Q4 2020 First Commonwealth Financial Corp Earnings Call
Good day and welcome to the fourth quarter 'twenty 'twenty earnings Conference call.
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I would now like to turn the conference over to Ryan Thomas Vice President of Finance and Investor Relations. Please go ahead.
Thanks, operator, and good afternoon, everyone. Thank you 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 Rusky, Chief Financial Officer, Brian Carroll, Chief Credit Officer, and James <unk>.
<unk>, our bank, President and Chief revenue Officer.
A reminder, a copy of today's earnings release can be accessed by logging on to F. E banking dotcom and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call before.
Before we begin I need to caution listeners that this call will contain forward looking statements. Please refer to our forward looking statements disclaimer on page two of the slide presentation for just for a list of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward looking statements.
Today's call will also include non-GAAP financial measures non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP a reconciliation.
<unk> of these measures can be found in the appendix of today's slide presentation.
That I will turn the call over to Mike.
Hey, Thank you Ryan and I will begin with the fourth quarter and then reflect on the year on the outlook for 2021.
In the fourth quarter net income of $25 7 million drove earnings per share up 27%, beating the consensus estimate of 23 per share.
Core ROA and the core efficiency ratio.
For $1, one, 4% and 56% respectively.
Our core pretax pre provision on ROA was 176% due to an increase in the core net interest margin.
The $3 two 9% and continued strength in non interest income driven by mortgage interchange income wealth management in Sps.
Fourth quarter loan volumes in commercial C&I lending were soft due to lower utilization of lines of credit and some payoffs. This math the strength we saw in the consumer businesses and resulted in a contraction in the overall loan portfolio.
P P T <unk>.
Expenses for the quarter were up due to higher salaries and benefits, particularly hospitalization expense provision expense at $7 7 million included a pass through item of $3 $2 million in unfunded commitment expense. It's important to note that we adopted the Cecil methodologies.
All achieved for the allowance for credit losses in the fourth quarter.
Shifting gears as we think about the future we think a lot about our customers change in behavior. This is why we continue to make significant investments in next generation technology in 2020, with a new online mobile platform.
New Treasury management system, 100% issuance.
Contactless debit and credit cards, and new P. P to P solutions like Zelle, and real time payments and we refresh refreshed our digital account opening customer experience with a new mobile responsive design and.
On a year challenged by a global pandemic. These digital tools enabled our customers to bank, when where and how they want it.
Here is a sampling of some of the growth and changes we've seen.
Debit card interchange income was up 11% or over $2 3 million year over year, driven by robust increase in transactions and dollar volume.
New digital deposit account openings were up 189%.
Digital customer conversations are up 233% from 2019.
This interactive conversation feature available through our new online mobile platform lets customers start conversations with us.
Anytime day or night.
Mobile remote deposit capture users increased 45%.
Image deposits had etfs increased 84%.
Virtual meeting collaboration increased to 175% to over 2600, a month our leaders are finding ways to keep our employees engaged with each other and with customers.
And then there is our favorable Apple store rating of four eight on our FC.
The mobile banking App, our customers are telling us what we're doing wrong and what we're doing right with our mobile app and we listen.
We're proud of our progress with our digital strategy over the last several years and particularly in 2019 in 'twenty. However.
However, we must continue to improve our user experience and digital on the new account openings across consumer and business banking.
Just a few more reflections before I hand, it over to Jim Reske, our CFO on.
On the credit side, we proactively marked our credit early and often while reaching out to our clients in the midst of the pandemic during 2020 and per page 10 in our supplemental deck, we quickly build our loan loss reserve usually qualitative overlays. It now stands at 161 per.
Total loans X P. P P and covers fourth quarter nonperforming loans.
$4 $1 million by 180, 87% the highest coverage figure for the year.
Npls, our nonperforming loans as a percentage of loans was 0.80 per cent or 80 basis points in net charge offs in 2020 or 27 basis points for the year.
You will notice on page 12 of our supplemental debt published this morning, and an increase in loan deferrals to 168% of total loans as of last Friday January 22nd.
On page 13, the increase stems almost entirely from extending deferrals to a handful of hospitality credits totaling $76 million or 29, 6% on that particular portfolio.
These types of deferrals are constructive and will enable a handful of our developers through the late innings of this pandemic.
