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spk01: Good day, and thank you for standing by. Welcome to the first Commonwealth Financial Corporation second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.
spk02: Thank you, Pasha, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's second quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, and Jane Grabentz, our Bank President and Chief Revenue Officer. As a reminder, a copy of today's earnings release can be accessed by logging on to fcbanking.com and selecting the investor relations link at the top of the page. We have also included a slide presentation on our investor relations website with supplemental financial information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on page two of the slide presentation for a description of risks and uncertainties that could cause the 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. A 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. Hey, thanks, Ryan, and welcome, everyone. Net income in the second quarter of $29.6 million produced core earnings per share of $0.31, a core pre-tax pre-provision ROA of 1.82%, and a core efficiency ratio of 53.21%. Importantly, pre-tax, pre-provision net revenue of $42.9 million was slightly ahead of the consensus estimate reflecting good underlying second quarter momentum in our key businesses. Lending rebounded in the second quarter, increasing year-to-date loan growth to 5.3% annualized rate, and that excludes PPP loans. The loan growth was broad-based, and although indirect lending and corporate banking led the way, mortgage, branch-based consumer lending, and small business all contributed meaningfully. Our corporate bank had several big wins and is seeing deepening pipelines. Blocking national trends, our branch team has originated $209 million in home equity loans year-to-date, which represents a 12% increase year-over-year. Geographically, Ohio continues to lead the way with the majority of our loan growth, although PA production remains strong. Our regional business model and a focus on execution have been key elements in driving balance sheet and fee income growth. We've also lifted out some talented lenders from large competitors over the past year. Consumer and small business household growth helped fuel non-interest income, which remained strong at $26.1 million, even as mortgage gain on sale income tapered. Card-related interchange income at $7.4 million was a quarterly company record by a wide margin. At $2.7 million, trust revenue was a quarterly record as well. Our SBA business contributed $1.6 million to gain on-sale income, and SBA pipelines have never been stronger. This is four quarters in a row of strong contribution by the SBA business. Importantly, in this discussion around growth, business conditions in the second quarter in our markets recovered faster than we anticipated, and our business customers are generally positive about the outlook ahead. Expenses remain well controlled, and the core efficiency ratio was an impressive 53.21%. Over the last six years, First Commonwealth's revenue base has broadened considerably. With significant investments in new commercial lending teams, a de novo mortgage business, indirect lending, SBA lending, credit card, and new digital platforms to include online loan and deposit account opening. We've also expanded our footprint through five strategic M&A opportunities. Even as we've made these significant investments, and transformed our company at the forefront of our planning is adhering to the core principle of maintaining positive operating leverage. Turning to NIM, Jim will provide important detail in a few minutes. But at a very high level, I believe our NIM is benefiting from our long-term approach to building a diversified loan portfolio that is balanced between commercial and consumer loans. At a time when banks are struggling to deploy excess cash, our consumer loan growth has been strong all year, and our commercial loan growth picked up steam as the second quarter progressed. We like the contribution margin a new consumer loan brings versus having money parked at the Federal Reserve or in investment security. We also have the potential of cross-selling a new consumer customer as an added bonus. We're also enthused about the lift-out of an equipment finance team from a larger institution that we recently announced, as well as the momentum in our SBA business. Both of these businesses are scalable and will enable our margin to expand by generating higher-yielding assets. Importantly, we're very pleased with the adoption of our new digital platform. The second quarter, our active mobile users increased an annualized 22%. Additionally, we continue to bring new capability forward, and we'll be introducing a new mobile mortgage platform in August where our customers can easily apply for and track their mortgage status from anywhere at any time. Lastly, regarding credit, we feel our asset quality is solid, and coupled with improving economic conditions, we expect credit to be a tailwind in the back half of the year. And now I'll turn it over to Jim Refke, our CFO. Thanks, Mike. As Mike already mentioned, we were pleased with our financial performance this quarter, especially with regard to loan growth, fee income, and expense control. Hopefully, I can provide you with a little more detail on our NIM, asset