Q4 2023 First Commonwealth Financial Corp Earnings Call
Participants
Ryan Thomas; VP, Finance & IR; First Commonwealth Financial Corporation
Mike Price; President, CEO & Director; First Commonwealth Financial Corporation
Jim Reske; EVP, CFO & Treasurer; First Commonwealth Financial Corporation
Jane Grebenc; EVP, Chief Revenue Officer & Director; First Commonwealth Financial Corporation
Daniel Tamayo; Analyst; Raymond James
Karl Shepherd; Analyst; RBC Capital Markets
Michael Perito; Analyst; Keefe, Bruyette & Woods, Inc.
Manuel Navas; Analyst; D.A. Davidson & Company
Matthew Breese; Analyst; Stephens Inc.
Frank Schiraldi; Analyst; Piper Sandler & Co.
Presentation
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 any background noise. And after the speakers' remarks, there will be a question and answer session. (Operator Instructions)
Again, 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
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 Bryan. This quarter will be our Deputy Chief Credit Officer, Brian, to hockey.
As a reminder, a copy of yesterday's earnings release can be accessed by logging on to FC. BANKING.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 look, 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 on 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. For reconciliation of these measures can be found in the appendix of today's slide presentation.
So with that, I will turn it over to Mike.
Mike Price
Thanks Ryan, I will begin with some fourth quarter highlights. We are pleased with our fourth quarter earnings per share of $0.44 with a 1.56% core ROA, a 1.91% core pretax pre-provision ROA, and a 53% efficiency ratio.
Average deposits for the quarter grew 1.6% annualized and loans grew at 2.8% annualized. The loan growth was decidedly commercial with equipment finance leading the way. Our margin fell to 3.65%, lower than we had expected, driven by our customers' expectations on deposit rates in our markets. While we are always focused on deposit acquisition, we're just as focused on deposit retention. Still, our quarter end cost of deposits at 1.65% remained 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 a release of unfunded reserves. Net charge-offs totaled $16.3 million. However, all but $4.4 million had earmarked specific reserves that had been previously provided for. A good portion of the charge-offs were former centric loans stemming from our acquisition, which closed on January 31, 2023.
Essentially, our reserve levels ended the year roughly where they began inJanuary of 2023 at 1.31% of total loans. Our non nonperforming loans fell $8.5 million to $39.5 million or 44 basis points of total loans and are back to where we started the year.
With 2023 behind us, let me turn some time now over for year over year highlights. We made a $1.70 in core earnings per share backing out merger related items with a core ROA of 1.56%, a 2% core pretax, pre-provision ROA and net interest margin of 3.81% and a 52.91% efficiency ratio.
Tailwinds included well-controlled credit expense or GRIP, organic deposit and loan growth, a bigger balance sheet due to the centric acquisition and higher interest rates. 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 our acquisition, which also helped operating leverage.
We grew average deposits for the year at 12.5% and loans at 17.6%. Excluding acquired centric deposit and loans, loans grew at 5.5% and deposits grew at 7.6% compared to the fourth quarter of 2022. Like many in our industry, our checking and basic savings balances fell for 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 live the mission every day at all level levels of the organization, grow our deposit funding and lending businesses commensurately and at the appropriate spread improve in every region and line of business and support unit every year become digital in every facet of our business, continued Invigorate talent leadership and culture and remained focus on 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 important 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 have built solid offerings in our fee businesses and can create partner introductions.
And lastly, our business mix drifted towards commercial banking this past year. And we can do an even better job of gathering deposits 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 in execution, and we're enthused about the opportunity in front of us.
Lastly, we continue to build out our core digital capabilities to include back offices, efficiencies and customer focused online and mobile banking enhancements for both consumers and businesses. In 2024, we will allow customers to aggregate the third party bank accounts on the summary view within their First Commonwealth online banking profile. This complete view of finances across into institutions supports our core mission of helping our customers improve their financial lives.
And with that, I'll turn it over to Jim.
Jim Reske
Thanks, Mike. Mike's already provided an overview of the year and a few financial highlights for the fourth quarter. So I'll just trying to drill down into some detail on the margin and tried to provide some additional guidance for you.
