Q4 2022 First Commonwealth Financial Corp Earnings Call
Okay.
Good morning, My name is Devon, and I will be your conference operator today at this time I would like to welcome everyone to the first Commonwealth Financial Corporation Q4, 2022 earnings release conference call.
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 would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question anytime again press star followed by the number one on your telephone keypad.
Thank you for your patience, Mr. Ryan Thomas Vice President of Finance and Investor Relations you may begin the conference.
Thank you Devin and good afternoon, everyone. Thank you for joining us today to discuss the first Commonwealth Financial Corporation's fourth quarter financial results.
Speaking on today's call will be Mike price, President and CEO , Jim Murasky, Chief Financial Officer, Jean Gubins Bank, President and Chief revenue Officer, and Brian Carroll, Our Chief Credit Officer.
As a reminder, a copy of yesterday's earnings release can be accessed by logging on to F. C banking dot com and selecting the Investor Relations link at the top of the page.
We've also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call before we begin I need to caution listeners that this call will contain forward looking statements. Please refer to our forward looking statements disclaimer on page three of the slide presentation for a description of <unk>.
<unk> and uncertainties that could cause actual results to differ materially from those reflected in the forward looking statement.
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.
Reconciliation of these measures measures can be accessed in the appendix of today's slide presentation.
With that I will turn the call over to Mike.
Hey, Thank you Ryan we had another very productive year and a good quarter.
Fourth quarter core net income increased $2 4 million over the third quarter to $36 $8 million.
It was up <unk> <unk> per share over the third quarter as well.
For the fourth quarter of $5 $7 million increase in net interest income combined with a $1 $6 million decrease in noninterest expense.
To more than offset a $1 $6 million decline in non interest income and a $3 2 million dollar increase in provision expense despite higher provisioning due mostly to loan growth credit trends improved on virtually all fronts for the year in the quarter.
In the fourth quarter of 2022, ROA was 147% core ROA was 151%.
Core return on tangible common equity was 23, 2%.
Also core pre tax pre provision ROA was $2 two 8% and core efficiency was exactly 50% both records for the company core pre tax pre provision net revenue of $55 3 million was up by six 4 million from last quarter and inquiry.
The 13%.
It is now approximately 50% higher than it was in the last quarter before the pandemic.
These results really speak to the common culmination.
Felipe.
Grow our business over the last few years.
And a couple of strategies there we've developed the regional business model, we've added an enhanced customer offerings things like equipment finance indirect auto just to name a few we've added key talent and leadership and we've grown our commercial lending teams, we've really increased our digital relevance so a lot of success.
There as we reflect on record profitability, it's clear that our earnings benefited from an expanding margin and strong loan growth the margin expanded by 23 basis points to 399% as our asset sensitive balance sheet responded to fed rate hikes and new higher rate.
<unk> replace the runoff of lower rate loans about half of our loan portfolio is variable. So we will still see some benefits of the fed's December rate.
In January rate hikes in any ensuing quarters, we expect our net interest margin to expand another 15 basis points in the first quarter give or take five basis points a.
Strong loan growth contributed to an increase in spread income to $88 3 million in the fourth quarter up $55 7 million or 7% as compared to the third quarter. The loan growth was fairly evenly split between commercial and consumer categories with commercial.
Loans growing by 14, 6% annualized and consumer loans growing by 17, 2% annualized equipment finance balances ended the year at approximately $80 million with a with equipment finance getting up to speed, we expect loan growth to be around 10% in 2012.
Three which together with our expanding net interest margin should produce strong growth in net income that will lead to positive operating leverage.
After announcing the acquisition of centric bank on August 32022, we received regulatory approval for the transaction in November and we're pleased to announce that centric receive shareholder approval. This morning as a result, the legal close is scheduled to take place.
January 31.
Centric as a commercially oriented franchise in good markets, we expect to push more consumer product through their branch light chassis and increase their commercial lending and deposit gathering activity. We believe that we will achieve the requisite cost saves and meet or exceed the targeted 2023 earnings accretion.
Of eight cents per share.
With 2022 in the history books, we can look back on another year of strong performance for first Commonwealth as I mentioned, we found a terrific partner centric with which we can enter the central Pennsylvania market and leap over the $10 billion threshold, we grew spread income by $33.
$6 million over 2021, but that includes a reduction of $25 million in PPP income, which means that ex PPP. Our spread income grew by $54 1 million asset quality measures improved fee income was down as expected with the slowdown in mortgage and SBA gains.
