First Commonwealth Financial Corporation (FCF) Q1 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation First Quarter 2026 Earnings Release Conference Call. [Operator Instructions] And I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. You may begin.

Thanks, Abby, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's first 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 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 statements. 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. A 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.

Thank you, Ryan. Good afternoon, everyone. Several headlines for the first quarter of 2026 follow. Net income of $37.5 million resulted in $0.37 of earnings per share as compared to our consensus earnings estimate of $0.40. Net interest income was down from $4.2 million for the quarter to $109.3 million as we sold $210 million of Eastern PA commercial loans and loan balances fell another $74.2 million due to heightened payoffs. Our commercial loan repayments swelled to $630 million in the first quarter, up some $150 million over the first quarter of 2025. In the first quarter, we had 18 successful CRE projects. They were refinanced or sold, representing a payoff of approximately $240 million in loan outstandings. The net interest margin or NIM fell as expected to 3.92%. Among other items, positive replacement yields on new fixed rate loans in the first quarter were 54 basis points higher and coupled with $150 million of swaps rolling off in the second quarter, this should provide the impetus for further NIM expansion. Deposits grew 6.3% end-to-end annualized in the first quarter, and our money market promotions have resulted in new consumer checking accounts. Heretofore, we have been reticent to aggressively drop rates. But given the elevated loan payoffs and a markedly lower loan-to-deposit ratio, we are well positioned to test lower deposit rates in the next several quarters. Noninterest expenses were up $1.2 million to $75.5 million in the quarter as salaries and incentives increased alongside $500,000 of prepayment fees for the repurchase of long-term debt. Our efficiency ratio climbed to 55.4%, and we intend to slow down our expense growth rate. The provision for loan losses increased $3.7 million to $10.7 million on a linked-quarter basis as we had $9.6 million in specific reserves for 3 larger credits, one of which was from Eastern Pennsylvania. Our nonperforming loans or NPLs to loans remained stubbornly high at 0.98% in the first quarter, specifically 3 previously discussed relationships totaling $20.5 million moved to nonperforming status during the quarter with $9.6 million of associated specific reserves. These downgrades offset otherwise positive asset resolution during the quarter. And please recall that of our $92.3 million in NPLs, $28.1 million or 30.4% is guaranteed by the SBA. The balance sheet and liquidity continued to strengthen in the first quarter as we paid off virtually all borrowings, lowered our loan-to-deposit ratio to 91% and grew tangible book value per share by 4.3% while at the same time repurchasing our stock. Other notable first quarter items include our Center Bank acquisition has exceeded financial expectations and helped lead Cincinnati to company-leading loan and deposit growth in the second quarter. Residential mortgage had a strong first quarter with both loan volumes and gain on sale income. The Small Business and Business Banking segment volumes were brisk as we have added new bankers and enhanced credit processes. Also, our retail bank had the highest Net Promoter and customer satisfaction scores since we began tracking. As we think about the ensuing quarters in future, it will be important that we focus on the basics, namely live our mission, grow the bank, get better. As we grow the bank, we must do so steadily and ensure our credit costs converge and surpass peers. Getting better will necessitate new approaches and technologies to both make it easier for customers to do business with First Commonwealth while simplifying internal processes. Given our adoption of fintech over the years and our current AI usage, we have important tools to continue to evolve our company. Simultaneously, we must become more efficient as we scale the bank. Our first strategic initiative, live our mission to improve the financial lives of our neighbors and businesses remains the cornerstone of our brand and is what sets us apart as a community bank. With that, I'll turn it over to Jim Reske, our CFO.

