FIRST COMMONWEALTH FINANCIAL CORP /PA/ (FCF) FY 2021 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, 2021, and 2020. 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 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 March 1, 2021 for a discussion and analysis of the factors that affected periods prior to 2020.

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, 2021, FCB operated 118 community banking offices throughout western and central Pennsylvania and northeastern, central and southwestern Ohio, as well as loan production offices in Pittsburgh, Pennsylvania, and Cleveland, Columbus, Canton, Lewis Center, Hudson and Westlake, 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, 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, income taxes and, less frequently, loss on sale or other-than-temporary impairments on investment securities.

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 to be critical because it is 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 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

28

Table of Contents

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.

•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 and accruing troubled debt restructurings.

•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.

29

Table of Contents

Selected Financial Information

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

Results for 2021 and 2020 reflect accounting for the allowance for credit losses under the current expected credit loss methodology, while results prior to 2020 reflect accounting under the incurred methodology.

Results of Operations—2021 Compared to 2020

Net Income

Net income for 2021 was $138.3 million, or $1.44 per diluted share, as compared to net income of $73.4 million, or $0.75 per diluted share in 2020. The increase in net income was the result of a $58.1 million decline in provision for credit losses and an increase of $10.3 million and $12.3 million in net interest income and noninterest income, respectively.

30

Table of Contents

Our return on average equity was 12.6% and our return on average assets was 1.47% for 2021, compared to 6.8% and 0.82%, respectively, for 2020.

Average diluted shares for the year 2021 were 2% less than the comparable period in 2020 primarily due to $31.3 million of common stock buybacks completed during 2021.

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 amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities. 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 2021 was $1.1 million compared to $1.5 million in 2020. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income) at 72% and 74% for the years ended December 31, 2021 and 2020, respectively.

Net interest income, on a fully taxable equivalent basis, was $279.6 million for the year-ended December 31, 2021, a $9.9 million, or 4%, increase compared to $269.7 million for the same period in 2020. The net interest margin, on a fully taxable equivalent basis, decreased 6 basis points to 3.26% in 2021 from 3.32% in 2020. The net interest margin is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

The impact of growth in interest-earning assets in 2021 was offset by the effect of the mix of the asset growth and lower interest rates, resulting in a decrease in the net interest margin for the year ended December 31, 2021. Average earning assets for the year ended December 31, 2021 increased $458.5 million, or 6%, compared to the year ended December 31, 2020. The change in the volume of interest-earning assets and interest-bearing liabilities positively increased net interest income by $12.2 million in the year ended December 31, 2021 compared to the same period in 2020, while changes in rates negatively impacted net interest income by $2.3 million. Interest-sensitive assets totaling $4.6 billion will either reprice or mature over the next twelve months.

The taxable equivalent yield on interest-earning assets was 3.43% for the year ended December 31, 2021, a decrease of 29 basis points from the 3.72% yield for the same period in 2020. This change is primarily due to a decrease in the yield on our adjustable and variable rate commercial loan portfolios, which decreased by 56 basis points largely due to loans repricing in a lower interest rate environment after the Federal Reserve decreased short-term interest rates by 150 basis points in the first quarter of 2020. Also contributing to this decline was the yield on the investment portfolio, which decreased by 41 basis points compared to the prior year.

The loan yield for the year ended December 31, 2021 decreased 14 basis points and was impacted by $312.7 million in average Paycheck Protection Program ("PPP") loans outstanding during the period. These loans were originated under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and had a stated loan rate of 1% and a yield of 7.4% and 3.2% for the years ended December 31, 2021 and December 31, 2020, respectively. The yield on PPP loans includes the recognition of PPP loan deferred processing fees, net of deferred origination costs, of $19.9 million for the year ended December 31, 2021 and $8.4 million for the year ended December 31, 2020. These amounts are recognized in interest income as a yield adjustment over the life of the loan with accelerated recognition when a loan is forgiven or paid off. As of December 31, 2021, we expect to recognize additional PPP-related deferred processing fees, net of origination costs, of approximately $2.6 million as an adjustment to yield over the remaining life of the loans. At December 31, 2021, the balance of PPP loans outstanding totaled $71.3 million. PPP loans generated $23.2 million in income during the year ended December 31, 2021 and increased both the yield on total loans and the net interest margin by 16 basis points. During the year ended December 31, 2020, PPP loans generated $12.1 million in income decreasing the loan portfolio yield by 6 basis points and the net interest margin by 1 basis point. During the year ended December 31, 2021, the Company originated $255.8 million in new PPP loans and processed forgiveness on $764.0 million of PPP loans.

