Earnings Call Transcript - FCF Q4 2024

Operator, 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. 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, Vice President of Finance and Investor Relations

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, President and CEO

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 loan 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 our 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, Chief Financial Officer

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 the 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, top-line 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 top-line revenue before the recently announced CenterBank acquisition, but that acquisition will create modest additional operating leverage after we close as planned in the second quarter of this year, contributing about 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-off 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.

Operator, Operator

Your first question comes from Daniel Tamayo from Raymond James. Your line is now open.

Daniel Tamayo, Analyst

Thank you. Good afternoon, guys. Maybe we can just start on the fees, if you don’t mind, Jim. The guidance is 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, Chief Financial Officer

On the card income, we are. We felt the Durbin impact has really hit us in the third quarter and continued 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, generating a lot of fee income. That faded out a little bit towards the end of the year, but that actually looks really good. 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 Price, President and CEO

Yeah. I mean, I just think Jim stated it well, as the year-over-year difference from the 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 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, Analyst

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, President and CEO

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 rearview mirror and we’ll be talking about how much growth in 2026.

Daniel Tamayo, Analyst

Terrific. Thank you for taking my questions.

Mike Price, President and CEO

Thank you.

Operator, Operator

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

Karl Shepard, Analyst

Hey. Good afternoon, everybody.

Mike Price, President and CEO

Hi, Karl.

Karl Shepard, Analyst

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, Chief Financial Officer

I appreciate your question, Karl, as it allows us to discuss this topic. The guidance number is quite significant, and I want to explain my perspective on it. Firstly, you are right that roughly half of it is attributable to the macro swaps loan. There's a table in the supplement on our investor relations website that illustrates the macro swaps alone, showing that we anticipate adding 8 to 10 basis points to NIM for the year. As for the remainder, the short answer is that it's all coming from the asset side in our projections. Our previous projections were hindered by the challenge of forecasting customer deposit behavior during the rising rate environment. We recognized this concern, and while we aimed to make aggressive predictions about customer behavior, actual deposit pricing decisions led to different outcomes. Consequently, we are currently being conservative in our forecast for deposit costs. In the NIM forecast I just provided, we are not expecting a decrease in deposit costs at all. We do have some built-in assumptions regarding beta in certain loans, and overall, our philosophy is to price for deposit growth. We want to increase our loan portfolio while also growing deposits in alignment with that growth. We're pleased that we’ve managed to reduce our loan-to-deposit ratio from the high 90s to the low 90s, and we aim to maintain that level. However, our current deposit pricing shows almost no reduction in costs. Looking at other banks that have reported this quarter, most are decreasing deposit costs, and our internal market analysis supports this trend, indicating potential opportunities for us to lower deposit costs. For instance, we have a $1.75 billion CD book, with approximately $0.5 billion maturing in the first quarter and nearly $1 billion maturing in the first half of next year, as we've kept everything relatively short. We have the opportunity to manage our deposit costs, but we aren't relying on this. The key aspect of our forecast revolves around the loan side, particularly due to positive replacement yields projected at around 40 basis points next year. In the first half of 2024, we saw these yields at about 100 basis points positive, which then declined by nearly 50 basis points as the year progressed. Overall, we expect the loan portfolio yield to rise from just under 6 basis points to approximately 6.25 basis points, indicating about a 25 basis points improvement in loan portfolio yield. Thus, our NIM forecast is fundamentally based on the asset side. Naturally, this is contingent on interest rates; our new forecast includes two cuts expected later next year, and we will adjust the guidance as necessary if circumstances change. We also aim to be cautious in our outlook for next quarter, emphasizing that significant improvements will likely occur when the macro swaps begin to roll off. Specifically, the first $150 million of the $250 million for this year is set to come off on May 1st, and we're looking forward to that milestone. I hope this provides clarity.

Karl Shepard, Analyst

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, President and CEO

I’ve known Stewart for about six or seven years through the Ohio Bankers League and through our acquisition in that area. I appreciate that his franchise covers Indian Hill, with Madeira and Milford on either side where we have a branch. It aligns well with our operations, and he has solid mortgage and commercial lenders that complement our team nicely. He's deeply connected in the community, and his Board is strong, which could lead to business referrals for us. Overall, this is a strategic deal that has the potential to significantly enhance our presence in the area. We have a capable leader down there now, and I believe she can further develop that franchise. We grew our loans from $186 million to $700 million, and with the addition of our new market president from this acquisition, we might be able to double or triple that figure. This opportunity could be quite impactful and extend well beyond the size of the bank. Jim, do you have anything to add?