But increased swap activity helped offset that somewhat in our SBA in equipment finance originations continue to build momentum expenses were up mostly due to inflationary wage pressures that we achieved positive operating leverage and our efficiency ratio fell lastly, I would just add that while the majority of our recent loan growth.
As occurred in Ohio, or Pennsylvania market is growing as well now and has long been a source of stable low cost funding and with that I'll turn it over to Jim <unk> our CFO .
Thanks, Mike.
Since Mike has already provided a high level overview of the quarter's financial results I'll dive a little deeper into our deposit trends fees expenses and then touch on credit.
Deposit costs remained low in the fourth quarter. The total cost of deposits did rise in the fourth quarter as expected, but only 20 basis points up from five basis points last quarter.
We calculate our cumulative through the cycle beta through the fourth quarter at only five 6%.
We have previously disclosed expectations of a 20% beta which was informed by our near zero beta is through the end of the third quarter of last year and in fact, our fourth quarter incremental data was 18% in line with those expectations.
We are however, revising our cumulative through the cycle beta estimate to 25% by the end of 2023 just to be more consistent with our long term historical data.
The deposit picture for us in the fourth quarter was clouded a bit by our conscious strategy to stay below $10 billion in total assets through year end.
While assets are easy to manage our concern was that a sudden influx of deposits might inadvertently pushes over the $10 billion Mark on December 31.
And we were able to successfully manage that so our durbin impact will be mid 2024 as planned.
Midway through the quarter. Just ended we introduced several deposit strategies that I started to have a real tangible impact as the quarter progressed and continue to pull in deposit balances.
Fee income was down by $1 $6 million last quarter.
It's entirely to a $1 $6 million drop in swap income.
We feel good about our fee businesses, but fee income will remain under pressure.
Remain under some pressure in 2023 due to macroeconomic variables like the housing market asset values and SBA premiums.
Nevertheless, we still expect fee income to be up by about 6% in 2023 over 2022 inclusive centric.
Noninterest expense improved by $1 $6 million from last quarter in part due to about $800000 of third quarter expenses that we had identified and previously disclosed that weren't present in the fourth quarter.
While the first quarter 'twenty three will be noisy due to onetime items associated with the centric acquisition, we still expect to hit the previously announced 35% cost save figure.
Now in the past, we have not parsed out in our comments the difference between operating expense and total non interest expense because intangible amortization wasn't that material.
So we will likely break these figures out more carefully post acquisition.
For the full year 2022, our standalone operating expense without centric of course.
It was $224 7 million up by 7% from 2021.
And we expect that in 2023, it will probably be up by another 7% to 8%.
In 2023, however, total operating expense will include centric.
And then to get to total non interest expense, we will have to add intangible amortization.
That last figure will include the new intangible amortization from the acquisition, which we will calculate a close and disclose with our first quarter results.
Provision expense was up in the fourth quarter, but not because of any credit deterioration in fact credit metrics improved.
Roughly half the provision of $4 6 million was due to loan growth.
The remaining provision expense reflected about $2 million and net charge offs, which is lower than last quarter, plus about $3 7 million for changes in our economic forecast.
All asset quality measures remained strong.
At 11 basis points net charge offs are lower than last quarter and charge offs also came in lower for the full year.
Compared to the end of last year nonperforming loans are down from 80 basis points to 46 pages importance of total loans.
Nonperforming assets are down from 50 937 basis points of total loans.
And the dollar balances of non accrual nonperforming criticized and classified loans are all down 30% to 40%.
If a credit recession is looming.
We have yet to feel it and if it does come.
We are starting from a very good position.
On a different note our tangible book value per share grew by 32 to $7 92.
And our tangible common equity ratio improved by 13 basis points to 779% due mostly to our strong earnings capacity, but also reflecting a $4 $6 million reduction in accumulated other comprehensive income.
Finally, our effective tax rate was $19 98%.
And with that we will take any questions you may have.
At this time I would like to remind everyone to ask a question Press Star then the number one on your telephone keypad.
Our next question comes from Daniel Tamayo with Raymond James.
Good afternoon, guys. Thanks for taking my questions.
Okay.
Maybe first.
Just on the margin.
I appreciate the guidance for the first quarter and the further expansion.
Just a clarification does that include.
Purchase accounting accretion.
That's coming with the deal.
Great question, Doug and thanks for asking so we can clarify it does include that that includes that based on our assumptions. We had at the time the deal was announced.
So those all of those it was a different rate environment, so that will change.
So I would tell you it has to broaden your question a bit the thing that could produce some downward pressure on that NIM estimate is deposit cost and deposit costs rise faster than we thought that that.
