FIRST COMMONWEALTH FINANCIAL CORP /PA/ - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)



Pennsylvania		25-1428528
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

601 Philadelphia Street, Indiana, PA		15701
(Address of principal executive offices)		(Zip Code)

724-349-7220

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of issuer’s common stock, $1.00 par value, as of May 3, 2019, was 98,499,937.

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX



		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

	Consolidated Statements of Financial Condition (Unaudited)	3
	Consolidated Statements of Income (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	6
	Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to the Unaudited Consolidated Financial Statements	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	55

ITEM 4.	Controls and Procedures	55

PART II.	Other Information

ITEM 1.	Legal Proceedings	56

ITEM 1A.	Risk Factors	56

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

ITEM 3.	Defaults Upon Senior Securities	56

ITEM 4.	Mine Safety Disclosures	56

ITEM 5.	Other Information	56

ITEM 6.	Exhibits	57

	Signatures	58

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



	March 31, 2019			December 31, 2018
	(Unaudited)
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	100,724		$	95,934
Interest-bearing bank deposits	23,168			3,013
Securities available for sale, at fair value	893,101			909,247
Securities held to maturity, at amortized cost (Fair value of $380,443 and $383,993 at March 31, 2019 and December 31, 2018, respectively)	384,909			393,855
Other investments	25,378			32,126
Loans held for sale	9,627			11,881
Loans:
Portfolio loans	5,871,070			5,774,139
Allowance for credit losses	(49,653		)	(47,764		)
Net loans	5,821,417			5,726,375
Premises and equipment, net	129,107			80,474
Other real estate owned	3,993			3,935
Goodwill	274,202			274,202
Amortizing intangibles, net	12,876			13,038
Bank owned life insurance	217,192			215,766
Other assets	76,979			68,409
Total assets	$	7,972,673		$	7,828,255
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	1,510,566		$	1,466,213
Interest-bearing	4,620,194			4,431,779
Total deposits	6,130,760			5,897,992
Short-term borrowings	565,616			721,823
Subordinated debentures	170,328			170,288
Other long-term debt	7,395			7,551
Capital lease obligation	7,118			7,217
Total long-term debt	184,841			185,056
Other liabilities	93,437			47,995
Total liabilities	6,974,654			6,852,866
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued	—			—
Common stock, $1 par value per share, 200,000,000 shares authorized; 113,914,902 shares issued at March 31, 2019 and December 31, 2018, and 98,625,806 and 98,518,668 shares outstanding at March 31, 2019 and December 31, 2018, respectively	113,915			113,915
Additional paid-in capital	493,664			492,273
Retained earnings	526,136			511,409
Accumulated other comprehensive loss, net	(4,102		)	(11,341		)
Treasury stock (15,289,096 and 15,396,234 shares at March 31, 2019 and December 31, 2018, respectively)	(131,594		)	(130,867		)
Total shareholders’ equity	998,019			975,389
Total liabilities and shareholders’ equity	$	7,972,673		$	7,828,255

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)



	For the Three Months Ended
	March 31,
	2019			2018
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	70,421		$	58,483
Interest and dividends on investments:
Taxable interest	8,164			7,056
Interest exempt from federal income taxes	418			410
Dividends	537			519
Interest on bank deposits	54			31
Total interest income	79,594			66,499
Interest Expense
Interest on deposits	8,175			3,541
Interest on short-term borrowings	3,438			2,295
Interest on subordinated debentures	2,354			827
Interest on other long-term debt	71			77
Interest on lease obligations	70			74
Total interest expense	14,108			6,814
Net Interest Income	65,486			59,685
Provision for credit losses	4,095			6,903
Net Interest Income after Provision for Credit Losses	61,391			52,782
Noninterest Income
Net securities gains	—			2,840
Trust income	1,926			1,928
Service charges on deposit accounts	4,245			4,406
Insurance and retail brokerage commissions	1,961			1,868
Income from bank owned life insurance	1,426			1,494
Gain on sale of mortgage loans	1,428			1,484
Gain on sale of other loans and assets	1,084			574
Card-related interchange income	4,730			4,742
Derivatives mark to market	(26		)	789
Swap fee income	393			290
Other income	1,705			1,628
Total noninterest income	18,872			22,043
Noninterest Expense
Salaries and employee benefits	27,220			24,873
Net occupancy	4,916			4,369
Furniture and equipment	3,668			3,540
Data processing	2,544			2,433
Advertising and promotion	1,240			809
Pennsylvania shares tax	916			903
Intangible amortization	754			784
Collection and repossession	547			823
Other professional fees and services	754			1,007
FDIC insurance	574			776
Loss on sale or write-down of assets	65			197
Litigation and operational losses	401			179
Merger and acquisition related	—			337
Other operating	6,131			5,843
Total noninterest expense	49,730			46,873
Income Before Income Taxes	30,533			27,952
Income tax provision	5,944			4,682
Net Income	$	24,589		$	23,270
Average Shares Outstanding	98,479,041			97,433,137
Average Shares Outstanding Assuming Dilution	98,706,827			97,601,162
Per Share Data:
Basic Earnings per Share	$	0.25		$	0.24
Diluted Earnings per Share	$	0.25		$	0.24
Cash Dividends Declared per Common Share	$	0.10		$	0.08

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	For the Three Months Ended
	March 31,
	2019			2018
	(dollars in thousands)
Net Income	$	24,589		$	23,270
Other comprehensive income (loss), before tax (expense) benefit:
Unrealized holding gains (losses) on securities arising during the period	9,030			(3,982		)
Less: reclassification adjustment for gains on securities included in net income	—			(2,840		)
Unrealized holding gains (losses) on derivatives arising during the period	133			(130		)
Less: reclassification adjustment for losses on derivatives included in net income	—			—
Total other comprehensive income (loss), before tax (expense) benefit	9,163			(6,952		)
Income tax (expense) benefit related to items of other comprehensive income (loss)	(1,924		)	1,460
Total other comprehensive income (loss)	7,239			(5,492		)
Comprehensive Income	$	31,828		$	17,778

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2018	98,518,668		$	113,915	$	492,273	$	511,409		$	(11,341	)	$	(130,867	)	$	975,389
Net income							24,589									24,589
Other comprehensive income										7,239						7,239
Cash dividends declared ($0.10 per share)							(9,862		)							(9,862		)
Treasury stock acquired	(159,562	)											(2,074		)	(2,074		)
Treasury stock reissued	188,700				941		—						1,590			2,531
Restricted stock	78,000		—		450		—						(243		)	207
Balance at March 31, 2019	98,625,806		$	113,915	$	493,664	$	526,136		$	(4,102	)	$	(131,594	)	$	998,019



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2017	97,456,478		$	113,915	$	470,123	$	437,416		$	(6,173	)	$	(127,154	)	$	888,127
Cumulative effect of adoption of ASU 2018-02							1,344			(1,344		)				—
January 1, 2018	97,456,478		113,915		470,123		438,760			(7,517		)	(127,154		)	888,127
Net income							23,270									23,270
Other comprehensive loss										(5,492		)				(5,492		)
Cash dividends declared ($0.08 per share)							(7,803		)							(7,803		)
Treasury stock acquired	(72,307	)											(1,079		)	(1,079		)
Treasury stock reissued	149,480				1,108		—						1,149			2,257
Restricted stock	69,500		—		537		—						(468		)	69
Balance at March 31, 2018	97,603,151		$	113,915	$	471,768	$	454,227		$	(13,009	)	$	(127,552	)	$	899,349

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	For the Three Months Ended
	March 31,
	2019			2018
Operating Activities	(dollars in thousands)
Net income	$	24,589		$	23,270
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	4,095			6,903
Deferred tax expense	1,443			1,097
Depreciation and amortization	2,478			2,380
Net gains on securities and other assets	(2,218		)	(5,143		)
Net amortization of premiums and discounts on securities	784			775
Income from increase in cash surrender value of bank owned life insurance	(1,426		)	(1,494		)
Increase in interest receivable	(2,346		)	(620		)
Mortgage loans originated for sale	(34,985		)	(38,218		)
Proceeds from sale of mortgage loans	35,255			46,134
Increase (decrease) in interest payable	1,522			(235		)
Increase in income taxes payable	4,454			3,557
Other-net	(14,956		)	(17,004		)
Net cash provided by operating activities	18,689			21,402
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	8,641			11,335
Purchases	—			—
Transactions with securities available for sale:
Proceeds from sales	—			—
Proceeds from maturities and redemptions	31,099			44,067
Purchases	(6,401		)	(130,012		)
Purchases of FHLB stock	(10,293		)	(13,491		)
Proceeds from the redemption of FHLB stock	17,041			18,928
Proceeds from sale of loans	8,559			6,647
Proceeds from sale of other assets	1,144			1,141
Net (increase) decrease in loans	(104,189		)	16,012
Purchases of premises and equipment and other assets	(4,128		)	(1,974		)
Net cash used in investing activities	(58,527		)	(47,347		)
Financing Activities
Net (decrease) increase in federal funds purchased	(11,000		)	6,000
Net decrease in other short-term borrowings	(145,207		)	(125,450		)
Net increase in deposits	232,892			122,849
Repayments of other long-term debt	(156		)	(150		)
Repayments of capital lease obligation	(99		)	(92		)
Dividends paid	(9,862		)	(7,803		)
Purchase of treasury stock	(1,785		)	(1,079		)
Net cash provided by (used in) financing activities	64,783			(5,725		)
Net increase (decrease) in cash and cash equivalents	24,945			(31,670		)
Cash and cash equivalents at January 1	98,947			107,292
Cash and cash equivalents at March 31	$	123,892		$	75,622

The accompanying notes are an integral part of these unaudited consolidated financial statements.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

The accounting and reporting policies of First Commonwealth Financial Corporation and its subsidiaries (“First Commonwealth” or the “Company”) conform with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual realized amounts could differ from those estimates. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of First Commonwealth’s financial position, results of operations, comprehensive income, cash flows and changes in shareholders’ equity as of and for the periods presented. Certain information and Note disclosures normally included in Consolidated Financial Statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest-bearing bank deposits. Generally, federal funds are sold for one-day periods.

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the full year of 2019. These interim financial statements should be read in conjunction with First Commonwealth’s 2018 Annual Report on Form 10-K.

Adoption of New Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Additionally, the FASB issued ASU No. 2018-01, "Leases (Topic 842)" in January 2018, ASU No. 2018-11, "Leases - Targeted Improvements" in July 2018 and ASU 2018-20, "Leases - Narrow-Scope Improvements for Lessors" in December 2018. These ASU's provide certain improvements and optional practical expedients to Topic 842. First Commonwealth adopted this guidance on January 1, 2019. Under this new guidance, all entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. First Commonwealth has elected the transition option provided in ASU No. 2018-11, which provides for the modified retrospective approach to be applied on January 1, 2019. Upon adoption of this standard on January 1, 2019, we recognized right-of-use ("ROU") assets and related lease liabilities totaling $38.5 million and $41.8 million, respectively. Additionally, during the first quarter of 2019, we recognized an additional right-of-use asset and related lease liability totaling $10.0 million in connection with the relocation of leased space that includes a corporate loan production office and some administrative offices. We have elected to apply certain practical expedients provided under the standard including (i) to not apply the requirements in the new standard to short-term leases (ii) to not reassess the lease classification for any expired or existing lease (iii) to account for lease and non-lease components separately (iv) to not reassess initial direct costs for any existing leases. The initial impact of this standard primarily relates to operating leases of certain real estate properties. First Commonwealth has no material leasing arrangements for which it is the lessor of property or equipment.

