First Commonwealth Financial Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 25, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I would like to welcome everyone to the First Commonwealth Financial Corporation Third Quarter 2023 Earnings Result Release Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer again, press star 1. Thank you.

Operator

It is now my pleasure to turn today's call over to Mr. Ryan Thomas, Vice President of Finance and Investor Relations. Sir, please go ahead.

Speaker 1

Thank you, Brent, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's 3rd quarter financial results. Participating on today's call will be Mike Price, President and CEO Jim Rieske, Chief Financial Officer Jane Rubens, Bank President and Chief Revenue Officer and Brian Carap, 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.

Speaker 1

Before we begin, I need to caution listeners that this call will contain forward looking statements. Please refer to the 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 statements. Today's call will also include non GAAP financial measures. Non GAAP financial measures could be viewed in addition to and not as an alternative for or reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation.

Speaker 1

With that, I will turn the call over to Mike.

Speaker 2

Hey, thank you, Ryan, and good afternoon, everyone. For the Q3 of 2023, we are pleased to report core net income of $39,600,000 which translates of $0.39 of earnings per share and ROA of 1.38% and efficiency ratio of 53.42%. The NIM compressed 9 basis points quarter to quarter to 3.76%. The rate of deposit cost increases is slowing and we believe that the NIM will stabilize going into the end of the year and continue to hold up in 2024. In a higher for longer environment, we believe that improvement in loan yields would likely out Strip Growth in Deposit Cost.

Speaker 2

Operating expenses were up $1,000,000 from the prior quarter, driven by costs associated with debit cards. Basically, we had a one time recognition of $900,000 in losses identified as part of a new automated system for processing debit card disputes. In addition, we had a $600,000 increase in FDIC insurance compared to last quarter due to the acquisition of Centric and the associated deposit balances. This was somewhat offset by $1,100,000 increases in salaries and benefits due in part to lower hospitalization expenses. Total loans grew From a line of business perspective, Commercial Banking and Equipment Finance were the key categories driving growth.

Speaker 2

We've metered loan growth commensurate with deposit growth each of the last three quarters. We have also strategically exited of non relationship borrowers. End of period deposits grew $94,800,000 or 4.2 increase by 2.1% from last quarter. Strong regional contributors included Central Ohio and Community PA. This led to the loan to deposit ratio rising slightly from 96.4% to 96.7% in the quarter.

Speaker 2

We ended the quarter with solid credit metrics. Total delinquency was 25 basis points and non performing loans as a percentage of total loans were flat at 54 basis points. Reserve coverage was a healthy 280%, criticized loans and classified loans both improved. Net charge offs annualized as a percentage of average loans were $4,000,000 or 18 basis points, which of which approximately $1,200,000 was related to Centric acquisition. Provision expense for the Q3 totaled $5,900,000 driven by loan growth in an additional $4,100,000 in specific reserves, reflecting an updated appraisal on a non accrual commercial loan.

Speaker 2

The allowance for credit losses at quarter end totaled $134,300,000 and the allowance as a percentage of loans was a healthy 1.51%, which screens well, we believe, relative to our peers. On the digital front, adoption of credit score manager a credit score manager tool in online banking has grown faster than expectations since launched in late April. We now have 30,000 users taking advantage of this robust Financial Wellness tool we believe is a best in class solution. The focus on our digital account openings has yielded expected growth so far in 2023, especially for checking accounts with an increase of over 190% in openings compared to the same period last year. We are now opening approximately one of every 5 accounts via the digital channel versus in person.

Speaker 2

In closing, we've built enough strong revenue engines and have sufficient risk appetite to grow constructively provided we fund the asset growth with organic deposit growth. With that, I'll turn it over to Jim Ryske, our CFO. Jim?

Speaker 3

Thanks, Mike. We have been able to produce solid deposit growth all year to fund our loan growth. On a year to date basis, making no adjustments whatsoever for our Centric acquisition, Loans have grown by $1,280,000,000 while deposits have grown by nearly the same amount, dollars 1,240,000,000 As a result, our loan to deposit ratio has been relatively stable in the mid-90s all year. But that masks our ability to grow our deposit base to fund our loan growth. Excluding the Centric acquisition, total loans have grown by $354,000,000 year to date, while period end deposits excluding Centric has grown by $597,000,000 These deposits, however, came at a cost.

