First Commonwealth Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Dollar amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. The company completed its acquisition of Centric Financial Corporation on January 31, 2023, so year-over-year balance-sheet and operating comparisons include acquisition effects.
Financial performance
- Quarterly earnings: Net income was $42.8 million, or $0.42 per diluted share, versus $30.8 million, or $0.33, in Q2 2022. Return on average assets was 1.54% versus 1.28%; return on average equity was 13.90% versus 11.60%.
- Six-month earnings: Net income was $73.0 million, or $0.72 per diluted share, compared with $58.5 million, or $0.62, in the prior-year period. Return on average assets was 1.36% versus 1.23%, and return on average equity was 12.29% versus 10.86%.
- Net interest income and margin: Q2 net interest income on a fully taxable equivalent basis was $98.1 million, up from $73.9 million; net interest margin was 3.85% versus 3.38%. For the first six months, fully taxable equivalent net interest income was $192.8 million versus $142.3 million, and margin was 3.93% versus 3.29%. Management attributed the improvement to higher asset yields and loan growth, partly offset by higher deposit and borrowing costs. Centric purchase-accounting accretion contributed 14 basis points to Q2 margin.
- Other income and expenses: Noninterest income was $24.5 million in Q2, essentially unchanged year over year; it was $47.5 million for six months, down 2%. Noninterest expense rose 18% to $65.9 million in Q2 and 23% to $137.3 million for six months. Six-month expense included $8.5 million of Centric acquisition costs.
- Credit costs: Q2 provision for credit losses was $2.8 million versus $4.1 million a year earlier. Six-month provision was $10.8 million, including a $10.7 million day-one provision on acquired non-PCD loans; excluding that item, reported loan provision was $2.6 million. Six-month net charge-offs were $9.8 million versus $2.7 million, including substantial charge-offs on acquired Centric loans.
- Balance sheet and funding: Total assets were $11.32 billion at June 30, up from $9.81 billion at year-end 2022; loans and leases were $8.80 billion versus $7.64 billion, and deposits were $9.15 billion versus $8.01 billion. Noninterest-bearing deposits were $2.62 billion. Short-term borrowings were $542.8 million; subordinated debentures and other long-term debt totaled $182.1 million, with a further $5.2 million capital lease obligation.
- Liquidity and cash flow: Cash and cash equivalents were $448.9 million, up $294.6 million from year-end. For the first six months, operating cash flow was $86.3 million, investing cash outflow was $137.0 million, and financing cash inflow was $345.3 million. Management reported $4.41 billion of net available liquidity from listed internal and external sources.
- Capital and shareholder returns: Shareholders’ equity was $1.23 billion, up from $1.05 billion, mainly reflecting $141.4 million of shares issued for Centric and first-half earnings. The company reported a 10.75% common equity Tier 1 ratio at the holding-company level and said it and the bank subsidiary remained well-capitalized. Dividends declared were $0.125 per share in Q2; the board declared the same quarterly dividend for payment in August. The board expanded the repurchase authorization by $25 million in April.
Material changes and notable items
- Centric added seven full-service banking offices and one loan production office, approximately $923.6 million of acquired loans at fair value, $757.0 million of deposits, and $60.4 million of goodwill. The company issued 9.69 million shares as consideration. Management said Centric’s post-acquisition revenue and net income could not practicably be identified separately.
- Average interest-earning assets increased 16.6% in Q2 year over year, while the cost of interest-bearing liabilities rose to 1.88% from 0.22%. Management cited customer movement toward higher-rate money-market and time deposits. First-half time deposits increased $570.6 million from year-end; $757.0 million of deposit growth came from the acquisition.
- At June 30, the allowance for credit losses was $133.5 million, or 1.52% of loans, versus $102.9 million, or 1.35%, at year-end. Nonperforming loans were $48.0 million, or 0.54% of loans, compared with $35.5 million, or 0.46%, at year-end. Management attributed much of the increase to acquired loans and said it considered the allowance appropriate.
- Available-for-sale and held-to-maturity securities had estimated fair values of $738.1 million and $364.6 million, respectively. Held-to-maturity amortized cost was $439.9 million. The filing attributes unrealized securities losses primarily to market interest-rate changes; accumulated other comprehensive loss was $138.6 million at June 30.
- Uninsured deposits were estimated at $2.4 billion, of which $0.9 billion was secured by pledged securities or letters of credit. The company also disclosed a 0.58 ratio of rate-sensitive assets to liabilities repricing within one year; its sensitivity model estimated a 1.83% increase in annual net interest income under an immediate 100-basis-point rate increase, subject to modeling assumptions.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue, or margin guidance. Management cautions that first-half results are not necessarily indicative of full-year results. Forward-looking risks include economic and financial-market volatility, interest-rate changes, deposit outflows and funding costs, loan performance and real-estate values, regulatory changes, acquisition integration, cybersecurity and technology risks, and potential goodwill impairment. The company identified industry concerns following bank failures as a risk, including possible deposit pressure, higher funding costs, regulatory changes, and additional FDIC assessments.
Commitments to extend credit totaled $2.58 billion; standby and commercial letters of credit were also outstanding. Management did not expect pending or threatened litigation to materially affect consolidated financial position; reasonably possible losses beyond any recorded liability were estimated at $0–$1 million in aggregate, though a material effect on a particular future period’s results or cash flows could not be ruled out. The LIBOR transition was completed for LIBOR-based loans by June 30, 2023; management expected no material consolidated financial-statement impact.
Important facts for investors to verify
- How much of earnings and margin improvement is sustainable after Centric-related purchase-accounting accretion and acquisition effects?
- Whether deposit pricing, deposit mix, uninsured balances, and borrowing needs continue to pressure funding costs and liquidity.
- Whether acquired and legacy loan credit quality deteriorates, particularly given higher nonperforming loans, criticized loans, and net charge-offs.
- How securities valuation losses, rate sensitivity, and potential future interest-rate changes affect capital, liquidity, and earnings.
- Whether Centric integration, expense growth, and share issuance deliver expected benefits while supporting per-share earnings and capital levels.