First Commonwealth Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. First Commonwealth is a Pennsylvania-based bank holding company. Unless otherwise noted, figures are in millions of dollars.
Financial performance and position
| Metric | Q1 2019 | Comparable period / change |
|---|---|---|
| Net interest income (GAAP) | $65.5 | $59.7 in Q1 2018 |
| Net interest income, fully taxable equivalent | $65.9 | $60.2 in Q1 2018 |
| Net interest margin, fully taxable equivalent | 3.75% | 3.69% in Q1 2018 |
| Noninterest income | $18.9 | $22.0 in Q1 2018 |
| Noninterest expense | $49.7 | $46.9 in Q1 2018 |
| Provision for credit losses | $4.1 | $6.9 in Q1 2018 |
| Net income / diluted EPS | $24.6 / $0.25 | $23.3 / $0.24 in Q1 2018 |
| Cash dividends declared per share | $0.10 | $0.08 in Q1 2018 |
- Return on average assets was 1.27%, versus 1.29% in Q1 2018; return on average equity was 10.11%, versus 10.57%.
- Operating cash flow was $18.7, investing cash flow was negative $58.5, and financing cash flow was positive $64.8. Cash and cash equivalents rose $24.9 to $123.9.
- At March 31, total assets were $7,972.7; portfolio loans were $5,871.1, net loans were $5,821.4, and deposits were $6,130.8. Shareholders’ equity was $998.0.
- Funding and debt included $565.6 of short-term borrowings, $170.3 of subordinated debentures, $7.4 of other long-term debt, and a $7.1 capital lease obligation. The filing reports the bank and holding company met applicable capital requirements and were considered well-capitalized.
Material changes and management commentary
- Net income increased about 5.7% year over year. Higher net interest income and a lower credit-loss provision more than offset lower noninterest income and higher expenses.
- Management attributed higher net interest income to growth in average earning assets and improved asset yields. Average earning assets increased $515.6, and the yield on earning assets rose 44 basis points to 4.55%; higher funding costs partly offset those gains.
- Noninterest income declined $3.2, principally because Q1 2018 included a $2.8 securities gain and a more favorable derivatives mark-to-market result. Noninterest expense increased $2.9, including higher salaries, employee benefits, occupancy, and advertising costs.
- Loans grew $96.9, or 1.7%, from year-end 2018; deposits rose $232.8. Short-term borrowings declined $156.2 from year-end.
- Nonperforming loans were $31.3, or 0.53% of loans, compared with $32.0 and 0.55% at year-end. The allowance for credit losses was $49.7, or 0.85% of loans; net charge-offs were $2.2 for the quarter.
- Liquidity sources included unused borrowing capacity and committed lines. At quarter-end, stated capacities included $1.6 billion at the FHLB, $822.9 of FRB collateral borrowing capacity, $205.0 of federal funds lines, and $514.9 of repo lines; the filing reports no outstanding FRB, federal funds-line, or repo-line balances.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results. Forward-looking outcomes depend on economic conditions, interest rates, credit quality, competition, technology, acquisitions, regulation, and other risks.
- Interest-rate sensitivity modeling indicates that a gradual 100-basis-point increase would raise modeled 12-month net interest income by 0.43%; a 100-basis-point decline would reduce it by 2.67%. Management notes model assumptions and limitations, including customer deposit behavior.
- Management stated that the allowance was adequate, but warned that economic conditions, rates, borrower finances, delinquency trends, and collateral values could change loss estimates. Criticized loans totaled $120.5, or 2.1% of the portfolio.
- Pending and threatened litigation was not expected by management to have a material aggregate effect on consolidated financial position. Additional reasonably possible losses beyond any recorded liability were estimated at $0 to $1.0; outcomes could affect a particular future period.
- Adoption of lease accounting on January 1, 2019 added $38.5 of right-of-use assets and $41.8 of lease liabilities; quarter-end balances were $47.6 and $51.4, respectively. The company also recognized an additional $10.0 related to relocated leased space during the quarter.
- The company was evaluating the impact of the expected-credit-loss standard (CECL), effective for it January 1, 2020; the impact was not yet determined. No goodwill impairment was recorded, but management said adverse economic conditions or changes in performance, asset values, or share price could trigger future impairment.
- As a subsequent event, the company announced an agreement to acquire 14 Pennsylvania branches, approximately $525 of deposits, and $120 of loans from Santander Bank. The transaction was subject to regulatory approval and expected to close in Q3 2019.
- The board authorized a new $25.0 share-repurchase program on March 4; 74,033 shares had been repurchased by quarter-end at an average $12.48 per share. A $0.10 quarterly dividend was declared after quarter-end.
Important facts for investors to verify
- Whether loan and deposit growth, improved net interest margin, and higher funding costs continued in subsequent quarters.
- Credit trends behind the $2.2 of quarterly net charge-offs, criticized loans, nonperforming loans, and the allowance coverage ratio.
- The evolving cost and funding mix, including deposit pricing, short-term borrowings, and subordinated debt.
- Regulatory approval, closing, and integration of the Santander branch and deposit acquisition.
- The eventual CECL transition impact and any changes in lease commitments, legal contingencies, or goodwill impairment assessments.