Centric Financial Corporation (FCF) Earnings Call Transcript & Summary

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation acquisition of Centric Financial Corporation Conference Call. [Operator Instructions] I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Dennis, and good morning, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's acquisition of Centric Financial Corporation. Participating on this call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; and Brian Karrip, our Chief Credit Officer. As a reminder, a copy of yesterday's press release can be accessed by logging on to fcbanking.com and clicking the Investor Relations link at the top of the page. We also included a supplemental slide presentation on our website that will be referenced during today's call. Before we begin, I need to remind listeners that today's call contains forward-looking statements with respect to the future performance and financial conditions of both First Commonwealth and Centric Financial that involves risks and uncertainties. Further information is contained within yesterday's press release, which we encourage you to review. Additionally, we may refer to non-GAAP measures, which are intended to supplement but not substitute the most directly comparable GAAP measures. The press release and supplemental slide presentation contains financial information and other quantitative information to be discussed today as well as a reconciliation of GAAP to non-GAAP measures. I will now turn the call over to Mike.

Thank you, Ryan. We are pleased to announce the acquisition of Centric Financial Corporation with $1 billion in assets headquartered in Harrisburg, Pennsylvania. It's worthwhile to note that this will be our sixth acquisition in the last 7 years, and we've looked at about 60 M&A opportunities in that time, which is another way of saying that we've been selective and disciplined. We've done very well with the 5 acquisitions we've done. Each strategic opportunity has made us a better bank, been financially compelling in the long run and had a relatively clear path forward to success. Slide 5 of the investor deck delineates our success with acquisitions over the years. For example, the subtotal of Ohio loans acquired in 4 M&A opportunities at closing is $731 million, and we now have $2.3 billion of loans in that state. So we know how to buy a bank and grow it from there. All of our previous acquisitions have followed a similar pattern of low-risk metro market expansion transactions that have provided a chassis on which we can build a commercial bank. In general, this acquisition represents a continuation of that strategy. However, one thing that makes Centric particularly attractive to us is it already has a strong commercial growth engine. As I got to know Patricia Husic through the Pennsylvania Bankers Association over the past several years, my admiration grew for the commercially-focused, growth-oriented bank she and her team were able to build. Through conversations that began over a year ago, Patty and I realized that there was a strong similarity between our 2 cultures and that a strategic partnership made sense. Looking ahead, we expect Centric to be a source of growth on the commercial side but also to provide additional tailwinds in the retail bank as we introduce our offerings in mortgage, indirect, HELOC key loans through branches and SBA to their customers. This acquisition makes financial sense as well. For several years now, as we approach the $10 billion asset threshold, we've been asked how we intended to cross. And our answer was consistent with what most $9 billion banks would say. We're prepared to cross organically but we'd prefer to cross the acquisition because of the significant loss of interchange income due to the Durbin amendment. But of course, the odds are fairly low that the right partner comes along at just the right time in a geography that we want to be in at a price that makes sense. And of course, that institution would have to want to partner with us and not the competition. So Centric is the right bank for First Commonwealth at the right time. Page 9 of the investor deck talks through how the $24 million earnings stream we are acquiring more than offsets the loss of $13 million in interchange income as we cross $10 billion. It's also important to note that the timing of the deal is good because it doesn't accelerate our crossing of the $10 billion threshold any sooner than we would have organically. But, and this is the important part, even if we were crossing $10 billion, Centric is the right partner for us. With its $1 billion in assets and branch-light 7 branches, Centric extends our franchise into demographically attractive markets surrounding Harrisburg and Lancaster in just west of Philadelphia. The demographics of their markets improve our overall demographic profile, which is not something we can say for a lot of other potential partners in our geography. Furthermore, this acquisition builds upon our familiarity with central and eastern Pennsylvania markets that we obtained through our recent central Pennsylvania branch acquisition. Finally, about half of Centric's lending is in the Philadelphia area, a market where we have a significant toehold in commercial real estate lending and where our newly-formed Equipment Finance Group is headquartered. Looking to the future, our approach to M&A hasn't changed. We would be happy to do additional transactions that move us further beyond the $10 billion threshold so long as they make sense strategically and financially for our shareholders. Moving beyond the $10 billion threshold with a larger deal is not as important, though as ensuring that any given transaction improves our profitability on the other side. But even without M&A, our organic growth opportunities remain strong, including balanced commercial consumer loan growth, the new Equipment Finance effort, our SBA and other fee income businesses, all within the umbrella of a regional business model. With that, I'll turn it over to Jim Reske, our CFO.

