$13.91
$25.75
bear $13.91
base $21.39
bull $25.75
margin of safety $8.00
market price* $20.34
First Commonwealth Financial is the holding company for First Commonwealth Bank, a community bank with $12.3 billion of assets, $9.5 billion of loans and $10.3 billion of deposits across western, central and south-central Pennsylvania and Ohio (Columbus, Canton, Ashtabula and Cincinnati). It has grown by acquiring small banks and branch groups (Centric in Harrisburg and Lancaster in January 2023, CenterBank in Cincinnati in April 2025) and by lending organically. Loans are about 93 percent of deposits, so the bank is funded mainly by customer deposits; its borrowings are small, including $138 million of short-term borrowings and $122 million of subordinated debt at June 2026. As a lender, deposits are the raw material of the business and interest is an operating cost, so we value earnings after interest and subtract no debt. How we measured earnings. We built owner earnings from cash flow: operating cash flow, less timing items (accrued interest, taxes payable, mortgage loans bought and sold within the period, and the "other" line), less the provision for credit losses, which we treat as a real recurring cost even though it is non-cash, less maintenance capital spending. The cash-flow statement has no separate stock-compensation add-back (restricted-stock expense was $4.9 million in 2025), so it is charged once by not adding it back. Per diluted share this gives $0.67 (2016), $0.66, $0.87, $0.90, $0.52 (2020, when the pandemic reserve build took the provision to $56.7 million), $1.23, $1.19, $1.33, $1.15 and $1.23 (2025). Our normal level is the median of 2018 to 2025, $1.17: it starts in 2018 because the lower corporate tax rate changed the business's earnings (net income roughly doubled from 2017 to 2018), and it includes the 2020 trough and the 2021 reserve release, which offset each other. Last year's owner earnings grew 6.5 percent ($1.15 to $1.23). Our first-year assumption is 3 percent growth from $1.17, below that figure, so no reversal of a slowdown is assumed. Earnings so far in 2026 are stronger (net income $82.1 million in the first half versus $66.1 million a year earlier, with interest costs falling), but two quarters are not enough to move the normal level, so that strength is reflected only in the bull case. Estimates in earlier analyses were built on a different earnings measure and are not comparable; what has changed in the business is that problem loans (nonaccruals) rose from $61.5 million at the end of 2024 to $91.8 million at the end of 2025, then eased to $81.6 million by June 2026, while net charge-offs ran at $29.4 million (0.31 percent of loans) in 2025 and an annualized 0.41 percent in the first half of 2026. The allowance for credit losses is $125.8 million, 1.32 percent of loans. Base case: $21.39 per share. Owner earnings start at $1.17 and grow 3 percent a year for five years and 2 percent for the next five, reaching $1.50 in year 10. That growth is credited because it is funded from the bank's own profits: it keeps about 30 percent of earnings (28 percent in 2025), earns roughly 10 percent a year on its tangible equity, and must keep equity growing in step with the loan book, so only the rest is distributable ($0.86 per share in year 1 rising to $1.21 in year 10, worth $7.46 over the ten years). The business is assumed to keep earning that year-10 level indefinitely with no further growth, worth $13.93 today, because the deposit franchise and its customer relationships have persisted for decades. Not credited: further acquisitions (each is priced and paid for in shares or cash; Centric alone lifted the diluted share count from 93.9 million in 2022 to 101.8 million in 2023), any margin expansion, and share gains. With no growth at all the base would be about $19.49, and if the normal level were $1.00 rather than $1.17 it would be about $17.94. Bear case: $13.91 per share. We use the bank's own experience in the 2008 to 2010 credit cycle: provisions rose from $23.1 million in 2008 to $100.6 million in 2009 (about 2.2 percent of its $4.6 billion of loans), net charge-offs were $71.7 million, and the company lost $19.5 million (figures from the company's 2009 results announcement). Applied to today's $9.5 billion book: year 1 earns $1.10 (a little below normal as the cycle begins); year 2 provisions rise to about 0.5 percent of loans and earnings fall to $0.95; year 3 provisions reach 2.2 percent (about $206 million against roughly $30 million in a recent normal year), producing a loss of about $0.35 per share; year 4 provisions ease to about 1.0 percent (our assumption for the recovery) and earnings are $0.55. Afterwards earnings settle at $0.90 per share and stay flat forever, the median of the 2018 to 2022 low-interest-rate years, with no growth. The cycle costs about $2.15 per share, about 19 percent of tangible equity. The business is worth $13.91 per share; no debt is subtracted because interest is already charged in the earnings. The bear value exceeds tangible book value of $11.58 per share (equity of $1,569 million less $378 million of goodwill and $20 million of intangibles, on 101.1 million shares) because even in this case the deposit franchise keeps earning about 8 percent a year on that tangible equity. We do not model a stock issue; a repeat of the 11.5 million share issuance the bank made in November 2008 (about 5.6 percent of average diluted shares) would lower this case by roughly $0.80. Bull case: $25.75 per share. Owner earnings start at $1.30, consistent with the strong first half of 2026, and grow 5 percent for five years (the pace of 2018 to 2025, from $0.87 to $1.23) and 3 percent for the next five, reaching $1.92 in year 10, then hold flat. No downturn is included. The business is worth $25.75 per share; no debt is subtracted. What would make this wrong. The largest risk is credit: the loan book is concentrated in Pennsylvania and Ohio, and nonaccruals are still about one-third higher than at the end of 2024 even after easing. The second is the interest margin: owner earnings were $0.52 to $0.90 a share in 2018 to 2020 and $1.15 to $1.33 from 2021 to 2025; the base case assumes $1.17, inside the recent range but well above the earlier years. Margin-of-safety price: $8.00. We are reasonably sure of earnings of $1.15 to $1.33 a share because the last five years all sit in that range, but less sure that holds: the three years before that were $0.52 to $0.90, and the interest margin of recent years may not persist. The worst realistic outcome is a 2009-style credit cycle; the bank is deposit-funded with small borrowings, so it would likely survive that, but shares could sit below tangible book value for several years. If we are wrong about the margin or about credit, earnings of $0.90 to $1.00 are the plausible alternative. The price assumes a three-to-five-year holding period, during which the bank returns cash: dividends of $55.5 million in 2025 (about $0.54 per share) plus $35.8 million of buybacks, with a further $36.9 million repurchased in the first half of 2026. At $8.00 the bank's normal earnings of $1.17 are about a 15 percent yield on that price before any growth, and if the shares merely returned to tangible book value after three years (about $12.65 by then, building at 3 percent a year) with roughly $0.55 a year in dividends, the implied return would be about 21 percent a year. That is why the margin-of-safety price is $8.00.