FCF
#Thank you, Roland.
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.
We've 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 <UNK> <UNK>, President and CEO of First Commonwealth Financial Corporation, and <UNK> <UNK>, 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 <UNK> 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.
Now I'd like to turn the call over to <UNK> <UNK>.
Thanks, <UNK>, and welcome to our second-quarter analyst call and thank you for joining us this afternoon.
Our second-quarter net income was $13.4 million, or $0.15 earnings per share.
Our first and second-quarter earnings per share of $0.31 are the best consecutive quarterly earnings per share figures since the second and third quarters of 2008.
<UNK> will elaborate, but tailwinds for the second quarter included improved noninterest income on a linked-quarter basis of over $2 million and a significant reduction in operating losses stemming from debit card activity as compared to the first quarter.
Headwinds on a linked-quarter basis were a $1.9 million increase in provision expense, a $1.1 million OREO write-down, and the $400,000 write-down of a former headquarters building and branch as we sell the property and consolidate it into a location less than one mile away in Dubois, Pennsylvania.
I will briefly touch on two themes, our earnings capacity and, secondly, our cost structure.
First, our earnings capacity is improving as prior initiatives are taking hold, and I will speak to just a few of these areas.
Loans grew roughly 5.1% on an annualized basis in the second quarter, largely due to momentum in corporate banking.
We saw nice traction in direct C&I lending, commercial real estate lending and construction lending.
We have two corporate banking initiatives, our Cleveland corporate banking LPO and a dealer floor plan initiative, and they are both growing in line with our business plan.
Corporate lending also offset some sluggishness in our branch consumer lending and in our indirect auto business.
<UNK> will tease out the nuance in our net interest income and margin in a minute.
Next, our wealth management and insurance income is performing well as the partnership with our branches has strengthened.
You can see this in the insurance and retail brokerage commissions line item in the press release.
Here the year-over-year figures increase from $3 million to $4.4 million.
Also contributing to fee income momentum were some meaningful traction in a few consumer categories, namely deposit service charges, interchange income, ATM fees, and merchant fees.
All told, these improvements contributed probably half of the increase in the noninterest income of over $2 million.
Importantly, our mortgage-funded loan volumes improved from the first quarter to the second quarter and the gain on sale increased some $200,000.
We still have a long ways to go, but the quarter had good traction and trajectory with mortgage.
Although a small deal, we are enthused about the prospects of our acquisition of First Community in Columbus, Ohio.
It provides a good commercial lending and mortgage platform in a market where we already have over $100 million in loan commitments.
The market is vibrant and growing.
Our First Community acquisition is on track with an expected closing of October 1.
We expect to have a one-time charge of $1.3 million in the fourth quarter.
As we convert the bank and begin in earnest, our cost basis looks to be about $600,000 per quarter as compared to an acquired revenue stream of over $900,000 per quarter.
In short, we feel like we have a good market, a great family-owned bank, and a wonderful opportunity to build upon.
Now for my second theme and our efforts around efficiency.
Adjusting for the previously-mentioned OREO write-down and the sale of the former bank headquarters building, our noninterest expense was $39.1 million in the second quarter.
Salaries and benefits were in line with our expectations and were essentially flat on a linked-quarter basis and as compared to the second quarter of 2014.
And this includes absorbing $1.1 million in salaries and benefits from the new mortgage division and the acquisition of the insurance agency.
In closing, just a few additional items.
We are now three quarters removed from our core conversion and we feel we are at the upper end of the range of committed savings of $6 million to $8 million annually.
Just as importantly, our bandwidth to integrate new technologies and product has increased markedly.
Essentially, we've remade the IT backbone of our Company.
This has and will continue to enhance the customer experience.
I want to follow-up on several items I mentioned last quarter.
We launched [Opening Act], an online deposit account opening option for customers and prospects, and we are seeing nice activity.
We introduced a critical system to automate our dealer floor plan business and more seamlessly keep track of a dealer's inventory of cars and trucks and give them good reporting, as well as ourselves.
Next our mobile banking adoption is robust with year-to-date growth of well over 31%.
We also have good momentum with our bill pay and Internet banking adoption continues to exceed our targets.
We are also relaunching our mobile remote deposit capture alongside our new suite of mobile banking and online products, and we expect a nice pick up there as well.