quality, fee income, and expenses. Our net interest margin for the second quarter was 3.17%, down from 3.40% last quarter. Loan yields fell by 11 basis points, but we were able to offset most of that by reducing the cost of interest bearing liabilities by seven basis points. But to understand our NIN, you have to look at the effects of PPP and changes in our asset mix, especially cash. For example, we began the quarter with $479 million in PPP loans. By June 30th, that figure had shrunk to $292 million. Similarly, Excess cash dropped from $414 million to $189 million over the period. These changes don't come through if you only look at our published average balances, which barely moved. Essentially, what happened is this. We started the quarter with a lot of excess cash because of government stimulus programs that took place in the first quarter. In addition, PPP loans were forgiven over the course of the quarter, generating even more cash. We invested some of that excess cash into securities early in the quarter and into strong low growth toward the end of the quarter. To be more precise, PPP and excess cash had two distinct effects on the margin. First, the first quarter NIM had the benefit of $7.9 million of PPP income, while second quarter PPP income was only $5.5 million. Second, we put excess cash to work by purchasing approximately $300 million of securities in the second quarter. That's better than leaving it sitting cash. Those investments will generate about $3.9 million of net interest income annually, or about $0.03 per share. But they still yield less than what we were earning on the PPP loans, and it's still a layer of thin margin assets on top of the balance sheet that drags down the NIM. Because of the noise from PPP and excess cash, we have been publishing a core NIM that adjusts for both of those things. Our previous guidance was for our core NIM to fall between 3.20% and 3.30%, and our core NIM for the second quarter came in at 3.20%, which was within that range, albeit at the bottom of that range. The reason for that is simple math. The more excess cash we invest in securities, the less cash there is to adjust for in the core calculations. The good news here is that our loan growth in the second quarter was very strong, especially towards the end of the quarter. That should help the margin going forward. We expect to maintain that trajectory for the remainder of the year, which should replace PPP runoff and further soak up excess cash to the benefit of the margin. As a result, we are reiterating our core NIM guidance of 3.25% plus or minus five basis points. Let me switch gears now to asset quality and offer a couple thoughts that may be helpful to you. First, we realized that deferrals were the number one topic a year ago, but our deferrals have all but disappeared, from a peak of over $1 billion during the pandemic to $138 million last quarter to only $59.5 million this quarter, or just 88 basis points of total loans. Second, non-performing loans are just 0.82% of total loans ex-PPP, and the reserve coverage of non-performing loans is 182.9%. These are levels that we believe compare very favorably to peers. Third, we just completed our regular semi-annual loan review process in which we review every commercial credit in excess of $350,000. This involved a review of about 1,000 relationships totaling $2.4 billion out of a $3.9 billion commercial loan portfolio. At the conclusion of that exercise, there were zero downgrades to special mention or substandard in the portfolio, The thoroughness of that exercise gives us confidence as we took note of declines in both special mention and classified loans this quarter. Classified loans, for example, dropped from $72.3 million to $56.3 million, a level very close to the pre-pandemic level of $52.5 million at the end of 2019. Fourth, delinquencies, which are sometimes seen as an early warning sign of trouble ahead, not only went down from last quarter, but they had an all-time low for our bank at just 11 basis points of total loans ex PPP. Fifth and finally, our reserves remain at 1.50% of total loans ex PPP, protecting our capital and our earnings stream going forward. As for fee income, even with mortgage income slowing down a bit in the second half, We anticipate being able to sustain a pace of $26 to $27 million per quarter in non-interest income for the remainder of 2021 due to favorable trends we are seeing in SBA, swap, and trust income. Turning to expenses, NIE came in at $51.5 million in the second quarter, down slightly from $51.9 million last quarter. Our previous NIE guidance was $52 to $53 million per quarter, so we've been comfortably below that. We do, however, expect some expense associated with returning to a more normal work and travel environment, elevated hospitalization expense that we have been seeing, new hires in revenue producing and credit positions, and the new recently announced equipment finance effort, bringing our NIE guidance to $53 to $54 million per quarter for the remainder of the year. Finally, we repurchased 72,724 shares in the second quarter, at an average price of $13.95. And with that, we'll take any questions you may have. Thanks, Jim. Questions operating?
spk01: Ladies and gentlemen, as a reminder, in order to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. And your first question is from the line of Michael Perito with KBW.
