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, 2025, and 2024. 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 March 2, 2026 for a discussion and analysis of the factors that affected periods prior to 2025.
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, 2025, FCB operated 126 community banking offices throughout Pennsylvania and Ohio, as well as Business Centers in Canfield, Canton, Hudson, Independence and Lewis Center, Ohio and Pittsburgh and Berwyn, Pennsylvania.
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 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 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 include 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, gross domestic product and business bankruptcies. 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,
(dollars in thousands, except share data)
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Net securities gains (losses)
Other income
Other expenses
Income before income taxes
Income tax provision
Net Income
Per Share Data—Basic
Net Income
Dividends declared
Average shares outstanding
Per Share Data—Diluted
Net Income
Average shares outstanding
At End of Period
Total assets
Investment securities
Loans and leases, net of unearned income
Allowance for credit losses
Deposits
Short-term borrowings
Subordinated debentures
Other long-term debt
Shareholders’ equity
Key Ratios
Return on average assets
Return on average equity
Net loans to deposits ratio
Dividends per share as a percent of net income per share
Average equity to average assets ratio
Results of Operations—2025 Compared to 2024
Net Income
Net income for 2025 was $152.3 million, or $1.47 per diluted share, as compared to net income of $142.6 million, or $1.39 per diluted share in 2024. Contributing to the increase in net income was a $47.2 million increase in net interest income, offset by a $7.6 million increase in provision for credit losses. Provision for credit losses in 2025 included $3.8 million related to the day 1 adjustment on non-PCD loans acquired in the Center acquisition. Additionally, the increase in net interest income was offset by
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a $24.1 million increase in noninterest expense in 2025 compared to 2024, with $4.0 million of the 2025 increase attributable to the Center acquisition. Noninterest income decreased $2.4 million in 2025 compared to 2024 resulting from a decline of $6.3 million in card-related interchange income as a result of the Company being subject to the Durbin Amendment to the Dodd-Frank Act for the full year of 2025 compared to six-months in 2024.
Our return on average equity was 10.1% and our return on average assets was 1.26% for 2025, compared to 10.4% and 1.22%, respectively, for 2024.
Average diluted shares for the year 2025 were 1.3% more than the comparable period in 2024 primarily due to $45.9 million in common shares issued in relation to the Center acquisition offset by $36.5 million of common stock buybacks completed during 2025.
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 2025 was $1.4 million compared to $1.3 million in 2024. Net interest income comprises a majority of our revenue (net interest income before provision expense plus noninterest income) at 81% and 79% for the years ended December 31, 2025 and 2024, respectively.
Net interest income, on a fully taxable equivalent basis, was $427.5 million for the year-ended December 31, 2025, a $47.2 million, or 12%, increase compared to $380.2 million for the same period in 2024. The net interest margin, on a fully taxable equivalent basis, increased 29 basis points to 3.84% in 2025 from 3.55% in 2024. 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.
Growth in interest-earning assets as well as higher reinvestment rates for the investment and loan portfolios had a positive impact on interest income for the year ended December 31, 2025. Average earning assets for the year ended December 31, 2025 increased $0.4 billion, or 4%, compared to the year ended December 31, 2024 and interest income increased $32.3 million, or 5.4%. The primary interest earning asset attributable to the Center acquisition was their loan portfolio, which averaged $195.9 million for the year ended December 31, 2025. Interest-sensitive assets totaling $5.7 billion will either reprice or mature over the next twelve months.
The taxable equivalent yield on interest-earning assets was 5.70% for the year ended December 31, 2025, an increase of 8 basis points from the 5.62% yield for the same period in 2024. The yield on interest-earning assets benefited from higher reinvestment rates related to the investment and loan portfolios. The tax-equivalent yield for the investment portfolio increased by 32 basis points and the loan and lease portfolio increased by 4 basis points when compared to the year ended December 31, 2025. The increase in the loan and lease portfolio yield is primarily the result of higher reinvestment rates on our fixed loans, including our fixed rate commercial loan portfolio, indirect automobile loan portfolio and direct consumer installment loan portfolio, which increased by 37 basis points, 35 basis points and 29 basis points, respectively. Additionally, for the year ended December 31, 2025, seven basis points of the yield on interest-earning assets can be attributed to the recognition of $7.4 million in accretion of purchase accounting marks, primarily from the Centric and Center acquisitions. For the year ended December 31, 2024, $7.5 million in accretion of purchase accounting marks benefited the yield on interest-earning assets by seven basis points.
As of December 31, 2025, 49% of our loan portfolio had variable or adjustable interest rates and 51% had fixed interest rates. After incorporating the impact of our cash flow hedges that convert the interest rate on $175.0 million of our 1-month Secured Overnight Financing Rate ("SOFR") based loans to fixed rates, the variable and adjustable interest rates would account for 47% of our loan portfolio. Loans with variable or adjustable interest rates include approximately 26% tied to the prime interest rate, 51% tied to SOFR, 12% tied to Treasury rates and 9% tied to Federal Home Loan Bank rates.
