Cincinnati Good morning. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation Q4 2022 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question at any time, again, press star followed by one on your telephone keypad. Thank you for your patience. Mr. Ryan Thomas, Vice President of Finance and Investor Relations, you may begin the conference.
Thank you, Devin, good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's Q4 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; Brian Karrip, our Chief Credit Officer. A reminder, a copy of yesterday'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 three of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statement. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. Reconciliation of these measures can be accessed in the appendix of today's slide presentation. With that, I will turn the call over to Mike.
Hey. Thank you, Ryan. We had another very productive year and a good quarter. Q4 core net income increased $2.4 million over the Q3 to $36.8 million. Q4 core EPS of $0.39 was up $0.02 per share over the Q3 as well. For the Q4, a $5.7 million increase in net interest income, combined with a $1.6 million decrease in non-interest expense to more than offset a $1.6 million decline in non-interest income and a $3.2 million increase in provision expense. Despite higher provisioning due mostly to loan growth, credit trends improved on virtually all fronts for the year and the quarter. In the Q4 of 2022, ROA was 1.47%.
Core ROA was 1.51%. Core return on tangible common equity was 20.32%. Core pre-tax, pre-provision ROA was 2.28%, and core efficiency was exactly 50%, both records for the company. Core pre-tax, pre-provision net revenue of $55.3 million was up by $6.4 million from last quarter, an increase of 13%, and is now approximately 50% higher than it was in the last quarter before the pandemic. You know, these results really speak to the common combination to thoughtfully grow our business over the last few years. A couple strategies there. We've developed the regional business model. We've added and enhanced customer offerings, things like equipment finance, indirect auto, just to name a few. We've added key talent and leadership, and we've grown our commercial lending teams.
We've really increased our digital relevance, so a lot of success there. As we reflect on record profitability, it's clear that our earnings benefited from an expanding margin and strong loan growth. The margin expanded by 23 basis points to 3.99% as our asset-sensitive balance sheet responded to Fed rate hikes and new higher rate loans replaced the runoff of lower rate loans. About half of our loan portfolio is variable, so we will still see some benefits of the Fed's December rate and January rate hikes in the ensuing quarters. We expect our net interest margin to expand another 15 basis points in the Q1, give or take five basis points.
A strong loan growth contributed to an increase in spread income to $88.3 million in the Q4, up by $5.7 million or 7% as compared to the Q3. The loan growth was fairly evenly split between commercial and consumer categories, with commercial loans growing by 14.6% annualized and consumer loans growing by 17.2% annualized. Equipment finance balances ended the year at approximately $80 million. With equipment finance getting up to speed, we expect loan growth to be around 10% in 2023, which together with our expanding net interest margin, should produce strong growth and spread income that will lead to positive operating leverage.
After announcing the acquisition of Centric Bank on August 30, 2022, we received regulatory approval for the transaction in November, and we're pleased to announce that Centric received shareholder approval this morning. The legal close is scheduled to take place on 31st January . Centric is a commercially oriented franchise in good markets. We expect to push more consumer product through their branch light chassis and increase their commercial lending and deposit gathering activity. We believe that we will achieve the requisite cost saves and meet or exceed the targeted 2023 earnings accretion of $0.08 per share. With 2022 in the history books, we can look back on another year of strong performance for First Commonwealth.
As I mentioned, we found a terrific partner in Centric with which we can enter the central Pennsylvania market and leap over the $10 billion threshold. We grew spread income by $33.6 million over 2021, that includes a reduction of $20.5 million in PPP income, which means that ex-PPP, our spread income grew by $54.1 million. Asset quality measures improved. Fee income was down as expected with the slowdown in mortgage and SBA gains, but increased swap activity helped offset that somewhat, and our SBA and equipment finance originations continue to build momentum. Expenses were up mostly due to inflationary wage pressures, but we achieved positive operating leverage and our efficiency ratio fell.
Lastly, I would just add that while the majority of our recent loan growth has occurred in Ohio, our Pennsylvania market is growing as well now and has long been the source of stable low cost funding. With that, I'll turn it over to Jim Reske, our CFO.
