First Commonwealth Financial Corp (FCF) 2008 Q1 法說會逐字稿

Good afternoon. I would like to welcome everyone to First Commonwealth's first quarter earnings conference call. (OPERATOR INSTRUCTIONS). At this time I'll turn the call over to Rich Stimmel, Communications Manager at First Commonwealth. Mr. Stimmel, the floor is yours, sir.

Thank you, Mike. As a reminder, a copy of today's earnings release can be accessed by logging on to www.FCBanking.com and clicking on the investor relations link at the top of the page, Before we begin I'd like to caution listeners that this conference call will contain forward-looking statements about First Commonwealth, its business, strategies and prospects. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these forward-looking statements to reflect events or circumstance that occur after this call. Please refer to our SEC filings, including our most recent annual report on form 10-K for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the investor relations section of our website. NOw, I would like to introduce to you the President and CEO of First Commonwealth Financial Corporation, Mr. John Dolan.

Thanks, Rich. Good afternoon everyone. We certainly appreciate you joining us today for our first quarter earnings call. Joining me today is our Chief Financial Officer, Ed Lipkus, who will be providing additional details on our first quarter performance, and Mike Price, President of First Commonwealth Bank. He'll update you on the progress we're making in our wealth management, commercial services and consumer services lines of business.

I'd like to start off by stating that our strategy is to win in our marketplace by becoming the best community based financial in our markets. And first choice among clients, employees, and shareholders. I'm pleased with our first quarter results and I'd like to share some key highlights with you. Net income increased 2.1%, compared to the same period last year. Net interest income increased 2.3 compared to the fourth quarter of 2007 or 9.2% annualized, and has increased consecutively over the last three quarters. Federal loans increased $190 million and the provision for credit losses increased $200,000 primarily due to the increase in loan growth year-over-year. Net interest income increased 17.8% compared to the first quarter of 2007.

We had a great quarter of loan growth. Mike will talk to you about the strengths of our corporate lending group. However, I would like to discuss opportunities created as a result of market conditions and how our balance sheet allowed us to capitalize on them. Regarding the market, for credits over a certain size, on top of $10 million, the markets seemed to have seized up. The bigger banks are reticent to blend, and are much more cautious with their balance sheets. We see this especially in the commercial real estate and corporate finance, Both areas where we've grown appreciably.

Regarding our positioning, we'd like to think of ourselves as a community bank because we feel strongly that you win by delivering locally. Those community roots have served us well on the relationship side as we've gone upmarket over the last few years. We are finding that our size has given us an advantage versus smaller community banks with both our lending limits and our capacity. Conversely, as the credit markets have seized up, we find that there are fewer lenders than the supply of good quality credit opportunities on some larger participation loans. This has served us well and we've grown with some quality companies. Our relatively strong balance sheet in these troubled times has allowed us to follow some long standing commercial real estate relationships to adjacent or contiguous markets like State College or Morgantown, West Virginia.

Our pipeline remains strong. And this is perhaps a limited opportunity to simultaneously grow assets as a company both quickly and safely. We are also beginning to see improvements of our asset quality performance measurements. Nonperforming loan balances decreased $5.3 million and now represents 1.25% of our loans, as of March 31, 2008. Compared to 1.46% December 31, 2007. I'd also like to reiterate that what we previously disclosed. First Commonwealth is not a participant or underwriter in the subprime mortgage loan or collateralized debt marketplace, and therefore does not have any exposure to risks associated with these activities. All mortgage banked securities in First Commonwealth's portfolio are AAA rated. And backed by U.S. government agencies.

Over the past year, we've worked very hard to position First Commonwealth to become first choice of our clients, our employees, and our shareholders. To become a first choice financial institution, we felt it necessary to realign the structure of our organization in 2007 so as to enhance our ability to respond to the needs of all of our stake holders. This realignment took place in 2007 and continues to be refined. With this realignment and our commitment to find and retain the very best talent possible, we now have a corporate structure which facilitates open communication and team work and a management team that's focused on long term success. Our purpose of realigning the team was to better provide role clarity and alignment of structure with our strategy. We wanted to get the right people in the right seats with the appropriate focus. We believe we have accomplished this.

