First Commonwealth Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Dollar amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and financial performance
The company is a bank holding company. Results reflect the effects of the COVID-19 pandemic, low interest rates, Paycheck Protection Program (PPP) lending and customer deposit growth. The Santander branch acquisition completed in September 2019 also affects year-over-year comparisons.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net income | $19.2 million | $26.6 million | $47.8 million | $78.5 million |
| Diluted earnings per share | $0.20 | $0.27 | $0.49 | $0.80 |
| Net interest income (GAAP) | $66.4 million | $68.4 million | $200.8 million | $201.1 million |
| Net interest margin (fully taxable equivalent) | 3.11% | 3.76% | 3.34% | 3.75% |
| Provision for credit losses | $11.2 million | $2.7 million | $49.0 million | $9.6 million |
| Noninterest income | $26.8 million | $22.2 million | $67.9 million | $63.0 million |
| Noninterest expense | $58.2 million | $54.9 million | $161.3 million | $156.9 million |
Financial position, cash flow and liquidity
- At September 30, total assets were $9.29 billion, compared with $8.31 billion at December 31, 2019. Portfolio loans were $6.95 billion, up $760.6 million, and total deposits were $7.70 billion, up $1.03 billion.
- PPP loans outstanding were $573.5 million at quarter-end. They are SBA-guaranteed and carry a stated rate of 1%; the company reported a 2.7% yield including recognized fees. The company expects to recognize about $14.8 million of net deferred PPP processing fees over the loans’ remaining terms.
- Cash and cash equivalents were $380.1 million, versus $121.9 million at year-end 2019. For the first nine months, operating cash flow was $70.8 million, investing cash flow was negative $712.3 million and financing cash flow was positive $899.7 million.
- Short-term borrowings were $122.4 million; long-term debt, including subordinated debentures and lease obligations, totaled $233.5 million. Shareholders’ equity was $1.07 billion.
- Management reported substantial unused borrowing capacity, including $1.5 billion at the FHLB, $831.5 million through the Federal Reserve’s borrower-in-custody program, and $180 million of federal funds lines and $456 million of repo lines, each with no outstanding balance under those lines at quarter-end.
- The company and its bank subsidiary were reported as well-capitalized. The company’s total risk-based capital ratio was 14.44%, Tier 1 leverage ratio 8.94% and common equity Tier 1 ratio 10.74%.
Material changes and management commentary
- Year-to-date net income declined 39%, primarily because the company recorded $49.0 million of credit-loss provision, compared with $9.6 million a year earlier. Management cited COVID-related uncertainty, higher qualitative reserves, and specific reserves for commercial real estate and other borrower exposures.
- Q3 net interest income on a fully taxable equivalent basis was $66.7 million, down from $68.9 million. Asset growth was outweighed by rate pressure; the margin fell 65 basis points year over year. Management attributed the decline mainly to lower market rates and lower loan yields.
- Year-to-date noninterest income rose 8%, helped by mortgage loan sale gains, which increased $7.1 million, and higher card interchange income. Deposit service charges fell, which management linked to higher customer balances and lower consumer spending.
- Noninterest expense increased 3% year to date. Q3 and year-to-date expenses included $3.3 million for a voluntary early-retirement program and $2.5 million for a plan to consolidate 29 branches by December 31, 2020. The retirement program had about 72 participants.
- The allowance for credit losses rose to $88.3 million, or 1.27% of portfolio loans, from $51.6 million, or 0.83%, at year-end. Nonperforming loans were $49.7 million, or 0.71% of loans, versus $32.2 million, or 0.52%, at year-end. Criticized loans totaled $189.0 million, up $88.4 million, with downgrades concentrated partly in hospitality and retail.
- The company deferred adoption of CECL under temporary CARES Act relief and continued using the incurred-loss method. Based on conditions at the planned January 1, 2020 adoption date, management had estimated CECL could increase the year-end 2019 allowance by approximately 20%–30%; the filing does not provide a revised adoption-date estimate.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management cautioned that actual results may be affected by the duration and economic consequences of COVID-19, borrower financial condition, interest rates, deposit behavior, market volatility, regulation and other risks. It stated that further COVID-related loan deferrals may be granted based on individual credit assessments.
- By September 30, the company had granted approximately 6,800 COVID-related deferrals covering $1.4 billion in principal; loans still in deferral status were $65.4 million. As of October 23, about $1.3 billion of deferrals had expired. Among those expired accounts, $13.2 million was 30–59 days past due, $0.4 million was 60–89 days past due and $1.2 million was 90 or more days past due and still accruing.
- A lawsuit filed October 14, 2020 seeks statewide class-action status and alleges deficiencies in vehicle repossession and post-sale notices. The bank intends to defend the claims; potential loss could not be reasonably estimated at the filing date. Management said other pending or threatened litigation was not expected to materially affect consolidated financial position, while noting possible period-specific effects.
- Management found no goodwill impairment trigger at September 30, but warned that adverse economic conditions, asset values or stock-price changes could lead to future impairment.
- Quarterly cash dividends declared were $0.11 per share. The board declared another $0.11 dividend on October 27, payable November 20, 2020; future dividends remain subject to board discretion.
Most important facts for investors to verify
- Whether COVID-related borrower stress, expired deferrals and criticized loans lead to additional nonaccrual loans, charge-offs or higher provisions.
- PPP forgiveness, fee recognition timing and any risks or liabilities associated with program participation.
- Whether deposit balances remain elevated and how low interest rates affect margins, loan yields and funding costs.
- Execution, savings and one-time costs from the 29-branch consolidation and early-retirement program.
- Developments in the repossession-notice litigation, CECL adoption timing and eventual allowance impact.