First Commonwealth Financial Corp (FCF) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the First Commonwealth Financial first-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host, Rich Stimel. Sir, you may begin.

Thank you. As a reminder, a copy of today's earnings release can be accessed by logging on to fcfbanking.com and selecting the Investor Relations link at the top of the page. We've also included a slide presentation on our Investor Relations page with supplemental financial 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 Jim Reske, Executive Vice President and Chief Financial Officer. After brief comments from management, we will open the call to 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'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. Good afternoon and as always thank you for investing some time with us today. With me today is Jim Reske, our CFO, and he will be speaking to you in a moment.

Our net income of $14.2 million for the first quarter of 2015 translated to earnings per share of $0.16 and represents a good start to 2015. Our lower credit costs, stronger wealth management revenue, lower systemic noninterest expense, and a special FHLB dividend drove earnings and created nice tailwinds for the quarter. Conversely, smaller fees for insufficient funds and overdrafts weighed on our noninterest income.

Some other important observations include: we had solid average quarterly loan growth of $48.2 million, which helped drive net interest income; a more robust NIM at 3.35% helped us as well. The growth in loans stemmed largely from a flurry of commercial loan activity at year end. Asset quality continued to improve and resulted in a provision expense of just $1.2 million.

Third, our noninterest expense dipped to $39.9 million for the quarter, which includes well over $1 million in unbudgeted expense due to unusual snow removal costs and debit card losses that carried over from the fourth quarter of 2014, related to several national retailer card breaches. We continue to tighten our operations environment, and the rate of those losses has abated.

Noninterest income of $14.2 million was stronger than the previous quarter, as stronger wealth management fees and commercial loan fees overcame lower deposit service charge income and a slower than forecasted ramp-up in our mortgage business.

As we reflect on the last 12 to 24 months, we've really had our shoulder to the wheel on at least four fronts to position our Company. Namely and first, I would mention our core conversion last year where we remade the IT backbone of our Company.

Beyond the cost structure, this has really enabled a myriad of 2015 initiatives designed to enhance the customer experience and drive value for the Bank; and I will just give you a flavor for some substantial things in the offing this year at First Commonwealth. A refresh of our online banking and our fcbanking homepage; a valuation of the credit card product to support our customers' online buying preferences; the launch of [Opening Act] here in May, an online account opening option for our customers and prospects; the launch of an outbound call center to introduce customers to our capabilities; a wholesale emphasis on helping our clients navigate their financial future, as measured by referral activity between our professional partners at the Bank; consistent deployment of a powerful new customer relationship management tool; the introduction of a home construction loan product for our mortgage customers; introduction of [Datascan], a product that will help us grow our dealer floorplan business; and also an introduction of chip card and Apple Pay here later this year.

That is a lot, and that has really been enabled by our core conversion here a year ago.

Second, and as long as we're talking about some of the things that impact customer experience, I would also note that we have been focused on our penetration of mobile banking and Internet banking, which are tracking satisfactorily and really above our industry standards. Conversely, our bill pay penetration is really just at the median of our peer group and represents opportunity for improvement. Continued traction in these digital measures in the ensuing months and years to come will really be vital to move ahead and be competitive.

Third, as I mentioned earlier, our mortgage initiative is slower than we forecasted it out of the gate in 2015. However, we remain excited about the prospects for incremental fee income and the potential for acquisition of younger credit-worthy households.

And the last thing I would mention and fourth, before turning it over to Jim, it's been one year since we launched our Cleveland loan production office. Our three lenders there have generated over $130 million in loan commitments with roughly two-thirds of those being Commercial Real Estate and one-third C&I commitments. These strategic forays have really -- were really enabled by our core system and a resulting simpler operating environment.

With that I'll turn it over to Jim and let him dig into a few of the details around the numbers.

Thanks, Mike. We are off to a very good start in 2015. I will pick up on some of Mike's themes that have driven our performance, including a strong net interest margin, lower credit costs, fee income growth, and lower operating expense. I would encourage you to take advantage of the earnings release supplement presentation that is available on our website, which has been completely revamped this quarter to provide investors with some useful information that expands on the earnings release.

