First Commonwealth Financial Corp (FCF) 2025 Q3 法說會逐字稿

(Operator Instructions)

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. [Operator Instructions] I would now like to turn the call over to Ryan Thomas. Please go ahead.

Thank you, Danielle, and good afternoon, everyone.

Thank you for joining us today to discuss 1st Commonwealth Financial Corporation's 3rd quarter financial results. Participating on today's call will be Thomas Michael Price, President and CEO, Jim Raske, Chief Financial Officer, Jane Gerbent, bank President and Chief Revenue Officer, Brian Sohockie, Chief Cre 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 a reported results prepared in 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.

Hey, 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 through 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.

Feecom 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% from 54.1% in the second quarter, reflecting good expense control.

Tangible book value grew 11.6% annualized on a late 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 dollar 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 3rd 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 for plan fraud is isolated, and we expect it to be largely resolved by year end. As of September 30th, our four plan exposures totalled $122 million across 21 traditional auto and RV relationships with individual exposures ranging from $2 million to $18 million.

Net charge-offs for the quarter were $12.2 million primarily driven by the aforementioned $5.5 million dollar dealer for plan charge off and $2.8 million associated with the sale of five recently acquired Centre 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 for 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 Centre bank acquisition in Cincinnati. Is exceeding our customer retention expectations. We're grateful for the opportunity that acquisition has given us to accelerate the build out of that region. On the digital front, we see good growth in services and high digital satisfaction and survey results. We continue to add customer facing features to our platform and to improve productivity to 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 Jemes Reske, our CFO.

Thanks Mike.

This quarter's core results show you what a little bit of nim expansion and loan growth can do. Pre pre-provision that 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 jobs 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 9 basis points from 3.83% last quarter to 3.92% this quarter. The expansion was primarily driven by a 7-basis point decrease. In the cost of deposits to 1.84%. Loan yields were largely flat this quarter as a free basis point decrease in purchase accounting marks was mostly made up for by a $25 million dollar macro swap and matured on August 25th, as well as the continued upward repricing of fixed rate loans.

Fourth quartered him We 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 NIM in the fourth quarter, but we expected him to recover in 2026, so roughly the level of the quarter just ended, or about 3.9%, give or take 5 basis points as usual.

In 2026, the expiration of $175 million in macro swaps and the expected continued up the continuation of upward fixed rate loan repricing helps to blunt the effect of falling short-term rates on loan yields.

That projection assumes that we'll have 2 more rate cuts this quarter and 4 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 and sale.

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 largely 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 and an average price of $16.81.

We have $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 Instructions)

Our first question is from Daniel Tamayo of Raymond James. Please go ahead.

Thank you, good afternoon, everyone.

Maybe we just start on the credit side. It seems like the — everything was kind of ring-fenced for the most part around the credits you referenced, the floor plan and the credits from canter. Let me just make sure I have this right. So, the floor plan relationship at quarter end is $16 million. You gave some info on the floor plan in total, $122 million, I think, Mike, but the floor plan relationship with the fraud is $16 million now. And then do you have the — that’s right, sorry.

That’s correct. It went from $31.9 million to $16 million this past quarter. And $122 million overall floor plan exposure.

Okay and the, I guess, remaining stress in that particular relationship you expect to be resolved in the 4th quarter, or did I not hear that?

Yeah, largely we're just unwinding it.

Okay.

And what are reserves on that loan now? Did you say?

There’s 4.4.

4.4 okay. And then the relationship from the canter acquisition that that is driving these what are the numbers on that? I don't know if I have those.

Yeah, there were 5 recently acquired Centre 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.

So I don't know if you want to expand upon that.

Yes, sure, Mike. This is Brian. There were 5 loans. They were all marked at our original time of acquisition. And as Mike mentioned, the charge-off of $2.8 million resulted in only provision of just over $100,000 for the quarter. They were PCD loans, and the mark did not reduce the carrying value. So, you see the charge-off, but you don’t see the impact on provision.

