First Commonwealth Financial Corp. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. First Commonwealth is a Pennsylvania-based financial holding company providing consumer and commercial banking, wealth management, and insurance services in Pennsylvania and Ohio.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Total assets, year-end | $9.81 billion | $9.55 billion |
| Loans and leases, year-end | $7.64 billion | $6.84 billion |
| Deposits, year-end | $8.01 billion | $7.98 billion |
| Shareholders’ equity, year-end | $1.05 billion | $1.11 billion |
| Net interest income | $312.2 million | $278.5 million |
| Net interest margin, fully taxable-equivalent | 3.58% | 3.26% |
| Net income | $128.2 million | $138.3 million |
| Diluted earnings per share | $1.37 | $1.44 |
| Return on average assets / equity | 1.34% / 11.99% | 1.47% / 12.55% |
Net interest income increased 12% as higher asset yields and loan growth more than offset rising funding costs. The provision for credit losses was $21.1 million, compared with a $1.4 million credit in 2021. Noninterest income declined 8% to $98.7 million, principally reflecting lower mortgage-loan sale gains; noninterest expense rose 7% to $229.6 million. The effective tax rate was 20%.
Net cash from operating activities was $151.4 million; investing activities used $588.8 million, mainly reflecting loan growth; financing activities provided $196.2 million. Cash and cash equivalents fell $241.1 million to $154.2 million. The net loans-to-deposits ratio rose to 94.18% from 84.52%.
Loans grew 12%, with notable growth in residential real estate and consumer loans. Commercial real estate represented 31% of loans. Nonperforming loans fell to $35.5 million, or 0.46% of loans, from $55.2 million, or 0.81%. Net charge-offs were $7.1 million, or 0.10% of average loans. The allowance was $102.9 million, 1.35% of loans, unchanged as a percentage from 2021.
Material changes and significant items
- First Commonwealth funded loan growth partly by reducing securities and bank deposits: investment securities declined $358.9 million and cash and interest-bearing balances with banks fell $241.1 million.
- Short-term borrowings increased $234.4 million to $372.7 million; deposits increased only $23.0 million. Year-end uninsured deposits were estimated at $2.1 billion.
- Available-for-sale securities had $136.3 million of gross unrealized losses at year-end, primarily attributed to higher market interest rates. Accumulated other comprehensive loss increased to $137.7 million from $8.8 million, contributing to the $57.3 million decline in shareholders’ equity.
- The company repurchased $15.6 million of stock and declared $0.475 per share in dividends, up from $0.455 in 2021.
- Centric Financial Corporation’s acquisition closed January 31, 2023, after the reporting date. The all-stock transaction issued 9.69 million First Commonwealth shares. Centric’s addition takes the company above $10 billion in assets.
Outlook, risks, and contingencies
The filing does not provide specific forward earnings or revenue guidance. Management reported that the 2022 net interest margin benefited from rising rates, while noting that interest-rate changes can also pressure funding costs, asset values, and earnings. The company’s modeled 12-month net interest income sensitivity at year-end was +1.54% for a gradual 100-basis-point increase and -1.43% for a gradual 100-basis-point decrease; actual outcomes may differ from model assumptions.
- Key disclosed risks include interest-rate and deposit competition, liquidity and funding needs, credit deterioration, commercial real estate exposure, economic uncertainty and inflation, cybersecurity and third-party vendor risks, and acquisition integration and regulatory risks.
- First Commonwealth expects to become subject to the debit interchange fee cap beginning July 1, 2024, following its expected asset-threshold crossing; it estimated the cap would have reduced 2022 interchange income by approximately $14.1 million.
- Crossing the $10 billion asset threshold also subjects the Bank to CFPB supervision and enforcement, and to the Volcker Rule, according to the filing. The FDIC adopted a uniform 2-basis-point increase in base deposit insurance assessment rates effective in 2023.
- The company was transitioning remaining LIBOR-linked contracts to SOFR by June 30, 2023; it did not expect the transition to materially affect consolidated financial statements.
- Pending and threatened litigation was not expected to be material to consolidated financial position. The estimated range of reasonably possible losses beyond recorded liabilities was $0 to $1 million in aggregate; a material effect on a particular future period’s results or cash flows could not be ruled out.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter.
Important facts for investors to verify
- Whether Centric integration, its asset growth, and associated regulatory requirements affect costs, capital, deposit mix, and expected benefits.
- Deposit stability and pricing, particularly given $2.1 billion of estimated uninsured deposits, higher short-term borrowings, and the increased loan-to-deposit ratio.
- Credit trends in commercial real estate and consumer lending, and the assumptions underlying the $102.9 million credit-loss allowance.
- The timing and realized earnings impact of the securities portfolio’s unrealized losses, as well as any resulting changes in capital or liquidity management.
- The effects of further interest-rate changes on net interest income, deposit costs, and the transition from LIBOR; also verify the anticipated interchange-fee-cap impact from 2024.