First Commonwealth Financial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparison is with Q1 2014 unless otherwise noted. The filing presents unaudited interim consolidated results and cautions that the quarter is not necessarily indicative of full-year 2015 performance.
Financial performance
| Metric | Q1 2015 | Comparable / change |
|---|---|---|
| Net interest income, GAAP | $47.2 million | $45.6 million in Q1 2014 |
| Net interest income, fully taxable equivalent | $48.0 million | $46.5 million in Q1 2014 |
| Net interest margin, fully taxable equivalent | 3.35% | 3.33% in Q1 2014 |
| Noninterest income | $14.2 million | Down $0.7 million, or 5% |
| Noninterest expense | $39.9 million | Essentially unchanged |
| Provision for credit losses | $1.2 million | Down $2.1 million, or 64% |
| Income before taxes | $20.4 million | $17.4 million in Q1 2014 |
| Net income / diluted EPS | $14.2 million / $0.16 | $12.3 million / $0.13 |
| Return on average assets / equity | 0.91% / 8.03% | 0.80% / 6.97% in Q1 2014 |
| Cash dividends declared per share | $0.07 | Unchanged from Q1 2014 |
Net interest income benefited from a $1.0 million special FHLB stock dividend, lower time-deposit costs, and higher average earning assets; lower asset yields partly offset those gains. The FTE net interest margin included a 7-basis-point benefit from the FHLB dividend. Tax provision was $6.1 million; the effective tax rate was 30.1%.
Financial position, cash flow and capital
- Assets: $6.33 billion at March 31, down $28.4 million from year-end 2014. Portfolio loans were $4.44 billion, down $19.7 million during the quarter.
- Deposits and funding: Deposits totaled $4.29 billion, down $21.8 million. Time deposits fell $124.6 million, partly offset by growth in demand and savings balances. Short-term borrowings were $1.13 billion; long-term debt was $64.3 million and subordinated debentures $72.2 million.
- Cash flow: Operating activities provided $15.7 million and investing activities provided $27.1 million; financing activities used $52.1 million. Cash and cash equivalents ended at $65.3 million, down $9.3 million in the quarter.
- Credit: Allowance for credit losses was $46.7 million, 1.05% of loans, versus $52.1 million and 1.17% at year-end. Nonperforming loans were $49.2 million, or 1.11% of loans; net charge-offs were $6.5 million, compared with $3.0 million in Q1 2014.
- Equity and regulatory capital: Shareholders’ equity was $712.9 million, down $3.3 million from year-end, reflecting repurchases and dividends partly offset by earnings and higher securities values. The company reported that it and its bank subsidiary met capital requirements and were well-capitalized. At the parent, total risk-based capital was 12.32% and common equity Tier 1 was 10.09%.
Material changes and unusual items
- Net income rose 16%, primarily on lower credit-loss provision and higher net interest income. Noninterest income declined, mainly reflecting a smaller gain on asset sales; Q1 2014 included a $1.2 million gain from selling the registered investment advisory business.
- Q1 2015 included $1.0 million of litigation and operational losses, including $0.8 million of fraud losses associated with merchant debit-card breaches. Q1 2014 included a $0.9 million insurance recovery, contributing to the year-over-year expense comparison.
- Net charge-offs increased to $6.5 million, including a $3.3 million partial charge-off on commercial industrial loans tied to a local energy company and a $1.2 million charge-off on a relationship transferred to loans held for sale. Nonperforming loans declined from $55.3 million at year-end, aided by charge-offs and loan payoffs.
- The company repurchased 2.17 million shares under a newly authorized $25 million program at an average price of $8.57 per share through March 31. The board declared a subsequent $0.07 quarterly dividend, payable May 22, 2015.
- Available-for-sale securities were $1.27 billion; the company also reported $30.3 million of held-to-maturity securities, with no such securities at year-end 2014. Accumulated other comprehensive income improved by $7.2 million in Q1, principally from securities and derivatives valuation changes.
Outlook, liquidity and risks
The filing provides no specific earnings or revenue guidance. Management described efforts to offset margin pressure through deposit and funding mix, loan growth, and investment activity. The company’s one-year rate-sensitive asset-to-liability ratio was 0.75; its model estimated that a gradual 100-basis-point rate increase would reduce annual net interest income by 0.6%, while an immediate 100-basis-point increase would reduce it by 0.3%. Management cautioned that these models depend on assumptions and may not match actual results.
Liquidity sources include core deposits, securities and loan cash flows, FHLB advances, Federal Reserve borrowing capacity, brokered certificates, and correspondent-bank lines. Available capacities were substantial, although the company had $1.0 billion of FHLB borrowings outstanding and $1.13 billion of short-term borrowings overall.
Credit risks include the pooled trust-preferred securities portfolio: $41.9 million book value and $31.1 million estimated fair value, with below-investment-grade ratings and significant unrealized losses. Management recognized no new credit-related impairment in Q1 but warned that future impairment is possible. Oil-and-gas industry commitments were $140.9 million, with $55.3 million outstanding; management said it would continue monitoring borrowers exposed to reduced drilling activity and lower prices. Other cited risks include changing economic conditions, interest rates, borrower performance, market volatility, regulation, technology and legal or regulatory developments. Management reported no material changes to the risk factors in its 2014 Form 10-K. Legal proceedings arise in the ordinary course; management did not expect a material adverse effect but noted outcomes are uncertain.
Key facts for investors to verify
- Whether reduced credit costs and improved asset-quality trends persist, given higher quarterly net charge-offs and the decline in the allowance balance.
- The condition and performance of the energy-related and other large nonperforming commercial relationships, including subsequent recoveries or further charge-offs.
- Whether the FHLB special dividend and lower deposit costs recur, and how loan yields, funding costs and rate changes affect future net interest margin.
- The valuation and cash-flow assumptions for pooled trust-preferred securities, and any subsequent impairment or changes in expected collections.
- The effects of share repurchases, dividends and Basel III requirements on capital and liquidity; verify the remaining authorization and subsequent repurchase activity.