Okay. And so those have been sold now, and they’re gone. Okay. All right. Great. 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 discussed moves here?

Yes. No change from prior comments from a charge-off perspective, expectation is to operate in the mid- to high 20 basis point range. Last quarter, we said 25 to 30 basis points. And similarly, from a provision basis, that will grow with our loan growth, respectively.

Okay. All right. Terrific. And then I guess just finally on the credit side, and I’ll step back here. The NPL is down at 92 basis points of loans. Does that feel like a relatively comfortable level for you guys? Maybe that’s the wrong way to phrase it. Is 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, 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 nonperforming assets.

I just add to Mike's comment that you know we'll have the tailwind of the majority of the dealer floor plan, wind down in 4th quarter, and then kind of normalization of, cleanup of the portfolio from there.

Okay great well I appreciate all the colour guys thanks very much.

Thank you.

(Operator Instructions)

Our next question comes from Carl Shepherd 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 from this in 4Q?

That’s correct.

Okay. 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 then kind of what the accretion headwind was? And then just kind of how you see loan yields trending?

Yes. 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 reflective of the rate cut. So still positive. That led to a positive replacement yields for the portfolio of about 25 basis points overall. The fixed rate production right now is running about 1/3 of the total production. The 87 basis points of positive on the fixed rate means the whole portfolio is repriced up at about 25 basis points, but the fixed rate repricing — up repricing hopefully will persist even after there’s a few more rate cuts.

Okay. 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 model’s 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’re pretty thoughtful about this stuff, but what do you see that gives you that 3.90% number?

Yes, I appreciate the question. Happy to tell you everything our thinking behind it and then you can make your own judgments as usual. I don’t know if a sense of conservatism, but we do have more rate cuts in this projection that we had in the past. So, there’s 2 this year and then 4 by the end of next year. I would tell you that the pattern is not even in the projection we have, which we get from a third party that is probably the same third-party most banks use. If the rate cuts are quarter-by-quarter next year, 28, 18, 9 and 40. So they’re kind of backloaded next quarter. But all that does in the model in that kind of rate scenario is take the yield on loans overall down by 15 basis 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 NIM stability.

So the numbers that we’re 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 steepening curve, which is generally — that’s good for banks. So that helps a little bit. It helps us on the short end. We feel the pay in short end of our loans that are linked to the short-term rates. So, we can bring the deposit costs down. And if in a mid- to long-end part of the curve stays up or goes up a bit, that helps with the fixed asset repricing. All that’s going into the mix, and it’s ended up looking stable from here. Thank you

(Operator Instructions)

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 expecting basic cuts to increase here. Can you kind of flesh out some of the deposit repricing 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?

Yes. I’ll just give you a little colour on the deposits. This is Jim. A little colour on the deposits and what’s happening in the quarter. We’re 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 simply 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 pipelines were relatively short, like most banks. So, in the second quarter, for example, we had $400-and-some millions 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 that maturity downward while keeping the retention rate at an acceptable level.

The 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 over 90%, which we think is better than the industry average. We kind of track that closely. And then 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, 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 82% to 49%. So, we’ve been able to kind of manage the pricing of that while still maintaining even growing deposit balances.

I hope that extra colour answers your question, is a little helpful

Yes, that’s great colour. I appreciate that.

This is Mike. I would just add that for the people in the room, Mike McCuen, Jim Reske, Jane Grebenc, 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 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, supported by great teams of people all right to kind of give us feed us data and help us keep our fingers on that pulse.

I appreciate insight into the woodworks there. Regarding organic growth, it’s come in steady. Can you just speak to the expectations moving forward if payoffs are starting to pick up, maybe sizing up that headwind? And on the talent, you got from Centre Bank or anything in particular you’re focusing on or excited about in terms of growth?