These deferrals also tend to come with a quid pro quo to include increased recourse or another and credit enhancement on alone here again, we feel well positioned with credit in 2021.
During 2020, we grew our top line some $7 million, while our expenses grew only $2 million net of some restructuring charges. This is yet another year. Despite formidable interest rate headwinds the positive operating leverage our full year core efficiency efficiency.
Ratio fell from $56, 97% in 2019 to $56 two 8% in 2020 indicative of the resolve of the management team.
We wielded.
And internal initiatives dumped project thrive to spur revenue growth improve efficiency protect margin and optimized capital among dozens of initiatives here, we consolidated some 20% of our branches before yearend after starting the process in late March.
We also nimbly use the remainder of a previously authorized buyback the purchased 2 million shares at a weighted average of $7 84 per share in the fourth quarter.
In 2020, we also had a record year with $94 million in noninterest income as interchange mortgage wealth management and SBA.
All had record years as well non interest income for the fourth quarter approached 28% of revenues and was 26% for the entire year.
X P. P. P total loans grew $111 million or 2% in 2020 on the backs of strong consumer and mortgage lending and modest growth in small business. This momentum was more than offset by a slight slight downdraft and see our CRE lending and a comparable decrease in our C&I.
Portfolio in 2020 once again, however, our newer Ohio markets found a path for broad based growth and they now account for 34% of total loans. We are optimistic about our pipelines in early 2021, and our ability to grow meaningfully in 2000.
In 'twenty one.
In 2020, we became virtually better in virtually every aspect of our business to include each revenue producing line of business each geographic region of our company our fee businesses, our expense focus our credit and enterprise risk culture, and lastly, our digital strategy.
We are genuinely excited about our prospects for growth in 2021, and with that I'll turn it over to Jim.
Thanks, Mike.
Let me highlight a few things from our fourth quarter financial results before offering some guidance for 'twenty 'twenty one.
First fee income was strong in the fourth quarter, we anticipated, but did not see a seasonal slowdown in mortgage originations in the fourth quarter.
Fee income was actually suppressed by $1 $2 million due to the mark to market on a single derivative. Despite this fee income still came in at near record levels.
We talk a lot about mortgage, but we're very pleased to see our wealth businesses coming along nicely compared to where they were a year ago as well.
Second the net interest margin expanded from $3, one one per cent last quarter to $3 two 8% this quarter in part due to our intentional efforts to reduce excess customer cash levels.
Core NIM expanded by one basis point per quarter from $3, two 8% last quarter to $3 two 9%. That's a cost of deposits continued to come down.
Third core non interest expense was up from last quarter as strong mortgage originations and other activity drove increased incentive expense while at the same time reduced loan originations and other areas resulted in a slowdown on Fas 91 expense deferrals.
Hospitalization expense was up by $600000 from last quarter, and we had a 400000 dollar expense in the fourth quarter related to the annual true up of our bowling liability.
So those two items alone accounted for a million dollars a day increase in expense from last quarter.
Now, let's talk about guidance for 2021.
Note that our assumptions do not yet include another round the P. P. P M.
And any government stimulus because it's way too early to understand their impact.
While concrete guidance as elusive hopefully we can provide some helpful thoughts as to what we believe may influence our financial performance in 'twenty and 'twenty one.
Let's start with loan growth and fee income.
We expect fairly robust loan growth next year for years, our guidance for loan growth has been mid single digits.
We believe that we can be at the higher end of that range. This year.
We expect the fee income will remain strong through at least the first half of 2021 in particular, because we had expected to see some softening on the mortgage refi boom by now but mortgage originations remained strong.
Fee income in the second half will largely depend upon the extent to which the mortgage refi boom continues.
Now for net interest margin and noninterest expense.
As far as we can tell right now we believe that our core NIM will be approximately five basis points on either side of $3 12 per cent in 'twenty 'twenty, one, but many factors could change that number and we'll update you as the year progresses.
The NIM is expected to be profoundly affected in 2021 by P. P. P forgiveness and further stimulus both of which could leave us with a lot of excess cash to reinvest.
N P T P round, two which will add more low margin assets to the books all of that would suppress the debt.
There are however, three quote unquote arrows in our quiver that.
