Q1 2022 First Commonwealth Financial Corp Earnings Call
Good afternoon. My name is Christian I'll be your conference operator today.
At this time I'd like to welcome everyone to the first Commonwealth Financial Q1, 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you Ryan Thomas Vice President Finance and Investor Relations you may begin.
Thank you, Chris and good afternoon, everyone. Thank you for joining us today to discuss the first Commonwealth Financial Corporation's first quarter financial results.
Participating on today's call will be Mike price, President and CEO , Jim Rescue Chief Financial Officer, Jane Gubins Bank, President and Chief revenue Officer, and Brian <unk>, Our Chief Credit Officer.
As a reminder, a copy of yesterday'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 reckon.
A reconciliation of these measures can be found in the appendix of today's slide presentation.
And now I'll turn the call over to Mike.
Yeah. Thanks, Ryan we were pleased to report core earnings per share of 29 for the first quarter met consensus estimates pretax pre provision net revenue or P. PNR was down from last quarter, largely due to a $2 $3 million decline in P. P. P.
Income and a $2 1 million decline in fee income, reflecting in part an anticipated decline in mortgage gain on sale income.
I'll return to in a moment.
Excluding P. P. P eight 8% loan growth in the first quarter was largely driven.
By the consumer lending categories of indirect HELOC and mortgage and to a lesser extent by commercial real estate.
This balanced loan growth is consistent with our long term strategy of commercial consumer balance sheet diversification and granularity, we often talk about the impact of rising rates on our variable rate commercial loan portfolio, but yields in the consumer category or categories are increasing.
In the current rate environment as well for example, indirect lending witnessed a nice progression of rates over the course of the quarter, starting the quarter in the high twos and ending in the low threes as price increases took effect.
All of these changes work together to expand the core net interest margin by five basis points in the March rate hike and any additional rate hikes should result in further net interest margin expansion in the second quarter as.
As I mentioned non interest income or fee income was down $2 1 million quarter to quarter, primarily due to a 700000.
The decrease in gain on sale of mortgage loans mortgage originations are actually still quite strong but gain on sale margins are compressed. We also had a $600000 seasonal decrease in interchange income, which we fully expect that as fourth fourth quarter interchange always.
Benefits from holiday shopping the quarter over quarter decline in swap income is mostly due to a $1 million gain in the swap derivative that we recorded last quarter, we expect swaps and interchange to bounce back due to seasonal factors and makeup for slowing mortgage income resulting in fee income.
26% $27 million per quarter for the remainder of the year consistent with our previous guidance.
Core non interest expense was well controlled at $55 $6 million given wage and other inflationary pressure like every company, we are battling wage pressure and worker shortages, we expect.
Noninterest expense to hover between 56% $57 million per quarter. This year consistent with previous guidance as well charge offs were light and this was a good credit quarter over quarter on multiple fronts.
Nonperforming loans fell from $55 3 million at the end of the fourth quarter to $37 6 million at the end of the first quarter or 54 basis points of total loans. The reserve coverage ratio stood at 132% net.
Net charge offs in the first quarter were only seven basis points.
As we look forward spread income should be positively impacted over the remainder of the year should interest rates increase as anticipated given the asset sensitivity of our balance sheet.
Despite inventory challenges momentum in indirect lending and purchase mortgage continued in the second quarter indirect lending books, an impressive $174 million in first quarter volume alongside healthy mortgage originations of $132 million in the <unk>.
First quarter, we saw gain on sale premiums contract.
Our branch based small business and home equity lending volume, we're off to a record start in the first quarter and we carry good momentum there into the second quarter as well in commercial banking and on the surface commercial real estate loans grew some at $93 million, but this was largely commercial construction loans.
Moving to permanent CRE loans, Ohio is growing nicely and the team. The teams expect broad based growth by loan type and geography over the remainder of the year. We also started to see an uptick in commercial line utilization rates in the first quarter as well from 35% at year end to 39.