Thanks, Mike. Mike's already covered the strategic highlights of the transaction, so I'll focus on what makes this transaction compelling from a financial point of view. It's important to note, first of all, that Centric has been a strong stand-alone performer. Page 6 of the investor deck provides some of their profitability figures. And while we are providing peer data in the deck, their profitability figures compare very favorably to peers. When compared to similarly-sized Mid-Atlantic publicly-traded banks, their core return on average assets, core return on average tangible common equity and net interest margin are all on the 75th percentile or greater. And their efficiency ratio is 5 full points below the peer median. If you look at Page 7 of the investor deck, you can see that this financial performance has been powered by a commercially-oriented balance sheet, which as Mike mentioned, is particularly attractive to us. Turning now to the deal metrics on Page 10. This is a transaction that is a success for both sets of shareholders. We are paying 1.31x tangible book value and 9.2x forward earnings. If you look at the top left of Page 11, you'll see that this price results in modest tangible book value dilution of 3.1%, which with 6.8% accretion in the first full year, we earned back in 2 years. As is customary and recently announced deals, we've also provided these figures excluding AOCI and rate marks, in which case, the earn-back period falls to 1.4 years. Pro forma capital ratios are all solid in part because the consideration is all stock. The acquisition improves our key performance ratios, including ROA, ROE, NIM and efficiency. What you don't see on this page is that the transaction is also good for Centric's shareholders, who will be receiving a 42.5% premium for their stock. They are also receiving a liquid stock in exchange for their shares and, for the first time, a dividend. They will own 9% of the company pro forma, which is commensurate with their earnings contribution. A final word or 2 about our assumptions. In sum, we believe that they are conservative and achievable. We have seen loan growth of 6%, which is consistent with our mid- to high single-digit growth philosophy. Based on our due diligence, we have identified 35% cost saves, which is in line with recently announced transactions. We have listed the interest rate marks on Page 10, which we feel were relatively modest in part because fortunately, Centric does not have a large securities portfolio for a bank it's size. Finally, I'm sure you'll note that our credit mark is 3.33%. Centric has not yet adopted CECL so in a way, this transaction adopts CECL for them. In that, we ran our loan portfolio through our own CECL model to establish the mark, including separate marks under hospitality and SBA portfolios. I would also say that in due diligence, we applied our credit culture to Centric's loan portfolio, and our credit culture has not only been continually refined in the decades since The Great Recession but also as appropriate for a bank of our size. And with that, we'll take any questions you may have.

[Operator Instructions] And your first question is from the line of Frank Schiraldi with Piper Sandler.

Just going through some presentations and releases of Centric. And it appears to me, I mean, that ex-PPP growth really ramped up in suburban Philly and the Philly region over, really, the last 2 quarters, especially. Could you talk out that a bit and where that growth is coming on and how big an opportunity that market is compared to Harrisburg?

Well, first of all, I would just say we've had some success recently there, with our commercial real estate offering and without a location there. So you've kind of hit the nail on the head. We're really excited about that market. We've really done some high-quality industrial real estate and warehouse space. And it's been a good market for us. We've been there for probably the better part of 5 years and we have about $300 million there already. And they do it quite well. And we have some similar customers, although they're on the boots and they have some terrific relationships. So we're really excited about that area just to the west and up into the Doylestown in Bucks County. It's a great market.