Also contributing to the increase in yield on interest-earning assets was th e yield on the investment portfolio, which increased by 32 basis points compared to the prior year, primarily as new volume rates were higher than the portfolio yield. The average investment portfolio balance increased $60.4 million as growth in average deposits exceeded the funding needs for loan growth. The yield on interest-bearing deposits with banks decreased 79 basis points compared to the prior year as a result of lower interest rates, while the average balance decreased $108.2 million.
The cost of interest-bearing liabilities decreased to 2.55% for the year ended December 31, 2025, compared to 2.83% for the same period in 2024. The decrease of 20 basis points in the cost of interest-bearing deposits can be attributed to declines in
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market interest rates, which influenced the mix of deposits with growth in both money market accounts and time deposits. Average time deposits increased $213.3 million, or 13.8%, while the cost of these deposits decreased 52 basis points. Contributing to the average growth in time deposits was an average of $60.6 million acquired as part of the Center acquisition. Other interest-bearing deposits increased an average of $336.2 million, or 6.0%, while the cost of deposits decreased 14 basis points. Average growth in other-interest bearing deposits attributable to the Center acquisition totaled $98.1 million.
The cost of short-term borrowings decreased 93 basis points in comparison to the same period in the prior year. Average short-term borrowings decreased by $349.1 million for the year ended December 31, 2025 compared to the same period in 2024 primarily due to the payoff of $516.0 million in short-term borrowings related to the Federal Reserve Term Funding program in the fourth quarter of 2024. Average long-term debt increased $75.8 million as a result of a $127.0 million FHLB borrowing entered into in the fourth quarter of 2024, while the cost of long-term debt decreased by 44 basis points.
Comparing the year ended December 31, 2025 with the same period in 2024, changes in rates positively impacted net interest income by $28.9 million. The higher yield on interest-earning assets increased net interest income by $8.5 million, while the change in the cost of interest-bearing liabilities positively impacted net interest income by $20.4 million.
Changes in the volume of interest-earning assets and interest-bearing liabilities positively increased net interest income by $18.3 million in the year ended December 31, 2025 compared to the same period in 2024. Higher levels of interest-earning assets resulted in an increase of $23.8 million in interest income, and changes in the volume and mix of interest-bearing liabilities increased interest expense by $5.4 million, primarily due to growth in time and savings deposits.
Net interest income was positively impacted by a decrease of $136.8 million in average net free funds at December 31, 2025 as compared to December 31, 2024. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The higher level of net free funds was primarily the result of growth in noninterest-bearing demand deposits as well as higher average shareholders' equity due to retained earnings and stock issued for the Center acquisition.
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:
For the Years Ended December 31,
(dollars in thousands)
Interest income per Consolidated Statements of Income
Adjustment to fully taxable equivalent basis
Interest income adjusted to fully taxable equivalent basis (non-GAAP)
Interest expense
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
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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:
Average Balance Sheets and Net Interest Analysis
Average
Balance
Income /
Expense (a)
Yield or
Rate
Average
Balance
Income /
Expense (a)
Yield or
Rate
Average
Balance
Income /
Expense (a)
Yield or
Rate
(dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with banks
Tax-free investment securities
Taxable investment securities
Loans and leases, net of unearned
income (b)(c)(d)
Total interest-earning assets
Noninterest-earning assets:
Cash
Allowance for credit losses
Other assets
Total noninterest-earning assets
Total Assets
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand
deposits
Savings deposits
Time deposits
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand
deposits
Other liabilities
Shareholders’ equity
Total noninterest-bearing funding sources
Total Liabilities and Shareholders’ Equity
Net Interest Income and Net Yield on Interest-Earning Assets
(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) 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:
Analysis of Year-to-Year Changes in Net Interest Income
2025 Change from 2024
2024 Change from 2023
Total
Change
Change Due
To Volume
Change Due
To Rate (a)
Total
Change
Change Due
To Volume
Change Due
To Rate (a)
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks
Tax-free investment securities
Taxable investment securities
Loans and leases
Total interest income (b)
Interest-bearing liabilities:
Interest-bearing demand deposits
Savings deposits
Time deposits
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
(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 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 2025 totaled $36.7 million, reflecting an increase of $7.6 million compared to the $29.2 million provision recognized in 2024. Included in the provision expense for 2025 was $3.4 million in day 1 non-PCD expense and $0.3 million in expense related to off-balance sheet commitments related to the Center acquisition. Provision expense related to outstanding loans and leases, excluding the impact of the day 1 non-PCD expense in 2025, increased $3.1 million in 2025. The provision for off-balance sheet commitments increased $7.2 million in 2025 compared to 2024 as a result of higher off-balance sheet commitments related to commercial and residential construction loan commitments, as well as the impact of periodic updates, completed in the third quarter of 2025, related to the expected loss rates for these loan categories.
