Good day, and thank you for standing by. Welcome to the First Commonwealth Financial Corporation’s First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.

I would now like to hand the conference over to Ryan Thomas, Vice President of Finance, Investor Relations. Thank you. Please go ahead, sir..

Thank you, operator, 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 today will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Brian Karrip, Chief Credit Officer; and Jane Grebenc our Bank President and Chief Revenue Officer.

As a reminder, a copy of today'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.

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 2 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statement.

Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for, our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. And with that, I will turn the call over to Mike..

Hey. Thank you, Ryan, and welcome to those on the call today. I'll start with several first quarter headlines for First Commonwealth Financial performance. All in all, a very good quarter. Net income of $39.8 million yielded $0.41 in earnings per share, both quarterly records for our company.

ROAA was 1.77% and regardless of credit tailwinds, our core pre-tax, pre-provision ROAA was 2%. Net interest income was up $1.9 million to $69.4 million as our borrowers received forgiveness of the 2021 PPP loans. This PPP forgiveness help buoy margin to 3.4%. Our consumer lending categories were all strong with several delivering record originations.

Commercial lending originations had some first quarter momentum, but could not outrun liquidity-induced payoffs, PPP forgiveness and lower line utilization from our business customers. Geographically, our Ohio markets continue to lead the way in growth.

The team did a nice job of further reducing our already low-cost deposit funding to help strengthen the margin, as well. We expect excess deposits to start to slowly burn down as spending increases..

Thanks, Mike. Mike has already provided a high-level review of our financial results for the quarter. So I'll spend my time providing some additional details on our margin and our non-interest expense. The reported net interest margin or NIM improved from 3.26% to 3.40%.

New PPP round two net originations of $215 million in the first quarter almost perfectly matched the $216 million of net round one PPP loans that were forgiven, leaving PPP balances virtually unchanged at approximately $479 million as of March 31.

Not for forgiveness worked to the benefit of the margin, as expected, fortunately, these effects were telegraphed in advance and well-anticipated in our forecast and by the margin, as we couldn't help but note that consensus estimates of our spread income came with it approximately $400,000 of our actual figure of $69.8 million.

However, our consensus estimates for net interest income for the remainder of 2021 don't yet seem to reflect the anticipated recognition of fee income from PPP round two loans that we generated in the first quarter, which is of course completely understandable.

To be clear, as of March 31, we had $13.1 million in total PPP fee recognition remaining from both rounds, $9.5 billion of which is from round two. Of that $13.1 million, we expect to recognize $10.2 million in the remainder of 2021, $8.5 million of which is from round two.

These forecasts assume 90% of the balances from both rounds are forgiven by the end of year. On the other end, our core NIM excludes the effects of both PPP and excess cash. That improved from 3.29% to 3.36%, excuse me, in the first quarter, mostly due to improvement in the cost of interest-bearing deposits.

In one quarter, we took nearly a third of the cost of our interest-bearing demand and saving deposits off from 14 basis points to 10 basis points and about a quarter off of the cost of time deposits from 105 basis points to 75 basis points..

Thank you, Jim. Management is pleased to report our solid first quarter credit results, underscoring the effectiveness of our underwriting standards, the discipline around our portfolio management practices and the strength of our credit culture.

While we see the light at the end of the pandemic tunnel, the final episodes of the mini-series are still being written. Management continues to be prudent and reasoned as we navigate the economic recovery and the reopening of our local economies. Let's turn to the numbers.

Our Q1 commercial delinquencies were quite low at 0.03%, reflecting our hands-on relationship management approach to commercial lending. Our consumer delinquencies were well behaved at 0.27%. This is due to our strategy of early calling by our borrowers’ assistance team, as well as stimulus checks and early tax refunds. .

Okay.

Thanks, Brian and operator, questions?.

Your first question comes from the line of Steve Moss of B. Riley Securities. Please go ahead. Your line is open..

Hi. Good afternoon..

Good afternoon, Steve..

Good afternoon.