Percent on March 31. This is really the first significant uptick in this figure since the onset of the pandemic SBA gain on sale income of $2 $2 million in the first quarter of 2022 is more than double the gain on sale income in the first quarter of 2021.
Importantly, the SBA business is growing steadily into another long term revenue engine for our company our de Novo efforts in equipment finance yield their first leases and loans in the first quarter as our new technology platform coalesce after being build out from scratch some work on the <unk>.
Technology infrastructure remains but we are pleased with the progress we've made in such short time. The deals booked are what we anticipated in terms of size term and yield.
These smaller ticket financings included commercial trucks and trailers as well as agriculture, construction and manufacturing equipment, such as machine tools. This capability as an exciting development for our company. So despite the choppy environment and pressure on loan spreads.
Path forward with 2022 revenue as broad based growth coupled with some anticipated interest rate increases, but also add that the adoption of our digital platform continues to grow at a brisk pace in the first quarter. Our overall active digital users users grew at a 10% rate and our active mode.
<unk> users are growing at over 14% annually highlighting how critical the channel is to our customers.
Lastly, regarding our brand for the fourth consecutive year.
First Commonwealth Bank has been recognized by Forbes as one of the world's best banks three banks in Pennsylvania received this 2022 distinction, which is based upon survey results of bank customers using an independent analytics firm. We're proud of the recognition which comes from our customers and their view of our team.
With that I'll turn it over to Jim Reske, our Chief Financial Officer Chip.
Thanks, Mike.
Overall loan growth is strong credit remains benign fee income is expected to grow as other sources rise up to replace lower mortgage gain on sale income and costs are generally under control and.
In short things are going well for first Commonwealth.
Question on everyone's mind, however is how the net interest margin and spread income will react in the anticipated rising rate environment.
To address that we first need to talk about balance sheet movements, we've seen and that we anticipate.
For us the Big story. This year is the redeployment of excess liquidity into profitable loan growth.
We had previously guided to high single digit loan growth and combined with the Covid finance, we anticipated, earning asset growth of approximately 10% for the full year 2022.
We reiterate that guidance as we see no slowing of loan demand.
At the same time, we continued our strategy in the first quarter of allowing the securities portfolio run off so that we can use that cash flow combined with excess cash on hand to fund loan growth.
So far in 2022, our loan growth has exceeded internal targets validating that strategy.
The securities portfolio of swell from $1 3 billion at the end of 2019 to $1 6 billion at the end of 2021 as you put a measured amount of excess liquidity to work during the pandemic.
By $136 million in the first quarter.
The growth of the loan portfolio combined with a shrinkage of the securities portfolio improved the mix of earning assets in the first quarter, leading to the five basis point expansion in our core NIM to three 2%.
On the liability side of the balance sheet deposits continue to flow in leading to growth in excess cash over the course of the quarter to about $400 million of quarter end.
This along with the expected slowdown in Pvp forgiveness had a suppressive effect on the stated GAAP NIM.
The excess cash should allow us to keep deposit betas low however, especially if rate hikes are larger early in the tightening cycle, while we still have so much excess excess liquidity on hand.
In terms of capital like many other banks rising rates resulted in a decrease in other comprehensive income or OCI.
We have for several years now taken steps to protect equity against fluctuations in OCI by designating roughly a third of the securities portfolio as held to maturity and.
And like most banks our size OCI has no impact on our regulatory capital ratios.
We had no share repurchase activity in the first quarter as our share price was higher than internal targets for most of the quarter.
We have $20 million share repurchase authorization remaining however, and we expect to resume share repurchases in the second quarter to take advantage of current market conditions, especially given our continued excess capital generation capacity.
Finally, some thoughts on how the rate environment will impact us.
Given our asset sensitivity, we believe we are very well positioned to deliver an expanding NIM.
And increasing net interest income over the remainder of 2000 22022.
As we disclosed in the past each 25 basis point rate hike generally expands our NIM by four to five basis points.
Our latest simulations assumed seven hikes this year and net interest income in that scenario falls largely in line with consensus estimates.
