First Commonwealth Financial Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. First Commonwealth is a bank holding company. Comparisons below are with Q3 and the first nine months of 2014, or with December 31, 2014 for balance-sheet items. Dollar amounts are in millions unless stated otherwise.
Financial highlights
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income, GAAP | $46.7 | $46.6 | $140.2 | $137.5 |
| Net interest income, fully taxable equivalent | $47.6 | $47.4 | $142.8 | $140.0 |
| Noninterest income | $15.5 | $15.1 | $46.0 | $47.0 |
| Provision for credit losses | $4.6 | $2.1 | $8.8 | $8.6 |
| Noninterest expense | $40.3 | $41.6 | $120.7 | $123.9 |
| Net income | $12.4 | $12.5 | $40.1 | $36.7 |
| Diluted EPS | $0.14 | $0.13 | $0.45 | $0.39 |
| Net interest margin, FTE | 3.25% | 3.26% | 3.29% | 3.28% |
- Quarterly performance: Net income was nearly flat year over year despite higher provision expense; diluted EPS increased, with fewer average shares outstanding following repurchases. Q3 return on average assets was 0.78% and return on average equity was 6.86%.
- Nine-month performance: Net income rose about 9%, supported by higher net interest income and lower noninterest expense, partly offset by lower noninterest income. Return on average assets was 0.84% and return on average equity was 7.48%.
- Interest income and costs: Nine-month FTE net interest income increased $2.7 million. Asset growth and lower funding costs helped offset declining asset yields; FTE net interest margin edged up to 3.29%. Management reported rate changes reduced nine-month net interest income by about $4.5 million.
Financial position, cash flow and capital
- At September 30, total assets were $6,384.7 million, compared with $6,360.3 million at year-end 2014. Loans were $4,575.7 million, up $118.4 million; deposits were $4,161.5 million, down $154.0 million.
- Funding shifted: noninterest-bearing deposits increased $88.2 million, while time deposits declined $256.1 million. Short-term borrowings rose to $1,329.8 million from $1,105.9 million. Total long-term debt fell to $111.2 million from $161.6 million.
- For the first nine months, operating cash flow was $52.4 million, investing cash use was $29.6 million, and financing cash use was $24.6 million. Cash and cash equivalents ended at $72.8 million, down $1.8 million from year-end.
- Shareholders’ equity was $722.8 million, up from $716.1 million. The company reported regulatory capital ratios above applicable well-capitalized thresholds; at the holding company, total risk-based capital was 12.46%, Tier 1 risk-based capital 11.50%, leverage 10.13%, and common equity Tier 1 10.22%.
- The company repurchased approximately 2.9 million shares under its $25 million repurchase program, completed in May. Dividends declared were $0.21 per share for the first nine months; a $0.07 quarterly dividend was declared October 28.
Material changes, outlook and risks
- Credit quality: Nonperforming loans declined to $40.8 million, or 0.89% of total loans, from $55.3 million, or 1.24%, at December 31, 2014. However, classified loans increased to $81.7 million from $67.8 million. The allowance was $48.5 million, 1.06% of loans, and covered 118.84% of nonperforming loans.
- Q3 provision expense rose to $4.6 million from $2.1 million, mainly due to higher specific reserves for two impaired commercial loans. Management cited commercial borrower conditions and indirect auto charge-offs among provision factors. It considered the allowance adequate but noted estimates are sensitive to economic conditions, rates, borrower finances, delinquencies and collateral values.
- Oil-and-gas industry commitments totaled $145.5 million, including $69.6 million outstanding. Management said it would monitor borrowers exposed to lower drilling activity and oil and gas prices; certain relationships were already nonperforming.
- The investment portfolio included $42.0 million book value of pooled trust-preferred securities, valued at $35.8 million, with below-investment-grade ratings and significant unrealized losses. No impairment charge was recorded in the period, but management warned future impairment remains possible and depends on estimated cash flows, defaults and market liquidity.
- Interest-rate modeling showed a modest decline in 12-month net interest income under a gradual +100 basis-point scenario (0.2%) and under a +200 basis-point scenario (0.2%); results depend on assumptions and the filing cautions that the model is less reliable in low-rate environments. The company also had a cumulative one-year repricing gap, with rate-sensitive liabilities exceeding assets.
- Unusual items included a $0.7 million Pennsylvania shares-tax settlement, fraud losses associated with merchant debit-card breaches, and write-downs on real estate and a bank building. Prior-year expenses included IT conversion costs that did not recur in 2015.
- Subsequent event: On October 1, 2015, the bank acquired First Community Bank for $14.8 million in cash. The acquired bank had $102.8 million of assets and four branches. Integration and acquisition effects were not reflected in the September 30 financial position.
- The filing gives no specific earnings or revenue guidance. Management’s forward-looking statements are subject to risks including economic and interest-rate conditions, credit quality, competition, regulation, technology, acquisitions and integration. Management reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material legal proceeding expected to adversely affect the company, while noting litigation outcomes remain uncertain.
Key facts for investors to verify
- Whether loan growth and stronger noninterest-bearing deposits can continue without further reliance on short-term borrowings, and how deposit trends evolve after the acquisition.
- Whether higher commercial loan reserves and increased classified loans lead to additional credit costs, particularly in energy-related and other commercial exposures.
- Performance and valuation assumptions for pooled trust-preferred securities, including defaults, deferrals and potential future impairment.
- Acquisition integration, purchase accounting and the acquired bank’s contribution to earnings, expenses and capital after October 1.
- Whether net interest margin and earnings respond as modeled to rate changes, given the company’s repricing profile and model assumptions.