First of all, net interest income was $48 million, up by $1 million from the linked quarter, and up by $1.5 million from the year-ago quarter. The first quarter benefited from the $1 million special dividend from the Federal Home Loan Bank. But even adjusting for this dividend, we were pleased to have maintained spread income at the same $47 million level of last quarter given that there are two fewer days in the first quarter, which otherwise would have lowered net interest income by approximately $900,000.

Annualized growth in average loan balances of $48.2 million due to strong commercial loan originations at the end of last year helped drive first-quarter net interest income. End-of-period loan balances were down slightly for the first quarter, as growth in commercial and industrial loans in the first quarter could not offset a runoff in direct installment consumer loans. But loans are up by $192 million or 4.5% since last year.

Our net interest margin expanded by 13 basis points from 3.22% in the fourth quarter to 3.35% in the first quarter. To be fair, 7 basis points of this expansion was directly attributable to the $1 million FHLB special dividend.

However, in a reversal of last quarter, positive commercial loan replacement yields contributed to a 3 basis point increase in the yield on the loan portfolio. Lower funding costs also contributed 2 basis points to the margin, as we continue to runoff higher-cost broker time deposits and grow demand deposits and savings deposits.

Our total cost of deposits is now down to 19 basis points. Non-interest-bearing demand deposits increased by $50.9 million or 5% in the first quarter and currently comprise 24.2% of total deposits.

Savings and interest-bearing demand accounts were up by another $52 million in the quarter or 2.1%.

In order to further protect the Bank from the potential effects of a prolonged low rate environment, the Bank entered into another $100 million macro swap in the first quarter. This swap is in addition to the $100 million swap we executed in the third quarter of last year.

Like that swap, this swap also effectively extends the duration of another $100 million of our $1.3 billion in LIBOR-based commercial loans into three- and four-year maturities. So, if short-term rates remain low -- and in fact even if they rise slightly -- this swap will add approximately $1 million of pretax income on an annualized basis in the first year, resulting in approximately 2 basis points of protection to the net interest margin. The Bank still remains asset sensitive in the second year of a rising rate scenario, but we have endeavored to maintain a relatively neutral position in the first year, in order to avoid the high short-term opportunity costs associated with asset sensitivity.

Lower loan loss provision expense contributed strongly to our improved performance in the first quarter. It's important to note that we did not release reserves in the first quarter. Rather, we added $1.2 million to reserves in the first quarter, though this is significantly less than provision expense in prior periods.

This was driven by continued fundamental improvements in asset quality, as the percentage of nonperforming loans continues to decline. During the first quarter, the Bank charged off $6.5 million in loans; but these charge-offs largely represented the charge-off of specific reserves that had been set aside against these loans in prior periods.

The replacement of these specific reserves with further general reserves was not warranted in the first quarter due to the Bank's improved credit history. The Bank's ratio of general reserves as a percentage of non-impaired loans improved slightly in the first quarter to 0.98%, up from 0.97% last quarter.

Turning to noninterest income, exclusive of nonrecurring gains on the sales of securities and other assets, noninterest income improved by $600,000 compared to the prior quarter and compared to the same period a year ago. Going forward, our fee income should benefit from both our insurance agency acquisition and our investment in our mortgage initiative.

As Mike mentioned, the mortgage ramp-up was slower than expected in the first quarter but continues to build momentum. We earned $122,000 in spread income and $[440],000 in noninterest gain on sale income from mortgage in the first quarter.

That is a nice contribution. But the noninterest expense associated with the mortgage initiative totals $740,000 in the first quarter, and so the business is still not yet operating on a breakeven basis.

However, we were out of the first mortgage business for a decade, and the precise pace of our reentry has always been difficult to predict. We are still building a business that is on track to make a meaningful contribution to fee income in 2015.

In terms of noninterest expense, the quarterly and yearly comparison is strongly affected by a number of nonrecurring items, including the $8.6 million legal reserve that we set aside last quarter. These items are described in detail in our earnings release and are itemized in a table on page 9 of our earnings release supplement.