This one has seen the increases take place evenly over the year, so larger increases sooner, we'll be even more beneficial.
Especially since our current excess cash gives us the ability to respond levels competitive pressure to raise deposit rates.
Beyond the direct impact on our variable rate portfolio as the rate hikes with higher rates loan replacement yields should turn positive.
For example, our auto loans have a two and a half year life and we are already seeing the run off of lower yielding loans that were put on at the onset of the pandemic.
For the sake of comparability with other banks, we published impacted parallel yield curve shifts using both ramp and shock scenarios, our calculations show that in a 200 basis point ramp.
Our net interest income expanded by $9 9 million or three 4% over 12 months.
While on the 200 basis point shock scenario, our net interest income expanded by $29 8 million or 10, 2% over 12 months.
Those figures assumes zero percent deposit betas for the first 50 basis points of basis points of rate hikes, and 25% betas thereafter.
We've been able to get our cost of deposits down to four basis points and as I mentioned earlier, we still have about $400 million of excess cash, which should enable us to keep those deposit betas low.
We expect it to have positive operating leverage ex PPP in 2022 with two hikes with seven or more we're quite confident that positive operating leverage year over year ex PPP.
And with that we'll take any questions you may have.
Operator questions.
Certainly at this time I'd, just like to remind everyone. If you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Russell Gunther with D. A Davidson your line is open.
Hey, good afternoon guys.
Hi.
Yes.
I wanted to start on the loan growth conversation appreciate all of the color that you guys provided.
First on the equipment finance piece nice to see that get going is your expectation for that related growth. This year remain unchanged at this point.
Probably down slightly but not materially I don't know that it affects our guidance previous guidance with loans, Jim which for.
910%, 10% overall.
Is that helpful Russell.
Thank you Guy and then on the color around the utilization rate to 39 from 37, just a quick reminder, if you could about what that has been historically and.
Should we get there what that might mean to growth going forward.
Yeah. The 35 to 39 is the commercial line utilization rate, it's not across the board with construction and with the consumer but it's meaningful because that had just hovered nearly at an all time low for the better part of two years.
The $5 billion or so.
Outstanding that's about.
And a $20 million.
Okay. So it shows that they are beginning to put their cash to work.
And we see investment we see an uptick in.
Deal activity, we certainly see an uptick in small business. So I just think that.
Business is going well and for us from helix to indirect to mortgage.
It feels pretty brisk.
That's helpful. Mike. Thank you and then you guys.
You guys spent some time in terms of the loan growth mix this quarter.
Would you expect that kind of diversification.
Prove consistent with current levels or are you expecting commercial to pickup in the back half and potentially moderate your appetite around the.
The consumer side would be helpful to get your thoughts on loan mix as well.
Just one thought and I'll turn it over to Jen Russell.
Consumer is leading the way we've kind of anticipated pressure on the consumer categories of indirect and mortgage and branch based lending <unk> primarily.
Over the last year or so and it just hasnt materialized. So my gut would tell me that probably commercial like in the second half of last year really gained momentum and perhaps.
Consumers slows down a bit.
We're pleased and.
The resilience of the consumer side of the business and how it's growing Jane do you want to add to that or.
Any other commentary.
You know Mike I agree with everything that you said the only thing that I would add is that we're not consciously turning from any one of the businesses and consumers slowed down a little debt will be well positioned with commercial picking up but we are turning in a way.
I suspect it will slow a bit since so much of our closed and home equity lending is around.
<unk>.
Refinances of existing first mortgages elsewhere and as rates go up that business is just going to naturally slow.
Okay.
The irony is the.
The irony is in the numbers as mortgage rates have ticked up our pipeline has grown.
Just kind of an unexpected outcome.
And we've also see the inventory build a bit in our backyard of houses.
The available borrowers.
Well that's it for me guys. Thank you Mike Jane for taking my questions I'll step back.
Thanks Russell.
The next question is from Daniel Mayo with Raymond James Your line is open.
