Q1 2024 First Commonwealth Financial Corp Earnings Call
Desiree: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator for today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation first quarter 2024 earnings release conference call. All lines have been placed on mute to prevent any background noise.
Ladies and gentlemen, thank you for standing by my name is desert Ray and I will be your conference operator for today at this time I would like to welcome everyone to the first Commonwealth Financial Corporation first quarter 'twenty 'twenty four earnings release conference call.
Desert Ray: All lines have been please on mute to prevent any background noise.
Desiree: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star 1. I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.
Desert Ray: 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.
Desert Ray: If you would like to withdraw your question again press the star one.
Desert Ray: I would now like to turn the conference over to Ryan So much Vice President of Finance and Investor Relations. Please go ahead.
Ryan M. Thomas: Thank you, Desiree, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's first quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, Jane Grebenc, Bank President and Chief Revenue Officer, Brian Karrip, our Chief Revenue Officer, and Mike McKeown, our Corporate Banking Executive. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fdbanking.com and selecting the Investor Relations link at the top of the page.
Ryan M. Thomas: Thank you Doug and good afternoon, everyone. Thank you for joining us today to discuss first Commonwealth Financial Corporation's first quarter financial results participating on today's call will be Mike price, President and CEO, Jim Reske, Chief Financial Officer, Jean Gubins Bank, President and Chief Revenue Officer, Brian Carroll, Our Chief revenue Officer.
Speaker Change: And Mike Macewan, or corporate banking executive and as a reminder, a copy of yesterday's earnings release can be accessed by logging on to the FC 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.
Ryan M. Thomas: 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 3 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 statement. Today's call will also include non-GAAP financial measures.
Speaker Change: 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.
Speaker Change: 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 can be found in the appendix of today's slide presentation with that I will turn the call over to Mike.
Ryan M. Thomas: 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 can be found in the appendix of today's slide presentation. With that, I will turn the call over to my...
Thomas Michael Price: A Thank you, Ryan, and welcome, everyone. Despite pressure on the net interest margin through higher depository costs, First Commonwealth beat consensus earnings estimates by one penny, with 37 cents per share, in the first quarter of 2020. Core ROA and the efficiency ratio were 1.31% and 55.05%, respectively. Bank set a number of earnings records in 2023 and had a particularly strong fourth quarter. That was certainly worth celebrating, but it affects most of the period-over-period comparisons. For example...
Mike: Okay. Thank you Ryan and welcome everyone.
Mike: Despite pressure on the net interest margin through higher depository cost first Commonwealth beat consensus earning estimates.
Mike: By one penny with 37 cents per share.
Mike: In the first quarter of 2024 core ROA and the efficiency ratio were 131% and 55.0% to 5% respectively.
Mike: Bank set a number of earnings records in 2023.
Mike: And had a particularly strong fourth quarter.
Mike: That was certainly worth celebrating but it affects most of the period over period comparisons for example in the fourth quarter of 2023, we had negative provision expense of.
Thomas Michael Price: In the fourth quarter of 2023, we had a negative provision expense of $1.9 million due to the release of reserves. This quarter, provision expense was a more typical $4.2 million. That swing strongly affected quarter over quarter comparisons of financial metrics like core EPS, return on assets, and return on tangible common equity. In addition, interest expense increased by $4.6 million over the last quarter, overwhelming the $1.2 million increase in interest income and resulting in a $3.4 million decline in net interest income. As a result, the core non-GAAP measures that we report on a pre-provision basis, such as core pre-tax, pre-provision net revenue, and core pre-tax, pre-provision ROAs, also declined from last quarter.
One $9 million due to the release of reserves.
Mike: This quarter provision expense was a more typical $4.2 million.
That swing strongly affected quarter over quarter comparisons of financial metrics like core EPS return on assets and return on tangible common equity. In addition interest expense increased by $4 $6 million over the last quarter overwhelming the $1 $2 million increase.
Mike: And interest income and resulting in a $3 $4 million decline in net interest income as a result.
For non-GAAP measures that we report on a pre provision basis, such as core pretax pre provision net revenue.
Mike: Core pretax pre provision ROA.
Mike: They also declined from last quarter importantly balance sheet liquidity strengthen as our loan to deposit ratio fell from 97, 9% at year end to 95, 6% at the end of the first quarter end of period deposits increased over 200.
Thomas Michael Price: Importantly, balance sheet liquidity strengthened as our loan to deposit ratio fell from 97.9% at year end to 95.6% at the end of the first quarter. End of period deposits increased over $254 million or 11.1% annualized, while loans increased just 1.5% annualized or $33 million. Consumer CDs constituted the bulk of deposit growth, primarily from our core consumer customers, while business deposits fell due to seasonal factors. We've begun to taper CD pricing based on first quarter growth and market conditions, and we'll continue to watch competitor rates and Consumer Behavior.
Mike: $54 million or 11.
1% annualized while loans increased just one 5% annualized or $33 million.
Mike: Consumer Cds constituted the bulk of deposit growth primarily from our core consumer customers, while business deposits fell due to seasonal factors, we've begun to paper CD pricing based on first quarter growth in market conditions, and we'll continue to watch competitor rates and.
Mike: Consumer behavior.
Thomas Michael Price: Loan growth for the quarter may appear to be on the low side for us, but it's very much in line with our long-term plan to tilt the balance sheet more towards commercial lending. Commercial loans grew at an annualized rate of 5.24%, right in line with our long-term mid-single digit growth guidance. That commercial growth offset declines in consumer real estate balances.
Mike: Loan growth for the quarter may appear to be on the low side for us, but it's very much in line with our long term plan to tilt the balance sheet more towards commercial lending commercial loans grew at an annualized rate of five 4%.
Mike: Right in line with our long term mid single digits guidance that commercial growth offset declines in consumer real estate balances and the movement in consumer balances. This does surprise, we're now selling over 90, 90% of our mortgage originations, including mortgage construction loans and in fact mortgage.
Thomas Michael Price: And the movement in consumer balances is no surprise. We're now selling over 90% of our mortgage originations, including mortgage construction loans, and in fact, mortgage gain on sale fee income increased over the last quarter. Second, lean products like HELOCs and HELONs are naturally down because of the rate environment, and also because a lot of those balances were driven by refi activity during the pandemic.
Mike: Gain on sale fee income increase over last quarter.
Lean products like HELOC and he loans are naturally down because of the rate environment and also because a lot of those balances were driven by refi activity during the pandemic and the auto book is replacing runoff of nicely pricing upward.
Thomas Michael Price: And the auto book is replacing runoff and nicely pricing upward, exactly as planned. Overall, we see the diversification of our loan portfolio as one of our key strengths, and slow growth or even modest declines in consumer balances in any given quarter provide us with the liquidity and capital to grow commercial loans and maintain our current mid-single digit guidance. As we execute regionally and profitably grow core deposits, loans, and fee income, then we will grow meaningfully in the years ahead.
Mike: Exactly as planned overall, we see the diversification of our loan portfolio as one of our key strengths and slow growth or even modest declines in consumer balances in any given quarter provide us with the liquidity and capital to grow commercial loans and maintain our current.
Mike: Mid single digit guidance.
As we execute regionally and profitably grow core deposits loans fee income than we will grow meaningful meaningfully in the years ahead.
Thomas Michael Price: Becoming the best bank for businesses and their owners will be a big part of that growth. The Capitol, Columbus, and Cincinnati regions present significant opportunities for growth at First Commonwealth. Our branch and business-based deposit-gathering efforts have also led to our low-cost funding advantage. With mild loan growth, it might appear from the outside like this was an uneventful quarter for us, but nothing could be further from the truth.
Mike: Becoming the best bank for businesses and their owners will be a big part of that growth.
Mike: The capital Columbus, and Cincinnati regions presents significant opportunities for growth at first Commonwealth Our branch and business based deposit gathering efforts have also led to our low cost funding advantage.
Mike: With mild loan growth it might appear from the outside like this was an uneventful quarter for us, but nothing could be further from the truth. We have made a number of internal management changes to maintain our momentum and ensure our success since hiring a new chief lending officer last September we have made a concern.
James R. Reske: We've made a number of internal management changes to maintain our momentum and ensure our success. Since hiring a new Chief Lending Officer last September, we have made a concerted effort to upgrade regional leadership, create more enduring operational scalability, and improve our C&I expertise. Some recent actions include naming new regional presidents in Pittsburgh and Cincinnati, new leadership in the Harrisburg region, and a new head of corporate banking portfolio management and commercial loan documentation.
