Premier Financial Corp. (PFC) reported fourth-quarter earnings for 2023 that fell short of expectations, citing a decrease in net interest margin and seasonal effects on its residential business. The company, which saw a 2.5% annualized loan growth for the quarter, announced plans for controlled asset and loan growth in 2024, along with an increase in net interest margin and fee income.
Key Takeaways
- Premier Financial Corp. reported Q4 earnings of $20.1M or $0.56 per share.
- The company experienced lower net interest margin and seasonal residential business impacts.
- Loan growth stood at 2.5% for the quarter, totaling 4.3% for the year.
- Net interest margin decreased by 8 basis points from the previous quarter.
- Wealth fee income rose by 18%, while mortgage banking income declined.
- The company divested its insurance agency business and resized its mortgage operations.
- Premier Financial expects a net interest margin increase and a 6% rise in fee income in 2024.
- They have authorization for share buybacks of 1.2M shares but have not executed any.
Company Outlook
- Premier Financial projects controlled growth in earning assets and loans for 2024.
- They anticipate a net interest margin increase of 2% starting in May.
- Fee income is expected to grow by 6%, with deposit-related service fees up by 3%.
- Residential mortgage revenue and wealth fees are expected to increase by 8% to 12%.
Bearish Highlights
- The company reported a decline in mortgage banking income due to valuation adjustments.
- There was an increase in criticized assets, mainly from cash flow issues and capital requirements.
Bullish Highlights
- Wealth fee income increased by 18%.
- Annualized commercial growth was 5.8% and consumer deposits grew nearly 8%.
- The company's tangible book value per share increased to $18.69.
Misses
- Earnings for Q4 were slightly below expectations.
- The net interest margin decreased more than anticipated due to aggressive deposit-gathering.
Q&A Highlights
- The company discussed the impact of Federal Reserve interest rate decisions on their net interest income guidance.
- They emphasized the importance of adjusting deposit pricing based on market conditions and maintaining flexibility.
- Executives expressed confidence in the company's liability-sensitive position and the ability to manage interest rates on new loans effectively.
In conclusion, Premier Financial Corp. faces challenges from market conditions but remains focused on strategic growth and operational adjustments to maintain profitability. The company's executives are preparing for various scenarios related to Federal Reserve actions and market dynamics, aiming to position Premier Financial for success in the upcoming year.
InvestingPro Insights
Premier Financial Corp. (PFC) has demonstrated a commitment to shareholder returns, having raised its dividend for 13 consecutive years, a sign of the company's confidence in its financial stability and future earnings potential. This is particularly noteworthy for investors seeking consistent income, as the company's dividend yield stands at an attractive 5.71%.
InvestingPro Tips suggest that PFC is currently trading at a low P/E ratio relative to near-term earnings growth, with the latest data showing a P/E ratio of 6.98. This could indicate that the stock is undervalued compared to its growth prospects, making it a potentially attractive buy for value investors. Moreover, the company's shares are trading at a low earnings multiple, which, when paired with a PEG ratio of 0.76, suggests that the stock might be a bargain in the context of its expected earnings growth.
InvestingPro Data reveals a solid revenue growth of 4.9% in the last twelve months as of Q4 2023. However, it's important to note that the company's revenue growth on a quarterly basis showed a decline of 14.76% in Q4 2023, which could be a point of concern for investors looking at short-term performance.
For those interested in deeper analysis, InvestingPro+ offers a range of additional tips, with 8 more tips available for Premier Financial Corp. that could help investors make more informed decisions. Subscribers can access these tips and more detailed metrics, ensuring they have the latest data at their fingertips.
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Full transcript - First Defiance (PFC) Q4 2023:
Operator: Good morning, and welcome to the Premier Financial Corp. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Paul Nungester with Premier Financial Corp. Please go ahead.
Paul Nungester: Thank you. Good morning, everyone, and thank you for joining us for today's fourth quarter 2023 earnings conference call. This call is also being webcast and the audio replay will be available at the Premier Financial Corp. website at premierfincorp.com. Following our prepared comments on the Company's strategy and performance, we will be available to take your questions. Before we begin, I'd like to remind you that during the conference call today, including during the question-and-answer period, you may hear forward-looking statements related to future financial results and business operations for Premier Financial Corp. Actual results may differ materially from current management forecasts and projections as a result of factors over which the Company has no control. Information on these risk factors and additional information on forward-looking statements are included in the news release and in the Company's reports on file with the Securities and Exchange Commission. I'll now turn the call over to Gary for his opening remarks.
