Earnings Call Transcript
First Commonwealth Financial Corp /Pa/ (FCF)
Earnings Call Transcript - FCF Q4 2022
Operator, Operator
Good morning. My name is Devon, and I will be your conference operator today. I would like to welcome everyone to the First Commonwealth Financial Corporation Q4 2022 Earnings Release Conference Call. All lines have been muted to avoid background noise. After the speakers’ remarks, there will be a question-and-answer session. Mr. Ryan Thomas, Vice President of Finance and Investor Relations, you may begin the conference.
Ryan Thomas, Vice President of Finance and Investor Relations
Thank you, Devon, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation’s fourth quarter financial results. Participating on today’s call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; and Brian Karrip, our Chief Credit Officer. As 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 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 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Today’s call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. 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.
Mike Price, President and CEO
Hi. Thank you, Ryan. We had another very productive year and a good quarter. Our fourth quarter core net income increased $2.4 million over the third quarter to $36.8 million. In the fourth quarter, core EPS of $0.39 was up $0.02 per share over the third quarter as well. For the fourth quarter, 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 fourth quarter of 2022, ROA was 1.47%, core ROA was 1.51%, core return on tangible common equity was 20.32%, also 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. Now these results really speak to the culmination of thoughtfully growing our business over the last few years. In a couple of strategies there, we have developed a regional business model; we have added enhanced customer offerings, things like equipment finance, indirect auto, just to name a few. We have added key talent and leadership, and we have grown our commercial lending teams; we have 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 run-off 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 any ensuing quarters. We expect our net interest margin to expand another 15 basis points in the first quarter, give or take 5 basis points. Our strong loan growth contributed to an increase in spread income to $88.3 million in the fourth quarter, up by $5.7 million or 7% as compared to the third quarter. 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 in net 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 are pleased to announce that Centric received shareholder approval this morning. As a result, the legal close is scheduled to take place on January 31. Centric is a commercially-oriented franchise in good markets. We expect to push more consumer products through their branches and increase their commercial lending and deposit-gathering activity. We believe that we will achieve the requisite cost savings 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, but 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 that 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. And with that, I will turn it over to Jim Reske, our CFO.
Jim Reske, Chief Financial Officer
Thanks, Mike. Since Mike has already provided a high-level overview of the quarter’s financial results, I will dive a little deeper into our deposit trends, fees, expenses, and then touch on credit. Deposit costs remained low in the fourth quarter. The total cost of deposits did rise in the fourth quarter as expected, but only to 20 basis points, up from 5 basis points last quarter. We calculate our cumulative through-the-cycle beta through the fourth quarter at only 5.6%. We have previously disclosed expectations of a 20% beta which was informed by our near-zero betas through the end of the third quarter of last year, and in fact, our fourth quarter 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 positive picture for us in the fourth quarter 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 December 31st, and we were able to successfully manage that. So 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, but fee income will remain under some pressure in 2023 due to macroeconomic variables like the housing market, asset values, and SBA premiums. Nevertheless, 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 third-quarter expenses that we had identified and previously disclosed that weren’t present in the fourth quarter. While the first quarter 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. Now 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. But 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 and we expect that in 2023 it will probably be up by another 7% to 8%. In 2023, however, total operating expense will include Centric and then 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 first quarter results. Provision expense was up in the fourth quarter, but not because of any credit deterioration; in fact, credit metrics improved. Roughly half of 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 and 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 to total loans, non-performing assets are down from 59 basis points to 37 basis points of total loans and 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; and 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%. And with that, we will take any questions you may have.
Operator, Operator
Our next question comes from Daniel Tamayo with Raymond James.
Daniel Tamayo, Analyst
Good afternoon, guys. Thanks for taking my questions. Maybe first, just on the margin. I appreciate the guidance for the first quarter and the further expansion. Just a clarification, does that include purchase accounting accretion that’s coming with the deal?
