FIRST COMMONWEALTH FINANCIAL CORP PA
For the period ended Sep 30, 2024. Filed Nov 12, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Nov 12, 2024
FCF$20.91-0.8%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-06-30; filed 2024-08-09.
0000712537-24-000101
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-09-30; filed 2024-11-12.
0000712537-24-000121
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 182 previous paragraphs and 181 current paragraphs.
104 unchanged; 63 reworded; 14 added; 6 removed; 9 previous and 0 current paragraphs rearranged.
Tables are not compared: 26 previous and 28 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (14)
Current report
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
Current report
The following table presents the components of noninterest income for the nine months ended September 30:
Current report
Income from bank owned life insurance increased $1.3 million, of which $1.0 million was related to an increase in policy death benefits. Service charges on deposit accounts increased $0.9 million primarily due to higher business account analysis income and increased customer activity. Trust income increased $0.8 million due to gains in the value of assets under management. Swap fee income declined $0.9 million as a result of a decrease in new interest rate swaps entered into by our commercial loan customers compared to the prior period.
Current report
Total noninterest income for the three months ended September 30, 2024 decreased $0.1 million compared to the three months ended September 30, 2023. The most significant change includes a $3.1 million decrease in card-related interchange income primarily due to the Durbin Amendment, which impacted the Company beginning July 1, 2024. Swap fee income declined
Current report
$0.4 million as a result of a reduction in new swaps entered by our commercial customers. Offsetting these decreases is a $1.0 million increase in income from bank owned life insurance, primarily due to policy death benefits and a $0.4 million increase in insurance and retail brokerage income due to growth in annuity sales. Additionally, gain on sale of other loans and assets increased $1.5 million due to the volume and spread related to the sale of SBA loans.
Current report
Noninterest expense increased $2.7 million for the three months ended September 30, 2024 compared to the same period in 2023. The increase is primarily a result of a $3.0 million increase in salaries and employee benefits expense due to annual merit increases, increased severance expense and a higher number of full time equivalent employees.
Current report
The Company evaluates its potential interest rate sensitivity by utilizing multiple interest rate scenarios that incorporate both rising and declining rates. Results of these scenarios are impacted by variables that include the current level of interest rates, product characteristics such as floors and ceilings, the frequency with which variable rate products reset their rates, and projected pricing changes for non-maturity deposits. For example, the results in a declining rate scenario could be affected by the model's use of an assumed interest rate floor of zero. In the nine months ended September 30, 2024 and 2023, the cost of our interest-bearing liabilities averaged 2.84% and 1.84%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 5.63% and 5.14%, respectively.
Current report
Management of credit risk within our loan and lease portfolio is a focus of the Company and is a continuous process in order to address changing economic and lending environments. In order to identify and manage credit risk, segment and concentration limits are established and approved by our Board of Directors’ Risk Committee in order to maintain alignment with our credit risk appetite, loan strategic plan, loan policy and underwriting guidelines. In addition, our Credit Department completes industry studies to identify potential risk in the portfolio. For example, within the commercial real estate portfolio, industry studies are completed for the following sectors: hospitality, industrial, multifamily, office, retail, senior living, healthcare and student housing.
Current report
On an annual basis, the Credit Department also reviews the commercial real estate portfolio as a whole, along with underwriting practices and loan level stress testing procedures, to enhance risk management practices and monitor commercial real estate concentrations. This review provides an overview of the portfolio to ensure that emerging risks have been identified, and documents and validates the standard interest rate and capitalization rate stress scenarios.
Current report
The following tables represent our commercial real estate portfolio by type of property securing the credit as of September 30, 2024. Total non-pass commercial real estate loans increased by $0.3 million to $115.0 million when compared to December 31, 2023.
Current report
The office portfolio comprises 17% of total commercial real estate loans and 33% of total commercial real estate non-pass loans. The average loan commitment size for the office portfolio is $1.0 million and the average outstanding balance as of September 30, 2024 is $0.9 million. Within the office portfolio, exposures over $1.0 million have an average debt service coverage ratio of 1.48x, which exceeds our internal guidelines of 1.35x to 1.40x, depending on property class. Additionally, for loans with exposure over $1.0 million, the office portfolio has an average loan to value of 62.1% compared to internal guidelines of 60-75%, depending on property class. Our current measure is based off of the most recent appraisal on file, the majority of which are from origination.
Current report
As previously noted, portfolio segment limits are approved by our Board of Directors' Risk Committee. These segment limits incorporate loan commitments and are based off of total Tier 1 capital plus the allowable allowance for credit losses. In the second quarter of 2024, after considering the current environment and potential risks related to the office portfolio, the segment limit for the office portfolio was decreased from 65% to 50%, with the actual segment concentration at 40% as of September 30, 2024.
Current report
The following table summarizes commercial real estate loans by the location of the properties by which they are collateralized as of September 30, 2024. Some loans are collateralized by multiple properties spread over various states. In those instances, the loan is included below based on the location of the primary property collateralizing the loan.
