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First Commonwealth Financial Corporation (FCF)

Q1 2012 Earnings Call· Wed, Apr 25, 2012

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Transcript

Operator

Operator

I would like to welcome everyone to First Commonwealth's Financial First Quarter 2012 Earnings Conference Call. [Operator Instructions]. At this time I will turn the call over to Rich Stimel, Communications Manager at First Commonwealth.

Rich Stimel

Analyst

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 of the left side of the page. We have also included slide presentation on our investor relations page with supplemental financial information that we will reference throughout today’s call. With me in the room today are Thomas Price, President and CEO First Commonwealth Financial Corporation, Robert Rout, Executive Vice President and Chief Financial Officer and Tony Kallsen, Senior Vice President and Senior Credit 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 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, 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 would like to turn the call over to Thomas Price

Michael T. Price

Analyst

Hey thanks Rich and good afternoon everyone. I appreciate you taking the time to join us on today’s call. it's been just a little more than a month since I was informed by the board that I was being named President and CEO and I am indeed grateful for this opportunity and excited for the future of our company. I am happy to report pretty solid performance in the first quarter, a good loan growth and low-cost deposit growth drove net interest income. We saw some slippage in the spread which concerns us and Bob will speak to that in a minute but we like the lone mix with well over half on the retail side and the most significant portion of the corporate business coming from our middle-market efforts that we really started in earnest just over a year and a half ago. On credit quality I talked about key areas of strategic focus previously and I'll start with credit quality, it really starts with us building a strong credit infrastructure that will serve us well for years to come to that point our provision is down significantly and our nonperforming asset levels continue to improve. Our nonperforming loans have decreased by more than 35% since the during the first quarter of 2011 and our classified assets have really been cut in half over that same time period. Tony Kallsen, our Senior Credit Officer whose pinch-hitting for Bob Emmerich will give you more color commentary in a minute. Our second area of focus is really the thoughtful management of our strong capital position, this is about ensuring stability but it's also benefiting our shareholders as credit yields and as earnings return increasing our dividend from $0.03 per share to $0.05 is part of this effort. In our third area…

Bob Rout

Analyst

Thank you Mike. Good afternoon everyone, as you heard Mike’s opening comments we experienced considerable performance improvements in the number of areas this quarter, strong diversified loan and deposit growth. The [Indiscernible] is certainly under pressure in this unprecedented low interest rate environment but certainly performance satisfactory given the current conditions. Our aggressive strategies last quarter with respect to troubled loan cleanup are pleasingly meeting expectations, noninterest income and noninterest expense continue to provide challenges and opportunities even after factoring on some of the noise in those categories from credit related activities. So let’s start out with a little deeper dive in to this quarter's net interest margin. First quarter net interest income has benefited from approximately $163 million of loan growth over the last 2 consecutive quarters. The loans are still only up 63 million on a year over year basis due to some involuntary and voluntary loan portfolio shrinkage during the first three quarters of last year. As Mike mentioned there is no doubt that yields on new quality loans are under competitive pressure. We've been able partially mitigate this yield pressure with continued improvements in the mix and growth of our deposits. As mentioned in my previous calls we did get very active managing down deposit rates well in advance of the Federal Reserve’s operation twist monetary easing strategy that was implemented in the fall of last year. Those were very beneficial moves but still not enough to entirely offset the core net interest margin compression that comes with this interest rate environment. Our net interest margin was 3.75% for the quarter on a fully taxable equivalent basis included in that number is about a $1 million of delinquent interest that we recovered on that $11 million troubled land fill loan that paid off this quarter. That…