The investment portfolio yield decreased 41 basis points in comparison to the prior year as a result of the decrease in short-term interest rates. Investment portfolio purchases during the year ended December 31, 2021 have been primarily in obligations of U.S. government agencies, obligations of other government-sponsored enterprises and obligations of states and political subdivisions with durations of approximately four to five years and corporate bonds with a duration of nine years. Additionally, as a result of excess liquidity caused by significant growth in deposits, the average balance of interest-bearing deposits with banks has increased from $179.2 million in 2020 to $317.5 million in 2021. The impact of the level and rate paid on interest-bearing deposits with banks decreased the yield on interest-earnings assets by 13 basis points for the year ended December 31, 2021.

31

Table of Contents

Decreases in the cost of interest-bearing liabilities offset the negative impact of lower yields on interest-earning assets. The cost of interest-bearing liabilities was 0.27% for the year-ended December 31, 2021, compared to 0.58% for the same period in 2020. Lower market interest rates resulted in the cost of interest-bearing deposits decreasing 31 basis points and short-term borrowings decreasing 41 basis points in comparison to the same period in the prior year. Deposit growth contributed to a decline in average short-term borrowings of $22.8 million for the year ended December 31, 2021 compared to the same period in 2020. Average long-term debt decreased $32.7 million, while the cost of long-term debt increased by 31 basis points due to the maturity of lower costing borrowings.

Comparing the year ended December 31, 2021 with the same period in 2020, changes in rates negatively impacted net interest income by $2.3 million. The lower yield on interest-earning assets decreased net interest income by $15.3 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $13.1 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively increased net interest income by $12.2 million in the year ended December 31, 2021 compared to the same period in 2020. Higher levels of interest-earning assets resulted in an increase of $7.6 million in interest income, and changes in the volume of interest-bearing liabilities decreased interest expense by $4.6 million, primarily due to decreases in long-term borrowings and time deposits.

Positively affecting net interest income was a $531.5 million increase in average net free funds at December 31, 2021 as compared to December 31, 2020. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was a $479.0 million increase in average noninterest-bearing demand deposits primarily due to deposit growth related to PPP loan proceeds. Average time deposits for the year ended December 31, 2021 decreased $277.3 million, or 38%, compared to the comparable period in 2020, while the average rate paid on time deposits decreased 91 basis points. Over the next twelve months, $276.0 million in certificates of deposits are scheduled to mature.

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:

32

Table of Contents

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.

33

Table of Contents

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 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 portfolio. The change in the allowance for credit 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 for loans for 2021 totaled a $0.4 million negative provision, a decrease of $53.8 million, or 100.7%, compared to 2020. The level of provision expense for the year-ended December 31, 2021 is primarily a result of an improved economic forecast, which reflects a decline in the impact of the COVID-19 pandemic on the economy and expected loan losses. The provision for credit losses was also impacted by a decrease of $4.5 million in reserves on individually analyzed loans. Contributing to the decline in provision for credit losses was a $4.2 million decrease in expense related to lower reserves for off-balance sheet commitments.

Provision expense for the commercial, financial, agricultural and other category was impacted by net charge-offs of $4.6 million, offset by a decrease in outstanding balances, excluding PPP loans. Because PPP loans are fully guaranteed by the Small Business Administration ("SBA"), there is no allowance for credit losses recognized for these loans. Provision expense for real estate construction and residential real estate can be attributed to improved economic factors. Provision expense for the commercial real estate category is a result of $1.5 million in net charge-offs offset by a $4.9 million decrease in general reserves due to improved economic factors as well as a $3.5 million decrease in specific reserves. Net charge-offs related to loans to individuals were $2.6 million for the year ended December 31, 2021, including $0.8 million for indirect auto loans and $1.5 million related to other consumer loans. The provision expense for loans to individuals was also impacted by growth in the portfolio of $184.2 million.

