First Commonwealth Financial (FCF) Q3 2026 Earnings Call Transcript

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DATE

Wednesday, Oct. 28, 2026

CALL PARTICIPANTS

• Vice President of Finance and Investor Relations - Ryan Thomas
• President and CEO - Thomas Michael Price
• Chief Financial Officer - James R. Reske
• Chief Credit Officer - Brian Sohocki
• Chief Lending Officer - Michael McCuen

TAKEAWAYS

• Core EPS -- $0.45 per share, representing an increase from $0.44 in the previous quarter.
• Net Interest Margin -- 4.11%, increasing 10 basis points from the prior quarter due to lower deposit costs and higher loan yields.
• Provision for Credit Losses -- $14.2 million, including $3.5 million associated with unfunded loan commitments and $10.7 million for loan losses.
• Specific Reserves -- $7.7 million, allocated to three previously identified commercial credits.
• Loan Growth -- 2.6% annualized, driven by increased consumer and commercial originations and a slowdown in loan payoffs.
• Share Repurchases -- $88 million in Q3, comprising approximately 4.2 million shares at an average price of $21.18 per share.
• New Buyback Authorization -- $25 million, authorized by the board of directors to recommence repurchases after the blackout period.
• Federal Energy Tax Credits -- $4.7 million recognized in the quarter, reducing the income tax provision and helping offset elevated credit costs.
• Nonperforming Loans -- $95.2 million, an increase of $13.6 million reflecting the migration of two large commercial credits to nonaccrual status.
• Net Charge-offs -- 0.19% of average loans annualized, decreasing from 0.49% in the previous quarter.
• Core Return on Average Tangible Common Equity -- 15.90%, an increase of 24 basis points from the prior quarter despite higher provision expense.
• Cost of Deposits -- 1.67%, reflecting a 7 basis point decrease from the previous quarter.
• Loan-to-Deposit Ratio -- 93.2%, increasing from 92.7% at the end of the second quarter.
• Common Equity Tier 1 Capital Ratio -- 11.9%, representing $539.4 million in excess of regulatory "well capitalized" requirements.
• Fee Income Guidance -- $24 million to $25 million for the fourth quarter, maintained by management despite core growth being offset by the loss of one-time gains.
• Expense Guidance -- $74 million to $76 million for the fourth quarter, consistent with previous estimates.
• NIM Guidance -- 4.20% for the fourth quarter, with management projecting a rise to the mid-4.20s in 2027 assuming a frozen yield curve.
• Unfunded Loan Commitments Provision -- $3.5 million, necessitated by strong commercial production in committed lines.
• Asset Write-down -- $600,000, resulting from the termination of a long-term sale-leaseback agreement.

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RISKS

• Price noted that provision expense reached its "highest provisioning quarter we have had ever" at $14.2 million, driven by specific commercial credits and unfunded commitments.
• Sohocki warned that the increase in classified loans was the result of the "migration of the two of the larger loans" into nonperforming status, requiring incremental specific reserves.
• Management indicated that higher interest rates are expected to dampen demand, particularly for commercial real estate projects that may become unfinanceable.

SUMMARY

First Commonwealth Financial Corporation (NYSE:FCF) reported consistent core earnings for the third quarter, supported by net interest margin expansion and a decrease in deposit costs. Management executed a substantial share repurchase program that utilized $88 million in capital, right-sizing the tangible common equity ratio to 9.2% while improving core returns. The financial period was impacted by an elevated provision for credit losses related to specific nonperforming loans, which was largely mitigated by the strategic recognition of $4.7 million in federal energy tax credits. The company reaffirmed its mid-single-digit loan growth targets and provided a positive outlook for margin expansion through 2027 based on current yield curve dynamics.

• CFO Reske noted that the adoption of federal energy tax credits could lower the effective tax rate by 1 percentage point to 2 percentage points per year, stating, "it is heavily dependent on the terms of each deal."
• Management reported that 20% of criticized loans are currently concentrated in a specific portfolio from the Centric acquisition in Central Pennsylvania, which is being actively managed down.
• The company is projecting a 25% deposit beta on non-maturity interest-bearing deposits as it navigates competition for funding in a rising rate environment.
• Price highlighted that loan yields were impacted by a 4 basis point drag from the reversal of accrued interest on nonaccrual loans during the third quarter.
• The 2027 investment strategy focuses on improving banker productivity and fraud prevention, with CEO Price stating, "The latter becomes vital to investment in the future of our company."