Tony E. Kallsen

Analyst

Thanks Bob. First Commonwealth Bank continued to show measured improvement in asset quality. Classified loans declined 14 million or 7% from last quarter, the ratio of classified loans to risk based capital at the bank level is 25%. Non-performing loans declined 22.5 million or 20% from last quarter. The ratio of nonperforming loans to total loans is 2.17%. You may recall that nonperforming loans peaked in the third quarter of 2011 at 161.9 million or 4.07% of loans nonperforming assets declined 31.2 million or 22%. The most significant resolutions of nonperforming assets during the first quarter were as follows, as previously disclosed the bank was paid in full on an $11 million loan that financed a landfill. The sale of an office tower in downtown Pittsburgh with an OREO carrying value of 6.8 million and the sale of one of the three notes moved to held for sale in the fourth quarter. This note was secured by a suburban office property and was sold for 6.8 million or roughly 75% of the original note balance. The bank recovered 1.7 million as a gain on sale. Subsequent to quarter end the bank closed on the sale of a second held for sale note that was secured by a retail property, that note sold for 5.3 million or roughly 76% of the original note balance and the bank recovered 1.2 million as a gain on sale. I thought I would take a minute to discuss the $2.8 million OREO write down, while certain property valuations have improved undeveloped land has generally continued to deteriorate its feasibility and absorption continue to be called into question. That was the case with this property, the bank has an established process to continually update the values of its OREO properties and promptly recognizes a write-down if…

Michael T. Price

Analyst

With that we would love to be helpful with questions you might have.

Operator

Operator

[Operator Instructions]. The first question we have comes from the location of Bob Ramsey of FBR. Please go ahead.

Bob Ramsey

Analyst

I was really happy to see the dividend increase that you all announced and I was just curious I know in the past you all have said that as you get more comfortable with credit that all capital options are on the table, it certainly would see in the dividend increase signals some growing comfort there. I am interested in how you all are thinking about other ways of deploying the capital on your balance sheet and whether buybacks might be of a part of the near-term plan.

Michael T. Price

Analyst

The first two obviously are this is Mike, to continue to grow organically and the second option obviously is dividends and then we will look to evaluate those other options. Bob anything you would add there?

Bob Rout

Analyst

No we are right in the middle of our strategic planning process and certainly our expected growth rates as going forward is going to impact what we think our capital needs are going to be and we run that through stress tests all the time and certainly improvement in credit quality is a factor in the stress test. So yes that’s on the table but we are not ready to announce anything at this point.

Bob Ramsey

Analyst

Okay and I guess as you all kind of work through the strategic planning process, will you be sharing in the future sort of what you think the growth potential, the organic growth potential in your business or setting some goals along those lines?

Michael T. Price

Analyst

We will certainly be setting some goals of where we would like to be in three to five years and thinking about the mix of options that will get there primarily organic growth and we will certainly share those thoughts with you.

Operator

Operator

And the next question we have comes from Mike Shafir of Stern, Agee.

Mike Shafir

Analyst

Listen, I was just wondering as we kind of think about the margin I guess it was a little bit more impacted from an organic standpoint than I would have thought. So as we think about that moving forward and we look at some of the leverage you can pull to help offset that, your CD cost still remain relatively high but just maybe you can put some context around where new loan yields are coming on. How we can think about the margin from if we take out the 8 basis points of benefit this quarter.

Michael T. Price

Analyst

Just a couple of thoughts for you, the new loan yields in the commercial side as we look at month-to-month and kind of the trailing 12 month average, they are not off that much it's really more of a re-pricing of things that have runoff with newer loans but the averages themselves are not deteriorating that much. We still have a little play with our funds pricing and we meet regularly on that and grind on that with all exceptions and we are moving those down and continue to move those down in some pretty good chunks over the course of the last couple of months. So that’s clearly an opportunity and additionally the mix of business. We just want a little bit more robust mix on the small business on the CNI side and we think that's healthy not just for the margin but for the relationship value of our core customers. I don't know Bob, anything you want to add?

Bob Rout

Analyst

Yes certainly the reinvestment activity within the investment portfolio has provided downward pressure, but there is not a whole of unique strategies that we have. I think this initiative is basically the industry. We just want to be careful not trying to stretch and take more than the market has to offer us right now. We have a lot of good things going and this interest rate environment will change.

Mike Shafir

Analyst

So if we think about that 367 margin, are we looking for gradual decline over the next several quarters then?

Bob Rout

Analyst

All things given equally yes.

Mike Shafir

Analyst

Okay and then just going back to your expense levels and thinking about a core rate of around 41 million. I am assuming then you are backing out the collection and reposition expense and then also the loss on sale of write-downs this quarter.

