First Commonwealth Financial Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2025

There are 13 speakers on the call.

Operator

Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation First Quarter twenty twenty five Earnings Release Conference Call. I'd now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Speaker 1

Thank you, Regina, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's first quarter financial results. Participating on today's call will be Mike Price, President and CEO Jim Reske, Chief Financial Officer Jane Grebens, Bank President and Chief Revenue Officer Brian Suhocchi, Chief Credit Officer and Mike McEwen, Chief Lending Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental 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 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 statements. Today's call will also include non GAAP financial measures. Non GAAP financial measures should be viewed in addition to and not as an alternative for our 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

Thank you, Ryan, and good afternoon, everyone. First Commonwealth net consensus estimates was $0.32 of core earnings per share in the first quarter of twenty twenty five. Our return on assets of 1.14% in the first quarter was down from 1.23% in the fourth quarter as expenses rose and fee income fell. Loans grew at an annualized rate of 4.4% or $99,000,000 in total. Commercial loans accounted for $63,000,000 or 64% of the overall quarterly increase.

Speaker 2

Equipment Finance and Indirect Auto lending both contributed meaningfully. The pipeline and growth momentum continue into April. Net interest margin at 3.62% rose eight basis points with good fundamentals. Deposit costs fell to 1.99%. Interestingly, deposit costs continue their downward march even as we grew deposits at an annualized rate of 7.7% using end of period figures.

Speaker 2

As a team, we have remained focused on improving our liquidity as our loan to deposit ratio has decreased from 97% to 92% over the last two years. And as Jim will further describe, the NIM should benefit from macro swaps that are coming off throughout the remainder of 2025. Credit is expected to continue to improve assuming stable economic conditions. Key trends are good, including NPLs, Watch, OAEM, substandard and criticized categories, all of which peaked in the second or third quarter of last year. But they've fallen as we've resolved problem credits throughout the last two quarters.

Speaker 2

The team continues to closely watch the financial health of consumers, which comprise roughly 68% to 70% of U. S. GDP, about 40% of our lending business. At this time, the First Commonwealth consumers appeared to be in good shape. The tariff uncertainty and the prospect of a resurgence of inflation have roiled financial markets over the last several weeks.

Speaker 2

Importantly, the return of inflation would also further weaken consumers and business households. Fee income was down $1,500,000 in the first quarter of twenty twenty five. We are encouraged that the $3,500,000 hit each quarter to interchange income due to the Durbin Amendment after crossing $10,000,000,000 in total assets has largely been absorbed by good momentum with other fee businesses, namely service charges, gain on sale businesses, trust, insurance brokerage and swap income. Our efficiency ratio rose to 59.08%, up from 56.07% in the fourth quarter. Expenses increased $2,100,000 to $71,100,000 in the first quarter.

Speaker 2

Salaries and wages were the primary cause and more specifically incentive compensation. Total FTE has also drifted upward as we continue to invest in our regional banking teams alongside our equipment finance group. We view these investments as critical components of becoming the best bank for business. Centre Bank will legally close at the April and could provide a boost to efficiency and margin. We picked up some good talent and are genuinely excited about the strategic fit that Centre Bank brings to a market that is already well led and ripe for growth.

Speaker 2

The Board of Directors approved a dividend increase of $01 per share consistent with prior years, bringing our dividend yield and payout ratio to approximately 3.540% respectively. The announcement of tariffs on almost every country has led to uncertainty and the concern that a trade war, if sustained, could lead to disruptions of global supply chains, renewed inflation and an economic slowdown. We saw initial signs of this strain with the preliminary GDP figures this morning. Our bankers have actively reached out to clients over the last several months to gauge the impact of tariffs on their businesses and identify early signs of stress. Generally, our clients have been less phased by the administration's actions

Speaker 3

than we

Speaker 2

might have initially expected. On balance, while most commercial clients would prefer a more tailored approach, many believe that tariffs may ultimately benefit their businesses. For example, the steel sector has been a vocal supporter of the tariffs and believes they are necessary to remain competitive. On the flip side, other sectors have expressed concern over the tariffs. These include polymers, manufacturing, aluminum, coal production and chemical.