Net interest income was down $2 million from last quarter, but our net interest margin or NIM came in at 3.65%, which compares quite favorably to peers. Looking back at the quarter, loan yields actually performed quite well and in line with expectations. New loans came on the books at 7.80%, which was 162 basis points higher than the loans that ran off. That increased loan yields by 10 basis points over last quarter, but that wasn't enough to offset a 24 basis point increase in the cost of funds.
The increase in deposit costs was mostly due to continued movement of customer deposit balances into higher yielding money market and CD accounts. The good news is that the pace of increases in the cost of funds continues to slow down. The 24 basis point increase in the cost of funds in the fourth quarter is lower than the 32 basis points increase in last quarter, which is lower than the 48 basis point increase in the second quarter and the 51 basis point increase in the first quarter. We expect that slowdown to continue.
And even with last quarter's increase in the cost of deposits, our total cost of deposits in the fourth quarter was 1.65% and our total cost of funds was 1.94%, still an enviable position amongst our peers and a source of competitive advantage. Accumulated through the cycle beta to this point is only 36%, in part because we started this cycle with a total cost of deposits of only 4 basis points. To sum up, we believe that our net interest margin has been holding up well and that our margin will come through the cycle in a strong competitive position.
Looking ahead to the first half of 2024 the continued upward repricing of the loan portfolio is expected to roughly match the increase in the bank's cost of funds. Even so we expect net interest income to improve year over year compared to 2023. We would caution, however, that we expect a wider range of potential margin outcomes than usual due to the unpredictability of both rate movements and deposit behavior.
Fee income was off by about $0.5 million from last quarter, mostly due to mortgage gain on sale income that was down by about that much along with trustee income that was down by about $400,000 due to tax receipts last quarter. These were offset by SBA gains that were up by about $600,000 from last quarter.
We expect fee income in the first quarter to be in line with the fourth quarter. And for the full year 2024, we would expect fee income to be roughly equal to 2023 as growth in SBA and other sources offset the impact of losing approximately $6.2 million of interchange income due to the Durbin Amendment.
As I mentioned, net interest income was down $2 million from last quarter, but that was nearly offset by a $2.2 million decline in expenses. The improvement in [NIE] was driven by a $1.2 million positive variance in the Pennsylvania shares tax for the reversal of an over accrual of taxes we had accrued for the central acquisition.
Our advertising spend was also down from last quarter by $472,000, but that's mostly just timing. We did, however, experience a $308,000 positive year-end adjustments in Bali due to higher discount rates. In sum, we expect noninterest expense to run at about $68 million to $69 million a quarter in 2024, which is in line with consensus estimates.
We provided some information on credit and charge offs in the earnings release, but I wanted to provide some additional color on the call. We have $16.3 million in total net charge offs, $12 million of which had been provided for in prior periods. Of the total net charge-off amount of $16.3 million, $8.3 million was from loans acquired in our last acquisition and that group of loans had specific reserves from prior periods of $8 million, not the $6 million figure shown in the earnings release.
The $16.3 million net charge off total also included a $4.3 million charge-off of an individual commercial real estate credit, which was not an acquired loan, and that loan had a $4.1 million specific reserve from prior periods.
Of our total $39.5 million of nonperforming loans on the balance sheet, $14.6 million are acquired loans and those acquired loans had $4.6 million of specific reserves held against them. In fact, that $4.6 million of specific reserves represents the lion's share of the $5 million of specific reserves left in the entire bank.
We thought this additional detail might be helpful because charge-offs were elevated this quarter. However, given our business mix, our long term view of a quote unquote, normalized net charge-off rate of around 20 to 25 basis points hasn't changed.
Turning to the balance sheet. Loan growth was augmented by securities purchases in the quarter, which brought up the yield on the securities portfolio. You may recall that we've been holding excess liquidity since the Silicon Valley Bank crisis in March, at which time we borrowed [$250 million] from the Federal Home Loan Bank and parked at the Fed in cash. We deploy some of that liquidity into securities in the third quarter and the rest of it in the fourth quarter at a yield a little over 6%. Fortunately, for us just before yields started to fall.
