FIRST COMMONWEALTH FINANCIAL CORP /PA/ (FCF) FY 2024 MD&A

ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis represents an overview of the financial condition and the results of operations of First Commonwealth and its subsidiaries, as of and for the years ended December 31, 2024, and 2023. The purpose of this discussion is to focus on information concerning our financial condition and results of operations that is not readily apparent from the Consolidated Financial Statements. In order to obtain a more thorough understanding of this discussion, you should refer to the Consolidated Financial Statements, the notes thereto and to other financial information presented in this Annual Report. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC on February 29, 2024 for a discussion and analysis of the factors that affected periods prior to 2024.

Company Overview

First Commonwealth provides a diversified array of consumer and commercial banking services through our bank subsidiary, FCB. We also provide trust and wealth management services through FCB and insurance products through FCIA. At December 31, 2024, FCB operated 124 community banking offices throughout Pennsylvania and Ohio, as well as loan production offices in Harrisburg, Pennsylvania, and Cleveland, Columbus, Canton, Canfield and Hudson, Ohio.

Our consumer services include internet, mobile and telephone banking, an automated teller machine network, personal checking accounts, interest-earning checking accounts, savings accounts, health savings accounts, insured money market accounts, debit cards, investment certificates, fixed and variable rate certificates of deposit, mortgage loans, secured and unsecured installment loans, construction and real estate loans, safe deposit facilities, credit cards, credit lines with overdraft checking protection and IRA accounts. Commercial banking services include commercial lending and leasing, small and high-volume business checking accounts, on-line account management services, ACH origination, payroll direct deposit, commercial cash management services and repurchase agreements. We also provide a variety of trust and asset management services and a full complement of auto, home and business insurance as well as term life insurance. We offer annuities, mutual funds and stock and bond brokerage services through an arrangement with a broker-dealer and insurance brokers. Most of our commercial customers are small and mid-sized businesses in Pennsylvania and Ohio.

As a financial institution with a focus on traditional banking activities, we earn the majority of our revenue through net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing our net interest margin, which is net interest income (on a fully taxable-equivalent basis) as a percentage of our average interest-earning assets. We also generate revenue through fees earned on various services and products that we offer to our customers and, less frequently, through sales of assets, such as loans, investments or properties. These revenue sources are offset by provisions for credit losses on loans, operating expenses and income taxes.

General economic conditions also affect our business by impacting our customers’ need for financing, thus affecting loan growth, as well as impacting the credit strength of existing and potential borrowers.

Critical Accounting Policies and Significant Accounting Estimates

First Commonwealth’s accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and predominant practice in the banking industry. The preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Over time, these estimates, assumptions and judgments may prove to be inaccurate or vary from actual results and may significantly affect our reported results and financial position for the period presented or in future periods. We currently view the determination of the allowance for credit losses and business combinations to be critical because they are highly dependent on subjective or complex judgments, assumptions and estimates made by management.

Allowance for Credit Losses

We account for the credit risk associated with our lending activities through the allowance and provision for credit losses. The allowance represents management’s best estimate of expected losses in our existing loan and lease portfolio as of the balance sheet date. The provision is a periodic charge to earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of expected losses. Management determines and reviews with the Board of Directors the appropriateness of the allowance on a quarterly basis in accordance with the methodology described below.

•Loans are segmented into groups with similar characteristics and risks and an allowance for credit losses is calculated for each segment based on the estimate of credit losses.

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•The allowance for credit losses is calculated by pooling loans of similar credit risk characteristics and applying a discounted cash flow methodology after incorporating probability of default and loss given default estimates. Probability of default represents an estimate of the likelihood of default and loss given default measures the expected loss upon default. Inputs impacting the expected losses includes a forecast of macroeconomic factors, using a weighted forecast from a nationally recognized firm.

•Loans that do not have the same risks and characteristics of the loan pools are individually reviewed. These are generally large balance commercial loans and commercial mortgages that are rated less than “satisfactory” based on our internal credit-rating process.

•We assess whether the loans identified for review are “nonperforming”. This means it is expected that all amounts will not be collected according to the contractual terms of the loan agreement, which generally represents loans that management has placed on nonaccrual status.

•For individually analyzed loans we calculate the estimated fair value of the loans that are selected for review based on observable market prices, discounted cash flows or the value of the underlying collateral and record an allowance if needed.

•We then review the results to determine the appropriate balance of the allowance for credit losses. This review includes consideration of additional factors, such as the mix of loans in the portfolio, the balance of the allowance relative to total loans and nonperforming assets, trends in the overall risk profile in the portfolio, trends in delinquencies and nonaccrual loans, and local and national economic information and industry data, including trends in the industries we believe are higher risk.