All of these items represent real gains and losses. And obviously, any time we talk in terms of, quote-unquote, nonrecurring items or operating expense, these are non-GAAP concepts and a full reconciliation to GAAP figures can be found in the supplement.

But in order to better understand our business, we look at operating expense on a core basis before any of these items. On that basis, operating expense decreased by $500,000 compared to last quarter, from $39.1 million in the fourth quarter to $38.6 million in the first quarter.

Operating expenses came down despite absorbing $700,000 in increased snow removal and utility costs and $300,000 in increased expense to set aside reserves for increased unfunded loan commitments. Compared to the same quarter last year, core operating expense is up by $800,000, largely reflecting increased costs associated with our insurance agency acquisition and our mortgage buildout.

The Company is committed to creating a culture of continuous ongoing improvements in operations and efficiency. For example, as we have previously announced in our local markets, we will be officially closing three branches on April 30, which is tomorrow. We expect this will save us approximately $350,000 in operating costs on an annual basis.

In other news, our effective tax rate was 30.1% at the end of the first quarter. In terms of capital management, we completed $18.6 million of our $25 million stock buyback authorization in the first quarter, ahead of schedule, due to the purchase of several large blocks of shares.

And with that, we will take any questions you may have.

(Operator Instructions) Bob Ramsey, FBR Capital Markets.

Hey, good afternoon. It's great to see a little bit of margin expansion. I know you guys broke out what was from the FHLB, but it looks like there was a couple basis point benefit from higher low yields, too, which is unusual in this environment.

Just curious whether there was any benefit in they are from shifts on the nonperforming loans, or whether it was the day count, or whether there were some higher-yielding loans that were put on the balance sheet this quarter. What drove up the yield on the loan book quarter-over-quarter?

Bob, this is Mike, and thanks for joining us today. But just looking at the complexions of the loans that were approved, I just think they are a little higher-yielding in terms of the types of credit. One was a rehab or occupational therapy type business; another was a custom products molded business; and some other things have just had higher yields.

But I don't know if that is sustainable, but the texture of the loans was just a little higher-yielding.

Bob, I will just add to that a little bit. If you look at the mix of commercial loan originations in the first quarter, the mix tended to favor investment real estate, which tends to be term loans instead of the adjustable-rate LIBOR-based loans. So that helped a little bit.

But also just the rate on the loans that ran off was lower as well. That contributed to the positive replacement yields I mentioned earlier.

Okay, great. That's helpful. Then as we think about the net interest margin headed into the second quarter, I guess the FHLB dividend benefit of like 7 bps goes away. So is it right to think that we start 7 basis points lower and then maybe there is a little bit of core impression? Is that directionally fair?

Yes, in a broad sense, Bob, I think it is directionally fair. It may have been you or one of the other analysts who mentioned this on the call a while ago, but there is an expectation that we now have that our margin is going to bounce around a little bit of a range. So quarter-on-quarter, two quarters ago we had positive replacement yields; last quarter that wasn't the case; this quarter it's the case again.

So rather than just saying we are on a secular trend, long-term trend towards margin compression, I think it is fair to say we're going to bounce around the range a little bit.

Okay, great. Shifting gears a little bit to loan growth, just curious: thoughts on loan growth this quarter. Obviously your balances were down pretty modestly, but they were down.

I think last quarter you guys had talked about expectations for 2015 being something in the mid single digits. Just curious if that is still good guidance and what you guys are seeing in the pipeline.

Yes, the pipelines on the commercial side, Bob, look good. On the consumer side a little thinner.

The consumer side, particularly the branch portfolio, is the one that is leaking a little oil and just there isn't the refinance activity that we've seen in prior years. Commercial real estate is robust.

I think it's -- when we look at the last year from the first quarter of 2014, it's about $192 million or 4.5%. I think that's still realistic, particularly when you add in the Cleveland LPO and some of our other books in other markets, particularly in Ohio, Columbus, and how they have helped us. So I think that's still the guidance that we would stick with.

Okay, great. I will hop out and give someone else a chance.

Will Curtiss, SunTrust.

