Earnings Call Transcript - FCF Q4 2023

Operator, Operator

Thank you for standing by. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation Q4 2023 Earnings Conference Call. All lines have been placed on mute to prevent the background noise. And after the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn our call over to Ryan Thomas, Vice President of Finance and Investor Relations. Ryan, please go ahead.

Ryan Thomas, Vice President of Finance and Investor Relations

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

Mike Price, President and CEO

Thanks, Ryan. I will begin with some fourth quarter highlights. We are pleased with our fourth quarter earnings per share of $0.44 with a 1.56% core ROA, a 1.91% core pretax pre-provision ROA, and a 53% efficiency ratio. Average deposits for the quarter grew 1.6% annualized and loans grew at 2.8% annualized. The loan growth was decidedly commercial with equipment finance leading the way. Our margin fell to 3.65%, lower than we had expected, driven by our customers' expectations on deposit rates in our markets. While we are always focused on deposit acquisition, we're just as focused on deposit retention. Still, our quarter-end cost deposits at 1.65% and remains strong relative to peers and the quarter-over-quarter increase in the cost of deposits slowed each quarter of 2024. We had a constructive credit quarter with a $1.9 million release of reserves due in part to improvement in qualitative reserves and release of unfunded reserves. Net charge-offs totaled $16.3 million, however, all but $4.4 million had earmarked specific reserves that had been previously provided for. A good portion of the charge-offs were former Centric loans, stemming from our acquisition, which closed on January 31st, 2023. Essentially, our reserve levels ended the year roughly where they began in January of 2023 at 1.31% of total loans. Our non-performing loans fell $8.5 million to $39.5 million or 44 basis points of total loans and are back to where we started the year. With 2023 behind us, let me turn some time now over for year-over-year highlights. We made $1.70 in core earnings per share, backing out merger-related items with a core ROA of 1.56%, a 2% core pre-tax pre-provision ROA, a net interest margin of 3.81%, and a 52.91% efficiency ratio. Tailwinds included well-controlled credit expense or organic deposit and loan growth, a bigger balance sheet due to the Centric acquisition, and higher interest rates. The latter three tailwinds drove a 24% or $73.6 million increase in net interest income to $386.9 million for the year. Headwinds included markedly higher deposit rates for the year and flat fee income. As we reflect on the year, we had good expense control and drove some additional cost savings through acquisition, which also helped operating leverage. We grew average deposits for the year at 12.5% and loans at 17.6%. Excluding acquired Centric deposit and loans, loans grew at 5.5% and deposits grew at 7.6% compared to the fourth quarter of 2022. Like many in our industry, our checking and basic savings balances fell, the growth in higher-cost money market and CD balances more than offset the downdraft. However, the lower-cost accounts did not attrite in number nor did the mix of deposits change meaningfully between the consumer business and public funds categories. Also, our business deposits outperformed our expectations. In our regional approach to deposit gathering and lending, we had a good year and carry momentum into 2024 in our three largest regions. Importantly, we navigated our sixth M&A opportunity, which we now call the capital region and are excited about what lies ahead for this market. As we look through the year and into 2025 thematically, we will wake up every day and think about how to live the mission at all levels of the organization, grow our deposit funding and lending businesses commensurately and at the appropriate spread, improve in every region, line of business and support unit every year, become digital in every facet of our business, continue to invigorate talent, leadership, and culture, and remain focused on operating leverage and efficiency. We had a strong 2023. We'll continue to build on that success in a few important areas. Three of our regions are performing very well. The three other regions are just beginning to find their stride. Also, as the employment market has cooled some, we are continuing to attract some very talented bankers for key positions. Given our talent offerings and leadership, we can grow C&I relationships. We've built solid offerings in our fee businesses and can create partner introductions. Lastly, our business mix drifted towards commercial banking this past year and we can do an even better job of gathering deposits and getting appropriately compensated for lending activities. The list could be longer, but the point is that effectiveness in the trenches with our core banking is really all about will and execution, and we're enthused about the opportunity in front of us. Lastly, we continue to build out our core digital capabilities to include back-office efficiencies and customer-focused online and mobile banking enhancements for both consumers and businesses. In 2024, we will allow customers to aggregate their third-party bank accounts on the summary view within their First Commonwealth online banking profile. This complete view of finances across institutions supports our core mission of helping our customers improve their financial lives. With that, I'll turn it over to Jim.

