First Commonwealth Financial Corporation (FCF) Earnings Call Transcript & Summary

Welcome to the annual meeting of shareholders of First Commonwealth Financial Corporation. Please note that today's meeting is being recorded. During the meeting, we'll have a question-and-answer session. You can submit questions or comments at any time by clicking on the message icon. It is now my pleasure to turn today's meeting over to David Dahlmann, Chairman of Board of Directors of First Commonwealth Financial Corporation. Mr. Dahlmann, the floor is yours.

Thank you, Ashley. Good afternoon, everyone. I'm David S. Dahlmann, Chairman of the Board of Directors of First Commonwealth Financial Corporation. And it's my pleasure to welcome all of you to the 37th Annual Meeting to Shareholders. It's now 2:00 p.m. on April 28, 2020, and in accordance with the notice of the meeting, I call this meeting to order. Today's meeting is being conducted as a virtual meeting through a live webcast. This format allows shareholders to participate from their homes in accordance with the current social distancing guidelines to contain the spread of COVID-19 virus. Thank you very much to those who are participating in our virtual meeting today. Joining me on the line are Mike Price, the President and Chief Executive Officer of First Commonwealth Financial Corporation; Jim Reske, the Chief Financial Officer of First Commonwealth Financial Corporation; and Matt Tomb, the Secretary of First Commonwealth Financial Corporation. I will preside at today's meeting, and Matt will act as Secretary. This morning, First Commonwealth announced its orders for the -- its earnings for the first quarter of 2020. A copy of the earnings release is available on the company's website at www.fcbanking.com, by selecting the Investors Relationship and selecting News under the News & Market Data menu. Next I would direct your attention to the rules of conduct for a meeting today, which you can find in the File section of the webcast in the lower-left corner of your screen. Please take a moment to review the rules of conduct. Turning now to the agenda for the meeting. After I complete my welcoming remarks, I'll turn the call over to Matt Tomb to conduct the business meeting. During the business meeting, shareholders will be asked to vote on 4 items of business. The first item is the election of 14 directors, each to serve for a term of 1 year and until his or her successor has been elected and qualified. Two, after the election of directors, shareholders be asked to ratify the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020. Third, shareholders be asked to approve an employee stock purchase plan. And finally, shareholders will be asked to approve a nonbinding advisory vote on the compensation of named executive officers. Following the business meeting, we'll move to Item 3 on the agenda, labeled remarks, during which Mike Price will discuss the company's strategies and priorities. We'll then open the meeting for questions and comments by shareholders. At the conclusion of the question-and-comment period, we will adjourn the meeting no later than 3:00 p.m. I'll now turn the call over to Matt Tomb, who will lead us through the business portion of the meeting. Matt?

Thank you, Dave. We'll turn to the official business of the meeting shortly, but first, I need to cover a few legal formalities. First, I'll call your attention to the meeting minutes of the 2019 annual meeting of shareholders. These can be accessed in the Files section in the lower left-hand corner of your screen. The minutes were approved by the Board of Directors of the corporation and are available for your review. Second, I confirm that the corporation has received a sworn affidavit of the notice of Internet availability of proxy materials for this meeting, which was mailed by first-class mail on or about March 18, 2020, to shareholders of record as of March 2. Third, I note that a list of shareholders of record of the company as of March 2, the record date, is available for review by shareholders by selecting the Shareholders List link in the lower left corner of your screen on the webcast. Fourth, please note that Joseph Roach from Computershare, who will be acting as inspector of election for this meeting, is also in attendance. And finally, I confirm that out of the 98,248,083 shares of common stock that were issued and outstanding as of the record date, 86,023,525 shares, or approximately 87.56% of the outstanding shares are represented at this meeting in person or by proxy. Therefore, I can report that a quorum is present to convene this meeting. Turning now to topic 2b on the meeting agenda. We will open the polls for voting on the items of business at today's meeting. If you have not voted or if you wish to change your vote, you may do so now by clicking the link provided online. If you've already voted by proxy, you do not need to take any action unless you wish to change your vote. Referring to topic 2c on the meeting agenda, you will see that there are 4 ballot proposals to be voted on today. Each proposal is described in detail in the company's proxy statement. The first item of business is the election of 14 individuals to the Board of Directors. In accordance with the company's bylaws, each Director will be allowed to serve for a term of 1 year and until his or her successor has been elected and qualified. The nominees are Julie A. Caponi, Ray T. Charley, Gary R. Claus, David S. Dahlmann, Johnston A. Glass, Jon L. Gorney, Jane Grebenc, David W. Greenfield, Bart E. Johnson, Luke A. Latimer, Aradhna M. Oliphant, T. Michael Price, Robert J. Ventura and Stephen A. Wolfe. Directors are elected by a plurality of votes cast, which means that the 14 nominees who receive the highest number of votes will be elected. However, our corporate governance guidelines provide that in circumstances of an uncontested director election, which is the case for this year's election, any director who does not receive a majority of votes cast must promptly tender his or her resignation to the Board. The second item of business to come before this meeting is the ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020. Two representatives from Ernst & Young are in attendance, they are Alex Schmidt, coordinating partner; and Tim Mercurio, Audit Senior Manager. Alex has advised company that he has no formal statement to make. However, he will be available during the question-and-comment period, if necessary, to respond to appropriate questions from shareholders. The third item of business is the approval of employee stock purchase plan. A summary of this plan can be found on pages 19 through 23 of the proxy statement. The fourth and final item of business to come before the meeting is the approval of a nonbinding advisory vote on the compensation of the company's named executive officers, currently known as Say on Pay. Information concerning executive compensation can be found on pages 25 through 47 of the proxy statement and the text of the resolution that shareholders have been asked to vote on, is found on Page 24. Now that we've gone through all of the items, I will declare that the online voting is closed. And based on a preliminary review of the votes cast and tally that was provided to me before the meeting, I'm pleased to announce that Julie A. Caponi, Ray T. Charley, Gary R. Claus, David S. Dahlmann, Johnston A. Glass, Jane Grebenc, Jon L. Gorney, David W. Greenfield, Bart E. Johnson, Luke A. Latimer, Aradhna M. Oliphant, T. Michael Price, Robert J. Ventura and Stephen A. Wolfe have each been elected to the Board of Directors. Each Director has received at least a majority of the votes cast for his or her election. The appointment of Ernst & Young LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020, has been ratified. The First Commonwealth Financial Corporation employee stock purchase plan has been approved. The advisory vote on the compensation of our named executive officers has been approved. Please note that these results are preliminary and are subject to tabulation by the inspector of election. We will report the final voting results within 4 business days by filing a Form 8-K with the SEC. That concludes the business portion of the meeting. And at this time, I will turn the meeting back over to Mr. Dahlmann.