The level of provision expense in 2025 was primarily related to two loan categories: the commercial, financial, agricultural and other category and commercial real estate. These two categories accounted for $26.4 million of the $32.7 million total provision expense for loans and leases. Provision expense for the commercial, financial, agricultural and other category was $21.9 million in 2025 and included $8.5 million for a dealer floor plan relationship that was moved to noanccrual during the second quarter of 2025 as a result of being out of trust on sold vehicles. Also impacting this category was $8.0 million recognized related to the equipment finance portfolio as a result of $265.9 million, or 62%, loan growth in that category. Provision expense for the commercial real estate category was primarily a result of $4.7 million for the non-owner occupied real estate portfolio. Included in provision expense for the non-owner occupied portfolio was a $1.7 million specific reserve for a loan that was moved to nonaccrual in the fourth quarter of 2025. Additionally, the negative provisio n for the residential real estate category can be attributed to a slight increase of $18.6 million in outstanding loan balances offset by the impact of lower loss rates. The level of provision expense for loans to individuals is related to net charge-offs in that category, which totaled $5.5 million for
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the year ended December 31, 2025, including $4.0 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:
Dollars
Percentage
Dollars
Percentage
(dollars in thousands)
Commercial, financial, agricultural and other
Time and demand
Commercial credit cards
Equipment finance
Time and demand other
Real estate construction
Construction other
Construction residential
Residential real estate
Residential first liens
Residential junior liens/home equity
Commercial real estate
Multifamily
Non-owner occupied
Owner occupied
Loans to individuals
Automobile and recreational vehicles
Consumer credit cards
Consumer other
Provision for credit losses on loans and leases
Provision for credit losses - acquisition day 1 non-PCD
Total provision for credit losses on loans and leases
Provision for off-balance sheet credit exposure
Total provision for credit losses
The allowance for credit losses was $125.8 million, or 1.32%, of total loans and leases outstanding at December 31, 2025, compared to $118.9 million, or 1.32%, at December 31, 2024. Nonperforming loans as a percentage of total loans increased to 0.97% at December 31, 2025 from 0.68% at December 31, 2024. The allowance to nonperforming loan ratio was 137.1% as of December 31, 2025 and 193.5% at December 31, 2024. Net charge-offs were $29.4 million for the year ended December 31, 2025 compared to $31.2 million for the same period in 2024, a decrease of $1.8 million. During 2025, $7.6 million in charge-offs were recognized as a result of the previously mentioned dealer floor plan loan and $5.6 million in charge-offs were recorded when certain commercial loans were moved to held for sale during the year.
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, 2025.
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A detailed analysis of our credit loss experience for the previous five years is shown below:
(dollars in thousands)
Loans and leases outstanding at end of year
Average loans outstanding
Balance, beginning of year
Day 1 allowance for credit loss on PCD acquired loans
Provision for credit losses - acquisition day 1 non-PCD
Loans charged off:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans charged off
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total recoveries
Net charge-offs
Provision charged to expense
Balance, end of year
Ratios:
Net charge-offs as a percentage of average loans and leases outstanding
Allowance for credit losses as a percentage of end-of-period loans and leases outstanding
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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:
2025 compared to 2024
$ Change
% Change
(dollars in thousands)
Noninterest Income:
Trust income
Service charges on deposit accounts
Insurance and retail brokerage commissions
Income from bank owned life insurance
Card-related interchange income
Swap fee income
Other income
Subtotal
Net securities losses
Gain on VISA exchange
Gain on sale of mortgage loans
Gain on sale of other loans and assets
Derivative mark to market
Total noninterest income
Total noninterest income (excluding net securities losses, 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 $2.2 million, or 3%, in 2025. This decrease can be attributed to a $6.3 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. As a result, its curtailment of card-related interchange income went into effect on July 1, 2024.
Insurance and retail brokerage commissions increased by $1.1 million, or 10%, in 2025, primarily due to higher annuity sales, while Trust income increased $1.1 million, or 9%, due to revenue for assets under management. Swap fee income increased $0.7 million, compared to the prior period, as a result of a growth in new interest rate swaps entered into by our commercial loan customers.
Total noninterest income decreased $2.4 million, or 2%, in comparison to the year ended December 31, 2024. Gain on sale of mortgages increased $1.5 million as a result of changes in volume and spread received on mortgage loans sold, and gain on sale of other loans and assets decreased $2.2 million as a result of a decline in the volume and spread on the sale of SBA loans.
