First Commonwealth Financial Corp (FCF) 2009 Q3 法說會逐字稿

Welcome to the First Commonwealth Financial Corporation third quarter earnings event. All participants will be in listen-only only mode for this event. After today's presentation there will be an opportunity to ask questions. (Operator Instructions). This is being recorded and at this time I would turn the call over to Rich Stimel, Communications Manager of First Commonwealth. Mr. Stimel?

Thank you. As a reminder, a copy of today's earnings release can be accessed by logging on at 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. Please refer to our forward-looking statements disclaimers from the earnings release for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.

Now I'd like to introduce the President and CEO of First Commonwealth Financial Corporation, Mr. John Dolan.

Hello everyone, thanks for joining us on today's call. With me today, I have Mike Price the President of First Commonwealth Bank. Mike and I will be discussing the third quarter financial results, our line of business performance and most importantly, what we are seeing in the trends of credit quality. As you are all aware, it was another challenging quarter with the economic conditions continuing to create headwinds particularly as it relates to credit quality of our loan portfolio. Our third quarter net loss of $3 million was a result of a $21 million provision for credit losses and $10 million other than temporary impairment charge. The $10 million in impairment losses stem from fourth deterioration of our hold trust preferred securities as banks continue to feel the stress of the financial and economic climate. However, deferrals and defaults by banks in our pools did slow down to 19 deferrals and defaults in the third quarter versus 30 in the second quarter. We've included a table in our press release that details each pool including our class rating, number of banks, deferrals and defaults and excess subordination. Any additional deferrals and defaults in the near term on the 10 pools will likely result in an immediate credit impairment going forward charge going forward.

During the quarter, we also added a significant amount to reserves, to address the $52 million net increase in nonperforming loans. Michael will get into more details but our reserve now stands at 1.6% of average loans outstanding compared to 1.85% at June 30, 2009. The provision for loan losses was $21 million and can be divided up as follows; $7.5 million to commercial and industrial loans, $6.8 million in commercial real estate, and $6.2 million in construction loans with the remaining $900,000 to consumer loan categories. Also $18.4 million in direct allocations of the $18.4 million, $9.7 million or roughly half of our direct allocations were for shared national credits and coincidentally about half or 54% in the direct allocations were for credits outside of Pennsylvania. Nearly 90% of the direct allocations in the provision for loan losses within Pennsylvania were for three loans in western Pennsylvania. Charge-offs were $15.6 million this quarter. 46% of the gross charge-offs were in C&I loans, 38% in construction loans. $11.1 million in charge-offs were as a result of two credits previously provided for both of which were mixed and outside of Pennsylvania.

Beyond the credit quality issues, we did see net interest decrease by 11 basis points to 3.62% in the third quarter but the margin was up four basis points over the same period last year. Net interest margin would have been up from the prior quarter if not for the reversal of $1.9 million of previously recorded income on transferred loans to nonaccrual, loans that were transferred to a nonaccrual status and a $757,000 was a result of loss from loans that were already on nonaccrual status. Alleviating some of this compression is the improvement of our funding mix as the cost of funds drop 12 basis points to 1.61%. We are allowing longer term CDs to run off while average savings and money market balances increased $164 million from the previous quarter. Average interest earnings assets were up $63 million from the linked quarter driven by increase in loans of $112 million during the third quarter. This comes out to $87 million in commercial loans and $25 million in consumer loans. None were outside, were originated outside of Pennsylvania.

Excluding impairment losses and net security gains, non-interest income was down $353,000 in the third quarter of 2009 compared to the same period last year. While we are seeing declines year-over-year in our trust business and service charges on deposit accounts, these declines are being offset by insurance and retail brokerage commissions which have increased nearly 49% year-over-year. We did see improvement in the trust income and service charge on deposit accounts from linked quarters. On the expense side, non-interest expense increased $2.9 million in the third quarter of 2009 compared to the third quarter of 2008 due to a $1.9 million increase in the FDIC insurance cost and $802,000 in the collection of reposition cost related to the nonperforming loans. Additionally hospitalization expense increased $510,000 quarter-over-quarter. On the linked quarter basis, non-interest expense decreased $3.4 million which included the $2.9 million special assessment recorded in the second quarter.

