This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good afternoon. My name is David and I'll be your conference operator today. At this time, I'd like to welcome everyone to the first Commonwealth Financial Corporation 3Q 2021 earnings release conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. Thank you. Vice President of Finance and Investor Relations, Ryan Thomas, you may begin your conference.
spk04: Thank you, David. Good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation's third quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, Janger Bence, Bank President and Chief Revenue Officer, and Brian Karup, our Chief Credit 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 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. And with that, I will turn the call over to Mike.
spk09: Thank you, Ryan, and good afternoon, everyone. Third quarter net income of $34.1 million produced core earnings per share of $0.36, accompanied by core return on assets of 1.43% and core pre-tax, pre-provisioned ROA of 1.79%. This was a very good quarter for First Commonwealth with solid profitability, growth, and credit metrics. Other headlines for the quarter include, first, Excluding PPP loan payoffs, we're pleased with loan growth of 8.2% or $132.3 million in the third quarter, with ongoing strength in indirect lending, home equity lending, commercial lending, and mortgage lending. Our growth is broad-based between commercial and retail lending disciplines and has become increasingly granular over the years. As an aside, our loan growth over the last two quarters has not yet benefited from higher line of credit utilization. Second, the loan growth and improved margin enabled a $2.4 million quarter-over-quarter increase in net interest income to $70.9 million. Jim will have more color on the net interest margin. Third, non-interest income or fees grew $1.2 million quarter over quarter to $27.2 million on the strength of improvement in SBA and mortgage gain on sale income, as well as higher wealth management income. Importantly, our card-related interchange business generated $7.1 million in fee income. Our regional business model has been a strong contributor to feed income growth with better teamwork and collaboration, enabling us to deliver a broader set of solutions for our clients. Fourth, our efficiency ratio increased to 55.27%, as core non-interest expense rose some $3.7 million, primarily due to higher personnel expense, including higher incentive accruals based upon increased production, higher wages, particularly in entry-level positions driven by inflationary pressure, higher hospitalization expense, and then the hiring of the management team of the equipment finance division. It is increasingly clear that we are not immune to expense headwinds in the current environment. Fifth, and importantly on the credit side, we guided last quarter to stronger credit metrics in the second half of the year in 2021. That's exactly what is happening. The third quarter represented our lowest loan charge-offs in nine quarters. A decrease in specific reserves for troubled credits, coupled with general improvement in economic conditions, led to a provision of just $330,000, down from $5.4 million in the second quarter. Our reserves now represent 1.3% of total loans, excluding TPP. in a 247 percent of non non-performing loans the level of non-performing loans improves significantly from 52.8 million dollars in the second quarter to just 38.1 million dollars in the third quarter or 56 basis points of total loans similarly non-performing assets of 39 million dollars at quarter end now stand at 41 basis points of total assets Just to put the quarter end in early October, a $6.9 million troubled credit was resolved and will be reflected in Q4 results. Other notable third quarter items follow. First Commonwealth earned the number one SBA lender ranking in Pittsburgh for the fiscal year ending September 30th, 2021. This is a significant accomplishment and reflective of both the talent in the SBA lending team coupled with the partnership enabled by the regional business model alluded to earlier. In the third quarter, we continue to transform our technology to include the selection of a new loan origination system as well as introducing several new cash management solutions or TM solutions for our business clients. We continue to be pleased with our adoption of our new mobile banking app, which is growing at an annualized rate of 18%. As we work through our three-year strategic plan, I would share three of our six areas of focus that might be most relevant to investors. First, let's accelerate the growth trajectory of our company, and we'll do this primarily through organic, broad-based loan growth across both our commercial and consumer loans. Second, continue to increase digital relevance to drive customer satisfaction, ease of use, and brand identity, primarily through the continued investment in customer-facing technology. And third, anticipate and offset expense pressure to maintain operating leverage over a multi-year horizon. I say this because we realize that building new businesses like Equipment Finance from the ground up will negatively impact operating leverage at first, but can have a powerful impact on operating leverage in the long run. Regarding growth, we received many good questions about our equipment finance efforts, so let me provide an update on our progress. As you recall, we did a lift-out from a larger bank in June of a Philadelphia team with a 20-year track record of performance. As we enter the business, we expect to fund small-ticket loans and leases on equipment on a nationwide basis. The group's primary experience has been with essential use commercial equipment diversified across industries and equipment types. The manufacturing, construction, and professional service industries represent more than half of their originations by industry. Primary equipment types included utility trucks, highway trucks, machine tools, trailers, and manufacturing and packaging equipment. A good example of a piece of essential use equipment would be a machine tool like a lathe that a small business needs to run its business. We expect the average ticket size to be about $80,000 and an average term of 60 months. Based on the historical performance of this scheme, we expect yields in the mid-5% range and spreads in the mid-4% range, with charge-offs typically ranging from 55 to 75 basis points. If all goes according to plan, we believe that we can generate some $200 to $250 million of equipment finance assets on our books by the end of 2022 before really hitting our stride in 2023 and 2024. And with that, I'll turn it over to Jim.
