Prepared remarks
Hello, everyone. Thank you for joining us, and welcome to the First Commonwealth Financial Corporation Q2 2026 Earnings Release Conference Call. I will now hand the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.
Thanks, Jonah, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's second quarter financial results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Mike McCuen, Chief Banking Officer; and Brian Sohocki, Chief Credit 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. 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. Second quarter financial performance of First Commonwealth and highlights include core earnings per share of $0.44, up $0.07 over the first quarter; a core ROAA of 1.46% and core pretax pre-provision ROAA of 2.14%; a core efficiency ratio of 52.24%; and a net interest margin of 4.01%, which expanded 9 basis points as a function of lower deposit and funding costs, higher loan yields and securities purchases. All key income statement categories moved positively quarter-over-quarter to include net interest income, provision expense, noninterest or fee income and noninterest expense. Second quarter loan growth of 1.97% annualized was matched by average deposit growth of 2.03%. Loan growth for the quarter was led by equipment finance, commercial construction, branch-based home equity loan lending and our indirect lending business, all of which offset contraction in commercial real estate and C&I lending. The quarter was notable due to a record quarter of commercial loan payoffs of roughly $740 million following a record first quarter of commercial loan payoffs of roughly $630 million. Commercial loan originations increased to approximately $693 million in the second quarter. Although charge-offs remain elevated as we continue to resolve identified problem credits, credit quality improved modestly in the second quarter with lower nonperforming loan balances alongside stable delinquency and allowance levels. Other items that may be of interest to investors include: for the year, Community PA and Cincinnati, two of our five regions, have led the way with both deposit and loan growth. Fee income grew year-over-year due in part to nice traction in mortgage and wealth management businesses. The team continues to find uses for AI. We felt like we're on our front foot with IT and technology for years, particularly with our fintech partnerships. But let me just give you one AI example. In our call center, our vendor turned on a feature where AI listens to the call and pops the policy and procedure to the employee to help navigate a solution for our clients. Oftentimes, they're navigating up to six different systems at one time. Just one small example of probably a dozen or more. With that, I will turn it over to Jim Reske, our CFO.
Thanks, Mike. Mike has already summarized the second quarter's financial performance, so I'll try to provide some additional detail around the margin, fee income and expenses as usual. The net interest margin improved by 9 basis points to 4.01%. While average deposits grew by 2.03%, period-end deposits were down at an annualized rate of 5.77% with about two-thirds of the decline coming from time deposits. With excess cash on hand and limited loan growth, we priced time deposit promotions less aggressively compared to competitors in the second quarter, resulting in outflows towards the end of the quarter. That tighter deposit pricing obviously helped the NIM. About 6 basis points of the 9 basis points of improvement came from lower funding costs with the cost of deposits falling by 5 basis points to 1.74%. The other 3 basis points came from the asset side of the balance sheet, driven by a combination of higher loan yields and the investment of excess cash into securities. The rate environment continues to allow us to reprice our loan book upward with fixed-rate loans repricing upward by 61 basis points. The yield on the loan portfolio improved by 4 basis points from 6.03% to 6.07%. The expiration of $150 million in macro swaps on May 1 contributed to the increase in loan yields. Looking ahead to the second half of 2026, we see net loan growth picking up as production continues and payoffs normalize, returning loan growth closer to our mid-single-digit guidance, while the NIM will benefit from the rate environment but suffer from stiffer deposit competition. We expect that will leave the NIM in the low 4% range. Fee income was up by $2.3 million from last quarter. Fee income benefited from an $806,000 gain from the redemption of a $6.6 million subordinated debt instrument inherited from a prior acquisition, along with a $450,000 BOLI death claim, which together accounted for about $1.3 million of the $2.3 million of improvement. We also had an increase of about $0.5 million in interchange and deposit service charges. Our previous guidance for fee income to range from $24 million to $25 million per quarter for the remainder of this year remains unchanged. Noninterest expense improved by $1.3 million from last quarter. Salary and hospitalization expense did go up in the second quarter, offset somewhat by a vendor rebate of approximately $450,000. But the quarter-over-quarter comparison benefits from a few discrete expense items that hit us in the first quarter, including about $0.5 million of snow removal costs in the first quarter and a $0.5 million FHLB prepayment penalty in the first quarter. Our previous expense guidance of about $74 million to $76 million per quarter remains unchanged for the remainder of 2026. We repurchased approximately $12 million in stock last quarter at a weighted average price of $18.66. We had approximately $13 million remaining in repurchase authorization at the end of the second quarter. And yesterday, our Board approved an additional $75 million in repurchase authorization. We intend to continue share repurchase activity in the third quarter. Tangible book value per share grew to $11.58, up from $11.34 last quarter and $10.63 a year ago. Compared to last quarter, our CET1 ratio has improved from 12.5% to 12.6% and our tangible common equity ratio increased from 9.7% to 9.9%. And with that, we'll take any questions you may have.
