First Commonwealth Financial Corp (FCF) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for the First Commonwealth Financial Corporation Second Quarter 2017 Earnings Release, Q&A Session, Conference Call and Webcast. (Operator Instructions)

I will now turn the conference call over to Mr. Ryan Thomas, Vice President of Finance and Investor Relations. Mr. Thomas, the floor is yours, sir.

Thank you, Michael, and thanks again to everyone that could join us today on such short notice. We learned after the call that there were a number of people waiting to ask questions, but apparently, no one could get through. So as a result, we thought it would be best practice to go ahead and schedule this call to fully address any questions you might have. And again, we certainly apologize for the confusion and inconvenience that this caused.

The format of today's call, we're going to include a few brief comments from Mike Price, President and CEO of First Commonwealth, and then we'll open the call up for your questions. For that portion of the call, we will be joined by our CFO, Jim Reske; Chief Credit Officer, Brian Karrip; and Mark Lopushansky, our Chief Treasury Officer.

Before I turn the call over to Mike, I'd like to caution listeners that this conference call will contain forward-looking statements about First Commonwealth, its businesses, strategies and prospects. Please refer to our forward-looking statements disclaimer on Page 2 of today's slide presentation on our Investor Relations website for a description of risks and uncertainties that could cause these results to differ materially from those reflected in the forward-looking statements.

And with that, I'll turn the call over to Mike.

Thanks, Ryan. And as I mentioned yesterday, in the second quarter, we closed and integrated the acquisition of Delaware County Bank in the Columbus, Ohio MSA. As a credit to both banks' leadership teams, deposits have actually grown significantly since the deal closed, which we believe is somewhat unusual for a transaction of this type and really bodes well for the future of our business in Central Ohio. And then notwithstanding our merger-related expenses of $9.9 million in the second quarter, core net income of $20.4 million produced core earnings per share of $0.21 and a core return on assets of 1.11%. Primary drivers of second quarter performance include solid organic loan and deposit growth, strong organic growth in fee income and improved spread income driven by a buoyant net interest margin. We also experienced improved asset quality as evidenced by a negative provision of $1.6 million, even as the reserve as a percentage of originated loans remained at 0.98%.

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

(Operator Instructions) The first question we have comes from Steve Moss with FBR.

This is actually Kyle Peterson on for Steve today. Just wondering if you guys could start kind of on the -- kind of as we're looking at NIM. In 3Q, obviously, there's some moving pieces with kind of the June rate hike kind of -- and some kind of accretion and other impact from Delaware County Bank. Just wondering if you guys can kind of see where you see that kind of moving from, kind of on a 3Q basis there.

Jim, if you can handle that?

Yes. Sure. Thanks, Kyle. Appreciate the question. So the NIM ended the quarter at 3.54%, as was published. We expect it to stay probably in that range around that, from 3.50% to 3.60%. There will be some benefit that comes from the June rate hike that will be affecting the third quarter NIM. What we previously disclosed is that we get about 2 basis points of improvement in the NIM almost immediately in the quarter following the rate hike. And so that should be coming into the NIM next quarter.

Okay. And then I guess, just a little bit on the accretion impact from DCB. Noticed in the slides that it says about $600,000 higher. Is that -- is the lion's share of the accretion from DCB? And kind of where do you guys see at least the scheduled accretion kind of rolling out in future quarters?

Yes. Sure. So the accretion of future quarters won't change a whole lot from this quarter. It will be -- the total amount of accretable yield expressed in terms of basis points of NIM in the second quarter was about 4 basis points.

Okay. And you expect a similar kind of accretion run rate, at least through the rest of this year, and then maybe kind of ramping down in '18? Is that a fair way to look at it?

Yes. That's exactly the way to look at it, Kyle. It won't change that dramatically in the ensuing quarters, but it will fade out over time.

Okay. And then just kind of last one for me. And then I'll give someone else a chance to jump in. I just wonder if you could touch a little bit more kind of on M&A. I know kind of DCB is closed now. Just want to see an update on kind of how that is going and kind of your thoughts or appetite for any kind of potential deals and what you'd be looking for.

Our pattern for the last 2 years has been 3 small acquisitions to build out a franchise in Central and Northern Ohio. That's now $1.3 billion in deposits and $1.1 billion in loans in a pretty conservative kind of controlled growth, lower risk -- execution risk. And they've been really nice chassis for us to really put commercial banking on top of a nice, manageable retail franchise. I think that's been our pattern. I think we'll continue to look at opportunities like that to expand our footprint just a little. We like the drivable footprint and also the fill-in within our Western Pennsylvania franchise. So that's our current thinking. And Jim, I don't know if you want to add to that.