And that May work to offset some of these NIM pressures.
First we expect the phenomenon of negative loan replacement yields to soon run its course I'll expectation had been that we'd reach neutrality in asset yields in mid 'twenty 'twenty, one, but in the fourth quarter negative replacement yields only brought down the loan portfolio yield by two basis points. So we're almost there.
Second on the liability side.
We see continued runway for reductions in deposit cost.
We have $471.2 million in Cds maturing in 'twenty and 'twenty, one with $289 9 million, yielding one point to one per cent.
During in the first half.
And we also have $129 $4 million in money market savings deposits. The current you currently yield of one point to two per cent that well we price in the first half of 'twenty 'twenty one.
Third and most importantly, our balance sheet remains asset sensitive.
The blended moodys rate forecast that we use called for a modest steepening of the yield curve. This year and more next year, even while short term rates remain at zero.
Our NIM would benefit from that scenario.
Turning now to non interest expense, we believe core N I E should come in at between $52 million to $53 million per quarter.
That's up from $206 4 million in 2020 and from our previous guidance.
Part of the increase was due to a change of $3 million expected increase in collection and repo expense, but that remains quite unclear, especially a foreclosure moratoriums and unemployment insurance or extended.
One other potential tailwind to expected costs could be the next round of P. P P, which will allow us to defer origination expense potential potentially lowering non interest expense.
The rest of the increase is more straightforward.
We are not hesitating to invest in loan growth talent, including commercial lenders and consumer lending teams as well as credit and Treasury management personnel, because we sense growth opportunity as the crisis abates.
Furthermore, we believe that the work from home environment will wind down in corporate travel and client entertainment, what we knew at some point in the latter half of this year.
Finally on a more exciting note share repurchases will continue.
We announced yesterday, our board has approved an additional $25 million share repurchase program.
We expect repurchase activity to play out relatively slowly over the course of 'twenty 'twenty, one, especially in response to dip in our stock price.
And with that I'll turn it over to Brian Kerr.
Thank you Jim.
Good afternoon, I'll walk you through some prepared credit comments and then we'll go to Q&A.
Our strong fourth quarter results underscore the effectiveness of our portfolio management practices.
Our risk management strategies and disciplined price culture.
Over the past few years, we tap the brakes on certain higher risk sectors.
We selectively reduced certain segments, such as energy, we've adjusted our corporate.
And consumer alone guidelines to achieve a more.
Moderate risk profile.
We improved our portfolio risk through geographic and industry diversification and we've reduced our concentrations of credit by limiting single transaction exposures.
Our consumer delinquencies at your own continue to be very low.
And were only two basis points.
I'm sorry, our commercial delinquencies are consumer delinquencies ticked up a bit at year end to 45 basis points due to seasonality.
We were pleased to see that our investments in the collections team.
And a favorable comparison to pre Covid, while 31 19.
Or delinquencies at 54 basis points.
Criticized loans increased by approximately $114 million largely due to downgrades.
Hospitality portfolio.
Nonperforming loans at year end totaled $54 $1 million, an increase of $4 3 million from the prior quarter.
We had a number of smaller credits that we moved to accrual and one hospitality relationship with a balance of approximately $7 million that was moved to non accrual debt net increase was $4 million in nonperforming loans.
Basketball more loans as a percentage of total loans, excluding D. P. P was 0.86% and our allowance for credit losses as a percentage of nonperforming loans increased to a healthy iron 87 per cent.
And performing assets as a percentage of total assets increased from five 5% in Q3 to six 2% in Q4.
Net charge offs for the fourth quarter came in at $4 $8 million net charge offs as a percentage of average loans. Excluding P. P. G. D. P. P was 0.3 O per cent.
Given the economic conditions that were generally in line with our internal targets now.
Now, let me provide some color regarding reserves.
First you should note that we adopted T. So at 12, 31, 2020 and book to transition them out of $34 million.
We utilized certain Moody's models to support our estimates of key economic indicators, including GDP and unemployment.
As the economic models as the economic uncertainties play out and conditions improve we might see some tailwind towards the back half of 2021.
Provision for Q4 was $7 $7 million, including $3 2 million related to the unfunded commitments.
The provision reflects our strong credit metrics and improving economic indicators.
As noted on page 10 of the supplemental slide deck.
