KBRA Affirms Ratings for First Commonwealth Financial Corporation

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Indiana, PA-based First Commonwealth Financial Corporation (NYSE: FCF) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary, First Commonwealth Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

FCF’s ratings are supported by its durable, branch-based deposit franchise with a solid footprint in rural and urban markets with lower relative interest rate sensitivity. The core deposit base also accounts for 89% of total funding, and estimated uninsured deposits at 4Q23 were only 27% of total deposits with 1.9x coverage from total liquidity sources. The company’s noninterest bearing deposit base (26% of total deposits) also contributed to the company’s lower deposit funding costs pre-pandemic (4Q19: 0.56%) and supported a low deposit beta through the 525 bps of interest rate increases through 2023 (4Q23: 1.23% cost of deposits). In addition, the company has a diversified revenue stream with a five year average noninterest income to total revenue ratio of 24%, providing stability to the spread revenue base. The composition of noninterest income in 2023 was buffeted by durable sources including account, trust, and brokerage fees. Reflective of the company’s sound capital management practices, FCF’s CET1 ratio has been consistently maintained above 11% in recent years and is expected to build further, becoming closer to rated peer average. KBRA considers the company’s loss absorption capacity derived from the LLR, in combination with its solid capital position, to be suitable for its risk profile. The company’s credit management practices appear robust as it has maintained solid credit performance throughout the current economic cycle. FCF’s loan portfolio is well diversified with sufficient concentration limits established with a geographic focus in parts of Western PA and OH. The recent uptick in NPAs and NCOs has been primarily driven by the PCD loan portfolio acquired as part of the Centric Bank ("Centric") acquisition which had a 3.3% credit mark at acquisition. KBRA expects FCF to experience some increased volatility in asset quality as it works through the acquired loan portfolio from Centric; however, we expect that management will successfully navigate the transition due to its experienced track record, conservative management style, and proactive risk management practices.

Rating Sensitivities

A rating upgrade is not expected in the near term. However, further geographic expansion along with increased, stable noninterest revenue, and maintenance of solid asset quality and increased capital metrics may lead to a rating upgrade over time. A rating downgrade is unlikely in the near term, though significant deterioration in credit quality, with elevated credit costs adversely impacting earnings over a longer time horizon and depleting capital, could result in negative rating action.

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