Yes. No. Just -- we always say banks are sold and not bought, as everybody says. And so you can't quite time these things perfectly. It is good, I think, from our perspective to have a little bit of time to digest some of the acquisitions that we've done. We actually mentioned that when we announced the last acquisition, that it was good to take some time to integrate those acquisitions and make sure they're done successfully and then get a chance to look at the acquisition opportunities as they become available.

I mean, just one other comment I would add on net interest margin. And Jim and his team kind of keep me informed and the management team from month to month, and they follow it just copiously. But we look at every asset class of loans that we're putting on the books. And right now, the replacement rates are higher than the loans that are running off. And that's really been a nice trend for probably 4 or 5, at least, quarters, Jim, and really bodes positively for the stabilization and perhaps a little upward pressure on the margin. But -- so we look at that closely and very analytically, and Jim and his team do a terrific job.

Yes. And thanks for mentioning it, Mike. The replacement yield is a question we have gotten from analysts from time to time, and we have noticed that trend in the last several quarters pretty consistently. In fact, I could tell you that in the quarter just ended, the replacement yields on loan portfolios were higher in almost every category. And the only category where they weren't higher than the yields on loans that were running off was categories like certain consumer loans, where we are offering rate specials to get a growth. Those products end up being profitable products in the long run, but we offer rate specials up front to encourage customers to take the product. But that's the only category where we had -- didn't have a positive replacement yield. Other than that, across the board, we're seeing positive replacement yields on loan portfolio categories.

Okay. That's helpful. And that, I guess, should kind of help offset kind of the accretion, especially next year, as it kind of fades out, right?

Yes. Correct. Yes. And then the long-term effects of the rate hikes. So the -- that helps the variable portfolio reprice upward, even without replacement yields. Those are all positive upward pressures on the NIM.

And I think -- and usually for a bank of our size, I think, Jim, the number is about 62% or 63% of our portfolio is variable at the commercial portfolio, and that reprices fairly quickly.

That's right. We had -- about 40% of the portfolio reprices almost immediately. And then over time, the number you're talking about -- I think it's 62%. I'll find it in a second -- reprices. So, here we go. 42.1% of that portfolio reprices almost immediately. And given time, about 61.3% of the portfolio is variable and will reprice with upward movements of interest rate.

The next question we have comes from Jake Civiello of RBC Capital Markets.

With your organic loan and deposit annualized growth metrics without DCB in the mid-6% range, which I think you said yesterday, do you anticipate the DCB growth to grow at a similar rate in the second half of this year? Or will it take time to achieve similar levels of balance sheet growth for that old part of the -- for the old DCB franchise?

I think they're clipping right along, and I think one of the things that elevates it is just a little higher lending limits with a larger bank. So that portends well for us short term to kind of accelerate the growth there, and it already has. And it's also just, quite frankly, a vibrant market with lots of good opportunities both on the C&I and the commercial real estate side.

That kind of leads me into my second question. On a bigger, longer-term picture, as the size and the scale of the Ohio footprint continues to grow, do you think at some point down the road you could achieve loan and deposit growth in equal parts compared to the legacy Pennsylvania franchise?

I think it might grow a little quicker, but we're satisfied with the growth that we're getting in Pennsylvania. And that's more of just penetrating our own customers and the markets a little better. And -- but we're seeing opportunities in both markets.

Okay. Then just one more for me. Are there cost savings opportunities still to come following the DCB closing? And had you provided any expense guidance for the second half of 2017?

We have not, other than I -- we have a nice slide on the supplemental deck on Page 9 that really shows noninterest expense kind of in the middle of the page. And that's both prior to unfunded commitments, intangibles and acquisition expenses. And it shows us at about $46.9 million. I think, Jim, in your prepared remarks yesterday, Jim talked about we had about a $1.1 million write-down on some OREO properties. And we really want this to stabilize, and we really are pretty committed to driving our efficiency ratio well below 60% over time. And we have a couple things in mind that we'll probably speak to a quarter from now and things that we'll execute on to continue to improve our operating expenses and our efficiency. We think that's vital to have and be able to make investments in central digital capabilities and to continue to be fresh there for our customer base. And we're going to have to be more efficient.