The most significant changes, other than the changes noted above, include gains on VISA exchange of $5.1 million and $5.7 million for the years ended December 31, 2025 and 2024, respectively, related to the conversion and sale of Visa shares. Offsetting these gains are $4.3 million and $5.4 million in losses recognized on the sale available for sale securities for 2025 and 2024, respectively, 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:
2025 compared to 2024
$ Change
% Change
(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits
Net occupancy
Furniture and equipment
Data processing
Advertising and promotion
Pennsylvania shares tax
Intangible amortization
Other professional fees and services
FDIC insurance
Other operating expenses
Subtotal
Loss on sale or write-down of assets
Litigation and operational losses
Loss on early redemption of subordinated debt
Merger and acquisition related
Total noninterest expense
Total noninterest expense increased $24.1 million compared to the year ended December 31, 2024. Salaries and employee benefits increased $14.7 million. Contributing to the higher salary expense in 2025 was a $7.7 million increase in incentive expense, of which $1.5 million can be attributed to finalizing payments related to prior year volumes and performance, with the remaining increase due to higher performance levels and sales volumes in 2025. Also impacting salary and benefit expense is a $1.9 million increase in 401(k) expense, a $1.1 million increase in FICA taxes and a higher number of full time equivalent employees, partially due to the Center acquisition. The number of full time equivalent employees totaled 1,512 at December 31, 2024, increasing to 1,567 at December 31, 2025.
Net occupancy expense increased $0.9 million due to additional properties acquired as part of the Center acquisition as well as increased snow removal expense.
Pennsylvania shares tax decreased $0.9 million compared to the year ended December 31, 2024 primarily due to higher income generated outside of Pennsylvania resulting from continued growth in our SBA and equipment finance loan portfolios.
Other operating expense increased $2.9 million compared to the prior period primarily due to loan-related appraisals, credit reporting and OREO expense. The increase in other professional fees and services is a result of services and advisors for several areas, none of which were individually material. Merger and acquisition related expenses increased $4.0 million compared to the prior period as a result of the Center acquisition which occurred in the second quarter of 2025.
Income Tax
The provision for income taxes of $39.1 million in 2025 reflects an increase of $3.4 million compared to the provision for income taxes in 2024 as a result of a $13.2 million increase in the level of income before taxes.
The effective tax rate was 20.4% and 20.0% for tax expense in 2025 and 2024, 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 $758.1 million as of December 31, 2025 compared to December 31, 2024. Loans and leases, including loans held for sale, increased $743.7 million. Contributing to the loan growth in 2025, including loans
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held for sale, were increases of $265.9 million in equipment finance loans, $231.3 million in commercial real estate loans and $107.0 million in automobile and recreational vehicle loans. Investment securities decreased $19.6 million, or 1%, and cash and interest-bearing balances with banks increased $47.0 million, or 35%.
First Commonwealth’s total liabilities increased $608.9 million in 2025. Deposits increased $573.0 million and long-term borrowings decreased $0.8 million. Short-term borrowings increased $67.8 million, or 85%.
Total shareholders' equity increased $149.2 million in 2025. The growth in shareholders' equity was the result of net income of $152.3 million, common stock issued for the Center acquisition of $45.9 million and a $37.9 million increase in accumulated other comprehensive income resulting from changes in the fair value of available for sale investments, offset by $55.5 million in dividends declared and $36.5 million in stock repurchases.
Loan and Lease Portfolio
Following is a summary of our loan and lease portfolio as of December 31:
Amount
Amount
Amount
Amount
Amount
(dollars in thousands)
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans and leases
The loan and lease portfolio, excluding loans held for sale, totaled $9.5 billion as of December 31, 2025, reflecting growth of $524.3 million compared to December 31, 2024. The Center acquisition contributed $292.6 million of this loan growth while the movement of a portfolio of loans to held for sale in the fourth quarter of 2025 negatively impacted the growth by $225.4 million. Commercial, financial, agricultural and other loans increased $367.0 million, or 22%, $265.9 million of which is a result of growth in the equipment finance portfolio and $92.5 million of which was the result of growth in time and demand loans. Residential real estate loans increased $18.6 million, or 1%, as $82.9 million growth from the Center acquisition was offset by runoff in the portfolio due to a higher percentage of new loans being originated for sale. Commercial real estate loans increased $57.4 million, or 2%, primarily due to growth in owner- and non-owner occupied properties. Growth in commercial real estate loans was impacted by the addition of $114.6 million acquired as part of the Center acquisition, offset by $173.9 million of loans moved to held for sale in the fourth quarter of 2025. Loans to individuals increased $101.9 million primarily due to growth in indirect auto and recreational vehicle loans.
Loans secured by 1-4 family residential properties in the process of foreclosure totaled $14.1 million at December 31, 2025 and $12.1 million at December 31, 2024.
The level of the loan portfolio in 2025 was impacted by the Center acquisition as well as the movement of a select portfolio of loans to held for sale. To better understand the changes to loan portfolio in 2025, the following table shows a breakdown of our loan portfolio between loans acquired through the Center acquisition and the portfolio moved to held for sale as of December 31, 2025 :
Legacy
Acquired (1)
Portfolio Moved to Held for Sale
Total
(dollars in thousands)
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans and leases
(1) Includes April 30, 2025 balance of loans acquired as part of the Center acquisition plus day 1 gross up of PCD loans.
