First Commonwealth Financial Corp (FCF) 2021 Q3 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 3Q 2021 Earnings Release Conference Call. Today's conference is being recorded.(Operator Instructions) Vice President of Finance and Investor Relations, Ryan Thomas, you may begin your conference.

Thank you, David, and 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; Jane Grebenc, Bank 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 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 2 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 with that, I will turn the call over to Mike.

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 1.343% and core pretax pre-provision 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 first -- over the last few 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, noninterest 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 fee 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 net interest -- noninterest 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 physicians 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 9 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 PPP, and a 247% of nonperforming loans. The level of nonperforming loans improved significantly from $52.8 million in the second quarter to just $38.1 million in the third quarter or 56 basis points of total loans. Similarly, nonperforming assets of $39 million at quarter end now stand at 41 basis points of total assets.

Subsequent to quarter end in early October, a $6.9 million troubled credit was resolved and will be reflected in our Q4 results. Other notable third quarter items follow. First Commonwealth earned the #1 SBA lender ranking in Pittsburgh for the fiscal year ending September 30, 2021. This is a significant accomplishment and reflective of both the talent and the SBA lending team, coupled with the partnership enabled by the regional business model alluded to earlier.

In the third quarter, we continued 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 3-year strategic plan, I would share 3 of our 6 areas of focus that might be most relevant to investors: First, to 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 multiyear horizon. I'd 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've 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 type. The manufacturing construction and professional service industries represent more than half of their originations by industry. Primary equipment types included utility trucks, highway truck, machine tools, trailers and manufacturing and packaging equipment. A good example of a piece of central 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 team, 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 million to $250 million of equipment finance assets on our books by the end of 2022 before really hitting our stride in '23 and '24.

And with that, I'll turn it over to Jim.

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 6 basis points this quarter to 3.23%. NIM expansion was driven by strong organic loan growth of just over 8% annualized. The NIM 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 30, 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 GAAP 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 sit in cash, we would have excluded that cash from the core NIM calculation based on the way we calculate it, and the core NIM would have dropped by only 1 basis point to 3.19%. We think that the core NIM 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 6 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%, we priced on October 13 subsequent to quarter end. That alone will save us nearly $1 million a year of interest expense and at about 1 point of NIM. We'll reap the benefit of that starting in the fourth quarter.

With that behind us, we're down to about $400 million of time deposits remaining at a cost of 36 basis points, 3/4 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 Q 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 10-Q, 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 NIM story in 2022 will be driven by the redeployment of excess cash in 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 [loans]. 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. It seems to be 1 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 and customer accounts, have returned to more normalized levels.

Turning to noninterest expense. Last quarter, our guidance was $53 million to $54 million, and we came in at $55 million for the reasons Mike described. Like many of our peers, we are experiencing expense pressures, mostly related to people costs, like salaries and benefits. While there is 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 at 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 can 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.

(Operator Instructions) We'll take our first question from Mike Perito with KBW.

I wanted to start, Jim, just on the cost piece. It sounds like between the kind of the qualitative items that Mike described and then the guide. I mean this $55 million range is is kind of here to stay. I guess, just we try to extrapolate that to 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?

On the expense side. Yes, on the expense side, I -- over the last 7 or 8 years, we have nipped and tuck 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. The $50 million does feel like kind of a new number. It's a bit unexpected. It's impacted a lot of our lower -- our entry-level positions, which is absolutely vital for customer service. Our call center has just lost some and boomed, and it helps support the digital capacity of the bank 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 $50 million is something we're coming to grips with -- $55 million, forgive me, but we're working through plans for next year and invariably, we do things to make sure that we get cost out from time to time, but we're not prepared to announce anything like that at this time.

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 onetime costs, but not many. So that's kind of why it's -- there's some general guidance there.

Yes, I was going to say maybe coming at it slightly differently. I mean, obviously, 2021 was a bit of anomaly in many ways. You're on pace to do a, call it, 55% efficiency ratio for the year, but if we think about 2023. I mean 2022 relative to 2020, right? I mean, you guys, I think, were at 57%. I mean, it's reasonable to think that you'll probably be below that as PPP comes out, but 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?

Yes, go ahead.

I think so. I mean I think also the reality is that we have to think long term, not only about the business at 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 5 years on top of general inflationary and other pressure. So it's -- there's a lot of -- there always is a lot to be that needs to be done on a 3-year plan, and that isn't changing. Our company changes pretty significantly if you look at it every 2 to 3 years in terms of how we do business, the platforms, we broaden 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 we'll go into maintaining operating leverage over the next year or two.

No. No, that's helpful. And then the last for me is just on the capital piece. I 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 90 days worth reporting?