Questions and answers
Our first question is from the line of Daniel Tamayo at Raymond James.
Maybe we start on the credit side. Just curious if you could provide some details. I guess the bigger increase, and neither was a huge increase, but a little bit of an increase in classified loans. If you could kind of give us some color on what was driving that in the quarter?
Yes. Daniel, I can jump in. Maybe just taking a look at criticized overall to start. As a whole, the overall trend remained relatively stable. We ended the quarter at 3% of loans, essentially unchanged. Within that portfolio, however, we saw some migration between special mention and substandard. It was really about $10 million and two credits. That resulted in the modest increase in classified assets that you saw. Importantly, the migration occurred within previously identified criticized relationships rather than a broad influx of new problem credits. As a result, the classified balances increased, but we didn't see a corresponding increase in the overall level of criticized assets, which was a positive. And as Mike said in his comments, at the same time, several of the indicators that we view as leading measures of the portfolio direction improved during the quarter. Watch balances decreased by some $30 million. Delinquency was stable and the other portfolio asset metrics improved as well as we dug down into the portfolios. All that said, classified assets and nonperforming loans remain elevated above our long-term objectives, and we'll continue to work through those in future quarters and expect a little bit of variability in charge-offs and problem loans as we go through those categories.
Yes, that was my next question was just on the charge-off side. I mean, I'm just curious if you can put a little finer point on that in terms of what we may see in terms of charge-offs near term before they come back to somewhat normalized levels.
Yes. It's hard to put an exact number on it. You saw that we increased reserves in the first quarter. If you go back to last quarter, we had three commercial credits with reserves kind of totaling about $11 million. One of those worked through the process in the second quarter and was part of the charge-offs. We had an individual credit that had a $3.4 million charge-off and a prior period reserve of $3.25 million. So as we go through that, we'd expect a little bit of action from those reserves and individual credits before we revert back to kind of where we've seen our charge-offs. If you look at a three- and five-year history, we've been right at about 30 basis points to 32 basis points, and we'll see ourselves revert back to that norm over time.
Okay. That's helpful. And then maybe just quickly for you, Jim, on the margin guidance. I appreciate the low 4s thoughts. I mean it sounds like that means maybe you're expecting a little bit of expansion here in the back half as you think about it holistically. Is that about the level do you think that you might stay in the low 4s as these kind of competing factors on both sides start to stabilize? Or do you think there's the potential for continued expansion in '27?
Yes. I'm hesitant at this point to give guidance into 2027, Dan. I was trying to look just for the remainder of this year. The most recent runs we did had the margin drifting up for the second half of this year. I can tell you explicitly that the last run we did had the margin with no rate increases at all going to 4.08% in the fourth quarter and 4.13% if there was one hike in September. But that latest run, I'm taking with a grain of salt for my guidance because that did include the latest and greatest information we have about deposit competition, which is really heating up in our market. We were able to bring deposit costs down in the second quarter in a really healthy way, which is good, especially after having lagged some peers doing that. So we were able to bring that down, we saw an outflow of CDs and now we see deposit pricing competition picking up. So all that works together to bring that guidance to the low 4s. But at this point, I can't see into 2027 yet.
I appreciate you going over those. Yes, the pushes and the pulls. Appreciate the answers, guys.
Your next question is from the line of Karl Shepard at RBC Capital Markets.
Mike, you touched on the record payoffs again this quarter. I guess, could you frame up maybe what you see as a more normalized range? And then do you have visibility into that in the third quarter and maybe a little bit into the fourth quarter as well?
We do expect them to subside somewhat. We think we've had probably half a dozen or so larger ones that were more one-offs and just outright sales and getting out of real estate. A lot of them obviously are construction. A lot of them are planned going to the permanent market. That being said, we just feel regarding loan growth, we have good growth in construction fundings. We hit the tipping point there. Business banking and our corporate bank, we have good momentum in each market. Our consumer is growing and probably most importantly, talent and execution just continues to improve. In the first half of the year, we grew in two of our five regions. We expect to grow all of them in the second half of the year. So just momentum in getting beyond this. So it's not perfect, but that's kind of my best take from the vantage point in July.