Jim Reske, Chief Financial Officer

Thanks, Mike. Mike has already shared an overview of the year and some financial highlights for the fourth quarter, so I'll provide more details on the margin and give you additional guidance. Net interest income decreased by $2 million from last quarter, but our net interest margin stood at 3.65%, which is competitive with our peers. During the quarter, loan yields performed well and met expectations. New loans were recorded at 7.80%, which was 162 basis points higher than the loans that matured. This boosted loan yields by 10 basis points from last quarter, but it didn't fully offset a 24 basis point increase in the cost of funds. The rise in deposit costs was mainly due to customers moving their deposits into higher-yielding money market and CD accounts. The good news is that the rate of increase in the cost of funds is slowing down. The 24 basis point increase in the fourth quarter is less than the 32 basis points increase from the last quarter, which followed increases of 48 basis points in the second quarter and 51 basis points in the first quarter. We anticipate that this slowdown will continue. Despite last quarter's rise in deposit costs, our total cost of deposits in the fourth quarter was 1.65%, and our total cost of funds was 1.94%, maintaining a competitive edge. Our cumulative through-the-cycle beta is only 36%, partly because we started this cycle with a total deposit cost of just four basis points. In summary, we believe our net interest margin is performing well, and we expect our margin to maintain a strong competitive position through the cycle. Looking ahead to the first half of 2024, we anticipate that the ongoing repricing of the loan portfolio will roughly match the increase in the bank's cost of funds. Still, we expect net interest income to improve year-over-year compared to 2023, although we expect a wider range of potential margin outcomes than usual due to unpredictable rate movements and deposit behavior. Fee income decreased by about $0.5 million from last quarter, primarily due to a decline in mortgage gain on sale income and a decrease in trust income of about $400,000 attributed to tax receipts last quarter. This was offset by an increase in SBA gains of approximately $600,000 from the previous quarter. We expect fee income in the first quarter to be consistent with the fourth quarter and project that for 2024, fee income will be roughly similar to 2023 as growth in SBA and other sources compensates for the loss of about $6.2 million in interchange income because of the Durbin Amendment. As I mentioned, net interest income was down $2 million from last quarter, but that was balanced by a $2.2 million decline in expenses. The improvement in net interest income was fueled by a $1.2 million positive variance from the Pennsylvania share tax due to the reversal of an over-accrual of taxes related to the Centric acquisition. We also cut our advertising expenses by $472,000 from the previous quarter, but that's mostly a timing issue. We did, however, see a $308,000 positive year-end adjustment to BOLI because of higher discount rates. Overall, we expect non-interest expense to range between $68 million and $69 million per quarter in 2024, aligning with consensus estimates. We provided some insights on credit and charge-offs in the earnings release, but I wanted to add more context on this call. We recorded $16.3 million in total net charge-offs, $12 million of which had been accounted for in prior periods. Of the total net charge-offs, $8.3 million came from loans acquired in our last acquisition, which had specific reserves from earlier periods totaling $8 million, not the $6 million stated in the earnings release. The $16.3 million total also included a $4.3 million charge-off of an individual commercial real estate loan, which is not acquired and had a $4.1 million specific reserve from prior periods. Of our total $39.5 million in non-performing loans, $14.6 million are acquired loans, which have $4.6 million in specific reserves. In fact, those specific reserves constitute most of the $5 million in specific reserves left in the entire bank. We thought this extra information would be useful since charge-offs were elevated this quarter. However, considering our business mix, our long-term view of a "normalized" net charge-off rate of about 20 to 25 basis points remains unchanged. Moving to the balance sheet, loan growth was supported by securities purchases this quarter, which improved the yield on our securities portfolio. You may recall that we've held excess liquidity since the Silicon Valley Bank crisis in March when we borrowed $250 million from the Federal Home Loan Bank, partly in cash. We invested some of that liquidity into securities in the third quarter and the rest in the fourth quarter, achieving a yield of just over 6% just before yields began to decline. Capital increased by $73.7 million in the quarter, with AOCI up by $42.3 million, and we retained $31.4 million in earnings after dividends and some buyback activity. We bought back $978,000 in stock this quarter when our stock price dipped below $12.50. The combination of strong capital growth and moderate balance sheet growth has positively influenced our capital ratios. Our tangible common equity ratio increased from 7.7% to 8.4%, while our CET1 ratio grew from 10.9% to 11.2%. More significantly, tangible book value per share rose by 9% from $8.35 last quarter to $9.09 this quarter. And with that, we are ready to take any questions you may have.