Capital grew by $73.7 million in the quarter as AOCI improved by $42.3 million in the quarter and we retained $31.4 million in earnings after dividends and some buyback activity. We only bought back $978,000 in stock in the quarter, buying whenever our stock price dips below $12.50. The combination of the strong capital growth and moderate balance sheet growth had a positive impact on capital ratios.
Our tangible common equity ratio grew from 7.7% to 8.4%, while our CET1 ratio grew from 10.9% to 11.2%. Perhaps more importantly, tangible book value per share improved by 9% from $8.35 a share last quarter to $9.9 per share this quarter. And with that we'll take any questions you may have. Operator, questions.
Question and Answer Session
Operator
Thank you. (Operator Instructions) Daniel Tamayo, Raymond James.
Daniel Tamayo
Thank you. Good afternoon, guys. And we start first on just your NIM and net interest income guidance. Jim, I guess first and what was the the accretion in the in the quarter or the purchase accounting accretion. And just to make sure we're on the same page, the guidance you gave is for stable is a stated and then guidance, including accretion.
Jim Reske
Yeah, it is stated, including accretion. Accretion was 9 basis points in the fourth quarter. We'd expect that to fade out by 1 to 2 basis points per quarter next year.
Daniel Tamayo
Okay. So it's coming off a 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 having done it?
Jim Reske
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 and the yields on the loans, which we think are going to roughly match, you can never pinpoint exactly. So we're just trying to give guidance within an appropriate range. But the larger factors, the cost of funds and the yield on loans are going to drive it much more than the fade out of the yield on the purchase accounting.
Daniel Tamayo
Understood. And then I guess just following up on that, I'm just curious how you expect rate cuts to impact the margin when they when they would happen Yes.
Jim Reske
So the rate cuts will affect us. We remain asset sensitive and some of it depends on the timing of the rate cuts and the speed of the rate cuts. So we don't think of it this way. The portfolio we disclose and talk about this all the time. But the loan portfolio is about half fixed and half variable.
So the rate cuts happen, they hit the variable portfolio right away. And then the fixed portfolio acts as a buffer. But the fixed portfolio that's been repricing upward and has proven repricing upward even without rates hikes for the last half of last year. So that's fully disclosed in our prepared remarks, 162 basis points of positive replacement yields. That's largely a fixed portfolio repricing upward because the variable portfolio has already repriced.
So with 162 basis points of upward repricing in the fixed portfolio, you can probably have a few cuts and still have upward repricing in the fixed portfolio, which will act as a buffer and then on the way down and offset to some of the impact of the rate cuts on the variable portfolio. So those two offset each other.
But generally, we are still we disclose asset sensitivity in our regulatory filings on based on parallel cuts. But we're still asset-sensitive and at some point, the cuts will overtake on the repricing of the fixed asset portfolio and just one more time, if I can. The other side of it, of course, is the liability side of the balance sheet and the deposit behavior. And we've without any cuts taking place yet just the threat of constant end of cuts, we've already seen some easing up of competition in our markets. So some relief on the deposit pricing side. And that's that's it takes some time to bring the cost of deposits down. So hopefully that gives you a little color types setup to understand now that so that's helpful.
Daniel Tamayo
I mean, you don't have a I'm kind of an explicit budget or thought into how much the margin would move for Ocado. 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 new compression that you think it would be we use for modeling?
Jim Reske
Yes, we used to say rule of thumb, 5 basis points impact per cup, and that was when deposit behavior was much more stable now. So I'm not sure that rule of thumb holds very well is that 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 the forecast, we purchase a blended forecast that has the Fed funds rate ended the year, 425. And I think that was 425 at the time we did our budgeting exercises and if you did it today it'll be 4%. So we anticipate declines. We just think of us from stability because while these offsets going on for the first half of the year, but even if the Fed funds rate goes to end of the year 425. By the end of the year, they'll be in compression.
Operator
Karl Shepherd, RBC Capital Markets.
