First Commonwealth Financial Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights:

• Financial performance: Return on assets improved to 1.34%, core pretax pre-provision ROA grew to 2.05%. Net interest margin expanded, deposits and loans grew.
• Credit issues: Dealer floor plan customer out of trust led to charge-offs and reserve adjustments, isolated and expected to resolve by year-end; Center Bank acquisition exceeding customer retention expectations.
• Digital initiatives: Good growth in services, high digital satisfaction, and continued addition of customer-facing features using RPA and AI.

Segment Performance:

• Net interest margin expanded 9 basis points to 3.92%. Average deposits increased 4% with cost of deposits declining 7 basis points to 1.84%.
• Loans were up $137 million or 5.7%, with contributions from equipment finance, commercial banking, indirect and home equity lending; mortgage lending was a headwind but outlook improving.
• Fee income remained resilient at 18% of total revenue, with wealth business improvement offset by slower gain on sale income.
• Efficiency ratio improved to 52.3% from 54.1% in Q2. Tangible book value grew 11.6% annualized linked-quarter and 9.1% year-over-year.
• Credit side: Core provision expense reached $11.3 million, net charge-offs $12.2 million, nonperforming loans declined to 0.91%.

Guidance:

• NIM: Fourth quarter NIM may face short-term downward pressure from Fed cuts, seasonal deposit decline, and macro swap expirations, but expected to recover to ~3.9% in 2026.
• Expenses: Expect expenses to grow ~3% next year.
• Share repurchase: Intend to execute remaining $20.7 million share repurchase authorization in remainder of 2025 assuming share price remains close.
• Charge-offs: Expect net charge-offs in mid- to high 20 basis point range.
• Loan growth: Guidance remains mid-single digit, with growth in home equity loans a bright spot.

Risks:

• Dealer floor plan: Isolated fraud situation with related charge-offs and reserve adjustments, but expected to be largely resolved by year-end.
• Interest rate fluctuations: Potential short-term NIM pressure from Fed cuts, seasonal deposit changes, and macro swap expirations.
• Competition: Competitive pressures in certain markets affecting lending structure and pricing.

Question and Answer: Q: On credit side, status of floor plan credit and charge-offs?

A: Thomas Michael Price stated the floor plan relationship at quarter end is $16 million, expected to be resolved largely in the fourth quarter. Mike Price also mentioned net charge-offs are expected to operate in the mid- to high 20 basis point range.

Q: On NIM, fixed asset repricing and loan yield trends?

A: James Reske said the fixed asset repricing was still 87 basis points, and loan yields are affected by rate cuts but fixed rate repricing may persist. NIM projection for 2026 is ~3.9% considering rate cuts and repricing.

Q: Deposit repricing dynamics and mix improvement?

A: James Reske discussed managing deposit maturities, time deposit retention rates are good, and there's a focus on transaction accounts for mix improvement. Jane Grebenc reiterated the grind towards improving transaction accounts.

Q: Securities and equipment finance growth?

A: James Reske said securities are likely to be held steady, and Michael McCuen mentioned equipment finance growth is expected to continue with considerations of incentives and market factors.