Okay. I appreciate that. And then I know this comes up on every quarterly call, but on the buyback, you've gone over kind of your framework before, but the authorization is a little bit larger than you've had. So anything you want to message with the bigger number out there this quarter?
Yes, just—we are drifting up all the time. Jim and I put our heads together and at 9.7% and 9.8%, and it's going to continue to drift, even if we start to hit our loan growth targets, we just thought it might be prudent to get a little larger authorization in place. Jim, why don't you add to that?
Yes, just exactly that. The capital ratio keeps drifting upward. And like Mike said, we have plenty of capital to, first and foremost, capitalize organic growth, which is the first priority. But even then, if the tangible common equity ratio gets to where it's pushing 10% or goes beyond 10%, it's very hard to earn a respectable return on equity. We were really pleased to see the ROTCE over 15% this quarter, but it's harder and harder to do that if you have excess capital. So we bought back some shares. I think when I look back now in the second quarter, we purchased at $18.66, which we bought back a whole lot more given the price today. So we'll probably be a little more aggressive going forward.
Your next question is from the line of Kelly Motta at KBW.
I think putting together some of your margin commentary, one thing you noted was the increased deposit competition. I was hoping you could provide color as to what you're seeing in your markets, one? And then two, your balance sheet flexibility allowed you to be a little bit more discerning. Just wondering how you're thinking about that loan-to-deposit ratio and the additional flexibility you may have there.
Yes. Specifically, and I'll let Jim amplify that on the deposit side, our money market, we feel we're very competitive, but more on the CD side. And we felt that pressure really just in the last month or so. Jim?
Yes, that's right. The competition, Kelly, is really in the time deposits. If I look back to COVID, we had said we didn't have a very large time deposit book. We ran some of that down, but now it's a fairly decent sized time deposit book, about $1.7 billion. And so we have to price it to maintain that deposit book and grow it. We had so much excess cash in the second quarter that we felt like we didn't need to be so aggressive and pulled back a little bit and lo and behold, right towards the end of the quarter in June, as Mike was saying, the deposit competition heated up and we saw the outflow. So we need to react to that. And that's really to bring you up to the minute. We saw even just yesterday a couple of more competitors raising CD rates to rates that have 4 handles on them. The competition really is not so far away in the money market product. That's still in the mid-3s. But the CD competition is heating up, and it's across the board. It's not just online banks. It's not just credit unions. It's not just smaller banks, it's everybody. So you cannot ignore that and maintain your CD book. So we've raised rates already to do that, and we'll continue to do that to grow our deposits to fund our loan growth.
Kelly, the second part of your question?
Just the flexibility on balance sheet, and you did have a bit more flexibility this quarter to let some deposits go. So wondering where you're comfortable with taking that loan-to-deposit ratio.
That's right. We like it where it is in the low 90s. But it's not binding. We've worked hard to get there. After Silicon Valley, we really have grown our deposits about 5% a year, each year, and we worked it down from 96%–97%. It feels like a good place to be, and we don't want to give that away. Quite frankly, our customers didn't have rate with us. They were just loyal customers and they were getting rates somewhere else, and we've worked hard to gather the CD book. It's come mostly from our own customers, and we just don't want to give that away. It remains a nice way to continue to grow deposits in a way that—our loan yields are good.
Got it. That's helpful. And then on the growth and the payoffs you saw, you noted that there was pressure on CRE, which I think you had touched on earlier and also C&I. Can you provide color as to where line utilization stands and how that compares to normalized levels and any dynamics factoring in there?
Yes, it's drifted up. We've been monitoring that and watching that with just the line utilization of revolving commercial lines and C&I lines drifting up over the last three quarters. So the one commentary I'd give you, Kelly, is that the production has been really good. It's just the payoffs have been—the payoff crescendo has continued and gotten stronger. If that crescendo and the payoff slows down even a little bit, we'll have really good loan growth. Now of course, that will put pressure on the deposit growth and make sure we fund that loan growth with deposits, but it will all work together. We're really pleased with the production side.