Mike Price, President and CEO
Thank you for your question, it’s a good one, and I appreciate the opportunity to clarify. Yes, it includes our assumptions at the time the deal was announced, but we were in a different rate environment then, and that has changed. To give you a broader perspective, one factor that could put downward pressure on that net interest margin estimate is the rising costs of deposits. That's why we provided guidance within a range of plus or minus 5 basis points. This will exert downward pressure. However, we will reevaluate all the figures at closing in the new rate environment. We don’t have a definitive answer at this moment, but there is a possibility that we could see some upside to the number we mentioned earlier.
Daniel Tamayo, Analyst
Okay. Do you have a sense or just a guide for what the core margin would be in the first quarter excluding those marks?
Mike Price, President and CEO
Well, we are at 3.99 now and the guide we are giving is 15 basis points up, so it will be about 4.14, 4.15, plus or minus 5 on either side. So that's the best guidance we can give you now and we will just have to revise it once we close the deal and have the final mark calculated and provide further guidance as we go.
Daniel Tamayo, Analyst
No. That’s great. I appreciate that. And then 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 first quarter, how do you envision the margin moving throughout the rest of the year?
Mike Price, President and CEO
Go ahead, Jim.
Jim Reske, Chief Financial Officer
We anticipate that our margins will peak as deposit rates eventually align. We previously indicated that we expect margins to reach their peak in the second quarter of this year, followed by a decline. This outlook is contingent on our rate forecast, which is derived from a weighted average of Moody’s baseline, upside, and downside projections. According to our rate forecast, peak rates should only reach 4.7%, which is not significantly higher than our current levels, and we foresee EBIT rates beginning to decrease in the second half of the year. This forms the basis of the estimate I am providing. If rates exceed expectations and remain elevated, the peak may be postponed. However, like others in the industry, we will see deposit costs continue to rise, which will ultimately contribute to reaching that peak.
Mike Price, President and CEO
I’d like to add to Jim’s comment, Dan, if I may. Jim noted that we could not afford to lose $10 billion in the fourth quarter. That was a significant point, and we believe we can enhance our commercial deposit gathering efforts like we have in previous years, where over 60% of our non-interest-bearing deposits are from businesses. This will be a primary area of focus for us, along with our goals and incentives. We are conducting special promotions and tests that we review weekly. We feel optimistic about what we can achieve in 2023, aiming to fund our loan growth at 10%. If there are slight adjustments because of challenges or a mild recession, the funding pressure may not be as pronounced.
Jim Reske, Chief Financial Officer
Right.
Daniel Tamayo, Analyst
Okay. That’s great. And just, finally, to stay on the margin here.
Mike Price, President and CEO
Yeah.
Daniel Tamayo, Analyst
Do you have an idea of how much compression that might be, considering you're at a 25 basis point cumulative deposit beta? How much do you think the margin could potentially contract from the peak in the first quarter?
Jim Reske, Chief Financial Officer
Based on our current understanding, we anticipate that the peak will occur in the second quarter, and we plan to continue expanding during this period. We expect to finish the year with a figure above 4%, so we do not foresee a decline in expansion. I believe the final numbers may end up slightly higher than our current estimates. However, I am cautious about predicting too far into the future, as the marks on Centric will impact this figure, along with deposit costs and how we manage them throughout the year. This perspective may change, and we will provide updates as necessary. For now, we believe this number will remain above 4% by the year's end.
Daniel Tamayo, Analyst
All right. Terrific. That’s very helpful. I appreciate it. I know it’s a tough number to get at especially with the marks. So I appreciate you answering the questions.
Mike Price, President and CEO
Yeah. Thank you, Dan.
Operator, Operator
Our next question comes from Frank Schiraldi with Piper Sandler.
Frank Schiraldi, Analyst
Hey, guys.
Mike Price, President and CEO
Good afternoon.