INDUSTRY GLOSSARY

• ACL: Allowance for credit losses, a reserve established to cover estimated credit losses in the loan portfolio.
• CET1: Common Equity Tier 1 capital ratio, a measurement of a bank's core equity capital compared to its total risk-weighted assets.
• FTE: Fully taxable equivalent, an adjustment made to interest income to make tax-exempt income comparable to taxable income.
• NCO: Net charge-off, the dollar amount of loans a bank determines it is unlikely to collect, minus any recoveries on previously charged-off loans.
• NPL: Nonperforming loan, a loan that is in default or close to being in default because payments are significantly overdue.
• ROATCE: Return on average tangible common equity, a financial ratio measuring performance calculated by dividing net income by average tangible common equity.
• TCE: Tangible common equity, a measure of a company's capital which excludes intangible assets like goodwill.

Full Conference Call Transcript

Operator: Ladies and gentlemen, thank you for joining us. And welcome to the First Commonwealth Financial Corporation third quarter 26 Earnings Release Conference Call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press *1 to raise your hand. Withdraw your question, press *1 again. I will now hand the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Ryan Thomas: Thank you, Jonathan, and good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation's third quarter financial results. Participating on today's call will be Mike Price, President and CEO Jim Reske, chief financial officer; Brian Sohocki, chief credit officer; and Michael 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 today's 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 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.

Thomas Michael Price: Thank you, Ryan. Good afternoon, everyone. Core earnings per share totaled $0.45 for the third quarter. There were 2 unrelated offsetting financial events this quarter. These results included $4.7 million of 1-time energy tax credits equivalent to $6 million on a pretax basis. These tax credits help to offset provision expense that came in at $14.2 million. The provision figure includes $3.5 million associated with the unfunded loan commitments reflective of strong production this quarter in committed lines. The other $10.7 million represents provision for loan losses driven principally by approximately $7.7 million of specific reserves associated with 3 previously identified credits.

Nonperforming loans increased, but the increase was also concentrated in a limited number of previously identified relationships rather than broad based portfolio deterioration. Beyond those 2 events, the operating trends of our core businesses are strong. The net interest margin increased to 4.11% supported by a decline in deposit cost to 1.67% and the impact of the Fed's latest hike on our variable rate loan portfolio. Additionally, consumer and commercial loan originations throughout the third quarter increased year over year. Loan payoffs also slowed for the first time in 5 quarters, leading to annualized loan growth of 2.6% in the quarter. Together with current backlogs, these trends support the outlook for loan growth within our mid single digit guidance.

Our 3 principal areas of focus for the near term include better credit performance, generating profitable growth, and controlling expenses to create positive operating leverage. The latter becomes vital to investment in the future of our company. Our 2027 investment plan includes opportunities with technology, talent, marketing, fraud prevention, and improved banker productivity. Lead generation, and financial analysis. Lastly, we believe a mission driven community bank of our size remains important and relevant to our customers, communities, employees, and investors. And with that, I will turn it over to Jim.

James R. Reske: Thanks, Mike. Mike provided the broad brush strokes of our financial performance this quarter, including credit. So I will spend my time drilling down into our results to help you get a better understanding of the long term run rate of our financial performance. The credit story is important. But I do not want it to overshadow positive trends in our net interest margin, spread income, balance sheet growth, and our fee income trajectory. Before I walk you through those things, however, I want to spend a moment addressing the impact of the tax credits and the buyback on the quarter. First, the tax credits.

We have for many years purchased credits against our income tax, but this was our first foray into federal energy tax credits. We started looking at these tax credits in the second quarter this year, and we purchased just over 50 million in credits in the third quarter. Those credits will be applied towards our federal tax liability for tax years 2025 and 2022. That resulted in the recognition of $4.7 million in tax in the third quarter. We intend to purchase credits going forward, including for tax year 2026, And with that purchase, you will purchase additional credits that we could carry back to 2023 and 2024.

Once that is done and assuming the laws affecting the transferability federal renewable energy tax credits do not change, we will likely settle into a rhythm of purchasing tax credits like this every year. We think this could bring our effective tax rate down by approximately 1 to 2 percentage points which might be worth about $0.02 per share per year, but it is heavily dependent on the terms of each deal. The other major event of the quarter worth talking about was full execution of the previously announced $75 million buyback program. We came into the quarter with about $13 million of share repurchase authority from our previous program.

And combined with a new authorization, repurchased approximately $88 million of stock during the quarter at an average price of $21.18. That helped right size the tangible common ratio from 9.9% last quarter to 9.2% this quarter. That in turn contributed to the expansion of our core return on average common equity, to 15.90% up 24 basis points from last quarter despite the elevated provision expense this quarter. We are also pleased to announce that our board has authorized an additional $25 million in repurchase authority. We intend to recommence share repurchases next week once we come out of blackout.