There are many factors affecting the allowance for credit losses; some are quantitative, while others require qualitative judgment. These factors require the use of estimates related to the amount and timing of expected future cash flows, appraised values on nonperforming loans, estimated losses for each loan category based on historical loss experience, forecasts of economic trends and conditions, all of which may be susceptible to significant judgment and change. To the extent that actual outcomes differ from estimates, additional provisions for credit losses could be required that could adversely affect our earnings or financial position in future periods.

As noted above, the allowance for credit losses is estimated using a number of inputs and assumptions. Management's sensitivity analysis of the allowance identified that the model has the highest degree of sensitivity around values used in the economic forecast, specifically national unemployment and gross domestic product. Additionally, there is also a high degree of sensitivity related to estimated prepayment speeds as it is a major driver for the life of loan expectations. The sensitivity of estimated prepayment speeds had the largest impact on the residential first lien loan pool.

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Selected Financial Information

The following table provides selected financial information for the periods ended December 31,

Results of Operations—2024 Compared to 2023

Net Income

Net income for 2024 was $142.6 million, or $1.39 per diluted share, as compared to net income of $157.1 million, or $1.54 per diluted share in 2023. Contributing to the decrease in net income was a $6.8 million decline in net interest income and a $14.4 million increase in provision for credit losses. Provision for credit losses in 2023 included $10.7 million related to the day 1 adjustment on non-PCD loans acquired in the Centric acquisition. Noninterest expense increased $0.8 million in 2024 compared

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to 2023, however 2023 included $8.9 million in expenses related to the Centric acquisition. Noninterest income increased $2.6 million in 2024 compared to 2023 despite a decline of $6.8 million in card-related interchange income as a result of the Company being subject to the Durbin Amendment to the Dodd-Frank Act beginning July 1, 2024.

Our return on average equity was 10.4% and our return on average assets was 1.22% for 2024, compared to 12.8% and 1.42%, respectively, for 2023.

Average diluted shares for the year 2024 were 0.4% more than the comparable period in 2023 primarily due to $12.7 million of common stock buybacks completed during 2024.

Net Interest Income

Net interest income, which is our primary source of revenue, is the difference between interest income from earning assets (loans and securities) and interest expense paid on liabilities (deposits, short-term borrowings and long-term debt). The net interest margin is expressed as the percentage of net interest income, on a fully taxable equivalent basis, to average interest-earning assets. To compare the tax exempt asset yields to taxable yields, amounts are adjusted to the pretax equivalent amounts based on the marginal corporate federal income tax rate of 21%. The taxable equivalent adjustment to net interest income for 2024 was $1.3 million compared to $1.2 million in 2023. Net interest income comprises a majority of our revenue (net interest income before provision expense plus noninterest income) at 79% and 80% for the years ended December 31, 2024 and 2023, respectively.

Net interest income, on a fully taxable equivalent basis, was $380.2 million for the year-ended December 31, 2024, a $6.7 million, or 2%, decrease compared to $386.9 million for the same period in 2023. The net interest margin, on a fully taxable equivalent basis, decreased 26 basis points to 3.55% in 2024 from 3.81% in 2023. Net interest income and the net interest margin are affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

The growth in interest-earning assets as well as the higher interest rate environment had a positive impact on interest income for the year ended December 31, 2024. Average earning assets for the year ended December 31, 2024 increased $0.6 billion, or 6%, compared to the year ended December 31, 2023 and interest income increased $70.5 million, or 13.3%. Interest-sensitive assets totaling $5.1 billion will either reprice or mature over the next twelve months.

The taxable equivalent yield on interest-earning assets was 5.62% for the year ended December 31, 2024, an increase of 39 basis points from the 5.23% yield for the same period in 2023. This change is the result of a higher market interest rate rates for the majority of 2024 and resulted in the loan and leases portfolio yield increasing by 38 basis points. Contributing to this increase were the yields on our indirect automobile loan portfolio and adjustable and variable rate commercial loan portfolios, which increased by 78 basis points and 13 basis points, respectively. Additionally, for the year ended December 31, 2024 seven basis points of the yield on interest-earning assets can be attributed to the recognition of $7.5 million in accretion of purchase accounting marks, primarily from the Centric acquisition. For the year ended December 31, 2023, $9.1 million in accretion of purchase accounting marks benefited the yield on interest-earning assets by nine basis points.

