Operator
Thank you for standing by. My name is Danielle, and I will be your conference operator today. At this time, I would like to welcome everyone to the first Commonwealth Financial Corporation conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Ryan Thummes. Please go ahead.
Thank you, Danielle, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's third quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief financial officer, Jane Grebentz, bank president and chief revenue officer, Brian Sohaki, chief credit officer, and Mike McEwen, chief lending officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the investor relations link at the top of the page. We have also included a slide presentation on our investor relations website with supplemental information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statement. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for are reported results prepared in accordance with GAAP. Reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike.
Thank you, Ryan. Our performance in the third quarter reflects broad-based momentum across our regions and lines of business. Key highlights include a return on assets improved to 1.34%, and our core pre-tax, pre-provision ROA grew 10 basis points to 2.05%. Net interest margin expanded 9 basis points to 3.92%, marking another quarter of improvement. Average deposits increased 4%, reflecting balanced growth across all of our geographies. The cost of deposits declined 7 basis points to 1.84%, underscoring effective pricing discipline balanced with growth. Loans were up $137 million, or 5.7%, despite some payoff headwinds in commercial real estate. Loan growth saw meaningful contributions from equipment finance, commercial banking, indirect, and home equity lending. Mortgage lending provided a headwind to balance sheet growth, although some of that runoff was by design, and the outlook for the business is improving. Geographically, we had strong loan contributions from all markets in Ohio and Pennsylvania. Fee income remained resilient post-Durban, representing 18% of total revenue. a healthy quarter-over-quarter improvement in our wealth business was offset by slower gain on sale income. The third-quarter efficiency ratio improved to 52.3 percent from 54.1 percent in the second quarter, reflecting good expense control. Tangible book value grew, 11.6 percent annualized on a linked quarter basis and 9.1% year-over-year. On the credit side, core provision expense increased by $2.4 million quarter-over-quarter, reaching $11.3 million. As disclosed last quarter, we had a $31.9 million dealer floor plan customer who was out of trust. In the second quarter, we set aside $4.2 million in reserves for this relationship. In the third quarter, a receiver was appointed to liquidate the collateral. The out-of-trust amount and related liquidation costs rose as the process evolved. During the third quarter, $5.5 million was charged off. An additional $3.1 million was added to reserves, resulting in a net provision impact for this relationship of $4.4 million in the third quarter. This recent dealer floor plan fraud is isolated, and we expect it to be largely resolved by year end. As of September 30th, our floor plan exposures totaled $122 million across 21 traditional auto and RV relationships, with individual exposures ranging from $2 million to $18 million. dollars. Net charge-offs for the quarter were $12.2 million, primarily driven by the aforementioned $5.5 million dealer floor plan charge-off, and $2.8 million associated with the sale of five recently acquired center bank loans. This was an opportunistic sale utilizing the allocated loan mark from the acquisition with only $100,000 in provision expense. These two items accounted for 34 basis points of the quarter's 51 basis points of net charge-offs. With the dealer floor plan relationship now at $16 million, non-performing loans declined to 0.91% compared to 1.04% in the prior quarter. Our loan portfolio maintains negligible exposure to private credit funds, equipment finance firms, NDFIs, or subprime lenders. Our recent center bank acquisition in Cincinnati is exceeding our customer retention expectations. We're grateful for the opportunity that acquisition has given us to accelerate the buildout of that region. On the digital front, we see good growth in services and high digital satisfaction in survey results. We continue to add customer-facing features to our platform and to improve productivity through the use of RPA and AI. We are excited about the outlook for First Commonwealth and the confluence of profitable growth, a regional focus leading to better low-cost deposit gathering and higher fee income, coupled with lower credit costs in the future. With that, I'll turn it over to Jim Resky, our CFO. Thanks, Mike.