Frank Schiraldi, Analyst
Just on the thinking about the efficiency ratio in the quarter right at 50% and the positive operating leverage for 2023 and the cost base in Centric. So, given that you imply obviously a sub-50% efficiency ratio, is that a place you think, as you think about more medium-term maybe that you think you can operate the bank from? Or 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?
Mike Price, President and CEO
I think when you mention midterm, you're referring to a time frame of one to two years. We're comfortable with being in the low 50s efficiency ratio because our plan is to grow the bank. We've been systematically developing diverse revenue streams, and we'll continue to enhance those. Our goal is to keep growing the bank in the same manner we have over the past two years and make further investments. We're also expanding into new areas in Central Pennsylvania and on the outskirts of the Philadelphia metropolitan area. Therefore, I don't anticipate us dropping below 50% efficiency anytime soon, and our focus is on increasing revenue and growing the bank.
Frank Schiraldi, Analyst
Okay. There has been a lot of discussion about the net interest margin, and I know you mentioned some hesitation about projecting into next year. If the Federal Reserve implements a few more rate hikes and then maintains a stable interest rate for a while, do you believe that the net interest margin could stay above 4%? Or do you anticipate it might level off there? Looking ahead to 2024, is it more likely that the net interest margin will decline to a more typical level? I'm trying to understand if, in a stable interest rate environment, a normalized net interest margin could potentially exceed that 4% mark.
Jim Reske, Chief Financial Officer
It's a difficult question to answer. As a bit of an old joke goes, my predictions for 2024 are uncertain. However, we have actually analyzed scenarios like the one you mentioned. We consistently apply the same rate forecast, and we approach our CECL model with 40% on the baseline and 30% for the potential upside and downside, acknowledging that these forecasts may be either understated or overstated. We try to understand what might happen if those forecasts are inaccurate or if the Fed raises rates more aggressively and maintains them for an extended period. Generally, for us, this situation would actually improve the net interest margin, allowing it to remain elevated for a longer time, although the trend remains similar—experiencing a peak before it declines. Based on what I know right now, I would say we could end the year with a margin above 4%. As for what happens in 2024, I don't have a specific number, but I would expect a gradual decline, especially if deposit costs increase. If rates reach 5% and stay there for a couple of years, deposit rates are likely to keep rising.
Frank Schiraldi, Analyst
I was surprised to see that consumer strength remains a significant factor in loan growth. I apologize if I missed this in your prepared remarks, but are you noticing any slowdown in this area or do you anticipate a slowdown, especially considering the macroeconomic environment and the expected increase in commercial activity as we move into 2023?
Mike Price, President and CEO
We anticipate a decrease in mortgage originations next year, possibly around 10%, but not as much as 20% or 30%. If our rate were at 4.70, it might drop to around 4.30 for first mortgages. The HELOC and HELOAN sectors are expected to be weaker, but we believe in our strong branch teams and will concentrate on deposits and reaching out to small business customers. The indirect auto segment is performing well, and our team has effectively increased our profit margins in that area, which is being managed efficiently. While we will still engage in HELOC and HELOAN from our branches, our mortgage output is likely to remain relatively stable, shifting from the high 4s to the mid or low 4s. We are optimistic about the long-term potential of this business since it allows us to offer cornerstone checking accounts and create lasting customer relationships. The consumer business remains a key focus for us. Jane, do you have anything to add?
Jane Grebenc, Bank President and Chief Revenue Officer
Not really, Mike. I think you covered it. We think the consumer is healthy.
Frank Schiraldi, Analyst
Okay. Great. I appreciate the color. Thank you.
Operator, Operator
Our next question comes from Karl Shepard with RBC Capital Markets.
Karl Shepard, Analyst
Hey. Good afternoon and thanks for taking the questions.
Mike Price, President and CEO
You bet.
Karl Shepard, Analyst
I know we are all trying to get a sense for the margin trajectory, but I guess I am kind of curious to ask how you feel about core momentum in the bank. I think your numbers look pretty good and you have Centric coming in equipment finance ramping. So how do you feel about just kind of the overall positioning of the bank as you go into 2023 and kind of strategic priorities?