Speaker 3

In the Q3, we saw our cost of deposits increased by 28 basis points, while our loan yields improved by only 21 basis points. Deposit rotation from low yield categories to higher cost deposit categories continued, but at a slower rate than last quarter. Fortunately, the overall pace of deposit cost increases continue to slow in the 3rd quarter. Average cost of funds increased 48 basis points in the 2nd quarter, but only increased 32 basis points in the 3rd quarter. It's too early to call the peak on deposit costs, The loan yields keep coming up nicely as well.

Speaker 3

New loans came on the books at an average rate of 7.43% in the 3rd quarter, up nicely from 7.01% in the 2nd quarter and 6.61% in the Q1. The result, As Mike said, it was 9 basis points of margin compression to 3.76%, a level which we still believe compares relatively well with peers. Our initial outlook for next year continues to show margin stability. Though the range of potential is wider than usual due to the unpredictability of depositor behavior. Our base case rate scenario calls for a Fed funds rate of about 4% by the end of next year.

Speaker 3

In this projection, the NIM actually expands a bit until mid-twenty 24 and then fall slightly in the second half, ending 2024 right about where it is now. Hence, NIM stability. In a higher for longer rate scenario. You don't see that dip in the second half of twenty twenty four. So the NIM is marginally better by about 5 basis points.

Speaker 3

These forecasts are highly dependent on assumptions regarding depositor behavior. For example, We have fairly conservative assumptions around the continued rotation of customer deposits in 2024 from low cost categories into higher yielding ones, higher costing loan, even in a falling rate environment. So even in that falling rate environment, we assume that we'll still have about 10% for the low cost deposits to rotate into higher cost categories in keeping with our experience in 2023. And even with those assumptions, The 2024 NIM looks stable. By contrast, in a higher for longer rate environment, we get the benefit of higher loan yields, in part because the variable rate loan portfolio does not reprice downward.

Speaker 3

But in that scenario, we'd expect more deposit rotation into higher cost rate categories, which would offset some of the benefit of higher rate. Fee income was little changed from last quarter. SBA gain on sale premiums have been under pressure, but our wealth division did better. We expect the income to be little changed next quarter. For next year, we are looking to grow SBAP income to help offset slowing mortgage gain on sale income and the impact of lost interchange income due to the Durbin Amendment.

Speaker 3

Non interest expense was elevated in the 2nd quarter in part due to costs associated with debit cards and related items as Mike described. Our expected non interest expense is around $65,000,000 to $67,000,000 next quarter. We think expense pressures will continue in 2024, that we're committed to keeping a lid on costs. We repurchased approximately 260,000 shares in the 3rd quarter at a weighted average price of $12.36 We slowed share repurchases somewhat late in the second quarter to conserve capital. Tangible book value per share increased from $8.24 to $8.35 as retained earnings growth outstripped increased AOCI.

Speaker 3

Regulatory capital ratios improved slightly, while the tangible common equity ratio remained unchanged. And with that, I'll turn it back over to Mike.

Speaker 2

Operator, now we'll turn it over for questions.

Operator

In order to ask a question. Your first question comes from the line of Daniel Tamayo with Raymond James. Your line is open.

Speaker 4

Good afternoon, everybody.

Speaker 5

Hi, Daniel.

Speaker 4

Maybe we start on I just want to make sure I heard your guidance correctly here, Jim, on the margin. The yes, I mean, just I guess I can just tell you what I so if the Fed funds rate ends about 4% in the year, then the NIM is going to expand, sorry, yes, expand during the year and then end the year around where it is now. Was there a contraction at the beginning of the year? Or is that did I hear that it just expands and then Okay.

Speaker 3

I'm sorry. I didn't mean to talk over you. But yes, you got to write the first one. There's a little bit of expansion from now. So you get some of the benefit of the loan portfolio of the rate increases that have happened this year year to date and a positive improvement you've been experiencing.

Speaker 3

So that helps to give you a little bit expansion. But then, rates if the Fed funds rate falls that much by the end of next year, there's variable rate portfolio that brings the overall NIM down a bit. So it trails off towards the end of next year and it ends next year. And that projection Actually exactly where it is right now at 3.76.

Speaker 4

Okay. So you've got the margin going up next quarter essentially and then fed dependent kind of as we move into 2024.

Speaker 3

Review. Yes, with the big caveat that these are all projections and we could always be wrong. They are forecast, right? So the hard thing to forecast has been Positive Behavior, which is one of the reasons I was trying to give a little more disclosure on some of the deposit behavior assumptions underlying the projections. But that's right.

Speaker 3

We got that right. In that projection, we think kind of we think that the low point for the margin is actually this quarter.