Current report
In November 2023, FASB released Accounting Standards Update 2023-07 (“ASU 2023-07”), Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures to improve disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an interim and annual basis. ASU 2023-07 does not change how an entity identifies its operating segments, but does require that an entity that has a single reportable segment, such as First Commonwealth, to provide the required enhanced disclosures. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. ASU 2023-07 should be applied retrospectively to all prior periods presented in the consolidated financial statements. The Company is in the process of assessing the impact of the adoption of ASU 2023-07 on its consolidated financial statements and related disclosures.
Removed paragraphs (6)
Previous report
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Previous report
The following table presents the components of noninterest income for the six months ended June 30:
Previous report
Total noninterest income, excluding net securities losses, gain on VISA exchange, gain on sale of mortgage loans, gain on sale of other loans and assets and the derivatives mark to market for the six months ended June 30, 2024 increased $1.1 million, or 3%, compared to the six months ended June 30, 2023. Service charges on deposit accounts increased $0.7 million due to increased customer activity and trust income increased $0.5 million due to gains in the value of assets under management. Included in the $0.5 million increase in other income is a $0.2 million increase in income from limited partnership investments. Swap fee income declined $0.6 million as there were no new interest rate swaps entered into by our commercial loan customers and card-related interchange income decreased $0.4 million due to a slight decline in customer card usage.
Previous report
Total noninterest income for the three months ended June 30, 2024 increased $0.7 million compared to the three months ended June 30, 2023. The most significant changes include a $5.6 million gain recognized upon the conversion of Visa class B shares, an increase of $0.4 million in insurance and retail brokerage fees due to increased annuity sales, a $0.4 million increase in gain on sale of mortgage loans due to an increase in the volume in sales of mortgage loans and an increase of $0.3 million in trust income fees resulting from a gain in the value of assets under management. Offsetting these increases to noninterest income, were $5.5 million in losses recognized on the sale of available for sale securities, a $0.5 million decrease in the gain on sale of other loans and assets due to changes in the spread of SBA loans sold, and a decrease of $0.3 million in swap fee income as no new interest rate swaps were entered into during the second quarter of 2024.
Previous report
Noninterest expense decreased $0.1 million for the three months ended June 30, 2024 compared to the same period in 2023. The decrease is a result of a $0.4 million decrease in advertising and promotion expense, a $0.4 million decrease in litigation and operational losses, and a $0.5 million decrease in other operating expense primarily due to decreases in printing and postage related expenses. Offsetting these are a $0.6 million increase in salaries and employee benefits expense due to annual merit increases and $0.4 million in loss recognized related to the early redemption of $50.0 million of the company's subordinated debentures.
Previous report
The analysis and model used to quantify the sensitivity of our net interest income becomes less meaningful in a decreasing 200 basis point scenario given the current interest rate environment. Results of the 200 basis point interest rate decline scenario is affected by the fact that many of our interest-bearing liabilities are at rates below 2%, with an assumed floor of zero in the model. In the six months ended June 30, 2024 and 2023, the cost of our interest-bearing liabilities averaged 2.81% and 1.59%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 5.60% and 5.02%, respectively.
Reworded paragraphs (63)
Previous wording
This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three and six months ended June 30, 2024 and 2023, and should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto included in this Form 10-Q.
Current wording
This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three and nine months ended September 30, 2024 and 2023, and should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto included in this Form 10-Q.
Previous wording
We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the unaudited Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on pages 64 and 72 for six and three months ended June 30, 2024 and 2023.
Current wording
We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the unaudited Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on pages 66 and 74 for nine and three months ended September 30, 2024 and 2023.
Previous wording
For the six months ended June 30, 2024, First Commonwealth had net income of $74.6 million, or $0.73 diluted earnings per share, compared to net income of $73.0 million, or $0.72 diluted earnings per share, in the six months ended June 30, 2023. The increase in net income was primarily the result of a $6.0 million decrease in noninterest expense as a result of $8.5 million in expenses related to the Centric acquisition recognized in the six months ended June 30, 2023. Other items impacting net income include a $4.9 million decrease in net interest income and a $1.3 million increase in the provision for credit losses offset by a $1.7 million increase in noninterest income.
Current wording
For the nine months ended September 30, 2024, First Commonwealth had net income of $106.7 million, or $1.04 diluted earnings per share, compared to net income of $112.2 million, or $1.10 diluted earnings per share, in the nine months ended September 30, 2023. The decrease in net income was primarily the result of a $6.1 million decrease in net interest income and a $6.0 million increase in the provision for credit losses. Offsetting these items was a $1.6 million increase in noninterest income and a $3.3 million decrease in noninterest expense, the latter of which was primarily due to $8.9 million in expenses related to the Centric acquisition recognized in the nine months ended September 30, 2023.
Previous wording
For the six months ended June 30, 2024, the Company’s return on average equity was 11.24% and its return on average assets was 1.29%, compared to 12.29% and 1.36%, respectively, for the six months ended June 30, 2023.
Current wording
For the nine months ended September 30, 2024, the Company’s return on average equity was 10.54% and its return on average assets was 1.22%, compared to 12.35% and 1.37%, respectively, for the nine months ended September 30, 2023.