Thank you and good afternoon, everyone.
I guess first.
I think in the last call you mentioned that you think you can keep the balance sheet overall.
<unk> under $10 billion through 2023.
Wanted to see if that was still the thought process.
It is Jim do you want to expand on that yes, no. It definitely is we still think of them.
One growth absorbed the excess cash I think last time I may have said that the loan growth probably absorb all the excess cash and securities portfolio run off some time in the third quarter. It looks like now because of the deposits are still flowing in that will probably take place in the fourth quarter, but we still think we'll be able to stay under 10 billion at the end of this year.
Okay terrific and then as it relates to the kind of preparing to cross that.
10 billion threshold do you expect any uptick in operating expenses over the next couple of years related to that.
Yes, there is definitely some there's been some already as we've kind of built out those areas.
Risk management compliance all of those things have always been a strong focus for us anyway, but we have added in those areas and so there is some after the expenses already reflected in our run rate and there will definitely be more.
Okay.
Paul.
And then maybe follow up for me just on the.
The fee income guidance.
Thank you Kate.
I agree with you more detail.
On what Youre thinking in terms of or what you're assuming in terms of mortgage banking from here.
That allows us to get on a recoup that on the other side with the rest of the <unk>.
Line items and fees.
I'll start and let Jim finish here, but just.
We mentioned the mortgage side, we are expecting a bit of a downdraft. There. What's surprising is the volumes have been pretty resilient and I just mentioned.
With the increases in rates.
We've had a surge in our pipeline and it's mostly from those who have been preapproved and they are now finally able to get a home. So that's been a little bit of a surprise, but nevertheless, we expect that will come down from 2020 . One highs, we feel that trust and brokerage has got a good trajectory interchange.
It's coming in right at budget, and we expect good things there and gain on sale in our SBA.
Business, we think will contribute nicely this year, Jim what else.
I would just emphasize what you just said Mike the SBA, that's really on a nice trajectory.
We didn't highlight it enough, but it is up half a million dollars quarter over quarter, we expect that to grow and take up a lot of the slack mortgage gain on sale. So that's a strong business and one of the thing the line item you see on the income statement as the swap fee income.
Just with commercial being where it is in the first quarter that that swap fee income line is almost always commensurate with commercial lending and so is commercial growth picks up over the course of the year as it seasonally we expect it to.
The swap fee income should grow as well.
I appreciate all that color that's all for me. Thank you.
Thanks.
The next question is from Michael Perito with VW. Your line is open.
Hey, good afternoon.
Good afternoon, everyone.
Wanted to stick on the topic for a second here just kind of looking through the line items here and you guys. Just spent some time on some of them, but I was just wondering just kind of two quick questions here one.
On the trust income side can you just remind us.
What if any of that revenue can be impacted by fluctuations in the markets and then secondly, just on the topic of overdrafts.
Just any can you remind us what youre doing there and how big that is and any thoughts as we see some larger banks continue to kind of deemphasize that that line item.
Jane.
You start with wealth management.
Sure.
Fabulous.
Think about our trust business.
Is that.
Most of our clients.
Or in.
<unk> asked us to.
To keep them from getting poor rather than to get the rich. So many of our clients are in fixed income they don't take big bets. They don't take big risks so market swings don't hurt us the way you might expect it's a nice stable business for us.
Okay.
And on the overdraft NSF.
Hi.
We're pretty low incident rate for a bank of our size and we don't expect an immediate or material impact Jim what would you add to that well I don't think the it's.
It has ever been a source of emphasis in fee income for the bank in general.
In that I think our fee structures are generally pretty mild.
And so.
Compared to peers appear to peers. So it's certainly not an area that we will be we will be looking to grow fee income given there.
Hence regulatory scrutiny, but.
Not a major source of growth but.
Fairly stable okay.
That's helpful.
<unk>.
And secondly to piggyback on another question around the 10 billion asset threshold, the 10%, earning asset growth for 2022.
Really puts you if you have similar growth next year kind of puts you right up on that.