Note 2 Supplemental Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the Consolidated Statements of Comprehensive Income. Reclassification adjustments related to securities available for sale are included in the "Net securities gains" line and reclassification adjustments related to losses on derivatives are included in the "Other operating expenses" line in the Consolidated Statements of Income.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	For the Three Months Ended March 31,
	2019							2018
	Pretax Amount		Tax (Expense) Benefit			Net of Tax Amount		Pretax Amount			Tax (Expense) Benefit		Net of Tax Amount
	(dollars in thousands)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period	$	9,030	$	(1,896	)	$	7,134	$	(3,982	)	$	837	$	(3,145	)
Reclassification adjustment for gains on securities included in net income	—		—			—		(2,840		)	596		(2,244		)
Total unrealized gains (losses) on securities	9,030		(1,896		)	7,134		(6,822		)	1,433		(5,389		)
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) on derivatives arising during the period	133		(28		)	105		(130		)	27		(103		)
Reclassification adjustment for losses on derivatives included in net income	—		—			—		—			—		—
Total unrealized gains (losses) on derivatives	133		(28		)	105		(130		)	27		(103		)
Total other comprehensive income (loss)	$	9,163	$	(1,924	)	$	7,239	$	(6,952	)	$	1,460	$	(5,492	)

The following table details the change in components of OCI for the three months ended March 31:



	2019											2018
	Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income (Loss)			Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income (Loss)
	(dollars in thousands)
Balance at December 31	$	(11,697	)	$	461	$	(105	)	$	(11,341	)	$	(6,166	)	$	299	$	(306	)	$	(6,173	)
Cumulative effect of adoption of ASU 2018-02	—			—		—			—			(1,344		)	—		—			(1,344		)
Balance at January 1	(11,697		)	461		(105		)	(11,341		)	(7,510		)	299		(306		)	(7,517		)
Other comprehensive income (loss) before reclassification adjustment	7,134			—		105			7,239			(3,145		)	—		(103		)	(3,248		)
Amounts reclassified from accumulated other comprehensive (loss) income	—			—		—			—			(2,244		)	—		—			(2,244		)
Net other comprehensive income (loss) during the period	7,134			—		105			7,239			(5,389		)	—		(103		)	(5,492		)
Balance at March 31	$	(4,563	)	$	461	$	—		$	(4,102	)	$	(12,899	)	$	299	$	(409	)	$	(13,009	)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 Supplemental Cash Flow Disclosures

The following table presents information related to cash paid during the period for interest and income taxes, as well as detail on non-cash investing and financing activities for the three months ended March 31:



	2019		2018
	(dollars in thousands)
Cash paid during the period for:
Interest	$	12,660	$	7,072
Income taxes	61		28
Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets	982		1,186
Loans transferred from held to maturity to held for sale	4,156		8,019
Gross increase (decrease) in market value adjustment to securities available for sale	9,030		(6,822		)
Gross increase (decrease) in market value adjustment to derivatives	133		(131		)
Noncash treasury stock reissuance	2,531		2,257
Unsettled treasury stock repurchases	289		—
Proceeds from death benefit on bank-owned life insurance not received	—		2,306

Note 4 Earnings per Share

The following table summarizes the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computations:



	For the Three Months Ended March 31,
	2019			2018
Weighted average common shares issued	113,914,902			113,914,902
Average treasury stock shares	(15,291,253		)	(16,369,144		)
Average deferred compensation shares	(37,411		)	(37,411		)
Average unearned nonvested shares	(107,197		)	(75,210		)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	98,479,041			97,433,137
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	190,375			130,614
Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share	37,411			37,411
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	98,706,827			97,601,162
Basic Earnings per Share	$	0.25		$	0.24
Diluted Earnings per Share	$	0.25		$	0.24

The following table shows the number of shares and the price per share related to common stock equivalents that were not included in the computation of diluted earnings per share for the three months ended March 31 because to do so would have been antidilutive.



	2019					2018
		Price Range					Price Range
	Shares	From		To		Shares	From		To
Restricted Stock	95,403	$	12.99	$	14.49	37,298	$	9.84	$	14.49
Restricted Stock Units	39,618	$	14.22	$	16.62	43,067	$	13.25	$	15.83

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5 Commitments and Contingent Liabilities

Commitments and Letters of Credit

Standby letters of credit and commercial letters of credit are conditional commitments issued by First Commonwealth to guarantee the performance of a customer to a third party. The contract or notional amount of these instruments reflects the maximum amount of future payments that First Commonwealth could be required to pay under the guarantees if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. In addition, many of these commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements.

The following table identifies the notional amount of those instruments at:



	March 31, 2019		December 31, 2018
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,881,445	$	1,883,914
Financial standby letters of credit	18,121		18,298
Performance standby letters of credit	28,520		22,027
Commercial letters of credit	887		887

The notional amounts outstanding as of March 31, 2019 include amounts issued in 2019 of $8.1 million in performance standby letters of credit. There were no financial standby or commercial letters of credit issued in 2019. A liability of $0.3 million and $0.2 million has been recorded as of March 31, 2019 and December 31, 2018, respectively, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.

Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk related to these commitments resulted in the recording of a liability of $4.6 million and $5.0 million as of March 31, 2019 and December 31, 2018, respectively. This liability is reflected in "Other liabilities" in the Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.

Legal Proceedings

First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of March 31, 2019, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against First Commonwealth or its subsidiaries will be material to First Commonwealth’s consolidated financial position. On at least a quarterly basis, First Commonwealth assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that First Commonwealth will incur losses and the amounts of the losses can be reasonably estimated, First Commonwealth records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability (if any), is between $0 and $1 million. Although First Commonwealth does not believe that the outcome of pending litigation will be material to First Commonwealth’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations and cash flows for a particular reporting period in the future.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6 Investment Securities

Securities Available for Sale

Below is an analysis of the amortized cost and estimated fair values of securities available for sale at:



	March 31, 2019									December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	8,731	$	539	$	(24	)	$	9,246	$	9,011	$	479	$	(84	)	$	9,406
Mortgage-Backed Securities – Commercial	169,153		457		(1,490		)	168,120		169,633		214		(2,103		)	167,744
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	660,080		2,749		(8,863		)	653,966		686,906		1,846		(15,391		)	673,361
Other Government-Sponsored Enterprises	10,000		6		—			10,006		10,000		12		—			10,012
Obligations of States and Political Subdivisions	28,010		204		—			28,214		27,592		126		(6		)	27,712
Corporate Securities	22,903		665		(19		)	23,549		20,912		321		(221		)	21,012
Total Securities Available for Sale	$	898,877	$	4,620	$	(10,396	)	$	893,101	$	924,054	$	2,998	$	(17,805	)	$	909,247

Mortgage-backed securities include mortgage-backed obligations of U.S. Government agencies and obligations of U.S. Government-sponsored enterprises. These obligations have contractual maturities ranging from less than one year to approximately 30 years with lower anticipated lives to maturity due to prepayments. All mortgage-backed securities contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact upon prepayment speeds; therefore, First Commonwealth uses computer simulation models to test the average life and yield volatility of all mortgage-backed securities under various interest rate scenarios to monitor the potential impact on earnings and interest rate risk positions.

Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties. Other fixed income securities within the portfolio also contain prepayment risk.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of debt securities available for sale at March 31, 2019, by contractual maturity, are shown below.



	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	—	$	—
Due after 1 but within 5 years	27,333		27,588
Due after 5 but within 10 years	33,580		34,181
Due after 10 years	—		—
	60,913		61,769
Mortgage-Backed Securities (a)	837,964		831,332
Total Debt Securities	$	898,877	$	893,101


(a)	Mortgage-Backed Securities include an amortized cost of $177.9 million and a fair value of $177.4 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $660.1 million and a fair value of $654.0 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to securities available for sale were as follows for the three months ended March 31:



	2019		2018
	(dollars in thousands)
Proceeds from sales	$	—	$	—
Gross gains (losses) realized:
Sales Transactions:
Gross gains	$	—	$	—
Gross losses	—		—
	—		—
Maturities and impairment
Gross gains	—		2,840
Gross losses	—		—
	—		2,840
Net gains and impairment	$	—	$	2,840

Gross gains of $2.8 million were recognized in 2018 as a result of a successful auction call on PreSTL XIV, one of our pooled trust preferred securities. There were no gains or losses recognized in 2019.

Securities available for sale with an estimated fair value of $625.2 million and $636.3 million were pledged as of March 31, 2019 and December 31, 2018, respectively, to secure public deposits and for other purposes required or permitted by law.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Securities Held to Maturity

Below is an analysis of the amortized cost and fair values of debt securities held to maturity at:



	March 31, 2019									December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	3,606	$	—	$	(26	)	$	3,580	$	3,635	$	—	$	(97	)	$	3,538
Mortgage-Backed Securities- Commercial	54,898		—		(1,763		)	53,135		55,221		—		(2,327		)	52,894
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	270,807		352		(3,303		)	267,856		279,109		212		(7,254		)	272,067
Mortgage-Backed Securities – Commercial	12,894		—		(95		)	12,799		13,159		—		(258		)	12,901
Obligations of States and Political Subdivisions	42,304		400		(31		)	42,673		42,331		175		(313		)	42,193
Debt Securities Issued by Foreign Governments	400		—		—			400		400		—		—			400
Total Securities Held to Maturity	$	384,909	$	752	$	(5,218	)	$	380,443	$	393,855	$	387	$	(10,249	)	$	383,993

The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.



	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	518	$	518
Due after 1 but within 5 years	7,922		7,965
Due after 5 but within 10 years	34,264		34,590
Due after 10 years	—		—
	42,704		43,073
Mortgage-Backed Securities (a)	342,205		337,370
Total Debt Securities	$	384,909	$	380,443


(a)	Mortgage-Backed Securities include an amortized cost of $58.5 million and a fair value of $56.7 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $283.7 million and a fair value of $280.7 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

Securities held to maturity with an amortized cost of $324.7 million and $250.3 million were pledged as of March 31, 2019 and December 31, 2018, respectively, to secure public deposits and for other purposes required or permitted by law.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7 Impairment of Investment Securities

Securities Available for Sale and Held to Maturity

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit-related other-than-temporary impairment on debt securities is recognized in earnings, while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the three months ended March 31, 2019 and 2018, no other-than-temporary impairment charges were recognized.

First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the average cost method to determine the net gain or loss on equity securities.

We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more likely than not to sell, or be required to sell, the security. We evaluate whether we are more likely than not to sell debt securities based upon our investment strategy for the particular type of security, our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by weakness in the U.S. economy or changes in real estate values.

The following table presents the gross unrealized losses and estimated fair values at March 31, 2019 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	—	$	—		$	7,336	$	(50	)	$	7,336	$	(50	)
Mortgage-Backed Securities – Commercial	48,274		(28		)	124,003		(3,225		)	172,277		(3,253		)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	4		—			710,446		(12,166		)	710,450		(12,166		)
Mortgage-Backed Securities – Commercial	—		—			12,799		(95		)	12,799		(95		)
Obligations of States and Political Subdivisions	—		—			5,925		(31		)	5,925		(31		)
Debt Securities Issued by Foreign Governments	200		—			—		—			200		—
Corporate Securities	—		—			4,976		(19		)	4,976		(19		)
Total Securities	$	48,478	$	(28	)	$	865,485	$	(15,586	)	$	913,963	$	(15,614	)

At March 31, 2019, fixed income securities issued by U.S. Government-sponsored enterprises and U.S. Government agencies comprised 79% and 21%, respectively, of total unrealized losses due to changes in market interest rates. At March 31, 2019, there are 98 debt securities in an unrealized loss position.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the gross unrealized losses and estimated fair values at December 31, 2018 by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	2,289	$	(41	)	$	5,028	$	(140	)	$	7,317	$	(181	)
Mortgage-Backed Securities - Commercial	95,826		(925		)	75,959		(3,505		)	171,785		(4,430		)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	156,732		(1,856		)	626,003		(20,789		)	782,735		(22,645		)
Mortgage-Backed Securities – Commercial	—		—			12,901		(258		)	12,901		(258		)
Obligation of States and Political Subdivisions	8,591		(85		)	9,338		(234		)	17,929		(319		)
Corporate Securities	14,769		(214		)	3,993		(7		)	18,762		(221		)
Total Securities	$	278,207	$	(3,121	)	$	733,222	$	(24,933	)	$	1,011,429	$	(28,054	)

As of March 31, 2019, our corporate securities had an amortized cost and an estimated fair value of $22.9 million and $23.5 million, respectively. As of December 31, 2018, our corporate securities had an amortized cost and estimated fair value of $20.9 million and $21.0 million, respectively. Corporate securities are comprised of debt for large regional banks. There was one corporate security in an unrealized loss position as of March 31, 2019 and four corporate securities in an unrealized loss position as of December 31, 2018. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

During 2018, all of our pooled trust preferred collateralized debt obligations were liquidated either through a successful auction call or sale. Other-than-temporary impairment charges were recognized on the pooled trust preferred securities in 2008, 2009 and 2010. The following table provides a cumulative roll forward of credit losses recognized in earnings for the trust preferred securities:



	For the Three Months Ended March 31,
	2019		2018
	(dollars in thousands)
Balance, beginning (a)	$	—	$	12,208
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—		—
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—		—
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)	—		(147		)
Reduction for debt securities sold during the period	—		—
Reduction for debt securities called during the period	—		(2,302		)
Balance, ending	$	—	$	9,759


(a)	The beginning balance represents credit related losses included in other-than-temporary impairment charges recognized on debt securities in prior periods.


(b)	Represents the increase in cash flows recognized in interest income during the period.

Other Investments

As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of March 31, 2019 and December 31, 2018, our FHLB stock totaled $23.7 million and $30.5 million, respectively, and is included in “Other investments” on the Consolidated Statements of Financial Condition.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three months ended March 31, 2019.

As of both March 31, 2019 and 2018, "Other investments" also includes $1.7 million in equity securities. These securities do not have a readily determinable fair value and are carried at cost. During the three-months ended March 31, 2019 and 2018, there were no gains or losses recognized through earnings on equity securities. On a quarterly basis, management evaluates equity securities by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information.

Note 8 Loans and Allowance for Credit Losses

The following table provides outstanding balances related to each of our loan types:



	March 31, 2019						December 31, 2018
	Originated		Acquired		Total		Originated		Acquired		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,143,885	$	36,435	$	1,180,320	$	1,100,947	$	37,526	$	1,138,473
Real estate construction	383,164		6,223		389,387		353,008		5,970		358,978
Residential real estate	1,325,740		239,609		1,565,349		1,313,645		248,760		1,562,405
Commercial real estate	1,946,482		191,894		2,138,376		1,922,349		201,195		2,123,544
Loans to individuals	593,481		4,157		597,638		585,347		5,392		590,739
Total loans	$	5,392,752	$	478,318	$	5,871,070	$	5,275,296	$	498,843	$	5,774,139

Credit Quality Information

As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are used in grading our loans:



Pass		Acceptable levels of risk exist in the relationship. Includes all loans not classified as OAEM, substandard or doubtful.