Previous wording
Net interest income, on a fully taxable equivalent basis, was $187.9 million in the first six months of 2024, compared to $192.8 million for the same period in 2023. The decrease in net interest income can be attributedtoa 122 basis point increase in the cost of interest-bearing liabilities offset by a 58 basis point increase in the yield on interest-earning assets. Net interest income comprises the majority of our operating revenue (net interest income before provision expense plus noninterest income), at 79.2% and 80.2% for the six months ended June 30, 2024 and 2023, respectively.
Current wording
Net interest income, on a fully taxable equivalent basis, was $284.8 million in the first nine months of 2024, compared to $290.9 million for the same period in 2023. The decrease in net interest income can be attributedtoa 100 basis point increase in the cost of interest-bearing liabilities offset by a 49 basis point increase in the yield on interest-earning assets. Net interest income comprises the majority of our operating revenue (net interest income before provision expense plus noninterest income), at 79.3% and 80.0% for the nine months ended September 30, 2024 and 2023, respectively.
Previous wording
The net interest margin on a fully taxable equivalent basis was 3.55% for the six months ended June 30, 2024 and 3.93% for the six months ended June 30, 2023. The net interest margin is affected by changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.
Current wording
The net interest margin on a fully taxable equivalent basis was 3.55% for the nine months ended September 30, 2024 and 3.87% for the nine months ended September 30, 2023. The net interest margin is affected by changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.
Previous wording
The taxable equivalent yield on interest-earning assets was 5.60% for the six months ended June 30, 2024, an increase of 58 basis points compared to the 5.02% yield for the same period in 2023. This change is a result of the higher interest rate environment and resulted in the loan portfolio yield increasing by 58 basis points when compared to the six months ended June 30, 2023. Contributing to this increase was the yield on our adjustable and variable rate commercial loan portfolios, which increased 46 basis points due to the impact on loan repricing and new volumes at higher interest rates. Additionally,8 basis points of the yield on interest-earning assets can be attributed to the recognition of $4.1 million in accretion of purchase accounting marks, primarily from the Centric acquisition. For thesix months ended June 30, 2023, accretion of purchase accounting marks contributed$4.4 million, or 9 basis points, to the yield on interest-earning assets.
Current wording
The taxable equivalent yield on interest-earning assets was 5.63% for the nine months ended September 30, 2024, an increase of 49 basis points compared to the 5.14% yield for the same period in 2023. This change is a result of the higher interest rate environment and resulted in the loan portfolio yield increasing by 47 basis points when compared to the nine months ended September 30, 2023. Contributing to this increase was the yield on our adjustable and variable rate commercial loan portfolios, which increased 30 basis points due to the impact on loan repricing and new volumes at higher interest rates. Additionally, for the nine months ended September 30, 2024,8 basis points of the yield on interest-earning assets can be attributed to the recognition of $6.1 million in accretion of purchase accounting marks, primarily from the Centric acquisition. For thenine months ended September 30, 2023, accretion of purchase accounting marks contributed$6.9 million, or 9 basis points, to the yield on interest-earning assets.
Previous wording
The investment portfolio yield increased 101 basis points in comparison to the prior year as new volume rates were higher than the portfolio yield. The average investment portfolio balance for the period ended June 30, 2024 increased $261.4 million as compared to the six months ended June 30, 2023 as a result of liquidity from growth in interest-bearing liabilities. The yield on interest-bearing deposits with banks increased 44 basis points for the six months ended June 30, 2024 as compared to the prior year, while the average balance decreased from $178.1 million in 2023 to $160.4 million in 2024.
Current wording
The investment portfolio yield increased 101 basis points in comparison to the prior year as new volume rates were higher than the portfolio yield. The average investment portfolio balance for the period ended September 30, 2024 increased $278.9 million as compared to the nine months ended September 30, 2023 as a result of liquidity from growth in interest-bearing liabilities. The yield on interest-bearing deposits with banks increased 20 basis points for the nine months ended September 30, 2024 as compared to the prior year, while the average balance increased from $197.5 million in 2023 to $199.9 million in 2024.
Previous wording
The cost of interest-bearing liabilities increased to 2.81% for the six months ended June 30, 2024, from 1.59% for the same period in 2023. The cost of interest-bearing deposits increased 126 basis points and short-term borrowings increased 26 basis points in comparison to the same period last year. The increase in the cost of interest-bearing deposits can be attributed to higher market interest rates and changes in the mix of deposits as customers moved funds to take advantage of the increased rates offered in money market and time deposit accounts. Comparing the six months ended June 30, 2024 with the comparable period in 2023, average time deposits increased $638.8 million, or 79.2%, with an increase in the cost of these deposits of 154 basis points. Other interest-bearing deposits increased on average $137.3 million, or 2.5%, compared to the six months ended June 30, 2023 and the cost of these deposits increased 103 basis points. Compared to the prior period, short-term borrowings increased an average of$219.4 million in order to fund growth in loans and investments.
