher floating rate.
Matthew Breese: Okay. Setting the true floating rate stuff aside, could you help us a little bit understand what the maturity profile is like for the fixed rate portion of the book, either duration or how much you expect it to kind of come up for maturity of next year?
James Reske: Yes. I don't have it broken down by like type of loan. The overall loan portfolio duration is only 2.76 years, but that reflects that portion of loan portfolio that 32% linked to the short end of the curve, the other part that's variable, and then the fixed rate stuff as well. It must be conceptually if this helps you, we think about, the concept of what we call yield curve diversity. It's not really needed to term, but it's something we talk about. So we have things that are priced at the long end of the curve. Things like fixed rate mortgages might be on the books, but you also, you also have things here at the very short end of the curve. What you have in the middle of the curve are things like indirect auto. So, we're a $1 billion portfolio over a $1 billion that reprices up the two-and-a-half-year part of the curve and then the equipment finance portfolio we're building. Those are almost all five-year loans that don't really pay at all. You know, we, call sometimes leasing, but 85% of those are loans. And when those are loans or leases, they have almost a perfect five-year duration that doesn't prepay. So that kind of builds that duration overall in case it's kind of it's those repricing characteristics that smooth out the repricing of our portfolio over time, but the total duration on loans, 2.76 years, on securities 4.35 years. Total assets that would be, it's 2.79 years on total assets. Hope that helps.
Matthew Breese: Very helpful. And just one more on this topic, and apologies if it's belaboring the point, but you'd also mentioned that there's a still a positive repricing gap, on the fixed rate book by, I think, 170 basis points. Do you mind providing for us what those what the before and after those numbers are? What is it repricing to and from?
James Reske: Yeah. It might take a second to find it, but I have it here. It'll take me it'll take me a second. Go ahead and answer it, if you have another question.
Matthew Breese: Yeah. While you're looking through your papers, Mike, just one for you. We've seen a little bit of a pickup here in in NPAs. It sounds like some of it is your own, some of it is from Centric. Where would you be surprised to see NPAs climb to? I mean, are we near the top in year over year or are you expecting a little bit more than mobilization? And maybe some color on how you expect charge offs to behave as well?
Thomas Michael Price: Yes, I do. I think we're near the peak. It could tick up a little bit, but I think it would come down in the ensuing quarters. We have about a third of that NPL and NPA stack is Centric. We feel like we have good line of sight on those credits. We're not being surprised as much anymore and they're well marked as Brian outlined. So I think hopefully that's a peak. In terms of charge offs, I think Brian shared as well our charge off figure this past quarter versus what it would be normalized at would be, in the low teens. And, that feels right to us longer term and, I hope that's helpful.
James Reske: It it's helpful to me because it gave me some time to find the answer to the previous. So, going back to what you're asking, I think what you're asking is the replacement yields on fixed rate loans. When I talk about 172 basis points, what are the underlying numbers? And, here they are, for better or worse. In the third quarter, we originated $290 million of fixed rate loans at 7.24%. And but $265 million ran off at 5.52%. So the nice thing about that is rates fall under 25 basis points. Hopefully, your replacement yields on those are a 150 basis points and another 25 basis points cut, replacement yield is still a 125 basis points, and it you still get a lift even in a falling rate environment. That's how we think about it.
Matthew Breese: Appreciate that. Wouldn't that have a bit of a dampening effect on the loan beta? It just feels like that's a steep gap and it's more than half the book. So I'm just curious, wouldn't that dampen the 45% expected loan beta over time? And that's my last question. Thank you.
James Reske: Yeah. I think it's baked in there. I just think about whether it dampens it or, and to what extent. When we think about our loan beta for next year, it's not that far off our deposit beta. I mean, just thinking about it depends a little bit on when you start the following cycle. If you start in September, just to get the math, the loan beta for next year. Loan beta actually is a little less than that. It's like 10% to 15% -- like, 10% to 15% next year. The deposit beta is like 25%. So, my deployment, by the way, was just, over time, you go through the whole cycle. So, whenever this cycle ends, three years from now, they tend to even out over time.
Operator: Your next question comes from the line of Frank Schiraldi from Piper Sandler. Your line is open.
Frank Schiraldi: Hey, guys. Good afternoon. Just a question on the large deposit that came in at the end -- or near the end of the quarter, last week of the quarter. Should that -- or would that tend to create some volatility in the fourth quarter? Just curious if you expect some of that to flow back out or perhaps even seen some of that already given we're at the end of October here?
Thomas Michael Price: I think, our best line of sight right now is that we'll have a good portion of that, that, might flow out in the first quarter of next year. We'll do everything we can to hold on to it and we'll take it while we can get it.
Frank Schiraldi: Sure. And then just a follow-up on the trends in deposit costs. Jim, I thought you had mentioned that you thought we'd see -- and maybe I'm wrong, but thought we'd see another quarter of increased deposit costs perhaps at a lower level, but first of all, is that what you said? And then secondly, is it possible just given 50 basis points we've seen here already in September in terms of cuts that maybe this is an inflection point for deposits in the third quarter here?
