Q4 2021 First Commonwealth Financial Corp Earnings Call

Good afternoon.

My name is David and I'll be your conference operator today at this time I'd like to welcome everyone to the first Commonwealth Financial Corporation fourth quarter 2021 earnings release Conference call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during this.

Time simply prestige Starkey, followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again, Thank you Ryan Thomas Vice President of Finance and Investor Relations you May begin your conference.

Thank you David and good afternoon, everyone. Thank you for joining us today to discuss the 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, Jean <unk> <unk>.

President and Chief resident revenue Officer, and Brian Carroll, Our Chief Credit Officer.

As a reminder, a copy of today's earnings release can be accessed by logging on to F. C banking dotcom 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 our forward looking statements disclaimer on page three of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward looking statements.

Today's call will also include non-GAAP financial measures non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation and no.

I will turn the call over to Mike.

Hey, Thank you Ryan this past year was another good year for first Commonwealth. So much of what we did sets us up well for 2022, we continued multiyear investments in our core systems and digital technologies core businesses fee businesses, new geographies and credit systems as well.

As our leadership and lot of talent here are a few of the 2021 highlights regarding loans, we had strong growth X P. P. P of 12% in the second quarter eight 2% in the third quarter and 11, 2% in the fourth quarter of 2021 carry good momentum into 2022.

Regarding P. P. P through two rounds, we made 707400 loans for $845 million and realized some $23 $2 million and forgiveness income in 2021, we also picked up a number of new business prospects in each round of PPP.

Lending on margin our NIM suffered in this low rate environment, but our core NIM net of excess cash and PPP seems to have bottomed out in the third quarter of last year importantly, our loan growth prospects and asset sensitivity position us well for NIM expansion in two.

And 'twenty two our non interest or fee income was up appreciably in 2021 to $106 $8 million, even as gain on sale of mortgage income fell from $5 2 million from record 2020 levels. Our card related income grew $4 million.

$28 million, our wealth and insurance businesses were up $2 7 million to $19 $6 million as we segue from PPP activity to traditional SBA lending our SBA gain on sale business improved $3 1 million to $6 8 million.

In 2021, we are now the number one SBA lender in Pittsburgh.

SBA lender in Ohio.

And SBA is poised to make an even more meaningful contribution to fee income in 2022 and mortgage we built.

A strong balanced offering between purchase money construction and refinance it was well positioned to take advantage of low rates and higher premiums I might add in 2020 doing 999 $787 million in production.

Given ongoing strength in the purchase money in construction portions of the business. The team had another strong year with $760 million in 2021 production.

Mortgage touched over 6000 households over the last two years, many now using debit cards HELOC checking accounts and other services with us.

Spencers were well controlled from 2020% to 21, even as we added talent and commercial and indirect lending and scaled our risk and governance culture. We also kept up a brisk pace of IP project work each quarter also after years of looking to buy into the equipment finance space.

<unk>, we did a lift out strategy with a penis based team from a larger bank we.

We will see our first originations this quarter and equipment finance our actions to close 20% of our branches in 2020 and enabled these investments. We also wanted to give you a sampling of record levels of digital engagements and just to name a few mobile remote deposit capture.

Items increased 43% in 2021.

We now have 50000, plus mobile wallet users and we saw a 63% increase in monthly transactions overall active mobile users on our digital platform increased 13, 5% in 2021, and lastly, debit card dollar volume increased 14.

4% year over year on capital the team took advantage of excess capital and low stock prices to retire $2 1 million shares in 2021 at an average price of.

$14 29 and.

And we still grew book value per share by 8% from $7 82 per share at the end of 2021 to $8 43 per share at year end 2021 on credit metrics remained strong in the fourth quarter with our ACL to loans at 135% with low.

Delinquency and low charge offs, given our business mix, turning our attention to the fourth quarter net income of $34 8 million improved 684000 as compared to the third quarter core earnings per share of <unk> 37.