Speaker 2

A positive reflection is that many businesses have taken steps to secure supply chains and can pass on increased costs through price escalators because of their experience gained during the pandemic. Although tariff uncertainty could create loan growth headwinds, our pipelines remain strong and we have not identified any specific credit impacts yet. On the regional lending front, our Northern Ohio, Pittsburgh, Central Ohio, Cincinnati and Community PA markets are off to terrific starts. And interesting aside, the country's largest natural gas power plant alongside an AI data center is being constructed in in Indiana County, our home county in in Western Pennsylvania. At 4.5 gigawatts, the plant could power Manhattan and is expected to cost more than $10,000,000,000 and this is from a Wall Street Journal article on April 2.

Speaker 2

These types of projects are springing up throughout our markets, not all 10,000,000,000, but they're creating jobs and revitalizing economies. Good sign and good for our home county. Anyway, with that, I'll turn it off to turn it over to Jeff, to Jim.

Speaker 3

Great. Thank you, Mike. Mike already mentioned the expansion of our NIM, so let me start there. Our previous guidance was for NIM to be relatively flat in Q1, followed by expansion in the remaining three quarters of twenty twenty five. We were quite pleased to see eight basis points of expansion last quarter.

Speaker 3

We had thought that the need to grow deposits to fund our loan growth would hinder our ability to bring deposit costs down, but that wasn't the case. Deposit costs fell by eight basis points even as we grew deposits. On the asset side of the balance sheet, fourth quarter Fed rate cuts continued to be felt in the first quarter in our variable rate loan portfolio, but that was blunted somewhat by the fact that new loans were coming on in the low sevens, while loans that ran off were in the high sixes. That's why our loan yield was only down five basis points last quarter. By contrast, the yield on the securities portfolio was up 15 basis points, partly as a result of a small securities restructuring we did in January using the gains from the sale of our remaining Visa stock as we had previously disclosed.

Speaker 3

Purchase accounting marks from the Centric acquisition added five basis points to the NIM in the first quarter unchanged from last quarter. We expect that will continue to fade by about one basis point per quarter. In terms of forward NIM guidance, our new baseline forecast contemplates three Fed rate cuts up from two in last quarter's forecast. And in that scenario, we'd expect our NIM to expand to the high 370s by the end of the year, give or take a few basis points as always. If there are no cuts at all, we'd expect the NIM to expand another 10 basis points from there to the high 380s by the end of the year.

Speaker 3

And that gives you a sense of the impact of the rate cut. About seven basis points of the NIM expansion that we expect comes from the expiration of macro swaps with $150,000,000 expiring tomorrow, an additional $25,000,000 expiring in the third quarter and $75,000,000 in the fourth quarter of this year, and then finally an additional $175,000,000 expiring in 2026. Moving on to loan growth. Our previous guidance for mid single digit loan growth remains unchanged. Now to fee income.

Speaker 3

Fee income was down from last quarter by $2,600,000 We had about $1,400,000 of unusual gains last quarter along with a decline of about $600,000 in the first quarter related to the fewer number of days in the quarter, which we expected. So, that combination of $2,000,000 that swing of $2,000,000 was fully expected. More fundamentally, our SBA gain on sale income was down by about $1,000,000 from last quarter offset somewhat by a $500,000 increase in our insurance and wealth income. Our fee income of $22,500,000 actually came in right in the middle of our previous guidance of 22,000,000 to $23,000,000 for the quarter. We expect that second quarter fee income should be should be better than the first quarter, about $1,000,000 better than the first quarter or roughly $23,000,000 to $24,000,000 growing another $1,000,000 in the third quarter and then coming down by about $1,000,000 in the fourth quarter, which we attribute to seasonality in fee businesses like mortgage.

Speaker 3

Expenses increased by $2,100,000 over last quarter and at $71,100,000 were well in excess of our previous guidance of 60,000,000 to $69,000,000 for the quarter. As disclosed in our earnings release, first quarter results included about $1,500,000 in expense for finalizing incentive payments related to the prior year. We also had a $700,000 increase in snow removal costs, which were higher than expected. Salary expense was up slightly more than expected on higher headcount. Taking all of this into account, we believe that, including the pending acquisition of Centre Bank, which closes today, non interest expense should be in the 71,000,000 to $73,000,000 range for the rest of the year.

Speaker 3

Capital ratios benefited from a reduction in AOCI from 102,000,000 to $81,200,000 as well as retained earnings. Our tangible book value per share grew 16.3% annualized from the previous quarter and 7% annualized even without the AOCI. There was no buyback activity in the first quarter, timing the closing of the Center Bank acquisition. And we have 6,700,000 of remaining capacity under our previously authorized buyback program. And with that, we'll take any questions you may have.