Bob Rout

Analyst

Yes.

Mike Shafir

Analyst

So the write-down should certainly come down in theory as you get rid of some of those loans and then also the collection repossession expense, how should we just be kind of thinking about those two line items as you had one loan that sold off and clearly you are not going to have the OREO benefit in terms of collecting the rent there but you're also not going to have the expense.

Bob Rout

Analyst

I wish I could predict what's going to happen to those loan collection costs. Certainly as the troubled loans come down you would expect a proportional reduction and it's also some of the larger ones that are resolving that take so much of those collection costs resources. So yes, I would think a substantial movement on in that. As far as predicting where that's going to be, I think that would be very speculative right now.

Mike Shafir

Analyst

Okay and then just as we think about that $40-$41 million goal, what kind of a time period should we think about that?

Bob Rout

Analyst

40 million run rate.

Mike Shafir

Analyst

I mean in what kind of time period do you think we can get to those run rate numbers?

Bob Rout

Analyst

I think we're trying to hit before the end of the year.

Operator

Operator

Yes sir, the next question comes from Richard Weiss of Janney.

Richard Weiss

Analyst

In regard to the loan pricing on slide 5, I think you're competing with price rather than underwriting standards.

Michael T. Price

Analyst

Rick, I'm having a tough time hearing you, could you start again?

Richard Weiss

Analyst

Starting with slide 5 in the presentation, and with regard to price, how do you compare to the competition would be the first question. And the second one would be would you be willing to share some of the yields that you are sitting on, commercial real estate or commercial business loans.

Michael T. Price

Analyst

It's probably most appropriate on the residential real estate side and really the refinance and some of our mortgage activity there because that's really where we've had most of the growth the last couple of quarters and I would share there that, we're probably third or fourth in the market in price there. We're certainly not the price leader but we're at that 65-75% how is a crude estimate and that's probably the most important number there. And then I think on the CNI side, it's deal to deal and I would say we are in fray. I don't see that we are winning business on price. I think it's more a matter of relationship in calling. We've been very focused on blitzes. I mean in our small business and retail, we probably made 1,500 blitz calls on specific days in the first quarter. So we're getting a lot of ads backs. So I don't think we're certainly a price leader on CNI either.

Richard Weiss

Analyst

What are you doing a change in strategy from having price loans in the past, relative to the competition?

Bob Rout

Analyst

I would say we're being a little more aggressive on our consumer home equity loans. When we look at the alternatives on the balance sheet with our excess liquidity, did we want to go out and buy some mortgage backed securities or agencies and say 1.5 or rather get more aggressive on some of the consumer loans and we opted to get more aggressive on the loans. So if anything's been aggressive it's probably the consumer loans. The CNI, there's just too much competition out there. It's pretty hard to charge a premium and I don't think we are undercutting prices there to get the volume that we're seeing.

Michael T. Price

Analyst

And the other thing, we've had some nice growth recently is in the indirect side and we're pretty scientific. I mean we are stacking up against maybe a dozen banks, loan to values, collateral types, FICA scores, ABCD and looking precisely where we're at in the pecking order and again, some of our other bigger bank brother intend to be price leaders and we can follow a little bit because our underwriting center is in the market and there is just more relationship value there with the dealers and we tend to do the fore plans and so forth.

Bob Rout

Analyst

I think it's fair to say that the indirect lending competition has heated up, as more and more banks gotten back into the market after being out of the market. So we are staying with the pack. So that we get our share of the volume.

Richard Weiss

Analyst

Okay and just speaking of the pack, it seems like the pack is pretty big in many of your markets, would you expect more M&A to pick up. And what's your perception of that?

Michael T. Price

Analyst

I don't know. I just thought it would pick up a couple of years ago but I suspect it will but I think we've all being saying that for a few years.

Bob Rout

Analyst

I mean you had part value you had main line, some fee couple of small ones, you've not seen the big stuff yet.

Richard Weiss

Analyst

So not much difference now than say if I had asked this question three months ago.