Operator, Operator

Thank you. Our first question comes from the line of Daniel Tamayo with Raymond James. Your line is live.

Daniel Tamayo, Analyst

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

Jim Reske, Chief Financial Officer

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

Daniel Tamayo, Analyst

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

Jim Reske, Chief Financial Officer

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

Daniel Tamayo, Analyst

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

Jim Reske, Chief Financial Officer

Yes, the rate cuts will have an impact on us, as we are asset sensitive. The effect depends on when and how quickly the cuts occur. Our loan portfolio is roughly split between fixed and variable rates. When rate cuts happen, they immediately affect the variable part, while the fixed part is repriced later. The fixed portfolio has been increasing in yield even without rate hikes over the last six months. The 162 basis points of positive replacement yields I mentioned earlier is mainly due to the upward repricing in the fixed portfolio, as the variable portion has already adjusted. With that upward repricing, we could potentially experience several cuts and still see increases in the fixed portfolio, which acts as a cushion against the impact of rate cuts on the variable side. Overall, we maintain our asset sensitivity and continuously report it in our regulatory filings based on expected parallel cuts. At some point, the rate cuts will start to outpace the pricing on the fixed side. Additionally, regarding the liability side of our balance sheet and deposit behaviors, we’ve noticed some easing in competition in our market, attributed to the anticipation of cuts, which has provided some relief in deposit pricing. However, it will take time to lower deposit costs. I hope that provides some insight into our situation.

Daniel Tamayo, Analyst

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

Jim Reske, Chief Financial Officer

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

Daniel Tamayo, Analyst

Okay. All right. I appreciate all the color, you taking my questions. Thanks, Jim.

Jim Reske, Chief Financial Officer

You bet. Thanks, Daniel.

Operator, Operator

Thank you. Thank you for your question. Our next question comes from the line of Karl Shepherd with RBC Capital Markets. Your line is live.

Karl Shepherd, Analyst

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

Jim Reske, Chief Financial Officer

Looking at the trend of decreases we've seen, as I mentioned in my prepared remarks, it's been a consistent drop. I believe that in the next quarter, while the cost of deposits will continue to rise, even with anticipated rate cuts, we should see that increase slow down to around 10 to 15 basis points. So, we are looking at a continued rise in the cost of deposits, despite some relief in market pressure. More deposits are seeking higher rates, leading to this expected increase in the cost of funds. However, I foresee this slowdown. This aligns with our expectations of a 10 to 15 basis point rise in loan yields, even in such a rate environment. We've also structured our maturities and deposits to be relatively short. About two-thirds of our CD book is set to reprice in 2024. Additionally, we have money market specials with a maximum duration of six months, creating opportunities to reduce deposit rates. All of this is part of our strategic outlook. I hope this clarifies things a bit.