Speaker 4

On that note, do you have the what the margin was kind of in September or just Curious how it progressed during the Q3?

Speaker 3

You know I don't, but I'll get it for you before the end of the call.

Speaker 4

Okay. That sounds great. And then the just Wondering, I heard your comment on expense pressure continuing in 2024. Just curious if you could put a little finer point on Kind of how you're thinking about that relative to maybe what you've done historically in terms of expense growth?

Speaker 2

I'll start there, Daniel, a great question. Just a week ago, we went through 30 operating plans for regions, lines of business and business support units. And with resolve, we will try to get to a good point of operating leverage in next year's budget. And that will include a combination of making the best assumptions we can about what's going to happen in different optionalities for interest rates, really driving some more cost out and not you have enough turnover in a bank, you don't have to announce risks and things like that, but just in process coupled with process improvements. But we just expect every line of business, every business unit, every region to get better every year to grow deposits, to grow loans, and create some operating leverage in their own respective budgets.

Speaker 2

And we're about 50% through that process. So we will land the planes here in the next 30 days. And That's the goal and if you look

Speaker 3

at our track record over

Speaker 2

the last 11 or 12 years, we're pretty close or good at that and if we miss, it's not by much.

Speaker 4

All right, terrific. Well, I appreciate the color. I'll step back.

Operator

Your next question comes from the line of Michael Perito with KBW. Your line

Speaker 3

is open.

Speaker 6

Hey, good afternoon guys. Thanks for taking my questions.

Speaker 2

Good to be with you.

Speaker 6

I wanted to circle back on the margin conversation a little bit. Was curious if you guys can maybe give us a little incremental color in terms of like what the incremental spread is on your loan and deposit books today. So meaning like your blended commercial loan yield on new originations against kind of your incremental dollar of deposits and where that spread is today. And It would seem like based on your margin guidance that you guys feel a bit more confident about being able to maintain or grow that spread moving forward now, but just curious if I'm interpreting that correctly and any detail there would be helpful. Go ahead, Jim.

Speaker 6

I think

Speaker 3

you are talking about well, new loan spreads like on corporate loans, I think you are holding up very nicely.

Speaker 2

They are. And in fact, our biggest category of growth is commercial variable and our spreads there On advances and really all in or well in excess of 8%.

Speaker 6

Okay. And on the incremental funding side, Roughly where are you guys kind of at today against that excess 8% figure?

Speaker 3

Yes. Incremental funding is going to be driven by the deposit specials we have out right now, which is going to be between 4% 5%. Current TD special, time deposit specials are right about 5% and money market specials are between 4% and 4.5%.

Speaker 7

Okay. All right. So I mean, it

Speaker 6

sounds like then the incremental spread is very supportive of kind of the margin, which I guess backing into your commentary, Jim, to the prior question about how you think this could be the bottom for the name. I mean that those facts would seem to be very supportive. I mean is that kind of the

Speaker 3

buildup in terms of your projections? Yes, I think that's right. And just to be kind of clear that The figure Mike was throwing out, there's a yield on some of the corporate categories. So the overall yield and everything coming in is 7.43% in the quarter Annual marginal cost of funds is still in the 4% to 5% range that does kind of support the continued stability of the NIM.

Speaker 2

And we've pivoted. We're supporting growth in categories quite frankly that have the best spread. And We're really believers in all of our businesses, but there's times where we've pinched some of those businesses that have lower yields at this time. We want to keep our producers looking forward, but we're putting on assets in the most attractive categories generally.

Speaker 3

That's helpful. And then if we think of as we

Speaker 6

start and I realize you're not really providing 2024 guided pool. Yes. But as we think about the growth opportunities next year, it seems to me like it's kind of a balance between Your appetite for growth and customers' appetite for taking credit, right? And so, I mean, on the one hand, it seems like your balance sheet is very well positioned. If the spreads and the risk adjusted returns are within your comfort level, you guys have room to grow loans in a net basis pretty at least mid single digits next year without putting too much stress on really anything.

Speaker 6

But I guess the flip side of that question is, do you think there's enough customer appetite with, for example, corporate yields north of 8% to drive that type of production based on what you're hearing and seeing today. And we'd love just some color on kind of those sides of the equation as we think about loan growth for 2024 for you guys.

Speaker 2

We do. I mean, we're not a market maker. We're a taker. We're In most of the markets we're in, there is sufficient volume and opportunities out there for us to compete. And We have a number of competitors, both small and large that either don't have the flexibility or desire to grow right now.

