First Commonwealth Financial Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparisons are primarily with Q1 2022 for operating results and December 31, 2022 for balance-sheet changes. Dollar figures below are in millions unless noted.
Business context and results
The regional bank completed its acquisition of Centric Financial Corporation on January 31, 2023, issuing 9.69 million common shares. Centric added seven banking offices and approximately $948 million of loans and $757 million of deposits. Its results were integrated, so the company said Centric’s specific contribution to revenue and net income could not practicably be isolated.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net interest income, GAAP | $94.4 | $68.2 |
| Net interest income, fully taxable equivalent | $94.7 | $68.4 |
| Noninterest income | $23.0 | $24.0 |
| Noninterest expense | $71.4 | $55.7 |
| Net income | $30.2 | $27.7 |
| Diluted earnings per share | $0.30 | $0.29 |
| Net interest margin, fully taxable equivalent | 4.01% | 3.19% |
Net income rose $2.5 million. Higher net interest income and lower credit-loss provision, excluding the acquisition-related day-one provision, were partly offset by higher expenses. Net interest income growth reflected higher earning-asset yields and loan balances, alongside increased deposit and borrowing costs. Noninterest expense included $8.5 million of Centric acquisition costs; salaries and benefits also increased, partly due to acquired employees. Noninterest income declined 4%, including lower mortgage-sale gains and derivative mark-to-market results.
Financial position, cash flow and liquidity
- Scale and funding: Total assets were $11.11 billion versus $9.81 billion at year-end; loans and leases were $8.66 billion versus $7.64 billion; deposits were $9.23 billion versus $8.01 billion. Much of the increase reflects Centric.
- Credit: Allowance for credit losses was $133.9 million, or 1.55% of loans, compared with $102.9 million, or 1.35%, at year-end. The reported Q1 provision included $10.7 million for acquired non-PCD loans. Net charge-offs were $1.2 million; nonperforming loans were $44.2 million, or 0.51% of loans.
- Debt: Short-term borrowings were $279.0 million, down from $372.7 million at year-end. Long-term debt was $187.5 million, including $177.6 million of subordinated debentures. Centric brought $186.7 million of borrowings at acquisition.
- Liquidity: The company reported $4.17 billion of net available liquidity across internal and external sources. Estimated uninsured deposits were $2.5 billion; $1.0 billion of uninsured deposits were secured by pledged securities or letters of credit. Management reported using new short-term borrowings to add on-balance-sheet liquidity during the quarter.
- Cash flow: Operating activities provided $38.6 million; investing activities provided $11.1 million; financing activities provided $191.8 million. Cash and cash equivalents ended the quarter at $395.8 million, compared with $524.8 million at March 31, 2022.
- Capital: Shareholders’ equity was $1.23 billion, up from $1.05 billion at year-end, principally reflecting acquisition shares, earnings and improved other comprehensive income. The company and bank met regulatory capital requirements and were categorized as well-capitalized.
Material changes, outlook and risks
- Centric drove significant balance-sheet growth and added $57.1 million of goodwill. Acquisition accounting remains provisional for up to 12 months; management said material valuation adjustments were not expected.
- Available-for-sale and held-to-maturity securities had substantial unrealized losses associated with higher market interest rates. Management attributed the losses to rate changes and reported no expected credit-related impairment on investment securities in the quarter.
- The company reported $8.2 million of reserves for unfunded commitments and letters of credit. It disclosed routine litigation and estimated reasonably possible losses beyond recorded liabilities of $0–$1 million, while stating it did not expect aggregate ultimate litigation liability to be material to financial position.
- No specific earnings or financial guidance was provided. Management said the quarter’s results are not necessarily indicative of full-year results. The board authorized an additional $25 million for share repurchases after quarter-end and declared a $0.125-per-share quarterly dividend, payable in May 2023.
- Disclosed risks include economic and market disruption, deposit outflows, funding costs, interest-rate and securities-value changes, credit deterioration, regulatory changes, acquisition integration, cybersecurity and operational issues, and potential goodwill impairment. The filing added a risk factor addressing recent bank failures and reduced confidence in financial institutions.
- Q1 rate-sensitivity modeling estimated that a gradual +100 basis-point rate change would increase annual net interest income by 1.70%, while an immediate +100 basis-point change would increase it by 5.34%. Management cautioned that model assumptions and customer behavior may differ from actual results.
Most important facts for investors to verify
- How Centric integration, acquired-loan performance and provisional purchase-accounting estimates affect future earnings and credit costs.
- Deposit trends, uninsured-deposit movements, funding costs and the availability of reported liquidity sources.
- Loan-credit quality, including criticized and classified loans, nonperforming loans and allowance adequacy as the acquired portfolio seasons.
- Whether net interest margin gains persist as deposit pricing responds to market rates and interest-rate hedges affect results.
- Actual repurchases and dividends, and any changes in regulatory capital, interest-rate exposure or securities-related losses.