In 2007, our company recommitted itself to being responsive to our clients' needs and maximizing our customers' convenience. This includes a comprehensive review of products and services. We reevaluated our assumptions and perceptions about service We looked at how we defined exceptional service, and how we encouraged and supported throughout our company. We looked at our products. We reviewed and refined over half of our -- all of our products we offer, and we continue to review the remaining products. We established former processes that more clearly define our goals and monitor our progress. Every employee will have an individual scorecard by which their performance will be measured.

Once again, of this was done in an effort to become first choice of the communities we have the privilege of serving and to meet our responsibilities to our shareholders. To this end, I would like to briefly address our dividend, which I know is an issue in the minds of many of our shareholders. As you know, many of our larger competitors have been forced to reduce or eliminate their dividends to provide a source of capital. We recognize the value of our dividend to our shareholder base, and intend to grow our earnings to support our historically strong dividend. In addition, while our capital levels will continue to support dividends over the near term, we realize that we must achieve earnings growth in order to maintain our dividend at its current rate over the long term. As always, dividends are declared as the discretion of the board of directors, but our objective and the focus of our strategic initiatives is the achievement of earnings per share growth that supports our exceptionally strong dividend. I will now turn discussion over to Ed. Ed?

Well, thank you John, and good afternoon everyone. I want to start out by identifying the areas that I'll be covering on today's call. First, I will provide some details on our quarterly earnings and our net interest margin. Then I'll follow up with some additional information regarding loan growth and asset quality.

First Commonwealth reported first quarter 2008 net income of $11.1 million or $0.15 per diluted share compared to $10.9 million or $0.15 per diluted share in the same period last year. An $11.6 million or $0.16 per share for the quarter 2007. Net income increased $226,000, or 2.1%, as John indicated earlier year-over-year primarily due to an increase in noninterest income, partly offset by an a decline in net interest income, a slightly larger provision for credit losses and higher noninterest expense. Compared to the fourth quarter 2007, net income decreased $527,000 or 4.5%, mainly due to higher noninterest expense and provision for credit losses, partly offset by increased net interest income and a lower tax provision. Net interest income was up $926,000 or 2.3% from the fourth quarter of 2007. This improvement in net interest income is primarily due to increased levels of loans and investments and a 29 basis point decrease in funding costs. Despite significant Federal Reserve Bank reductions in short loans, and it's -- our net interest margin decreased only 4 basis compared to last quarter, 30 basis points compared to the first quarter of 2007.

In anticipation of the yield curve becoming steeper in 2008, we began to reduce our de-leveraging of investments toward the end of 2007. And we began to (inaudible) our funding to be able to react to the expected changing yield curve. Due to yield curve becoming steeper in the first quarter, we increased our investment securities portfolio 2.7% from year end as we began to get more favorable spreads. We do remain cautiously optimistic about our net interest margin for the remainder of 2008 as we are liability sensitive. However, certain liabilities have implied floors such as savings and certificates of deposits and a competitive landscape may prevent us from lowering rates further should the Federal Reserve continue this trend.

We did experience strong loan growth last quarter with total loans increasing $195 million or 5.3%. This growth was mainly in commercial loans with about 61% of this commercial loan growth coming in the C&I, commercial and industrial area. About 23% in the commercial real estate area and about 16% in commercial construction loans. Our commercial loan pipeline continues to be strong and is well over historic levels. Mike will provide additional insight into our commercial services line of business. Noninterest income for the first quarter 2008 increased $2 million or 17.8% from the first quarter of 2007, and increased $626,000 or 4.9% from the fourth quarter of 2007, primarily due to higher insurance commissions and increases in other income. Higher sales, additional producers, and enhanced calling program resulted in increased insurance commissions. Other income grew primarily as a result of increased letter of credit fees and swap fees, and Mike will provide more details on our sales execution.

