First Commonwealth Financial Corp (FCF) 2012 Q4 法說會逐字稿

Good afternoon, and welcome to the First Commonwealth Financial Corporation fourth-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Rich Stimel. Please go ahead.

Thank you. 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, and then selecting News on the left side of the page under News and Market Data. We've also included a slide presentation on our Investor Relations page, with supplemental financial information that we'll reference throughout today's call.

With me in the room today are Mike Price, President and CEO of First Commonwealth Financial Corporation; Bob Rout, Executive Vice President and Chief Financial Officer; and Bob Emmerich, Executive Vice President and Chief Credit Officer. After brief comments from management, we'll open the call to your questions. For that portion of the call, we'll be joined by Mark Lopushansky, our Chief Treasury Officer.

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 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 statements.

And now I'd like to turn the call over to Mike Price.

Hey, thanks, Rich, and good afternoon, everyone. Thank you for joining us. Fiscal year-end 2012 produced $42 million of net income or $0.40 per share versus $15.3 million in 2011. The increase was a function of a marked drop in provision expense for the year. Although loan and noninterest-bearing deposit growth was solid, these fundamentals did not outrun our net interest margin compression of 19 basis points.

On a quarterly basis, we posted $0.11 per share, and $0.12 per share, respectively, in the first two quarters of 2012, and $0.09 per share in the third and fourth quarters. The September fraud, coupled with OREO write-downs and related costs, created almost all of the second-half strain, and interrupted our momentum.

And holding my feet to the fire, I'm going to briefly give an update of the five strategic themes that I outlined on my first earnings call as an interim CEO just one year ago. I'll leave capital management to Bob, and we'll forgo talent, given the audience -- although we feel that we've made significant progress there.

But the first theme I shared a year ago was, clearly, putting our lingering credit issues behind us, and building a strong credit infrastructure that creates competitive advantage over time. Our clear credit progression stalled in the second half of the year, with third and fourth quarter noise and backup with the nonperforming loans. However, we are a much better credit organization than we were just three years ago. We appropriately modified our risk appetite, and adopted policies and concentration limits to ensure our credit risk profile is markedly better in years to come.

Just one example is our large credit exposures. We have significantly reduced the number of credits over $15 million to get the aggregate exposure to less than 50% of capital. Lastly, on credit, we have two large credits that are creating a logjam in our NPLs that Bob will speak to. Our outflows are probably not that unusual -- or, excuse me -- our inflows are probably not that unusual, but we need to continue to make progress with the few remaining legacy development credits from the '04 to '08 vintage that still tend to creep up and haunt us. Bob will speak to these particulars in some detail in anticipation of your questions.

The third strategic theme that I outlined was delivering a consistently superior customer experience, and becoming the best choice for businesses, their owners and their employees among Community Banks. This third game is the crux of our business, our brand and our value proposition.

We had good loan growth in retail banking with indirect auto, branch lending, and small business. And, in fact, they had record years in new loan production. This translated into 7% growth in retail banking lending, but is without first mortgage. In fact, as many of you know, our traditional mortgage business was really jettisoned about six years ago, and our portfolio shrank 26%.

We've obviously missed the mortgage lending tsunami that is really benefiting many of our competitors. And this is both a blessing and a curse. I think it's forced us to grow in other ways that will benefit us longer-term, but we have not benefited from the unprecedented times with fee income and loan growth related to mortgage.

On the Corporate Banking side and lending, we ended up with 1% growth for the year. We had well over $100 million in commercial real estate payoffs, which proved to be a headwind. Importantly, I think our new loan originations were the strongest in four years, and I think for the first time, are equally yolked between commercial real estate, middle-market and large corporate.

We grew our non-time deposits 6% and our noninterest-bearing DDA over 15%. And this was really on the strength of the cash -- our cash management offering and our sustained focus on business calling. In fact, our business DDAs grew almost 18%. Also driving the DDA or checking story is solid momentum with our Bank at Work Program, titled WorkSmart, which continues to account for roughly 20% of our new checking activity.

