First Commonwealth Financial Corporation

Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, Jane Gravens, Bank President and Chief Revenue Officer, and Brian Sohocke, Chief Credit Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fdbanking.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 three 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 or are 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, thank you, Ryan, and welcome, everyone. In the fourth quarter, we met consensus earnings estimates of 35 cents per share and preserved relatively strong profitability. We ended the year with a fourth quarter pre-tax, pre-provision ROA of 1.77%, an ROE of 1.23%, a NIM of 3.54%, and a core efficiency ratio of 56.1%. Reflecting on the year, we stabilized the margin, grew deposits, managed expenses, and selectively pursued high yielding loan categories in the face of unanticipated deposit pricing pressure, higher credit costs, and six months of Durban. We believe that 2024 was a year that sets us up well for 2025. We ended the year in a better capital and liquidity position than when we started. We made some key hires that will enable CNI growth, further integrated our last acquisition and announced another one, all while staying focused on achieving and maintaining top quartile profitability. Importantly, higher rates led to tepid low demand throughout the year in both CRE and CNI lending. Demand was tepid in consumer categories as well. C&I Equipment Finance was a notable bright spot, and the portfolio grew $61 million alone in the fourth quarter. Average deposits grew 8.7% in the quarter, but were skewed by a large commercial customer deposit that came in at the end of the quarter, which drove much of the average balance increase. A better comparison would be for the year where average deposits grew some 451.1 million or 5%. That drove our loan to deposit ratio down from the high 90s at the end of the year to 92.5% at the end of 2024, leaving us with dry powder to lend. We're seeing fairly balanced deposit growth across most of our regions, and our teams are all tasked to grow core deposits with an emphasis on transaction accounts. More importantly, we feel our balance sheet is now prime for growth and profitability as we turn on the loan growth engine in 2025. In the fourth quarter, we saw good commercial real estate activity after being selective for some time due to heightened credit, liquidity, and pricing concerns. We continue to emphasize the acquisition of C&I relationships across middle market, business banking, and small business. Our optimism regarding loan growth in 2025 and beyond stems from we have strong regional accountability and two new regional presidents in key growth markets, both of whom have strong CNI backgrounds. We've hired a bevy of talented CNI commercial bankers and leaders over the last 24 months. We believe we've gotten the portfolio runoff headwinds behind us, with the former centric acquired loans and aspects of CRE. We've never been stronger in C&I, commercial real estate, SBA, equipment finance, indirect, and consumer lending. We will strive for mid-single digit loan growth this year. Jim will expand on the revenue detail, but we believe the evolving interest rate environment that seems to favor higher for longer should help our NIM. And in terms of fee income, we overcame a meaningful $6.7 million Durban hit to fee income in the second half of 2024 because mortgage, SBA, and wealth management stepped up. And other service charges scaled up as well. Credit costs, driven by lingering pressures in our centric acquired loans, were elevated throughout the year but moderated in the fourth quarter. Encouragingly, NPLs declined from 0.83% to 0.68%, and reserves to loans remained above peer levels, signaling continued strength in our credit position. We had elevated charge-offs in this quarter, but a lot of that reflected the charge-off of three non-performing loans we had recognized and provided for last quarter. Our 2024 credit metrics were significantly impacted by the acquired centric loan portfolio. However, our asset migration trends are favorable as we enter 2025. We announced our first acquisition in two years with Center Bank in Cincinnati. We really like this small acquisition. It's strategic and the bank is well led with a cast of good talent for a bank of its size. We see a lot of upside in this market to leverage our existing presence and build more critical mass in Cincinnati that will help us replicate the success we've had in Ohio's other major metro markets, all of which goes above and beyond the deal mass. Lastly, customer experience metrics improved as the net promoter score and branch customer satisfaction reached historic highs for First Commonwealth. Our organization continues to rally around living our mission and that is to improve the financial lives of our neighbors and their businesses. And with that, I'll turn it over to Jim Reske, our CFO.