Operator

We'll take our first question from the line of Daniel Tamayo with Raymond James. Please go ahead.

Speaker 4

Hey, good afternoon guys. How are you?

Speaker 5

Good.

Speaker 4

I guess first on the loan growth guide, sounds like things are still kind of moving in the right direction. I mean even more than that it was good quarter. Zeroing in, I guess, specifically on the equipment finance portfolio, just curious the momentum that you've been seeing there, if you think that continues from here? And if we did go into some kind of slowdown, just curious how you think that portfolio would react from a growth and also from a credit perspective.

Speaker 2

So far, so good on credit. We might have seen some pull through just because of the anticipation of tariffs, and perhaps that has increased the volume in the first three to four months of the year. We'll see. But we're seeing pretty healthy application volume now well into April. And I, actually, I have, Mike McEwen on the phone, who is Chief Lending Officer.

Speaker 2

Mike, what would you add?

Speaker 6

I would just add that part of the investment you referenced, Mike, was additional talent in the Equipment Finance Group. And we've also benefited a little bit Some of the larger foreign finance teams groups have pulled back from the market. And so that's probably helped us a bit too. But we've not seen a let up yet in the application growth. It's still pretty strong.

Speaker 2

Is that helpful, Dan?

Speaker 4

It is, Mike. Thanks. Yeah. Maybe on a similar vein, but just different book, the commercial books, the CRE as well as the traditional commercial. Just curious if you gave some color on borrower sentiment in your comments, but just curious if you had anything else in terms of what you're seeing from them in terms of pull through rates and how they're reacting to the whole uncertainty in Washington and tariffs and everything else and kind of your expectation for near term versus back half if there's a difference in terms of where loan growth could land?

Speaker 2

Yes. I'll hand it off to Mike. But I would say we have seen some pull through there on equipment. We're seeing commercial real estate more active than it certainly was this time last year, and so the pipeline there is pretty good. The construction book in commercial real estate

Speaker 2

I mean, we've been very intentional about wanting to grow the c and I book, and we feel like we're starting to have some success success there with even larger credits. And we build out our talent in the regional teams with two new presidents within the last twelve months or so and probably at least half a dozen to a dozen additional lenders, PM professionals. So that feels really good. Mike, what would you add?

Speaker 6

Yeah. I would just add that really the momentum started to feel good in the fourth quarter, the mood swings. The pipelines were building. So we're benefiting from activity that was generated in the fourth quarter, but we haven't seen a let up. The real estate developers have a little bit better view on cost.

Speaker 6

Rates were slightly down. And so some projects that were deferred are now being put in place. These are longtime customers of ours in our markets that we know extremely well. So that part of it, we feel pretty good about. And again, think the mood hasn't totally changed on the future, but our eyes are wide open based on these what happens the tariffs and so forth.

Speaker 6

But haven't seen a lot of yet. Yeah. So I feel pretty good.

Speaker 2

Hey, The only thing I would add that we didn't mention is just Janker, Benz, Mike, and I are out on a number of calls. And we just thought customers seem to be way ahead of us, in terms of their supply chain. Perhaps if they're getting tungsten from China or this product from Europe, they've already thought of how to deflect it to another country or to a domestic supplier. And I I think a lot of that came from the challenges that came with COVID. So even if it was a smaller family owned business, they almost it's not that they anticipated it or it wouldn't hurt, but they just seem to be dealing with it in the normal course despite the headlines of the last month.

Speaker 4

That's that's great color, Mike. Thanks for that. And maybe just a last one here on deposits. It looks like the growth in the quarter is really driven by the savings segment there. Curious if there was anything unusual happening there, if you guys had any color on that?

Speaker 4

And what kind of rates that the kind of new rates on the savings deposits that you're seeing?

Speaker 2

Yeah. I mean, I'll turn it to Jim and Jane. But it just seems like we've given up a little on the beta because we wanna keep growing deposits. And if you remember in the last cycle, we used the beta in the later stages to drive down our, deposit costs. And we just haven't gotten there yet.

Speaker 2

We still wanna grow deposits and be more liquid. So we probably have given up a little bit on rate and could have taken our deposit cost down a little quicker. It's also just a culture of deposit gathering where that's a big part of the goals and incentives of everybody from a branch manager to a corporate banker. Jane or, Jim, what would you add?