He was a penny better as well core ROA was a healthy 145% and the pre tax pre provision <unk> was one 171%.

$2 7 million negative provision expense stemming from low charge offs a recovery on previously charged off loan and reserve reliefs create a tailwind for the quarter over quarter comparison.

I wanted to add some color to our fourth quarter loan growth of 11, 2% ex PPP, which really sets us up well for continuing growth in C&I lending, we were up 26 million to nine 6% annualized to $1 1 billion.

Footings I might add and lines of credit on commercial on the commercial side at 35% usage of the total facilities are still well below the pre pandemic levels were 48%, which could provide some 2022 tailwind but haven't yet commercial construction was up.

Some $65 million from $318 million base in the quarter. So a lot our commitments now run over $750 million and it.

Increased construction draws will be a source of 2022 loan growth tailwind.

CRE was up three 4% to $2 $3 billion residential mortgage was up $53 million or 10, 6% to $2 billion really a combination of both mortgage and really reinvigorated consumer lending through our branches consumer was up 20.

$3 million or nine 4% to $1 billion, including $15 million in growth in indirect auto which had a terrific year as we look forward the outlook in each of our geographies and our lending disciplines as positive taking a step back from the quarter, our three Ohio markets grew loans over 20.

2% or $500 million for the year. This stems from building out those three smaller acquisitions, we did in northern Ohio, Columbus, and Cincinnati from three to six years ago, respectively. All in all 2021 was a good year for first Commonwealth and fourth in the fourth quarter was another.

Solid quarter. Our team is just as enthused about what lies ahead for our company with that I will turn it over to Jim.

Alright, Thanks, Mike.

The PPP, we will soon be behind us, but it continues to affect our results in the fourth quarter. So let me say a word about that before moving onto more fundamental results.

At the end of the third quarter, we had approximately $152 million in PPP loans on our books with approximately $6 $3 million in fee income left to be recognized as of September 30th.

We had thought that most of our PPP loans would have been forgiven by year end. However.

However, as of December 31, $71 million in PPP loans still remain on the books with approximately $2 $5 million and origination fee income remaining which will be recognized as interest income over the remaining life of these loans or upon forgiveness.

As a result, while we recognized approximately $5 7 million and total PPP income in the third quarter from interest and fees.

That figure fell to $4 1 million in the fourth quarter.

Nevertheless, the GAAP net interest margin or NIM was unchanged at three 3% essentially strong loan growth put excess cash to work offsetting the loss of PPP income, leaving the GAAP NIM unchanged.

Looking forward to 2022 as PPP runs its course, the GAAP NIM will lose the benefit of Pvp in the first half of 2022 as it will for all banks and participated in the PPP program.

And then is that expected to rebound in the second half of 2022 as loan growth, what's the remaining excess cash to work.

In contrast, our core NIM, which.

Which we define to exclude the PPP income in excess cash is expected.

To derive steadily from here the core NIM increased slightly from three 6% last quarter to three 7% in the fourth quarter confirming our previous guidance at the core NIM bottomed out in the third quarter.

We expect the corn that core NIM trajectory to continue in 2022.

Forward reconciliation of corn into GAAP NIM is provided in our earnings supplement which can be found on the investor relations portion of our website.

Fourth quarter fee income benefited from stronger swap income, but that wasn't enough to overcome the seasonal slowdown in mortgage gain on sale income expenses were up by $5 million over last quarter almost entirely driven by expenses related to the build out of our new equipment Finance group.

I'll wrap up with some guidance for 2022, which hopefully youll find helpful.

We expect organic loan growth to be in the mid to high single digits and when combined with growth from our new equipment Finance division should approach double digit growth in earning assets.

But because we can fund that growth with cash and securities portfolio run off the bank's total assets should only grow by about $200 million Keith.

Keeping us under $10 billion in total assets at year end 2022.

Fee income is expected to remain steady in 2022 compared to 2021 as a long expected falloff in mortgage gain on sale income as you replace with growth in SBA interchange Slops in wealth income.