Mike: <unk> effort to upgrade regional leadership create more enduring operational scalability and improve our C&I expertise. Some recent actions include naming new regional presidents and Pittsburgh in Cincinnati, New leadership in the Harrisburg region, and a new head of corporate banking portfolio management and commercial loan.
Mike: Documentation, we've also hired five new commercial bankers during the same period as we like to say, we always keep our feet moving in other words, we actively cultivate a culture of continual transformation improvement. So that we can produce steadily improving financial results year in and year out.
James R. Reske: We've also hired five new commercial bankers during this same period. As we like to say, we always keep our feet moving. In other words, we actively cultivate a culture of continual transformation and improvement so that we can produce steadily improving financial results year in and year out. And with that, I'll turn it over to Jim, our CFO.
Mike: And with that I'll turn it over to Jim our CFO.
James R. Reske: Before I break down the margin and other elements of the income statement, I'd like to highlight a few balance sheet items. Regulatory capital ratios improved due to strong retained earnings and the absence of any buyback activity in the quarter, combined with modest balance sheet expenses. Strong deposit growth coupled with modest loan growth improved our liquidity as well. Not only did it bring down the loan-to-deposit ratio, as Mike mentioned, but it also left us with $223 million of excess cash at the end of the quarter.
James R. Reske: Thanks, Mike.
James R. Reske: Before I break down the margin and the other elements of the income statement I would like to highlight a few balance sheet items.
James R. Reske: Regulatory capital ratios improved due to strong retained earnings and the absence of any buyback activity in the quarter combined with modest balance sheet expansion.
James R. Reske: Strong deposit growth, coupled with modest loan growth improved our liquidity as well.
James R. Reske: Not only did it bring down our loan to deposit ratio as Mike mentioned, but it also left us with $223 million of excess cash at the end of the quarter.
James R. Reske: The strength of our internal capital generation and our improved liquidity position has allowed us to announce two actions with our first quarter earnings. First, a regular increase in the dividend of two cents per year, in keeping with prior years and our long-term goal of smooth and steady increases in the dividend for our shareholders. And secondly, the redemption of $50 million of our $100 million in outstanding subordinated debentures on June 5. The timing of this redemption was right for several reasons.
James R. Reske: The strength of our internal capital generation and our improved liquidity position has allowed us to announce two actions with first quarter earnings first regular increase in the dividend of <unk> <unk> per year in keeping with prior year and keeping with prior years.
James R. Reske: And our long term goal is smooth and steady increases in the dividend for our shareholders.
James R. Reske: And secondly, the redemption of $50 million of our $100 million in outstanding subordinated debentures on June one.
James R. Reske: The timing of this redemption was right for several reasons first the sub debt would've lost another 20% of its tier two capital treatment on June 1st Henry.
James R. Reske: First, the sub-debt would have lost another 20% of its Tier 2 capital treatment on June 1st, and refinancing options are prohibitively expensive. Second, the consolidated total risk-based capital ratio improved organically by 34 basis points in a quarter. 34 basis points. That mostly offsets the 44 basis point impact of calling a sub-debt in the second quarter. And we have modeled further organic growth in our capital ratios in the second quarter as well. Third, the excess cash at quarter end provided the liquidity with which to fund the repurchase without taking on any additional borrowing.
James R. Reske: Refinancing options are prohibitively expensive.
James R. Reske: Second.
James R. Reske: The consolidated total risk based capital ratio improved organically by 34 basis points in the quarter 34 basis points.
James R. Reske: That mostly offset the 44 basis point impact of call it sub debt in the second quarter.
And we have model further organic growth in our capital ratios in the second quarter as well.
Third the excess cash at quarter end, providing liquidity with which to fund the repurchase without taking on any additional borrowings.
James R. Reske: Finally, the coupon of this tranche of the sub-debt was currently about 7.45%, and we're paying it off using funds that are currently sitting at the Fed earning 5.4%, so its redemption will save the company approximately a million dollars in pre-tax expense per year and improve the net interest margin, or NIM, by about a base. Our strong deposit build in the first quarter came at the expense of the net interest margin, as our NIM compressed by 13 basis points in the quarter.
James R. Reske: Finally, the coupon of this tranche of the sub debt was currently about seven 4% to 5% and we're paying it off is in funds that are currently sitting at the fed earning five 4%. So its redemption will save the company approximately $1 million in pre tax expense per year and improve the net interest margin our NIM by about a basis point.
James R. Reske: Our strong deposit build in the first quarter came at the expense of the net interest margin as our NIM compressed by 13 basis points for the quarter.
James R. Reske: We had expected that the yield on earning assets would improve by approximately 10 to 15 basis points, matching a 10 to 15 basis point anticipated increase in the cost of funds, producing instability. It didn't turn out that way. Instead, the yield on earning assets only improved by five basis points, and the cost of funds went up 19 basis points. In the aggregate, we originated new loans at just over 8% in the first quarter, but the old ones that are running off were, in the aggregate, about 7%, resulting in a relatively modest replacement yield.
James R. Reske: We had expected that the yield on earning assets would improve by approximately 10 to 15 basis points matching a 10 to 15 basis point anticipated increase in our cost of funds producing NIM stability. It didn't turn out that way instead, the yield on earning assets only improved by five basis points and the cost of funds went up 19 basis points.
James R. Reske: In the aggregate we originated new loans at just over 8% in the first quarter.
The old ones that are running off and we're in the aggregate, although 7%, resulting in relatively modest replacement yields on top of that the loan portfolio yield was negatively impacted in first quarter by the continued effect of receive fixed macro swaps that we entered into several years ago, Fortunately $25 million of those swaps run off.
James R. Reske: On top of that, the loan portfolio yield was negatively impacted in the first quarter by the continued effect of received fixed macro swaps that we entered into several years ago. Fortunately, 25 million of those swaps run off on June 30th of this year, and another 50 million run off in December.
James R. Reske: On June 30 of this year and another $50 million run off in December.
James R. Reske: Those would only have a one basis point benefit to the NIM in 2024, but a further $250 million runoff in 2025, which we expect to produce a cumulative benefit to the NIM of 8 to 11 basis points, depending on the trajectory of rates. If rates stay higher for longer, the benefit of the macro swap roll-off will be on the high side of that. On the liability side, deposit costs increased by 25 basis points as we saw a $233 million decline in low-cost deposit categories, combined with a $283 million increase in the more expensive category.
James R. Reske: Those are only had a one basis point benefit to the NIM in 2024, but a further $250 million run up in 2025, which we expect to produce a cumulative benefit.
James R. Reske: Benefits of the NIM of eight to 11 basis points, depending on the trajectory of rates.
James R. Reske: And stay higher for longer the benefit of the macro swap roll off will be on the high side of that range.
James R. Reske: On the liability side deposit costs increased by 25 basis points as we saw a $233 million decline in low cost deposit categories.
James R. Reske: With a $283 million increase in the more expensive categories.
James R. Reske: Despite the movements and balances, we saw net gains in consumer households in the quarter. In fact, our deposit pricing strategies have been effective not just in retaining our deposits but in attracting new dollars to the bank.
James R. Reske: Despite the movements and balances we saw net gains in consumer households in the quarter.
James R. Reske: In fact, our deposit pricing strategies have been effective not just in retaining our deposits, but in attracting new dollars to the bank.
James R. Reske: While the cost of deposits went up 25 basis points, the cost of funds only went up by 19 basis points because we benefited from participation in the Federal Reserve's bank term funding program for a quarter. We got into the program and borrowed just over $500 million while the Fed was still pricing the borrowings on the forward curve. So we are grandfathered in, so to speak, at 4.76% on those borrowings until next March.
James R. Reske: While the cost of deposits went up 25 basis points.
James R. Reske: Funds only went up by 19 basis points, because we benefited from participation in the federal Reserve's Bank term funding program in the quarter.
James R. Reske: We got in the program and borrowed just over $500 million.
James R. Reske: The fed was still pricing the borrowings on the forward curve.
So we are grandfathered in.
James R. Reske: To speak at 476% on those borrowings until next March.
James R. Reske: We didn't enter the program with the intent to arbitrage the rate. We simply borrowed that much because that's what we needed at the time, and the Fed's rate was less than the FHLB. Ordinarily, we would use the excess cash generation from the strong deposit growth we enjoyed in the first quarter to pay off borrowings. But given the rate differential, we prefer to stay in the BTFP program for now, which is why we ended the quarter with $223 million on deposit at the Fed at 5.4%.
