First Commonwealth Financial Corporation — Q3 2023 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2023. First Commonwealth is a Pennsylvania-based bank holding company. Results include Centric Financial Corporation, acquired January 31, 2023; the company issued 9.69 million shares for the acquisition, which added approximately $951 million of loans and $757 million of deposits.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net income | $39.2 million | $34.0 million | $112.2 million | $92.4 million |
| Diluted EPS | $0.38 | $0.36 | $1.10 | $0.98 |
| Net interest income, fully taxable equivalent | $98.1 million | $82.6 million | $290.9 million | $225.0 million |
| Net interest margin, fully taxable equivalent | 3.76% | 3.76% | 3.87% | 3.45% |
| Noninterest income | $24.8 million | $25.9 million | $72.3 million | $74.4 million |
| Noninterest expense | $67.4 million | $59.9 million | $204.7 million | $171.3 million |
Q3 return on average assets was 1.38% (1.41% prior year) and return on average equity was 12.46% (12.67%). For the nine months, those measures were 1.37% and 12.35%, compared with 1.29% and 11.47%.
Balance sheet at September 30, 2023: Total assets were $11.42 billion, up from $9.81 billion at December 31, 2022; total loans and leases were $8.90 billion, up from $7.64 billion; deposits were $9.24 billion, up from $8.01 billion. Shareholders’ equity was $1.24 billion, compared with $1.05 billion at year-end.
Funding, debt and liquidity: Noninterest-bearing deposits were $2.54 billion. Short-term borrowings were $544.1 million; subordinated debentures were $177.7 million and other long-term debt was $4.3 million. Nine-month operating cash flow was $106.7 million; cash and cash equivalents increased $182.8 million to $337.1 million. Management reported $4.42 billion in net available liquidity sources, including unencumbered securities, Federal Home Loan Bank and Federal Reserve capacity, other bank lines and brokered deposits. Estimated uninsured deposits were $2.6 billion, of which $0.9 billion was secured by pledged securities or letters of credit.
Credit and capital: The allowance for credit losses was $134.3 million, or 1.51% of loans, versus $102.9 million, or 1.35%, at year-end. Nonperforming loans were $47.9 million, or 0.54% of loans, versus $35.5 million and 0.46% at year-end. Nine-month net charge-offs were $13.8 million, compared with $5.1 million a year earlier. The company and bank were reported well-capitalized; the holding company’s total risk-based capital ratio was 13.79% and common equity Tier 1 ratio was 10.90%.
Material changes and management commentary
- Nine-month net income increased primarily due to $65.7 million higher net interest income and lower provision expense excluding Centric’s $10.7 million acquisition-date non-PCD loan provision; higher noninterest expense partly offset the gains.
- Higher asset yields supported earnings, but deposit and borrowing costs rose sharply. In Q3, the fully taxable equivalent asset yield rose to 5.37% from 3.92%, while the cost of interest-bearing liabilities increased to 2.28% from 0.24%; margin remained 3.76%.
- Nine-month noninterest expense increased 20%, including $8.9 million of Centric-related acquisition costs. Salaries, FDIC insurance, intangible amortization and litigation/operational losses also rose. Noninterest income declined 3%, notably due to lower swap fees and mortgage-sale gains.
- Deposit mix shifted toward interest-bearing and time deposits; noninterest-bearing deposits declined $134.8 million from year-end. Management cited greater customer rate sensitivity.
- Centric added $60.4 million of goodwill. Management reported no goodwill impairment indicators at September 30, but said adverse economic or performance changes could lead to impairment. Purchase-accounting mark accretion contributed 10 basis points to Q3 margin.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements are subject to economic and market conditions, interest-rate and funding changes, deposit outflows, loan performance and real-estate values, regulatory changes, competition, technology and cybersecurity events, and acquisition integration risks. A modeled immediate 100-basis-point rate increase would raise annual net interest income by 4.21%; a 100-basis-point decrease would lower it by 4.38%, subject to model assumptions and behavioral uncertainty.
Available-for-sale securities had $161.1 million of gross unrealized losses and held-to-maturity securities had $87.9 million at September 30; management attributed the losses to market interest-rate changes and reported no expected credit-related impairment. Accumulated other comprehensive loss was $154.1 million. A specific $4.1 million reserve was recorded in Q3 for a commercial real estate loan following an updated appraisal. Legal proceedings were not expected by management to materially affect consolidated financial position; reasonably possible aggregate losses beyond recorded liabilities were estimated at $0–$1 million, though effects on a future period’s results or cash flows could be material.
Off-balance-sheet commitments to extend credit totaled $2.53 billion; the company recorded an $8.9 million reserve for credit exposure on unfunded commitments and letters of credit. The filing also identifies financial-industry instability, potentially higher funding costs, uninsured-deposit outflows, additional FDIC assessments and tighter regulation as risks.
Important facts for investors to verify
- Whether Centric integration delivers expected benefits and whether acquisition-related costs or purchase-accounting accretion materially change in future periods.
- Deposit retention, uninsured-deposit trends, funding mix and borrowing costs, alongside the company’s reported liquidity capacity.
- Credit quality trends, particularly nonperforming and criticized loans, commercial real estate exposures, charge-offs and allowance adequacy.
- Exposure to interest-rate changes and the valuation or eventual realization of securities-related unrealized losses.
- Future operating expense, FDIC assessments, litigation or operational losses, and dividend and repurchase decisions.