Beyond the tax credits and the buyback, however, there are positive fundamental trends in our revenue that are worth talking about. Our net interest margin or NIM expanded by 10 basis points. From 4 point o 1% last quarter to 4.11% this quarter. We were able to decrease deposit cost by 7 basis points last quarter. The September rate hike came too late to have much benefit on loan yields in the third quarter. But loan yields in the third quarter were held back by the reversal of accrued interest on nonaccrual loans which created a drag of approximately 4 basis points on NIM in the third quarter.

Looking forward, with no further changes in rates, which means no hikes and no changes in the shape of the yield curve, We would expect our NIM to rise to around 4.20% in the fourth quarter and continue to rise into the mid-4.20s in 2027. All those estimates are give or take 5 basis points. As is per usual. I would also point out that it is not only NIM that is a good story for us, but our net interest income increased as well. $3.9 million last quarter, an annualized rate of approximately 13.7%.

Fee income was unchanged from last quarter, but that is only because real progress in core fee items such as wealth, mortgage, and back to back interest rate swaps was offset by the loss of $1.3 million of second-quarter, 1-time gains we did not have this quarter. Our previous guidance for fee income to range from 24 million to $25 million per quarter remains unchanged for the fourth quarter. Expenses were up this quarter. but they were impacted by several discrete items. We incurred a $600 thousand write down on the extension of a long term lease but it will save us money in the long run.

In addition, we received a $500 thousand reimbursement from a vendor last quarter that we obviously did not have this quarter. Those 2 items together accounted for about $1.1 million of the quarter over quarter swing in expenses. Other major increased expense items included incentive accruals primarily related to increased loan production and our FDIC assessment costs. Looking ahead, our previous guidance of $74 million to $76 million per quarter remains unchanged for the fourth quarter. We will provide updated non interest income and expense guidance for 2027 in January. As we have done in the past. And with that, we will take any questions you may have.

Operator: We will now begin the question-and-answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. We ask that you pick up your handset when asking a question to allow for optimal sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from the line of Kelly Motta from KBW. Your line is now open. Please go ahead.

Kelly Motta: Hi. This is Megan Lynch on for Kelly Motta. Thanks. For taking my question. So your deposit cost trended lower, very good trend. And I was just sort of wondering how sustainable you guys thought this was in a higher rate environment and with any competition? And last rising rate cycle, your deposit beta was just under 40%. So any thoughts on what you thought that was going to be in the next set of hikes?

Thomas Michael Price: Jim, why do not you start?

James R. Reske: Yeah. I will just offer a couple of thoughts on that. 1 is we do see deposit and our long term goal is to grow our deposit base commensurate with our loan growth. So we look for mid single digit loan growth. We would like to fund that consistently with deposit growth keep our loan to deposit ratio where it is now in the low 90s. And that means we have to pay market rates for those deposits with the competition heating up in a rising rate environment, we expect our beta to be consistent with way we calculated our historical beta of 25%. We kept that on non maturity deposits, interest bearing deposits, not including time deposits.

We actually pay outside vendors to look at our deposit base to kind of accurately assess where our deposit betas have been in the past so we can have a good estimate for the future. But that is the estimate we are using, about a 25% deposit beta. So okay. Answers some of your question, and Mike, you wanted to add.

Thomas Michael Price: it is a bimonthly exercise. Every 2 weeks, we are getting together as a team and trying to understand the texture of exactly what you are talking about. And where we might attract some money and also how we might manage costs for our margin. it is a fun conundrum.

Kelly Motta: Okay. Thank you. That was helpful. And then I also like, you had very strong noninterest bearing deposit growth, and time deposits came down. So can you sort of provide more detail on the drivers of that as well as upcoming maturities and CDs in the next quarter and the rates they are maturing versus the new offering rate?

James R. Reske: Yeah. A couple thoughts. We do. We last 18 months or so, we had CDs at shorter term maturities, but every bank was doing that. So nothing really new there. We are kind of keeping rates short. Term short, and that was working. Earlier this year, we started going a little bit longer. Had some doubts whether a 15-month CD would attract customers and balances because customers typically do not like to go beyond 12 months, but it worked very well for us. That was probably because we had a very strong customer perception of a falling rate environment.

So if they saw a good rate, at a longer term, even though beyond 12 months, we are able to gather funds in those in those accounts. Now there is a shift in the customer sentiment towards a rising rate environment, so it is harder to get customers to do that. But the way the structure we have a number of COCD maturities coming up soon, I would not call it a cliff or anything that is unmanageable, but because those rates were short now, a lot of those fees are maturing. And we are dealing with that as they as they come. 80% of CDs that mature. The 20% that do not generally tend to stay with the bank.

They go into money market accounts or something else. Those rates are close. The 80% that do stay, about half of those will want the current special rate, whatever that is. And the other half will roll to the retention rate we are offering them. That whole process works, and that is a lot of the way we manage the rate cost, the deposit cost of the bank. Has worked well.

