FCF
#Thanks, Brian.
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 information that may be referenced throughout today's call.
With me in the room today are Mike <UNK>, President and CEO of First Commonwealth Financial Corporation; and Jim <UNK>, Executive Vice President and Chief Financial Officer.
After brief comments from management, we will open the phone call to your questions.
For that portion of the call, we'll be joined by Brian Karrip, 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 businesses, 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 Mike <UNK>.
Okay, thanks, <UNK>, and welcome, everyone.
In early April, we legally closed the acquisition of Delaware County Bank in the Columbus, Ohio MSA.
And in the latter part of May, we've successfully integrated our 2 companies.
This added $384 million in loans and $484 million in deposits in the beginning of the second quarter.
We now have an Ohio banking franchise with $1.3 billion in deposits and $1.1 billion in loans after 3 successful acquisitions in less than 2 years.
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 point.
Primary drivers of second quarter performance included solid loan growth, a negative provision of $1.6 million and a buoyant net interest margin.
Second quarter organic loan growth of $84 million, or 6.8% annualized, was led by strong activity in commercial real estate and direct C&I lending.
In our 2.5 year old mortgage division, second quarter loan closings were the best we've experienced in our short history in this business, with roughly half of the originations coming from our new Ohio markets.
Negative provision expense of $1.6 million was aided by low charge-offs and some $3.1 million of recoveries from 2 larger credits.
Nonperforming loans decreased $9.7 million from March 31 to $40.2 million and a 0.75% of total loans, the lowest figure in years.
Also, the allowance for loan losses as a percentage of originated loans at 0.97% stayed comfortably in line with our expectations.
As I shared earlier, our bank acquisitions in Ohio have had sticky deposits with no net runoff, enabling the repayment of high-priced Federal Home Loan Bank borrowings.
Coupled with solid loan growth and pricing discipline on new loans in current deposits, the net interest margin improved to 3.54% for the second quarter.
Importantly, and as expected, with the myriad of investments and strategic initiatives, the earnings capacity of our company is increasing.
Second quarter net interest income of $58.9 million and noninterest income of $18.9 million are among the highest figures ever for First Commonwealth.
Consistent growth and higher yield in commercial loans over the last several years, coupled with new households in Northern and Central Ohio, are the key enablers.
Our sizable debit card interchange business increased to $4.8 million in the second quarter, up appreciably from $4.2 million in the first quarter.
Prior to recent acquisitions, the previous high for this business was $3.8 million in the second quarter of 2016.
Other bright spots in fee income included trust revenue, insurance commissions and deposit service charges.
And these businesses are getting appreciably better.
We feel this earnings progression is evident over the last 4 quarters as the trailing ROA over that period is now 1.08%, also up appreciably from prior years.
With that, I'll turn it over to Jim <UNK>, our CFO.
Thanks, Mike.
As Mike mentioned, core earnings per share, that is excluding merger expense, came in at $0.21, up $0.03 from last quarter.
Core ROA was 1.11%, up from 0.98% last quarter.
The core efficiency ratio was 60.19%.
But as anticipated, our expense base included some noise from the DCB acquisition and conversion in the second quarter.
We expect core efficiency to trend below 60% in the second half.
Onetime transaction costs for DCB were in line with expectations at $9.9 million in the second quarter and $10.5 million for the first half of the year.
We typically focus on linked-quarter comparisons in reviewing quarterly results.
But they are all, of course, impacted by the closing of the DCB transaction in the second quarter.
Loan and deposit balances as well as spread and fee income all improved from last quarter, as one would expect with an acquisition.
It's important to note, however, that the improvement in our performance was driven not only by the acquisition but by organic growth as well.
Mike mentioned that our organic loan growth, without DCB, was at an annualized rate of 6.8%.
But our organic deposit growth, not including DCB, was at a 6.4% annualized rate in the second quarter as well.
Similarly, fee income, excluding securities gains, was up by $2.7 million from last quarter with approximately $800,000 of that improvement coming from acquired DCB operations and the rest coming from organic growth.
Expenses, of course, were also up from last quarter, in part due to the acquisition.
There were, however, a few expense items that are worth clarifying.
First, approximately $1.1 million of the increase in expense was due to losses on the write-downs of 3 properties we were holding as real estate owned, or REO, that had nothing to with DCB.
The remaining REO on the balance sheet is only $6 million.
Second, the expense associated with the reserves against unfunded commitments, which runs through other operating expense, was up by $900,000 over last quarter.
And finally, we had noncash expense of about $800,000 from core deposit intangible amortization in the second quarter, up from $600,000 last quarter.
CEI expense is expected to be $1.4 million in the second half of 2017.
DCB's deposit balances are up since we struck the deal.
And they are more valuable now as well due to the Fed's rate hikes.
The CDI amortization is over 10 years, but is on an accelerated basis, and therefore, should fade out over the next few years.
On a final note, our effective tax rate was 30.04%.
And with that, we'll take any questions you may have.
Well, thanks, operator.
That's a surprise.
I thought we were going to have a question or 2.
You know where to reach us, covering analysts, and we're glad to field your questions and be helpful in any way that we can.
We appreciate your interest in First Commonwealth and look forward to seeing many of you between now and the end of the year.
Thank you.