Yeah, Some of the payoffs that we’ve seen are really healthy commercial real estate projects, refinancing into permanent markets, nonrecourse in the 5s. 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 have a lot of — 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 rein on all of this. Mike McCuen, anything you want to add?

I totally agree, yes, I agree. I think the volumes — production volumes are good, tempered by some payoffs, but feel pretty good going into next year on production results.

Yes. And our guidance remains mid-single digit. Just a surprising bright spot this past quarter is growing home equity loans, like $15 million 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 Instructions)

Our next question comes from Matthew Breese from Stephens Inc.

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 say plus or minus 5 basis points because every model's perfect. That's probably in that range.

It I don't think we go as far as 5 to 10, Matt. That'd be a little extreme for the one quarter and then bounce back so it's probably in the 5 point range.

Okay, is it possible.

Let's just say we get we get a few cuts.

This quarter we're down to 5 bits. Is it possible to get down another couple of basis points in the 1st quarter from bleed over and maybe an additional cut in the 1st quarter as well before we start to see some stabilization.

Yeah, possible. I mean, so much, we're trying to do a projection based on a rate forecast which has the timing rate implies within it. So in our bank and we're just seeing that the reality is there's a lag, so there's a, if you do a rate, if there's a rate cut, it hits our prime portfolio and so for portfolio right away, and then there's a lag in how we price the deposit, so there's always, it's never perfect, so you get some of these checks right away and then over time the liability site 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, in in different categories, some of it's just consumers doing holiday spending, but, and some of it goes from 4th quarter to the 1st quarter with commercial accounts as well. So, that happens just like it does every year. We'll be borrowing at the marginal rate and that's a little more expensive, so then it recovers or the.

For the year next year.

And then you had 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 loan time deposits because we had to do some of that just to raise the deposit balances, but we have a deep, deep push towards transaction accounts across the bank, both in consumer and commercial. Jane, I don’t know if you wanted to add anything because that kind of you.

And we'll just keep grinding.

Got it. Okay.

Yes, thank you.

Maybe just a couple.

More, securities were.

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. I really slow anyway but replace it and not grow that portfolio. Part of that thinking is that we just want to use that liquidity, use our liquidity for loan growth.

And not leverage up the bank by borrowing money to buy securities. So probably where you see it now is a level where you're going to plan to hold it, probably through 206.

Great and then just on equipment finance continues to.

Be a real driver of, underlying C&I.

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 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. Like, 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, yeah.

That's all I had. I'll leave it there. Thanks for taking me.

Questions.

Thank you.

(Operator Instructions)

Our next question comes from Daniel Cardenas from Jenny Montgomery Scott. Please go ahead.

Hey good afternoon, Guys. And then.

If could you provide some colour on the competitive factors on the lending side right now? I've heard, you know.

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 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.

The.

Year.

And we really haven't changed much in our structure approach, but that's hurt the yields the earlier question. I would say that in 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, yes, appreciate that. And then maybe colour on the M&A front. I mean we've seen activity pick up a little bit here recently, wondering what you're seeing come across your desk of chatter is picked up or if it's slowed down, from the last quarter. I.

I think there's more conversations. I think for us.

We really wanted to help our depository.

And our liquidity and we've had a but a lot of conversations that were prudent, maybe too prudent times, as I said last quarter, but we, we're hopeful that. We can grow through acquisition. We, we've been stuck at about 12.5 billion and 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 felt a little short this quarter because of credit on the ROA side. It just, it's not an excuse. We need to have a great name, 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. Our bias is generally smaller because of the risk, better.

And make sure that it 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.

(Operator Instructions)

That concludes our Q&A session. I will now turn the conference back over to Mike Price for closing remarks.

Yes. 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, the 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 1, 2 or 3 ways that we can continue to get more efficient. Using technology like robotic process automation or AI or just better straight-through processes.

So 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 talented team up and down throughout the organization. So, thank you again. Look forward to being with a few of you over the course of the ensuing weeks and just appreciate you.

This concludes our conference call. You may now disconnect.