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

Hello and welcome to the Annual Meeting of Shareholders of First Commonwealth Financial Corporation. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to David Dahlmann, Chairman of the Board of Directors of First Commonwealth Financial Corporation. Mr. Dahlmann, the floor is yours.

Thank you very much. Good afternoon, everyone. As noted, I'm David S. Dahlmann. I'm Chairman of the Board of First Commonwealth Financial Corp. And certainly my pleasure to welcome all of you to the 38th Annual Meeting of Shareholders. It is now 2:00 on April 27, 2021. 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 will allow our shareholders to participate from their homes in accordance with the ongoing social distancing guidelines to contain the spread of COVID-19 virus. Thank you very much for those who are participating in the virtual meeting today. Joining me on the line is Mike Price, the President and Chief Executive Officer of First Commonwealth Financial Corporation; also, Jim Reske, the Chief Financial Officer of First Commonwealth Financial Corp.; and Matt Tomb, who's the Secretary of First Commonwealth Financial Corporation. I will be presiding at today's meeting, and Matt will act as a Secretary. This morning, First Commonwealth announced earnings for the first quarter of 2021. A copy of the earnings release is available on the company's website at www.fcbanking.com. You can get there by selecting the Investor Relations and selecting News under the News & Market Data menu. Next, I would direct your attention to the rules of conduct for our meeting today, which you can find in the files section of the webcast in the lower left corner of your screen. I'd ask you to take a moment to review those rules. 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, our shareholders will be asked to vote on 3 items of business. The first item is the election of 14 directors, each to serve for a 1-year term and until his or her successors have been elected and qualified. The second will be after the election of directors, shareholders will 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, 2021. And finally, the shareholders will be asked to approve the nonbinding advisory vote on the compensation of named executive officers. Following the business meeting, we'll move to item, which is listed as Item 3 on your agenda labeled remarks, during which time Mike Price will discuss the company's strategy and priorities and joining Mike and adding comments will be Jim Reske. We'll then open the meeting for questions and comments by the shareholders. At the conclusion of the question and comment period, we will adjourn at approximately 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. Before I turn to the official business of the meeting, I do need to cover a few legal formalities. First, I want to call everyone's attention to the meeting minutes for the 2020 Annual Meeting of Shareholders. You can access these by selecting the 2020 Annual Meeting minutes link in the left panel of your screen. The minutes were approved by the Board of Directors of the corporation and are available for your review. Second, I can confirm that the corporation has received a sworn affidavit of mailing of the notice of Internet availability of proxy materials for this meeting, which was mailed by first-class mail on or about March 17, 2021, to shareholders of record as of March 1. Third, I would note that a list of shareholders of record of the corporation as of March 1 is available for review by shareholders by selecting the shareholder list link in the left panel of your screen. Please note that this link is only visible for those who logged on using the control number on your proxy card. Fourth, Joseph Roach from Computershare, who will be acting as the Inspector of Election for this meeting, is also in attendance. Finally, I can confirm that out of 96,216,066 shares of common stock that were issued and outstanding as of the record date, 82,427,698 shares or 85.7%, are representative of this meeting in person or by proxy. Therefore, I can declare that a quorum is present to convene this meeting. Turning now to topic 2B on your meeting agenda. We'll 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 on the link provided online. This link is only available to shareholders who logged in using the control number on your proxy card. And if you've already voted by proxy, you do not need to take any action, again, unless you wish to change your vote. Referring to topic 2C on the meeting agenda, you will see that there are 3 ballot proposals to be voted on today. Each proposal is described in detail in the company's proxy statement. The first proposal is the election of 14 individuals to the Board of Directors. Under our bylaws, each director is elected to serve a 1-year term and until his or her successor has been elected and qualified. The nominees for this year 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 the circumstance 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 in his or her favor must promptly tender their resignation to the Board. The second item of business for 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, 2021. Two representatives from Ernst & Young are in attendance. They are Alex Schmidt, partner; and Tim Mercurio, Managing Director. Alex has advised the company that he does not have a formal statement to make. However, he will be available during the question and comment period to respond to appropriate questions from shareholders. The third 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, which is commonly known as say-on-pay. Information concerning executive compensation can be found on pages 20 through 44 of the proxy statement, and the text of the resolution that shareholders are being asked to approve is found on Page 19. Now that we reviewed the items of business, we will close online voting. [Voting]