Thanks, Mike. Since Mike's already provided a high-level overview of the quarter's financial results, I'll dive a little deeper into our deposit trends, fees, expenses, and then touch on credit. Deposit costs remained low in the Q4. The total cost of deposits did rise in the Q4, as expected, but only to 20 basis points, up from five basis points last quarter. We calculate our cumulative through-the-cycle beta through the Q4 at only 5.6%. We had previously disclosed expectations of a 20% beta, which was informed by our near zero betas through the end of the Q3 of last year. In fact, our Q4 incremental beta was 18% in line with those expectations.
We are, however, revising our cumulative through the cycle beta estimate to 25% by the end of 2023 just to be more consistent with our long-term historical beta. The deposit picture for us in the Q4 was clouded a bit by our conscious strategy to stay below $10 billion in total assets through year-end. While assets are easy to manage, our concern was that a sudden influx of deposits might inadvertently push us over the $10 billion mark on 31st December , and we were able to successfully manage that. Our Durbin impact will be mid-2024 as planned. Midway through the quarter just ended, we did introduce several deposit strategies that have started to have a real tangible impact as the quarter progressed and continue to pull in deposit balances.
Fee income was down by $1.6 million last quarter, due almost entirely to a $1.6 million drop in swap income. We feel good about our fee businesses. Fee income will remain under some pressure in 2023 due to macroeconomic variables like the housing market, asset values, and SBA premiums. We still expect fee income to be up by about 6% in 2023 over 2022, inclusive of Centric. Non-interest expense improved by $1.6 million from last quarter, in part due to about $800,000 of Q3 expenses that we had identified and previously disclosed that weren't present in the Q4.
While the Q1 of 2023 will be noisy due to one-time items associated with the Centric acquisition, we still expect to hit the previously announced 35% cost save figure. In the past, we have not parsed out in our comments the difference between operating expense and total non-interest expense because intangible amortization wasn't that material. We will likely break these figures out more carefully post-acquisition. For the full year 2022, our standalone operating expense, without Centric of course, was $224.7 million, up by 7% from 2021. We expect that in 2023 it will probably be up by another 7% to 8%. In 2023, however, total operating expense will include Centric. To get to total non-interest expense, we will have to add intangible amortization.
That last figure will include the new intangible amortization from the acquisition, which we will calculate at close and disclose with our Q1 results. Provision expense was up in the Q4, not because of any credit deterioration. In fact, credit metrics improved. Roughly half the provision, or $4.6 million, was due to loan growth. The remaining provision expense reflected about $2 million in net charge-offs, which is lower than last quarter, plus about $3.7 million for changes in our economic forecast. All asset quality measures remain strong. At 11 basis points, net charge-offs are lower than last quarter, charge-offs also came in lower for the full year. Compared to the end of last year, non-performing loans are down from 80 basis points to 46 basis points of total loans.
Non-performing assets are down from 59 basis points to 37 basis points of total loans. The dollar balances of non-accrual, non-performing, criticized, and classified loans are all down 30% to 40%. If a credit recession is looming, we have yet to feel it. If it does come, we are starting from a very good position. On a different note, our tangible book value per share grew by $0.32 to $7.92, and our tangible common equity ratio improved by 13 basis points to 7.79%, due mostly to our strong earnings capacity, but also reflecting a $4.6 million reduction in accumulated other comprehensive income. Finally, our effective tax rate was 19.98%. With that, we will take any questions you may have.
At this time, I would like to remind everyone, to ask a question, press star and then the number one on your telephone keypad. Our next question comes from Daniel Tamayo with Raymond James.
Good afternoon, guys. Thanks for taking my questions. Maybe first, just on the margin, appreciate the guidance for the Q1 and the further expansion. Just a clarification. Does that include purchase accounting accretion that's coming with the deal?
Great question. It does. Thanks for asking so we can clarify. It does include that, but it includes that based on our assumptions we had at the time the deal was announced. All those. It was a different rate environment, so that will change. I'll tell you just to broaden your question a bit, the thing that could produce some downward pressure on that NIM estimate is deposit costs. If deposit costs rise faster than we thought, that's why we give some guidance within ±5 basis points. That'll be downward pressure. We're going to redo all the marks at closing in a different rate environment. We don't have that answer for you yet or we would give it to you.
It's likely that that might provide some upside to the number we disclosed a minute ago.
Okay. Do you have a sense for or, just a guide for what the core margin would be in the Q1, excluding those marks?
Well, we're 399 now, the guide we were giving is 15 basis points up, it'll be about four, 14, 415 ±5 on either side. That's the best guidance we can give you now, we'll just have to revise it once we close the deal and have the final marks calculated and provide further guidance as we go.