Good afternoon. I thought maybe we would start on the fees. I think you mentioned in your prepared remarks a little disappointment in the progress on the mortgage business to date. Just curious if you can provide some additional color on the business and maybe your thoughts on why it might be a little behind where you expected.

I think the primary reason it's behind is we've been out of the business for over 10 years. And perhaps we were -- the ramp-up was a little aggressive in terms of the forecast. I think that the business is running at about half the volumes that we had hoped, honestly.

I think the challenge has been -- we've been able to get the quality of producers, having been out of the business. I think we have just -- we feel like we have got to a tipping point where we've begun to get some better producers here after a quarter or two.

But I think it's really the talent and people understanding how committed we are to the business. The mortgage loan originators are really true professionals in any community they live in, and they make a living by how well they do, and they want to be aligned with a partner or a bank that is competitive and committed to the business. I just think as that becomes clear, we will have some more good people join us.

And I -- let me that I think we are fortunate and we are very happy to have the professionals that we have with us now. We are just looking to add more. In fact we have had some talent acquisition in the first quarter that's going to help to really the build the business and be accretive in the quarters going forward.

Okay, great. Thank you. Then on service charges it looked like the quarterly drop was pretty consistent with what we've seen historically. Just curious if there was anything else maybe that impacted that this quarter. And if not, should we expect a rebound like we've seen previously?

Honestly, the bounce in our noninterest-bearing DDA is less a function of activity and more a function of people keeping more money in their accounts. Consequently, it's our belief they are just not overdrawn as much.

So we are seeing the incidence rate of the overdraft and NSFs fall, and that is really where it's left -- is it, Jim, a $0.5 million hole in our income statement.

Yes.

A quarter.

Right, this quarter, so -- and I think that when we first noticed that happening we were very -- we do an internal investigation to understand why that was happening. And then we had heard anecdotally that other banks was experiencing that. Now that the others of our peers have (inaudible) we see a few others who have noticed the same kind of effect.

The higher balances, higher customer balances, less overdraft; as a result, less overdraft (technical difficulty).

Okay. Thanks, guys.

John Moran, Macquarie Capital.

Hey, guys. I just want to follow up on the mortgage banking stuff. It sounds like about $750,000 or so in OpEx is not quite breaking even. Jim, I think in your prepared remarks you said that you expect that to still be a solid contributor to fee revenue this year.

Is the expectation still that it would be EPS accretive and chipping in on the bottom line, too? Or is this going to run as a breakeven business this year and then chip in, in 2016?

The former, and I am sorry for not being clearer. I do think it will be net income positive by the end of the year. It's just going slower than we had thought for the first quarter.

Okay, got it.

Thanks for clarifying.

Yes. No, thank you. That's helpful. Then just wanted -- wondering if you guys -- on the OpEx run rate it sounds like there was some wintry stuff that went on there and maybe some additional provision for unfunded commitments.

So if I am reading you right, it sounds like you think you can chip away at that run rate; and then you've got some help from branch saves coming in here too. Just wondering if you could put a finer point on that for us.

I think that's fair. And, John, you're from Boston, right?

Well, I grew up in New Jersey.

Okay. Because a month ago we still had three inches of ice on the lakes around here, so it was long and tough sledding.

Yes. It was very expensive. $700,000 of snow removal really hit us; this was a headwind, obviously. The warmer months won't have that headwind.

But the other piece of what you mentioned, the unfunded commitments, it's just -- we have increased lines and an increased utilization, so that is just an [asset] we make every quarter.

So the reserve is an expense that goes through the -- not expense, but it is representing good trends in the underlying business. So that's all positive.

Sure, yes, yes. The other housekeeping one that I had was just if you had an update on the energy book. I know that there was some movement in the one that was the one larger one that was hanging around.

But I think last quarter small and healthy with round numbers, $60 million in loans outstanding or something like that, and $150 million in commitments. Any update on that?

No real movement there. And obviously one of the credits that we had some charge-offs on was the long-standing company we've talked about that's really a shallow-well servicer and we have some charge-offs against that account this year -- or this quarter, that were previously reserved.

Okay, but no real movement in terms of concentrations or commitments or anything like that?