Okay. And then on Page 9 of where you guys talk about Durbin, you mentioned additional earnings offset as provided by a ramp-up in equipment finance. Just curious if that's assumed to be synergistic. Does this acquisition really help in that effort? Is that sort of separate to the deal?

It's -- in the same geography, it is indeed separate. However, I think having the equipment finance and Centric in that market certainly is good for our brand. And -- but that will be a business that's small-ticket leasing that will be more regional and national in scope. And obviously, this business will be a commercial lending business. And then we'll add the consumer piece through the branch. They have a terrific branch in an area called Devon. So we're excited about being able to fill out the consumer side as well as build upon the success they've already had on the commercial side. And they have some terrific lenders in that market.

And Frank, this is Jim Reske. Just in hindsight, that last bullet point probably should have been indented under the lot of -- major of this is covered, to be clear that we're talking about our organic prospects that the equipment finance is not part of the synergies of the deal.

Sure. Okay, great. And then if I could just sneak in 1 more. Mike, you mentioned that your approach to M&A hasn't changed. And I hate talking about future deals when we're talking about this deal. But in terms of future acquisitions, since you mentioned it, would you say that this maybe shifts the focus towards -- for additional deals towards Philly a bit, given you've got this small foothold now? And you already had a foothold in the commercial real estate. You've got a small foothold in the Philly footprint now in terms of franchise. Do you feel like maybe you need additional acquisitions or additional acquisitions would really help you take advantage of that? So just wondering if this shifts the geographic focus at all in terms of potential future deals?

Not necessarily. I think the thing we like about Centric is it's branch-light. The branches and where they're located is terrific, so we can punch above our weight and they have a commercial offering that is, I think, will really fit well with us and then we can grow there. I think when we think about gathering deposits, our eye is still probably towards Ohio, honestly. But this is really a terrific transaction that gets us into great demographics. And I think that we will build out our commercial banking operation and then work the consumer to the branches that Centric already has. Jane, anything you want to add on that?

No, I think that's right. Opportunistically, we will we always prefer something that we can get to it, back in the same day and so we'll keep focused on that big circle.

Your next question is from the line of Karl Shepard with RBC Capital Markets.

Mike, you touched on it at the top. Historically, you guys have been very selective with M&A. So I wanted to ask, what about Centric stood out kind of from some of the other deals that you have looked at? And I think maybe you're hinting at the demographics of the new markets. But if you could expand on that, that would be great.

It really starts with Patty Husic, the CEO. I've known her through the PBA for 10 years, the culture she's built. I just like her people. I think they'll fit well with us. I love the way that Centric has built out branches strategically that cover central Pennsylvania and are really in the right spot in where we'd like to be in the Philly MSA. And they're well done and it's a scalable model, and I think we can do a lot with what she's built. And, I think the culture would be the first thing. We're both -- we're customer-centered. We tear a lot. We're out with our people all the time doing calls, both Jane and I and Brian and others. But Patty does the same thing. And so I think culture was probably at the top of the list.

Okay. And then as a follow-up. So you guys have Equipment Finance kicking in this year. You'll have Centric next year. I think Jim gave 6% as an assumed growth number, but you guys also sound pretty optimistic about some of the opportunities to build out consumer as well. So do you want us to think any differently about kind of the medium- and longer-term growth profile of your company?

I don't think so. I think probably -- I mean, our guidance has been high single digits, which I think, going into a period where rates have gone up, is going to be challenging enough. And I don't think so. I think we have to make sure our credit quality is very, very good, and we will, and that we really have an enduring business model on the revenue side that will perform well through the ups and downs of economic cycles.

Okay. And then if I can squeeze in 1 last one. You guys, on Slide 5, give kind of the balances of Ohio over time and highlighted the success of building that out. Anything you really want us to think about that specific that you can use from that playbook as it relates to Centric? Help us understand what's really worked in Ohio and what might be repeatable with this one.