Jim Reske, Chief Financial Officer

No. We love these small acquisitions like this. They built a great bank, and we’re really happy to partner with them. We think of it in terms of time; we were going to build a nice big bank in Cincinnati anyway, but this moves us maybe five years ahead. It's just really nice. Smaller acquisitions come with lower risk, so we are very receptive to these small positions. That said, we are also open to larger acquisitions; it all depends on what's available.

Mike Price, President and CEO

Okay. I hope…

Karl Shepard, Analyst

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

Mike Price, President and CEO

Thank you.

Operator, Operator

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

Kelly Motta, Analyst

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, President and CEO

We’re on the ground the day after we announced the deal with the bank we are acquiring and have the privilege to partner with. We meet the people two or three times during the first month to assess them, and typically we find talented individuals who can really assist us, which excites us. Our market president is already integrating with the CEO there. It’s thrilling to grow our bank. We made a $186 million acquisition with a family-owned business, and they helped us grow that to nearly three quarters of a billion in about five to six years. These are significant, beneficial deals. We’re quite strategic about pricing, often leaving something on the table to share, which could be seen as a fault. Our goal is to grow the company, and we have a strong team. We’ve crossed the $10 billion mark while remaining profitable, and we are optimistic about our growth potential. The talent we’ve added over the last year and a half to two years makes us excited about what the bank could look like at $15 billion or $20 billion. We believe our best years are still ahead of us.

Kelly Motta, Analyst

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, President and CEO

I'm going to hand it over to Brian Sohocki, our Chief Credit Officer, who is closely involved in this matter. Credit is essential for our bank's future, and we believe that despite the recent acquisition, our numbers remain strong. As we navigate this situation, we are looking at the opportunities in Harrisburg and aim to expand in that market. We are confident in our current position and the team we have in place. Brian?

Brian Sohocki, Chief Credit Officer

Thank you, Mike. I’ll address this from a couple of angles. First, regarding the asset migration in the portfolio, we observed some positive trends, particularly in the last two quarters, with improvements in our watch-rated credits, delinquency rates, criticized assets, and non-performing loans. I know you’re interested in the Centric portfolio. We’ve seen improvements in all these areas. For the year, watch assets and the Centric portfolio declined by $148 million, which is a significant decrease. Criticized assets also saw a reduction, and in the third quarter, we experienced a notable drop in these assets, which continued into the fourth quarter. Additionally, we saw a positive movement in non-performing loans, which decreased by over $13 million in the fourth quarter, with Centric loans down by $9.5 million during that period. Looking ahead to next year, this will present a challenge as a percentage of our asset base, but we are encouraged by the positive trends we’ve seen and expect more normalization in the Centric portfolio.

Kelly Motta, Analyst

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, President and CEO

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, Chief Credit Officer

25 basis points to 30 basis points.

Mike Price, President and CEO

Right.

Kelly Motta, Analyst

Got it. Thank you.

Operator, Operator

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

Matthew Breese, Analyst

Hey. Good afternoon.

Mike Price, President and CEO

Hey, Matt.

Matthew Breese, Analyst

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, Chief Financial Officer

Thank you, Matt. We held a significant amount of excess cash throughout three quarters of last year. We took part in the Fed’s BTFP program, which we had previously mentioned, totaling about $500 million at a locked rate. We used some of that money to make deposits with the Fed and gained some benefits from the arbitrage. However, we were carrying a large sum of cash during that period. We paid off most of it within the first three days of the fourth quarter, and by November, we cleared the remaining $80 million. It's a relief to have that behind us, as it created some distortions. We're now in a much more standard position, borrowing around $50 million on an average day, which feels balanced for a well-funded bank. Regarding our securities portfolio, we intend to keep it stable, with only modest growth anticipated. There is some decline due to current rates, but it remains slow. At the start of the fourth quarter, we pre-funded expected runoff of about $125 million and purchased securities, anticipating rate declines. We locked in those rates and secured two-year borrowing to support that. This was a unique situation, but overall, the securities portfolio is expected to remain relatively flat for 2025.

