First Commonwealth Financial Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. First Commonwealth is a Pennsylvania-based financial holding company. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income (GAAP) | $45.7 | $46.9 | $91.1 | $95.1 |
| Net interest margin (fully taxable equivalent) | 3.35% | 3.61% | 3.40% | 3.68% |
| Provision for credit losses | $10.8 | $4.3 | $15.3 | $8.1 |
| Noninterest income | $14.9 | $16.1 | $29.8 | $33.5 |
| Noninterest expense | $42.0 | $41.8 | $83.5 | $88.6 |
| Net income | $5.8 | $12.3 | $16.4 | $23.4 |
| Diluted EPS | $0.06 | $0.12 | $0.17 | $0.22 |
For Q2, net income fell about 53% year over year; for the first half, it declined about 30%. First-half net interest income on a fully taxable equivalent basis was $93.2 million, down from $97.4 million. Lower asset yields, including the runoff of higher-yielding assets and growth in lower-yielding investments, outweighed reduced funding costs. The reported six-month net interest margin fell 28 basis points.
Financial position, cash flow and liquidity
- At June 30, total assets were $6.15 billion, loans were $4.23 billion, and deposits were $4.73 billion. Since December 31, 2012, assets rose $157.6 million, loans rose $25.0 million, and deposits rose $175.2 million.
- Cash and cash equivalents were $82.0 million, down $21.0 million over the first half. Operating cash flow was $43.7 million; investing activities used $225.8 million and financing activities provided $161.1 million.
- Short-term borrowings were $441.8 million versus $356.2 million at year-end. Long-term debt plus subordinated debentures totaled $216.8 million, down from $280.2 million. Deposits remained the company’s principal long-term funding source.
- Available funding included unused FHLB and Federal Reserve borrowing capacity; the filing reports $1.4 billion of maximum FHLB capacity, with $454.3 million in borrowings and $30.8 million in letter-of-credit usage. CDARS capacity was $921.1 million, of which $297.8 million was outstanding.
- Shareholders’ equity was $710.7 million, down $35.3 million from year-end. The decline reflected share repurchases, dividends and a $18.0 million after-tax loss in other comprehensive income, primarily from lower securities values.
Credit quality and material changes
- Nonperforming loans declined to $73.1 million from $107.6 million at year-end; nonperforming loans were 1.73% of total loans versus 2.56%. The improvement reflected loan sales, charge-offs and loans returning to accrual status.
- Despite lower nonperforming balances, first-half net charge-offs rose to $25.0 million from $7.6 million a year earlier. The allowance for credit losses fell to $57.5 million, or 1.36% of loans, from $67.2 million, or 1.60%, at year-end.
- A single commercial borrower drove much of the elevated provision: management cited $10.4 million of first-half provision and a $13.1 million charge-off related to a western Pennsylvania real estate developer. The company also cited material charge-offs on a healthcare facility and a student-housing project.
- Available-for-sale securities increased to $1.31 billion from $1.17 billion. The portfolio had $44.8 million of gross unrealized losses at quarter-end, including losses on pooled trust preferred securities; no other-than-temporary impairment charge was recorded in the first half.
- The company repurchased approximately 3.27 million shares during the first half for $23.2 million. It declared $0.11 per share in dividends for the first half, compared with $0.08 a year earlier.
Outlook, risks and unusual items
- Management expects net interest margin pressure to continue: $2.8 billion of interest-sensitive assets are scheduled to reprice or mature over the next 12 months. It also expects $700.8 million of certificates of deposit to mature or reprice during that period. No specific earnings or revenue guidance was provided.
- Management cited continued low interest rates, competitive pricing, credit deterioration, real-estate values, securities valuations, regulatory requirements, and cyber risks as factors that could affect results. Its rate model showed a modest estimated increase in annual net interest income under a 200-basis-point rate rise and declines under rate decreases; management cautioned that the model has limitations.
- On April 1, the company redeemed $32.5 million of 9.50% capital securities and recorded a $1.6 million loss, including a prepayment penalty and unamortized issuance costs. Management said the funding was replaced with lower-cost alternatives.
- The company established a $0.8 million reserve for a historical tax-reporting issue affecting approximately 700–900 customers. An appeal remains pending in the McGrogan IRA-account class action after the trial court dismissed the claims; management said other routine litigation was not expected to materially affect the company overall.
- Management reported that the company and bank met applicable capital requirements and were considered well-capitalized. It expected to remain well-capitalized after forthcoming regulatory capital-rule changes. A quarterly dividend of $0.06 per share was declared after quarter-end.
Important facts for investors to verify
- Whether credit costs and large commercial borrower exposures continue to decline, and whether the lower allowance remains adequate as charge-offs stay elevated.
- Whether the reported reduction in nonperforming loans reflects sustainable borrower improvement versus sales, charge-offs and other balance-sheet actions.
- How falling securities values, especially pooled trust preferred holdings, affect capital and whether future impairment charges arise.
- Whether deposit growth, wholesale funding reliance and upcoming deposit repricing support liquidity and net interest margin.
- The outcome of the McGrogan appeal and resolution of the $0.8 million customer tax-reporting contingency.