We also need to add some new sources of revenue to the mix here. We have a team that has a good, diversified background in banking. And we need to pick the right entry point for first mortgage and some other opportunities in retail, commercial banking and wealth. We need more legs on the revenue stool.

Lastly, in corroborating the business trends, we objectively measure customer satisfaction and household growth each month. The trends here are very positive.

Our fourth theme, if you recall, was enthusiastically migrate to a culture of operating excellence. We have four measures here. Currently, the most important to us is markedly better efficiency. We must stay focused on efficiency as a top strategic imperative. Progress in 2012 we felt was significant. Cutting through the credit noise, we feel our core noninterest expenses are now below $41 million per quarter.

There's lots of initiatives here. I'll just give you a few of the highlights. We've outsourced our statements, better product, less cost. We've changed our ATM network provider. We've removed a layer of senior management. We've optimized branch staffing. We've made important trade-offs with the marketing mix to reduce expenses. We've renegotiated contracts with some key providers of technology and other services.

Over the last couple of years, our full-time equivalents have decreased 226 or 14% from a recent high of over 1600, down to 1395 as of December 31, 2012. A key here has really been developing department budgets and plans, along with benchmarking. And that's helped immeasurably.

We also have done a full review of our IT platform, and we're looking to migrate to a more integrated and cost-effective approach to support the Bank for years to come. We've begun an RFP process, and expect to make decisions about a specific path and timeframe in the next three months or so. We'll keep you updated as this initiative progresses. We're still not satisfied with the transformation, given the new reality and where the margin might take us over the next several years, so it's really doubly important we stay focused on efficiency and it remains a top priority.

With that, I will turn the time over to Bob Rout for a more thorough financial review.

Thank you, Mike, and good afternoon, everyone. As Mike just mentioned, our earnings per share for the quarter was $0.09, giving us $0.40 earnings per share for the full year, and a substantial improvement over the last couple of years. I will provide a little more color on that performance, starting with net interest income.

Like most banks, we, too, are feeling the effects of this unusually low interest rate environment. Our net interest margin has contracted by 19 basis points or 5% over the past year. However, our net interest income has only contracted by 1%. Loan growth, loan pricing discipline, and paying particular attention to deposit pricing and also deposit mix, has been extremely helpful in mitigating this difficult environment.

On a linked quarter basis, we actually saw our net interest margin increase by 3 basis points. Some of that increase was benefited by some acceleration of fees for loans that either paid off or amended. But we were also able to decrease our deposit costs by 5 basis points this past quarter, through growing DDA accounts, and again, by watching the pricings on our maturing CDs very closely. Going forward, we expect continued challenges with the NIM, until the Federal Reserve Bank modifies its accommodation strategies or until the economic demand accelerates.

Bob Emmerich will be following my presentation with additional detail on credit activities this quarter, but provision expense was $5.7 million, and OREO charge-downs were $3.2 million. Both of these areas represent a substantial improvement over last year on both a quarterly and full-year perspective.

Our noninterest income trends continue to reflect a lot of credit noise from OREO gains, OREO rental income, security gains, and credit adjustments for commercial loan swaps. This past quarter, we did have a $900,000 credit adjustment for one of our commercial loan swap arrangements that tripped into nonperforming status this quarter. The customer continues to make payments, but we thought it was prudent to fully reserve the market value of that swap until a clear direction on that loan is determined.

After you pull out the credit effects and one-time security gains, some areas of note in the recurring noninterest income categories would include -- we continue to see strong double-digit growth in card-related fees as result of us increasing DDA households, and a steady consumer preference shift for these types of payments. That consumer shift has also had a counter effect on NSF fees. There are definitely less checks being written these days, and consumers are also certainly more sensitive to NSF fees in this economy.

Account analysis fees for our commercial customers has had very good growth this year, as a result of our ongoing strategic focus for gathering business deposit accounts. Annuity sales continue to be weak in this low interest rate environment.