Mike Price, President and CEO
We feel really positive about our position in the lending business. Even though some areas like our fee businesses are experiencing challenges, we have strong confidence in our long-term prospects for SBA and mortgage lending, as well as robust consumer lending through our branches. We are expanding our equipment finance platform and have brought in new talent for C&I lending. Overall, we feel optimistic about the company. For those familiar with us over the years, we consistently improve; we've made gradual gains in our return on assets each year. We focus on operating leverage across all our budgets and departments. We're enthusiastic about our future, especially in new markets, and we believe we significantly impact our clients through our value proposition. We aim to refocus on funding, a strength of ours, and are eager to see how well we can perform this year and increase our core deposits. Additionally, we feel there are still opportunities ahead. Our regional model is starting to unify the bank across six key markets: Northern, Southern, and Central Ohio, Pittsburgh, Community PA, and the capital region. Overall, we are excited about what lies ahead for our company. Thank you for your question.
Karl Shepard, Analyst
Thanks for the color. And as a, 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, but what kind of trends do you see today and what do you need to see over the next couple of quarters to get where you want to be?
Mike Price, President and CEO
Yeah. I mean for this year, just because of some downdraft in some places, we have been a little higher but probably 9%, 10% and we think commercial is on a good trick. And then, of course, we have a newer business that everything equipment finance adds $80 million in the second half of the year goes right to growth and higher spread growth, I might add. And so, Jim, anything you would add or Jane?
Jim Reske, Chief Financial Officer
I want to clarify that we are not basing our expectations on a recession that would lead to reduced lending or increased unemployment. According to our forecast, which I have mentioned, we anticipate the unemployment rate will rise to just over 5% by the end of the year. However, we do not believe this will cause a decline in loan volumes. In fact, we see these factors as interconnected; if there's pressure from a recession causing loan volumes to decrease a bit from our expectations, it could alleviate some funding pressures, and we would be fine as that plays out.
Mike Price, President and CEO
Jane, anything you would add? This is your world.
Jane Grebenc, Bank President and Chief Revenue Officer
The only thing that I would add, Mike, is in a couple of the businesses we are 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; and we are also seeing construction delays in some of our residential mortgage and SBA loans. So the economy still isn’t completely frictionless. We still see some of the COVID friction in the economy, but it’s not recessionary, it’s just friction.
Mike Price, President and CEO
Great point. Is that helpful?
Karl Shepard, Analyst
Yeah. Thanks for all the color.
Operator, Operator
Our next question comes from Michael Perito with KBW.
Michael Perito, Analyst
Hey. Good afternoon, guys. Thanks for taking my questions.
Mike Price, President and CEO
Hi, Michael.
Michael Perito, Analyst
A lot of them have been addressed, but just two quick ones. One, Mike, on the Centric is about to close, most of your peers are saying bank M&A is pretty quiet. Just curious what you are hearing and where your thoughts are at for that heading into the start of this year?
Mike Price, President and CEO
We focus on organic growth every day as it represents the best use of our resources. Our priority is to be successful in this area consistently. When opportunities arise, like with Centric and Foundation in Cincinnati, they must align with our goals. Jim often mentions that we've evaluated 60 potential projects to pursue only six, indicating that we aren't seeing much activity. Additionally, any opportunities would need to be strategically and financially sound for us. We are selective and not relying on these prospects. If something beneficial arises that is advantageous for our company, that's great, but it is not a central element of our strategic plan.
Michael Perito, Analyst
Thanks for the update. Regarding non-interest income, the current environment for mortgages and investments is certainly challenging. I'm interested to know if there are specific areas where you see potential for either more or less upside compared to your forecasts. Are there any particular line items that you're feeling optimistic or cautious about?