Michael T. Price

Analyst

Yes and certainly even a small community banks which have to be feeling pressure on a number of fronts when they look at the economic potential of the region, again on a number of different levels, they are saying, hey maybe we're coming out of this. Because it's just not a real strong interest that push everybody to make that decision.

Operator

Operator

The next one does come from Collyn Gilbert of Stifel Nicolaus.

Collyn Gilbert

Analyst

Couple of questions, one is Bob, can you tell us what the margin was at the month of March?

Bob Rout

Analyst

Probably not. We don't usually disclose that. I am not sure I have the number here with me.

Collyn Gilbert

Analyst

Second question, on the three million of commercial non-performers that were added this quarter, what's the LTV of those credits and when were they originated?

Tony E. Kallsen

Analyst

I don't know if I have the origination dates. This is Tony. We actually on a gross basis put in about 8.5 million and then we had about 5.7 million that was received in the form of pay downs or settlements. So that where you get your net from. The ones that were added were not all real estate. Let me see if I can get to that list.

Collyn Gilbert

Analyst

I have one more if you don't mind? I know Bob you said it's really hard to predict the sort of REO expenses going forward which I can appreciate. But of the 176 million in overall operating expenses in 2011, do you know what percent of that, or not even percent of dollar, whatever, would be considered non-provision credit expenses?

Bob Rout

Analyst

Not off the top of my head. I wouldn’t speculate. I am sure its 12-14 million of that was credit related.

Michael T. Price

Analyst

And then just to circle back on your earlier question, as suspected, the larger ones that went into non-performing were not all real estate. So I am not sure I can really give you an LTV on a lot of those.

Collyn Gilbert

Analyst

Any other credit metrics that you could offer or structures or debt service or just a little bit of a…

Michael T. Price

Analyst

The names that went in, there was at least one of these that was a CNI credit. Typically when we are putting in non-accrual debt service coverage ratio is going to be less than one that is the case here. I don't believe it’s a wipeout. I think it's close to breakeven and I know we've restructured the credit as well and I think we also have a real estate based transaction with single family homes. Those LTVs are probably not in too bad a shape. I am going to guess they are certainly not in excess of 100% or something like that. So I don't know, is that what you were looking for?

Operator

Operator

The next question comes from Damon DelMonte of KBW. Please go ahead.

Damon Del Monte

Analyst

I guess my first question has to do with, can you just give us a general update on the four remaining large non-performers that you highlight on slide eight as far as where you are in a process of resolving them?

Tony E. Kallsen

Analyst

I'll just check through an order with credit one, we have negotiated a forbearance agreement on that credit and that is in a repayment situation right now. There is a tail to this. We do expect a large portion of this repayment to come at the end of this forbearance which goes out for I think another two years. On credit two, we've actually restructured this relationship significantly and we've done some AB note structures here. So I think what we'll find or we certainly hope we'll find probably Q2 maybe Q3 of this year is that we'll be able to upgrade the A note portion of these, the B note portion which charged-off.

Damon Del Monte

Analyst

I am sorry, you've already charged it off or you will be charging it off?

Tony E. Kallsen

Analyst

No we have charged them off. Credit number three, we actually are anticipating a payoff on this credit. That will be refinanced or recapitalized hopefully later this year. Credit number four, I am not sure I have a lot to report in terms of the resolution here, I guess just the word Florida probably tells you that. And then credit number five, I think I mentioned that subsequent to the end of the quarter we did close on that, that was moved into held for sale, we did close on that and that transaction has already been consummated so that gain is a good number.

Damon Del Monte

Analyst

And just on that credit number five, just for my own knowledge here, when you sell a loan like this, do you get to recapture the lost interest income or the deferred interest income at all or no, because it's sold?

Tony E. Kallsen

Analyst

Well, when we move it into held for sale, we mark-to-market that and when we sell it, I suppose if were to fortunate enough to recapture 100%.

Bob Rout

Analyst

I don't think there is any interest recapture on this particular sale. There won't be. Just to give you a little more color on that Florida one, its $5.7 million balance now. We have a $2.4 million specific reserve set aside for that one and that's part of a very large participation where there is multiple participants and they looking to try to complete that project and get it either sold or at least operated on the cash flow basis.

