First Commonwealth Financial Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2024

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator for today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation First Quarter 2024 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Speaker 1

Thank you, Desiree, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's Q1 financial results. Participating on today's call will be Mike Price, President and CEO Jim Ryske, Chief Financial Officer Jane Grementz, Bank President and Chief Revenue Officer Brian Carrap, our Chief Revenue Officer and Mike McKeown, our Corporate Banking Executive. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to sbbanking.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 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 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 our reported results prepared in accordance with GAAP. 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

Thank you, Ryan, and welcome everyone. Despite pressure on the net interest margin through higher depository costs, First Commonwealth fee consensus earning estimates by $0.01 with $0.37 per share in the Q1 of 2024. Core ROA and the efficiency ratio were 1.31% and 55.05 percent respectively. The bank set a number of earnings records in 2023 and had a particularly strong Q4. That was certainly worth celebrating, but it affects most of the period over period comparisons.

Speaker 2

For example, in the Q4 of 2023, we had negative provision expense of $1,900,000 due to the release of reserves. This quarter provision expense was a more typical $4,200,000 That swing strongly affected quarter over quarter comparisons of financial metrics like core EPS, return on assets and return on tangible common equity. In addition, interest expense increased by $4,600,000 over the last quarter, overwhelming the $1,200,000 increase in interest income and resulting in a $3,400,000 decline in net interest income. As a result, the core non GAAP measures that we report on a pre provision basis such as core pre tax pre provision net revenue and core pretaxpreprovision ROA, they also declined from last quarter. Importantly, balance sheet liquidity strengthened as our loan to deposit ratio fell from 97.9% at year end to 95 point 6% at the end of the Q1.

Speaker 2

End of period deposits increased over $254,000,000 or 11 0.1 percent annualized, while loans increased just 1.5 percent annualized or $33,000,000 Consumer CDs constituted the bulk of deposit growth, primarily from our core consumer customers, while business deposits fell due to seasonal factors. We've begun to taper CD pricing based on Q1 growth and market conditions and we'll continue to watch competitor rates and consumer behavior. Loan growth for the quarter may appear to be on the low side for us, but it's very much in line with our long term plan to tilt the balance sheet more towards commercial lending. Commercial loans grew at an annualized rate of 5.24 percent, right in line with our long term mid single digits guidance. That commercial growth offset declines in consumer real estate balances.

Speaker 2

And the movement in consumer balances is no surprise. We're now selling over 90% of our mortgage originations, including mortgage loans and in fact mortgage gain on sale fee income increased over last quarter. 2nd, lien products like HELOCs and HELoans are naturally down because of the rate environment and also because a lot of those balances were driven by refi activity during the pandemic. And the auto book is replacing runoff and nicely pricing upward exactly as planned. Overall, we see the diversification of our loan portfolio as one of our key strengths and slow growth or even modest declines in consumer balances in any given quarter provide us with the liquidity and capital to grow commercial loans and maintain our current mid single digits guidance.

Speaker 2

As we execute regionally and profitably grow core deposits, loans, fee income, then we will grow meaningfully in the years ahead. Becoming the best bank for businesses and their owners will be a big part of that growth. The Capital, Columbus and Cincinnati regions present significant opportunities for growth at First Commonwealth. Our branch and business based deposit gathering efforts have also led to our low cost funding advantage. With mild loan growth, it might appear from the outside like this was an uneventful quarter for us, but nothing could be further from the truth.

Speaker 2

We've made a number of internal management changes to maintain our momentum and ensure our success. Since hiring a new Chief Lending Officer last September, we have made a concerted effort to upgrade regional leadership, create more enduring operational scalability and improve our C and I expertise. Some recent actions include naming new regional presidents in Pittsburgh and Cincinnati, new leadership in the Harrisburg region and a new Head of Corporate Banking Portfolio Management and Commercial Loan Documentation. We've also hired 5 new commercial bankers during the same period. As we like to say, we always keep our feet moving.

