What First Commonwealth Financial (FCF) Said on Its Q3 Earnings Call

Key Points

• Q3 core EPS was $0.45, with stronger net interest margin and loan production partly offset by $14.2 million in provisions tied largely to three previously identified credits. Management said the credit issues were concentrated rather than indicative of broad portfolio deterioration.
• Net interest margin expanded 10 basis points to 4.11%, while annualized loan growth reached 2.6%; management expects margin to rise to roughly 4.20% in Q4 and anticipates mid-single-digit loan growth based on current backlogs.
• First Commonwealth repurchased approximately $88 million of stock and authorized another $25 million, but credit performance remains a priority as the bank works through criticized and nonperforming loans over the next several quarters.

First Commonwealth Financial NYSE: FCF reported third-quarter core earnings per share of $0.45, as higher net interest margin and loan production were partly offset by elevated credit provisions tied to a limited number of previously identified loans.

President and CEO Mike Price said the quarter included two offsetting items: $4.7 million in one-time energy tax credits and $14.2 million in provision expense. The tax credits equated to about $6 million on a pretax basis, while the provision included $3.5 million for unfunded loan commitments and $10.7 million for loan losses.

Price said approximately $7.7 million of the loan-loss provision related to specific reserves for three previously identified credits. While nonperforming loans increased during the quarter, he said the rise was concentrated in those relationships rather than reflecting broad-based deterioration across the loan portfolio.

Margin expansion and loan growth

The company’s net interest margin increased 10 basis points sequentially to 4.11%, supported by a seven-basis-point decline in deposit costs to 1.67% and the effect of the Federal Reserve’s latest rate increase on variable-rate loans.

Chief Financial Officer Jim Reske said third-quarter margin results were reduced by roughly four basis points due to the reversal of accrued interest on non-accrual loans. Assuming no additional changes in rates or the yield curve, he said First Commonwealth expects net interest margin to rise to about 4.20% in the fourth quarter and continue increasing into the mid-4.20% range during 2027.

Reske added that net interest income rose $3.9 million from the prior quarter, representing an annualized growth rate of about 13.7%. The company maintained its fourth-quarter fee-income guidance of $24 million to $25 million.

Consumer and commercial loan originations increased year over year, while loan payoffs slowed for the first time in five quarters. That combination produced annualized loan growth of 2.6% in the third quarter. Price said current loan backlogs support the company’s outlook for mid-single-digit loan growth.

Management said it is seeking balanced growth across six lending categories: home-equity lending, mortgage, indirect auto, commercial real estate, commercial and industrial lending, and equipment finance. Price said the bank does not intend to rely on outsized growth in any single category.

Still, Price and Chief Lending Officer Mike McCuen said higher interest rates could dampen borrowing demand, particularly in commercial real estate. Price said a half-point to full-point rise in rates could make some projects unfinanceable and complicate refinancing for maturing loans.

Deposits, costs and capital actions

Management said deposit competition has increased, and the company aims to grow deposits in line with loans to maintain its loan-to-deposit ratio in the low 90% range. Reske said First Commonwealth is using an estimated 25% deposit beta for interest-bearing, non-maturity deposits, consistent with its historical experience.

On certificates of deposit, Reske said the company has been managing a number of near-term maturities after favoring shorter-duration CDs over the past 18 months. He said the bank retains about 80% of maturing CDs, with customers who do not renew often moving funds into other bank products such as money market accounts.

Price said the company’s deposit base remains granular and consumer-oriented, with more than 200,000 households in its consumer bank. He added that roughly two-thirds of noninterest-bearing deposits are commercial, while consumer deposits account for more than 60% of total deposits when time deposits and noninterest-bearing accounts are included.

Noninterest expense increased during the quarter, though Reske cited several discrete items. Those included a $600,000 write-down associated with extending a long-term lease, which he said would generate future savings, and the absence of a $500,000 vendor reimbursement received in the second quarter. Higher incentive accruals tied to loan production and increased FDIC assessment costs also contributed to the increase. The company maintained fourth-quarter noninterest expense guidance of $74 million to $76 million.

First Commonwealth repurchased approximately $88 million of stock during the quarter at an average price of $21.18 per share, completing the previously announced $75 million repurchase program along with remaining authority from an earlier plan. The repurchases reduced the tangible common equity ratio to 9.2% from 9.9% in the prior quarter and contributed to a 24-basis-point increase in core return on average common equity to 15.90%.

The board authorized an additional $25 million in repurchase capacity. Reske said the company expects to resume repurchases after the blackout period ends.

Credit outlook and tax credits

Chief Credit Officer Brian Sohocki said the increase in classified and nonperforming loans was largely driven by two loans that migrated into nonperforming status and a third existing nonperforming loan that required additional reserves. He said other assets especially mentioned declined by $25 million during the quarter, while watch loans were down more than $100 million year to date.

Management identified the largest impaired credits as a $16 million commercial and industrial loan, a $5 million mixed-use Pittsburgh credit, and an existing $11 million Pittsburgh mixed-use multifamily loan. Price also cited an Ohio student-housing project among the major relationships being addressed.

The company continues to work through criticized loans associated with its entry into central Pennsylvania. Price said about $60 million of roughly $300 million in criticized loans relates to that market, though management characterized the remaining exposure as granular after a limited number of larger credits.

Sohocki said the company expects to work through the identified nonperforming loans over the next several quarters and believes reserves were appropriate based on collateral values and workout strategies. Price said the company hopes provision expense can return below $10 million, though he cautioned that outcomes remain dependent on credit resolution.

Reske said First Commonwealth purchased just over $50 million in federal energy tax credits during the third quarter, generating the $4.7 million tax benefit. The company plans to continue purchasing credits, subject to the transferability rules remaining in place. Over time, he said the strategy could lower the effective tax rate by roughly one to two percentage points, potentially adding about $0.02 per share annually, though results will depend on individual transaction terms.

Looking ahead, Price said the company’s near-term priorities are improving credit performance, generating profitable growth and controlling expenses to create positive operating leverage. He also highlighted planned investments in technology, talent, marketing, fraud prevention, banker productivity and data-driven customer tools.

About First Commonwealth Financial (NYSE:FCF)

First Commonwealth Financial Corporation NYSE: FCF is a bank holding company headquartered in Indiana, Pennsylvania. Through its principal subsidiary, First Commonwealth Bank, the company provides financial services to consumers, businesses, municipalities and nonprofit organizations.

Its offerings include checking and savings accounts, certificates of deposit, residential and consumer lending, commercial loans, mortgages, treasury management and online and mobile banking. The company also provides wealth management, investment and trust services, along with insurance and other financial solutions through affiliated businesses.

First Commonwealth Bank serves communities primarily in western and central Pennsylvania and northeastern Ohio through a network of community banking offices and digital channels.

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