spk08: Thanks, Mike. As Mike already mentioned, we were pleased with our financial performance this quarter. Hopefully, I can provide you with a little more detail on our net interest margin, fee income, and expenses. The GAAP net interest margin expanded by six basis points this quarter to 3.23%. Mint expansion was driven by strong organic loan growth of just over 8% annualized. The mint expansion wasn't impacted by PPP. Total PPP income in the third quarter was $5.7 million, up by only $200,000 from last quarter. As of September 30th, we had $152 million of PPP remaining on the books, with $6.3 million in fee income that remains to be recognized. We expect that most of the remaining PPP balances will be forgiven in the fourth quarter, which should help the gap NIM. The core NIM, which we calculate to exclude the effects of PPP and excess cash, fell from 3.20% last quarter to 3.16% this quarter because we purchased $134 million of securities in the quarter. Had we not purchased the securities and just left the money sitting cash, we would have excluded that cash from the core NIM calculation based on the way we calculated, and the core NIM would have dropped by only one basis point to 3.19%. We think that the corn end has bottomed out and should drift upwards from here as we redeploy excess cash into loans. Our cost of deposits in the third quarter was down to only six basis points. I'm pleased to report that our last remaining tranche of high-cost deposits, totaling $52 million at a cost of 1.65%, repriced on October 13th, subsequent to quarter end. That alone will save us nearly a million dollars a year in interest expense and at about a point in them. We'll reap the benefit of that starting in the fourth quarter. With that behind us, we're down to about $400 million in time deposits remaining at a cost of 36 basis points, three-quarters of which will mature by the end of 2022. so while some deposit repricing opportunity remains we are very far along in repricing our entire deposit book leaving us very well positioned if rates rise with that in mind we've taken a hard look at the deposit beta assumptions in our interest rate risk sensitivity calculations in light of unprecedented levels of liquidity we are revising our interest rate risk assumptions to reflect the ability to lag deposit rate increases for the first two 25 basis point rate hikes. The result will be what we believe to be a more accurate picture of our asset sensitivity in the current environment. You'll see this in our IRR tables once we publish our 10Q, but to give you a preview, a 100 basis point parallel shock will show an increase in the first year net interest income of over 5%. That's roughly double the previous level of sensitivity, so we wanted to explain the reason for the change. Even without a rate hike, however, the NIMS story in 2022 will be driven by the redeployment of excess cash and loans, especially since we believe that deposit balances will remain relatively stable throughout 2022, and any loan growth above cash levels can be funded by cash flow from the securities portfolio. This effectively rotates lower-earning assets into higher-earning ones. This asset rotation should benefit NIM in 2022, even if rates don't rise. And then if rates do rise, our asset sensitivity will kick in and expand the margin even further. Turning now to fee income, fee income of $27.2 million in the quarter remains a bright spot and seems to be one aspect of our company that is consistently underappreciated. There's been talk of slowdown in mortgage all year, but our mortgage gain on sale income actually increased by $400,000 over the last quarter. SBA is another fee income engine that continues to gain momentum now that PPP is mostly behind us, with SBA gain on sale income up by $700,000 from last quarter to $2.4 million. Card-related interchange income continues at near-record levels for us of approximately $7 million a quarter. And deposit service charges, after being off pace for much of the pandemic due to heightened cash levels in customer accounts, have returned to more normalized levels. Turning to non-interest expense, last quarter our guidance was $53 to $54 million, and we came in at $55 million for the reasons you might describe. Like many of our peers, we are experiencing expense pressures mostly related to people costs, like salaries and benefits. While there's some normal variability in costs quarter to quarter, it's difficult to see NIE falling from current levels. Fortunately, the pace of our loan growth gives us confidence that our revenue can outpace expense growth. Finally, we repurchased 997,517 shares of stock during the third quarter and an average price of $13.35. While we ended the quarter with approximately $10.3 million remaining of our $25 million share repurchase authorization, we are also pleased to announce that our board authorized an additional $25 million share repurchase authorization yesterday. We increased the authorization so that we could have repurchase authority available to redeploy expected excess capital generation in the fourth quarter and into next year. And with that, we'll take any questions you may have.