Gary Small: Thank you, Paul, and good morning to all for joining us. Per our release, fourth quarter earnings totaled $20.1 million or $0.56 per share for the quarter. The results lagged our third quarter performance, as anticipated, due to lower net interest margin and the seasonal impacts of our residential business as guided at the end of the third quarter. However, the quarter did also include a couple of unanticipated non-recurring or timing items that left the earnings for the quarter slightly below our expectations. And now, I'll rundown the particulars. First, a quick look at capital. As you noticed, our earnings combined with a favorable AOCI movement, brings our tangible book value per share to $18.69. That's a really good strong progression over the last three quarters, which of course included the big pickup we had on the sale of our insurance operation, but evidence that we've got more upside there and we've made good progress during the year. Loan growth for the quarter totaled 2.5% on an annualized basis. And that brings our total loan growth for the year to 4.3% and that was in line with the expectations that we had for the year coming off of a 20%-plus growth here in '22 where we were designed to be a 4% shop this year. Annualized commercial growth totaled 5.8% and for the full year, it grew 4.2%, again controlled growth was our mantra for '23. Our consumer deposits annualized for the quarter grew at just shy of 8%, and when you combine third quarter and fourth quarter figures, our annualized growth for those two quarters was 6.7%. That's a really strong number for us. Non-interest-bearing deposits also stabilized, delivering 2% annualized growth over that same period of Q3 and Q4 combined. It's good positive trend for customer deposits over the second half of the year. Net interest margin did decrease 8 basis points from Q4 to Q3 and that was a bit more slippage than we provided in guidance on our last call, which was about 4% on our high -- 4 basis points on our high-end expectation. We had a very effective new money deposit and household acquisition program that we initiated early in the quarter and it contributed to the decline. We have selected targeted markets across the organization for a bit more aggressive deposit-gathering activity and it totals less than 10% of our locations, so we're happy with that particular outcome the trade offers in the margin. Fee income stories for the quarter. Our wealth fee income increased 18% versus Q3 and it really reflects, as we all saw, the strong finish we had in equity and fixed income markets at the end of the year and should carry forward into '24. Mortgage banking income declined more than the typical seasonal decline anticipated for the quarter. Significant move in 10 year treasury yields toward the end of December drove unfavorable valuation adjustments on the MSR asset and on our construction commitment hedges. We benefited from the same volatility when the 10 year was rising in the third quarter. So, it's just one of those lumpy factors in our business. Expenses were right on the mark, just shy of $38 million for the quarter. And on the credit front, our non-performing assets declined 10% for the quarter. Delinquencies did tick up a bit in auto and residential real estate, but each remains within historical norms. Net charge-offs for the quarter were driven by a single credit, 70% or so of the total. And on a full year basis, net charge-offs still come in at 6 basis points, and we're very pleased with that outcome. Our Special Mention ratings category increased in Q4 and that was driven by a single additional relationship. For the year, that brings three credits to the front that make up the lion's share of the increase in our Special Mention category. There is no central theme. Each is a unique industry. Each is still accruing, and we have good expectations. They represent two C&I clients and one investment in multi-family real estate. The combination of those two created about a 5% to 6% reduction in the quarter relative to the additional provision that we set aside for those two items. Again, credit can be a bit lumpy. We are very pleased with our full year performance on that front, but worth a mention here in the fourth quarter. And now, I'll turn it over to Paul for some more performance details.