Karl Shepherd, Analyst

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

Mike Price, President and CEO

I believe it will be. We've slightly constricted the consumer due to spreads, but we're definitely still open for business, and we have enough to maintain our top performers. Additionally, we have substantial portfolios that require replacement for some runoff. On the commercial side, we feel renewed about the C&I business, particularly in equipment finance. Last year, we established several new larger relationships, potentially between six to twelve, in our top three markets, and we're confident we can continue to build on that momentum. Recently, we’ve also gained access to some high-caliber talent that can contribute, and while it may seem like just a few, it's significant for our size. From a broader perspective, we are really adjusting our market approach. As my bank President often mentions, success is about will and execution, and we are quite proficient at that. Over the past five to ten years, we have continually improved our execution. We need to apply that same focus on the deposit side. Despite the acquisition last year, we still managed to grow deposits by 7.5%. While we had to offer competitive rates to achieve that, so did everyone else.

Karl Shepherd, Analyst

Okay. Thank you, both.

Operator, Operator

Thanks for your question. Our next question comes from the line of Michael Perito with KBW. Your line is live.

Michael Perito, Analyst

Hey guys. Good afternoon. Thanks for taking my questions.

Mike Price, President and CEO

Hey, Michael.

Michael Perito, Analyst

I was wondering if you could maybe spend a minute on the $68 million to $69 million, I think, if I heard correctly, on the overhead per quarter in 2024. Just where are you guys looking to spend some more money? Is there any kind of disruption or anything settled a bit from some of the volatility we saw earlier in the year? Are you starting to see lenders maybe get a little uncomfortable at their banks where they're not being allowed to pursue growth because of capital liquidity issues? Just curious if there's anything built in the budget around that? And just generally speaking, beyond that, what you guys are allocating investment dollars to in 2024?

Mike Price, President and CEO

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

Michael Perito, Analyst

Yes, it is. And especially tying back to kind of the growth in commercial leading the way. I think that makes a lot of sense. What about on the fee income side, understanding the year-on-year comp is a little tough because of the interchange hit. But any expectations in your local area for kind of mortgage activity to pick up, particularly if rates start to leak back down? Or we've also seen some other banks choose to exit the insurance business. Just curious if there's any kind of initiatives or conversations you guys are having that we should be mindful of as we think about where that growth rate could move even if we just back out the interchange for a minute, what could be some of the positive drivers in 2024?

Mike Price, President and CEO

We believe our teams, especially in the gain on sale areas related to SBA and mortgage, are already quite skilled and well-developed. Starting with SBA, the gain on sale has decreased. We have that integrated with our regional model and under the guidance of our regional Presidents, which has improved each year. As we know, mortgage activity could potentially rebound in any given quarter, leading to significant changes in its economics. This presents a possible opportunity. However, much of our focus is on consistent efforts like cross-selling and providing excellent service to our clients by connecting them with wealth management and other services while maintaining our core operations. Jane, do you have anything to add?

Michael Perito, Analyst

Yes, I'm sorry for interrupting, Jane. If there's anything you'd like to add, I would really like to hear it.

Jane Grebenc, Bank President and Chief Revenue Officer

No, I think Mike covered it. Thanks.

Michael Perito, Analyst

Okay. Lastly, I'm curious about the $12.50 buyback level where you become less active. Is there a point where, as you continue to accumulate capital and grow, this level might increase? I understand that theoretically, the return on investment doesn't change just because you have more capital, but I wonder if there are any factors that might influence the potential movement of that level and the possibility of capital deployment for buybacks in 2024.

Jim Reske, Chief Financial Officer

We see managing capital levels as an important consideration. If our capital levels become too high, we could consider using some of that for buybacks, something we have been open to in the past. Our current trading conditions, showing a premium valuation at 1.8% tangible, make stock buybacks a bit more challenging. Additionally, funding our organic growth is always our top priority. However, if our capital continues to accumulate while loan growth remains steady, we could see a significant rise in capital, which could provide an opportunity for more buybacks. A key factor for us is the two tranches of subordinated debt we have, which total $100 million. One tranche became callable last June, and its Tier 2 treatment is starting to diminish. Another tranche will be callable this coming June. If our capital ratios keep growing, we might have the ability to call that debt, which would impact our Tier 2 capital and subsequently affect our PCE.