Speaker 3

Jane, go ahead.

Speaker 7

I would guess that much of the growth that you're seeing in savings is almost a substitute product to CDs. As we've been bringing down the rates on CDs, customers aren't taking the money out of the bank, but they might be parking it in some money markets while they wait and see what happens here. So I I think we still have much of it in the house, but but we're, it's moving around a little bit.

Speaker 4

Alright. That makes sense. Thanks, Jane. Thanks, Mike. Appreciate the, the color today.

Operator

Our next question comes from the line of Frank Schiraldi with Piper Sandler. Please go ahead.

Speaker 8

Hey. Good afternoon. Just in terms of Jim, just in terms of the NIM guide, can you share what that assumes for, you know, do you do you anticipate, deposit costs move lower from here without additional rate cuts? Or is that continued kind of steady state given that you expect or trying to grow the deposit book?

Speaker 3

Yes. Thanks, Frank, for asking because we talked about this on last quarter's call, so appreciate the question. It gives me a chance to clarify a little bit. Last quarter, we talked about how we took a very conservative line with our ability to drop deposits because we thought we really, really want to grow deposits. We wanna keep a loan to deposit ratio where it is in the low nineties.

Speaker 3

We wanna fund that growth with the deposits. So Mike just hinted at this moment ago. Our kind of pricing strategies are following that. So last quarter, at the call, we were saying we're not assuming rates are gonna fall on deposits. And and lo and behold, in the first quarter, we were able to lower deposit cost by eight basis points, which is great.

Speaker 3

But looking for their forecast for the rest of the year, that that I just I would reiterate the guidance for the first quarter. We're not an ability to drop the deposit rates. In other words, if I look at the $1.99 of total cost of deposits right now, the assumption is that holds fairly steady by the end of the year. So when I say our NIM can get to the high three seventies, that doesn't assume an ability to do it by dropping deposit cost. And if you could drop deposit cost, well, it could be even better than that.

Speaker 3

There'd be upside to that. I I would can I just add one more thought to that? Some of those assumptions on deposit costs, when we're looking at their historical betas and ability to drop deposits and need to fund it, were done, before we saw a lot of competitors dropping rates. And what we've seen in our local market, what we see when we look at the peer reports for the quarter, this quarter's like last quarter, everybody's dropping rates. And that's part of our story too in the first quarter, and Jane was alluding to it a moment ago.

Speaker 3

And see these mature money markets mature, we're able to present the customers with lower rates than they had and people are staying. So, we have done well to keep all the maturity short, and that rollover process is benefiting us just like everybody else. And so that assumption of not taking deposit rates down is probably, very conservative. But to the extent it's conservative and we're able to do better, then that it just gives it a little more upside to that NIM forecast. Hopefully, that's gonna help for you, Frank.

Speaker 8

Yeah. That's great. But just on that, just does that NIM guidance you gave or outlook, that that includes the center deal?

Speaker 3

Yes. That includes center deal. And I tell you, we're working on the marks of the center deal right now. We are closing. We're gonna get final numbers from them and then do the final work with our third party to do the marks.

Speaker 3

It's just not that significant to move the needle that much. It might be one or two basis points of that NIM forecast, but it's just not gonna be that. It's helped with additive and overall look. Well, we're very excited about the acquisition for lots of fundamental reasons. But in terms of the NIM guidance, it's not that big enough to move the needle that much.

Speaker 8

Okay. And then just lastly on buybacks. Obviously, now that you've got the deal closed, could change things. And so just curious your appetite or just thoughts given the pullback in shares on the use of buybacks as capital return here and any thoughts, I guess, around sizing that as well? Thanks.

Speaker 3

Yeah. Yeah. So I was watching the the stock prices in the fourteens. We thought this would be a great opportunity to boost out the market and now, back up, and we're gonna come out of blackout here in a little bit with an opportunity. But, sir, our capital priorities haven't changed.

Speaker 3

We wanna make sure we can capitalize growth and loan growth organic growth. That's become the first priority. Increase the dividend, steady rate, which we did this year again, and then look for these buybacks. We return capital to shareholders. We generated excess capital after the dividend of $20,000,000 last quarter, plus another 20,000,000 of AOCI, which you can't count on every quarter, but there's plenty of capital generation.