Kelly, we also feel like we have six buckets of lending: commercial real estate, C&I, equipment finance, mortgage, branch-based consumer lending and indirect auto. In the second half of the year, going in, we have four of those six growing—equipment finance, indirect auto, HELOC/HELOAN and probably going to get there with C&I and commercial. So we're pretty broad-based, and we feel like we have momentum in those businesses. Mortgage, we're still selling most everything we originate. Mortgage is a good story year-over-year on the fee side, up almost $1 million, I believe. We just have good pipelines despite the rate environment. So we feel good about loans and where we're at.
Last question, if I could just slip it in, is just on that—it sounds like everything on the production is very constructive. What do you think is driving that? And what are you seeing as you're talking to your borrowers? Are they just more comfortable where we are now? Any color would be really helpful as we think about what's been impacting that uptick.
On mortgage or on all?
I was talking mostly commercial, but I'm happy with whatever color you can give.
I just think our retail model is coalesced with really good leadership and new leaders over the course of the last few years and just better and better teams that are getting more sophisticated. We like that our business banking, which serves the lower end of commercial, has really gathered momentum in the last 1.5 to 2 years. We've added a lot of professionals to that space. That's granular and at the lower end it comes with a lot of deposits. At the end of the day, it comes down to talent and execution. We've added talent on that team. We have complemented it with a pretty strong treasury management function that's getting better and has more capability because our borrowers need more than just a loan. They have deposit relationships. We're doing a better job of cross-selling our wealth management and our insurance. You see that in the numbers and how we've recouped what we've lost with the $13.5 million of cross-sell to our customers. It is all coming together, and we feel like the best years are ahead of us with the team we have now.
Your next question is from the line of Manuel Navas from Piper Sandler.
It seems like you guys have some nice confidence on the production levels in terms of loan growth. How fast can you see loan growth kind of get back to mid-single digits? Is it as soon as third quarter? Do you need it to build a bit more? Just kind of some thoughts on the pipeline here into the near term, back half of the year.
Good question. Last quarter, we sold a $200 million portfolio, and we had a downdraft of another $100 million. So it was quite a climb from that spot and the payoffs we had with more payoffs to get to 2% annualized. We do feel like we have some momentum. Mid-single digit is good guidance for us. As you've seen over the years, we really believe deeply in the concept of operating leverage. We manage with a lot of cost discipline and feel like 4%, 5%, 6% is enough to leverage into good earnings per share growth and value creation. Another lever we like is fee income. That's one reason we've moved decisively to a regional model. We report by line of business, but we execute and we win in discrete regions throughout the company. It's a bit more expensive model, but we have good leaders and are confident it will create differentiation over time.
What's your appetite for continued talent acquisition? Does that pipeline continue? Or are you kind of seeing it try to produce now and taking a step back?
I'll share an anecdote: one of our very wise leaders put in a ghost position. What he meant by that was he wanted to be able to hire the right person at any time that he found her or him. I love that. When we find good people, we need to find a way to get them on the payroll and move the company forward with the right kind of rainmakers. Consequently, we've lost very few of them over the years. That speaks to the culture and the good leaders we have. Not everybody has caught on yet, but after this call, I guess they will.
I appreciate the color. Can I shift over to NIM for a moment? What are new loan yields coming on at? I'm trying to think of the marginal aspects. And how big of a shift? And I guess you say the CD competition is more like mid-4s with competitors. Where is your marginal deposit cost right now? And if you could walk through those near-term drivers of NIM, please?
I'll try to answer those. The blended new cost of deposits overall coming on was about 3% for a good part of the quarter, but that changed more towards the end of the quarter with the deposit competition and is going to drift upwards. The promotional CD rates are going to be in the 4s going forward. New loan yields coming on are in the mid-6s, with loans coming off a little bit lower than that. So far, we've been seeing positive replacement yield. The differential is much wider in the fixed-rate loans. Variable-rate loans—about two-thirds of production is variable and one-third fixed. The positive placement yield I mentioned in my prepared remarks, the 61 basis points, was on the fixed-rate side. For variable production, if spreads maintain the same level, replacement yields are roughly neutral; it fluctuates a little quarter-over-quarter, but not by much. That's the dynamic.
Can you talk a little bit about the repricing potential on the fixed-rate side, over the rest of this year into next year?
If the Fed holds where they are now, we're really happy with the 61 basis points on the fixed-rate side. On the securities side, it was better, but it's skewed a little because we accelerated some securities purchases with the excess cash. The securities portfolio yield is low compared to the opportunity right now. We're able to purchase securities at low-5s right now, so that placement yield is pretty strong. If the Fed holds where they are for a while, we'll eventually reprice the whole loan book, except for low-rate mortgages that hang on until prepayments occur.