Noninterest expense for the first quarter of 2008 increased $1.1 million or 2.9% compared to the first quarter of 2007, and increased $2 million, or 5.4% from the fourth quarter of 2007. These increases were primarily due to higher salaries from normal merit increases as well as increased occupancy expense and other operating expenses. We are beginning to see improvements in our asset quality performance measurements. Nonaccrual balances decreased $5.3 million from last quarter and now represent 1.25% of our loans as of March 31 compared to 1.46% at the end of the year. This decrease was primarily due to the successful workout of commercial credits, including the $4.3 million commercial credit relationship that we disclosed in the fourth quarter of 2007. Excluding the two large commercial loans that we had previously disclosed in 2007, nonaccrual loans as a percentage of total loans as of March 31. were 0.41%. Loans past due in excess of 90 days and still accruing did increase $6.4 million to $20.1 million compared to March 31, 2007. And the majority of this increase was related to one commercial loan that we feel is adequately collateralized by real estate. The provision for credit losses for the first quarter of 2008 increased $827,000 year over year. While we experienced payoffs on loans that carried specific allocated reserves that resulted in an improvement in credit quality, additional provisions were warranted in the quarter due to the growth in the commercial portfolio.

That wraps up my comments on our quarterly results. I would like to now turn the call over to Mike to take some time to discuss his focus on our lines of business and our opportunities. With that, it is my pleasure to introduce the President of First Commonwealth Bank, Mike Price.

Thanks, as John indicated earlier, our aspiration is simply to become the best community bank in Western Pennsylvania. I think we've generated good momentum in the first quarter of 2008, our corporate banking group had a strong quarter, and the wealth management group also performed well. Let me just say that we have some real opportunity to grow our consumer services business, which includes branch and business banking. We've solidified our retail banking operations with the hiring of Eric Ritter as the new Head of Retail Banking and he started a few weeks ago. He joins First Commonwealth with about 20 years of banking experience with both a large bank and a number of community banks as well.

As I think about our approach to winning in 2008 and beyond, just like to talk about five themes in our strategic process in each line of business. And these themes are first customer focus. We feel we need to be consumed as an organization with what happens between our folks on the front line and our customers and how we can make that better. And we need to deliver locally like a community bank with all the friendliness, care and respect that that entails. The second theme in our plan is talented leadership. And we need to retain, develop, and attract the most talented team in the marketplace. Our third theme is execution and accountability and our feeling is we need to become the best and most pervasive sales force and service organization in our market. Our fourth strategic theme is strategic focus. And quite simply, we need to focus on the right few levers in each of our line of businesses that will really drive results. Our fifth theme is partnering and vision here is that our lines of business will work together and become each other's best source of new business.

Let me briefly comment on the performance in our lines of business. Namely, wealth management, commercial services, and consumer services, and give you my perspective on our momentum on each area and the key strategic levers. In Wealth Management, we saw good year-over-year growth in 2007 and I think we've maintained that momentum and perhaps ratcheted up a little bit in the first quarter of 2008. Our insurance business here and investment business is up nicely with products like our investments products, where we see sales year-over-year up some 60%. And we've really increased the expectations around this important offering with our branch platform staff and I think we have better results. We have a good sales leader there and we've assembled a strong team of investment reps. And we've increased goals, some pretty simple stuff and we manage that week to week. We've also done a nice job with our employee benefits business.

And as I shift gears in corporate banking, John and Ed have shared some pretty strong first quarter results and we've seen our loans grow 10% plus since year end 2007. And our corporate bank has developed three key areas of competency and expertise. If a corporate finance group, we have a commercial real estate lending group, and we have a regional or middle market lending group. We have laid a good strategic foundation with our executive in charge there, his name is Joe Dell, and his team. I think we have a strong sales infrastructure with line of sight goals and incentives. Joe is a good hands on leader as well as his key lieutenants who run that business and we have strong accountability. We're very optimistic about that business there.

Our last line of business that I'd like to comment on is our consumer services or retail banking. I think here we've struggled the last couple of years. Our balance sheet ran off during that time, both consumer loans and deposits. Not surprisingly, our sales productivity fell as well. Whether you look at that on a per branch, or a per FTE basis. We have good first quarter signs. Let me share two in the interest of time.

On the consumer loan side we've grown our HELOC installment loan book for the first time in about 2.5 years. Just in the last month. And really it was on the strength of a well conceived first quarter loan campaign. We call it internally Successes Brewing. And our year-over-year sales productivity is up 30% whether we're looking at units or dollars. Encouragingly, in the first quarter we also grew our DDA and savings portfolio as well. And we consciously let our CD book dribble down slightly as interest rates got very, very competitive.