spk02: Hey, good afternoon, guys. Good afternoon. I had a couple questions. Obviously, it was good to see some of the revenue momentum come through in the quarter. And I was wondering more specifically on the loan growth side. I know you guys provided some updated broader commentary for the back half of the year. Do you think the mix will shift more dramatically towards commercial, or do you think that the consumer portfolios could be the larger driver of the growth for the near future here until kind of line utilization recovers to a more normalized rate? We like the pipelines we're seeing. This is Mike in the corporate bank, and we think growth there could continue and pick up perhaps a little bit. On the retail side, there it's mostly execution, and our branch-based team has really moved the needle this year and grown the business. as well as in our indirect business has really expanded into new markets, primarily Ohio, and penetrated those markets well. I think it'll probably be pretty equally yoked, maybe with a little tilt towards retail. That's speculation, but it's good to have a lot of oars in the water to generate growth, and that's what we had this past quarter. And on that point, you know, with the equipment finance platform, I know you guys have provided some general thoughts around what direction it could head, but I was curious if you could give more of a better sense for us around timing in terms of how long the ramp-up process for that type of platform can take. For example, are there any non-competes or anything of that sort, like hiring a traditional commercial lender that we should be mindful of, or is it pretty much you guys can start originating these loans immediately after bringing them on board? There's no non-competes. This was a list that we didn't purchase an equipment finance or leasing business. We really expect that In the second half or towards the end of next year, we'll be break-even in that business. And then the following two years could be very accretive for us to our profitability. And we're not ready to give you a number. We obviously have internal forecasts. We'll see how the build-out proceeds. We have a very competent professional who's led the same team for the last 17 or 18 years. And... But we're not doing this to make $3 million to $5 million. We're doing it to make a lot more money than that. So we're pretty enthused about that business, and it has our full attention. In fact, it's probably near the top of our list in terms of businesses that can really continue to transform our company. And we have had some success, as you know, with Mortgage Reinvigorated Indirect, SBA, and really doing de novo type things and introducing them to our business. So we're excited about it. Great. And then just last question for me, and then I'll let someone else jump in. Michael, I was wondering if you could just give us any updates on kind of the capital and deployment front, and maybe more specifically just on the M&A environment. You know, it's been a pretty active quarter. Seems like there's pretty good deal flow. Just curious, you know, how the pipeline looks and if there's, you know, attractive opportunities out there potentially for you guys to explore. You know, there could be. Price is important. Jim likes to remind me, and I know all of you, that, you know, we've looked at now 50 things to do five. So we're pretty picky, and we want to make sure that it's financially sound and it's also very strategic and makes us a better company. And it's also strategic or accretive, not just to our earnings per share, but the profitability of the bank. overall profitability. And so there is increased activity and there's opportunities in front of us, but we've looked at a lot of things over the years. Hopefully that's helpful. We're excited about M&A, I think, and perhaps the opportunity to do deals, but they need to be right. Yeah. And can you just – sorry, just remind us kind of what – your target box kind of looks like on the M&A front from size and geography standpoint? Jim? Yeah, sure. So we think about it, I guess, first geographically. We want things that are in a contiguous footprint, a drivable kind of footprint. So we look at overlap deals that are within our geographies, and we've had great success with these market extension deals into newer metro areas. But we look at all those types of deals. In terms of size, you know, the old rule of thumb was always 20% to 30% of your asset size was the right fit. I think it's going to be much larger than that. It's an MLE, which we would consider, but that has its own integration challenges, much smaller in that it's not accretive enough. I think as a company, what we've done, what we've shown is that we're willing to look at some of those smaller deals if they move the needle appreciably for us, if they have the right kind of business mix, if they have good talent, if they get us into the right kind of geography, we would look at those smaller deals. And we often have those conversations, so we're happy to do that. I guess in general, Common and M&A, we believe we have a really bright future and a lot to offer, and so we believe we can fold in other companies and make them a part of the success story very effectively. Great. Thank you, guys, for taking my questions. Appreciate it. Thank you.
spk01: Our next question is from the line of Steve Moss with B-Rally Securities.