I don't believe so, no.

Okay. Last one for me and then I'll leave you guys alone. The LPO success in Cleveland, do you guys intend to maybe take that and put it into other markets? And, if so, is there places that you've got soft circle?

Yes, we would like to do that, and we've looked at Columbus market. It's just a market we are familiar with and we know well.

Terrific.

And we've done a couple loans there on the commercial real estate side. So we have nothing for certain, but we are looking in that market.

Great.

The talent is more important than the timing.

Got you. It makes sense. Thanks very much for taking the questions, guys.

(Operator Instructions) Collyn Gilbert, KBW.

Thanks, good afternoon, guys. Just wanted to follow up on some of just the movement in credit this quarter. So the $5.6 million, I guess, if we think about it for the energy credit in terms of the charge-off and then the previous reserve that you had set aside, what was the original balance on that loan?

That credit was well north of $10 million, maybe $12 million.

Okay. Then the same question on the credit that you have now, $3 million that you've got ready to sell. What was the original balance on that credit?

$5 million.

Okay, okay. Just in general, how should we think about the reserve from here? We released -- you guys obviously released some this quarter.

Do you think that can continue? Or how should we be thinking about that over the next few quarters?

Hey, Collyn; it's Jim Reske. I think in general if you think about reserve, we went to get to a place where we have a real run rate where we are just replacing charge-offs with (technical difficulty). So if we get our credit quality to peer standards in the [28] to 30 basis point range, then you can get a provision expense that will approximate that kind of level quarter-on-quarter going forward.

Now obviously that is not the actual math and the calculation of the ALLL; and in any given quarter there is lumpiness, like you see this quarter with some big credits coming through that had specific reserves charged, set aside against (technical difficulty) prior periods, and (technical difficulty) going on.

But if you want to think about just the long-term kind of rate, we want to get to that kind of -- those kind of credit metrics lined up, that have that kind of peer level, and then the provision expenses quarter-on-quarter of just replace (technical difficulty)

Okay, okay. That's helpful. If you already said this, Jim, I apologize, but what -- can you offer us maybe some guidance on where you think an ongoing run rate will be on expenses, obviously having come in a little bit better this quarter?

Yes, happy to. Last quarter we were explicit saying that we had a $40 million benchmark; we wanted to keep that south of $40 million. In this quarter we're pleased that even on adjusted basis it came through below that.

We give out all kinds of detail on all the adjustments that you can make if you choose to, with the operating number in the mid-38s, $38.6 million this quarter, which we were pleased with. But south of $40 million is what we are looking at.

So that same guidance?

That's correct.

Okay, okay. That was all I had. Thank you.

Bob Ramsey, FBR Capital Markets.

Hey, thanks for taking the follow-up. Just a quick question on the two large credits that you all had charge-offs on this quarter. The one that was moved to loans held-for-sale, is there an agreement or commitment in place to sell that yet?

And I guess similar question; the energy credit you all took a large charge on, is it still on your balance sheet? And what does the timeline to resolution look like on that credit?

On the first credit we do have an agreement to sell that credit. Then on the second credit, the shallow-well driller, just really working through. That is a long-time customer of the Bank, and just working through that credit closely with that borrower and just making sure that their cash flow can match the amortization that we have on the loan.

Okay, okay. Fair enough. Then shifting to capital, you guys, as you mentioned, were even a little more active than expected on the share repurchase front. I'm guessing that you still anticipate completing the existing authorization this quarter.

I am just curious, if you all are successful in that regard, whether that gets you done for the year, or whether you all would evaluate another authorization in the back half of the year.

I think the latter. So I think that clearly we will finish that authorization here in the second quarter, probably pretty early in the second quarter. So that will help the average number of shares for the quarter. Then going forward, we're just going to take a look at our capital and evaluate whether or not we should do some more or we have better uses for the capital.

Okay, great. Thank you.

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Mike Price for closing remarks.

Hey, as always, thank you for your interest in the Company. We look forward to seeing you in the next quarter; and Jim and I are a phone call away if we can be helpful to you in any way. Take care; bye-bye.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.