That's why we gave some guidance within plus or minus five basis points that'll be downward pressure, but we're going to redo all the marks at closing and a different rate environment and we don't have that answer for you yet or we would give it to you, but it's the likelihood that it might provide some upside to that range that number we disclosed a minute ago.
Okay do you have a sense for or.
It's just a guide for what the core margin would be in the first quarter. Excluding those marks there were 399 now the guidance, we're giving is 15 basis points up so it will be about four 4% or $14 15, plus or minus five on either side.
So that's.
That's the best guidance, we can give you now and we'll just have to revise it once we close the deal and have any final marks calculated and provide further guidance as we go.
No that's great I appreciate that.
And then as we think about kind of the rest of the year with.
You revised your deposit deposit beta assumption cumulative.
Back up to 25%.
As we think about that.
Playing out over the course of the year assuming.
No other rate hikes, maybe after the first quarter.
Do you envision the margin moving throughout the rest of the year.
Go ahead, Jim Yes shall we see.
We've disclosed this before but we do see a peak in margin as deposit rates eventually kind of catch up.
What we had disclosed before is still the way, we see it which is margin probably peaking in the second quarter of this year.
And then coming down from there now some of that's based on our rate forecast is just based on a weighted average.
Moody's baseline forecast and an upside and the downside and our rate forecast. The peak rates are only four 7% not much higher than they are now and those rates start to kind of come down in the second half so that informs fee Keith.
Estimate that I'm, giving you.
Rates go higher and stay higher.
The peak might be delayed by then.
Inevitably with along with everyone else in the industry deposit costs are.
We're going to keep growing catch up eventually cause near the peak let.
Let me just add to Jim's comment then if I can.
Jim mentioned that we could not afford to trip over $10 billion in the fourth quarter that was really a play and we really feel like we can gin the commercial deposit gathering machine like we did in the prior years, where we see.
<unk> seen some of our pie charts before there were 60% plus of our noninterest bearing deposits was business and so thats really going to be our focus there will be a point of strategic focus and goals and incentives are running specials and tests that we monitor week to week and we just have a good feeling about 2020 through what we can accomplish.
And.
Getting to a point, where we can fund our loan growth at 10% and if thats, a little off because of a bump or a mild recession those funding.
Funding pressure might not be the same.
That's correct.
Okay, that's great.
And just finally.
To stay on the margin here.
Do you have a sense of how much compression that that might be I mean, assuming year.
Your 25 basis points to 25% of cumulative deposit beta.
How much do you think the margin would could.
Could potentially contracts from the peak in the first quarter.
Well.
Based on what we know now we see continuing the pages in the first part of <unk> as the second quarter. So we'll continue to expand the market in the second quarter.
But then where we see any of the year is still over 4%.
So not not giving back all the expansion so at a level.
A little higher than we are now.
And.
I'm hesitant to go that far out because I think the marks from centric coffee chocolate intermediate panamax or can affect this number and of course deposit costs.
Now how we manage that of course, the credit of course of the year. This could change. So we'll have to update this as we go ahead.
As we see it right now we see that number staying above 4% by the end of the year.
Alright terrific that's very helpful. I appreciate it.
It's a tough number to get out, especially with the markets.
I appreciate you answering my questions.
Thank you Dan.
Our next question comes from Frank Schiraldi with Piper Sandler.
Hey, guys.
Good afternoon.
Just on the.
Thinking about the efficiency ratio in the quarter right at 50% and the positive operating leverage.
For 2023, and then the cost saves from centric.
Given that youre.
Apply obviously, a sub 50% efficiency ratio.
Is that a place you think.
Think about more medium term maybe that you think you can operate the bank from.
Or I understand an offset will be the durbin impact in mid 2024, just wondering your thoughts on kind of a longer term.
Where do you think you can operate the bank from in terms of efficiencies.
I think he used the term mid term, which to me it would apply one or two years and I think low.
<unk>, we're comfortable with because we plan to grow the bank you've seen us kind of methodically put together a lot of diversified revenue engines, and we're going to continue to ramp those up.
So we'd like to continue to grant grow the bank that we have the way we have in the last few years.
<unk> investments and of course, we have new territory in central Pennsylvania on the outskirts of.
The Philadelphia MSA.
So I think I don't see us.
Doing sub 50 right away and.
We want to build out the revenue side of the bank and grow the bank.
Okay.
And then.
And a lot of talk about the mainland Im hesitant to ask because Jim on how you said you were hesitant to go out to the other.
Next year, but.