This quarter's core results show you what a little bit of NIM expansion and loan growth can do. Pre-tax pre-provisioned net revenue, or PPNR, was up by $4.3 million over the last quarter, and nearly every financial metric improved. An increase in spread income overcame a modest decline in fee income and a negligible increase in expenses, leading to improvements in core EPS, NIM, core ROA, core ROTCE, and efficiency. And even though provision and charge drops are up, as Mike mentioned earlier, the key asset quality measures of non-performing loans and classified loans improved from last quarter as well. So let's look at the details. Spread income improved by $4.9 million over the last quarter on balanced loan and deposit growth. The net interest margin, or NIM, expanded by nine basis points, from 3.83% last quarter to 3.92% this quarter. The expansion was primarily driven by a seven-basis point decrease in the cost of deposit to 1.84%. Loan yields were largely flat this quarter, as a three-basis point decrease in purchase accounting marks was mostly made up for by a $25 million macro swap and matured on August 25th, as well as the continued upward repricing of fixed-rate loans. Fourth quarter NIM will feel the full effect of the Fed's September cut, and potentially today, as well as any further cuts during the quarter, offset by the continued upward repricing of fixed-rate loans, as well as the expiration of $75 million of macro swaps in the fourth quarter. Plus, there's usually a seasonal decline in deposits this time of year, which we would need to replace with more expensive borrowings if the past predicts the future. These factors could put some short-term downward pressure on the MIM in the fourth quarter. But we expect the new to recover in 2026, so roughly the level of the quarter just ended, or about 3.9%, give or take five basis points as usual. In 2026, the expiration of $175 million in macro swaps and the expected continued upward – the continuation of upward fixed-rate low repricing helps to blunt the effect of falling short-term rates on loan yields. That projection assumes that we'll have two more rate cuts this quarter and four next year, resulting in a steepening yield curve. It also assumes that we continue our mid-single-digit loan and deposit growth, along with projected improvements in the deposit mix that we expect to bring the cost of deposits down, in keeping with the projected decline in loan yield. Core fee income, excluding securities gains, declined slightly from last quarter by $261,000. As Mike mentioned, we had lower gain on sale income, which was due to some REO gains in the second quarter, and a $400,000 decrease in SBA gain on sale income. These decreases were somewhat offset by improved performance in our wealth division, with trust up $0.5 million and brokerage up $0.4 million from last quarter. We expect fee income to gradually increase in 2026. Core non-interest expense, or NIE, excluding merger expense, was up slightly from last quarter by $350,000, larger due to salary expense, driven by increased incentive accruals based on recent performance of loan growth. Looking forward, we currently expect that expenses will grow by approximately 3% next year. We repurchased approximately 625,000 shares in the third quarter at an average price of $16.81. We had $20.7 million of share repurchase authorization remaining at quarter end, most of which we intend to execute on the remainder of 25, assuming our share price remains close to current levels. And with that, we'll take any questions you may have.
Operator
We will now begin our question and answer portion. If you would like to ask a question, press star, then the number one on your telephone keypad. Thank you. Our first question is from Daniel Tamayo of Raymond James. Please go ahead.
Thank you. Good afternoon, everyone. um maybe we just start on the um on the credit side uh you know it seems like the uh everything was kind of ring fenced for the most part around the the credits you you referenced the floor plan and the the credits from center um let me just make sure i have this right so the the floor plan relationship um at quarter end is 16 million dollars um you gave some info on the on the floor plan in total 122 million i think mike but uh but the floor plan relationship with the fraud is 16 million now and then do you have the um that's right sorry that's correct it went from 31.9 to 16 million dollars the past quarter and 120 overall floor plan exposure okay and the um the i guess remaining stress in in that particular relationship you expect to be resolved in the fourth quarter? Or did I not hear that?
Yeah, largely. We're just unwinding it.
Okay. Okay. And what are reserves on that loan now, did you say?
And then the relationship from the center acquisition that is driving these, what are the numbers on that? I don't know if I have those.
Yeah, there was five recently acquired center bank loans, and we had an opportunity to sell those loans with a minimal hit. So I don't know if you want to expand upon that.
Yeah, sure, Mike. This is Brian. There was five loans. They were all marked at, as Mike mentioned, the mark did not.
Okay, thank you. And so, those have been sold now, and they're gone. Okay. And as it relates to the rest of the portfolio, then, back in the kind of historical range for charge-offs, or do you have any thoughts on where net charge-offs kind of, or provision, whatever is easier to discuss, moves here? Yeah, no change from- And then I guess just finally on the credit side, and I'll step back here, the MPL is down at 92 basis points of loans. Does that feel like a really relatively comfortable level for you guys? Maybe that's the wrong way to phrase it. Do you expect kind of stability from there? Do you expect that number continues to come down.