Speaker 2

In other words, we actively cultivate a culture of continual transformation and improvement so that we can produce steadily improving financial results year in year out. And with that, I'll turn it over to Jim, our CFO.

Speaker 3

Thanks, Mike. Before I break down the margin and other elements of the income statement, I'd like to highlight a few balance sheet items. Regulatory capital ratios improved due to strong retained earnings and the absence of any buyback activity in the quarter, combined with modest balance sheet expansion. Strong deposit growth coupled with modest loan growth improved our liquidity as well. Not only did it bring down the loan to deposit ratio as Mike mentioned, but it also left us with $223,000,000 of excess cash at the end of the quarter.

Speaker 3

The strength of our internal capital generation and our improved liquidity position has allowed us to announce 2 actions with 1st quarter earnings. First, a regular increase in the dividend of $0.02 per year in keeping with prior year in keeping with prior years and our long term goal of smooth and steady increases in the dividend for our shareholders. And secondly, the redemption of $50,000,000 of our $100,000,000 in outstanding subordinated debentures on June 1. The timing of this redemption was right for several reasons. First, the sub debt would have lost another 20% of its Tier 2 capital treatment on June 1 and refinancing options are prohibitively expenses.

Speaker 3

2nd, the consolidated total risk based capital ratio improved organically by 34 basis points in the quarter, 34 basis points. That mostly offsets the 44 basis point impact of calling the sub debt in the 2nd quarter. And we have modeled further organic growth in our capital ratios in the 2nd quarter as well. 3rd, the excess cash at quarter end provided the liquidity with which to fund the repurchase without taking on any additional borrowings. Finally, the coupon of this tranche of the sub debt was currently about 7.45 percent and we're paying it off using funds that are currently sitting at the Fed earning 5.4 percent, so its redemption will save the company approximately $1,000,000 in pre tax expense per year and improve the net interest margin or NIM by about a basis point.

Speaker 3

Our strong deposit build in the Q1 came at the expense of the net interest margin as our NIM compressed by 13 basis points in the quarter. We had expected that the yield on earning assets would improve by approximately 10 basis points to 15 basis points, matching a 10 basis points to 15 basis point anticipated increase in the cost of funds producing the instability. It didn't turn out that way. Instead, the yield on earning assets only improved by 5 basis points and the cost of funds went up 19 basis points. In the aggregate, we originated new loans at just over 8% in the Q1, but the old ones that are running off were in the aggregate above 7% resulting in relatively modest replacement yields.

Speaker 3

On top of that, the loan portfolio yield was negatively impacted in Q1 by the continued effect of received fixed macro swaps that we entered into several years ago. Fortunately, dollars 25,000,000 of those swaps run off on June 30th this year and another $50,000,000 run off in December. Those would only have a one basis point benefit to the NIM in 2024, but a further $250,000,000 runoff in 2025, which we expect to produce a cumulative benefit to the NIM of 8 to 11 basis points depending on the trajectory of rates. If rates stay higher for longer, the benefit of the macro swap roll off will be in the high side of that range. On the liability side, deposit costs increased by 25 basis points as we saw a $233,000,000 decline in low cost deposit categories, combined with a $283,000,000 increase in the more expensive categories.

Speaker 3

Despite the movements in balances, we saw net gains in consumer households in the quarter. In fact, our deposit pricing strategies have been effective not just in retaining our deposits, but in attracting new dollars to the bank. While the cost of deposits went up 25 basis points, the cost of SUNS only went up by 19 basis points because we benefited from participation in the Federal Reserve's bank term funding program in the quarter. We got in the program and borrowed just over $500,000,000 while the Fed was still pricing the borrowings on the forward curve. So we are grandfathered in, so to speak, at 4.76 percent on those borrowings until next March.