We are also weeks away from watching our debit EMV chip cards and also Apple Pay, so a great list of items.
Just one more thing.
Although our overall credit costs do include our second-quarter provision expense of just over $3 million and the $1.1 million OREO write-down, we are elevated compared to prior quarters recently.
The following credit indicators were really at 8- to 10-year lows: total nonperforming loans of $45.1 million; OREO of $6.5 million, NPAS at $52 million; criticized loans at $120.5 million; and total delinquency at 23 basis points.
We are vigilant with our approach to credit.
With that I will turn it over to <UNK> <UNK>, our CFO.
As usual, I'll pick up on some of <UNK>'s themes that drove our performance in the second quarter along with providing some additional detail that we hope you will find helpful.
I encourage you to take advantage of the earnings release supplement that is available on our website, which we feel provides investors with useful information that expands on the earnings release.
First of all, net interest income at $47.2 million was up by $1 million over the same quarter a year ago, but decreased by $800,000 compared to last quarter, reflecting the impact of the $1 million special dividend from the Federal Home Loan Bank that we received in the first quarter of this year.
Loan growth of $57 million from last quarter and $167 million from a year ago helped offset declining loan yields and maintain net interest income.
Our net interest margin in the second quarter was 3.26%, exactly the same as the year-ago period, but down 9 basis points from last quarter.
7 basis points of the quarter-on-quarter decline was driven by the one-time FHLB special dividend in the first quarter.
Total loan yields contracted by 5 basis points.
The Bank once again experienced positive commercial loan replacement yields continuing the trend from the first quarter.
However, this was not enough to offset unfavorable replacement yields in other categories.
Lower funding costs contributed 2 basis points to the margin as we continue to run off higher-cost brokered time deposits and grow demand deposits and savings deposits.
Our total cost of deposits is now down to 16 basis points and our total cost of funds is 26 basis points.
Non-interest-bearing demand deposits increased by $28 million over the prior quarter for a 10.9% annualized rate and currently comprise over 25% of total deposits.
Loan-loss provision expenses of $3 million in the second quarter increased by $1.9 million over the first quarter, primarily as a result of a $1 million increase in general reserves and a $600,000 increase in a specific reserve on a loan that had been previously classified as nonperforming.
Net charge-offs were $4.4 million during the second quarter, primarily driven by a $2.3 million write-down of a loan that was classified as non-accrual in the fourth quarter of last year.
$2.1 million of this $2.3 million write-down was against specific reserves.
The Bank's ratio of reserves to total loans was 1.01% at June 30 and its general reserves as a percentage of non-impaired loans remained at 0.98%.
The big story of the quarter is the rebound in non-interest income, which improved by $2.2 million over the prior quarter.
A number of items contributed to the increase.
Interchange revenue from debit card swipes improved by $300,000.
Gain on sale of loans from our mortgage banking initiative improved by $200,000 as that business continues to grow.
Merchant fees included in other income improved by $200,000 over the prior quarter as a result of the introduction of a new merchant services provider.
And, finally, service charges on deposits improved by $600,000 through a combination of two things: higher fee income related to overdrafts and insufficient funds and improved ATM surcharge and foreign fee income as a result of a new fee structure we introduced in the second quarter.
Fee income from commercial loan swap activities also increased over the prior quarter, but this figure reflects a normal quarterly credit revaluation of swap [counterparties] and swings from quarter to quarter.
Nevertheless, all-in-all this was a great quarter in terms of fee income and a nice rebound from the first quarter.
Turning to non-interest expense, our total non-interest expense increased by $800,000 in the second quarter as compared to last quarter, but the quarterly comparison is strongly affected by $800,000 in fraud-related debit card losses in the first quarter, which, thankfully, return to more normal levels in the second quarter.
We also had in the second quarter a $1.1 million write-down of a collection of REO properties and $400,000 write-down for the anticipated sale of a building that had previously been the headquarters of an acquired bank, which <UNK> mentioned earlier.
We adjust for these items at a calculation of, quote-unquote, operating expense that can be found in the supplement.
Operating expense was $38.7 million in the second quarter, relatively unchanged from $38.5 million in the prior quarter.
The most noteworthy items affecting operating expense were a decrease in occupancy expense of $600,000 over the prior quarter due to lower snow removal and utility costs, offset by a $400,000 increase in collection and repo expense in the second quarter.
