First Commonwealth Financial Corporation — Q2 2022 Form 10-Q
Business and period: Regional banking company reporting unaudited results for the three and six months ended June 30, 2022. Comparisons are with the corresponding 2021 periods unless otherwise noted. Balance-sheet comparisons are with December 31, 2021.
Financial performance and position
| Metric | Q2 2022 | Six months 2022 | Comparison / period-end |
|---|---|---|---|
| Net interest income, GAAP | $73.7 million | $141.8 million | Up 8.0% and 3.0%, respectively |
| Net interest income, fully taxable equivalent | $73.9 million | $142.3 million | Compared with $68.5 million and $138.2 million |
| Net interest margin, fully taxable equivalent | 3.38% | 3.29% | Q2 2021: 3.17%; first-half 2021: 3.29% |
| Noninterest income | $24.5 million | $48.5 million | Down 6% and 9%, respectively |
| Noninterest expense | $55.7 million | $111.4 million | Up 8% in both periods |
| Provision for credit losses | $4.1 million | $6.1 million | Q2 2021: $5.4 million; first-half 2021: $1.0 million |
| Net income / diluted EPS | $30.8 million / $0.33 | $58.5 million / $0.62 | Q2 2021: $29.6 million / $0.31; first-half 2021: $69.4 million / $0.72 |
| Return on average assets / equity | 1.28% / 11.60% | 1.23% / 10.86% | First-half 2021: 1.51% / 12.87% |
- Balance sheet: Total assets were $9.53 billion, versus $9.55 billion at year-end. Loans and leases were $7.12 billion, up $280.5 million (4.1%); deposits were $8.05 billion, up $71.0 million. Shareholders’ equity was $1.05 billion, down $60.2 million.
- Credit: Allowance for credit losses was $93.6 million, or 1.31% of loans. Nonperforming loans were $35.7 million (0.50% of loans), down from $55.2 million (0.81%) at year-end. First-half net charge-offs were $2.7 million, or 0.08% annualized.
- Cash flow: For the first half, operating activities provided $60.4 million; investing activities used $144.6 million; financing activities used $11.4 million. Cash and cash equivalents declined $95.6 million to $299.8 million.
- Debt and liquidity: Short-term borrowings were $88.9 million; long-term debt, including subordinated debentures, was $181.8 million. Management reported substantial available borrowing capacity, including $1.1 billion through the Federal Reserve collateral program, $1.9 billion at the FHLB, and $160 million in correspondent-bank federal funds lines, with no balances outstanding on those facilities at quarter-end.
- Capital: The company and bank were classified as well capitalized. Company ratios included 14.64% total risk-based capital, 12.16% Tier 1 risk-based capital, 9.79% Tier 1 leverage and 11.23% common equity Tier 1.
Material changes and notable items
- Q2 net income increased 3.8%, supported by higher net interest income and a lower credit-loss provision, partly offset by lower noninterest income and higher expenses. First-half net income fell 15.7%, reflecting higher provision expense, lower noninterest income and increased operating costs.
- First-half noninterest income fell mainly because mortgage-loan sale gains declined $5.3 million; total noninterest income excluding securities gains, loan-sale gains and derivative marks rose 4%. Salaries and benefits increased $4.9 million in the first half, primarily from merit increases and higher staffing.
- Available-for-sale securities and derivatives generated an $88.3 million after-tax other comprehensive loss for the first half. Available-for-sale securities had $93.7 million of gross unrealized losses at June 30; management attributed the losses to market interest-rate changes and reported no expected credit-related impairment. This reduced reported equity.
- Management cited a $1.2 million collection of interest and fees on a paid-off nonaccrual loan as increasing Q2 net interest margin by 6 basis points. PPP-related income declined substantially as loans were forgiven or repaid.
- The company repurchased 715,307 shares in Q2 for $9.7 million; $11.1 million of repurchases were recorded for the first half. The quarterly dividend declared was $0.12 per share.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management’s allowance forecast incorporated inflation, rising interest rates, oil prices, supply-chain disruption, COVID-19 and the war in Ukraine; its one-year unemployment forecast averaged 4.28%, with a 4.59% peak.
- Interest-rate modeling estimated that a gradual 100-basis-point increase could raise annual net interest income 1.77%, while an immediate 100-basis-point increase could raise it 5.46%. The company cautioned that models depend on assumptions about deposit pricing, prepayments and customer behavior. Its one-year repricing asset/liability ratio was 0.78.
- Key stated risks include economic and market conditions, borrower performance and credit losses, interest rates and inflation, liquidity, regulation, cybersecurity and technology, staffing, competition, and legal or regulatory proceedings. Management reported no material change to previously disclosed risk factors.
- Unfunded commitments to extend credit totaled $2.29 billion; standby and commercial letters of credit added approximately $35.7 million in notional commitments. The recorded reserve for off-balance-sheet credit exposure was $8.8 million. Management said commitments may expire unused.
- Management did not expect pending or threatened litigation to materially affect consolidated financial position; reasonably possible aggregate losses beyond any recorded liability were estimated at $0–$1 million, though period-specific effects on results or cash flows cannot be ruled out.
Important facts for investors to verify
- Whether loan growth and deposit trends continue, and how the changing rate environment affects funding costs and net interest margin.
- Whether unrealized securities losses remain market-related and how further rate changes affect accumulated other comprehensive loss, equity and liquidity.
- Credit quality, particularly commercial real estate and consumer lending, nonperforming loans, charge-offs and the adequacy of the $93.6 million loan allowance and $8.8 million commitment reserve.
- Whether expense growth, especially compensation and other operating costs, is offset by recurring revenue as mortgage and asset-sale gains normalize.
- Capital, liquidity capacity, share repurchases and dividends in light of market conditions and the company’s stated interest-rate sensitivity.