Earnings Call: Q2 2021

Jul 28, 2021

Good day and thank you for standing by. Welcome to the First Commonwealth Financial Corporation Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead. Thank you, Pasha, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's 2nd quarter financial results. Participating on today's call will be Mike Price, President and CEO Jim Reske, Chief Financial Officer and Jane Grebenz, our Bank President and Chief Revenue Officer. As a reminder, a copy of today's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at 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 the actual results to differ materially from those reflected in the forward looking statement. Today's call will also include non GAAP financial measures. Non GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike. Thanks, Ryan, and welcome, everyone. Net income in the 2nd quarter of $29,600,000 produced core earnings per share of $0.31 a core pre tax pre provision ROA of 1.82 percent and a core efficiency ratio of 53.21%. Importantly, pre tax pre provision net revenue of $42,900,000 was slightly ahead of the consensus estimate, reflecting good underlying 2nd quarter momentum in our key businesses. Lending rebounded in the 2nd quarter, increasing year to date loan growth to 5.3% annualized rate and that excludes PPP loans. The loan growth was broad based and although indirect lending and corporate banking led the way, mortgage, branch based consumer lending and small business all contributed meaningfully. Our corporate bank had several big wins and is seeing deepening pipelines. Bucking national trends, our branch team has originated $209,000,000 in home equity loans year to date, which represents a 12% increase year over year. Geographically, Ohio continues to lead the way with the majority of our loan growth, although PA production remains strong. Our regional business model and a focus on execution have been key elements in driving balance sheet and fee income growth. We have also lifted out some talented lenders from large competitors over the past year. Consumer and small business household growth helped fuel non interest income, which remained strong at $26,100,000 even as mortgage gain on sale income tapered. Card related interchange income at $7,400,000 was a quarterly company record by a wide margin. At $2,700,000 trust revenue was a quarterly record as well. Our SBA business contributed $1,600,000 to gain on sale income and SBA pipelines have never been stronger. This is 4 quarters in a row of strong contribution by the SBA business. Importantly, in this discussion around growth, business conditions in the Q2 in our markets recovered faster than we anticipated and our business customers are generally positive about the outlook ahead. Expenses remain well controlled and the core efficiency ratio was an impressive 53.21%. Over the last 6 years, First Commonwealth revenue base has broadened considerably with significant investment in new commercial lending teams, a de novo mortgage business, indirect lending, SBA lending, credit card and new digital platforms to include online loan and deposit account opening. We've expanded also expanded our footprint through 5 strategic M and A opportunities. Even as we've made these significant investments and transformed our company, at the forefront of our planning is adhering to the core principle of maintaining positive operating leverage. Turning to NIM, Jim will provide important detail in a few minutes. But at a very high level, I believe our NIM is benefiting from our long term approach to building a diversified loan portfolio that is balanced between commercial and consumer loans. At a time when banks are struggling to deploy excess cash, our consumer loan growth has been strong all year and our commercial loan growth picked up steam as the 2nd quarter progressed. We like the contribution margin a new consumer loan brings versus having money parked at the fair reserve or in an investment security. And we also have the potential of cross selling a new consumer customer as an added bonus. We're also enthused about the lift out of an equipment finance team from a larger institution that we recently announced as well as the momentum in our SBA business. Both of these businesses are scalable and will enable our margin to expand by generating higher yielding assets. Importantly, we're very pleased with the adoption of our new digital platform. The 2nd quarter, our active mobile users increased an annualized 22%. Additionally, we continue to bring new capability forward and we'll be introducing a new mobile mortgage platform in August, where our customers can easily apply for and track their mortgage status from anywhere at any time. Lastly, regarding credit, we feel our asset quality is solid and coupled with improving economic conditions, we expect credit to be a tailwind in the back half of the year. And now, I'll turn it over to Jim Retsky, our CFO. Thanks, Mike. As Mike already mentioned, we were pleased with our financial performance this quarter, especially with regard to loan growth, fee income and expense control. Hopefully, I can provide you with a little more detail on our NIM, asset quality, fee income and expenses. Our net interest margin for the 2nd quarter was 3.17 percent down from 3.40% last quarter. Loan yields fell by 11 basis points, but we were able to offset most of that by reducing the cost of interest bearing liabilities by 7 basis points. But to understand our