Noninterest expense has also been affected by all of the credit noise, significant external fraud last quarter, and severance payments, as we continually strive to right-size the staffing levels. As I have mentioned previously, we believe we need to get core noninterest expense levels down to that $40 million to $41 million per quarter run rate. After you strip out the credit and nonrecurring issues, we are now in that range.

But we also believe that there is much more opportunity as we refine our IT structure, our operating processes, and our retail distribution methodologies. Operational efficiency is a big part of our strategic plan objectives over the next three years.

Another strategic theme for us is to thoughtfully manage capital. That capital plan includes a lot of stress testing. We want to be in a well-capitalized position even in the most severe stress scenarios, while at the same time, we want to ensure sufficient capital to support long-term growth prospects and shareholder dividends.

Under this framework, we initiated a $50 million common stock buyback in June of 2012. To date, we have repurchased approximately $39 million of that authorization. Yesterday, our Board of Directors approved an additional $25 million common stock repurchase plan. We also plan to redeem $32.5 million of fixed-rate Trust Preferred securities that are paying a rate of 9.5%. Both of these actions are modestly accretive to earnings per share and net interest margin, and will have the effect of reducing our regulatory capital ratios 100 to 110 basis points. The exact amounts will, of course, depend upon buyback, timing and prices.

We always get questions about our effective tax rate. Ours is currently at 26%.

So with that, I will turn the discussion over to Bob Emmerich, our Chief Credit Officer.

Thank you, Bob. First Commonwealth had an increase in nonperforming loans in the fourth quarter of $14 million. Within the credit arena, I suspect that will be the focus of your attention this afternoon, and I will cover that in detail. Before I get to that, I would like to point out some positive outcomes for the quarter.

Provision expense for the quarter was favorable at $5.7 million. That compares to $6.7 million for the third quarter and $21 million for the year, or 49 basis points on average loan outstandings. Net charge-offs were modest at $2.6 million for the quarter and $14.6 million for the year, or 35 basis points. The two largest charge-offs that the Bank took in the fourth quarter were further write-downs on two Marshall Bank participations, which totaled $1.245 million.

The consumer loan portfolio continues to perform well with what we consider to be favorable loss rates. We also believe we have built a diversified loan portfolio with a balanced mix between corporate lending, and consumer and small business lending. And within corporate banking, a balanced mix between C&I lending and investment real estate, and between property types within investment real estate. We are conscious of not becoming overly reliant on syndications as a source of new loans, but view syndications as an important tool to diversify the portfolio by industry classification.

You will recall that in the third quarter, First Commonwealth had an increase of $9 million in nonperforming loans compared to the second quarter of 2012. That was driven largely by two items. First, we reclassified as nonaccrual the $4.8 million in consumer loans accrued by residential property that were 150 days or more past due.

Second, the Bank placed on nonaccrual a $6.7 million loan to a Western Pennsylvania nonprofit entity that operated an inpatient care facility. As an update on that credit, a related entity, that is not obligated on the loan, had continued to make payments to keep the loan current. But the borrower has stopped using the facility and just recently filed bankruptcy.

As I mentioned at the start, in the fourth-quarter, nonperforming loans increased $14 million. That increase was driven primarily by five new NPLs as aggregate UPB totals $15 million. Two are nonaccrual and three are TDRs. The non-accruals are a $4.6 million participation in a loan originated by Marshall Bank, which is secured by a hotel resort in Washington state. This property has performed satisfactorily with adequate debt service coverage. However, the note ballooned in August. The agent bank had negotiated an extension of this note under terms we felt were appropriate.

Three members of the bank group held out for better terms and the negotiations still have not concluded. And as much as the note was over 90 days delinquent at year-end, the note was classified nonaccrual. You may remember that First Commonwealth purchased eight participations from Marshall Bank that totaled $59 million. All of them have now gone bad. Three loans remain on the books, with a total balance of $10.6 million. And one was taken into OREO and carries a balance of $2.2 million.

The second nonaccrual is a $4.9 million loan on a student housing property in Pittsburgh. This property was under a master lease with an educational institution that has had declining enrollment. That institution did not extend the master release when it matured in November. The borrower is looking to reposition the property, but cash flow is inadequate to service the debt.