Mike, and maybe just start off with loan pricing here kind of seen just kind of curious as to what you are seeing for competition in your markets? I noticed your yields ex PPP were stable quarter-over-quarter, but curious of that dynamic going forward here?.

Yes. Just looking at our net production, Jim, I think it was pretty flat from quarter-to-quarter, maybe a little pressure on mortgage loans, installment loans, commercial fixed was pretty flat.

But tale of the tape, is that fair?.

Yes. That is pretty much - on the commercial loans are coming on in the low threes, that's been pretty consistent. Part of the story for us Steve, is the replacement yield story is getting better.

It's not – it hasn't gone away, but in the fourth quarter, we had negative replacement yields of 62 basis points, negative and this quarter was only negative 20. And so that's playing itself out like kind of like we thought it would and getting us closer to neutrality and it's helping stabilize the loan portfolio yield.

That's why this quarter, we saw an improvement. The loan portfolio yield was relatively unchanged, actually it was up one basis point that's not statistically significant. It was really on the deposit side, where we had improvements, so..

Is that helpful?.

That is helpful, exactly what I was looking for. And then, just in terms of sticking with the margin and the balance sheet here just you guys added securities this quarter, cash still went up. Just kind of curious on the rates of your purchases this quarter and maybe the potential for additional purchases in the upcoming quarter..

Jim?.

Yes. Sure. So, it seems quite a bit over the quarter, actually. As at the beginning of the first quarter, we were buying securities in the low ones, a little over 1% and most of what we buy is plain vanilla NBFs. We don't really look at the securities portfolio, that's the place where we want to take risk. So it's pretty plain vanilla.

But those deals were in the low ones. By the end of the first quarter, we actually were able to buy securities because of the steepening of the yield curve that were at 2%. But the yield curve has flattened out a little bit since then, that was in the 10-year up a little higher than yesterday.

It's come back a little bit and our preference is generally is not to extend duration in the securities portfolio. So we have been trying to buy securities in the four to five year duration window, but not really gone beyond that. So, those yields have come down south of 150 in the last week or so.

You asked about the securities portfolio in general and with that much cash sitting around we do expect to buy more securities going forward. We want to make sure that we maintain sufficient liquidity for our customers. If they spend that money, obviously, we anticipate some good loan growth.

So we want to make sure we take those funds and deploy them into profitable loan growth, which is of course our first choice. But even with all that, we will probably increase the securities portfolio somewhat over the course of the year..

Okay. That's helpful. And then, just one last one for me in terms of expenses here down nicely quarter-over-quarter.

Just kind of - and I apologize if I missed this, just kind of curious as to how to think about expense for the upcoming quarter and if there is any maybe a PPP impact this quarter?.

Yes. I don't know that the guidance has changed.

This is Mike, 52 to 53, Jim, I don't know if you want to add any color to that?.

Yes. That still looks good, seems to be the right guidance and we looked at the consensus forecast and didn't see any reason to update that guidance. We think it's a benefit of a few things within the first quarter.

I think you were asking about, if there is any one deferrals on PPP and that was in the total allowance giving earlier $428,000 that reduced to $428,000 in the first quarter. We assess any one every quarter production, but that was really associated with PPP round two.

So, and we have is purely figure just for the first quarter’s production for PPP round two..

Okay. Great. Well, nice quarter and thank you very much for all the color..

Thank you..

Your next question comes from Steven Duong of RBC Capital Markets. Please go ahead. Your line is open..

Hey. Good afternoon, guys. Jim, I appreciate the core NIM now. It's great, you guys are getting that to $325 million.

Maybe just a little detail on just the liability side, what do you have maturing on your time deposits? And where are you currently pricing them at?.

Yes. We have actually, I am glad you asked, we have some detail. I am happy to share with you. We have about $320 million in CDs maturing in the remaining three quarters of this year and that pool of CDs is currently yielding 60 basis points.

So, those are maturing and the current offerings we have the rack rates are not very different from the other banks in our area. CD pricing and for times haven’t been different terms tends to be fairly middle of the pack, but a new 12 month CD will be close to 10 basis points. Again - and that's not new news there.