Speaker 3

So, we have not made any official decision to turn on the buyback, but, we would look at all those factors in the second quarter to see if it's appropriate to do so. Okay. All right.

Speaker 8

I appreciate the color. Thank you.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Carl Shepherd with RBC Capital Markets. Please go ahead.

Speaker 9

Hey. Good afternoon, guys.

Speaker 2

Good afternoon.

Speaker 9

Jim, just to pick up the deposit cost guidance one more time.

Speaker 3

Yeah.

Speaker 5

Sure.

Speaker 9

I just wanna get it straight. The high three seventies assumes a couple of cuts, and you're you're saying stable deposit cost even in buckets like savings or interest bearing demand in that scenario? That seems very conservative to me. So that's what I just wanna make sure it's not pricing or go ahead.

Speaker 3

It is. It is. And so, look, the whole bank we're redoing our reforecast exercise actually this month for the rest of the year, so that guidance might change for the next quarter. There's a couple of things going on. I think the the macro swaps alone give you, halfway there to the NIM guidance.

Speaker 3

And the rest of it, you can is is coming from positive replacement yields even as in a falling rate environment. So, yeah. I agree with you. Like, that that assumption on the deposit cost might be conservative. You you started to on this avenue of the the different categories.

Speaker 3

There's obviously mix shifts going out within those categories. So I'm not we're not saying that it's stable in every category across the board, but that's the aggregate cost of deposits, which includes time and and interest bearing staying stable. So we'll revisit that assumption here and update guidance as the year goes on.

Speaker 9

Okay. Sorry to pick at it. I know it's not the easiest thing to forecast, and you you do your best every quarter.

Speaker 3

Yes. Right. But I anticipated the question, so thank you very much, Carl.

Speaker 9

Can I move over to expenses? The FTE kind of ticked up a little bit over the course of the quarter, I guess. Is there any more planned for this the year? And then just anything else going on besides stripping out the incentive comp from last quarter and adding back center that you wanna flag for us?

Speaker 2

Yeah. The FTE is really an investment on, probably half of it on the commercial side of the bank, and pretty pleased with the prospects of return there. I think part of it is also just filling vacancies in our financial solutions network. And we're also gonna look closely at cost here in the second quarter. Feels like the run rate is a little higher than it should be, and we'll probably be back to you perhaps, in the next quarter or so with, some opportunities there.

Speaker 2

Jim, what do

Speaker 3

you wanna add? No. It's just, you know, we're happy to be able to pick up talent where we can. We're able to do that in some select pockets in a commercial bank. So that's a good addition to FPE.

Speaker 3

We've got some measures as well to make sure that our turnover rate is under control in our branch network and the people like to work here and stay here. So that helps the the TE count as well. Just back to the FTE count as well.

Speaker 2

Okay.

Speaker 3

Thank you both. Thank you.

Operator

Our next question comes from the line of Kelly Motta with KBW. Please go ahead.

Speaker 10

Hi. Good afternoon. Thanks for the question and congrats on getting the deal to close so quickly. Follow following up on on the expense question, maybe framing it in another way, you talked about, you know, the new talent you've hired, two new presidents and treasury management. Wondering, you know, acknowledging that you are paying close close attention to expenses, if there's any other areas where, you know, you think you might be opportunistic with adding talent.

Speaker 2

With adding talent, I think we've added to and bolstered our equipment finance group, and our commercial banking teams. Not at the time. I think that we're pretty pleased with our fee businesses, our gain on sale businesses, the staffing we have there, and wealth management, and they're contributing nicely. Mortgage, is probably up year over year, in terms of originations and volume. They're probably not at that point or inflection point where you would consider adding to some of those consumer lending businesses.

Speaker 2

So I I think we're pretty good. I we're gonna be off-site on Monday, and we're gonna talk about, getting better processes and, how we improve the flow through our bank in our operations areas. And, and, you

Speaker 3

know, we we

Speaker 2

will become more efficient than we were this quarter.

Speaker 10

Got it. That's helpful. And and then on the the SBA front, those gain on that gain on sale came in a bit We've seen that at a couple other banks. Wondering if you could share the drivers of that, if it was just pipeline there or gain on sale margins and your outlook for this business.

Speaker 10

Is q four more of a a normalized level? Or is would you anticipate this quarter to be a good run rate in the near term?