Mike Price, President and CEO
Yeah. I will start there and let Jane follow on Jim. But just on the SBA piece, we are a little frustrated, because we really have good volume and we are number one SBA lender in a couple of our key markets. That’s a part of our brand. We feel like we are doing good for customers and our bank, but the volume hasn’t materialized into fee income, but it will and that business has been around for a long time. So we are still very bullish on it even though it’s kind of tamped down right now. We have grown that business pretty nicely in the volume. I will speak to that one. I spoke a little bit to mortgage. And obviously, indirect auto too or not indirect auto, but our card business is off probably about 12% and 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?
Jane Grebenc, Bank President and Chief Revenue Officer
I would like to add that the brokerage business is performing well. The investment management and trust business is somewhat weaker due to market volatility, which affects our pricing based on asset values. However, this situation seems temporary and more like a minor setback. Regarding SBA, we still have a few construction loans from early 2020 that are pending completion but I am confident they will close eventually. They are making progress, albeit slowly.
Mike Price, President and CEO
Is that helpful?
Michael Perito, Analyst
Thank you, Mike. That’s all I have. Appreciate it.
Mike Price, President and CEO
Thank you.
Operator, Operator
Our next question comes from Manuel Navas with D.A. Davidson.
Manuel Navas, Analyst
Hey. Good afternoon.
Mike Price, President and CEO
Good afternoon, Manuel.
Manuel Navas, Analyst
Can you kind of talk about the loan growth target and explain a little bit more about the mix and then I will dive into the equipment finance group in a second.
Mike Price, President and CEO
We approach our strategy in two ways: geographically and by product line, with an increasing focus on geography. Ohio has been experiencing significant growth, averaging about 20% in loan growth over the past few years. Additionally, markets in Pittsburgh and Community Pennsylvania have seen notable improvements. After a challenging period in Community Pennsylvania, they achieved about 7% to 8% growth last year. This geographical analysis is one aspect we monitor closely. Regarding lines of business, we anticipate our commercial segment will lead this year, while our indirect auto line is starting off strong. Jim is reviewing the actual numbers.
Jim Reske, Chief Financial Officer
We have adjusted our guidance after discussing mid-single-digit growth for some time, occasionally mentioning upper single digits. What gives us confidence in projecting 10% growth is the equipment finance business really gaining momentum. We have developed that sector, which we have frequently highlighted in previous calls. While there are still equipment-related challenges impacting the business, it is expected to contribute significantly to our projected loan growth next year. Along with moderate growth in other sectors, this leads us to the 10% target. While we should specify loans and leases, it's important to note that 85% of our equipment finance business consists of loans, with only about 15% being leases at this time.
Mike Price, President and CEO
Yeah. And I forgot to mention on the commercial side, just the backlog we have in the commercial construction business, and that will delayer this year, and those construction calls are already beginning to occur. So that’s another nice driver. Jane, are we missing anything?
Jane Grebenc, Bank President and Chief Revenue Officer
No, I don’t believe so. When I consider the expectations, it's clear that every region is projected to experience modest growth, and each business line is anticipated to grow at a moderate rate. This means that some areas may experience slight increases or decreases, but another line of business or region will balance that out. Overall, I feel optimistic about the growth expectations and do not perceive any significant weaknesses.
Jim Reske, Chief Financial Officer
Yeah. If I could just add one more thought or follow 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.
Mike Price, President and CEO
Yeah. Too clear.
Manuel Navas, Analyst
No. That’s really helpful. Now equipment finance alone, what 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 and then kind of what are the yields that you are getting currently?
Mike Price, President and CEO
Yeah. Jane, why don’t we let you take that one?
Jane Grebenc, Bank President and Chief Revenue Officer
Let’s start with, Jim, where he would start with yields, Mike, and then I will back clean up.