NIM, you have to look at the effects of PPP and changes in our asset mix especially cash. For example, we began the quarter with $479,000,000 in PPP loans. By June 30 that figure had shrunk to $292,000,000 Similarly, excess cash dropped from $414,000,000 to $189,000,000 over the period. These changes don't come through if you only look at our published average balances which barely moved. Essentially, what happened is this, we started the quarter with a lot of excess cash because of government stimulus programs that took place in the Q1. In addition, PPP loans were forgiven over the course of the quarter generating even more cash. We invested some of that excess cash into securities early in the quarter and into strong loan growth towards the end of the quarter. To be more precise, PPP and excess cash had 2 distinct effects on the margin. First, excuse me, the 1st quarter NIM had the benefit of $7,900,000 of PPP income while 2nd quarter PPP income was only $5,500,000 2nd, we put excess cash to work by purchasing approximately $300,000,000 of securities in the 2nd quarter. That's better than leaving it sit in cash. Those investments will generate about $3,900,000 of net interest income annually or about $0.03 per share. But they still yield less than what we were earning on the PPP loans and it's still a layer of thin margin assets on top of the balance sheet that drags down the NIM. Because of the noise from PPP and excess cash, we have been publishing a core NIM that adjusts for both of those things. Our previous guidance was for our core NIM to fall between 3.20% and 3.30% and our core NIM for the 2nd quarter came in at 3.20% which was within that range albeit at the bottom of that range. The reason for that is simple math. The more excess cash we invest in securities, the less cash there is to adjust for in the core calculation. The good news here is that our loan growth in the 2nd quarter was very strong especially towards the end of the quarter. That should help the margin going forward. We expect to maintain that trajectory for the remainder of the year, which should replace PPP runoff and further soak up excess cash to the benefit of the margin. As a result, we are reiterating our core NIM guidance of 3.25 percent plus or minus 5 basis points. Let me switch gears now to asset quality and offer a couple of thoughts that may be helpful to you. First, we realized that deferrals were the number one topic a year ago, but our deferrals have all but disappeared from a peak of over $1,000,000,000 during the pandemic to $138,000,000 last quarter to only $59,500,000 this quarter or just 88 basis points of total loans. 2nd, non performing loans are just 0.82 percent of total loans ex PPP and the reserve coverage of non performing loans is 182.9%. These are levels that we believe compare very favorably to peers. 3rd, we just completed our regular semi annual loan review process in which we review every commercial credit in excess of $350,000 This is all the review of about 1,000 relationships totaling $2,400,000,000 out of a $3,900,000,000 commercial loan portfolio. At the conclusion of that exercise, there were 0 downgrades to special mention or substandard in the portfolio. The thoroughness of that exercise gives us confidence as we took note of declines in both special mention and classified loans this quarter. Classified loans, for example, dropped from $72,300,000 to $56,300,000 a level very close to the pre pandemic level of $52,500,000 at the end of 2019. 4th, delinquencies, which are sometimes seen as an early warning sign of trouble ahead, not only went down from last quarter, but they are at an all time low for our bank at just 11 basis points of total loans ex PPP. 5th and finally, our reserves remain at 1.50 percent of total loans ex PPP protecting our capital and our earnings stream going forward. As for fee income, even with mortgage income slowing down a bit in the second half, we anticipate being able to sustain the pace of $26,000,000 to $27,000,000 per quarter in non interest income for the remainder of 2021 due to favorable trends we are seeing in SBA, swap and trust income. Turning to expenses, NIE came in at $51,500,000 in the 2nd quarter, down slightly from $51,900,000 last quarter. Our previous NIE guidance was $52,000,000 to $53,000,000 per quarter, so we've been comfortably below that. We do, however, expect some expense associated with returning to a more normal work and travel environment, elevated hospitalization expense that we have been seeing, new hires in revenue producing and credit positions and the new recently announced equipment finance effort bringing our NIE guidance to $53,000,000 to $54,000,000 per quarter for the remainder of the year. Finally, we repurchased 72,724 shares in the 2nd quarter at an average price of $13.95 And with that, we'll take any questions you may have. Thanks, Jim. Questions, operator? And your first question is from the line of Michael Perito with KBW. Hey, good afternoon, guys. Good afternoon. I had a couple of questions. Obviously, it was good to see some of the revenue momentum come through in the quarter. And I was wondering more specifically on the loan growth side. I know you guys provided some updated broader commentary for the back half of the year. But do you think the mix will shift more dramatically towards commercial or do you think that the consumer portfolios could be the larger driver of the growth for the near future here until kind of line utilization