Current wording
The cost of interest-bearing liabilities increased to 2.84% for the nine months ended September 30, 2024, from 1.84% for the same period in 2023. The cost of interest-bearing deposits increased 109 basis points and short-term borrowings decreased 11 basis points in comparison to the same period last year. The increase in the cost of interest-bearing deposits can be attributed to higher market interest rates, as well as changes in the mix of deposits as customers moved funds to take advantage of the increased rates offered in money market and time deposit accounts. Comparing the nine months ended September 30, 2024 with the comparable period in 2023, average time deposits increased $599.2 million, or 67.3%, with an increase in the cost of these deposits of 130 basis points. Other interest-bearing deposits increased on average $116.7 million, or 2.1%, compared to the nine months ended September 30, 2023 and the cost of these deposits increased 88 basis points. Compared to the prior period, short-term borrowings increased an average of$158.0 million in order to provide liquidity and fund growth in loans and investments.
Previous wording
For the six months ended June 30, 2024, changes in rates negatively impacted net interest income by $6.9 million when compared with the same period in 2023. The higher yield on interest-earning assets positively impacted net interest income by $34.3 million, while the increase in the cost of interest-bearing liabilities negatively impacted net interest income by $41.1 million.
Current wording
For the nine months ended September 30, 2024, changes in rates negatively impacted net interest income by $7.0 million when compared with the same period in 2023. The higher yield on interest-earning assets positively impacted net interest income by $44.3 million, while the increase in the cost of interest-bearing liabilities negatively impacted net interest income by $51.3 million.
Previous wording
Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $2.0 million for the six months ended June 30, 2024, as compared to the same period in 2023. Higher levels of interest-earning assets resulted in an increase of $16.1 million in interest income, and changes in the volume and mix of interest-bearing liabilities increased interest expense by $14.0 million. Average interest-earning assets for the six months ended June 30, 2024 increased $755.4 million, or 7.6%, compared to the same period in 2023. Average loans for the comparable period increased $511.7 million, or 6.0%.
Current wording
Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $0.9 million for the nine months ended September 30, 2024, as compared to the same period in 2023. Higher levels of interest-earning assets resulted in an increase of $20.4 million in interest income, while changes in the volume and mix of interest-bearing liabilities increased interest expense by $19.5 million. Average interest-earning assets for the nine months ended September 30, 2024 increased $661.0 million, or 6.6%, compared to the same period in 2023. Average loans for the comparable period increased $379.7 million, or 4.4% and average investments increased $278.9 million, or 22.7%.
Previous wording
Net interest income was negatively impacted by a $232.5 million decrease in average net free funds for the six months ended June 30, 2024 as compared to June 30, 2023. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The level of net free funds was impacted by a lower level of noninterest-bearing demand deposits as customers became more rate sensitive and moved their funds into interest-bearing deposits.
Current wording
Net interest income was negatively impacted by a $190.8 million decrease in average net free funds for the nine months ended September 30, 2024 as compared to September 30, 2023. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The level of net free funds was impacted by a lower level of noninterest-bearing demand deposits as customers became more rate sensitive and moved their funds into interest-bearing deposits. Average noninterest-bearing demand deposits for the nine months ended September 30, 2024 decreased $292.7 million, or 11.3%, compared to the same period in 2023.
Previous wording
The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the six months ended June 30:
Current wording
The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the nine months ended September 30:
Previous wording
The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis for the six months ended June 30:
Current wording
The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis for the nine months ended September 30:
Previous wording
(a)Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the six months ended June 30, 2024 and 2023.
Current wording
(a)Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the nine months ended September 30, 2024 and 2023.
Previous wording
The following table shows the effect of changes in volumes and rates on interest income and interest expense for the six months ended June 30, 2024 compared with June 30, 2023:
Current wording
The following table shows the effect of changes in volumes and rates on interest income and interest expense for the nine months ended September 30, 2024 compared with September 30, 2023:
Previous wording
The table below provides a breakout of the provision for credit losses by loan category for the six months ended June 30:
Current wording
The table below provides a breakout of the provision for credit losses by loan category for the nine months ended September 30:
Previous wording
Total provision expense for the six months ended June 30, 2024, increased $1.3 million compared to the six months ended June 30, 2023. The increase can be attributed to $8.7 million in net charge-offs as well as an increase of $6.7 million in specific reserves. The specific reserves can be attributed to $3.8 million for two time and demand relationships and $2.6 million for three non-owner occupied relationships, all of which were moved to nonaccrual during the six months ended June 30, 2024. During the first six months of 2023, provision expense of $10.7 million was recognized as the day 1 non-PCD provision expense resulting from the Centric acquisition and a $0.1 million decrease in the provision for off-balance sheet commitments. The negative provision for off-balance sheet commitments for the six months ended June 30, 2024 was a result of lower off-balance sheet commitments related to construction and time and demand loans.
Current wording
Total provision expense for the nine months ended September 30, 2024, increased $6.0 million compared to the nine months ended September 30, 2023. The increase can be attributed to $17.5 million in net charge-offs as well as an increase of $9.2 million in specific reserves. The specific reserves can be attributed to $6.2 million for three non-owner occupied relationships and $2.8 million for a time and demand relationship, all of which were moved to nonaccrual during the nine months ended September 30, 2024. During the first nine months of 2023, provision expense of $10.7 million was recognized as the day 1 non-PCD provision expense resulting from the Centric acquisition. A $1.8 million decrease in the provision for off-balance sheet commitments was recognized for the nine months ended September 30, 2024 as a result of lower off-balance sheet commitments related to construction and time and demand loans.
