First Commonwealth Financial Corporation — Q1 2022 10-Q
Business context and reporting period. First Commonwealth is a bank holding company. This unaudited filing covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Unless otherwise indicated, amounts below are in millions of dollars. Management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net interest income, GAAP | $68.2 | $69.4 in Q1 2021 |
| Net interest margin, fully taxable equivalent | 3.19% | 3.40% in Q1 2021 |
| Noninterest income | $24.0 | $27.4 in Q1 2021 |
| Noninterest expense | $55.7 | $51.9 in Q1 2021 |
| Net income / diluted EPS | $27.7 / $0.29 | $39.8 / $0.41 in Q1 2021 |
| Total assets | $9,642.1 | $9,545.1 at Dec. 31, 2021 |
| Loans and leases, gross | $6,952.1 | $6,839.2 at Dec. 31, 2021 |
| Deposits | $8,171.8 | $7,982.5 at Dec. 31, 2021 |
| Shareholders’ equity | $1,067.6 | $1,109.4 at Dec. 31, 2021 |
- Net income declined about 30% year over year. Management cited the shift from a $4.4 million credit-loss benefit in Q1 2021 to $2.0 million of provision expense in Q1 2022, lower noninterest income, and higher operating expenses.
- Net interest income on a fully taxable equivalent basis was $68.4 million versus $69.8 million. Lower asset yields outweighed reduced funding costs and growth in earning assets. Interest-earning assets averaged $8.70 billion, up 4.7%; the average yield was 3.33% versus 3.63%, while the cost of interest-bearing liabilities fell to 0.22% from 0.34%.
- Noninterest income fell 12%, chiefly because mortgage-loan sale gains declined $3.8 million and derivative mark-to-market income declined $1.1 million. Core fee categories cited by management, excluding specified sale gains and derivative marks, rose 4%.
- Noninterest expense rose 7%, including a $2.3 million increase in salaries and benefits; average staffing increased from 1,387 to 1,432 full-time equivalent employees.
- Cash and cash equivalents ended the quarter at $524.8 million, up $129.4 million during the quarter. Operating cash flow was $31.2 million; investing activities used $35.9 million and financing activities provided $134.2 million.
- Total debt-related balances included $95.7 million of short-term borrowings and $170.8 million of subordinated debentures; other long-term debt and lease obligations were $5.4 million and $5.8 million. Deposit growth funded balance-sheet expansion; the net-loans-to-deposits ratio was 84.09%.
Material changes, credit and capital
- Loans grew $112.9 million, or 1.7%, from year-end. Residential real estate, commercial real estate and consumer loans increased; construction loans fell $95.5 million as projects were completed. PPP loans declined to $28.9 million from $71.3 million at year-end.
- The allowance for credit losses was $91.2 million, or 1.31% of loans, versus $92.5 million and 1.35% at year-end. Net charge-offs were $1.1 million, annualized at 0.07%, compared with $3.3 million and 0.20% in Q1 2021. Nonperforming loans declined to $37.5 million from $55.2 million at year-end. A $14.5 million multifamily loan was 30–59 days past due at quarter-end and was paid off after quarter-end.
- Total provision expense included $2.2 million for off-balance-sheet credit exposure, while the loan-and-lease provision was a $0.2 million credit. The reserve for unfunded commitments and letters of credit was $8.6 million, up from $6.4 million at year-end.
- Shareholders’ equity fell $41.8 million, principally from a $59.4 million after-tax other comprehensive loss on securities and derivatives, partly offset by net income. Available-for-sale securities’ fair value was $933.2 million versus $1,041.4 million at year-end; held-to-maturity securities had $477.1 million fair value against $512.9 million amortized cost. Management attributed unrealized securities losses to market interest-rate changes and reported no expected credit-related impairment.
- The company and bank remained well-capitalized. At the holding company, total risk-based capital was 14.74%, Tier 1 risk-based capital 12.24%, common equity Tier 1 11.30%, and Tier 1 leverage 9.81%. The quarter’s declared dividend was $0.115 per share; on April 26, the board declared $0.12 per share for payment in May. A share-repurchase authorization of up to $25 million remained in place.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management’s allowance assumptions consider interest-rate increases, oil prices, supply-chain disruption, COVID-19, and Russia’s invasion of Ukraine and potential effects on the U.S. economy.
- Interest-rate modeling estimated that a gradual +100 basis-point change would increase 12-month net interest income 1.97%, while an immediate +100 basis-point change would increase it 4.79%, assuming no balance-sheet changes. Modeled outcomes depend on assumptions about deposit pricing, prepayments and customer behavior; management cautions that actual results may differ.
- Liquidity sources include core deposits and available borrowing capacity: $1.8 billion at the FHLB, $1.1 billion through the Federal Reserve collateral program, $160 million of federal-funds lines and $400 million of repo lines; these facilities were largely unused at quarter-end. The company also reported $1.4 billion maximum CDARS capacity.
- Management reported no material change to previously disclosed risk factors. Risks described include economic and market conditions, interest rates and inflation, credit quality, liquidity, cyber and technology disruptions, regulation, litigation, employee retention, and the ongoing pandemic. Management said pending or threatened litigation was not expected to be material to consolidated financial position; aggregate reasonably possible losses beyond recorded liabilities were estimated at $0–$1 million, though period-specific results or cash flows could still be affected.
- Disclosure controls were assessed as effective. The company continued preparing for the LIBOR transition; it said LIBOR had been discontinued as an index for new loans. A new credit-loss accounting standard was expected to add disclosures but not materially affect the financial statements.
Most important facts for investors to verify
- Whether margin and earnings stabilize as PPP fee income runs off, interest rates change and deposit costs reprice.
- Whether loan growth, criticized credits and the allowance remain consistent with actual credit performance, particularly in commercial real estate and construction.
- How the large securities and hedge-related unrealized losses affect equity, regulatory capital, liquidity and future earnings as market rates evolve.
- Whether elevated compensation and operating expenses are offset by stronger recurring fee revenue or operating leverage.
- Future dividend and repurchase decisions, and the timing and terms of the company’s transition from LIBOR.