Thank you very much, Matt. I declare the business portion of the meeting adjourned. At this point, I'd like to turn to Item 3 in the agenda remarks, we'll ask our CEO, Mike Price, to provide those to you. Mike?

Thanks, David. And if we could go to Slide 8. Good afternoon, everyone. At our best, First Commonwealth exists to improve the financial lives of our neighbors in their businesses. We are a mission-driven bank and help our customers and communities manage, save, borrow and protect their money. Just 2 examples. In January, we were 1 of 4 banks nationwide, recognized by the FDIC for our efforts to expand financial literacy with specific recognition given to our partnership with Goodwill of Southwestern Pennsylvania as part of their community reentry program, providing nonviolent offenders a gateway to reenter the workforce. The second example, most recently over the past couple of weeks, we've shifted operations and reassigned upwards of 100 employees to work around the clock to help 1,500 businesses access the Paycheck Protection Program, securing more than $426 million in funds to keep their businesses afloat and employees on the payroll at this time of COVID-19. On Page 9, you get a glimpse of the scope and the performance of First Commonwealth Bank. Just a few highlights. 2019 was our seventh consecutive year of core earnings per share growth. During this time, our compound annual growth rate of earnings per share was 16%, I might add. Over the last 6 years and through 2019, the bank has more than doubled its core return on tangible common equity to 15.3% and also doubled its core profitability to 1.35% as depicted by core ROA, both figures at the end of 2019. At the same time, efficiency of the bank has improved dramatically from 67.1% in 2013 to a 57% efficiency ratio in 2019. We've also grown our bank through a series of 5 well-executed acquisitions over 5 years in adjacent markets in Ohio and Central Pennsylvania. Importantly, we've also dramatically expanded the number of consumer households and business customers who we're privileged to serve. We've originated a record $2 billion in commercial and consumer loans in 2019. And as you can see on the slide, we are actively engaged in our communities. We've become a successful small business lender ranked #2 and 3, respectively, in SBA lending in Pittsburgh and the Cleveland MSAs. This experience has been critical to our success in helping our small business customers access government funds through the Paycheck Protection Program. On Slide 10, just a summary of some of the early action we took relating to the COVID-19 crisis by working with businesses to extend forbearance and become -- we became actively engaged in the Paycheck Protection Program, commonly known as PPP. We similarly helped consumers as we proactively offered payment relief on mortgage and auto loans, and we've held off on some foreclosures and repossessions at this time as well. We've closely followed CDC and government guidance to protect our employees and customers as part of our -- as our demographic is one of the oldest in the United States. We've also started a COVID-19 food drive, matching up to $75,000 of employee and customer donations to enable critical nonprofits in the communities where we live and work. The COVID-19 crisis has not only impacted the health and wellbeing of our communities but has taken a dramatic toll on the economic livelihood of households in our backyard. We're making a difference with our clients every day. On Page 11, in an opportunity with a terrific partner bank, we acquired 14 branches from Santander in Central Pennsylvania in early September. This was contiguous to our current branch network and markets in Central PA. This added over 20,000 households and the team has grown deposits, starting with $470 million base, and we've grown it by $33 million in the last 6 months alone. Great start. On Page 12, our regional business model has spurred local accountability, improved local leadership and enabled better connectedness between our lines of business to deliver solutions to our clients. The results are evident in the growth we've seen in our newer markets in Ohio and Central Pennsylvania. Although, Ohio is only about 1/4 of our depository, it now produces a majority of our loan and deposit growth. On Page 13, besides enabling our clients, our focus is pretty simple: to grow our businesses on both the loan and the low-cost funding sides of our balance sheet. We are executing better with our clients and have a bevy of new digital tools to help them. Lastly, as we look at the future, efficiency is a vital focus to both fund digital tools for our clients' needs and also provide good returns to our investors. How we do this is described in Slide 14, we are authentic and mission-driven. We're focused on having positive operating leverage from year-to-year. We protect shareholder value at times like these, in part through a strong risk culture aligned with the long-term expectations of our stakeholders. The bank is profitable with the pretax pre-provision ROA in the first quarter of 1.79%. Our first quarter reserve build is appropriate given the external environment and puts us at 1.25% of reserves to loans. And First Commonwealth has a strong balance sheet with ample liquidity and capital. We also have a strong risk culture. With that, I'm going to turn it over to Jim Reske, who will provide added color in detail regarding our financial results. Jim?