spk07: At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And we'll take our first question from Mike Perito with KDW.
spk02: Hey, good afternoon, guys. Thanks for taking my questions. Good afternoon. I wanted to start, Jim, just on the cost piece, you know, it sounds like between the kind of the qualitative items that Mike described and then the guide, I mean, that this $55 million range is kind of here to stay. I guess it's just we try to extrapolate that into what kind of growth we can see next year. I mean, obviously it's a fairly sizable step up. I mean, do you think that there's a lot of upward – maybe not a lot, but is there upward pressure off of kind of this quarterly run rate on an annualized basis, or do you think – it's more kind of low single digits, full year-on-year type of growth for the expenses?
spk09: On the expense side, yes. On the expense side, you know, over the last seven or eight years, we have nipped and tucked expenses and done some significant things to make sure and ensure we have operating leverage. And we plan to continue to do that. We're going to have a little blip here as we invest in equipment finance. And that could be a huge platform for us. And then we'll realize revenue really in the latter half of next year. $50 million does feel like kind of a new number. It's a bit unexpected. It's impacted a lot of our lower entry-level positions, which is absolutely vital for customer service. Our call center has just blossomed and boomed, and it supports the digital capacity of the banks. but the costs are higher than we would have anticipated 6 to 12 to 18 months ago. So that's really the foundation. I think we're just sorting through it a bit. I think Jim's statement that, you know, $50 million is something we'll come into grips with. $55, forgive me. But we're working through plans for next year, and invariably – You know, we do things to make sure that we get costs out from time to time, but we're not prepared to announce anything like that at this time.
spk02: Sorry, go ahead.
spk08: No, just to add, it's hard to give exactly. Every time we do this, there's always some variability quarter to quarter. There were a few things in the third quarter that were one-time costs but not many, so that's kind of why there's some general guidance there.
spk02: Yeah, I was going to say, maybe coming at it slightly differently. I mean, obviously, 2021 was a bit of an anomaly in many ways. You know, you're on pace to do a, call it 55% efficiency ratio. But, you know, if we think about 2023, I mean, 2022 relative to 2020, right, I mean, you guys, I think we're at 57%. I mean, it's reasonable to think that you'll probably be below that as PPP comes out, but, you know, not where you've been year to date just because of some of the equipment finance investments and some of the wage pressure. Is that maybe a better way to frame it?
spk08: Yeah.
spk09: I think so. I mean, I think also the reality is that we have to think long-term not only about the business in its current state, but how we continue to invest in digital platforms, business platforms with account origination and other tools. that we'll invest in for the future. So we really have to find costs and find opportunity to continue the level of investment we've had in the last five years on top of general... you know, inflationary and other pressure. So there's a lot that needs – there always is a lot that needs to be kind of a three-year plan, and that isn't changing. Our company changes pretty significantly if you look at it every two to three years in terms of how we do business, the platforms, we've broadened them. Our digital relevance is there. We'll continue to invest there. That's a long-winded answer, but it's not a cryptic answer to your question. There's a lot of plans that will go into maintaining operating leverage over the next year or two.
spk02: No, that's helpful. So thank you. And then the last for me is just on the capital piece, you know, don't want to talk for others, but a little bit more buyback activity than I was expecting. I know it sounds like you guys still have some appetite moving forward. I was wondering if you could expand on that a little bit and then just, Mike, maybe provide an update on kind of the M&A environment and any changes over the last, you know, 90 days worth reporting.
spk08: Yeah, no, sure. It's pretty simple. I mean, we had authorization remaining about $10 million, but we're just generating a lot of capital. So, loan growth is really working. We think we'll generate over $20 million of excess capital in the fourth quarter. And so, there's a good chance that we would run out of authorization. And so, we went to the board and said it would be prudent to increase the authorization. And the way we go back into the market and buy the stock, you know, we accelerate buying back on the dips. We just think it's smart to do that. And so we wanted to have authorization ready in case that happens. So there's also the prospect of perhaps taxes on buybacks, but that's all speculative at this point. That's been in the news. So there's some background motivation to do buybacks now, but that's highly speculative, really driven by excess capital generation.
