First Commonwealth Financial Corporation (NYSE:FCF) Q3 2023 Earnings Call Transcript

First Commonwealth Financial Corporation (NYSE:FCF) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Ladies and gentlemen thank you for standing by. My name is Brent and I would like to welcome everyone to the First Commonwealth Financial Corporation Third Quarter 2023 Earnings Results Release Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn today's call over to Mr. Ryan Thomas Vice President of Finance and Investor Relations. Sir please go ahead.

Ryan Thomas: Thank you, Brent and good afternoon everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation third quarter financial results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; and Brian Karrip, our Chief Credit Officer. As a reminder, a copy of 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.

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Please refer to the forward-looking statements disclaimer on Page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition, to and not as an alternative for, our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that I will turn the call over to Mike.

Mike Price: Thank you, Ryan and good afternoon everyone. For the third quarter of 2023, we are pleased to report core net income of $39.6 million, which translates to $0.39 of earnings per share, an ROA of 1.38%, and efficiency ratio of 53.4%. The NIM compressed nine basis points quarter-to-quarter to 3.76%. The rate of deposit cost increases is slowing and we believe that the NIM will stabilize going into the end of the year and continue to hold up in 2024. In a higher for longer environment, we believe that improvement in loan yields would likely outstrip growth in deposit cost. Operating expenses were up $1 million from the prior quarter, driven by costs associated with debit cards. Basically we had a one-time recognition of $900,000 in losses identified as part of a new automated system for processing debit card disputes.

In addition, we had a $600,000 increase in FDIC insurance compared to last quarter due to the acquisition of Centric and the associated deposit balances. This was somewhat offset by $1.1 million in decreases in salaries and benefits due in part to lower hospitalization expenses. Total loans grew some $102 million in the quarter or 4.6% annualized. Our Northern Ohio and Pittsburgh regions led the way geographically. From a line of business perspective, Commercial Banking and Equipment Finance were the key categories driving growth. We've metered loan growth commensurate with deposit growth each of the last three quarters. We have also strategically exited some non-relationship borrowers. End-of-period deposits grew $94.8 million or 4.2% annualized in the third quarter which is just short of the loan growth in the quarter.

Average deposits increased by 2.1% from last quarter. Strong regional contributors included Central Ohio and Community PA. This led to the loan-to-deposit ratio rising slightly from 96.4% to 96.7% in the quarter. We ended the quarter with solid credit metrics. Total delinquency was 25 basis points and non-performing loans as a percentage of total loans were flat at 54 basis points. Reserve coverage was a healthy 280%. Criticized loans and classified loans both improved. Net charge-offs annualized as a percentage of average loans were $4.4 million or 18 basis points of which approximately $1.2 million was related to the Centric acquisition. Provision expense for the third quarter totaled $5.9 million driven by loan growth and an additional $4.1 million in specific reserves, reflecting an updated appraisal on a non-accrual commercial loan.

The allowance for credit losses at quarter end totaled $134.3 million and the allowance as a percentage of loans was a healthy 1.51% which screens well we believe relative to our peers. On the digital front, adoption of credit score manager, a credit score manager tool and online banking has grown faster than expectations since launched in late April. We now have 30,000 users taking advantage of this robust financial wellness tool we believe is a best-in-class solution. The focus on our digital account openings has yielded expected growth so far in 2023 especially for checking accounts with an increase of over 190% in openings compared to the same period last year. We are now opening approximately one of every five accounts via the digital channel versus in person.

In closing, we've built enough strong revenue engines and have sufficient risk appetite to grow constructively provided we fund the asset growth with organic deposit growth. With that, I'll turn it over to Jim Reske our CFO. Jim?

Jim Reske: Thanks, Mike. We have been able to produce solid deposit growth all year to fund our loan growth. On a year-to-date basis making no adjustments whatsoever for our Centric acquisition, loans have grown by $1.28 billion, while deposits have grown by nearly the same amount $1.24 billion. As a result, our loan-to-deposit ratio has been relatively stable in the mid-90s all year, but that masks our ability to grow our deposit base to fund our loan growth. Excluding the Centric acquisition, total loans have grown by $354 million year-to-date while period-end deposits excluding Centric have grown by $597 million. These deposits however came at a cost. In the third quarter, we saw our cost of deposits increased by 28 basis points, while our loan yields improved by only 21 basis points.

Deposit rotation from low-yield categories the higher cost deposit categories continued, but at a slower rate than last quarter. Fortunately, the overall pace of deposit cost increases continued to slow in the third quarter. Average cost of funds increased 48 basis points in the second quarter, but only increased 32 basis points in the third quarter. It's too early to call the peak on deposit costs, but loan yields keep coming up nicely as well. New loans came on the books at an average rate of 7.43% in the third quarter, up nicely from 7.01% in the second quarter and 6.61% in the first quarter. The result as Mike said was 9 basis points of margin compression to 3.76%, a level which we still believe compares relatively well with peers. Our initial outlook for next year continues to show margin stability, though the range of potential outcomes is wider than usual due to the unpredictability of depositor behavior.

Our base case rate scenario calls for a Fed funds rate of about 4% by the end of next year. In this projection, the NIM actually expands a bit until mid-2024 and then fall slightly in the second half ending 2024 right about where it is now hence NIM stability. In a higher-for-longer rate scenario, you don't see that dip in the second half of 2024. So the NIM is marginally better by about 5 basis points. These forecasts are highly dependent on assumptions regarding depositor behavior. For example, we have fairly conservative assumptions around the continued rotation of customer deposits in 2024 from low-cost categories into higher-yielding loans, higher costing loans even in a falling rate environment. So even in that falling rate environment, we assume that we'll still have about 10% of the low-cost deposits rotate into higher cost categories in keeping with our experience in 2023.

And even with those assumptions, the 2024 NIM looks stable. By contrast in a higher from a longer rate environment, we get the benefit of higher loan yields in part, because the variable rate loan portfolio does not re-price downwards. But in that scenario, we'd expect more deposit rotation into higher cost freight categories, which would offset some of the benefit of higher rates. Fee income was little changed from last quarter. SBA gain on sale premiums have been under pressure, but our wealth division did better. We expect the income to be little changed next quarter. For next year, we are looking to grow SBA fee income to help offset slowing mortgage gain on sale income and the impact of lost interchange income due to the Durbin Amendment.

Non-interest expense was elevated in the second quarter in part due to costs associated with debit cards and related items as Mike described. Our expected non-interest expense is around $65 million to $67 million next quarter. We think expense pressures will continue in 2024, but we're committed to keeping a lid on costs. We repurchased approximately 260,000 shares in the third quarter at a weighted average price of $12.36. We slowed share repurchases somewhat late in the second quarter to conserve capital. Tangible book value per share increased from $8.24 to $8.35, as retained earnings growth outstripped increased AOCI. Regulatory capital ratios improved slightly, while the tangible common equity ratio remained unchanged. And with that, I will turn it back over to Mike.

Mike Price: Operator, now we'll turn it over for questions.

Operator: [Operator Instructions] Your first question comes from the line of Daniel Tamayo with Raymond James. Your line is open.

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