Just to -- I just had one thought. And just to, I think, maybe answer one part of your question directly. Some of the expenses from DCB were not fully taken out of the second quarter. I don't think anyone gets all the expenses out in the same quarter that they close an acquisition. For example, there were some employees who worked to help us through the conversion that stayed on through the quarter that obviously won't be there in the third quarter. So there'd be some expense savings still to come.

(Operator Instructions) At this time, we'll proceed to Mr. Dan Cardenas of Raymond James.

Just a couple of quick questions here. Going back to the margin. What if any -- from the recent rate hikes, did you pass any of that along to your depositors? And as you look forward, I mean, when do you begin -- if you haven't, when do you begin to expect to pass on rate hikes to the deposit base?

It's a great question, Dan. We do spend a lot of time thinking about that and have had a lot of conversations about that internally and with the investor community. And I think the industry is always talking about deposit betas and how the rate hikes affect the deposit base and cost of funds. So to be honest, so far, through several Fed rate hikes, we've actually seen very little deposit pricing pressure in our markets. Part of that is because, as a bank, we're maybe a little more commercially oriented than some, so we have a fairly healthy percentage of noninterest-bearing deposits, over 25%. So that helps our cost of funds. But we also are not particularly dependent on time deposits, which might be a little more rate-sensitive. So that's helped keep our overall cost of deposits down to 12 basis points this quarter. I think the cost of interest-bearing deposits was 20 basis points this quarter. So that's still pretty healthy. What I can tell you is, anecdotally, we have seen recently other banks offering time deposit specials, not in the general -- what we call the [wrap] rate of deposits, but specials to attract those funds. We think those may be offered by the banks that might need the time deposits more than we necessarily do. And then also, to pull these concepts together, given the term structure of our balance sheet as a commercial balance sheet, generally, the duration of our assets is a little less than the duration of our liabilities for negative duration equity. And so we don't necessarily have a need to extend liability duration the way some banks might if they were, for example, portfolio-ing long-term mortgages and long-term loans and less commercial in nature. So I mentioned that to say that we have seen some of those pressures. We do, in general, want to keep our loan-to-deposit ratio under 100%. It's not a hard-and-fast guideline, but it is a desire to -- a general desire we have to fund our loan production with deposits. And so I do think in the quarters to come that there'll be some deposit pricing pressure. That will offset a little bit, to some extent, some of the positive NIM trends that we mentioned a moment ago, such as positive replacement yields. And all of that will work together and be reflected in our NIM.

Okay. Good. Good. And then maybe some color as to your expectations for charge-offs in the back half of the year, especially given the recovery that we saw in Q2. I mean, do you expect kind of to return more to Q1 levels? Or what are your thoughts there?

I think -- and Jim and I have shared in the past. I mean, I think if you go back 3 or 4 years and look at our quarterly or annual provision expense and then just kind of divide that out and make a quarterly figure, that's kind of what we expect. And there's been a -- the two larger recoveries we've had. One was a developer from several years ago, but one was an equipment finance company that was near term. So obviously, those come episodically. But when you look at our nonperforming loans, nonperforming assets, trends in some criticized asset categories, certainly, they're very positive by historical standards. But as we all know in this business, that can change.

Yes. And I would only add that the charge-offs and recoveries are a normal part of our business every quarter. So there will always be some level of that. And what we try to say consistently is that the best way to understand our company is to look over the long-term trends rather than taking any one individual quarter and highlighting that. So as Mike said, if you look at longer-term trends for our company, you'd probably get a better picture of kind of provision expense trend over time.

Great. Appreciate that. And Jim, last question for me, and I'll step back. Just loan pipelines. How are those looking right now? And geographically, are prospects better in Ohio than they are in your legacy footprint?

Yes.

They're about equal with the exception -- in terms of opportunity, with the exception of mortgage. Mortgage, we're doing about the same units, but we're doing larger units in Ohio. But on the commercial banking side, we have terrific opportunity in both markets. And I was just sharing with Jim on the way over, just personally, probably have 4 or 5 opportunities. So perhaps confidence is rising in that C&I space, and there's more activity. At least that's what we're seeing right now.

(Operator Instructions) Well, at this time, there appears to be no further questions. We'll go ahead and conclude today's question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Yes. Thanks, operator, and thank you for your interest in our company, and look forward to talking to you -- many of you over the course of the -- the fall and the spring at your conferences and on calls as well. Thank you. Bye-bye.

And we thank you, sir, and the management team, and yourself, again, for all your time, and we thank you, to the participants. The conference call has now concluded. At this time, you may disconnect your lines. Thank you. Take care, and have a great day, everyone.