Really probably over realistically right at the earning assets of $9 899, So I'm just curious.
If you guys are at the board level, having conversations around.
The next 24 months plan here, assuming no M&A materializes I mean is it fair for us to think that you will continue to manage the balance sheet below that level through the end of next year absent any M&A or what are you guys might think about it that way I just would love to hear any expanded thoughts.
I'll start and let Jim finish, but just we've engineered our mortgage and.
Our SBA and our equipment finance.
Yes, probably a year or so away from being totally optimized dose of a gain on sale businesses, which just gives us optionality with balance sheet, Jim what would you add yes.
I think youre, describing it accurately we are pretty confident we'll be able to stay under $10 billion by the end of this year I would say very constant.
But next year, we'll try.
We do think about managing the balance sheet to stay under as long as we can and so we will try at the end of 2023, but it'll be more difficult a lot of it does depend on deposit inflows the deposit inflows keep.
Keep coming in then that makes it difficult to manage the size of the balance sheet. So one of the reasons why we think we can keep deposit betas feeling low because we can manage those deposit costs to stay very low allowed deposits to run off a little bit if that happens put the bank into a borrowing position because once the bank at Intuit and a borrowing position if we get close to $10 billion. It gives you.
A lot of flexibility to manage the balance sheet by as Mike said tuning certain asset classes and the gain on sale sources, you could sell off more mortgage production and other production or sell loan portfolios at the bank to the cash position, there's no balance sheet flexibility because you can sell a loan portfolio and it just converts to cash and doesn't shrink the size of the balance sheet, but if you have borrowers that you can pay down with them and you can sell off some ASP.
<unk> Securities first obviously and then other loan portfolios payout borrowings and manage the size of the balance sheet and.
And so we see that with a certain COVID-19 excess cash we'll have more of that flexibility next year, but it'll be tight by the end of 'twenty traders, there's no way around that yes, just one other comment to your question is just the we look at several M&A opportunities every year as you know, we're pretty picky and we haven't done one for a year or two but.
Hopefully there the deal just has to be constructive for both companies and that's a little harder than just buying another bank and.
It needs also to be not just accretive to our EPS minimally dilutive to our tangible book value and within the guard rails, there, but it really we have to feel like it's accretive to our longer term profitability of the company.
That's all helpful. Thank you and then.
<unk>.
Just one last question for me, Mike I appreciate some of the.
The digital adoption stats you provided at the end of your script. There just wondering on the business banking side.
If you can maybe just give us some updated thoughts around where you guys are investing technology wise today or what you think are some of the.
The critical things Youre looking into just trying to keep some of your edge and momentum in that businesses as we move forward.
Yeah, I'll, let Jane.
Hi, I'm here in a second.
But we did put in a nice TM platform for really mid market and small business about a year and a half ago with good adoption, but we do have a ways to go. We're ahead on the consumer side and we're catching up on the business side Jan any color you want to provide.
Only that in addition to the Treasury management work that we've done.
We are doing some front end loan system work this year.
We expect that to pay dividends for US and then we're also looking at.
Enhancements to the Treasury management system that we've already put in and we're looking.
We are installing.
Installing a new credit card platform for consumer and commercial later this year.
Those are kind of big things that I Miss Jay Thank you.
Okay. Thank you guys I appreciate the color.
Thanks for taking my question.
Okay.
The next question is from Steve Moss with B Riley Securities. Your line is open.
Okay.
Hey, this is good schwartzman sees associate.
Alright disconnected earlier, so I may have missed this but credit quality. So a lot of improvement this quarter I'm just sort of curious.
The reserve release is a little bit moderated so what sort of expectations do you guys have in the reserve longer term and how should we think about provisioning moving forward.
Yes.
We have our chief credit officer here as well he may want to add to the answer but.
We like the reserve where it is we feel obviously that it's adequate one thing we were able to.
Avoid as large releases last year that might have put us in a position where if there is any kind of economic difficulty going forward that we would have to have a lot of provision expense to rebuild it so.
