First Commonwealth Financial Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. Amounts are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context and key financial metrics
The company is a bank holding company. At September 30, 2013, it reported total assets of $6.151 billion, primarily loans and available-for-sale securities.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income, GAAP | $47.2 million | $46.7 million | $138.3 million | $141.7 million |
| Net interest income, fully taxable equivalent | $48.3 million | $47.7 million | $141.4 million | $145.1 million |
| Net interest margin, fully taxable equivalent | 3.43% | 3.54% | 3.41% | 3.63% |
| Provision for credit losses | $2.7 million | $6.8 million | $18.0 million | $14.8 million |
| Noninterest income | $17.1 million | $17.9 million | $46.9 million | $51.3 million |
| Noninterest expense | $40.0 million | $44.8 million | $123.5 million | $133.4 million |
| Net income | $15.9 million | $9.8 million | $32.2 million | $33.2 million |
| Diluted earnings per share | $0.16 | $0.09 | $0.33 | $0.32 |
- At September 30, total loans were $4.240 billion; deposits were $4.618 billion; short-term borrowings were $551.6 million; long-term debt, including subordinated debentures, was $216.7 million; and shareholders’ equity was $711.4 million.
- Cash and cash equivalents were $93.3 million. For the first nine months, operating cash flow was $67.8 million, investing cash outflow was $222.2 million, and financing cash inflow was $144.7 million.
- The allowance for credit losses was $55.0 million, or 1.30% of loans. Nonperforming loans were $71.2 million, or 1.68% of loans; other real estate owned was $9.7 million.
- Regulatory capital ratios were above stated well-capitalized thresholds: the bank’s total risk-based capital ratio was 12.73%, Tier 1 risk-based ratio 11.55%, and Tier 1 leverage ratio 9.50%. Management expected the company to remain well-capitalized after future rule changes.
Material changes versus comparable periods
- Q3 net income increased $6.0 million year over year, chiefly reflecting lower credit-loss provision and lower noninterest expense. Nine-month net income decreased $1.0 million.
- Nine-month net interest income on a fully taxable equivalent basis fell $3.7 million, and margin declined 22 basis points. Lower asset yields outweighed lower funding costs; average earning assets grew 4%.
- Nine-month noninterest expense declined $9.9 million, while noninterest income declined $4.4 million. Prior-year income included a $1.9 million joint-venture termination fee and larger gains on loan sales; prior-year expense included a $3.5 million fraud loss.
- Nonperforming loans declined $36.3 million from year-end 2012, but the reduction reflected charge-offs, loan sales and loans returned to accrual as well as credit improvement. Nine-month net charge-offs rose to $30.2 million from $12.0 million a year earlier.
- Shareholders’ equity fell $34.7 million from year-end, including a $20.7 million after-tax decline in accumulated other comprehensive income, largely from unrealized securities losses. The company repurchased $30.0 million of stock and declared $0.17 per share in dividends over the nine months.
Outlook, risks, contingencies and unusual items
- Management said margin pressure was expected to continue: $2.8 billion of interest-sensitive assets were due to reprice or mature over the following 12 months. It also cited low interest rates, lower yields on new assets and consumer-loan pricing competition. This is commentary, not earnings guidance.
- The company forecast approximately $12 million of charges related to a new core processing system, with conversion expected in Q2 or Q3 2014. It disclosed execution, customer-service, operational and reputational risks if the transition is delayed or disrupted.
- On April 1, 2013, it redeemed $32.5 million of 9.50% capital securities, recording a $1.6 million loss, and replaced the funding with lower-cost alternatives.
- Q3 included approximately $1.0 million of income from an unscheduled payment on an impaired pooled trust-preferred security; management said this added 8 basis points to quarterly margin. The portfolio’s fair value was $25.5 million against $48.8 million book value, with significant credit and valuation uncertainty.
- A probable liability reserve of $0.8 million was established for a historical tax-reporting error affecting approximately 700–900 customers. The McGrogan IRA-rate class action was remanded after an appellate court affirmed denial of certain claims and quashed other appeal issues; the filing does not provide a final resolution.
- Liquidity sources included core deposits, borrowing capacity at the Federal Reserve and FHLB, and brokered/CDARS funding. FHLB capacity was $1.5 billion, with $554.6 million borrowed and $29.0 million committed; Federal Reserve collateralized borrowing capacity was $802.6 million, with none outstanding. The company also reported a $15.0 million unsecured line with no amount drawn.
- Interest-rate modeling showed estimated 12-month net interest income changes of negative $0.7 million for a 100-basis-point rise and negative $0.5 million for a 200-basis-point rise, versus unchanged rates. Management cautioned that model assumptions and results may not match actual outcomes.
Important facts for investors to verify
- Whether net interest margin and asset yields stabilize as loans and securities reprice, and whether deposit-cost reductions continue.
- Whether credit quality improves beyond reductions driven by charge-offs and loan sales, particularly in commercial and commercial-real-estate exposures; monitor charge-offs, nonaccruals and reserve adequacy.
- Actual costs, schedule and operational results of the planned core-system conversion.
- Future valuation, cash flows and impairment risk for pooled trust-preferred securities, and the outcome of the customer tax-reporting contingency and litigation.
- Capital, liquidity and shareholder distributions, including the effect of stock repurchases, dividends and applicable regulatory capital changes.