Expenses are expected to run at 56% to $57 million per quarter in 2020 due in parts of our equipment Finance Buildout.

However, we still expect positive operating leverage when comparing our growth in expense with a year over year growth in our revenue excluding PPP.

Finally, I would note that our buyback program was active in the fourth quarter during which time, we repurchased 1 million shares at a weighted average price of $15 28.

And if those numbers down slightly different from what you recall reading in our earnings release Thats because they are the repurchase of the repurchase numbers I. Just gave you are correct just for the record.

In any event, we have approximately $20 million remaining under our current repurchase authorization.

And with that we'll take any questions you may have.

Questions operator.

At this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster, we'll take our first question from Frank Schiraldi with Piper Sandler.

Hi, guys.

Thanks.

Just on.

Jim just a clarification on the.

Loan growth expectations I heard you say mid to high single digits. So was that excluding equipment finance them with equipment finance, it's double digits.

No the number.

Yes.

The number I was giving the mid to high single digits is excluding equipment finance to just just the regular loan growth organic loan growth without equipment finance, if you adequately finance on top of that together all in it should approach double digits. Okay.

And then.

Just.

You mentioned the core NIM.

Moving higher here wondering if you can give any sort of color on.

Expectations as we see rate hikes, what a given 25 basis point hike would do for your.

Your NIM here.

Yes sure.

Every 25 basis point hike resulted in about a 5% to seven basis point improvement in the NIM.

That's usually in the quarter in which the hike happens then there is follow on effects as loans repricing continue after effects after that so it does drift upwards after that but that's about the ratio.

Perfect.

Okay.

And any color on how you think about I would imagine.

I don't know if you model it with.

Static sort of deposit betas through hikes, but I would imagine the first couple of at least beta is there going to be a lot lower.

So any color on that front in terms of what the five to seven what sort of deposit betas baked into that.

We changed our approach last quarter and what we're assuming now is zero percent deposit betas for the first two hikes whenever whenever they occur.

And we're doing that in our regular planning we're doing that in our interest rate sensitivity tables that we publish so zero percent deposit beta is what our assumption is in the first two hikes and Thats really just driven by the liquid.

Liquidity levels that we have that everybody has after that.

Our beta assumption is 25% per hike.

Okay.

Five to seven and then would be for the first few and then as the deposit beta gapped up a little bit that would be reduced I guess is the way to think about it.

Yes.

It would be.

Alright, and thanks again, you bet. Thank you.

Okay next we'll go to Daniel Tamayo with Raymond James.

Okay.

Hi, good afternoon, everyone.

Maybe first you touched on the repurchase activity in the quarter.

But I just wanted to know kind of how youre thinking about the.

The repurchase at these prices.

I think you mentioned $14 this quarter, you repurchased on average a little bit higher than that but.

Obviously with the.

Creating tangible book each quarter Im curious, what youre thinking about the process for repurchases now.

Yes.

Yes.

We I think share repurchases are a very appropriate way to return capital to shareholders in an appropriate way to manage capital levels. So for us it's.

We will look at for example, the earn back calculations, but it's really driven by where we want the capital debate, how much excess capital, we're generating and how much capital we need to retain to fund what we expect to have loan growth last quarter and the fourth quarter, we were repurchasing up to $16 a share. We just had a cap at $16 and we were purchasing at levels below that.

When it get above that we just stopped repurchasing.

And what we plan to do in the fourth quarter was to repurchase just the excess capital generation. We have we now have as I mentioned, a moment ago $20 million of share repurchase authority remaining.

But we have really strong loan growth prospects so and.

With the share price still staying about $16, a share and getting north of that the share repurchase activity, probably will slow down a bit from here.

I'm happy to have that authorization, though so that if that does share price does drop and plenty of dry powder to buy <unk>.

Understood. Thanks.

Yes, absolutely.

I guess secondly on the margin.

You have clear core NIM margin guidance in terms of expansion from here.