Previous wording
The allowance for credit losses was $123.7 million, or 1.37%, of total loans and leases outstanding at June 30, 2024, compared to $117.7 million, or 1.31%, at December 31, 2023 and $133.5 million, or 1.52%, at June 30, 2023. Nonperforming loans as a percentage of total loans and leases increased to 0.63% at June 30, 2024 from 0.54% as of June 30, 2023 and 0.44% at December 31, 2023. The allowance to nonperforming loan ratio was 216.48%, 298.23% and 278.17% as of June 30, 2024, December 31, 2023 and June 30, 2023, respectively.
Current wording
The allowance for credit losses was $126.1 million, or 1.41%, of total loans and leases outstanding at September 30, 2024, compared to $117.7 million, or 1.31%, at December 31, 2023 and $134.3 million, or 1.51%, at September 30, 2023. Nonperforming loans as a percentage of total loans and leases increased to 0.83% at September 30, 2024 from 0.54% as of September 30, 2023 and 0.44% at December 31, 2023. The allowance to nonperforming loan ratio was 168.77%, 298.23% and 280.31% as of September 30, 2024, December 31, 2023 and September 30, 2023, respectively.
Previous wording
Below is an analysis of the consolidated allowance for credit losses for the six months ended June 30, 2024 and 2023 and the year-ended December 31, 2023:
Current wording
Below is an analysis of the consolidated allowance for credit losses for the nine months ended September 30, 2024 and 2023 and the year-ended December 31, 2023:
Previous wording
The Company's total assets exceeded $10.0 billion as of December 31, 2023; therefore, beginning July 1, 2024, we are subject to the interchange fee cap included in the Durbin Amendment to the Dodd-Frank Act. We estimate that the application of the interchange fee cap, as compared to the twelve months prior to being subject to the cap, will decrease our interchange income by approximately $6.9 million during the last two quarters of 2024 and will decrease our annual interchange income by approximately $13.8 million in 2025.
Current wording
Total noninterest income, excluding net securities losses, gain on VISA exchange, gain on sale of mortgage loans, gain on sale of other loans and assets and the derivatives mark to market for the nine months ended September 30, 2024 decreased $0.6 million, or 1%, compared to the nine months ended September 30, 2023. This decrease is primarily due to a $3.5 million decline in card-related interchange income resulting from the Company being subject to the Durbin Amendment to the Dodd-Frank Act beginning July 1, 2024. The Durbin Amendment is now applicable to the Company because its total assets exceeded $10.0 billion as of December 31, 2023. We estimate that the application of the interchange fee cap, as compared to the twelve months prior to the July 1, 2024 effective date, will decrease our interchange income by approximately $6.3 million in 2024 and approximately $12.8 million in 2025.
Previous wording
Total noninterest income increased $1.7 million, or 4%, compared to the same period in the prior year. The most significant changes, other than the changes noted above, include a $5.6 million gain related to the conversion of Visa class B shares and a $1.1 million increase in gain on sale of mortgage loans as a result of changes in volume and the spread received on mortgage loans sold. Offsetting these are $5.5 million in losses recognized on the sale of $75.1 million in available for sale securities, which were sold in order to reinvest into higher yielding investments, and a $0.5 million decrease in the gain on sale of other loans and assets primarily due to a change in the spread on the sale of SBA loans.
Current wording
Total noninterest income increased $1.6 million, or 2%, compared to the same period in the prior year. The most significant changes, other than the changes noted above, include a $5.7 million gain related to the conversion and sale of Visa class B shares. Gain on sale of mortgages increased $1.0 million as a result of changes in volume and spread received on mortgage loans sold, and gain on sale of other loans and assets increased $1.0 million due to an increase in the volume and spread on the sale of SBA loans. Offsetting these gains are $5.3 million in losses recognized on the sale of $75.1 million in available for sale securities, which were sold in order to reinvest into higher yielding investments.
Previous wording
The following table presents the components of noninterest expense for the six months ended June 30:
Current wording
The following table presents the components of noninterest expense for the nine months ended September 30:
Previous wording
Noninterest expense decreased $6.0 million, or 4%, for the six months ended June 30, 2024 compared to the same period in 2023. This decrease is primarily the result of $8.5 million in merger-related expenses associated with the Centric acquisition recognized during the comparable period in 2023. Advertising and promotion expense decreased $0.8 million due to the timing and types of advertising in 2024 compared to 2023. Offsetting these decreases is a $1.6 million increase in salaries and benefits expense primarilydue to annual merit salary increases and the inclusion of Centric employees for six months in 2024, as compared to five months in 2023. The number of full time equivalent employees totaled 1,483 at June 30, 2023 and 1,472 at June 30, 2024. Increases in net occupancy, furniture and equipment and intangible amortization all reflected increases primarily due to the Centric acquisition, while data processing costs increased $0.5 million due to continued investment in our digital banking and other product offerings. During the six months ended June 30, 2024, $0.4 million in remaining subordinated debt issuance costs that were being amortized over the life of the instrument were accelerated and recognized in conjunction with the redemption of $50.0 million in subordinated debentures.