No, that's great. We appreciate that. As we think about kind of the rest of the year with you revised your deposit beta assumption cumulative, back up to 25%. As we think about that playing out over the course of the year, assuming no other rate hikes maybe after the Q1, how do you envision the margin moving throughout the rest of the year?
Go ahead, Jim.
Yeah, sure. We've disclosed this before, but we do see a peak in margin as deposit rates eventually kind of catch up. What we had disclosed before is still the way we see it, which is margin probably peaking in the Q2 of this year, coming down from there. Some of that's based on our rate forecast, which is based on a weighted average of a Moody's baseline forecast and an upside and a downside. In our rate forecast, the peak rates are only 4.7%, not much higher than they are now. Those rates start to kind of come down in the second half. That informs the peak estimate that I'm giving you.
If the rates go higher and stay higher, that the peak might be delayed. Inevitably, along with everyone else in the industry, deposit costs are going to keep growing and catch up and eventually cause NIM to peak.
Let me just add to Jim's comment, Dan, if I can. Jim mentioned that we could not afford to trip over $10 billion in the Q4. That was really a play. We really feel like we can gin the commercial deposit gathering machine, like we did in the prior years where we, y ou know, you've seen some of our pie charts before. You know, where 60%+ of our non-increasing deposits was business. That's really going to be our focus. It'll be a point of strategic focus and goals and incentives.
We're running specials and tests that we monitor week to week. We just have a good feeling about 2023, what we can accomplish, and getting to a point where we can fund our loan growth at 10%. If that's a little off because of a bump or a mild recession, you know, those, the funding pressure might not be the same. That's right.
Okay, that's great. Just finally to stay on the margin here. Do you have a sense of how much compression that might be? I mean, just assuming your 25% cumulative deposit beta, how much do you think the margin could potentially contract from the peak in the Q1?
Well, based on what we know now, we see it continuing. You know, the peak isn't the Q1, the peak is the Q2. It'll continue to expand a little bit in the Q2.
Oh, sorry.
Where we see it ending the year is still over 4%. Not giving back all the expansion. A level, a little higher than we are now. I'm hesitant to go that far out because I think the marks from Centric as we calculate and the final marks are going to affect this number. Deposit costs and how we manage that. The year this could change, so we'll have to update this as we go ahead. As we see it right now, we see that number staying above 4% by the end of the year.
All right. Terrific. That's very helpful. I appreciate it. I know that's a tough number to get at, especially with the marks. I appreciate you answering my questions.
Thank you, Dan.
Our next question comes from Frank Schiraldi with Piper Sandler.
Hey, guys.
Good afternoon.
Just on the thinking about the efficiency ratio in the quarter right at 50% and the positive operating leverage for 2023 and the cost saves from Centric. You know, given that your, you know, imply obviously a sub 50% efficiency ratio, is that a place you think, you know, as you think about more medium term maybe, that you think you can operate the bank from? Or you know, I understand an offset will be the Durbin impact in mid-2024. Just wondering your thoughts on kind of longer term, where you think you can operate the bank from in terms of efficiencies.
I think you used the term mid-term, which to me would imply one or two years. I think low 50s we're comfortable with because we plan to grow the bank. You've seen us kind of methodically put together a lot of diversified revenue engines, and we're going to continue to ramp those up. We'd like to continue to grow the bank that we have, the way we have in the last two years, and make investments. Of course, we have new territory in central Pennsylvania and in the outskirts of the Philadelphia MSA. I think I don't see us, you know, doing sub 50 right away. We want to build out the revenue side of the bank and grow the bank.
Okay. You know, a lot of talk about the NIM, and I'm hesitant to ask because Jim, I know you said you were hesitant to go out to the end of next year. You know, as you think about if the Fed, you know, we get a couple of more rate hikes here, and then, the Fed, is the interest rate picture is a little more static for some time. Do you feel like that NIM above 4% is an area where the bank could operate at? You know, maybe it plateaus there. Are you thinking that in 2024, it's more likely that the NIM, you know, continues to drop to a more normalized level?
I guess that's what I'm trying to, you know, such out is if you think in a static rate environment, a normalized level could be above that 4% figure.