Yes. 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 -- once the Board and said it will be prudent to increase the authorization. And the way we go back into the market and buy the stock, we accelerate buying back on the dips. We just think it's smart to do that. And so we wanted to have authorization rate 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 use buybacks now, but that's highly speculative, really driven by excess capital generation.

Yes. On the M&A front, I mean, we've had over the years, I think Jim and I have shared over 55 irons in the fire to do 5. 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 were important for us, every 1 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.

Next, we'll go to Steven Duong with RBC Capital Markets.

Mike, just the SBA gains, I mean this looks like -- yes, it did pretty good this quarter. I guess is there anything specific about the environment now that jumped to we are up by $700,000 to $2.4 million. And I guess, what was it -- it was 1-something before. Yes, just curious like what led to the strong performance in that business.

Just like mortgage and SBA and soon to the equipment finance, we've major investments in these platforms. It takes several years to realize the investment. In the past year, if you go back to gain on sale income over the last 7 or 8 quarters, I mean, you were at $400,000, $500,000 up to [1.3, 1.5, 1.1, 1.6, 2.4]. And that has been very intentional. We've added to the sales force. We've invested in the capacity. Our Chief Credit Officer, Brian Karrip 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 is kind of an exception business to SBA as a real brown game kind of business. Jeff comes from a larger bank environment, Jeff Rosen and who runs this business and his team, and they run some large platforms for some bigger banks. So we think we have the vision to execute this and make it a core part of our noninterest income. And 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. And when you do that, you really have a customer for a lifetime. So we, quite frankly, we really like the business. And I think the other thing is just with the onset of PPP, our capacity was with PPP and appropriately so. I mean, at the end of the day, 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 had 1, now we have 2 or 3, we're going to have more ores in the water in this business each year.

All right. That's great to hear. And I guess 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. So it's not something that anybody can just jump in. And also with the business, is there any cyclicality to the business? Or is this something that is just you guys just hit the ground and just continue on growing the business?

I'm going to turn it over to Jane Grebenc. She is our President and Chief Revenue Officer, and she works closely with Jeff and the team on this business.

Jane, do you have -- can you answer Steven's question?

Sure. Thank you, Steven. I think the important things that we've done with SBA are between Jeff Rosen and Keith Bufano, 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 regions. And we've got -- we think we've got the compensation structure where everybody's interests are mutually aligned. There's no fighting, no bickering, 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.

A great question, Steve, about the barriers to entry. I think it's -- you're a year or 2 or 3, and that's with the right talent. And then -- And 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 do an SBA loans, and that's a real credit to them.

That's great to hear. And is there any cyclicality like the mortgage business? Or is it less cyclical?

I apologize. 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 will 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. In the last year, we did have a lot of PPP going on. So we have very healthy pipelines in closing and underwriting.

Got it. I really appreciate that. That's really helpful. And yes, 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 point rise. 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 0 and then the third rate hike, you put a beta higher beta on it? And if so, what is the beta number?

Yes, good question. Just to clarify, the beta number is based on our historic deposit studies, and that's a 25% beta. And we've been using a 25% beta for some time. The lag means 0% beta for the first 2 rate hikes. And then you just click to the 25% beta for hike 3 4, and then 5, 6, 7, where you do the 200 and 300 basis point parallel shifts as well. We had looked at -- there's some -- I think there's some that suggest you could feather it in a little bit for the first hike and the second hike 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 to go out and liquidity would actually do in a rising rate scenario.

Yes. I totally agree. I mean, considering, yes, all the deposits that you guys are having right now, I can't imagine anybody is really posing for deposits on the first billing rate hikes. Well, that's it for me. I really appreciate you guys taking the questions.

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

This is probably something you've explained in the past, but the calculation of the core NIM figure, which you talked about being $3.16 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. And did I hear that there was -- you excluded excess cash from that calculation?

Yes. 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 at the Investor Relations portion of the website. We try to be pretty disclosive about these things and have all the numbers that you could do the calculation differently. But you understood it properly, we are trying to exclude PPP as it has 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 distortive effects on the NIM. And the PPP will probably be behind us pretty soon, but the cash will leave for a while. So we'll probably keep that practice and publish a reconciliation probably for next year.

Okay. Great. Yes. I'll find that. And then your assumptions -- I want to make sure I heard 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?

Yes. And as 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 we 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 noninterest-bearing deposits since last quarter. So there is some growth in deposits normally and -- but the spend down will offset that. And as those 2 offset each other, it roughly leaves deposit balances steady. And that's good for us because that means instead of going both sides of the balance sheet, we can just take the excess cash when we deploy it into a higher earning asset like loans. That's the idea.