34

Table of Contents

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

The level of provision expense for the year-ended December 31, 2020 totaled $53.5 million and primarily was a result of $17.2 million in net charge-offs and an increase in the allowance for credit losses resulting from the implementation of CECL. The expected loss methodology uses an economic forecast which at December 31, 2020 incorporated uncertainty and risks related to the COVID-19 pandemic.

The allowance for credit losses was $92.5 million, or 1.35%, of total loans outstanding at December 31, 2021, compared to $101.3 million, or 1.50%, at December 31, 2020. Nonperforming loans as a percentage of total loans increased slightly to 0.81% at December 31, 2021 from 0.80% at December 31, 2020. The allowance to nonperforming loan ratio was 167.7% as of December 31, 2021 and 187.4% at December 31, 2020. Net charge-offs were $8.4 million for the year-ended December 31, 2021 compared to $17.2 million for the same period in 2020.

Upon adoption of CECL at January 1, 2020, the provision for credit losses on off-balance sheet credit exposures are recorded as part of the provision for credit losses instead of a component of non-interest expense as it previously was recorded. The provision for credit losses recorded for off-balance sheet credit exposures totaled a negative provision of $1.0 million for the year ended December 31, 2021 and provision expense of $3.2 million for the year ended December 31, 2020.

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, 2021.

35

Table of Contents

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

36

Table of Contents

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 gains, gain on sale of mortgage loans, gain on sale of other loans and assets and the derivatives mark to market, increased $9.4 million, or 13%, in 2021. Card related interchange income increased $4.0 million due to growth in customer accounts and transactions and trust income increased $2.0 million due to growth in assets under management. Service charges on deposit accounts increased $1.6 million as customer activity began to return to pre-COVID levels and swap fee income increased $1.0 million due to an increase in interest rate swaps entered into for our commercial customers.

Total noninterest income increased $12.3 million, or 13%, in comparison to the year ended December 31, 2020. The most significant change, other than the changes noted above, includes a $4.9 million increase in the mark to market adjustment on interest rate swaps entered into for our commercial customers. This adjustment does not reflect a realized gain on the swaps, but rather relates to a change in fair value due to movements in corporate bond spreads and swap rates as well as changes in counterparty credit risk. Gain on sale of other loans and assets increased $3.3 million due to an increase in the sale of other loans, primarily SBA loans, in comparison to the prior year. Partially offsetting these increases is a decrease of $5.2 million in gain on sale of mortgage loans due to a decline in volume and spread received on mortgage loans sold.

If the Company's total assets would equal or exceed $10 billion we would no longer qualify for exemption from the interchange fee cap included in the Dodd-Frank Act. We estimate the application of the interchange fee cap would have decreased interchange income by approximately $13.8 million in 2021.

37

Table of Contents

Noninterest Expense

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

Total noninterest expense decreased $2.0 million, or 1%, compared to the year ended December 31, 2020. Contributing to the decline in expense is the recognition in 2020 of $3.4 million in voluntary early retirement expense and $2.7 million in branch consolidation expense. There was no similar activity during the year ended December 31, 2021. Also contributing to the decrease in noninterest expense is a $1.1 million decline in net occupancy expense resulting from savings related to the branch consolidation efforts in 2020 more than offsetting increases in this expense.

Offsetting these decreases is an increase of $1.9 million in other operating expenses resulting from a $1.2 million credit in unfunded commitment expense recognized in 2020, with no similar credit in 2021. As a result of the adoption of CECL, the unfunded commitment expense is now recorded as part of provision for credit losses. Data processing expense increased $1.8 million due to updates to our digital banking product offerings.

Income Tax

The provision for income taxes of $34.6 million in 2021 reflects an increase of $17.8 million compared to the provision for income taxes in 2020, as a result of a $82.6 million increase in the level of income before taxes.