James Reske: Well, the last point, it felt like it. It felt like the 50 basis points cut in September felt like it was reflected in the markets. We could just see the market competition dissipate and the deposit movements kind of change, and it feels like everyone's got the message that rates are falling. So it's much easier to pass along falling deposit rates and still grow deposits at the same time. So, that did seem to be see -- it felt like a shift in September to the last part of your question. On the first part of your question, I'm not sure I said what you said. I, I hope I didn't. If I did, let me clarify a little bit. I do think that that the rate of increase in the cost of deposits was moving downward over the course of the year. That's the point I was trying to make in the prepared remarks. So, it was up in the first quarter, but it was up less than the second quarter. It was up less than the third quarter by only 8 basis points. We actually think it should come down a little bit in the fourth quarter. It's just a projection. So, I didn't mean to say that I think it'll increase. I've been talking about the trend of increases coming down. We think we might turn the quarter in the fourth quarter. I will patch that with a huge grain of salt. Predicting deposit costs and deposit rate movements has been the hardest things in this whole cycle. So, I wouldn't, put too much stock in that, but we do not predict or anyone on internal forecast that the cost of deposits will continue to increase next quarter. It should plateau.
Frank Schiraldi: Okay. So, said it otherwise, is it maybe the thinking that the trough is in the fourth quarter here?
James Reske: Yes.
Frank Schiraldi: Okay. Yes. That's right. And then, just lastly, I mean, I think, you're just given the numbers you gave around margin by the end of next year based on a couple of scenarios. Seems like that still kind of translates to about 5 basis points in margin compression for a given 25 basis point cut and I think you've maybe even said that in the past. So just wanted to, double check if that's kind of still a reasonable, guidepost for a given, 25 basis points?
James Reske: Yeah. That's kind of our rule of thumb. The way I thought about that in particular, over the last couple of days was, in the year, in our last forecast, we're thinking, carrying on at the stable of these rates and now we have a new forecast that's 30 it's going to be 40 to 50 basis points lower, and so it's 10 basis points lower than it was with the last rate forecast. So, for another 50 basis points, it cuts to get down 10 basis points, and that's your 25 basis points per cut. Of course, the way it all played itself out with those headwinds and tailwinds I was talking about is that you don't just have a pure, 5 basis point per 25 basis point cut because if you go from 550 to 3% and you're down 250 basis points in rates, that's a lot of cuts, then I wouldn't take that number by 5 and things like that into the NIM. The tailwinds offset a lot of that. That's why I was trying to give the model -- the forecast numbers from our model.
Frank Schiraldi: No, that's appreciated. Okay, great. Thanks for the color.
Operator: Your next question comes from the line of Manuel Navas from D.A. Davidson. Your line is open.
Manuel Navas: Hey, starting on the fees for fourth quarter, that range is it's a little wider $24 million to $22 million if I got it right. Can you just talk about, what gets you to the higher end? Is it like SBA sales? And then can you talk about fees going forward into next year. If rates come down, mortgage should pick up, just kind of thoughts on that benefit as well on the fee side?
Thomas Michael Price: I'll give you some broad strokes and then Jim can fill in. But we do think if rates come down that will help all across the board with revenue and volume on the commercial lending side and the consumer side as well as our fee businesses. We've really built a pretty formidable SBA offering and continue we'll continue to invest there. Our mortgage banking could snap back pretty nicely with good share, good deposits in our core markets that could turn into refi and other things. So we do feel that could be a tailwind. Jim, other guidance you would provide?
James Reske: Yes. We have the fee engines baked into the bank, that kind of hung along and some of them done really nicely. While we don't talk about a lot of insurance, that keeps coming along adding some fee. We have our wealth division, which has done really well this year. If you think about growth for next year, I think you're hitting on it in a changing rate environment. You hope that, you're able to do more mortgage refi and then, more, SBA. I think that could just grow that business as well. The mortgage refi a little bit is independent on just the short-term rates though. We were got really hopeful that we do some refi business in that middle part of the curve went up again a little bit and so we just don't want to get too excited just because the Fed funds rate comes down doesn't mean mortgage rates come down, you get a lot of refi business. So, we got to take that into account.
Thomas Michael Price: Yes. The wealth management piece provided $500,000 quarter over quarter of offset to the $3 million headwind with Durbin. That business continues to mature. We also have treasury management. We've just built a really nice offering on the back of the corporate bank. We continue to get service charging come from there and just do a nice job for our commercial clients. We're just trying to move the bank into the future and make sure as we get to $15 billion and higher, we're more commercially oriented. We've built mature businesses. We're doing a better job of cross selling through the regional model. So there's real emphasis on relationship banking, C&I, small business based, getting the deposits, which we've already always been pretty good at, but also cross selling the relationship capabilities of our company.
James Reske: And Manuel, just for your modeling purposes that wide range kind of brackets the number that we were thinking of $5 million on either side. That's why it is what it is.
Manuel Navas: That's helpful. Just on the swap benefit, is the baseline scenario, getting fed funds to 300 basis points by year end, 2025?