Thomas Michael Price: Yeah. I would just add that the texture of our depository. On the on the noninterest bearing side is about 2/3 commercial. Mhmm. And so a lot of that might be more seasonal. And, it is really overall, though, about 2/3 consumer when you consider time and non interest bearing and NOW accounts. And that is really at an average size that is much smaller. It just does not have. It has a little less pressure there, and that. that is really good for us. So we have really a good consumer oriented granular depository that is really served us well. Through the last 2 cycles.

Kelly Motta: Okay. That was really good color. Thank you. And then just 1 more You were very. You were active on the buybacks this quarter, and I know you said that you were gonna resume them next week. Could you give any, like, color on the run rate or put any numbers to it? Or is that all we get?

James R. Reske: Yeah. I just read out our board authorized to the $25 million authorization. And then 1 of the reasons we do it in $25 million tranches like that unlike the 1 we did last quarter with 75 million is that. That allows us to do the repurchase just due to amount of retained earnings we have after paying a dividend to shareholders. So we do not wanna telegraph in advance because we do not always know in advance, and even if we do, we would not wanna say it. it is gonna be precise timing of when we do those kinds of buybacks.

I just can tell you that we will be back in the market next week and so we will be active on the buyback.

Kelly Motta: Okay. Awesome. Thank you so much. that is it from me.

James R. Reske: Thank you for the question.

Operator: Your next question comes from the line of Daniel Tamayo from Raymond James. Your line is now open. Please go ahead.

Daniel Tamayo: Yeah. Thank you. Good afternoon, Mike. Good afternoon, Jim. Maybe just starting on the credit side, if you can just kind of touch on your thoughts on the path of resolution for the increase in the, NPLs and the classifieds?

Thomas Michael Price: Yeah. I will turn it over to Brian, but I would just share with this. We had 3 identified credits that made up the bulk of the reserve. Specific reserves this quarter, they were identified. We still have probably about 20% of our criticized is really from our entree into Central Pennsylvania. So that is outsized, and we continue to work that down. And the complexion of that is probably of that 60 million of 300 million or so are criticized. there is just 1 larger loan in there that is about 10 and probably 1 over 5. And then after that, it is pretty granular. Brian, what would you add?

Brian Sohocki: No. that is good comments, Mike. And yeah, obviously, the classified increased specifically this quarter. It was the result of the migration of the 2 of the larger loans. That moved into NPL and generated reserve. The third loan was already a nonperforming loan that had some incremental reserve So if you look at the increase, it was specific to these identified credits. Your question's specific to the future. Obviously, resolution of those is our key focus. And that will drive the classified, the nonperforming, and the reserves moving forward. Know, to Mike's port. Point, importantly, we are not seeing broad based deterioration. With new credits moving into the category.

As you drill down into criticized loans and watch loans, our OLEM actually decreased by 25 million this past quarter. While the classified increased by 26 million it is there that you really see the transition, the migration from the criticized into the classified. When you drill down further into the watch loans, you know, we are down over $100 million year-to-date. So we are seeing a good portfolio performance on the front end. And our focus here over the next couple of quarters will be you know, resolution of the nonperformers. At quarter end, we felt that the reserve was appropriate based on the collateral valuations.

Each of those loans, as you would expect, is in different stages of collection and resolution. And that will be our short term focus.

Daniel Tamayo: Okay. Thanks for that, Brian, and thanks for the color, Mike. And then I guess my follow-up would be just on the C and I loan growth side. We had a I guess, an inflection in growth this quarter. Just curious your thoughts around ability to continue the trend there as we look forward.

Thomas Michael Price: Yeah. We feel like we are turning the corner. I would say that, in fairness, some of that does include our equipment finance group. Which has slowed down a bit. But we do have traction in our regions, and a focal point is C and I lending. Both larger, all down to small business and business banking. And it also remains a focus because those are cornerstone relationships that have a replete with household value. So that is where our ground game is focused. And is a key for our growth. However, that being said, as we look to the future, you know, we have 6 lending buckets we have. HELOC, HELOAN out of the branches. We have mortgage.

We have indirect auto on the commercial side. We have CRE, CNI. And then equipment finance. And we really want broad based growth across all of those 6 categories in relationship value where we can get it. And so we are not looking for 8% or 10% growth in some category to pick it up. We have had years here. We had 2 or 3 years where we grew every region and every product line. And that is ideally how we would like to grow it. Appreciate that, Mike.

Daniel Tamayo: And then maybe lastly, just on the on that loan growth topic again and probably more on the CRE side, but feel free to answer for any of the buckets. Just curious your thoughts on higher rates, kind of where we are and where we could be in the next year, the impact that could have on the demand side.