Paul Nungester: Thank you, Gary. I'll start with the balance sheet where total deposits increased by 4.4% point-to-point annualized for 4Q, primarily due to customer deposits, which increased 7.7% annualized. We continued to experience more mix migration during the quarter, including decreases in savings and demand deposits, which were more than offset by increases in our time and money market deposits as customers continue to seek higher yields. On the other side, total earning assets increased primarily as a result of commercial loan growth, which was 5.8% annualized for 4Q. Our loan-to-deposit ratio improved by 50 basis points and we were able to reduce higher-cost wholesale fundings by another $90 million due to the combination of our strong customer deposit growth, but only modest earning asset growth. As a result of these balance sheet changes in deposit costs outpacing earning asset yields, we experienced some additional net interest margin compression for 4Q. Total interest-bearing deposit costs increased 29 basis points to 2.83% for 4Q, which was driven mostly by growth in mix migration, while loan yields increased 9 basis points to 5.21%. Excluding the impact of PPP and marks, earning asset yields were 4.85% in December 2023 for an increase of 146 basis points since December 2021. This represents a cumulative beta of 28%, up from 26% in September, compared to the 525 basis point increase in the monthly average effective federal funds rate for the same period. Excluding marks, cost of funds were 2.38% in December 2023 for an increase of 217 basis points since December 2021, which represents a cumulative beta of 41% up from 38% in September. Next, non-interest income decreased $1.5 million to $11.8 million in 4Q, primarily due to mortgage banking income where gains declined $2.1 million from last quarter as a result of lower margins on hedged losses related to the drop in 10 year treasury rates in late 4Q. This was partially offset by higher security gains, better wealth revenues, and increased BOLI income, which did include $453,000 in claim gains. Expenses of $37.9 million were down $0.2 million or almost 2% annualized on a linked quarter basis. Through the combination of successful cost-saving initiatives and the insurance agency sale, we reduced our expense run rate by 11% to $152 million annualized from our original 2023 estimate of $170 million. We also improved our expense to average assets ratio by 30 basis points to 1.76% compared to the fourth quarter of 2022. Provision for the fourth quarter was an expense of $1.8 million comprised of $2.1 million expense for loans and a $0.4 million benefit on a linked-quarter decrease in unfunded commitments. Provision expense for loans was primarily due to $2.1 million of net charge-offs, which was mostly due to the one commercial credit. The allowance coverage ratio remained flat at 1.14% of loans. We closed by mentioning, our continued improvements to capital, including book equity up 24% annualized, and tangible equity up 37% annualized from 3Q. Our TE ratio has climbed back north of 8% and our regulatory ratios have further strengthened, including CET1 over 12% and total capital over 14%. These enhancements represent a solid foundation as we begin 2024. It completes my financial review, and I'll turn the call back to Gary.
Gary Small: Thank you, Paul. 2023 has been an important year of change for Premier Bank in addition to focusing on the inverted yield curve challenges that were presented to all. We successfully divested our insurance agency business and significantly right-sized our residential mortgage business during the year. When combined with the completion of other significant projects across the organization, Premier is very well-positioned to leverage on our anticipated margin and revenue growth going forward. As Paul mentioned, our expenses per earning asset ratio was 1.76%. It's one of the best in the industry. With that in mind, I'll touch on some guidance topics for '24. Earning asset growth, we post a range of 4%, continue with our mantra of controlled growth over the next 12 months. Loan growth particularly would be 2%-plus, with commercial up about 3.5% and with lower yielding residential mortgage balances declining. Customer deposits would grow generally in the same range as our earning asset growth and we will expect to see a reduction to some degree in our wholesale funding for the year. Net interest margin, we modeled for 3 turns from the Fed beginning in May. From a mid-point range, net interest growth would be in the 2%, that would be mid-point. Full year margin for '23 -- would be similar to '23 but trending upward from Q1 forward. From a provision perspective, the model assumption is 10 basis points for net charge-offs versus the 6 basis points that we ran this year, factors in loan growth and on an ALLL, we would expect that unemployment information and so forth would have us moving up our coverage ratio a couple of bps from where we closed out the year. From a fee income perspective, I'll just throw a number out there. Since there was so much noise in '23, it's hard to do percentages, but we're at $48 million range, is the mid-point for fee income for '24. On a normalized basis for insurance and the other factors of change, that's about a 6%-plus increase over the prior year. Deposit-related service fees or modest growth for the year of about 3%, we have initiated limits on our merchant represent net fees in '24, and getting that behind us. Doing so, creates a slightly more modest year-over-year change on consumer fee income. Residential mortgage revenue and wealth fees though are anticipated to be up 8% to 12%. Expenses run-rate-wise, $160 million will cover it. That's up about 4.5% over our third quarter and fourth quarter of '23 run rate, and the expense is a bit front-loaded as it is, I think each year for most organizations with a little bit more cost that falls in compensation-wise in Q1 and the seasonality that goes with the first quarter. So, $41 million-plus of costs in the first quarter with the rest of that $160 million spread pretty evenly over the remaining three. The earnings progression from the year, it looks like a bit of a hockey stick, as you leave '23, from a trajectory standpoint, first quarter slightly down with all that typical cost and seasonality pacing and Q2 through Q4 ever increasing. So, with that, operator, I'd ask that we turn the open -- lines open for questions.