recovers to a more normalized rate? We like the pipelines we're seeing, this is Mike, in the Corporate Bank. And we think growth there could continue and pick up perhaps a little bit. On the retail side, we've just just there, it's mostly execution. And our branch based team has really moved the needle this year and grown the business, as well as in our indirect business has really expanded into new markets, primarily Ohio and penetrated those markets well. I think it will probably be pretty equally yoked, maybe with a little tilt towards retail. That's speculation, but it's good to have a lot of oars in the water to generate growth. And that's what we had this past quarter. And on that point, with the equipment finance platform, I know you guys have provided some general thoughts around like where what direction it could head. But I was curious if you could give more of us a better sense for us around timing in terms of how long the ramp up process for that type of platform can take? I mean, for example, like are there any non competes or anything of that sort like with hiring a traditional commercial lender that we should be mindful of? Or is it pretty much you guys can start originating these loans immediately after bringing him on board? Yes. There's no non competes. This was a lift out. We didn't purchase an equipment finance or leasing business. We really expect that in the second half or towards the end of next year, we'll be breakeven in that business. And then the following 2 years could be very accretive for us to our profitability. And we're not ready to give you a number. We obviously have internal forecasts. We'll see how the build out proceeds. We're a very competent professional who's led the same team for the last 17 or 18 years. And but we're not doing this to make $3,000,000 to $5,000,000 We're doing it to make a lot more money than that. So we're pretty enthused about that business and it has our full attention. In fact, it's probably near the top of our list in terms of businesses that can really continue to transform our company. And we have had some success, as you know, with mortgage, reinvigorated indirect, SBA and really doing de novo type things and introducing them to our business. So we're excited about it. Great. And then just last question for me and then I'll let someone else jump in. Just on the Michael, I was wondering if you could just give us any updates on kind of the capital and deployment front and maybe more specifically just on the M and A environment, it's been a pretty active quarter. It seems like there's pretty good deal flow. Just curious how the pipeline looks and if there's attractive opportunities out there potentially for you guys to explore? There could be. Price is important. Jim likes to remind me and I know all of you that we've looked at now 50 things to do 5. So we're pretty picky and we want to make sure that it's financially sound and it's also very strategic and makes us a better company. And it's also strategic accretive not just for our earnings per share, but profitability of the bank, overall profitability. And so there is increased activity and there's opportunities in front of us, but we've looked at a lot of things over the years. Hopefully, that's helpful. We're excited about M and A, I think, and perhaps the opportunity to do deals, but they need to be right. Yes. And can you just I'm sorry, just remind us kind of what your target box kind of looks like on the M and A front from size and geography standpoint? Jim? Yes, sure. So we think about it in I guess, 1st, geographically, we want things that are in a contiguous footprint, the drivable kind of footprint, so that we look at overlap deals that are within our geographies and we've had great success with these markets extension deals into your metro areas. But we look at all those types of deals. In terms of size, the old rule of thumb is always 20% to 30% of your asset size was the right fit. If it gets to be much larger than that, it's an MOE which we would consider, but that has its own integration challenges, much smaller than that it's not accretive enough. I think as a company what we've done, what we've shown is that we're willing to look at some of the smaller deals if they move the needle appreciably for us, if they have the right kind of business mix, if they have good talent, if they get us into a right kind of geography, we would look at those smaller deals and we often have those conversations. So we're happy to do that. I guess in general comment on M and A, we believe we have a really bright future and a lot to offer. So we believe we can fold in other companies and make them a part of the success story very effectively. Great. Thank you guys for taking my questions. Appreciate it. Thank you. Your next question is from the line of Steve Moss with B. Riley Securities. Good afternoon. Maybe just starting with the loan pipeline and I hear you Mike in terms of just the things the deepening pipeline, kind of curious as to what you're hearing seen for pricing and competition and just kind of maybe translate some of that into loan growth here? Just a little different. The assumption is there is an RFP on every deal and sometimes there is and you have to compete. A lot of times in lending, particularly in the smaller and the mid size, it's just a matter of execution and being in front of your customer or in front of a prospect. So I would say, on the small business side, we have nice SBA pipelines. Our corporate