Speaker 2

So that's where we're at. It's a good position to be in. And by the way, that varies by geography. We have 6 markets, Capital Region in Eastern PA, Community PA, Pittsburgh, Northern Ohio, Central Ohio and Cincinnati. And it does vary by geography, but we believe there's enough out there to comfortably hit, what are lower loan figures this year and next year than we've done the prior 2 years.

Speaker 2

Part of that is because we're pretty balanced and we have any more a pretty full range of solutions for clients.

Speaker 6

Great. And then just last question for me. Obviously, the credit quality of your balance sheet remains pretty stable here. But as we think about the Q3, there's really been some not so savory data points from Many credit card delinquencies, auto delinquencies, obviously Discover was pretty bearish on their earnings call. So how do you guys kind of approach to credit piece here.

Speaker 6

I mean, obviously, you're calling your portfolio and stressing it and looking at it, but there are starting to become somewhat obvious signs of deterioration. Obviously, that doesn't directly correlate to your loan book, right, but could have broader implications for the economy if continued, right? So I just would love some updated thoughts around the current credit environment. And, yes, I'm just curious how you guys are kind of approaching that just given some of the data points we've gotten in the last kind of week or 2.

Speaker 2

Well, we have Jane Gribbenz, myself, Brian Karrip and others that have Been through several cycles over 35 years or so and each and this geography we're in tends to do pretty well through cycles and has through did through the great financial crisis in certain categories. We've really tightened and we're tough on credit across the board appropriately so. And There are we do feel there will be some strain, but probably on things in retrospect that we knew we should have done at the time. We'll work through it and but we do think that there's enough demand out there and the credit will hold up relatively well. Brian, do you want to add any color to that?

Speaker 8

Just that we have seen delinquencies in the consumer side pick up a couple of basis points. As we look at and take it apart, we know that our portfolio for indirect is up a few basis points, roughly 10 basis points quarter over quarter. Our portfolio is well underwritten. You think about the strong FICO scores in that business around 7.44 weighted average. You think about the granularity in the portfolio, the deal size, the go to market strategy,

Speaker 2

We feel pretty comfortable that

Speaker 8

we can see what we have in our portfolio and address any increase in delinquencies.

Speaker 3

Brian, if I could add, just kind of looking over your shoulder, your delinquency reports, this story is a little bit mixed. Overall, consumer delinquencies are up as categories you mentioned, but they're somewhat down as well, I think, right?

Speaker 8

Yes, the HELOC category improved. And We think our portfolio is in good shape entering into this credit cycle.

Speaker 6

Got it. No, I think that's very fair. I appreciate you guys all pitching in there and providing some color. It's helpful. So thank you for taking my questions.

Operator

2. Your next question comes from the line of Karl Sheppard with RBC Capital Markets. Your line is open.

Speaker 9

Hey, good afternoon guys.

Speaker 6

Hi, Karl.

Speaker 9

I wanted to pick up here on the of

Speaker 3

the conversation. Jim, I appreciate kind of

Speaker 9

all the help and the sensitivities in the forecasting. But what are you guys hearing from this field that gives you a little bit of confidence in the forecast. And I know the comment was, I think, slowing deposit pressures. But if you had to give it your best shot, When do you think deposit costs can peak assuming the Fed is done?

Speaker 3

Yes. We probably go right to the heart of your question on the of the peak. The projections we have, even in a foreign rate environment, they drift slowly upward. The analogy, I don't think it's a good analogy, but I came up with this, it's like a motorboat. You shut off the engine, it keeps drifting forward.

Speaker 3

Even if Fed cuts rates, next year, deposit overall deposit cost will continue to drift upward just because of this rotation phenomenon that we've been talking about. That's why we've been trying to track it, understand it. I think we've been very successful in getting new dollars in the door and growing our deposit base like I mentioned in my lead off to my comments. But it also reprices our own loan book and that's going to continue next year. So it doesn't in our projections, even in a falling environment, we don't see a peak.

Speaker 3

It kind of levels off towards the end of next year. And then in a if rates stay higher for longer, if rates don't change from here in that environment, The deposit rates continue to drift upward. It's just that the loan rates drift upward even at an even faster rate. And so that's why it's better from a margin perspective for us.

Speaker 2

Yes. I would just add and Jane is on the phone. I think her and the team have done a terrific job pivoting to deposits, bringing deposits in. And as you recall, we got off to a late start simply because we had to cramp under $10,000,000,000 with Durbin. And but once we got focused, we've grown deposits pretty nicely from quarter to quarter and added a lot of new deposits.