spk09: Yeah, on the M&A front, I mean, we've had over the years, I think Jim and I have shared, you know, over 55 irons in the fire to do five. So it has to work for us both strategically and financially. We want something that we see a nice path to execution with lower risk. And those have been our criteria, and we've kind of tended to do smaller-type deals rather than larger deals. And those deals have worked for us, every one of them. And so that's our MO. There's always something in the air, but there's a big difference between that and making an announcement. Got it.
spk02: Helpful, guys. Thank you for taking my questions. Appreciate it. Thanks, Mike.
spk07: And next we'll go to Stephen Duong with RBC Capital Markets.
spk06: Hey, good afternoon, guys. Good afternoon. Mike, just the SBA games, I mean, those looks like, yeah, it did pretty good this quarter. I guess, is there anything specific about the environment now that, you know, jumped to, you're up by 700,000 to 2.4 million? And I guess, what was it? It was one something before. Yeah, just curious, like, you know, what led to the strong performance in that business?
spk09: But just like mortgage and SBA and soon to be equipment finance, we've made major investments in these platforms. It takes several years to realize the investment. In the past year, if you go back to gain and sell income over the last seven or eight quarters, I mean, you were $400,000, $500,000 up to $1.3, $1.5, $1.1, $1.6, $1.2.4 now. And that has been very intentional. We've added to the sales force. We've invested in the capacity. Our chief credit officer, Brian Carriff, likes to say, crawl, walk, run. That's exactly what we've done. But we feel like we're just beginning to hit our stride in this business. And that was the intention, to go from SBA as kind of an exception business to SBA as a real crown game kind of business. Jeff comes from a larger bank environment, Jeff Rosen, who runs this business. and his team, and they run some large platforms from some bigger banks. We think we have the vision to execute this and make it a core part of our non-interest income. We're excited about it, too, because it really helps our borrowers that can't quite get over the hump to get a deal done for them. When you do that, you really have a customer for a lifetime. Quite frankly, we really like the business. I think... The other thing is just with the onset of PPP, you know, our capacity was with PPP, and appropriately so. I mean, at the end of the day, you know, we did over 8,000 loans for $900 million, which we felt was appropriate in our communities to support our clients. So this is a business that it's not – It's not a fleeting thing. I mean, we have one, now we have two or three. You know, we're going to have more ores in the water in this business each year.
spk06: That's great to hear. And I guess, you know, the business is it. You made all these investments. Is it fair to say that there's a little bit of a moat around the business, that it's not something that anybody can just jump in? Also, with the business, is there any cyclicality to the business, or is this something that you guys just hit the ground and you just continue on growing the business?
spk09: You know what? I'm going to turn it over to Jane Gerbet. She's our president and chief revenue officer, and she works closely with Jeff and the team on this business. Jane, can you answer Stephen's question?
spk00: Sure. Thank you, Stephen. You know, I think the important things that we've done with SBA are between Jeff Rosen and Keith Lufano, we have some pros that have run the business, as Mike said, with much larger platforms. And we've been very clever about integrating that oversight with local market representation. So our local BDOs are part of our region. And we think we've got the compensation structure where everybody's interests are mutually aligned. There's no fighting, no bickering, no, you know, no arguing about what's right for the client. And so it's nothing that's too fancy, but it is tough to replicate because it all has to work together.
spk09: A great question, Steve, about the barriers to entry. You know, I think it's, you know, you're a year or two or three in, And that's with the right talent. And then Jane said something pretty profound, and that is it has to be integrated with the local markets. That's so important, and we feel like we get there with the regional business model. And we have tight integration between our commercial banking floors doing SBA loans, and that's a real credit to them.
spk06: That's great to hear. And is there any cyclicality like the mortgage business, or is it less cyclical?
spk00: Oh, I don't know. I apologize. You know, I think it will not be cyclical like mortgage. I do think we're going to have to work a little bit harder next year because we will lose the 90% guarantee and it'll go back to the more normalized 75% guarantee. But I think that regardless, we're going to do just fine. The pipelines today are probably up by double from last year. Now last year we did have a lot of PPP going on, but we have very healthy pipelines in closing and underwriting.
