First Commonwealth Financial Corp /Pa/ Q4 FY2025 Earnings Call

Thank you for waiting. My name is Jordan, and I will be your conference operator today. I want to welcome everyone to the First Commonwealth Financial Corporation Fourth Quarter 2025 Earnings Release Conference Call. Thank you. I will now hand the call over to Ryan Thomas, Vice President of Finance and Investor Relations. Please proceed.

Thank you, Jordan, and good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation's fourth quarter financial results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue 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, and welcome, everyone. Headline performance numbers for the fourth quarter include core EPS of $0.43 per share, which beat consensus earnings estimates alongside a net interest margin that expanded to 3.98%, a core ROA of 1.45% and a core efficiency ratio of 52.8%. During the fourth quarter, average deposits and total loans grew modestly at 2.8% and 1.2%, respectively, due to seasonal headwinds and several larger commercial loan payoffs. Net interest income grew as the margin expanded on the heels of healthy new commercial loan volume at good rates. Deposit costs fell 1 basis point to 1.83%. Fee income was flat, as gains in SBA were offset by seasonal declines in wealth and mortgage. Our fee income at 18% of total revenue compares favorably to peers, and we have a concerted effort and long-term focus on growing fee income through our regional banking model. Wages and incentives remained pressured due to market conditions. The provision for credit losses decreased by $4.3 million compared to last quarter to $7 million. The elevated prior quarter provision was reflective of the continued resolution of a previously disclosed dealer floor plan credit. The credit required no further reserve in the fourth quarter. While NPLs increased 4 basis points to 94 basis points versus the prior quarter, we are appropriately reserved for these loans and did not experience a provision impact like the third quarter. Nonperforming loans include both the unguaranteed portion of SBA loans and the government-guaranteed portion of any SBA loan, which is owned by the bank. As of December 31, 2025, $98 million of nonperforming loans included $39.2 million of total SBA loans, of which $31.2 million was government guaranteed. As a result of our 94 basis points of NPLs, 32 basis points is guaranteed. In the fourth quarter, we repurchased $23.1 million of our stock or 1.4 million shares at $15.94 per share. We repurchased 2.1 million shares in total in 2025, which incidentally is roughly 2/3 of the 3 million shares we issued in the Center Bank acquisition. For the year, core EPS of $1.53 compares favorably to the consensus earnings estimates of $1.40 that was in place in December of 2024 as well as the highest revised midyear consensus estimate of $1.54. Net interest income of $427.5 million in 2025 was up an impressive $47.2 million year-over-year, while net interest income benefited in general from higher for longer interest rates, more specifically, net interest income was driven by better loan yields, good loan volumes, lower deposit costs and a better commercial business mix. All this mixed together drove the NIM markedly higher over last year. Loan growth was 8.2% annualized and 5% without the Center Bank acquisition as commercial banking, equipment finance and indirect led the way. Average deposit growth of 6.1% for the year largely kept pace with loan growth and was approximately 4.2% without Center Bank. Here, money market and CDs accounted for over $534 million in growth, while noninterest-bearing DDA added another $116 million to a now $10.3 billion depository. For the year, noninterest income fell only $3 million year-over-year, despite another $6.3 million in Durbin amendment debit card headwinds that resulted from crossing $10 billion in assets. In short, our fee businesses are filling the gap. In sum, 2025 was a year in which strong growth in spread and fee income more than offset the impact of higher expenses and lost Durbin interchange income, resulting in year-over-year improvements in PPNR, core EPS, core ROA and efficiency. During the year, and oh, by the way, the team completed the acquisition of Center Bank and grew deposits 3% annually for the year. Before I turn the call over to Jim, I wanted to take a moment to recognize Jane Grebenc, who will be retiring at the end of March. Jane has been a friend and a mentor to me and many other leaders throughout her distinguished career, and she has left an indelible mark on First Commonwealth. Jane's dedication, leadership and wisdom have played a pivotal role in the strategic transformations that have helped position First Commonwealth as a top quartile performer. Thank you, Jane. And with that, I will turn it over to Jim Reske, our CFO.