Speaker 2

Jane, any color you want to add?

Speaker 10

Only that we have seen the requests for deposit exceptions decline a bit, which tells us that competitors are slowing down a bit. And our retention rate on the CDs that we have been bringing in and our money market specials, the retention rates were very good. So we feel good. You can never have too many transaction accounts, but we feel good.

Speaker 3

It's Jim again. If I could jump back in, Just because Jane mentioned it, our CD retention rate has been really remarkable. We retain about 80% of the CDs that mature. Now of that, the ones that we retain, we've seen about 60% of those will go to the rack rate, they were priced lower, but about 40% will take the current special rate. But the retention rate has been really strong.

Speaker 3

That's really in our favor. Let me also just take a minute Just to give you a little more color on that whole deposit rotation concept we've been talking about, because it really informs our projections for next year. So if I look at the low cost deposit categories really of non interest bearing and savings. Those together were about $4,600,000,000 at the end of the Q1 and that's a good starting point for us because we closed Centric acquisition in the Q1. Those two categories together fell to about $4,300,000,000 in the 2nd quarter.

Speaker 3

That was a 5.8% decline in those categories. But in the 3rd quarter, it fell to $4,200,000,000 That was a 3.6% decline in those categories. So just in a macro level, I mean, James giving you the color from The Street of the day to day exceptions that we deal with customers and those interactions. But on a macro level, I'm watching the numbers and I'm seeing them slow down. That gives me a lot of confidence.

Speaker 3

And even with that, we still have a fairly aggressive assumption that it's going to continue next year. And even with that, we still get things to build. Oh, and one more thing, I do have the month to month NIM answer from the previous caller from, I think, Danny, you were asking. July NIM was 3.83 percent, which is pretty consistent with the Q2 385%, but July was 383%, August was 369%, And September was up to 3.76.

Speaker 6

So there you go.

Speaker 9

Okay. Not that that wasn't a lot of color, but I'm just going to ask a follow-up on deposits, but the strategic focus is growing deposits to fund loan growth. We've talked a lot about the pricing pressures and that changing rotation. Just when you think about driving balanced growth in 2024. It doesn't seem like it's going to be a CD special game.

Speaker 9

It seems like it's going

Speaker 3

to be more core relationship growth.

Speaker 9

But if you could just expand on those That would be great. Thanks for all the help.

Speaker 2

Jane, you want to comment and lead us off there?

Speaker 10

Well, I think we're always going to have CD specials, at least for the next couple of 3 years. But As I said before, I don't think the pace or The height of these specials is going to continue. And we still have a very strong transaction account base and we've got a nice savings book. So I feel very good about our deposit positioning.

Speaker 2

It's a good slide on Slide 15. This is Mike. Sorry to interrupt. Thanks for that, Jane. But Our average retail account is $11 Our average deposit size is 18.

Speaker 2

You might move over 3 or 4 basis points, but you're probably not or 300 or 400 basis points, but perhaps not so inclined over an additional 25,000,000,000 and these are loyal customers in small communities. I mean our community PA, we call it the breadbasket of our company, is $3,500,000,000 of our deposits. And just great clients, deep relationships, We just we do feel confident that we have a good depository and we just think it surprises as Jim suggested, but we feel like we're well positioned.

Speaker 9

Okay. Thank you. I'll step back.

Operator

Your next question comes from the line of Manuel Neves with D. A. Davidson. Your line is open.

Speaker 7

Hey, good afternoon. What are you kind of assuming on that like loan yield repricing kind of in a normal quarter with no hikes, with no change to that funds rate. Do you have kind of a standard loan yield increase?

Speaker 2

I'll just start where I think Jim might have mentioned it, but our portfolio here the last quarter was about 7.40 in terms of new loan yields and that range from as high as in certain categories as high as well over 8. And the 2 key categories are commercial and really equipment finance. And equipment finance is really running in the high seven. And so those are key categories for us that there's good volume there and that volume doesn't evaporate. And Even our indirect business has got up in almost 7%, 6.85%.

Speaker 2

So just good progression by the team in terms of getting paid for our risk and wherever they're at on the yield curve. And so that's a nice position to start from. Jim, Anything you want to add?

Speaker 3

Yes. Emmanuel, I'd add. So we're giving we keep giving you we're giving you the new loan yields, but the replacement yields, The differential between yield on what's coming off versus what's coming off has been expanding. And that also gives us confidence in the margin. So in the 2nd quarter, that differential was 87 basis points.