Other Assets Especially Mentioned (OAEM)		Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in deterioration of the repayment prospects or weaken the Company’s credit position at some future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances surrounding the specific credit. No loss of principal or interest is expected.



Substandard		Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of deterioration of the borrower’s financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Company may also be classified as substandard.



Doubtful		Loans with the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.

The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movement between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables represent our credit risk profile by creditworthiness:



	March 31, 2019
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated loans
Pass	$	1,107,013	$	374,201	$	1,315,339	$	1,894,745	$	593,253	$	5,284,551
Non-Pass
OAEM	31,225		8,963		809		32,635		—		73,632
Substandard	5,647		—		9,592		19,102		228		34,569
Doubtful	—		—		—		—		—		—
Total Non-Pass	36,872		8,963		10,401		51,737		228		108,201
Total	$	1,143,885	$	383,164	$	1,325,740	$	1,946,482	$	593,481	$	5,392,752

Acquired loans
Pass	$	30,627	$	5,602	$	236,594	$	189,052	$	4,143	$	466,018
Non-Pass
OAEM	5,672		621		725		423		—		7,441
Substandard	136		—		2,290		2,419		14		4,859
Doubtful	—		—		—		—		—		—
Total Non-Pass	5,808		621		3,015		2,842		14		12,300
Total	$	36,435	$	6,223	$	239,609	$	191,894	$	4,157	$	478,318



	December 31, 2018
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated loans
Pass	$	1,055,394	$	337,367	$	1,302,912	$	1,880,139	$	585,141	$	5,160,953
Non-Pass
OAEM	33,723		15,641		1,026		28,904		—		79,294
Substandard	11,830		—		9,707		13,306		206		35,049
Doubtful	—		—		—		—		—		—
Total Non-Pass	45,553		15,641		10,733		42,210		206		114,343
Total	$	1,100,947	$	353,008	$	1,313,645	$	1,922,349	$	585,347	$	5,275,296

Acquired loans
Pass	$	31,399	$	5,337	$	245,637	$	198,201	$	5,377	$	485,951
Non-Pass
OAEM	5,890		633		736		441		—		7,700
Substandard	237		—		2,387		2,553		15		5,192
Doubtful	—		—		—		—		—		—
Total Non-Pass	6,127		633		3,123		2,994		15		12,892
Total	$	37,526	$	5,970	$	248,760	$	201,195	$	5,392	$	498,843

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Portfolio Risks

The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital and liquidity. First Commonwealth devotes substantial resources to managing this risk primarily through our credit administration department that develops and administers policies and procedures for underwriting, maintaining, monitoring and collecting loans. Credit administration is independent of lending departments and oversight is provided by the Credit Committee of the First Commonwealth Board of Directors.

Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate to absorb losses inherent to the portfolio as of March 31, 2019. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

Age Analysis of Past Due Loans by Segment

The following tables delineate the aging analysis of the recorded investments in past due loans as of March 31, 2019 and December 31, 2018. Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.



	March 31, 2019
	30 - 59 days past due		60 - 89 days past due		90 days or greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	207	$	1,037	$	83	$	4,390	$	5,717	$	1,138,168	$	1,143,885
Real estate construction	507		—		—		—		507		382,657		383,164
Residential real estate	2,995		1,739		460		6,126		11,320		1,314,420		1,325,740
Commercial real estate	1,161		122		—		8,539		9,822		1,936,660		1,946,482
Loans to individuals	2,406		481		759		228		3,874		589,607		593,481
Total	$	7,276	$	3,379	$	1,302	$	19,283	$	31,240	$	5,361,512	$	5,392,752

Acquired loans
Commercial, financial, agricultural and other	$	—	$	—	$	—	$	100	$	100	$	36,335	$	36,435
Real estate construction	—		—		—		—		—		6,223		6,223
Residential real estate	98		35		171		1,816		2,120		237,489		239,609
Commercial real estate	185		—		—		947		1,132		190,762		191,894
Loans to individuals	22		7		36		14		79		4,078		4,157
Total	$	305	$	42	$	207	$	2,877	$	3,431	$	474,887	$	478,318

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	December 31, 2018
	30 - 59 days past due		60 - 89 days past due		90 days or greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	130	$	247	$	92	$	10,223	$	10,692	$	1,090,255	$	1,100,947
Real estate construction	212		—		—		—		212		352,796		353,008
Residential real estate	3,697		710		790		6,238		11,435		1,302,210		1,313,645
Commercial real estate	492		69		—		3,437		3,998		1,918,351		1,922,349
Loans to individuals	2,362		532		662		207		3,763		581,584		585,347
Total	$	6,893	$	1,558	$	1,544	$	20,105	$	30,100	$	5,245,196	$	5,275,296

Acquired loans
Commercial, financial, agricultural and other	$	1	$	—	$	—	$	204	$	205	$	37,321	$	37,526
Real estate construction	—		—		—		—		—		5,970		5,970
Residential real estate	226		24		27		1,904		2,181		246,579		248,760
Commercial real estate	—		—		—		1,042		1,042		200,153		201,195
Loans to individuals	46		12		11		15		84		5,308		5,392
Total	$	273	$	36	$	38	$	3,165	$	3,512	$	495,331	$	498,843

Nonaccrual Loans

The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. 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.

When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all delinquent interest and principal becomes current under the terms of the loan agreement or (b) the loan is both well-secured and in the process of collection and collectability is no longer in doubt.

Impaired Loans

Management considers loans to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination of impairment is treated the same across all loan categories. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole source for repayment of the loan is the operation or liquidation of collateral. When the loan is collateral dependent, the appraised value less estimated cost to sell is utilized. If management determines the value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans on accrual status are also considered to be impaired loans.

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 financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal of an

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received under the cash basis method.

At March 31, 2019 and December 31, 2018, there were no impaired loans held for sale. During the three months ended, March 31, 2019 and 2018, there were no gains or losses recognized on sales of impaired loans.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of March 31, 2019 and December 31, 2018. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated using month-end balances of the loans for the period reported and are included in the table below based on their period-end allowance position.



	March 31, 2019						December 31, 2018
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
Originated loans:
With no related allowance recorded:
Commercial, financial, agricultural and other	$	2,599	$	9,100			$	8,735	$	16,442
Real estate construction	—		—				—		—
Residential real estate	10,545		12,264				10,726		12,571
Commercial real estate	3,752		4,042				3,599		3,812
Loans to individuals	339		530				281		408
Subtotal	17,235		25,936				23,341		33,233
With an allowance recorded:
Commercial, financial, agricultural and other	3,317		3,479		$	1,012	3,042		3,181		$	797
Real estate construction	—		—		—		—		—		—
Residential real estate	713		713		119		486		495		107
Commercial real estate	7,017		7,035		914		1,866		1,878		596
Loans to individuals	—		—		—		—		—		—
Subtotal	11,047		11,227		2,045		5,394		5,554		1,500
Total	$	28,282	$	37,163	$	2,045	$	28,735	$	38,787	$	1,500

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	March 31, 2019						December 31, 2018
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
Acquired loans
With no related allowance recorded:
Commercial, financial, agricultural and other	$	100	$	100			$	73	$	73
Real estate construction	—		—				—		—
Residential real estate	1,937		2,369				2,031		2,604
Commercial real estate	947		1,962				1,042		2,052
Loans to individuals	14		16				15		17
Subtotal	2,998		4,447				3,161		4,746
With an allowance recorded:
Commercial, financial, agricultural and other	—		—		$	—	131		131		$	131
Real estate construction	—		—		—		—		—		—
Residential real estate	—		—		—		—		—		—
Commercial real estate	—		—		—		—		—		—
Loans to individuals	—		—		—		—		—		—
Subtotal	—		—		—		131		131		131
Total	$	2,998	$	4,447	$	—	$	3,292	$	4,877	$	131



	For the Three Months Ended March 31,
	2019								2018
	Originated Loans				Acquired Loans				Originated Loans				Acquired Loans
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	2,707	$	13	$	439	$	—	$	8,130	$	10	$	411	$	—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	10,798		72		1,981		1		10,401		63		678		1
Commercial real estate	3,994		36		982		1		5,510		31		907		—
Loans to individuals	324		1		14		—		354		2		17		—
Subtotal	17,823		122		3,416		2		24,395		106		2,013		1
With an allowance recorded:
Commercial, financial, agricultural and other	3,068		3		—		—		17,720		66		—		—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	604		5		—		—		706		—		93		—
Commercial real estate	3,278		1		—		—		1,960		1		118		—
Loans to individuals	—		—		—		—		—		—		—		—
Subtotal	6,950		9		—		—		20,386		67		211		—
Total	$	24,773	$	131	$	3,416	$	2	$	44,781	$	173	$	2,224	$	1

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unfunded commitments related to nonperforming loans were $0.1 million at March 31, 2019 and $1.6 million at December 31, 2018. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $12 thousand was established for these off balance sheet exposures at both March 31, 2019 and December 31, 2018.

The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans:



	March 31, 2019		December 31, 2018
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	9,120	$	8,757
Nonaccrual status	5,874		11,761
Total	$	14,994	$	20,518
Commitments
Letters of credit	$	60	$	60
Unused lines of credit	263		1,027
Total	$	323	$	1,087

The following tables provide detail, including specific reserves and reasons for modification, related to loans identified as troubled debt restructurings:



	For the Three Months Ended March 31, 2019
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	1	$	—	$	—	$	61	$	61	$	62	$	—
Residential real estate	6	17		49		514		580		570		40
Commercial real estate	2	—		556		242		798		767		—
Loans to individuals	3	—		—		48		48		46		—
Total	12	$	17	$	605	$	865	$	1,487	$	1,445	$	40



	For the Three Months Ended March 31, 2018
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	2	$	4,709	$	—	$	162	$	4,871	$	3,942	$	531
Residential real estate	11	20		75		346		441		404		17
Commercial real estate	1	3,017		—		—		3,017		2,994		227
Loans to individuals	4	—		28		30		58		53		—
Total	18	$	7,746	$	103	$	538	$	8,387	$	7,393	$	775

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate may include loans that were modified for a change in rate as well as

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

a re-amortization of the principal and an extension of the maturity. For the three months ended March 31, 2019 and 2018, $0.6 million and $0.1 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. For both 2019 and 2018 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following table provides information related to loans that were restructured within the past twelve months and that were considered to be in default during the three months ended March 31:



	2019			2018
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Commercial, financial, agricultural and other	—	$	—	1	$	940
Loans to individuals	1	10		—	—
Total	1	$	10	1	$	940

The following tables provide detail related to the allowance for credit losses:



	For the Three Months Ended March 31, 2019
	Commercial, financial, agricultural and other			Real estate construction		Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	19,235		$	2,002	$	3,934		$	18,382		$	4,033		$	47,586
Charge-offs	(483		)	—		(136		)	(299		)	(1,110		)	(2,028		)
Recoveries	76			42		81			41			114			354
Provision (credit)	987			210		271			1,094			1,126			3,688
Ending balance	19,815			2,254		4,150			19,218			4,163			49,600
Acquired loans:
Beginning balance	139			—		35			4			—			178
Charge-offs	(526		)	—		(45		)	—			(5		)	(576		)
Recoveries	11			—		24			—			9			44
Provision (credit)	394			—		21			(4		)	(4		)	407
Ending balance	18			—		35			—			—			53
Total ending balance	$	19,833		$	2,254	$	4,185		$	19,218		$	4,163		$	49,653
Ending balance: individually evaluated for impairment	$	1,012		$	—	$	119		$	914		$	—		$	2,045
Ending balance: collectively evaluated for impairment	18,821			2,254		4,066			18,304			4,163			47,608
Loans:
Ending balance	1,180,320			389,387		1,565,349			2,138,376			597,638			5,871,070
Ending balance: individually evaluated for impairment	5,627			—		3,938			11,111			—			20,676
Ending balance: collectively evaluated for impairment	1,174,693			389,387		1,561,411			2,127,265			597,638			5,850,394

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	For the Three Months Ended March 31, 2018
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	23,418		$	1,349		$	2,753		$	17,328		$	3,404		$	48,252
Charge-offs	(290		)	—			(455		)	(168		)	(1,169		)	(2,082		)
Recoveries	256			1			75			69			195			596
Provision (credit)	4,148			(236		)	768			1,265			986			6,931
Ending balance	27,532			1,114			3,141			18,494			3,416			53,697
Acquired loans:
Beginning balance	11			—			6			29			—			46
Charge-offs	—			—			(16		)	—			(4		)	(20		)
Recoveries	7			6			17			—			7			37
Provision (credit)	2			(6		)	6			(27		)	(3		)	(28		)
Ending balance	20			—			13			2			—			35
Total ending balance	$	27,552		$	1,114		$	3,154		$	18,496		$	3,416		$	53,732
Ending balance: individually evaluated for impairment	$	9,045		$	—		$	287		$	2,141		$	—		$	11,473
Ending balance: collectively evaluated for impairment	18,507			1,114			2,867			16,355			3,416			42,259
Loans:
Ending balance	1,131,594			246,961			1,434,623			2,027,072			541,055			5,381,305
Ending balance: individually evaluated for impairment	33,278			—			6,853			10,360			—			50,491
Ending balance: collectively evaluated for impairment	1,098,316			246,961			1,427,770			2,016,712			541,055			5,330,814

Note 9 Leases

On January 1, 2019, the Company adopted ASU 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842 using the transition option provided in ASU 2018-11, which provides for the modified retrospective approach. Under this approach comparative periods were not restated and no cumulative effect adjustment to the opening balance of retained earnings was required.