Thanks, Mike. I'll take a moment to review 2019 before talking about the first quarter of 2020 and where we are today. On Page 16, we show 4 key financial performance metrics, and we're showing those over an 8-year span because 2019 capped an impressive 8-year run of improving financial performance. On these charts, First Commonwealth's performance is shown as a red line, while our peers are shown with a dotted green line. You can see that 8 years ago, we lagged peer levels. But over that time span, we have steadily improved our performance to the point where we are either at or ahead of our banking peers. Take the top left as an example. This chart shows our average return on average assets, which is a common measure of profitability in our industry and shows our net income in relation to our size. Eight years ago, we were below peer levels, but now our profitability has outpaced peers. The same is true for return on equity right below it, which is a measure of our net income in relation to how much capital we have. The efficiency ratio on the top right works a little differently. For this ratio, lower is better. It represents how much it costs us to generate $1 revenue -- of revenue. Eight years ago, it took a $0.665 to generate $1 of revenue, which was more than peers. We brought that down over time to peers levels during a time when the competition is getting tougher as peers were improving their efficiency as well. Finally, the net interest margin is its own star. Here, higher is better. Our margins severely lagged peers at the beginning of this period. But we positioned the bank to address this to the point where our margin is now ahead of peers. This is especially important in light of current events because as the Federal Reserve has lowered rates in response to current crisis, we expect that margins will compress across the industry. Let's turn to the first quarter. The first quarter was profitable. The most significant financial event is that we built up loan loss reserves in response to the COVID crisis, which impacted earnings for the quarter. To be clear, we had not yet seen an increase in delinquencies as of the end of the first quarter, but we believe that building a loan loss reserve is the responsible thing to do in the current environment. In the first quarter, we built a reserve by $27.4 million, which represents the amount of the provision expense in excess in net credit loss. This brought our ratio of reserves to total loans up from 0.83% to 1.25%, an increase in the ratio of approximately 50%. Even with this reserve build, we remain profitable for the quarter, which added retained earnings and capital. Finally, as you can see on the page, we have plenty of liquidity with which to service our customers as well, with approximately $3.7 billion of available liquidity. In terms of capital, we are entering into the current COVID crisis, a position of strength. We have approximately $200 million of excess capital over and above what it takes to be considered well capitalized. While we are not required to run capital stress tests due to our size, we do so anyway. And in keeping with our conservative risk and governance culture, we perform those tests. In those capital stress tests, even in our most severely adverse scenarios, we remain well capitalized. Finally, I would note that we have temporarily suspended our share repurchase program to preserve capital as have most other things, but our dividend remains intact. And with that, I'll turn it back over to our Chairman, David Dahlmann.

Thank you very much, Jim. I would now like to move to the question-and-comment period, which is Item 4 on your agenda. In doing so, I'd ask you to observe the rules of conduct I referenced at the beginning of the meeting. You may submit your questions online by clicking on the dialogue icon in the upper right-hand corner of the meeting center screen. All questions should be directed to our CEO, Mike Price. And responding, Mike may call upon members of his management team. [Operator Instructions] In the interest of having sufficient time to give all shareholders an opportunity to ask questions, we may summarize the questions received on the portal or combine questions on the same topic and answer them together. The meeting is now open for shareholder questions or comments, and I'm going to ask Mike to handle the responses. Mike?

Very good. And Ryan, do we have any questions on the portal?

I'm showing no questions submitted at this time, Mike. If you would like to pause for a minute, we can do that.

Okay. Just pause for about 15 or 30 seconds. And we do appreciate all of you being -- your interest in our company in following over the years sincerely and your engagement in our respective communities as well. Any questions, Ryan?

There have been no questions submitted.

Okay. Thank you. I will turn it back to you, David.

Thank you very much, Mike. I want to echo what Mike said on behalf of the Board of Directors. I want to thank each of you for attending today. We truly appreciate your response and your support for First Commonwealth. I look forward to seeing you again. And hopefully, it will be in person in 2021. Two things, as we sign off. One, I would ask that the Directors and Matt Tomb join as soon as possible following this meeting for our organization meeting. And second, I want to thank Ashley and turn the meeting back over to her. Thank you. Good day.

This concludes the meeting. You may now disconnect.