spk06: Got it. I really appreciate that. That's really helpful. And, yeah, it just sounds like it's such a great, wonderful business to have some recurring fee income going forward with that. And then maybe just on the rate sensitivity that you guys spoke about, the plus 100 basis points, It's great to hear that you looked at the beta assumptions. And so if I'm listening to this right, there's a lag on the first 225 basis point rate hike. Does that mean that it's zero? And then the third rate hike, you put a higher beta on it? And if so, what is the beta number?
spk08: Yeah, no, good question. Just to clarify, the beta number is based on our historic deposit studies, and that's 25% beta. And we've been using 25% beta for some time. The lag means 0% beta for the first two rate hikes, and then you just click to the 25% beta for hike 3, 4, and then 5, 6, 7 when you do the 200 and 300 basis point parallel shifts as well. We had looked at, and there's some, I think, there's some that suggest you could feather it in a little bit for the first time, and the second time, and the third. That just gets too complicated. We think this is just a helpful assumption. And I think it's a much more accurate picture of what we and other banks like us with a lot of liquidity would actually do in a rising rate scenario.
spk06: Yeah, I totally agree. I mean, considering all the deposits that you guys are having right now, I can't imagine anybody's really chasing for deposits on the first one or two rate hikes. Well, that's it for me. I really appreciate you guys taking the questions. Thank you.
spk09: Thank you.
spk07: And next we'll go to Daniel Tomeo with Raymond James.
spk01: Hey, good afternoon, everyone. Thanks for taking my question. This is probably something you've explained in the past, but the calculation of the core NIM figure, which you talked about being 316 in the quarter, I just want to make sure I understood that correctly, because the margin expansion in the third quarter, you said, did not come from PPP fees, but the core NIM contracted in the quarter. Did I hear that you excluded excess cash from that calculation?
spk08: Yeah. And look, we recognize that there's no real industry standard for a core NIM, so we want to be careful about that kind of thing. We do publish a full reconciliation. It's in the earnings release PowerPoint supplement that is available on our website, on the Investor Relations portion of the website. We try to be pretty disclosive about these things and give all the numbers so that you could do the calculation differently. But you understood it properly. We are trying to exclude PPP as if it never even happened from the numerator and the denominator, the earnings and the balances, and then the excess cash as well because those are both distorted effects. And the PPP will probably be behind us pretty soon, but the cash will linger for a while. So we'll probably keep that practice and publisher reconciliation probably through next year.
spk01: Okay, great. Yeah, I'll find that. Thank you. And then your assumptions, I want to make sure I read this correctly as well, that deposits are going to be flat in 2022. What does that assume for the excess liquidity on the balance sheet?
spk08: Yeah, and part of that assumption comes from the idea that some of the excess liquidity will finally be spent. We haven't seen a lot of that. We've looked at some industry studies that show people will start spending down some of that excess liquidity. And the basic idea behind it is not that complicated. It's that we always have normal growth in deposits. We had, I think, 6% growth in non-sparing deposits since last quarter. So there is some growth in deposits normally, but the spend down will offset that. And as those two offset each other, it roughly leaves deposit balances steady. And that's good for us because that means instead of growing both sides of the balance sheet, we can just take the excess cash and redeploy it into a higher-earning asset like loans. That's the idea.
spk01: Understood. Well, I appreciate you catching up and getting me up to speed. That's all I have. Thank you. Thank you. Thank you.
spk07: As a reminder, ladies and gentlemen, it's star one if you'd like to ask a question. Next we'll go to Russell Gunther with D.A. Davidson and Company.
spk09: Hey, good afternoon, Guy. Hey, Russell. I want to spend a minute on the organic growth outlook. You guys have been outperforming on that front for the last couple of quarters, depending on how 4Q shapes out, really tracking above that mid-single-digit rate.
spk03: If you look to, Mike, layer in that equipment finance you mentioned, even the low end, $200 million, I mean, that's quite a head start.
