First Commonwealth Financial Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context and key financial results
The company is a bank holding company. Results improved year over year, primarily as lower credit costs and higher noninterest income more than offset pressure on net interest income and increased expenses.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net income | $9.8 | $8.3 | $33.2 | $21.0 |
| Diluted EPS | $0.09 | $0.08 | $0.32 | $0.20 |
| Net interest income, GAAP | $46.7 | $47.5 | $141.7 | $142.2 |
| Net interest income, fully taxable equivalent | $47.7 | $48.8 | $145.1 | $146.5 |
| Net interest margin, fully taxable equivalent | 3.54% | 3.81% | 3.63% | 3.81% |
| Provision for credit losses | $6.8 | $7.0 | $14.8 | $29.9 |
| Noninterest income | $17.9 | $10.8 | $51.3 | $42.2 |
| Noninterest expense | $44.8 | $41.1 | $133.4 | $128.3 |
Financial position, cash flow and liquidity
- At September 30, assets were $5.964 billion, up from $5.841 billion at December 31, 2011. Portfolio loans were $4.214 billion, up 4% from year-end; deposits were $4.494 billion, slightly below $4.505 billion.
- Cash and cash equivalents were $89.1 million at quarter-end. For the first nine months, operating cash flow was $54.6 million; investing activities used $135.2 million, largely reflecting $185.0 million of net loan growth; financing activities provided $91.2 million.
- Short-term borrowings rose to $461.8 million from $312.8 million at year-end. Long-term debt was $74.7 million and subordinated debentures were $105.8 million. Management cited available borrowing capacity through the Federal Reserve, FHLB and other sources.
- Shareholders’ equity was $773.9 million. The company and its bank subsidiary met applicable regulatory capital requirements; the bank’s total risk-based, Tier I risk-based and Tier I leverage ratios were 14.3%, 13.1% and 11.2%, respectively.
Material changes and credit quality
- Nine-month net income rose 58% year over year. The provision for credit losses fell by $15.1 million, while noninterest income increased $9.1 million. Net interest income on a fully taxable equivalent basis declined $1.4 million.
- Management attributed margin pressure to the low-rate environment and runoff of higher-yielding assets. It reported that approximately $2.9 billion of interest-sensitive assets would reprice or mature over the next 12 months.
- Net charge-offs were $12.0 million for the first nine months, compared with $29.0 million a year earlier. The allowance was $64.1 million, or 1.52% of loans, versus $61.2 million, or 1.51%, at year-end.
- Nonperforming loans were $93.9 million, or 2.23% of loans, versus $112.2 million, or 2.76%, at year-end. Criticized loans declined $23.0 million, or 8%, from year-end, but nonaccrual loans excluding loans held for sale increased $8.3 million. Commercial real estate represented the largest share of nonperforming loans.
- Other real estate owned fell to $16.0 million from $30.0 million at year-end. The company completed sales of previously nonperforming loans held for sale, recognizing a $2.9 million gain.
Outlook, unusual items and risks
- No specific earnings or full-year financial guidance is provided. Management expects continued net interest margin challenges, citing low rates and asset repricing.
- Q3 included a $1.9 million fee from termination of a mortgage-banking joint venture. The company said it was exploring strategic options for residential mortgage originations.
- A third-quarter external fraud involving fraudulent wire transfers through a commercial client’s compromised computer system resulted in a $3.5 million loss. The company filed an insurance claim subject to up to a $0.5 million deductible, but had not recognized a recovery; it was pursuing other recovery strategies and enhanced security procedures.
- A class action concerning an IRA account interest-rate promise was dismissed on summary judgment in August 2012; plaintiffs appealed. Management stated that other material legal proceedings were not expected to have a material adverse effect.
- Other disclosed risks include credit deterioration, real estate values, interest-rate and securities valuation exposure, regulatory changes, competition, and cybercrime. Pooled trust-preferred securities had a $52.7 million book value and $23.1 million fair value; their valuations depend on modeled cash flows and other significant unobservable assumptions. No credit-related impairment charge was recorded in the first nine months.
Key facts for investors to verify
- Whether the improvement in earnings persists without the joint-venture termination fee, loan-sale gains and favorable derivative valuation changes.
- Trends in net interest margin and funding mix, including higher short-term borrowings and upcoming asset and certificate-of-deposit repricing.
- Credit performance in commercial real estate and construction, nonaccrual loans, troubled restructurings, and adequacy of the allowance.
- Outcome of the insurance claim and other recovery efforts related to the $3.5 million fraud loss.
- Appeal status of the IRA class action and potential effects of valuation assumptions for pooled trust-preferred securities.