First Commonwealth Financial Corporation — Q3 2022 Form 10-Q
Business context and reporting period. The company is a Pennsylvania-based bank holding company. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless stated otherwise. Balance-sheet comparisons are with December 31, 2021.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income (GAAP) | $82.4m | $70.6m | $224.2m | $208.3m |
| Net interest margin (fully taxable equivalent) | 3.76% | 3.23% | 3.45% | 3.27% |
| Provision for credit losses | $5.9m | $0.3m | $12.0m | $1.4m |
| Noninterest income | $25.9m | $27.2m | $74.4m | $80.7m |
| Noninterest expense | $59.9m | $55.0m | $171.3m | $158.4m |
| Net income | $34.0m | $34.1m | $92.4m | $103.5m |
| Diluted earnings per share | $0.36 | $0.36 | $0.98 | $1.08 |
At September 30, total assets were $9.58bn, portfolio loans and leases were $7.35bn, deposits were $8.08bn, and shareholders’ equity was $1.02bn. Loans increased 7.5% from year-end, while deposits rose $95.2m. The allowance for credit losses was $96.1m, or 1.31% of portfolio loans; nonperforming loans were $35.7m, or 0.48% of loans.
Nine-month operating cash flow was $108.7m; investing activities used $328.5m and financing activities provided $5.2m. Cash and cash equivalents declined $214.6m from January 1 to $180.8m. Short-term borrowings were $97.9m and long-term debt, including subordinated debentures, was $181.5m. Regulatory capital ratios remained above well-capitalized thresholds: holding-company total risk-based capital was 14.48% and the bank’s was 13.82%.
Material changes versus prior periods
- Q3 net income was nearly flat year over year: higher net interest income was largely offset by a $5.6m higher credit-loss provision, increased expenses, and lower noninterest income. For the first nine months, net income fell $11.0m, principally reflecting higher provision expense and operating costs.
- Net interest income rose with higher loan balances and yields, while deposit and other funding costs remained low. Q3 average loans grew $498.1m year over year; the reported fully taxable equivalent margin increased 53 basis points.
- Nine-month noninterest income fell $6.3m, mainly due to lower mortgage-sale gains ($7.3m decline) and lower gains on other loan and asset sales. Noninterest expense rose $12.9m, including higher compensation, occupancy, data processing, and other operating costs.
- Credit quality measures improved from year-end: nonperforming loans declined from $55.2m, and net charge-offs for the first nine months were $5.1m versus $9.5m in 2021. The allowance nonetheless increased, reflecting loan growth and updated economic forecasts.
- Shareholders’ equity decreased $86.8m from year-end, largely due to $133.5m of net-of-tax other comprehensive losses on securities and derivatives. Available-for-sale securities had $139.7m of gross unrealized losses; held-to-maturity securities had $79.6m. Management attributed investment-security losses to market interest-rate changes and reported no expected credit-related impairment.
Outlook, management commentary, and risks
- Acquisition: The company agreed to acquire Centric Financial Corporation in an all-stock transaction at a fixed exchange ratio of 1.09 First Commonwealth shares per Centric share. Based on June 30, 2022 carrying values, Centric had approximately $1.0bn in assets, $0.9bn in deposits, and $0.9bn in loans. Closing was expected in Q1 2023, subject to shareholder, regulatory, and other customary conditions.
- Guidance: The filing does not provide specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results. The board declared a $0.12-per-share quarterly dividend payable November 18, 2022; future dividends remain discretionary.
- Interest-rate exposure: The company’s modeled 12-month net interest income sensitivity to gradual +100 and +200 basis-point changes was +1.26% and +2.36%, respectively; under immediate shocks, estimates were +3.91% and +7.42%. Management notes that models rely on assumptions about deposit pricing, prepayments, and customer behavior, and results may differ from actual outcomes.
- Credit and economic risk: Management’s allowance forecast incorporates rising rates, inflation, oil prices, supply-chain disruption, the war in Ukraine, and possible effects on the U.S. economy. The company identifies borrower performance, loan mix, reserve estimates, economic conditions, and liquidity among the factors that could affect results.
- Liquidity: Available borrowing capacity included $1.0bn under the Federal Reserve collateral program, $1.9bn at the FHLB, $160m of federal-funds lines, and $400m of repurchase lines; none of these facilities had balances outstanding at quarter-end. CDARS capacity was $1.4bn, with $5.4m outstanding.
- Costs and contingencies: An October 2022 FDIC rule raising assessment rates by 2 basis points from 2023 was estimated to increase annual assessments by about $1.7m. Management did not expect pending litigation to materially affect consolidated financial position; the aggregate reasonably possible loss beyond recorded liabilities was estimated at $0–$1m, though period-specific effects on results or cash flows cannot be ruled out. The company reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Centric acquisition approvals, closing timing, exchange-ratio implications, and expected integration costs or benefits.
- Whether loan growth, interest-rate changes, and deposit repricing sustain net interest margin as funding costs adjust.
- Credit-loss provision assumptions and trends in criticized loans, nonperforming loans, charge-offs, and unfunded-commitment reserves.
- How much of the securities and derivative-related accumulated other comprehensive loss may affect capital, liquidity, or future earnings if positions are sold or rates change.
- Actual deposit retention, use of wholesale funding, and cash levels compared with stated borrowing capacity and modeled liquidity needs.
- Whether rising operating expenses—including the expected FDIC assessment increase—are offset by revenue growth and operating efficiencies.