First Commonwealth Financial Corp (FCF) 2021 Q4 法說會逐字稿

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 Fourth Quarter 2021 Earnings Release Conference Call. Today's conference is being recorded. (Operator Instructions) Thank you. Ryan Thomas, Vice President of Finance and Investor Relations, you may begin your conference.

Thank you, David, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's fourth quarter financial results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, President and Chief Revenue Officer; and Brian Karrip, 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'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 statements.

Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation.

And now I will turn the call over to Mike.

Thank you, Ryan. This past year was another good year for First Commonwealth. So much of what we did sets us up well for 2022. We continued multiyear investments in our core systems and digital technologies, core businesses, fee businesses, new geographies and credit systems as well as our leadership and [line talent].

Here are a few of the 2021 highlights. Regarding loans, we had strong growth ex PPP of 12% in the second quarter, 8.2% in the third quarter and 11.2% in the fourth quarter of 2021 and carry good momentum into 2022.

Regarding PPP, the 2 rounds, we made 7,400 loans for $845 million and realized some $23.2 million in forgiveness income in 2021. We also picked up a number of new business prospects in each round of PPP lending.

On margin, our NIM suffered in this low rate environment, but our core NIM, net of excess cash and PPP, seems to have bottomed out in the third quarter of last year. Importantly, our loan growth prospects and asset sensitivity position us well for NIM expansion in 2022.

Our noninterest or fee income was up appreciably in 2021 to $106.8 million, even as gain on sale of mortgage income fell from $5.2 million from record 2020 levels. Our card-related income grew $4 million to $28 million. Our wealth and insurance businesses were up $2.7 million to $19.6 million.

As we segue from PPP activity to traditional SBA lending, our SBA gain on sale business improved $3.1 million to $6.8 million in 2021. We are now the #1 SBA lender in Pittsburgh and a top SBA lender in Ohio. And SBA is poised to make an even more meaningful contribution to fee income in 2022.

In mortgage, we've built a strong, balanced offering between purchase money, construction and refinance. It was well positioned to take advantage of low rates and higher premiums I might add in 2020, doing 900 -- $787 million in production. Given ongoing strength in the purchase money and construction portions of the business, the team had another strong year with $760 million in 2021 production.

Mortgage touched over 6,000 households over the last 2 years, with many now using debit cards, HELOCs, checking accounts and other services with us. Expenses were well controlled from 2020 to '21, even as we added talent in commercial and indirect lending and scaled our risk and governance culture. We also kept up a brisk pace of IT project work each quarter.

Also, after years of looking to buy into the equipment finance space, we did a lift-out strategy with the PA-based team from a larger bank. We will see our first originations this quarter in equipment finance. Our actions to close 20% of our branches in 2020 enabled these investments.

We also wanted to give you a sampling of record levels of digital engagements. And just to name a few, mobile remote deposit capture items increased 43% in 2021. We now have 50,000-plus mobile wallet users, and we saw a 63% increase in monthly transactions. Overall, active mobile users on our digital platform increased 13.5% in 2021. And lastly, debit card dollar volume increased 14.4% year-over-year.

On capital, the team took advantage of excess capital and low stock prices to retire 2.1 million shares in 2021 at an average price of $14.29. And we still grew book value per share by 8% from $7.82 per share at the end of 2021 to $8.43 per share at year-end 2021.

On credit, metrics remained strong in the fourth quarter with our ACL to loans at 1.35% with low delinquency and low charge-offs given our business mix.

Turning our attention to the fourth quarter. Net income of $34.8 million improved $684,000 as compared to the third quarter. Core earnings per share of $0.37 was $0.01 better as well. Core ROA was a healthy 1.45%, and the pretax, pre-provision RA was 1.71%. A $2.7 million negative provision expense stemming from low charge-offs, a recovery on a previously charged-off loan and a reserve release created tailwinds for the quarter-over-quarter comparison.

I wanted to add some color to our fourth quarter loan growth of 11.2% ex PPP, which really sets us up well for continuing growth. In C&I lending, we were up $26 million, a 9.6% annualized to $1.1 billion in footing. I might add our lines of credit on commercial -- on the commercial side at 35% usage of the total facilities are still well below the pre-pandemic levels of 48%, which could provide some 2022 tailwinds that haven't yet.