Of course, any time we talk in terms of non-recurring items and operating expense these are non-GAAP and a full GAAP ---+ a full reconciliation to GAAP figures can be found in the supplement, which is available on our website.
In other news, our effective tax rate was 29.8% at the end of the second quarter.
And in terms of capital management we completed the remaining portion of our $25 million stock buyback authorization, repurchasing 714,000 shares from the second quarter.
So far in 2015 we have returned $25 million to shareholders in the form of stock buybacks and $12.6 million in the form of dividends.
While we currently have no open share repurchase authorization, our long-term strategy is to earn an acceptable return on capital for our shareholders and return excess capital to shareholders using a balance of dividends and buybacks.
And with that we will take any questions you may have.
Yes, they should and the only upward pressure will come in the fourth quarter with the integration of First Community in Columbus.
And I shared that number before; it's about a $600,000 uptick.
And there will also be one-time closing costs if that merger closes, which we expect in the fourth quarter of this year.
Yes, $1.3 million there.
Pretty satisfied with where it's at.
I think we're clipping along at about 5%.
And also encouraged as we look at the pipeline, the percentage is ---+ even the closings in the first half of the year are predominantly direct loans, about 86%.
And then the type of loan really: C&I, predominantly, 43%; IRE and construction about 45%p; and municipal about 10%.
So we like that mix and when we look at the types of loans we're getting some really nice looks.
We are seeing some strain on ---+ little bit with convenance and recourse around the edges of investment real estate.
We tend to maybe walk away from a few of those, but some nice companies.
I'm looking at a long-term care facility for the elderly we just did here in the last month for about $6 million; a highway and bridge construction company for about $10 million, nice new client.
Just the type of thing you expect a community bank to do; a foods company expanding and acquiring a medical office building.
Just kind of garden-variety kind of stuff, <UNK>.
A school district and a really highly-rated for capital projects about $6 or $8 million there; another food company $6 million.
Good, good stuff.
We saw three or four downgrades in our portfolio that created a little strain that showed up in ALLL methodology and the provisioning.
It's not there yet, on mortgage that is.
We are running probably at 50% to 60% of where we had hoped to be, but we saw some nice, positive traction in the second quarter.
So we think that will continue to contribute and we may be another six months away or so from breakeven there.
I would say with ATM fees that was a nice, sustainable outcome in the second quarter.
I would say with deposit service charges probably the same and interchange income.
And the other real positive is just good traction with wealth income and a lot more there over the course of the last 6 to 7 months, so pretty positive.
That was actually the beginning of the second quarter and when I mentioned that I was referring to our ATM surcharge fees and foreign fees.
Correct.
Yes, sure.
So the margin actually has exhibited remarkable stability.
The margin in the second quarter at 3.62% is exactly the same as it was in the same quarter a year ago.
The margin for the first half of this year is 3.30%, which is also exactly the same as it was in the first half of the prior year, so nice stability in the margin there.
The replacement yields on commercial loans, we've been watching that very closely.
That seems to go back and forth quarter on quarter, depending on the loan originations and the run-offs, and the payments that we experience.
As I noted, this is the second quarter in a row with positive commercial loan replacement yields, so that's really good.
But we think that the margin is, generally speaking, going to be bouncing around in this range until we see a rise in interest rates.
That was primarily the SNC review.
It's not.
We are just being opportunistic with the cleanup in an adjacent facility and we've been kind of nipping and tucking with real estate probably for two to three branches a year for the last several years, so this is just more of the same.
We have a bull's-eye on those old headquarters buildings that are a little unwieldy and used to have a lot of employees in and now we just have a branch.
And we really don't have too many of those left.
<UNK>, to give you an idea on the financial impact, we mentioned that it's a $400,000 charge we are taking in the second quarter, but it should save about $200,000 a year.
So it's about a two-year payback.
Nothing to announce right now, but generally speaking, the timing of that acquisition's close will coincide rather nicely with the timing of our annual capital plan as we prepare ---+ as we do our strategic planning exercise.
And when we do all that together towards the end of this year, we will be looking at our capital levels and if we think it's appropriate to seek another authorization, we will.
You mean in terms of product or capability.
No, I think we're in good shape.
Just as always, we appreciate your interest in our company and the services that you provide us and also thank you.