But in terms of the.

On the discretionary the comments you made about the decline in reported NIM in the first half of the year and then.

A rebound in the back half what are your assumptions within that for the the usage of the excess liquidity on the balance sheet.

Yes, sure thanks for asking and I'll try to get a little more explicit on the NIM guidance.

Be helpful.

So we ended the year with about $300 million excess cash the number fluctuates a little bit, but we think excess cash we'll probably be deployed fully given all the loan growth prospects that we have some time in the third quarter at the same time, we stopped purchasing securities in the securities portfolio ended the year at about $1 6 billion.

That will drift down to about $1 $3 billion by the end of next year. So that will provide another $300 million of funding, we can deploy into loan growth.

So that will put us.

The excess cash will be gone by the end of the third quarter of next year.

So what will happen is that the NIM the GAAP NIM will lose the benefit of PPP early in the year, but still suffer the wait.

Suppressive effect of the excess cash for the first part of the year.

But by the end of the year.

The PDP will be in the rearview mirror, the excess cash to be in the rearview mirror and the core NIM in the GAAP NIM will converge.

So to be very explicit about it we think that if rates don't rise at all levels, both the GAAP NIM and the core NIM will probably end the year by the end of the year in the fourth quarter somewhere in the $3 20 range in the middle of <unk>.

If rates rise two times, which is what we had in our forecast I know some of you have rates rising three or four times, a if rates rise two times in both the GAAP NIM and the core NIM together will converge to the mid <unk> by the end of the year.

The pattern is much different the GAAP NIM will fall a little bit first and then recover and the core NIM should just steadily rising you can because in our core NIM calculation, we exclude both TPP and excess cash.

So hopefully thats really helpful to you.

That's very helpful. I appreciate all the color there.

And then lastly, changing changing tax here just on the equipment Finance Guy just you talked about the difference in the the growth targets with and without but I think last quarter, you mentioned 200 to 250 million imbalances.

This is what you were thinking by the end of the year is that still the thought process.

Yes, that's correct and probably making loans here in the first quarter.

Alright terrific. That's all I had thank you for taking my questions.

Thank you.

Next we'll go to Steve Moss with B Riley.

Good afternoon.

David just.

Going back to the loan growth here, Mike I hear you in terms of the bear much upbeat and obviously the guidance is there to maybe a little color as to the type of construction projects or lending on.

I heard you on the I think it was 750 million commitments kind of curious as to how you draw that up.

Are you a little bit more color on the other sources of commercial loan growth Youre seeing.

Yes on the construction side.

<unk> received some nice opportunities with our top developers in strong submarkets in Cleveland, Columbus, Cincinnati and Pittsburgh.

Kind of.

Education.

Net Ed Smith is intact.

And.

And just a really good projects coming online with multifamily.

And we and we're also seeing on the industrial side some input.

Print developers with large tenants like Amazon Frito lays Pepsi and others that are building out space for those so high quality projects people, we know in footprint and they've come on pretty quickly I think.

Our commitments there probably have gone from $3 50 up to well north of $700 million over the course of.

The last 12 plus months.

And not really fully drawn in fact, we expect that the incremental funding will be about $6 $9 million per month that.

That will come online this year.

That's just one piece of the commercial construction and then that goes many firms are perm to commercial real estate.

And then other aspects of the growth that really C&I lending where would you see.

See a nice uptick in everything from small business.

Mid market classic family owned businesses. We've also seen an uptick in SBA and then on the residential side.

Our.

I think our we believe our mortgage production will be in line with the last few years.

We're getting paid a little bit less on gain on sale.

That being said the.

The consumer or the branch side of the business is really improve their productivity and that business is growing and then indirect we've had nice momentum as well so one or two of those could miss that perhaps the commercial.

Kind of eclipse the consumer side in the fourth quarter, it's just nice to have kind of.

Our loan growth engine, that's relatively equally yoked between consumer and commercial bank and it just allows us perhaps to absorb some shock or maybe a weakness in any one segment in a given quarter.