Commercial construction was up some $65 million from a $318 million base in the quarter, so a lot. Our commitments now run over $750 million, and increased construction draws will be a source of 2022 loan growth tailwind.

CRE was up 3.4% to $2.3 billion. Residential mortgage was up $53 million or 10.6% to $2 billion, really a combination of both mortgage and really reinvigorated consumer lending through our branches. Consumer was up $23 million or 9.4% to $1 billion, including $15 million in growth in indirect auto, which had a terrific year. As we look forward, the outlook in each of our geographies and [lending disciplines] is positive.

Taking a step back from the quarter, our 3 Ohio markets grew loans over 22% or $500 million for the year. This stems from building out those 3 smaller acquisitions we did in Northern Ohio, Columbus and Cincinnati from 3 to 6 years ago, respectively.

All in all, 2021 was a good year for First Commonwealth, and the fourth quarter was another solid quarter. Our team is just as enthused about what lies ahead for our company.

With that, I will turn it over to Jim.

Great. Thanks, Mike. The PPP wave will soon be behind us, but it continues to affect our results in the fourth quarter. So let me say a word about that before moving on to more fundamental results.

At the end of the third quarter, we had approximately $152 million in PPP loans on our book with approximately $6.3 million in fee income left to be recognized as of September 30. We had thought that most of our PPP loans would have been forgiven by year-end. However, as of December 31, $71 million of PPP loans still remain on the books with approximately $2.5 million in origination fee income remaining, which will be recognized as interest income over the remaining life of these loans or fund forgiveness.

As a result, while we recognized approximately $5.7 million of total PPP income in the third quarter for interest and fees, that figure fell to $4.1 million in the fourth quarter. Nevertheless, the GAAP net interest margin, or NIM, was unchanged at 3.23%. Essentially, strong loan growth put excess cash to work, offsetting the loss of PPP income, leaving the GAAP NIM unchanged.

Looking forward to 2022 as PPP runs its course, the GAAP NIM will move the benefit of PPP in the first half of 2022 as it will for all banks that participated in the PPP program. The GAAP NIM is then expected to rebound in the second half of 2022 as loan growth puts the remaining excess cash to work.

In contrast, our core NIM, which we define to exclude both PPP income and excess cash, is expected to rise steadily for the year. The core NIM increased slightly from 3.16% last quarter to 3.17% in the fourth quarter, confirming our previous guidance that the core NIM bottomed out in the third quarter. We expect that core NIM trajectory to continue in 2022. A full reconciliation of core NIM to GAAP NIM is provided in our earnings supplement, which can be found on the Investor Relations portion of our website.

Fourth quarter fee income benefited from stronger swap income, but that wasn't enough to overcome the seasonal slowdown in mortgage gain on sale income. Expenses were up by $0.5 million over last quarter, almost entirely driven by expenses related to the build-out of our new equipment finance group.

I'll wrap up with some guidance for 2022, which hopefully you'll find helpful. We expect organic loan growth to be in the mid- to high single digits. And when combined with growth from our new equipment finance division, should approach double-digit growth in earning assets. But because we can fund that growth with cash and securities portfolio runoff, the bank's total assets should only grow by about $200 million, keeping us under $10 billion in total assets at year-end 2022.

Fee income is expected to remain steady in 2022 compared to 2021, has a long expected falloff in mortgage gain on sale income as we replaced with growth in SBA, interchange, swaps and wealth income. Expenses are expected to run at $56 million to $57 million per quarter in 2022 due in part to our equipment finance build-out. However, we should expect positive operating leverage when comparing our growth and expense with the year-over-year growth in our revenue, excluding PPP.

Finally, I would note that our buyback program was active in the fourth quarter, during which time we repurchased 1 million shares at a weighted average price of $15.28. And if those numbers sound slightly different from what you recall reading in our earnings release, that's because they are. The repurchase numbers I just gave you are correct just for the record. In any event, we have approximately $20 million remaining under our current repurchase authorization.

And with that, we'll take any questions you may have.

Questions, operator?

(Operator Instructions) We'll take our first question from Frank Schiraldi with Piper Sandler.

Just on -- Jim, just a clarification on the loan growth expectations. I heard you say mid- to high single digits. So was that excluding equipment finance and with equipment finance it's double digits?

No, the number -- well, yes and no. The number I was giving in the mid- to high single digits is excluding equipment finance, just the regular loan growth, organic loan growth without equipment finance. If you add equipment finance on top of that, together, all in, it should approach double digits.