Thanks, Mike. Fourth quarter core earnings per share of 35 cents is up 4 cents from last quarter, largely driven by a $4.1 million improvement in provision expense. On a linked quarter basis, we saw a combined improvement in fee income and expense of $1.9 million That was somewhat offset by a $1.4 million decline in spread income. We had total NIM compression of two basis points in a quarter. The purchase accounting contributed seven basis points to the NIM in the third quarter and five basis points in the fourth quarter. So without the fade out of the purchase accounting, the reported NIM would have been unchanged. If you look at our deposits, there were two dynamics happening in our deposit book this quarter. The first one is the previously disclosed $175 million corporate deposit that we received toward the end of last quarter. Average deposits were up in fourth quarter by $207 million, or 8.7% annualized, over last quarter, so the average was up largely, though not entirely, due to that large commercial deposit. The new growth came as we continued to acquire new deposits at less than our borrowing cost, all while pricing down our overall book. The result was a modest one basis point decline in our total cost of deposits to 2.07%. The other dynamic affecting deposits was movement in public funds. Our end of period deposits were down by 67.5 million, largely as a result of a seasonal $206.5 million decline in public fund balances, which always declined toward the end of every year before coming back in the first quarter. Turning to loans, loans grew by $23.5 million in the fourth quarter for an annualized growth rate of 1.04%. We are projecting mid-single-digit loan growth next year as we build upon some of the groundwork we've laid for CNI growth, as Mike talked about, and some of the portfolio runoff headwinds that we had in 2024 get behind us. So putting that together, growing spread income in 2025 will be a function of loan growth and the NIMS. We believe that the net interest margin can expand in 2025. Our internal forecasting is now based on only two rate cuts next year, and in that scenario, the NIM is relatively stable in the first quarter, but expands steadily over the remainder of 2025 to end the year 10 to 20 basis points higher than it is now. Together with the return of moderate loan growth per our guidance, top line revenue should steadily improve over 2025 and do so at a faster clip in expenses, leading to positive operating leverage in 2025. We were confident of our ability to grow top-line revenue before the recently announced Central Bank acquisition, but that acquisition will create modest additional operating leverage after we close as planned in the second quarter of this year, contributing about a penny a share to EPS per quarter starting in the third quarter of 2025. Fee income was an interesting and generally positive story in the fourth quarter. Fees improved by $800,000 over the last quarter, despite the fact that the third quarter had a benefit of about $900,000 in one-time bully income. Fee income rose quarter over quarter nevertheless due to a $700,000 increase in swap income, combined with about a half-million-dollar gain on a limited partnership investment and a half-million-dollar improvement in mortgage gain on sale income over the last quarter, net of hedging costs, of course. Stepping back a bit, fee income was a good story for us, not just because of the quarter-over-quarter improvement, but because of how the bank has been able to more than offset the long-expected Durbin impact on interchange income that hit us in the second half of 2024. Looking back at 2024 as a whole, debit card-related interchange income was indeed $6.7 million lower than last year due to Durbin, but fee income in total was up year-over-year by $2.6 million. primarily because of improvement in our core fee income businesses, including mortgage, wealth, and SBA. As we look ahead to 2025, we'll believe we'll generate fee income of about $22 to $23 million a quarter in the first quarter of 2025, growing gradually as the year goes on. The center bank acquisition contributes a few hundred thousand dollars of fee income per quarter in the second half of the year. Non-interest expense improved by $1 million in comparison to last quarter, largely due to some items that we experienced last quarter, including elevated operational losses and severance expense. Fraud losses declined compared to recent quarters as we began to realize the benefits of investments in enhanced fraud detection software and staffing. We believe that non-interest expense will be approximately $68 to $69 million in the first quarter of 2025, jumping by about 2 million in the second quarter as merit increases kick in, and increasing by another 1.3 million per quarter in the second half once we close the previously announced central bank acquisition in the second quarter. Turning to provision, total provision expense was 6.5 million, down from 10.6 million in the third quarter. You may recall that our credit experience last quarter was the tail of just a handful of credit, and this quarter's elevated charge of experience is largely driven by the charge-offs of three of those credits, totaling about $8 million. In fact, in total, approximately $8 million of our charge-offs in the fourth quarter were loans specifically reserved for in prior periods. Capital ratio has improved as a result of strong earnings with limited balance sheet growth. We've repurchased 477,000 shares of stock in the quarter, but shut off the buyback after we announced the center acquisition, and we won't be resuming buybacks until after that deal closes. And with that, we will take any questions you have.