First Commonwealth Financial Corporation

Good afternoon. My name is David and I'll be your conference operator today. At this time, I'd like to welcome everyone to the first Commonwealth Financial Corporation 3Q 2021 earnings release conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. Thank you. Vice President of Finance and Investor Relations, Ryan Thomas, you may begin your conference.

Thank you, David. Good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation's third quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, Janger Bence, Bank President and Chief Revenue Officer, and Brian Karup, our Chief Credit 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 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. And with that, I will turn the call over to Mike.

Thank you, Ryan, and good afternoon, everyone. Third quarter net income of $34.1 million produced core earnings per share of $0.36, accompanied by core return on assets of 1.43% and core pre-tax, pre-provisioned ROA of 1.79%. This was a very good quarter for First Commonwealth with solid profitability, growth, and credit metrics. Other headlines for the quarter include, first, Excluding PPP loan payoffs, we're pleased with loan growth of 8.2% or $132.3 million in the third quarter, with ongoing strength in indirect lending, home equity lending, commercial lending, and mortgage lending. Our growth is broad-based between commercial and retail lending disciplines and has become increasingly granular over the years. As an aside, our loan growth over the last two quarters has not yet benefited from higher line of credit utilization. Second, the loan growth and improved margin enabled a $2.4 million quarter-over-quarter increase in net interest income to $70.9 million. Jim will have more color on the net interest margin. Third, non-interest income or fees grew $1.2 million quarter over quarter to $27.2 million on the strength of improvement in SBA and mortgage gain on sale income, as well as higher wealth management income. Importantly, our card-related interchange business generated $7.1 million in fee income. Our regional business model has been a strong contributor to feed income growth with better teamwork and collaboration, enabling us to deliver a broader set of solutions for our clients. Fourth, our efficiency ratio increased to 55.27%, as core non-interest expense rose some $3.7 million, primarily due to higher personnel expense, including higher incentive accruals based upon increased production, higher wages, particularly in entry-level positions driven by inflationary pressure, higher hospitalization expense, and then the hiring of the management team of the equipment finance division. It is increasingly clear that we are not immune to expense headwinds in the current environment. Fifth, and importantly on the credit side, we guided last quarter to stronger credit metrics in the second half of the year in 2021. That's exactly what is happening. The third quarter represented our lowest loan charge-offs in nine quarters. A decrease in specific reserves for troubled credits, coupled with general improvement in economic conditions, led to a provision of just $330,000, down from $5.4 million in the second quarter. Our reserves now represent 1.3% of total loans, excluding TPP. in a 247 percent of non non-performing loans the level of non-performing loans improves significantly from 52.8 million dollars in the second quarter to just 38.1 million dollars in the third quarter or 56 basis points of total loans similarly non-performing assets of 39 million dollars at quarter end now stand at 41 basis points of total assets Just to put the quarter end in early October, a $6.9 million troubled credit was resolved and will be reflected in Q4 results. Other notable third quarter items follow. First Commonwealth earned the number one SBA lender ranking in Pittsburgh for the fiscal year ending September 30th, 2021. This is a significant accomplishment and reflective of both the talent in the SBA lending team coupled with the partnership enabled by the regional business model alluded to earlier. In the third quarter, we continue to transform our technology to include the selection of a new loan origination system as well as introducing several new cash management solutions or TM solutions for our business clients. We continue to be pleased with our adoption of our new mobile banking app, which is growing at an annualized rate of 18%. As we work through our three-year strategic plan, I would share three of our six areas of focus that might be most relevant to investors. First, let's accelerate the growth trajectory of our company, and we'll do this primarily through organic, broad-based loan growth across both our commercial and consumer loans. Second, continue to increase digital relevance to drive customer satisfaction, ease of use, and brand identity, primarily through the continued investment in customer-facing technology. And third, anticipate and offset expense pressure to maintain operating leverage over a multi-year horizon. I say this because we realize that building new businesses like Equipment Finance from the ground up will negatively impact operating leverage at first, but can have a powerful impact on operating leverage in the long run. Regarding growth, we received many good questions about our equipment finance efforts, so let me provide an update on our progress. As you recall, we did a lift-out from a larger bank in June of a Philadelphia team with a 20-year track record of performance. As we enter the business, we expect to fund small-ticket loans and leases on equipment on a nationwide basis. The group's primary experience has been with essential use commercial equipment diversified across industries and equipment types. The manufacturing, construction, and professional service industries represent more than half of their originations by industry. Primary equipment types included utility trucks, highway trucks, machine tools, trailers, and manufacturing and packaging equipment. A good example of a piece of essential use equipment would be a machine tool like a lathe that a small business needs to run its business. We expect the average ticket size to be about $80,000 and an average term of 60 months. Based on the historical performance of this scheme, we expect yields in the mid-5% range and spreads in the mid-4% range, with charge-offs typically ranging from 55 to 75 basis points. If all goes according to plan, we believe that we can generate some $200 to $250 million of equipment finance assets on our books by the end of 2022 before really hitting our stride in 2023 and 2024. And with that, I'll turn it over to Jim.