Thomas Michael Price: I think it will dampen demand. Mike, if you have anything you wanna add?

Michael McCuen: No, you are right, Mike. It will dampen demand. When it comes to just to that question.

Thomas Michael Price: Yeah. Yeah. And it will dampen demand particularly on the commercial real estate side. I mean, 0.5 point, a full point is gonna just make some projects unfinanceable and or maturing loans that much tougher. That being said, Jim, we have you know, as the rates do continue to go up, there is there is a beta on the short end and also on the longer end of the curve. Mhmm. On replacement rate provided the volume can stay up there. Anything you would add Yeah.

James R. Reske: No. I mean, I think just. So on that topic, Danny, do not see that what you are asking about, the rate environment is a real Goldilocks for us right now. It does allow us to continue to be pricing up for the fixed rate loans. So even if there is no if you do not meet our loan growth targets in the single digits, so they have always been pretty modest. so we think they are achievable. that is what we are planning on now. But if we cannot, we will still reprice up with the bulk. Which is works in our favor.

Daniel Tamayo: that is good clarity from everybody. Appreciate your answers. Thank you.

Operator: Your next question comes from the line of Karl Shepard from RBC Capital Markets. Your line is now open. Please go ahead.

Karl Shepard: Hey. Good afternoon.

Thomas Michael Price: Good afternoon, Karl.

Karl Shepard: I guess, I wanted to start on the margin. Obviously, a really strong performance again this quarter and a positive outlook. We can look at the numbers ourselves, but I am curious your view. Is there anything that stands out? Do you think allows this execution? Is it the environment? And then just kinda what could maybe knock you off getting to 24 and 4 q and kinda holding that into 2027, knowing that deposit pricing is always the wildcard.

Thomas Michael Price: I think our loan yields have been going up. I think on the higher yielding and the lower yielding, we are. We have good loan mix. I think we have good deposit mix that you know, we might be able to hang rate and still overall keep our cost of deposits relatively flat. I think we are in a nice place just because we have a granular depository and we will test that. And we actually will test it a couple times within a quarter. With certain specials and products to the team. And so I think we are relatively well positioned, but things tend to play out a little differently.

That being said, you know, granular consumer oriented depository, particularly on the longer end, if you have a bunch of $5 thousand and $10 thousand CDs and the opportunity cost of not getting the highest rate, it is not in tens of thousands of dollars if it was a million dollars. it is in hundreds of dollars instead. And I think that portends well for us. We have 200 thousand-plus households in our consumer bank.

And like I said, they are over 60% of the overall depository then we have that noninterest bearing Majority of that is business, which I mentioned earlier, and we are getting better, and our TM capabilities are getting better and getting some fee income, the team, with that and having more solutions for our clients. So we are we just have a broad ground game. Now that is a little harder to manage sometimes, but there are benefits And I do not know what, but you and I had--

James R. Reske: Yeah. Just answer the question of the strategic, or is it good fortune, I think if you reflect back in the first quarter, we talked about fact we came across some liquidity from a loan sale. We felt that gave us the opportunity to change the mix a little bit of our whole portfolio. We started to price down a little bit the CD side. Strategically really focused on noninterest bearing. So I think as we said at that time that we would have some good success on deposit pricing, that is kind of. that showed up now.

Now we probably have to think about pivoting a little towards you know, focusing more on the growth side now that we got ourselves in a good position.

Thomas Michael Price: Yeah. We do feel like. And Jim started off. We really feel like we need to be a profitable bank on the net interest margin side, but we also feel a pressure to grow net interest income. And we have, and we just do not feel like we feel like we can do better there or we should do better.

Karl Shepard: Okay. that is helpful. And then just a follow-up question. On the tax rate Should we-- are you sort of pointing to a Q4 rate kinda like this quarter then if we just think about the benefits from I guess, 2023 and 2024 and then 2026? From a similar type purchase of an energy credit. Is that a fair way to think about it, or help us out, Jim. We are also in the p and l when they show up?

James R. Reske: You bet. So I am trying. Well, I am trying to get some clarity on is that it is gonna be a little lumpy at first until it gets into a regular rhythm. So because these tax credits are newly transferred over kind of making up for lost time. We want to get 1 in before we filed our 2025 return on October 15. And so that is why we started in the second quarter and we kind of got it done by the end of the third quarter. And that took care of the 25 liability. And now there is an opportunity to do 2026 with carry back tax years 2023 and 2024.

So our tough these tax credits, you can purchase them up to 75% of your federal tax liability. That number ends up being roughly 25 million per year for us, roughly. So if you did 2026 and then 2023 and 2024, that is, like, $75 million worth of credit. So what I am trying to telegraph is a lump like that coming through. Once that is done, then you get to know, 2028 and 2027 and 2028. you start buying this every year. As long as the law does not change. And the law seems to be favored by both conservatives and liberals on both sides of the aisle for reducing taxes and promoting renewable energy.

