First Commonwealth Financial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. Figures below are in millions unless otherwise stated. The filing is unaudited.
Business context and financial performance
The company is a bank holding company. First-quarter earnings rose sharply from the prior-year quarter, largely because the company recorded a credit-loss provision benefit rather than the substantial provision expense recorded in Q1 2020.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net interest income (GAAP) | $69.4 | $67.7 |
| Net interest income, fully taxable equivalent | $69.8 | $68.1 |
| Net interest margin, fully taxable equivalent | 3.40% | 3.65% |
| Provision for credit losses | $(4.4) benefit | $31.0 expense |
| Noninterest income | $27.4 | $19.3 |
| Noninterest expense | $51.9 | $50.3 |
| Net income | $39.8 | $4.7 |
| Diluted earnings per share | $0.41 | $0.05 |
| Cash dividends declared per share | $0.11 | $0.11 |
Financial position, cash flow, debt, and liquidity
- Assets and funding: Total assets were $9,417 at March 31, up from $9,068 at year-end. Deposits increased to $7,869 from $7,439; loans were $6,737, down from $6,761. Noninterest-bearing deposits were $2,616.
- Cash flow: Operating activities provided $51.2; investing activities used $314.7, largely reflecting securities purchases; financing activities provided $411.5, including $430.6 of deposit growth. Cash and cash equivalents increased $148.1 to $504.6.
- Debt: Short-term borrowings were $110.8. Long-term debt, including subordinated debentures and capital lease obligations, totaled $233.0. Subordinated debentures were $170.7.
- Liquidity: Management reported substantial unused borrowing sources, including $1.8 billion of FHLB capacity, $861.5 million under the Federal Reserve borrower-in-custody program, and $180.0 million of federal funds lines; none was outstanding on those latter two facilities. The net loans-to-deposits ratio was 84.64%.
- Capital: Shareholders’ equity was $1,087.5. The company and bank were reported well-capitalized; the company’s total risk-based capital ratio was 15.27% and common equity Tier 1 ratio was 11.61%.
Material changes versus comparable periods
- Net income increased to $39.8 from $4.7, primarily reflecting a $4.4 provision benefit in Q1 2021 versus $31.0 of provision expense in Q1 2020. Management attributed the lower expected-loss provision to an improved economic forecast.
- Fully taxable equivalent net interest income increased modestly, but net interest margin declined 25 basis points to 3.40%. Lower asset yields were partly offset by a 51-basis-point decline in the cost of interest-bearing liabilities.
- Noninterest income increased $8.1, or 42%, including higher mortgage-sale gains, card interchange income and a more favorable derivatives mark-to-market result. Noninterest expense increased $1.6, or 3%.
- Deposits grew $430.6 during the quarter, which management associated with PPP proceeds and federal stimulus payments. Loan balances declined $24.3 from year-end.
- The allowance for credit losses fell to $96.8, or 1.44% of loans, from $101.3, or 1.50%, at year-end. Nonperforming loans were $50.4, or 0.75% of loans, versus $54.1, or 0.80%, at year-end.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- PPP: PPP loans outstanding were $478.5 at quarter-end. The company recognized $7.0 of net deferred PPP processing fees in loan interest income during Q1 and expected approximately $13.1 of additional fees to be recognized over remaining loan terms. PPP loans are SBA-guaranteed, but the company notes potential risks and liabilities associated with program participation.
- COVID-19 credit exposure: Loans totaling $136.6 remained in a CARES Act payment-deferral period at March 31. Management said some deferrals could be extended. Credit quality, borrower performance and the economic forecast remain material uncertainties.
- Interest-rate risk: The company’s model estimated that an immediate 100-basis-point rate increase would raise 12-month net interest income by 3.11%, while a 100-basis-point decrease would reduce it by 4.84%. Management cautions that model assumptions may differ from actual results.
- Other items: Q1 included a $0.4 gain from the sale of a nonperforming relationship and a favorable year-over-year change in derivatives marks; the latter is a fair-value change, not necessarily a realized gain. The company continued a branch-consolidation program announced in 2020.
- Legal matter: A Pennsylvania repossession-notice class-action complaint was dismissed with prejudice on May 4, 2021, subject to possible appeal. Management said aggregate litigation liability was not expected to be material to consolidated financial position; reasonably possible losses beyond recorded liabilities were estimated at $0–$1.0, excluding that case.
- Capital returns: The board declared a $0.115-per-share dividend on April 27, payable May 21, 2021. A $25.0 share-repurchase authorization was approved in January; 28,012 shares had been repurchased by quarter-end.
Important facts for investors to verify
- Whether the improved economic forecast supporting the provision benefit remains appropriate, and how credit losses and the allowance develop.
- Performance of the $136.6 in loans still under payment deferral, the $478.5 PPP portfolio, and commercial real estate exposures.
- Sustainability of earnings excluding the large year-over-year provision swing, PPP fee recognition, mortgage-sale gains and derivatives valuation changes.
- Deposit levels, loan demand, margin trends and actual sensitivity to changing interest rates compared with modeled estimates.
- Progress on the dismissed repossession case, including any appeal, and the use of the repurchase authorization and future dividend decisions.