That hasn't moved in a while that's pretty middle of the pack for our market. And what we are experiencing our rollover rates that are anywhere from one half to two-thirds of the maturing CDs rollover. So, that's 60 basis points of CDs $320 million for the remainder of this year.

We also have - in addition to that, Steve, another $81 million in money market accounts that had a guaranteed time on them and those are actually yielding 1.14% and those are going to be priced rated this year as well. So, there really is some new pricing opportunity. Overall, when your cost of deposits is 11 basis points.

That's not a negative carry versus the interest on excess reserves that affect, right? So that's getting to parity with the 10 basis points we get from the Fed, it's not a drag on earnings anymore. But there is some opportunity to bring down this further..

Right.

I guess, - and so, with CDs at you are pricing at 10 basis points are there actually people rolling it over into a CD at 10 basis points versus just putting in a savings account?.

Well, Steve, every season, think of then, every interest rate environment there is always a group of CDs that when we get to maturities on a roll without any action by the borrower at all. That’s across every bank and that's continuing.

So, in this environment right now, there is almost no one in our market are offering any time deposit specials at all and the remaining hold out for some of the banks that we're still offering higher rack rates has finally brought those down as well.

So there is – if you want a time deposit, the customer there is just not many places where you can go..

Right, right.

I guess, then, if we look into next year, is it possible that we should see cost of deposits like 5 to 10 basis points?.

Oh yes. Yes, I mean, we are 11 now total. The NIB is still growing too, right? So that helps the overall mix as well. But yes, well let me switch now, you could see that in the 5 to 10 basis points range for the rest of this year..

Yes. Right.

And you are pretty much limited on what you could do on the borrowing side, right?.

That's right. We have some borrowings that are going to roll off in May. I think there is a $50 million of FHLB borrowings that's going to roll off in May. But the way those are priced not worth paying prepayment penalty. So we just let it ride or let roll off, but also that will come up here in the next month with healthy NIM as well..

Got it. And just one last one just on this margin.

If that the 10-year stays where it is currently, do you expect your overall core loan yield to increase or just remain stable?.

Probably likely to remain stable I mean, the steepening has helped us and I think we've been pretty successful in our originations in getting the most spreads we can in our commercial originations getting floors and for our customers as well those picked up quarter-over-quarter. So I think we are pretty successful on that.

But given the steepening of the yield curve, given where the tenure is right now, we are probably looking at yield stability on the loan side..

Great. That's all I had and this is a nice preempt for the quarter. Thank you..

Thank you..

Your next question comes from Russell Gunther of DA Davidson. Please go ahead. Your line is open..

Hey. Good afternoon, guys..

Good afternoon..

I wanted to follow-up, Mike, on your commentary about the organic growth outlook. A lot of good color and detail there. Trying to triangulate to progression of the consumer strength and when that baton gets passed to the commercial.

Does your mid-single digit guide contemplate commercial growth contributing to the positive momentum? Or is the mix going to be more consumer-weighted here?.

I believe we could cross the Rubicon kind of late in the second quarter or in the third quarter. We are satisfied with production in the last two quarters. It's just the liquidity. The shrinkage in the line usage and the excess liquidity that created some payoffs kind of outran as a bit. But I expect that commercial side to ramp up somewhat.

So I think we could have both of them built by the second half of the year and moving in the same direction. In our small business lending, we really set some records in the first quarter with production. SBA hits the fee income. We had good momentum there. Indirect lending, good momentum. We just need cars and houses, the inventory shrinkage for both.

And then consumer lending branch-based, Jane Grebenc, has just done a great job. I mean, that number is up probably 30% year-over-year and that's mostly sales-related. Then of course mortgage, plus the mortgage gets converted into gain and sale income. It doesn’t – it’s not really hitting the balance sheet right now.

So, I feel good about the consumer side and the commercial side has always been the big engine for us and we expect that to kick in the next couple quarters..