The total qualitative reserve factors increased by a net $8 $3 million Q quarter over quarter.
Specific to the identified COVID-19 related I risk portfolios.
Qualitative reserve was applied for the quarter up $9 $1 million.
Credit carefully considered high risk portfolios as outlined on page 13 of the slide deck.
These five portfolios will be evaluated quarterly.
And reserves would be adjusted accordingly.
The reserve build slide in the deck provides a bridge from our 12 31 19 balance of $51 6 million for the year end reserve of 101.3. This is.
Looser of the $3.2 million of provision for unfunded commitments.
Reserves to total loans grew to 1.5 O per cent.
Total loans and $1 six one total loans net PPP loans or.
We're all we've been conservative in our approach.
Solid reserve coverage ratios.
With that I'll turn it back to Mike for Q&A.
Yes.
Hey, Thanks, Brian.
Questions operator.
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Yeah.
Okay.
Okay.
Yeah.
Yeah.
The first question comes from Frank Schiraldi from Piper Sandler. Please go ahead.
Good afternoon.
Just a couple of questions on.
On the guidance, Jim you mentioned.
You sound pretty confident and in loan growth.
Apparently robust I think you said the high end of mid single digit it. So so 6% I guess.
Sort of what you're guiding to and then just kind of wondering if you could.
Given line Utilizations were lower in the quarter you know what gives you the confidence in this sort of more robust growth and if you could break that out between sort of rugby on commercial expectation.
Yeah. This is Mike.
We really see some strength on the consumer lending side in our branches.
Certainly with mortgage lender lending and we portfolio a portion of that and then also with our indirect business.
We really haven't had those engines before we have broader engines in noninterest income and now <unk>.
<unk> base in.
Consumer and commercial banking to grow and we do expect to rebound here, perhaps as early as the second quarter in the commercial.
Side of the business that we even seen see some beginning of pipeline growth in certain markets on the commercial side and we think as demand comes back.
On the credit are down because accounts receivable inventory that working capital cycle.
On that businesses need is down as well and we think that could rebound and.
And really create some momentum and we've constructed our budget. We are very meticulous about that year end and year out and we just feel like we have more engines than we've had before and better teams and producers on Jim or Jim do you want to add to that.
Cheng.
Thanks, Mike No I don't have much to add.
I'm glad that we've got.
Five different regions identified in the bank because.
Because we see.
Different tail winds region by region and job.
You know, we're running the company much more geographically and we see much more accountability by geography.
And I'll build on that just a little Frank I mean.
First five six years ago, we were.
Domiciled in we really operate the <unk>.
<unk> thousand 90% on the franchise out of Western P E and as we've done acquisitions faithfully probably accounted for about 20% of our depository.
And loans and they now account for 34% and they're growing very rapidly in the three metro markets in Northern Ohio, Columbus, and Cincinnati and the other thing is as I think as we've gotten larger and we performed better I think Jane and the team, we'd get better and better producers.
So I think it's pretty simple, but there is definitely more momentum there.
Okay, great. Thanks for all the color and then just quickly.
Quickly on the fee income guide on Jim I think you said did you just you know sort of strong will continue to be strong through the first half of 'twenty 'twenty. One so does that just imply that we'll see sort of similar levels to what we see in the back half of 'twenty and 'twenty in terms of our total our noninterest income.
Yeah, that's about right look I'll be very clear with you first I think generally the overall consensus estimate for us for fee income is a little on the light side. It looks like it's annualizing more of the experience that we had in the first half of 2020, and our second half flow through.
Both quarters are really strong on fee income.
And there was a time limit on the fourth quarter that we thought while this mortgage refi boom come do it and then there'll be seasonality and it just hasn't slowed down. So when do you think some of that will keep rolling in the first half of this year at some of that you know will place its probably its course and then it might come down on the second half, but I do think it can be pretty strong year for.
Fee income.
Okay, Great and then if I can sneak in one.
On my last quick one on credit the increase in criticized in the quarter does that reflect more just sort of a.
Alone review that is now completed or if it is if that does reflect the longer view is that still in process.
Hey, Brian Great question.
Yeah, Great question, Frank So a number of things happened in the fourth quarter.