As you think about it at the fed.
We've got a couple of more rate hikes here and that the fed.
As the interest rate picture is a little more static for some time.
Do you feel like that.
Above 4% is an area where.
The bank could see could operate at maybe it plateaus there or are you thinking.
That in 2024, it's more likely that demand continues to drop.
A more normalized level I guess thats, what im trying to suss out is if you think in a static rate environment, a normalized level could be above that 4% figure.
Thats a tough question.
And to use an old joke my Crystal ball gets cloudy when you start getting out to 2024, but.
We have actually stressed it for the kind of scenario, we're talking about because we realize that in a really using consistently the rate forecast are using with this our approach that necessarily we do our seasonal model with a 40% rate on our baseline, 30%, an upside or downside using that rate forecast that it might be under overstated. So we tried to stress it and say well what happens if it's.
Wrong, what happens if rates for the fed raises rates little more aggressively here in <unk>.
Stay up for a while longer and I can tell you. The answer generally for US is that it's better the NIM is better so the margin is better.
And it stayed higher for longer but the pattern is pretty much the same and you get to a peak and then it comes down now in that World I would tell you that we ended up.
A pretty.
Based on what I know now you have a margin that ends the year.
Well about four.
What it goes to in 2024.
Actually don't have that but my guess would be that it would drift downward and contingent downward if deposit costs because of deposits if rates go to 5% stay there for two or three years to solid eventually deposit rates are going to keep going up and open up.
Got it.
Okay, and then just lastly, kind of I was surprised to see consumer continue to be as strong as it has been in terms of the.
As a driver.
Partial driver of loan growth.
Sorry, if I missed it in your prepared remarks, but are you starting to see a slowdown are you expecting a slowdown on that side of things just given the macro environment with more of a pickup in commercial going forward into 2023.
We are I mean, we did.
We might do 10% less than mortgage this next year, but not 20 or 30 I mean, if we were at $4 70, we might be at $4 30.
And first mortgage HELOC key loan is probably.
Much softer and under pressure, but also we've taken our good people in the branches and we've really got to focus on deposits and calling on business customers small business customers the indirect auto business looks good.
And the team has done a nice job of getting our spreads up in that business, it's very well managed and.
So that's a business that can probably help us, but we will be doing some HELOC and heat loans out of branches and we'll be doing some mortgage and not a lot less actually.
From.
Maybe the high fours to maybe the mid or low fours and but that's also a business that long term, we like the business because we get a cornerstone checking account that we cross sell we get households, a customer for life and.
So I think the consumer businesses.
Something that is important to us Jean anything you would add.
Not really Mark I think you I think you've covered it we think the consumer is healthy.
Okay, Great I appreciate the color. Thank you.
Our next question comes from Karl Shepard with RBC capital markets.
Hey, good afternoon, and thanks for taking my questions.
Is that.
I know, we're all trying to get a sense for the margin trajectory, but I guess I'm kind of curious to ask how you feel about <unk> momentum in the bank I think your numbers look pretty good and you have centric company and equipment finance ramping so how do you feel about just kind of the overall positioning of the bank as you go into 'twenty three strategic priorities.
We just feel really good I mean, we we.
We feel like we're positioned in our lending business as well, even the businesses that are hitting a bit of a.
Speed bumps like.
Our fee businesses, we really believe in SBA and mortgage longer term.
Good robust consumer lending through our branches and we're really building out our equipment finance platform our SBA.
We've got new talent.
In C&I lending.
We feel good about our company and I think for those of you have covered us for a number of years. The one thing. We do is we get better every year.
This has been a march from a 60 basis point ROA Bank and we get five to 10 basis points better every year.
We operate with the principal.
Operating leverage in every budget in every part of our bank.
We're just excited about the future of our company, we're excited about the new markets.
And it's fun and we feel like we make a difference with our clients and the value proposition that we deliver.
Thanks.
We are turning our focus back to funding, but we've always been pretty good at funding and it's just going to be fun to see how well we can do this year and how much core deposits we can gather.
And then we just feel like there is a couple of more players left in the playbook at least.
And we think our regional model starting to admit the banking bank together in six of our discrete markets Northern Southern Central Ohio, Pittsburgh Covid.
The DPA and now this capital region.
I don't know, we're just we're excited about the future of our company and thanks for asking.
Thanks for the color.
Excuse me as a follow up to I wanted to ask what kind of economy are you assuming in your loan growth guidance I think we all have kind of a different view, but what kind of trends are you seeing today and what do you need to see over the next couple of quarters to get where you want to be.