Is that helpful.

That is helpful.

And maybe just.

With the equipment finance business as Youre, starting that up here. If you could just remind us of kind of the yields you expect to get and just kind of the trajectory of growth maybe as the year goes on.

Yes.

Trajectory of growth will be back end or second half loaded and then we really expect the business to kind of take off from there and really have breakout years in.

The next two years once we get beyond this year, we've built a business from scratch and as of this week, we can book loans and I guess Jane anything you want to add Janus the president of our bank and really has hands on with the startup of <unk>.

Equipment finance.

Sure.

Thank you.

As Mike said, we are we can go lives now and the end.

And well and we expect the.

The yields to be in the high fours and so and it will help NIM a little bit but it is a hockey stick towards the end of the year.

Right.

Okay. That's helpful.

And then.

On expenses I apologize I might have just been my phone to just.

If you could repeat was at $56 million per quarter.

For expenses.

Torture Jimmy.

Jim.

Oh I'm sorry, yes. The number it was the guidance I gave was 56% to $57 million per quarter.

Okay.

Okay great.

<unk>.

That's everything from me. Thank you very much appreciate the color.

Thank you.

Okay next we'll go to Michael Perito with K B W.

Yes.

Hey, good afternoon, thanks for taking my questions.

Yeah.

On the <unk>.

On the cost side.

Just curious maybe if you could spend a minute. There is clearly if we kind of move back a couple of quarters. You guys are clearly kind of in our run rate now that was a little higher than what you were taken six months ago. Some of that seems like maybe some faster growth on the equipment finance side and some of it seems like obviously the environment on the labor side and elsewhere is kind of little bit more challenging.

I'm just curious as we think about that range for next year I mean is it safe to say that it assumes budgets and fairly robust growth.

The equipment finance side and if it comes in higher what do you think are some of the pressures.

That are relevant that we should be mindful of.

The cost environment remains challenging.

Okay, Yes.

We have budgeted loan growth that's in the range that Jim talked about.

In the mid to high single digits in the budget.

We expect that.

Pretty much across the board in our lending businesses and also across geographies.

And we've just seen nice traction more growth, obviously in Ohio, but the.

Pennsylvania growth really beginning to move as well I'm, sorry, I didn't hear the second part of your question.

Yeah.

It was just generally speaking I mean, what do you guys view as some of the pressures on expenses upward.

Could potentially knock you guys above the guided range that youre mindful and managing today.

Yes, I mean, the typical things.

More wage pressure and inflationary pressure in the supply chain.

We would probably be top of mind for me.

With all of US are having a lot of open racks.

Maybe does get filled we're quickly.

That would actually be good because it would probably lead to more productivity and higher production Jimmy.

Jim anything you want to add.

Just because part of your question was talking about first half of 2021, when the run rate was more like $52 million or 53 in the second half.

What's going on in other words can we think we are getting kind of stabilizing ftes.

The $657 million number so some of it definitely is equipment finance build out.

On that note I would say that we're really pleased with where things are going we thought that that business will be we'd be lucky to be breakeven in 2022, we actually think that business on a standalone basis went positive operating leverage this year, so pretty slow more income than actually the expenses. So it's really working out very well.

One other thing that happened over the course of 2021.

With the early part of the year still got the benefit of operating in a somewhat closed environment. So things like travel client entertainment. So those expenses were just an ordinary low like they were in 2020.

And then as we over the course of the years dependent Mcguane, we opened up we spent more money on travel and entertainment all those expenses kind of came up a little bit.

That added to the expense base as well over the course of the year then when omicron hit also down again and so we are expecting we've actually looking forward.

<unk> to 'twenty to 'twenty, two and baked in the numbers. We gave you in our guidance really operating as a more open company again, so I hope that gives you maybe a little bit color behind some of the trends we saw in the numbers and then the other thing I'd just to make sure we're clear as Mike mentioned all of that production.