Karl Shepherd
And maybe to start again on the margin. Jim, could you just talk a little bit about your level of confidence and the cost of funds increase is slowing I know you mentioned competition easing a little bit, but just kind of what are you 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
Well, I'm looking at the pattern of decreases over the past. So I kind of rattle them off during the prepared remarks. That's just been coming down. So I think that next quarter, the cost of deposits should bill still be increasing even if rates cut, but that should slow down to a 10 or 15 basis point range. So 10 to 15 bps of increase, continued increase in the cost of deposits, even with easing of pressure in the market, even with rate cuts, still some increase in the cost of funds is more depositors seek higher rates. So that that's the slowdown that I'm anticipating kind of the reason why and that roughly matches what we anticipate 10 to 15 basis points increase on the benefit of increasing loan yields and that kind of rate environment.
Some part of what helps us is that we've already kind of tried to structure the maturities and the deposit book fairly short, about two thirds of the CD book will reprice in calendar year 2024. And we have money market specials like everybody else is six months max and money market specials. So there will be opportunities for us to reprice the deposits downward. So that fell that all that is baked into the thinking. I hope that helps a little bit.
Karl Shepherd
Yes, definitely. And this is probably more of my 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 LibiGel?
Mike Price
I think it will be. We've some we've changed the consumer a bit just because of spreads, but we're still certainly open for business, certainly enough to keep our top performers. Plus those are big portfolios. We have a little bit of runoff there that needs to be replaced that on the commercial side, we just feel a little reinvigorated around the C&I business equipment finance, um, we brought in a pretty good number of new larger relationships last year, maybe a half a dozen to a dozen in our top three markets. And we feel like we can continue and kind of eccentric accentuate that momentum.
We also have just down some access and in the last quarter, too, to some different caliber of athlete that can help us just two or three doesn't sound like a lot, but it's good at our size. So that's that's kind of from [10,000 feet].
I would also just say we are we really are shifting our approach to markets. And as my bank president likes to say, you know, it's a matter of will and execution, and we're pretty good at that. And we've been consistently -- we've gotten better every year over the last five to 10 years, just executing in the trenches and we need to do that, quite frankly on the deposit side. The last year and notwithstanding the acquisition, we grew deposits 7.5%. Now we had the hang rate to do it, but so did everybody else. Okay.
Operator
Michael Perito, KBW.
Michael Perito
Thanks for taking my questions. Say, Michael, I was wondering if you could maybe spend a minute, the $68 million to $69 million, I think, if I heard correctly on the up the overhead per quarter in '24, just where are you guys looking to spend some more money? Is there any kind of as has disruption or anything settled a bit from some of the volatility we saw earlier in the year? Are you starting to see lenders maybe get a little uncomfortable at their banks where they're not being allowed to pursue growth because the weather capital liquidity issues. Just curious if there's anything built into the budget around that. And just generally speaking beyond that, what you guys are allocating investment dollars to 24.
Jim Reske
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 we'll certainly be replacing some of those. Is that helpful, Michael.
Michael Perito
Yes, it is up and down, 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 on the fee income side, understanding the year-on-year comp is a little tough because of the interchange hit, but on any expectations in your local area for kind of mortgage activity to pick up, if particularly if rates start to leak back down. We've also seen some other banks choose to exit the insurance business. Just curious if there's any kind of initiatives you're talk 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 on what could be some of the positive drivers in 24.
Jim Reske
We feel like our teams, particularly on the gain on sale side with SBA and mortgage are already very capable and build out. So I would just start with SBA. Gain on sale there has been down and we just we have that tied to our regional model and underneath our regional presidents, and that's gotten better every year. A mortgage as you and I both know could come back in a given quarter and it could be off to the races and the the economics of that could change. And so that could certainly be an opportunity. But a lot of the rest of it is just slugging it out cross-selling doing the things we can do well for our clients, connecting them to wealth and other services. And cross-selling the consumer businesses and just the basics and blocking and tackling came out and you want to say that okay?
Michael Perito
Yeah. No, I mean, I'm sorry, I didn't meant to cut it off. Jane, if there's anything left ends up here.
Jane Grebenc
But no, I think Mike covered it thanks.