bank has really helped there. And it's just the way credit enhancement to get a deal done. We're seeing a good pipeline in our SBA lending in our commercial real estate and in our C and I. Again, deepening pipelines, I would say that you have to compete on price. You really don't want to compete on credit quality. If anything, probably at the onset, we had tightened some guidelines, quite frankly. And so we don't want to compromise there. And then we really have a regional business model where we empower regional presidents to go out. We have P and Ls and regional metrics on their markets and they go out and compete and we make calls with them and it's a lot of fun. I don't know that I have a lot to add other than we feel like we have good momentum And in our commercial bank and in our retail bank, we're making a lot of calls. And the HELOC business is very good right now. Okay. That's helpful. And then in terms of just where were new origination yields for the quarter? I apologize if I missed that. Jim, we have the Yes. It depends on the asset category. Some of the consumer categories were in the high 2s like indirect auto. Mortgages were in the low 3s. The commercial categories are generally in the low to mid 3s for new origination yields. Okay. That's helpful. Does that help? Yes, that does. Thanks for that, Jim. And then maybe just on the provision here and just kind of how to think about trends going forward. Just kind of curious, I know you guys indicated in the release that growth drove it, drove the provisions quarter, but just kind of curious as to how to think how you guys are thinking about the reserve ratio as we go through go forward the next 6 months and so forth? Well, we believe that with our credit quality and what we've seen in the migration in key categories like classified and criticized, which has been good the last quarter, The pressure will be off a bit there and that notwithstanding migration, which we're seeing migration go the other way in a positive way, I think that there'll be less pressure certainly. And you want to cover charge offs. And this quarter, the charge offs were 3.9%. That was mostly one credit. Otherwise, we would have had a very low charge off quarter. But it's really in line with our expectations and the past 4 or 5 quarters. And so you want to cover charge offs and we're probably we feel we're a little bit at the higher range of the loan loss reserve to total loans. We have good coverage. So that would really point to less pressure and maybe a credit being a tailwind in the second half of the year. Okay. And I mean, are there some maybe some overlays still just that you guys are keeping that you want to wait for things to get a little bit better for that reservation maybe to get back towards that day 1 reserve? I'm really sorry, Steve. I'm having a tough time hearing you. Sorry. Maybe just like how do in terms of just the reserve ratio, just kind of like where do you think it could maybe bottom out? I mean, I realize you guys didn't adopt CECL till later. So just trying to think about how to get towards a lower ratio longer term? I think it'll naturally trite with our peers, I suspect. And our asset mix is a little different. And Jim, I don't know if you want to add anything. Yes. Look, I think Mike covered the basic dynamics of provision expense quarter to quarter, which oddly enough just haven't changed even as CECL. You're covering your charge offs and you're covering your loan loss. You're providing for future loan growth. We're really pleased that our reserve coverage ratio has held up this high. And I think what we're experiencing, I think it's what a lot of banks would like is that we're growing into that reserve coverage ratio. So as opposed to the whipsaw of building up a big reserve under CECL and then releasing it and having to build it again, What every bank would like is the ability to grow into that ratio. We don't have a target. I know you mentioned the day 1, but we don't have a target to get back to day 1 and release the reserves to drive it down to that. We just we have an obligation and what we want to make sure is that we have adequate reserves based on what we see in the portfolio and based on our economic forecasts and all the rest. If it plays out like I just said and loan growth continues the way it's going and the economy keeps improving, we probably will get back down at those ratios. But hopefully, that will take place over time and not some big massive release that puts you just at risk of having to provide for that again. Hopefully, that's a little bit helpful commentary for you. That's all helpful. I appreciate it. Thank you very much. Thanks, Steve. Your next question is from the line of Russell Gunther with D. A. Davidson. Hey, good afternoon, guys. Good afternoon. I wanted to follow back to the discussion around the equipment finance lift out and maybe just the volume and rate impact. So on the volume side, you guys have been targeting a mid single digit rate successfully executing there. As this matures, is this a business line that you see as accretive to that growth rate or more of a mix shift and recommitting to a mid single digit growth? And then on the rate side, does this represent upside going forward to a 3.20%, 3.30% near term core NIM guide? Yes, I think yes and yes. We do see it as accretive to our net interest margin and we do see it as an opportunity to boost growth. And the guidance we've given is mid single digits and notwithstanding