Executive Summary / Key Takeaways

• First Commonwealth Financial is demonstrating building momentum, with net interest margin expanding in the first quarter of 2025, driven by decreasing deposit costs and the anticipated positive impact from expiring macro interest rate swaps.
• The company is guiding for mid-single-digit loan growth in 2025, fueled by strategic investments in commercial banking talent, strengthening pipelines in C&I and commercial real estate, and selective growth in consumer lending segments like equipment finance and indirect auto.
• Fee income is proving resilient despite the impact of the Durbin Amendment, with growth in areas like wealth management, SBA lending, and service charges offsetting the decline in interchange income.
• Credit quality metrics are showing signs of improvement, with non-performing loans and criticized asset levels peaking in mid-2024 and expected to normalize as the tail from the acquired Centric portfolio dissipates.
• Capital levels remain strong, supporting organic growth, consistent dividend increases, and potential share repurchases to manage leverage.

The Foundation of a Regional Bank: Strategy, Markets, and Competitive Dynamics

First Commonwealth Financial Corporation, founded in 1934 in Indiana, Pennsylvania, operates as a regional financial holding company with a history shaped by strategic acquisitions. The company has expanded its footprint, notably into Ohio, which has become a significant source of business over the past five to ten years. This growth strategy continued with the acquisition of Centric in the first quarter of 2023, adding presence in Central and Eastern Pennsylvania, and the recent completion of the CenterBank acquisition in April 2025, aimed at building critical mass in the Cincinnati market.

The company employs a regional business model designed to enhance delivery and cross-selling capabilities across its diverse service lines, which include consumer and commercial banking, mortgage, wealth management, and insurance. This model emphasizes local relationships and community presence through its branch network.

In the competitive landscape, First Commonwealth operates alongside larger regional banks such as Huntington Bancshares (HBAN), KeyCorp (KEY), PNC Financial Services Group (PNC), and Fifth Third Bancorp (FITB), which share overlapping geographic markets in the Midwest and Northeast. These larger competitors often possess greater scale and more advanced digital capabilities, offering efficiencies in areas like transaction processing and account management that can lead to lower operating costs per unit. For example, some competitors demonstrate 15-25% faster processing speeds and 10-15% lower operating costs per interaction compared to more traditional banking models.

First Commonwealth's operational technology includes standard banking platforms for internet, mobile, and telephone banking, an ATM network, and systems for data processing and fraud detection. While the company is investing in areas like enhanced fraud detection software and staffing, and building out its treasury management offerings, it acknowledges that some larger rivals have invested more heavily in digital transformation, potentially creating efficiency gaps. The company's strategic response involves leveraging its community-focused branch network to foster stronger local relationships and higher customer loyalty, particularly in rural areas, which can translate into more stable deposit bases and higher customer retention. This approach aims to differentiate First Commonwealth from competitors that may prioritize digital scale over personalized local service.

Beyond direct bank competitors, fintech firms and online banks pose indirect competition by offering potentially lower-cost basic services due to reduced overhead. This competitive pressure underscores the importance of First Commonwealth's focus on building comprehensive customer relationships and cross-selling multiple products and services through its regional model to maintain profitability and relevance.

Performance Reflecting Strategic Shifts and Market Realities

First Commonwealth's recent financial performance reflects the interplay of strategic initiatives, market interest rate dynamics, and ongoing efforts to integrate acquisitions and manage credit quality. For the three months ended March 31, 2025, the company reported net income of $32.7 million, or $0.32 diluted earnings per share, compared to $37.5 million, or $0.37 diluted earnings per share, in the prior year period. This decrease was primarily influenced by higher noninterest expense, lower non-interest income, and an increased provision for credit losses, partially offset by an increase in net interest income.

