First Commonwealth Financial Corporation - 3Q 2026 Earnings Release Conference Call - FIRST COMMONWEALTH FINANCIAL CORP

Financial Performance:

• Core earnings per share (EPS) totaled $0.45; reported EPS included a $4.7 million (pre-tax $6 million) one-time benefit from federal energy tax credits.
• Net interest margin (NIM) expanded to 4.11% (up 10 bps QoQ), driven by a decline in deposit costs to 1.67% and repricing from the Fed's September rate hike.
• Provision for loan losses was $14.2 million, comprised of $10.7 million in specific reserves (driven by three identified credits totaling ~$18 million) and $3.5 million for unfunded loan commitments.
• Non-performing loans (NPLs) increased due to migration of specific credits; criticized loans decreased by $25 million, while watch loans fell over $100 million year-to-date.
• Tangible common equity ratio improved to 9.2% (down from 9.9%) following an $88 million share repurchase; core return on average common equity (ROACE) rose to 15.90%.
• Net interest income grew 13.7% annualized; fee income remained flat quarter-over-quarter due to offsetting one-time gains lost.
• Expenses increased quarter-over-quarter due to a $0.6 million lease write-down, incentive accruals, and higher FDIC assessments, excluding a $0.5 million vendor reimbursement from the prior quarter.

Guidance and Future Outlook:

• NIM is expected to reach ~4.20% in Q4 2026 and continue rising into the mid-420s range in 2027, assuming no further rate changes or curve shifts.
• Loan growth guidance remains mid-single digits, supported by annualized growth of 2.6% in Q3, slowing payoffs, and strong originations across six lending buckets.
• Non-interest income guidance for Q4 2026 remains $24–$25 million; updated 2027 non-interest income and expense guidance will be provided in January.
• Federal energy tax credits are projected to lower the effective tax rate by 1–2 percentage points annually (approx. $0.02 per share) once a recurring purchase rhythm is established.
• A $25 million additional share repurchase authorization has been approved, with repurchases resuming next week following the blackout period.
• Construction and HELOC funding is expected to contribute incremental loan growth over the next 12–18 months as commitments fund.

Business Segments and Product Lines:

• Loan originations increased year-over-year across commercial and consumer segments; equipment finance growth has moderated, while commercial & industrial (C&I) lending shows traction.
• Portfolio mix includes six key buckets: HELOCs, closed-end loans, mortgages, indirect auto, CRE/CNI, and equipment finance; strategy focuses on broad-based growth across all categories.
• Deposit composition is ~67% consumer-oriented and granular (200k+ households), with non-interest-bearing deposits comprising ~2/3 of the commercial base.
• CD portfolio strategy shifted from short-term (under 12 months) to 15-month terms earlier in the year; retention rate remains stable at ~80% for maturing CDs.
• Fintech investment plan for 2027 targets technology, talent, marketing, fraud prevention, and banker productivity to enhance next-best-action capabilities and data insights.
• The bank actively de-risked its portfolio by halting out-of-footprint SBA lending, limiting leveraged finance/dealer floor plans, and closing a production office in eastern PA.

Market and Competitive Landscape:

• Deposit competition is described as heating up in a rising-rate environment, requiring the bank to maintain market rates to preserve loan-to-deposit ratios in the low 90s.
• Management forecasts a deposit beta of ~25% for non-maturity deposits; promotional rates (e.g., 4.25% for 15 months) will be offered to compete, though granular consumer deposits offer natural cost advantages.
• Regional focus on Western Pennsylvania, Central Pennsylvania, and Ohio benefits from local energy and data center growth, providing resilience against broader economic downturns.
• Indirect auto book performance remains strong with loss rates of 30–40 basis points even through difficult cycles.
• Higher interest rates are expected to dampen demand, particularly in commercial real estate, by making certain projects unfinanceable or difficult to refinance.

Risks and Challenges:

• Credit risk remains concentrated in a few specific large credits, including a ~$16M C&I credit and a ~$5M Pittsburgh mixed-use multifamily loan, which entered non-accrual this quarter.
• The Central Pennsylvania acquisition remains a credit headwind, representing ~20% of criticized loans ($60M of $300M criticized), though the remainder is granular and manageable.
• Future provision expense may remain elevated for the next two quarters as the bank works through specific reserves and unfunded construction commitments before converging to typical levels.
• Rising rates pose a dual risk of dampening loan demand and increasing deposit pricing pressure, potentially compressing NIM if loan yields do not keep pace.
• Regulatory and legislative changes regarding the transferability of federal renewable energy tax credits could impact the projected tax rate benefits.

Management Commentary and Tone:

• Management expressed cautious confidence, highlighting strong operating trends, NIM expansion, and disciplined cost management despite elevated provisions.
• Tone indicated a strategic pivot from deposit pricing optimization to profitable loan growth, leveraging the strong NIM foundation.
• CEO Mike Price and CFO Jim Reske emphasized the "mission-driven community bank" model, noting relevance to employees, customers, and investors.
• Management acknowledged the "conundrum" of balancing deposit retention with margin preservation in a competitive environment.
• Leadership conveyed optimism about the regional economy's insulation from a potential recession due to local energy and infrastructure developments.

Analyst Questions and Answers:

• Deposit Sustainability: Analysts asked about deposit cost sustainability in a rising rate environment; management reiterated a 25% beta on non-maturity deposits and acknowledged the need to match market rates on promotions.
• Credit Resolution: Questions focused on the path to resolving NPLs; management identified three primary impaired credits (C&I, Pittsburgh multifamily, Ohio student housing) and noted granular risk outside these top items.
• NIM Outlook: Analysts queried if the 4.20% NIM projection assumes a frozen yield curve; management confirmed the baseline is "no hikes/no curve change," but noted a potential peak and decline if rates fall per market forecasts.
• Tax Credit Lumping: Clarification was provided that tax credit benefits will be lumpy initially as they cover prior years (23–24) and current year (25/26), stabilizing in subsequent years.
• Charge-Off Timeline: Management does not provide specific charge-off guidance but anticipates the current elevated provision will normalize over the next two quarters.

Other Key Points:

• Share buybacks totaled $88 million this quarter at an average price of $21.18, utilizing both remaining authority from the prior program and a new authorization.
• The bank reported a 25% beta on non-maturity deposits, excluding time deposits which are priced separately based on market specials.
• Specific reserves were driven by three credits: one previously identified, and two new migrations from criticized to non-performing categories.
• The bank holds over 200,000 consumer banking households, providing a stable, granular deposit base less sensitive to large balance migration.
• Management highlighted a strategic shift to stop out-of-footprint lending to mitigate future credit concentration risks.