the pandemic, we really felt we would be at the high end of the range. And we feel that this could provide another boost and really complement a very capable commercial banking franchise. Yes, got it. Okay. And then in terms of the expense guide change, how much of that increase on a quarterly basis is driven by the equipment finance team? You mentioned a few other drivers, but is that the bulk of it? Yes. Well, the equipment financing is just starting. So the early days of the equipment finance would be $1,000,000 to $1,500,000 a quarter, probably by the time it's all set and done, it's really humming, the expense will be about $2,000,000 a quarter, but that will more than pay for itself once it passes the breakeven point. It will very much pay for itself and then some pass that point. So it's not they just came on board. We're really happy to have them. We're building up systems and we're building up the internal control environment, all the things we have to do, a lot like what we do with mortgage. We do expect to book some assets by the end of this year. That's why we're being a little conservative on the breakeven point being towards the end of next year. We want to get some earning assets on the books as soon as we can to kind of help that effort pay for itself. All right, Jim. Thank you. And then, Mike, I understand you guys don't want to put too fine a point on it right now, but you mentioned not doing it to make $3,000,000 to $5,000,000 I mean that sounds like a net income type of number, which is about a $0.01 on the high side. Is that the way to think about it or how should we stay tuned for earnings accretion? I think multiple of that. Yes, absolutely. We'll give you plenty of guidance as we go on. We'll have multiple quarters and quarterly calls before we get to that point. So we'll refine that guidance as we go. But yes, ultimately, eventually past that, it should be more accretive than that. If you look at this a little bit like the mortgage business, where ultimately 3, 4, 5 years down the road, it gets to be 10% to 15% of your balance sheet and is really throwing off some really healthy income. Yes, makes sense. I appreciate it, guys. And then just last one on the expense side of things. You had a lot of success with the initiatives that you put in place, getting those cost saves out. I mean, have you given any thoughts into the back half of this year or as you're thinking about budgeting for 2022, revisiting branch rationalization or any other potential expense initiatives? Not right now. It's pretty fluid. We look at it, as you know, Russell, quarter to quarter and then we're now into the planning season for 2022. And it's a key principle and we've been able to maintain positive operating leverage despite a slew of investments I cited earlier. And each of those discretely was akin to the equipment finance business. We're spending $3,000,000 to $5,000,000 plus to really build out platforms and we figured a way to cover for them. And that's what we have to do. And we also have to continue to make investments in digital. And we have another product I mentioned earlier, the Blend Mortgage solution, which will be terrific. And we're still bullish on that business. We just have great producers. It's good for the brand. We get new households. We cross sell them. So even though mortgage is tapering, it's an important part of our company now. Yes. And I understood Mike and the positive operating leverage, it's great to see it from the prepared remarks. And so at least it sounds like a commitment to do that amid discontinued franchise investment. So is that the message to take away going forward? It is. It is. And I know if we have baked in a given quarter, you're going to remind us of that and try not to. Fair enough. Okay, thanks for taking my question. Your next question is from the line of Stephen Duong from RBC Capital Markets. Hey, good afternoon guys. Good afternoon, Steve. Hey, Jim. It looks like the liquidity has slowed a little bit on your period end balance sheet. Is it fair that when we look at the average deposit balance next quarter that it could be perhaps flat to down and your cash and securities could perhaps be soaked up a little bit with the loan growth? Yes. I missed a little bit of what you said, Steve, but if I get the gist of it, you're asking about trends in deposits and securities. Is that right? Yes, between because obviously this quarter average deposits jumped up, liquidity jumped up, but then I noticed your period end balance sheet. It looks like that has kind of been played out and maybe heading to the Q3, the liquidity that we've been seeing has kind of leveled off. Yes, I think that's right. I'm glad you picked up on that because it was a bit of an odd quarter to decipher from the numbers you mentioned and what you're looking at. The period end figures barely moved, but the averages were up and really that's because of this big influx right towards the end of the Q1 with the last federal stimulus program. But I would say overall, yes, we do think the deposit balance that probably leveling off. One of the big questions is whether they all the PPP loans that converted to cash that are in customer accounts and the stimulus dollars, whether there will be a rush of spending to withdraw some of that money. But basically what we plan on and what we expect is that deposit base to be relatively stable from here. We also expect the securities portfolio to be relatively stable for the rest of the