Speaker 3

We didn't enter the program with the intent to arbitrage the rate. We simply borrowed that much because that's what we needed at the time and the Fed's rate was less than the FHLB. Ordinarily, we would use the excess cash generation from the strong deposit growth we enjoyed in the Q1 to pay off borrowings. But given the rate differential, we prefer to stay in the BTFP program for now, which is why we ended the quarter with $223,000,000 on deposit at the Fed at 5.4%. While it's obviously accretive to income to the tune of about $0.01 a share in 2024, it did have a 3 basis points depressive effect on the NIM in the Q1.

Speaker 3

Fee income and non interest expense are both little changed, but slightly unfavorable to last quarter. Back to back swap fees were non existent as customers have little desire to lock in fixed rates and interchange was down seasonably compared to the Q4 with holiday spending. We were pleased however to see mortgage and SBA gain and sale income pick up from last quarter. That was good. The non interest expense comparison to last quarter was also affected by a tax accrual reversal that benefited the 4th quarter and by higher occupancy expense in the Q1.

Speaker 3

And with that, I'll turn it back over to Mike.

Speaker 2

Thanks, Jim. And operator, if we could pause for some questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Daniel Tamayo with Raymond James. Your line is open.

Speaker 4

All right. Thank you. Good afternoon, guys. Maybe, Jim, I appreciate all the detail on the puts and the takes of the margin in the Q1 as well as what's coming in the next rest of the year and even into 2025 with those swaps. But maybe you can kind of fill us in on how you're thinking about the core margin and the total margin path for the rest of the year?

Speaker 3

Yes, thanks. You may have noticed that from absent from my prepared remarks is any kind of forecast of the NIM. And that was conscious. But just to be as clear as I can be, we're very cognizant of the fact that in the last three quarters in a row, we are forecasting instability and yet the margin compressed by about 10 basis points every quarter. I will tell you that the forecast that we have suggest the same thing, NIM stability going forward.

Speaker 3

So that is our forecast. And those forecasts actually take into account a falling rate environment. Those the rate environment forecast in our preparation of those forecasts project the fed funds down to 4.38% by the end of the year about 4 rate cuts. If that is slowed down rate cuts or in a higher longer term environment, that will benefit them then, that will be even better. I will say we have sharpened our pencils and gotten better at forecasting deposit movements.

Speaker 3

That's something that I think we were catching we were caught out on in the last couple of quarters in the last year. We've gotten better at that. So we're trying to understand where our depositors are going. And we've also, in light of the disparity between loan growth and deposit growth this quarter, dial back the aggressiveness of deposit rates a little bit. So we still have decent specials out there, but they're not top of market specials.

Speaker 3

And that's probably going to bring deposit growth more in line with the loan growth and help them achieve that kind of stability target. But that's how we're thinking about it now, Dan.

Speaker 4

Okay. That's very helpful. And just to be clear, the one basis point benefit from swaps in 2024 and then the 3 basis point negative impact, I mean, from the funds at the window the Fed window, that's all baked into your assumption there?

Speaker 3

It is. The cash on hand at the Fed right now, that 3% 3 basis points of press and effect that I talked about, the reason I have a little bit of optimism is that cash has come down a little bit here in the Q2 so far. Without selling sales out of school, we're right about $150,000,000 right now. If it stayed at $250,000,000 for the full quarter, it would have about a 6 basis points or 7 basis points depressive effect. The average for the Q1 was only $112,000,000 even though we ended the quarter $223,000,000 of excess cash.

Speaker 3

The average excess cash for the quarter was $112,000,000 That's why it was only a 3 basis points depressive effect. If it stayed at $250,000,000 for the full second quarter, that's like a 6 or 7 basis points it has to effect. But it's come down and nice to be

Speaker 5

a little hopeful. And I

Speaker 3

would just add, thin margin balance sheet leverage business is generally not something we find attractive and don't pursue. But now that we've got it, we're going to stay in the program because we make a little money off of it. And we would hate to pay off those borrowings and then find that we have great loan growth in the second half of the year. We're borrowing again from the FHLB at 5.4%. Hope that clarifies things a little bit on the excess cash question anyway.

Speaker 4

It does. Yes, it does. Thank you. I guess and then just lastly, what are your thoughts on accretion? What the contribution was in the Q1?