Yeah. It's a tough question. You know, to use an old joke, my crystal ball gets cloudy when you start getting out to 2024. We have actually stressed it for the kind of scenario you're talking about because we realize that in, you know, using consistently the rate forecast we're using with this, our approach that this is the way we do our CECL model with a 40% weight on the baseline, 30% on upside and downside, using that rate forecast, that it might be under overstated. We try to stress it and say, "Well, what happens if it's wrong? What happens if rates, if the Fed raises rates a little more aggressively here and rates stay up for a while longer?" I can tell you the answer generally for us is that it's better. The NIM is better.
The margin is better, and it stays higher for longer. The pattern is pretty much the same. You get to a peak, and then it comes down. In that world, I would tell you that we end up at a pretty at this base I want to know now, you have a margin that ends the year well above 4%. What it goes to in 2024, I actually don't have that, but my guess would be that it would drift downward and continue downward if deposit costs stay up. If rates go to 5% and stay there for two or three years, just solid, eventually deposit rates are going to keep going up and up and up.
Got it. Okay. Just lastly, kind of I was surprised that the state consumer continued to be as strong as it has been in terms of the, you know, as a driver, as a partial driver of loan growth. Sorry if I missed in your prepared remarks, are you starting to see a slowdown or are you expecting a slowdown on that side of things just given the macro environment with, you know, more of a pickup in commercial going forward into 2023?
We are. I mean, we did, we might do 10% less in mortgage this next year, but not 20 or 30. I mean, if we were at $470, we might be at $430, in first mortgage. HELOC, HELOAN is probably much softer and under pressure. Also we've taken our good people in the branches, and we've really got them focused on deposits and calling on business customers, small business customers. You know, the indirect auto business looks good, and the team has done a nice job of getting our spreads up in that business. It's very well managed. So that's a business that can probably help us.
We will be doing some HELOC and HELOANs out of branches, and we'll be doing some mortgage and not a lot less actually, you know, from, you know, maybe the high fours to maybe the mid or low fours. That's also a business that long term, we like the business because we get a cornerstone checking account that we cross-sell, we get households, a customer for life. So I think the consumer business is something that is important to us. Jane, anything you would add?
Not really, Mike. I think you covered it. We think the consumer is healthy.
Okay, great. I appreciate the color. Thank you.
Our next question comes from Karl Shepard with RBC Capital Markets.
Hey, good afternoon, thanks for taking the questions.
You bet.
I know we're all trying to get a sense for the margin trajectory, but I guess I'm kind of curious to ask how you feel about core momentum in the bank. I think your numbers look pretty good. You have Centric coming in, equipment finance ramping. How do you feel about just kind of the overall positioning of the bank as you go into 23 and kind of strategic priorities?
Yeah. We just feel really good. I mean, we feel like we're positioned in our lending business as well. Even the businesses that are hitting a bit of a speed bump like, you know, our fee businesses. We really believe in SBA and mortgage longer term, you know, good, robust consumer lending through our branches. We're really building out our equipment finance platform or SBA. We've got new talent in C&I lending. We feel good about our company. I think for those of you who have covered us for a number of years, the one thing we do is we get better every year. I mean, you know, this has been a march from a 60 basis point ROA bank, and we get five, 10 basis points better every year.
We operate with the principle of operating leverage in every budget in every part of our bank. We're just excited about the future of our company. We're excited about the new markets. It's fun. We feel like we make a difference with our clients and the value proposition that we deliver. We think we're, you know, we're turning our focus back to funding, but we've always been pretty good at funding. It's just gonna be fun to see how well we can do this year and how much core deposits we can gather. Then we just feel like there's a couple more plays left in the playbook at least.
You know, we think our regional model is starting to knit the bank together in six of our discrete markets, northern, southern, central Ohio, Pittsburgh, community PA, and now this capital region. I don't know. We're excited about the future of our company. Thanks for asking.
Thanks, for the color. Excuse me. As a follow-up too, I wanted to ask, what kind of economy are you assuming in your loan growth guidance? I think we all have kind of a different view. You know, what kind of trends are you seeing today, and what do you need to see over the next couple of quarters to get where you want to be?
Yeah. I mean, for this year, just because of some downdraft in some places, you know, we've been a little higher, but probably 9% to 10%. We think, you know, commercial's on a good trajectory. Of course, we have a newer business that, you know, everything equipment finance adds, you know, $80 million in the second half of the year goes right to growth and higher spread growth, I might add. Jim, anything you would add, or Jane?