Matthew Breese, Analyst

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, President and CEO

We’ve considered that, and I'm thinking it will be around 10% or less. My team and I will discuss this further. We really appreciate the business and how it's managed. I believe we have a strong individual who can connect with the corporate bank, which might capture a larger share. Overall, we like the business, as it resembles a consumer-focused operation that assists small enterprises with essential equipment. There’s significant market presence in this area, making it a good fit for us, similar to the SBA. While there might be some pushback regarding the 10% or less target, it certainly cannot represent 20% of the total loan portfolio.

Matthew Breese, Analyst

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, President and CEO

The equipment finance will grow at that rate on its own. There is approximately a $1 billion portfolio outside of equipment finance in commercial and industrial (C&I) that needs to grow independently, and that is the area we aim to expand aggressively. We believe that segment, along with small business and the business banking segment, as well as the middle market, represents some of the most profitable segments for any bank. This includes lending, deposits, owner’s accounts, family-owned businesses, employees, and cross-selling treasury management services, which allows for strong relationships built over decades. Establishing such relationships can be challenging for smaller banks, and we believe we can excel in this area, especially given our concentration of talent, credit expertise, and skills. This is likely the segment we’re most enthusiastic about. Commercial real estate will continue to grow as well, but over the next five to ten years, I would like to see C&I become a more significant part of the portfolio, increasing from 16%, 17%, or 18% to around 25% to 30%.

Matthew Breese, Analyst

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, Chief Financial Officer

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, Analyst

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, Chief Financial Officer

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 and 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, Analyst

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, President and CEO

Thanks, Matt.

Operator, Operator

Your next question comes from Manuel Navas of D.A. Davidson. Your line is open.

Manuel Navas, Analyst

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, Chief Financial Officer

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 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 base cuts. 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 are lots of effects across the curve, but generally speaking, two cuts are better than four, and one cut is better than two.

Manuel Navas, Analyst

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, Chief Financial Officer

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, President and CEO

Yes. Since I’m a non-finance guy, the only thing I would add is the scenario like that primes demand for consumers. 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, Chief Financial Officer

Yeah.

Mike Price, President and CEO

… and what it could do for us.

Manuel Navas, Analyst

Switching to the deposit side for a moment, you talked about it wasn’t that much of a 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, Chief Financial Officer

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, Analyst

Sure.

Jim Reske, Chief Financial Officer

Our large deposit added 4 basis points to the total cost of deposits. There’s movement across different categories. For instance, in the second quarter of last year, over 50% of our money market category, our largest deposit category, was over 4%, but this dropped to 43% in the third quarter and to 36% in the fourth quarter. These deposits are not falling to 1%; they’re shifting to the next tier. This illustrates the deposit rotation we observed previously, which has now leveled off. We, along with other banks, have been able to reduce deposit costs. We already have strategies in place to lower renewal rates for CD maturities, and we've managed to retain about 80% of those when they mature. There’s significant opportunity in the deposit area.

Manuel Navas, Analyst

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, Chief Financial Officer

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, President and CEO

We closely examine our relative profitability. When analyzing 82 banks with assets between $10 billion and $100 billion, we assess our profitability ranking each quarter. Profitability is a key aspect of assessing the quality of a bank, alongside growth. There are various ways to achieve return on assets, including through credit, net interest margin, or managing costs effectively. We excel in cost management. Our goal is to ensure that over a three or four-year period, as we focus on tangible common equity and return on assets, we rank in the upper quartile. This reflects our mindset and dedication to our financial performance.

Jim Reske, Chief Financial Officer

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 the 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, President and CEO

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

Jim Reske, Chief Financial Officer

That’s true.

Manuel Navas, Analyst

I appreciate this extra commentary and thank you.

Mike Price, President and CEO

Thank you.

Operator, Operator

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

Mike Price, President and CEO

I think we put everybody to sleep, Jim.

Jim Reske, Chief Financial Officer

That’s for you.

Mike Price, President and CEO

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, Operator

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