First Commonwealth has elected to apply certain practical expedients provided under the standard including (i) to not apply the requirements in the new standard to short-term leases (ii) to not reassess the lease classification for any expired or existing lease (iii) to account for lease and non-lease components separately (iv) to not reassess initial direct costs for any existing leases. The impact of this standard primarily relates to operating leases of certain real estate properties, primarily certain branch and ATM locations and office space. First Commonwealth has no material leasing arrangements for which it is the lessor of property or equipment.

Adoption of this standard resulted in the Company recognizing an ROU asset of $38.5 million and a lease liability of $41.8 million on January 1, 2019.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table represents the Consolidated Statements of Condition classification of the Company’s ROU assets and lease liabilities, lease costs and other lease information as of and for the three months ended March 31, 2019 (dollars in thousands).



Balance sheet:
Operating lease asset classified as premises and equipment	$	47,566
Operating lease liability classified as other liabilities	51,371
Income statement:
Operating lease cost classified as occupancy and equipment expense	$	1,337
Weighted average lease term, in years	16.28
Weighted average discount rate	3.49		%
Operating cash flows	$	1,119

The ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. First Commonwealth's lease agreements often include one or more options to renew at the Company's discretion. If we consider the renewal option to be reasonably certain, we include the extended term in the calculation of the ROU asset and lease liability.

First Commonwealth uses incremental borrowing rates when calculating the lease liability because the rate implicit in the lease is not readily determinable. The incremental borrowing rate used by First Commonwealth is an amortizing loan rate obtained from the Federal Home Loan Bank ("FHLB") of Pittsburgh. This rate is consistent with a collateralized borrowing rate and is available for terms similar to the lease payment schedules.

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2019 were as follows (dollars in thousands):



For the twelve months ended:
March 31, 2020	$	4,499
March 31, 2021	4,517
March 31, 2022	4,480
March 31, 2023	4,413
March 31, 2024	4,370
Thereafter	46,528
Total future minimum lease payments	68,807
Less remaining imputed interest	17,436
Present value of future minimum lease payments	$	51,371

Note 10 Income Taxes

In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes”, at March 31, 2019 and December 31, 2018, First Commonwealth had no material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense.

First Commonwealth is subject to routine audits of our tax returns by the Internal Revenue Service (“IRS”) as well as all states in which we conduct business. Generally, tax years prior to the year ended December 31, 2015 are no longer open to examination by federal and state taxing authorities.

During the first quarter of 2018, First Commonwealth adopted ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". Adoption of this ASU reclassified the stranded other accumulated income of $1.3 million resulting from the tax reform passed in December 2017 from accumulated other comprehensive income to retained earnings. There was no impact to total equity as a result of the adoption of this update.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11 Fair Values of Assets and Liabilities

FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosures for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). All non-financial assets are included either as a separate line item on the Consolidated Statements of Financial Condition or in the “Other assets” category of the Consolidated Statements of Financial Condition. Currently, First Commonwealth does not have any non-financial liabilities to disclose.

FASB ASC Topic 825, “Financial Instruments”, permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.

In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. These levels are:


•	Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange (“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

•

Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, corporate securities, FHLB stock, loans held for sale, interest rate derivatives (including interest rate caps, interest rate collars, interest rate swaps and risk participation agreements), certain other real estate owned and certain impaired loans.

Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix pricing. The model will also use processes such as an option adjusted spread to assess the impact of interest rates and to develop prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.

Management validates the market values provided by the third party service by having another recognized pricing service price 100% of the securities on an annual basis and a random sample of securities each quarter, monthly monitoring of variances from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the financial markets.

Other investments recorded in the Consolidated Statements of Financial Condition are primarily comprised of FHLB stock whose estimated fair value is based on its par value. Additional information on FHLB stock is provided in Note 7, “Impairment of Investment Securities.”

Loans held for sale primarily include residential mortgage loans originated for sale in the secondary mortgage market. The estimated fair value for these loans was determined on the basis of rates obtained in the respective secondary market. Loans held for sale could also include commercial loans for which fair value is determined using an executed trade or market bid obtained from potential buyers.

Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities, and consist of interest rate swaps where there is no significant deterioration in the counterparties' (loan customers') credit risk since origination of the interest rate swap as well as interest rate caps, interest rate collars and risk participation agreements. First Commonwealth values its interest rate swap and cap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to one year, Eurodollar futures contracts and swap rates from one year to thirty

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 12, “Derivatives.”

For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the credit risk of its counterparties as well as our own credit risk. Accordingly, we have considered factors such as the likelihood of default, expected loss given default, net exposures and remaining contractual life, among other things, in determining if any fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure.

We also utilize this approach to estimate our own credit risk on derivative liability positions. In 2019, we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.

Interest rate derivatives also include interest rate forwards entered into to hedge residential mortgage loans held for sale and the related interest-rate lock commitments. This includes forward commitments to sell mortgage loans. The fair value of these derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.

In addition, the Company hedges foreign currency risk through the use of foreign exchange forward contracts. The fair value of foreign exchange forward contracts is based on the differential between the contract price and the market-based forward rate.

The estimated fair value for other real estate owned included in Level 2 is determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement.

•

Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any, market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable equity investments, certain interest rate derivatives, certain other real estate owned and certain impaired loans.

The estimated fair value of other investments included in Level 3 is based on carrying value as these securities do not have a readily determinable fair value.

The estimated fair value of limited partnership investments included in Level 3 is based on par value.

For interest rate derivatives included in Level 3, the fair value incorporates credit risk by considering such factors as likelihood of default and expected loss given default based on the credit quality of the underlying counterparties (loan customers).

In accordance with ASU No. 2011-4, the following table provides information related to quantitative inputs and assumptions used in March 31, 2019 Level 3 fair value measurements.



	Fair Value (dollars in thousands)			Valuation Technique	Unobservable Inputs	Range / (weighted average)
Other Investments	$	1,670		CarryingValue	N/A	N/A
Impaired Loans	1,044		(a)	Reserve study	Discount rate	10.00%
					Gas per MMBTU	$2.61 - $3.49 (b)
					Oil per BBL/d	$47.09 - $53.14 (b)
	3,187		(a)	Discounted Cash Flow	Discount Rate	1.9% - 9.5%
Limited Partnership Investments	3,200			Par Value	N/A	N/A


(a)	The remainder of impaired loans valued using Level 3 inputs are not included in this disclosure as the values of those loans are based on bankruptcy agreement documentation.


(b)	Unobservable inputs are defined as follows: MMBTU - million British thermal units; BBL/d - barrels per day.

The discount rate is the significant unobservable input used in the fair value measurement of impaired loans. Significant increases in this rate would result in a decrease in the estimated fair value of the loans, while a decrease in this rate would result in a higher fair value measurement. Other unobservable inputs in the fair value measurement of impaired loans relate to gas, oil and natural gas prices. Increases in these prices would result in an increase in the estimated fair value of the loans, while a decrease in these prices would result in a lower fair value measurement.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis:



	March 31, 2019
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	9,246	$	—	$	9,246
Mortgage-Backed Securities - Commercial	—		168,120		—		168,120
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		653,966		—		653,966
Other Government-Sponsored Enterprises	—		10,006		—		10,006
Obligations of States and Political Subdivisions	—		28,214		—		28,214
Corporate Securities	—		23,549		—		23,549
Total Securities Available for Sale	—		893,101		—		893,101
Other Investments	—		23,708		1,670		25,378
Loans Held for Sale	—		9,627		—		9,627
Other Assets(a)	—		7,613		3,200		10,813
Total Assets	$	—	$	934,049	$	4,870	$	938,919
Other Liabilities(a)	$	—	$	7,868	$	—	$	7,868
Total Liabilities	$	—	$	7,868	$	—	$	7,868


(a)	Hedging and non-hedging interest rate derivatives and limited partnership investments



	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	9,406	$	—	$	9,406
Mortgage-Backed Securities - Commercial	—		167,744		—		167,744
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		673,361		—		673,361
Other Government-Sponsored Enterprises	—		10,012		—		10,012
Obligations of States and Political Subdivisions	—		27,712		—		27,712
Corporate Securities	—		21,012		—		21,012
Total Securities Available for Sale	—		909,247		—		909,247
Other Investments	—		30,456		1,670		32,126
Loans Held for Sale	—		11,881		—		11,881
Other Assets(a)	—		1,769		2,696		4,465
Total Assets	$	—	$	953,353	$	4,366	$	957,719
Other Liabilities(a)	$	—	$	2,081	$	—	$	2,081
Total Liabilities	$	—	$	2,081	$	—	$	2,081


(a)	Hedging and non-hedging interest rate derivatives and limited partnership investments

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the three months ended March 31, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:



	2019
	Other Investments		Other Assets			Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	2,696		$	4,366
Total gains or losses
Included in earnings	—		—			—
Included in other comprehensive income	—		(47		)	(47		)
Purchases, issuances, sales and settlements
Purchases	—		551			551
Issuances	—		—			—
Sales	—		—			—
Settlements	—		—			—
Transfers from Level 3	—		—			—
Transfers into Level 3	—		—			—
Balance, end of period	$	1,670	$	3,200		$	4,870



	2018
	Pooled Trust Preferred Collateralized Debt Obligations			Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	23,646		$	1,670	$	2,143	$	27,459
Total gains or losses
Included in earnings	2,840			—		—		2,840
Included in other comprehensive income	4,529			—		—		4,529
Purchases, issuances, sales and settlements
Purchases	—			—		149		149
Issuances	—			—		—		—
Sales	—			—		—		—
Settlements	(16,883		)	—		—		(16,883		)
Transfers from Level 3	—			—		—		—
Transfers into Level 3	—			—		—		—
Balance, end of period	$	14,132		$	1,670	$	2,292	$	18,094

During the three months ended March 31, 2019 and 2018, there were no transfers between fair value Levels 1, 2 or 3. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at March 31, 2019 and 2018.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The tables below present the balances of assets measured at fair value on a nonrecurring basis at:



	March 31, 2019
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	14,391	$	14,849	$	29,240
Other real estate owned	—		4,300		—		4,300
Total Assets	$	—	$	18,691	$	14,849	$	33,540



	December 31, 2018
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	15,076	$	15,320	$	30,396
Other real estate owned	—		4,035		—		4,035
Total Assets	$	—	$	19,111	$	15,320	$	34,431

The following gains(losses) were realized on the assets measured on a nonrecurring basis:



	For the Three Months Ended March 31,
	2019			2018
	(dollars in thousands)
Impaired loans	$	(969	)	$	(7,850	)
Other real estate owned	(49		)	(30		)
Total losses	$	(1,018	)	$	(7,880	)

Impaired loans over $100 thousand are individually reviewed to determine the amount of each loan considered to be at risk of non-collection. The fair value for impaired loans that are collateral based is determined by reviewing real property appraisals, equipment valuations, accounts receivable listings and other financial information. A discounted cash flow analysis is performed to determine fair value for impaired loans when an observable market price or a current appraisal is not available. For real estate secured loans, First Commonwealth’s loan policy requires updated appraisals be obtained at least every twelve months on all impaired loans with balances of $250 thousand and over. For real estate secured loans with balances under $250 thousand, we rely on broker price opinions. For non-real estate secured assets, the Company normally relies on third party valuations specific to the collateral type.

The fair value for other real estate owned, determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement, is classified as Level 2. The fair value for other real estate owned, determined using an internal valuation, is classified as Level 3. OREO has a current carrying value of $4.0 million as of March 31, 2019 and consists primarily of residential and commercial real estate properties in Pennsylvania. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less estimated cost to sell, as determined by valuation techniques appropriate in the circumstances.

Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note 13, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2019.

FASB ASC 825-10, “Transition Related to FSP FAS 107-1” and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.

Securities: Fair values for securities available for sale and held to maturity are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Pooled trust preferred collateralized debt obligations values are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. These valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument. The carrying value of other investments, which includes FHLB stock and other equity investments, is considered a reasonable estimate of fair value.

Loans: The fair values of all loans are estimated by discounting the estimated future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality adjusted for past due and nonperforming loans.

Loans held for sale: The estimated fair value of loans held for sale is based on market bids obtained from potential buyers.

Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The carrying amount and fair value for standby letters of credit was $0.3 million and $0.2 million at March 31, 2019 and December 31, 2018, respectively. See Note 5, “Commitments and Contingent Liabilities,” for additional information.

Deposit liabilities: The estimated fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date because of the customers’ ability to withdraw funds immediately. The carrying value of variable rate time deposit accounts and certificates of deposit approximate their fair values at the report date. Also, fair values of fixed rate time deposits for both periods are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregated expected maturities.