Thank you, Mike. Yes, it's very encouraging on the organic growth outlook. And then, just switching gears last line of questions would be on the fee income side. Also encouraging to hear that $26 million, $27 million number on a quarterly basis despite mortgage coming down.

Could you guys just spend a minute in terms of what you think the drivers going forward will be of that fee income strength? And perhaps comment on the SBA gain on sale specifically if you could. Thank you..

Yes. I - just a couple comments and then, Jim can fill and perhaps Jane as well. But just we really haven't seen a lot in swap fees. That could create some tailwind and it hasn't. Mortgage is tapering somewhat, but remained strong in the second quarter. SBA loans we expect to have a nice quarter and have a good pipeline there.

Our brokerage business and trust business just get better every year. Interchange is strong. And so, you'll see – you might see a little taper in mortgage.

Jim or Jane, any color there? Any additional color?.

I think you hit the high points, Mike. I'd only add if those numbers reflect some tapering of the mortgage income that we anticipate to be even highest mortgage income will continue on the current trajectory, but could expect that to slow a bit. And then Jane, I'll turn it up to you if you have any other color on the thing that Mike was mentioning..

It's been a very good quarter for SBA. And we expect that to just get better. The SBA pipelines are very strong. So that won't show in the balance sheet. But 60% or more of our SBA business comes from referrals from small business lenders or corporate bankers. So we're happy either way. So the pipelines are very strong in SBA.

And the gain on sale in SBA has been stronger than I've ever seen it, 11%, 12%. So, I feel good about – I feel good about the non-interest income..

Thank you all for taking my question..

Thanks, Russell..

Your next question comes from Frank Schiraldi of Piper Sandler. Please go ahead. Your line is open..

Hi, everyone. Just wanted to ask about - I am sorry if I missed it, but in terms of share repurchases, I know you have a new program.

But just wondering your appetite there, given the move in the share price?.

Jim?.

Yes. And we're happy to have the program and the authorization to put that in place. We had looked at the price levels where we wanted to buy and we want to be more aggressive in the $14 and that's why the average price is $13.99 with the share price coming up a little bit. We had tapered off those purchases. But we are really good.

For us, it's not so much, sometimes people kind of calculation of - the earn back period across the period. The purpose for us is a question of generating excess capital and the best use of that excess capital. So, there is – the share purchases will continue this year and might even pick up from here..

Okay. And then, lastly, on the – and I know you guys touched on this in terms of the potential for releases going forward.

But in terms of the reserve-to-loan ratio, just wondering your thoughts on where that could trend to as some more uncertainty maybe comes out of the environment and is it best to kind of think about where we were early in 2020 before the pandemic or what's the best way to think about where that could sort of stabilize?.

Brian?.

Yes. Thank you. Thank you for your question. So we continue to be disciplined and prudent in the way we reserve. We look at our loan growth. We are going to look at our charge-offs, our quantitative and qualitative components of our model, including our high-risk model, our high-risk portfolio.

And then, we will potentially bring the reserves down depending on the economic outlook. Let me also note that, we had almost $13 million in our high-risk portfolio at year end. We have reduced that to about $6 million this quarter. So we’ve brought the number down consistent with the improvement in the economy.

But we'll continue to look at it and as the picture gets clear, we'll continue to dial-in to what is an appropriate level of reserves for our company..

Okay. Do you – I mean, it's always hard to say, but you got the high risk portfolio, you have, is that actively being looked at in terms of, do you see the potential to maybe move some of that off balance sheet this year.

I am just trying to get a sense if there is any reason to expect anything other than very normalized loss rate for 2021?.

We give you the high risk portfolio in the slide deck and what is hard for you to tease out of it is that the retail portfolio we reduced the reserve associated with that the high risk portfolio, cut it more than half. And so we are seeing great improvement in the retail side of our portfolio. Senior living, we've got one problem we're dealing with.

Energy, restaurants, we are watching closely, but we brought those reserves associated to COVID-related reserves down purposefully, because we are seeing improvement in that portfolio..