Okay. And then just you mentioned the core NIM moving higher here. Wondering if you can give any sort of color on expectations as we see rate hikes, what a given 25 basis point hike would do for your NIM here?

Yes, sure. Every 25 basis point hike results in about a 5 to 7 basis point improvement in the NIM. That's usually in the quarter which the hike happens. Then there's follow-on effects as loans repricing continue, the after effects after that. So it does tick upwards after that. But that's about the ratio per hike.

Okay. And any color on how you think about -- I would imagine -- I don't know if you model it with static sort of deposit betas through hikes, but I would imagine the first couple of weeks betas are going to be a lot lower. So any color on that front in terms of what the 5 to 7 -- what sort of deposit data is baked into that?

Yes. We changed our approach last quarter, and what we're assuming now is the 0% deposit betas for the first 2 hikes whenever they occur. And we're doing that in our regular planning. We're doing that in our interest rate sensitivity tables that we published.

So 0% deposit beta is what our assumption is in the first 2 hikes, and that's really just driven by the liquidity levels that we have that everybody has. After that, it's -- our beta assumption is 25% per hike.

Okay. So the 5 to 7 then would be for the first few and then as the deposit beta gaps up a little bit, that would be reduced, I guess? Is that the way to think about it?

Yes. It would be. It would be.

Next, we'll go to Daniel Tamayo with Raymond James.

Maybe first, you touched on the repurchase activity in the quarter. But I just want to know kind of how you're thinking about the repurchase at these prices. And I think you mentioned $14 last quarter, you repurchased on average a little bit higher than that, but obviously, with accreting tangible book each quarter just curious what you're thinking about the process for repurchases now?

Yes. We're -- we -- I think share repurchases are a very appropriate way to return capital to shareholders and a prudent way to manage capital levels. So for us, it's -- we will look at, for example, the earnback calculation, but it's really driven by where we want the capital to be, how much excess capital we're generating and how much capital we need to retain to fund what we expect to have in loan growth.

Last quarter, in the fourth quarter, we were repurchasing up to $16 a share, and we just had a cap of $16. And we're repurchasing at levels below that. When it got above that, we just -- we're going to stop repurchasing.

And what we plan to do in the fourth quarter is to repurchase just the excess capital generation we have. We now have, as I mentioned a moment ago, $20 million of share repurchase authority remaining. But we have really strong loan growth prospects.

So -- and the share price still staying about $16 a share and going north of that. The share repurchase activity probably will slow down a bit from here. We're happy to have that authorization though, so that if it does -- the share price does drop, we have plenty of dry powder to buy in the dips.

Understood. Yes, absolutely. I guess, secondly, on the margin, you have a clear core NIM margin guidance in terms of expansion from here. But in terms of the discussion or the comments you made about the decline in reported NIM over the first half of the year and then a rebound in the back half, what are your assumptions within that for the usage of the excess liquidity on the balance sheet?

Yes, sure. Thanks for asking. And I'll try to be a little more explicit on the NIM guidance to be helpful. So the end of the year was about $300 million in excess cash. The number fluctuates a little bit, but we think the excess cash will probably be deployed fully given all the loan growth prospects that we have some time in the third quarter.

At the same time, we've stopped purchasing securities. The securities portfolio ended the year at about $1.6 billion. We think that will drift down to about $1.3 billion by the end of next year. So that will provide another $300 million of funding that we can deploy into loan growth.

So that will put us -- that will mean the excess cash will be gone by the end of the third quarter of next year. So what will happen is that the NIM, the GAAP NIM will leave the benefit of PPP early in the year, but still suffer the weight, the suppressive effect of the excess cash for the first part of the year. But by the end of the year, the PPP will be in the rearview mirror, the excess cash will be on the rearview mirror and the core NIM and the GAAP NIM will converge.

So to be very explicit about it, we think that if rates don't rise at all, both the GAAP NIM and the core NIM will probably end the year -- by the end of the year in the fourth quarter somewhere in the 3.20% range, in the middle 3.20s. If rates rise 2x, which is what we had in our forecast, I know some of you have rates rising 3 or 4x, so if rates rise 2x, both the GAAP NIM and the core NIM together will converge in the mid-3.30s by the end of the year.