Yes, I mean, our for this year, just because of some downdraft in some places.
It's been a little higher, but probably 9% to 10%.
<unk>.
Thank you <unk>.
<unk> on a good trajectory and that of course, we have a newer business.
Everything equipment finance ads in our $80 million in the second half of the year goes right to growth in higher spread growth I might add and so Jim anything you would add or Jay I would say, it's not we're not predicating those kinds of expectations on a recessionary environment that requires a pullback in lending or the consumers start to.
Get worried unemployment rises I can tell you actually officially in in our forecast.
The weighted average forecast I keep referencing in this call the unemployment rate goes to just over 5%.
End of the year.
But we're not using that and saying thats going to result in a big pullback in loan volumes and in fact, we kind of see those things working together because there is some recessionary price pressure on loan volumes slow down a little bit from what our expectations are that that will release, some funding pressure and will be fine.
It goes into the next Gen anything you would add this is your world.
Okay.
The only thing that I would add Mike is.
And a couple of the businesses, we are still seeing supply chain issues.
The car business is still.
It's still.
<unk>.
Equipment finance business.
<unk> seeing supply chain issues equipment is taking longer can be delivered.
And we're also seeing construction delays in some of our residential mortgage.
And SBA loans so the.
The economy still isn't.
Lately.
Frictionless, we still see some of the COVID-19 friction in the economy, but it's not a recessionary it's just friction.
Great point.
Is that helpful.
Thanks for all the color.
Okay.
Our next question comes from Michael Perito, with a K B W.
Hey, good afternoon, guys. Thanks for taking my question.
Great.
A lot of a little bit addressed but just two quick ones one Mike on the centric is about to close most of your peers are saying bank M&A is pretty quiet just curious what you're hearing and what were your thoughts around that heading into the start of this year.
We wake up every day, and we think about organic growth and.
And how we grow our company and that's the highest and best use of our capital So thats, where fundamentally we start and we have to be successful there year end and year out and then when we have great opportunities like with centric with foundation in Cincinnati that have to be right and Jim always likes to say, we've looked at 60 things to do.
Six.
So.
We are not seeing a lot of activity and then even with <unk>.
Where it would have to be right for us strategically and it would have to be right for us financially and we're pretty picky and.
No I don't.
So anyway, we're not counting on that if it presents itself in a way that's.
It really positive for our company and as win win.
Great.
It's not a key part of our strategic plan.
Great. Thanks, and then just within the noninterest income.
Obviously.
Looking at the environment on mortgage.
Investments and everything are challenging just curious if there's any particular areas that might have more or less upside relative to your forecast anything youre excited about a more cautious about.
While all in basis.
Yes, I'll start there and let Jean Paul and Jim but just.
On the SBA piece, we're a little frustrated because we really have good volume.
And our number one SBA lender in a couple of our key markets. That's a part of our brand we feel like we're doing good for customers and.
Our bank and.
But the volume hasn't materialized into fee income, but it will and that business has been around for a long time. So we're still very bullish on it even though it's kind of tamped down right now, but we've grown that business pretty nicely in the volume I'll speak to that one I spoke a little bit to mortgage.
And obviously indirect auto to or not indirect auto, but our card businesses off probably of that.
And a 12% and Thats just consumers.
Not spending as much money in swiping their cards is often at.
At least in our part of the vineyard Jane what else would you add in terms of the outlook for.
Our fee businesses.
There are a couple of things I would add Mike.
Our brokerage business.
Looks good.
<unk>.
Investment management and trust business is a little bit soft because of the market volatility.
We're priced where paid against the asset value and the volatility is not our friend.
But none of the deals.
Like it.
<unk>.
How long.
It all feels like a blip.
Next point on SBA, we have a couple of loans still in the pipeline construction loans.
In early 2020.
And then just Kevin completed yet.
And they will.
But.
Yeah.
I stopped counting the days.
Yeah.
And I'll just note they'll close we're progressing that is progressing slowly.
Is that helpful.
Yes.
Thank you. Our next question comes from Manuel Nava with D. A Davidson.
Hey, good afternoon.
Good afternoon Venlo.
Could you kind of talk about the loan growth target.
Explain a little bit more about the mix and then I'll.
I'll dive into the equipment Finance group in a second.
Yes, the mix as we do it two ways, we do it with.
Geographically and we do it by product for iron and more and more we're running our company geographically and I would say that.
Ohio has just been on a tear probably.
Average loan growth there of about 20%.
Last several years and then.
In Pittsburgh and.
Our community markets have really improved quite a bit I mean, we were leaking oil for a number of years.