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The majority of our loan and lease portfolio is with borrowers located in the states of Pennsylvania and Ohio. As of December 31, 2025 and 2024, there were no concentrations of loans relating to any industry in excess of 10% of total loans.
Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at December 31, 2025 were as follows:
Within
One Year
One to
5 Years
After
5 Years
Total
(dollars in thousands)
Commercial, financial, agricultural and other
Real estate construction (a)
Commercial real estate
Other
Total
Loans at fixed interest rates
Loans at variable interest rates
Total
(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 $204.4 million to any one borrower or closely related group of borrowers, but has established lower thresholds for credit risk management.
Commercial real estate comprises 33% 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:
Amount
Amount
(dollars in thousands)
Land
Residential 1-4
Industrial and storage
Multifamily
Office
Healthcare
Student housing
Retail
Hospitality
Specialty use
Other
Total
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The following table represents our commercial real estate portfolio by type of property securing the credit as of December 31, 2025. Total non-pass commercial real estate loans increased by $17.7 million to $127.5 million when compared to December 31, 2024.
Pass
OAEM
Substandard Accruing
Substandard Nonaccruing
Total Non-Pass
Total
% Non-Pass
(dollars in thousands)
Land
Residential 1-4
Industrial and storage
Multifamily
Office
Healthcare
Student housing
Retail
Hospitality
Specialty use
Other
Total
The office portfolio comprises 14.8% of total commercial real estate loans and 25.0% of total commercial real estate non-pass loans. The average loan commitment size for the office portfolio is $0.9 million and the average outstanding balance as of December 31, 2025 is $0.9 million. Within the office portfolio, exposures over $1.0 million have an average debt service coverage ratio of 1.54x, which exceeds our internal guidelines of 1.25x to 1.50x, depending on property class. Additionally, for loans with exposure over $1.0 million, the office portfolio has a weighted average loan to value of 54% 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.
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 32.4% as of December 31, 2025.
The following table summarizes commercial real estate loans by the location of the properties by which they are collateralized as of December 31, 2025. 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.
Balance
% of Total
(dollars in thousands)
Ohio
Pennsylvania
New Jersey
Indiana
Kentucky
New York
Other
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:
(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis
Troubled debt restructured loans on nonaccrual basis
Troubled debt restructured loans on accrual basis
Total nonperforming loans
Loans and leases past due in excess of 90 days and still accruing
Other real estate owned
Loans and leases outstanding at end of period
Average loans and leases outstanding
Nonperforming loans as a percentage of total loans and leases
Provision for credit losses on loans and leases
Provision for credit losses - acquisition day 1 non-PCD
Allowance for credit losses
Net charge-offs
Net charge-offs as a percentage of average loans and leases outstanding
Provision for credit losses on loans and leases as a percentage of net charge-offs (b)
Allowance for credit losses as a percentage of end-of-period loans and leases outstanding (a)
Allowance for credit losses as a percentage of nonperforming loans (a)
Gross income that would have been recorded at original rates
Interest that was reflected in income
Net reduction to interest income due to nonaccrual
(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 $30.3 million to $91.8 million at December 31, 2025, compared to $61.5 million at December 31, 2024. During 2025, $94.1 million in loans were moved to nonaccrual, offset by $30.3 million in paydowns and payoffs, $5.8 million in sales, and $27.0 million in charge-offs. During 2025, two dealer floor plan relationships with balances of $13.8 million at December 31, 2025 were placed in nonaccrual status. The relationships totaled $41.4 million when placed in nonaccrual and subsequently the balances were reduced by $20.0 million in payments from the liquidation and sale of collateral and by $7.6 million in chargeoffs. In addition, $8.5 million in the new nonaccrual loans were the result of the Center acquisition. Nonperforming loans as a percentage of total loans increased to 0.97% from 0.68% at December 31, 2025 compared to December 31, 2024, respectively.
Net charge-offs were $29.4 million in 2025 compared to $31.2 million for the year 2024. The most significant credit losses recognized during the year include a $7.6 million charge-off recognized on a dealer floor plan relationship, $2.8 million recognized on nonperforming loans acquired from the Center acquisition, $7.0 million recognized on automobile and recreational vehicles and $1.8 million recognized on a non-owner occupied relationship loan. Included in the above charge-off detail is $7.4 million in charge-offs related to loans that were moved to held for sale during 2025. 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 decreased to 99.7% for the year ended December 31, 2025 from 103.8% for the year ended December 31, 2024. This change was primarily driven by the $29.4 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:
Allowance
Amount
Allowance
Amount
Allowance
Amount
Allowance
Amount
Allowance
Amount
(dollars in thousands)
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total
Allowance for credit losses as percentage of end-of-period loans and leases outstanding
(a) Represents the ratio of loans in each category to total loans.