The effective tax rate was 20.0% and 18.6% for tax expense in 2021 and 2020, 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 $477.0 million as of December 31, 2021 compared to December 31, 2020. Loans, including loans held for sale, increased $63.2 million, or 1%, and investment securities increased $389.6 million, or 33%. Loan growth in 2021 was impacted by a decrease of $407.6 million in PPP loans as a result of SBA forgiveness and payments. As of December 31, 2021 outstanding PPP loans totaled $71.3 million compared to $478.9 million at December 31, 2020. The increase in investment securities can be attributed to the liquidity provided from the decline in PPP loans as well as increases in noninterest-bearing deposits of $338.8 million, or 15%, and interest-bearing deposits of $205.0 million, or 4%.

38

Table of Contents

During 2021, approximately $554.6 million in investment securities were sold, called or matured. Most of these securities were higher yielding securities in comparison to the total portfolio yield and, as such, their replacement contributed to the decrease in the yield earned on the portfolio. In total, $21.6 million in agency securities, $994.4 million in mortgage-backed securities, $3.2 million in municipal securities, $19.2 million in corporate securities and $0.2 million in other securities were purchased in 2021 in order to invest excess liquidity and help replace runoff from the portfolio while maintaining a reduced risk profile.

First Commonwealth’s total liabilities increased $436.2 million, or 5%, in 2021. Deposits increased $543.8 million, or 7%. The increase in deposits is a result of elevated customer balances from PPP loan proceeds and the deposit of Federal Stimulus checks. Short-term borrowings decreased $20.9 million, or 18%, largely due to maturities and additional liquidity provided from the increase in deposits.

Total shareholders' equity increased $40.8 million in 2021. Growth in shareholders' equity was the result of net income of $138.3 million partially offset by a $26.0 million decrease in accumulated other comprehensive income, $43.6 million in dividends declared and $31.3 million in stock repurchases.

Loan Portfolio

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

The loan portfolio totaled $6.8 billion as of December 31, 2021, reflecting growth of $78.0 million, or 1%, compared to December 31, 2020. All categories experienced loan growth, except for commercial, financial, agricultural and other.

Commercial, financial, agricultural and other loans decreased $382.5 million, or 25%, as a result of a $407.6 million decline in PPP loans due to SBA forgiveness and payments. These loans carry a fixed rate of 1.00% and yielded 7.4% in 2021 after considering origination fees and costs recognized over the life of the loan or accelerated recognition at payoff or forgiveness.

Residential real estate loans increased $169.7 million, or 10%, primarily due to originations of first lien closed-end 1-4 family mortgage loans. Growth in the loans to individuals category of $184.2 million, or 23%, was the result of growth in indirect auto loans.

The majority of our loan portfolio is with borrowers located in the state of Pennsylvania. The Company also has a portion of its loan portfolio in Ohio as a result of four recent acquisitions in that state. As of December 31, 2021 and 2020, there were no concentrations of loans relating to any industry in excess of 10% of total loans.

39

Table of Contents

Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at December 31, 2021 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 $156.3 million to any one borrower or closely related group of borrowers, but has established lower thresholds for credit risk management.

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.

40

Table of Contents

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.

Nonperforming loans increased $1.1 million to $55.2 million at December 31, 2021, compared to $54.1 million at December 31, 2020. Nonperforming loans as a percentage of total loans increased to 0.81% from 0.80% at December 31, 2021 compared to December 31, 2020.

Also included in nonperforming loans are TDRs, which 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. TDRs decreased $3.0 million during 2021. For additional information on TDRs please refer to Note 8 “Loans and Allowance for Credit Losses.”

In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 national

emergency. These modifications typically provide for the deferral of both principal and interest for 90 days. The CARES Act,

along with a joint agency statement issued by banking regulators, provides that modifications meeting certain criteria made in

response to COVID-19 do not need to be accounted for as a TDR. As of December 31, 2020 the Company has granted

41

Table of Contents

approximately 6,800 deferrals to its customers with aggregate principal balances of $1.4 billion. As of December 31, 2021, the balance of loans in deferral status had fallen to $6.2 million.