Operator: [Operator Instructions] We will now take our first question from Michael Perito from KBW. Michael, your line is now open. Please go ahead.
Andrew DeFranco: Hi. This is Mike's associate Andrew filling in. Thanks for taking my question.
Gary Small: Good morning.
Paul Nungester: Good morning, Andrew.
Andrew DeFranco: Good morning. I'd love to start on the margin. I appreciate all the color there with the guide. Just maybe a little bit more color, kind of what the cadence expectation is there. So, it kind of sounds like there's room for the margin to maybe bottom here in 1Q. And then we'll get some expansion throughout the rest of the year. And then maybe just some additional color on the drivers there, around the margin. It sounds like deposit costs obviously came up here in the fourth quarter when you guys were pushing for that additional growth. Should we expect that dynamic to kind of continue in the first quarter or maybe kind of level out from here?
Paul Nungester: Yes, that's correct. You've got that correct there, Andrew. So, as we exit '23 December having a little bit higher deposit cost versus the average for the quarter, but we do have our models showing that we will be bottoming out here in the first quarter. Those conditions kind of stabilize and then grow from there, which is the key driver to the earnings trajectory that Gary just mentioned. Key drivers for the NIM at this point will be continued success on the deposit front, both retention and some additional growth to help fund modest earning asset growth that we have built-in for 2024 and then the Fed actions. So, as Gary mentioned, we've got 3% baked into our model. Kind of make quarter for the last three quarters of the year there with May, August, November, so we need to Fed to hopefully play along with that trajectory. And we've got a lot of plans being finalized and ready to go. So, that as that begins to happen, we can start to recapture costs where possible on the deposit front, money markets and such, especially CDs will start to reprice down with it as well. Lower terms on those in terms of locking-in the maturities and things like that. So, really we're putting all our plans in place here to be able to take advantage of rates starting to come our way on the short end there and that will support the NIM path and ultimately the earnings goals for the year.
Andrew DeFranco: Awesome. And then second from me here, maybe just switching to capital for a second. I believe, correct me if I'm wrong, I think there is around 1.2 million shares left on the authorization. Could you just kind of give us a little bit of a reminder on thoughts around buybacks here and then maybe alternative uses of capital for 2024, maybe M&A conversations, anything going on there? And then also just -- strictly just for wrap-up here, how -- when does that authorization expire as well? I just couldn't find it off the top of my head.
Gary Small: So, the authorization, although we have an expiration date, I think it’s just shares, Andrew we'll get back with you if we find that we do have one, but typically the case, right. On the actual activity relative to M&A, what I would share is similar to what I would have shared last quarter. There's a little bit more conversation as we can now see over the horizon and see positive marks coming our way to the portfolios over the next four quarters to eight quarters versus uncertain marks based on the Fed's activity over '23. Having said that, I really don't think that we will see things in earnest change until the Fed has moved quite a bit and purchase accounting and predictability of capital and other impacts are -- have settled down a bit more, but I do feel a little more animal spirits in the marketplace relative to conversation and so forth and that would -- we include ourselves in those conversations. But I wouldn't say it's a meaningful change from the last time we had this discussion.
Paul Nungester: And then I guess, little bit more, Andrew, to your questions around the buybacks. It's always a tool that we have in our chest there that we look at for the opportunity to enhance some earnings. The math is a little different these days with the new tax rules and that extra excise tax and needing to cover that to make it like move the needle and things like that. As we've said on past calls, we weren't any -- we've seen the numbers haven't been active on that front. Mainly, we're focused on building capital, and now that the curve has moved in the right way to help that at least from a tangible equity perspective, that's something that we will look more at on a go-forward basis and find our spots to possibly execute, if it makes sense.
Gary Small: We have nothing cooked into the plan, and that's typical with us because we'll take the opportunistic move when the market is right. And as Paul mentioned, we've got our capital where we like it. Right now, we're running at about mid-point versus pure on capital, maybe it'll -- it goes heavy in all our trajectory would say we'll be on a little bit overcapitalized if you will as we go through the year. So, it's the right topic and we'll address those opportunities as they come up.
Andrew DeFranco: Great. Thank you. And then just if I can sneak one last one in here. I believe it was last quarter, you guys were talking a little bit about this Small Business Banking platform possibly seeing it in early 2024. I was just curious if you can provide any update there. And maybe just kind of a broad overview on what you're looking for with that project throughout the year.