Speaker 4

And then where that may go the rest of the year?

Speaker 3

EPS accretion or I'm sorry, what do you mean?

Speaker 4

I'm sorry, discount accretion, purchase accounting.

Speaker 3

Oh, I think it was 7 basis points in the quarter. It's going to be fading out about a basis point every quarter. Okay. 7 basis points

Speaker 5

in the

Speaker 3

1st quarter, it's fading out by 5 basis points each quarter.

Speaker 4

All right. Well, thanks for taking all my questions. Appreciate it.

Speaker 2

Thanks, Dan. You bet.

Operator

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

Speaker 3

Hey, good afternoon guys.

Speaker 2

Hey, Karl.

Speaker 5

Jim, I wanted to pick up on the margin discussion a little bit. When you talk about the swaps on Slide 14, should the message that we should take away is that the overall margin can drift higher over the next couple of quarters and into 25%, if we think in near term stability and those kind of roll off. Is that a fair way for us to think about it?

Speaker 3

It could if rates stay high and the replacement yields pick up a little bit and we can bring the deposit costs under control. Those are a lot of ifs. We're getting closer and closer to the your question is about those NAPA swaps. So we're just getting closer to maturity. So we thought we'd provide some helpful disclosure this quarter to kind of spell out the effect of those the roll off of those swaps would be.

Speaker 3

There's a page in our supplement that we put on the PowerPoint presentations. We call it an earnings presentation supplement that is on the Investor Relations portion of our website. It's page 14 that kind of has a bar chart that spells out the dollar volume of the swap maturities, the macro soft maturities and then the cumulative NIM impact for all those. The real benefit isn't until next year. But maybe you could think about this way to answer your question directly.

Speaker 3

That will help reduce the stability that we're looking for, right, if you have that support from those things rolling off. But that can only help. And it's if they stay in a higher rate, higher for longer rate environment, we'll just keep repricing up the fixed rate loan portfolio and those Microsofts roll off and that will work out really well. Okay.

Speaker 2

Jim, your team modeled really in a baseline scenario or falling about 8 basis points of cumulative impact accreting to the margin and flat rate scenario 11 basis points. That's right. So it's material. And that's through 2025, Carl.

Speaker 3

Yes. Okay.

Speaker 5

And then on loan growth, so we've got deposit outstripping loans this quarter. I know you guys are trying to be very measured aligning the 2, but should we think about this quarter's performance is giving you a little bit of runway for the rest of the year? Or do you think kind of this case of loan growth is a fair assumption?

Speaker 2

I think it does give us runway. I think that we've proven with 7.5% loan growth last year, notwithstanding our acquisition of Centric in the new capital region and that we can generate deposits. And then through this Q4, even if it cost us a little something, something. And so we're excited about that. And we've also grown deposits, deposit households as Jim mentioned.

Speaker 2

And so we're going to taper and dial that in better and better each quarter. We're also excited about growing the corporate bank, maybe a real estate deal or 2 this year and turning that back on a bit. But more importantly, growing C and I Small Business SBA, which will become the core of the company over the next 5 plus years. And so we're optimistic about the future and our ability to grow.

Speaker 3

Okay. Thank you both. Before our next question, if I could circle back, I said 7 basis points of NIM accretion is actually 7.6, so it rounds at 8%. That's purchase account accretion for the Q1 just ended, just for the record.

Operator

Next question comes from the line of Kelly Motta with KBW. Your line is open.

Speaker 6

Hi. Thanks so much for the question. I guess kind of picking up on loan growth, picking up on the question there. Just wondering if you could talk a bit about your pipelines where you're seeing opportunities and the best opportunities where you're seeing the most demand from your clients?

Speaker 2

Yes. Right now on the consumer side, we have pinched the volume there really across the board and we're just replacing what is running off at best. On the commercial side, our SBA business has pretty good pipeline. C and I, the pipelines are building somewhat depending on the region. And commercial real estate, the demand there is still tamped down and we but there will be a deal or 2 there.