James R. Reske: We didn't enter the program with the intent to arbitrage the rate, we simply borrow that much because that's what we needed at the time and the fed's rate was less than the FHFA ordinarily we would use the excess cash generation from our strong deposit growth. We enjoyed in the first quarter to pay off borrowings, but given the rate differential we prefer to stay in the <unk> program.
James R. Reske: Now, which is why we ended the quarter with $222 million as a positive the fed at five 4%, but obviously accretive to income to <unk>.
James R. Reske: While it's obviously accreted income to the tune of about a penny a share in 2024, it did have a three basis points suppressive effect on the NIM in the first quarter. Fee income and non-interest expense are both little change, but slightly unfavorable to the last quarter. Back-to-back swap fees were non-existent as customers had little desire to lock in fixed rates, and interchange was down seasonably compared to the fourth quarter due to holiday spending.
<unk> of about a penny a share in 2024. It did have a three basis points of pressure effect on the NIM in the first quarter.
James R. Reske: Fee income and noninterest expense are both little change was slightly unfavorable to last quarter back to back swap fees were nonexistent as customers have little desire to lock in fixed rates and interchange was down seasonally compared to the fourth quarter with holiday spending.
James R. Reske: We were pleased, however, to see mortgage and SBA gain in sale income pick up from last quarter. That was good. The non-interest expense comparison to last quarter was also affected by a tax accrual reversal that benefited the fourth quarter and by higher occupancy expense in the first quarter.
James R. Reske: We were pleased however to see mortgage and SBA gain on sale income pickup from last quarter that was good the noninterest expense comparison to last quarter was also affected by a tax accrual reversal that benefited the fourth quarter and by higher occupancy expense in the first quarter.
James R. Reske: And with that I'll turn it back over to Mike.
Mike: Thanks, Jim and operator, if we could pause for some questions.
James R. Reske: Thanks, Jim. And operator, if we could pause for some questions. Thank you.
Desiree: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press the star 1 to join the call. Transcribed by https://otter.ai. Your first question comes from the line of Daniel Tamayo with Raymond James. Your line is open.
Mike: Thank you we will now begin the question and answer session. If you have dialed in and would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue.
Mike: You would like to Redraw your question simply press Star one again.
Mike: You are called upon to ask your question and our listening via Speakerphone on your device. Please pick up your handset to ensure that your phone is not on mute when asking a question.
Mike: Again press the star one to join the queue.
Mike: Okay.
Mike: Okay.
Mike: Your first question comes from the line of Daniel Tamayo with Raymond James Your line is open.
Daniel Tamayo: All right, thank you. Good afternoon, guys. Maybe Jim, I appreciate all the detail on the puts and the takes of the margin in the first quarter, as well as what's coming in the next rest of the year and even into 25 with those swaps. But maybe you can kind of fill us in on how you're thinking about the core margin and the total margin path for the rest of the year.
Daniel Tamayo: Alright, thank you.
Daniel Tamayo: Good afternoon guys.
Daniel Tamayo: Yes.
Daniel Tamayo: Maybe Jim I appreciate all the detail on the puts and the takes of the.
Daniel Tamayo: Margin in the first quarter as well as what's what's coming in the next.
Daniel Tamayo: Rest of the year and even into 'twenty five with those swaps but.
Daniel Tamayo: Maybe you can kind of.
Daniel Tamayo: Fill us in on how Youre thinking about.
Daniel Tamayo: The core margin and the.
Daniel Tamayo: The total margin path for the rest of the year.
James R. Reske: Oh yeah, thanks. You may have noticed that absent from my prepared remarks was any kind of forecast of NIM, and that was conscious, but just to be as clear as I can be, we're very cognizant of the fact that in the last three quarters in a row we were forecasting instability, and yet the margin compressed by about 10 base points every quarter. So I will tell you that the forecast that we have suggests the same thing, NIM stability going forward.
Speaker Change: Yes. Thanks, So you may have noticed.
Speaker Change: Absent from my prepared remarks is there any kind of forecast of the NIM.
Speaker Change: Yes.
Speaker Change: That was conscious but just to be players that can be we're very cognizant of the fact that in the last three quarters in a row, we were forecasting instability and yet the margin compressed by about 10 basis points every quarter I.
Speaker Change: I will tell you that the forecast that we have suggest the same thing NIM stability going forward.
James R. Reske: So that is our forecast, and those forecasts actually take into account a falling rate environment, the rate environment forecast, and our preparation of those forecasts, project the Fed funds rate down to 4.38% by the end of the year, about four rate cuts. If it slows down rate cuts or in a higher, longer environment, that'll benefit them, and that'll be even better. I will say they have sharpened their pencils and gotten better at forecasting deposit movements.
Speaker Change: No.
Speaker Change: That is our our forecast in those forecasts actually take into account a falling rate environment.
Speaker Change: The rate environment forecast.
Speaker Change: Okay.
Speaker Change: Our preparation of those forecasts.
Speaker Change: Project, the fed funds down to 438% by the end of the year Bob for rate cuts.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Slows down rate cuts are at a higher longer environment, an environment that will benefit the NIM that will be even better.
Speaker Change: I'll say we have.
Speaker Change: Sharpened, our pencils and gotten better at forecasting deposit movements.
James R. Reske: That's something that I think we were caught out on in the last couple quarters of the last year. We've gotten better at that, so we're trying to understand where our depositors are going. And we've also, in light of the... disparity between loan growth and deposit growth this quarter, dialed back the aggressiveness of the deposit rates a little bit. So we still have these specials out there, but they're not top-of-market specials. And that's probably going to bring deposit growth more in line with loan growth and help them achieve that kind of stability target. But that's how we're thinking about it now.
Speaker Change: Something that I think we were catching up.
Speaker Change: Got out on in the last couple of quarters in the last year, we've gotten better at that.
Speaker Change: So we're trying to understand where depositors are going and we are also in light of the.
Speaker Change: Disparity between loan growth and deposit growth this quarter dialed back the aggressiveness of the deposit rates a little bit.
Speaker Change: We still have some specials out there, but they're not top of market specials, and thats, probably going to bring deposit growth more in line with loan growth and.
Speaker Change: And help them achieve that kind of stability target, but thats.
Speaker Change: That's how we're thinking about on that day.
James R. Reske: Okay, that's very helpful. And just to be clear, the one basis point benefit from swaps in 2024 and then the three basis point negative impact, I mean, from the funds at the window, the Fed window, that's all baked into your assumption there.
Speaker Change: Okay. That's that's very helpful.
Speaker Change: And just to be clear the.
Speaker Change: The one basis point.
Benefit from swaps in 2024.
Speaker Change: And then the three basis point negative impact.
Speaker Change: From the funds at the window.
Speaker Change: No thats all baked into your assumption there.
Speaker Change: Yes. It is.
James R. Reske: It is the cash on hand at the Fed right now. That three basis point suppressive effect that I talked about, the reason I have a little bit of optimism is that cash has come down a little bit here in the second quarter so far. So without telling tales out of school, we're right about 150 million right now; if it stayed at 250 for the full quarter, it would have about a six or seven base point suppressive effect. The average for the first quarter was only 112 million, even though we ended the quarter with 223 in excess. The average excess cash for the quarter was $112 million.
Speaker Change: The the cash on hand at the fed.
Right now that 3% three basis points suppressant effect that I talked about.
Speaker Change: The reason I have a little bit of optimism is that cash has come down a little bit here in the first and the second quarter. So far so without telling tales out of school or right about a $150 million right now if it stayed at $2 50 for the full quarter it would have.
Speaker Change: About a six or seven basis points across the fact with the average for the first quarter was only $112 million, even though we ended the quarter 223 of excess cash.
Average excess cash for the quarter was $112 million. That's why it was only three basis points suppressive effect.
James R. Reske: That's why it was only a three-base point suppressive effect. If it stayed at $250 for the full second quarter, that would be like a six or seven-base point suppressive effect. But it's come down, and I see a little hope. And I would just add, thin margin, balance sheet leveraged business is generally not something we find attractive and don't pursue. But now that we've got it, we're gonna stay in the program because we make a little money off of it, and we would hate to pay off those borrowings and then find that we have great loan growth in the second half of the year. We're borrowing again from the FHLB at 5.4%. I hope that clarifies things a little bit on the excess cash question anyway.
Speaker Change: If it stayed at $2 50 for the full second quarter Thats like a six or seven basis points at Tesla effect, but it has come down. It makes me a little hopeful and I would just add thin margin balance sheet leverage business is generally not something we find attractive and don't pursue but now that we've got it we're going to stay in the program because we make a little money off of it and we win.