Michael Perito, Analyst

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

Jim Reske, Chief Financial Officer

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

Michael Perito, Analyst

Okay. All right. But go ahead.

Jim Reske, Chief Financial Officer

Yes. When we issued it, we issued $100 million in two tranches, one being $250 million with a five-year maturity, now called ten-year maturity, and the other being ten-year, now referred to as fifteen-year maturities. We will be dealing with the other $50 million, which I believe has another four years from this June before it first becomes callable.

Michael Perito, Analyst

And the rate on the first $50 million tranches is something I could look up, but if you haven't had the...

Jim Reske, Chief Financial Officer

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

Michael Perito, Analyst

Perfect. Thank you guys, I appreciate the color as always.

Jim Reske, Chief Financial Officer

Thank you.

Operator, Operator

Thanks for your questions. Our next question comes from the line of Manuel Navas with D.A. Davidson. Your line is live.

Manuel Navas, Analyst

Hey. Can you tell me about the marginal net interest margin of the additional assets right now? You mentioned new loans are at approximately 7.50% in current funding. What’s the net interest margin on those new assets?

Jim Reske, Chief Financial Officer

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

Manuel Navas, Analyst

Can you review your deposit channels and indicate where you are experiencing the most success? Which ones will you focus on throughout the year?

Jim Reske, Chief Financial Officer

Yes, the deposit channels are all retail. We do not see broker deposits. We just really don't believe it gives us any credit. And quite frankly, economically, it hasn't been any cheaper than wholesale borrowings, so really have not tried to do any of that. The deposit retail, we find that our customers have responded to specialists that we offer in the market like everybody else, the specialist are all in money markets and CDs, not in other categories like savings are now. And one stat we'd like to say, which is buried in one of our disclosures is that for every dollar that we bring in, in these specials, about $0.60 is new money. And of that $0.50, it's new, about half is new money from our own customers and the other half is new money from new customers. So, I think that's pretty well. But Jane, I don't know if you want to give any other color on the deposit channels and the origination channels to add to what I was saying.

Jane Grebenc, Bank President and Chief Revenue Officer

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

Mike Price, President and CEO

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

Manuel Navas, Analyst

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

Mike Price, President and CEO

Jane, do you want to start?

Jane Grebenc, Bank President and Chief Revenue Officer

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

Manuel Navas, Analyst

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

Mike Price, President and CEO

Yes, as you know, we've been very selective with mergers and acquisitions. We've pursued six opportunities and evaluated sixty. When we made the recent acquisition, we were in a strong financial position during the summer of 2022. Now, we might consider a scenario with a loan-to-deposit ratio that could enhance our liquidity. While our criteria may be a bit more stringent, there are still opportunities available. Our success rate is about one in ten, largely by our own choice. We enjoy engaging in M&A, as we believe in our ability to integrate banks effectively. We are particularly enthusiastic about opportunities that are geographically strategic and contiguous. We view these as beneficial in the long term. However, we are cautious and do not pursue a deal every year simply for the sake of it.

Manuel Navas, Analyst

I appreciate that. Thank you.

Operator, Operator

Thank you for your question. Our next question is from the line of Matthew Breese with Stephens Inc. Your line is live.

Matthew Breese, Analyst

Hey, good afternoon everybody.

Mike Price, President and CEO

Hey, Matt.

Matthew Breese, Analyst

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

Mike Price, President and CEO

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

Jim Reske, Chief Financial Officer

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

Matthew Breese, Analyst

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

Mike Price, President and CEO

I really like our deposit portfolio. We have mentioned in the supplemental deck that our average deposit size is $18,000, with $11,000 on the retail side and $68,000 on the business side, which we consider very favorable. In fact, Jane and I, along with others in this room, will be making calls tomorrow after our all-employee meeting to keep this momentum going, and we genuinely enjoy it. We anticipate continued growth in this area. Regarding the overall market size, I believe we have consistently performed well, and we intend to maintain a strong position with our depository and granular core deposit offerings, which are crucial for the long-term profitability of our bank. Jane, do you have anything to add?