The pattern is what's different. The GAAP NIM will fall a little bit first and then recover, and the core NIM should just steadily rise because in our core NIM calculation, we exclude both PPP and excess cash. So hopefully, that's really helpful to you.

That's very helpful. Appreciate all the color there. And then lastly, changing tacks here, just on the equipment finance guide. Just you talked about the difference in the growth targets with and without. But I think last quarter, you mentioned $200 million to $250 million in balances is what you were thinking by the end of the year. Is that still the thought process?

Yes, that's correct and probably making loans here in the first quarter.

Next, we'll go to Steve Moss with B. Riley.

Maybe just going back to loan growth here. Mike, I hear you in terms of very much upbeat and obviously, the guidance is there, too. Maybe a little color as to the type of construction projects you're lending on. I heard you on that. I think it was $750 million commitments kind of traces to how you've drawn that up and just need a little bit more color on the other sources of commercial loan growth you're seeing.

Yes. On the construction side, we're seeing some nice opportunities with our top developers in probably strong submarkets in Cleveland, Columbus, Cincinnati and Pittsburgh, kind of education, [eds, meds], and tech and just really good projects coming online with multifamily. And we -- and we're also seeing on the industrial side some in footprint developers with large tenants like Amazon, Frito-Lay, Pepsi and others that are building out space for those. So high-quality projects, people we know in footprint, and they've come on pretty quickly.

I think our commitments there have probably gone from $350 million up to well north of $700 million over the course of the last 12-plus months and not really fully drawn. In fact, we expect that the incremental funding will be about $6 million to $9 million per month that will come online this year. So that's just one piece, the commercial construction, and then that goes many firms or firm commercial real estate.

And then other aspects of the growth are really C&I lending, where we've seen a nice uptick in everything from small business to kind of mid-market classic family-owned businesses. We've also seen an uptick in SBA.

And then on the residential side, our -- I think our -- we believe our mortgage production will be in line with the last few years. We're getting paid a little bit less on gain on sale.

That being said, the consumer or the branch side of the business has really improved the productivity, and that business is growing. And then indirect, we've had nice momentum as well.

So 1 or 2 of those commits that perhaps the commercial kind of eclipse the consumer side in the fourth quarter. It's just nice to have kind of a loan growth engine that's relatively equally yoked between consumer and commercial banking. And it just allows us perhaps to absorb some shock or maybe a weakness in any one segment in a given quarter. Was that helpful?

That is helpful. And maybe just with the equipment finance business as you're starting that after, if you can just remind us of kind of the yields you expect to get and just kind of the trajectory of growth maybe as the year goes on.

Yes. I mean, the trajectory of growth will be a back-end or second-half loaded. And then we really expect the business to kind of take off from there and really have breakout years in the next 2 years once we get beyond this year.

We've built the business from scratch. And as of this week, we can book loans. And I guess, Jane, anything you want to add, Jane, as the president of our bank and really is hands on with the start-up of equipment finance.

Sure. Thank you. As Mike said, we can go live now and will. And we expect the yields to be in the high 4s, and so it will help NIM a little bit. But it is a hockey stick towards the end of the year.

Right. Okay. That's helpful. And then on expense -- I apologize, it might have just been my phone, but just if you can repeat, was it $56 million per quarter for expenses? I'm not so sure, Jim.

I'm sorry. Yes, the number was -- the guidance I gave was $56 million to $57 million per quarter.

Okay. Next, we'll go to Michael Perito with KBW.

On the cost side, I'm just curious maybe if you can spend a minute because clearly, if we kind of move back a couple of quarters, you guys are clearly kind of in a run rate now that was a little higher than what you were thinking 6 months ago. Some of that seems like maybe some faster growth on the equipment finance side. And some of it seems like, obviously, the environment on the labor side and elsewhere is kind of a little bit more challenging.

But just curious, as we think about that range for next year, I mean, is it safe to say that it assumes budgets in fairly robust growth on the equipment finance side? And if it comes in higher, what do you think are some of the pressures that are relevant that we should be mindful of as the cost environment remains a little challenging?

Yes. I mean, we have budgeted loan growth that's in the range that Jim talked about, in the mid- to high single digits in the budget. And we expect that pretty much across the board in our lending businesses and also across geographies.

And we've just seen nice traction. More growth, obviously, in Ohio, but the Pennsylvania growth really beginning to move as well. And I'm sorry, I didn't hear the second part of your question.