Jim Reske, Chief Financial Officer
The yields in that business are quite strong, exceeding 7%, which is where we prefer to keep it. We didn't establish that business to achieve double-digit yields because we want to avoid that level of risk. The equipment mainly consists of trucks and essential equipment, and the yields significantly contribute to our overall net interest margin and the bank as a whole. Regarding your question about the proportion of our loan growth next year, it will likely account for 30% to 40% of the total growth. We plan to present a comprehensive estimate of what we anticipate booking this year, which will be notably additive. Other segments are growing at historically moderate rates, while equipment finance continues to lead, allowing us to present a complete overview. Jane, would you like to add anything?
Jane Grebenc, Bank President and Chief Revenue Officer
We are continuing to add salespeople, and as Jim mentioned, this represents a significant part of our loan growth this year. I believe I heard you inquire whether we expect it to be substantial in the long term, and it probably will not exceed 10% to 15% of the loan portfolio.
Manuel Navas, Analyst
That’s perfect. That’s helpful. How many people have you added? How much is the footprint on your employee base in this division?
Jane Grebenc, Bank President and Chief Revenue Officer
It’s small. The leader of the group, Rob Boyer, has been very, very careful. We add out a few employees at a time, because we have been very careful about collection and onboarding. And we have been adding primarily salespeople, and we probably have a couple of dozen people in the group right now.
Manuel Navas, Analyst
Okay. That’s really helpful. Thank you, guys.
Mike Price, President and CEO
Thank you.
Operator, Operator
Our next question comes from Daniel Cardenas with Janney Montgomery Scott.
Daniel Cardenas, Analyst
Good afternoon, guys. How are you?
Mike Price, President and CEO
Good.
Daniel Cardenas, Analyst
Just a quick follow-up on the equipment finance, what’s the duration of that portfolio and the average loan size?
Mike Price, President and CEO
The average loan size is approximately $160,000, slightly higher than our initial projection due to market trends, but it may decrease a bit from that point. The duration is around 60 to 70 months, though Jane might have a more accurate figure. A key aspect of this business is that, unlike the auto sector, it tends to prepay, so the duration aligns closely with the stated life.
Jane Grebenc, Bank President and Chief Revenue Officer
Yeah. Just about five years.
Daniel Cardenas, Analyst
Okay. So then to get to the growth that you are projecting right now, is it safe to assume that you will kind of stay within that average or do you kind of foresee going up in size to help you get there?
Jane Grebenc, Bank President and Chief Revenue Officer
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. So we will probably stay about where we are, at least for the foreseeable future.
Daniel Cardenas, Analyst
Okay. And what kind of loss rate are you building into your model for the equipment finance?
Jane Grebenc, Bank President and Chief Revenue Officer
Jim, do you want me to take that?
Jim Reske, Chief Financial Officer
Yeah. If you have it at your fingertips, please.
Jane Grebenc, Bank President and Chief Revenue Officer
I do. We assumed initially 75 basis points. As you can imagine, it’s next to nothing. So far the actual losses have been zero.
Daniel Cardenas, Analyst
All right. Congrats on that. And then 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?
Mike Price, President and CEO
Well, like we have been saying, our long-term goal is that we want to make sure that we fund our loan growth and deposit growth. But when in any given quarter, we don’t have that, we are able to tap into borrowings, so we have a very large amount of liquidity. So funding our loan book is not a problem. In the fourth quarter, we just had that dynamic there. We didn’t want to have an influx of deposits because of the inflexibility of deposits; assets are so flexible. So if we had gotten to the end of December of last year and we were 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 in envelopes and then back to depositors and give them their money back. So that gave us this balance sheet flexibility we really like going into the end of last year. Now like I said, there’s plenty of money available. The money that we are raising in the market even with CD specials and other kinds of specials is all below our incremental cost of over net borrowings. So that’s all better for us in the borrowings, and the money is really flowing in in response to those specials. So that’s kind of how we manage and how we look at it.
Daniel Cardenas, Analyst
Okay. Good. And then last question for me in terms of as I look at your deposits, do you have any brokered deposits in the portfolio right now?
Mike Price, President and CEO
No.
