First Commonwealth Financial Corp (FCF) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Commonwealth Financial first quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this call may be recorded. I would like to introduce your host for today's conference, Rich Stimel, Vice President, Corporate Communications. You may begin.

Thank you. As a reminder, a copy of today's earnings release can be accessed by logging onto FCbanking.com and selecting the investor relations link at the top of the page. We have also included a slide presentation on our investor relations page with supplemental financial information that will be referenced throughout today's call.

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

Before we begin, I would like to caution listeners that this conference call will contain forward-looking statements about First Commonwealth, its business, strategy, and process 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 forward-looking statements. Now I would like to turn the call over to Mike Price.

Thank you, Rich, and good afternoon, everyone. And thank you for joining us on today's call. Despite many of you on the phone saying your goodbyes last quarter, Bob Ralph, our CFO, is graciously here with us again, as Jim Reske, our new CFO, will start with us next week.

I know Bob has images of far off destinations dancing in his head and some pretty significant other endeavors, but he has continued to stick around and help us out. And, for that, we are very appreciative.

In terms of our performance in the first quarter of this year, net income of $12.3 million translated to $0.13 earnings per share. Encouragingly, first-quarter earnings overcame a $2.4 million in IT conversion expenses and a specific reserve of $4.5 million for a larger credit that was downgraded to nonaccrual. Bob will also talk about some tailwinds from the sale of our RIA and also a recovery -- an insurance recovery from a fraud.

We really like the progress we are seeing with our credit quality metrics, with our efficiency efforts, with the conversion of our core processing platform, with our de novo mortgage efforts, and with our Cleveland Business Center. However, we need to grow our topline and I will talk a little bit more about that.

We have talked frequently about our strategic focus on building an enduring credit culture. Our NPAs are down more than 50% from their peak levels a couple years ago, and our NPLs have decreased 28% over the last 12 months. Even with the $4.5 million reserve, provision expense totaled $3.2 million for the quarter.

Our corporate and retail banking businesses are well-positioned, despite a tepid loan growth in the first quarter. You will see average loan growth for the quarter was up $29.4 million, but we had a significant down draft at the end of the quarter with several large payoffs and a pay down. As a result, actual quarter end balances dropped over the year-end.

In the first quarter we experienced some low origination volumes. We have already begun to see a pickup in the second quarter and we have kicked off a new retail lending campaign. Our de novo mortgage effort will make the Bank's first purchase money mortgage loans since 2006. In the third quarter, we have begun a configuration of our loan origination systems and we plan to hire 12 mortgage originators within our existing retail footprint.

Earlier this month, we announced the official opening of the Cleveland Business Center. This office is now staffed with three commercial lenders and has approved commitments so far in excess of $67 million. Our overall business center strategy is to prudently expand into larger, contiguous metropolitan markets where there is ample cross-sell and fee generation opportunities.

Operation Excellence, which is our initiative to convert our core processing platform, is on track and achieving all milestones. Directly related savings that have been identified at this point total $6 million, with at least an additional $500,000 in supplemental cost savings also identified. In importantly, on an annualized basis, we are already seeing over $1 million in annualized savings from the project at this early stage.

Beyond these savings -- these direct savings and indirectly associated with Operation Excellence, our executive team has specified dozens of other incremental cost savings and process improvements that will further support our efficiency efforts. So we are very optimistic about the trajectory of our noninterest expense.

Bob will get into the details of our financial results. But, in general, our first quarter results are encouraging, even with tempered loan growth. The additional revenue engines of mortgage and the Cleveland Business Center portend well for the second half of the year into 2015.

With that, I will turn it over to Bob.

Thank you, Mike, and good afternoon, everyone. As Mike mentioned, we had a fairly noisy quarter with a number of one-time items that essentially offset one another. The gain on our sale of the registered investment advisory business and some fraud insurance proceeds were enough to offset the IT conversion costs.

On top of that, we had a really good quarter with respect to asset quality. Our ongoing focus in this area is starting to generate some real earnings benefits and also some stability.

Our net interest margin of 3.31% and net interest income was fairly stable on a linked quarter basis. We did not get any significant help from loan growth this quarter, but we did have some nice prepayment penalty fees and other fees, plus a nice increase in the Federal Home Loan stock dividends this quarter.