Thanks, Mike. Mike has already provided an overview of financial results, so I'll drill down a bit on spread income and the margin. Spread income was down from last quarter by $4.2 million, but approximately $2.6 million of this decline can be attributed to having fewer days in the quarter. The remainder stems from the lower level of earning assets and the impact of last quarter's Fed rate cuts on the variable rate loan portfolio. The Fed cuts resulted in a 9 basis point contraction in the yield on earning assets, somewhat offset by a 5 basis point decrease in the cost of funds. The decline in earning assets is largely the result of the disposition of $210 million in loans that were moved to held for sale at the end of the fourth quarter. This quarter's net interest margin or NIM of 3.92% is in line with our previous guidance. While it is down from last quarter's 3.98%, the NIM in the fourth quarter benefited from about 3 basis points from several unique items that we talked about last quarter, including the recognition of accrued interest from the payoff of several loans that had previously replaced on nonaccrual status. Looking ahead, the NIM should benefit from fewer-than-expected rate cuts to keep the variable rate loans from repricing downward while continuing to allow the fixed rate loans and securities to reprice upward. And the expiration of $150 million of macro swaps on May 1 this Friday is even more valuable in a higher rate environment as it will allow those loans to flow to higher rates than expected. Based on our new one cut base case, we are revising our previous NIM guidance upwards slightly, about 3 to 5 basis points higher each quarter than before, drifting upwards to the low 4% range by the fourth quarter of this year. First quarter noninterest expense or NIE, increased by $1.2 million from last quarter, but first quarter NIE included about $1.3 million in expense for finalizing incentive payments related to prior year volumes and performance similar to the first quarter last year, along with the $500,000 FHLB prepayment penalty that Mike mentioned. We expect NIE per quarter to hover in the $74 million to $76 million range this year. Fee income is a little changed from last quarter. First quarter fee income included approximately $435,000 from the payoff of several loans that had been included in the held-for-sale portfolio at year-end, where they paid off at par, the difference between par and the mark was recognized as fee income. Wealth, mortgage and SBA are all up significantly from the same quarter a year ago. Fee income should range from $24 million to $25 million per quarter this year. We repurchased approximately $22.7 million in stock last quarter at a weighted average price of $17.67. We have $25 million remaining in repurchase authorization, not the $18.4 million figure that was in the earnings release. We announced a $0.02 increase in the dividend yesterday, marking the 11th straight year of dividend increases. Combined with the dividend, we returned nearly 100% of internal capital generation to our shareholders last quarter, and yet tangible book value per share grew from $11.22 to $11.34. We intend to continue share repurchase activity in the second quarter. Our CET1 ratio improved from 12.1% to 12.5%. Our TCE ratio was unchanged at 9.7% And with that, we'll take any questions you may have.

[Operator Instructions] And our first question comes from the line of Daniel Tamayo with Raymond James.

Maybe starting just on the increase in the charge-offs. I appreciate the comments on the loans that were paid down or sold in the second quarter early on. Maybe just a clarification on that. First of all, were there any charge-offs associated with those credits that were sold or paid off? And then, Jim, I was just wondering if you had any thoughts on provision or net charge-offs for the rest of the year.

Brian Sohocki?

Yes. Daniel, I can jump in. The charge-offs from the portfolio, we recorded $2.8 million during the fourth quarter when we moved them to held for sale. And then there was approximately $400,000 that had paid off at par that were reversed and run through the income statement in the first quarter. As you look at the other charge-off activity, my comment would be that we remained above our long-term target, but we did improve sequentially. And the level continues to be driven by a limited number of isolated credits. We're not seeing any indicators of systematic stress across the portfolio. Overall, the performance has been remaining consistent outside of those isolated numbers. And I think your last part of the question was just related to the activity in the press release post quarter end. There was 2 names that were in nonperforming at the end of the first quarter. One, we ultimately exited via a loan sale and incurred just a charge-off outside of our reserved amount of just under $150,000. The second was an exit full payoff at par.

Okay. Very helpful. And I appreciate that detail on the second quarter. So I think what you're saying is you're -- and correct me if I'm wrong, you're expecting -- I guess you said they were a little bit above your long-term target in the first quarter. So that should drift down towards that range kind of as the year plays out. Is there like a ramp down, you think still from here? Or we're moving pretty quickly back into that range?

Yes. We'll continue to work through the resolution. Specifically, as you saw in the release, the one item which was moved to NPL during the first quarter is a second quarter charge-off. So more of a slow ramp down to the historical level as we resolve those credits that moved into NPL.

Okay. Great. That's helpful. And then, Jim, maybe or Mike or anyone on the loan growth. Just curious what paydown activity looked like in the first quarter, kind of how you're forecasting that to trend down for the rest of the year and how that offsets against origination activity?

Yes. Just in the -- we compared the first quarter to the first quarter of last year, and we had $10 million more of production, well over $900 million in the first quarter of 2026. Our payoff activity was heightened. It went from about $480 million to about $630 million. It was up $150 million. And so we felt that, and we felt that on top of the loan sale and last year, we grew modestly. We grew about $90 million, $95 million in the first quarter. It was about 4.5%, maybe 4.4%. To notwithstanding those payoffs, our activity was steady. It was good. It was -- HELOC key loan was a bright spot, I would say, small business, business banking and still trying to get the commercial real estate construction portfolio to overtake the payoffs and some of the originations there. So we just -- we feel the year sets up pretty well, notwithstanding $150 million more of payoffs from a year ago. And I would say that in the ensuing quarters since the first quarter of last year, the payoffs went up every single quarter. We feel with rates maybe cresting here, perhaps that -- and moving up that, that activity has slowed somewhat here in the last 30 days or so or maybe it's coming at a natural end because we don't have that many big names left to pay off. So that's the calculus, and we do feel good about the level of activity and that we can hit the guidance that we've given historically of mid-single loan growth.