Just generally speaking, I mean, what do you guys view as some of the pressures on expenses upward that could potentially knock you guys above the guided range that you're mindful of managing today?

Yes. I mean, the typical things, more wage pressure and inflationary pressure in the supply chain will probably be top of mind for me. We have a lot -- all of us are having a lot of open reqs. Maybe those get filled more quickly. That would actually be good because it would probably lead to more productivity and higher production. Jim, anything you want to add?

Yes, Yes, just because part of your question was talking about first half of 2021 when the run rate was more like $52 million or $53 million and then second half and what's going on. In other words, we think we are getting kind of stabilizing our fees, $56 million to $57 million number.

So some of it definitely is equipment finance build-out. Just in that note, I would say that we we're really pleased with where things are going. We thought that, that business would be really lucky to be breakeven in 2022. We actually think that business on a stand-alone basis will have positive operating leverage this year. So we produce a little bit more income than actually we expect this year. So it's really working out very well.

But one of the things that happened over the course of 2021 for the early part of the year, so that's a benefit of operating in a somewhat closed environment. So things like travel, client entertainment, some of the expenses were just [unordinarily low], like they were in 2020.

Then as we -- over the course of the year, the pandemic waned and we opened up, we spent the money on travel, client entertainment, all those expenses kind of came up a little bit. And that added to the expense base as well over the course of the year.

Then when Omicron hit, that all slowed down again, and so we are expecting -- we're actually looking forward to '22 and baking the numbers we gave you in our guidance, really operating as a more open company again. So I hope that gives you maybe a little bit of color behind some of the trends you saw in the numbers.

And then the other thing I'd just to make sure we're clear is what Mike mentioned, all that production, there's expense associated with that. And that's money well spent. That's the incentive compensation that we paid to get that kind of loan growth. So that's just part of the business.

Yes. No, that's perfect. And then on the fee side, I just want to clarify the guidance. So you guys are expecting to be fairly flat and like that $106 million reported GAAP noninterest income that you guys put up this year for next year?

Yes. I think our number is around $107 million this year. Total year, $107.2 million. That's what I have. And we do think that's going to be slightly up from there, but really, the story is going to be mortgage income down a little bit, offset by growth in some of the other areas we talked about like SBA.

Yes. And what about on the swap side? I mean, is that an area where we see some decent growth this year just with rates and with some of the commercial customer growth that you guys are seeing? I mean, I think you guys were run rating almost $3.5 million leading into the pandemic annually and then now stepped back. I'm just curious what your thoughts are there.

Absolutely. And there could be some upside there and in other places. But I think the guidance is hopefully conservative but realistic and then could provide some upside.

Loan and fees will be hitched together somewhat. And a lot of times we cross-sell to clients, wealth management and other fees that really [billows] the fee income.

But each of the business is on firm footing, and it's really had a nice growth trajectory in the last several years on the fee income side. Wealth was a prime example, I highlighted earlier that was between wealth and insurance, we were up $2.7 million to $19.6 million this past year. So we'll try to keep it going.

Yes. Great. And then just last for me. I mean, Jim, you mentioned the $200 million, I think it was, of earning asset growth and staying under $10 billion. Can you -- Mike, can you maybe give us just a state of the pipeline as we look into 2022 on an M&A -- from an M&A perspective?

And I guess how are you guys thinking about crossing that threshold? I mean, it seems like particularly with the equipment financing coming on, it's kind of inevitable at some point in the near future. Just curious for some updated thoughts there.

Yes. I mean, we've done 5 deals. We've looked at almost 60 at this point. So it has to be really constructive for both the seller and us strategically and then as well as financially, both on dilution side and also accretion.

We've stayed pretty close to knitting in our backyard and things that are contiguous to our footprint. We think that lowers execution risk.

And then it's just the details of it. I mean you can't go in just, hey, we're going to do a deal. I mean, you get in the midst of the deal, and you look at it. And it has to work for both of you, and you have to really feel like on the other end of this, we're a more valuable company.

So I think we've been maybe more picky than some, but I think that served us well. You can see the platform we've built out in Ohio from scratch had alone $0.5 billion of growth this past year.

So I mean, we're conservative, but when we do -- when we get involved in a deal, we make it very constructive for both parties. And so we're excited about M&A. It's just -- that's a little lumpy and episodic. So -- but it has to work.

