First Commonwealth Financial Corporation

Good day, and thank you for standing by. Welcome to the first Commonwealth Financial Corporation second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Pasha, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's second quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, and Jane Grabentz, our Bank President and Chief Revenue Officer. As a reminder, a copy of today's earnings release can be accessed by logging on to fcbanking.com and selecting the investor relations link at 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 two of the slide presentation for a description of risks and uncertainties that could cause the actual results to differ materially from those reflected in the forward-looking statement. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike. Hey, thanks, Ryan, and welcome, everyone. Net income in the second quarter of $29.6 million produced core earnings per share of $0.31, a core pre-tax pre-provision ROA of 1.82%, and a core efficiency ratio of 53.21%. Importantly, pre-tax, pre-provision net revenue of $42.9 million was slightly ahead of the consensus estimate reflecting good underlying second quarter momentum in our key businesses. Lending rebounded in the second quarter, increasing year-to-date loan growth to 5.3% annualized rate, and that excludes PPP loans. The loan growth was broad-based, and although indirect lending and corporate banking led the way, mortgage, branch-based consumer lending, and small business all contributed meaningfully. Our corporate bank had several big wins and is seeing deepening pipelines. Blocking national trends, our branch team has originated $209 million in home equity loans year-to-date, which represents a 12% increase year-over-year. Geographically, Ohio continues to lead the way with the majority of our loan growth, although PA production remains strong. Our regional business model and a focus on execution have been key elements in driving balance sheet and fee income growth. We've also lifted out some talented lenders from large competitors over the past year. Consumer and small business household growth helped fuel non-interest income, which remained strong at $26.1 million, even as mortgage gain on sale income tapered. Card-related interchange income at $7.4 million was a quarterly company record by a wide margin. At $2.7 million, trust revenue was a quarterly record as well. Our SBA business contributed $1.6 million to gain on-sale income, and SBA pipelines have never been stronger. This is four quarters in a row of strong contribution by the SBA business. Importantly, in this discussion around growth, business conditions in the second quarter in our markets recovered faster than we anticipated, and our business customers are generally positive about the outlook ahead. Expenses remain well controlled, and the core efficiency ratio was an impressive 53.21%. Over the last six years, First Commonwealth's revenue base has broadened considerably. With significant investments in new commercial lending teams, a de novo mortgage business, indirect lending, SBA lending, credit card, and new digital platforms to include online loan and deposit account opening. We've also expanded our footprint through five strategic M&A opportunities. Even as we've made these significant investments, and transformed our company at the forefront of our planning is adhering to the core principle of maintaining positive operating leverage. Turning to NIM, Jim will provide important detail in a few minutes. But at a very high level, I believe our NIM is benefiting from our long-term approach to building a diversified loan portfolio that is balanced between commercial and consumer loans. At a time when banks are struggling to deploy excess cash, our consumer loan growth has been strong all year, and our commercial loan growth picked up steam as the second quarter progressed. We like the contribution margin a new consumer loan brings versus having money parked at the Federal Reserve or in investment security. We also have the potential of cross-selling a new consumer customer as an added bonus. We're also enthused about the lift-out of an equipment finance team from a larger institution that we recently announced, as well as the momentum in our SBA business. Both of these businesses are scalable and will enable our margin to expand by generating higher-yielding assets. Importantly, we're very pleased with the adoption of our new digital platform. The second quarter, our active mobile users increased an annualized 22%. Additionally, we continue to bring new capability forward, and we'll be introducing a new mobile mortgage platform in August where our customers can easily apply for and track their mortgage status from anywhere at any time. Lastly, regarding credit, we feel our asset quality is solid, and coupled with improving economic conditions, we expect credit to be a tailwind in the back half of the year. And now I'll turn it over to Jim Refke, our CFO. Thanks, Mike. As Mike already mentioned, we were pleased with our financial performance this quarter, especially with regard to loan growth, fee income, and expense control. Hopefully, I can provide you with a little more detail on our NIM, asset quality, fee income, and expenses. Our net interest margin for the second