Speaker 2

So it's not fulsome like we were growing maybe 2 years ago where it seemed like each year we would guide in the high single digits and we would eclipse that. Now our guidance is probably more like mid single digits.

Speaker 6

Got it. That's super helpful. Sorry, I didn't mean to cut you off.

Speaker 2

No worries. I just have Jane Gerventz, our President and Mike McEwen, our Executive Vice President of Corporate Banking. Anything that the 2 of you would add? This is an important consideration on loan growth.

Speaker 7

Sure. Couple of things. We are bullish on SBA and it's important to note that only 25% of that hits the balance sheet. The other 75% ultimately gets sold and we get the gain on sale income in lieu of the balance growth. So we're seeing good SBA business.

Speaker 7

And Brian has reminded me that the SBA business that we are booking now is probably the best we'll see because it's able to be approved under today's interest rate environment. So this is all good stuff. Most of that SBA is business acquisition. And so we do like the SBA business a lot. And then as Mike said, the commercial business is a little bit more muted, but we are seeing pipelines growing.

Speaker 7

And

Speaker 3

I think

Speaker 7

customers and prospects are starting to finally think maybe the recession isn't right around the corner and they're starting to spend a little bit.

Speaker 6

Got it. That's super helpful. Thank you so much. And then, maybe actually then switching to fees, mortgage, you had a nice quarter for mortgage. And in your prepared remarks, you mentioned selling more production there and you just mentioned SBA.

Speaker 6

And I've heard from some other banks that the premiums have come back a bit in that line item. Just wondering if gain on sale was in both lines was pretty strong this quarter, If this is a good run rate for those items and any sort of puts or takes off of Q1 levels would be great.

Speaker 3

Yes. Jane, any thoughts?

Speaker 7

Well, we feel good about the volumes and you're right. The premiums have come down in both businesses some. It just means we have to work harder for each dollar. But I think the run rates in both businesses are you know, I don't I don't want to overpromise, but I I think we're about where we're going to be.

Speaker 6

Got it. That's helpful. I will step back. Thank you so much.

Speaker 2

Thank you.

Operator

Next question comes from the line of Matthew Breese with Stephens. Your line is open.

Speaker 8

Hey, good afternoon, everybody. Hey, Matt. Mike, just a point of clarification. So traditionally, when we talk about kind of mid single digit loan growth, it's usually all inclusive, but we've definitely made a difference this quarter in terms of talking about commercial versus consumer growth. When you point to mid single digit growth for the rest of the year, are you implying all in loan growth or you just commercial growth and that means we'll probably see loan growth similar to what we saw this quarter?

Speaker 2

I'd like to see it all in, which means we would get maybe a little tailwind from the consumer side, maybe a little bit. We've done a nice job of pricing our consumer and maintaining some volumes particularly in the indirect auto, which is an end market business. And so we can maybe get a tipping point there and maybe some tailwinds. And so but maybe be more it will be have to be commercially driven. But that is for the whole year and we would have to do a lot more in the undoubtedly.

Speaker 8

Okay. So all in loan growth is probably more than likely to be on the lower side of the mid single digit growth with commercial being kind of the X factor?

Speaker 2

I suspect you're right, but we're going to hold our feet to the fire internally 5%.

Speaker 8

Fair enough.

Speaker 6

Yes. Mike,

Speaker 7

we could turn up consumer loan volume, but we would have to blink on price and we'd have to blink a little bit more than we're comfortable blinking right this minute. The auto business is softening a little bit. So if we wanted to turn it up, we would have to compete on price.

Speaker 8

That's right. Got it.

Speaker 3

All right. And then, Jim, maybe just

Speaker 9

a couple for you. You pointed out

Speaker 8

in your opening comments that we do have a bit more liquidity on the balance sheet today. Securities also grew a little bit. I was hoping for some more color on those two items, strategy around securities at this point and liquidity deployment.