As of December 31, 2024, 51% of our loan portfolio had variable or adjustable interest rates and 49% had fixed interest rates. After incorporating the impact of our cash flow hedges that convert the interest rate on $425.0 million of our 1-month Secured Overnight Financing Rate ("SOFR") based loans to fixed rates, the variable and adjustable interest rates would account for 46% of our loan portfolio. Loans with variable or adjustable interest rates include approximately 27% tied to the prime interest rate, 50% tied to SOFR, 11% tied to Treasury rates, 10% tied to Federal Home Loan Bank rates.

Also contributing to the increase in yield on interest-earning assets was the yield on the investment portfolio, which increased by 90 basis points compared to the prior year, primarily as new volume rates were higher than the portfolio yield. The average investment portfolio balance increased $276.0 million as growth in average deposits exceeded the funding needs for loan growth. The yield on interest-bearing deposits with banks increased 13 basis points compared to the prior year as a result of higher interest rates, while the average balance decreased $11.8 million.

Increases in the cost of interest-bearing liabilities offset the positive impact of higher yields on interest-earning assets. The cost of interest-bearing liabilities was 2.83% for the year ended December 31, 2024, compared to 2.03% for the same period in 2023. The increase of 92 basis points in the cost of interest-bearing deposits can be attributed to market interest rates, which influenced the mix of deposits as customers moved funds into higher costing deposits to take advantage of the increased rates offered on money market accounts and time deposits. Average time deposits increased $577.3 million, or 59.3%, with an increase in the cost of these deposits of 104 basis points. Other interest-bearing deposits increased an average of $128.4 million, or 2.3%, increasing the cost of deposits 74 basis points.

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The cost of short-term borrowings decreased 35 basis points in comparison to the same period in the prior year. Average short-term borrowings increased by $4.9 million for the year ended December 31, 2024 compared to the same period in 2023. Average long-term debt decreased $0.1 million, while the cost of long-term debt decreased by 4 basis points.

Comparing the year ended December 31, 2024 with the same period in 2023, changes in rates negatively impacted net interest income by $8.2 million. The higher yield on interest-earning assets increased net interest income by $47.8 million, while the change in the cost of interest-bearing liabilities negatively impacted net interest income by $56.0 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively increased net interest income by $1.5 million in the year ended December 31, 2024 compared to the same period in 2023. Higher levels of interest-earning assets resulted in an increase of $22.8 million in interest income, and changes in the volume and mix of interest-bearing liabilities increased interest expense by $21.3 million, primarily due to growth in time and savings deposits.

Net interest income was negatively impacted by a decrease of $147.3 million in average net free funds at December 31, 2024 as compared to December 31, 2023. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The lower level of net free funds was primarily the result of lower noninterest-bearing demand deposits as customers became more rate sensitive.

The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the periods presented:

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The following table provides information regarding the average balances and yields or rates on interest-earning assets and interest-bearing liabilities for the periods ended December 31:

(a)Income on interest-earning assets has been computed on a fully taxable equivalent basis using the federal income tax statutory rate of 21%.

(b)Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.

(c)Loan income includes loan fees.

(d)Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits which were made for regulatory purposes.

(e)Includes held for sale loans.

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The following table sets forth certain information regarding changes in net interest income attributable to changes in the volume of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated:

(a)Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.

(b)Changes in interest income have been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate.

Provision for Credit Losses

The provision for credit losses is determined based on management’s estimates of the appropriate level of the allowance for credit losses needed to provide for expected losses inherent in the loan and lease portfolio and on off-balance sheet commitments. The provision for credit losses is an amount added to the allowance against which credit losses are charged.

The provision is a result of management's estimate of credit losses over the contractual life of the loan and lease portfolio. The change in the allowance for credit losses is impacted by estimated expected losses in the portfolio determined by a discounted cash flow analysis considering inputs such as contractual payment schedules, prepayment estimates, historical loss experience, calculated probability of default and loss given default estimates and forecasts for certain macroeconomic variables, such as unemployment, gross domestic product and the housing price index as well as other macroeconomic variables.

The provision for credit losses in 2024 totaled $29.2 million, reflecting an increase of $14.4 million compared to the $14.8 million provision recognized in 2023. Included in the provision expense for 2023 was $10.7 million in day 1 non-PCD expense related to the Centric acquisition. Provision expense related to outstanding loans and leases, excluding the impact of the day 1 non-PCD expense in 2023, increased $25.3 million in 2024. This increase can be primarily attributed to $31.2 million in net charge-offs and a $3.1 million increase in specific reserves. The provision for off-balance sheet commitments decreased $0.3 million in 2024 compared to 2023 as a result of lower off-balance sheet commitments related to construction loans.