Michael Perito
Okay. And then just lastly for me and I'll jump back. Just the $12.50 kind of buyback level where you guys become less active. Just wondering is there a level of capital where you guys continue to accrete capital and grow or that drift higher? As I mean, I understand theoretically right, the ROI on that doesn't change because you have more capital, but just wondering if there's any kind of what some of the inputs are that you guys look at where we should be mindful of that level maybe moving and dumb capital deployment materializing in buybacks in '24 at some point.
Jim Reske
Yes, we have thought of it as a way to manage capital levels of capital. Let's get to the excesses and you could you have you can deploy some of that might have actually been kind of very willing to do that in the past. Part of it is where we're trading, we're trading at a nice premium valuation of 1.8 times tangible. And so that makes the buying back stock at these levels a little more difficult. And then there are other of the capital.
We always say, organic funding. Our organic growth is the first use of capital. So I want to make note always be clear about that. But as capital continues to build and loan growth is moderate, you can get some really nice capital build, which could allow for further buybacks.
The big thing in the capital horizon for us is that we have two tranches of subordinated debt outstanding, $50 million and $50 million for a total of $100 million. 50 million of that became callable last June and the Tier 2 treatment that started to fade out. Another 20% will fade out this coming June. And so as capital ratios continue to capital levels continue to build, we may be in a position to call that and that would affect Tier 2 capital wouldn't affect piece. You see data and break.
Michael Perito
Got it. Sorry, Jim, the margin front again. So you have $50 million that's callable already, the other $50 million is callable when?
Jim Reske
Yes, it would be another four years from this --
Michael Perito
Okay. Sorry, go ahead.
Jim Reske
Yes. When we issued it, we issued a $100 million, two $50 million tranches. One was a 10-year, five year no call 10-year maturity. The other was 10-year, no call 15-year maturities. So we'll be living with the other $50 million. I think it's another four years from this June it will first be callable.
Michael Perito
And the rate on the first $50 million tranches, I could look it up, but if you have handy.
Jim Reske
It's floating at about 7.1% right now. So we funded it will 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 humans, of course, Acuity tree when you want to make sure your total capital ratios are building to the point where you could absorb that. And are you would you would affect total risk base by about 40 basis points to call that $50 million.
Operator
Manuel Navas, D.A. Davidson.
Manuel Navas
Another way to ask about the margin, what kind of are you -- what's the margin on them have added assets right now. You said you had I think 750 new loans was kind of current funding and then that added on those new assets?
Jim Reske
Yeah. The incremental rate on the new originations is about [780]. The incremental cost of funds is right around 5%. If we borrow the money overnight, it's 5.36%. But if we gather money through our money market specials are 4, and our CD specials are split between 5.25 for seven month and 4.85 per month. So the all in rate of new fund acquisition is probably in the high 4s. That gives you high forced fund originations in the high 7s. That gives you 3% spread coming in roughly.
Manuel Navas
Okay. If that uptick and would what kind of a third party can you just kind of review your deposit channels and where you're seeing the most success from and which ones you're going to accentuate over the course of the year?
Jim Reske
Yes, we have the partner channels are all retail. We did not see new broker deposits we just really don't believe it gives us any credit for it, frankly, economically, it hasn't been a cheaper than wholesale borrowings. I really have not tried to do anyway on the deposits are retail, and we find that our customers have responded to the specials that we offer in a market like everybody else. The specials are all in money markets and CDs not in other categories like savings are now.
And once that 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 [$0.62] is new money. And of that $0.60 it's new -- about half is new money from our own customers and the other half is new money from new customer sales. I think that's pretty well.
But Jane, if you want to give any other color on the deposit channels and the origination channel to add what I would say.
Jane Grebenc
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
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
I appreciate that. You highlighted it at one point investing in the Central PA region. You had some hires there. Can you just talk about the opportunities there? And that's kind of the build-out of the centric acquisition cannulas for shorter on.
Jane Grebenc
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 our hiring some folks from some of the largest banks who by necessity need to run a very concentrated line of business model and a little bit more regionally focused. And so we've been able to hire some good commercial lenders, good treasury management portfolio management folks and are bullish on that. We love Harrisburg. We love land caster, and that's our kind of geography.
Manuel Navas
That's great color. My last question, is that that a region of focus for you in terms of some potential M&A, can you talk about that in general as well.