And based on the preliminary review of the votes cast, I can announce the results, which again are preliminary. 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 received at least the majority of the votes cast for his or her election. Secondly, the appointment of Ernst & Young as the company's independent registered public accounting firm for the fiscal year ending December 31, 2021, has been ratified. And finally, the advisory vote on compensation of our named executive officers has been approved. As I said, the results that I just read are preliminary and are subject to final tabulation by the inspector of election. We will file an 8-K, which will report the final votes within 4 business days, and you can find that on the SEC's website. So at this time, I will turn the meeting back over to Mr. Dahlmann.

Thank you very much, Matt. At this point, I will declare the business portion of the meeting adjourned. I would like to open -- I would like to turn the meeting over to Mike Price and Jim Reske for their comments. Mike?

Thank you, David, and welcome. It is good to be with all of you today. Now, I'll start with the slide on our mission, which is simply to improve the financial lives of our neighbors and their businesses. At our best, we help and solve problems for our clients. Our track record in things like SBA lending, PPP lending last year as well as low-income housing and mortgage lending throughout our footprint, I think, are evidence of our commitment to the mission, and we're proud of our achievements there. In the next several slides, we'll make this mission come alive, just a little bit more. So next slide. I think this is more evidence of our commitment to improving the financial lives of our customers just focusing on the 2 columns in the middle around consumers at the onset of COVID, we allowed a 90-day grace period for credit card mortgage, auto loan payments, second request required additional approval. But the point is, we were there for our customers, and we reached out to them, in fact, to see if they needed help. We also approved approximately 5,000 forbearance agreements for consumer customers. On the business side, we approved over 1,600 forbearance agreements for commercial customers. We also got very involved with SBA's Paycheck Protection Program. We ultimately approved almost 5,000 loans representing $606 million of approved commitments, which supported over 80,000 jobs. That work has continued this year in the first quarter, where we've done roughly 2,500 loans for $250 million. Next slide. Last year was indeed a year of distinction. I'll just comment on a few things. On the FDIC's CRA performance evaluation, we were recognized as a leader in community development loans. Just a week ago for the third straight year, we were pleased to be recognized by Forbes Magazine as one of the best banks in America, one of the 75 best banks and also as a top workplace. Probably just as importantly, on the SBA side, we were the #2 SBA lender in Pittsburgh and the #4 SBA lender in Cleveland, Ohio. And just evidence of our commitment to be the best bank for businesses and particularly smaller businesses throughout our footprint. On the next slide, you'll see that within weeks of the onset of the pandemic in March of 2020, under a project called, we ultimately dubbed it Project THRIVE, we really began to focus on 3 things: fulfilling our mission, as I've shared; developing a critical path to be profitable as compared to our peers; and then really emerging from the COVID crisis stronger than ever. And we feel like we fulfilled these 3 cornerstones of that project. We came together as an executive and as a senior management team, and we assigned revenue, expense, margin and capital as 4 areas that we were going to focus on during 2020. And just a little -- some highlights here. Obviously, on revenue and growth, the team got very focused on PPP. We really felt it was our duty to deliver for our clients. We also got focused on continuing a trajectory with our mortgage, indirect auto businesses and continuing the trajectory of serving our consumers. We also were very focused on our digital capabilities to really enable our customers at this time. And we really had improved our digital offerings over the prior several years. On the expense side, we looked closely at every line item on the expenses. And simply because we felt like lower for longer interest rates were going to create some headwinds for the banking industry and ourselves, and we really felt it was critical that we become even more efficient. And if some of you recall, probably at the end of -- probably 2011, '12, we were about 67% efficiency ratio, and that ratio has dropped in the most recent quarter, as Jim will highlight in a minute, all the way to 53%. And one of the things we did, and it was really enabled by our digital strength is we really consolidated a portion of our branches just in anticipation of lower for longer interest rates. We also worked hard on our margin. There was interest rate cuts at the beginning of the pandemic, really undermined banking margins, and so we focused on our deposit funding costs and our mix of our loans. And indeed, this past quarter, our margin has begun to move up once again. Lastly, we really focused on capital. Opportunities for organic growth with our dividend, which Jim will announce here in a minute, and then also with M&A opportunities and even stock buybacks. On the next slide, you can see over the last decade, this has been a very busy team. And I'll just highlight a few things. Starting at the top. Our digital capabilities have really improved since a core conversion in our bank in 2014. But really, last year, right in the midst of the pandemic, we added a new treasury management platform for our commercial customers. We put in a mobile online platform for over 200,000 consumers and small businesses. We had added an additional real-time payments option Zelle for our customers. We also really improved our digital account opening and made it more mobile-centric. As we move down this list, last year, we were really fortunate that we had invested in the prior several years in our consumer lending platforms to include mortgage, SBA lending and indirect lending, and that will set the stage for some of the financial results that Jim will outline here in a minute. As I mentioned previously, in retail, we consolidated a number of our branches into adjacent locations. And we saw our digital platform usage SOR, which I'll get to in a minute. Also setting the stage was really our successful expansion into Ohio in North Central Pennsylvania. The team did an extraordinary