Business context and reporting period
First Commonwealth Financial Corporation is a Pennsylvania-based bank holding company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020 unless otherwise stated. Dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income, GAAP | $70.6 | $66.4 | $208.3 | $200.8 |
| Noninterest income | $27.2 | $26.8 | $80.7 | $67.9 |
| Provision for credit losses | $0.3 | $11.2 | $1.4 | $49.0 |
| Noninterest expense | $55.0 | $58.2 | $158.4 | $161.3 |
| Net income | $34.1 | $19.2 | $103.5 | $47.8 |
| Diluted EPS | $0.36 | $0.20 | $1.08 | $0.49 |
| Net interest margin, FTE | 3.23% | 3.11% | 3.27% | 3.34% |
Third-quarter return on average assets was 1.42% and return on average equity was 12.14%; the nine-month figures were 1.48% and 12.62%, respectively. The declared dividend was $0.115 per share for Q3 and $0.34 per share for the first nine months.
| Balance-sheet metric | September 30, 2021 | December 31, 2020 |
|---|---|---|
| Total assets | $9,477.9 | $9,068.1 |
| Portfolio loans | $6,732.6 | $6,761.2 |
| Deposits | $7,936.5 | $7,438.7 |
| Shareholders’ equity | $1,112.9 | $1,068.6 |
| Short-term borrowings | $117.8 | $117.4 |
| Long-term debt, including subordinated debt and lease obligation | $182.5 | $233.3 |
| Allowance for credit losses | $94.2 | $101.3 |
For the first nine months, operating cash flow was $119.4 million, investing cash outflow was $541.0 million, and financing cash inflow was $399.7 million. Cash and cash equivalents ended the period at $334.7 million, compared with $380.1 million at September 30, 2020. The net-loans-to-deposits ratio was 83.90% at September 30, 2021.
Material changes and management commentary
- Nine-month net income increased $55.7 million year over year, primarily reflecting the much lower credit-loss provision, higher noninterest income, and lower expenses. Q3 net income rose $14.9 million, driven mainly by lower credit provisions and higher net interest income.
- Nine-month net interest income on a fully taxable-equivalent basis increased to $209.1 million from $201.9 million. The margin declined to 3.27% from 3.34%, as lower asset yields partly offset lower funding costs. Q3 FTE margin improved to 3.23% from 3.11%.
- Noninterest income rose 19% for the nine-month period, with growth in interchange, trust, service-charge, and loan-sale income. Q3 total noninterest income was up 2%; lower mortgage-sale gains partly offset growth elsewhere.
- Noninterest expense declined 2% year to date, in part because 2020 included $3.3 million of early-retirement costs and $2.5 million of branch-consolidation costs. Data-processing expense increased $1.6 million year to date.
- Deposits rose $497.8 million and total assets rose $409.8 million from year-end. Management attributed deposit growth partly to PPP proceeds and government stimulus payments. Portfolio loans decreased $28.6 million, including a $326.8 million reduction in PPP loans, while residential real estate and individual loans grew.
- Unrealized investment-security losses contributed to accumulated other comprehensive income declining to $3.5 million from $17.2 million at year-end. Net charge-offs were $9.5 million for the first nine months, versus $12.4 million in 2020.
Credit, liquidity, risks, and outlook
- Nonperforming loans were $38.1 million, or 0.56% of loans, versus $54.1 million and 0.80% at year-end. The allowance equaled 1.40% of loans and 247.30% of nonperforming loans. Management considered the allowance appropriate; these estimates depend on economic forecasts and borrower performance.
- Loans with COVID-related payment deferrals totaled $29.9 million at September 30, down from $113.8 million at year-end. Troubled debt restructurings totaled $23.6 million. Commercial real estate represented 54.85% of nonperforming loans.
- Liquidity sources include deposits, loan and security cash flows, and unused borrowing facilities. Disclosed capacities included $1.8 billion at the FHLB, $950.8 million under the Federal Reserve collateral program, $160.0 million of federal-funds lines, and $621.4 million of repo lines; these facilities were largely unused at period-end.
- Both the company and bank were reported well-capitalized. The company’s total risk-based capital ratio was 14.95%, Tier 1 ratio 12.44%, and common equity Tier 1 ratio 11.46%.
- Management gave no specific earnings or revenue guidance. It cautioned that results depend on COVID-19 impacts, interest rates, economic and credit conditions, regulation, technology, competition, and other risks. Its interest-rate model estimated that a gradual +100-basis-point move would increase 12-month net interest income 2.42%, while an immediate +100-basis-point move would increase it 5.15%; management noted model assumptions may not match actual outcomes.
- Commitments to extend credit were $2.27 billion. The recorded reserve for off-balance-sheet credit exposure was $6.4 million. Management did not expect pending or threatened litigation to materially affect consolidated financial position; reasonably possible losses beyond recorded liabilities were estimated at $0–$1 million, though period-specific results or cash flows could still be affected.
- Subsequent events: the board authorized a new $25 million share-repurchase program on October 26, 2021, and declared a $0.115 dividend. A $6.9 million nonperforming commercial real estate loan was sold at par after quarter-end.
Important facts for investors to verify
- Whether lower credit provisions and improved credit indicators persist, and how borrower deferrals, criticized loans, and commercial real estate exposures evolve.
- How PPP fee recognition, PPP runoff, deposit levels, and loan growth affect recurring net interest income and margin.
- The assumptions behind interest-rate sensitivity estimates, including deposit repricing behavior, and their implications if rates or funding costs change.
- Whether the $25 million repurchase authorization and dividend level remain consistent with capital, liquidity, asset quality, and earnings.
- The effect of investment-security fair-value changes on equity and the potential for future goodwill impairment or other material contingencies.