spk02: Good afternoon. Good afternoon. Maybe just starting with the loan pipeline, and I hear you, Mike, in terms of just the deepening pipeline. Kind of curious as to what you're seeing for pricing and competition and just kind of maybe translating some of that into loan growth here. Just a little different. The assumption is there is an RFP on every deal, and sometimes there is, and you have to compete. A lot of times in lending, particularly in the smaller and the midsize, it's just a matter of execution and being in front of your customer or in front of a prospect. I would say on the small business side, we have nice SBA pipelines. Our corporate bank has really helped there. and it's just a way of credit enhancement to get a deal done. We're seeing a good pipeline in our SBA lending, in our commercial real estate, and in our C&I. Again, deepening pipelines, I would say that you have to compete on price. You really don't want to compete on credit quality. If anything... You know, probably at the onset, we had tightened some guidelines, quite frankly, and so we don't want to compromise there. And then we really have a regional business model where we empower regional presidents to go out. We have P&Ls and regional metrics on their markets, and, you know, they go out and compete, and we make calls with them, and it's a lot of fun. Yeah. I don't know that I have a lot to add other than we feel like we have good momentum. And in our commercial bank and in our retail bank, we're making a lot of calls. And the HELOC business is very good right now. Okay. That's helpful. And in terms of just where were new origination yields for the quarter? I apologize if I missed that. Jim? Yeah, it depends on the asset category. Some of the consumer categories were in the high twos, like indirect auto. Mortgages were in the low threes. The commercial categories were generally in the low to mid threes for new origination yields. Okay, that's helpful. Does that help? Yes, that does. Thanks for that, Jim. And then maybe just on the provision here and just kind of how to how to think about trends going forward. Just kind of curious, I know you guys indicated in the release that growth drove it, drove the provisions quarter, but just kind of curious how you guys are thinking about the reserve ratio as we go forward the next six months and so forth. Well, we believe that with our credit quality and what we've seen in the migration and key categories like classified and criticized, which has been good the last quarter, the pressure will be off a bit there. And notwithstanding migration, which we're seeing migration go the other way in a positive way, I think that there will be less pressure, certainly. And you want to cover charge-offs. This quarter, the charge-offs were 3.9. That was mostly one credit. Otherwise, we would have had a very low charge-off quarter. But it's really in line with our expectations in the past four or five quarters. And if you want to cover charge-offs, then we're probably – we feel we're a little bit at the higher range of the loan loss reserve for total loans. We have good coverage. So that would really point to, you know, less pressure and maybe a credit being a tailwind in the second half of the year. Okay. I mean, are there maybe some overlays still just that you guys are keeping that you want to wait for things to get a little bit better? for that reserve ratio maybe to get back towards that day one reserve? I'm having a tough time hearing you. Oh, sorry. Maybe just, like, in terms of just the reserve ratio, just kind of, like, where do you think it could maybe bottom out? I mean, I realize you guys didn't adopt Cecil until later. So just trying to think about how to get towards a lower ratio longer term. I think it'll naturally trite with our peers, I suspect. And our asset mix is a little different. And, Jim, I don't know if you want to add anything. Yeah, I think Mike covered the basic dynamics of provision expense quarter to quarter, which, oddly enough, just haven't changed even as you see. So you're covering your charge-offs and you're covering your loan growth. You're providing for future loan growth. we're really pleased that our reserve coverage ratio has held up this high. And I think what we're experiencing, I think it's what a lot of banks would like, is that we're growing into that kind of reserve coverage ratio. So as opposed to the whipsaw of building up a base to reserve, then releasing it, then having to build it again, what every bank would like is the ability to grow into that ratio. We don't have a target. I know you mentioned the day one, but we don't have a target to get back to day one and release the reserves to drive it down to that. We have an obligation while we want to make sure that we have adequate reserves based on what we see in the portfolio and based on our economic forecasts and all the rest. If it plays out like I just said and loan growth continues the way it's going and the economy keeps improving, we probably will get back down to those ratios, but hopefully that'll take place over time and not some big massive release that puts you just at risk of having to provide for that again. Hopefully that's a little bit of a helpful commentary for you. That's all helpful. I appreciate it. Thank you very much. Thanks, Steve.
spk01: Your next question is from the line of Russell Gunther with DA Davidson.
