First Commonwealth Financial Corporation

Good day and welcome to the first Commonwealth Financial Corporation second quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. And I'd now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Cole, and good afternoon, everyone. Thanks for joining us in today's call to discuss First Commonwealth Financial Corporation's second quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Refke, Chief Financial Officer, Brian Karup, Chief Credit Officer, and Jane Verbentz, our Bank President and Chief Revenue Officer. 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 have also included a slide presentation on our investor relations website with supplemental financial information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on page two of the slide presentation for a description of risks and uncertainty that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported financial results in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike Price.

Thank you, Ryan. We were generally pleased with the second quarter results with net income of $23.9 million, earnings per share of 24%, a pre-tax pre-provision ROA of 1.61%, and a core efficiency ratio of 57.2%. First, provision expense fell to $6.9 million from $31 million in the first quarter as three non-performing loans were resolved. The second quarter reserve increased from $2 million to $81 million, or 1.28% of total loans excluding PPP loans, as we added another $5.5 million in qualitative reserves to reflect the economy. and our COVID overlay. We believe that ratio compares favorably to other incurred banks. Although our second quarter reserve of $81 million was calculated using the incurred loss model, adding our previously disclosed day one seasonal increase would put reserves into the mid-$90 million range. That would put the reserve coverage in the mid-150s, which we believe would compare favorably to Cecil Banks, our size, even with no further reserve bill. That's all because of the strong reserve bill we did in the first quarter. Our first quarter loan deferral figure of $1.1 billion, or 17.6% of total loans, go all the way to $186 million, or 2.7% of total loans, as of July 24th. Most of our deferrals were 90 days and our approach to customers, consumers and businesses in March and early April shifted from accommodative and customer service oriented to a more credit oriented approach in May and June. The team is exercising extraordinary oversight with regard to credit. This is warranted particularly if the ongoing reopening of the economy cannot safely continue in the ensuing quarter or two, and as the impact of the initial shorter-term government stimulus dissipates. In the second quarter, our credit and banking teams did a name-by-name commercial loan review and spoke with some 1,600 clients in total. Brian Karup, our chief credit officer, will provide more credit commentary shortly. Second, the team helped roughly 5,000 local businesses preserve roughly 80,000 jobs at a median loan size of only $32,000 through the Payroll Protection Program. Excluding $571 million of PPP loans, our portfolio grew 2.7% annualized, driven by record mortgage volumes, strong indirect loan originations, and corporate banking growth. our Ohio markets accounted for all of the net new loan growth in the second quarter, further validating our Ohio expansion over the past few years. As an aside, over $20 million in PPP loan fees were wired to First Commonwealth in June from the SBA and will accrete into income in the second half of the year as we expect that the majority of our PPP loans will be forgiven. Third, the net interest margin of 3.29% fell as expected, but after adjusting for the dilutive effects of the PPP loans at 1% and an excess of low-yielding cash on our balance sheet, the NIM of our company was closer to 3.41%. Jim Retske, our CFO, will provide commentary on margin expenses and other important items. Fourth, non-interest income of $21.8 million in the second quarter increased some $2.5 million as the company set quarterly records in both mortgage originations and debit card interchange income. Regarding the former, some $203 million in mortgage originations increased gain on sale income some $1.7 million to $4.2 million. On the latter, we added 10% more debit cards with our Santander branch acquisition last year. And in the second quarter, consumer debit card swipes were up as retailers had a strong preference for cards versus cash. This produced $5.9 million in debit card interchange income, $600,000 more than last quarter. Fifth, our capital levels remain strong. We have over $200 million of excess capital, and together with our H-triple-L, this would allow us to absorb losses equal to roughly 5% of the entire loan portfolio at once and still remain well capitalized. Sixth, despite the $2.5 million uptick in our non-interest expense, the $52.8 million the underlying expense trend is down as the quarter-over-quarter comparison absorbs 3.4 million negative variance in unfunded commitment expense. Jim Rusty will elaborate on this as well, but we want to enter 2021 and sustain through the year a $51 to $52 million quarterly non-interest expense run rate. At the onset of the COVID pandemic and after the first Federal Reserve cuts in March, the executive team started a broad-based initiative dubbed Project Thrive, as we focused on, one, growth, expense and efficiency, NIM, and capital, with the express goal of emerging on the other side of the pandemic stronger than ever. We now have two dozen initiatives, some small, some large, in the works, but yesterday we announced a consolidation of 20%, of our branches across our footprint into adjacent offices that will be completed by year-end. This comes at a time that we are setting quarterly company records with online mobile account opening, mobile deposit activity, and debit card activity with our new contactless cards. In the ensuing months, we expect to launch our third generation of P2P payment and the fourth generation of an integrated mobile online banking platform. after the successful launch of a new treasury management platform for our commercial clients in June. Customer preferences continue to change meaningfully, and the COVID crisis has pushed all things digital well past traditional servicing. Just one example. In the second quarter, we opened 992 deposit accounts via our mobile online platform and summed three times our first quarter figure, which, by the way, was not bad, our investment in digital leaves us well prepared for the future. Lastly, the First Commonwealth theme will remain focused on a handful of items that will simply make us a better bank, namely accentuating opportunities to grow our core business and geographies as we continue to build the First Commonwealth brand, Second, realizing efficiencies at a time when margins are compressed and could remain there for the foreseeable future. Third, executing a handful of key digital initiatives in the ensuing months and continuing to build competitive advantage on that front. And lastly, navigating the COVID environment to deliver good through-the-cycle credit and net interest margin outcomes for our shareholders. I'd like to now turn the time over to Jim Reske. Jim? Thank you, Mike.