Is there is expense associated with that then thats money well spent that's incentive compensation that we pay to get those kept that kind of loan growth.

No.

That's just.

Part of the business.

Yes no.

Perfect. Thank you for that and then on the on the fee side just wanted to clarify the guidance. So you guys are expecting to be fairly flat in like that $106 million reported GAAP noninterest income that you guys put up this year for next year.

Yes, I think our numbers around $107 million this year.

Total year 107 two.

I will have an idea of where do you think thats going to be slightly up from there, but really it's the store is going to be a mortgage income down a little bit offset by growth in some of the other areas we've talked about like SBA.

Yes, and what about the swap side I mean is that an area, where we see some decent growth. This year, just with rates and what some of the commercial customer growth that you guys are seeing I mean, I think you guys have a run rate of almost $3 5 million.

Leading into the pandemic annually and that obviously took a step back. We're just curious what your thoughts are there.

Absolutely and there could be some upside there and in other places but.

I think the guidance is.

Hopefully conservative, but realistic and then.

Could provide some upside.

Loan and fees will be hitch together somewhat and.

A lot of times, we cross sell to clients wealth management and other fees that really builds the.

The fee income.

Each of the businesses on firm footing, and it's really had a nice growth trajectory in the last several years on the fee income side.

Wealth was Prime example, I highlighted earlier that was between wealth and insurance were up $2 7 million to $19. Six this past year. So we'll try to keep it going.

Yeah, Great and then just last for me I mean revenue metric.

$200 million I think it was of earning asset growth or staying under 10 billion.

Could you buy could you maybe give us just the state of the pipeline as we look into 2022 on an M&A from an M&A perspective.

Yes, I guess.

How are you guys thinking about crossing that threshold I mean, it seems like particularly with the equipment financing coming on it's kind of inevitable at some point in the near future just curious for some updated thoughts there.

Yes.

We've done five deals.

We've looked at.

Almost 60 at this point so it has to be really constructive for both the seller and us.

Strategically and then as well as financially both fund solutions side and also accretion.

Stayed pretty close to the knitting in our backyard and things that are contiguous to our footprint, we think that lowers execution risk.

And then just the details of it.

Go in.

Just hey, we're going to do a deal I mean, you get in the midst of a deal and you look at it and it has to work for both of you and you have to really feel like on the other end of this world where valuable company.

I think we've been maybe more picky than some but I think that's served US well you can see the platform. We've built out in Ohio from scratch pad alone a half a billion dollars of growth. This past year. So I mean, we're conservative but when we do.

When we get involved in the deal we make it very constructive for both parties and so we're excited about M&A. It just.

That's a little lumpy and episodic so.

But it has to work.

Yes, yes.

One last question, maybe on the budgeting side I mean, how long do you guys think you could stay under 10 billion without kind of.

Significantly altering.

Your natural growth organic growth efforts.

Yes, its actually one of the nice things about using up the cash in 2022 is that it puts us in a slight borrowing position at the end of 'twenty. Two so like I said organically, we think the balance sheet won't grow that much in 2020, so will comfortably stabilized Tim advancements within 2023, yes borrowing. Some money then you can gives you a little flexibility to manage the balance sheet too.

So while some assets like securities payoffs borrowings and hovered below by the end of 'twenty, three and that will be the plan.

But you're right with the growth I'm pretty comfortable with four months I guess.

Yeah, that's right I think you can stay below at the end of 2023 as well and then.

God willing theirs.

M&A could help us leap across which I think was also implied in your question, which we've been saying for years.

Sure would be nice to be on the other side of $10 billion of more profitable and not a less profitable company between a nice acquisition plus.

Plus equipment finance.

That would be a strong position to be in and we've had a record here. The last 567 years of improving the profitability of the bank virtually every year.

Mhm.

Thank you Jonathan.

Sure.

Ed.

<unk>.

It's important to remember that indirect.

VA.

Equipment finance and mortgage also gives us the ability to.

