First Commonwealth Financial Corporation — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2012, compared with Q1 2011 unless otherwise noted. Balance-sheet comparisons are to December 31, 2011. The company is a Pennsylvania-based bank holding company. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Net interest income, GAAP | $48.2 | $47.9 in Q1 2011 |
| Net interest income, fully taxable equivalent | $49.4 | $49.4 in Q1 2011 |
| Net interest margin, fully taxable equivalent | 3.75% | 3.87% in Q1 2011 |
| Noninterest income | $17.4 | $14.3 in Q1 2011 |
| Noninterest expense | $46.8 | $41.4 in Q1 2011 |
| Provision for credit losses | $3.8 | $13.8 in Q1 2011 |
| Income before taxes | $15.0 | $7.0 in Q1 2011 |
| Net income; diluted EPS | $11.1; $0.11 | $5.2; $0.05 in Q1 2011 |
| Operating cash flow | $19.7 | $19.4 in Q1 2011 |
| Total assets | $5,968.6 | $5,841.1 at Dec. 31, 2011 |
| Portfolio loans, gross | $4,128.6 | $4,043.6 at Dec. 31, 2011 |
| Total deposits | $4,633.8 | $4,504.7 at Dec. 31, 2011 |
| Shareholders’ equity | $767.4 | $758.5 at Dec. 31, 2011 |
Net interest income plus noninterest income was approximately $65.6 million, up from $62.2 million in Q1 2011. Cash and cash equivalents were $81.6 million at quarter-end, up $3.1 million during the quarter. Investing activities used $139.3 million, principally reflecting securities purchases and loan growth; financing activities provided $122.7 million, including deposit growth.
Total short-term borrowings were $309.4 million; long-term debt was $101.0 million and subordinated debentures were $105.8 million. Total liabilities were $5,201.3 million. The allowance for credit losses was $60.7 million, or 1.47% of loans, versus $61.2 million, or 1.51%, at year-end.
Material changes and management commentary
- Net income more than doubled year over year, primarily because the credit-loss provision was $10.0 million lower and gains on asset sales were higher. Higher noninterest expenses partly offset these benefits.
- Net interest margin declined 12 basis points year over year. The yield on earning assets fell 38 basis points to 4.39%; the cost of interest-bearing liabilities fell to 0.79% from 1.10%. Management attributed pressure to repricing in a low-rate environment and described deposit mix, pricing discipline, and investment volumes as partial offsets.
- Loans grew $84.9 million, or 2%, from year-end. Management cited growth in residential real estate and indirect auto lending, alongside efforts to reduce larger credit exposures. Deposits increased $129.1 million.
- Credit indicators improved: criticized loans fell $26.5 million, or 9%, to $265.5 million; accruing delinquencies declined $10.2 million, or 29%; and net charge-offs were $4.3 million versus $8.3 million in Q1 2011. Nonperforming loans excluding loans held for sale were $81.6 million, down from $98.8 million at year-end. The broader reported nonperforming-loan total, including $8.1 million of nonperforming loans held for sale, was $89.7 million.
- Noninterest expense increased 13%, with higher collection and repossession costs, unfunded-commitment reserves, and asset-sale/write-down losses. An updated appraisal prompted a $2.8 million write-down of an OREO property; total losses on sale or write-down of assets were $3.3 million.
- The company reported $29.96 million of unrealized losses on pooled trust preferred collateralized debt obligations (book value $54.5 million; fair value $24.5 million). No new credit-related impairment charge was recorded in the quarter; management’s cash-flow analysis nevertheless identified seven securities as likely to experience principal and interest shortfalls, for which impairment had been recognized in prior years.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings or revenue guidance. Management cautions that quarterly results are not necessarily indicative of full-year 2012 performance.
- Interest-rate sensitivity modeling estimated 12-month net interest income increases of $0.5 million and $2.0 million for gradual +100- and +200-basis-point scenarios, and decreases of $4.1 million and $8.3 million for -100- and -200-basis-point scenarios. Management warns that the model is less reliable in the -200-basis-point scenario and depends on assumptions about balance-sheet behavior and customer pricing.
- Liquidity sources include core deposits and available borrowing facilities. At March 31, unused capacity was approximately $830.7 million under CDARS and $772.5 million through the Federal Reserve collateral program; FHLB capacity was $1.2 billion, with $245.8 million of borrowings and $15.1 million of letters of credit using capacity. Amounts outstanding under the company’s $15 million unsecured line of credit were zero.
- The company disclosed that it was not meeting the return-on-average-assets covenant on a $1.1 million ESOP loan guarantee and was working with the lender, expecting a waiver or modification.
- A class action alleging breach of an IRA account interest-rate commitment had been certified as to the contract claim. Summary-judgment decision was pending after April 4, 2012 argument; the company said it could not estimate a reasonably possible loss.
- On April 24, 2012, the board declared a quarterly dividend of $0.05 per share, payable May 18, a 67% increase from $0.03. Management said future increases would depend on consistent earnings and continued improvement in economic conditions.
- Regulatory capital ratios exceeded stated minimums. At March 31, the bank’s total risk-based capital ratio was 14.2%, Tier 1 risk-based ratio 13.0%, and Tier 1 leverage ratio 11.3%; each exceeded the filing’s “well capitalized” thresholds.
Most important facts for investors to verify
- Whether improving credit quality and lower provision needs persist, particularly in commercial real estate and construction exposures; also monitor the allowance and nonperforming-loan measures, including the treatment of loans held for sale.
- Valuation and cash-flow assumptions for the pooled trust preferred securities, given their substantial unrealized losses, illiquidity, and potential for future impairment.
- Whether net interest margin stabilizes as low-rate asset repricing continues, and how actual earnings compare with modeled rate sensitivities.
- Resolution of the IRA class action and the ESOP loan covenant waiver or modification.
- Recurring earnings after unusual asset-sale gains and OREO write-downs, and whether the higher dividend remains supportable.