So there is a good chance it will persist for a while. And so I am trying to give as much of an outlook as I can for you guys to help you with their just using a modeling tax rate. When I talk about, like, 1 or 2 percentage points, when we talk about the annual tax rate, not I mean, just, you know, the we are. We are we are. The federal taxes rate is 21%. Right now, our effective tax rate is a little hair over 20% because we have a very small muni portfolio. We have BOLI, and those 2 things are at the balance sheet gross. They are not really adding to those things.

And so less proportion is less and less of the balance sheet. So the effective tax rate you know, a year or so ago is in the high 19s now, it is in the 20, very low. it is a little hair over 20%. With these federal tax credits, if you start getting in that rhythm, it could really bring that down, which would fall right to the bottom line. So trying to get as much clarity as I can with that. Muddying the waters too much. So hope that helps.

Karl Shepard: No, that does. Appreciate it. Thank you.

James R. Reske: Thanks for the question.

Operator: Your next question is from the line of Matthew Breese at Stephens Inc. Your line is now open. Please go ahead.

Matthew Breese: Hey, good afternoon. A few questions from me. Jim, on the NIM, I think you had said, you know, 2027, call it mid-4.20s, perhaps a NIM inching towards 4.20, which is pretty incredible, especially without anything you know, esoteric. On the balance sheet. But I also think I heard you say that is with no rate hikes. And it does feel like we are gonna get anything from 1 to 3 hikes. How does that change kind of the NIM outlook?

James R. Reske: Yeah. No. Thanks for asking. And I am. I was trying to keep it high level so that you could take that information and apply your own rate forecast to it. But here's here's the thing. Then try to do this without getting too much into the weeds. We purchase an outside rate forecast. it is the same rate forecast as most banks, I think. Purchase. That rate forecast would have the short term rates coming down to, like, the Fed funds, like, 3.62 by the end of next year. And, in fact, the entire yield curve going. Experiencing an. A parallel downward shift. That assumes that inflation's under control. The Fed can cut rates. A whole bunch of things.

In that scenario, the short term rate. Where is it. It actually has a December hike in it. So the short term rate comes up. We benefit from that. That NIM expands, we peak in the first quarter, then start trailing off. that is a lot of complexity to take into account, and this is a ton of assumptions how the feature's gonna play itself out. So try to simplify that to say, let's just assume nothing changes. the yield curve is frozen. We got the September hike and nothing else. What happens? And that is the Goldilocks scenario I mentioned earlier. that is really good for us. The yield curve has some steepness to it.

The repricing of the fixed rate loan portfolio continues. It was really good in the third quarter. And that continues to reprice the whole fixed rate book up. that is that is worth about 5 basis points over the course of next year. The September hike gives us 5. I mentioned, you know, we do not talk about a core NIM, but I tried to mention in the prepared remarks that reversal of the nonaccrual accrued interest on the nonaccrual loans this quarter cost us 4. You know, we were. We proposed it for 4.11, and that cost us 4.

So it is really easy to see with the full benefit of September hike. getting to 4.20 in the fourth quarter. It would it is great visibility in that. If you can reprice up for given the state of the yield curve, just frozen. You get another 5 basis points. Now if the yield curve does have that downward shift, inflation's under control, long end thinks so. The bond market thinks so. The Fed thinks so. Yeah. Then we peak in the first quarter, it comes down. But that is a mouthful, and I was you know, trying to keep that out of prepared remarks and hoping to have a conversation like this with whoever asks. So thanks for asking.

Hope that helps you.

Matthew Breese: Yeah. The other 1 I wanted to kind of discuss was you know, this is not the first bank conference call this earning season. We are hearing a lot about high promo rates. You know, TD's money market and kind of the low to mid fours at this point. But a lot of management teams, similar to you, pointing to deposit betas that kinda match the last cycle, and I cannot quite square those 2 narratives. So maybe help me out you know, promo activity is really high, but we are. So why is that? Help me make that sense.

James R. Reske: Well, it is sensitive to that. So that depends on your loan growth. So if you. If we have the kind of loan growth we have, we are able to keep the deposit growth from that loan growth of the deposit growth. You have to price that at the market rates to keep up with that. We have had a historical 25% beta, but that is on the non maturity deposits. Those include the time deposits. So you are right. If you offer those specials, and we have got 4.25 specials out there. So go out and open a deposit account. We offer competitive rates, we have to keep up with it. That will affect it.