(Operator Instructions) Next, we'll go to Russell Gunther with D.A. Davidson and Company.

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 shakes out, really tracking above that mid-single-digit rate. As you look to, Mike layer in that equipment finance mentioned, even the low end, $200 million, I mean that's quite a head start. 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 growth expectations outside of the equipment finance and then layering that on top as you look into next year.

Yes. 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 Karrip our Chief Credit Officer for 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 our commitments have really climbed newer commitments over the last several months since early May. And with a lot of nice new approvals, the utilization and the outstanding are still low. And that will turn as these projects mature, less some tailwind there in the construction portfolio. As we move to C&I, we've really derisked 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 the activity. Jane and I mentioned SBA pipelines are very strong. And so we feel good about the commercial business even better than a quarter or 2 ago. And 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, 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, its focus.

And Jane, what would you add to that? I mean we feel good about where we're at with lending in the future over the course of the next year, notwithstanding equipment finance.

Jane, anything I'm missing?

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. 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. We tightened a little bit on the consumer side during COVID, and we didn't lose them yet. So we're still getting the structure that we want. Delinquencies are at historic lows, and we're still growing the books. And the pipelines are healthy across the whole bank. I feel really good about it -- I feel good about equipment finance. It's tough to stand up a business in the middle of a pandemic because people are working remote and all that, but we're staying on track, the vendors are good partners. So I think we're going to be just fine.

I guess just as a follow-up, you mentioned consumer just strides have it loosened there yet. 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?

I think it's too soon to say that we would remix. And we aren't close to any 1 business segment limits. So we can -- I think we can keep going just the way we are.

Next, we'll go to Frank Schiraldi with Piper Sandler.

Just on 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 a under earn back? And then sort of where is the threshold there?

Yes. It's really not driven by an earn back calculation. We understand people will look at the earn back calculation, say, that's long and I'd rather not do it because of the earn-back, but it's for us, it's not really driven by that. Right now in the marketplace, we're in blackout, but we have an arrangement, a 10(b)5 range rate that's under the current authorization. So we are right now buying back at any price below $14 with the -- when we come out of blackout 3 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 we're not just saying that as bank management teams would 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 growth basis, we're earning a higher multiple than we actually have. As long as that's the case, we think there's room to buy back that stock because they're coming 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 under leveraged. I think we published in the earnings release, the tangible common ratio ex PPP 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.

Got you. 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 NIM bottoming out. And just wondering, does that assume any securities purchases, additional securities purchases or given the loan growth you guys are expecting, does that kind of take care of the excess cash over the next 12 months?

Thanks for asking Frank, giving us a chance to clarify. It's really driven by the idea that the excess cash will be redeployed in 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 PPP loans as they've been forgiven into cash. we redeployed some of that into security. So the securities portfolio, as you can see in our balance sheet has grown, but that's mostly where it's core. At this point, we will 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.

And next, we'll go to Daniel Cardenas with Boenning and Scattergood.

Quick question for you. So given the improvements that we've seen in nonperforming assets and loan growth. 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 or you're thinking about growth as well?

Brian, you're on the call, why don't you answer this, Brian Karrip, Chief Credit Officer. Brian, are you out there because credit is a good story.

Positive Yes. Well, we -- long-term charge-offs match provisioning, 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 nonperforming loans, we're in a good position with credit. 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 reserves.

Yes, Daniel, I'll just add and Brian, we must have connectivity issues with Brian, so terribly sorry about that. But that basic age of formula of reserving for charge-offs and then for loan growth kind of remains the same, but the wildcard is too full. And you saw kind of extra qualitative effect as we have for general economic conditions. So that can always change. And if the economy looks like it's going south, it's predicted to go south, our CECL reserves could be affected by that, but the general provision expense quarter-to-quarter is really going to be driven by charge-offs and loan growth. The only color that on top of that whole conversation is that our asset quality is getting so good, and the economic outlook is not -- does not look like it's going to stop, looks pretty good that banks like us are having a hard time finding rationales 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 there's much as you might want to probably will not be able to do that going forward.

(technical difficulty)

Yes. 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.

Agree. 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? Or does that factor in additional hires throughout the course of the year?

Yes, great question. That -- that factors in additional hires. I mean today, we only have 7 team members on the Board. They're the grass and the people that run it. They'll be adding a cadre of more operations and salespeople over the course of next year. So there'll be some costs associated with that. Is that helpful, Dan?

Yes, sir. Great. That's all I have. I'll step back.

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.

Yes, 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. And our story is one where we just try to get better every quarter, and we deliver on that. We think successively 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 noninterest income on the growth side as well. And we just feel good about the future of our company. And -- but thank you again and look forward to being with you over the course of this fourth quarter. Take care.

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