The three TDRs are as follows -- a $3.2 million loan on a retail property in downtown Pittsburgh. The property has high vacancy and does not cash flow. The guarantors have been keeping the loan current and have funded a debt service reserve. The loan ballooned in April of last year.

The Bank granted the borrower a six-month extension while they look to reposition the property with a new construction loan from another bank. A second six-month extension was granted in October. Given the delay in completing the refinancing, and the multiple extensions of the balloon, the loan was classified as a TDR.

Second, a $1.5 million balance on a $2 million line of credit to a homebuilder for a project in central Pennsylvania. The project has been slow, but absorption picked up markedly in 2012. The borrower is classified substandard due to a history of losses, given the weak residential real estate market. This line of credit matured in December, and the Bank extended the line to allow the developer to finish out this project. That line extension resulted in classification as a TDR.

Third, a $750,000 tax anticipation note to a municipality. TANs need to be repaid within one year. This small municipality was unable to pay more recent answer note at year-end. FCB agreed to a term payout, which resulted in classification as a TDR.

The total NPL balance is, of course, the result of both inflows and outflows. We have not seen as much success as we would like on the outflows, and that will continue to be a focus of our attention in coming quarters.

As you are aware, one-third of our $108 million NPL balance is in two loans. The $19 million remaining balance on a note to a Pittsburgh real estate developer -- that note is part of a 42-month forbearance agreement with three other banks. It does not mature until the second quarter of 2014. And the $16,000 balance on a loan on an apartment project in Eastern Pennsylvania. That loan was restructured as part of an AB note structure last year. This is the A note. The loan has been kept current and has positive cash flow, but has been kept on nonaccrual due to delinquent taxes.

As you know, the Bank has discontinued disclosing specific reserves on individual NPLs. In the fourth quarter, the primary reserve assessments were to create a reserve for the student housing property that was placed on nonaccrual, and an increase in the reserve for the $19 million loan to the real estate developer.

In the fourth quarter, the Bank had OREO write-downs of $3.2 million, primarily due to reappraisals of two properties that have been on the books for over a year. Those write-downs were a student housing project in Northeastern Pennsylvania and a lot development project in Southeastern Pennsylvania.

That concludes our credit discussion. And I will turn the call back to Mike Price.

Hey, thanks, Bob. And with that, we will open it up for questions.

(Operator Instructions). Bob Ramsey, FBR.

I was hoping you could talk a little bit about loan growth and just sort of trying to pick apart the pieces, some of maybe the payoffs of loans versus -- I know you talked about record origination growth, but the total was still down. So I was hoping you could give a little more color around loan growth.

Yes. Well, there's two components of that -- retail, I kind of went through that at about 7%. I'm assuming you're talking about corporate banking. And the three components there are large corporate, middle-market, and commercial real estate. And we had -- in excess of $100 million of payouts in our commercial real estate. We had some larger construction loans that -- one was over $30 million that matured in the year. And so there were payoffs there, and as well as a downdraft in the syndications on the utilization.

Okay. And what -- I guess broadly speaking, is your sense of customer demand and how did it trend? Was it stronger at the end of the quarter? I know a lot of banks have said they seemed to sense some uptick in the year-end.

Yes, we did. We ended up pushing a lot of loans into the first quarter of the year that were supposed to close in the latter part of December. But I think that's fair. We saw a little uptick -- despite the commercial real estate loan portfolio, what I mentioned earlier, a little bit more activity in the fourth quarter, with quality projects in Western PA, with really nice anchors in strip centers. And so that was positive.

I don't know that the middle-market or the small business has really come back. I think that in small business, encouragingly, though, we did see about a 3%, 3.5% growth there for us, which was better than we have seen for a couple of years. So maybe that portends well for that segment. Is that helpful?