James Reske: Yeah. I think the swap benefit you'll see in the, earnings Deck. Right. Of 8 basis points. That, I think, is based on the previous rate forecast, which had Fed funds at 3.29 at the end of 2025. So, it might be -- so maybe it's 7 basis points if rates go to 2.95 like our revised forecast. Hard to say.
Manuel Navas: If by the end of next year, the yield curve is a little steeper, could how would that impact kind of your NIM thoughts if that is a very positive scenario? What could be that upside, for second half of next year into 2026? We talk about that all the time. I'm sorry to mute you off. Go ahead. No, no, go ahead. I just I just want to put, caveats to it. I know it's a very positive scenario, but, like, what could be the upside of that type of scenario for you?
James Reske: Yeah. In the near term, we think about, you know, changes in, you know, the cost of funds as we try to grow the deposit book and the yields of new loans come on and replace these. All that stuff. And long term, we think as bankers, it's positive. It's a positive slope to the yield curve. It's an environment we can make some money.
Thomas Michael Price: I'm just smiling at Jim because he just gave me four budget passes, Four scenarios for 2025. Jim, I think it's about $0.09 or $0.10. Yeah. Long term a positive slope is great for banks. So that's our story and we're sticking to it.
Manuel Navas: Okay. And then, my last question is deposit growth has been really strong. You talked about that large deposit. What's kind of the appetite from here, with that marginal cost of 3.20 for new deposits? Is it a loan to deposit ratio target? Is it pre-funding loan growth next year? What's kind of the appetite on deposit growth side?
James Reske: The appetite deposit growth side is for, I'll tell you exactly how we think about this internally. We think about a smooth steady glide path, and the phrase glide path keeps coming up again and again. A smooth steady glide path in deposit growth. So for example, this last quarter, if you say, hey, loans were not growing that fast, we could have taken our foot off the gas in terms of deposit growth. We don't want to do that. We want to keep growing at 3% per quarter, which is a 3.2% average, average in the third quarter. We want to keep that going in the fourth quarter. The point is we want to bring that loan to deposit ratio down and get ourselves liquidity for a loan growth going forward and so in terms of the real dynamic that you're getting at, it's really driven by desire to grow the bank on the asset side and just make sure that you fund it on the liability side. In any given period, those may not match, but long term that's what we want to do. We want the deposit ratio down to 92.5%. We've got a long way to go before it gets over a 100%. So we feel like we've got the liquidity to grow. Mike?
Thomas Michael Price: As our bank president, Jane Grebenc, likes to say, we are relentless around the closets, nonstop. Jane, anything you want to add? You're the you're the impetus behind, our great core depository.
Jane Grebenc: Only that you know, there's really two kinds of deposits. There's the, the transaction accounts that represent new households, whether commercial or consumer and then there's the time and the money market stuff that has the volatility of exception pricing and goes up and down with rates and we're always in the business to grow the transaction accounts and transaction households as rapidly and as aggressively as we can.
Thomas Michael Price: There's your answer.
Manuel Navas: That helps. Thank you. I'll step back into the queue.
Operator: Your next question comes from the line of Daniel Cardenas from Janney Montgomery Scott. Your line is open.
Daniel Cardenas: Hey guys, good afternoon. Just a quick question on the size of your participation portfolio. How big is that? And are there any other loans within that portfolio that you're watching given the migration of one larger credit into NPL status?
Brian Sohocki: Yes, I'll take that. We've actually really shrunk the portfolio over time, as we focused on the credit risk appetite. That Shared National Credit Book is just over $115 million today and only 10 relationships. So it's really not a factor as we look at it. The one commercial real estate credit that moved to non-performing was obviously in that Shared National portfolio, but very much not a focus and it's a manageable at 10 relationships.
Daniel Cardenas: Okay. Now was the was there was the reason for the, for the nonperforming move in that in that specific loan? Was it related to, just bad management of the facility or lack of tenants filling up the space? Can you give us a little color on that?
Brian Sohocki: More so the latter. The construction was a rehabilitation that started right before COVID. They experienced COVID delays as well as some significant construction cost increases over the period of time. That pushed them to the higher end of their budget. Since then, the rehabilitation has been completed, but the tenancy has not met expectation. It is a mixed use. It's not your typical office. There's a grocery space. There's a 911 call center, and some other storage and office. They have some prospective tenants, but we're still working through a longer-term road to stability.
Daniel Cardenas: Alright. And was that located in the central business district?
Brian Sohocki: Just outside still in Allegheny County, but not in the downtown district.
Daniel Cardenas: Okay. Appreciate that. All right. All my other questions have been asked and answered. Thanks, guys.
Operator: That concludes our question-and-answer session. I will now turn the call back over to Mike Price for some final closing remarks.
Thomas Michael Price: Just appreciate the questions and your engagement with us. We're excited about the future of our company. We feel like we're building good momentum and acquiring talent in our six regions and our regional presidents are moving the bank forward positively. Thank you for your time today.
Operator: This concludes today's conference call. [Operator Closing Remarks].
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