Despite the challenges that remain particularly the strain on our construction loan portfolio, our revenue generating activities continue to demonstrate solid fundamentals. On our balance sheet, year-to-date annual growth was double digit or near double digit in DDA and savings, commercial loans and retail loans. Just as importantly, our household year-to-date annualized growth is over 3% while our attrition rate remains low. We are winning new clients and preserving relationships that we have. We are growing loans and our -- lowering our cost by expanding our low cost deposits. Although we remain vigilant and monitor our credit quality issues and continue to capitalize on significant opportunities in both consumer and commercial markets, so that's where we find ourselves with a great deal of momentum but not without our hills to climb.

So here to discuss how these challenges and opportunities are likely to affect our lines of businesses, Mike Price. Mike?

Thanks John. As John indicated First Commonwealth continue to feel the strain of the deteriorating economic conditions surrounding our commercial loan portfolio mainly in our construction loans. However, there are fundamentals within First Commonwealth Bank in our lines of business that are continuing to improve. I will get into those, but first I would like to provide some additional details around our credit quality issues.

Total nonperforming loans increased some $52 million during the third quarter of 2009 which was basically the same increase that we experienced in the second quarter this year. The significant addition this quarter include a $38.8 million real estate construction loan in southeastern Florida for land to be used in a condominium development, a $10.8 million real estate loan for a landfill in western PA, an $8.2 million real estate construction loan in Lake Tahoe Nevada for acquisition of land which became 90 days delinquent at quarter end, a $4.5 million real estate construction loan for lot development in western PA, and a $4.9 million commercial loan to a manufacturer of semiconductors in Texas. The breakdown of the additions to the nonperforming loans were $56 million or 75% in construction loans, $12 million or 17% in commercial real estate, and $6 million or 8% in C&I loans. Additionally 72% of the additions were loans outside of Pennsylvania. In summary, you can see the basically the increased in nonperforming loans in the quarter was concentrated in construction loans outside of Pennsylvania.

Now looking at the entire nonperforming loan portfolio, at September 30, 2009, we have $133.8 million which represents 2.88% of total loans. The breakdown of nonperforming loans by type are 72% are construction loans or $96 million, 17% are commercial real estate or $22 million, only 9% in C&I or $13 million and 2% in real estate residential or $3 million. Also, about a third of our nonperforming loans or $46 million were shared national credits and nearly two-thirds of the portfolio were loans outside of PA. Looking at the percentage of nonperforming loans to outstanding loans by type, we have 27.67% of construction loans are nonperforming, large number there. 1.76% of commercial real estate loans are nonperforming and a relatively modest 0.99% of C&I loans are nonperforming. Again in summary, the majority of our nonperforming loans are concentrated in construction loans outside of Pennsylvania. In the past, we've spoken about being somewhat insulated in western PA from the full spectrum or broad of the recession. This seems to be holding true. It's noteworthy that our construction loans were nearly $348 million or 7.5% of total loans at quarter end. We believe it might take a while to resolve these nonperforming loans since they are real estate related. These types of credits typically take longer to deal with and it's difficult to give a clear outlook as each of these tend to have their own unique strategies. I apologize for rattling off so many numbers but we wanted to be as transparent as possible on our credit quality issues.

As I mentioned earlier, we are seeing continued improvement in some fundamentals within lines of business at First Commonwealth Bank. Our balance sheet growth is balanced between retail and corporate banking and we are striving for that and we are getting good loan spreads and a better mix of lower cost transactions and savings deposits. Household growth continues to be solid despite being in a market with declining population and our attrition rates are low. Regarding some of the fundamentals, total loans from year end increased nearly $231 million or 7% annualized. Of that $161 million or 7.9% annualized were in commercial loans and $70 million or 5.5% annualized were in consumer loans. If you recall, we exited the mortgage origination business about three years ago and this portfolio has been running off since. Excluding this plan run off, consumer growth outpaced commercial by some $12 million.

Total deposits increased $217 million or 6.8% annualized from year end, lower costing transaction and saving deposits increased $388 million or 21.2% annualized during the same time frame. These lower costing deposits represented nearly 63% of total deposits at September 30, 2009 compared to 57% at December 30, 2008. A nice shift in the mix of deposits. Regarding our specific lines of business, despite the challenges, the momentum that we experienced in 2008 and our lines of business have continued to carry well into the third quarter of this year. Specifically in consumer services, the loan growth experienced this year is a real turnaround particularly in comparison to the same period last year. Last year increase in consumer loans from year end 2007 to September 30, 2008, was $17 million or 1.4% annualized compared to this year's growth of $70 million or 5.5%.