The level of provision expense in 2024 was primarily related to two loan categories including the commercial, financial, agricultural and other category as well as commercial real estate. These two categories accounted for $27.5 million of the $32.4 million total provision expense for loans and leases. Provision expense for the commercial, financial, agricultural and other category was $15.8 million in 2024 and was impacted by an increase of $11.5 million in provision expense related to time and demand loans and an increase of $3.4 million in provision expense related to the equipment finance portfolio. The increase in the provision expense related to the time and demand category can be attributed to $10.7 million in net charges-offs as well as an increase of $0.7 million in specific reserves primarily due to new loans moved to nonaccrual during 2024. The increase in the provision expense related to the equipment finance portfolio can be attributed to growth in the portfolio of $194.4 million, or 83%, and $1.8 million in net charge-offs. Provision expense for the commercial real estate category was impacted by $8.5 million in net charge-offs and an increase in general reserves due to $71.6 million in loan growth. Additionally, the $1.4 million negative provision for the residential real estate category can be attributed to a $75.2 million decrease in outstanding loan

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balances. Net charge-offs related to loans to individuals were $6.8 million for the year ended December 31, 2024, including $5.2 million for indirect auto loans and $1.2 million related to other consumer loans.

The table below provides a breakout of the provision for credit losses by loan category for the years ended December 31:

The allowance for credit losses was $118.9 million, or 1.32%, of total loans and leases outstanding at December 31, 2024, compared to $117.7 million, or 1.31%, at December 31, 2023. Nonperforming loans as a percentage of total loans increased to 0.68% at December 31, 2024 from 0.44% at December 31, 2023. The allowance to nonperforming loan ratio was 193.5% as of December 31, 2024 and 298.2% at December 31, 2023. Net charge-offs were $31.2 million for the year ended December 31, 2024 compared to $30.2 million for the same period in 2023, an increase of $1.0 million. During 2024, $11.1 million in charge-offs were recognized related to loans acquired through the Centric acquisition; $2.4 million of these charge-offs were specifically provided for as part of the PCD allowance for credit losses at acquisition.

Management believes that the allowance for credit losses is at a level deemed appropriate to absorb expected losses inherent in the loan portfolio at December 31, 2024.

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A detailed analysis of our credit loss experience for the previous five years is shown below:

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Noninterest Income

The components of noninterest income for each year in the three-year period ended December 31 are as follows:

Noninterest income, excluding net securities (losses) gains, gain on VISA exchange, gain on sale of mortgage loans, gain on sale of other loans and assets and the derivatives mark to market, decreased $1.9 million, or 2%, in 2024. This decrease can be attributed to a $6.8 million decline in card-related interchange income resulting from the Company being subject to the Durbin Amendment to the Dodd-Frank Act beginning July 1, 2024. The Durbin Amendment is now applicable to the Company because its total assets exceeded $10.0 billion as of December 31, 2023. The Company will be subject to the Durbin Amendment for the full year of 2025 and it is expected to decrease our 2025 interchange income by an additional $6.0 million compared to the 2024 level.

Income from bank owned life insurance increased $1.5 million, of which $1.0 million was related to an increase in policy death benefits. Service charges on deposit accounts increased $1.1 million primarily due to higher business account analysis income and increased customer activity. Trust income increased $1.3 million due to gains in the value of assets under management. Swap fee income declined $0.6 million as a result of a decrease in new interest rate swaps entered into by our commercial loan customers compared to the prior period.

Total noninterest income increased $2.6 million, or 3%, in comparison to the year ended December 31, 2023. The most significant changes, other than the changes noted above, include a $5.7 million gain related to the conversion and sale of Visa class B shares. Gain on sale of mortgages increased $1.8 million as a result of changes in volume and spread received on mortgage loans sold, and gain on sale of other loans and assets increased $2.4 million due to an increase in the volume and spread on the sale of SBA loans. Offsetting these gains are $5.4 million in losses recognized on the sale of $75.1 million in available for sale securities, which were sold in order to reinvest into higher yielding investments.

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Noninterest Expense

The components of noninterest expense for each year in the three-year period ended December 31 are as follows:

Total noninterest expense increased $0.8 million compared to the year ended December 31, 2023. Salaries and employee benefits increased $6.4 million primarily due to annual merit salary increases, higher severance expense and an increase in the number of full-time employees. The number of full time equivalent employees totaled 1,475 at December 31, 2023, increasing to 1,512 at December 31, 2024. Increases in net occupancy expense are attributed to insurance costs as well as higher depreciation expenses from new or improved locations. Data processing costs increased $0.6 million due to continued investment in our digital banking and other product offerings. The level of Pennsylvania shares tax increased $1.1 million as a result of an increased assessment base due to the Centric acquisition 2023. During 2024, $0.4 million in remaining subordinated debt issuance costs that were being amortized over the life of the instrument were accelerated and recognized in conjunction with the redemption of $50.0 million in subordinated debt. Offsetting these increases is a decrease of $8.6 million in merger and acquisition related expenses associated with the Centric acquisition.