Net charge-offs were $8.4 million in 2021 compared to $17.2 million for the year 2020. The most significant credit losses recognized during the year include $5.3 million in charge-offs recognized on two commercial, financial, agricultural and other relationships and a $1.4 million charge-off recognized on a commercial real estate relationship. Net charge-offs in the loans to individuals category totaled $2.6 million for 2021, 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 as a percentage of net charge-offs decreased to a negative 4.5% for the year ended December 31, 2021 from 311.0% for the year ended December 31, 2020. This change is primarily due to the implementation of CECL and the uncertainty and risks of the COVID-19 pandemic on the economy and the economic forecast in the year ended December 31, 2020.

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.

On March 27, 2020, the CARES Act was signed into law, providing banking organizations with optional, temporary relief

from complying with CECL. The Company elected to defer its adoption of CECL until the fourth quarter 2020. At the end of the deferral period, CECL was adopted effective January 1, 2020, therefore December 31, 2020 results reflect a full years impact of accounting for the allowance for credit losses under CECL.

The allowance for credit losses decreased $8.8 million from December 31, 2020 to December 31, 2021. The allowance for credit losses as a percentage of end-of-period loans outstanding was 1.35% at December 31, 2021. The decrease compared to December 31, 2020 is primarily due to improved economic forecasts, reflecting a decline in the expected impact of COVID-19 pandemic on the economy during 2021. The increased level of the allowance for credit losses at December 31, 2021 and 2020, compared to prior years is a result of calculating the allowance in those years in accordance with CECL, which provides for expected losses over the life of a loan. Prior years allowance for credit losses was calculated to provide for credit losses as they were incurred. The allowance for credit losses includes both a general reserve for performing loans and reserves for individually analyzed loans. Comparing December 31, 2021 to December 31, 2020, the general reserve for performing loans is 1.36% and 1.43%, respectively, of total performing loans for both periods. Reserves for individually analyzed loans decreased from 9.1% of nonperforming loans at December 31, 2020 to 0.7% of nonperforming loans at December 31, 2021. The allowance for credit losses as a percentage of nonperforming loans was 167.7% and 187.4% at December 31, 2021 and 2020, 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

42

Table of Contents

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 for Loans.”

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 detail schedule of the amortized cost of securities available for sale as of December 31:

As of December 31, 2021, securities available for sale had a fair value of $1.0 billion. Gross unrealized gains were $9.5 million and gross unrealized losses were $13.7 million.

The following is a schedule of the contractual maturity distribution of securities available for sale at December 31, 2021.

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

(b)Yields are calculated on a taxable equivalent basis.

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 45 years and have anticipated average lives to maturity ranging from less than three years to approximately five years.

The available for sale investment portfolio amortized cost increased $240.1 million, or 30%, at December 31, 2021 compared to 2020. Available for sale investment purchases of $676.9 million were offset by the sale, call or maturity of $433.9 million in investments. 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.

43

Table of Contents

Following is a detail 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, 2021.

The held to maturity investment portfolio increased $179.5 million, or 50%, at December 31, 2021 compared to 2020. Held to maturity investment purchases of $361.7 million were offset by the sale, call or maturity of $120.7 million in investments.

See Note 7 “Investment Securities" and Note 16 “Fair Values of Assets and Liabilities” for additional information related to the investment portfolio.

44

Table of Contents

Deposits

Total deposits increased $543.8 million, or 7%, in 2021. Interest-bearing demand and savings deposits increased $382.9 million, noninterest-bearing demand deposits increased $338.8 million and time deposits decreased $177.9 million. The increase in deposits can be attributed to elevated customer deposit balances from PPP loan proceeds and the deposit of Federal stimulus checks. For additional information concerning our deposits, please refer to Note 12 “Interest-Bearing Deposits.”

Time deposits of $100 thousand or more had remaining maturities as follows as of the end of each year in the three-year period ended December 31:

Short-Term Borrowings and Long-Term Debt

Short-term borrowings increased $20.9 million, or 18%, from $117.4 million at December 31, 2020 to $138.3 million at December 31, 2021. Long-term debt decreased $51.0 million, from $233.3 million at December 31, 2020 to $182.3 million at December 31, 2021. For additional information concerning our short-term borrowings, subordinated debentures and other long-term debt, please refer to Note 13 “Short-term Borrowings,” Note 14 “Subordinated Debentures” and Note 15 “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, 2021. 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 12 “Interest-Bearing Deposits” of the Consolidated Financial Statements.

