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Text: 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.
Third quarter net income of $34.1 million produced core earnings per share of $0.36, accompanied by core return on assets of 1.43% and core pre-tax pre-provision ROA of 1.79%.
This was a very good quarter for First Commonwealth with solid profitability, growth in credit metrics.
Other headlines for the quarter include first, excluding PPP loan payoffs, we're pleased with loan growth of 8.2% or $132.3 million in the third quarter with ongoing strength in indirect lending, home equity lending, commercial lending and mortgage lending.
Our growth is broad-based between commercial and retail lending disciplines and has become increasingly granular over the years.
As an aside, our loan growth over the first -- over the last two quarters has not yet benefited from higher line of credit utilization.
Second, the loan growth and improved margin enabled a $2.4 million quarter-over-quarter increase in net interest income to $70.9 million.
Jim will have more color on the net interest margin.
Third, non-interest income or fees grew $1.2 million quarter-over-quarter to $27.2 million on the strength of improvement in SBA and mortgage gain on sale income as well as higher wealth management income.
Importantly, our card-related interchange business generated $7.1 million in fee income.
Our regional business model has been a strong contributor to fee income growth with better teamwork and collaboration enabling us to deliver a broader set of solutions for our clients.
Fourth, our efficiency ratio increased to 55.27% as core non-interest expense rose some $3.7 million, primarily due to higher personnel expense, including higher incentive accruals based upon increased production, higher wages, particularly in entry level positions driven by inflationary pressure, higher hospitalization expense and then the hiring of the management team of the equipment finance division.
It is increasingly clear that we are not immune to expense headwinds in the current environment.
Fifth and importantly on the credit side, we guided last quarter to stronger credit metrics in the second half of the year in 2021.
That's exactly what is happening.
The third quarter represented our lowest loan charge-offs in nine quarters, a decrease in specific reserves for troubled credits coupled with general improvement in economic conditions led to a provision of just $330,000 down from $5.4 million in the second quarter.
Our reserves now represent 1.3% of total loans, excluding PPP and a 247% of non-performing loans.
The level of non-performing loans improved significantly from $52.8 million in the second quarter to just $38.1 million in the third quarter or 56 basis points of total loans.
Similarly, non-performing assets of $39 million at quarter end now stand at 41 basis points of total assets.
Subsequent to quarter end in early October a $6.9 million troubled credit was resolved and will be reflected in Q4 results.
Other notable third quarter items follow.
First Commonwealth earned the number one SBA lender ranking in Pittsburgh for the fiscal year ending September 30, 2021.
This is a significant accomplishment and reflective of both the talent in the SBA lending team coupled with the partnership enabled by the regional business model alluded to earlier.
In the third quarter, we continued to transform our technology to include the selection of a new loan origination system, as well as introducing several new cash management solutions or TM Solutions for our business clients.
We continue to be pleased with our adoption of our new mobile banking app, which is growing at an annualized rate of 18%.
As we work through our three year strategic plan, I would share three of our six areas of focus that might be most relevant to investors.
First, this accelerates the growth trajectory of our company, and we'll do this primarily through organic, broad-based loan growth across both our commercial and consumer loans.
Second, continue to increase digital relevance to drive customer satisfaction, ease of use and brand identity, primarily through the continued investment in customer-facing technology.
And third, anticipate and offset expense pressure to maintain operating leverage over a multi-year horizon.
I say this because we realize that building new businesses like equipment finance from the ground up will negatively impact operating leverage at first, but can have a powerful impact on operating leverage in the long run.
Regarding growth, we've received many good questions about our equipment finance efforts, so let me provide an update on our progress.
As you recall, we did a lift out from our large -- from a larger bank in June of a Philadelphia team with a 20-year track record of performance.
As we enter the business we expect the funds small ticket loans and leases on equipment on a nationwide basis.
The group's primary experience has been with essential used commercial equipment diversified across industries and equipment type.
The manufacturing, construction and professional service industries represent more than half of their originations by industry.
Primary equipment types included utility trucks, highway trucks, machine tools, trailers and manufacturing and packaging equipment.
A good example of a piece of essential use equipment would be a machine tool like a lathe that a small business needs to run its business.
We expect the average ticket size to be about $80,000 and an average term of 60 months.
Based on the historical performance of this team, we expect yields in the mid-5% range and spreads in the mid-4% range with charge-offs typically ranging from 55 basis points to 75 basis points.
If all goes according to plan, we believe that we can generate some $200 million to $250 million of equipment finance assets on our books by the end of 2022 before really hitting our stride in '23 and '24.
