First Commonwealth Financial 2026 Q3 Earnings Call

Please go ahead. Thank you, Jonathan, and good afternoon, everyone.

Thanks 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, Brian Sohocki, Chief Credit Officer, and Mike McCuen, 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 today's 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 our 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.

Hey, thank you, Ryan. Good afternoon, everyone. Core earnings per share totaled $0.45 for the third quarter. There were two unrelated offsetting financial events this quarter. These results included $4.7 million of one-time energy tax credits, equivalent to $6 million on a pre-tax basis. These tax credits helped offset provision expense that came in at $14.2 million. The provision figure includes $3.5 million associated with the unfunded loan commitments reflective of strong production this quarter in committed lines. The other $10.7 million represents provision for loan losses, driven principally by approximately $7.7 million of specific reserves associated with three previously identified credits. Non-performing loans increased, but the increase was also concentrated in a limited number of previously identified relationships rather than broad-based portfolio deterioration. Beyond those two events, the operating trends of our core businesses are strong.

The net interest margin increased to 4.11%, supported by a decline in deposit cost to 1.67% and the impact of the Fed's latest hike on our variable rate loan portfolio. Additionally, consumer and commercial loan originations throughout the third quarter increased year-over-year. Loan payoffs also slowed for the first time in five quarters, leading to annualized loan growth of 2.6% in the quarter. Together with current backlogs, these trends support the outlook for loan growth within our mid-single-digit guidance. Our three principal areas of focus for the near term include better credit performance, generating profitable growth, and controlling expenses to create positive operating leverage. The latter becomes vital to investment in the future of our company. Our 2027 investment plan includes opportunities with technology, talent, marketing, fraud prevention, and improved banker productivity, lead generation, and financial analysis.

Lastly, we believe a mission-driven community bank of our size remains important and relevant to our customers, communities, employees, and investors. With that, I'll turn it over to Jim.

Thanks, Mike. Mike provided the broad brushstrokes of our financial performance this quarter, including credit. I'll spend my time drilling down into our results to help you get a better understanding of the long-term run rate of our financial performance. The credit story is important, but I don't want it to overshadow positive trends in our net interest margin, spread income, balance sheet growth, and our fee income trajectory. Before I walk you through those things, however, I want to spend a moment addressing the impact of the tax credits and the buyback on the quarter. First, the tax credits. We have for many years purchased credits against our income tax, but this was our first foray into federal energy tax credits. We started looking at these tax credits in the second quarter of this year, and we purchased just over $50 million in credits in the third quarter.

Those credits will be applied towards our federal tax liability for tax years '25 and prior. That resulted in the recognition of $4.7 million in tax benefits in the third quarter. We intend to purchase credits going forward, including for tax year 2026. With that purchase, we'll purchase additional credits that we could carry back to 2023 and 2024. Once that's done, and assuming the laws affecting the transferability of federal renewable energy tax credits don't change, we'll likely settle into a rhythm of purchasing tax credits like this every year. We think this could bring our effective tax rate down by approximately one to two percentage points, which might be worth about $0.02 per share per year, but it's heavily dependent on the terms of each deal.

The other major event of the quarter we are talking about was the full execution of the previously announced $75 million buyback program. We came into the quarter with about $13 million of share repurchase authority from our previous program, and combined with the new authorization, repurchased approximately $88 million in stock during the quarter at an average price of $21.18. That helped rightsize the tangible common ratio from 9.9% last quarter to 9.2% this quarter. That, in turn, contributed to the expansion of our core return on average common equity to 15.90%, up 24 basis points from last quarter, despite the elevated provision expense this quarter. We are also pleased to announce that our board has authorized an additional $25 million in repurchase authority. We intend to recommence share repurchases next week, once we come out of blackout.

Beyond the tax credits and the buyback, however, there are positive fundamental trends in our revenue that are worth talking about. Our net interest margin, or NIM, expanded by 10 basis points from 4.01% last quarter to 4.11% this quarter. We were able to decrease deposit costs by seven basis points last quarter. The September rate cut came too late to have much benefit on loan yields in the third quarter, but loan yields in the third quarter were held back by the reversal of accrued interest on non-accrual loans, which created a drag of approximately four basis points of NIM in the third quarter. Looking forward, with no further changes in rates, which means no hikes and no changes in the shape of the yield curve, we would expect our NIM to rise to around 4.20% in the fourth quarter and continue to rise into the mid-4.20s in 2027.

All those estimates are give or take five basis points as per usual. I would also point out that it is not only NIM that is a good story for us, but our net interest income increased as well by $3.9 million last quarter in annualized rate of approximately 13.7%. Fee income was unchanged from last quarter, but that is only because real progress in core fee items such as wealth, mortgage, and back-to-back interest rate swaps was offset by the loss of $1.3 million of second quarter one-time gains we did not have this quarter. Our previous guidance for fee income to range from $24 million to $25 million per quarter remains unchanged for the fourth quarter. Expenses were up this quarter but were impacted by several discrete items. We incurred a $0.6 million write-down on the extension of a long-term lease, but it will save us money in the long run.

In addition, we received a half-million-dollar reimbursement from the vendor last quarter that we obviously did not have this quarter. Those two items together accounted for about $1.1 million of the quarter-over-quarter swing in expenses. The other major increased expense items included incentive accruals, primarily related to increased loan production and our FDIC assessment costs. Looking ahead, our previous guidance of $74 million to $76 million per quarter remains unchanged for the fourth quarter. We will provide updated non-interest income and expense guidance for 2027 in January, as we have done in the past. With that, we will take any questions you may have.