Yes. And then maybe I'll throw in one last question. Just maybe, Jim, on the budgeting side. I mean, how long do you guys think you could stay under $10 billion without kind of significantly altering your natural organic growth efforts?

Yes. It's actually one of the nice things about using up the cash in 2022 is that it puts us in a slight borrowing position at the end of '22. So like I said, organically, we think the balance sheet won't grow that much in 2022. So we'll comfortably stay below [our expectations].

But in 2023, if we're borrowing some money, then you can -- it gives you a little flexibility to manage the balance sheet to sell us some assets like securities, pay off some borrowings and hover below by the end of '23. And that would be the plan. But you're right, with the growth you have...

Pretty comfortable [in the last 24] months, I guess. Sorry, sorry to interrupt. Yes.

That's right. I think we can stay below at the end of 2023 as well. And then God willing, this M&A could help us leap across, which I think was also implied in your question which we've been saying for years.

Yes. Sure would be nice to be on the other side of $10 billion, a more profitable and not a less profitable company. Between (inaudible) acquisition plus equipment finance, that would be a strong position to be in. And we've had a record here in the last 5, 6, 7 years of improving the profitability of the bank virtually every year.

If I might add, it's important to remember that indirect, SBA, equipment finance and mortgage also give us the ability to sell assets. We don't -- we've chosen to keep lots of that stuff on the balance sheet because we could. But we don't have to do that. And we're prepared not to, and I think that helps us quite a bit as well.

I mean, if you can -- obviously, with the way the measurement period works, if you can just stay below through the end of 2023, I mean, it almost buys you another 6-plus months anyway even if you were to cross. So it really extends the period out even longer before you have to worry about any of the Durbin impacts or anything like that?

That's right.

That's right.

Next, we'll go to Russell Gunther with D.A. Davidson.

Just a couple of follow-ups. The first on the loan growth conversation. Mike, you talked about the benefits of the commercial and consumer complementing each other, both verticals really on fire at the end of the year. Just curious, within your guidance how you think about that mix for 2022. And could it look different? Or is there less of an appetite to portfolio single-family? Just any thoughts there.

Yes. I would say that as we closed the year, commercial definitely gained momentum in the second half of the year, the mid-market and larger commercial banking. Mortgage damped down a little bit in the third quarter, it was surprisingly resilient in the fourth quarter. And the pipeline there looks good going into next year.

Our gain on sale income there has been [submarine that's hit], but we also get a household and we get checking accounts, debit cards and something we can bank hopefully for a decade or so. So there's -- mortgage is a source of young credit-worthy households.

When I think about the businesses, small business is on a good trajectory as is branch lending. But commercial seems to have really heated up and could carry the day in the first half of the year. Jane, anything you want to add on just momentum in lending businesses as we go into 2022?

Sure. If all goes well, nobody has to carry the day. We expect growth, different levels of growth in every one of the business lines. And we also expect growth, again, not spread evenly, but we do expect growth in the geography.

So as an example, we don't expect rapid commercial real estate growth in our community markets, our more rural markets, but we do expect lots of good consumer growth. And so if you take that sort of thinking throughout the footprint, that's the beauty of well organized geographically. We can set expectations by line of business and by geography, and we've done that.

Okay. Great.

I would also add, Russell, that the producers and the teams get just better every year in each line of business. And Jane likes to say, and I couldn't agree more, our top producers in any of our disciplines are as good as any at our much larger banking brother and sisters.

So -- and that's been fun, and that sets the different tone. And we also did some lift-outs this past year, and we have noncompete agreements rolling off.

And as you know, Russell, we will invest and wait for a return on that investment like we're doing with equipment finance for a year or 2. We just think that serves us well, and we have the expense discipline where we can do that.

Sounds great, Mike. I just have one other follow-up, Jim, on the margin conversation piece. The guidance you gave in terms of converging in the mid 3.30s with a couple of hikes, does that consider the equipment finance growth and the higher yield there or were you kind of talking more on a static basis?

No, it's all in. Thanks for asking. I appreciate that. It's all in, equipment finance. And that's one of the reasons why equipment finance business with the higher yields putting cash forward to those yields even if there are no hikes, which almost no one is thinking right now. But if there are no hikes, the margin should still expand because that's a nice margin business, it's a higher margin business.