First off we began getting many financial statements that had been on extension and as those financial statements were analyzed we'd look and identify whether or not there was some financial covenants tripped you see it as an opportunity to have a real negotiation and discussion with our borrowers secondly, we did.
Completely second full loan review that semiannual longer review covered 972 names she went through quarter $1 billion and as part of that we also adjusted risk ratings and finally I would just draw your attention to.
Our firm belief that there might have been an exploration of the cares Act and so we wanted to act with a sense of urgency on any forbearance is so we could provide certain short term modifications consistent with the cares act. So our relationship managers did spend a fair amount of time with their borrowers.
Is saying, if you think you're going to need.
A forbearance and would like to negotiate for one day now would be a good time, so the cash flow which of those various events did lead to.
Higher forbearance or deferrals in the fourth quarter as well as some.
Migration and increase in criticized assets.
Okay. It sounds like you feel like on migration is complete now that once you have.
You know you completed that long review process in the fourth quarter.
Yeah, I feel very comfortable we mark the book properly you know, Michael say over and over again golf balls and strikes honestly at first Commonwealth and I feel very comfortable that we are.
That we've appropriately marked our credits and that we will continue to watch them over 'twenty and 'twenty one.
Okay, great. Thanks for all the color.
Next question operator. The next question comes from Steve Moss with B round on Securities. Please go ahead.
Good afternoon guys.
Can you just perhaps starting on following up on credit here, just kind of curious as to how youre thinking about credit costs and you know what the potential is for the formation of charge offs in 'twenty and 'twenty one.
I think our feeling is that it might be similar to two.
2020, but I'll, let Brian expand upon that.
Yeah.
Here's what I'm seeing and beginning to see some light at the end of the tunnel.
We may see a little bit of an uptick the first two quarters of this year and or our viewpoint. Our outlook is that the back half of the year things will begin to improve we think 'twenty 'twenty one numbers will be generally in line with where we were 2020, which.
<unk> is right in line with our internal targets.
Okay. That's helpful. And then you know on.
On the on the margin from Jim you gave a number of details around funding.
Cds repricing in borrowings would be replacing as well where are your repricing Cds. These days.
How much it's a pretty good quarter for our funding costs come down how much further do you think we could go here.
Yeah. Most of those time deposits will reprice at the rack rate in our rack rate is actually very similar to others in the market. It depends on the term, but theyre all 10 to 20 basis points very low.
So we are still even if those rates, though we will still see <unk>.
Half to two thirds just rollover.
The rest will sometimes just rolling to savings accounts spend to learn between zero and five basis points.
So theres a quite a bit and that's why we're quite happy about it because it's quite a bit of healthy repricing opportunity.
On that from.
Right Okay.
That's helpful. And then just in terms of business activity here it sounds like it maybe might correct me on a wrong, but Ohio.
<unk> continues to be stronger relative to Pennsylvania.
I'm just kind of curious about the dynamics, you're seeing between markets and any color there.
Okay.
Sorry, I muted the free.
[laughter] yeah the.
We've had good growth and it's been broad based it's been on both consumer and the commercial side and more on the C&I side, as well and actually C&I and commercial real estate I think.
In Pennsylvania, Brian gave you a pretty good list of about 10 minutes ago, four or five ways that we de risk the bank and.
And Trust me, what I can say that we have de risked the back I mean, we've gone from 70, plus days over $15 million in credit and Brian I'll get it wrong, but the number is probably closer to 25 now and so that created some headwind for us It has for our core franchise for a number of years.
The other thing is the demographics quite frankly in the Metro markets in Ohio are a little better and.
So those are probably the two reasons I think as we've gotten we've moved culpably to a regional business model here at the last several years.
Each market is getting better and performing better on.
Each year and so that just gives me great confidence that we will we will have a year, where our consumer and commercial with both hit on all cylinders and each region.
And I'm just more optimistic about growth for a company that I have been at any time since I've been here.
Okay.
Okay.
Maybe one last fall from me just in terms of potential acquisitions.
What's the level of activity, there and you know.
Any areas of interest.
Yeah.
I don't want to sound like a broken record we've done things debt.
Has been we've executed very well they've been smaller.
Things that have been in adjacent markets and they haven't been a stretch for us.
I hope, we can continue to use that playbook.
But we're very mindful of the cost of a deal on.
