First Commonwealth Financial Corporation — Q2 2021 Form 10-Q
Business context and period: The filing reports unaudited consolidated results for the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods. First Commonwealth is a bank holding company. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income, GAAP | $68.2 | $66.7 | $137.6 | $134.4 |
| Net interest income, fully taxable equivalent | $68.5 | $67.0 | $138.2 | $135.2 |
| Noninterest income | $26.1 | $21.8 | $53.4 | $41.1 |
| Provision for credit losses | $5.4 | $6.9 | $1.0 | $37.8 |
| Noninterest expense | $51.5 | $52.8 | $103.4 | $103.0 |
| Net income | $29.6 | $23.9 | $69.4 | $28.6 |
| Diluted EPS | $0.31 | $0.24 | $0.72 | $0.29 |
| Net interest margin, fully taxable equivalent | 3.17% | 3.29% | 3.29% | 3.46% |
- Balance sheet at June 30: Assets were $9,402.4 million, up from $9,068.1 million at year-end 2020. Deposits rose to $7,885.0 million from $7,438.7 million; portfolio loans were $6,740.5 million versus $6,761.2 million. Shareholders’ equity was $1,106.4 million, compared with $1,068.6 million.
- Credit quality: Allowance for credit losses was $97.0 million, or 1.44% of loans, versus $101.3 million, or 1.50%, at year-end. Nonperforming loans were $52.8 million (0.78% of loans), down from $54.1 million (0.80%). Six-month net charge-offs were $7.2 million, equal to an annualized 0.21% of average loans. Criticized loans totaled $250.4 million, down $52.4 million since year-end.
- Liquidity and debt: Cash and cash equivalents were $284.5 million at June 30, down $72.1 million over six months. Operating cash flow was $73.3 million; investing activities used $507.2 million, largely reflecting securities purchases and loan activity; financing activities provided $361.8 million. Deposits were the primary funding source. Short-term borrowings were $107.4 million and long-term debt, including subordinated debentures and lease obligations, was $182.8 million. The company reported unused borrowing capacity across several sources, including $1.8 billion at the FHLB, $931.4 million under the Federal Reserve collateral program, and $160.0 million in federal funds lines; these facilities have different terms and collateral requirements.
- Capital and shareholder returns: The company and bank met regulatory capital requirements and were classified as well capitalized. Company total risk-based capital was 15.16%, Tier 1 risk-based capital 12.58%, and common equity Tier 1 11.58%. Six-month dividends declared were $0.225 per share. A $25 million repurchase authorization was approved in January; 100,736 shares had been repurchased through June 30.
Material changes and management commentary
- Six-month net income increased by $40.8 million year over year, principally because provision expense fell sharply from the elevated 2020 level associated with pandemic uncertainty. Noninterest income also rose $12.4 million. In Q2, higher noninterest income, net interest income, and a lower provision supported earnings growth.
- Fully taxable equivalent net interest margin contracted year over year, despite higher net interest income. Management attributed the margin pressure to lower market rates and the mix of earning assets and funding. Lower funding costs and growth in average earning assets partly offset lower asset yields.
- Noninterest income growth included higher card interchange, trust and swap fees, and gains on sales of loans and assets. Six-month derivative mark-to-market income improved $3.1 million year over year; management noted this was an unrealized fair-value change, not a realized swap gain. Noninterest expense was nearly flat year over year for the first half; lower staffing and occupancy costs partly offset higher data-processing costs.
- Deposits grew $446.4 million in the first half, which management linked to PPP proceeds and government stimulus payments. PPP loans outstanding were $292.4 million at June 30; the company recognized $11.2 million of related deferred processing fees in first-half loan yield and expected about $12.3 million of additional fees to be recognized over remaining loan terms.
- COVID-related payment deferrals remained on loans with $59.5 million aggregate principal at June 30. TDR balances rose to $30.6 million from $23.3 million at year-end, including an increase in nonaccrual TDRs. Management reported improved credit forecasts and falling criticized and classified balances, but identified loan quality as a key risk.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue, margin, or loan-growth guidance. Management cautioned that interim results are not necessarily indicative of full-year performance.
- Management’s forward-looking risk discussion includes COVID-19 impacts, interest-rate and market changes, borrower condition, competition, regulation, technology and vendor reliability, legal matters, and possible goodwill impairment. The company reported no material change to previously disclosed annual-report risk factors.
- Interest-rate models estimated that an immediate +100 basis-point change would increase 12-month net interest income by 2.70%, while an immediate -100 basis-point change would reduce it by 4.42%; gradual-change estimates were +1.05% and -1.17%, respectively. Management cautioned that models depend on assumptions about deposit pricing, prepayments, and customer behavior.
- Management did not expect pending or threatened litigation to materially affect consolidated financial position; aggregate reasonably possible losses beyond recorded liabilities were estimated at $0–$1 million. A vehicle-repossession class action was dismissed with prejudice in May 2021, but plaintiffs appealed.
- The company continued preparing for the LIBOR transition and was evaluating the impact of reference-rate reform. It also noted that changing economic conditions could lead to future goodwill impairment, though no impairment indicators were identified at June 30.
Important facts for investors to verify
- Whether falling net interest margin and low-rate funding dynamics continue to weigh on earnings, and how actual results compare with the filing’s rate-sensitivity scenarios.
- Whether PPP fee recognition, forgiveness activity, and the unusually large 2020 credit-provision comparison are affecting the sustainability of reported earnings.
- Credit trends in commercial real estate and commercial borrowers, including the $59.5 million still under COVID-related deferral, elevated TDR balances, and subsequent loan payoffs.
- Deposit stability as stimulus-related balances normalize, and the availability and cost of contingent liquidity sources.
- Developments in the appealed repossession case, LIBOR transition execution, and any changes to goodwill impairment assessments.