Hi.
In community, Pennsylvania, and I think they grew about 7% or 8% last year. So that's one dimension that we look really closely at is how we are delivering geographically and then also by lines of business.
We expect our commercial.
To really kind of be at the forefront again this year and kind of carry the day and then our indirect auto is off to a good start.
And Jim Youre looking at the actual numbers yes.
Just wanted to one of the things Thats kind of shifted our guidance because for a long time, when you're talking about mid single digits. Once in a while I'm talking about upper single digits excuse me around that within that one of the things Thats, just giving us confidence about saying going out there with a 10% as the equipment finance business from the beginning of this fee through the built out that.
That business, we talked about that a lot on previous calls that's really kind of.
Really coming up to speed as Jane mentioned, there are still equipment issues that affect that business, but even that that's a good chunk of our expected loan growth next year, and so that combined with pretty modest.
Modest with moderate growth in the other areas altogether gets to 10%.
Liquidity, probably should say loans and leases, but even in our equipment finance business, 85% of the business as loans only about 15% of leases right now.
I forgot to mention on the commercial side.
Backlog, we have in the commercial construction business and that will.
We layered in this year and those construction draws are already beginning to occur. So that's another nice driver Jane are we missing anything.
Yes.
No I don't think so.
Im looking at expectations everybody.
Every geography is expected to grow modestly in every business line is expected to grow moderately.
So the combination means somebody can be a little bit up or down and another business line or geography, I'll pick it up so I feel good about the expectations for growth.
Okay.
I feel good I don't I don't.
Don't see any real weakness.
Yes, if I could just add one more thought on bullet point, our line utilization is still not up to where it was pre pandemic, it's gone up a little bit but they are still maybe a little more runway there to.
Clint.
That's really helpful.
Now a quick finance alone.
What are kind of.
Expectations.
<unk>.
Loans by the end of this year kind of where can that portfolio grow to in the next two years and then kind of what are the yields that you're getting currently.
Yes, Jane why don't we let you take that one.
Okay.
Let's start with Jim I'll start with yields Mike and then I'll back cleanup.
Yes, so the yield from that business R. R.
Really strong really nice.
But right now drilling over 7% and that's really where we'd like it to be.
We didnt feel that business to be double digit yields we don't want to take on that kind of risk and the equipment is mostly things like trucks.
Nice bread and butter kind of equipment like that and the yields are really very additive to our overall NIM into the bank as a whole.
In terms of like I think your question was like a proportion of our loan growth next year.
Probably 30% to 40% of the loan growth next year. If you look at the overall big picture number of what we expect to be booking this year equipment finance is really additive.
So that's why we can say the other businesses are growing at historical moderate growth rates are growing in equipment finance layered on top for the chemical puts the whole picture together and build the whole the whole picture.
Jane if you want to add that.
Sure, we're continuing to add salespeople.
As Jim said, it's a big portion of our loan book this year.
I thought I heard you ask ultimately, whether we see it being and it's probably never going to be more than 10% to 15% of the loan portfolio.
That's correct.
That's helpful.
How many people have you added.
How much is the footprint on your employee base in this division.
Yes.
Small.
The leader of the group, Rob lawyer has been very very careful.
Add out a few employees that Todd because he's been very careful about selection and on boarding.
And.
We've been adding primarily salespeople and we publicly have a couple of dozen people in the group right now.
Okay. That's really helpful. Thank you guys.
Thank you.
Our next question comes from Daniel Cardenas with Jamie monitoring Scott.
Okay.
Good afternoon, guys how are you.
Okay.
Just a quick follow up on the equipment finance.
What's the duration of that portfolio.
And the average loan size.
Average loan size is about 160000.
The fluids up a little bit from our earnings projections just.
Because of the way the market was moving it might come down a little bit from that.
The duration was I think 60 to 70 months or Jean you can correct me on that one but one of the features of that business is unlike.
The auto business it really prepays so the duration is.
Similar to the standard life.
Yes, just about five years.
So then to get to the growth that youre projecting right now.
Is it safe to assume that youll kind of stay within that average or do you kind of foresee.
Going up and decides to to help you get there.
We don't we don't have any we don't have any immediate plans to increase.
Besides we like the space because we like the yields a lot.
And we like the collateral so we will probably stay about where we are.
At least for the foreseeable future.
Okay.
And what kind of loss rate are you bill.
Building into your to your model for the for the equipment finance.
Jim do you want me to take that.
Yes, if you have at your fingertips. Please.
We assumed initially 75 basis points as you can imagine.