We've probably looked at 40, plus things to do five or six.
Five right and.
And.
If the numbers don't work and it's not strategic we don't do it and.
So that's pretty conservative I think we'd like to do something a little larger but you'll also invite a different kind of risk and you have to feel very comfortable that you can execute that risk and and there's not any.
No theres, nothing thats going to bite you and.
Jane and I on a number of others on the team.
I'm done.
And small banks dozens and dozens of deals and.
And we're.
We just want to we just want to grow it responsibly and thoughtfully and we have I think a better organic engine and we really would like to do deals don't get me wrong. It's just.
It has to work for us and.
But I'd love to do something in an adjacent market here.
Pennsylvania, Ohio, and or fill in and a small or a little larger.
Okay, great. Thank you very much.
Yeah.
The next question comes from Russell Gunther with D. A Davidson. Please go ahead.
Hey, good afternoon guys.
Good afternoon.
I wanted to follow up on the margin discussion. So first to make sure I heard the guidance right. The $3 20, plus or minus five basis points on either end of that that's core and so that's what you guys consider exclusive of PPP fees.
So that's question wanted to make sure I have that right too.
What dynamics need to materialize to to hit the high end of that range.
Jim Yeah.
Well there are a couple of things going on in first line for the sake of clarity, yes, that's core.
And we publish a reconciliation of core in our earnings deck supplement.
But basically we are excluding P. P P loans.
And all the PDP forgiveness income.
And then we are also excluding the effect of the excess cash that's on the balance sheet, that's our definition of core.
We reconcile it back to the GAAP NIM.
For everyone's benefit.
So we think that could be quite a bit of pvp forgiveness in the first half on with you for the PPP loans that remain on our books.
The 588 million 589 that we did in total last year about 100 was from given for the year ended so there's quite a bit left to go so that is forgiven as everybody knows by now the amortization of the fee income on that will accelerate on that could really boost the state it now quite high.
In the first half of this year, depending on the pace of that forgiveness.
But we'll continue to publish that corn and strip that out to get to that number. So that's what we mean when we say the corn in some of the upside of that number of cancer. The second part of your question will depend on a day.
The slope of the yield curve and how that might shift over the course of the year.
No one has a crystal ball like I mentioned, we purchased early on.
Forecast on rates our rate forecast from Moody's.
And some of that calls for some steepening so to the extent that happens that could really be some upside to our NIM somewhat in this year, but even more so next year.
Okay. Thank you Jim Yes, it is quite a bit I guess, the one follow up to that would be.
What that includes in terms of your assumptions for the investment portfolio going forward, both from a overall size as a percentage of earning assets and the reinvestment opportunity.
Yeah, Great question, a lot of that will depend on the pace of deposit withdrawals. That's a lot of those PPP loans are forgiven. So that's been on PPP loans are forgiven all that does is true one turn.
Turn on Pvp loan assets into cash asset for us.
And it depends on the pace with which the customers pull that money out and use it and deploy it but that's a cash takes around we are it's very expensive to let it stick around because while it sticks around it you know very low any asset on our books. So we do intend to invest some of that excess cash over the year you asked about our assumptions our assumptions on investment yields on securities are not aggressive at all.
We're seeing our yields.
On plain Vanilla MBS securities that are maybe one to one 1% and we really don't look at that book as a place to stretch for yield and take on any risk. So we don't look at really anything esoteric in that portfolio. It's very plain vanilla. So that's that is the that's the assumption specifically with regard to your question as to what percentage of the.
On the.
Book, It will be our debt general assumptions on that won't change a whole lot, but it's really going to depend on how much cash we have in <unk>.
And how much more going on that cash we have to invest.
Got it okay, great. Thank you, Jim and then switching gears a little bit I appreciate the.
Color on the expense outlook I, just trying to tie together a lot of the conversation we've had I mean, it seems to me like the answer would be yes.
Are you able to commit to generating positive operating leverage for 2021.
We're gonna like all of them.
Like a lot of things I think we're gonna have to scramble to get there that's the goal.
And we scrambled last year with some cost take out and some other things as you know if the revenue line moves it can get really it could get a lot tougher but that that is the goal is to have positive operating leverage debt. Let me answer that also with a brief anecdote.