Yes, that is helpful. And then maybe if you could provide a little bit more color around margin as well. I know the prepared comments suggested still more stress, which I'm sure all banks out there are going to see. But you guys were able to buck the trend this quarter. And your unit loan yields held in relatively flat. I'm curious how your loan yields stayed so strong this quarter, and how you're thinking about the trend. Or maybe how you're thinking about the magnitude of the trend in the first quarter.

You know, I'll let Bob handle an anomaly there.

Hi, Bob. It's Bob Rout. I think we're going to expect continued pressure to that NIM. I had stated previously that I thought maybe a 5 to 7 basis points contraction per quarter. That might seem a little high. I'd probably back off on that somewhat, based upon this fourth quarter results.

And as I mentioned in my comments, we remain fairly disciplined on our pricing, and hopefully, with our credit underwriting too. As you know, there's a lot of banks out there scrambling for assets. And especially we saw within our large corporate syndications where there was a couple of deals where we walked away, and decided not to participate in either the refinancing or the initial deals, both because of pricing and structure.

I don't think we have a whole lot of room left in the deposit rates. We'll continue to ratchet down. We will continue to get a greater portion of that mix to be demand deposit rates. And some of the things we're doing here with these Trust Preferreds, early redemption, is going to be helpful as well -- not a lot, but it will help the margin a couple of basis points over a full-year basis.

Hey, Bob, this is Mike Price. Just one other kind of dimension to add to Bob's good comments. And one of them is, is that just -- we were really surprised and encouraged by the noninterest-bearing DDA growth, particularly on the business side. And I think that's just the fruits of a lot of calling and sustained calling over several years.

The other thing I would share is the finance team does a very good job of really looking at competitors on the deposit side at least twice a month. And I'm just looking at a sheet right now with all the CD maturities and, really, all the money market rates out there. And we're clearly now below -- if there's an average max and min, just right between min and max in our pricing. And I think that's prudent, given the environment we're in. And we've really been there for a while. So, as Bob mentioned, I think we've wrung out a lot on the deposit side.

Okay, that's great. Thanks, guys.

Damon DelMonte, KBW.

My first question has to do with the margin. Bob, how much of an impact was it to the margin from prepayment fees this quarter, and I guess in terms of basis points?

I think we calculated that to be about 2 basis points. And it's probably equal with the 5 basis point reduction in deposit costs.

Okay. And answering Bob's question about the margin before, did you say that the expected impact from the redemption of the Trust Preferreds would be something like 1 or 2 basis points on an annual basis?

Yes.

Okay, all right. And then I guess with respect to criticized loans, it looks like that they were up around $23 million, mostly in CRE on a quarter-over-quarter basis. Any kind of comment on what was driving that?

One of the properties was -- it's a healthcare facility, a different healthcare facility. And the co-borrower, some of their properties have had some vacancies. So that was one loan that we moved to OEM. We also had a strike in the NHL, which required us to move one of our loans, but (multiple speakers) --

What kind of loan was that? Like, directly related to the NHL? Or a business that's impacted by it?

I think we need to be cautious.

Yes. Okay.

(laughter) Lest we --.

Okay. Thanks.

Yes, we're going to be cautious here, Damon. Because the more information we have, might make it specifically identifiable.

Got it. Understood. Understood. Okay. And then I guess my other question, probably, Mike, just more broadly speaking, do you feel like the commercial real estate paydowns or prepayments are slowing? And do you think that's more of a first and second-quarter event? Or do you think it's something that's going to take place during -- throughout the year, 2013?

I think the minimum is shifting in commercial real estate from a portfolio that we -- and also, we did two things. We deleveraged the larger loans, and then we really put collars around commercial real estate. I think that that is really played itself out.

Okay, I think that's all that I had for now. Thank you very much.

John Moran, Macquarie.

Just real quick on OpEx. I know it sounds like you've got an initiative underway here with possibly revisiting how you guys are doing the IT system, and the timeframe laid out on that. And then some other -- you sort of alluded to other initiatives that are ongoing. Where can we ultimately go on OpEx? If our core is running today 40 to 41, do you think there's a whole lot of room to squeeze that down over '13 and '14?