Current wording
Noninterest expense decreased $3.3 million, or 2%, for the nine months ended September 30, 2024 compared to the same period in 2023. This decrease is primarily the result of $8.9 million in merger-related expenses associated with the Centric acquisition recognized during the comparable period in 2023. For the nine months ended September, 30, 2024, advertising and promotion expense decreased $0.5 million due to the timing and types of advertising in 2024 compared to 2023. Offsetting these decreases is a $4.6 million increase in salaries and benefits expense primarilydue to annual merit salary increases, higher severance expense and an increase in the number of full-time employees. The number of full time equivalent employees totaled 1,481 at September 30, 2023 and 1,500 at September 30, 2024. Increases in net occupancy expense can be attributed to insurance costs as well as higher depreciation expenses from new or improved locations. Data processing costs increased $0.5 million due to continued investment in our digital banking and other product offerings. During the nine months ended September 30, 2024, $0.4 million in remaining subordinated debt issuance costs that were being amortized over the life of the instrument were accelerated and recognized in conjunction with the redemption of $50.0 million in subordinated debentures.
Previous wording
The provision for income taxes decreased $0.1 million for the six months ended June 30, 2024, compared to the corresponding period in 2023.
Current wording
The provision for income taxes decreased $1.7 million for the nine months ended September 30, 2024, compared to the corresponding period in 2023.
Previous wording
We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income, for the six months ended June 30, 2024 and 2023.
Current wording
We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income, for the nine months ended September 30, 2024 and 2023.
Previous wording
We generate an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest, income from bank-owned life insurance and tax benefits associated with low income housing tax credits, all of which are relatively consistent regardless of the level of pretax income. These provided for an effective tax rate of 19.8% and 20.3% for the six months ended June 30, 2024 and 2023, respectively.
Current wording
We generate an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest, income from bank-owned life insurance and tax benefits associated with low income housing tax credits, all of which are relatively consistent regardless of the level of pretax income. These provided for an effective tax rate of 20.1% and 20.3% for the nine months ended September 30, 2024 and 2023, respectively.
Previous wording
As of June 30, 2024, our deferred tax assets totaled $60.0 million. Based on our evaluation, we determined that it is more likely than not that all of these assets will be realized. As a result, a valuation allowance against these assets was not recorded. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved forecasts, evaluation of historical earnings levels and consideration of potential tax strategies. If future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material impact on our financial condition and results of operations.
Current wording
As of September 30, 2024, our deferred tax assets totaled $53.2 million. Based on our evaluation, we determined that it is more likely than not that all of these assets will be realized. As a result, a valuation allowance against these assets was not recorded. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved forecasts, evaluation of historical earnings levels and consideration of potential tax strategies. If future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material impact on our financial condition and results of operations.
Previous wording
For the three months ended June 30, 2024, First Commonwealth recognized net income of $37.1 million, or $0.36 diluted earnings per share, compared to net income of $42.8 million, or $0.42 diluted earnings per share, in the three months ended June 30, 2023. The decrease in net income was primarily the result of a $2.8 million decrease in net interest income and a $5.0 million increase in the provision for credit losses.
Current wording
For the three months ended September 30, 2024, First Commonwealth recognized net income of $32.1 million, or $0.31 diluted earnings per share, compared to net income of $39.2 million, or $0.38 diluted earnings per share, in the three months ended September 30, 2023. The decrease in net income was primarily the result of a $1.2 million decrease in net interest income, a $4.7 million increase in the provision for credit losses and a $2.7 million increase in noninterest expense.
Previous wording
For the three months ended June 30, 2024, the Company’s return on average equity was 11.10% and its return on average assets was 1.28%, compared to 13.90% and 1.54%, respectively, for the three months ended June 30, 2023.
Current wording
For the three months ended September 30, 2024, the Company’s return on average equity was 9.19% and its return on average assets was 1.08%, compared to 12.46% and 1.38%, respectively, for the three months ended September 30, 2023.
Previous wording
Net interest income, on a fully taxable equivalent basis, was $95.3 million in the second quarter of 2024, compared to $98.1 million for the same period in 2023. The decrease in net interest income can be attributedtoa 97 basis point increase in the cost of interest-bearing liabilities offset by a 50 basis point increase in the yield on interest-earning assets. Net interest income comprises the majority of our operating revenue (i.e., net interest income before provision expense plus noninterest income), at 79.0% and 80.0% for the three months ended June 30, 2024 and 2023, respectively.
Current wording
Net interest income, on a fully taxable equivalent basis, was $96.9 million in the third quarter of 2024, compared to $98.1 million for the same period in 2023. The decrease in net interest income can be attributedtoa 63 basis point increase in the cost of interest-bearing liabilities offset by a 31 basis point increase in the yield on interest-earning assets. Net interest income comprises the majority of our operating revenue (i.e., net interest income before provision expense plus noninterest income), at 79.6% and 79.7% for the three months ended September 30, 2024 and 2023, respectively.
Previous wording
The net interest margin, on a fully taxable equivalent basis, was 3.57% and 3.85% for the three months ended June 30, 2024 and 2023, respectively.