Speaker 3

Yes. Thanks for asking. We'll take some of the excess cash and deploy it in liquidities, but not aggressively. Really, securities right now, we can maybe get in the high 5s. We're getting 5.4 overnight at the Fed.

Speaker 3

Obviously, the securities has some duration. And whenever we buy, we're always looking at 4 to 5 year duration. So that helps a little bit in the falling rate environment. But the yield pickup is not tremendous in securities right now. We've gotten securities portfolio up a little bit from last year when it got a little uncomfortably low just in terms of on balance sheet liquidity.

Speaker 3

It's back up a little bit now. But we just always would rather be making loans and buying securities. So if we have a loan growth opportunity, we'd just rather deploy it there. And we really not we don't want to put it all into securities and find that we're borrowing overnight to fund loan growth. We're just ready for the loan growth.

Speaker 3

So we'll keep our eyes on it. But for the moment, my thought is some securities growth, we'll take some of that cash. I mean, if we have I already disclosed it, if we have $150,000,000 today, we'll take $50,000,000 If they have the sub debt on June 1, maybe whatever is left half of that in the securities growth and we'll see what happens with loan growth going forward.

Speaker 8

Okay. I appreciate that. And then, Jim, historically, you do provide some update on what kind of the forward outlook is for total fee income and expenses. Expenses came in actually better than expected this quarter and I appreciate some update there.

Speaker 3

Yes. And our guidance really isn't changing on those things. I think the fee income and the expenses are going to be consistent with the guidance we've previously given. So and I think that was on the fee side, $67,000,000 to $68,000,000 and it was $67,000,000 to $69,000,000 for the quarter. But I don't mean to change the guidance because I thought actually both the analyst consensus on those and our previous guidance was did need to be updated.

Speaker 8

Understood. Okay. And then just an update on overall credit, all eyes are on office and you have some great disclosures, but I'd love to hear a little bit more about kind of your top exposures in office, what the typical sizes of the biggest loans and how they're performing, if anything is keeping me up at nights?

Speaker 2

There's always a few. I get comfortable from the fact that in office we only have 11 loans over $10,000,000 and probably 18 between 5 10. So we're pretty granular. We've worked on our exposure somewhat over the course of the last year. And we're pretty thin on Central Business District.

Speaker 2

I think we have just $73,000,000 there. I have Brian Karup, our Chief Credit Officer with us. Brian, do you want to add some other color?

Speaker 9

Sure. And thanks for your question. We have 2 deals that are above $20,000,000 both are performing well, both have low LTVs, strong debt yields, strong DSCRs. 1 will mature as we saw in the slide number 18, Q3 of $24,000,000 $22,000,000 will mature. We're extending that loan for 6 months.

Speaker 9

We gave you the maturity ladder, so you could see it with greater clarity and emphasizes who we are and how we think about our portfolio. It emphasizes how we think about the granularity in our portfolio, how we break it out, how we stratify it and how we think about our overall office business. The slide is fairly complete. I'd be happy to answer any questions.

Speaker 8

What is the I'm sorry, what's the nature of the extension?

Speaker 9

They're looking to sell property and so we have agreed so we have a proactive approach with each one of our borrowers. In fact, Matt, we went out and did a physical inspection of each one of our office properties that will mature between 20 425. We wanted to better understand physical occupancy versus economic tenancy. And then in doing so, we meet with our clients and we say, what is the next step and what are your thoughts? With this borrower, they said our plan is to sell the property and we went to them and had the discussion about let's do a 6 month extension so we can have an orderly exit.

Speaker 8

Okay. That makes sense. And you feel like if there's any lost content, you're well reserved for that?

Speaker 9

Absolutely. It's performing. That's performing.

Speaker 8

Great. Well, I appreciate all the answers there and the color. Thank you.

Speaker 2

Thank you.

Operator

We have another question coming in, comes from the line of Manuel Neves with D. A. Davidson. Your line is open.

Speaker 8

Hey, good afternoon.

Speaker 2

Good afternoon.