I think we're going to have a clearer vision there in the next two quarters. I think we have to continue to get costs out irrespective of any transformation with IT. I think that could be -- that might be a -- it's not a bottleneck, but it might be a great opportunity to really get to a more elegant and efficient system. And at the same time, have a ripple effect on other processes, loan operations, DDA and so forth, throughout the Bank. And we're really sizing that up.

We think it's vital to get to really to pass the median and become the best-in-class efficiency performer. The other place that we will look, that I think I've alluded to earlier, is really at delivering that work. And just the adoption rate with our mobile banking has been just really terrific. And it's a highly rated product. And we're really tracking transactions and branches and checks.

So we have to be smart about that delivery system. I think our view is, is that we still need the branches to open accounts and for key delivery mechanism for clients, particularly business clients. But I think that the density of your branch network and what might now be a spoke, maybe you kind of consolidate the hubs over a period time, and you can do something relatively transformative there.

And so we're going to look at that. I don't think -- the market is, I think, the interest rate environment and the macro environment, coupled with the proliferation of technology, is kind of a confluence there. And we really have to be smart about it and think about what the distribution network needs to look like in two to three years.

So, I don't know. I think we need to push well past the 40 to 41 over a period time. Bob -- Bob Rout -- I mean, you're --?

No, I truly believe there's lots more opportunity below that $160 million a year mark. And I think there's certainly a good 3% to 4% alternative for opportunity.

Makes sense. Thanks. Just a quick second one for Bob, on the TruPs coming out, there's another $70 million, but I think they're both -- if I'm remembering correctly, they're both variable and kind of tied to LIBOR. So not much left to do with other pieces, the capital stack to help out on the funding cost side of things. Is that correct?

That's correct. There is approximately $70 million of variable rate TRuPs that are currently paying LIBOR plus 285.

Okay.

So, not only is it cheap capital, but pretty cheap funding. And it's also something, if we see rates moving, we could put a hedge on pretty quickly and lock those rates in.

Got you. Yes, that makes sense. And did I hear you correct, Bob, you said taxes is 28%?

26%. Approximately 26% effective tax rate.

Okay, I thought I misheard. Thanks very much. I appreciate it.

Next question?

Collyn Gilbert, Stifel Nicolaus.

I hope you have not overextended yourselves to the likes of Sidney Crosby. (laughter) I'll leave it at that, as the Flyers are such a disappointment. Anyway, just wanted to dig in a little bit, Bob, on the margin comments. Because it seems like -- I'm just trying to reconcile why you'll see that much compression, given the stability in loan yields and security yields that we're seeing, and your comment about pricing discipline, obviously.

And then on top of that, the 700-plus-million or so of quarterly savings on the TRuP redemption. It doesn't seem like the margin erosion should be quite as significant as what maybe you're suggesting. So was that -- was there an anomaly? I mean, I think you said it, maybe even. And the loan yields this quarter are like -- if you could just give a little more color to that.

No, the ones that we're really keeping an eye on, Collyn, is we have this churning going on in our residential mortgage portfolio. That's still running off pretty quickly or refinancing into one of our home equity products.

And the other thing is the investment portfolio. That stuff runs off pretty quickly. And the replacement yields are just absolutely horrible on really anything that you look at and try to stay within a reasonable risk profile.

Yes, the loan yields were propped up a little bit by some good fee activity, though that may be a slight anomaly. I would say maybe we're starting to decelerate on those margin compression, but I still think the compression is going to be there going forward into '13.

Okay, okay. Okay, that was it. Thanks.

Okay. Thank you, Collyn.

Mac Hodgson, SunTrust Robinson Humphrey.

Bob, were the 9.5% TruPs, were those swapped? I get a higher benefit to the margin in the 5 to 6 basis point range. Just want to be sure I'm not missing anything there.

The -- well, it all depends with our replacement cost. If you fund it overnight, you might get a 5 or 6, but if you want to be conservative and fund out with maybe some 5 to 7 year monies, that will take some of that blush off that yield.