Short-term borrowings: The fair values of borrowings from the FHLB were estimated based on the estimated incremental borrowing rate for similar type borrowings. The carrying amounts of other short-term borrowings such as federal funds purchased and securities sold under agreement to repurchase were used to approximate fair value due to the short-term nature of the borrowings.

Subordinated debt, long-term debt and capital lease obligation: The fair value is estimated by discounting the future cash flows using First Commonwealth’s estimate of the current market rate for similar types of borrowing arrangements or an announced redemption price.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents carrying amounts and fair values of First Commonwealth’s financial instruments:



	March 31, 2019
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	100,724	$	100,724	$	100,724	$	—	$	—
Interest-bearing deposits	23,168		23,168		23,168		—		—
Securities available for sale	893,101		893,101		—		893,101		—
Securities held to maturity	384,909		380,443		—		380,443		—
Other investments	25,378		25,378		—		23,708		1,670
Loans held for sale	9,627		9,627		—		9,627		—
Loans	5,871,070		5,921,319		—		14,391		5,906,928
Financial liabilities
Deposits	6,130,760		6,135,980		—		6,135,980		—
Short-term borrowings	565,616		565,522		—		565,522		—
Subordinated debt	170,328		169,764		—		—		169,764
Long-term debt	7,395		7,701		—		7,701		—
Capital lease obligation	7,118		7,118		—		7,118		—



	December 31, 2018
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	95,934	$	95,934	$	95,934	$	—	$	—
Interest-bearing deposits	3,013		3,013		3,013		—		—
Securities available for sale	909,247		909,247		—		909,247		—
Securities held to maturity	393,855		383,993		—		383,993		—
Other investments	32,126		32,126		—		30,456		1,670
Loans held for sale	11,881		11,881		—		11,881		—
Loans	5,774,139		5,821,791		—		15,076		5,806,715
Financial liabilities
Deposits	5,897,992		5,904,147		—		5,904,147		—
Short-term borrowings	721,823		721,532		—		721,532		—
Subordinated debt	170,288		168,067		—		—		168,067
Long-term debt	7,551		7,720		—		7,720		—
Capital lease obligation	7,217		7,217		—		7,217		—

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 12 Derivatives

Derivatives Not Designated as Hedging Instruments

First Commonwealth is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives relate to interest rate swaps that First Commonwealth enters into with customers to allow customers to convert variable rate loans to a fixed rate. First Commonwealth pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. First Commonwealth pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount.

The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties.

We have 31 risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution. We have nine risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are the lead bank. The risk participation agreement provides credit protection to us should the borrower fail to perform on its interest rate derivative contract with us.

First Commonwealth is also party to interest rate caps and collars that are not designated as hedging instruments. The interest rate caps relate to contracts that First Commonwealth enters into with loan customers that provide a maximum interest rate on their variable rate loan. At the same time the interest rate cap is entered into with the customer, First Commonwealth enters into an offsetting interest rate cap with another financial institution. The notional amount and maximum interest rate on both interest cap contracts are identical. The interest rate collars relate to contracts that First Commonwealth enters into with loan customers that provides both a maximum and minimum interest rate on their variable rate loan. At the same time the interest rate collar is entered into with the customer, First Commonwealth enters into an offsetting interest rate collar with another financial institution. The notional amount and the maximum and minimum interest rates on both interest collar contracts are identical.

The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.

Derivatives Designated as Hedging Instruments

In 2015, the Company entered into an interest rate swap contract that was designated as a cash flow hedge. This contract, which had a notional amount of $65.0 million, matured on March 4, 2019. The periodic net settlement of interest rate swaps was recorded as an adjustment to "Interest and fees on loans" in the Consolidated Statements of Income. For the three months ended March 31, 2019 there was a $0.1 million negative impact on net interest income as a result of these interest rate swaps.

The Company also enters into interest rate lock commitments in conjunction with its mortgage origination business. These are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company locks the rate in with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Loans under mandatory rate lock commitments are covered under forward sales contracts of mortgage-backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the Consolidated Statements of Income. The impact to noninterest income for the three months ended March 31, 2019 was a decrease of $0.4 million.

Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. We determine the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and taking into consideration the probability that the rate lock commitments will close or will be funded. At March 31, 2019, the underlying funded mortgage loan commitments had a carrying value of $7.2 million and a fair value of $8.2 million, while the underlying unfunded mortgage loan commitments had a notional amount of $25.2 million. At December 31, 2018, the underlying funded mortgage loan commitments had a carrying value of $6.9 million and a fair value of $7.6 million, while the underlying unfunded mortgage loan commitments had a notional amount of $9.9 million. The interest rate lock commitments decreased other noninterest income by $0.1 million for the three months ended March 31, 2019.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In addition, a small amount of interest income on loans is exposed to changes in foreign exchange rates. Several commercial borrowers have a portion of their operations outside of the United States and borrow funds on a short-term basis to fund those operations. In order to reduce the risk related to the translation of foreign denominated transactions into U.S. dollars, the Company enters into foreign exchange forward contracts. These contracts relate principally to the Euro and the Canadian dollar. The contracts are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the Consolidated Statements of Income. The impact on other noninterest expense for the three months ended March 31, 2019 totaled $2 thousand. At March 31, 2019 and December 31, 2018, the underlying loans had a carrying value of $1.8 million and $1.9 million, respectively, and a fair value of $1.8 million and $1.9 million, respectively.

The following table depicts the credit value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks:



	March 31, 2019			December 31, 2018
	(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment	$	(29	)	$	(3	)
Notional amount:
Interest rate derivatives	370,693			411,645
Interest rate caps	36,028			36,111
Interest rate collars	35,354			—
Risk participation agreements	170,016			162,139
Sold credit protection on risk participation agreements	(46,871		)	(59,315		)
Interest rate options	25,215			9,900
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment	—			(133		)
Notional amount	—			65,000
Interest rate forwards:
Fair value adjustment	(234		)	(170		)
Notional amount	30,000			15,000
Foreign exchange forwards:
Fair value adjustment	7			(6		)
Notional amount	1,797			1,927

The table below presents the amount representing the change in the fair value of derivative assets and derivative liabilities attributable to credit risk included in "Other income" on the Consolidated Statements of Income:



	For the Three Months Ended March 31,
	2019			2018
	(dollars in thousands)
Non-hedging interest rate derivatives
(Decrease) increase in other income	$	(470	)	$	789
Hedging interest rate derivatives
Decrease in interest and fees on loans	(118		)	(81		)
Increase in other expense	7			—
Hedging interest rate forwards
Decrease in other income	(64		)	—
Decrease in other expense	—			(62		)
Hedging foreign exchange forwards
Increase (decrease) in other expense	2			(3		)

The fair value of our derivatives is included in a table in Note 11, “Fair Values of Assets and Liabilities,” in the line items

“Other assets” and “Other liabilities.”

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 13 Goodwill

FASB ASC Topic 350-20, “Intangibles – Goodwill and Other” requires an annual valuation of the fair value of a reporting unit that has goodwill and a comparison of the fair value to the book value of equity to determine whether the goodwill has been impaired. Goodwill is also required to be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. When triggering events or circumstances indicate that goodwill testing is required, an assessment of qualitative factors can be completed before performing the two step goodwill impairment test. ASU No. 2011-8 provides that if an assessment of qualitative factors determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then the two step goodwill impairment test is not required.

We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as of March 31, 2019 and December 31, 2018 was $274.2 million. No impairment charges on goodwill or other intangible assets were incurred in 2019 or 2018.

We test goodwill for impairment as of November 30th each year and again at any quarter-end if any material events occur during a quarter that may affect goodwill.

As of March 31, 2019, goodwill was not considered impaired; however, changing economic conditions that may adversely affect our performance, the fair value of our assets and liabilities, or our stock price could result in impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

Note 14 Subordinated Debentures

Subordinated debentures outstanding are as follows:



		March 31, 2019			December 31, 2018
	Due	Amount		Rate	Amount		Rate
		(dollars in thousands)
Owed to:
First Commonwealth Bank	2028	$	49,152	4.875% until June 1, 2023, then LIBOR + 1.845%	$	49,131	4.875% until June 1, 2023, then LIBOR + 1.845%
First Commonwealth Bank	2033	$	49,009	5.50% until June 1, 2028, then LIBOR + 2.37%	$	48,990	5.50% until June 1, 2028, then LIBOR + 2.37%
First Commonwealth Capital Trust II	2034	$	30,929	LIBOR + 2.85%	$	30,929	LIBOR + 2.85%
First Commonwealth Capital Trust III	2034	41,238		LIBOR + 2.85%	41,238		LIBOR + 2.85%
Total		$	170,328		$	170,288

On May 21, 2018, First Commonwealth issued ten-year subordinated notes with an aggregate principal amount of $50.0 million and a fixed-to-floating rate of 4.875%. The rate remains fixed until June 1, 2023, then adjusts on a quarterly basis to LIBOR + 1.845%. The Bank may redeem the notes, beginning with the interest payment due on June 1, 2023, in whole or in part at a redemption price equal to 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest to the date of redemption. Deferred issuance costs of $0.9 million are being amortized on a straight-line basis over the term of the notes.

On May 21, 2018, First Commonwealth issued fifteen-year subordinated notes with an aggregate principal amount of $50.0 million and a fixed-to-floating rate of 5.50%. The rate remains fixed until June 1, 2028, then adjusts on a quarterly basis to LIBOR + 2.37%. The Bank may redeem the notes, beginning with the interest payment due on June 1, 2028, in whole or in part at a redemption price equal to 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest to the date of redemption. Deferred issuance costs of $1.1 million are being amortized on a straight-line basis over the term of the notes.

First Commonwealth currently has two trusts, First Commonwealth Capital Trust II and First Commonwealth Capital Trust III, of which 100% of the common equity is owned by First Commonwealth. The trusts were formed for the purpose of issuing company obligated mandatorily redeemable capital securities to third-party investors and investing the proceeds from the sale of the capital securities solely in junior subordinated debt securities (“subordinated debentures”) of First Commonwealth. The subordinated debentures held by each trust are the sole assets of the trust.

Interest on the debentures issued to First Commonwealth Capital Trust III is paid quarterly at a floating rate of LIBOR + 2.85% which is reset quarterly. Subject to regulatory approval, First Commonwealth may redeem the debentures, in whole or in part, at

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

its option on any interest payment date at a redemption price equal to 100% of the principal amount of the debentures, plus accrued and unpaid interest to the date of the redemption. Deferred issuance costs of $0.6 million are being amortized on a straight-line basis over the term of the securities.

Interest on the debentures issued to First Commonwealth Capital Trust II is paid quarterly at a floating rate of LIBOR + 2.85%, which is reset quarterly. Subject to regulatory approval, First Commonwealth may redeem the debentures, in whole or in part, at its option at a redemption price equal to 100% of the principal amount of the debentures, plus accrued and unpaid interest to the date of the redemption. Deferred issuance costs of $0.5 million are being amortized on a straight-line basis over the term of the securities.

Note 15 Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, First Commonwealth will generally be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue, therefore a cumulative effect adjustment to opening retained earnings was not necessary.

In connection with the adoption of Topic 606, First Commonwealth is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, for example, sales commission. The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

The Company also evaluated whether it has any significant contract balances. A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration resulting in a contract receivable or before payment is due resulting in a contract asset. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the Company has already received payment from the customer. First Commonwealth’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as trust income which is based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2019 and December 31, 2018, the Company did not have any significant contract balances.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with derivatives are not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust income, service charges on deposits, insurance and retail brokerage commissions, card related interchange income and gain(loss) on sale of OREO. The recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Noninterest revenue streams in-scope of Topic 606 are discussed below:

Trust Income

Trust income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon a tiered scale of market value of the assets under management at month-end. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as financial planning or tax return preparation services are also available to trust customers. The Company’s performance obligation for these transactional-based services is generally satisfied and related revenue recognized, at a point in time. Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of fees earned from its deposit customers for transaction-based, account maintenance, overdraft services and account analysis fees. Transaction-based fees, which include services such as ATM use fees, stop payment fees, statement rendering and ACH fees are recognized at the time the transaction is executed which is the point in time the Company fulfills the customer’s request. Monthly account maintenance fees are earned over the course of the month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. The Company’s performance obligation for account analysis fees is generally satisfied, and the related revenue recognized, during the month the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Insurance and Retail Brokerage Commissions

Insurance income primarily consists of commissions received from execution of personal, business and health insurance policies when acting as an agent on behalf of insurance carriers. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Because the Company’s contracts with the insurance carriers are generally cancellable by either party, with minimal notice, insurance commissions are recognized during the policy period as received. Also, the majority of insurance commissions are received on a monthly basis during the policy period; however, some carriers pay the full annual commission to First Commonwealth at the time of policy issuance or renewal. In these cases, First Commonwealth would be required to refund any commissions it would not be entitled to as a result of cancelled or terminated policies. The Company has established a refund liability for the remaining term of the policies expected to be cancelled. The Company also receives incentive-based contingency fees from the insurance carriers. Contingency fee revenue, which totals approximately $0.3 million per year, is recognized as received due to the immaterial amount.