You might ask what are we doing differently. And I would characterize our approach as back to basics. Let me just talk to a few items. In all of our branches, associates now have score cards and they know precisely what's expected of them. We've changed our goals and incentives by really switching from kind of a widgets units mentality to more balance sheet measures that are more aligned with shareholder value and growth. We've done basic things. We've just begun a weekly sales rollup call where we review all the branch and region results and we stack rank each of the branches and all the goal categories as we review performance.

Another fun thing we've started is we've just started to do monthly blitzes where we go out and call on small businesses and corporate customers as an organization across the organization. And our first blitz in March we had over 50 teams make some 600 calls and we'll take that to the next level in the next few months. Don't get me wrong, there's still lots to do. But there's palpable progress in our retail business. We have some more important work to do, I think we need to build our small business franchise, perfect our sales culture and perfect our approach to our banking. I can tell you, we've made great strides on all three of these. But there's plenty to do. With that, I will turn it back to John. John?

Thanks, Mike. As I indicated earlier, I believe that we're well positioned to take full advantage of the opportunities that continue to result from the recent disruptions in the credit and capital markets. We can't predict how long this opportunity will last, but we intend to capitalize while it's open. We do recognize that long term growth requires improvement in our core lines of business, and as you've just heard from Mike, this is a significant focus of his current efforts. Mike and the team have made significant progress in a short period of time and I'm expected about our plans for 2008 and beyond. This concludes our discussion segment. I'd like to now open the floor to questions.

(OPERATOR INSTRUCTIONS). Our first question comes from [Tim Rosello] with KBW. Please go ahead, sir.

Good afternoon.

Hi, Tim.

The first is in regards to loan growth quarter over quarter and year-over-year. And I'm just curious about the run rate going forward. Should we be expecting the same type of growth or is it going to go down a little bit.

For the short term we have a nice pipeline and we'll continue to grow. I think quite frankly, to do this growth quarter over quarter is probably unrealistic.

And this is Edward Lipkus, Tim. I have to say that because of some of the conduit markets if not all of them drying up and the capital markets seizing up, we don't know how long that's going to last. It's hard to predict any kind of run rate on these types of credits. We're -- it's our expectation to minimize the run rates and we do strategically try to position ourselves to avoid it but it's really hard to predict.

Okay. Thank you for that. And the second question I have is in regards to reserves. I see that they've been declining slightly for the past couple quarters. Is this trend going to continue or should we expect them to level out at this current level?

That's an excellent question. It's Ed Lipkus. I'll say this. We've disclosed that we had two large credit problems that we are working out. We think we're working them out satisfactorily right now. We did believe our asset quality has improved over the last couple of quarters. We do an extensive analysis every quarter to make sure that our allowance is adequate. And the numbers are the numbers. We do a significant amount of modeling here. And we are very comfortable. Whether or not we would expect the trend to continue, we think we're using very conservative underwriting fundamentals. I don't have a crystal ball. But I can tell you that they've been in the band here north of 1% to say 115 of loans and probably remain in that band.

Okay. Perfect. Thank you very much.

Our next question comes from Matt Schultheis with Ferris, Baker & Watts.

Good afternoon. I wanted to focus in on your loan growth a little bit more. Obviously, you guys have a lot of C&I and a lot of commercial real estate. Commercial real estate construction, what are we looking at on the construction side? What type of building?

That's an excellent question. And certainly in this marketplace one might say commercial construction you think risk, you think -- we're seeing it across all areas. We're looking at commercial, office buildings, medical, health, hospitality, it's really a mixed bag here. We have some residential units, not a lot. We did branch out into State College area so we had a few deals over there.

Is that multifamily?

Multifamily.

Okay. And as far as the C and I, what would you say the average size company is that you're financing out of this new growth? And would you say this is companies doing 5 to $10 million in sales, small businesses or somewhere north of that?

We're seeing a wonderful opportunity for a bank our size. We're poised to take advantage in some of the capital markets right now. So we are seeing some looks, and it's all across the board. We are seeing a few national syndications. We are seeing a few large credits within our footprints. Nothing that I would say categorizes us as over the top here. But the C and I growth, because of the market seizing up, we're getting looks that were taken away from us in the last year or two.

