First Commonwealth Financial Corporation (FCF) Earnings

Management highlights

- Overall Financial & Balance Sheet Performance: All key income statement categories improved quarter-over-quarter, with NIM expansion driven by lower deposit and funding costs, higher loan yields, and securities purchases. Credit quality improved modestly, with lower non-performing loan balances, stable delinquency, and stable allowance levels even as charge-offs remain elevated while the firm works through legacy problem credits. Capital positions strengthened: CET1 ratio increased from 12.5% to 12.6% quarter-over-quarter, tangible common equity ratio rose from 9.7% to 9.9%, and tangible book value per share grew to $11.58 from $11.34. The board approved an additional $75 million in share repurchase authorization, leaving $13 million in existing authorization plus the new expansion at quarter end. Two of the firm's five operating regions (Community PA and Cincinnati) led both deposit and loan growth year-to-date. - Lending Activity: The quarter saw a record $740 million in commercial loan payoffs, following a record $630 million in payoffs in Q1, while commercial loan originations rose to approximately $693 million. Line utilization on revolving commercial and CNI lines has drifted up over the past three quarters, and loan production momentum is broad-based across most lending categories. - Technology & Operational Efficiency: The firm is deploying AI across operations to improve employee efficiency and customer service; an example cited is an AI call center feature that pulls up relevant policy and procedure guidance for representatives navigating multiple systems during customer calls. The firm maintains strong FinTech partnerships and a long-standing focus on IT and technology improvement. - Deposit Strategy: Excess cash allowed the firm to price time deposit promotions less aggressively than competitors in Q2, which improved NIM but resulted in period-end deposit outflows, two-thirds of which came from time deposits. Deposit competition has recently heated up substantially, particularly for time deposits, forcing the firm to raise CD rates to retain and grow its deposit book.

Guidance

- Full-year 2026 quarterly fee income guidance is maintained at $24 million to $25 million per quarter for the remainder of the year. - Full-year 2026 quarterly non-interest expense guidance is maintained at $74 million to $76 million per quarter for the remainder of the year. - Management expects net loan growth to pick up in the second half of 2026 as payoffs normalize, returning to the firm's prior mid-single-digit annual loan growth target, with all five regions expected to grow in H2 2026. - NIM is expected to remain in the low 4% range for the remainder of 2026: upward pressure from the rate environment and asset repricing will be offset by increasing deposit competition, resulting in stable low 4% NIM. Internal forecasts projected NIM of 4.08% in Q4 2026 if rates hold steady, and 4.13% if there is one additional 25 basis point rate hike, though management adjusted guidance lower to account for recently intensifying deposit competition. A 25 basis point rate hike would deliver approximately a 5 basis point NIM lift, as the firm remains asset sensitive. - Management confirmed that organic loan growth is the first priority for capital allocation, with excess capital used for share repurchases to maintain return on equity at acceptable levels when the tangible common equity ratio approaches 10%.

Segment performance

This transcript does not break out financial performance into distinct product segments with separate absolute revenue figures or revenue contribution percentages. Aggregate company-wide performance for the quarter is as follows: core earnings per share of 44 cents (up 7 cents from Q1 2026), core ROA of 1.46%, core pre-tax pre-provision ROA of 2.14%, core efficiency ratio of 52.24%, and net interest margin (NIM) of 4.01% (up 9 basis points quarter-over-quarter). Net interest income increased quarter-over-quarter. Fee income rose $2.3 million quarter-over-quarter to a range consistent with full-year guidance, driven by a $806,000 gain from sub debt redemption, a $450,000 insurance death claim, and a $500,000 increase in interchange and deposit service charges. Non-interest expense fell $1.3 million quarter-over-quarter, driven by one-time discrete costs that hit Q1 (half a million in snow removal costs, half a million in FHLB prepayment penalty) that did not recur in Q2. Overall loan growth was 1.97% annualized, with growth led by equipment finance, commercial construction, branch-based home equity lending, and indirect lending, offset by contraction in Commercial Real Estate (CRE) and CNI lending. Average deposit growth matched loan growth at 2.03%, while period-end deposits declined at an annualized 5.77% rate.

Risks & headwinds

- Credit risk: Classified assets and non-performing loans remain elevated above the firm's long-term targets, and management expects continued volatility in charge-offs and problem loan balances as the firm works through existing problem credits. - Deposit competition risk: Competition for time deposits has intensified sharply across all competitor types (online banks, credit unions, community and regional banks) in recent weeks, which will increase the firm's funding costs and put downward pressure on NIM. - Commercial Real Estate and CNI lending risk: The firm has seen contraction in both CRE and CNI lending portfolios amid elevated payoffs, and continued slow growth in these segments could pressure overall loan growth targets.

Analyst Q&A

• Q: What is driving the modest increase in classified loans this quarter, and when will charge-offs return to normalized levels? /

  A: The small increase in classified loans stemmed from the migration of two existing criticized credits totaling $10 million from special mention to substandard classification, rather than an influx of new problem credits. Overall criticized assets as a percentage of total loans remained stable at 3%, and leading credit indicators (watch balances, delinquency) improved in the quarter. Charge-offs are expected to remain elevated as the firm works through existing reserved problem credits, before reverting to the historical normalized range of 30 to 32 basis points over time.

• Q: Why did the board approve a larger than usual new share repurchase authorization, and what is the capital allocation framework? /

  A: The firm's capital ratios have drifted steadily upward, and management has more than enough capital to fund targeted organic loan growth, which remains the first priority for capital. Excess capital above a TCE ratio of ~10% makes it difficult to generate acceptable returns on equity, so the firm will use excess capital for additional share repurchases. Management plans to be more aggressive with repurchases in Q3, given attractive current pricing, and the larger authorization accommodates this plan.

• Q: Where is deposit competition heating up, and what is the firm's comfortable target range for the loan-to-deposit ratio? /

  A: Competition is almost entirely concentrated in time deposits, with almost all competitor types (not just online banks) now offering promotional CD rates with 4% handles. After having excess cash in Q2, the firm pulled back on aggressive CD pricing, resulting in outflows, and has since raised CD rates to retain and grow its deposit base. The firm is comfortable with a loan-to-deposit ratio in the low 90s, a level it worked hard to reach after the Silicon Valley Bank stress event, and does not want to let the ratio rise meaningfully above this range.

• Q: When will loan growth return to the mid-single-digit target, and what is driving improving commercial loan production? /

  A: Management expects to reach mid-single-digit annualized growth as soon as the third quarter, as the recent record pace of large commercial loan payoffs (driven by one-off real estate sales and permanent loan takeouts) is unsustainable and will subside. Improving commercial loan production is driven by investments in talent, particularly in the business banking segment for loans under $5 million, stronger regional leadership, and improved cross-selling of fee-based services (wealth management, insurance) to new borrower clients.