Income Tax

The provision for income taxes of $35.6 million in 2024 reflects a decrease of $4.9 million compared to the provision for income taxes in 2023 as a result of a $19.3 million decrease in the level of income before taxes.

The effective tax rate was 20.0% and 20.5% for tax expense in 2024 and 2023, respectively. We ordinarily generate an annual effective tax rate that is less than the statutory rate due to benefits resulting from tax-exempt interest, income from bank owned life insurance, and tax benefits associated with low income housing tax credits, all of which are relatively consistent regardless of the level of pretax income.

Financial Condition

First Commonwealth’s total assets increased $0.1 billion as of December 31, 2024 compared to December 31, 2023. Loans and leases, including loans held for sale, increased $37.2 million. Loan growth, excluding loans held for sale, in 2024 totaled $15.0 million with equipment finance loans accounting for a majority of the growth. Investment securities increased $113.3 million, or 8% and cash and interest-bearing balances with banks decreased $13.6 million, or 9%.

First Commonwealth’s total liabilities increased $34.6 million in 2024. Deposits increased $485.7 million and long-term borrowings increased $126.2 million. Short-term borrowings decreased $517.7 million, or 87%. Subordinated debentures decreased $49.4 million due to the early redemption of a $50.0 million issuance.

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Total shareholders' equity increased $90.9 million in 2024. The growth in shareholders' equity was the result of net income of $142.6 million and a $9.2 million increase in accumulated other comprehensive income, offset by $52.6 million in dividends declared and $12.7 million in stock repurchases.

Loan and Lease Portfolio

Following is a summary of our loan and lease portfolio as of December 31:

The loan and lease portfolio totaled $9.0 billion as of December 31, 2024, reflecting growth of $15.0 million compared to December 31, 2023. Commercial, financial, agricultural and other loans increased $134.6 million, or 9%, $194.4 million of which is a result of growth in the equipment finance portfolio while time and demand loans decreased by $53.7 million. Residential real estate loans decreased $75.2 million, or 3%, due to a higher percentage of new loans being originated for sale. Commercial real estate loans increased $71.6 million, or 2%, primarily due to growth in multifamily and non-owner occupied properties. Loans to individuals decreased $1.7 million primarily due to a decline in other consumer loans, offset by growth in indirect auto and recreational vehicle loans.

Loans secured by 1-4 family residential properties in the process of foreclosure totaled $12.1 million at December 31, 2024 and $9.9 million at December 31, 2023.

The level of the loan portfolio in 2023 was impacted by the Centric acquisition. To better understand the changes to loan portfolio in 2023, the following table shows a breakdown of our loan portfolio between loans originated and loans acquired through the Centric acquisition as of December 31, 2023:

(1) Includes January 31, 2023 balance of loans acquired as part of the Centric acquisition plus day 1 gross up of PCD loans.

The majority of our loan and lease portfolio is with borrowers located in the states of Pennsylvania and Ohio. As of December 31, 2024 and 2023, there were no concentrations of loans relating to any industry in excess of 10% of total loans.

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Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at December 31, 2024 were as follows:

(a)The maturities of real estate construction loans include term commitments that follow the construction period. Loans with these term commitments will be moved to the commercial real estate category when the construction phase of the project is completed.

First Commonwealth has a legal lending limit of $190.3 million to any one borrower or closely related group of borrowers, but has established lower thresholds for credit risk management.

Commercial real estate comprises 35% of our total loan portfolio. Commercial real estate loans are collateralized by real estate properties including, but not limited to, multifamily properties, office, retail, hotels and student housing. The following table summarizes the commercial real estate portfolio by type of property securing the credit as of December 31:

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The following table represents our commercial real estate portfolio by type of property securing the credit as of December 31, 2024. Total non-pass commercial real estate loans increased by $13.0 million to $109.8 million when compared to December 31, 2023.

The office portfolio comprises 17.1% of total commercial real estate loans and 37.1% of total commercial real estate non-pass loans. The average loan commitment size for the office portfolio is $1.6 million and the average outstanding balance as of December 31, 2024 is $1.1 million. Within the office portfolio, exposures over $1.0 million have an average debt service coverage ratio of 1.46x, which exceeds our internal guidelines of 1.35x to 1.40x, depending on property class. Additionally for loans with exposure over $1.0 million, the office portfolio has an average loan to value of 61.0% compared to internal guidelines of 60-75% depending on property class. Our current measure is based off of the most recent appraisal on file, the majority of which are from origination.