The allowance for credit losses increased $6.9 million from December 31, 2024 to December 31, 2025. The allowance for credit losses as a percentage of end-of-period loans and leases outstanding was 1.32% at both December 31, 2025 and 2024, respectively. The allowance for credit losses includes both a general reserve for performing loans and reserves for individually analyzed loans. Comparing December 31, 2025 to December 31, 2024, the general reserve for performing loans is 1.22% and 1.24%, respectively, of total performing loans for both periods. Reserves for individually analyzed loans decreased from 13.0% of nonperforming loans at December 31, 2024 to 10.7% of nonperforming loans at December 31, 2025. The allowance for credit losses as a percentage of nonperforming loans was 137.1% and 193.5% at December 31, 2025 and 2024, 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, business bankruptcies 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 , please refer to “ Accounting Policies and Significant Accounting Estimates—Allowance for Credit .”
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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:
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential
Mortgage-Backed Securities—Commercial
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential
Other Government-Sponsored Enterprises
Obligations of States and Political Subdivisions
Corporate Securities
Total Securities Available for Sale
As of December 31, 2025, securities available for sale had a fair value of $1.0 billion. Gross unrealized gains were $5.7 million and gross unrealized losses were $87.7 million. The level of gross unrealized losses is directly related to the increase in market interest rates.
The securities available for sale portfolio decreased $133.4 million, or 12%, as of December 31, 2025 compared to December 31, 2024, as deposit growth provided additional liquidity which exceeded funding needs of the loan portfolio. Most of the run off in this portfolio is related to the sales, paydown and maturity of mortgage-backed securities. 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, 2025.
Government
Agencies and
Corporations
States and
Political
Subdivisions
Other
Securities
Total
Amortized
Cost (a)
Weighted
Average
Yield (b)
(dollars in thousands)
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
(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 42 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 decreased $171.5 million, or 14%, at December 31, 2025 compared to 2024. Purchases of available for sale investments totaled $162.1 million during 2025 and calls or maturities totaled $282.7 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:
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential
Mortgage-Backed Securities—Commercial
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential
Mortgage-Backed Securities—Commercial
Other Government-Sponsored Enterprises
Obligations of States and Political Subdivisions
Debt Securities Issued by Foreign Governments
Total Securities Held to Maturity
The following is a schedule of the contractual maturity distribution of securities held to maturity at December 31, 2025.
Government
Agencies and
Corporations
States and
Political
Subdivisions
Other
Securities
Total
Amortized
Cost
Weighted
Average
Yield (a)
(dollars in thousands)
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
(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 increased $113.8 million, or 28%, at December 31, 2025 compared to 2024. Held to maturity investment purchases of $192.5 million were offset by the calls or maturities of $78.3 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.
Deposits
Total deposits increased $573.0 million in 2025. Interest-bearing demand and savings deposits increased $359.3 million, noninterest-bearing demand deposits increased $123.2 million and time deposits increased $90.5 million. The growth and changes in the mix of deposits in 2025 was impacted by $278.0 million in deposits acquired as part of the Center acquisition.
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The following table shows a breakdown of the components of First Commonwealth’s deposits as of the end of the year in the two-year period ending December 31:
Originated
Acquired (a)
Amount
Amount (b)
(dollars in thousands)
Noninterest-bearing deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Total deposits
(a) Reflects the deposit balances, including purchase accounting marks, of deposits acquired from Center as of the acquisition date of April 30, 2025.
(b) Category totals have been reclassified to remove the impact of the internal sweep program.
In the table above, compared to amounts previously disclosed, deposits for December 31, 2024 reflect a reclassification of $1.2
billion out of savings deposits into interest-bearing demand deposits. This reclassification removes the impact of an internal
sweep program that has historically been in place for regulatory reserve requirements. In the second quarter of 2025, the
internal sweep program was terminated; therefore, for consistency purposes, interest-bearing demand deposits and savings
deposits for periods prior to June 30, 2025 are now shown without the deposit reclassification.
The level of deposits during any period is 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.
For additional information concerning our deposits, please refer to Note 14 “Interest-Bearing Deposits.”
At December 31, 2025 and 2024, time deposits of $100 thousand or more totaled $1,061.4 million and $1,018.3 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:
Amount
Amount
(dollars in thousands)
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
The estimated total amount of uninsured deposits was $2.9 billion and $2.6 billion at December 31, 2025 and 2024, respectively, of which $0.8 billion and $0.7 billion were secured by pledged investment securities or letters of credit at December 31, 2025 and 2024, respectively. 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 increased $67.8 million, or 85%, from $80.1 million at December 31, 2024 to $148.0 million at December 31, 2025. Long-term debt decreased $1.2 million, from $263.0 million at December 31, 2024 to $261.7 million at December 31, 2025. 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.
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Contractual Obligations and Off-Balance Sheet Arrangements
The table below sets forth our contractual obligations to make future payments as of December 31, 2025. For a more detailed description of each category of obligation, refer to the note in our Consolidated Financial Statements indicated in the table below.