I think it was around the end of March when Mike looked at me and ask me that question can we track. It internally obviously, we're very focused on operating leverage as part of our core DNA as a company and Mike was asking about that.
Operating leverage for this year and I thought well, it's you know it.
March with Covid hitting us on the pandemic hits over there's no way, we can get positive operating leverage in calendar 2020 than we did.
It was quite positive our core revenue grew $9 3 million in corn and I only grew $2 8 million. So we were very pleased with that so that's we'd love for that to continue but time will tell.
Understood and then you know maybe a similar type of question, but.
Fit ability ratios have been.
Really strong in it and I think as you call out in your deck from a P. P. NR perspective in that you know $1 75 ish range do you have a target that you are striving for on either a P. P and our ROI perspective, or something else that you set out for 2021.
Yeah.
Longer term I'll qualify that I mean in our plan on the first page is 180 pretax pre provision on ROA and a sub 55% efficiency ratio.
That doesn't set up real well for this year I would not look for that.
That's what we need to be moving possibly and then we need to find dollars to continue to invest in our.
Our digital platform and I started there because.
A lot of investment and.
Our customers that really enabled us to the pandemic to have the kind of year, we had and to really let those fee businesses grow with talent at the same time you know we were shifting expenses. So you just have to be nimble and thoughtful and we have to when we're in front of you Russell quarterly were very.
Countable for where we're at and where we're going.
I appreciate it guys. Thanks for taking my questions Thats It for me.
Yeah.
The next question comes from Steven Duong with RBC capital markets. Please go ahead.
Hi, good afternoon guys.
Just first just on the margin it looks like you have a little over a five or 15 million on C. D. A.
How much of that do you expect to roll off by the end of the year.
Yeah with 400, and so thanks for the question with $471 million maturing next year.
Probably we will probably retain half to two thirds of that that's been the pace recently, even at even without offering any deposit specials, even without reaching for yield at all about half to two thirds will rollover.
Okay.
Okay. So basically by the fourth quarter of this year that could get down to like a.
300 number.
Oh, yes.
Absolutely.
And that 300 number.
You're saying the cost is around 10 to 20 basis points.
That's right now the rest of the money just to be clear may not roll into Cds, but it just might someone doesn't renew their C. D day, let's say what the rate is so low on my phone is put on my savings accounts. So there's a lot of that money stays with the bank. It just doesn't go into time deposits.
Right right right.
And so then.
Right now it looks like your total.
Deposit costs are less than 20 basis points do you see the potential for breaking through with the 10 basis point line by the end of the year.
Yeah, Steve It's a great question and I have not calculated it that way.
I would I would say we have a good chance of doing that by bringing these costs. Some of these costs down.
When you have this much money.
And I gave some of them on the money from the numbers excuse me in my prepared remarks $290 million at 1.2 on another.
That's the C D number on another $130 million of money markets at one point you too.
Those will come down on the 100 to 110 basis points less debt.
That chunk of money, so that really could be the total cost of deposits down in house.
Steve This is Mike just to be clear I mean longer term the engine that Jamie <unk> who's on the phone is developed and along with Greg Saepiss, our head of corporate banking and our head of retail to go out and get business deposits is key.
Noninterest bearing deposits on checking accounts and those drive your fee income and so I don't want to be dismissive.
Dismissive of deposits in general longer term would cherish every checking accounts every transaction accounts, we have where focus is.
And our DNA has to be to get noninterest bearing business accounts and and that's what we're about and thankfully we've shifted in the last five years that really enables the flexibility with.
With the time deposits.
Oh, that's good to hear.
And I just I saw on your presentation, you had a $1 7 million in the P. P. P fees was that just the accelerated portion or was that the total PPP fees for the quarter.
That was just the accelerated amortization that does not include the regular recognition of the fee income for the rest of the portfolio.
Okay.
What was the total recognition and how much do you have remaining.
Well like I was saying we have about a net.
$100 million from off the books so far.
By the end of the fourth quarter. So there's about 480 or 490 million that remains.
And net portfolio I don't have a dollar figure handy for the total amount of.
Amortization on the portfolio, the fourth quarter, but I could probably get that for you.
Okay.
And then just one last one from me.
On the loan growth side on the commercial side.
U.
Seem pretty positive on it.