As previously noted, portfolio segment limits are approved by our Board of Directors' Risk Committee. These segment limits incorporate loan commitments and are based off of total Tier 1 capital plus the allowable allowance for credit losses. In the second quarter of 2024, after considering the current environment and potential risks related to the office portfolio, the segment limit for the office portfolio was decreased from 65% to 50%, with the actual segment concentration at 40% as of December 31, 2024.

The following table summarizes commercial real estate loans by the location of the properties by which they are collateralized as of December 31, 2024. Some loans are collateralized by multiple properties spread over various states. In those instances the loan is included below based on the location of the primary property collateralizing the loan.

When calculating the allowance for credit losses the commercial real estate portfolio is segmented into three portfolio segments: multifamily, non-owner occupied and owner occupied. For additional information related to these segments, including credit quality, see Note 9 "Loans and Leases and Allowance for Credit Losses" of the Consolidated Financial Statements.

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Nonperforming Loans

Nonperforming loans include nonaccrual loans and restructured loans. Nonaccrual loans represent loans on which interest accruals have been discontinued. Restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower under terms not available in the market.

We discontinue interest accruals on a loan when, based on current information and events, it is probable that we will be unable to fully collect principal or interest due according to the contractual terms of the loan. Consumer loans are placed in nonaccrual status at 150 days past due.  Other types of loans are typically placed in nonaccrual status when there is evidence of a significantly weakened financial condition or principal and interest is 90 days or more delinquent. Interest received on a nonaccrual loan is normally applied as a reduction to loan principal rather than interest income utilizing the cost recovery methodology of revenue recognition.

Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The estimated credit loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral and the present value of projected future cash flows. Losses are recognized when a loss is expected and the amount is reasonably estimable.

The following is a comparison of nonperforming assets and the effects on interest due to nonaccrual loans for the period ended December 31:

(a)End of period loans and nonperforming loans exclude loans held for sale.

(b)Does not include provision for credit losses on loans and leases - acquisition day 1 non-PCD.

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Nonperforming loans increased $22.0 million to $61.5 million at December 31, 2024, compared to $39.5 million at December 31, 2023. The increase in nonperforming loans is primarily a result of $62.9 million in loans being moved to nonaccrual status, offset by the sale of $20.1 million in nonperforming loans as well as the charge off of $14.2 million in seven commercial nonperforming loans. Nonperforming loans as a percentage of total loans increased to 0.68% from 0.44% at December 31, 2024 compared to December 31, 2023, respectively.

Net charge-offs were $31.2 million in 2024 compared to $30.2 million for the year 2023. The most significant credit losses recognized during the year include $11.1 million in charge-offs related to the Centric acquisition. Net charge-offs in the commercial, financial, agricultural and other category totaled $14.7 million, of which $7.0 million were related to the Centric acquisition. Commercial real estate net charge-offs totaled $8.5 million primarily due to a $5.4 million in charge-offs recognized on three commercial real estate relationships and $3.1 million related to the Centric acquisition. Net charge-offs in the loans to individuals category totaled $6.8 million for 2024, primarily due to charge-offs of indirect auto loans. Additional detail on credit risk is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Provision for Credit Losses,” “Allowance for Credit Losses" and "Credit Risk.”

Provision for credit losses on loans and leases as a percentage of net charge-offs increased to 103.8% for the year ended December 31, 2024 from 23.6% for the year ended December 31, 2023. This change was primarily driven by the $31.2 million in net charge-offs.

Allowance for Credit Losses

Following is a summary of the allocation of the allowance for credit losses at December 31:

(a)Represents the ratio of loans in each category to total loans.

The allowance for credit losses increased $1.2 million from December 31, 2023 to December 31, 2024. The allowance for credit losses as a percentage of end-of-period loans and leases outstanding was 1.32% and 1.31% at December 31, 2024 and 2023, respectively. The allowance for credit losses includes both a general reserve for performing loans and reserves for individually analyzed loans. Comparing December 31, 2024 to December 31, 2023, the general reserve for performing loans is 1.24% and 1.26%, respectively, of total performing loans for both periods. Reserves for individually analyzed loans increased from 11.5% of nonperforming loans at December 31, 2023 to 13.0% of nonperforming loans at December 31, 2024. The allowance for credit losses as a percentage of nonperforming loans was 193.5% and 298.2% at December 31, 2024 and 2023, respectively.