Speaker 3

That's when new loans are coming on, the book was 7.01%, but It was 87 basis points higher than what was running off the books. And the differential in the Q3 was 115 basis points.

Speaker 7

Okay. Okay. That's

Speaker 3

helpful.

Speaker 7

As you're thinking about growth in Q4 into next year, Where do pipeline stand? And there's usually been a shift towards more commercial at the back half of the year. Is that Could it keep happening? Just kind of thought process on the mix of lung growth at the back half of the year and into next year?

Speaker 2

Pipelines are definitely lighter than they were a year or 2 ago, but the 2 years preceding this, we grew in the low teens. And so, they're understandably, we do think the kind of guidance we've given Mid single digits from 4% to 6% is very achievable in a variety of ways. And if anything, we're kind of pension volume if the spread isn't right or it's not in the right category. And at the same time, we kind of we cherish A couple of businesses right now that we're pinching a little bit more just because of where the yields are at.

Speaker 3

And by pinching, we mean we're pricing those so that the new origination volume is fairly close to the run up volume. So the loan portfolio size doesn't grow, but it's the prices upward, which doesn't create any capital or funding pressures, but has increased yield in margin. And on the consumer side, that story is playing out fairly nicely. And that's mainly auto, right? Yes, I'm thinking particularly of auto.

Speaker 3

I think we've spoken about that before, but that's exactly what I'm thinking about. And that creates a room when you want to for which new growth that you want to fund and capitalize gives you the ability to do that in commercial lending.

Speaker 7

Can you kind of give an update on equipment finance that's been a nice place of growth. It seems like yields have kind of gotten even better, high 7s. Just the latest there, it's obviously grown from Small base, but the growth has been pretty nice.

Speaker 2

Yes. I mean that's it's now at it grew $46,000,000 $46,000,000 this past quarter or like $35,000,000 actually

Speaker 3

and $46,000,000 of new

Speaker 2

volume and at $769,000,000 and just we like the granularity of that. We've even pinched that a bit a little bit in terms of the type of equipment finance that we are doing. And so and we just have a terrific team that we did a lift out a few years ago and We're just pretty bullish on the business and in some of our commercial categories.

Speaker 7

Just a shift I appreciate that. Just a shift for my last question. Can you talk a little bit about new deposit flows and how much are coming from current customers bringing more money or from gaining households? Yes.

Speaker 3

So that relationship is actually something we've been watching this year. It's remained fairly stable. When we give a every $100 of new money that we get in, from a deposit special, about 50 is from our own book, repricing upward. So that you've got a CD special and what you're doing is moving from an existing savings account on this bearing into the new special CD special or money market special. But the other 50 is new.

Speaker 3

And now that other 50 that's new, about half is from our existing customer base. So it is bringing more money to us, which is great. And then the last 25 is the real, the new money.

Speaker 2

I think what's helped us there is a year ago, our cost of funds, the deposit at

Speaker 3

this time last year, Jim, was 5 basis points.

Speaker 7

Yes.

Speaker 11

Right.

Speaker 2

And we had all but driven off CD customers.

Speaker 3

Correct.

Speaker 2

And so I just think now that we hang rates, we have loyal customers And we're getting they have most of their household with us, but the hot money that might have been somewhere else at a different bank, I think, Customers are aggregating it with us. How long that continues to play out? The way it is currently playing out, Not sure, but and again, a lot of that is coming from our rural markets.

Speaker 7

Okay. That's great. And I do want to catch up on the buyback. How did that appetite change across the quarter? You kind of Just from the 10 year rising to where it did and you want to have a little bit more capital and is that should does that lead me to think it could go up a little bit In terms of pace

Speaker 3

in the Q4? It just actually I just changed the cap on the price at which we're buying back the stock. We were early in the quarter buying back at levels below 12 point And towards the end, I said that's capital $12 So we would buy back and again, any given day, we're trading under $12 a share. That slows it down a little bit, partly so we keep some dry powder, but also because we want to be in a position with our sub debt to be able to call it. You recall we have Two tranches of subs at the bank level $50,000,000 each.

Speaker 3

One of those tranches is already callable and has lost 20% of its Tier 2 treatment. And so we really like to be able to call be able to continue to build capital levels and be in a position to call that if we want to by next June when we lose another 20% of Tier 2 capital treatment. That was thinking behind that.

Operator

Question is from the line of Matthew Breese with Stephens Inc. Your line is open.

Speaker 8

Hey, good afternoon, everybody. Hey, Matt.