Speaker Change: <unk> payout those borrowings and then.
Speaker Change: Following that we have great loan growth in the second half of the year, we were borrowing again from the FHA will be at five 4%.
Speaker Change: I hope that clarifies it takes a little bit of excess cash question anyway.
Speaker Change: It does yes. It does thank you.
Speaker Change: <unk>.
Speaker Change: Alright, I guess and then just lastly.
James R. Reske: It does. Yeah, it does. Thank you. Oh, and then just lastly, what are your thoughts on accretion, what the contribution was in the first quarter, and then where that may go the rest of the year?
Speaker Change: What are your thoughts on accretion.
Speaker Change: Contribution was in the first quarter, and then where that May go to the rest of the year.
unknown: EPS equation, or I'm sorry, what do you mean? I'm sorry.
Speaker Change: Our EPS accretion or Im sorry, what do you mean I'm sorry.
unknown: I'm sorry, discount accretion.
Speaker Change: Discount accretion.
unknown: Oh, oh, I think it was seven base points in a quarter. It's going to be fading out about a base point every quarter. Okay. Seven days to enter the CURSE Board, and you'll be fading out by a base point. All right.
Speaker Change: Purchase accounting.
Speaker Change: Well I think it was seven basis points in the quarter is going to be fading out about a basis point every quarter.
Speaker Change: Okay, Kevin based on for the first quarter and fading out by a five basis point each quarter.
Daniel Tamayo: All right. Well, thanks for taking on my questions. I appreciate it. Thanks, Dan.
Kevin: Alright, well thanks for taking all my questions I appreciate it.
Speaker Change: Thanks, Dan.
Karl Robert Shepard: Our next question comes from Karl Shepard with RBC Capital Markets.
Speaker Change: Our next question comes from the line of Carl Shepherd with RBC capital markets. Your line is open.
Karl Robert Shepard: Jim, I wanted to pick up on the When you talk about the swaps on the slide, the message that we should take away is that the overall margin can drift higher over the next couple of quarters and into 25, if we're thinking near-term stability and those kind of fall off. Is that a fair way for us to think about it? It could if rates stay high, the replacement yields pick up a little bit, and we can bring the deposit costs under control. Those are a lot of ifs.
Hey, good afternoon guys.
Karl Robert Shepard: The call.
Karl Robert Shepard: Jim I wanted to pick up on the margin discussion.
Karl Robert Shepard: When you talk about the swaps on slide 14.
Karl Robert Shepard: Sure.
Karl Robert Shepard: Message that we should take away is that the overall margin drift.
Karl Robert Shepard: Higher over the next couple of quarters and into 'twenty five.
Karl Robert Shepard: Near term stability and those kind of fall off is that a fair way for us to think about it.
Karl Robert Shepard: It could if rates stay high on the replacement yields tick up a little bit and we can bring the deposit cost center.
James R. Reske: We're getting closer and closer to the, Your question is about those macro swaps. We're getting closer to maturity, so we thought we'd provide some helpful disclosure this quarter to kind of spell out the effect of those that roll off the swaps. There's a page in our supplement that we put on the PowerPoint presentation. We call it an earnings presentation supplement that is on the investor relations portion of our website.
Karl Robert Shepard: Under control, but those are a lot of it.
Karl Robert Shepard: We're getting closer and closer to the.
Karl Robert Shepard: Your questions about those macro swaps. So we are getting closer to maturities. We thought we'd provide some helpful disclosure this quarter to kind of spell out the effect of those.
Karl Robert Shepard: Roll off of those swaps of the there's a page in our supplement that we put on the.
Karl Robert Shepard: Powerpoint presentations I can call. It an earnings presentation supplement that is on the Investor relations portion of our website at page 14 that kind of as a bar chart that spells out the dollar volume of the <unk>.
James R. Reske: It's page 14 that kind of has a bar chart that spells out the dollar volume of the swap, maturities, the Macro Solid Maturities, and then the cumulative NIM impact for all those. The real benefit isn't until next year. But if you think about it this way, to answer your question directly, that will help reduce the stability that we're looking for. Right, because he had that support from those things rolling off. That can only help. And if they stay at a higher rate, higher for longer rate environment, we'll just keep repricing up the fixed rate loan portfolio, and those macro swaps will roll off, and that'll work out really well.
Karl Robert Shepard: Wap.
Karl Robert Shepard: Our maturities the macro cell maturities and then the cumulative NIM impact for although it's a real benefit of that until next year.
Speaker Change: But maybe you could think about it this way to answer your question directly.
Speaker Change: That will help reduce the stability that we're looking for.
Speaker Change: Alright, so if you have that support from those things rolling off.
Speaker Change: That can only help.
Speaker Change: Stay at a higher rate.
Speaker Change: Higher for longer rate environment will just keep repricing of the fixed rate loan portfolio and those macro swaps roll off and that will work out really well.
James R. Reske: Okay Jim.
James R. Reske: Jim, your team modeled really, in a baseline scenario or following about eight basis points of cumulative impact accreting to the margin and, in a flat rate scenario, 11. That's right. So it's material. That's through 2025, Karl.
James R. Reske: Jim your team modeled really in our baseline scenario of falling about eight basis points with cumulative impact creating to the margin.
James R. Reske: In a flat rate scenario of 11 basis points Thats right. So its material and that's through 2025 call.
James R. Reske: Yes, okay.
Karl Robert Shepard: And then on loan growth, so we've got deposits outstripping loans.
James R. Reske: And then on loan growth. So we've got deposit outstripping loans this quarter.
Karl Robert Shepard: Stripping Loans This Quarter. I know you guys are trying to be very measured in aligning the two, but should we think about this quarter's performance as giving you a little bit of runway for the rest of the year, or do you think this pace of loan growth is a fair assumption?
I know you guys are trying to be very measured aligning the tool, but should we think about this quarter's performance is giving you a little bit a runway.
James R. Reske: The rest of the year or do you think.
James R. Reske: The pace of loan growth is a fair assumption.
Thomas Michael Price: I think that we've proven with seven and a half percent loan growth last year, notwithstanding our acquisition of Centric in the new capital region, and that we can generate deposits and then through this fourth quarter, even if it costs us a little something-something. And so we're excited about that. And we've also grown deposits, deposit households, as Jim mentioned. And so we're going to taper and dial that in better and better each quarter.
Speaker Change: I think it does give us runway.
Speaker Change: <unk> that we've proven was seven 5% loan growth last year notwithstanding.
Our acquisition of centric and the new capital region and.
Speaker Change: That we can generate deposits and then through this fourth quarter, even if it costs us a little something some.
Speaker Change: And so we're excited about that and we've also grown deposits.
Speaker Change: Deposit households, as Jim mentioned.
Speaker Change: And so we're going to taper and dial that in better and better each quarter. So we're also excited about growing the corporate bank.
Thomas Michael Price: But we're also excited about growing the corporate bank, maybe a real estate deal or two this year, and turning that back on a bit. But more importantly, growing CNI, small business, and SBA, which will become the core of the company over the next five plus years. And so... We're optimistic about the future and our ability to grow.
Speaker Change: Maybe a real estate deal or two this year and.
Speaker Change: Turning that back on a bit, but more importantly, growing C&I and small business SBA, which will become the core of the company.
Speaker Change: Over the next.
Speaker Change: Five plus years and so.
Speaker Change: We are optimistic about the future and our ability to grow.
James R. Reske: Okay, thank you both. And before our next question, if I could circle back, I said seven base points of an accretion was actually 7.6, so it rounds to eight. That's the purchase of a county accretion for the first quarter just ended.
Speaker Change: Okay. Thank you Bob.
Speaker Change: And before our next question if I could circle back I said seven basis points of NIM accretion. It was actually 767 rounds eight ex purchase accounting accretion for the for the first quarter just ended.
Kelly Mota: The next question comes from the line of Kelly Mota with KBW.
Speaker Change: Just for the record.
Speaker Change: Next question comes from the line of Gary Kelly Motta with <unk>. Your line is open.
Kelly Mota: Hi, thanks so much for the question. I guess I'm kind of picking up on loan growth, picking up on the question there. Just wondering if you could talk a bit about your pipelines, where you're seeing opportunities and the best opportunities, where you're seeing the most demand from your clients.
Speaker Change: Hi, Thanks, so much for the question.
Speaker Change: I guess kind of picking up on loan growth picking up on that question. There. Just wondering if you could talk a bit about your pipelines, where youre seeing opportunities and the best opportunities.
Speaker Change: And what are you seeing the most demand from your clients.