I would say we're not predicating those kinds of expectations on a recessionary environment that requires a pullback in lending or the consumers start to get worried, unemployment rises. I can tell you actually officially in our forecast, the weighted average forecast I keep referencing in this call, the unemployment rate goes to just over 5% by the end of the year. We're not using that and saying that's going to result in a big pullback in loan volumes. In fact, we kind of see those things working together because if there is some recessionary pressure and loan volumes slow down a little bit from what our expectations are, well, then that will relieve some funding pressure, and we'll be fine. That goes into the mix.
Yeah. Jane, anything you would add? This is your world.
The only thing that I would add, Mike, is in a couple of the businesses, we're still seeing supply chain issues. The car business is still challenged. The equipment finance business is still seeing supply chain issues. Equipment is taking longer to be delivered. We're also seeing construction delays in some of our residential mortgage and SBA loans. You know, the economy still isn't completely frictionless. You know, we still see some of the COVID friction in the economy. It's not recessionary. It's just friction.
Great point. Is that helpful?
Yeah. Thanks, for the color .
Our next question comes from Michael Perito with KBW.
Hey. Good afternoon, guys. Thanks for taking my question.
Great.
A lot of them have been addressed, but just two quick ones. One, you know, Mike, Centric's about to close. You know, most of your peers are saying bank M&A is pretty quiet. Just curious what you're hearing and where your thoughts are at for that heading into, you know, the start of this year.
You know, we wake up every day, we think about organic growth and how we grow our company. That's the highest and best use of our capital. That's where fundamentally we start, and we have to be successful there year in and year out. When we have great opportunities like with Centric or with Foundation in Cincinnati, they have to be right. You know, Jim always likes to say we've looked at 60 things to do six. We're not seeing a lot of activity. Even if we were, it would have to be right for us strategically, and it would have to be right for us financially. We're pretty picky, and I don't. Anyway, we're not counting on that.
If it presents itself in a way that's really positive for our company and is win-win, then great. It's not a key part of our strategic plan.
Great. Thanks. Then just within the non-interest income, you know, obviously the environment on mortgage and, you know, investments and everything are challenging. Just curious if there's any particular areas that might have more or less upside relative to your forecast? Anything you're excited about or more cautious about on the line item basis?
Yeah. I'll start there and let Jane follow and Jim. Just on the SBA piece, we're a little frustrated because we really have good volume, and, you know, we're number one SBA lender in a couple of our key markets. That's a part of our brand. We feel like we're doing good for customers and our bank. The volume hasn't materialized into fee income, but it will. That business has been around for a long time, so we're still very bullish on it, even though it's kind of tamped down right now. We've grown that business pretty nicely in the volume. I'll speak to that one.
I spoke a little bit to mortgage, and, you know, obviously, not indirect auto, but our card business is off probably about, you know, 12%. That's just consumers not spending as much money and swiping their cards as often, at least in our part of the vineyard. Jane, what else would you add in terms of outlook for fee businesses?
The only couple things I would add, Mike, are that the brokerage business looks good. The investment management and trust business is a little bit soft because of the market volatility. You know, we're paid against asset values, and the volatility is not our friend. None of that feels like it's prolonged. You know, it all feels like a blip. To Mike's point on SBA, we have a couple of loans still in the pipeline, construction loans, which started in early 2020, and they just haven't completed yet. They will, but, you know, I've stopped counting the days, and I just know they'll close. They're progressing. They're just progressing slowly.
Is that helpful?
Thank you, guys. That's all. Appreciate it. Yep.
Thank you.
Our next question comes from Manuel Navas with D.A. Davidson.
Hey, good afternoon.
Good afternoon, Manuel.
Can you kind of talk about the loan growth target and explain a little bit more about the mix? I'll dive into the Equipment Finance Group in a second.
Yeah. The mix is, We do it two ways. We do it with, geographically, and we do it by product line. More and more, we're running our company geographically. I would say that, Ohio has just been on a tear, probably average loan growth there of about 20% the last several years. In Pittsburgh and, our community PA markets have really improved quite a bit. I mean, we were leaking oil for a number of years in community Pennsylvania, and I think they grew about 7% or 8% last year. That's one dimension that we look really closely at, is how we're delivering geographically.
Also by lines of business, you know, we expect our commercial to really kind of be at the forefront again this year and kind of carry the day. Our indirect auto is off to a good start. Jim, you're looking at the actual numbers.