Thanks, Mike. Core operating results for the fourth quarter of 2025 continued the momentum of the third quarter. Core ROA improved 11 basis points to 1.45% and core ROTCE improved 93 basis points to 15.83%. Spread income increased $2.1 million from the previous quarter, primarily due to a 6 basis point increase in the net interest margin. The yield on earning assets increased 3 basis points, while the cost of funds decreased 3 basis points. Looking ahead, our NIM guidance has little changed from last quarter, a near-term dip as our margin to our variable rate loans fully reflects fourth quarter rate cuts, followed by gradual improvement each quarter, ending the year 2026 at around 4%. At year-end, we designated a portfolio of approximately $225 million in commercial loans as held for sale. These loans represent a pool of commercial loans that were originated primarily in our Philadelphia MSA, which the bank had previously decided to exit in order to focus the bank's resources on customers in other areas. Subsequent to that decision and communication to borrowers, a bank approached us with an offer to purchase the portfolio. Since discussions regarding that sale are ongoing, we moved the portfolio to held for sale as of year-end. The ongoing effect in 2026 should the sale be consummated, would be to reinvest the cash proceeds from the sale of $225 million in loans into lower-yielding securities at a rate differential of approximately 1.5%. The sale is consummated will also have the ancillary benefits of improving our liquidity and our capital ratios. As Mike mentioned, total average deposits increased $72 million or 2.8% annualized over last quarter. Seasonal outflows in public funds were more than offset by growth in consumer checking and time deposits, along with growth in small business and corporate money market deposits. Core noninterest income of $24.3 million decreased $200,000 from the previous quarter. SBA gain on sale income increased by $800,000, but this was more than offset by a $700,000 decrease in wealth advisory fees and a $200,000 decrease in swap fees. In 2026, we expect noninterest income to be relatively flat over 2025. Though longer term, as Mike mentioned, we would expect our regional model to improve fee income results. Core noninterest expense of $74.3 million increased $1.7 million from the previous quarter, mostly due to increases in salaries and benefits as we filled a number of open positions in the fourth quarter. The bank, however, was able to achieve positive operating leverage over last quarter. The core efficiency ratio remained below 53%, and we expect to be able to limit operating cost increases to approximately 3% year-over-year looking ahead. Mike mentioned our buyback activity in the fourth quarter. I would add that remaining repurchase capacity under the current program was $22.7 million as of December 31, 2025. On top of that, an additional $25 million of share repurchase authority was authorized by our Board yesterday. Of course, we only repurchased shares using excess capital generation in any given quarter, which effectively caps repurchase activity at approximately $25 million to $30 million per quarter. And with that, we'll take any questions you may have.

Your first question comes from the line of Daniel Tamayo from Raymond James.

Congratulations to Jane on your retirement. I apologize if I missed any information, but I am curious about the impact of the SBA guarantees on the non-performing loans. Can you share your thoughts on where the net charge-offs and provisions might be heading in 2026? Additionally, do you have any updates on the floor plan loan that has caused some issues, and what its status is at the end of the quarter?

Yes. The charge-off guidance we normally give is 25 to 30 basis points. And the floor plan credit, we have maybe $1.5 million left to resolve. Is that right, Brian?

Yes, I'll jump in there. Thanks, Mike. First, I'll just start in the fourth quarter for the dealer floor plan loan. We ended the year with a $2.5 million outstanding balance. So we're nearing resolution with just a number of cards left in the liquidation process. There was no additional reserve as noted previously, and we have just a small release, about $80,000 in the quarter. Since you mentioned the net charge-offs, there was a $2.1 million charge in the fourth quarter related to the dealer floor plan loan and also within that 47 basis points that was reported on an annualized basis. And I concur with Mike's guidance on the forecast moving forward.

Okay. Great. And as it relates to the provision or reserves, with the reserves coming out over the last couple of quarters, does this feel like a pretty good run rate for stability, just over 130, or do you think that still can trickle down?

Yes. I wouldn't say there's any change in our philosophy. Credit costs remain manageable. Reserve levels remain strong, consistent with peers, slightly ahead in some cases at the 132. Where we've seen emerging stress, we've already responded, whether that's through the specific reserves in prior quarters. We've kept our qualitative overlays in place. And overall, comfortable that the reserve is just appropriate, reflecting where the risk is in the portfolio.

Okay. And maybe just changing gears here, but just as it relates to the loan sale that you're expecting here probably near term, is that something you could see happening more in 2026 in terms of additional loans being moved off the balance sheet? Or is this kind of a one-off situation that you don't see recurring?