Mike Price
I mean, as you know, we've been very picky on M&A. We've done six things and looked at 60. Then you also when we did this acquisition, we were all flushed with cash right, summer of 2022. And so now we might be looking at more of a depository with a loan to deposit ratio that would add to our liquidity.
So our advantage point in our box might even be a little tighter, but there's opportunities out there. But we were -- our batting average is about 1 in 10, and that's more of self choice. So we like do an M&A. We feel like we can integrate banks and we get excited about the geography, particularly but strategic. It adds it adds to our geography. It's contiguous and we really see it as accretive longer term. But I think you know us we're pretty conservative and we just don't do a deal every year to do a deal.
Operator
(Operator Instructions) Matthew Breese, Stephens, Inc.
Matthew Breese
Good afternoon, everybody. 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.
Jim Reske
Our loan growth guide is probably low to mid-single digits. And I use the word commensurate in my opening remarks, but it's somewhat tied to how we do on deposits. 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 some. And we feel like our capabilities continue to improve it. This year will probably be a little strained by some liquidity, but we'll have to fix that and solve that and we're resolute to do that both.
Mike Price
But 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. And that's the way we would like to play out.
Matthew Breese
And as you look at noninterest-bearing deposits, the overall percentage of the pie obviously took a step down this quarter. Are you starting to see signs of stabilization on the end or where you expect to see that kind of floor out?
Jim Reske
Yes, I just like from our deposit portfolio, I mean, I think we have a slide in the supplemental deck that touched about it in. Our average deposit size is $18,000. So $11,000 on the retail side, $68,000 on the business side. We'll take tons and tons of that, and that's what we call on. And that effect, Jane and I and the people in the room here are all making calls tomorrow. After all-employee call, and that's what we do. We get out and we get after it. And it's fun and we expect to continue to grow that.
In terms of how big the pie is, I think ours has always been pretty good and we expect to maintain a good advantage with depository and a granular core deposit franchise. And that's really important to the long-term profitability of our bank chain. What would you add here?
Jane Grebenc
The well already, we're starting to see deposit specials cooling off in the markets. It seems throughout in August, September, October, November that you couldn't keep up with the specials. They're starting to cool. And I'm and I'm gratified by that.
So you've seen our exceptions of pricing exceptions going down. I think that I'm optimistic that gum, if we haven't hit the floor, we're very, very close with it. When it comes to deposit cost increases and we are getting much better. I'm Altix here 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 strength, we're still open for business. We just want to lend to relationships. We're less interested in the transaction for the transaction side, yes.
Jim Reske
The other thing we've seen at this additional color is helpful to use responsiveness to the consumer to rate from more responsiveness as some of the specialty have than we even thought we would have. In other words, deposit pricing is all trial and error. You put out this rate even target for X rate. I'll get Y the volume of deposits and we've seen more than we expected, just kind of tells you the competitive pressures are easing and that gives us the ability to be a little bit of pricing power to lower the rates we're offering. So it gives us some confidence we can bring the rates down.
Jane Grebenc
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 they want to think that they're being treated fairly.
Mike Price
And sorry, one more thing that just kind of your question on that NIB as a percentage of total deposits, I remember a year ago people saying, we are 33%. Where do you think you'll end '23? And we are thinking about 25%, I think, we're 26%. So it's kind of come about where we thought after Bill's draconian table. Back in 2003, it was 14% or [16%]. And it could be zero, if it just hasn't played out that way and giving that granular it is and where it's moved to this point. The NIB part feels pretty stable.
Jim Reske
Yeah, I think
Matthew Breese
We might have cycle managed to that's what. Yes, exactly.
Jim Reske
I just also feel that our average size of 18,000 on the consumer, 68,000 on the business side, there's just a there's a different type of on opportunity cost with that dollar amount versus a larger bank that might have deposits that are 3 or 4 or 5 times that size, maybe 10 sites. So they're just not as much money. And we do expect that attrition for that deposit cost is slow.