Yeah. Just like you see, one of the things that's kind of shifted our guidance, because for a long time, we talk about mid-single digits, and once in a while, we talk about upper single digits. CECL around that. One of the things that's just giving us confidence about saying going out there with 10% is the equipment finance business really getting up to speed. We really built out that business. We talked about that a lot on previous calls. It's really kind of really coming up to speed. As Jane mentioned, there are still, you know, equipment issues that affect that business. Even then, that's a good chunk of our expected loan growth next year.
That, you know, combined with, you know, pretty modest or not modest, but moderate growth in the other areas altogether gets to 10%. Technically, we probably should say loans and leases, but even in our equipment finance business, 85% of the business is loans, only about 15% is leases right now.
Yeah. I forgot to mention on the commercial side, just the backlog we have in the commercial construction business, and that will be layered in this year, and those construction draws are already beginning to occur. That's another nice driver. Jane, are we missing anything?
No, I don't think so. If I'm looking at expectations, everybody, every geography is expected to grow modestly, and every business line is expected to grow moderately. The combination means somebody can be a little bit up or down, and another business line or geography will pick it up. I feel good about the expectations for growth. I feel good. I don't see any real weakness. Yeah. If I could just add one more thought, ono bullet point. Our line utilization is still not up to where it was pre-pandemic. It's gone up a little bit, but there's still maybe a little more runway there.
Yeah. Good point.
That's really helpful. Now equipment finance alone, what are kind of expectations as a percentage of loans by the end of this year? Kind of where can that portfolio grow to in the next two years? Then kind of what are the yields that you're getting currently?
Yeah. Jane, why don't we let you take that one?
Let's start with Jim, or he can start with yields, Mike, and then I'll back clean up.
The yields in that business are really strong, really nice. Right now, going over 7%, that's really where we like it to be. We didn't build that business to be double-digit yields. We don't want to take on that kind of risk. The equipment is mostly things like trucks and nice bread-and-butter kind of equipment like that, the yields are really very additive to our overall NIM and to the bank as a whole. In terms of, like, I think your question was like a proportion of our loan growth next year. It's probably 30% to 40% of the loan growth next year. If you look at an overall big picture number of what we expect to be booking this year, equipment finance is really additive.
That's where we can say the other businesses are growing at historical moderate growth rates are growing and then equipment finance we add on top, really kind of puts the whole picture together, builds the whole picture. Jane, if you want to add to that.
Sure. We're continuing to add sale's people. As Jim said, it's a, it's a big portion of our loan growth this year. I heard you ask, ultimately, where do we see it being? It's probably never gonna be more than 10% to 15% of the loan portfolio.
That's good. That's helpful. How many people have you added? How much is the footprint on your employee base in this division?
It's small. The leader of the group, Rob Boyer, has been very careful. We add out a few employees at a time because he's been very careful about selection and onboarding. We've been adding primarily salespeople. We probably have a couple of dozen people in the group right now.
Okay. That's really helpful. Thank you, guys.
Thank you.
Our next question comes from Daniel Cardenas with Janney Montgomery Scott.
Good afternoon, guys. How are you?
Good.
Just a quick follow-up on the equiment finance. What's the duration of that portfolio and the average loan size?
Average loan size is about $160,000. It was up a little bit from our earliest projections just because of the way the market was moving. It might come down a little bit from that. Duration was, I think, 60 to 70 months. Jane, you could correct me on that. One of the features of that business is unlike the auto business, it rarely prepays. The duration is very kind of similar to the stated life.
Yep, just about five years.
Okay. To get to the growth that you're projecting right now, is it safe to assume that you'll kind of stay within that average, or do you kind of foresee, going up in size to help you get there?
We don't.
No.
We don't have any immediate plans to increase the size. We like the space because we like the yields a lot, and we like the collateral. We'll probably stay about where we are, at least for the foreseeable future.
Okay. What kind of loss rate are you building into your model for the equipment finance?
Jim, do you want me to take that?
Yeah. If you have it at your fingertips, please.
I do. You know, we assumed initially, 75 basis points. As you can imagine, it's next to nothing. So far, the actual losses have been zero.
All right. Congrats on that. Maybe just jumping over to borrowings. In this quarter, we saw a pretty substantial jump. Can you maybe give us some color as to how we should think about borrowings on a go-forward basis?
