First Commonwealth Financial Corporation — Q1 2014 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are to Q1 2013 unless otherwise noted. First Commonwealth is a Pennsylvania-based bank holding company. Financial figures below are in millions of dollars unless stated otherwise.
Key financial results and position
| Metric | Q1 2014 / March 31, 2014 | Comparison |
|---|---|---|
| Net income | $12.3; diluted EPS $0.13 | $10.6; diluted EPS $0.11 in Q1 2013 |
| Net interest income | $45.6 GAAP; $46.5 fully taxable equivalent | $45.4 GAAP; $46.4 fully taxable equivalent |
| Net interest margin | 3.33% fully taxable equivalent | 3.45% in Q1 2013 |
| Noninterest income | $14.9 | $14.9 |
| Noninterest expense | $39.9 | $41.5 |
| Provision for credit losses | $3.2 | $4.5 |
| Net cash from operating activities | $20.9 | $12.8 |
| Total assets | $6,209 | $6,215 at December 31, 2013 |
| Loans, net of unearned income | $4,252 | $4,284 at December 31, 2013 |
| Deposits | $4,648 | $4,604 at December 31, 2013 |
| Short-term borrowings | $573 | $627 at December 31, 2013 |
| Long-term debt, including subordinated debentures | $216 | $217 at December 31, 2013 |
| Shareholders’ equity | $716.8 | $711.7 at December 31, 2013 |
Material changes and operating trends
- Net income increased about 17%, primarily reflecting lower credit-loss provision and noninterest expense. Pretax income rose to $17.4 million from $14.4 million.
- Net interest income was nearly flat, while margin declined 12 basis points. Management attributed pressure to low rates, asset repricing and competitive pricing, partly offset by lower funding costs and growth in average earning assets.
- Noninterest expense fell 4% overall. Excluding conversion costs and operational recoveries/losses, it declined 7%. Q1 2014 included $2.1 million of accelerated depreciation and $0.4 million of other costs related to the planned core-processing conversion.
- Noninterest income was broadly unchanged. A $1.2 million gain from selling the registered investment advisory business contributed to higher asset-sale gains; this was offset in part by a $1.0 million year-over-year decline in derivative mark-to-market income.
- Loans declined $31.6 million from year-end, while deposits increased $44.0 million. Noninterest-bearing deposits rose $54.6 million; interest-bearing and savings deposits fell $29.5 million.
- Net charge-offs fell to $3.0 million from $9.4 million. Nonperforming loans were $56.2 million, or 1.32% of loans, versus $59.4 million, or 1.39%, at year-end. The allowance was $54.5 million, 1.28% of loans and 97% of nonperforming loans.
Liquidity, capital, outlook and risks
- Cash and cash equivalents were $91.4 million at quarter-end, up $14.0 million during the quarter. Liquidity sources include deposits, asset repayments and maturities, and available Federal Reserve, FHLB and other borrowing facilities. The filing reports substantial unused capacity, including $811.8 million under the Federal Reserve collateral program and FHLB capacity of up to $1.6 billion.
- Regulatory capital ratios remained above current minimums. The company reported total risk-based capital of 13.57% and Tier 1 risk-based capital of 12.40%; the bank was classified as well-capitalized. Management expected to remain well-capitalized under forthcoming capital rules.
- No quantified earnings guidance was provided. Management noted the core-processing conversion was expected in Q3 2014 and estimated approximately $12 million of total related charges. Actual full-year results may differ from Q1.
- Interest-rate sensitivity modeling showed a potential 12-month net interest income decrease of $0.6 million in a +100-basis-point scenario and $0.1 million in a +200-basis-point scenario. Management cautioned that model assumptions and low rates limit reliability.
- Key risks include prolonged low rates and margin compression, economic or real-estate weakness, borrower defaults, valuation and impairment risk in securities, regulatory and compliance costs, cyber risks, and competitive pressure. The filing specifically notes $42.2 million book value of pooled trust-preferred securities with $27.9 million estimated fair value; these below-investment-grade securities remain exposed to credit, liquidity and impairment risk.
- Legal matters include continuing Market Rate Savings IRA litigation. The bank said it believes the claims are without merit; outcomes and potential damages cannot be reliably estimated. A separate $0.8 million reserve was established for a historical customer tax-reporting error.
- The board authorized a further $25 million share-repurchase program in February 2014. The company repurchased about 1.1 million shares during Q1 and declared a $0.07 per-share quarterly dividend.
Important facts for investors to verify
- Whether margin pressure continues and loan growth can offset lower asset yields.
- Credit quality trends, particularly the new $8.0 million nonaccrual commercial-industrial relationship, criticized loans and allowance adequacy.
- Performance and valuation assumptions for pooled trust-preferred securities, including future impairment exposure.
- Total conversion costs and whether the planned Q3 2014 system conversion proceeds on schedule.
- Developments in the IRA litigation and resolution of the customer tax-reporting matter.
- Capital, liquidity and funding costs as deposit mix, repurchases and regulatory requirements evolve.