Thomas Michael Price: Yes, right now, on the consumer side, we have pinched the volume there really across the board, and we're just replacing what is running off at best. On the commercial side, our SBA business has a pretty good pipeline. CNI, the pipelines are building somewhat depending on the region and commercial real estate, the demand there is still tamped down, and we, you know, but there will be a deal or two there. So it's not fulsome like we were growing maybe two years ago, where it seemed like each year we would guide in the high single digits and we would eclipse that. Now our guidance is probably more like mid-single digits
Speaker Change: Yes, right now on the consumer side, we have.
Speaker Change: Hence the volume there really across the board and we're just replacing.
Speaker Change: What is running off at best on the commercial side, our SBA business has pretty good pipeline.
C&I the pipelines are building somewhat dependent on the region and <unk>.
Speaker Change: Commercial real estate the demand there is.
Speaker Change: Still tamped down and we.
Speaker Change: But there will be a deal or two there. So it's not full some like we were growing maybe two years ago, where it seemed like each year, we would guide in the high single digits, and we would eclipse that now.
Speaker Change: Now our guidance is probably more like mid single digits.
Thomas Michael Price: Got it. That's super, that's super helpful. Sorry, I didn't mean to cut you off.
Speaker Change: Got it.
Speaker Change: That's super helpful. Sorry didn't mean to cut you off.
Thomas Michael Price: No worries; I just have Jane Grebenc, our President, and Mike McKeown, our Executive Vice President of Corporate Banking. Anything that the two of you would add? This is an important consideration for loan growth.
Speaker Change: Nowhere is I just have Jane <unk>, our president and Mike Mckeown are.
Speaker Change: Executive.
Speaker Change: Vice President of corporate banking anything that the two of you would add this is an important consideration on loan growth.
Speaker Change: Sure.
Jane Grebenc: Sure, a couple things. We are bullish on SBA. And it's important to know that only 25% of that hits the balance sheet. Now the other 75% ultimately gets sold, and we get the gain on sale, income in lieu of balance growth.
Speaker Change: A couple of things.
Michael Anthony Perito: We are bullish on SBA.
Speaker Change: And it's important to note that only 25% of that hits the balance sheet.
Speaker Change: The other 75% ultimately gets sold and we get the gain on sale.
Speaker Change: Income in lieu of the balanced growth so.
Jane Grebenc: So we're seeing good SBA business, and Brian has reminded me that the SBA business that we are booking now is probably the best we'll see because it's, It's able to be approved under today's interest rate environment. So this is all good stuff.
Speaker Change: We're seeing good SBA business and Brian has reminded me.
Speaker Change: <unk>.
The SBA business that we're booking now is probably the best we will see because it's it's.
Speaker Change: It's able to be approved under today's interest rate environment. So this is all good stuff most of that SBA as business acquisition.
Michael Anthony Perito: Most of that SBA business is business acquisition, and so we do like the SBA business a lot. [inaudible] As Mike said, the commercial business is a little bit more muted, but we are seeing pipelines growing. I think we'll, I think customers and prospects are finally starting to think maybe the recession isn't right around the corner, and they're starting to spend a little bit.
Speaker Change: And so we do like the SBA business a lot.
And then.
Speaker Change: As Mike said, the commercial business is a little bit more muted, but we are seeing pipelines growing.
Speaker Change: And.
Speaker Change: I think.
Speaker Change: I think.
Customers and prospects are starting to finally.
Speaker Change: I think maybe the recession isn't right around the corner and they're starting to.
Speaker Change: To spend a little bit.
Speaker Change: Got it that's super helpful. Thank you so much and then.
Speaker Change: Maybe actually then switching switching to fees.
Speaker Change: Mortgage.
Speaker Change: You had a nice quarter for mortgage.
Kelly Mota: Just wondering if, you know, gain on sale was pretty strong in both lines this quarter. If this is a good run rate for those items, and any sort of puts or takes off of Q1 levels would be great.
Speaker Change: And in your prepared remarks, you mentioned selling more production there and you just mentioned the SBA and I've heard.
Speaker Change: Perhaps some other banks at the premiums have come back a bit.
Speaker Change: In that line item just wondering if you know gain on sale was in both lines for us pretty strong this quarter. If this is a good run rate for those that those items in any sort of puts or takes off of Q1 levels would be great.
Jane Grebenc: Jane, any thoughts?
Jane Grebenc: Well, we feel good about the volumes, and you're right, the premiums have come down in both businesses some. It just means we have to work harder for each dollar. But I think the run rates in both businesses are... You know, I don't I don't want to over promise, but I think we're about where we're going to be.
Speaker Change: Yes, Jane any thoughts.
Jane: Well, we feel good about the volumes and you're right. The premiums have come down on both businesses. Some it just means we have to work harder for each each dollar, but I think the run rates in both businesses are.
Speaker Change: I don't want to overpay.
Jane: Over promise, but I think we're about where we're going to be.
Kelly Mota: Got it. That's helpful. I will step back. Thank you so much.
Speaker Change: Got it that's helpful. I'll step back thank you so much.
Matthew M. Breese: The next question comes from the line of Matthew Breese with Stiffens. Your line is open.
Speaker Change: Thank you.
Speaker Change: Next question comes from the line of Matthew Breese with Stephens. Your line is open hey.
Matthew M. Breese: Hey, good afternoon, everybody. Mike, just a point of clarification. So traditionally, when we talk about kind of mid single-digit loan growth, it's usually all inclusive. But we've definitely made a difference this quarter in terms of talking about commercial versus consumer growth. When you point to mid single-digit growth for the rest of the year, are you implying all-in loan growth or just commercial growth? And that means we'll probably see loan growth similar to what we saw this quarter.
Matthew M. Breese: Hey, good afternoon everybody.
Matthew M. Breese: Mike.
Matthew M. Breese: Mike just a point of clarification. So traditionally when we talk about kind of mid single digit loan growth, it's usually all inclusive, but we've definitely.
Matthew M. Breese: The difference this quarter talking about commercial versus consumer growth.
Matthew M. Breese: When you point to mid single digit growth.
Speaker Change: For the rest of the year are you, implying all any loan growth or are you just just commercial growth and that means we'll probably see loan growth similar to what we saw this quarter.
Thomas Michael Price: I'd like to see it all in, which means we would get maybe a little tailwind from the consumer side, maybe a little bit. We've done a nice job of pricing our customers and maintaining some volumes, particularly in the indirect auto, which is an in-market business. And so we could maybe get a tipping point there and maybe some tailwinds, and so, and maybe be more, but it will have to be commercially driven. That is for the whole year, and we would have to do a lot more in the second half of the year, undoubtedly.
Speaker Change: I'd like to see it all in which means we would get maybe a little tailwind from the consumer side.
Speaker Change: Maybe a little bit we've done a nice job of pricing our consumer.
And maintaining some volumes, particularly in the indirect auto which is an in market business and so we can maybe get a tipping point, there and maybe some tailwind.
Speaker Change: And so and but maybe be more it will be have to be commercially driven.
Speaker Change: But that is for the whole year, and we would have to do a lot more in the second half of the year undoubtedly.
Matthew M. Breese: Okay, so all in all, loan growth is probably more than likely to be on the lower side of the mid-tenant digit growth, with commercial being kind of the x factor.
Speaker Change: Okay. So all in loan growth is probably more than likely to be on the lower side of mid single digit growth.
Speaker Change: With commercial being kind of the X factor.
Thomas Michael Price: I suspect you're right, but we're going to hold our feet to the fire internally on 5%. Fair enough.
Speaker Change: I suspect Youre right.
We're going to hold our feet to the fire internally.
Thomas Michael Price: You know, we could turn up consumer loan volume, but we would have to blink on price. And we'd have to blink a little bit more than we're comfortable blinking right now. The auto business is softening a little bit, so if we wanted to turn it up, we'd have to compete on price.
Speaker Change: 5%.
Speaker Change: Fair enough.
Mike: Mike This is Mike.
Speaker Change: Yeah.
Mike: We could turn up consumer loan volume, but we would have to blink and price and we'd have to blink a little bit more than we're comfortable blinking right. This minute.
Mike: Even the auto business is softening a little bit. So if we wanted if we wanted to turn it up we would have to we have to compete on price.
Matthew M. Breese: All right. And then, Jim, maybe just a couple for you.
Speaker Change: Got it.
Speaker Change: Alright, and then Jim maybe just a couple for you you pointed out in your opening comments that we do have a bit more liquidity on the balance sheet. Today Securities also grew a little bit I was hoping so for hoping for some more color on those two items strategy around securities at this point and liquidity deployment.