Speaker 2

You know, the it we're a little perplexed perplexed by that. The SBA was going along pretty well. I think, perhaps the just the longevity of higher rates now on those borrowers that have just slightly more leveraged, perhaps as part of the answer. I guess I'll I'll turn it over to Mike or Jane who are closer to the business. Your your thoughts.

Speaker 2

Mike, do want me to go?

Speaker 3

Yes. Sure.

Speaker 4

Go ahead.

Speaker 7

So couple things. We think that SBA gain on sale will be a bit frothier as the year progresses because of pipeline and the mix of deals that are in there. There's some construction, there are some construction deals in there that need to, to close before we can do anything with them, And, and we've got some larger projects in there that are just taking a bit longer to complete. But it's not a question of margin. The gain on sale, margin is, right around where we expected it to be so far.

Speaker 10

Got it. That's help helpful. Maybe maybe last question for me on the expense guidance. Just wanna clarify if that that includes the impact of of, the run rate of the acquisition and the timing of the conversion on that.

Speaker 3

Yes. Yes. It does.

Speaker 2

And conversion conversion is slated for, the first weekend in June.

Speaker 3

Yeah. Kelly, and actually, you know, we gave some of that guidance on last quarter's call. I I think you you all reflected it. I saw it reflected in the consensus pretty well for the expense run rate.

Speaker 10

Great. Thank you so much. I will step back.

Speaker 3

Thanks, Kelly. Thank you.

Operator

Our next question comes from the line of Matthew Breese with Stephens. Please go ahead.

Speaker 5

Hey. Good afternoon.

Speaker 11

Good afternoon. Sorry beat a dead horse here, but the NIM outlook just sounds really robust. And, you know, Jim, I was hoping you could, you know, maybe extend that outlook a little bit, granted there's more factors as we get into 2026. But is the outlook for the NIM into 2026 still kinda up until the right?

Speaker 3

Well, it it depends a little bit on the forecast. In the flat rate forecast, which we do to kind of bracket, what if there are no rate cuts at all, which just stays where it is? Yeah. It's great in '26. It keeps going.

Speaker 3

It's, so it gets to three eighty and stays in the three eighties, and it actually hovers in the the three eighties in 2026. But end end 2026 in the high three eighties. So, yeah, if we have this baseline forecast with the three cuts, then it stays in the right around $3.80. If the $3.79 stays around $3.80 next year. So it depends on that.

Speaker 3

But it's a good thanks for the question. It's a good opportunity to say. There are other assumptions in there as well. There's no recession forecast in that. So the part of the assumption, with the in in all these forecasts is that we're able to continue to grow loans, continue to put on new loans at the rates that we assume we're to put them on, and that will replace the runoff that we assume they're gonna have with a lower rate loan.

Speaker 3

You get the nice benefit of that pickup and replacement yield. So, but there's not there's no contemplated slowdown in any of that. So there are other assumptions in there, that are affecting them.

Speaker 2

There there is Yeah. There's only

Speaker 11

Go ahead, Mike.

Speaker 2

Yeah. Just let me muse for a moment. I mean, if rates come down quicker than that, we're pretty broad based in our offerings with, consumer products that are on the sidelines, particularly consumer lending out of our branches, a good mortgage capability that we haven't dismantled. And, you know, those businesses could really turn on in an environment like that. And, you know, I think our mortgage business made 10 plus million dollars a year for us.

Speaker 2

So it it just I I think we're hedged that if rates go down and certain kinds of businesses pick up, we just don't feel like it would be a train wreck. In fact, we think if rates went down a little bit and the yield curve was upward sloping and it just spruced demand a little bit, we could have the best of, both worlds in the consumer and the commercial banking side.

Speaker 11

I appreciate that. I I mean, in my career, a handful of times, you've seen a 4% NIM, usually not for very long. I'm curious if you think you start to see kind of competition erode margins as you hover in the March there.

Speaker 2

I I suspect. I I think, you know, we're we're a bank also that I mean, we're about 19 and a half percent fee income. Our peers are about 16 and a half. Our top quartile is probably, you know, two percentage points better than that. We really need to get there.

Speaker 2

I mean, we've come a long way in a decade, but we really need to be a better fee income bank. And we've got to drive that through our regional business model, which we put in place, and we have good product offerings in wealth management, the gain on sale businesses, insurance, and other places. And we just feel like we can get there and get that fee income up as well over time. And that's just all blood, sweat, and tears and what Jane and and Mike McEwen are good at and the teams. And that's that's just execution.