I would also like to emphasize the improvement in average FICO scores at origination. In the first nine months of this year new consumer loans had an average FICO of 747 versus an average in the low 740s in 2008. Not a huge jump but it just reiterates the fact that we have not sacrificed our underwriting standards to generate this growth, and we are hopeful this should fair well for the future. The balance sheet traction is also supported by strong household growth of 3% in consumer households and 8% in small business households. Pittsburgh small business households are growing an other worldly 13%. Not surprisingly sales measures are strong in productivity is up impressively for the second year in a row. We are still continuing to see headwinds in service charges on deposit accounts as revenue is down due to declines in NSF overdraft fees which is a result of lower instant rates. Incident rates are really down 20% in NSF and overdraft. We just see consumers being a lot more frugal and playing it closer to the vest in these times. In summary, consumer services has made a turnaround and is growing for the first time in several years. Contributing factors here include sales infrastructure and execution, better small business performance, increased productivity, better performance in the offices, better marketing traction and certainly improved performance in Pittsburgh resulting from the dislodgement there.

In commercial services or corporate banking, we see some commendable balance sheet traction, particularly on the deposit side and that is certainly overshadowed by the unprecedented credit quality challenges and issues. The cross selling of deposit and cash management product continues to improve. Importantly, we've instituted lower hold limits and we are focused on purposely growing our commercial loan portfolio with more granular middle market loans in lieu of larger real estate loans and syndications.

In closing, we feel that we have good momentum in the consumer and small business area and we really feel like we have affected a turnaround in these businesses. We are experiencing nice deposit in household growth and wealth management is better integrated with our consumer and commercial offerings. We are seeing good cross sells and deposit gathering in the commercial services area.

So with all of that I will turn it back to John.

Thanks Mike. It's important to recognize that even though like everyone else we have obstacles we have to get around. Our commitment to the path we've chosen is ripping benefits even today. This disruption in the landscape within our market continues to offer an unparallel opportunity to welcome new customers to our organization and our success in this effort can be seen in the household growth that we've achieved. Even though we are experiencing uncharacteristic strains in our loan portfolio by historical standards, we continue to make improvements in our credit infrastructure, in our transitioning to more of a middle market approach to help mitigate future risks. We've identified the weaknesses in our construction loan portfolio. We don't seem -- we don't see the same type of deterioration in other loan categories. To the contrary indications are that consumer, C&I, commercial real estate loans, have held up reasonably well at this stage of the downturn. So we expect that the worst is behind us. Thank you all for your time here today and now we'll open the line for any questions that you have.

(Operator Instructions). Our first question comes from Damon DelMonte at KBW.

Your total construction exposure is $348 million or so, how much of that is actual land and development loan?

Mike, do you want to handle that?

Just looking for the data as we talk.

Let me jump in. $37 million is for residential. $65 million is for offices. By the way, most of the remaining categories that I'll rattle off here are for -- the lease space is pretty high in all categories. So $65 million is office space. $49 million is in student housing. $39 million is in hotels. $23 million in retail malls or strip plazas and then a variety of other smaller categories.

Okay. Great. And your total shared national credit exposure at the end of this quarter? I believe it was $336 million as of last quarter.

Okay. Current balance, $498 million. So those were some of the new credits that were added during the most recent OCC review.

I'm sorry. Can you explain how you went from $336 million to $498 million?

Those were the credits that were reclassified by the OCC, in the regulation.

What generally leads to a reclassification?

Pardon me?

What are some of the characteristics that require a reclassification? What did they discover in their review that made them put them in a category versus however you had them categorized before?

The additional participating banks. If it didn't meet the criteria one time, maybe not enough, didn't have the three banks or more, all of a sudden it gets less.

Okay. What is your total number of participation?

Dollar number?

Yes.

I believe that's -- we'll get that number for you before the end of the call, I'll give you that one.

Okay. And then with regards to your regulatory cap ratio, can you tell us what is your total capital ratio in your tier 1 capital ratio?

Sure. As John is getting you that number, the total participations are 537. You got that?

Yes I do. 537. Thank you.

Total capital ratios, 11.5%, tier 1, it's 10.3 and the leverage ratio is 9.2.