Current wording
The net interest margin, on a fully taxable equivalent basis, was 3.56% and 3.76% for the three months ended September 30, 2024 and 2023, respectively.
Previous wording
The taxable equivalent yield on interest-earning assets was 5.66% for the three months ended June 30, 2024, an increase of 50 basis points compared to the 5.16% yield for the same period in 2023. This is largely due to a 48 basis point increase in the loan portfolio yield when compared to the three months ended June 30, 2023 as a result of a higher interest rate environment in 2024. Contributing to this increase was the yield on our adjustable and variable rate commercial loan portfolios, which increased 31 basis points due to the impact on loan repricing and new volumes at higher interest rates. Additionally, 8 basis points of the increase in the yield on interest-earnings assets can be attributed to the recognition of $2.1 million in accretion of purchase accounting marks, primarily as a result of the Centric acquisition. For the three months ended June 30, 2023, accretion of purchase accounting marks contributed$3.2 million, or 12 basis points, to the yield on interest-earning assets. During the three months ended June 30, 2024, the yield on interest-earning assets increased by 2 basis points as a result of $0.6 million in deferred interest being recognized with the payoff of a commercial loan which was previously in nonaccrual status.
Current wording
The taxable equivalent yield on interest-earning assets was 5.68% for the three months ended September 30, 2024, an increase of 31 basis points compared to the 5.37% yield for the same period in 2023. This is largely due to a 30 basis point increase in the loan portfolio yield when compared to the three months ended September 30, 2023 as a result of a higher repricing rates in 2024. Also contributing to this increase is the growth in average loans of $120.1 million. Additionally, accretion of purchase accounting marks, primarily related to the Centric acquisition, contributed $2.0 million or 7 basis points to the yield on interest-earnings assets in the three months ended September 30, 2024. For the three months ended September 30, 2023, accretion of purchase accounting marks contributed$2.4 million, or 9 basis points, to the yield on interest-earning assets.
Previous wording
The investment portfolio yield increased 109 basis points in comparison to the prior year as new volume rates were higher than the portfolio yield. The average investment portfolio balance increased $283.7 million as a result of liquidity from growth in interest-bearing liabilities. The average balance of interest-bearing deposits with banks decreased from $308.4 million in 2023 to $208.4 million in 2024 while the yield increased 32 basis points. During the second quarter of 2024, $75.1 million in available for sale investment securities yielding 2.17% were sold and the proceeds were reinvested into securities yielding 5.49%. This transaction is expected to increase the net interest margin by 2 basis points beginning in the third quarter of 2024.
Current wording
The investment portfolio yield increased 102 basis points in comparison to the prior year as new volume rates were higher than the portfolio yield. The average investment portfolio balance increased $313.5 million as a result of liquidity from growth in interest-bearing liabilities. The average balance of interest-bearing deposits with banks increased from $235.8 million in 2023 to $278.0 million in 2024, while the yield decreased 14 basis points.
Previous wording
The cost of interest-bearing liabilities increased to 2.85% for the three months ended June 30, 2024, from 1.88% for the same period in 2023, primarily due to an increase in the cost of time deposits and savings deposits. The cost of interest-bearing demand deposits increased 50 basis points and short-term borrowings decreased 12 basis points in comparison to the same period last year. The increase in the cost of interest-bearing demand deposits can be attributed to higher market interest rates and changes in the mix of deposits as customers moved funds to take advantage of the increased rates on money market and time deposits. Comparing the three months ended June 30, 2024 with the comparable period in 2023, average time deposits increased $574.1 million, or 61.7%, with an increase in the cost of these deposits of 132 basis points. Other interest-bearing deposits increased on average $33.7 million, or 0.6%, compared to the three months ended June 30, 2023 and the cost of these deposits increased 84 basis points. Additionally, on June 1, 2024, the company redeemed a $50 million variable rate subordinated debenture with an interest rate of 7.45%. This redemption is expected to improve the net interest margin by approximately 2 basis points for the remainder of 2024.
Current wording
The cost of interest-bearing liabilities increased to 2.91% for the three months ended September 30, 2024, from 2.28% for the same period in 2023, primarily due to an increase in the cost of time deposits and savings deposits. The cost of interest-bearing demand deposits increased 46 basis points and short-term borrowings decreased 61 basis points in comparison to the same period last year. The increase in the cost of interest-bearing demand deposits can be attributed to higher market interest rates and changes in the mix of deposits as customers moved funds to take advantage of the increased rates on money market and time deposits. Comparing the three months ended September 30, 2024 with the comparable period in 2023, average time deposits increased $521.8 million, or 49.5%, with an increase in the cost of these deposits of 92 basis points. Other interest-bearing deposits increased on average $76.2 million, or 1.4%, compared to the three months ended September 30, 2023 and the cost of those deposits increased 60 basis points.
Previous wording
For the three months ended June 30, 2024, changes in interest rates negatively impacted net interest income by $2.0 million when compared with the same period in 2023. The higher yield on loans contributed to interest-earning assets positively impacting net interest income by $14.7 million, while an increase in the cost of interest-bearing liabilities negatively impacted net interest income by $16.6 million.