Is fixed-rate volume still about one-third of overall volume?
Yes, overall. That's across all categories—commercial, consumer, HELOCs, equipment finance, everything.
Your next question is from the line of Matthew Breese at Stephens Bank.
I guess, I don't know you've fully answered this, but what gives you the confidence that we're going to see a slowdown in payoffs? Is it just that the current pace is unsustainably high and will revert to the mean? And then the other question I have was if you strip away equipment C&I growth, it looks like non-equipment-based C&I growth has been down for maybe four consecutive quarters. Is that expected to turn around as well? And what does the pipeline look like there?
Great question. The anecdote around each payoff is an important factor in our guidance on that and the size of the payoffs. We just don't have that many loans over $50 million anymore. On the C&I side, we're working to grow it granularly with business banking and middle market loans. Over the last decade we've run down large syndicated credits, so we don't have $100 million SNCs left. The composition of the C&I book has changed. The pipelines, particularly in business banking under the $5 million range, have grown as we've invested in that team in the last year plus. That investment should drive improvement.
Jim, maybe just thinking through if securities aren't your first option. But if loan growth is—let's say loan growth is on the lower end of mid-single digits and capital is building, do we continue to see some securities purchases? And where would you like to see that as a percentage of assets?
It depends—great question. It depends on the funding side. We don't believe in balance sheet leverage by borrowing short-term and buying securities with that to leverage the balance sheet. We'd rather have a more conservative balance sheet where we make our money by taking deposits and making loans. But if we have great deposit growth and excess cash and slower loan growth, then yes, securities are a good option, especially when we can get rates where they are now in the low 5s. It's not our go-to option; we really don't believe in borrowing excess funds just to purchase securities. It dilutes NIM and ROAA. In the long run, it's not a winning strategy for a bank like ours.
Okay. Everything we saw this quarter was really kind of like a prefunding of stuff that's maturing.
Yes, that's right. Then with the way we're pricing CDs, those funds started to have outflows towards the end of the quarter, so we have to react. If everything goes right, we have mid-single-digit loan growth, mid-single-digit deposit growth, and loans and deposits will grow in step. As capital grows, we can retire some shares and keep capital ratios more in line so they don't grow excessively. That's the balance we're shooting for.
Within expenses, one area I noticed is that your FDIC insurance expense has been like clockwork between $1.4 million and $1.7 million per quarter. It dipped to $1.1 million—I'm curious what happened there and if anything within that's one-time or nonrecurring?
No, that's more of a new run rate. That's based on our new assessments. We're very happy about that. I can't say a whole lot more about it, but it's very positive.
Did you have the spot cost of deposits for the month of June or at the end of June, just to give us some idea of where this is heading?
I did not provide that earlier, but I don't mind providing it. It might take me a second to pull up the total cost... If you want to ask another question while I pull it up.
I'll give you one more question while you pull it up. Obviously, the Fed left rates unchanged today, but it feels like the bias is towards hikes. If we do get a hike or two this year, what's the reaction to the NIM? I think, Jim, you had mentioned 4.08% by the end of the year, but with a hike, we got 4.03% which seemed backwards to me—could you flesh that out?
Thanks for letting me clarify. With a hike, it was 4.13% in that run. The adjustment I'm making is that those forecasts did not take into account the latest thinking on deposit prices. That's why I backed off to our NIM guidance to the low 4s. The relationship is about the same: historically, you get about a 5 basis point lift in NIM for a 25 basis point hike. We're asset sensitive, and it's a benefit to us.
That's all I have. If you have the spot cost, I'll take it. If not, I'm all set.
Okay, I might take a second. The total cost for June was 1.71%.
There are no further questions at this time. We've reached the end of the Q&A session. I will now turn the call back to Mike Price, President and Chief Executive Officer, for closing remarks.
I appreciate your interest in our company. I appreciate the questions. It's fun running a commercial and consumer bank, and we feel like we're very relevant to our customers here in Central and Western Pennsylvania and Ohio. We also feel like we're a good bank. We do a lot of the right things for our clients. First and foremost, we listen to them. Thank you and we look forward to seeing a number of you over the course of the next quarter in the field.
This concludes today's call. Thank you for attending. You may now disconnect.