Net interest income, a core driver of profitability, showed resilience. On a fully taxable equivalent basis, net interest income increased to $95.9 million in the first three months of 2025, up from $92.6 million in the same period of 2024. This improvement was notable as the net interest margin expanded by 8 basis points to 3.62% in Q1 2025, compared to 3.52% in Q1 2024. This expansion occurred despite a slight decrease in the yield on interest-earning assets (down 3 basis points to 5.57%) and was primarily driven by a 10 basis point decrease in the cost of interest-bearing liabilities (down to 2.67%). The decrease in funding costs was influenced by a reduction in short-term borrowings, notably the payoff of Federal Reserve Term Funding Program borrowings, even as the cost of interest-bearing deposits saw a modest increase due to mix shifts towards higher-yielding deposit products like time deposits.

Loan growth, while muted in some prior periods due to strategic decisions and market demand, showed renewed momentum in the first quarter of 2025, increasing by $99 million, or an annualized rate of 4.4%. Commercial loans accounted for a significant portion of this growth ($63 million), with contributions from equipment finance and indirect auto lending. This follows a period in 2024 where loan growth was modest (1.04% annualized in Q4 2024) but deposits grew strongly (8.7% annualized in Q4 2024), leading to an improved loan-to-deposit ratio of 91.41% at March 31, 2025, down from the high 90s, providing enhanced liquidity.

Fee income has been a focus area, particularly as the company crossed the $10 billion asset threshold and became subject to the Durbin Amendment in mid-2024, resulting in a significant quarterly reduction in debit card interchange income (expected to decrease 2025 interchange income by approximately $6 million compared to 2024). Despite this headwind, total noninterest income in Q1 2025 was $22.5 million, a decrease of $1.5 million from Q1 2024, but demonstrating resilience as growth in other fee categories helped offset the Durbin impact. Trust income increased by $0.3 million, insurance and brokerage commissions rose by $0.5 million, and swap fee income saw a notable increase of $0.8 million due to new customer transactions. Gains on the sale of mortgage loans also saw a slight increase.

Noninterest expense increased by $5.7 million, or 9.0%, in Q1 2025 compared to Q1 2024, primarily driven by a $5.1 million increase in salaries and employee benefits, including higher incentive expense and hospitalization costs, as well as an increase in full-time equivalent employees (1538 at March 31, 2025, up from 1465 a year prior). Net occupancy expenses also increased.

Credit quality remains a key area of focus. While nonperforming loans as a percentage of total loans increased to 0.65% at March 31, 2025, from 0.47% a year prior, they decreased from 0.68% at December 31, 2024. Criticized loans also decreased in Q1 2025 compared to Q4 2024. Management notes that a disproportionate share of recent credit costs has stemmed from the Centric acquisition, but asset migration trends are showing improvement, and they believe they have largely identified and are working through these credits. The allowance for credit losses stood at $119.9 million, or 1.32% of total loans and leases outstanding, at March 31, 2025, consistent with prior periods and positioned above peer levels. Net charge-offs in Q1 2025 totaled $3.1 million, down from $4.3 million in Q1 2024.

Capital resources are solid. Shareholders equity increased by $41.9 million in Q1 2025, driven by net income and improvements in accumulated other comprehensive loss (AOCI) related to securities and derivatives valuations. Regulatory capital ratios remain strong, with the company and its bank subsidiary considered well-capitalized under Basel III rules.

The tangible book value per share has also shown positive momentum.

Outlook and Strategic Trajectory

First Commonwealth's outlook is centered on leveraging its improved liquidity position and strategic investments to drive profitable growth. The company maintains its guidance for mid-single-digit loan growth in 2025, expecting momentum to build throughout the year, particularly in commercial segments where pipelines are strengthening and new talent is contributing. The CenterBank acquisition is anticipated to be accretive and provide a strategic boost in the Cincinnati market, further supporting growth initiatives.