spk02: Hey, good afternoon, guys. Good afternoon. I wanted to follow back to the discussion around the equipment finance list out and maybe just the volume and rate impact. So on the volume side, you guys have been – targeting a mid-single-digit rate, successfully executing there. As this matures, is this a business line that you see as accretive to that growth rate or more of a mixed shift and recommitting to a mid-single-digit growth? And then on the rate side, does this represent upside going forward to a 320, 330 near-term core NIMB guidance? Yeah, I think yes and yes. We do see it as accretive to our net interest margin, and we do see it as an opportunity to boost growth. And the guidance we've given is in single digits, and notwithstanding the pandemic, we really felt we would be at the high end of the range, and we feel that this could provide another boost and really complement a very capable commercial banking franchise. Got it. Okay. And then in terms of the expense guide change, how much of that increase on a quarterly basis is driven by the equipment finance team? You mentioned a few other drivers, but that's the bulk of it. Yeah. Well, the equipment financing is just starting. So the early days of the equipment financing, our projections would be $1 million to $1.5 million a quarter. Probably by the time it's all said and done, it's really humming. The expense will be about $2 million a quarter, but that will more than pay for itself once it passes the break-even point. It will very much pay for itself and then pass that point. So they just came on board. We're really happy to have them. We're building up systems. We're building up the internal control environment, all the things we have to do, a lot like what we do with mortgage. We do expect to book some assets by the end of this year. That's why we're being a little conservative on the break-even point being towards the end of next year. We want to get some earning assets on the books as soon as we can to kind of help that effort pay for itself. All right, Jim, thank you. And then Mike, I understand you guys don't want to put too fine a point on it right now, but you mentioned not doing it to make $3 to $5 million. I mean, that sounds like a net income type of number, which is about a nickel on the high side. Is that the way to think about it, or how should we stay tuned for any depreciation? I think of multiple of that. Yeah, I'll... Yeah, absolutely. We'll give you plenty of guidance as we go on. We'll have multiple quarters and quarterly calls before we get to that point. So we'll refine that guidance as we go. But yeah, ultimately, eventually past that, it should be more creative than that. But we look at this a little bit like the mortgage business, where ultimately, three, four, five, four or five years down the road, it gets to be 10% to 15% of your balance sheet and is really throwing off some really healthy income. Yep. Makes sense. I appreciate it guys. And then just last one on the expense side of things, you know, you had a lot of success with the initiatives that you put in place, uh, getting those costs saved out. And have you given any thoughts into the back half of this year, or as you're thinking about budgeting for 2022 revisiting branch rationalization or any other potential expense initiatives? Not right now. It's pretty fluid. We look at it, as you know, Russell, quarter to quarter, and we're now into the planning season for 2022. And it's a key principle, and we've been able to maintain positive operating leverage despite a slew of investments, as I cited earlier. And each of those, the Street League, was akin to – the equipment finance business, you know, we're spending three to five plus million dollars to really build out platforms. And we figured a way to cover for them. And that's what we have to do. And we also have to continue to make investments in digital. And we have another product I mentioned earlier, the Blend Mortgage Solution, which will be terrific. And we're still bullish on that business. We just have great producers. It's good for the brand. We've get new households, we cross-sell them. So even though mortgages is tapering, it's an important part of our company now. Yeah, and I understand, Mike, and the positive opportunity leverage. So it's great to see it from the prepared remarks. So at least it sounds like a commitment to do that amid this continued franchise investment. So is that the message to take away going forward? It is. It is. And, uh, I know if we have a stake in a given quarter, you're going to remind us of that, and we'll try not to. Fair enough. Okay, thanks for taking my question.
spk01: Your next question is from the line of Stephen Duong from RBC Capital Markets.
spk02: Hey, good afternoon, guys. Good afternoon, Steve. Hey, Tim, it looks like the liquidity has slowed a little bit on your period and balance sheet. Is it fair that when we look at the average deposit balance next quarter, that it could be perhaps flat to down and your cash and securities could perhaps be soaked up a little bit with loan growth? Yeah, I missed a little bit of what you said, Steve, but if I get the gist of it, you're asking about trends in deposits and securities. Is that right? Yeah, because obviously this quarter, average deposits jumped up, liquidity jumped up, but then I noticed your period end balance sheet. It looks like that has kind of been played out, and maybe heading into the third quarter, the liquidity that we've been seeing has kind of leveled off. Yeah, I think that's right, and I'm glad you picked up on that because it was a bit of an odd quarter to decipher from the numbers you mentioned and what you're looking at. The period end figures barely moved, but the averages were up, and really that's because of this big influx right toward the end of the first quarter with the last federal stimulus program. But I would say overall, yes, we do think the deposit balance is probably leveling off. One of the big questions is whether all the PPP loans that converted to cash that are in customer accounts and the stimulus dollars, whether there will be a rush of spending to withdraw some of that money. But basically what we plan on and what we expect is that deposit base to be relatively stable from here. We also expect the securities portfolio to be relatively stable for the rest of the year. We don't expect to take a lot of that extra cash away. uh and positive