Retail brokerage income primarily consists of commissions received on annuity and investment product sales through a third-party service provider. The Company’s performance obligation is generally satisfied upon the issuance of the annuity policy or the execution of an investment transaction. The Company does not earn a significant amount of trailer fees on annuity sales. However, after considering the factors impacting these trailer fees, such as the uncertainty of investor behavior and changes in the market value of assets, First Commonwealth determined that it would recognize trailing fees as received because it could not reasonably estimate an amount of future trailing commissions for which collection is probable. Commissions from the third-party service provider are received on a monthly basis based upon customer activity for the month. The fees are recognized monthly with a receivable until commissions are received from the third-party service provider the following month. Because the Company acts as an agent in arranging the relationship between the customer and the third-party service provider and does not control the services rendered to the customers, retail brokerage fees are presented net of related costs, including $0.7 million and $0.4 million in commission expense as of March 31, 2019 and 2018, respectively.

Card Related Interchange Income

Card related interchange income is primarily comprised of debit and credit card income, ATM fees and merchant services income. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Card related interchange income is recognized daily as the customer transactions are settled.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Income

Other income includes service revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for these services are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Gains(losses) on sales of OREO

First Commonwealth records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When First Commonwealth finances the sale of OREO to the buyer, an assessment of whether the buyer is committed to perform their obligations under the contract is completed along with an evaluation of whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, First Commonwealth adjusts the transaction price and related gain(loss) on sale if a significant financing component is present.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606:



	For the Three Months Ended March 31,
	2019		2018
	(dollars in thousands)
Noninterest Income
In-scope of Topic 606:
Trust income	$	1,926	$	1,928
Service charges on deposit accounts	4,245		4,406
Insurance and retail brokerage commissions	1,961		1,868
Card-related interchange income	4,730		4,742
Gain on sale of other loans and assets	258		207
Other income	862		892
Noninterest Income (in-scope of Topic 606)	13,982		14,043
Noninterest Income (out-of-scope of Topic 606)	4,890		8,000
Total Noninterest Income	$	18,872	$	22,043

Note 16 New Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which amends the guidance for recognizing credit losses from an “incurred loss” methodology that delays recognition of credit losses until it is probable a loss has been incurred to an expected credit loss methodology. The Current Expected Credit Loss ("CECL") methodology requires the use of the modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The standard is effective for the Company as of January 1, 2020. We have established a CECL implementation team, which includes members from the finance and credit areas, with oversight by the Chief Executive Officer, Chief Financial Officer and Chief Credit Officer. During the third quarter of 2018, Management completed the implementation of third party software to assist with this ASU. In the fourth quarter of 2018, a third party was engaged to assist with evaluation of data and methodologies related to this standard. Management continued its implementation plan during the first quarter of 2019 with primary emphasis on the evaluation of data and methodologies. Management is currently evaluating the impact of the amended guidance on First Commonwealth’s financial condition or results of operations.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment" which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Impairment should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

allocated to the reporting unit. Income tax effects from any tax deductible goodwill should be taken into consideration of the carrying amount of the reporting unit when measuring for goodwill impairment, if applicable. An entity still has the option to perform the qualitative assessment for the reporting unit to determine if the quantitative impairment test is necessary. This standard is effective for interim and annual periods for fiscal years beginning after December 15, 2019. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This ASU updates disclosure requirements for fair value measurements, including elimination of the disclosure related to the amount and reason for transfers between Level 1 and Level 2 of the fair value hierarchy. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Adoption of this ASU will not have a material impact on First Commonwealth's financial condition or results of operations, as it relates only to disclosure requirements.

Note 17 Subsequent Event

On April 22, 2019, the Company announced that its banking subsidiary, First Commonwealth Bank, has signed a definitive agreement to acquire 14 branches located in State College, Lock Haven, Williamsport and Lewisburg, Pennsylvania, with approximately $525 million of deposits and $120 million of retail and business loans from Santander Bank, N.A. The transaction is subject to regulatory approval and is expected to close in the third quarter of 2019.

Table of Contents

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three months ended March 31, 2019 and 2018, and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this Form 10-Q.

Forward-Looking Statements

Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute “forward-looking statements” as well. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or words of similar meaning. These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors, including, but not limited to: (1) local, regional, national and international economic conditions and the impact they may have on First Commonwealth and its customers; (2) volatility and disruption in national and international financial markets; (3) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; (4) inflation, interest rate, commodity price, securities market and monetary fluctuations; (5) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which First Commonwealth or its customers must comply; (6) the soundness of other financial institutions; (7) political instability; (8) impairment of First Commonwealth’s goodwill or other intangible assets; (9) acts of God or of war or terrorism; (10) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (11) changes in consumer spending, borrowings and savings habits; (12) changes in the financial performance and/or condition of First Commonwealth’s borrowers; (13) technological changes; (14) acquisitions and integration of acquired businesses; (15) First Commonwealth’s ability to attract and retain qualified employees; (16) changes in the competitive environment in First Commonwealth’s markets and among banking organizations and other financial service providers; (17) the ability to increase market share and control expenses; (18) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (19) the reliability of First Commonwealth’s vendors, internal control systems or information systems; (20) the costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals; and (21) other risks and uncertainties described in this report and in the other reports that we file with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K.

In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Explanation of Use of Non-GAAP Financial Measure

In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”), First Commonwealth management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. We believe these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance and our business and performance trends as they facilitate comparison with the performance of others in the financial services industry. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 45 for the three months ended March 31, 2019 and 2018, respectively.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Selected Financial Data

The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the Consolidated Financial Statements and related notes.



	For the Three Months Ended March 31,
	2019			2018
	(dollars in thousands, except per share data)
Net Income	$	24,589		$	23,270
Per Share Data:
Basic Earnings per Share	$	0.25		$	0.24
Diluted Earnings per Share	0.25			0.24
Cash Dividends Declared per Common Share	0.10			0.08
Average Balance:
Total assets	$	7,878,908		$	7,300,382
Total equity	986,836			892,618
End of Period Balance:
Net loans ⁽¹⁾	$	5,831,044		$	5,337,332
Total assets	7,972,673			7,320,767
Total deposits	6,130,760			5,703,522
Total equity	998,019			899,349
Key Ratios:
Return on average assets	1.27		%	1.29		%
Return on average equity	10.11		%	10.57		%
Dividends payout ratio	40.00		%	33.33		%
Average equity to average assets ratio	12.53		%	12.23		%
Net interest margin	3.75		%	3.69		%
Net loans to deposits ratio	95.11		%	93.58		%

⁽¹⁾Includes loans held for sale.

Results of Operations

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Net Income

For the three months ended March 31, 2019, First Commonwealth had net income of $24.6 million, or $0.25 diluted earnings per share, compared to net income of $23.3 million, or $0.24 diluted earnings per share, in the three months ended March 31, 2018. Growth in net income is a result of an increase in net interest income as well as a decrease in the provision for credit losses, offset by an increase in noninterest expense and a decrease in noninterest income.

For the three months ended March 31, 2019, the Company’s return on average equity was 10.11% and its return on average assets was 1.27%, compared to 10.57% and 1.29%, respectively, for the three months ended March 31, 2018.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $65.9 million in the first three months of 2019, compared to $60.2 million for the same period in 2018. This increase was due to both growth in average interest earning assets of $515.6 million and a 44 basis point increase in the yield on interest earning assets. Net interest income comprises the majority of our operating revenue (net interest income before provision expense plus noninterest income), at 78% and 73% for the three months ended March 31, 2019 and 2018, respectively.

The net interest margin, on a fully taxable equivalent basis, was 3.75% and 3.69% for the three months ended March 31, 2019 and March 31, 2018, respectively. The 6 basis point increase in the net interest margin is attributable to both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The taxable equivalent yield on interest-earning assets was 4.55% for the three months ended March 31, 2019, an increase of 44 basis points compared to the 4.11% yield for the same period in 2018. This increase is largely due to an increase in the loan portfolio yield, which improved by 53 basis points when compared to the three months ended March 31, 2018. Contributing to this increase was an increase in the yield on our adjustable and variable rate commercial loan portfolio, which increased 69 basis points largely due to the Federal Reserve increasing short term interest rates by 100 basis points in 2018. The yield on the investment portfolio increased 10 basis points in comparison to the prior year. The majority of this increase can be attributed to investment security runoff being replaced with higher yielding investment securities. Investment portfolio purchases during the three months ended March 31, 2019 have been primarily in corporate securities with durations of approximately five years and municipal securities with a duration of approximately ten years.

The cost of interest-bearing liabilities increased to 1.07% for the three months ended March 31, 2019, from 0.56% for the same period in 2018, primarily due to an increase in the cost of short-term borrowings and an increase in long term debt as a result of the issuance of $100 million of subordinated debt in the second quarter of 2018. Deposits acquired in our recent acquisitions, along with approximately $50 million of the subordinated debt proceeds and organic growth in consumer checking and savings deposits, contributed to a decline in average short-term borrowings of $57.0 million for the three months ended March 31, 2019 compared to the same period in 2018. Higher market interest rates resulted in the cost of interest-bearing deposits increasing 28 basis points and short-term borrowings increasing 89 basis points in comparison to the same period last year. The impact of the subordinated debt on the cost of interest-bearing liabilities was 6 basis points for the three months ended March 31, 2019.

For the three months ended March 31, 2019, changes in interest rates positively impacted net interest income by $2.1 million when compared with the same period in 2018. The higher yield on interest-earning assets positively impacted net interest income by $7.9 million, while the increase in the cost of interest-bearing liabilities negatively impacted net interest income by $5.9 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $3.7 million in the three months ended March 31, 2019, as compared to the same period in 2018. Higher levels of interest-earning assets resulted in an increase of $5.1 million in interest income, and changes in the volume of interest-bearing liabilities increased interest expense by $1.4 million, primarily due to an increase in long term borrowings as a result of the subordinated debt issued in May 2018. Average earning assets for the three months ended March 31, 2019 increased $515.6 million, or 7.8%, compared to the same period in 2018. Average loans for the comparable period increased $397.9 million, or 7.4%.

Net interest income also benefited from a $138.5 million increase in average net free funds at March 31, 2019 as compared to March 31, 2018. 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 an increase of $64.5 million, or 4.6%, in noninterest-bearing demand deposit average balances. Average time deposits for the three months ended March 31, 2019 increased by $232.7 million at higher costs compared to the comparable period in 2018, increasing interest expense by $2.0 million. Increases in market interest rates negatively impacted interest expense by $5.9 million, while changes in the mix of interest-bearing liabilities had a $1.4 million negative impact.

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 three months ended March 31:



	2019		2018
	(dollars in thousands)
Interest income per Consolidated Statements of Income	$	79,594	$	66,499
Adjustment to fully taxable equivalent basis	457		493
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	80,051		66,992
Interest expense	14,108		6,814
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	65,943	$	60,178

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis for the three months ended March 31:



	2019							2018
	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	$	4,700		$	54	4.66	%	$	7,026		$	31	1.79	%
Tax-free investment securities	68,226			529		3.14		67,809			519		3.10
Taxable investment securities	1,243,519			8,701		2.84		1,123,893			7,575		2.73
Loans, net of unearned income (b)(c)	5,811,587			70,767		4.94		5,413,677			58,867		4.41
Total interest-earning assets	7,128,032			80,051		4.55		6,612,405			66,992		4.11
Noninterest-earning assets:
Cash	93,120							86,916
Allowance for credit losses	(49,472		)					(50,249		)
Other assets	707,228							651,310
Total noninterest-earning assets	750,876							687,977
Total Assets	$	7,878,908						$	7,300,382
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,186,907		$	1,565	0.53	%	$	1,132,069		$	699	0.25	%
Savings deposits (d)	2,490,480			3,265		0.53		2,441,084			1,542		0.26
Time deposits	865,944			3,345		1.57		633,214			1,300		0.83
Short-term borrowings	615,140			3,438		2.27		672,135			2,295		1.38
Long-term debt	184,931			2,495		5.47		87,780			978		4.52
Total interest-bearing liabilities	5,343,402			14,108		1.07		4,966,282			6,814		0.56
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	1,464,750							1,400,218
Other liabilities	83,920							41,264
Shareholders’ equity	986,836							892,618
Total Noninterest-Bearing Funding Sources	2,535,506							2,334,100
Total Liabilities and Shareholders’ Equity	$	7,878,908						$	7,300,382
Net Interest Income and Net Yield on Interest-Earning Assets				$	65,943	3.75	%				$	60,178	3.69	%


(a)	Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the three months ended March 31, 2019 and 2018.


(b)	Loan balances include held for sale and nonaccrual loans. Income on nonaccrual loans is accounted for on the cash basis.


(c)	Loan income includes loan fees earned.


(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.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following table shows the effect of changes in volumes and rates on interest income and interest expense for the three months ended March 31, 2019 compared with March 31, 2018:



	Analysis of Year-to-Year Changes in Net Interest Income
	Total Change		Change Due To Volume			Change Due To Rate (a)
	(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks	$	23	$	(10	)	$	33
Tax-free investment securities	10		3			7
Taxable investment securities	1,126		805			321
Loans	11,900		4,327			7,573
Total interest income (b)	13,059		5,125			7,934
Interest-bearing liabilities:
Interest-bearing demand deposits	866		34			832
Savings deposits	1,723		32			1,691
Time deposits	2,045		476			1,569
Short-term borrowings	1,143		(194		)	1,337
Long-term debt	1,517		1,083			434
Total interest expense	7,294		1,431			5,863
Net interest income	$	5,765	$	3,694		$	2,071


(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 for probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance, against which credit losses are charged.