Footnote
Number
Reference
1 Year
or Less
After 1
But Within
3 Years
After 3
But Within
5 Years
After 5
Years
Total
(dollars in thousands)
FHLB advances
Subordinated debentures
Operating leases
Total contractual obligations
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, 2025. 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, 2025, a reserve for expected credit losses of $8.2 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 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 $573.0 million during 2025, and comprised 95% of total liabilities at both December 31, 2025 and 2024. Proceeds from the sale, maturity and redemption of investment securities totaled $429.4 million during 2025 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, 2025:
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Total Available
Amount Used
Outstanding Letters of Credit
Net Available
(dollars in thousands)
Internal liquidity sources
Unencumbered securities
Other (excess pledged)
External liquidity sources
FHLB advances
FRB borrowings
Lines with other financial institutions
CDARS (1)
Total liquidity
(1) Reflects internal policy limit. Maximum capacity with CDARs is $1.8 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, 2025, the outstanding CDARS balance of $15.0 million carried an average weighted rate of 2.93% and an average original term of 322 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.
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 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 0.70 and 0.68 at December 31, 2025 and 2024, 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.
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Following is the gap analysis as of December 31:
0-90 Days
Days
Days
Cumulative
0-365 Days
Over 1 Year
Through 5
Years
Over 5
Years
(dollars in thousands)
Loans and leases
Investments
Other interest-earning assets
Total interest-sensitive assets (ISA)
Certificates of deposit
Other deposits
Borrowings
Total interest-sensitive liabilities (ISL)
Gap
ISA/ISL
Gap/Total assets
0-90 Days
Days
Days
Cumulative
0-365 Days
Over 1 Year
Through 5
Years
Over 5
Years
(dollars in thousands)
Loans and leases
Investments
Other interest-earning assets
Total interest-sensitive assets (ISA)
Certificates of deposit
Other deposits
Borrowings
Total interest-sensitive liabilities (ISL)
Gap
ISA/ISL
Gap/Total assets
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.
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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.
Net interest income change (12 months) for basis point movements of:
(dollars in thousands)
December 31, 2025 ($)
December 31, 2025 (%)
December 31, 2024 ($)
December 31, 2024 (%)
The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates versus if rates remained unchanged and there are no changes in balance sheet categories.
Net interest income change (12 months) for basis point movements of:
(dollars in thousands)
December 31, 2025 ($)
December 31, 2025 (%)
December 31, 2024 ($)
December 31, 2024 (%)
The Company evaluates its potential interest rate sensitivity by utilizing several interest rate scenarios that incorporate both
rising and declining rates. Results of these scenarios are impacted by variables that include the current level of interest rates,
product characteristics such as floors and ceilings, the frequency with which variable rate products reset their rates, and
projected pricing changes for non-maturity deposits. For example, the results in a declining rate scenario could be affected by
the model's use of an assumed interest rate floor of zero. For the years 2025 and 2024, the cost of our interest-bearing liabilities averaged 2.55% and 2.83%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 5.70% and 5.62%, respectively.
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
Management of credit risk within our loan and lease portfolio is a focus of the Company and is a continuous process in order to address changing economic and lending environments. In order to identify and manage credit risk, segment and concentration limits are established and approved by our Board of Directors’ Risk Committee in order to maintain alignment with our credit risk appetite, loan strategic plan, loan policy and underwriting guidelines. In addition, our Credit Department completes industry studies to identify potential risk in the portfolio. For example, within the commercial real estate portfolio, industry studies are completed for the following sectors: hospitality, industrial, multifamily, office, retail, senior living, healthcare and student housing.
On an annual basis, the Credit Department also reviews the commercial real estate portfolio as a whole, along with underwriting practices and loan level stress testing procedures, to enhance risk management practices and monitor commercial real estate
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concentrations. This review provides an overview of the portfolio to ensure that emerging risks have been identified, and documents and validates the standard interest rate and capitalization rate stress scenarios.
First Commonwealth maintains an allowance for credit losses at a level deemed sufficient for losses inherent in the loan and lease 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 $8.2 million at December 31, 2025 and is classified in “Other liabilities” on the Consolidated Statements of Financial Condition.
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. Consumer loans related to automobile and recreational vehicles are either charged off or repossessed at not later than 90 days past due.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The probable 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. Nonperforming loans increased $30.3 million at December 31, 2025 compared to the prior year.
The allowance for credit losses was $125.8 million at December 31, 2025, or 1.32% of loans outstanding, compared to $118.9 million, or 1.32% of loans outstanding, at December 31, 2024. Credit measures as of December 31, 2025 as compared to December 31, 2024 reflect an increase in the level of criticized loans of $43.0 million, from $224.2 million at December 31, 2024 to $267.2 million at December 31, 2025. Commercial, financial, agricultural and other loans and commercial real estate loans accounted for $21.7 million and $17.7 million, respectively, of this increase. Classified assets increased $43.1 million, from $96.3 million at December 31, 2024 to $139.4 million at December 31, 2025. Commercial, financial, agricultural and other loans and commercial real estate loans accounted for $33.9 million and $9.0 million, respectively, of this increase. Delinquency on accruing loans increased $14.9 million, or 67%, compared to the prior year primarily due to an increase of $9.3 million in commercial real estate loan delinquency.