quarter was 3.17%, down from 3.40% last quarter. Loan yields fell by 11 basis points, but we were able to offset most of that by reducing the cost of interest bearing liabilities by seven basis points. But to understand our NIN, you have to look at the effects of PPP and changes in our asset mix, especially cash. For example, we began the quarter with $479 million in PPP loans. By June 30th, that figure had shrunk to $292 million. Similarly, Excess cash dropped from $414 million to $189 million over the period. These changes don't come through if you only look at our published average balances, which barely moved. Essentially, what happened is this. We started the quarter with a lot of excess cash because of government stimulus programs that took place in the first quarter. In addition, PPP loans were forgiven over the course of the quarter, generating even more cash. We invested some of that excess cash into securities early in the quarter and into strong low growth toward the end of the quarter. To be more precise, PPP and excess cash had two distinct effects on the margin. First, the first quarter NIM had the benefit of $7.9 million of PPP income, while second quarter PPP income was only $5.5 million. Second, we put excess cash to work by purchasing approximately $300 million of securities in the second quarter. That's better than leaving it sitting cash. Those investments will generate about $3.9 million of net interest income annually, or about $0.03 per share. But they still yield less than what we were earning on the PPP loans, and it's still a layer of thin margin assets on top of the balance sheet that drags down the NIM. Because of the noise from PPP and excess cash, we have been publishing a core NIM that adjusts for both of those things. Our previous guidance was for our core NIM to fall between 3.20% and 3.30%, and our core NIM for the second quarter came in at 3.20%, which was within that range, albeit at the bottom of that range. The reason for that is simple math. The more excess cash we invest in securities, the less cash there is to adjust for in the core calculations. The good news here is that our loan growth in the second quarter was very strong, especially towards the end of the quarter. That should help the margin going forward. We expect to maintain that trajectory for the remainder of the year, which should replace PPP runoff and further soak up excess cash to the benefit of the margin. As a result, we are reiterating our core NIM guidance of 3.25% plus or minus five basis points. Let me switch gears now to asset quality and offer a couple thoughts that may be helpful to you. First, we realized that deferrals were the number one topic a year ago, but our deferrals have all but disappeared, from a peak of over $1 billion during the pandemic to $138 million last quarter to only $59.5 million this quarter, or just 88 basis points of total loans. Second, non-performing loans are just 0.82% of total loans ex-PPP, and the reserve coverage of non-performing loans is 182.9%. These are levels that we believe compare very favorably to peers. Third, we just completed our regular semi-annual loan review process in which we review every commercial credit in excess of $350,000. This involved a review of about 1,000 relationships totaling $2.4 billion out of a $3.9 billion commercial loan portfolio. At the conclusion of that exercise, there were zero downgrades to special mention or substandard in the portfolio, The thoroughness of that exercise gives us confidence as we took note of declines in both special mention and classified loans this quarter. Classified loans, for example, dropped from $72.3 million to $56.3 million, a level very close to the pre-pandemic level of $52.5 million at the end of 2019. Fourth, delinquencies, which are sometimes seen as an early warning sign of trouble ahead, not only went down from last quarter, but they had an all-time low for our bank at just 11 basis points of total loans ex PPP. Fifth and finally, our reserves remain at 1.50% of total loans ex PPP, protecting our capital and our earnings stream going forward. As for fee income, even with mortgage income slowing down a bit in the second half, We anticipate being able to sustain a pace of $26 to $27 million per quarter in non-interest income for the remainder of 2021 due to favorable trends we are seeing in SBA, swap, and trust income. Turning to expenses, NIE came in at $51.5 million in the second quarter, down slightly from $51.9 million last quarter. Our previous NIE guidance was $52 to $53 million per quarter, so we've been comfortably below that. We do, however, expect some expense associated with returning to a more normal work and travel environment, elevated hospitalization expense that we have been seeing, new hires in revenue producing and credit positions, and the new recently announced equipment finance effort, bringing our NIE guidance to $53 to $54 million per quarter for the remainder of the year. Finally, we repurchased 72,724 shares in the second quarter, at an average price of $13.95. And with that, we'll take any questions you may have. Thanks, Jim. Questions operating?

Ladies and gentlemen, as a reminder, in order to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. And your first question is from the line of Michael Perito with KBW.