As we announced earlier this quarter, we did sell our registered investment advisory business. This business represented a very small portion of our overall wealth management activities and there were some challenges trying to get this operation up to a larger scale. The gain of $1.2 million was a nice addition to our earnings and also our noninterest income this quarter, helping to offset some of the one-time conversion costs that we have been incurring.

Noninterest expense is a bright spot. As you all know, this has been a major strategic focus for us through our [50x15] campaign and our Operation Excellence IP initiatives. There, too, we have some one-time benefits relating to insurance proceeds, but we are seeing the efficiencies of these two initiatives coming on much stronger than we had originally anticipated.

Someone shared a statistic with me just the other day that since January of 2010, our full-time equivalent staff is down by 288 positions, and we certainly believe we are a much better run organization despite having significantly less staff. We see plenty more efficiency opportunities, especially through some of the remapping processes that we are going through in conjunction with the IT conversion project.

With respect to capital, we continued to prudently manage down what we believe is excess capital levels, now that some of the unpleasant credit surprises that we have experienced in the past have moderated. In February of this year, we announced an additional $25 million common stock buyback. That is in addition to the $75 million of buybacks we have already accomplished since 2012.

Currently our effective tax rate is 28.3%. You will also notice in our noninterest expense that we have, and most other banks in Pennsylvania, have benefited from a change in the Pennsylvania share stacks laws. Pennsylvania legislators and administration officials are currently reassessing that law to determine if these changes have cut do too deeply into the Commonwealth revenue streams.

So with that, I will turn over the discussion to Mike Price for any questions.

Operator, if you could open the line, we would love to entertain some questions.

(Operator Instructions) Bob Ramsey, FBR.

My first question is about the provision expenses this quarter for you guys. Credit trends looked really stable this quarter. You have had several quarters where things are performing pretty well. The allowance looks pretty big relative to that charge-off.

And yet, I guess you guys sort of kept the allowance relatively stable; a modest build to the allowance, but not much. Just kind of curious how you are thinking about the size of the allowance, whether there is opportunity, if credit continues to be stable or a little bit better, to release a little bit of those reserves or how you are thinking about the reserving methodology.

I will let Bob Emmerich add -- this is Mike Price, but typically our provision has been covering charge-offs. And I think our allowance is now at about 90%-something of non-performers. Bob, any other comment you would like to make?

Only that I think we are comfortable with the level of the reserve where it is, particularly when we look at pure group statistics. We are sort of in line with peer groups and I wouldn't expect to see a lot of release of reserves going forward.

So then, is the right way to think about it that you all will likely cover whatever the net charge-offs are in the quarter, as long as nonperformers are in the same ballpark as they are now? You will kind of keep the allowance and nonperformer ratio kind of stable and cover net charge-offs?

We would probably look to cover net charge-offs, yes.

Okay. And then, I know too, I think Bob mentioned that there was some benefit from prepayments in the quarter. I am not sure if I caught not exactly right, but I'm curious if that was the case, how material that was and how you guys are thinking about the net interest margin outlook from here.

Bob, this is Bob Rout. That prepayment penalty was $853,000. That equates to about 6 basis points to the margin.

Okay. So next quarter I guess would be reasonable to expect prepayments are -- sort of go back, and so the margin, you probably start off 6 basis points give or take lower, and then a little bit of core pressure. Is that fair?

Yes. I think continued moderate pressure on that net interest margin is probably reasonable to expect, barring prepayment penalties and other such fees.

Okay. And then, last question and I will hop out of the line here, but as you guys continued to make progress towards the system conversion in the third quarter this year, just wondering if you are still thinking about the expense run rate is it come out the other end being $1 million to $2 million below sort of a $40 million run rate level.

Yes. This is Mike. Absolutely, we are getting there. And, in fact, we are almost there, but we probably have about $1 million of the $6 million to $8 million that we have shared before. We do expect that to come out in both the fourth quarter and first quarter of next year.

Great. Thank you very much guys.

Collyn Gilbert, KBW.