job of retaining deposits and growing those franchises in the aftermath of those acquisitions by really building out our commercial and mortgage offerings on top of it. Let me just give you one example. In Ohio, 4 of the acquisitions there, we acquired $731 million in loans and $1.3 billion in deposits. We now have over $2 billion in deposits, up from $1.3 billion, and over $1.7 billion in loans, up over $1 billion. So that franchise has been really important to us and has really enabled our growth, our profitability over the last several years. We also just roughly 3 years ago, really got focused on a regional business model with regional presidents with accountability in respective markets to really improve the performance and to get the teams to work together cross-functionally. I suspect 4 or 5 years from now, we'll look at a chart like this and will be just as busy with robust, productive initiatives to continue to grow our company for the next 3 to 5 years. On the next slide, you'll just see our regions in our bank, which has really expanded from what we call our community markets in PA over the last 7 or 8 years. And these -- again, these regions are led by market presidents, who have balance sheet and income statement accountability. They also have other key metrics that they follow around customer satisfaction, referrals. And what this has done is this has really enabled us as a bank to connect the different capabilities of our bank, wealth, SBA, mortgage insurance with our clients and offer them more service. You might ask how this is going. And Ohio is now 33% of our loans and 22% of our total deposits, and it's really accounted for the majority of our growth over the last several years. And that doesn't mean that the Pennsylvania franchise is not strong. It is. It's very strong. It tends to lead on some of the deposit categories whereas Ohio tends to lead on some of the loan categories year in and year out. On the next slide, we've just outlined for you here briefly how we've intentionally approached our digital strategy. And these themes here, these 6 themes have not really changed for the last 4 or 5 years. And so thematically, with our digital strategy, we've been focused on being mobile-centric and full service with that mobile application. And being personalized in our approach to the customer experience, things like financial management tools, with savings goals, we're being able to customize the interface have been important, particularly for our younger users. Promoting customer engagement, supporting higher levels of security and really embracing and evolving payments. I'll just digress there for 1 minute. We started digital wallet, probably about 5 years ago. It was a sluggish start. In the last 2 or 3 years, our digital wallets and payments process there have skyrocketed. And lastly, evolving our data analytics. On the next slide, you'll see the fruits of that labor, and you'll see where our digital interface on the left on a cell phone, looks very much like the tablet or the online experience. And that seems simple, but it just took a lot of work. But in this day and age, that's what the customer expects. On the next slide, you'll see some of the fruits of this labor in digital and some of the payoffs and how we were indeed well positioned for the pandemic. You'll see digital account opening going up from 2,100 accounts to 4,500 accounts in just 1 year, 113%. Debit card transaction, as we move to contactless payment cards, and people were not swiping cards or putting them into a machine is up 15%, and our debit card interchange income was up appreciably. You'll see mobile deposit capture users. That's taking a picture of your check in depositing in your bank. This past year is up 45%. ATM image deposits, which to me is quite a leap of faith, that just feeds your check into the ATM machine, that's up 84%. And then as I mentioned earlier, mobile wallet users. You can see at the bottom that our products are -- have positive ratings from the App Store and also from Google. And we just feel like we're well positioned. We were well positioned for this pandemic, and we added to the repertoire last year with even newer solutions. So we're trying to meet customers where they're at and really enable them. On the next slide is just simply how we will continue to succeed. We feel that it's important that we remain authentic and a mission-driven community bank. We also feel it's important in our business that we control expenses. And we have positive operating leverage. It just means that our revenue always outgrows our expenses, and then that creates an improvement in our earnings per share of our bank. And it's just an important discipline for a business like ours. We also feel that it's important we protect shareholder value and have our credit costs outperform peers, and indeed, they are and they have, and really deploy capital as market conditions continue to improve. And Jim always expands on this beautifully. He just talks about organic growth first; dividend, second, for our shareholders; and stock buybacks and M&A activity. And M&A activity is important. You saw 5 deals earlier on that we've done and how they build out Ohio and our North Central Pennsylvania franchise. But we really probably looked at 45 plus to just do 5. So we're pretty picky, and we are very thoughtful. Lastly, and very importantly, is maintaining a good enterprise risk culture which Matt Tomb and the executive team do a terrific job of and having a good corporate governance culture really aligned with the long-term expectations of our stakeholders. And with that, I'm going to veer a little off script, and about a month ago, we had a press release. And I'll just share briefly. The team and I are very grateful for David Dahlmann and his leadership and counsel that he has provided us over the last 15 years as Chairman of the Board of Directors of First Commonwealth. David has created and his fellow board members a strong independent board and a rigorous corporate governance culture that creates appropriate accountability with a management team. And accountability is a good thing for us. It's also a privilege to welcome Jon Gorney into the position of Board Chairman. Jon has served on our Board for 8 years, but he has a 37-year banking career at 2 top 10 U.S. banks to include C-suite leadership roles in digital, IT and operations alongside integrating over roughly 1 dozen acquisitions. So his background makes him uniquely positioned to lead our Board at this time. And with that, I'll thank David once again, and welcome, Jon, and I'll also turn it over to Jim to talk about our financial results.