In addition, see Note 9 “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, 2021. 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, 2021, a reserve for expected credit losses of $6.4 million was recorded for unused commitments and letters of credit.

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

45

Table of Contents

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 FCB 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 $543.8 million, or 7%, during 2021, and comprised 95% of total liabilities at December 31, 2021, as compared to 93% at December 31, 2020. The increase in deposits in 2021 is a result of elevated customer deposit balances from PPP loan proceeds and the deposit of Federal stimulus checks into our customer's deposit accounts. Proceeds from the sale, maturity and redemption of investment securities totaled $554.6 million during 2021 and provided liquidity to fund loans, pay down short-term borrowings, purchase investment securities and fund depositor withdrawals.

We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the Federal Home Loan Bank of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank of Cleveland and access to certificates of deposit through brokers. We have increased our borrowing capacity at the Federal Reserve by establishing a Borrower-in-Custody of Collateral arrangement that enables us to pledge certain loans, not being used as collateral at the Federal Home Loan Bank, as collateral for borrowings at the Federal Reserve. At December 31, 2021 our borrowing capacity at the Federal Reserve related to this program was $982.1 million and there were no amounts outstanding. Additionally, as of December 31, 2021, our maximum borrowing capacity at the Federal Home Loan Bank of Pittsburgh was $1.9 billion and as of that date amounts used against this capacity included $5.6 million in outstanding borrowings.

We participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an ALCO strategy to increase and diversify funding sources. As of December 31, 2021, our maximum borrowing capacity under this program was $1.0 billion and as of that date there was $5.8 million outstanding. We also participate in a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks. As of December 31, 2021, our outstanding certificates of deposits from this program have an average weighted rate of 0.57% and an average original term of 341 days.

We also have available unused federal funds lines with four correspondent banks. These lines have an aggregate commitment of $160.0 million and there were no amounts outstanding as of December 31, 2021. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $875.2 million with no outstanding balance as of December 31, 2021.

The liquidity needs of First Commonwealth on an unconsolidated basis (the "Parent Company") consist primarily of operating expenses, debt service payments and dividend payments to our stockholders, which collectively totaled $51.5 million for the year ended December 31, 2021, as well as any cash necessary to repurchase our shares, which totaled $31.3 million for the year ended December 31, 2021. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent Company had $72.2 million in junior subordinated debentures and cash and interest-bearing deposits of $11.6 million at December 31, 2021. At the end of 2021, the Parent Company had a $20.0 million short-term, unsecured revolving line of credit with another financial institution. As of December 31, 2021, there were no amounts outstanding under this line. The Parent Company has the ability to enhance its liquidity position by raising capital or incurring debt.

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 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 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”

46

Table of Contents

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 0.84 and 0.51 at December 31, 2021 and 2020, 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:

47

Table of Contents

Gap analysis has limitations due to the static nature of the model, which holds volumes and consumer behaviors constant in all economic and interest rate scenarios. A lower level of rate sensitive assets to rate sensitive liabilities repricing in one year could indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. However, the gap analysis incorporates only the level of interest-earning assets and interest-bearing liabilities and not the sensitivity each has to changes in interest rates. The impact of the sensitivity to changes in interest rates is provided in the table below.

The following table presents an analysis of the potential sensitivity of our annual net interest income to gradual changes in interest rates over a 12-month time frame as compared with net interest income if rates remained unchanged and there are no changes in balance sheet categories.

The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates as compared to if rates remained unchanged, assuming there are no changes in balance sheet categories.

The analysis and model used to quantify the sensitivity of our net interest income becomes less meaningful in a decreasing 200 basis point scenario given the current interest rate environment. Results of the 100 and 200 basis point interest rate decline

48

Table of Contents

scenario are affected by the fact that many of our interest-bearing liabilities are at rates below 1%, with an assumed floor of zero in the model. For the years 2021 and 2020, the cost of our interest-bearing liabilities averaged 0.27% and 0.58%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.43% and 3.72%, respectively.

