First Commonwealth Financial Corporation

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the first Commonwealth Financial Corporation second quarter 2024 earnings release conference 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. If you'd like to withdraw your question, press star 1 again. I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Thanks, Regina, and good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation second quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, Jim Graben, Bank President and Chief Revenue Officer, Brian Carrick, Chief Credit Officer, and Mike McKeown, our Chief Lending 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 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 a reported results prepared in accordance with GAAP. 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, thank you, Ryan, and welcome, everyone. Core earnings per share of 36 cents beat consensus estimates by one penny for the second quarter of 2024. Pre-tax, pre-provision net revenue was up by $3.6 million over last quarter. Headline numbers for the second quarter include a core return on assets of 1.29%, a core pre-tax, pre-provision ROA of 1.88%, a core return on tangible common equity of 15.93%, and a core efficiency ratio of 53.34%. Importantly, the net interest margin expanded by five basis points to 3.57%, as the increase in loan yields outpaced the increase in funding costs for the first time since the fourth quarter of 2022. Other trends follow. Loan outstandings were flat, even as average deposit balances grew 8.7% in the second quarter. Looking at loans a little closer, total loans grew just under 1%. with growth centered on equipment finance and, to a lesser extent, SBA. Over the last year, we've pinched consumer loans, mortgages, home equity loans, and indirect auto, and have not chased volume at the expense of spread. We've moved prices up, and now, with the prospect of rate cuts, these consumer categories could become more attractive to us in the next few quarters. Similarly, we have been cautious over the last year with investment real estate, and coupled with tepid demand, originations have dropped. We are starting to see more good looks in both CNI and commercial real estate, and pipelines are building. As we've shared in the past, our loan growth in Ohio continues to outpace our Pennsylvania loan growth. Looking ahead, we are confident in our loan origination capabilities, And we believe we can get to well-structured and well-priced mid-single-digit loan growth by the fourth quarter and into 2025. Conversely, deposit gathering has been broad-based across most of our footprint. Deposit performance in our community PA market continues to be exceptional. Community PA just happens to be our largest low-cost deposit region as well. We've seen an increasing number of competitors lower deposit rates in our market area, taking some pressure off of pricing. We continue to offer competitive rates on time deposits because we want to bring our loan to deposit ratio down to create the liquidity to fund expected loan growth. But we're doing so at shortened terms to allow for repricing as rates fall. One other important dynamic worth noting is that we saw non-interest-bearing balances increased slightly over last quarter. We're hopeful that means we're nearing the end of outflow of pandemic surge deposits, as Jim likes to call them. Non-interest bearing was 24.5% of total deposits this quarter, relatively unchanged from 24.9% last quarter. Non-interest income grew $1.2 million to $25.2 million in the second quarter on the strength of higher wealth management fees and interchange income. The increase in wealth management fees was due to strong, fixed annuity sales in our wealth division as customers sought out instruments to protect their investments from falling rates. The increase in interchange income was welcome, but we expect a roughly $3.5 million quarterly downdraft in interchange income due to the Durban impact starting next quarter, which appears to be already have been baked into our estimates. Expenses continue to be well controlled at $65.8 million as our FTE remained down from year end, even as we staff appropriately to support crossing 10 billion. Our core efficiency ratio improved to 53.6%. Charge-offs of 4.4 million were relatively flat quarter over quarter. Provision expense, however, was elevated. as we set aside further specific reserves for non-performing loans. Non-performing loans increased $14.7 million for the quarter. Roughly 75% of the increase in NPLs was attributable to the former Centric loans. Of course, Centric is fully integrated into First Commonwealth, now as our capital region, so we'll soon stop reporting such items separately. But for now, we would note that approximately half of all of our current NPLs are related to loans acquired in that acquisition, which was about 10% of our total assets at the time. We understood we would have credit pressure during due diligence. We set a fairly robust credit mark and priced the transaction accordingly. And given the achievement of announced cost save, the transaction has been accretive to income despite the obvious credit workout headwinds. As Jim Reske will discuss in more detail, We also used a $5.6 million, a gain of $5.6 million from the sale of Visa V shares to absorb a loss on the sale of $75 million of low-yielding securities, which were replaced with securities at current market rates. We also redeemed a $50 million tranche of sub-debt in early June. Both of these will result in an annual picked-up in pre-tax income and will be accretive to our net interest margins. In closing, second quarter financials were solid, particularly pre-tax, pre-provision profitability and ongoing efficiency, and we continue to take steps to grow deposit liquidity to support broad-based loan growth into the future. With that, I'll turn it over to Jim. Thanks, Mike.