We expect it to come down, and we have a nice slide in our deck, our supplementary deck, that really shows historically where credit quality has been. And we really, if you look on page 10, bottom left quadrant there, you know, we've just been really quite elevated from third quarter of last year, fourth quarter, and first quarter of 2025, where we were between $61 million and $76 million of non-performing assets.
Yeah, and I just add to Mike's comment that, you know, we'll have the...
Okay, great. Well, I appreciate all the color, guys. Thanks very much. Thank you.
Operator
Our next question comes from Carl Shepard from RBC Capital Markets. Please go ahead.
Hey, good afternoon. Just a quick one on the floor plan credit. I think you implied this, but as you see it today, no incremental provision in 4Q? That's correct. And then Jim, I guess on the margin, I was a little surprised to not see loan yields tick up a little bit higher. So I was hoping you could help us with what the fixed asset repricing was and kind of what the accretion headwind was and then just kind of how you see loan yields trending.
Yeah, the fixed asset repricing was still 87 basis points. That is in the third quarter. That was a little bit down from the second quarter, but it's partly reflected of the rate cut. So still positive. That led to positive replacement yields for the portfolios of about 25 basis points overall. The fixed rate production right now is running about a third of the total production. So 87 base points of positive on the fixed rate means the whole portfolio is repriced up at about 25 basis points. But the fixed rate repricing, upper repricing hopefully will persist even after there's a few more rate cuts.
And then, since you gave it, I guess I'll ask a little bit about the 2026 NIM expectations. In the past, we've talked about your models kind of shooting it up towards 4% or even higher for the margin. Is that still the case, and this is a reflection of maybe a little bit of conservatism or some expectation of competition, or just help us understand kind of, you know, you're pretty thoughtful about this stuff, but, you know, what do you see that gives you that 390 number?
Yeah, I appreciate the question. happy to tell you everything there are thinking behind it and then you can you know make your your own judgments as usual um uh i don't have a sense of conservatism but we do have more rate cuts in this projection that we had in the past so there's two this year and then four by the end of next year i will tell you that the pattern is not even uh in the projection we have which we get from a third party that is probably the same third party most banks use there's the rate cuts are quarter by quarter next year, 28, 18, 9, and 40, so they're kind of backloaded next But all that does in the model in that kind of rate scenario is take the yield on loans overall down by 15 base points, and then because rates are falling, we can take the cost of deposits down by about the same amount, 15 basis points, and that ends up being a picture of new stability. The numbers that were pushing 4% probably just had a slightly higher rate forecast than we have this quarter. The other thing I just would note, it's not a parallel yield curve shift. It's a deepening curve, which is generally, you know, that's good for banks. So that helps a little bit. Also, some of the short end, the field of payment short end with our loans that are linked to short-term rates, but we're able to bring the deposit cost down. And if the mid to long end part of the curve stays up or goes up a bit, that helps with a fixed asset reprise. All that's going in the mix, and it's ended up looking, you know, pretty stable from here. Thank you.
Operator
Our next question comes from Charlie Disco from KBW. Please go ahead.
Hey, good afternoon. This is Charlie on for Kelly.
With a lot of the NIM expansion driven by the deposit repricing this quarter and then I'm expecting basic cuts to increase here. Can you kind of flush out some of the deposit repressing dynamics going forward? Maybe just dive into the drivers behind, like, the near-term compression and then a little bit of the neutrality from there? Thank you.
Yeah, I'll just give you a little color on the deposit. This is Jim. A little color on the deposit is what's happening in the quarter. We're really happy to see the deposit balances growing. That was really, and we kept saying this, using this term, That was a nice edge this year, to be able to grow deposit balances and still bring the cost of deposits down. But we've been able to do that. What's happened is that we have grown this time deposit portfolio and kept that deposit portfolio, the time deposit portfolio, relatively short, like most banks. So in the second quarter, for example, we had 400 and some million dollars of CD maturities. In the third quarter, we had over 800 million. So it's managing those maturities and managing them, being able to reprice them that maturity downward while still keeping the retention rate at an acceptable level. Retention rates have been pretty good on time deposits. They always end up being around 80%, which we think is about the industry average anyway. And then if you look at other deposits like money markets, our transaction accounts, our retention rates on those are actually over 90%, which we think is better than the industry We kind of track that pretty closely. And I'll give you one more fact, just if it helps you. On money market accounts, we've been able to reprice those as well. So in the second quarter, in the second quarter of money market accounts, 83% of the money market accounts had a yield over 3%. 83% of the money market account balances had a yield over 3%. And now that has gone from 83% to 49%. So we've been able to kind of manage the pricing of that while still being in and even going to positive balances. I hope that extra color answers your question and gets a little helpful.