Matthew Breese
That is great. I appreciate all the color from everybody. The last one from me is just on July, I heard you loud and clear, I kind of moving towards normalized charge-offs. You know, given given some of the movement this quarter on the reserve, specific reserves. Is this a good level, this 130 level for the year. Or do you anticipate maybe building a little bit? And I'm asking because I'm trying to get a frame of reference for the permission.
Mike Price
I don't know that we're expecting to build. I think on our view is that we're still a 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're very thoughtful on trying to anticipate things that are around the corner on and when we look closely at the data stacks and the commercial real estate portfolio, all kinds of good stuff, just to make sure we're comfortable with where we're at as greatly appreciated..
Operator
Frank Schiraldi, Piper Sandler.
Frank Schiraldi
I guess good afternoon. Just one more on the NIM, if I could. In terms of just want to make sure I understand the trajectory. It sounds like 1Q maybe sort of expectations for flattish results and then in the absence of rate cuts, would you expect that that's a trough for margin here in the first quarter, given what you're seeing on the deposit cost side?
Jim Reske
Yes, glad you asked that, frankly, the and generally speaking, if the rates stay high like this, that's better for us. First, I would think personally a Goldilocks scenario for us would be one or two cuts because that burst the bubble a little bit on deposit expectations might even take pressure off deposit rates. But like James said earlier, we've already seen some easing of that even without the actual cuts. But that was it for you. If you have a slow pace of rate cuts or no cuts, then that takes the repricing pressure off the variable rate portfolio and the fixed portfolio will continue to price upwards.
So that I guess that would be a good scenario, I guess to put it differently, if things play out the way the Federal Reserve keeps saying they will, which is if there are cuts, it will be slow and that's good for us if the futures market is right. And there's lots of cuts fast as well, then it will take some time. And then by the way, their deposit base, we reprice eventually that recovers, right. So it's just that the loan and loan side will reprice downward in a fast cutting scenario faster than we will be able to move on the deposit side.
Right? So so that places a color on the pace of changes and how it affects us helps a little bit.
Yes, no, definitely.
Frank Schiraldi
Then in terms of the NI outlook, you mentioned in your earlier commentary year over year for 2024. What is the base case for that? Is that the Fed's three rate cuts or how many rate cuts are kind of baked into that expectation.
Jim Reske
Our official budget forecast, which we stress has the Fed funds any of the year for 25.
Frank Schiraldi
And then your just commentary, Jim, on the, um, on the 20 and 25 basis points come more normalized charge off on. So is that I just want to make sure I understand that. That's kind of the expectation that we're in a pretty normalized environment. So that's sort of the expectation for 2024?
Jim Reske
Yes, yes, I would say, yes, on China, given the commentary from over a long term, perspective over the long haul. That's what kind of take given our given our mix of businesses. And I think we've used that figure for some time. We say it very often we would investors want to make sure we say it on the call so that we're clear with that with the markets. But that's kind of our general expectation for the portfolio Okay.
Frank Schiraldi
And then finally, just on buybacks, you mentioned where you were buying back stock at below that level and obviously thankfully a bit away from that level now and just a So does that just mean buybacks are pretty unlikely here where we sit today
Jim Reske
For now, we still have about 18 million of authorization left. So obviously, if there's a dip in the price, we would see an action on, but we're going to see how the year plays out. And if we are still growing capital build ISIVAOCI.'s move in the right direction last quarter. If that keeps going, 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 embrace that philosophy threshold and get back in the market and buy back some stock. Like I said, we we're not hesitant. We look at it as a capital management tool to manage capital levels. But Tom, it's probably less activity. You probably save it assuming very little activity in the first half data.
Operator
Thank you. Thank you for your question. And ladies and gentlemen, that will conclude our Q&A session here for today. I would like to turn the call back over to Mr. Price for any closing remarks.
Mike Price
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 on 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 I think on particularly on the commercial real estate side, in an average loan size of $5.1 million portfolio with very little in the 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 are really low by the standard that you're used to looking as for perhaps some larger banks and just a good risk control in them. Perhaps these are these might be of interest to you, but thank you again, and look forward to being with a number of you in the first and second quarter. Thank you, operator.
Operator
Thank you. And ladies and gentlemen, that will conclude today's call and thanks for joining. You may now disconnect.
Jim Reske
Have a great day.
