Key Highlights

  • Core diluted EPS was $0.45, up from $0.39 a year earlier and $0.44 in the second quarter.
  • Net interest margin on a taxable-equivalent basis widened to 4.11% from 3.92% a year ago.
  • Provision for credit losses rose to $14.2 million from $8.9 million in the second quarter.
  • Nonperforming loans reached $95.2 million, or 0.99% of period-end loans, versus 0.86% in June.
  • Common equity tier 1 capital fell to 11.9% from 12.6% after $88.0 million of buybacks, and a new $25 million authorization followed.

First Commonwealth Earnings: Why Did a Wider Margin Come With Rising Problem Loans?

First Commonwealth Financial (NYSE:FCF) reported third-quarter results on Tuesday, October 27, with GAAP net income of $44.9 million, or $0.45 per diluted share, and core net income of $45.4 million, or $0.45 per share. That compares with $0.39 per share a year earlier and $0.44 in the second quarter. Against a $0.46 estimate, core EPS landed one cent short (negative 1.56% as screened).

The release carried no numerical guidance. The chief executive pointed to higher revenue, margin expansion and modest loan growth, offset by a larger provision and higher operating expenses, and named credit, profitable growth and expenses as priorities.

Net Interest Margin: How Much Did Funding Costs Help the 4.11% Print?

Net interest income was $116.3 million, up from $112.4 million in the second quarter. The taxable-equivalent margin rose 10 basis points from the second quarter and 19 basis points from a year earlier. A 7 basis point drop in deposit costs drove most of the sequential gain, with loan growth and lower cash balances adding and one extra day.

Total cost of funds was 1.74%. Core noninterest expense rose to $76.2 million from $72.8 million in the second quarter. The core efficiency ratio worsened to 53.15% from 52.24%, on higher salaries, FDIC insurance and a sale-leaseback writedown.

Core pre-tax, pre-provision earnings were $65.5 million. Recognized federal tax credits of $4.7 million cut the tax provision to $5.7 million from $11.7 million.

Credit Quality: What Moved Nonperforming Loans to $95.2 Million?

The provision for credit losses was $14.2 million, against $8.9 million in the second quarter and $11.3 million a year ago. Of that, $6.7 million related to three individually analyzed commercial credits, two of which moved to nonaccrual, and $3.5 million covered unfunded commitments. The allowance rose to $133.5 million, or 1.40% of loans, from 1.35% in June.

Two commercial credits totaling $21.0 million moved to nonaccrual, lifting nonperforming loans to $95.2 million from $81.6 million. Classified loans rose to $174.6 million from $148.4 million. Net charge-offs fell to $4.6 million, or 0.19% of average loans, from 0.49%.

Total portfolio loans were $9.54 billion, up $70.5 million sequentially by calculation, led by equipment finance at $827.5 million. Deposits were $10.27 billion.

Capital Returns: What Does a 11.9% CET1 Ratio Leave for Buybacks?

The company repurchased 4.16 million shares at a weighted average price of $21.18 in the quarter, or roughly $88.0 million by calculation, cutting period-end shares to 96.9 million. Common equity tier 1 capital slipped to 11.9% from 12.6%, and tangible common equity to tangible assets was 9.2%.

On October 27 the board authorized an additional $25 million repurchase program and declared a quarterly dividend of $0.14 per share, up from $0.135 a year ago, payable on November 20 to holders of record on November 6.

Investors will watch the conference call on Wednesday, October 28, at 2:00 p.m. Eastern time, for detail on the two new nonaccrual credits, the expense trend and the pace of repurchases against capital.