Bob, it is good to have you on one more call. Just a follow-up on the expense comment, Mike. So the $38 million that you guys posted this quarter, so that already is sort of reflecting some of the expense initiatives that you have kind of have undertaken. So we should think about lowering even from there, right? That is what you are saying?

I think so. I think we had talked about a $40 million run rate, and $2 million less than that. We do have a pretty significant investment in mortgage that will offset that a little bit, but I would expect that we will be at the $38 million mark or so.

This is Bob Rout. If you are trying to calculate run rates, keep in mind that we did have a $900,000 insurance recovery this quarter that went into the noninterest expense.

Yes. Right. I was looking more of that core base. It seems like the core for the quarter was at $38.3 million. So, I mean, that is impressive if you have captured even -- that is just a big drop from the fourth quarter, I guess, is just what I am trying to reconcile.

Yes. We are very encouraged by the trend. There is usually some first quarter seasonality. Your medical expenses aren't nearly as high as they are towards the end of the year, as people start hitting -- have not yet hit their deductibles on their health savings accounts. And also there is a couple less days in the quarter than you will have in subsequent quarters.

And you haven't fully absorbed a merit increase cycle as well.

Yes. Okay. That's helpful. And then, maybe, could you guys give a little more color on your expectations for loan growth from here, and where you are seeing demand and how we can -- how should we be thinking about that throughout the rest of the year?

I will walk you through that. I don't think the guidance that I have shared is really mid-single digit growth mid to longer-term. We feel very good. And when we think about the aspects of lending, the commercial real estate we are seeing good looks, a little growth there, nice projects, and opportunities.

Where we feel a little bit of the pressure is middle market and small business. It is sluggish. We looked at the year-over-year productivity in the first quarter and it was down, probably down for the first time in three or four years, linked year-over-year. We see some spreads and -- pressure on the spreads and certainly a little bit on the structure.

And as we think about other types of income, in addition to loans, I think there is a path there for us to begin to move our insurance. Our wealth advisory businesses have been flat year-over-year, trust and brokerage.

And we have the Cleveland Business Center. We are very encouraged by that. I know a lot of the banks that have been very dependent on mortgage are down significantly year-over-year. We are looking at that as -- there will be a de novo effort for us in the fourth quarter.

So that will benefit, obviously, our net interest income as well as -- you know, we will portfolio some of the high quality jumbos and things like that. So we are pretty enthused about that and the individual that is running it in and the team he is putting together. So I think, on balance, the guidance we have shared in the past is probably on target.

We are probably at the end of the deleveraging, although we let a pretty large credit go in the first quarter. But, I feel good about the competitiveness of our retail and corporate banking business and growing with the number we had shared previously.

Okay. That's helpful. And, just curious what your appetite is for future buybacks. How are you guys thinking about buybacks in your capital plan?

We kind of weighted into one in February at about $25 million, and we have been pretty finicky in doing some buybacks and probably into about $5 million or $6 million is all.

Okay. Okay, all right; that's all I had. Thanks.

Matthew Breese, Sterne, Agee.

We spent a lot of time talking about expenses, but I was hoping to switch gears and maybe get some commentary on topline revenue growth and net interest income growth, and how do you feel about your ability to move those numbers in the right direction?

I think we are putting our shoulder to the wheel and we will begin to move them organically. And we have some significant initiatives in place, both with mortgage, the Cleveland Business Center.

What I didn't share with Collyn earlier is, with our insurance, with our wealth, we have added some key talent there, probably four or five key positions in the Pittsburgh area. And I think we are ramping up.

I think that the fact that we are getting expenses under control gives us a little bit more latitude to really invest in our businesses. And that expense figure is absorbing, really, five or six executive management or senior level positions to start up our mortgage operation already.

Okay. And, with the staff on hand or the staff that you plan to hire for the mortgage team, how much are you expecting that to contribute to noninterest income?

I think -- I had shared in the past that, just doing some simple math with 100 branches and a loan or two per month, we expect that to be a couple hundred million dollar business a year. And we will look to sell the majority of those loans, so, several cents per share. I think I had thrown out a figure of about $6 million annually.