Yeah, that's great color. I appreciate that.
Yeah, I would just add that for the people in the room, Mike McEwen, Jim Ruski, Jane Grabentz, and Norm Montgomery, they monitor this every other week. And they're looking at the loan and deposit volumes that come on. They're looking at the net impact on liquidity and also the impact on margin. This is something that we feel between our fingers every other week and we make game day decisions of where we're at and where we're going and how we're going to get there. And I just love the process. And it also just keeps us informed in what's happening in the bank.
By the way, all of us, speaking for all of us, we're supported by great teams of people. All of us have to kind of feed us data and help us keep our fingers to that pulse.
I appreciate the insight into the woodworks there. um regarding organic growth it's coming pretty steady can you just speak to the expectations moving forward um if payoffs are starting to pick up maybe sizing up that headwind and on the talent you got from center bank or anything in particular you're focusing on or excited about in terms of growth thank you yeah some of the payoffs that we've seen are really healthy commercial real estate projects refinancing into permanent markets non-recourse in the fives.
So that's not something we're going to do. And so that's some of the headwind that we see that's continued into the fourth quarter. However, we just have a lot of offense between consumer, mortgage, equipment finance, indirect auto. Our loan growth is going to be more constrained by liquidity versus our ability to go out and execute so that's kind of that's going to be the check rain on all this Mike McEwen anything you want to have totally agree yeah I agree I think the volumes production volumes are good tempered by some payoffs but feel pretty good going next year when production results yeah and our guidance remains mid single digit you know it's just a surprising bright spot this past quarter is growing home equity loan, you know, like $15 or $16 million. And so, we just have a lot of ways to get there.
Awesome. Thank you. Oh, thanks for taking my questions. I'll step back.
Operator
If you would like to ask a question, press start and the number one on your telephone keypad. Our next question comes from Matthew Brees from Seatsons Incorporated. Please go ahead. Hey, good afternoon.
Hey, Matt. um jim you had mentioned that with the fed cuts you expect a little bit of near-term nim pressure to what extent might we see nim pressure in the fourth quarter yeah it's always hard to guess i mean even the standard guidance i was giving i always says i always say plus or minus five basis points because every model is perfect that's probably in that range i don't think we go as far as five to ten matt that'd be a little extreme for the one quarter then bounce back so it's probably in the five basic point range okay is it possible you know let's just say we get we get a few cuts this quarter we're down to five bips is it possible we get down another couple of basis points in the first quarter from bleed over and maybe an
additional cut in the first quarter as well before we start to see some stabilization yeah absolutely possible i mean so much you know we're trying to do a projection based on a rate forecast, which has the timing of rates implied within it. So in our bank, we've just seen that the reality is there's a lag. So if there's a rate cut, it hits our prime portfolio and silver portfolio right away, and then there's a lag in how we price the deposit. So it's never perfect. So you get some of the effects right away, and then over time, the liability side catches up. And the seasonal change in deposits, I'm just throwing that out there so that people aren't surprised about that. We kind of see this every year. We saw it in different categories. Some of it's just consumers doing holiday spending. But some of it goes from fourth quarter to the first quarter, commercial accounts as well. So that happens just like it does every year. We'll be borrowing at a marginal rate, and that's a little more expensive. So that it recovers early in the year next year.
And then you'd also mentioned that you expect some improvement in deposit mix next year. What's behind that assumption? And maybe help us out with where you think we'll see some of the largest kind of mix shifts.
We just have a real push towards transaction accounts. And I gave some time deposit numbers a few minutes ago. We've grown time deposits because we had to do some of that just to raise the deposit balances. So we have a deep, deep push towards transaction accounts across the bank, both in consumer and commercial chain. I don't know if you wanted to add to that.