James R. Reske: You know, you pointed out in your opening comments, we do have a bit more liquidity on the balance sheet today. Securities also grew a little bit. I was hoping for some more color on those two items, strategy around securities at this point and liquidity deployment.
James R. Reske: Yeah, thanks for asking. We'll take some of the excess cash and deploy it in liquidities, but not aggressively. Really, securities right now, we can maybe get in the high fives. We're getting 5.4 overnight at the Fed.
James R. Reske: Yes, thanks for asking will take some of the excess cash and deployed and liquidities, but not not aggressively really.
James R. Reske: Securities right now we can may begin in the high fives, we're getting five four overnight at the fed obviously, the security system duration and whenever we buy we're always looking at four to five year duration.
James R. Reske: Obviously, the securities have some duration, and whenever we buy, we're always looking at four to five-year duration. So that helps a little bit in the falling rate environment, but the yield pickup is not tremendous in securities right now. We've gotten our securities portfolio up a little bit from last year when it got a little uncomfortably low, just in terms of on balance sheet liquidity. It's back up a little bit now, but we just always would rather be making loans on my securities.
James R. Reske: So that helps a little bit in a falling rate environment, but the yield pickup is not tremendous on securities right. Now we've gotten securities were probably up a little bit from last year. When it got a little uncomfortable low just in terms of on balance sheet liquidity its back up a little bit now, but we just always would rather it be making loans and buying securities. So if we had a loan growth opportunity, we just rather deploy it there.
James R. Reske: So if we have a loan growth opportunity, we'd just rather deploy it there. And we really don't want to put it all into securities and then find that we're borrowing overnight to fund loan growth. We'd rather use it for loan growth. So we'll keep our eyes on it, but for the moment, my thought is. Some securities growth, we'll take some of that cash. I mean, if we have, I already disclosed it, if we have $150 million today, we'll take $50 million to pay off the sub debt on June 1st. Maybe we'll, whenever it's locked, half of that, and the security's gone, then we'll see what happens with Lone Wolf going forward.
James R. Reske: And we would really not we don't want to put all into securities and then finally, we're borrowing overnight to fund loan growth. We just tried to use it for the longer so.
James R. Reske: We'll keep our eyes on it but for the moment my thought is.
James R. Reske: Some securities growth will take some of that cash.
James R. Reske: We have I already disclosed that if we have 150 million today with a $50 million of sub debt on June one.
James R. Reske: Maybe when whenever it's about half of that in the securities and we'll see what happens with loan growth going forward.
James R. Reske: Okay, appreciate that. And then Jim, you know, historically, you do provide some updates on what the forward outlook is for total fee income and expenses. Expenses came in actually, you know, better than expected this quarter, and I appreciate some updates. Yeah, and our guidance really isn't changing.
Speaker Change: Okay I appreciate that and then Jim historically, you do provide some update on what kind of the forward outlook is for total fee income and expenses.
Speaker Change: Expenses came in actually better than expected this quarter and I appreciate the update there yes.
James R. Reske: Yeah, and our guidance really isn't changing on those things. We think that the income and the expenses are going to be consistent with the guides we've previously given, so... and I think that was on the fee side, 67 to 68 on the fee side, and it was 67 to 69 million for the quarter. But I don't mean to change the guidance because I thought actually both the analyst consensus on those and our previous guidance did need to be updated.
James R. Reske: Yes in our guidance really isn't changing and those things I think the fee income and the expenses are going to consistent with the.
James R. Reske: The guidance, we've previously given so.
James R. Reske: And I think that was on the fee side 6700, 6800, 6700 $69 million.
James R. Reske: For the quarter, but I don't mean to change the guidance because I thought actually both.
James R. Reske: And analyst consensus on those in our previous guidance was.
James R. Reske: It.
James R. Reske: You didn't need to be updated.
Speaker Change: Understood Okay.
Matthew M. Breese: Okay, and then just an update on overall credit. You know, all eyes are on Office, and you have some great disclosures, but I'd love to hear a little bit more about your top exposures in Office, what the typical sizes of the biggest loans are and how they're performing, if anything is keeping you up at night.
Speaker Change: And then just an update on <unk>.
Speaker Change: Overall credit all eyes are on office and.
Speaker Change: You have some great disclosures, but I'd love to hear a little bit more about kind of your top exposures in office what the typical size is the biggest volumes and how they're performing and if anything is keeping me up at night.
James R. Reske: There are always a few. I get comfortable from the fact that, in office, we only have 11 loans over $10 million and probably 18 between five and 10. So we're pretty granular. We've worked on our exposure somewhat over the course of the last year. And, you know, we're pretty thin on the central business district. I think we have just 73 million there.
Speaker Change: Theres always a few.
Speaker Change: I get comfortable from the fact that in office, we only have 11 loans over $10 million.
Speaker Change: Probably 18 between five and 10, so we're pretty granular.
We've worked down our exposure somewhat over the course of the last year and.
Speaker Change: Pretty thin on Central business District, I think we have just $73 million there I have Brian Carroll, our chief credit officer with US Brian do you want to add some other color sure and thanks for your question.
Brian G. Karrip: I have Brian Karrip, our chief credit officer, with us. Brian, do you want to add some other color? Sure. And thanks for your question. We have two deals that are above $20 million. Both are performing well.
Brian Carroll: We have two deals that are above $20 million, both are performing well.
Brian G. Karrip: Both have low LTVs, strong debt yields, and strong DSCRs. One will mature, as we saw in slide number 18, third quarter of 24, $22 million will mature. We're extending that loan for six months. We gave you the maturity ladder so you could see it with greater clarity and emphasizes who we are and how we think about our portfolio. It emphasizes how we think about the granularity in our portfolio, how we break it out, how we stratify it, and how we think about our overall office business. The slide is fairly complete. I'd be happy to answer any questions.
Brian Carroll: Low ltvs strong debt yields and strong <unk>.
Speaker Change: One will mature as we saw in the.
Brian Carroll: Slide number 18.
Brian Carroll: Third quarter of two for $22 million were mature, we're extending that loan for six months. We gave you the maturity ladder. So you could see it with with greater clarity and emphasizes who we are and how we think about our portfolio.
Brian Carroll: It emphasizes how we think about the granularity of our portfolio, how we break it out how we stratify it and how we think about our overall office business.
Speaker Change: Slide is fairly complete I'd be happy to answer any questions.
unknown: What is the, I'm sorry, what's the nature of the extension? Yeah, looking at property. And so we have agreed.
Speaker Change: What is the im sorry, whats the nature of the extension.
Speaker Change: Yes.
Speaker Change: Yes, Im looking at for operate and so we have agreed so.
unknown: So, we have a proactive approach with each one of our borrowers. In fact, Matt, we went out and did a physical inspection of each one of our office properties that will mature between 24 and 25. We wanted to better understand physical occupancy versus economic tenancy. And in doing so, we meet with our clients, and we say, "What is the next step, and what are your thoughts?" With this borrower, they said their plan was to sell the property, and we went to them and had the discussion about letting's do a six month extension so we can have an orderly exit.
Speaker Change: So we have a proactive approach with each one of our borrowers in fact, Matt we went out and did a physical inspection of each one of our office properties that will mature between 24 and 25, we wanted to better understand physical occupancy versus economic tenancy and then in doing so we meet with our clients and we say what is that.
Speaker Change: Stepped on what are your thoughts with this borrower they set our plan is to sell the property.
Speaker Change: And we went to them and had the discussion about let's do a six month extension two can have an orderly exit.
unknown: Okay, that makes sense. And you feel like if there's any lost content, you're well prepared for that.
Matt: Okay that makes sense and you feel like Zhang loss content.
unknown: Oh, absolutely. No, it's performing. That's performing.
Speaker Change: <unk> for that.
Speaker Change: Oh, absolutely, yes, it's performing.
unknown: Great. Well, I appreciate all the answers there in color. Thank you.
Speaker Change: Performing.
Speaker Change: Great well I appreciate all the answers Darrin the color. Thank you.
unknown: Thank you. Again, if you would like to see more videos like this, please subscribe to our YouTube channel.
Speaker Change: Thank you.
Desiree: Again, if you would like to ask a question, press star, then the number 1 on your telephone keypad. We have another question coming in. It comes from the line of Manuel Navas with DA Davidson. Your line is open.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Speaker Change: Okay.
Speaker Change: We have another question coming in it comes from the line of Manuel <unk> with D. A Davidson your line is open.
Manuel: Hey, good afternoon.