Jane Grebenc, Bank President and Chief Revenue Officer

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

Jim Reske, Chief Financial Officer

We've noticed that consumer responsiveness has been better than expected regarding our specials. The deposit pricing approach is one of trial and error; you set a rate anticipating a certain volume of deposits. Surprisingly, we've received more deposits than we anticipated, indicating that competitive pressures are easing. This allows us to lower the rates we offer, giving us confidence to continue reducing them.

Jane Grebenc, Bank President and Chief Revenue Officer

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

Jim Reske, Chief Financial Officer

One more point regarding the NIB as a percentage of total deposits. About a year ago, people speculated that we would end 2023 at 33%, while we anticipated around 25%. Currently, we are at approximately 26%. This is a notable increase from 14% back in 2003, though the situation hasn't unfolded as we expected. Given the details and its movement so far, the NIB aspect appears quite stable.

Matthew Breese, Analyst

Yes, I guess might of cycle matters, too.

Jim Reske, Chief Financial Officer

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

Mike Price, President and CEO

I also feel our average size of $18,000 in the consumer segment and $68,000 on the business side presents a different type of opportunity cost compared to a larger bank with deposits that may be three, four, or even ten times that amount. Therefore, there is not as much money involved. We do expect that the attrition for that deposit cost will slow down.

Matthew Breese, Analyst

That was great. I appreciate all the insights from everyone. Jim, I heard you clearly regarding the shift towards normalized charge-offs. Considering some changes this quarter in the specific reserves, is this 130 level appropriate for the year, or do you foresee needing to increase it a bit? I'm asking to understand better how this relates to the provision.

Mike Price, President and CEO

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

Matthew Breese, Analyst

That’s great. I appreciate it. Thanks for taking all my questions.

Operator, Operator

Thank you. We have a final question from the line of Frank Schiraldi with Piper Sandler. Go ahead, your line is live.

Frank Schiraldi, Analyst

Good afternoon, everyone. I have one more question regarding the net interest margin. I want to clarify the expected trajectory. It seems that for the first quarter, there might be expectations for stable results. In the absence of rate cuts, do you think that this will be the lowest point for margins in the first quarter considering what you're observing with deposit costs?

Jim Reske, Chief Financial Officer

Yes, I'm glad you asked that, Frank. Generally speaking, if the rates remain high, that benefits us. My personal view is that a favorable scenario for us would involve one or two cuts, as that would moderate expectations for deposits and potentially ease pressure on deposit rates. However, as James mentioned earlier, we've already observed some easing even without actual rate cuts. In a situation where the rate cuts are slow or nonexistent, it alleviates the repricing pressure on our variable rate portfolio, while the fixed portfolio will continue to increase in price. This would indeed be a positive scenario. In other words, if the Federal Reserve continues on the path they have indicated, with slow cuts, that would be beneficial for us. Conversely, if the futures market aligns with more rapid cuts, there will be a delay in recovery for us. Even in that case, our deposit base will eventually reprice, it's just that the loan side will adjust downward more quickly than we can on the deposit side. I hope this clarifies how the pace of change affects us.

Frank Schiraldi, Analyst

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

Jim Reske, Chief Financial Officer

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

Frank Schiraldi, Analyst

Okay. And then, Jim, could you provide some commentary on the expectation for normalized charge-offs being in the range of 20 to 25 basis points? I just want to clarify that this indicates we are in a fairly normalized environment, which is what we can expect for 2024?

Jim Reske, Chief Financial Officer

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

Frank Schiraldi, Analyst

Okay. Finally, regarding buybacks, you mentioned buying back stock when it was below that level, and thankfully, it's a bit higher than that now. Does this mean that buybacks are unlikely at this point?

Jim Reske, Chief Financial Officer

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

Frank Schiraldi, Analyst

Got you. Okay, great. Thanks for all the color.

Jim Reske, Chief Financial Officer

Thank you.

Mike Price, President and CEO

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

Operator, Operator

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