First Commonwealth Financial Corporation — Q1 2024 Form 10-Q
Business context and reporting period. First Commonwealth is a bank holding company. This unaudited filing covers the three months ended March 31, 2024; income and cash-flow comparisons are with Q1 2023, while balance-sheet comparisons are generally with December 31, 2023. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior date |
|---|---|---|
| Net income; diluted EPS | $37.5 million; $0.37 | Q1 2023: $30.2 million; $0.30 |
| Net interest income (GAAP) | $92.3 million | Q1 2023: $94.4 million |
| Net interest income, fully taxable equivalent (non-GAAP) | $92.6 million; net interest margin 3.52% | Q1 2023: $94.7 million; margin 4.01% |
| Total noninterest income / expense | $24.0 million / $65.6 million | Q1 2023: $23.0 million / $71.4 million |
| Return on average assets / equity | 1.31% / 11.40% | Q1 2023: 1.17% / 10.56% |
| Total assets | $11.69 billion | December 31, 2023: $11.46 billion |
| Portfolio loans and leases | $9.00 billion | December 31, 2023: $8.97 billion |
| Total deposits | $9.45 billion | December 31, 2023: $9.19 billion; March 31, 2023: $9.23 billion |
| Allowance for credit losses; nonperforming loans | $119.1 million (1.32% of loans); $42.4 million (0.47%) | December 31, 2023: $117.7 million (1.31%); $39.5 million (0.44%) |
| Shareholders’ equity | $1.33 billion | December 31, 2023: $1.31 billion |
Operating cash flow was $39.6 million in Q1 2024; investing activities used $64.2 million and financing activities provided $188.0 million. Cash and cash equivalents ended the quarter at $310.4 million, compared with $395.8 million at March 31, 2023. The company reported $5.00 billion of net available liquidity sources at March 31, 2024. Short-term borrowings were $546.5 million; long-term debt, including subordinated debentures and lease obligations, was $186.5 million.
Regulatory capital ratios exceeded well-capitalized thresholds: the holding company’s total risk-based capital ratio was 14.27% and common equity Tier 1 ratio was 11.41%; the bank’s respective ratios were 13.25% and 11.13%. The declared Q1 common dividend was $0.125 per share.
Material changes versus comparable periods
- Net income rose 24% year over year, while diluted EPS increased from $0.30 to $0.37. Management attributed the improvement principally to $8.5 million of Centric acquisition-related costs in Q1 2023 and lower total provision expense versus that quarter, which included a $10.7 million acquisition-day-one provision. Q1 2024 results also reflected higher loan charge-offs and a higher loan-loss provision than the comparable quarter excluding that acquisition item.
- Net interest margin fell 49 basis points year over year. Higher yields on earning assets were more than offset by increased funding costs: the cost of interest-bearing liabilities rose to 2.77% from 1.27%. Interest expense increased to $53.2 million from $20.2 million.
- Deposits increased $254.1 million during the quarter, including growth in interest-bearing and time deposits, while noninterest-bearing deposits declined $54.0 million. Loans grew $31.1 million, or 0.3%, from year-end.
- Net charge-offs increased to $4.3 million from $1.2 million in Q1 2023; the annualized net charge-off ratio was 0.19% versus 0.06%. Nonperforming loans increased from year-end, with $13.5 million of commercial loans moving to nonaccrual, partly offset by payoffs and charge-offs.
- Noninterest expense declined 8% overall, but excluding the prior-year acquisition-related expense, the filing reports a 4% increase in the expense subtotal. Salaries, data processing, FDIC insurance, and certain operating costs rose.
Outlook, management commentary, risks and unusual items
- The filing provides no specific earnings, revenue, or margin guidance. Management cautions that quarterly results are not necessarily indicative of full-year results and says the allowance is appropriate for expected losses as of March 31.
- Interest-rate exposure is significant. The company’s one-year rate-sensitive asset-to-liability ratio was 0.71. Its model estimated that a gradual 100-basis-point rate increase would raise 12-month net interest income by 1.83%, while a 100-basis-point decrease would reduce it by 2.72%; an immediate 100-basis-point increase or decrease produced modeled changes of +5.47% or -5.44%. Management notes that these are model-based estimates subject to behavioral and other assumptions.
- Commercial real estate represented 34% of the loan portfolio. The company added $0.3 million of qualitative reserves for CRE collateral-value risks. At March 31, available-for-sale and held-to-maturity securities had aggregate gross unrealized losses of approximately $201.8 million, which management attributed to market interest-rate changes; 96% were in U.S. government or government-sponsored securities. Held-to-maturity securities had a fair value of $393.7 million versus $464.7 million amortized cost.
- Estimated uninsured deposits were $2.5 billion, of which $0.8 billion were secured by pledged securities or letters of credit. The company reported $516 million of Federal Reserve Bank Term Funding Program borrowings at 4.76%, maturing January 16, 2025, and said $311 million of FHLB letters of credit matured and were not renewed on April 25, 2024.
- After quarter-end, the company participated in a Visa share exchange; Visa Class C shares received were valued at approximately $5.7 million as of April 30, 2024, while Class B-2 shares remain at zero carrying value. The company also gave notice to redeem $50 million of subordinated notes on June 1, 2024; the remaining $0.4 million of issuance costs will be expensed then.
- Legal proceedings are described as ordinary-course matters. Management does not expect aggregate ultimate liability to be material to consolidated financial position; reasonably possible losses beyond recorded liabilities are estimated at $0 to $1 million. The filing reports no material change to previously disclosed risk factors.
- Forward-looking results are subject to economic and market conditions, interest rates, borrower performance, deposit behavior, credit losses, liquidity, cybersecurity and third-party systems, regulation, competition, and acquisition or integration risks. Management reported effective disclosure controls and procedures.
Important facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest margin and earnings.
- Whether CRE and other commercial credit quality, nonperforming loans, and net charge-offs worsen, and whether the allowance remains adequate.
- How unrealized securities losses, deposit outflows, available borrowing capacity, and the 2025 maturity of Federal Reserve borrowings affect liquidity and capital.
- The capital, expense, and funding effects of the $50 million subordinated-note redemption and the accounting outcome of the Visa exchange.
- Whether modeled interest-rate sensitivity and management’s assumptions align with actual customer deposit and borrower behavior.