First Commonwealth Financial Corp: Form 10-Q for the period ended Sep 30, 2024

Results of Operations

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

Net Income

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.

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.

Net Interest Income

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 attributed to a 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.

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.

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.

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.

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.

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.

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.

Information appearing in Item 2 of this report under the caption “Market Risk” is incorporated by reference in response to this item.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of 1-934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms of the Securities and Exchange Commission.

There have been no material changes to the risk factors previously disclosed under Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.