Speaker 3

A lot of my questions have been answered, but I just want to I was wondering some of the marginal rates of things. What was the marginal deposit rates for what came on? And I'm going to ask about different loan yields as well. Yes. So the current we have numbers of different specials like the current short term 7 month seating special is 5.05 percent and then the money market special is 4.5%.

Speaker 3

If you blend the volume, the overall new volume rate on deposits coming was right around 4.8% for new deposits coming in. So that was 4.48% last quarter and it's coming down a little bit, right? You're able to price down a little bit? We are well, last quarter that CD specialty venture would have been a 5.1 percent, actually 5.25 percent and now it's 5.05 percent. So we broke that down.

Speaker 3

Yes, I don't and I'm sorry if I said, the overall blended rate should be down from last quarter. I meant to say this quarter is 4.8%, if I think about the fact that it should be

Speaker 5

down from last quarter, not up.

Speaker 3

And then, new loan yields, you had strong equipment finance growth. Remind me the yields there and indirect dollar? Yes. Indirect dollar is in the high 7s, that's the net of the dealer reserve. And the hang on, let me get it for you.

Speaker 3

The credit finance, I think, was right around 8% for the quarter. And I think you said earlier, commercial is roughly around 8% in general? Yes. Commercial is a little bit higher, a little in the low The selling finance revenue is 7.98%, so yes, 8% and indirect 7.6% the amount of yield for the quarter. So indirect, for example, that's 7.6% for the quarter, dollars 110,000,000 came on at $7,600,000 $109,000,000 rolled off at 5.24 dollars So just the way you like it.

Speaker 3

Okay, nice. I was going to ask a question about better OpEx. I think you called out a little bit of a hospitalization expense, didn't kind of improved linked quarter and it's just going to is that just kind of going to bounce back up a little bit? Yes. What you're saying?

Speaker 3

Yes. That's fair to say. We don't get too hopeful when hospitalization is light for a given quarter because it bounces around so much. Just based on our experience, we self insure, we talked about this before publicly, we lay off, we have a reinsurance for a layer of we reinsure a layer of costs once we get to these at a certain level. But if we have good experience in a given quarter, the hospitalization expense will be low, but it does bounce around.

Speaker 3

Okay. So it's staying as previously expected. I appreciate it. Thank you. Thank you, Ben.

Operator

Next question comes from the line of Frank Chiarelli with Piper Sandler. Your line is open.

Speaker 3

Good afternoon. Good morning, Frank.

Speaker 10

Just in terms of you guys talked obviously about the tapering the CD rates here and it seems like your commentary was also that you're not high you're not at the high end of the market, but you're still competitive. And just kind of curious what you're seeing so far? Is the idea that given the kind of loan growth expectations you laid out that you can be competitive enough on the deposit side to kind of grow the deposits in line with that and hold the loan to deposit ratio kind of flattish through the year? What's the thinking there?

Speaker 2

Yes, I think that's right is and we watch that daily, daily, every day in terms of what the flows in and out are. And it does impact, how we think about consumer lending to start with and whether we continue to meter it or not. And but the replacement yields in some of the portfolios like indirect auto, it's not where we started a year ago. And the team has done a great job getting our rates up there. Jane, do you want to any commentary you want to provide in terms of the sparkling water of liquidity and how it might help us grow loans?

Speaker 7

No, Mike. I think, Frank, it sounds so simple when you say it, Frank, but that's exactly what we're trying to do.

Speaker 10

And in terms of just curious like the pressure now in the existing portfolio, it is has that obviously in terms of deposit costs moving higher, is it just mostly new money at this point? Has the existing stuff sort of stabilized to agree?

Speaker 3

Jane, I have some thoughts, but why don't you lead us off?

Speaker 7

Sure. We see we still see new money coming in. On any given special, we see about 50% new money and 50% of our existing book potentially repricing. And we've been pretty gracious about that because we'd rather keep the deposits. And but we are seeing the rate of repricing slowing down.