spk09: So how are you thinking about overall growth rate, both within, I don't want to call it core FCF, because this is going to be core too, but, you know, growth expectations outside of the equipment finance and then layering that on top as you look into next year? Yeah, I'll make some comments and let Jane, our president, clean up after me. I got a report. Let's start on the commercial side. I got a report from Brian Carapace. He started off right before the call. The loan committees have been pretty busy. We're seeing some nice activity in commercial real estate, particularly multifamily and industrial warehouse. And, you know, our commitments have really climbed. Newer commitments over the last several months since really May have And with a lot of nice new approvals, the utilization and the outstandings are still low. And that will turn, as these projects mature, lots of tailwind there in the construction portfolio. As we move to CNI, you know, we've really de-risked that business over the last decade or so, and it's a lot less chunky than it used to be. As we look at our pipelines there, we really like CNI. Jane and I mentioned SBA pipelines are very strong. And so we feel good about the commercial business, even better than a quarter or two ago. And the consumer businesses have been really hitting their stride. I mean, when we look at the activity, whether it's consumer lending in our branches or the indirect activity, it's up nicely, you know, order of magnitude 20% in each probably year over year. So I think fundamentally, Jane and the team have just – the businesses continue to improve. It's not really sexy. It's just training. It's increased productivity. It's focused. And, Jane, what would you add to that? I mean, we feel good about where we're at with lending and the future over the course of the next year, notwithstanding equipment finance. Jane, anything I'm missing?
spk00: I don't think you're missing anything, Mike. But the only thing I'd add, Russell, is – Our loan growth is so diversified that it does make it a little bit tricky to manage the efficiency ratio. You know, we've got a couple of extra businesses that other banks don't have. And I would take that problem any day, but it does mean that we always have to be thinking about the expenses. But I feel good about where all of the businesses are. um you know we tightened a little bit on the consumer side during covid and we did not uh we didn't loosen yet so we're still um we're still getting the structure that we want delinquencies are at historic lows uh and we're still growing the books and the pipelines are healthy across the whole bank i feel really good about it and i feel good I feel good about equipment finance. You know, it's tough to stand up a business in the middle of a pandemic because, you know, everybody's working remote and all that. But we are staying on track. The vendors are good partners. I think we're going to be just fine.
spk04: Thank you, Jane. Thank you, Mike.
spk03: I guess just as a follow-up, you know, you mentioned consumer just hitting its stride, haven't loosened there yet.
spk04: Would you expect those verticals to continue at a similar pace, or is there any appetite to dial that back or remix growth as the equipment finance comes on?
spk00: I think it's too soon to say that we would remix. You know, we aren't close to any one business's segment limits, so I think we can keep going just the way we are.
spk09: Okay, great. Well, thank you both. That was it for me. Thanks, Russell.
spk07: Okay, next we'll go to Frank Chiraldi with Piper Sendler.
spk05: Hi, everyone. Hey, Frank. Just a follow-up on buybacks, Jim. I wonder if you could just remind us in terms of parameters around where the buyback is attractive. Is it an earned back? And then sort of what is the threshold there?
spk08: Yeah, it's really not driven by an earn-back calculation. We understand people will look at the earn-back calculation and say, that's long, and I'd rather not do it because of the earn-back, but for us, it's not really driven by that. Right now in the marketplace, we're in blackout, but we have an arrangement, that's MD5 arrangement, that's under the current authorization, so we are right now buying back at any price below $14.00. When we come out of blackout three days from now, under the remaining authorization, with a new authorization, we may increase that. And it's really driven by our view that we are still fundamentally undervalued. and uh and we're not just saying that as bank management teams that always say they're undervalued we look at kind of the regression analysis that shows what banks with our roe should be trading at and we think that even though we like where we're trading right now on a price book basis uh we're earning a higher multiple than that we have so as long as that's the case we think there's room to buy back that stock because there'll come a day we're trading at a much higher level we'll look back and wish we had bought more at this level So now the buyback, the nice thing is that it's flexible. If there's a better opportunity to deploy the capital, like an accretive merger, we can pause the buyback and do that instead, and we've done that in the past. So that's always on the table as well. But this is just a way to redeploy the capital. The other thing is the capital ratios, because we're generating so much capital, keep creeping up. And so we want to make sure we're not underleveraged. I think the published in the earnings release, the tangible common ratio, XPPP is at 8.9%. Probably at the higher end of the range where we like it. So there's plenty of excess capital to deploy, and that's kind of our philosophy on buybacks.