And our next question comes from the line of Charlie Driscoll with KBW.

This is Charlie on for Kelly Motta. Just one clarifying question on the margin. I appreciate the comments on the 3 to 5 bps of expansion from here. But just drilling down on that exit margin, do you expect to kind of exit the year near 4% or a bit above that level? If you could kind of help us with how you're thinking about some of the pieces here or what could cause you to kind of exceed that exit rate, reach the high end or low end of that guide?

Yes. Thanks for the question and the opportunity to clarify. We think the fourth quarter should be over 4%. But I'm really glad you asked because there's variability and the big variability, especially if you look over the last few years has been deposit behavior. I think we're in a really good spot now. The loan-to-deposit ratio now 90.9%, so down to -- we really have some room here to bring down our deposits just because the balance sheet is so liquid. give us just more freedom to be a little more aggressive on deposit rates and bring that down. So that's kind of -- that's the big variable factor in our NIM forecast. But yes, all else being equal, we expect to end the year a little over 4%.

Yes. I would just add that in bringing down the cost, we will balance that with -- we hang promos and we have nice -- we've gathered a lot of deposits, core deposits as well as interest-bearing. And it's been a terrific way to gain new checking accounts. And the team has done a nice job. So it's more of a balance than you think, so that we'll pick our spots as we decrease rates, probably perhaps a little bit more on CDs. And by the way, we're going to test this and we're going to move the steering wheel, but we're just going to be cautious because household growth, the granularity of our depository is tied to -- when we get a customer, we're going to have to lend to them. It's just a good thing when we get a new consumer customer. And our depository is about 50-50 consumer, which makes it very granular. And we sail through events like Silicon Valley 3 years ago. And you can see our string of -- we grew deposits pretty steadily over the last 3 years or so.

Great. I appreciate the commentary there. I guess kind of on that deposit gathering activity, you saw a nice quarter here. But do you expect that to keep up with the mid-single-digit loan growth you guys are getting? Just kind of trying to get the right side of the balance sheet here, seeing up.

Yes. Long term, yes. Maybe shorter term, we're going to test some things and just -- we'll test some things. We have a good team.

Great. And then last one for me, just on expenses. Wondering if this is a good core run rate to build off of in 2026. Maybe you could provide some color on what sort of investments you're making and where you're exercising more discipline on the expense front.

No, I think the guidance we gave, we talked about NIE covering the $74 million to $76 million range. I wish I could actually give you a tighter range, but I know it's a $2 million range, but those just vary a little bit quarter-to-quarter. We're just committed to keeping expenses under control. Mark, I don't know if there's anything you want to add.

No, we've been good stewards of expenses over the years, and we like efficiency ratios that are less than 55%. And we just need to keep -- we've been pretty good at operating leverage through the years. And we just -- as we scale the bank, we have to stay true to that culture of -- and at the same time, we're getting stretched on expenses and talent. We have to find the right mix and really have lots of good discussions just like other management teams.

And our next question comes from the line of Karl Shepherd with RBC.

Can you guys hear me?

Yes.

Okay. Great. Jim, just one quick one on the NIM guidance. I think you said you moved from 2 cuts to 1 cut. Is that later in the year? Or is it earlier and might have a little bit of impact?

I think it's a little later in the year, like, late summer. I can verify that. It's an interesting dynamic I kind of -- again, I'm glad you asked because if there is one cut, it kind of -- if the rate environment is down a little bit, it gives us an opportunity to be -- to take deposit costs down even further. Generally, we say we're asset-sensitive balance sheet, but if the activity is on the deposit side, if it's a falling rate environment, it gives us a little more opportunity on the deposit side than it cost us in the downdraft in the variable rate loan portfolio. So when we look ahead on one cut versus -- this is the question you asked, I'm just kind of thinking about as you asked the question, one cut versus 0 cuts, the delta isn't all that big. The one cut in our base case forecast is, as I said, late summer, not September actually. So I hope that helps a little bit. We mentioned in my prepared remarks is that the base case last a budget for us was based on a purchased vendor that most banks use, and that was 4 cuts for the year, it's quite dramatically different now.