Gary Small: Andrew, we've curtailed the pace of expansion of that business as we finished out the '23 and the first half of '24, just in keeping with the more modest business acquisition mode that we're at. But we are still building the capabilities around the business. So, if you looked at the back room as far as credit capability and underwriting and uniqueness that goes with small business on that and adding some talent relative to being in the market in the smaller business space, that's still moving forward along with for our folks that are in the branch network, the continued development of their understanding and knowledge. But just the pacing, if it were two normal years, would have been faster and we've backed away just a little bit, and it's -- right now, with the commercial book, the larger commercial clients that we're trying to serve, are getting the priority relative to our capital and our deployed lending going forward.
Andrew DeFranco: Great. I appreciate all the color and thanks for taking my questions, guys.
Gary Small: Thank you.
Operator: We will now take our next question from Nick Cucharale from Hovde Group. Nick, your line is now open. Please go ahead.
Nick Cucharale: Good morning, everyone. How are you?
Gary Small: Good morning, Nick.
Paul Nungester: Very good, Nick. Thanks for joining us.
Nick Cucharale: Thank you. On the loan growth front, it sounds like your expectation is for another moderate year. Can you just give us some color on the overall lending environment? Is competition still fierce across your markets? And is your anticipation that more forceful growth returns once the funding landscape normalizes?
Gary Small: I'll start with fierce competition. I think that the client base is appropriately moderating their expectations for this business out there, but folks are -- there is enough uncertainty in the economic environment right now and in the world in general, while their order board still look healthy. Capital commitments and expansion commitments are probably more modest to be sure than in a normal year. So, it's really a matter of, it's a little bit more moderate supply. Having said that, we've all over the last year, generally reduced our -- a little bit of our new client prospecting and so forth because we wanted to maintain the capital and the deployed dollars that we put out for existing clients, and I think that's just been more the approach of the competition in the markets as well. So, we'll all probably get to a point where we're ready to go back into the market as we are, more so than we were in '23, but each bank will be a bit different story on that. The market as a whole, there is business there. I would say on the investment real estate side, we still see business in multi-family, but it's pretty quiet outside the multi-family space right now. Our markets fortunately are not bubble markets, so it's not as if there is huge absorption issues or anything to be dealt with. And that's -- I think we're in an advantage over our peers on the coast in that regard.
Nick Cucharale: That's great color. And then just one last one from me. It sounds like a modest increase on the expense front for the year. How far along is the Company on the path to $10 billion and what are the rough costs you expect to incur on that front in 2024?
Paul Nungester: Yes. Good question, Nick. We're still early days on that path. We did start incurring some of those costs last year in '23, but just the beginnings of it and we do have in our plans for this year, continuing to start to build that as we head towards that mark. But the modest growth we've got, that's still a few years off. So, we're not racing to get those costs in place today. Obviously, we'll bring it along as the growth in the overall organization can support it. From beginning to end, what we've estimated is that once we get to that point, it will have added about $7 million or so in annual cost to our base. So, we've probably added on an annualized basis, maybe $1 million of that so far and we'll add some more here in '24 and just keep incrementally building towards that as we add the right talent to be here and develop the programs needed for that $10 billion space, always working at our systems and our controls and you name it. So, it's an incremental path there, Nick.
Nick Cucharale: Thank you for taking my questions.
Gary Small: Thanks, Nick.
Operator: We will now take our next question from Christopher Marinac from Janney Montgomery. Christopher, your line is now open. Please go ahead.
Christopher Marinac: Thanks. Good morning. I wanted to dive into the increase in criticized assets, and just curious on if there is anything driving that and if there is a path that those may retreat from here.
Gary Small: Hey, Chris, it's a good question. We did have movement in the last quarter as well. What I can say is, relative to those, mostly for all three its cash flow versus capital requirement. They're missing a little bit on, say, the initial I need 120 coverage coming off cash flow-wise and they are slipping on that. Each has good capital support, good guarantors. It's just because they are missing on our originally underwritten marks, we blast them into that space and expect them to work out accordingly. I don't think -- if we look at the three, I don't think any of them will be in a position in the next six months that we will be changing that movement. But things do move in and out, and we've just had a couple of larger credits that we're doing some expansion and that expansion has been taking a little bit longer versus the revenue expectations for one of the clients and the others got CapEx adjustments to make so that they can live within the cash flow that they are now generating. So, just the typical adjustments we look at. And if you go back a couple of years, the numbers that we're looking at are not that abnormal, that it's just got so good for us, we got so low that the movement was noticeable. And as I mentioned in the fourth quarter, you feel that movement when we move a reasonable-sized credit into that space, we can feel it in our provision and so forth, but they also move back to pass credits for the most part, support, and we don't anticipate anything different here. Three different industries, no commonality in the story and whatnot, just situations.