Thanks, Mike. As shareholders, you know that our financial performance drives both price appreciation in our stock and our ability to pay you a dividend. So it's appropriate to set aside a moment or 2 to discuss our financial performance in 2020. On this page, we have summarized 4 key ratios that measure our financial performance going back to 2014. For 3 of them, higher is better, but for one of them, lower is better. We're on that at a moment. Now we are nothing, if not honest with ourselves and with you. And in that vein, we have laid out for you, not only our own performance on the red line, but also that of comparable peer banks on the dotted green line. Look, for example, with me at the top left corner, and I'll show you how this works. This measure is ROAA, or return on average assets. ROAA is a measure of how effectively we have used our assets to generate returns for shareholders. The graph, like I said, starts in 2014. The nice thing about looking at this stretch of time is that it shows the extent to which your management team has been able to turn around the financial performance of the bank. You can see that back in 2014, we were below the dotted green peer line. By 2018 and 2019, we had surpassed peers. Then COVID hit in 2020 and our priorities were on preserving capital, building loan loss reserves and cutting costs to make sure we would come through the crisis even stronger. The last part of the graph shows our financial results for the first quarter of this year which we announced this morning. We don't yet know what kind of numbers the peer banks will be putting up. But as you can see, by the way, the red line turned sharply upward, our ROAA has recovered very nicely. Most of these charts show a similar pattern. The chart below ROAA at the bottom left is a metric called ROAE, which is our return on equity. It shows how effectively we used our capital or equity to generate a return for our shareholders, and it follows a similar pattern to ROAA above. Perhaps the most dramatic story on the page is on the bottom right. This is our net interest margin, which is a measure of our spread income. It's important because spread income is about 70% of our total revenue. And it follows the same pattern as ROAA and ROAE, except that here, we came from way behind peers back in 2014 to surpass them by 2019, and we are rebounding here as well. Finally, we come to the only measure on the page where less is more, where a lower number is better, and that's the efficiency ratio on the top right. This measures how much it costs the bank to produce $1 of revenue. So we want that number to be as low as possible. Back in 2014, it took us $0.685 to produce every dollar of revenue. Last quarter, it took only $0.53. Now that's progress. Notice that other banks have become more efficient over this time period as well. But in this case, given our particular business mix, we're pleased to see our ratio right on top of theirs. The next page is simply some summary statistics about the quarter that we just wrapped up. And I believe that most of the numbers on this page are records for the company, which means that so far at least, we have come through the COVID crisis quite nicely. Some of these results were driven by our ability to release reserves that we have built up against bad loans due to improvements in loan quality and the outlook for the economy in general. But other results, including the first 3 big numbers in the top left of the page, reflecting our core operating results and have nothing to do with loan loss reserves. In brief, our core fee income-producing businesses, including mortgage, trust, brokerage, insurance and small business administration lending are all doing very well, and in some cases, more than double the performance of a year ago pre-COVID. And our expenses remain very well controlled as well, which is an area of continual focus for us. As a result, we were pleased to announce a 4.5% increase in the dividend to $0.46 a year. And with that, I will turn it back over to Mike for questions.