Well, like we've been saying, our long-term goal is that we wanna make sure that we fund our loan growth through deposit growth. When in any given quarter we don't have that, we're able to tap into borrowings, so we have a very large amount of equity, so funding our loan growth is not a problem. In the Q4, we just had that dynamic where we didn't want to have an influx of deposits because of the inflexibility of deposits. Assets are so flexible. If we had gotten to the end of December of last year and we're trying to avoid the $10 billion mark, you can sell a loan portfolio very quickly and pay down overnight borrowings the same day very quickly.
You can't do that if it was funded with deposits because you can't stuff money into envelopes and mail it back to depositors and give them their money back. That gave us this balance sheet flexibility we really liked going into the end of last year. Now like I said, there's plenty of that money available. The money that we're raising in the market, even with CD specials and other kinds of specials, is all below our incremental cost of overnight borrowings, so that's all better for us in the borrowings. The money's really flowing in in response to those specials. That's kind of how we manage it and how we look at it.
Okay. Good. Last question for me in terms of, as I look at your deposits, do you guys have any brokered deposits in portfolio right now?
No.
No.
None.
Okay. All right. That's all I have. Thanks, guys.
Thank you, Dan.
If you would like to ask a question at any time, please press star and then the number one on your telephone keypad. Our next question comes from Matthew Breese with Stephens Inc.
Good afternoon, everybody.
Hey, Matt.
I wanted to go back to the deposit discussion. Jim, I think I heard you say that you'd like to, you know, equally fund loan growth with deposits, implying that the loan to deposit ratio can stay, sub 100%. Is that accurate?
Yes, look, over the long term. Over the long term, that's definitely our goal.
Okay. That leads to my next question really, which is, you know, we are standing today with 33% non-interest-bearing deposits that compares to pre-COVID levels of I think closer to maybe 25%. Fed funds is obviously very different from that point in time. I'm just curious, you know, what is structurally different about the non-increasing deposit composition that, you know, that should we expect it to stay at this elevated level versus where it was pre-COVID?
I think it'll certainly stay at an elevated level compared to peers. I think it'll certainly stay at an elevated level with the composition between business and consumer. I think clearly we have an opportunity to leverage a broad business customer base and gather more deposits. We do that unusually through our branch network. A lot of banks, the branch manager does not go out and make calls on small business. In our bank, they are rewarded to not only do that, but to bring in core deposits and businesses that grow. I think that's fundamentally a little different certainly than our bigger bank brothers and sisters. It's, you know, you need to get customers and not just customers that borrow from you.
Jane, I mean, this has been your forte and your drumbeat for the last four or five years. Do you want to add to that?
The only thing that I would add is our loan portfolio, particularly on the commercial side, looks very different than it did four, five, six years ago. The loan portfolio today is overwhelmingly direct clients with whom we have direct relationships. With those clients, we expect a depository relationship. It's made all the difference in the world.
Is that helpful, Matt?
Got it. Yeah, very helpful. Maybe just as a follow-up, as we look at the book today versus pre-COVID, just as a reference point, are you capturing more client wallet share, or are you seeing similar granularity but over more accounts?
We are capturing better[crosstalk]
I'm sorry, Mike. I didn't mean to talk over you.
No, no. No, no. Go ahead.
I would say both. We are capturing much more wallet share. We've spent some money on our treasury management, product and infrastructure. We know that we need to be able to deliver, so that when we ask for the operating relationship, we've got a product set that allows us to ask for it.
You know, I would just add through our regional business model, we're much more likely to have a president or a senior lender much more closely knit to the other business lines, whether it's mortgage, wealth management, retail, and really bring other partners out to talk to that client and to help them, particularly on the personal banking side, also on consumer lending opportunities and wealth management opportunities. We're getting a better share of the wallet than we were, probably five, six years ago.
Understood. I appreciate all that detail. Maybe flipping to the other side of the balance sheet, could you provide what the roll-on blended loan yields are versus what's rolling off at this point?
Yeah. Yeah. Give me a second. Let me pull that up. There it is. For the quarter as a whole, we were putting on loans in the high fives, 588, and what was rolling off was at 544. It was a 44 basis point differential.
Okay. Do you have the pipeline yields all in?
I don't have the pipeline yields all in. I can tell you that, like, looking at what I'm looking in front of me, just speaking historically for the quarter just ended, those numbers improved consistently over every month in the quarter. The new loan yields going up, up as the quarter went on.