Speaker 7

6 months ago, it was bad. 9 months ago, it felt horrible. Today, it feels like it's starting to normalize and pricing is really slowing down.

Speaker 2

Is that helpful, Frank?

Speaker 10

Yes. And then just lastly, just thinking about reserve to loan levels, I mean, it seems like some of the smaller banks are trying to build reserves a bit here, just given where some of the bigger banks are on reserve coverage of the total book. And for you guys, just kind of curious how you think about that. I mean, just given that commercial is going to be the driver here, what does that alone kind of say about the reserve to loan ratio? Should we, at the end of the day, just expect continued increase, modest increase in that quarter over quarter as you grow the commercial book?

Speaker 10

Yes.

Speaker 2

I mean, we obviously fund reserves when we have growth. And that's a key part and a component of building the reserve and that's what's built it in

Speaker 9

the past. And Brian, what would you add to that? Just that we have about $3,300,000 in specific reserves from the acquisition.

Speaker 3

We have about $2,900,000

Speaker 9

in PCD reserves. So we did grow from $131,000,000 to $132,000,000 in our reserve ratio. But we've got adequate reserves to support our business and potentially to support some growth.

Speaker 3

Can I just add, I think our approach is very thorough? It's a bottoms up approach. In other words, rather, there's just some thinking about it, I want to be clear, that's why you asked the question. It's not like we say, well, let's do this on the ratio and then find a way to solve for that ratio. Even though, anecdotally, you might hear bankers, like you mentioned, small banks talking about that and thinking that way.

Speaker 3

But ours is very clear from the bottom up. So if we say, hey, the economic conditions are changing, then our quantitative reserve would be changing to reflect that. If we see GDP or employment factors changing. And then some of the qualitative factors we look at, changes underwriting standards or staff, all the factors we look at, I think we made some changes this quarter. As well as loan growth.

Speaker 3

Yes, right, as well as loan growth. So and then we do all that work and they say, oh, it turns out that given the way the portfolio grew, it didn't grow that much, so the ratio is 1.32 rather than saying, let's find a way to get it to 1.32. So anyway, I don't know if that helps or not, but that's kind of the way we think about it.

Speaker 10

Yes. No, I guess I'm just thinking through like as you build what the reserves are in the commercial book, I guess, versus reserves on the consumer book as a percentage of total loans. I don't know if you have that handy.

Speaker 9

I don't, but I could we could get it back to you.

Speaker 2

We've had our reserve higher than our peers generally and that's with a pretty good mix between probably heavier consumer than commercial and almost fifty-fifty and really that could switch to a more of a 60%, 60% plus commercial just because that's where the spread is and that's where the customer relationships, the more robust cost sell and the fulsome depository is.

Speaker 3

Okay.

Speaker 10

I appreciate all the color. Thanks.

Speaker 9

Thank you.

Operator

There are no further questions at this time. Mr. Mike Price, I'll turn the call back over to you.

Speaker 2

Yes. Thank you, operator. And as always, we appreciate your engagement and interest in First Commonwealth. As we think about our 2024 strategic themes, we've shared these with you before and they really don't change that much from year to year. But we think about as an organization living our mission every day that is to improve the financial lives of our neighbors and their businesses.

Speaker 2

We do that well. And then growing our business and we think we can improve our loan pricing. We can improve partner introductions in the regional teams. We can grow our C and I lending each year going forward, particularly given the team that we put together. And then we also think a lot about getting better.

Speaker 2

So live the mission, grow, get better. And not just vaguely, but in every region, every line of business, every business support unit. And we're trying to become digital in every facet of our business. And so those that's where our heads are at. Those of you who know us, we talk about these things and we expect to get better every year even as we cross $10,000,000,000 And we have a little win taken out of our sales with Durbin this year and just stay after it.

Speaker 2

And this is a fun business. We make a difference in the lives of our consumers and small business in our respective communities. And

Speaker 3

it's a

Speaker 2

great business to be in. Thank you.

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Earnings Conference Call
First Commonwealth Financial Q1 2024
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