Jim Reske, Chief Financial Officer
No.
Daniel Cardenas, Analyst
Okay. Great. That’s all I have. Thanks, guys.
Mike Price, President and CEO
Thank you, Dan.
Operator, Operator
Our next question comes from Matthew Breese with Stephens, Inc.
Matthew Breese, Analyst
Good afternoon, everybody.
Mike Price, President and CEO
Hi, Matt.
Matthew Breese, Analyst
I wanted to revisit the topic of deposits. Jim, I believe I heard you mention that you would prefer to fund loan growth with deposits, suggesting that the loan-to-deposit ratio can remain below 100%. Is that correct?
Jim Reske, Chief Financial Officer
Yeah. Look over the long-term. Over the long-term that’s definitely our goal.
Matthew Breese, Analyst
Okay. That brings me to my next question, which is that we currently have 33% non-interest-bearing deposits compared to pre-COVID levels, which were around 25%. The Fed funds rate is obviously much different now. I'm interested in understanding what structural changes might have occurred in the non-interest-bearing deposit composition that would lead us to expect it to remain at this higher level compared to pre-COVID.
Mike Price, President and CEO
I believe it will remain at a higher level compared to this year, especially considering the balance between business and consumer deposits. We have a clear chance to utilize our extensive business customer base to attract more deposits, primarily through our branch network. Unlike many banks where branch managers do not engage with small businesses, our bank rewards them for doing so as well as for bringing in core deposits from growing businesses. This approach sets us apart from our larger competitors. It's essential to acquire customers beyond just those who borrow from us, which has been a focus for you over the past several years. Would you like to add anything?
Jane Grebenc, Bank President and Chief Revenue Officer
The only thing that I would add is, our loan portfolio, particularly on the commercial side, looks very different than it did four years, five years, six years ago. The loan portfolio today is overwhelmingly direct clients with whom we have direct relationships, and with those clients, we expect a depository relationship, and it’s made all the difference in the world.
Mike Price, President and CEO
Does that help, Matt?
Matthew Breese, Analyst
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?
Jane Grebenc, Bank President and Chief Revenue Officer
We are capturing better wallet...
Mike Price, President and CEO
No. I think we are capturing...
Jane Grebenc, Bank President and Chief Revenue Officer
I would say both. We are capturing much more wallet share. We have spent some money on our treasury management product and infrastructure, and we know that we need to be able to deliver. And so that when we ask for the operating relationship we have got a product set that allows us to ask for it.
Mike Price, President and CEO
I would just add through our regional business model, we are much more likely to have President or a senior lender closely tied to the other business lines, whether it’s mortgage, wealth management, retail, and really bring other partners out to talk to that client and help them, particularly on the personal banking side, also on consumer lending opportunities and wealth management opportunities. So, we are getting a better share of the wallet than we were probably five years, six years ago.
Matthew Breese, Analyst
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?
Mike Price, President and CEO
Yeah.
Jim Reske, Chief Financial Officer
Yeah. Give me a second, let me pull that out. Give me a second.
Matthew Breese, Analyst
Yeah.
Jim Reske, Chief Financial Officer
Yeah. So for the quarter as a whole, we were putting on loans in the high 5s, 588 and what was rolling off at 544. So it was a 44 basis point differential.
Matthew Breese, Analyst
Okay. And you have the pipeline yield all in?
Jim Reske, Chief Financial Officer
I don’t have all the pipeline yields available right now. However, I can share that when I look at the historical data for the recently concluded quarter, the numbers show that the new loan yield has been consistently increasing each month throughout the quarter.
Matthew Breese, Analyst
Understood. I was hoping there was a 6% number either at the pipeline or at quarter end.