year. We don't expect to take a lot of that extra cash and deposit in securities. We'll probably repurchase securities to replace runoff. Of course, we've been out of the market of securities for the last couple of weeks when the purchase opportunities for plain vanilla mortgage backed securities were at 1% even, very unappealing. It's come up a bit since then, so it's a little bit better, but we try to stay out of the market when it gets to be that weak. But overall, we are much more excited about the loan growth prospect as a way to soak up the excess cash and the excess deposits. That's the way we see the second half playing out. Got it. And I guess with all this liquidity, I guess the one thing you could do is just buy more of your stock back. Is that are you kind of open more open to that if you still have this liquidity? We are. The stock prepurchases have never really been driven by liquidity. It's more driven by our it is a liquidity question. We don't really think of it that way. We think of it more as a capital planning exercise. And so, we have been taking a fairly non aggressive approach this year, fairly slow approach as we get as we just retain more earnings and through the second half and capital levels build, it really becomes more of a capital management tool to get to deploy the excess capital and so we could pick up the pace a little bit in the second half. But right now, the plan is to kind of maintain the slow steady pace we've been doing so far. Understood. And then just on your PPP balances right now, I guess it's kind of hard to tell, but do you think you'll have the majority of those balances be forgiven in the Q3 or the Q4? We do. We think that ultimately about 90% of the totals will be gone by the end of the year. That will leave the remaining PP balances somewhere between $100,000,000 $150,000,000 by the end of the year. There was this pause in the forgiveness programs driven by the way the SBA was forgiving PPP loans in the Q2. That was part of what led to the slowdown in forgiveness rates in the Q2, but it really picked up again towards the end of the quarter. And so most of the round 1 now has most of it's already been forgiven and we expect that the round 2 will follow the same kind of pattern and most of it will be forgiven by the end of the year. Great. Thanks for that. And then just on the loan growth in the quarter, I guess resi and auto were pretty strong. How are you guys feeling about those two segments for the second half of the year? And then also your C and I ex PPP, that kind of looks like that's bottomed out as well. Are you seeing that kind of starting to turn as well? Yes. It is. It was some of the loss there was in this that is turning. The commercial real estate was a little ahead of it. Commercial Solutions, which is just a smaller portion of C and I, we're already seeing a little some nice little growth there. So that is beginning to turn. And then I think the first question was just about the indirect business and our expansion into Ohio has really driven that. The team has done a nice job of getting in front of dealers. And we're also getting floor plans from that and other commercial business from that as well. And we really are having good credit experience and we have had. Steve, I would just remind you through the great recession, our indirect business performed very well. We've scaled it a bit, but our credit underwriting is pretty discerning. And if anything, at the onset of the pandemic, we tightened our standards a bit there. So we feel good about these portfolios and how they'll endure. If I could just add to that, if you don't mind, one thing that gives us confidence about C and I growth towards the second half is the growth that you don't see in the published financials, the growth in commitments. We had really strong growth in commitments in the Q2 and what happened, looks like turned into a decline in the utilization rate. And so even though the total C and I loan balances only didn't go up that much, the growth in commitments in the quarter was $124,000,000 So we see that really paving the way. And again, it gives us confidence that it's a timing issue as that gets drawn down the second half, we're going to experience that loan growth in C and I. Great point, Jim. Yes. That's good to hear. And I guess maybe just on back on the auto, it's been pretty strong. I thought it was kind of leveled off a little bit, but it's still pretty strong. There's no issues with the, I don't know, the chip shortage or anything like that. Are you still kind of bullish on it? Yes, we are. A lot of the really adept dealers are finding a way to do some just in time and it's surprising how resilient they've been. Some of the older school dealers, it's been a little harder on them. And I think this will sound a little obscure, but I think the Manheim used card index back in the middle of June, I think we've peaked at prices and we're starting to come off of those a little bit. So that probably pertains well for the business and steadier volumes. So I don't know, it's been more uninterrupted than we thought it would be despite the inventory shortages. That's great to hear. And then just last question, your equipment leasing, the lift out. I guess if you were to this is coming on board, if you were to look back and see some of the other segments that you've gotten involved with, how do you see the equipment leasing portfolio comparing to those other portfolios that you've been involved with