To sell assets.

We've chosen to keep lots of debt on the balance sheet, because we could.

But we don't have to do that and.

Were prepared not to.

And so I think that helps us quite a bit as well.

Alright, great going on today, if you can.

Obviously with the way the measurement period works. If you can just stay below through the end of 2023 I mean, there are almost five year. Another six plus months anyway. Even if you were to cross so a really extended period out even longer before you have to worry about any of the.

Durbin impact or anything like that.

That's right that's right.

Okay, great. Thank you guys I appreciate that thank you.

Okay.

Next we'll go to Russell Gunther with D. A davidson.

Hey, good afternoon, guys just a couple of follow ups first on the loan growth.

<unk> might.

Mike you talked about the benefits of the commercial and consumer complementing each other.

Both verticals really on fire at the end of the year just curious within your guide and how you think about that mix for 2022.

Could it look different or is there less of an appetite to portfolio single family or just any thoughts there.

Yes.

I would say that as we close the year.

Commercial desperately gained momentum in the second half of the year.

The mid market and larger <unk>.

<unk> banking.

Yes.

Mortgage tamped down a little bit in the third quarter was surprisingly resilient in the fourth quarter and the pipeline there looks good.

Going into next year, our gain on sale income there has been.

Submarine the pit, but we also get a household and we get.

Checking accounts debit cards.

Something we can bank hopefully it for a decade or so so there is.

Mortgage as a source of young credit worthy households.

As I think about the businesses small businesses on a good trajectory as his branch lending.

Commercial seems to have really heated up.

Could carry the day in the first half of the year.

John anything you want to add on just the momentum of lending businesses as we go into 2022.

Sure.

All goes well nobody has to carry the day.

We expect growth.

Different levels of growth in every one of the business lines and we also expect growth again not spread evenly, but we do expect growth in every geography. So.

As an example, we don't expect.

Rapid commercial real estate growth in our community markets are more rural markets, but we do expect lots of good consumer growth and so if you take that.

Sort of thinking throughout the footprint, that's the beauty of all organized geographically, we can set expectations.

By line of business and by geography and from that.

Okay, Great I would also add Russell.

The producers and the teams get just better every year.

In each line of business and Jane likes to say and I Couldnt agree more our top producers in any of our disciplines.

Are as good as any that are much larger.

Banking brother and sisters so.

And that's been fun and that sets a different tone and we also did some lift outs this past year.

And we have.

Non compete agreements rolling off and as you know Russell, we will invest and wait for a return on that investment like we're doing with equipment finance for a year or two we just think that serves us well and we have the expense discipline, where we can do that.

Thats, great, Mike and as Jane. Thank you Bo I just have one other follow up Jim on the margin conversation.

Guidance you gave in terms of converging in the mid <unk>.

<unk> a couple of hikes does that you consider.

The equipment finance growth in the higher yield there or you're kind of talking more on a static basis.

No. It does it's all in thanks for asking.

I appreciate that and Thats all in equipment finance and Thats one of the reasons why.

Finance business with the higher yields putting cash to work at those yields even if there are no hikes, which almost no. One is thinking right now, but if there are no hikes.

The margin should still expand because thats, a nice margin business.

Their margin business.

Okay, Great I appreciate the confirmation there that's it from me guys. Thank you.

Thanks Russell.

I'd like to remind everyone. If you have a question Thats star one on your telephone keypad next we will go to Matthew Breese with with D. Eight excuse me Matthew Breese with Stephens.

Hey, good afternoon.

Just a few quick ones.

First is could you provide what the incremental blended loan yields for the pipeline what are those today and what does that compare to versus what's on the books ex PPP.

Okay.

Yes.

Yes.

Searching for that yes.

Yes, it's not too different.

Answer we are given the last couple of quarters when the loans are coming on in the.

Mid to low threes.

Commercial loans are probably coming out of the mid threes, depending on the category. The consumer that is going to be less than that high twos low threes.