Jim Reske, Chief Financial Officer
There are indeed variations. Some businesses have longer timeframes than others. For instance, in the mortgage construction sector, loans may be locked in at rates for individuals building homes from eight or nine months ago, which are at very low rates. This impacts the current period yield because it’s a low rate. Conversely, in the commercial variable adjustable loans category, one of our largest segments where we originated $400 million, the new money yields in the fourth quarter were in the high 6s, specifically 667. This significantly increases the loan portfolio yield, which has been performing well. The situation varies depending on the specific portfolio being discussed.
Mike Price, President and CEO
And that category was our largest category in the fourth quarter in terms of volume and throughput, almost $400 million.
Jim Reske, Chief Financial Officer
Half of all the originations in that category are really beneficial, and that includes new originations. The existing portfolio has also re-priced due to the Fed rate increases, which has been very advantageous for the bank.
Matthew Breese, Analyst
Got it. Maybe turning to indirect auto, I mean, I heard you at the onset. It sounds like there’s really no notable deterioration in credit delinquencies, criticized classified. I did want to hone in and get a little bit of additional color on indirect auto, which we are getting more questions. 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?
Mike Price, President and CEO
Yeah. Just we brushed up on this before the call. Average ticket is about 30, Jane, as you shared with us; six-year duration and contracted duration, it tends to be shorter than that, two and a half years or so. The average payment is up a little bit over the last year about $50 to just over $500. And FICO, do we have that?
Jim Reske, Chief Financial Officer
Yeah. Over 700, but let me see if I can get more refined on that.
Mike Price, President and CEO
Yeah. Good. Jane, do you want to add anything while Jim’s finding the FICO? I know that’s on the report there.
Jane Grebenc, Bank President and Chief Revenue Officer
Yeah. There’s been really no degradation. You keep waiting for it to happen, but there’s been none. And the used car market is staying very, very healthy, because there are still shortages in the used car market. So few customers are leasing anymore that used car values are holding beautifully; and so far, it’s been magical. We underwrote...
Jim Reske, Chief Financial Officer
92% of our production is over 700 FICO.
Matthew Breese, Analyst
Okay. Last one for me is just around capital management, hopefully, the worst of kind of any sort of major impact to AOCI is behind us. I am curious, just given where the stock is and how you think about buybacks and if there’s any level where you would be more interested in that?
Jim Reske, Chief Financial Officer
We have $5.9 million left from our previously approved authorization by the Board. We were in a blackout period due to the pending Centric acquisition and couldn't participate in the market until now, following their shareholder meeting. With earnings now released, we can re-enter the market in a few days under this authorization. Our main focus on capital is that we are generating funds for organic growth, which is our primary goal. If we have excess capital, we will allocate it for buybacks. Considering the $5.9 million authorization we currently have, today's price reactions present a buying opportunity. We will enter the market, although we cannot do so for at least three days. We intend to utilize the remaining authorization for purchases during such dips, while most of this year's capital generation will be directed towards funding our organic loan growth.
Matthew Breese, Analyst
Great. That’s all I had. I appreciate taking all my questions. Thank you.
Mike Price, President and CEO
Thanks, Matt.
Jane Grebenc, Bank President and Chief Revenue Officer
Hey, Mike. If it’s okay, I hate to retread, but I do want to break for just a minute. Back to the FICO score, we can be even more precise that 90% or greater than 700, the average FICO score for the auto portfolio is 770. The average for rec is 785.
Mike Price, President and CEO
Thanks, Jane. I am sure Matt heard that.
Operator, Operator
Our final question comes from Manuel Navas with D.A. Davidson.
Mike Price, President and CEO
Pretty good. Manuel?
Operator, Operator
I see there are no further questions at this time. I will now turn the call back over to President and CEO, Mike Price.
Mike Price, President and CEO
I always say this that we just really appreciate the interest of the covering analysts for questions and the opportunity to share our story and our business with you. We are pretty passionate about it. We care a lot. And I hope it shows the results, and I look forward to being with a number of you over the course of the next 90 days. Thank you.
Operator, Operator
That concludes today’s conference. Thank you for attending today’s presentation. You may now disconnect.