The allowance for credit losses represents management’s estimate of expected losses in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated credit losses inherent in the remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions charged to income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off. Management evaluates the appropriateness of the allowance at least quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, contractual payment schedules, prepayment estimates, calculated probability of default and loss given default estimates and forecasts of certain macroeconomic variables, such as unemployment, gross domestic product, housing price index as well as other macroeconomic variables. This evaluation is subjective and requires material estimates that may change over time. For a description of the methodology used to calculate the allowance for credit losses, please refer to “Critical Accounting Policies and Significant Accounting Estimates—Allowance for Credit Losses.”

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Investment Portfolio

Marketable securities that we hold in our investment portfolio, which are classified as “securities available for sale,” act as a source of liquidity. However, we do not anticipate liquidating the investments prior to maturity.

Following is a detailed schedule of the amortized cost of securities available for sale as of December 31:

As of December 31, 2024, securities available for sale had a fair value of $1.1 billion. Gross unrealized gains were $5.4 million and gross unrealized losses were $125.6 million. The level of gross unrealized losses is directly related to the increase in market interest rates.

The securities available for sale portfolio increased $126.6 million, or 12%, as of December 31, 2024 compared to December 31, 2023, as deposit growth provided additional liquidity and investment securities provided an opportunity to take advantage of the current interest rate environment. Most of the growth in this portfolio was in the Mortgage-Backed Securities - Commercial category as these securities provide ongoing liquidity through regular principal paydowns and additionally can be pledged for borrowings or to secure public deposits.

The following is a schedule of the contractual maturity distribution of securities available for sale at December 31, 2024.

(a)Equities are excluded from this schedule because they have an indefinite maturity.

(b)Yields are calculated on a taxable equivalent basis, including amortization of premiums or discounts, and represent yield to maturity.

Mortgage-backed securities, which include mortgage-backed obligations of U.S. Government agencies and obligations of U.S. Government-sponsored enterprises, have contractual maturities ranging from less than one year to approximately 41 years and have anticipated average lives to maturity ranging from less than three years to approximately six years.

The available for sale investment portfolio amortized cost increased $129.3 million, or 11%, at December 31, 2024 compared to 2023. Purchases of available for sale investments totaled $437.3 million during 2024 and calls or maturities totaled $302.5 million. The level of purchases were impacted by liquidity available from increased deposits. Liquidity provided from sales, calls and maturities was utilized to fund growth in the loan portfolio or reinvested into investment securities and interest-bearing deposits with banks.

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Following is a detailed schedule of the amortized cost of securities held to maturity as of December 31:

The following is a schedule of the contractual maturity distribution of securities held to maturity at December 31, 2024.

(a)Yields are calculated on a taxable equivalent basis, including amortization of premiums or discounts, and represent yield to maturity.

The held to maturity investment portfolio decreased $13.4 million, or 3%, at December 31, 2024 compared to 2023. Held to maturity investment purchases of $55.3 million were offset by the calls or maturities of $68.0 million in investments.

See Note 8 “Investment Securities" and Note 18 “Fair Values of Assets and Liabilities” for additional information related to the investment portfolio.

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Deposits

Total deposits increased $485.7 million in 2024. Interest-bearing demand and savings deposits increased $162.0 million, noninterest-bearing demand deposits decreased $138.9 million and time deposits increased $462.6 million. The growth and changes in the mix of deposits is a result of customers moving funds into higher costing deposits as interest rates increased.

For additional information concerning our deposits, please refer to Note 14 “Interest-Bearing Deposits.”

At December 31, 2024 and 2023, time deposits of $100 thousand or more totaled $1,018.3 million and $725.1 million, respectively. Time deposits of $250 thousand or more had remaining maturities as follows as of the end of each year in the two-year period ended December 31:

The estimated total amount of uninsured deposits was $2.6 billion and $2.5 billion at December 31, 2024 and 2023, respectively, of which $0.7 billion were secured by pledged investment securities or letters of credit at December 31, 2024 and 2023. Uninsured amounts are estimated based on known deposit account relationships for each depositor and insurance guidelines provided by the FDIC.

Short-Term Borrowings and Long-Term Debt

Short-term borrowings decreased $517.7 million, or 87%, from $597.8 million at December 31, 2023 to $80.1 million at December 31, 2024. Long-term debt increased $76.2 million, from $186.8 million at December 31, 2023 to $263.0 million at December 31, 2024. For additional information concerning our short-term borrowings, subordinated debentures and other long-term debt, please refer to Note 15 “Short-term Borrowings,” Note 16 “Subordinated Debentures” and Note 17 “Other Long-term Debt” of the Consolidated Financial Statements.

