First Commonwealth Financial Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. The interim financial statements are unaudited. The company is a bank holding company.
Financial results and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior date |
|---|---|---|
| Net income | $10.6 million | $11.1 million in Q1 2012 |
| Basic and diluted EPS | $0.11 | $0.11 in Q1 2012 |
| Net interest income, GAAP | $45.4 million | $48.2 million in Q1 2012 |
| Net interest income, fully taxable equivalent | $46.4 million | $49.4 million in Q1 2012 |
| Net interest margin, fully taxable equivalent | 3.45% | 3.75% in Q1 2012 |
| Provision for credit losses | $4.5 million | $3.8 million in Q1 2012 |
| Noninterest income / expense | $14.9 million / $41.5 million | $17.4 million / $46.8 million in Q1 2012 |
| Total assets | $6.10 billion | $6.00 billion at Dec. 31, 2012 |
| Total loans / deposits | $4.22 billion / $4.71 billion | $4.20 billion / $4.56 billion at Dec. 31, 2012 |
| Shareholders’ equity | $747.7 million | $746.0 million at Dec. 31, 2012 |
| Allowance for credit losses | $62.3 million, or 1.48% of loans | $67.2 million, or 1.60%, at Dec. 31, 2012 |
Net income fell about 5% year over year as lower net interest and noninterest income and a higher credit-loss provision more than offset lower expenses. The 30-basis-point margin decline included a prior-year $1.0 million recovery of interest on a loan previously on nonaccrual status, which contributed 8 basis points to the prior-year margin. The dividend declared was $0.05 per share, versus $0.03 in Q1 2012.
Cash from operating activities was $12.8 million, compared with $19.7 million in Q1 2012. Investing activities used $156.9 million, while financing activities provided $96.9 million. Cash and cash equivalents ended the quarter at $55.8 million, down $47.2 million from year-end.
At March 31, short-term borrowings were $308.1 million, long-term debt was $174.3 million and subordinated debentures were $105.8 million. Total deposits increased $153.7 million in the quarter, principally from growth in time deposits; loans increased $14.1 million. The company and its bank subsidiary met applicable capital requirements and were reported as well-capitalized. The holding company’s total risk-based capital ratio was 14.52%; the bank’s was 13.01%.
Material changes and credit quality
- Net interest income declined $2.9 million year over year. Management attributed the pressure primarily to lower asset yields; reduced funding costs provided a partial offset. Average earning assets grew 3%, but management noted that roughly one-third of the growth was in lower-yielding investments.
- Noninterest income declined $2.5 million year over year, including lower gains on asset sales and lower other income. Noninterest expense fell $5.3 million, largely from lower problem-credit costs and the absence of a prior-year real-estate write-down.
- Nonperforming loans declined to $78.3 million from $107.6 million at year-end; management cited loan sales, a loan returned to accrual status and charge-offs. Criticized loans fell 12% to $254.9 million. Net charge-offs rose to $9.4 million from $4.3 million in Q1 2012, including substantial commercial real-estate charge-offs.
- Commercial real estate remained a notable credit exposure: it represented about 30% of loans and approximately 30% of nonperforming loans at quarter-end. Management said the allowance was adequate, while noting that estimates depend on economic conditions, borrower circumstances and collateral values.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management said margin pressures were expected to continue, with $2.8 billion of interest-sensitive assets scheduled to reprice or mature over the next 12 months. It also noted $729.7 million of certificates of deposit due to mature or reprice over that period.
- Management’s interest-rate model showed estimated 12-month net interest income changes of negative $4.0 million under a 100-basis-point rate decline and negative $0.3 million under a 100-basis-point increase, assuming a static balance sheet. Management cautioned that the model depends on assumptions and that low rates limit its reliability in falling-rate scenarios.
- Available-for-sale securities totaled $1.30 billion. Pooled trust preferred collateralized debt obligations had $51.1 million book value and $24.5 million fair value, with $26.6 million in unrealized losses. No new other-than-temporary impairment charge was recorded in Q1; management warned that future impairment remains possible if credit or market conditions worsen.
- On April 1, 2013, the company redeemed $32.5 million of 9.50% mandatorily redeemable capital securities and $1.1 million of related common securities at 103.32%. The redemption is expected to generate a $1.1 million prepayment penalty and $0.5 million of remaining deferred issuance costs in Q2.
- A historical tax-reporting error affecting approximately 700–900 customers resulted in a $0.4 million reserve; management said reasonably possible additional losses could be up to $0.2 million. A class-action contract claim was dismissed by the trial court, but plaintiffs appealed. Management reported no other material legal proceedings expected to materially affect the company, while acknowledging litigation uncertainty.
- Key risks cited include a weak economy and real-estate values, loan defaults, low interest rates and margin compression, investment-security impairment, cyberattacks and fraud, regulatory changes, and competitive pressures. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether lower margins, asset repricing and deposit funding costs continue to constrain net interest income.
- Whether commercial real-estate charge-offs and nonperforming-loan improvement are sustained, and whether the allowance remains adequate.
- Whether cash flows and liquidity remain sufficient as securities purchases, loan growth and deposit mix evolve.
- Whether pooled trust preferred security assumptions and valuations change, potentially causing impairment or capital effects.
- The Q2 earnings and funding impact of the capital-securities redemption, and the resolution and final cost of the customer tax-reporting issue and pending appeal.