(Operator Instructions) Next, we'll go to Matthew Breese with D.A. -- excuse me, Matthew Breese with Stephens.

Just a few quick ones. The first is, could you provide what the incremental blended loan yields for the pipeline? What are those today? And what does that compare to versus what's on the books ex PPP?

Yes. We're kind of searching for that.

Yes, it's not too different than what the answer we've given the last couple of quarters. The loans are coming out of the mid- to low 3s. Commercial loans are probably coming on in the mid-3s depending on the category. The consumer loan is going to be less than that, high teens and low 3s.

Got it. Okay. I'm just curious if we're starting to see higher loan yields today ex PPP versus what's on the books.

Yes. I would say not yet. So -- maybe it's implied in your question, this whole notion of replacing yields, whether they're positive or negative. We talked about this on the earnings calls for several quarters now.

And I think to be really honest about it, we had thought that the replacing yields start to turn neutral in mid-2021. And that really didn't happen. They continue to be negative, slightly negative and then a little more negative that bounced around a little bit, but they're negative throughout 2021.

We do expect them to really start to neutralize mid-2022 even in a flat rate environment. And the equipment finance contribution is part of that. But they should neutralize mid-2022.

The nice thing, however, was that our loan growth was such that the loan growth beyond the replacement dollars were all positive because if you originated $120 of loans and you have $100, the first $100 of the originated would be negative. [If you're replacing it with what's running off], that's negative. But the next 20 is putting excess cash to work. So that replacement yield is incredibly positive.

And that basically was the story for us for 3 quarters of the year last year as we had a strong growth in the second, third and fourth quarter. So that's maybe a little more complicated answer than you're asking for, but that's the digging -- [deep dive] to the whole replacement yield story and how that's playing itself out. It hasn't neutralized yet. We generally expect neutralization sometime in the middle of 2022, regardless of what happens in the [big picture].

Perfect. Next one for me is just -- I appreciate the financial guidance for 2022. Also curious about strategic initiatives for the year. Are there any new teams or segments you want to attack? Are there any new geographies that you plan to expand into? And then as you think about those items, going back to the M&A question, in terms of priorities, where does M&A fit into the stack these days?

It's -- we feel like we need to grow organically first and foremost and make our business better, and then we become more attractive and our valuation goes up. So we really start with -- we have 6 strategic initiatives this year, I'll just give you 2. One is to accelerate growth, and the second one is to improve our digital relevance, which we continue to do every year.

And on the growth side are a bevy of initiatives, one being equipment finance and ramping that up as quickly as we possibly can, but it also includes getting better in every one of our businesses, in every one of our geographies. And what you're seeing on the fee income side is just the synapses fire quicker in our regional business model. And that regional President and that team are working better and better together. And they make referrals, and it shows up.

So we think the productivity gains, importantly, are among the most important things we can do quarter-to-quarter and year-to-year. We do have some things tucked away that we're going to explore. I don't know that we're ready to announce those.

We've had good card businesses, and our card business has grown significantly. But we have to evaluate whether we extend in businesses like that. We're going to have a foray here in the leasing. That leasing will be small ticket. How quickly could it become more of the middle market business, we think that will take another year or 2 or 3. So there's all kinds of things we can expand to do with what we have already.

Geographically, though, assembling the best team to compete is an important idea in improving share in each of our major metro markets, Northern Ohio, Columbus, Cincinnati and Pittsburgh. Jane, do you want to add anything to that?

Just to add to what you were saying, Mike, about recruiting for top talent. The beauty of many of our markets is that we're really branch-light. And so we can recruit a lot of commercial talent and create very quick operating leverage.

Is that helpful, Matt?

Very helpful. Last very quick one for me is what's a good tax rate for 2022?

About 19% or a hair over that. I think it was 19.1%, but that's -- we've noticed most you have dialed that in quite well.

There are no further questions at this time. I'll now turn the call back over to Mike Price for any additional or closing remarks.

Thank you, as always, for your interest in our company. We're enthused about the future of our company. We feel like we've built a balanced bank between commercial and consumer with lots of good offerings, deep offerings.

We connect the dots between lines of business, and it's fun. And we feel like we make a difference in the communities we're in with both consumers and our business clients. Thanks again, and look forward to seeing a number of you over the course of the next quarter. Take care.

This concludes today's conference call. You may now disconnect.