securities we'll probably repurchase security to replace runoff of course we've been out of the market of securities for the last couple weeks when we purchase opportunities for playing vanilla mortgage-backed securities we're at one percent even uh very unappealing it's come up a bit since then so it's a little bit better but we try to stay out of the market when it gets to do that week But overall, we are much more excited about the loan growth prospect as a way to soak up the extra excess cash and the excess deposits. That's the way we see the second half playing out. Got it. And I guess, you know, with all this liquidity, I guess the one thing you could do is just buy more of your stock back. Is that, you know, are you kind of more open to that if you still have this liquidity? We are. You know, the stock repurchases have never really been driven by liquidity. It's more driven by our – it is a liquidity question. We don't really think of it that way. We think of it more of a capital planning exercise. Um, and so we have been taking a fairly non-aggressive approach this year, kind of slow approach, uh, as we get, uh, uh, as we just retain more earnings and, uh, through the second half and capital levels build, it really becomes more of a capital management tool to get to deploy the excess capital. And so we could pick up the pace a little bit in the second half, but right now the plan is to kind of maintain the slow, steady pace we've been doing so far. Understood. And then just on your PPP balances right now, I guess it's kind of hard to tell, but do you think you'll have the majority of those balances be forgiven in the third quarter or the fourth quarter? We do. We think that ultimately about 90% of the totals will be gone by the end of the year. That will leave the remaining PP balances somewhere between $100 million and $150 million by the end of the year. There was this pause in the forgiveness programs driven by the way the SBA was forgiving PPP loans in the second quarter. That was part of what led to the slowdown in forgiveness rates in the second quarter. But it really picked up, again, towards the end of the quarter. And so most of the round one now has stopped. Most of it's already been forgiven, and we expect that the round two will follow the same kind of pattern. Most of it will be forgiven by the end of the year. Great. Thanks for that. Just on the loan growth in the quarter, I guess, you know, Resi and Otto were pretty strong. How are you guys feeling about those two segments for the second half of the year? And then also your CNI XPPP, that kind of looks like that's bottomed out as well. Are you seeing, you know, that kind of starting to turn as well? Yeah, it is. It was some of the loss there was in this quarter. That is turning. The commercial real estate was a little ahead of it. Commercial solutions, which is just the smaller portion of CNI, we're already seeing some nice little growth there. So I think that is beginning to turn. And then I think the first question was just about the indirect business. And our expansion into Ohio has really driven that. It seems we've done a nice job of getting in front of dealers. And we're also getting floor plans from that and other commercial business from that as well. And we really are having good credit experience and – And we have had. Steve, I would just remind you, through the Great Recession, you know, our indirect business performed very well. We've scaled it a bit, but our credit underwriting is pretty discerning. And if anything, at the onset of the pandemic, we tightened our standards a bit there. So we feel good about these portfolios and how they'll endure. If I could just add to that, if you don't mind, one thing that gives us confidence about C&I growth towards the second half is the growth that you don't see in the published financials and growth in commitments. We had really strong growth in commitments in the second quarter, and what this has turned into is a decline in the utilization rate. And so even though the total C&I loan balance didn't go up that much, the growth in commitments in the quarter was $124 million. So we see that really paving the way. And, again, it gives us confidence that it's a timing issue if that gets drawn down to second half, we're going to experience that loan growth in C&I.
spk00: Great point, Jim.
spk02: Yeah. Yeah, that's good to hear. And I guess maybe just back on the auto issue, It's been pretty strong. I thought it was kind of leveled off a little bit, but it's still pretty strong. There's no issues with the chip shortage or anything like that? Are you still kind of bullish on it? Yeah, we are. A lot of the really adept dealers are just finding a way to do some just-in-time, and it's surprising how resilient they've been. Some of the older school dealers, it's been a little harder on them, and I think... This looks kind of a little obscure, but I think the Mannheim used card index back in the middle of June, I think we've peaked at prices, and we're starting to come off of those a little bit. So that probably pertains well for the business and steadier volumes. So I don't know. It's been more uninterrupted than we thought it would be despite the inventory shortages. That's great to hear. And then just, you know, last question, your equipment leasing with the lift out. I guess if you were, you know, this is coming on board, if you look back and see some of the other segments that you've, you know, gotten involved with, How do you see the equipment leasing portfolio comparing to those other portfolios that you've been involved with through the years? Do you see it really being up there compared to the other portfolios or in line, just in overall, like, growth and profitability? I think it'll be very profitable, and I think it will – we can grow it – uh i think we can we can have a substantial meaningful business for our company i'll just echo one thing i mentioned before about its place in our company because i think that gets to your question of being a part of the overall pie chart of the business uh and it's sliced being a 10 or 50 pie chart in terms of balances but it's a more profitable business than a lot of other businesses we do so it will it will be nicely accreted to margin. The yields are higher. It'll be an efficient business. It'll help the efficiency ratio. We're excited about that business as it grows. Great. That's it for me. Thank you. Thank you.