spk05: That's okay. And then just lastly, I just want to make sure I'm thinking about it right in terms of my modeling. You talked about the core and then bottoming out. And I'm just wondering, does that assume any securities purchases, additional securities purchases, or given the long growth you guys are expecting, does that kind of take care of the excess cash over the next 12 months?
spk08: Thanks for asking, Frank. It gives me a chance to clarify. No, it's really driven by the idea that the excess cash will be redeployed in the loan growth. We have deployed some of the excess cash we've generated through the pandemic, through the government stimulus programs and the conversion of the PPV loans as they've been forgiven into cash. We've redeployed some of that into security. So the security portfolios you can see in our balance sheet has grown. But that's mostly where it's course. At this point, we'll probably maintain the securities portfolio right about at the level that it's at. We will reinvest cash flow from the securities portfolio to keep it at that level. But the idea is that the cash we have remaining on the books, which was close to $300 million around quarter end, that should be redeployed into more profitable loan growth over the next 12 months.
spk07: Great.
spk05: Okay, that makes sense. Thanks for the call. Thanks, Frank.
spk07: And next we'll go to Danielle Cardenas with Boeing and Scattergood.
spk06: Good afternoon.
spk08: Quick question for you. So given the improvements that we've seen in non-performing assets and in loan growth, you know, we saw a decline in your loan loss reserve levels to 140 from 144 last quarter and minimal provisions this quarter. Should we expect to continue to see that ratio decline as you continue to grow And how should we think about provisioning on a go-forward basis for you guys? Does it just match charge-offs, or are you thinking about growth as well? Hey, Brian, you're on the call. Why don't you answer this?
spk09: Brian Carra for Chief Credit Officer. Brian, you out there? This credit's a good story. Yeah, well, we long-term, you know, charge-offs match provisioning. You know, we feel good, and we mentioned the subsequent event of $7 million that drops our NPAs and our NPLs. So we're well-positioned with good coverage of our non-performing loans. We're in a good position with credit. You know, with low delinquencies, the criticized and the other categories have fallen. So I think there will be pressure in our modeling probably to release some reserve.
spk08: Yeah, Dan, if I could just add, and we must have connectivity issues, but Brian's so terribly sorry about that. But that basic age-old formula of reserving for charge-offs and then for loan growth kind of remains the same, but the wild card is CECL, and the CECL kind of, extra qualitative factors we have for general economic conditions. So that could only change. And if the economy looks like it's going south, it's predicted to go south, our CECI reserves could be affected by that. But the general provision expense quarter is really going to be driven by charge-offs and loan growth. The only color I did on top of that The whole conversation is that our asset quality is getting so good, and the economic outlook does not look like it's going south. It looks pretty good, that banks like us are having a hard time finding rationale to hang on to the qualitative reserves that we have. So it's getting harder and harder to justify the qualitative reserves you have, and as much as we might want to, we probably will not be able to do that going forward. Brian, your line is open. Do we have Ryan?
spk03: Yeah, can you hear me? Yeah, we can hear you now. Okay. I think you were spot on with your answers, and I don't really have anything to add. It will really be very much around loan growth, economic conditions, improvement in our loan portfolio, and charge-offs. Well said. Great.
spk08: And then just one last question here on the equipment finance, on the guidance that you gave of the expected growth. Is that purely with the team that you have in place? Does that factor in additional hires throughout the course of the year?
spk09: Yeah, great question. That factors in additional hires. I mean, today we only have 17 members on the board. They're the brass, and the people that run it, they'll be adding staff. you know, a cadre of more operations and salespeople over the course of next year. So there will be some costs associated with that. Is that helpful, Dan?
spk08: Yes, sir. Great. That's all I have. I'll step back. Thanks, guys.
spk09: Thanks, Dan.
spk07: There are no further questions at this time. I'll now turn the call back over to Mike Price, President and Chief Executive Officer, for any additional or closing remarks.
spk09: I always say this, but I appreciate your interest in our company. I know I'll be with a number of you over the course of the next quarter, both Jim and I. Our story is one where we just try to get better every quarter, and we deliver on that. We think obsessively about operating leverage. We've really broadened the base of our fee businesses. Our core commercial and consumer businesses get better every year. We've switched gears to a regional banking model that is really producing for us on the non-interest income and the growth side as well, which is so good about the future of our company. But thank you again and look forward to being with you over the course of this fourth quarter. Take care.
spk07: This concludes today's conference call. You may now disconnect.
Disclaimer