The table below provides a breakout of the provision for credit losses by loan category for the three months ended March 31:



	2019				2018
	Dollars		Percentage		Dollars			Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,381	34	%	$	4,150		60	%
Real estate construction	210		5		(242		)	(3	)
Residential real estate	292		7		774			11
Commercial real estate	1,090		27		1,238			18
Loans to individuals	1,122		27		983			14
Total	$	4,095	100	%	$	6,903		100	%

The provision for credit losses for the three months ended March 31, 2019 decreased in comparison to the three months ended March 31, 2018 by $2.8 million. The level of provision expense in the first three months of 2019 is primarily a result of $2.2 million in net charge-offs, a $0.4 million increase in specific reserves, growth in the loan portfolio and an increase in the qualitative reserves as a result of a higher probability of slightly less favorable economic conditions.

The level of provision expense in the first three months of 2018 was primarily due to a $5.6 million specific reserve related to a commercial, financial, agricultural and other borrower as well as a $2.0 million specific reserve related to a commercial real estate borrower. The increase in specific reserves were partially offset by decreases in qualitative factors related to the lending environment and associated risks in the loan portfolio.

The allowance for credit losses was $49.7 million, or 0.85%, of total loans outstanding and 0.92% of total originated loans outstanding at March 31, 2019, compared to $47.8 million, or 0.83%, and 0.91%, respectively, at December 31, 2018 and $53.7 million, or 1.00%, and 1.08%, respectively, at March 31, 2018. Nonperforming loans as a percentage of total loans decreased to

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

0.53% at March 31, 2019 from 0.55% at December 31, 2018 and 1.06% as of March 31, 2018. The allowance to nonperforming loan ratio was 158.74%, 149.14% and 93.84% as of March 31, 2019, December 31, 2018 and March 31, 2018, respectively.

Below is an analysis of the consolidated allowance for credit losses for the three months ended March 31, 2019 and 2018 and the year-ended December 31, 2018:



	March 31, 2019		March 31, 2018		December 31, 2018
	(dollars in thousands)
Balance, beginning of period	$	47,764	$	48,298	$	48,298
Loans charged off:
Commercial, financial, agricultural and other	1,009		290		5,294
Real estate construction	—		—		—
Residential real estate	181		471		1,313
Commercial real estate	299		168		3,930
Loans to individuals	1,115		1,173		4,576
Total loans charged off	2,604		2,102		15,113
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	87		263		788
Real estate construction	42		7		141
Residential real estate	105		92		361
Commercial real estate	41		69		153
Loans to individuals	123		202		605
Total recoveries	398		633		2,048
Net credit losses	2,206		1,469		13,065
Provision charged to expense	4,095		6,903		12,531
Balance, end of period	$	49,653	$	53,732	$	47,764

Noninterest Income

The following table presents the components of noninterest income for the three months ended March 31:



	2019			2018		$ Change			% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	1,926		$	1,928	$	(2	)	—	%
Service charges on deposit accounts	4,245			4,406		(161		)	(4	)
Insurance and retail brokerage commissions	1,961			1,868		93			5
Income from bank owned life insurance	1,426			1,494		(68		)	(5	)
Card-related interchange income	4,730			4,742		(12		)	—
Swap fee income	393			290		103			36
Other income	1,705			1,628		77			5
Subtotal	16,386			16,356		30			—
Net securities gains	—			2,840		(2,840		)	(100	)
Gain on sale of mortgage loans	1,428			1,484		(56		)	(4	)
Gain on sale of other loans and assets	1,084			574		510			89
Derivatives mark to market	(26		)	789		(815		)	(103	)
Total noninterest income	$	18,872		$	22,043	$	(3,171	)	(14	)%

Total noninterest income for the three months ended March 31, 2019 decreased $3.2 million in comparison to the three months ended March 31, 2018. The most significant changes include a $2.8 million decrease in net securities gains resulting from the redemption of one of our pooled trust preferred securities in the first quarter of 2018 and an $0.8 million decrease in the mark to

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

market adjustment on interest rate swaps entered into for our commercial loan customers. This adjustment does not reflect a realized gain or loss on the swaps, but rather relates to a change in fair value due to movements in corporate bond spreads and swap rates. Partially offsetting these decreases is a $0.5 million increase in the gain on sale of loans and other assets primarily due to gains recognized in conjunction with the sale of the guaranteed portion of Small Business Administration ("SBA") loans.

Noninterest Expense

The following table presents the components of noninterest expense for the three months ended March 31:



	2019		2018		$ Change			% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	27,220	$	24,873	$	2,347		9	%
Net occupancy	4,916		4,369		547			13
Furniture and equipment	3,668		3,540		128			4
Data processing	2,544		2,433		111			5
Advertising and promotion	1,240		809		431			53
Pennsylvania shares tax	916		903		13			1
Intangible amortization	754		784		(30		)	(4	)
Collection and repossession	547		823		(276		)	(34	)
Other professional fees and services	754		1,007		(253		)	(25	)
FDIC insurance	574		776		(202		)	(26	)
Other operating	6,131		5,843		288			5
Subtotal	49,264		46,160		3,104			7
Loss on sale or write-down of assets	65		197		(132		)	(67	)
Merger and acquisition related	—		337		(337		)	(100	)
Litigation and operational losses	401		179		222			124
Total noninterest expense	$	49,730	$	46,873	$	2,857		6	%

Noninterest expense, excluding loss on sale or write-down of assets, litigation and operational losses and merger and acquisition related expenses, increased $3.1 million, or 7%, for the three months ended March 31, 2019 compared to the same period in 2018. Contributing to the higher expenses in 2019 is a $2.3 million increase in salaries and employee benefits as a result of a higher number of full-time equivalent employees, annual merit increases and a $1.4 million increase in hospitalization expense. The higher number of employees is primarily a result of the acquisition of Garfield Acquisition Corp. and its wholly-owned subsidiary, Foundation Bank, in May 2018 and continued expansion of our mortgage and commercial banking businesses. The Garfield acquisition also accounted for $0.1 million of the $0.5 million increase in net occupancy expense. Collection and repossession expense decreased $0.3 million due to costs related to several OREO properties that occurred in 2018 with no similar activity in 2019.

Income Tax

The provision for income taxes increased $1.3 million for the three months ended March 31, 2019, compared to the corresponding period in 2018. The increase in the provision for income taxes can be attributed to a $2.6 million increase in the level of income before taxes.

We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income, for the three months ended March 31, 2019 and 2018.

We generate an annual effective tax rate that is less than the statutory rate of 21% 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. Additionally, the three months ended March 31, 2018, included a $0.6 million reduction in tax expense due to an adjustment to the deferred tax asset adjustment recorded in the fourth quarter of 2017 as a result of the reduction in the statutory tax rate. These provided for an annual effective tax rate of 19.5% and 18.9% for the three months ended March 31, 2019 and 2018, respectively.

As of March 31, 2019, our deferred tax assets totaled $20.2 million. Based on our evaluation, we determined that it is more likely than not that all of these assets will be realized. As a result, a valuation allowance against these assets was not

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

recorded. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved forecasts, evaluation of historical earning levels and consideration of potential tax strategies. If future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material impact on our financial condition and results of operations.

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. We generate funds to meet these 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. During the first three months of 2019, the maturity and redemption of investment securities provided $39.7 million in liquidity. These funds contributed to the liquidity used in the first quarter to pay down of short-term borrowings, originate loans, 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 FHLB of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank of Cleveland (“FRB”) and access to certificates of deposit through brokers.

We participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources. As of March 31, 2019, our maximum borrowing capacity under this program was $1.2 billion and as of that date there was $5.5 million outstanding with an average weighted rate of 1.40% and an average original term of 339 days. These deposits are part of a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks.

An additional source of liquidity is the FRB Borrower-in-Custody of Collateral program, which enables us to pledge certain loans that are not being used as collateral at the FHLB as collateral for borrowings at the FRB. At March 31, 2019, the borrowing capacity under this program totaled $822.9 million and there were no amounts outstanding. As of March 31, 2019, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.6 billion and as of that date amounts used against this capacity included $0.4 billion in outstanding borrowings and no outstanding letters of credit.

We also have available unused federal funds lines with six correspondent banks. These lines have an aggregate commitment of $205.0 million with no outstanding balance as of March 31, 2019. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $514.9 million with no outstanding balance as of March 31, 2019.

First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution. As of March 31, 2019, there are no amounts outstanding on this line.

First Commonwealth’s long-term liquidity source is its core deposit base. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The following table shows a breakdown of the components of First Commonwealth’s deposits:



	March 31, 2019		December 31, 2018
	(dollars in thousands)
Noninterest-bearing demand deposits^(a)	$	1,510,566	$	1,466,213
Interest-bearing demand deposits^(a)	211,548		180,209
Savings deposits^(a)	3,517,350		3,401,354
Time deposits	891,296		850,216
Total	$	6,130,760	$	5,897,992


(a)	Balances include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.

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.

During the first three months of 2019, total deposits increased $232.8 million. Interest bearing demand and savings deposits increased $147.3 million, noninterest-bearing demand deposits increased $44.4 million and time deposits increased $41.1 million. The increase in time deposits is the result of an increase in core certificates of deposit of $42.3 million offset by a decline in CDARs deposits of $1.2 million.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Market Risk

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 0.76 and 0.74 at March 31, 2019 and December 31, 2018, 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.

Gap analysis has limitations due to the static nature of the model that 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 gap analysis.

The following is the gap analysis as of March 31, 2019 and December 31, 2018:



	March 31, 2019
	0-90 Days			91-180 Days			181-365 Days			Cumulative 0-365 Days			Over 1 Year Through 5 Years			Over 5 Years
	(dollars in thousands)
Loans	$	2,690,255		$	262,448		$	452,147		$	3,404,850		$	1,890,725		$	562,633
Investments	89,131			57,056			103,709			249,896			638,071			404,031
Other interest-earning assets	23,168			—			—			23,168			—			—
Total interest-sensitive assets (ISA)	2,802,554			319,504			555,856			3,677,914			2,528,796			966,664
Certificates of deposit	124,256			134,315			242,492			501,063			387,181			3,052
Other deposits	3,728,898			—			—			3,728,898			—			—
Borrowings	638,001			220			451			638,672			54,140			57,644
Total interest-sensitive liabilities (ISL)	4,491,155			134,535			242,943			4,868,633			441,321			60,696
Gap	$	(1,688,601	)	$	184,969		$	312,913		$	(1,190,719	)	$	2,087,475		$	905,968
ISA/ISL	0.62			2.37			2.29			0.76			5.73			15.93
Gap/Total assets	21.18		%	2.32		%	3.92		%	14.94		%	26.18		%	11.36		%



	December 31, 2018
	0-90 Days			91-180 Days			181-365 Days			Cumulative 0-365 Days			Over 1 Year Through 5 Years			Over 5 Years
	(dollars in thousands)
Loans	$	2,659,890		$	291,134		$	439,098		$	3,390,122		$	1,802,605		$	569,659
Investments	81,971			60,654			99,288			241,913			612,407			468,916
Other interest-earning assets	3,013			—			—			3,013			—			—
Total interest-sensitive assets (ISA)	2,744,874			351,788			538,386			3,635,048			2,415,012			1,038,575
Certificates of deposit	116,469			116,664			276,101			509,234			338,148			2,834
Other deposits	3,581,563			—			—			3,581,563			—			—
Borrowings	794,206			218			443			794,867			54,080			57,932
Total interest-sensitive liabilities (ISL)	4,492,238			116,882			276,544			4,885,664			392,228			60,766
Gap	$	(1,747,364	)	$	234,906		$	261,842		$	(1,250,616	)	$	2,022,784		$	977,809
ISA/ISL	0.61			3.01			1.95			0.74			6.16			17.09
Gap/Total assets	22.32		%	3.00		%	3.34		%	15.98		%	25.84		%	12.49		%

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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:
	-200			-100			+100			+200
	(dollars in thousands)
March 31, 2019 ($)	$	(17,322	)	$	(7,282	)	$	1,181		$	2,069
March 31, 2019 (%)	(6.35		)%	(2.67		)%	0.43		%	0.76		%

December 31, 2018 ($)	$	(16,914	)	$	(6,442	)	$	1,368		$	2,587
December 31, 2018 (%)	(6.32		)%	(2.41		)%	0.51		%	0.97		%

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:
	-200			-100			+100			+200
	(dollars in thousands)
March 31, 2019 ($)	$	(37,273	)	$	(10,659	)	$	2,304		$	3,354
March 31, 2019 (%)	(13.67		)%	(3.91		)%	0.85		%	1.23		%

December 31, 2018 ($)	$	(37,239	)	$	(14,277	)	$	10,674		$	20,597
December 31, 2018 (%)	(13.90		)%	(5.33		)%	3.99		%	7.69		%

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 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. In the three months ended March 31, 2019 and 2018, the cost of our interest-bearing liabilities averaged 1.07% and 0.56%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 4.55% and 4.11%, respectively.