A key driver for future profitability is the expected expansion of the net interest margin. Management explicitly guides for NIM expansion in 2025, projecting it to reach the high 370s by year-end under a baseline scenario of three Fed rate cuts. This expansion is significantly supported by the scheduled expiration of macro interest rate swaps, with substantial notional amounts rolling off throughout 2025 and into 2026, which are expected to provide a lift to the NIM. Furthermore, positive replacement yields on the loan portfolio, where new loans are priced higher than maturing ones, are expected to continue contributing to rising loan yields, even in a falling rate environment. While deposit costs are a variable factor, management's conservative assumption of relatively stable aggregate deposit costs in their NIM forecast suggests potential upside if market conditions allow for more rapid repricing downward.

Fee income is expected to continue its growth trajectory, with guidance for Q2 2025 fee income to be higher than Q1, with further growth anticipated in Q3 before a seasonal dip in Q4. The strategy to offset the Durbin impact by growing other fee businesses is expected to continue yielding results, driven by performance in wealth management, SBA lending, and other service categories.

Expense management remains a focus. While Q1 2025 expenses were elevated, management expects the run rate to be in the $71 million to $73 million range for the remainder of the year, including the impact of the CenterBank acquisition. They are committed to reviewing costs and improving efficiency alongside strategic investments.

Credit quality is expected to continue normalizing as the impact from acquired portfolios diminishes and the company's workout efforts yield results. The focus remains on disciplined underwriting and proactive credit management.

Capital generation is projected to remain strong, supporting the recently increased quarterly dividend of $0.14 per share and providing capacity for potential share repurchases, which the company may utilize to manage leverage levels.

Risks and Considerations

While the outlook is positive, several risks could impact First Commonwealth's trajectory. Credit risk remains paramount, particularly in the context of changing economic conditions and the performance of specific portfolios like commercial real estate and consumer loans. Although management sees positive trends and believes the Centric credit headwinds are abating, unexpected deterioration in economic conditions or specific industry sectors could lead to increased nonperforming assets, charge-offs, and provision expense.

Interest rate risk continues to be a factor. While the company is positioned to benefit from swap expirations and positive loan repricing, the pace and magnitude of future interest rate changes by the Federal Reserve could differ from current forecasts, impacting net interest income and deposit costs.

Liquidity risk, while currently managed well with an improved loan-to-deposit ratio, could be affected by rapid changes in deposit balances or unexpected funding needs. Competition for deposits remains intense, influenced by market rates offered by other financial institutions and alternative investments.

Operational risks, including cybersecurity threats and potential disruptions to systems or third-party providers, are inherent in the banking industry. Legal and regulatory developments, as well as the outcomes of examinations or inquiries, could also impact operations and financial results.

The competitive environment, characterized by larger, more digitally advanced institutions and agile fintechs, poses ongoing challenges to market share and profitability. First Commonwealth's ability to effectively execute its digital strategy and leverage its community model will be crucial in navigating this landscape.

Finally, the successful integration of acquired businesses, including the recently closed CenterBank, is essential to realizing anticipated synergies and contributions to earnings and efficiency.

Conclusion

First Commonwealth Financial appears to be at an inflection point, moving past some of the credit and liquidity headwinds that characterized recent periods and positioning itself for renewed growth and profitability. The core investment thesis is underpinned by the expectation of net interest margin expansion driven by structural balance sheet dynamics, particularly the roll-off of macro swaps and disciplined deposit management. Coupled with a clear strategy for driving mid-single-digit loan growth through targeted investments in commercial lending and leveraging its regional model, the company is building momentum.

While the impact of the Durbin Amendment presents a challenge to fee income, the company's diversified fee businesses and focus on cross-selling are demonstrating resilience. The expected normalization of credit quality as the Centric portfolio issues are worked through should also support improved financial performance. Despite facing competition from larger, more digitally advanced peers, First Commonwealth's emphasis on community relationships and strategic talent acquisition provides a foundation for organic expansion. Investors should monitor the pace of loan growth, the trajectory of the net interest margin as swaps expire, and the continued execution of the fee income strategy as key indicators of the company's ability to deliver on its outlook and enhance shareholder value in the evolving banking landscape.