Okay. I think that's all that I have for now. Thank you.

Thank you.

The next question comes from Mac Hodgson from SunTrust Robinson Humphrey.

Good afternoon.

Hi, Mac.

You were talking about, you mentioned the total nonperformers like you said one third national credit, two-thirds were out of Pennsylvania. What's the scenario where it would be a credit out of Pennsylvania but not a share national credit? Is it something in Ohio or one of your neighboring states or what would you be out of market? It wouldn't be a -- less participant? I'm trying to think what is more important if it's out of market or if it's --

Let me -- if you look at the table at the end of the earnings release, you'd be able to see that the largest participation levels are those that are in states that are surrounding Pennsylvania, and the few that are outside that reach are generally both participation and next would all be participation. So that would be the larger portion of those.

And it has to be greater than 20 million and over three par pants.

To get back on the nonperformers, in particular that $38.8 million construction credit in Southeast Florida, it seems like a huge credit exposure for you all, and I just want to be sure I'm clear on what your internal credit guidelines are of how large a credit to go up to. Maybe how big is your largest credit. I would assume that is fairly atypical but you also had that $38 million credit that you worked through for the last couple of years. How many more credits do you have I guess of that size?

We have -- our whole limit is $15 million now on our largest exposure. Our largest exposure overall you could get it up to $50 million, but we have four borrowers now over $50 million and I would say that indeed that loan is atypical.

Okay. Can you give more color on it? Maybe just more details on the project, kind of where it stands and how much reserve you have against it?

I'm somewhat redescent to do that because we are in work out with that individual and just I would prefer not to do that.

Could you say how large the total kind of credit is, $38.8 million is your piece of it, how large the total credit is?

Just slightly larger than that.

Okay.

It's a direct loan, not a participation.

I got you. And maybe can you give us any color on, you probably commented on this a bit, on your margin outlook? There was some pressure this quarter from credit, interest reversals. How do you expect the margin to trend the next couple of quarters?

We feel that the biggest impact on the margin will be the biggest factor will be the pressure of the nonaccruals. That's why I tried to break it down to the components what was reversal of interest and what was the interest lost. Now the interest loss would have been, which was lost on the nonaccrual that had been outstanding for the whole quarter. So as that has increased at the end of the quarter, a little more strain on the margin at that point. Going forward.

Okay. Great. That's it for me. Thanks.

Thank you.

Thank you.

Our next question comes from Tom Alonso at Fox-Pitt Kelton.

Good afternoon, guys.

Hi Tom. It's been a long day, huh?.

Yes, yes. That participation number, that 537, what was that in the second quarter?

We'll get that number for you.

And the snakes went to 498 from 336. Is that --

Yes.

So would all of that growth just be loans that were reclassified so you could basically -- participations were down by a similar amount?

Participations that were nonsneaks. Yes.

Okay.

We are going to need to get back to you on your first question.

That $38.8 million you said was not a sneak, that was a direct loan, it was your credit?

That's correct.

Were any of the ones that you mentioned on the front page here sneaks?

I'm going to take a quick look.

I'm assuming Lake Tahoe and the Texas one?

Hold on one second.

The landfill was not --

I'm assuming the western PA loans are not, but the one in Lake Tahoe and the one in Texas are?

That's correct.

And then this $388 million, this doesn't have anything to do with the $20.8 million sneak that you guys put out last quarter, the real estate construction loan in Kissimmee?

No.

They are two different credits completely?

Two different borrowers.

Perfect. What else did I have? I think that was it.

Thanks.

Thanks, guys.

Thank you.

(Operator Instructions). You have a follow-up question from Damon DelMonte from KBW.

I just want to clarify the $388 million construction loan in Florida, you guys are the lead on that. And is that a participation?

It is not. We were the sole lender.

Could you take us how you have exposure in Florida? How would you originate a loan like that?

We had followed a borrower that we had some experience here in an adjacent state.

What is the total size or relationship with that borrower?

I think it's one of the credits over $50 million.

Are any of the other loans nonperforming at this time?

No.

Just that one. Okay. Thank you very much.

Thank you.

At this time we show no further questions. I would like to turn the conference back over to management for any closing remarks.

Okay. I thank everybody for your participation in today's call. We appreciate your interest in First Commonwealth and look forward to speaking to you again soon. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.