It's more of a one-off. We really withdrew from that market, our branches and kind of our C&I commercial banking depository ground game. And about 2 years ago, we sent customers letters, and this is kind of really one of the last acts of the play. Mike McCuen is our Chief Banking Officer. He's on the line. Do you want to add anything for Daniel, Michael?

No, I think you covered it, Mike. Taking those resources that Jim alluded to, investing in the other markets that we have retail locations makes all the sense in the world for our business model.

Okay. Terrific. Appreciate it.

Your next question comes from the line of Karl Shepard from RBC Capital Markets.

Congrats, Jane. I guess I wanted to start on your loan growth expectations. It looks like you had pretty good production in some of the segments maybe you're targeting, and then you had the payoff headwind. So I guess just kind of what's the buildup for loan growth in '26, and just kind of just talk about maybe health of the pipelines and what you're seeing in your markets?

Yes. Last year, we grew 8%, 5% without Center Bank, and I expect that kind of loan growth to continue, although we experienced elevated payoffs, likely exceeding $200 million from the second half of the year to the first half. This created some noticeable challenges. Our business banking and mortgage sectors could perform well, although we will sell those. Overall, we feel positive about our commercial pipelines, including commercial real estate. We have allowed our construction portfolio to decrease, but we anticipate that will build and contribute about $20 million in drawdowns each month. We believe we're well positioned. Typically, the first and fourth quarters are slower for us compared to the second and third quarters, where most of our loan growth occurs each year. However, the payoffs are indeed a bit higher. Like last year, we might have initially guided for 5% to 7% growth and achieved 5%, even without Center Bank. I believe we're well positioned, and our teams are gaining experience, improving each year.

Okay. And then I guess maybe one for Jim. Just on the buyback, quite a bit of authorization out there now and the stock is a little bit higher than maybe where it was in 4Q when you're active. Just how do you want us to think about that?

Yes, our focus is currently on capital deployment, and there is a sensitivity to prices. We always maintain some reserve to capitalize on any price drops. If you look at 2025, we refrained from buybacks for much of the year, but increased our buyback activity later on. Right now, our capital ratios are strong, and we are generating enough capital to support our desired loan growth without any issues. Our guidance for future growth is in the mid-single digits, and we're producing more capital than necessary for that growth. We are cautious not to accelerate loan growth beyond our capacity to manage it organically, aligning it with our regional and credit capacity as well as market conditions. This is why our loan growth is at a sustainable level, and given our significant capital generation, we need to use that capital effectively rather than allowing our capital ratios to rise indefinitely. Thus, we have engaged in buybacks and plan to continue doing so this year.

Your next question comes from the line of Kelly Motta from KBW.

Congrats, Jane, on your retirement. Just to start off, I'd love to kick it off on margin. It came in quite a bit above where I had been expecting. You guys noted you had some payoffs. I'm just wondering if there was any loan fees in there or if that's a good run rate to go off of. And as we look ahead, I appreciate the commentary about the reinvestment from the HFS portfolio when that closes, but how we should be thinking about these dynamics here?

Yes, it's Jim. Great question, thank you. We were really pleased with our margin performance this quarter. Last quarter, we anticipated a dip and initially wondered if the margin was decreasing as expected. It was, but there were offsets. We had some payoffs and paydowns in loans that were previously on nonaccrual status, which allowed us to recognize interest on those loans again. This, along with other factors, helped maintain strong margin performance in the fourth quarter. Looking ahead, we believe the Fed will cut rates a couple of times in December, which we expect will impact the variable and SOFR-based loan portfolios in the first quarter, likely causing a small dip. However, other factors, like the continued upward repricing of fixed-rate loans and macro swaps coming off the books, will help keep the margin robust. That’s why we forecast that by 2026, we expect to see it drift upward to around the 4% level. I hope this adds more clarity.

No, that's super helpful. Maybe turning to the expenses. In Q4, they increased by about $1.5 million. I'm curious if that was mainly due to year-end adjustments. Looking forward, it appears you're anticipating strong margins and solid loan growth. As we consider the future, what are your expectations for expenses? Are there areas where you're planning to hire, and how should we interpret that run rate?