As Mike already mentioned, we were pleased with our financial performance this quarter.
Hopefully I can provide you with a little more detail on our net interest margin fee income and expenses.
The GAAP net interest margin expanded by 6 basis points this quarter to 3.33%.
Net expansion was driven by strong organic loan growth of just over 8% annualized.
The NIM expansion wasn't impacted by PPP.
Total PPP income in the third quarter was $5.7 million, up by only $200,000 from last quarter.
As of September 30, we had $152 million of PPP remaining on the books with $6.3 million in fee income that remains to be recognized.
We expect that most of the remaining PPP balances will be forgiven in the fourth quarter, which should help the GAAP NIM.
The core NIM which we calculate to exclude the effects of PPP and excess cash fell from 3.20% last quarter to 3.16% this quarter because we purchased $134 million of securities in the quarter.
Had we not purchased the securities and just let the money sit in cash, we would have excluded that cash from the core NIM calculation based on the way we calculate it and the core NIM would have dropped by only 1 basis point to 3.19%.
We think that the core NIM has bottomed out and should drift upwards from here as we redeploy excess cash into loans.
Our cost of deposits in the third quarter was down to only 6 basis points.
I'm pleased to report that our last remaining tranche of high cost deposits totaling $52 million at a cost of 1.65% repriced on October 13 subsequent to quarter end.
That alone will save us nearly $1 million a year in interest expense at about a point of NIM.
We will reap the benefit of that starting in the fourth quarter.
With that behind us, we're down to about $400 million in time deposits remaining at a cost of 36 basis points, three quarters of which will mature by the end of 2022.
So while some deposit repricing opportunity remains we are very far along in repricing our entire deposit book leaving us very well-positioned if rates rise.
With that in mind, we've taken a hard look at the deposit beta assumptions in our interest rate and risk sensitivity calculations.
In light of unprecedented levels of liquidity, we are revising our interest rate risk assumptions to reflect the ability to lag deposit rate increases for the first two 25 basis point rate hikes.
The result will be what we believe to be a more accurate picture of our asset sensitivity in the current environment.
You'll see this in our IRR tables once we published our 10-Q but to give you a preview a 100 basis point parallel shock will show an increase in the first year net interest income of over 5%.
That's roughly double the previous level of sensitivity so we wanted to explain the reason for the change.
Even without a rate hike however the NIM story in 2022 will be driven by the redeployment of excess cash and loans especially since we believe that deposit balances will remain relatively stable throughout 2022 and any loan growth above cash levels can be funded by cash flow from the securities portfolio.
This effectively rotates lower earning assets into higher earning ones.
This asset rotation should benefit NIM in 2022 even if rates don't rise and then if rates do rise our asset sensitivity will kick in and expand the margin even further.
Turning now to fee income; fee income of $27.2 million in the quarter remains a bright spot and seems to be one aspect of our company that is consistently underappreciated.
There's been talk of slowdown in mortgage all year but our mortgage gain on sale income actually increased by $400,000 over the last quarter.
SBA is another fee income engine that continues to gain momentum now that PPP is mostly behind us with SBA gear and sale income up by $700,000 from last quarter to $2.4 million.
Card related interchange income continues at new record levels for us of approximately $7 million a quarter, and deposit service charges after the off pace for much of the pandemic due to heightened cash levels and customer accounts have returned to more normalized levels.
Turning to non-interest expense, last quarter, our guidance was $53 million to $54 million, and we came in at $55 million for the reasons Mike described.
Like many of our peers, we are experiencing expense pressures mostly related to people costs like salaries and benefits.
While there are some normal variability and costs quarter-to-quarter, it's difficult to see NIE falling from current levels.
Fortunately, the pace of our loan growth gives us confidence that our revenue can outpace expense growth.
Finally, we repurchased 997,517 shares of stock during the third quarter at an average price of $13.35.
While we ended the quarter with approximately $10.3 million remaining of our $25 million share repurchase authorization we are also pleased to announce that our board authorized an additional $25 million share repurchase authorization yesterday.
We increased the authorization so that we could have repurchase authority available to redeploy expected excess capital generation in the fourth quarter and into next year.
And with that, we'll take any questions you may have.

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compname announces q3 earnings per share of $0.36.
compname announces third quarter 2021 earnings; declares quarterly dividend and authorization of a $25 million share repurchase program.
q3 earnings per share $0.36.
corp - qtrly net interest income (fte) of $70.9 million increased $2.4 million from previous quarter.

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