Speaker 11

Understood. Could you help me

Speaker 3

out with new loan yields? What are

Speaker 11

your pricing? Or what is the blended rate on the pipeline? Are you starting to see competition erode margins anywhere? If so, to what extent?

Speaker 2

Yes. I'll turn it over to Mike McEwen on that. I'd love to hear your response, Mike.

Speaker 6

I mean, the loan yields, as Jim alluded to, are coming in around 7% today. I will say that competitively, it feels like there's more competitive pressure today as folks are looking to grow loans. We have seen some slight moves down in margin and bids. Still pretty healthy overall, but you can anticipate I think that as folks are looking for more, to grow their portfolios, a little more pressure on that yield. But, it's still at a somewhat elevated level from where it is historically.

Speaker 6

We're just watching that closely as we select the right deals and the right clients.

Speaker 11

Got it. Okay. How much SBA exposure do you have on the balance sheet? And are you seeing anything notable credit trend wise there over the last bunch of weeks, particularly post tariffs? And then any notable exposures that might be more consumer oriented?

Speaker 11

I'm thinking franchises and restaurants and things like that.

Speaker 2

Yes. I'm going to turn it over to Brian Sohaki for that one. Great question.

Speaker 12

And I apologize. Can you just repeat the first part of it? What you referenced a specific industry, and I didn't catch the wording.

Speaker 11

Yeah. I was looking for SBA exposure that's on the balance sheet, notable credit trends overall, and then specifically if there's exposure to some of the more consumer oriented categories, and I'm thinking franchises and restaurants.

Speaker 12

Sure. No. Thank you. Thank you for repeating it. Yes.

Speaker 12

The SBA portfolio is quite diverse. We do have one individual that focuses on franchise lending. We've had a number of parameters, a box built around that business to ensure that it's franchises with a broad depth of locations and experience. We've built boxes around it to ensure that there's additional liquidity on the balance sheet of the individual as they start that franchise. So we feel pretty good about the business that we have in SBA for franchises.

Speaker 12

Beyond that, I wouldn't highlight any concentrations retail or otherwise that bring any concern. We sell the predominant share of our business and those that are on the books came via acquisition or as I think Jane highlighted earlier, we do a fair number of business expansion loans and those construction projects stay on the books until they're constructed and occupied. So feeling pretty good about the diversity of the book. Hopefully, helps.

Speaker 3

Yeah. And upstate,

Speaker 2

we have that for SBA footings on the balance sheet. We can probably get that for you by the end of the call. Yeah.

Speaker 11

Okay. And then just last one for me, Jim. As the swaps expire, what part of the average balance sheet are gonna be affected by that? Sorry for the JV question, but I'm just trying to figure out the average balance sheet with that rolling off.

Speaker 3

Well, the average balance sheet, the size won't change. I mean, if if the asset's there, the asset stays there. So right now, let's give you example. The one that's expiring tomorrow. They count on counting down the days, hundred fifty million dollars.

Speaker 3

That is we right now, we have received fixed swaps. So we're getting the sweat spread, excuse me, plus 0.595%. That's the received fixed. We're receiving point 595%. The day after tomorrow, we'll receive one month so far.

Speaker 3

We'll get a spread, whatever the spread is, plus one month so far, 4.327%. So that hundred 50,000,000 is still on the books. It'll stay there. It's just gonna pop up by the difference between 4.327 and 0.595.

Speaker 11

Okay. So is that loan yields will be affected by that? Is that what you're saying?

Speaker 3

Correct. K. Correct. Loan yield. So, yeah.

Speaker 3

I mean, that one swap alone is enough to add, what, $5,600,000 a year in income straight income.

Speaker 11

That's all I have. Thanks for taking my questions.

Speaker 3

You bet. Thank you so much.

Operator

And our next question comes from the line of Manuel Navis with D. A. Davidson. Please go ahead.

Speaker 5

Hey. I appreciate that the peak in kind of some of the credit issues was last year.

Speaker 7

Could you just kind of

Speaker 5

speak to the trend in provisioning from here

Speaker 3

and reserving?

Speaker 2

Yeah. I'll hand it over to Brian in a minute. We're we're about one thirty two reserve. I think about Mhmm. Last year, we had about 30,000,000 in charge offs and 29.1 in provisioning.