We are trying to all those assumptions And the way we build it to give you some insight is we just use that historical beta on the non-maturity deposits, so non maturity deposits. And then every promo we think we are gonna have to offer at that rate, whatever it is, if the going rate's 4.25 for 15. Whatever it is. We put all those promos in, to run the math on the actual promos we think we are gonna do, and that is where it could come out. that is where we kind of forecast it from. But then we respond to reality if. As things change.

If the market goes crazy and we have to keep up, we keep up. And it will change and we would adapt our forward guidance as a result. But that is kind of the best visibility we have into it right now. You may recall, by the way, last quarter, I was really hesitant. To call it and gave, like, here's. If the model says this, but I think otherwise because I did not. I thought I saw that competition. So I was skeptical that we would be able to drop deposit rates in the third quarter. So mea culpa on my part, we did it, and we were able to drop that. Really pleased to see that.

But we will definitely be keeping up with competitive rates.

Matthew Breese: Yep. Alright. 1 for me just on credit trends. Mike, you would mentioned in your opening remarks, and you are you know, really starting to pay attention. it is a high priority The level of NPAs where they are at is. it is starting to feel less fluky. Less kind of, like, 1 off fraud situations that we had you know, 12, 18 months ago. Can you maybe help us understand, what are the top 3 NPAs? What are they geography asset class wise? Is there any, you know, future loss content embedded in them? And what are you doing to kind of reverse the trend here?

Or is it a function of higher rates and a little bit more credit noise?

Thomas Michael Price: Yeah. Just, maybe I will start with what we have done. And just on the SBA, we have really stopped our out of footprint lending. that is about 20% of NPLs. Mike mentioned the loan sale in the eastern part of the state. Last year. And we have really closed that production office there. You know, we have done. We have limited our leveraged finance and our dealer floor plan businesses. We bolstered our portfolio management. And at the end of the day, those are those are all good things.

But we have also right now, 20% of the texture of our classified, criticized, if we look at our charge off history, the last several years is really our entree into Central Pennsylvania. And so we I mentioned we are now down to about 300 million there with about 60 million in criticized. So that is a lot of work on a portfolio that when we acquired it was just under $1 billion. And at the same time, we have been able to be profitable and move forward. Now I have I have calculated the delta on that. The delta on that is 14 to 15 basis points over where we would have been otherwise. Which is real money.

And you and I have talked about that. And so I do feel like I said this a year ago, and I know you are reminding me of it, is in the latter innings of this. But I feel like we are in the latter innings of it. When you asked about the top 3, I think of the Central Pennsylvania C And I Loan. I Think Of A Downtown Pittsburgh based multifamily develop. Multifaceted development opportunity. And, the third 1 would be an Ohio student housing project, and each of those is I could give you the dollar amount: 1 over 10. Just under 10 and 2 just under 10. Brian, what would you add?

Brian Sohocki: Yeah. I will just add a couple anecdotal comments. To build on Mike's. So he mentioned the $60 million of criticized loans that we have on the books from the Centric acquisition. I think the taking 1 step further into that the positive about it is there is 1 loan over $10 million there is very limited non. Nonperforming. So to your impaired question, there is about 5 or 6 million dollars of impaired in that portfolio. So once you get past the 1 larger criticized loan that is in that $60 million bucket. it is very granular and very manageable. And I think we have been deliberate in the market. We have added credit talent.

On top of the actions around the portfolio that Mike referenced. So know, not completely out of the woods with the headwind there, and there is always some variability with reducing that 60 million. But I feel it is granular and becomes manageable. And then as you look at the top impaired loans and the nonperforming bucket, Overall, and Mike referenced the 3 from this past quarter, those are 3 of the top 4 loans in our Fuck it. The larger C and I credit that came in this quarter at $16 million is the largest in that portfolio. The $5 million mixed use Pittsburgh credit that came into nonaccrual this quarter. it is 1 of those top 4 loans.

Yeah. So $21 million kinda float in to the nonperforming, nonaccrual bucket this period. And, it accounts for 2 of those top 4 it is worth just providing a little more color. The 1 that was already in as 1 of the top nonperforming. We added some re provision and reserve to this period. You know, that is an existing. it is an $11 million loan. And it is the it is a you know, the, I guess, the second largest non performer we have. it is it is also a Pittsburgh mixed use multifamily property. So, hopefully, that provides a little color Once you move out of the top 3 loans, they are the only ones of magnitude.

From the fourth loan on, through the 25th, it drops below $5 million and declines in size very quickly on a per loan basis. So I feel, again, the granularity is a positive and you know, to continue as we continue to work through it.

Matthew Breese: Yep. I appreciate all the detail. Thank you.

Thomas Michael Price: Thanks, Matthew.

Operator: As a reminder, if you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. Your next question is from the line of Manuel Navas from Piper Sandler. Your line is now open. Please go ahead.