And as far as your new efforts more aligning the branches the commercial lenders, it's obviously going to be somewhat smaller because they have to be branch dependent companies.

We are just -- this is Mike Price, Matt. We're kicking up our small business banking effort and we have those business bankers aligned with branches and those are credits that are probably average a couple hundred thousand and are all south of $1 million each.

And nice big margins on them, I'm sure.

Yes, and we feel like we're under-penetrated in that market and there's perhaps an opportunity to grow.

Okay. Obviously, your still have EFI loans which you're trying to work out here. And was wondering, my understanding, this ist just what I'm hearing through the grapevine, two types of EFI loans that have turned out to be fraudulent vapor loans, which are basically papers signed by made up people. There's nothing there. And loans signed by real people who are colluding on fraud. My understanding is that Sterling Financial walked away saying we're not going to take that one back. That's an issue between you and the borrower at this point. I was wondering if you have any comment related to that or if you've had any negotiations with PNC.

Let me say that I think I heard you say vapor loans? That's an interesting term. I've never heard that one before and I've been in the business 26 years. You're following this closely, and I think you know what my answer is going to be. This is a very delicate relationship that we're in. And I'm limited to what I can disclose. We have been forthright in our last 4 or 5 quarterly disclosures. We said in our press release here that we have $4.1 million in outstandings which $3 million have been classified as nonaccrual. We've been getting cooperation from Sterling. I would not categorize our relationship as one as anything less than that. At this point, anything can happen in these types of negotiations. And we stand where we stood for the last couple of quarters and should that change and we have to -- we'll obviously disclose it. That's kind of where we are.

Have you heard from anyone from PNC?

Yes. We are currently having dialogues with the folks. This deal did close on PNC on April fourth. And it's been over six months now. I haven't seen any sudden deterioration because of the -- usually, an acquirer will send some signals out through acquiree well in advance. And we haven't seen any change in their posturing, at least any material change. So we have discussions with them and that's where we are.

Okay. Thank you very much.

The next question we have comes from David Darst with FTN Midwest Securities.

Hi, David.

You indicated you're still liability sensitive. I wondered if you're now shifting to a more neutral position or becoming asset sensitive given the growth in the construction and C&I and also could you give us the percentage of total loans that are tied to PRAM rates?

That's a good question. I think for now we still see opportunities with deposit repricing in 2008. As I said earlier, we're cautiously optimistic. We do have a portion of our portfolio that's tied to prime and other live work. I would say that's probably somewhere between 30 and 35% of our total portfolio.

Okay. And what was the amount of income from the derivative and swap product. Is that a new product?

Well I believe -- just hold on for one minute. We strategically enter into these because we don't want to put the interest rate at risk on our books. And so it did give rise to materiality. So we don't have it on our income statement as a separate line item. I know there were several swaps we did during the first quarter. But none of them gave rise to materiality.

Okay. And then you indicated that you've done some shared national credits and some other participations. Could you give us the dollar amount of those?

Right now, that's not something that I would say has given rise to the level of concentration of materiality that we would want or need to disclose. So I really don't have that information right now. Let's just say that when we do underwrite these things, we apply the same conservative underwriting fundamentals and we're not taking the deals because of risk. We're in a unique position, David, because we're actually able to turn -- we're able to turn deals away that -- not because they're that much more risky but because we have such a healthy pipeline, we can choose to be pickier. These are deals that are top notch and it's hard for us to not underwrite them.

Okay. And then maybe a little bit of color on the types of loans that you're following your customers out of market to do.

You want color on the types of loans.

I'm sorry. You said you've gone to Wheeling and to State College and you're following some customers out of market.

In State College, I'm going to be real careful as to how much information we want to share here. We don't want to put ourself in a competitive disadvantage. We've strategically placed and LPO in State College because of opportunities and I think it's a healthy market and we've got some multifamily residential construction out there. There's some student housing. There's commercial construction that's underway right now. It's a robust area and we think we can continue to diversify our risks.

Generally, the clients are clients that we're familiar with. And we're able to follow them to those locations where they're growing and so we know them. We know the creditor-- the borrowers, and that's what makes it a good relationship for us.