Next to nothing.
So far the actual losses have been.
Zero.
Okay.
That's on that.
And then maybe just jumping over to borrowings and this quarter we saw a.
A pretty substantial jump.
Can you maybe give us some some color as to how we should think about borrowings on a go forward basis.
Well like we've been saying our long term goals that we wanted to make sure that we fund our loan growth with deposit growth.
In any given quarter, we don't have that we're able to tap into borrowings that we have a.
A very large amount of liquidity so funding our loan growth is not a problem in the fourth quarter. We just had that dynamic where we didn't want to have an influx of deposits because of the in flexibility of deposits.
Assets are so flexible so if we had gotten to the end of December of last year, and we're trying to avoid the $10 billion. Mark you can sell loan portfolio very quickly and pay down overnight borrowings. The same way very quickly you can't do that if it was funded with deposits because you can't stop money and envelopes and mail it back to deposits and getting your money back so that.
Give us this balance sheet flexibility to be really liked going into the end of last year.
Now like I said, there's plenty of money available for the money that were raising in the market, even with CD specials and other kinds of specialist is all below our incremental cost of overnight borrowings so that saw better for us and the borrowings.
The money is really flowing in and in response to those special so that's kind of how we manage and how we look at it.
Okay. Good.
Last question for me in terms of consumer deposits.
Do you guys have any brokered deposits.
In portfolio right now.
No.
No.
Alright, Thats all I have thanks, guys.
Thank you Dan.
If you would like to ask a question at any time. Please press Star then the number one on your telephone keypad.
Our next question comes from Matthew Breese with Stephens, Inc.
Good afternoon everybody.
Matt.
I wanted to go back to the deposit discussion.
Jim I think I heard you say that you'd like to equally fund loan growth with deposits, implying that the loan to deposit ratio can stay.
Sub 100% is is that accurate.
Yes.
The long term over the long term that's definitely our goal.
Okay and that leads to my next question really which as you know we are standing today with 33% noninterest bearing deposits that compares to pre COVID-19 levels I think closer to maybe 25% fed funds is obviously very different from that point in time, just curious what is what is structurally different.
About the noninterest bearing deposit composition that.
Ed.
Should we expect it to stay at this elevated level versus where it was pre COVID-19.
I think it will certainly stay at an elevated level compared to peers.
I think it will certainly stay at an elevated level with the composition between business and consumer and then clearly we have an opportunity to leverage.
Abroad.
<unk> customer base and gather more deposits.
And we do that unusually through our branch network a lot of banks.
The branch manager does not go out and make calls on small business and in our banks. They are rewarded not only do that but to bring in core deposits in businesses that grow. So I think that's fundamentally a little different certainly than our bigger bank brother and sisters and.
And it's.
You need to get customers not just customers that.
That.
At borrowed from Jane I mean, this has been your forte in the drumbeat for the last four or five years.
Add to that.
The only thing that I would add is.
Our loan portfolio.
Particularly on the commercial side looks very different than it did.
456 years ago.
The loan portfolio today is overwhelmingly direct clients with whom we have direct relationships and with those clients. We expect the depository relationship.
And.
It's made all the difference in the world.
Got it Matt Yeah, very helpful and maybe just as a follow up.
As we look at the at the book today versus pre Covid, just as a reference point are you capturing more client wallet share or are you seeing similar granularity, but over more accounts.
Yes.
Mark.
I'm sorry.
No no no no go ahead.
I would say both.
Catherine much more wallet share.
Some money on our Treasury management product.
Product.
And infrastructure and we know that we need to be able to deliver and so when we.
Asks for the operating relationship we've got a product set that allows us to ask why.
I would just add through our regional business model, we are much more likely to have.
A president or a senior lender.
Much more closely knit to the other business lines, whether it's mortgage wealth management.
Retail.
And.
And really bring other partners out to talk to that client and help them, particularly on the personal banking side also on consumer lending opportunities in wealth management opportunities.
<unk>.
We're getting a better share of the wallet than we were.
Probably five six years ago.
Understood I appreciate all that detail.
Maybe flipping to the other side of the balance sheet.
Could you provide what the the roll on blended loan yields are versus what's rolling off at this point.
Yes give me a second I pull that out.
It is.
Yes so.
For the quarter as a whole we were putting on loans in the high fives 588.
And what was rolling off was at 544, so it was a 44 basis points.
Yes.
And you have the pipeline yield all in.
I don't have the pipeline yields on them, but I can tell you that.
And what Im looking front of me just speaking historically for the quarter just ended those numbers improve consistently from here I just want to end the quarter.