Current wording
For the three months ended September 30, 2024, changes in interest rates negatively impacted net interest income by $0.7 million when compared with the same period in 2023. The higher yield on loans contributed to interest-earning assets positively impacting net interest income by $10.3 million, while an increase in the cost of interest-bearing liabilities negatively impacted net interest income by $11.0 million.
Previous wording
Changes in the volume of interest-earning assets and interest-bearing liabilities negatively impacted net interest income by $0.8 million during the three months ended June 30, 2024, as compared to the same period in 2023. The mix of interest-earning assets resulted in an increase of $4.8 million in interest income, while changes in the volume and mix of interest-bearing liabilities increased interest expense by $5.6 million. Average interest-earning assets for the three months ended June 30, 2024 increased $511.9 million, or 5.0%, compared to the same period in 2023. Average loans for the comparable period increased $328.3 million, or 3.8%. Average time deposits for the three months ended June 30, 2024 increased by $574.1 million compared to the comparable period in 2023, increasing interest expense by $4.3 million.
Current wording
Changes in the volume of interest-earning assets and interest-bearing liabilities negatively impacted net interest income by $0.5 million during the three months ended September 30, 2024, as compared to the same period in 2023. The mix of interest-earning assets resulted in an increase of $4.2 million in interest income, while changes in the volume and mix of interest-bearing liabilities increased interest expense by $4.7 million. Average interest-earning assets for the three months ended September 30, 2024 increased $475.8 million, or 4.6%, compared to the same period in 2023. Average loans for the comparable period increased $120.1 million, or 1.4%. Average time deposits for the three months ended September 30, 2024 increased by $521.8 million compared to the comparable period in 2023, increasing interest expense by $4.6 million.
Previous wording
Net interest income was negatively impacted by a $190.2 million decrease in average net free funds for the three months ended June 30, 2024 as compared to June 30, 2023. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The decline in the level of net free funds was primarily the result of a decrease in noninterest-bearing demand deposits as a result of customers becoming more rate sensitive as interest rates increased.
Current wording
Net interest income was negatively impacted by a $108.4 million decrease in average net free funds for the three months ended September 30, 2024 as compared to September 30, 2023. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The decline in the level of net free funds was primarily the result of a decrease in noninterest-bearing demand deposits, which decreased $232.7 million, as a result of customers becoming more rate sensitive due to higher interest rates.
Previous wording
The provision for credit losses on loans and leases for the three months ended June 30, 2024 increased in comparison to the three months ended June 30, 2023 by $5.8 million. The level of provision expense in the second quarter of 2024 is primarily the result of $4.4 million in net charges-offs and an additional $5.8 million in specific reserves. The provision for off-balance sheet credit exposure decreased $0.7 million primarily due to the level of unfunded commitments. The increase in specific reserves relates to $3.8 million in specific reserves for two time and demand relationships and $1.5 million in specific reserves related to two non-owner occupied relationships, all of which were moved to nonaccrual during the second quarter of 2024. In addition, specific reserves increased by $0.6 million due to an updated appraisal for a non-owner occupied real estate loan.
Current wording
The provision for credit losses on loans and leases for the three months ended September 30, 2024 increased in comparison to the three months ended September 30, 2023 by $6.5 million. The level of provision expense in the third quarter of 2024 was impacted by specific reserves for two commercial loans moved to nonaccrual status during the period, resulting in $5.5 million in specific reserves. Additionally, the provision expense reflected $8.8 million in net charges-offs, of which $5.1 million related to two commercial borrowers and resulted in $1.5 million of provision expense for the quarter. The provision for off-balance sheet credit exposure decreased $1.7 million primarily due to the level of unfunded commitments for construction and time and demand.
Previous wording
The level of provision expense in the second quarter of 2023 was primarily the result of increases in loan balances and changes in economic forecasts used in the calculation of the allowance for credit losses. Net charge-offs for the three months ended June 30, 2023 were $8.7 million.
Current wording
The level of provision expense in the third quarter of 2023 was primarily the result of an increase in loan balances and an additional $4.1 million in specific reserves for a commercial real estate loan as a result of an updated appraisal. Net charge-offs for the three months ended September 30, 2023 were $4.0 million.
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Improvements to Income Tax Disclosures. ASU 2023-09 requires additional disclosure information in specified categories with
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respect to the reconciliation of the effective tax rate to the statutory rate (the rate reconciliation) for federal, state and foreign
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income taxes. ASU 2023-09 also requires greater detail about individual reconciling items in the rate reconciliation for those
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items that exceed a specified threshold. In addition to the new rate reconciliation disclosures, ASU 2023-09 requires
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information related to taxes paid (net of refunds received) to be disaggregated for federal, state and foreign taxes, along with
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further disaggregation for specific jurisdictions, to the extent the related amounts exceed a quantitative threshold. ASU 2023-09
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is effective for the Company for annual periods beginning after December 15, 2024, with early adoption permitted. ASU
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2023-09 should be applied prospectively, with an option for retrospective application to each period in the financial statements.
Previous report — wording carried elsewhere
The Company is in the process of assessing the impact of adoption on its consolidated financial statements.