First Commonwealth Financial Corporation

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the first Commonwealth Financial Q1 2022 earnings 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, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you, Ryan Thomas, Vice President, Finance and Investor Relations. You may begin.

Thank you, Chris, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's first quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, Jane Grabenz, Bank President and Chief Revenue Officer, and Brian Karup, 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. 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 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 or reported results prepared in accordance with GAAP. Reconciliation of these measures can be found in the appendix of today's slide presentation. And now I'll turn the call over to Mike.

Hey, thanks, Ryan. We were pleased to report that core earnings per share of 29 cents for the first quarter met consensus estimates. Pre-tax, pre-provision net revenue, or PPNR, was down from last quarter largely due to a $2.3 million decline in PPP income and a $2.1 million decline in fee income reflecting in part an anticipated decline in mortgage gain on sale income, which I'll return to in a moment. Excluding PPP, 8.8% loan growth in the first quarter was largely driven by the consumer lending categories of indirect, HELOC, and mortgage, and to a lesser extent by commercial real estate. This balanced loan growth is consistent with our long-term strategy of commercial consumer balance sheet diversification and granularity. We often talk about the impact of rising rates on our variable rate commercial loan portfolio, but yields in the consumer categories are increasing in the current rate environment as well. For example, indirect lending witnessed a nice progression of rates over the course of the quarter, starting the quarter in the high 2s and ending in the low 3s, as price increases took effect. All of these changes work together to expand the core net interest margin by five basis points, and the March rate hike and any additional rate hikes should result in further net interest margin expansion in the second quarter. As I mentioned, non-interest income or fee income was down 2.1 million quarter to quarter, primarily due to the $700,000 decrease in gain on sale of mortgage loans. Mortgage originations are actually still quite strong, but gain on sale margins are compressed. We also had a $600,000 seasonal decrease in interchange income, which we fully expected as fourth quarter interchange always benefits from holiday shopping. The quarter over quarter decline in swap income is mostly due to a $1 million gain in the swap derivative that we recorded last quarter. We expect swaps and interchange to bounce back due to seasonal factors and make up for slowing mortgage income, resulting in fee income of $26 to $27 million per quarter for the remainder of the year consistent with our previous guidance. Core non-interest expense was well controlled at $55.6 million given wage and other inflationary pressure. Like every company, we are battling wage pressure and worker shortages. We expect non-interest expense to hover between $56 and $57 million per quarter this year, consistent with previous guidance as well. Charge-offs were light, and this was a good credit quarter on multiple fronts. Total non-performing loans fell from 55.3 million at the end of the fourth quarter to 37.6 million at the end of the first quarter, or 54 basis points of total loans. The reserve coverage ratio stood at 1.32%. Net charge-offs in the first quarter were only seven basis points. As we look forward, spread income should be positively impacted over the remainder of the year should interest rates increase as anticipated given the asset sensitivity of our balance sheet. Despite inventory challenges, momentum in indirect lending and purchase mortgage continued in the second quarter. Indirect lending booked an impressive $174 million in first quarter volume. Alongside healthy mortgage originations of $132 million in the first quarter, we saw gain on sale premiums contract. Our branch-based small business and home equity lending volume were off to a record start in the first quarter, and we carried good momentum there into the second quarter as well. In commercial banking and on the surface, commercial real estate loans grew some $93 million, but this was largely commercial construction loans moving to permanent CRE loans. Ohio is growing nicely, and the teams expect broad-based growth by loan type and geography over the remainder of the year. We also started to see an uptick in commercial line utilization rates in the first quarter as well, from 35% at year end to 39% on March 31st. This is really the first significant uptick in this figure since the onset of the pandemic. SBA gain on sale income of $2.2 million in the first quarter of 2022 is more than double the gain on sale income in the first quarter of 2021. Importantly, the SBA business is growing steadily into another long-term revenue engine for our company. Our de novo efforts in equipment finance yielded their first leases and loans in the first quarter. as their new technology platform coalesced after being built out from scratch. Some work on the technology infrastructure remains, but we are pleased with the progress we've made in such a short time. The deals booked are what we anticipated in terms of size, term, and yield. These smaller ticket financings included commercial trucks and trailers, as well as agriculture, construction, and manufacturing equipment such as machine tools. This capability is an exciting development for our company. So despite the choppy environment and pressure on loan spreads, the path forward with 2022 revenue is broad-based growth coupled with some anticipated interest rate increases. I'd also add that the adoption of our digital platform continues to grow at a brisk pace. In the first quarter, our overall active digital users grew at a 10% rate, And our active mobile users are growing at over 14% annually, highlighting how critical the channel is to our customers. Lastly, regarding our brand, for the fourth consecutive year, First Commonwealth Bank has been recognized by Forbes as one of the world's best banks. Three banks in Pennsylvania received this 2022 distinction, which is based upon survey results of bank customers using an independent analytics firm. We're proud of the recognition which comes from our customers and their view of our team. With that, I'll turn it over to Jim Reske, our Chief Financial Officer. Jim?