Got it Okay I'm just I'm just curious if.

We're starting to see higher loan yields today ex PPP versus what's on the books.

Yes, I would say not yet so.

Maybe it's implied in your question this whole notion of replacement yields and whether they're positive or negative we've talked about this on the earnings call for several quarters now and I think to be really honest about it we had thought that the replacement yield to start to turn neutral in mid 2021.

That really didn't happen they continued to be negative.

Slightly negative and then a little more negative than that bounce around a little bit but.

Negative throughout 2021, we do expect them to really start to neutralize mid 2022, even in a flat rate environment.

In the equipment finance contribution as part of that but they should neutralize mid 2022. The nice thing. However was that our loan growth was such that the loan growth beyond the replacement dollars.

All positive because if you originate $120 of loans and you run about a $100. The first is our first $100 of your originators negative replacement yields what's running off thats negative, but the next 'twenty is putting excess cash to work. So that replacement yield is incredibly positive and that basically was the story for us for three quarters.

And the year as soon as we have really strong growth in the second third and fourth quarter. So thats, maybe a little more complicated answer than you're asking for but that's.

They've been digging deeper into the whole replacement yield story, and how that's playing itself out it hasnt neutralize yet.

Generally expect neutralization sometime in the middle of 2022, regardless of what happens with the rate picture.

Perfect.

Next one from me is just.

I appreciate the financial guidance for 2022, so I'm just curious about strategic initiatives for the year are there any new teams or segments. You wanted to attack are there any new geographies that you plan to expand into and then as you think about those items going back to the M&A question.

Of priorities, where does M&A fit into the stack these days.

So we feel like we need to grow organically first and foremost and make our business better and then we become more attractive.

Our valuation goes up and so we really start with we have six.

Strategic initiatives. This year I'll just give you two one is to accelerate growth in the second one is to improve our digital relevance, which we continue to do it every year.

And on the growth side are a bevy of initiatives, one being equipment finance and ramping that up as quickly as we possibly possibly can but it also includes getting better in every one of our businesses in every one of our geographies and what Youre seeing on the fee income side is just the synapse inspire quicker.

<unk> and our regional business model and our regional President and that team are working better to better and better together.

And they make referrals and it shows up so.

So we think the productivity gains.

Shortly are among the most important things, we can do quarter to quarter and year to year.

Do you have some things tucked away that we're going to explore I don't know that were ready to announce those we've had good card businesses and our card business has grown.

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Significantly we have to evaluate whether we extend in businesses like that.

We're going to have a foray here and the leasing that leasing will be small ticket how quickly could it become more of a middle market business. We think that will take another year or two or three so there is all case all kinds of things we can expand to do.

With what we have already <unk>.

Geographically, though assembling the best team to compete.

Is a big important idea and improving share in each of our major metro markets, Northern Ohio, Columbus, Cincinnati and Pittsburgh.

Jane do you want to add anything to that.

Just to Cabot John to what you were saying Mike about.

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Recruiting for top talent.

The beauty of many of our markets is that we're really branch light.

And so we can recruit.

Lot of commercial talent.

And create.

Very quick operating leverage.

Does that help helpful. Matt.

Phone.

Last very quick one from me is.

What's a good tax rate for 2022.

About 19%.

We are here over that I think it was $19 one.

That's.

We noticed most of you dial that in quite well.

I appreciate you taking all my questions. Thank you. Thank.

Thank you.

There are no further questions at this time I will now turn the call back over to Mike price for any additional or closing remarks. Thank.

Thank you as always for your interest in our company. We are enthused about the future of our company we feel likely.

Built a balanced.

Thank between commercial commercial and consumer with lots of good offerings deep offerings, we connect the dots between lines of business.

And it's fun and we feel like we can make a difference in the communities. We're in with both consumers and our business clients. Thank you again and look forward to seeing a number of view over the course of the next quarter take care.

This concludes today's conference call you may now disconnect.

Okay.

Okay.

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