Okay. That's it. John, I appreciate you taking the time to have the call.

Thank you. Sure, David.

And the next question comes from Rick Weiss with Janney.

I guess a follow-up question with regards to the loan growth. It just seems it came in so fast this quarter compared to last year when it was shrinking. And the loans that you're doing organically rather than the participations, is that coming from new business in your area? Or is it just picking up business that the larger banks are ignoring, passing on for now?

It's a combination of that, Rick. I'd have to say that it didn't happen overnight and it didn't just happen in the first quarter. There's been a lot of work over the last year and a half. And it takes a while to cultivate those relationships. However, some of the opportunities that did occur was because some of the larger banks started to stumble and had to walk away from some deals. Some were -- may have been relationships that we have been talking to and weren't able to be competitive with. But all of a sudden, when the competitors had to walk away, our deal looked a lot better. It's a little bit of a combination. Some of these larger lenders lost some of the participants as well. So they were looking to have somebody else as a participant. And we were able to do it, and they were good credits for us.

Okay. Are any of the larger lenders cutting back on their own loan officers? Can your actually pick up some people?

There is that possibility. That's one of the opportunities that the marketplace has afforded us. Good quality individuals within the confines of any restrictions that we have right now. But generally, yes, there's more people on the market. And available to look around to go to a good organization with a good franchise going forward.

Okay. And let me ask you back to the reserves. I guess the chargeoffs exceeded the provision this quarter, and I think it's kind of what happened in the December quarter as well. And actually it was kind of like what's the strategy or a time where provisions are going to pick up to maintain the allowance and we'll start exceeding chargeoffs as they normally do for you guys?

Rick, this is Edward Lipkus. Let me answer your question as best I can to say that we had, as I indicated earlier, we had some improvement on accruals. We worked out that one March $4.3 million nonaccrual that we put on the fourth quarter 2007 and with that, and some of the other workouts, we had -- we actually worked it out faster than we thought. We had chargeoffs related to that. And yes, it's a little bit higher than our provision, but right now, I can just reiterate that our reserve is adequate. We go through extensive modeling here. We don't target a magic number. We just put it through our normal process. If we were to make our provision equal to our chargeoffs, we would have had too much in our reserve and that would have been an undesired result as well.

Some of the chargeoffs that we had freed up some of our allowance and therefore that reduced the pressure on the provision. Okay. All right. Thank you.

Thank you.

And the next question we have comes from Mac Hodgson with SunTrust Robinson Humphrey.

Hey, guys. Just a couple of other questions on the loan growth. Some of these people have already asked. Could you give a percentage of the loan growth that you got as a result of the inactivity in the capital markets or the lack of the capital markets being out there for some of these borrowers?

That's a good question. I have to say maybe 20 -- two-thirds, that's in total C&I. But you are asking related to the syndication national credits?

I'm just talking about total loan growth in the quarter. How much of that is a result of that disruption in the capital markets?

This is Mike Price. And this is a bit of a slag, but I would say probably about half.

And I think somebody asked this already. But with that half also be the loans that you did to participations?

Not necessarily.

Okay. And maybe comment about the securities portfolio. I know it rose a little bit in this quarter. Is that something we should anticipate going on again in the second quarter?

Well, it's hard to say. We're being real selective on our investments right now. We're trying to get in here with spreads at a certain level. I'd be reluctant to try to give you any additional color.

And maybe finally on loan production, I know you guys have talked in the past about selectively entering new markets. Commentary on the possibility of opening up another loan production office in a new market.

We're going to continue looking at that. Right now we have our hands full. And our pipeline is very strong. But that's not always going to be the case. So we will look at some of the faster growing market areas which we have already begun to look at. But we aren't ready to pull a trigger yet. We'll try to keep the momentum going by looking at the appropriate places for those LPOs.

Okay. Great. Thanks, guys.

Thank you.

Mr. Dolan, gentlemen. there appear to be no further questions at this time.

Okay. Great. Thank you, everybody.

Thank you.

Thank you gentlemen. This now concludes First Commonwealth's first quarter 2008 earnings conference call. A replay can be accessed for the next 30 days by logging on to the Investor Relations page at FCBanking.com. Thank you for joining today's presentation. At this time, you may disconnect your lines.