First Commonwealth's Q3 2025: Contradictions Emerge on Floor Plan, Loan Yields, and Deposit Costs

Guidance:

• Q4 NIM may feel near-term downward pressure from recent Fed cuts but expected to recover in 2026 to roughly 3.9% ±5 bps.
• Expect mid-single-digit loan and deposit growth going forward.
• Core noninterest expense expected to grow ~3% next year.
• No incremental provision anticipated from the dealer floor plan in 4Q.
• Plan to maintain securities portfolio near current (~13% of assets) to fund loan growth.
• $20.7M share repurchase authorization remaining to be executed in 2025.

Business Commentary:

• Financial Performance and Growth:
• First Commonwealth Financial Corporation reported a return on assets improvement to 1.34% and a core pretax, pre-provision ROA growth of 10 basis points to 2.05% in Q3.
• The net interest margin expanded by 9 basis points to 3.92%, marking another quarter of improvement.

• This growth was driven by balanced loan and deposit growth, effective pricing discipline, and geographic diversification.

• Deposit and Loan Dynamics:

• Average deposits increased by 4% in Q3, reflecting balanced growth across all geographies, with a cost of deposits declining by 7 basis points to 1.84%.
• Loans were up $137 million, or 5.7%, despite payoff headwinds in commercial real estate, supported by contributions from equipment finance, commercial banking, and indirect lending.

• The deposit growth was attributed to the bank's regional focus, low-cost deposit gathering, and strategic pricing decisions.

• Credit Quality and Provisions:

• The core provision expense increased by $2.4 million quarter-over-quarter to $11.3 million, primarily due to a $5.5 million charge-off and $3.1 million in reserve additions related to a dealer floor plan fraud.
• Net charge-offs were 12.2 million, primarily driven by these two items.

• The company expects credit quality to improve as the dealer floor plan issue is resolved, and the loan portfolio maintains negligible exposure to riskier sectors.

• Digital and Operational Efficiency:

• The bank saw good growth in digital services and high digital satisfaction, supported by the addition of customer-facing features and improvements through RPA and AI.
• The efficiency ratio improved to 52.3% from 54.1% in the second quarter, reflecting good expense control.
• This improvement is attributed to the strategic use of technology and the implementation of process improvements.

Sentiment Analysis:

Overall Tone: Positive

• Management cited "broad-based momentum," NIM expansion to 3.92%, efficiency improving to 52.3% (from 54.1%), tangible book value up (11.6% annualized linked-quarter, 9.1% YOY), and said they are "excited about the outlook" while expecting loan growth and lower future credit costs.

Q&A:

• Question from Daniel Tamayo (Raymond James): The floor plan relationship at quarter end is $16 million and total floor plan exposure is $122 million, correct?
  Response: Yes — the specific fraud-related relationship fell from $31.9M to $16M this quarter; total floor plan exposure is $122M.

• Question from Daniel Tamayo (Raymond James): Do you expect the remaining stress in that relationship to be resolved in the fourth quarter?
  Response: Yes — management expects the unwinding to be largely resolved in Q4.

• Question from Daniel Tamayo (Raymond James): What are reserves on that loan now?
  Response: Reserves for that relationship are $4.4 million.

• Question from Daniel Tamayo (Raymond James): Regarding the five Center Bank loans, what happened there and what was the impact?
  Response: Five acquired PCD loans were sold; $2.8M charge-off occurred but only ~ $100k provision was required due to acquisition marks.

• Question from Daniel Tamayo (Raymond James): Back to the portfolio, are charge-offs back in historical range and where do you expect net charge-offs/provision to trend?
  Response: Expect to operate in the mid- to high-20 bps range for net charge-offs (previously guided 25–30 bps); provision will scale with loan growth.

• Question from Daniel Tamayo (Raymond James): NPLs are down to ~0.91% from 1.04% — do you expect stability or further declines?
  Response: Management expects NPLs to continue coming down as the dealer floor plan winds down in Q4 and portfolio cleanup normalizes.