Christopher Marinac: That's very helpful. And it sounds like the growth of reserves is modest and not really signaling any true change in loss content at the end of the day.
Gary Small: That's our expectation.
Christopher Marinac: And then just a follow-up on current deposit pricing. Are you still seeing exception pricing out there or is that slowed down and again the progress on money markets that you talked about, looks like, it sounds like you have flexibility on pricing to some extent given the success in Q4.
Gary Small: We do. We operate in eight markets and where the opportunities are different between the markets. There are markets where -- we've got three markets where we have extensive market share and that means you've got repricing risk on a pretty good sized book to think about as well. We've got other markets where we have very minimal consumer market share, we have the commercial and building our consumer and we can be a little bit more aggressive there as we're trying to build more households and dollar balances in this environment. So, I think to your original question, we still see promotional pricing. I think until the Fed turns, there is still a market expectation from a customer standpoint for those that are watching rate, it better start with a 4% or 5% or we'll be -- we'll be looking elsewhere. And until the Fed moves, we really won't see a huge dimission on that. Our commitment is to be very nimble when the change comes. We would not be inclined to be sitting around on a fat or a pricing margin or a yield thinking perhaps we'll collect additional deposits on the way down. I think we -- in some markets that will be the case, but for the most part, we will be hitching our wagon to the Fed move and moving as quickly as possible. Where we see things changing in the market and it's true for us as well, on the CD front, duration. What was a 11 months or 12 months is now down to 8 months or 7 months and you're starting to see 5s and 6s. A year ago, we would have said 5 months won't get the client off the couch, they'll go pick for longer duration. I can see over the next couple of months, we're all squeezing down to -- those commitments are going to be more in the six-month category so that we don't have so much lag time when the Fed does move on the repricing of that book. But there is still some pricing pressure in the markets we serve.
Paul Nungester: Yes. And same thing on the money markets. When we were running the promos especially, geez, we started in the fourth quarter of '22 really, I mean similar, we had some price guarantees for a duration there, and those have been running off and we haven't been extending those, it's given us that flexibility for when the time comes, the cut, we can act, that we haven't re-locked it in for another 8 months to 12 months or wherever the case is.
Gary Small: That's important distinction that we have the majority of our dollars, flexible to us to move right?
Christopher Marinac: Great. Thanks very much for taking the questions and thanks for all the information this morning.
Gary Small: Thanks, Chris. Yes.
Operator: [Operator Instructions] We will now take our next question from David Long from Raymond James. David, your line is now open. Please go ahead.
David Long: Good morning, guys.
Gary Small: Good morning.
Paul Nungester: Good morning, David.
David Long: Just wanted to -- just going to stick with the deposit side of things right now. The -- you provided an outlook that included three cuts later this year. With that, what is your expectation for that deposit beta on the downside then?
Paul Nungester: Good question. We haven't actually got around that. First I'll run off the start. So, I'll have to get back to you for sure on better specific, David. But what I will say is that, the way that the model is running in our ALM here is that, even while the Fed is frozen right now and the cuts begin, there will still be pressure, right. We were just talking about finding the opportunities and setting ourselves up to be able to reprice, in the pockets where we have that opportunity, but CDs will take a while to still roll. Our money markets will start moving on those, but we'll be doing it in the broader context of competition and things like that. So, we actually expect that on a year-over-year basis, our deposit costs could -- it will be flattish or even up some ticks, but it would be on the right trend in the back half of the year there, where we're still going to be up for the early part of '24 first quarter, even into the second quarter until these cuts start, right. And then we'll take actions and start to bring those down, but on a year-over-year basis, it will look like they are still potentially up. So, we're going to be focused on the trends and to your point of resetting that beta point for the down cycle here to show how much we're recapturing from that perspective.