Yes. Just to be very specific, I mean, I would just take you to Page 5 in Foundation. We acquired $185 million in loans. We now have over $650 million. Those 2 branches in Columbus, DCB and First Community Bank acquired 383 and 61, we now have $1.2 billion. And so you asked what's the secret sauce. I mean, I wish it was something that would dazzle you. It's having culture, getting really good people and keeping performers and being supportive and having a culture of producers and then having a credit box that's open and constructive and works closely. I mean, Brian has put regional credit officers in each of these places so we can be super responsive. And then being aligned with our people. And our regional business model has been really effective in connecting the dots and cross-selling in these markets. We have terrific regional presidents in Ohio. So it's a little bit more than a grind than it looks on the surface. But I mean, I don't know, Jane, this is really your area. I mean, anything you would add?

Well, in every case, Ohio generally is branch-light, Centric is branch-light, so by definition, it will be commercially dead. And then we will just try to cross-sell the heck under that chassis: consumer loan, mortgage, indirect, wealth, insurance, SBA. And that's what we've done in Ohio and we're just going to wash, rinse, repeat.

Your next question is from the line of Michael Perito with KBW.

Question for Jim. Curious, the pro forma of the banks at $10.6 billion. You don't get the full year Durbin impact until 2025. Just assuming no M&A, I mean, what type of -- I guess, in your internal modeling or just even a range, just curious what type of asset size you guys can get to with no M&A by the time the full Durbin impact comes into play in 2025.

Yes. I think it's really driven by our loan growth prospects. And there's -- we just see a really great loan growth opportunity across the board. We think that's really driven by having a balanced commercial and consumer loan growth philosophy that's driving the composition of our balance sheet. So if there's a season where commercial is strong and consumer is not so strong, it bounces out as -- our loan growth prospects year-to-date -- our loan growth experience year-to-date has been really strong. Even in a market where people have taken a slowdown, it's been solid in environments within our credit appetite. So that's all been very good. So the balance sheet will go over $10 billion. We thought organically next year anyway, we thought that we were very confident we could keep the balance sheet under $10 billion by the end of this year. That's what we've been saying publicly. But with that strong loan growth, it really looked like it would kind of cross over next year anyway. And then we could just keep the balance sheet growing, to answer your question directly, after that. This leads us over, give us that earnings stream but then we can keep the balance sheet growth that kind of with the loan growth with that mid- to high single-digit rate, keep that balance sheet growth, sure of that.

Got it, helpful. And then just lastly, and I apologize if you mentioned this. I got on the call a few minutes late, but just what core was Centric on? And when is the conversion planned? I know you guys gave times around the cost savings. I was just curious if you could get a little bit more specific on that.

Yes. I mean, somewhat serendipitously there on Jack Henry Silver Lake and we are as well and I hope that is helpful. And we're looking for a close after year-end and a conversion in the first quarter of next year.

Your next question is from the line of Manuel Navas with D.A. Davidson.

Can you go into more detail on where the cost saves are coming from? I think that last question helped with that with you guys both being on Jack Henry. But just kind of give more detail on where the 35% is going to come from.

Yes, it's going to look a lot like a typical deal, so a lot of the cost saves are driven by reductions in the salary expense line. There's really no reduction in occupancy because we don't plan on closing any branches. There's no branch overlap. But other things such as professional fees, data processing, advertising, those types of cost saves that we expect. And I want to reiterate, the 35% is not just some nice number that we guessed at. We actually went through very clearly and identified all the cost saves, even layered in additional costs we might think we need to add like buying IT equipment and came up with a net number that gives us confidence that 35% is really achievable.

Also, you kind of described how this deal came together. Was there a bidding process or was it prenegotiated because of your knowledge as the CEO?

It was a negotiated opportunity for us. And again, we've known -- Patty and I have known each other for a long time and just began to have some discussions probably almost 2 years ago.