• Question from Karl Shepard (RBC Capital Markets): Should we expect no incremental provision from the floor plan in 4Q?
  Response: Correct — management does not expect additional provision related to that relationship in 4Q.

• Question from Karl Shepard (RBC Capital Markets): Can you quantify fixed-rate repricing and accretion headwinds and how loan yields are trending?
  Response: Fixed-rate repricing contributed ~87 bps in Q3; replacement yields roughly +25 bps overall; fixed-rate production is ~1/3 of originations and should continue to support yields.

• Question from Karl Shepard (RBC Capital Markets): Why is 2026 NIM guidance ~3.9% rather than ~4% historically modeled?
  Response: Their updated third‑party rate forecast assumes more cuts (2 this year, 4 next), leading to ~15 bps loan yield decline offset by ~15 bps deposit cost decline, producing NIM stability (~3.9%); a steepening curve partially helps.

• Question from Charles Driscoll (KBW): Can you explain deposit repricing dynamics and drivers of near-term compression and subsequent neutrality?
  Response: They managed large CD maturities by repricing downward while keeping retention (~80% for time deposits, >90% for transactional); money market yields repriced (portion >3% fell from ~82% to ~49%), enabling lower cost of deposits even while balances grew.

• Question from Charles Driscoll (KBW): With payoffs picking up, what are expectations for organic loan growth and any impact from Center Bank talent/markets?
  Response: Some payoffs are healthy refinancings; loan growth is more likely constrained by liquidity than demand — guidance remains mid-single-digit growth; Center Bank acquisition is meeting retention expectations and aids regional build-out.

• Question from Matthew Breese (Stephens): How much NIM pressure might occur in 4Q from Fed cuts?
  Response: Expect modest near-term NIM pressure, roughly in the ~5 bps range (management uses ±5 bps sensitivity), not an extreme 5–10 bps move.

• Question from Matthew Breese (Stephens): Could NIM bleed into Q1 due to lag and seasonality?
  Response: Yes — further modest pressure into Q1 is possible due to lagged deposit repricing and seasonal deposit declines, with recovery expected thereafter.

• Question from Matthew Breese (Stephens): What underpins the expected improvement in deposit mix next year?
  Response: A deliberate push to grow transaction accounts (consumer and commercial) and reduce reliance on time deposits; ongoing sales/branch efforts to shift mix.

• Question from Matthew Breese (Stephens): Will the securities portfolio grow above the current ~13% of assets?
  Response: No — plan is to hold the securities ratio near current levels through 2026 and deploy liquidity toward loan growth rather than buying more securities.

• Question from Matthew Breese (Stephens): Is equipment finance growth (+10% q/q) sustainable?
  Response: Near-term sustainability is expected (about a year) supported by favorable incentives like depreciation changes and experienced underwriting; management feels good for next few quarters.

• Question from Daniel Cardenas (Janney): What competitive dynamics are you seeing on lending across your footprint?
  Response: Competition is market-dependent: metro markets (e.g., Columbus) are more aggressive and have driven ~25 bps yield compression year-to-date; rural markets remain less pressured.

• Question from Daniel Cardenas (Janney): Has M&A chatter increased and what's your appetite/preferences?
  Response: More conversations are occurring; the bank prefers smaller, deposit-rich acquisitions that bolster liquidity and scale prudently; bias toward deals that add depository strength.

Contradiction Point 1

Floor Plan and Center Bank Acquisition Issues

It involves the handling and expected resolution of credit issues stemming from the floor plan relationship and the Center Bank acquisition, which directly impacts credit quality and loss provisions.