Manuel Antonio Navas: A lot of my questions have been answered, but I just want to ask some of the marginal rates of things. What were the marginal deposit rates for what came on? And I'm gonna ask about different loan yields as well. Yeah, so the current, we have a number of different specials, like the current short-term seven-month duty special is 5.05%, and then the money market special score is one and a half percent. If you blend the volume, the overall new volume rate on deposits coming in is right about 4.8% for new new new deposits coming in.
Manuel: Good afternoon.
Manuel: A lot of my questions have been answered, but I just wanted to I was wondering some of the marginal rates of things what was the marginal deposit rates.
Manuel: Sure.
I'm on I'm going to ask about different loan yields as well.
Speaker Change: Yes, so the current.
Speaker Change: We have numerous different specials like our current short term seven month CD specials five 5%.
Speaker Change: And then the money market specials for 5% of the blended volume the overall new volume rate on deposits coming in right about four 8%.
Speaker Change: Yes.
Speaker Change: New new deposits coming in.
Manuel Antonio Navas: So that was 4.48% last quarter, and it's coming down a little bit, right? You're able to lower the price down a little bit. Well, last quarter, that TD Specialized Venture would have been a 5.1, actually 5.25, and now it's 5.05, yeah. I don't, I don't, I don't, and I'm sorry if I said the overall blender rate should be down from last quarter. I meant to say this quarter is 4.8% if I think about that, but it should be down from last quarter, not up.
Speaker Change: So that was $4 four 8% last quarter, and it's coming down a little bit rate youre able to price down a little bit.
Speaker Change: We are well last quarter that TD, especially I mentioned would have been a $5 one actually five in a quarter and now it's five 5%.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: And I'm, sorry, if I said.
Speaker Change: The overall blended rate should be down from last quarter.
I meant to say that this quarter is four 8% of <unk> taken the step of it should be down from last quarter.
Okay.
James R. Reske: and then new loan yields. You had strong equipment finance and growth. Remind me of the yields there.
Speaker Change: And then.
Speaker Change: New loan yields you had strong equipment finance.
Remind me the yields there.
James R. Reske: Yeah, and Jack Donalds in the high seven, that's a net of a deal in reserve, and the, hang on, let me get it for you. The current finance, I think was right around 8% for the quarter. Transcript by Rev.com Page of, And I think you said earlier commercials were roughly around 8% in general. Yeah, commercials are a little bit higher, a little bit in the low eight.
Speaker Change: And in Toronto.
Speaker Change: Yes, Andrew.
Andrew: Hi, <unk>.
Andrew: Net of the dealer reserve.
Andrew: And the plan to get it for you.
I Couldnt finance I think it was right around 8% for the quarter.
Andrew: And I think you said earlier commercial is roughly around 8% in general.
Speaker Change: Yes, commercial's, a little higher a little bit more.
James R. Reske: The equivalent finance equity is 7.98. So yeah, 8%. And indirect 7.6% the amount of yields per quarter. So indirect, for example, that's 7.6% for the quarter. $110 million came on at 7.6, $109 million rolled off at 524.
The equipment Finance Avenue 798, 8%.
Speaker Change: And.
Speaker Change: In direct seven 6% new money yields for the quarter our indirect for example.
Speaker Change: Seven 6% for the quarter of $110 million came on at 761 hundred $9 million rolled off.
At 524.
James R. Reske: So just the way we like it. Okay, nice. I was going to ask a question, but... Better OPEX. I think you called out a little bit of a
Speaker Change: So just the way we like it.
Speaker Change: Okay.
Speaker Change: Okay.
I'll just ask a question about.
Speaker Change: Better Opex I think you called out.
unknown: A little bit of a hospitalization expense.
Speaker Change: <unk>.
Speaker Change: Our hospitalization expense didn't kind of.
Unknown Executive: Unknown Executive, First Commonwealth Financial Corp. Yes, that's fair to say. We don't get too hopeful when hospitalization is light for a given quarter because it bounces around so much. Just based on our experience, you know, we self-insure, we talked about this before publicly, we lay off, we have reinsurance for a layer of costs once we get to be at a certain level. But if we have good experience in the given quarter, the hospitalization expense will be low, but it does bounce back.
Speaker Change: Improved linked quarter and it's just going to is that just kind of bounce back up a little bit yes.
Speaker Change: Yes.
Speaker Change: That's fair to say, we don't get too hopeful and observations light for a given quarter because it bounces around so much of the year.
Speaker Change: Just based on our experience.
Speaker Change: We self insure we've talked about this before publicly we lay off we have a reinsurance for layer of.
Speaker Change: Sure.
Speaker Change: We reinsured layer of costs once we get to be at a certain level.
Speaker Change: But if we have good experience in a given quarter the optimization essentially low but it does bounce around.
Manuel Antonio Navas: Okay, so it's staying as previously expected. I appreciate it. Thank you. See you back.
Speaker Change: Okay. So it stays state as previously expected I appreciate it thank you.
Speaker Change: You bet.
Manuel Antonio Navas: as previously expected. I appreciate it. Thank you. See you back.
Speaker Change: Next question comes from the line of Frank <unk> with Piper Sandler Your line is open.
Frank Joseph Schiraldi: The next question comes from the line of Frank Schiraldi with Piper Sandler. Your line is open.
Frank: Good afternoon.
Frank: Frank.
Frank Joseph Schiraldi: Frank. Just in terms of you guys talking obviously about the tapering of the CD rates here, and seems like your commentary was also that you're not, you know, high, you know, at the high end of the market, but you're still competitive. And just kind of curious, what you're seeing so far is the idea that given the kind of loan growth expectations you laid out, you can be competitive enough on the deposit side to kind of grow the deposits in line with that and hold the loan to deposit ratio kind of flattish through the year. What's the thinking there?
Just in terms of you guys talked obviously about the tapering the CD rates here and it seems like your commentary was also that you.
Frank: Youre not.
Frank: Hi.
Frank: At the high end of the market, but you are still competitive.
And just kind of curious.
Frank: What youre seeing so far is the idea that given the kind of loan growth expectations you laid out.
Frank: Net.
Frank: You can be competitive enough on the deposit side to kind of grow that.
Frank: Deposits in line with that hold the loan to deposit ratio kind of flattish through the year with Lincoln.
Thomas Michael Price: Yeah, I think that's right, and we watched that daily, daily, every day, in terms of what the flows in and out are. And it does impact how we think about consumer lending to start with and whether we continue to meter it or not. But the replacement yields and some of the portfolios, like indirect auto, it's not where we started a year ago, and the team has done a great job getting our rates up there. Do you want to have any commentary you want to provide in terms of transcripts provided by Transcription Outsourcing, LLC?
Lincoln: Yes, I think Thats right is and we watch that daily Daily every day.
Lincoln: In terms of what the flows in and out or and it doesn't impact how we think about consumer lending to start with and whether we continue to meter it or not and but the replacement yields on some of the portfolios like indirect auto it's not where we started a year ago and the team has done a great job getting our rates up there.
Lincoln: Jay do you want to any commentary you want to provide in terms of.
Lincoln: Yeah.
Jay: The sparkling water of liquidity.
Jay: Great.
Jay: Help us grow loans.
Thomas Michael Price: No, Mike, I think Frank. It sounds so simple when you say it, Frank, but that's exactly what we're trying to do.
Jay: No Mike I think Frank.
Speaker Change: It sounds so simple when you say it Frank but that's exactly what we're trying to do.
Frank Joseph Schiraldi: And in terms of, just curious, like, the pressure now in the existing portfolio is, has that obviously, in terms of deposit costs moving higher, is it just mostly new money at this point? Has the existing stuff sort of stabilized to a degree?
Speaker Change: And in terms of.
Speaker Change: Just curious.
Speaker Change: Pressure now in the <unk>.
Existing portfolio it is.
Speaker Change: <unk>.
Obviously.
Speaker Change: Arms of deposit cost moving higher is it just mostly.
Speaker Change: Money at this point.
Speaker Change: As the existing stocks sort of stabilized to a degree.
Jane Grebenc: Jane, I have some thoughts, but why don't you read them off?
Jane I have some thoughts as to why don't you lead us off.
Jane Grebenc: Sure. We still see new money coming in. On any given special, we see about 50% new money and 50% of our existing book, Transcription by Transcription Outsourcing, LLC.
Speaker Change: Sure.
Jane: We see we still see new money coming in on any given special we see about <unk>.
50%, new money and 50% of our existing book.
Jane: Potentially re pricing and.
Jane: We've been <unk>.
