First Commonwealth Financial Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The company is a Pennsylvania-based financial holding company operating primarily in Pennsylvania and Ohio, with consumer and commercial banking, wealth management, and insurance businesses. Figures below are in U.S. dollars; annual figures are for 2020 unless otherwise noted.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets at year-end | $9.07 billion | $8.31 billion |
| Loans at year-end | $6.76 billion | $6.19 billion |
| Deposits at year-end | $7.44 billion | $6.68 billion |
| Net interest income | $268.3 million | $269.9 million |
| Net interest margin, taxable-equivalent | 3.32% | 3.75% |
| Noninterest income | $94.5 million | $85.5 million |
| Provision for credit losses | $56.7 million | $14.5 million |
| Net income | $73.4 million | $105.3 million |
| Diluted earnings per share | $0.75 | $1.07 |
| Return on average assets / equity | 0.82% / 6.82% | 1.31% / 10.32% |
| Shareholders’ equity at year-end | $1.07 billion | $1.06 billion |
Cash flow: Net cash provided by operating activities was $105.7 million, compared with $107.6 million in 2019. Investing activities used $483.1 million, while financing activities provided $612.2 million. Cash and cash equivalents increased $234.7 million to $356.6 million.
Credit quality: The allowance for credit losses was $101.3 million, or 1.50% of loans, versus $51.6 million, or 0.83%, a year earlier. Net charge-offs were $17.2 million versus $10.7 million. Nonperforming loans rose to $54.1 million, or 0.80% of loans, from $32.2 million, or 0.52%.
Debt and liquidity: Year-end short-term borrowings were $117.4 million; long-term debt, including subordinated debentures, was approximately $233.3 million. Deposits were the primary funding source and represented 93% of liabilities. The company reported $840 million of available Federal Reserve borrowing capacity, $1.5 billion of maximum FHLB capacity, and additional unused correspondent-bank lines. The Bank was reported well-capitalized; its total capital ratio was 14.36% and common equity Tier 1 ratio was 11.66%.
Fourth-quarter snapshot
| Metric | Q4 2020 | Q4 2019 |
|---|---|---|
| Net interest income | $67.5 million | $68.8 million |
| Provision for credit losses | $7.7 million | $4.9 million |
| Net income | $25.7 million | $26.8 million |
| Diluted EPS | $0.27 | $0.27 |
Changes, management commentary, and unusual items
- Net income declined 30% year over year, principally reflecting pandemic-related credit provisioning and one-time employee retirement and branch-consolidation expenses. Net interest margin contracted 43 basis points as lower asset yields outweighed lower funding costs; average interest-earning assets grew 12%.
- Noninterest income increased 11%, primarily as mortgage-loan sale gains rose to $18.8 million from $7.8 million. Deposit service charges fell $2.5 million amid higher customer balances and lower consumer spending.
- The company originated $589.1 million of Paycheck Protection Program loans; $478.9 million remained outstanding at year-end. The loans are SBA-guaranteed, but management noted participation risks that could not then be determined. Approximately $10.4 million of net deferred PPP processing fees remained to be recognized over time.
- CECL was adopted effective January 1, 2020, increasing the opening allowance by $13.4 million and reducing retained earnings by $11.2 million after tax. The year-end estimate included COVID-related economic forecasts and qualitative reserves.
- Criticized loans increased $202.2 million to $302.8 million, with commercial real estate accounting for $183.3 million of the increase, particularly hospitality and retail-related exposure. The company granted about 6,800 COVID-related payment deferrals covering $1.4 billion; the year-end balance still in deferral was $113.8 million.
- Deposits rose 11%, partly reflecting PPP proceeds and federal stimulus payments; short-term borrowings fell 42%. The company repurchased $20.9 million of shares and declared $0.44 per share in dividends. A new $25 million repurchase authorization was approved in January 2021.
- One-time costs included $3.4 million for a voluntary early-retirement program, $2.7 million for branch consolidation, and $0.9 million of COVID-related expenses. The company consolidated nearby branches during 2020; disclosures cite 28 or 29 locations in different sections.
- No financial guidance or quantified earnings outlook is provided. Management emphasized uncertainty around the pandemic, borrower performance, credit-loss estimates, interest rates, and the LIBOR transition. Other material risks include commercial real estate exposure, liquidity and funding access, cybersecurity and third-party vendors, regulation, competition, and acquisition execution.
- Auditors issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter. Management reported no material weakness in internal controls.
- Pending legal matters include a proposed Pennsylvania class action alleging deficient vehicle-repossession notices. Management could not reasonably estimate potential loss; it said aggregate reasonably possible losses on other matters beyond recorded liabilities ranged from $0 to $1 million.
Investor verification priorities
- Track criticized and nonperforming commercial real estate loans, deferral expirations, charge-offs, and whether the $101.3 million allowance remains adequate as economic conditions evolve.
- Assess the sustainability of net interest margin and earnings under changing rates, including repricing exposure and the transition of LIBOR-linked instruments.
- Monitor PPP loan forgiveness and fee recognition, along with the effect of elevated deposits and stimulus-related balances on future funding and liquidity.
- Reconcile the branch-consolidation disclosures (28 versus 29 locations) and assess realized savings against recorded restructuring costs.
- Review capital, dividends, and share repurchases against credit needs, regulatory limits, and the new $25 million repurchase authorization; also follow the repossession-notice litigation.