The allowance for credit losses as a percentage of nonperforming loans was 137.1% at December 31, 2025 and 193.5% as of December 31, 2024. The allowance for credit losses includes specific allocations of $9.8 million related to nonperforming loans covering 11% of the total nonperforming balance at December 31, 2025 and specific allocations of $8.0 million covering 13% of the total nonperforming balance at December 31, 2024. The amount of allowance related to individually analyzed nonperforming loans was determined by using estimated fair values obtained from current appraisals and updated discounted cash flow analyses. The increase in specific reserves is primarily the result of new nonperforming loans.
Management believes that the allowance for credit losses is at a level that is sufficient to absorb expected losses in the loan and lease portfolio at December 31, 2025.
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The following table provides information on net charge-offs and nonperforming loans by loan category:
For the Period Ended December 31, 2025
As of December 31, 2025
Net
Charge-offs
Total Net
Charge-
offs
Net
Charge-offs
of Average
Loans
Nonperforming
Loans
% of Total
Nonperforming
Loans
Nonperforming
Loans as a % of
Total Loans
(dollars in thousands)
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans and leases, net of unearned income
As indicated in the above table, commercial real estate and commercial financial, agricultural and other loans were the most significant portions of the nonperforming loans as of December 31, 2025. Included in nonaccrual loans as of December 31, 2025 are $10.3 million in loans that were on nonaccrual at the time of the Center or Centric acquisitions. See discussions related to the provision for credit losses and loans for more information.
New Accounting Pronouncements
New accounting pronouncements recently issued or proposed by the Financial Accounting Standards Board ("FASB") but not yet adopted as of December 31, 2025 are discussed below.
In November 2024, Accounting Standards Update 2024-03 ("ASU 2024-03"), “Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures" (Subtopic 220-40) was issued. ASU 2024-03 requires disaggregated disclosure of income statement expenses for public business entities. ASU 2024-03 requires new financial statement disclosures in tabular format, disaggregating information about prescribed categories underlying any relevant income statement expense caption. The prescribed categories include, among other things, employee compensation, depreciation, and intangible asset amortization. Additionally, entities must disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses. ASU 2024-03 will be effective for us, on a prospective basis, for annual periods beginning in 2027, and interim periods within fiscal years beginning in 2028, though early adoption and retrospective application is permitted. ASU 2024-03 is not expected to have a significant impact on our financial conditions or results of operations.
In September 2025, Accounting Standard Update 2025-06 ("ASU 2025-06"),“Intangibles - Goodwill and Other - Internal-Use Software" (Subtopic 350-40) was issued. A S U 2025-06 simplifies the accounting for internal-use software by removing project development stages and introducing a new capitalization threshold. Under the revised standard, software development costs are capitalized when management authorizes and commits funding for the project and it is probable the software will be completed and used as intended. ASU 2025-05 will be effective in 2028 and is not expected to have a significant impact on our financial conditions or results of operations.
In November 2025, Accounting Standard Update 2025‑08 ("ASU 2025-08"), “Financial Instruments - Credit Losses" (Topic 326) was issued. ASU 2025-08 expands the scope of acquired financial assets subject to the gross up approach formerly applicable only to purchased credit‑deteriorated ("PCD") assets, to include acquired non‑PCD loans that meet certain criteria, now referred to as “purchased seasoned loans” (PSLs). Under this model, an allowance for expected credit losses is recognized at acquisition, offsetting the loan’s amortized cost basis, thereby eliminating the day-one credit‑loss expense previously required for non‑PCD assets. PSLs are defined as non‑PCD loans acquired either (i) through a business combination, or (ii) purchased more than 90 days after origination when the acquirer was not involved in origination. ASU 2025-08 will be effective on a prospective basis for loans acquired on or after the adoption date, for interim and annual reporting periods beginning in 2027, though early adoption is permitted. The Company is evaluating the expected impact on accounting for acquired assets related to future transactions.
In November 2025, Accounting Standard Update 2025‑09 ("ASU 2025-09"), “Derivatives and Hedging" (Topic 815) was issued. This update allows designating a variable price component of a nonfinancial forecasted purchase or sale as the hedged risk, grouping individual forecasted transactions with similar (not identical) risk exposures, a new model for hedging forecasted interest on variable-rate debt, enabling changes in index or tenor without de-designation, subject to simplifying assumptions, and additional clarifications related to hedge accounting of nonfinancial components, net written options, and dual-hedge strategies. ASU 2025-09 will be effective beginning in 2027, though early adoption is permitted. The Company is in the process of assessing the impact of adoption on its consolidated financial statements.
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