Speaker 5

Jim, in the press release, you noted that because of some excess liquidity this quarter, it impacted the NIM by, I think, 8 basis points. Business. I was curious your thoughts on how much excess you're currently holding on to at period end? How long you intend to hold on to it? And if With some of the margin dynamics you're talking about, there's also some normalization of liquidity in those assumptions.

Speaker 3

Yes, it's been about $250,000,000 of excess liquidity where we took on right after Silicon Valley Bank failed in the Q1. We started to deploy some of that in the Q3. I think got it down to about $160,000,000 but of excess, just excess cash. So when I say excess cash, that means we borrowed money from the FHLB and we parked it at the Fed. We're going to continue with both though.

Speaker 3

What we've been experiencing is deploying that cash into securities purchases And we're going to continue to do that here for the rest of the year and in the next year as well.

Speaker 5

Okay. So maybe we should think put to work $40 ish million a quarter. Is that a fair way to think about it?

Speaker 3

Probably about right. Might be a little more than that. I think our securities portfolio for at least in last year, we were doing almost no purchases to let that run off, so that we redeployed the loan growth and that's a good profitable strategy, but it's gotten to a point where it's a little small in terms of proportion of total assets compared to peers. And so we'd like to get the size of the securities portfolio up a bit.

Speaker 5

Okay. That was Actually on my list of questions, we're down to 11% securities to assets, but this quarter, obviously a pop up close to 6% period to period. Where would you ultimately like to be and over what timeframe?

Speaker 3

We don't have a hard target. We just know it's got to get bigger from here. I think But not aggressively so. I think in our last projections, we were projecting it to grow by another $100,000,000 next year. So it's not We're not going to go guns ablazing and buy $500,000,000 of securities next year, but we do want the portfolio to grow from where it is now.

Speaker 5

Okay. I think accretable yield represented 10 bps of the NIM this quarter. It's always a hard to model figure. Could you Give us the most recent forecast there. How much of an impact every quarter you expect it to be on the NIM?

Speaker 3

Yes. We think It's about 10 basis points, you're right, 10 basis points and actually trying to make the point that accretable yield and the cash figures kind of offset each other. We think it's probably going to be about 7 basis points next quarter.

Speaker 5

And 7% slowly declining to 5%, is that a good Estimation for 2024?

Speaker 3

It is. I don't have the exact number and estimation for you for 2025 or 2024 yet. I'll get to that next

Speaker 9

quarter, but

Speaker 3

it is fading out, so that's probably a fair assumption.

Speaker 5

On the credit front, The one category I'm curious on is auto. There's been some more recent headlines that I think it's subprime audit delinquencies are starting to go higher. I wanted to know what your experience has been and if you see anything underneath the hood there that we should be incorporating into our models, higher charge offs, delinquencies, things of that nature.

Speaker 2

Well, we only do auto in market. We had good experience through the last credit cycle and probably starting to hook a few more cars. But, Brian, why don't you give them the rest of the story?

Speaker 8

Yes, we have a prime business. We don't have subprime. As I mentioned earlier, delinquencies are up from quarter in June, 30 basis points to 40 basis points this quarter. We're watching it closely. We've got a very experienced leadership team in that business.

Speaker 8

They're managing the business well. The underwriting is tight. And we're going to continue to watch it, Matt. Thank you for your question.

Speaker 5

I also wanted to ask just staying on the topic of credit, what is the size of your syndicated, if you have one loan portfolio? How's the credit performance there and how much of that, if you have any, is out of market?

Speaker 8

Yes. So our Do you want me to do it? Go ahead.

Speaker 3

Yes. The SNC book

Speaker 8

is $90,000,000 It's down significantly over the past several years And it's performing fine.

Speaker 5

Okay. And then I did want to touch on the specific reserve this quarter. It was based on a reappraisal. What was the credit? Was it a commercial 1st real estate or commercial credit?

Speaker 5

And what were some of the primary factors that changed the appraisal enough where you had to put some money aside?

Speaker 8

Brian? Yes. Thank you for your question. So this is an office property in the eastern part of the state, Central Business District. The loan was originated 2018 and the pandemic, the property became 100% vacant.

Speaker 8

In 2021. We put it on non accrual. Our procedure is to get an annual appraisal and the appraisal value that came in most recently showed a significant decrease in value. So we had a specific reserve of $4,100,000 So the appraisal year over year reflected 100 basis point increase in the cap rate. And as I mentioned earlier, the lease up assumptions from the appraiser, the conclusion it would take a fairly long period of time to lease the property.

Speaker 8

That's why the value decreased.