Okay. All right. Thank you..

Thanks, Frank..

Your next question comes from Matthew Breese of Stephens Inc. Please go ahead. Your line is open..

Hey, good afternoon..

Good afternoon..

Hey, Mike, just on the loan growth outlook, auto loans has been a strong driver or a strong component of consumer growth recently. We've heard more recently of some chip shortages in the area for I think particularly for the new car sales.

Just curious if you are seeing any impact there and as you look toward the end of this year if that could impact your ability to put new auto loans on the book? Maybe give us a sense for the mix between new and used auto?.

Hey, Jane, why don't you handle this one?.

Thanks, Mike. Thank you for the question. We are predominantly a newish used car lender, but the chip shortages, part shortages generally are affecting used cars as much as they are new cars. And we've had a very good first quarter, as you've noted. We are going to have a good April.

But I think it's going to – I think it's going to mute our growth a bit over the next couple of months. I think it will be good, but it could have been great. Supply is definitely being outstripped by demand..

Got it. Okay, I appreciate that. And then, Mike, just acknowledging the size of the balance sheet relative to the $10 billion thresholds in Durban.

I know M&A is something that's been brought up before just curious how conversations have gone? Are they picked up or not? And do you think is it M&A and your ability to acquire if something that could happen this year?.

We were very cognizant of the $10 billion indeed, we feel like we're prepared certainly from an enterprise risk perspective and – but on the acquisition side, I mean, ideally you either do something and find a way to stay under it for a year, which pushes it out in 2023 or it’s something larger. And there is nothing imminent right now.

There is lots of conversations out there. But I doubt that that's significantly different than like-sized peers.

But we also feel like with the impact of Durban it's incumbent upon us to find other sources of fee income to compensate for the loss in Durban and scale other businesses over a period of time and we feel like we've been on our way into a lot of things and we've been successful and the team on the operations and on the business development side have executed flawlessly, whether it's mortgage, indirect, enhanced consumer lending, SBA, we just have a good team that can build things out.

So, we'll try to help you both ways. We try to do it thoughtfully in terms of staying on this side or going decisively over and then we are cognizant of fee income as a percentage of revenue is important to us.

We've made great strides here in the last decade with lots of investment and we look to continue to grow those non-interest income and fee businesses..

Got it. Okay. Last one for me just on the digital banking front. It feels like that is a big push for all banks, especially on the back of COVID.

Could you just give us a couple of areas where you feel like on the digital banking side, you are different or set apart or further ahead on the curve than your peers?.

Yes. Couple places and I think we're getting very good at digital account opening, as a percentage of our overall new deposits. I feel like we've just put in a new treasury management platform and so we can play bigger than perhaps some of our community bank peers. Certainly, we are not doing foreign lock boxes and things like that the bigger banks do.

But nevertheless it’s just good utility there. I think our user interface and our customer experience from the mobile to the online, to the tablet is very contemporary and user-friendly has personal financial management tools that can help people with budgeting and other things. And this is the fun part of our business to maintain our relevance.

I also think we can - we could finance the digital with the community bank brand in a way that the bigger banks always don't have to win. I think you can like local and get a good digital experience. I have the expert on the line, Norm Montgomery who is our CIO.

Norm, do you want to add anything to that?.

I would just add that, last year, we set ourselves up well by changing our digital platforms as Mike indicated on both the consumer side and the business side. So, we are really ready to grow in those areas with the latest solutions..

Thanks, Norm.

Is that helpful?.

Very helpful. That's all I had. Mike. Thanks for taking my questions..

Thank you..

And there are no further questions at this time. I’ll turn the call back over to Mike Price, President and CEO for closing remarks..

Yes. Thanks again. We appreciate your sincere interest in our company. We look forward to being with a number of you over the next quarter or two. We appreciate the entry to terrific investors and just thank you for your efforts and your diligence in following First Commonwealth..

And this concludes today’s conference call. Thank you for participating. You may now disconnect. .