$6 million annually? Got it. And then, Bob, I think you mentioned that the overall number of FTEs is down quite a bit over the last year or two. How do you see that number trending? And where do you cut through fat and eventually hit bone, and you are unable to reduce that headcount any further?

I would see further reductions going forward, just as a result of the IT excellence. Just there will be a substantial amount of positions with that function alone.

I don't believe we are in the bone yet, because the renewed IT system is going to eliminate a lot of the people and paper that we used to fill any gaps between the hodgepodge system that we had previously. So I think it is going to make us a better Company despite more reductions in headcounts.

I think it will make us a better Company and we will be able to operate it with lower risk, too.

Absolutely. Yes.

All right, thank you guys.

(Operator Instructions) John Moran, Macquarie Capital.

I have just got two key follow-ups here at this point. One is just understanding the timing on the mortgage business, and I think I just want to make sure that I heard it correctly. It sounded like 12 folks coming into the business, back half of this year, mostly in 4Q. Is that correct?

Probably third and fourth quarter, and beginning -- making our first loan in the third quarter.

Okay. And then, we all just heard you say $6 million annually by the time it is up and running, so that is really a 2015 kind of event, then. And I think that is just --

That is correct.

Okay. Good. So that is definitely consistent with what you guys have said in the past. And the only other one that I had was just on the fee line.

The other income line, if we strip out the gain this quarter, looks like it came in about $2.4 million. It was a little softer than it was in the fourth quarter, which was softer than it was for most of the year in 2013. Is there anything going on there? And how should we kind of be thinking about that going forward?

John, Bob Rout here. I would say most of the effect would be related to soft fees on some commercial loans. You will get some variability in those numbers on a quarter to quarter basis, especially this quarter where the commercial lending hasn't been overly robust.

Got it, that's helpful. I appreciate it, guys.

Bob Ramsey, FBR.

I just had a couple last little details. One, to follow up on that fee income, so if it is quarterly volatility I guess it could be up or down any quarter. Is it fair to say that we get back to sort of a $3 million a quarter level on average, which is kind of where you guys were last year on that other fee income line?

I don't want to give you projections. This is again Bob Rout.

You'll be gone, we can't hold you to it.

(multiple speakers) that, of course, is the swap in counter nesting, depending upon the commercial line volume. We did have some mark-to-market adjustments back in -- last year this time that helped. And that was also related to swaps that sort of accelerated that quarter to quarter comparison as well.

Okay.

(multiple speakers) $3 million is maybe a little high.

Okay. Fair enough. And then, with the partial insurance recovery, which line item does that show in?

It would be in our operational losses on detailed income statement that we send out as a supplement to the press release.

Okay. Then, do you have the actual number of shares repurchased in the quarter? I know you all gave some color on, I think, the dollar amount and a couple of different authorizations. So I was just curious if you had the actual number of shares in total in this quarter.

Yes. That was part of the press release and I will just -- there was 383,387 shares for the first quarter.

I think that was from the most recent authorization. Wasn't there a piece left over from the last, or am I wrong about that?

You are right. There was about $4 million carryover from the prior authorization. And I don't have that exact number of shares with me.

Okay. Do you know what the authorization is at the end of the quarter, sort of what is left outstanding?

I will have to have somebody look that up.

Okay. Perfect. Last question I have got, then, is I know you mentioned that the registered investment advisory business, you guys don't expect much of an impact to the income statement and were having trouble getting it to scale. Was that business profitable? Is the net impact a little bit of a drag, or was there running at a little bit of a loss?

It was about $38,000 a quarter in profit.

Okay, perfect. Thank you for taking the follow-ups.

I am not showing any further questions in queue. I would like to turn the call back over to Mike Price for any further remarks.

Just, we may have the number for the stock buybacks for Bob Ramsey and the group on the phone.

Yes. The question was how much of the previous authorization -- how much was left of the $25 million that we just authorized here this quarter. And at the end of the quarter, it was $21.9 million still remaining of the $25 million authorization.

Thanks, Bob, and thank you for your interest in our Company and your thoughtful questions. Bob and I and the team are available if you have other questions, but thank you for your interest in First Commonwealth and hope to see you on the road soon. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.