And also, the 1 to 2 basis points is based upon a short year. We think we can have these redeemed by April 1. But on a full-year basis, you're right -- that probably does push the margin accretion maybe 4 basis points.

Okay, got you. So you're borrowing some funds at the Holding Company to repay those?

Yes. And -- or we could do it with maturing securities, but we still think maybe a 150 rate is the appropriate replacement funding rate for those.

Okay, got you. And you may have mentioned this, I apologize otherwise, but on the buyback, the $50 million program, did that expire? Or do you still have access to the availability under that program in addition to the $25 million?

No, we still have access to it, so our plan would be to finish out that $50 million and then have the additional $25 million.

Got you, got you. Okay, great, thanks.

Thank you.

Matthew Breese, Sterne Agee.

Just sticking with the expense commentary, Bob, you'd mentioned that ex some of the credit-related costs, we're already at a $40 million run rate, or there and abouts. So given (multiple speakers) where you've outlined --

$40 million to $41 million. Matt, $40 million to $41 million, we think is -- after you strip out some of the non-recurring credit noise and other issues, that's probably a run rate at this point.

Okay.

But go ahead. I'm jumping in on your question.

No, it's okay. I guess my question was, given some of the pretty extensive outlines for what's to come over the next year or two, and as far as what you want to pull out of expenses, is [$160 million] kind of a starting point and we can get below that after 2013?

I think we're looking to get below that after 2013, and playing out probably through the second half of 2014.

Okay. And you'd also mentioned that on the expense front, you do want to become a best-in-class performer, so I guess my question is, what would you consider best-in-class as far as efficiency ratios go?

Well, I know the number historically. (laughter) I just think the playing field has changed. I think we have a good peer group of 12 to 24 banks, and we tend to be in the bottom quartile, and we need to move up. And once we're in that upper quartile, I'll feel better about where we're at.

Okay. So the goal is to get into the upper quartile, but would you put any parameters around what kind of efficiency ratio that looks like?

Again, it's a bit of a moving target, but it's certainly 55 to 59, depending on what happens with NIM over the course of the next few years.

And then on the buyback front, with the stocks back over $7, you bought back quite a few shares this quarter. Can we expect you to be anywhere near that aggressive over the near-term?

No, I think it will be a function of price, Matt. Without giving away our price parameters, we won't be the one pushing the stock price. We'll be looking for pullback opportunities to pick up those shares. And again, the regulatory guidelines are structured to not allow that to happen or to help mitigate that from happening.

So, yes, I think it's all a matter of price. Now, if I could pick it all up in the first quarter, I'd gladly do it, if it's within our pricing guidelines. And if it takes us through the rest of 2013, I'm okay with that as well.

And then my last question is around the provision. We've seen a few quarters a little bit more consistent, but with the bump-up in criticized loans and nonperforming loans, can we expect a higher provision in the quarters to come?

Go ahead, Bob.

Yes, I was going to defer to Bob Emmerich, but go ahead, if you want to take it, Mike.

Yes, Bob, your thoughts?

Normally, if you see an increase in NPLs, it would normally come with an increase in credit expense. But we haven't seen the same level of collateral deterioration that we saw during the recession. Values have held up a bit, so we didn't see the same kind of direct -- as much of a direct correlation in this past quarter. And I would be hopeful that that trend would continue.

Hey, Matt, one other comment on your efficiency. I do think that a key there, obviously, is the topline as well as the bottom line. And we're changing the business mix -- I mean, we want it to be more business-oriented and rich in terms of our balances, the relationship value. And then importantly, the cross-selling that comes with that cash management and wealth. In wealth, we have a clear opportunity, which Bob alluded to. And so I expect that to be tugging the other way.

Okay, thank you, guys.

Thank you.

At this time, we show no further questions. Would you like me to repeat the Q&A instructions?

I'm sorry?

At this time, we show no further questions. Would you like me to repeat the Q&A instructions?

No, I think we're good. Hey, we'd just like to thank everyone for participating. Certainly, you can reach us with any follow-up questions. And we appreciate your interest in First Commonwealth. Thank you.

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