I think we're going to David first. David?

Yes. Thank you very much, Mike and Jim, for your comments. At this point, I'd like to open the meeting to questions. In so doing, I would ask you to observe the rules of conduct that I referenced at the beginning of the meeting. You can submit your questions online by clicking on the dialogue icon in the upper right corner of the meeting center screen. I'd ask that you direct all the questions to Mike or CEO and in responding, Mike may also call upon some members of the management team. I would note if there are any governance questions that arise, Mike will refer those to me and either I will address them or ask one of the committee chairs to address that. With that said, please make your questions or comments as brief as possible. If you could combine those to one subject that would be appreciated. In interest of having a 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 subject and answer them together. The meeting is now open for shareholder questions or comments. And so Mike, we'll wait and see what we have.

Okay. It looks like you might have answered them all already. We've received no questions today.

Mike, you did a stellar job there. If I could then, if we are through the questions or comments, I'd like to just close by again thanking all of you for joining us. We really appreciate your support of First Commonwealth. But before I sign off, I would like to, one, thank Mike for his very kind comments in regard to my tenure as Chairman, and I would like to also emphasize what Mike said, Jon Gorney is intimately qualified to service chair of this organization. I think we'll all be proud of his leadership. Finally, I would just like to recognize one other person that is Wendy Reynolds. Wendy has been with the organization for quite a few years and for most of the 38 years of these meetings, she's been involved with making sure everything runs on time. So when you retire on June 30 of this year, I hope we see her in many shareholder meetings in the future, but I personally want to thank Wendy for all her efforts over the years to make these annual shareholder meetings as productive as they have been. With that said, I will look forward to seeing you all again. Hopefully, it'll be in person in 2022. Thank you.

Ladies and gentlemen, this concludes the meeting. You may now disconnect. Everyone, have a wonderful day.