Just the efficiency was certainly on the back of the revenue side. We're normally very, very good at the expense side and maintaining operating leverage, and we have a nice little chart in our investor deck that shows that we're pretty good at putting our shoulder to the wheel. And we'll need to do that this year, watch our FTE count closely. That being said, we've invested pretty heavily in our commercial bank, our equipment finance group. And we expect more production there, and we expect for those investments to pay off for us. But we can do a little better job on the expense side as well. And we've invested pretty heavily, quite frankly, the last 2 years, I think, yes, $25 million or so...

And Kelly, you mentioned the word true ups. There were a couple of things that were one-offs that hit us in the fourth quarter that are not part of our thinking going forward. So we have some contract terminations and some other things in addition to what we said in our prepared remarks about filling open positions that what Mike talked about, about the staffing increases. So a couple of those one-offs are not in our future forecast for operating expense going forward.

Your next question comes from the line of Matthew Breese from Stephens Inc.

I had a couple of questions. Maybe first starting with the NIM. It sounds like the guidance is calling for around a 4% NIM by the end of the year. And I'm usually just a bit skeptical of the sustainability of 4% NIMs. And one thing we've been hearing a lot about this quarter is spread compression, both on the C&I and CRE front. And so I guess I had a 2-part question, which is, one, how does the pipeline yield look? And what are you getting for spreads on new C&I and commercial real estate business? And then maybe just touch on expectations around deposit costs for 2026?

Yes. I'll pass it over to Mike McCuen shortly for the loan expectations. When I examine our commercial variable and the new offerings we're introducing, it's at 7.3% in the last quarter, while commercial fixed is in the high 6s, and even our indirect lending is in the high 6s. This figure aligns with the 2.5-year mark on the yield curve, which we find favorable. I believe the replacement rates still appear solid. Despite the rates being lower this past quarter, our commercial variable's replacement rate was low, yet it remained positive.

Yes. I'll quickly add my thoughts before passing it to Mike McCuen for his insights on the market, spread, and spread compression. In the fourth quarter, we did not notice a significant difference in the rates for the variable rate portfolio, which included both new ones coming in and those rolling off. Overall, there wasn't much evidence of spread compression in that portfolio. As Mike mentioned, all the fixed-rate loans are still repricing upwards nicely. Since those are repricing towards the middle of the curve, a slight drop in the short end of the yield curve won't have a major impact on that dynamic. We have discussed this before, Matt.

Yes. Just to answer specifically on the segments. I would start with our business lending to the family-owned owner-operated business. We put a real focus on that about a year ago. And we're seeing healthy growth in that segment. I would say that's a prime, the prime plus based business. I don't see that changing from a spread perspective. Secondly, the equipment finance group, if they're doing mostly fixed-rate loans. Their yields are holding up pretty well. And then thirdly, I would say the commercial real estate business, that's a little trickier because as probably you've heard from others, the agency markets, the insurance markets are very aggressive these days. We have a pretty healthy pipeline, and we have a number of construction loans that are converting to permanent markets. The balancing act is those spreads are compressed, and we're trying to maintain our discipline around the real estate business, not just from a rate perspective, but also from a structure, term, recourse, all those things that go into those decisions. As our construction loans roll off, we have every chance to match those rates. We, in many cases, choose not to and let those move on, and then grow the construction loan portfolio, which, by the way, is up around $120 million over the last year, and that will lead to future funding. So that's a quick snapshot of why we're a little more comfortable based on the segments that we play in versus large corporate investment grade, things like that.

Got it. Okay. So it still sounds like you're putting on loans accretive to where the average yield is, and I'm assuming there's still some room to reprice deposits down. I guess, Jim, as we look to 4Q '26 and beyond, do you feel like there's momentum to carry the NIM above 4% as we get into 2027, all else equal?

Yes, I'll say that predicting too far into the future can be uncertain. We typically don't provide guidance that far ahead. However, if we look at the projections, it's anticipated that the net interest margin would stay in the low 4s by 2027. This is subject to various factors, and many things could change between now and then. By that time, our macro swaps will be fully off, which will be beneficial for us. We believe there’s potential to lower deposit rates a bit more, and we've been carefully monitoring market rates around us. In 2025, we were concerned about the challenge of funding loan growth alongside deposit growth and reducing rates simultaneously, but we managed to do it quite successfully that year. We think we can maintain that approach in 2026 as well, which will also support the margin.

Got it. Okay. And then last one before I'll hop back in the queue. I feel like you laid a few breadcrumbs on the stock buyback front. At least in the very near term, the next 1 or 2 quarters, should we be penciling in $25 million, $30 million in buybacks per quarter?