Understood. I was waiting, you know, I was hoping there was a 6% number either at the pipeline or at quarter end.
Well, there are. Yeah, there are. Like for example, in individual business lines, they're historically different. And some businesses have longer tails than others. For example, when in a mortgage construction business, we'll be locked in a rate for a loan for someone who's building a house eight or nine months ago. That's a really low rate. Then if it particularly gets to the point where it gets on the books, and it's a low rate, that brings down the current period yield. For commercial variable adjustable loans, for example, one of our biggest categories, where we originated $400 million, those new money yields in the Q4 were in the high 6.67%. That really brings the loan portfolio yield up, and that's been going very nicely.
The story depends on what portfolio you're talking about.
That category was our largest category in the Q4.
Yeah.
In terms of volume and throughput, almost $400 million.
Yeah. Half of all the originations in that category and really helping. That's the new origination money. The existing portfolio also repriced with, you know, the Fed rate increases. That's been really helpful to the bank.
Got it. Maybe turn to indirect auto. I mean, I heard you at the onset. It sounds like there's really no notable deterioration in credit, delinquencies, criticized classifieds. I did want to hone in and get a little bit of additional color on indirect auto, which we're getting more questions on. Could you just give us a sense for the health of that book. The FICOs of the book and maybe just an update on duration.
Yeah. We brushed up on this before the call. Average ticket's about $30, Jane, as you shared with us. 6-year duration, and contracted duration, it tends to be shorter than that, two and a half years or so. You know, the average payment is up a little bit over the last year, about $50 to just over $500. FICO, do we have that?
They're all over $700, but let me see if I can get more refined than that.
Yeah. Good. Jane, do you wanna add anything while Jim's finding the FICO? I know that's on the report there.
Yep. you know, there's been really no degradation. you keep waiting for it to happen, but there's been none. The used car market is staying very, very healthy, because there are still shortages in the used car market. You know, so few customers are leasing anymore that, used car values are holding beautifully. So far it's been magical. We underwrite.
Mike.
No, go ahead. I'm sorry, Jane. Go ahead and finish.
I was just gonna say we are holding to our underwriting standards. We haven't blinked. We are an A paper shop. Our capture rate is a little bit skinnier or a little bit lower than what you might see in other banks. We don't buy everything by any stretch.
Yeah. 92% of our production is over a 700 FICO.
Last one for me is just around capital management. You know, hopefully the worst of kinda any sort of major impacts to AOCI is behind us. I am curious, just given where the stock is and how you think about, you know, buybacks and if there's any level where you'd be more interested in that.
Jim?
We have $5.9 million remaining under our previously authorized authorization from our Board. We had to stay in blackout while the Centric acquisition was pending. Actually, we had to stay in out of the market technically through today through their shareholder meeting. Obviously, with the earnings, we're out of the market anyway. We could go back into the market in a few days with that authorization. Generally, though, in our big picture view of capital is that we are generating capital and using it for organic growth. That's the primary purpose of generating the capital. We want to use that capital to fund our organic loan growth. If there's excess capital, we can use that for buybacks.
I think with the $5.9 million of authorization we have, if we look at, like the price reaction today, for example, that creates a buying opportunity. We would be in the market. We can't go to market legally for at least three days from today anyway. But that would be a buying opportunity. We'll continue to use that remaining authorization for buying on those kinds of dips. By and large, we're gonna use the rest of the year's capital generation to fund the organic loan growth.
Great. That's all I had. I appreciate you taking all my questions. Thank you.
Thanks, Matt.
Hey, hey, Mike, if it's okay, I hate to retread, but I do wanna brag for just a minute. Back to the FICO score. We can be even more precise that 90% are greater than 700. The average FICO score for the auto portfolio is 770. The average for RAC is 785.
Thanks, Jane.
Uh-huh.
I'm sure Matt heard that. Hey, operator, any other questions?
Our final question comes from Manuel Navas with D.A. Davidson.
Very good. Manuel?
I see there are no further questions at this time. I now turn the call back over to President and CEO, Mike Price.
I always say this. We just really appreciate the interest of the covering analysts, your questions, and the opportunity to share our story and our business with you. We're pretty passionate about it. We care a lot. I hope it shows in the results. Look forward to being with a number of you over the course of the next 90 days. Thank you.
That concludes today's conference. Thank you for attending today's presentation. You may now.