Okay. That's helpful. And then I wanted to pick up a little bit on the credit discussion. I know the provision will kind of be an output of what's sitting there at 6/30. But if I put all your comments together and the specific reserves for the credits that were resolved after quarter end, it seems like there's room for the provision maybe to drift back down a little bit. I think you're kind of signaling with no stress in the portfolio, a stable reserve. Is that a fair way for us to think about this?

I think so, yes.

And our next question comes from the line of Manuel Navas with Piper Sandler.

Can you speak a little bit more on the buyback pace? And is it impacted at all with any potential shifts in loan growth? I mean, I know you reiterated the guide, but if loan growth comes in at different parts of the range, would you buy back more? Is that part of the calculus?

Great question, Manuel. It's not really driven. It's not leveraged by the loan growth. We have plenty of capital to capitalize the loan growth. In other words, I don't think that if we grew [indiscernible] we'd be pushing the capital ratios into any kind of place where we'd be concerned. It's really more driven by just a dollar amount of capital generation. We're kind of operating under the Fed guidance that says you allow to buy back -- return to shareholders between the dividend and then the buyback up to the dollar amount of capital generation in any given quarter, but not beyond that. And that's kind of what we've been operating at. There are -- if you -- there are peers that do go beyond that, but that requires a full loan application with the Fed, we just haven't done that. So that's what we're doing. So last quarter, there's a chart in the supplement that we published on the Investor Relations portion of our website, the PowerPoint that shows we returned about 95%, close to 100%. I think we came within $1.7 million so no, it's not so much loan growth. It's a fair question because we always say the primary use of capital is organic loan growth and capitalizing as we go. So that's -- I guess you're coming from, but that's really driven by just the dollar amount of capital generation the cap.

Okay. Shifting over to loan growth for a moment. Any shift to the mix or just because the production is pretty solid, you're going to keep the same mix. And one specific, could you comment a little bit on the equipment finance growth? Are we approaching a cap? Or does that still have a year or so left to run? That was kind of the nice positive area of growth for the quarter.

Yes, the mix is probably 1% more commercial, probably 61-39 now commercial consumer mix. So that's changed. And obviously, to move it 1% or so even in 2 quarters, takes a lot more production on one side than the other. So we are becoming more commercial. We actually talked about that this morning. And because we love the consumer households and the deposits and the granularity of that, and we just want to have good balance there. And then -- so great question. And then on the equipment finance side, I think there's room to run there for another year or so. And knock on wood, it's really met our credit projections and that portfolio mature here, begin to mature here in the next year or so, and we'll see how those credit costs come through and how that matures. But I -- we feel good about that business. The other thing the team has been very nimble and creative is we had a goal to kind of -- once we got that up and running to really switch that to an in-market true leasing business, and they're already pivoting there in a meaningful way that will result in a good portion of that business being in-market leases to our commercial clients. And so it's just a talented team, and we are we're just delighted with how that has unfolded. So hopeful that that's helpful, Manuel.

And our next question comes from the line of Matthew Breese with Stephens.

A few questions. First one is towards the back of your presentation, it looks like you have $35 million in maturing office next quarter. You have $17 million in the third quarter and $13 million in the fourth quarter. Given we're not totally out of the woods on office yet. Just curious, have you looked at the maturities and any sort of credit worries as we come upon those dates?

Yes. We've looked at it going out about through the end of next year, actually. Brian, do you want to comment on that?

Yes, I'll just jump in. And I guess we continue to actively manage the portfolio. We have seen exposures continue to trend lower. And my comment on the maturities is part of that is also managed purposely through shortening maturities and extending into a certain period in order to facilitate an exit or a refinance or a sale of a property. One of our biggest successes in 2025 was just that where we had a large reduction in the second half of the year through an asset sale as a result of that. So we evaluate maturity by maturity throughout the whole portfolio and focus over the next 24 months and are actively pursuing exit that makes sense for the portfolio.

Is that helpful?

Yes. Okay. Jim, it looks like the cash position is up a little bit, maybe excess $100 million, $150 million, kind of the near-term deployment for that?

Well, a couple of things. The cash position is up in part because of that the execution of the sale of the loans that are held for sale. So we see that cash we pay down and Mike mentioned this, we pay down some FHLB borrowing, bought some securities and still have -- with the loan book shrinking a little bit in the first quarter, we had an excess cash position. So we can foresee the pattern of some of our depositors, some of our large deposits that are in the public funds category. A lot of those come out in the second quarter, so we make sure we have cash around for that. So we don't invest that money and find ourselves having to borrow money because we have those outflows. So knowing that those are coming, we're holding some cash for that and holding the cash for excess loan growth. But to the extent it doesn't materialize, we de would be buying more securities. We're buying now expand the securities portfolio a little bit. That's kind of actually one of the issues at the moment.