In that sense, we're pleased that it's remained relatively stable.
And in a larger sense, it's going to be driven by charge off rates and loan growth loan growth is pretty strong charge offs are very low and so those two kind of offset each other and I think set us up well, Brian you want to perhaps add to that that's perfect answer.
Utilized Moody's.
As part of our tool set and we continue to see what you see in terms of GDP unemployment and then we factor in our decisions things like fuel costs and the ongoing war.
Very helpful. Thank you.
Could you give US a reminder, as well into the variable rate mix.
Or sorry, not the very very mixed but the duration of the securities book.
Duration Securities book was about actually extended a little bit with the rising rates. We just calculate at the end of the first quarter, it's about five and a half years.
And it's that actually duration kind of drives the OCI, because we compared to the.
That play to the yield curve the movement of that spot on the yield curve to calculate the LCR.
Awesome. Thank you and you guys have gone over a lot of the drivers for loan growth I'm, just sort of curious what geographies, where you guys really seeing a lot of the strength.
It's pretty broad based.
Most of that strength is in Ohio, we have bigger books in Pennsylvania that being said.
Our community PAA market, which is really.
Places like Indiana, Greensburg, Punxsutawney do boys Altoona Bedford Somerset.
Great quarter, probably clipping along at.
Ex PPP at about 7%, which was really.
Lot of this is macro but a lot of it is just.
Our leadership teams that we have in the field and the job we're doing to sell oppressed we have regional presidents in northern Ohio, Central Ohio, and Cincinnati all for the last couple of years growing.
15%, plus and really light it up and so I just feel good about our broad based momentum across the geography, but northern Ohio is probably leading the way followed by.
Cincinnati Columbus, and then community in Pittsburgh Pittsburgh has by far the biggest book.
Thank you for taking my questions.
The next question is from Matthew Breese with Stephens, Inc. Your line is open.
Good afternoon.
The majority of my questions have been answered, but I will just piggyback on the M&A question to get a sense for whether or not we're any closer to a deal today than we were three six months ago.
Yeah.
Not really.
At the same strategic and financial factors will drive its been as it is now.
We've really gotten to the table on a couple of things, maybe two or three things in the last couple of years.
Really nice companies and just.
Somebody who is willing to pay a little bit more or maybe they decided.
It could get more and are still trying and cut Blossom America and you've got to come together as one and really each company together has to be better than those two companies apart and this has to work and maybe where two tentative maybe up to Canada I don't know.
I think.
I don't know Ive just been doing this a long time and it has to really be constructive for both sides and it.
It has to be financially and then culturally the companies have to come together and have forward momentum.
Almost out of the gate.
And we have a team that I think we can manage a lot of execution risk I mean.
Jay and Brian Jim No.
Montgomery.
CIO I mean, we really have people that could put a bank together and have done it multiple times in the past. So that's not what makes us double clutch is.
It just has to work financially we work too hard we have.
Twice the oars in the water on the revenue side that we had a half a decade ago and we can we can continue to increase the profitability and we will over a period of time and these deals have to fit it's really that simple and they have ideally they add some demographics that are attractive as well.
I can just add Mike used the word tentative thoughts of a tongue in cheek worthy prefers disciplined because we have lots of looks we've looked at I think might be say six actually I know the number that we've calculated over 60 deals.
Since I've been here at least to do the size. We've done so we're very disciplined in our approach.
It really has to work.
Just.
We're not going to overpay overreach, just to build a larger bank.
One of the things that makes sense for us strategically and financially.
One three.
Three to four to five or six quarters. Later do you see for you to see the results in the numbers unequivocally, we don't even have to explain it.
ROA went from.
And Ah 60, as a decade ago and it just trundle about five or 10 basis points every year and all things being equal of course, but.
That's kind of what needs to happen.
Yeah.
That's all I had all my other questions have been answered I appreciate it. Thank you.
Yeah.
The next question is from Frank Schiraldi with Piper Sandler Your line is open.
