Yahoo Finance First Commonwealth Financial Corporation (NYSE:FCF) Q1 2024 Earnings Call Transcript
First Commonwealth Financial Corporation (NYSE:FCF) Q1 2024 Earnings Call Transcript April 24, 2024
First Commonwealth Financial Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 Instructions] I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.
Ryan Thomas : Thank you, Desiree, 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 Grebenc, Bank President and Chief Revenue Officer; Brian Karrip, our Chief Revenue Officer; and Mike McKeon, our Corporate Banking Executive. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We've also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call.
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 should 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. And with that, I will turn the call over to Mike.
Mike Price : Thank you, Ryan, and welcome, everyone. Despite pressure on the net interest margin through higher depository costs, First Commonwealth beat consensus earnings estimates by $0.01 with $0.37 per share in the first quarter of 2024. Core ROA and the efficiency ratio were 1.31% and 55.5%, respectively. The bank set a number of earnings records in 2023 and had a particularly strong fourth quarter. That was certainly worth celebrating, but it affects most of the period-over-period comparisons. For example, in the fourth quarter of 2023, we had negative provision expense of $1.9 million due to the release of reserves. This quarter provision expense was a more typical $4.2 million. 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 $4.6 million over the last quarter, overwhelming the $1.2 million increase in interest income and resulting in a $3.4 million 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 pre-tax pre-provision 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 95.6% at the end of the first quarter. End-of-period deposits increased over $254 million or 11.1% annualized, while loans increased just 1.5% annualized or $33 million. 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 first quarter 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% right in line with our long-term mid-single-digit guidance. That commercial growth offset declines in consumer real estate balances and the movement in consumer balances is no surprise. We're now selling over 90% of our mortgage originations, including mortgage construction loans and in fact, mortgage gain on sale fee income increased over last quarter. Second lean products like HELOCs and HE loans 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. 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 that might appear from the outside like this was an uneventful quarter for us, but nothing could be further from the truth. We've made a number of internal management changes to maintain our momentum and ensure our success. Since hiring the 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&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.
In other words, we actively cultivate a culture of continual transformation and improvement, so that we can to steadily improving financial results year in and year out. And with that, I'll turn it over to Jim, our CFO,
Jim Reske : 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 ratio has 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 million of excess cash at the end of the quarter. The strength of our internal capital generation and our improved liquidity position has allowed us to announce two actions with first quarter earnings. First, a regular increase in the dividend of $0.02 per 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 million of our $100 million 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 up ahead bit of expenses. Second, 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 second quarter. And we have modeled further organic growth in our cap ratios in the second quarter as well. Third, 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%, and we're paying it off in funds that are currently sitting at the Fed earning 5.4%. So its redemption save the company approximately $1 million in pretax expense per year and improved the net interest margin or NIM by about 1 basis point. Our strong deposit build in the first quarter came at the expense of a 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 to 15 basis points matching a 10 to 15 basis point anticipated increase in the cost of funds, producing NIM stability. 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 first quarter, but the old ones that are running off and were in the aggregate about 7%, resulting in relatively modest replacement yields. On top of that, the loan portfolio yield was negatively impacted in the first quarter by the continued effect of received fixed macro swaps that we entered into several years ago. Fortunately, $25 million of those swaps run off on June 30 of this year, and another $50 million runoff in December. Those who only have a 1 basis point benefit to the NIM in 2024, but a further $250 million 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 on the high side of that range.
On the liability side, deposit costs increased by 25 basis points as we saw a $233 million decline in low-cost deposit categories, combined with a $283 million increase in the more expensive category. 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 we're attracting new dollars to the bank. While the cost of deposits went up 25 basis points, the cost of funds 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 a program and borrowed just over $500 million, while the Fed was still pricing the borrowings on the forward curve.
So we are grandfathered in so to speak, at 4.76% on those borrowings until next March. We didn't enter the program with the intent to arbitrage the rate. We simply borrow 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 first quarter 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 million 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 point suppressive effect on the NIM in the first quarter. 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 seasonally compared to the fourth quarter 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 fourth quarter and by higher occupancy expense in the first quarter. And with that, I'll turn it back over to Mike.
Mike Price : Thanks, Jim. And operator, if we could pause for some questions.
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