Gary Small: I know, David, when we looked at '24 versus '23 on margin and then broke it down into the two components, it was like how can it be so similar? But to remember where we were this time last year, rates were running up and running up a lot more and that's cooked into our base for '23. We have some better margins. And so it is back to the trajectory that you would see as to where are we as we close out the year and then we climbed back at a much slower pace three turns versus gosh, how many did we see coming back in the first three months or four months of '24. So, it does kind of neutralize but it's on a year-over-year average basis, but certainly Q3 and Q4 you see material difference. On the betas themselves, the most illustratively I can say is that if there is a 25 bps movement, we won't see a 25 bps movement say in every category, because I'll take CDs for example, we still have posted, took a 12-month CD last year and it's priced at 3% or something like that, they'll be looking for -- even though we're bringing rates down, they've got room to move up a bit. And so that will curve a little cream off the top relative to that move and all the more reason why you've got to be ready to move downward because there will still be upward pressure on from certain parts of your book.
Paul Nungester: Yes. And then I'll add to that, David, when you're looking at the total portfolio, we still have significant dollars at that low-end, our savings and checking, and non-interest obviously where we never moved up. We didn't change our board rates, there were some mix migration. But those piles, they didn't go up and they are unlikely to come down in the down cycle. So, really it's focusing on the piles that we priced up and then re-capturing that on the way down, and the velocity will depend on partly the Fed and how quick they move, and then obviously the competitive environment, where we feel good about being in a position where the focus will be more so on retention versus acquisition, that we've done a good job, especially the second half of '23 kind of building that war chest per se. We've got it and now we just -- we need to retain that and then re-price the piles on the way down here.
Gary Small: And Dave, one of the things we learned that we probably knew instinctively, but the year sure showed us that there's a large quantity, our dollar level quantity of clients that are inelastic on pricing and it's one of the -- and then of course, there are those that aren't, and we're using every tool at our disposal to manage the movement, but we'll -- we will work with that in-elasticity as to our advantage as we go through the year.
David Long: No, that's some great color, so greatly appreciate that additional color. So, as a follow-up then, it doesn't sound like if the Fed doesn't move and we stay higher for longer, throughout the rest of the year, your NII guide, doesn't sound like it changes that much from that 2% for the year or would it?
Gary Small: Think if the Fed didn't do anything, I think we would have to come off of that number, Dave. It's adding -- it's beginning with beyond just the normal repricing and so forth, that we'll be doing here in the first four or five months. Once we cook in a turn, it's going in in May -- end of May, so it'll start picking up in June. Another turn in the next quarter, another turn late in the fourth quarter kind of not much of an impact there, but it would be less than what we have in our expectation right now.
Paul Nungester: Yes. Dave, we're still -- you'll see the numbers in our K when that comes out, but we're still in that liability-sensitive position today, not as much as we were in call it mid-point of '23 there, from all the actions that we've taken, and our success in getting wholesale down and things like that, but still net-net we are a liability-sensitive. So, if they don't cut, if it was flat for all of '24, Gary is right, we'd have to come off that and recast it, but it shouldn't be a material deviation because we're not as sensitive to it as we were.
Gary Small: On the left side of the balance sheet, new money going out the door for loans is still going out with a high-7 or mid -- to mid-8 on it, and we're sort of holding fast on that. When things got interesting there in December, clients' expectations thought perhaps the market would move on that, but I think we've all held pretty firm that we're going to get paid for the risks in the market right now on the loan side.
David Long: Got it. Thanks for taking my questions, guys. I appreciate it.
Paul Nungester: Thank you.
Operator: Thank you. We have no further questions registered. And with that, I'll hand back to Gary Small for final remarks.
Gary Small: Well, again, '23 an interesting year that we'll all remember. '24 although certain aspects of numerically may feel similar, as I said, we can see over the horizon now, we can see the direction of the Fed. It's not a matter of if, it's when and the pacing and so forth. For us, there is as much to be gained on, obviously the recapture of margin coming out of that liability since then there is, that will be growth-driven and there will be a time when 6%, 7% growth is back to how we make the needle move over the next four quarters to eight quarters. I think it's much more margin recapture, manage your Ps and Qs on the expense side, do smart things on the fee business side and we run a clean book from a credit perspective. So, when we come out of that cycle four to eight quarters going forward, we'll be more nimble, we'll be a stronger organization, and really well leveraged to grow going forward. And thanks for all your time this morning. Appreciate it.
Operator: Thank you for your participation. You may now disconnect your lines.
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