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 adequacy 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 probable estimated 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 impaired loans with a balance greater than $0.1 million, 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 $4.6 million at March 31, 2019 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

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

the borrower, who could not obtain comparable terms from alternative financing sources. In the first three months of 2019, 12 loans totaling $1.5 million were identified as troubled debt restructurings.

The balance of troubled debt restructured loans decreased $5.5 million from December 31, 2018. Changes during the first three months of 2019 are largely the result of the pay-off of a $6.0 million commercial, financial, agricultural and other relationship. Please refer to Note 8, “Loans and Allowance for Credit Losses,” for additional information on troubled debt restructurings.

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 on 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 probable risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses or a specifically assigned allowance for loan losses are recognized where appropriate.

Nonperforming loans, including loans held for sale, decreased $0.7 million to $31.3 million at March 31, 2019 compared to $32.0 million at December 31, 2018. During the three months ended March 31, 2019, $7.1 million of loans were moved to nonaccrual. Offsetting these additions was the payoff of an $6.0 million relationship, the charge-off of a $0.5 million commercial, financial, agricultural and other loan and the $0.3 million charge-off of a commercial real estate loan.

The allowance for credit losses as a percentage of nonperforming loans was 158.74% as of March 31, 2019, compared to 149.14% at December 31, 2018, and 93.84% at March 31, 2018. The amount of specific reserves included in the allowance for nonperforming loans was determined by using fair values obtained from current appraisals and updated discounted cash flow analyses. The allowance for credit losses includes specific reserves of $2.0 million and general reserves of $47.6 million as of March 31, 2019. Specific reserves increased $0.4 million from December 31, 2018, and decreased $9.4 million from March 31, 2018. The increase from December 31, 2018 is primarily due to the addition of the two nonaccrual relationships. The decrease from March 31, 2018 is primarily due to the payoff of two commercial relationships totaling $14.3 million and the sale of a $3.7 million dollar commercial relationship. These three relationships had total specific reserves of $9.0 million. Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at March 31, 2019.

Criticized loans totaled $120.5 million at March 31, 2019 and represented 2.1% of the loan portfolio. The level of criticized loans decreased as of March 31, 2019 when compared to December 31, 2018, by $6.7 million, or 5.3%. Classified loans totaled $39.4 million at March 31, 2019 compared to $40.2 million at December 31, 2018, a decrease of $0.8 million, or 2.0%. This decrease is primarily the result of the aforementioned changes in nonperforming loans. Delinquency on accruing loans for the same period increased $2.2 million, or 21.0%, the majority of which are commercial, financial, agricultural and other loans and commercial real estate loans.

The allowance for credit losses was $49.7 million at March 31, 2019, or 0.85% of total loans outstanding, compared to 0.83% reported at December 31, 2018, and 1.00% at March 31, 2018. General reserves, or the portion of the allowance related to loans that were not specifically evaluated for impairment, as a percentage of non-impaired loans were 0.82% at March 31, 2019 compared to 0.80% at December 31, 2018 and 0.79% at March 31, 2018. General reserves as a percentage of non-impaired originated loans were 0.89% at March 31, 2019 compared to 0.88% at December 31, 2018 and 0.86% at March 31, 2018.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following table provides information related to nonperforming assets, the allowance for credit losses and other credit-related measures:



	March 31,								December 31, 2018
	2019				2018				December 31, 2018
	(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	16,286			$	28,317			$	11,509
Loans held for sale on a nonaccrual basis	—				—				—
Troubled debt restructured loans on nonaccrual basis	5,874				10,233				11,761
Troubled debt restructured loans on accrual basis	9,120				18,707				8,757
Total nonperforming loans	$	31,280			$	57,257			$	32,027
Loans past due 30 to 90 days and still accruing	$	11,002			$	10,714			$	8,760
Loans past due in excess of 90 days and still accruing	$	1,509			$	1,955			$	1,582
Other real estate owned	$	3,993			$	2,997			$	3,935
Loans held for sale at end of period	$	9,627			$	9,759			$	11,881
Portfolio loans outstanding at end of period	$	5,871,070			$	5,381,305			$	5,774,139
Average loans outstanding	$	5,811,587		(a)	$	5,413,677		(a)	$	5,582,651		(b)
Nonperforming loans as a percentage of total loans	0.53		%		1.06		%		0.55		%
Provision for credit losses	$	4,095		(a)	$	6,903		(a)	$	12,531		(b)
Allowance for credit losses	$	49,653			$	53,732			$	47,764
Net charge-offs	$	2,206		(a)	$	1,469		(a)	$	13,065		(b)
Net charge-offs as a percentage of average loans outstanding (annualized)	0.15		%		0.11		%		0.23		%
Provision for credit losses as a percentage of net charge-offs	185.63		%	(a)	469.91		%	(a)	95.91		%	(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)	0.85		%		1.00		%		0.83		%
Allowance for credit losses as a percentage of end-of-period originated loans outstanding	0.92		%		1.08		%		0.91		%
Allowance for credit losses as a percentage of nonperforming loans (d)	158.74		%		93.84		%		149.14		%


(a)	For the three-month period ended.


(b)	For the twelve-month period ended.


(c)	Does not include loans held for sale.


(d)	Does not include nonperforming loans held for sale.

The following tables show the outstanding balances of our loan portfolio and the breakdown of net charge-offs and nonperforming loans, excluding loans held for sale, by loan type as of and for the periods presented:



	March 31, 2019				December 31, 2018
	Amount		%		Amount		%
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,180,320	20	%	$	1,138,473	20	%
Real estate construction	389,387		7		358,978		6
Residential real estate	1,565,349		27		1,562,405		27
Commercial real estate	2,138,376		36		2,123,544		37
Loans to individuals	597,638		10		590,739		10
Total loans and leases net of unearned income	$	5,871,070	100	%	$	5,774,139	100	%

During the three months ended March 31, 2019, loans increased $96.9 million, or 1.7%, compared to balances outstanding at December 31, 2018. All loan categories reflect growth for the three months ended March 31, 2019 with commercial, financial, agricultural and other as well as real estate construction providing a majority of the growth. Commercial, financial, agricultural and other loans increased $41.8 million, or 3.7%, largely due to growth in direct lending in Pennsylvania and Ohio. Real estate

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

construction loans increased $30.4 million, or 8.5%, with $19.0 million resulting from growth in commercial construction projects primarily in Pennsylvania and Ohio and $11.4 million due to growth in consumer construction.

As indicated in the table below, commercial, financial, agricultural and other, residential real estate and commercial real estate loans represented a significant portion of the nonperforming loans as of March 31, 2019. See discussions related to the provision for credit losses and loans for more information.



	For the Three Months Ended March 31, 2019							As of March 31, 2019
	Net Charge- offs			% of Total Net Charge-offs		Net Charge- offs as a % of Average Loans (annualized)		Nonperforming Loans		% of Total Nonperforming Loans		Nonperforming Loans as a % of Total Loans
	(dollars in thousands)
Commercial, financial, agricultural and other	$	922		41.79	%	0.06	%	$	6,016	19.23	%	0.10	%
Real estate construction	(42		)	(1.90	)	—		—		—		—
Residential real estate	76			3.44		—		13,195		42.18		0.22
Commercial real estate	258			11.70		0.02		11,716		37.46		0.20
Loans to individuals	992			44.97		0.07		353		1.13		0.01
Total loans, net of unearned income	$	2,206		100.00	%	0.15	%	$	31,280	100.00	%	0.53	%

Net charge-offs for the three months ended March 31, 2019 totaled $2.2 million, compared to $1.5 million for the three months ended March 31, 2018. The most significant charge-offs during the three months ended March 31, 2019 included a $0.5 million charge-off and a $0.3 million charge-off for two commercial customers and $1.0 million in net charge-offs related to loans to individuals, primarily indirect auto loans and personal credit lines. See discussions related to the provision for credit losses and loans for more information.

Capital Resources

At March 31, 2019, shareholders’ equity was $998.0 million, an increase of $22.6 million from December 31, 2018. The increase was primarily the result $24.6 million in net income, $2.7 million in treasury stock sales and an increase of $7.2 million in the fair value of available for sale investments. These increases were partially offset by $9.9 million of dividends paid to shareholders and $2.1 million of common stock repurchases. Cash dividends declared per common share were $0.10 and $0.08 for the three months ended March 31, 2019 and 2018, respectively.

First Commonwealth and First Commonwealth Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Commonwealth’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Commonwealth and First Commonwealth Bank must meet specific capital guidelines that involve quantitative measures of First Commonwealth’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. First Commonwealth’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Effective January 1, 2015, the Company became subject to the new regulatory risk-based capital rules adopted by the federal banking agencies implementing Basel III. The most significant changes include higher minimum capital requirements, as the minimum Tier I capital ratio increased from 4.0% to 6.0% and a new common equity Tier I capital ratio was established with a minimum level of 4.5%. Additionally, the new rules improve the quality of capital by providing stricter eligibility criteria for regulatory capital instruments and provide for a phase-in, beginning January 1, 2016, of a capital conservation buffer of 2.5% of risk-weighted assets. This buffer provides a requirement to hold common equity Tier 1 capital above the minimum risk-based capital requirements, resulting in an effective common equity Tier I risk-weighted asset minimum ratio of 7% on a fully phased-in basis.

The Basel III Rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company elected to retain this treatment, which reduces the volatility of regulatory capital levels.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

During the second quarter of 2018, First Commonwealth Bank, the Company's banking subsidiary, issued $100 million in subordinated debt, which under the regulatory rules qualifies as Tier II capital. This subordinated debt issuance increased the total risk-based capital ratio by 160 basis points.

As of March 31, 2019, First Commonwealth and First Commonwealth Bank met all capital adequacy requirements to which they are subject and was considered well-capitalized under the regulatory rules, all on a fully phased-in basis. To be considered well capitalized, the Company must maintain minimum Total risk-based capital, Tier I risk-based capital, Tier I leverage ratio and Common equity tier I risk-based capital as set forth in the table below:



	Actual				Minimum Capital Required				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
	(dollars in thousands)
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	936,382	14.60	%	$	673,575	10.50	%	$	641,500	10.00	%
First Commonwealth Bank	900,536		14.07		672,277		10.50		640,264		10.00
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	783,929	12.22	%	$	545,275	8.50	%	$	513,200	8.00	%
First Commonwealth Bank	748,083		11.68		544,224		8.50		512,211		8.00
Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	783,929	10.31	%	$	304,162	4.00	%	$	380,202	5.00	%
First Commonwealth Bank	748,083		9.85		303,652		4.00		379,565		5.00
Common Equity Tier I to Risk Weighted Assets
First Commonwealth Financial Corporation	$	713,929	11.13	%	$	449,050	7.00	%	$	416,975	6.50	%
First Commonwealth Bank	748,083		11.68		448,185		7.00		416,171		6.50

On April 23, 2019, First Commonwealth Financial Corporation declared a quarterly dividend of $0.10 per share payable on May 17, 2019 to shareholders of record as of May 3, 2019. The timing and amount of future dividends are at the discretion of First Commonwealth's Board of Directors based upon, among other factors, capital levels, asset quality, liquidity and current and projected earnings.

On March 4, 2019 a share repurchase program was authorized by the Board of Directors for up to an additional $25.0 million in shares of the Company's common stock. As of March 31, 2019, 74,033 common shares were repurchased at an average price of $12.48 per share. First Commonwealth may suspend or discontinue the program at any time.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Information appearing in Item 2 of this report under the caption “Market Risk” is incorporated by reference in response to this item.

ITEM 4. Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms of the Securities and Exchange Commission.

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


ITEM 1.	LEGAL PROCEEDINGS

The information required by this item is set forth in Part I, Item 1, Note 5, "Commitments and Contingent Liabilities," which is incorporated herein by reference in response to this item.


ITEM 1A.	RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 4, 2019, a share repurchase program was authorized for up to $25.0 million in shares of the Company's common stock. The following table details the amount of shares repurchased under this program during the first quarter of 2019:



Month Ending:	Total Number of Shares Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs*
January 31, 2019	—	$	—	—	—
February 28, 2019	—	—		—	—
March 31, 2019	74,033	12.48		74,033	1,910,789
Total	74,033	$	12.48	74,033

* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $12.60 at March 31, 2019.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable


ITEM 5.	OTHER INFORMATION

None

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 6. EXHIBITS



Exhibit Number	Description	Incorporated by Reference to

10.1	2019 Annual Incentive Plan	Filed herewith

10.2	2019-2021 Long-Term Incentive Plan	Filed herewith

31.1	Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.1	Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.2	Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

101	The following materials from First Commonwealth Financial Corporation’s Quarterly Report on Form 10-Q, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.	Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST COMMONWEALTH FINANCIAL CORPORATION

(Registrant)



DATED: May 6, 2019		/s/ T. Michael Price
		T. Michael Price President and Chief Executive Officer

DATED: May 6, 2019		/s/ James R. Reske
		James R. Reske Executive Vice President, Chief Financial Officer and Treasurer