Speaker 2

And I think we have just one additional non accrual borrower that is an office property. They're paying as agreed. It's a $2,200,000 loan and we feel pretty good about that one. That's correct.

Speaker 5

The loan where you put aside a specific reserve this quarter, what was the total What's the total loan size and how much are you now covered for on the reserve?

Speaker 8

The loan size is $12,600,000 and the specifics 4,000,001.

Speaker 5

I'm sorry, specific is how much, 6.1

Speaker 8

It's $4,000,000 what is the specific reserve, the loan? $4,000,000 Okay.

Speaker 5

Sorry for the pregnant pause. I'm just curious how much How confident are you in the $4,000,000 reserve common potential loss content there?

Speaker 8

We're as confident as the most recent appraisal, which is 1 month old. We continue watching monitor this. Should they find tenants or should they have a desire to sell the building, our special asset people will update the numbers and then we'll post up on a quarterly basis.

Speaker 6

Okay.

Speaker 5

Last one for me just around M and A. You still have a pretty strong multiple relative to the group and I'm curious If you're hearing more from your nearby peers that might not be in such a strong position, there's more conversations, whole bank or fee income. Bank.

Speaker 2

Yes, there is more whole bank and there is definitely a lot more conversation than I would say in the last 5 years. And we talk to everybody and people in the past have come to us a couple of times first and that's been nice. But we're a good partner quite frankly and we tend to do right by the people that partner with us And they do well and we do well. I think we have a slide in our investor deck that shows how we've grown organically and with small M and A, generally $1,000,000,000 or less. And that's been very accretive to us over time.

Speaker 2

And those would be ideal transactions, kind of tongue in cheek, particularly a rural depository. And so I you just don't know and we're not over aggressive, but we do talk to everybody and it would be a great way to continue to supplement. We can grow the bank. We just flat out can. It's just you got to do it right and you got to do it with low cost funding.

Speaker 2

And Jane is all over that, trust me. So, is that helpful?

Speaker 5

Very helpful, Mike. I appreciate it.

Speaker 3

Thank you for your time.

Speaker 6

Thank you.

Operator

Your next question comes from Daniel Cardenas with Janney Montgomery Scott. Your line is open.

Speaker 8

Hey, Dan. Hey, guys. Good afternoon.

Speaker 11

Most of my questions have been asked and answered. Just kind of a couple of modeling questions here for you guys. How should I think about your tax rate on a go forward basis? I mean, it's been fairly consistent here. Is that 20 ish percent still kind of a good run rate?

Speaker 3

It is about yes, it's 20.02, but call it 20.

Speaker 11

Okay. And then Jim, I missed your comments on fee income. Guess I can't multitask. Can you maybe just kind of quickly go through those again?

Speaker 3

Yes, sure, Dan. I can't multitask either, by the way. But the fee income is we think it's relatively stable. There's an next year, of course, we have the turbine impact, right? So that's going to affect the income.

Speaker 3

But we are looking at sources like growing SBA income to help offset that.

Speaker 11

Okay, great. That's all I have for right now. Thanks,

Speaker 8

guys. Thanks, Dan.

Operator

There are no further questions at this time. I will now turn the call back over to the CEO, Mr. Mike Price.

Speaker 2

We always appreciate your interest in our company and the opportunity to interact and hear what's on your mind. Thank you for your time today and

Speaker 9

Thank you.

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Key Takeaways

  • In Q3, First Commonwealth reported core net income of $39.6 million, EPS of $0.39, ROA of 1.38% and an efficiency ratio of 53.42%.
  • The net interest margin compressed by 9 bp to 3.76% quarter-on-quarter, but management expects NIM stability into year-end and through 2024 as loan yields outpace deposit cost increases in a higher-for-longer rate environment.
  • Loans and deposits grew in tandem, with period-end deposits rising 4.2% ($94.8 million) and a loan-to-deposit ratio of ~96.7%, driven by commercial banking and equipment finance while exiting non-relationship borrowers.
  • Credit metrics remain strong: 25 bp delinquency, NPL ratio stable at 54 bp, reserve coverage of 280%, and an allowance for credit losses at 1.51% of loans, including a $4.1 million specific reserve on a non-accrual commercial loan.
  • Digital adoption accelerated, with 30,000 users of the new credit score tool and a 190% increase in digital checking account openings year-over-year, while non-interest expenses were elevated by one-time debit card system losses and higher FDIC insurance.
AI Generated. May Contain Errors.
Earnings Conference Call
First Commonwealth Financial Q3 2023
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