Okay. And then I did want to touch on some of the categories outside of equipment finance. So traditional C&I ex equipment has been down for 3 quarters. It looks like commercial real estate has been down for 2 quarters, and we talked about prepays and payoffs and things like that. But for the larger segments, C&I commercial real estate, when do you start to -- when do you think we'll start to see some net growth there? Is that a 2Q event?

Yes, it will be definitely this year. We've added some business bankers. We're seeing -- and that's really more on the small end, more granular end. The payoffs are happening on a little larger credits. And so that's kind of a tough swap because you got to do 4 loans for every one that's paying off. I like that long term, but the team -- we've added a lot of business bankers over the last few years. They seem very productive. We actually, in the C&I segment, on the smaller end, small business and business banking actually grew that in the first quarter, $30 million or $40 million and really haven't done that on that bottom $600 million, $700 million, $800 million in that space. So that's good news, and we feel good about that. And that's obviously granular and comes with more depository. But we still have had some payment headwinds, no doubt. We do think we can grow there. We will grow it.

Last one is just between Ohio and Pennsylvania, there's just a ton of activity between chip manufacturing, AI data centers, and power plant build-out stuff. I was hoping for your comments around all that. And then how much of it can you say has had or potentially could have an impact on the pipeline or loan growth to date?

It might already be having an impact. I mean we have really probably our deepest pipeline after Cincinnati had a great first quarter, our deepest pipeline is probably in our $4.5 billion community PA market, particularly on the small business up through the business banking segment. And I think that I was with a contractor for dinner on Monday night and who's doing a lot of power generation, gas-powered, one in Homer City, it's having a real impact. And it's good to see. But I also think that, I mean, Ohio has really grown in the last few years and helped really led out in growth. So I expect that to continue. That's everything together. And Community PA always generated a lot of deposits. And now it looks like they're setting up for a good year on HELOC key loan and small business and business banking. So that's -- it's -- we like the business. It's fun, and we feel like we make a difference but it looks good.

And our next question comes from the line of Daniel Cardenas with Brean Capital.

Just a couple of questions. Have you noticed any change in customer sentiment just given the current economic environment right now?

It might be too early to tell. I did notice that our interchange income on debit card was off a couple of hundred thousand dollars.

With the holidays in the fourth quarter, too.

Yes. But -- and activity and swipes even, but I -- that's probably the first quarter, too. But yes, we've been and I think we've shared this with you, Dan and others. We've been watching our consumer books like a hawk. Our HELOC key loan, our mortgage and our indirect auto, and we're just -- we're seeing some pretty solid performance. So it kind of belies gas that I just filled up was in Pennsylvania is high at $4.47 a gallon. So we're just -- we're watching that closely.

Yes. I just -- I'd confirm that, Mike. And I mean that was one of the positives in the first quarter as consumer delinquency trends improved and was somewhat of an offset, helped our overall total delinquency level for the period. But we're monitoring everything that's touching energy and potential inflation impacts as we go through the quarter.

And Dan, I would add, we have probably -- it's not like we have 15,000 or 20,000 customers. We have -- plus indirect auto, we have 300,000 customers of the bank. So we have a lot of clients. So it's a pretty good sample set -- sample size.

All right. And then just jumping quickly back to credit. Within your level of nonperformers, is there any geographic concentration in any one particular market where perhaps some of these credits are housed in versus others?

No, nothing from a geographic standpoint as you look through it, it's been isolated credit events that have driven the overall dollar amount of NPLs. The one point I'd add is Mike made a comment in his opening statement. It's just important to distinguish between the guaranteed and unguaranteed exposure within the SBA portfolio. Those are all very granular. But from a concentration standpoint, as you asked, there are $28 million of guaranteed NPLs in that portfolio.

All right. And then just one quick modeling question on the tax rate. Is a 20% tax rate kind of a good run rate for you guys?

Yes, very close. I think we are at 20.6%. Yes, 20.26% for the first quarter.

And we have no additional questions at this time. So I will now turn the conference back over to Mr. Mike Price for closing remarks.

Thank you for your interest in our company. I did want to mention, lastly and importantly, after 37 years at our company, Norm Montgomery, our Chief Information Officer, is retiring, and we will miss him. And we have hired Ryan Gorney to replace Norm and have a talented team at our company and excited for Norm and his retirement, and welcome to Ryan Gorney.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.