Just curious do you talk to your clients are sitting on a lot of liquidity right now and how does that factor into your expectations.
They are and I have been on the phone gene why don't you take that one on liquidity.
Thanks, Mike. Thanks for the question you know we've seen on line utilization drop in 2020 from about 50% down into the high thirties.
So on an indication that our clients are also sitting on lots of cash and we've seen you know the bank is flushed with cash.
We anticipate that as the economy begins to open up Oh.
Clients will start to use that cash and they'll start to borrow again wound down on some lines.
Great. Thank you that's it from me.
Thanks to you.
As a reminder, if you have a question. Please press star then one to be joined into the queue.
The next question comes from Joe privilege with spending and Scattergood. Please go ahead.
Good afternoon, two quick questions. One on the next round of P. P. P. Any sense of what kind of applications, you've received and how much volume you might get from that and then the second question is on the allowance of loan side.
It's one 5% where do you see that longer term and could we see reserve releases here as soon as this quarter.
Yeah, I'll, let let's start with the credit question and Jean if we could find the P. P. P numbers I think you might have those but Brian on the.
On the loan loss reserve.
Okay.
Yeah. Thank you.
So here's how we're thinking about the loan loss reserve.
We as we are completed this year and in the transition to see still we want to be.
I continue to be disciplined in credit prudent the way that we address our reserves, we're going to look at both our qualitative <unk> quantitative components and our high risk portfolios throughout the year with an expectation that we may be in a position to bring these reserves down as the economic outlook.
In Peru.
On Jane on the P. P. P. Go ahead, I'm, sorry to interrupt you.
Great.
My question more is.
Longer term do you think one five per cent is is the right number or based on the likelihood of reserve releases could we see that drift down whether that's the one on a quarter or or something lower.
I might take that Mike.
Yeah.
Yeah, I mean, it's really going to be driven by our models are models do have.
Our Moody's models do have factors in there like GDP unemployment and so they will drift down as there is improving economic conditions, we also have $9 $1 million and.
Related to those high risk portfolios that we've outlined in the slide deck GAAP.
And as the improvement in the economy directly relates to those specific portfolios retail hospitality senior living energy, we would expect those to come down over time also Joe.
Yes.
Got it thanks.
And Jane on P. P P.
And back to the question on on P. P P volume up.
Right now, we've got about $174 million and applications and that's about 1300 apps.
Pace is much much much different than it was last year and that's another reason for the optimism around the loan growth.
You know I'm really proud of the work that we're doing around P. P. P. In 2020, but it wasn't all hands on deck kind of initiatives.
And.
We use we use virtually every resource this year, it's been much more quarantine.
Just as much more automated we knew what we were getting into we're taking care of our own customers first and I really like the cadence against last year. So we're pleased with where we are.
So Joe that's about 22% or about a fifth of the volume we saw on the first two waves in 2020.
And do you think that could get to a third or 50% or what's your gutsy.
Oh, My gut says that it's gonna stay around here.
Okay.
Absolute dollar amount, but we did about $600 million last year I don't I don't think we'll do.
More than a couple of hundred million, maybe maybe a little bit more.
Okay.
Yes.
Thanks, Joe.
This concludes our question and answer session I would like to turn the conference back over to Mike price CEO for any closing remarks.
Yeah. Thank you Jim did you have sub debt I do and I think you, Mike, but before we close the call. While we are still on the call I do have a couple of answers to questions that were asked earlier.
One of the questions was about the total deposit costs with the debt come down in half from 22 basis points to 10 basis points by the end of the year, it's not going to come to quite that 10 basis point level on I wanted to clear about that it looks like in our planning and it'll be more like 12 to 15 basis points by the end of the year on the other question was about the total amount of P. P. P spread income that was recognized.
On the quarter. The total amount was $5 5 million, but that included the $1 7 million of accelerated amortization. So the rest of it the rest of the P. P interest income recognized from the remaining P. P loans in the fourth quarter was $3 8 million just wanted to take the opportunity to clarify what were still on the call. Yeah. Thanks, Jim and thank all of you for your interest in our.
Any.
And we look forward to reporting out.
Positive momentum in the first quarter and the rest of the year as the economy recovers and people get vaccinated and thank you very much for your interest in first Commonwealth sincerely take care Bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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