Manuel Navas: Hey. I appreciate all the commentary on credit, but, what do you feel is, like, kind of the time line for all that? Is there a best guess We said a couple quarters of 30 to 32 basis points of maybe higher net charge offs. Is that still hold? Like, know this quarter is a little bit better because of some recoveries. But just kind of thoughts on that go forward look of charge offs or provisioning.

Brian Sohocki: Yes. We do not provide specific guidance to the future quarter reserve and provisioning. As we work through those specific credits we discussed, I do recognize that this quarter was heavy on reserve and light on charge offs. And we would expect to work through these credits in the next couple of quarters. And, you know, we did allocate based on our collateral and our workout strategies on those loans. And I would I would expect that, you know, barring you know, unforeseen events, we kinda manage within our typical provision going forward.

Thomas Michael Price: what is the other thing I would like to add to that? This quarter was, I think, our highest provisioning quarter we have had ever. And 3.5 million of that was unfunded. Which are primarily construction loans that will get funded later, but still, it is it was the highest. I would think we should hopefully get back down under $10 million but we will we will see. And Manuel, I wish I could have a crystal ball here. We will make credit. We will get it to converge with towards pure numbers and that is what we are focused on.

Manuel Navas: A component of the provision this quarter was that those unfunded commitments Does that mean that there is potential for stronger near term growth, or is that kind of spread out over time?

Thomas Michael Price: No. The 3.5 the 3.5. I did not realize the construction, but go ahead.

Brian Sohocki: Yeah. $33.5 million would be, you know, committed lines, which would be primarily, construction lending on the commercial side. And then, also, we have really had a nice year on HELOC lending out of branches. So those would be, you would expect takedowns on both the HELOCs and the construction over the course of the year to 18 months. So that is that is the good cholesterol, if you will. In the provision expense if there is such a thing.

Thomas Michael Price: Yeah. The over. there is Sorry, Manuel, there was over a $100 million of investment real estate construction growth in the quarter. And as you would expect, those are going to fund over a 12- to 18-month period on average. Usually, an equity phase for the first ramp up period. So but that construction portfolio has been growing over the course of 2026. So we see nice incremental growth being funded out of that, and we will see kind of some more incremental benefit in about 2 quarters as you see those loans start to fund.

Manuel Navas: Yeah. Thanks. We have been watching for a kind of a return to mid single digits pace. Like, guess, 3% kind of counts this quarter. Do you think that you accelerate near term? Or is it just kind of a slow rise process from here into next year?

Thomas Michael Price: Well, I think prognostication probably, I think I think we can hopefully keep at that pace or a little higher in the fourth quarter. Beyond that, talked a little bit about rising rates and what that might mean for family owned businesses, consumers, and others. You know, our mortgage business, we have had a lot of gain on sale income this year. And they have kind of battled through it, and they felt the rate increases in the volume in late August. I can almost remember the week. Where we were just kind of on fire for 8.5 months. And then we saw just a little downtick, but we were able to keep it up. But you just.

You worry a little bit about the state of the consumer and the you know, and particularly the family and the small business and the impact on them. So that is that is why a little tepid around you know, we are not in a sun belt. We are in you know, we are in community Pennsylvania, and Ohio, which is a little different texture, but quite frankly, there is a lot happening here with energy data centers in our backyard that could really propel us even if we were to get into a thicket I mean, you might not have a recession or the same kind of thicket.

In Central And Southern Ohio and Western Pennsylvania that you might have in the rest of country. So that is that is another thing that we felt a little bit impervious through the last cycles. Both on our indirect auto book tended to perform really well. 30 to 40 basis points of losses even through some tough cycles. So there is something about this area of the country, Western Pennsylvania and Ohio, where they have performed well through the last couple of cycles.

Manuel Navas: Thank you for the commentary. I will step back into queue.

Operator: There are no further questions at this time. I will now turn the call back to Mike Price for closing remarks.

Thomas Michael Price: As always, we appreciate the questions and, the challenges, the encouragement. So excited about the future of our company. Just. We have we have always been kind of sharp the last couple years with fintech investments and things like that. And we just. We will continue that. And we are looking at some really capable tools that can help us with everything from next best product to data-driven insights, call center efficiencies, smarter ways to work, and we have done a lot with anti-fraud and information security and money movement and just excited about continuing the pace of investment there. And I think we have highlighted in some of our investor calls, we have 35 fintech partners.

And just the democratization of technology. What it might mean for a company of our size and how we can compete in excited about that as we look to the future. And try to bring the best of the community banking experience but also just have a level of sophistication where we could remain relevant to our clients. And, just thank you for your interest in our company, and appreciate your questions today.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

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