spk01: Our final question has been on the line of Matthew Brees with Stevens Incorporated.
spk02: Hey, good afternoon. Just a few from me. You know, first... What types of equipment are going to be underwritten by the new team? Is this large ticket, small ticket, yellow metal? What is it? It's small ticket initially. Okay. Could you be any more specific there? Is it small ticket like office equipment or something else? And what are the kinds of typical loan terms you might get on it? Yeah, these will be through vendor programs, and this will include everything from small-ticket leasing. I mean, it could be landscaping. It could be office. It could be really tools and manufacturing, forklifts. Surprisingly, we go to some of our middle market clients, and invariably we might have $5 or $10 million that they will have between small equipment that runs the plant and, you know, another half a million dollars in leases. It'll be for some programs like that as well. Okay. I'm sorry, just clarify. It's not primarily office. I think you're alluding to that. It's, as Mike mentioned, transportation equipment, manufacturing equipment, but it's not primarily office equipment. Okay. I was just providing an example. Thank you for clarifying. And then... What are the typical kind of spreads and terms on this? The yields are in the 4.5% to 5.5% range pretty consistently, and that's pretty consistent through economic cycles. So that's why we're fairly confident that it will be in the credo because the yields are very attractive. And do you have an idea of historical lost content from the producers? Yeah, if you give us a few months, it's reasonable. It's probably a little higher than our loss now. Let me just get that for you. Sure. I'll ask my follow-up question. How much of the balance sheet at this point is floating rate and without floors? I just want to get a sense for if and when we do see a Fed hike, how quickly we might see some of your loan yields respond. Our loans, we have about 50% that reprice, about 50% are fixed. And that's by design. We've been higher on the fixed, and then we'd like it 50-50. Okay. And then my last one is, you know, if I strip away, you know, PPP this quarter, core NII was up sequentially. It feels like, you know, we inflected kind of the bottom was last quarter. As I think about the outlook, right, you know, good long growth, feels like the core NIM can expand. Could you provide any color on core NII and kind of the outlook there, maybe provide some guardrails as to how we should be thinking about it over the next six to 12 months? Well, first of all, by the way, I got your answer on the charge-offs. The normalized charge-off in this business is about 55 to 75 basis points. So that's going to be probably higher than your inject auto business, but the yields are going to make up for that. Thank you. It's a great question. Thanks. We'll give more clarifying comments as we go along. The spread of incoming people kind of, just to continue the story you were just telling, we see that as a big story of stability and maybe some growth potential because of the changes in the asset mix. Just to get better earning assets on the balance sheet. We'll try to get some clarity as to stripping out PPP and how that affects that because we still have a lot of PPP fee amortization to recognize. We'll recognize a lot of that in the second half. At the core, like you were talking about, the core NII without PPP seems to be a story of stability with some growth potential in the second half. Some of that story will depend on the rate environment. Obviously, we're all watching the 10-year headline treasury rate at 1.25%. For us, and I know you weren't asking this question directly, but it's implied in your question, for us we have very little as a company tied to the 10-year rate. For example, if you look at the middle part of the curve, the two- and three-year part of the curve, this isn't getting as much attention, but that's actually higher than it was at March 31st, and that indirect auto production is all tied to that part of the curve. So there's some of it that very much obviously the rate environment plays a part in our expectations toward the NII trend, which was the core of your question. But it's not as penalizing to us as you might think just looking at the headline 10-year number. Got it. Okay. Well, I appreciate that. Thanks for all the color. Thank you.
spk01: At this time, there are no further questions. I would like to turn the call over for any closing remarks.
spk02: Thank you, Operator. As always, we appreciate your interest in our company, and we look forward to being with a number of you over the course of the next three to six months. Thank you so much.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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