During the third quarter of 2021, after considering the excess liquidity position of First Commonwealth and the banking industry, management revised its interest rate assumptions related to its ability to lag deposit rate increases for the first two 25 basis point interest rate increases by the Federal Reserve. The results of this assumption change, which extended the repricing of core deposits, are reflected in the December 31, 2021 results in the above sensitivity tables for gradual and immediate interest rate changes.

The ALCO is responsible for the identification and management of interest rate risk exposure. As such, the ALCO continuously evaluates strategies to manage our exposure to interest rate fluctuations.

Asset/liability models require that certain assumptions be made, such as prepayment rates on earning assets and the impact of pricing on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon our experience, business plans and published industry experience. While management believes such assumptions to be reasonable, there can be no assurance that modeled results will approximate actual results.

Credit Risk

First Commonwealth maintains an allowance for credit losses at a level deemed sufficient for losses inherent in the loan portfolio at the date of each statement of financial condition. Management reviews the appropriateness of the allowance on a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of estimated expected losses.

First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include an assessment of individual nonperforming loans with a balance greater than $250 thousand, loss experience trends and other relevant factors.

First Commonwealth also maintains a reserve for unfunded loan commitments and letters of credit based upon credit risk and probability of funding. The reserve totaled $6.4 million at December 31, 2021 and is classified in “Other liabilities” on the Consolidated Statements of Financial Condition.

Nonperforming loans include nonaccrual loans and loans classified as troubled debt restructurings. Nonaccrual loans represent loans on which interest accruals have been discontinued. Troubled debt 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, who could not obtain comparable terms from alternate financing sources. In 2021, 30 loans totaling $9.4 million were identified as troubled debt restructurings. These loans were individually analyzed and no additional reserves were required.

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. A loan is also placed in nonaccrual status when, based on regulatory definitions, the loan is maintained on a “cash basis” due to the weakened financial condition of the borrower. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans which are placed on nonaccrual status at 150 days past due.

Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The risk of loss on these loans is evaluated by comparing the loan balance to the estimated fair value of any underlying collateral or the present value of projected future cash flows. Losses or specifically assigned allowance for credit losses are recognized where appropriate.

The allowance for credit losses was $92.5 million at December 31, 2021 or 1.35% of loans outstanding, compared to $101.3 million or 1.50% of loans outstanding at December 31, 2020. Credit measures as of December 31, 2021 compared to December 31, 2020 reflect a decrease in the level of criticized loans of $104.7 million from $302.8 million at December 31, 2020 to $198.1 million at December 31, 2021. Commercial real estate loans accounted for $90.3 million of this decrease. Classified assets increased $1.4 million from $76.2 million at December 31, 2020 to $77.6 million at December 31, 2021. Delinquency on accruing loans decreased $1.6 million, or 14%, and the level of nonperforming loans increased $1.1 million for the same period.

The allowance for credit losses as a percentage of nonperforming loans was 167.7% at December 31, 2021 and 187.4% as of December 31, 2020. The allowance for credit losses includes specific allocations of $0.4 million related to nonperforming loans covering 1% of the total nonperforming balance at December 31, 2021 and specific allocations of $4.9 million covering

49

Table of Contents

9% of the total nonperforming balance at December 31, 2020. The amount of allowance related to nonperforming loans was determined by using estimated fair values obtained from current appraisals and updated discounted cash flow analyses.

Management believes that the allowance for credit losses is at a level that is sufficient to absorb expected losses in the loan portfolio at December 31, 2021.

The following table provides information on net charge-offs and nonperforming loans by loan category:

As the above table illustrates, commercial real estate and residential real estate loans were the most significant portions of the nonperforming loans as of December 31, 2021. See discussions related to the provision for credit losses and loans for more information.

New Accounting Pronouncements

In March 2020, FASB released Accounting Standards Update (“ASU”) 2020-04 - Reference Rate Reform (Topic 848), which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of the potential discontinuance of the London Interbank Offered Rate ("LIBOR") as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022. The Company has established a cross-functional working group to manage the Company’s transition from LIBOR. Products that utilize LIBOR have been identified and have incorporated enhanced language to accommodate the transition to alternative reference rates. The Company continues to evaluate the impact of adopting the new standard and at this time does not expect it to have a material impact on its consolidated financial statements.