Hi, guys.
I wanted to follow up on NII, Jim I think you said that.
Your assumptions include seven hikes this year and in that scenario NII fall.
<unk> largely in line with consensus estimates. So I just wanted to I don't know how specific you wanted to get there, but I just wanted to sort of check that number I have consensus.
NII is 290.
For the year and again don't know how specific you under GAAP.
Is that kind of was that what you was that the implication.
Yet.
Frank.
Very close very close to the number of headwinds. The latest consensus was 289, three and Thats why I kind of phrase it that way I did because I didn't see any need to get corrected guidance to say higher lower either way in fact, the way I kind of read that is to say.
It tells me that in the aggregate.
You and the other analysts that cover us have roughly seven hikes baked in for US This year.
So that's how I know rather than beyond pulling each of you had asking you how many hikes do you have in your model.
We ran that <unk> got so close we still think it's probably because our analyst talk about seven hikes baked in.
That's the number I have Frank Okay, Great and then.
Also your your point on the 25 bps or what you get on a 25.
The increase in rates you mentioned, the four to five basis points in NIM and I just want to make sure im thinking about that correctly.
No.
<unk> makes a lot of sense that deposit betas are going to start off lower and then move a little bit higher over time.
Does the four to five basis points is that more sort of steady.
Because you do have some some floors on the commercial side.
Those kind of move lock step in terms of betas on both sides of the balance sheet or what's the way to think about that.
Yes.
<unk>.
And the IV at random money in Florida. So the floor is won't be a hindrance to a direct translation of rising rates and a commercial portfolio. So we're not really worried about that.
I was getting and reiterating assumptions, we said before on the deposit betas zero percent pages for the first two highest because those are in all of our assumptions I think the reality is unless we see real deposit run off the excess cash gives us the ability to err on the side of even lower deposit betas.
So that might make some of the NIM expansion, even better than those models would suggest.
The 45 basis points.
Yes.
Yeah.
Pretty consistent with what we've said in the past when we've done other simulations. When we do this through latest simulation with the 780 <unk> ended up being about the same thing but of course, even if you did.
Four hikes and stopped there are follow on effects for repricing the portfolio even afterwards.
So it continues to float up and get back in the stimulation. If you do four then stop in the ensuing quarters. After that it continues to drift upward because you're just repricing the loan portfolio, although fixed stuff gets reprice overtime. In addition, lowering prices in any given quarter. When there was a rate hike.
But oddly enough when we run it was 7% it still ends up being about 45.
Okay. Okay, great. Thank you.
You bet. Thank you.
The next question is from Karl Shepard with RBC capital markets. Your line is open.
Good afternoon everybody.
Hi, Carl.
I wanted to ask I was looking back at your 2022 strategic things and one of them was growing households.
What do you think the strong consumer loan growth you guys have put up the last couple of quarters could mean for the value of that franchise longer term.
Yes.
Well I think.
And mortgage is a great source of new households, and it's also a great source of new home equity loans.
We don't do I would say a sophisticated profitability analysis by customer set.
I would like our larger bank Bank Brethren.
I think its material I also think that.
With the brands that we have in particular in Western Pennsylvania, I also think we benefit from a lot of the indirect households, we bring in as well in the small business households, the team does a nice job.
Cross selling the consumer side of the bank and then on the consumer side trying to identify the.
So is it on small businesses.
That's a big part of our house household growth.
I mean in terms of thinking about the lifetime value of the households, we think about it that way.
We need we do teasers, we have to get the rest of the business and we hang some teasers on HELOC from time to time I think we have one out there right now and Thats predicated on getting the checking account and getting the debit card swipes and everything else, Jim do you want to add to that.
Just jumping in and starting Jamie can add to but I. Just think as you can tell that we always think about this is so much more we could be doing.
But we do think that this balanced approach, we have consumer and commercial lending balanced diversified balance sheet really does build long term franchise value because I think that's entirely focused on commercial or CRE and like a lot of banks our size won't have that kind of broad based household growth and so we do think that that builds long term franchise.