I can just reiterate it and, you know, it's a grind. It's actually a culture of grind and we've been grinding on it for a couple of years now. We're starting to see food in that labor and we'll just keep grinding.
Thank you. Maybe just a couple more. Yeah, please. Securities were down this quarter.
We're now below 13% of total assets. it feels on the low side for you could we see some growth there in the coming quarters probably not i think we're going to hold it about where it is and our plan right now is to replace the runoff last really slow anyway but replace it and really not grow the portfolio part of that thinking is that we just want to use that liquidity use our liquidity for loan growth and um and not leverage up the bank by borrowing money to buy securities so probably where you see it now as a level where we plan to hold it probably through 26.
Great. And then just on equipment, equipment finance continues to be a real driver of underlying CNI. Is plus 10% a quarter sustainable or where do we start to see that revert to the mean?
We're probably about a year away. This is Mike Price. And we've been really pleased. We've been pleased with the yields and also with the credit performance. But we also have a team that's been doing this for about 25 years, so we feel good about that. Mike, anything you want to add?
No, I think there's some incentives this year when it comes to depreciation and expected that to impact and benefit equipment finance. At least for the next few quarters, we feel pretty good about that growth.
That's all I had. I'll leave it there. Thanks for taking my questions. Thank you.
Operator
Our next question comes from Daniel Cardenas from Jamie Montgomery Scott. Please go ahead.
Good afternoon, guys. Could you provide some color on competitive factors on the lending side right now? I've heard a lot of give on structure and pricing in various markets, wondering if you're seeing the same thing within your footprint.
I do think it depends on the market, Dan, and I'll let Mike take this. This is his, but I think there's a big difference between Columbus, Ohio, and rural Pennsylvania. But there's, Mike, what would you add?
I would say yields, margin on the yields has probably dropped 25 basis points over the course of And we really haven't changed much in our structure approach. But that's hurt the yields to your earlier question. I would say some of the metro markets are much more competitive than the rural markets, as Mike just said. On structure, it's gotten more aggressive. We mentioned the permanent markets, the agency lending. Those are very aggressive right now. It's not something we do, but it does impact our balance sheet.
Is that helpful, Dan? Yes, sir. I just appreciate that.
And then maybe I'll color on the M&A for anything we've seen. activity pick up a little bit here recently um wondering what you're seeing come across your desk of the chatter is picked up or if it's it's slowed down from last quarter i think there's more conversations i think for us um you know we really wanted to help our depository and our liquidity and um you know we've we've had a uh but a lot of a lot of conversations that were We're pretty prudent, maybe too prudent at times, as I said last quarter, but we're hopeful that we can grow through acquisition. We've been stuck at about $12.5 billion, and, you know, crossing 10, you normally lose a lot of your mojo as it relates to your profitability. We've been able to maintain that really with an eye to realistically get to 140, and we fell a little short this quarter because of credit on the ROA side. But we just, it's not an excuse. We need to have a great NIM and we need to have a great ROA, irrespective of the size. But certainly, if we had a right acquisition or two that could get us down the road a couple billion dollars more, that would be terrific. You know, our bias is generally smaller because of the risk. Better, and make sure that it's a good depository that can help our liquidity and help fund the bank. And I don't know if that's particularly helpful, Dan.
Yeah, no, no, it is. All right. All my other questions have been asked and answered. I'll step back.
Operator
That concludes our Q&A session. I will now turn the conference back over to Mike Price for closing remarks.
Yeah, thank you. I appreciate your interest in our company. I would just add that we've really shifted to deliver the bank regionally, And we really expect the payoff of that to be not just to better deliver the mission, to better grow households and low-cost deposits in the depository, and then also better grow our fee income. We do feel like we can grow the loans. And the other thing that's kind of interesting and exciting, I think, is as we look at, as an executive team, 30 operating plans for our lines of business, for our business units, for our geographies, as part of our strategic planning process, we really feel there's probably, you know, one, two, or three ways that we can continue to get more efficient using technology, you know, like robotic process automation or AI, or just better straight-through processes. And we just have bright people that can look at their operation and make it better. And so there's just a lot of things that we're excited about the company to move the company forward and make it better. And we just also have a pretty talented team up and down throughout the organization. So thank you again. Look forward to being with a number of you over the course of the ensuing weeks, and just appreciate you.