Jane: Pretty gracious about that because we'd rather keep the deposits and but we are seeing the rate of re pricing slowing down.
Jane Grebenc: Six months ago, it was bad. Nine months ago, it felt horrible. Today, it feels like it's starting to normalize. Pricing is really slowing down.
Six months ago.
Jane: It was bad.
Jane: Nine months ago. It felt horrible today it feels like it's starting to normalize and that pricing is really slowing down.
Frank Joseph Schiraldi: Is that helpful, Frank? Yeah.
Does that helpful. Frank Yes, yes.
Frank Joseph Schiraldi: Yeah, yeah, and then, just lastly, yeah, I'm just thinking about reserve to loan levels. I mean, it seems like some of the smaller banks are trying to build reserves a bit here, just given where some of the bigger banks are on reserve coverage of the total book. And for you guys, just kind of curious, what do you think about that? I mean, just given that commercial is going to be the driver here.
Speaker Change: And then just lastly.
Yes, just thinking about <unk>.
Frank: <unk> alone levels I mean, it seems like some of the smaller banks are.
Frank: Trying to build reserves a bit here.
Frank: Just given where some of the bigger banks are.
Frank: Reserve coverage of the total Bakken and for you guys just kind of curious.
How you think about that.
Frank: Just given that commercial is going to be the driver here.
Frank Joseph Schiraldi: What does that alone kind of say about the reserve to loan ratio? Should we, at the end of the day, just expect continued increases, modest increases in that, you know, quarter over quarter as you grow the commercial?
Frank: What does that alone say about the reserve to loan ratio should we at the end of the day just expect continued.
Frank: Increase modest increase in that quarter over quarter as you grow the commercial book.
James R. Reske: Yeah, I mean, we obviously fund reserves, and we have growth. And that's a key part and a component of building the reserve. And that's what built it in the past. And Brian, what would you add to that? Just that we have about $3.3 million in specific reserves from the acquisition. We have about $2.5 million in reserves.
Frank: Yes, I mean, we obviously fund reserves when we have growth and that's a key part in our component of building the reserve and Thats whats built it in the past and Brian what would you add to that just that we have about $3 3 million in specific reserves from the acquisition. We have about 2.2 dollars 9 million in PC game Reserve.
Brian G. Karrip: So we did grow from 131 to 132 in our reserve ratio, but we've got adequate reserves to support our business and potentially to support some growth. Can I just add? I think our approach is very thorough; it's a bottoms-up approach. In other words, there's just some...
Frank: <unk>.
Brian Carroll: So we did grow from $1 31 to $1 32, and our reserve ratio, but we've got adequate reserves to support our business and potentially to support some growth.
Brian Carroll: And can I just add I think our approach is very thorough bottoms up approach in other words the rabbit is just.
James R. Reske: I want to be clear about the way you asked the question. It's not like we say, well, let's do this on the ratio and then find a way to solve for that ratio. Even though, anecdotally, you might hear bankers, like you mentioned, small banks, talking about that and thinking that way. But ours is very thorough from the bottom up.
Brian Carroll: Yes.
Brian Carroll: Thinking about I want to be clear those where you ask the question in a clinically say well, let's do this in a ratio and then find a way to solve for that ratio even though.
Brian Carroll: Total you might hear bankers. Thank you mentioned small banks talking about that and thinking that way, but ours is very fair from the bottom up so if we say hey.
James R. Reske: So if we say, hey, you know, the economic conditions are changing, that our quantitative reserve would be changing to reflect that. If we see GDP or employment factors changing. And then some of the qualitative factors we look at, changes, you know, underwriting standards for staff, all the factors we look at, I think we made some changes this quarter, as well as loan growth. Yeah, right, as well as loan growth. So and then we do all that work, and they say, oh, it turns out that, given the way the portfolio grew or didn't grow that much, and so the ratio is 1.32, rather than saying, let's find a way to get it to 1.32. So anyway, I don't know if that helps or not, but that's kind of the way we do it. Transcription by Trans-Expert at Fiverr.com
Brian Carroll: Economic conditions are changing that are quantitative reserve would be changed to reflect that if we see GDP or unemployment factors changing and then some of the qualitative factors. We look at changes in underwriting standards or staff. All the factors. We look at I think we made some changes this quarter as well as loan growth, yes, right. So as loan growth. So and then we do all of that.
Brian Carroll: Work and they say Oh, if it turns out that.
Brian Carroll: Given the way the portfolio gorge and grow that nitrogen. So the ratio is 132, rather than saying, let's find a way to get at Columbia creativity. So anyway, I hope that helps or not but thats kind of way to think about it.
Speaker Change: Yeah, No I guess I'm, just thinking sort of like as you build what the reserves are in the commercial book I guess versus reserves of consumer book.
Frank Joseph Schiraldi: Yeah, no, I guess I'm just thinking through, as you build what the reserves are in the commercial book, I guess, versus reserves on the consumer book, which has a percentage of total loans. I don't know if you have that handy.
Speaker Change: As a percentage of total loans I don't know if you have that handy.
James R. Reske: I don't, but I could. We could get it back to you. Okay.
I don't but I could we could get it back to you.
Speaker Change: Alright.
Speaker Change: We've had a reserve we had a reserve higher than our peers generally and that's with some.
James R. Reske: We've had our reserve higher than our peers, generally, and that's with, you know, a pretty good mix between probably heavier consumer than commercial and almost 50-50. And really, that could switch to more of a 60-60 plus percent commercial, just because that's where the spread is. And that's where the customer relationships, the more robust cross-sell, and the fulsome depository are.
Speaker Change: It's a pretty good mix between.
Speaker Change: Probably heavier consumer than then.
Speaker Change: <unk> and <unk>.
Speaker Change: Almost 50, 50, and really that could switch to a more of a 60% 60 plus percent commercial just because.
Speaker Change: Where the spread is and that's where the customer relationships the more robust cross sell.
Speaker Change: The fulsome depository is.
Frank Joseph Schiraldi: Okay. I appreciate all the color. Thanks.
Speaker Change: Okay I appreciate all the color. Thanks.
Speaker Change: Thank you.
Desiree: There are no further questions at this time. Mr. Mike Price, I turn the call back over to you.
Speaker Change: Okay.
Speaker Change: There are no further questions at this time, Mr. Mike price I'll turn the call back over to you.
Thomas Michael Price: Hey, thank you, operator. And, as always, we appreciate your engagement and interest in First Commonwealth. As we think about our 2024 strategic themes, we've shared these with you before, and they really don't change that much from year to year. But we think about, you know, as an organization living our mission every day, which is to improve the financial lives of our neighbors and their businesses. We do that well, and then we grow our business, and we think we can improve our loan pricing, we can improve partner introductions in the regional teams, and we can grow our CNI lending each year going forward, particularly given the team that we put together.
Speaker Change: Yes.
Thank you operator, and as always we appreciate your engagement and interest in first Commonwealth as we think about our 2024 strategic themes we share these with you before.
Thomas Michael Price: Really don't change that much from year to year, but we think about an organization living our mission every day that is to improve the financial lives of our neighbors in their businesses, we do that well and then growing our business and we think we.
Thomas Michael Price: Can improve our.
Thomas Michael Price: Loan pricing, we can prove partner introductions and the regional teams, we can grow our C&I lending.
Thomas Michael Price: Each year going forward, particularly given the team that we've put together and then we also think a lot about getting better so lived emission grow get better and not just <unk>.
Thomas Michael Price: And then we also think a lot about getting better. So live the mission of growth and getting better, and not just vaguely that in every region, every line of business, every business supports you, and we're trying to become digital in every facet of our business. And so that's where our heads are at. Those of you who know us, we talk about these things, and we expect them to get better every year, even as we cross 10 billion. And we have a little wind taken out of our sails with Durbin this year, so just stay after it.
Thomas Michael Price: Vaguely Brennan every region every line of business every business support unit.
Thomas Michael Price: And we're trying to become digital in every facet of our business and so those that's where.
Thomas Michael Price: Where our heads are at those of you who know us.
Thomas Michael Price: We talk about these things and we expect to get better every year, even as we cross $10 billion and we have a little when taken out of our sales with Durbin this year.
Thomas Michael Price: Just stay after it and this is a fund business, we make a difference in the lives of our consumers and small business in our respective communities.
Thomas Michael Price: And this is a fun business. We make a difference in the lives of our consumers and small businesses and our respective communities. And... It's a great business to be in.
Speaker Change: It's a great business to be in thank you.
Desiree: This concludes today's conference call. You may now disconnect.
Speaker Change: This concludes today's conference call you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].