Damon Del Monte

Analyst

Great thanks. My next question has to do with the overall status of loan pipeline. You have shown some good growth the last couple of quarters. Can you give us an update on your commercial loan pipeline as to maybe where that stands in a dollar amount?

Michael T. Price

Analyst

I can't, and I don't think we've given that. I just think it’s comparable and actually we had a senior officer's meeting this morning and we asked the head of that division a small business division the status and the middle market person, it is about the same as it’s been which for us has been good the last couple of quarters. Small business, they say the pipeline is percolating but I heard that before and growth there has been relatively flat. We are seeing nice non-interest bearing deposit growth there which is a little paradoxical and those customers just aren't borrowing yet. So hopefully we can get that turned around. We have a nice portfolio there about 450 million. It would be good if that portfolio was growing robustly to help us here.

Operator

Operator

For your next question we have comes from John Moran of Macquarie.

John Moran

Analyst

Just one detailed question on tax rate realizing of course that it kind of bounces around based on whatever happens in any given quarter. But now that we are through hopefully most of the noise on the credit side of things, is 26ish the right place to be thinking on effective tax rate?

Bob Rout

Analyst

I think we sell about 25 to 27 range that I gave in my comment.

John Moran

Analyst

Okay and then just kind of a big picture question. Obviously you guys have exposure to shale activity and sort of second order outcomes out there. Anything in the past I think you've shared sort of anecdotal evidence of some benefit there. Anything that you guys care to share this quarter.

Michael T. Price

Analyst

No, we just continue to track it and I would just say that in our loan committees which albeit participating in one year about half an hour, we'll probably see it about 10% of the activity related to shale. Mostly it’s a supply side everything from lumber yards to steel fabricators to waste water treatment and they've certainly been impacted by the price of natural gas over the course of last year. But it's healthy and it's meaningful to us.

Operator

Operator

The next question we have comes from Wayne Archambo of Monarch Partners.

Wayne Archambo

Analyst

This has been touched on briefly a few questions ago, but on the M&A environment you see yourself part of that. Are there still in acquisitions that you see in your contiguous market or do you just plan to grow organically. Just give us some readout what your thoughts are there.

Michael T. Price

Analyst

Our thoughts are to grow organically and to use our capital for the dividend initially. Our stock price really hasn’t warranted serious consideration there and anything we might do well into the future would be contiguous fill in, it would have to be complementary strategically and bring something to the table. But I think we can grow and be successful where we are at but I am not sure right now our stock price warrants that.

Wayne Archambo

Analyst

So you don't see this as a 2012 event. You've got other priorities right now.

Michael T. Price

Analyst

For now yes, and I also think we need to string together a few good quarters but that's where our heads at. Bob anything you want to add?

Bob Rout

Analyst

Yes, every bank has three growth modes whether it be organic, acquisitions or [indiscernible] and depending upon what's happening in the market, banks will shift back and forth between those growth modes. Right now organics working really, really well for us and we think it provides additional growth opportunity. But with that said, we will look for M&A. but right now we are at a disadvantage because our stock gives us trading up to the peer levels yet. As Mike said, we probably needed another quarter or two to validate that our performance this quarter is indicative what's going to happen going forward. And then I think once that happens, we’ll start seeing the stocks rating mostly at more peer level.

Wayne Archambo

Analyst

Do you have any sense on just population growth in your markets? Is there immigration, is it flat, any sense of the population growth in your markets?

Michael T. Price

Analyst

We look at that every year as part of our strategic planning process and up until a couple of years ago we were still a net loser in the households modest and I think it stabilized somewhat but it's probably been a nine to 12 months since I dusted off those numbers. It was pretty unspectacular quite frankly.

Operator

Operator

Gentlemen we are showing no further questions at this time.

Michael T. Price

Analyst

Well thank you. I appreciate you investing 40 minutes with us and your interest in our company and you can certainly reach Bob or I if you have additional questions and thank you again.

Operator

Operator

And we thank you to the rest of the management for your time. The conference call has now concluded. At this time you may disconnect your lines. Thank you and have a good day.