Contractual Obligations and Off-Balance Sheet Arrangements

The table below sets forth our contractual obligations to make future payments as of December 31, 2024. For a more detailed description of each category of obligation, refer to the note in our Consolidated Financial Statements indicated in the table below.

The table above excludes our cash obligations upon maturity of certificates of deposit, which is set forth in Note 14 “Interest-Bearing Deposits” of the Consolidated Financial Statements.

In addition, see Note 10 “Commitments and Letters of Credit” for detail related to our off-balance sheet commitments to extend credit, financial standby letters of credit, performance standby letters of credit and commercial letters of credit as of December 31, 2024. Commitments to extend credit, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements since it is unknown if the borrower will draw upon these commitments and often these commitments expire without being drawn upon. As of December 31, 2024, a reserve for expected credit losses of $4.1 million was recorded for unused commitments and letters of credit.

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Liquidity

Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers, as well as our operating cash needs, with cost-effective funding. Liquidity risk arises from the possibility that we may not be able to meet our financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, our Board of Directors has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements based on limits approved by our Board of Directors. This policy designates our Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by our Treasury Department, which monitors it by using such measures as a 30-day liquidity stress analysis, liquidity gap ratios and noncore funding ratios.

We generate funds to meet our cash flow needs primarily through the core deposit base of First Commonwealth Bank and the maturity or repayment of loans and other interest-earning assets, including investments. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is sometimes influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. Deposits increased $485.7 million during 2024, and comprised 95% and 91% of total liabilities at December 31, 2024 and 2023, respectively. Proceeds from the sale, maturity and redemption of investment securities totaled $370.5 million during 2024 and provided liquidity to fund loans, purchase investment securities and fund depositor withdrawals.

The following represents our expanded sources of liquidity as of December 31, 2024:

(1) Reflects internal policy limit. Maximum capacity with CDARs is $1.7 billion.

Our participation in the Certificate of Deposit Account Registry Services ("CDARS") program is part of an ALCO strategy to increase and diversify funding sources. As of December 31, 2024, the outstanding CDARS balance of $14.5 million carried an average weighted rate of 3.22% and an average original term of 357 days. These deposits are part of a reciprocal program that allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks.

Liquidity available through the Federal Reserve is a result of the FRB Borrower-in-Custody of Collateral program, which enables us to take certain loans that are not being used as collateral at the FHLB and pledge them as collateral for borrowings at the FRB.

During 2024, the Company increased its liquidity by purchasing $85.2 million in letters of credit from the FHLB of Pittsburgh, which were then used to secure public deposits. This resulted in a similar amount of previously pledged securities becoming unencumbered.

Refer to “Financial Condition” above for additional information concerning our deposits, loan portfolio, investment securities and borrowings.

Market Risk

Market risk refers to potential losses arising from items such as changes in interest rates, foreign exchange rates, equity prices and commodity prices. Our market risk is composed primarily of interest rate risk. Interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk. Repricing risk arises from differences in the cash flow or repricing between

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asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indices, which do not always change by the same amount. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from “embedded options” within asset and liability products as certain borrowers have the option to prepay their loans when rates fall, while certain depositors can redeem or withdraw their deposits early when rates rise.

The process by which we manage our interest rate risk is called asset/liability management. The goals of our asset/liability management are increasing net interest income without taking undue interest rate risk or material loss of net market value of our equity, while maintaining adequate liquidity. Net interest income is increased by growing earning assets and increasing the difference between the rate earned on earning assets and the rate paid on interest-bearing liabilities. Liquidity is measured by the ability to meet both depositors’ and credit customers’ requirements.

We use an asset/liability model to measure our interest rate risk. Interest rate risk measures include earnings simulation and gap analysis. Gap analysis is a static measure that does not incorporate assumptions regarding future events. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate environment. Net interest income simulations explicitly measure the exposure to earnings from changes in market rates of interest. Under simulation analysis, our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. Our net interest income simulations assume a level balance sheet whereby new volume equals run-off. The ALCO reviews earnings simulations over multiple years under various interest rate scenarios. Reviewing these various measures provides us with a reasonably comprehensive view of our interest rate profile.

The following gap analysis compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. The ratio of rate sensitive assets to rate sensitive liabilities repricing within a one-year period was 0.68 and 0.69 at December 31, 2024 and 2023, respectively. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is largely driven by the modeling of interest-bearing non-maturity deposits, which are included in the analysis as repricing within one year.

Following is the gap analysis as of December 31:

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