through the years? Do you see it really being up there compared to the other portfolios or in line, just in overall like growth and profitability? I think it will be very profitable. And I think it will we can grow it. I think we can have a substantial meaningful business for our company. I'll just echo one thing I mentioned before about its place in our company because I think that gets to your question of being a part of the overall pie chart of the business. And it's Slice being a 10% to 50% pie chart in terms of balances. But it's a more profitable business than a lot of other businesses we do. So it will be nicely accretive to margin, the yields are higher, it's a very efficient business that will help the efficiency ratio. We're really excited about that business as it grows. Great. That's it for me. Thank you. Thank you. Our final question is from the line of Matthew Breese with Stephens Incorporated. Hey, good afternoon. Just a few from me. First, what types of equipment are going to be underwritten by the new team? Is this large ticket, small ticket, yellow metal? What is it? It's small ticket initially. Okay. Could it be any more specific there? Is it small ticket like office equipment or something else? And what are the kinds of typical loan terms you might get on it? Yes. These will be through vendor programs and this will include everything from small ticket leasing or I mean it could be landscaping, it could be office, it could be really tools and manufacturing forklifts. Surprisingly, we go to some of our middle market clients and invariably, we might have $5,000,000 or $10,000,000 that they will have between small equipment that runs the plant, another $500,000 in leases. It will be for some programs like that as well. I'm sorry, just to clarify, it's not primarily office. I think you were alluding to that. It's, as Mike mentioned, transportation equipment, manufacturing equipment, those 2, but it's not primarily office equipment. Okay. I was just providing an example. Thank you for clarifying. And then what are the typical kind of spreads in terms on this? The yields are in the 4.5% to 5.5% range pretty consistently. And that's pretty consistent through economic cycles. So, it's a that's why we're fairly confident that it will be NIM accretive because that's the yields are very attractive. And do you have an idea of historical loss content from the producers? Yes. If you give us a few minutes, it's fairly it's reasonable, it's probably a little higher than our loss now. Let me get that for you. Sure. I'll ask my follow-up question. How much of the balance sheet at this point is floating rate and without floors? Just want to get a sense for if and when we do see a Fed hike, how quickly we might see some of your loan yields respond? Yes. Our loans, we have about 50% that reprice and about 50% are fixed. And that's by design. We've been higher on the fixed and then we've just we like it fifty-fifty. Okay. And then my last one is, if I strip away PPP this quarter, core NII was up sequentially, feels like we've inflected kind of the bottom was last quarter. As I think about the outlook, right, good loan growth, it feels like the core NIM can expand. Could you provide any color on core NII and kind of the outlook there? Maybe provide some guardrails as to how we should be thinking about it over the next 6 to 12 months? I think, well, first of all, by the way, I got your answer on the charge offs. The normalized charge off in this business is about 55 to 75 basis points. So that's probably higher than our inject auto business, but the yields more to make up for that. Okay. Thank you. And it's a great question. Thanks. We'll give more clarifying color as you go along. The spread income we think will kind of it's a little bit just to continue the story you were just telling. We see that as a bigger story of stability and maybe some growth potential because of the changes in the asset mix, just to get better earning assets on the balance sheet. We'll try to get some clarity as to stripping out PPP and how that affects that because we still have a lot of PPP fee amortization to recognize. We'll recognize some a lot of that in the second half. But the core like you were talking about the core NII without PPP seems to be a story of stability with some growth potential in the second half. Some of that story will depend on the rate environment. Obviously, we're all watching the 10 year headline treasury rate at 1.25%. For us, I know you weren't asking this question directly, but it's implied in your question. For us, we have very little as a company tied to the 10 year rate. For example, if you look at the middle part of the curve, the 2 3 year part of the curve, this isn't getting as much attention, but that's actually higher than it was at March 31 and that indirect auto production is all tied to that part of the curve. So there's some of it very much obviously the rate environment plays a part in our expectations toward NII trend, which was the core of your question, but it's not as penalizing to us as you might think just looking at the headline 10 year number. Got it. Okay. Well, I appreciate that. Thanks for all the color. Thank you. At this time, there are no further questions. I would like to turn the call over for any closing remarks. Thank you, operator. As always, we appreciate your interest in our company and we look forward to being with a number of you over the course of the next 3 to 6 months. Thank you so much.