I appreciate even highlighting it and Jay I don't know if you'd add anything.
I don't know the answer to the question, it's a really interesting one.
I think our real value is.
And the fact that our.
Our people are.
Our growing.
High quality, earning assets.
In.
Markets with less than robust demographics, and growing much faster than their competitors.
And I think I think it's our people who are the assets really because.
Because they're really.
We're outgrowing.
Our typical competitors.
Whether it's the competitors don't see the markets is important enough.
Or whether the competitors just don't have people, who are who are as good as ours are people are outperforming the market.
Yes.
<unk> credit.
And the team in small business commercial small business and consumer are relentless about getting the noninterest bearing checking accounts and.
And having that as a cornerstone of the relationship and you see that in our cost of funds and how that has steadily improved over the last half decade.
Okay.
That's helpful.
Another question I had two I think you mentioned doubling the number of revenue oars in the water.
Okay.
I am curious with digital the digital investments you guys are making <unk> seemed like a pretty friendly place to new business, what kind of success, we have in bringing talent into the organization maybe more recently.
I'm, sorry is it bringing the bringing talent into the organization and what kind of success, we're having with that yes, we really have had a nice run and getting producers to come and work for us whether it's on the SBA side of the mortgage side, the commercial banking side the TM side.
And mostly from really capable people from larger banks and some from similarly sized banks, but I think a lot of that has to do with culture.
<unk> team has been in place for a period of time, and we're pretty hands on or out in the market.
There is a lot and as our Greg our head.
Ahead of commercial lending and Joe our consumer lending channel what would you add to that.
I think there is two things the first skills.
I agree with Mike we've had a good run.
Hiring talent.
A big part of it.
Yeah.
We pay fairly and we will let the athlete to run we don't micromanage.
To all sorts of.
A new show and I think folks appreciate that.
But we had the same issues bringing.
Entry level talent into the organization.
We're constantly looking for entry level talent.
Great comment so that's helpful.
Yeah very helpful. Thanks, everyone.
Thank you.
Again, Thats star one to ask a question. The next question is from Russell Gunther with D. A Davidson your line is open.
Hey, Thanks for taking the follow up guys just circling back around the 10 billion in asset conversation could you just quickly remind us of what that Durbin hit would be and then Jim to your expense comment.
Are you able to quantify or characterize what that might be and as we've talked about the revenue growth in terms of rates in terms of equipment finance.
Is that revenue growth enough to absorb.
Related pressures and still demonstrate that positive operating leverage.
Yeah, Great question.
I would say that the of the Durbin hit is about $13 million.
So and we published that number so it's about $30 million to cross the $10 billion line and loss interchange income the soft costs. We have estimated is between one and $2 million, but I can't tell you is how much of that we've already absorbed because we've already absorbed some of that and how much of that will let them.
A more of a crescendo as we get closer we've done a lot of 10 billion preparedness planning.
We have an internal task force set up to review it.
Our board and regulators and everybody else. So we feel like when it comes will be very ready and.
And like I said before we have always had a very strong enterprise risk culture, it's been a very strong emphasis of ours. So.
We have no doubt that we'll be prepared I just can't quantify for you how much additional cost will be once we cross that line it will definitely be something that.
We have plans to offset it and the plans include everything from.
Equipment finance, the more robust credit card to just continuing to grow the regions of our bank.
And I think that if not overtake it perhaps even in equipment finance.
But I think that will take a couple of years to materialize.
Yes, the timing may not be exactly right, but ultimately it will be yes.
Yes.
Thank you Bob I appreciate it.
We have no further questions at this time I'll turn the call over to Mike price for any closing remarks.
Thank you interesting times appreciate the terrific questions as I always say, we're excited about the future of our company to grow its a privilege to do what we do in the communities helped being part of the economic vitality of each of these small towns in big cities and it's fun.
So much appreciate your interest in our company.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
Okay.
Yeah.