First Commonwealth Financial Corporation Q1 2010 Earnings Call Transcript

First Commonwealth Financial Corporation Q1 2010 Earnings Call Transcript
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First Commonwealth Financial Corporation (FCF)

Q1 2010 Earnings Conference Call

April 22, 2010 2:00 PM ET

Executives

Richard Stimel – Communications Manager

John Dolan – President and CEO

Robert Rout – EVP and CFO

Michael Price – President of First Commonwealth Bank

Robert Emmerich – EVP & Chief Credit Officer

Analysts

Matt Schultheis – Boenning & Scattergood

Damon DelMonte – KBW

Mac Hodgson – SunTrust Robinson Humphrey

Presentation

Operator

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Good afternoon and welcome to First Commonwealth’s First Quarter 2010 Earnings Conference call. All participants will be in a listen-only mode. (Operator Instructions)

After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Rich Stimel. Sir, you may go ahead.

Richard Stimel

Thank you. 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 and then selecting news on the left side of the page. We’ve also included a slide presentation on our Investor Relations page with supplemental and financial information that we’ll reference throughout today’s call. With me in the room today are John Dolan, President and CEO of First Commonwealth Financial Corporation, Mike Price, President of First Commonwealth Bank and Bob Rout, Executive Vice President Chief Financial Officer.

After brief comments from management we’ll open the call to your questions. For that portion of the call we’ll be joined by Bob Emmerich, our Chief Credit Officer and John Previte, our Senior Vice President of Investments. 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 two of the slide presentation for 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 John Dolan.

John Dolan

Good afternoon everyone and thanks for joining us today. There is a lot to cover on the call and I’d like to start with an overview of the first quarter and an update on some key strategic initiatives. As I mentioned on last quarter’s call we’re very pleased to have Bob Rout on Board as Executive Vice President and Chief Financial Officer. Bob will be providing details on our first quarter financial performance and then finally Mike Price will discuss our operating initiatives and performance of our clients and business.

Needless to say our first quarter net loss of $13.2 million was extraordinarily disappointing. This compares to net income of $1.7 million in the first quarter of 2009. During the first quarter of 2010, we saw enormous declines in collateral values. The volatility we’re experiencing remains largely a product of a small number of out of state credits concentrated in the real estate sector. Mike will get into the details of our credit quality a little later but in general non-performing loans increased roughly 12.7% to $167.4 million from December 31, 2009.

There were two key participation loans that were placed into non-performing status in the first quarter and again Mike will go into those details a little bit later. On our first quarter provision for loan losses was $45 million which represents an increase of $36.8 million from the first quarter of 2009, and was primarily driven by the deterioration of collateral values. Obviously credit quality remains our number one focus as we continue to work to resolve the credit challenges in our out of state construction loans and construction loans.

These loans make up a relatively small portion of our portfolio and have had a disproportionately large effect on our earnings. In addition, they have obscured what is otherwise a compelling story about the performance of our branch banking and small business banking. Over the last two to three years, First Commonwealth has systematically renewed our community banking focus. Our approach has been build on the strategy of delivering locally as a responsible community bank. To that end we continued to see significant progress in first quarter.

Net interest income was up 5% from the first quarter of 2009, driven by a 15 basis point increase in net interest margin. Non-interest income is up as well largely as a result of improved performance in the deposit services, wealth and insurance products. This is the focus of the number of strategic initiatives and we believe these efforts will produce significant opportunities for growth. Our strategic focus on core deposit growth continues to reap benefits as these deposits are not only are most reasonably priced source of funds but they’re also a great source of fee revenue in a powerful means of building customer relationships.

On the OTTI front, we continued to see a reduction in deferrals and defaults for the last three quarters. In the first quarter of 2010, we recorded a $2.8 million impairment charge on six trust preferred securities as down from $9.9 million recorded in the first quarter of 2009. Additionally, we’ve seen one of our banks within our poles cure during the quarter. We also continued our cost containment efforts with non-interest expense decreasing slightly from our first quarter 2009.

We’ve taken a very surgical approach to our expense reduction initiatives because we remain intent on cutting the fact while preserving the muscle that moves our company forward. We believe more opportunities exist to reduce expenses. So while we understand that credit quality is the pressing matter of the day and that these credits were originated mostly in 2006, 2007 we also know that these credit issues are almost having another important story that loans, deposits, net interest income, net interest margins are up. While impairment charges and non-interest expenses are down. Basically we’ve executed on a community banking principals which have let to a solid fundamental performance in the first quarter. So although we feel about good the growth we’ve generated, our credit issues continued to create volatile in our earnings.

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