Speaker 2

So as you would expect, it kind of matched our charge offs. The first quarter is pretty good. Our charge offs are down, provisioning stayed high a little bit. And ideally, over the course of the year, they would match. And we're already in a pretty good position.

Speaker 2

We're probably seven basis points higher than our 10 to a hundred billion dollar peers, on the reserve. So we're in a good position there. And we also feel like, you know, some of the acquired loans that we can see the tail, the watch list and everything starting to dissipate. And we didn't really feel a lot from our legacy portfolio or as much over the last few years. Brian, what would you add?

Speaker 12

Yes. I wouldn't add too much to the reserve outlook. I mean, I'd anticipate it to remain relatively stable. We experienced loan growth in the first quarter, both on the funded side and the unfunded construction side. We'll continue to show growth in the reserve based on that.

Speaker 12

Pending macroeconomic environment, we'll see changes in our kind of qualitative side. But I think Mike covered most of it there.

Speaker 5

That's helpful. With the just shifting topic for

Speaker 3

a second, with Center Bank closing,

Speaker 5

is there any kind of updated metrics with that one? I know it adds density to your Cincinnati footprint. Anything anything to update there? It's already in your guidance, but just, maybe more qualitative how it helps with loan growth. And then any further thoughts on the next transaction?

Speaker 5

Kind of what would you consider going forward if any of your interests have shifted or just stayed on the same disciplined process?

Speaker 2

I would just add on Center Bank. We've gotten some unexpected good talent from that, organization. It's already integrated with our regional president there who are they're in the same space, and that's really positive in terms of cohesion and culture. We we get, several good lenders that, will hit the ground running and add to the team. So pretty excited about that.

Speaker 2

We've also felt like we got to the expense targets that we pretty easily and added some talent, even added some corporate talent to fill open positions throughout First Commonwealth. We're excited about that. I think that I think that we can Jim, you'll have to coach me here. If memory serves, it's kind of outsized accretive for the size. It was almost like two and a half, 3% accretive in, 02/1926 for bank that was pretty small.

Speaker 2

So we're we're pretty high on it. And, we also think that market is just ripe for growth. We have a number of our senior executives now that live in Cincinnati and have terrific, brands there personally. And I just I just really believe we could easily over the next few years, rapidly increase our deposit and loan footings there. And we just already have quality relationships with developers and other businesses.

Speaker 2

So that's a great place to start up. Regarding M and A, I mean, it's the full gamut. We we've done smaller deals. They've tended to do very well for us, and we've been very conservative, as you know, in terms of, being pretty picky. And and and almost all of our deals deals have been strategic and really added to our geography, primarily Ohio, where, you know, a decade ago, we we had we hardly had anything.

Speaker 2

And those those markets have been the lion's share of our growth over the last five or six year or last ten years. So I don't know that our appetite has changed much. I think there might be more conversations in the offing the last six months or so. Jim, what am I missing?

Speaker 3

Nothing. I mean, it's it's no. No. Nothing to add, Mike.

Speaker 7

Hey. Hey, Mike. One thing to add with Center Bank. I thought you captured it all beautifully, but, the one really nice surprise you know, we expected all of the good stuff that we're gonna get, but the one really nice surprise was the caliber of the mortgage operation. And so we think that'll help us, deliver the mission in Cincinnati.

Speaker 7

We think it'll help us grow the residential mortgage business as well as the home equity business and consumer businesses generally.

Speaker 2

Great comment, Jane. Thank you for that.

Speaker 12

Hey, Mike. If I might if I might just go back for a moment, the SBA balances on the book is about $165,000,000

Speaker 5

I appreciate all the commentary. Thank you, guys.

Operator

And that will conclude our question and answer session. I'll turn the call back to Mike Price for any closing comments.

Speaker 2

Hey. As always, we appreciate your interest in our company. We're excited about the future, you know, our C and I businesses in our regions along side, we feel like our great offerings in CRE, equipment finance, consumer offerings, mortgage. We also are a bank that has a granular depository, lots of households, and we're anxious to grow our fee businesses as a percentage of our overall revenue. Again, leveraging the regional model and our local teams and the relationships that we already have with clients.

Speaker 2

We also will be intentional and vigilant about our costs and and continuing to perform there as we have in the past. So thank you for your interest and look forward to seeing a number of you over the course of, the second quarter.

Operator

That will conclude today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
First Commonwealth Financial Q1 2025
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