So the yields going up about a quarter behind us.
Understood. Yes, I was waiting I was hoping there was a 6% number either at the pipeline or at quarter end is that does that.
Yes, there are like for example in individual business lines. This story will be different so in some businesses that longer tails than others. So for example, we're in the mortgage construction business going to be locked in a rate for a loan for some years building a house.
Nine months ago, that's a really low rate in particular gets to the point, where it sits on our books into low rate that brings on the current period down the current period yield but for commercial variable adjustable.
Adjustable loans for example, one of our biggest categories, where we originated 400 million those new money yields in the fourth quarter were in the high 6% to $6 67, so that really brings the loan portfolio yield up and Thats.
And thats been growing very nicely.
The story depends on our portfolio, we're talking about in that category was our largest category in the fourth quarter, yet in terms of volume and throughput on this $400 million yet half of all new originations in that category and really helping.
That's a new origination on the existing portfolio also reprice with.
The fed rate increases so that's been really coupled to the bank.
Got it.
Maybe turning to indirect auto I mean, I heard you at the onset it sounds like there's really no notable deterioration in credit.
Delinquencies critical criticized classifieds.
I did want to hone in and get a little bit of additional color on indirect auto which work getting more questions on.
Could you just give us a sense for.
The health of that book the FICO.
Of of the book and maybe just an update on on duration.
Yes, just.
Brushed up on this before the call average tickets about 30 June <unk>.
Shared with us.
Six year duration.
<unk>.
And contracted duration it tends to be shorter than that two five years or so.
The average payment is up a little bit over the last year about $50 to just over $500.
And.
FICO do we have that they're all over.
700, but let me see if I can get.
Good morning, Simon that care for good.
Jane do you want to add anything while Jim's sign on the FICO no. That's on a reported there.
Yes.
Theres been really no degradation.
Yes.
Keep waiting for it to happen, but there's been none.
And.
The used car market is staying very very healthy.
Because there are still shortages in the used car market. So few customers are leasing anymore.
That used car values are holding beautifully.
And.
So so far it's been it's been magical.
We underwrite.
Go ahead.
No go ahead, I'm, sorry, James Gordon finish.
I was just going to say we are holding.
Holding to our underwriting standards, we havent blank and we are in a pay per shop.
So our capture rate is a little bit skinny or a little bit lower than what you might see in other banks.
We don't buy everything by any stretch.
Yes, 92% of our production is over 700 FICO.
Okay.
Last one for me is just around capital management.
Hopefully the worst of kind of any any sort of major impacts OCI is behind us I am curious just given where the stock is and how you think about buybacks and if theres any level, where you'd be more interested in that.
Jim Yes, so we have $5 $9 million remaining under our previously authorized authorization from our board we had to stay in blackout. While these centric acquisition was pending actually we had a stay out of the market technically through today through their shareholder meeting, but obviously with the earnings coming out of the market any way we could go back into the market in a few.
H with that authorization generally though is in a big picture view of capital is that we are generating capital and using it for organic growth and Thats. The primary purpose of generating capital and so we want to use that capital to fund our organic loan growth since it's excess capital. We can use that for buybacks I think with the $5 9 million authorization that we have.
If we look at.
Price reaction today for example that creates a buying opportunity we would be in the market we can't go to market.
<unk> for at least three days from today anyway, so but.
That would be a buying opportunity.
And we will continue to use that remaining authorization for buying in those kinds of deaths.
By and large we're going to.
Use the rest of the years capital generation to fund the organic loan growth.
Great. That's all I had I appreciate you taking all my questions. Thank you.
Thanks Pat.
Hey, Mike if it's okay, I hate to retread, but I don't want to Brexit in just a minute.
Back to the FICO score, we can be even more precise that 90% or greater than 700. The average FICO score for the auto portfolio is 770.
The average for Iraq is 785.
Thanks Jane.
Sure, Matt sure Matt heard that.
Operator any other questions.
Our final question comes from Manuel Nava with da Davidson.
Pretty good.
Yeah.
Meanwhile.
Hi.
I see there are no further questions at this time I will now turn the call back over to President and CEO , Mike price.
Okay.
I always say this but we just really appreciate the interest of the covering analyst questions.
The opportunity to share our story at our business with with you we're pretty passionate about it we care a lot and hope it shows that the results and.
Look forward to being with a number of you over the course of the next 90 days.
Thank you.
Okay.
That concludes today's conference. Thank you for attending today's presentation you may now disconnect.
Sure.
Okay.
Right.