It's difficult for me to predict definitively in the next two quarters because it's not solely reliant on the stock price, although it is influenced by it. If the price increases significantly, we will reduce the buyback pace, and it wouldn't all occur in the first half. If the price remains stable or decreases, a substantial portion will take place in the first half. However, it might not all happen in that timeframe. We plan to utilize our authority and be quite proactive with it overall, but there remains sensitivity to the price.

Your next question comes from the line of Manuel Navas from Piper Sandler.

On the NIM, what kind of decline are we expecting in this first quarter? Did you talk about how much the NPLs contributed to the NIM this quarter, like in dollar amount or basis points? I’m trying to estimate what to expect from the NIM in the next quarter.

Yes. The non-performing loans had an impact of about 3 basis points on the net interest margin. It was slightly larger. I want to highlight the effect of that particular portfolio, as we spent considerable time analyzing the variable rate portfolio in the fourth quarter to understand why its yield didn't decrease as much as we expected. The yield did drop due to the impact of SOFR, but this was counterbalanced by the nonaccruals and a few other factors. Overall, the effect on the total net interest margin from the nonaccruals returning was about 3 basis points for the fourth quarter. What was the other part of your question?

And then from there, how big of a dip that we are looking at in the first quarter?

The dip we anticipate is between 5 and 10. I'm being cautious with this estimate because we typically account for a 5 to 10 range in our forecasts. Looking ahead, I believe our model suggests that it will gradually increase by about 5 basis points each quarter. Although it's slightly less than 5 basis points each quarter, it still rises enough to finish the year around 4%.

And as those loans are sold, your loan-to-deposit ratio ex those loans is like in the low 90s, you could be a little more aggressive on deposits, right?

Thank you for mentioning that. It's a significant aspect of our strategy. We are pleased with the loan-to-deposit ratio. The securities we purchase will reflect current rates, so they won’t lose value. This means they can easily be sold as liquidity to support our loan growth. We also have substantial borrowing capacity, making liquidity a non-issue. This situation provides us with additional liquidity to support future loan growth and allows us to avoid being overly aggressive with deposit rates to achieve that growth.

We're probably two-thirds of our peers in terms of the deposit beta over the last year regarding the cost of deposits. If they're down 33%, we're down about 22%. We’ve done that intentionally, and we've likely kept them a bit higher than we could have because we wanted to focus on growth and reduce borrowings. We've managed to achieve both. In the long run, if rates decline, there may be more potential for a decrease. However, we’ll continue our efforts to grow deposits. Additionally, it’s also about acquiring new noninterest-bearing accounts and new checking accounts. We have a sales team under Jane's and Mike's leadership that has been successful in this area, and we will keep pushing forward.

Are there other impacts from the sale of these loans on operating expenses and your focus away from the filling area? Are there additional effects on the loan loss reserve that we should start planning for now?

I'll provide a financial answer. The effects on the loan loss reserve were fully realized in the fourth quarter and are already included in the financials. Regarding operational expenses, there isn't much change. We've already exited a few physical locations some time ago, so there will be no additional facility expenses. However, this does allow management to refocus on other areas. Mike, I'm in the queue, and I'm not sure if you want to elaborate further on how we manage the business.

No, Philadelphia is a great market. It's also very competitive, and the investment needed to compete effectively there would be substantial. We believe that money could be better utilized in other markets where we already have a strong presence and want to grow. So, this was a trade-off we made. I think we'll see more profitable growth in those other markets than we would have in Philadelphia. Nothing against Philadelphia; it's a great market, but there are many competitors there.

And Manuel, just from a financial effect, these were already in relationships, so we were deciding to exit it. So it was kind of a slow bleed on the loan growth. It was a net against other loan growth. So that will be removed now that we've moved them into held for sale.

I will now turn the call back over to Mike Price, President and CEO, for closing remarks.

Thank you for your continued interest in our company. I appreciate the great questions and look forward to engaging with many of you over the next quarter. We are enthusiastic about the future of our business and our growth plans, which include maintaining operating leverage and expanding our fee-based services. Achieving solid low-cost deposit growth in our markets is a key objective. We believe that with our diverse lending portfolio, we are more focused on securing low-cost core deposits than solely on long-term loan growth. Thank you for your time today and stay warm.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may disconnect.