Can you update us on the credits, specifically the floor plan financing and Center Bank acquisition? - Daniel Tamayo (Raymond James & Associates, Inc., Research Division)

2025Q3: The floor plan relationship was $31.9 million and has been reduced to $16 million. This relationship is expected to be largely resolved by year-end. - [Thomas Michael Price](CEO)

Are charge-offs expected to rise to a normalized range in the back half? - Daniel Tamayo (Raymond James & Associates, Inc., Research Division)

2025Q2: Absent those 2 events, our core credit metrics were neutral quarter-over-quarter. - [Brian J. Sohocki](CCO)

Contradiction Point 2

Loan Yield and NIM Expectations

It involves expectations for loan yields and net interest margin (NIM), which are critical for financial forecasting and investor expectations.

What are the key factors driving loan yields and NIM expectations for 2026? - Karl Robert Shepard (RBC Capital Markets, Research Division)

2025Q3: We expect NIM to recover to the level of the third quarter in 2026. The projection assumes several more rate cuts, resulting in a loss of 15 basis points in loan yields, but we expect to maintain NIM stability due to deposit cost reductions. - [James Reske](CFO)

Can you explain the 42 basis points increase in loan yields in July? - Karl Robert Shepard (RBC Capital Markets, Research Division)

2025Q2: It's predicated on continuing trends of the previous quarters... It's a little -- few basis points higher in the first quarter... We assume if we continue, that should persist for a while... The 42 basis points increase in loan yields was driven by commercial fixed loans, which increased by 111 basis points, and indirect installment loans, which increased by 73 basis points. - [James R. Reske](CFO)

Contradiction Point 3

Deposit Cost Assumptions and NIM Guidance

It involves changes in financial forecasts related to deposit cost assumptions and NIM guidance, which are critical for understanding the bank's financial strategy and performance expectations.

What are the drivers for loan yields and NIM expectations in 2026? - Karl Shepard (RBC Capital Markets)

2025Q3: We expect NIM to recover to the level of the third quarter in 2026. The projection assumes several more rate cuts, resulting in a loss of 15 basis points in loan yields, but we expect to maintain NIM stability due to deposit cost reductions. - [James Reske](CFO)

What assumptions underpin deposit cost movement in relation to NIM guidance? - Frank Schiraldi (Piper Sandler)

2025Q1: James Reske states their NIM guidance assumes stable deposit costs, as they are not planning to reduce rates to fund loan growth. The current deposit cost of 1.99% is expected to hold steady through the end of the year. - [James Reske](CFO)

Contradiction Point 4

Floor Plan Relationship Resolution

It involves expectations for the resolution of a significant credit issue, which impacts the bank's financial health and credit risk management.

Can you provide an update on credit issues, specifically the floor plan and Center Bank acquisition? - Daniel Tamayo (Raymond James)

2025Q3: The floor plan relationship was $31.9 million and has been reduced to $16 million. This relationship is expected to be largely resolved by year-end. - [Thomas Michael Price](CEO)

Can you explain the momentum in the Equipment Finance portfolio and its response to potential economic slowdowns? What is your outlook for commercial loans amid tariff uncertainty? - Daniel Tamayo (Raymond James)

2025Q1: Mike Price: The Equipment Finance portfolio shows healthy application volume, with some potential acceleration due to tariff anticipation, but the current volume remains robust. - [Mike Price](CEO)

Contradiction Point 5

Deposit Cost Management and Strategic Pricing

It involves the strategies and expectations related to managing deposit costs, which are critical for maintaining the bank's net interest margin and profitability.

Can you discuss deposit repricing dynamics moving forward? - Charles Driscoll (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: We have managed to reduce deposit costs while maintaining deposit balances, with good retention rates and strategic repricing of short-term deposits. - [James Reske](CFO)

What is the outlook for deposit costs in 2026, and will the decline continue? - Manuel Navas (D.A. Davidson)

2024Q4: Through strategic pricing and product renewal, we will continue to lower deposit costs because we do expect that our competitors will do the same as the Fed cut moves forward. - [James Reske](CFO)